In this job, I can go on several of these journeys a week, some more interesting than others. A while ago while looking for country growth statistics, I ventured on a very Robert Frost-esque trip of the path less taken down and stumbled upon numbers charting the GDP of countries since the birth of Christ.
From the data series it is suggested that the world started off on an equal footing. GDP per capita of the Western regions, Latin America, Japan, China and India all started off in the ball park of $400 in current Dollars. Keeping in mind the necessary caveat that these are estimates and must be taken with a pinch of salt, I move ahead in the timeline. It isn’t until 1500 that the West clearly starts to break away reaching levels of around $700 with Italy ahead at over $1100. But Italy’s prosperity does not last long and in the next three centuries it stagnates while Holland begins to experience persistent growth. About the same time Britain’s growth rate also begins to increase albeit at a slower rate than Holland’s. Per capita GDP crawls at a slow pace until around 1820 when growth takes off and explodes. In fact, the accompanying chart of the series shows growth in the next 180 years to be a near vertical spike! While at first the Western world appears to a major driver, over the next 180 years, it spreads over the rest of the globe.
So what caused this major shift in the world? It is of course at this point I remember that I chose to read not history but GCSE Geography. And while this choice has resulted in me being less navigationally challenged than my male and female peers, it has not however equipped me very well to deal with this data. Several books in hand and various hours on the internet later, I have managed to deduce thus.
Italy, one of the earlier economic progressors gave themselves and the modern world one of the key factors for growth. The great intellectual and cultural movement and revolt against the intellectual sterility of the medieval spirit that was the ‘Renaissance’ gave birth to something that we all take for granted today – scientific rationalism. The idea of being able to involve the mind in innovative thought, relying on empirical evidence and mathematical tools to support technological advances truly took the world into a new era. It also provided the foundations, if you will, for the industrial revolution that would come years later.
Britain and the US were the major gainers of this revolution in the 18th and 19th centuries, a stage in history when major technological advances in agriculture, manufacturing and transportation boosted productivity which in turn led to increasing wealth. The GDP per capita of the UK more than doubled in the 70 years from $1250 in 1800 to $3190 in 1870.
These changes subsequently spread through Europe and North America and the rest of the world. And it continues to be an important process even today, having a profound effect in the urbanisation of developing countries and their contribution to world economic growth.
The next key driver evidences itself in the notable prominence of the Dutch during the seventeenth century. The Dutch East India Company proved to be one of the earliest advances in capital markets, created out of a need to monopolize the Asian spice trade. The charter of the new company empowered it to build forts, maintain armies, and conclude treaties with Asian rulers and establish colonies. It was the first multinational corporation in the world and the first to issue stock. Who knew that one day, these initial stirrings in the capital markets would lead to the modern business world we live in today – one where the easy availability of money through shares, bonds, long term loans, etc is most necessary for the large scale production of goods and services and economic growth.
Incidentally, the Dutch are also responsible for giving us the first economic bubble and a metaphor in ‘Tulip mania’! At the dizzying heights of the flower’s popularity, prices had escalated to such a level that people traded in their land, livestock, farms and life savings all to acquire one single tulip bulb!
Talk of the Dutch East India Company brings us onto another driver of economic prosperity that is trade, or rather free trade. While Holland advocated the free movement of goods in the 17th century, it wasn’t until the 19th century when countries dropped their restrictions on trade and adopted the Gold Standard that it became a major engine of global growth. After the Wall Street crash in the 1930s, the world reverted to protectionism and it was not until after the Second World War that it became important again to countries’ vital income. In 1948, the General Agreement on Tariffs and Trade (GATT) was formed, in the Cuban capital, Havana. Its result was 23 countries getting together to sign an agreement to reduce customs tariffs. Free trade has since had its ups and downs and still remains a bone of contention for many despite it long been advocated by economists.
The past 200 years has seen various important factors drive the world forward, only some of which have been mentioned here. Others include the development of fast and efficient modes of communication and transport, the progress in property rights and many more. So what will drive the world’s advance in the next 100 years? The investment of at least a part of GDP in infrastructure, the use of the innovative process in designing new technologies for the future, the acceptance of competition and openness to the idea of free trade will be crucial in achieving sustained global growth going forwards.
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And finally………. a bag with two human skulls, a stuffed puffer fish, inflatable dolls, breast implants, a coffin, false teeth, false limbs, and a suitcase with £10,000 in cash. What is this list? Well, it’s not something you could win off the conveyor belt in the Generation Game so much as they are items returned to the lost property office for the Transport of London in the last year!
Have a good weekend,
Aparna Ram
Research Analyst
Seven Investment Management Limited