Mixed Fortunes

Abstract

Abstract This book offers a new interpretation of the ‘Great Divergence’ and ‘Great Convergence’ stories: how Western countries grew rich and why parts of the developing world (South and East Asia, Middle East) did not catch up with the West during 1500–1950, but started to catch up afterwards, whereas others (Latin America, South Africa, Russia) did better in 1500–1950, but have fallen behind the first group since 1950. Western countries exited the Malthusian trap by dismantling traditional collectivist institutions that increased income inequality, impoverished the masses, and even decreased life expectancy, but allowed the redistribution of income in favour of savings and investment at the expense of consumption. When the same pattern was applied to developing countries (colonialism—Latin America, Russian empire, Sub-Saharan Africa), it resulted in the destruction of traditional institutions, an increase in income inequality, and the worsening of starting positions for catch-up development. This group of countries replicated the Western exit from the Malthusian trap—they experienced an immediate increase in income differentiation, a rise in savings and investment and growth of productivity, but at the price of rising social inequality and deterioration of institutional capacities. Other developing countries (East and South Asia, Middle East, and North Africa) were less affected by colonialism and managed to retain their traditional institutions. This delayed their transition to modern economic growth until the mid twentieth century, but allowed them to preserve good starting positions for economic growth—low inequality and strong institutions.