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Europe and Globalization — A Historic Tour

How did globalization benefit the most open countries over the centuries?

December 12, 2002

How did globalization benefit the most open countries over the centuries?

Over time, corresponding to improvements in technology and trade, the world has seen dramatic gains in income. But those gains have been concentrated in a few countries.

The fundamental question of interest to world economic historians is: Why did Europe get so rich relative to other regions, a pattern that began in the Middle Ages — and accelerated after 1500?

Angus Maddison, an OECD economist, has assembled the best measure of economic activity for long historical periods. He argues that, circa AD 400, average per capita income was roughly equal to its minimal subsistence level throughout the world.

However, by 1500 — before the great opening of the 16th century — Western Europe had nearly doubled its per capita income, while other regions remained stagnant.

Maddison also estimates that western Europe's per capita income surpassed China's at around AD 1300. By 1820, Western Europe enjoyed twice the per capita income of China.

And by 1870 it had nearly four times China's per capita income. Europe and its offshoot countries (the United States, Canada, Australia and New Zealand) have maintained their lead in per capita income over the past century.

As late as 1950, Africa was struggling to maintain levels of per capita income that Europe had surpassed in 1600. China was even more retarded in its progress.

As late as 1973, Chinese per capita income was lower than that of Europe in 1600. Japan is the non-European exception. Japan surpassed Africa and the rest of Asia in the 18th century.

And by 1913, Japan enjoyed a per capita income comparable to many southern and eastern European economies. Japan's exceptional growth resulted from its effort to imitate Western economic success.

Japan did so consciously, systematically and at a deep institutional level.

There is broad agreement among economic historians about the reasons behind these differences in per capita income growth across regions.

In essence, growth was the predictable consequence of a combination of outward economic orientation with favorable domestic institutions.

This applies especially to the presence of the rule of law and other preconditions favorable to individual freedom and to individuals' incentives to work and innovate.

The first European cities — and later countries — to hit upon the right combination of individual incentives and access to markets thrived and were imitated.

Political fragmentation in medieval Europe decentralized authority — and actually spurred continuing competition among rulers.

European civilization was unique in this respect — a fact that reflected climatic and geographic factors peculiar to Europe.

Political fragmentation and competition — combined with the cultural inheritance of Roman, Christian and Germanic traditions — also fostered the concepts of private property and individual rights.

Japan's feudal structure and geographical isolation from the rest of Asia produced competitive political and economic pressures that were similar to that of Europe, which may explain its imitation of European institutions and economic success.

It is worth emphasizing that early European growth (and later Japanese growth) was especially beneficial to the poor.

The end of serfdom in Western Europe was the result of increasing competition among rulers. It often took the form of constructing towns and cities.

That essentially represented an outward-looking entrepreneurial act by medieval lords in search of new market opportunities.

After all, to be successful, towns had to be populated. So cities became 'gateways to freedom' for serfs, some of whom were explicitly granted freedom by entrepreneurial city-building lords.

Competing medieval lords were also active proponents of technological progress, which substantially improved European agricultural productivity.

As trade and freedom flourished, so did technological progress and new ways of organizing life emerged — working for wages, living in towns and cities.

A lord in search of new wealth and power was encouraged to cooperate — rather than coerce — as a means of expanding his power.

That pattern would reappear. Exploration and conquest and technological improvements in navigation and weaponry owed their origins to political competition. But private gains were an inevitable result.

Those private gains took the form of trading or mineral rights granted to merchants or explorers and land grants to colonists in America during the 17th and 18th centuries.

Each epoch of global competition had clear winners and losers. Venice's reign gave way to those of intrepid Portugal and Spain in the 15th and 16th centuries.

And they, in turn, were displaced by the superior cultivation-based empire-building strategies and entrepreneurship of the Dutch and British in the 17th and 18th centuries.

European trade, technology, wealth and manufacturing flourished. And alongside these grew an international network of great minds and entrepreneurs devoted to applied scientific inquiry.

Thus was the groundwork laid for the industrial revolution. In Europe, competition among power-hungry, greedy despots made them become beneficent rulers and patrons of technology.

Trade routes expanded, technology was rapidly disseminated and progress was cumulative, each improvement built on its predecessor.

What are the lessons for globalization today? Simply this: Countries that cut themselves off from close interaction with others — like China did for a long time — tend to fall woefully behind in developing their economic potential.

And countries that dynamically pursue trade and commerce with the outside world — as the medieval Europeans did — eventually become the wealthiest and most powerful nations on earth.

The combination of free trade and domestic institutions conducive to individual liberty has never failed to produce success.

But, and herein lies a note of caution: Nothing ever stays the same.

These days, it appears as if the Europeans have lost some of their dynamism — and the spirit of intraregional competition that had served them so well.

Charles W. Calomiris is the Paul M. Montrone Professor of Finance and Economics at Columbia Business school and a professor at Columbia’s school of International and Public Affairs.