The Wealth and Poverty of Nations: 

What have we learned since Adam Smith?

Will MastersDepartment of Agricultural Economics

Purdue Universitywww.agecon.purdue.edu/staff/masters

ICEE Econ CampBrookston, IN

October 16th, 2007

The year 1776 produced some great new ideas

In the United States, modern democracy… …and in Scotland, modern

economics!

What have we learned since then about the wealth and poverty of nations?

• We have a lot more– experience, observation and data

• including the U.S. experience!– testing of possible explanations

• do they make sense? (economic theory) • do they fit the data? (econometrics)

• How well has Adam Smith’s book held up?– look at his ideas in just three key areas:

• the influence of agriculture and geographic location

• the proper role of government• the link between wealth and population growth

Adam Smith on the role of agriculture and geographic location

• Agricultural success leverages industrial growth“The most opulent nations, indeed, generally excel all their

neighbours in agriculture as well as in manufactures; but they are commonly more distinguished by their superiority in the latter.” (Book 1, Ch. 1)

• Low-cost transport facilitates growth by specialization“As by means of water-carriage a more extensive market

is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country.” (Book 1, Ch. 3)

Adam Smith on the role of government

• Good government is limited but active

“The sovereign has only three duties to attend to:

first, the duty of protecting the society from violence and invasion of other independent societies;

secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it; and,

thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” (Book 4, ch. 9)

Adam Smith on the role of population growth

• Income growth encourages population growth, which in turn promotes more income growth“High wages… encourage population (and) what encourages

the progress of population… encourages real wealth.” (Book IV, Ch. 7)

What do the data show about these three mechanisms?

• We have lots of evidence about each of them:– Geographic location and agriculture– Government policies and governance– Population growth and demography

• I will focus on results from my own research, and what might be most useful for you

Source: Calculated from data in Angus Maddison (2001), The World Economy: A Millenial Perspective. Paris: OECD.

Estimated real income per capita, 1400-1998(regions with above-average income)

Since 1776, the wealth of nations has grown rapidly in some countries

USA

JapanW.Eur.Other west

World ave.E.Eur.Fmr.USSR

1776

Source: Calculated from data in Angus Maddison (2001), The World Economy: A Millenial Perspective. Paris: OECD.

…and why do the poor lag so far behind?

World ave.

Lat.Am.

Oth.Asia

China

India

Africa

Estimated real income per capita, 1400-1998(regions with average income or below)

Idea #1: Geographic location still matters!only the tropics are still poor

Source: J.D. Sachs, 2001. “Tropical Underdevelopment.” NBER Working Paper 8119.

GDP per capita by latitude, 1995(in 1990 PPP dollars)

50s 40s 30s 20s 10s equator 10s 20s 30s 40s 50s

4,000

12,000

8,000

Southern hemisphere

Northern hemisphere

Source: Sachs, JD, “Tropical Underdevelopment.” NBER Working Paper 8119. Cambridge, MA: NBER.

…although coastal location can help some tropical countries

catch up

Income per person, 1995 (with sub-national data for 19 countries)

Coastal location helps explain the success of tropical Asia, especially East Asia

0

2,000

4,000

6,000

8,000World

E.Asia

S.Asia

S.-S.Afr.

2000 PPP US$

World average

East Asia (developing)

Sub-Sah. Africa

S.Asia

US

dolla

rs a

t PPP p

rice

s of

20

00

Source: World Bank, World Development Indicators 2005.

Until 1990s, Asia was significantly poorer than Africa

Real income per capita, 1975-2003

Average Governance Ratings by Region, 1996-2002

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

OECD

Eastern Europe

Lat.Am.&Carib.

East Asia

M.E.&N.Africa

Fmr.Sov.Union

South Asia

S.-Sah. Africa

Average of Six Indicators (-2.5 to +2.5)

1996199820002002

Note: Data show n are average of survey data and other indicators reflecting six underlying aspects of national governance: Voice and Accountability; Political Stability and Absence of Violence; Government Effectiveness; Regulatory Quality; Rule of Law ; and Control of Corruption.Source: D. Kaufmann, A. Kraay, and M. Mastruzzi (2003), "Governance Matters III: Governance Indicators for 1996–2002," World Bank Policy Research Working Paper 3106. Data available online at w w w .w orldbank.org/w bi/governance.

Idea #2: Quality of government matters

Successful governance is both cause and consequence of per-capita income

Source: Computed from UN Population Division, 2004 <http://esa.un.org/unpp>

But what explains the extreme tragedy of poverty and disease

in Africa?Life expectancy at birth, 1950-2000

The contrast between S. Asia and Africa is greatest in

agricultureAgricultural output per capita by region, 1961-2003

75

100

125

150

175

E&SEAsiaSouthAsiaRestWorldSSAfrica

FAO

in

dex v

alu

e,

19

61

=1

00

Source: calculated from FAO data, at http://apps.fao.org.

Asia’s agricultural successes have been mainly in food production

Food output per capita by region, 1961-2003

75

100

125

150

175

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

FA

O i

nd

ex v

alu

e, 1

961=

100

.

E&SEAsiaSouthAsiaRestWorldSSAfrica

Nonfood farm output/capita by region, 1961-03

75

100

125

150

175

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

FA

O i

nd

ex v

alu

e, 1

961=

100

.

E&SEAsiaSouthAsiaRestWorldSSAfrica

Source: calculated from FAO data, at http://apps.fao.org.

Food production matters; undernutrition remains the world’s #1 cause of ill-health

0 20 40 60 80 100 120 140

Underweight Unsafe sex

Blood pressure Water & sanitation

TobaccoIndoor smoke from fuels

Cholesterol Alcohol

Zinc deficiency Vitamin A deficiency

Iron deficiency Low fruit and vegetable intake

Overweight

Annual loss of disability-adjusted life-years

(millions of DALYs)

Worldwide disease burden from m ajor risk factors, 2000

Source: WHO (2002), World Health Report 2002, available online at www.who.int.

Explaining Africa’s lag brings us to what Adam Smith did not know…

Adoption of new varieties (pct. of cropped area)

13%

42%

62%

80%

8%

23%

39%52%

12%4%1%

26%

0%10%20%

30%40%50%60%

70%80%90%

1970 1980 1990 1998

Asia

Lat.Am.

SSAfrica

Source: Calculated from data in R.E. Evenson and D. Gollin (2003), Crop Variety Improvement and its Effect on Productivity. Wallingford: CABI.

…such as the power of R&D to transform agriculture

Smith also did not foresee the course ofdemographic transition in deaths and birth rates:

Sweden

deaths

births

Mexico

Mauritius

Cru

de b

irth

an

d d

eath

rate

s (p

er

100

0)

Source: Keith Montgomery, http://www.uwmc.uwc.edu/geography/Demotrans

peak rate≈ 3.5%

slow decline in deaths then births, peak rate of pop. growth≈1.5 pct/yr

pre-1776

Africa’s uniquely late and rapid fall in mortality when its fertility rates were still high

caused exceptionally rapid population growth:Africa’s population

growth rate is slowing, but is still

faster than historical rates elsewhere

Rural Population Growth by Region, 1950s-2020s

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1950

-60

1960

-70

1970

-80

1980

-90

1990

-200

0

2000

-201

0

2010

-202

0

2020

-203

0

Ru

ral

po

p.

gro

wth

rat

e

. (

per

cen

t p

er y

ear)

SSAfricaE&SEAsiaSouthAsiaRestWorld

Africa’s cities started small. They grow fast but cannot absorb everyone,

making for rapid rural population growth

Source: Calculated from FAOStat data.

Sudden improvements in child survival lead to rising

dependency ratios

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1950 1960 1970 1980 1990 2000 2010No

. of

ch

ildre

n (

0-1

4)

pe

r a

du

lt (

15

-64

)

.

AfricaAsiaRest of the World

Source: UN Population Division, World Population Prospects: The 2002 Revision . Available online at <http://esa.un.org/unpp>.

Demographic burdens and demographic gifts, 1950-2020

Burden of rising

child-adult ratio

“gift” of falling

child-adult ratio

Conclusions

• Smith was pretty much exactly right about the importance of agriculture, trade and good government

• But he did not know (and could not have known!) about • how science-based R&D has transformed

agriculture, health, transport and communications, spreading opportunities for specialization and trade

• how falling mortality and income growth lead to falling fertility and the demographic transition

• So, extending prosperity to the poorest regions requires:• new technologies to overcome geographic

constraints, and• enough patience to complete the demographic

transition, perhaps with the help of foreign aid and out-migration