Varying patterns of development illuminate global inequalities. Measured by the welfare of citizens, ‘development’ is empirically represented by the standard of living in a given nation-state. Originating in 16th century France, development was used to describe the développer, the “unfolding” of centralized cities and expansion of state power. Referring to an increasing spatial-political relationship, development is rooted in understanding welfare as the unfolding of institutional structure within a geographically defined territory. Empirical definition of development is contentious, because it suggests that standards of living are a measurable construct. Applied through a quantitative lens, economic development analyzes the standard of living between national economies. Based in economic growth, economic development suggests the application of resources towards the welfare of citizens- the ‘welfare state’. Through a historical analysis of the ‘welfare state’, economic development is framed as dependent upon empirical geographical and institutional advantages.
What is a Nation?
Europe’s 17th-century rise of nation-states birthed the concept of economic development. French développer of cities gained signification; economic prosperity became institutionalized under the “nation-state”. As a recognized sovereign territory, the nation-state economically integrated cities in to a mercantilist capital accumulation regime. Since the 16th century, the economic doctrine of mercantilism drove the imperial practices of western European powers towards the creation of nation-states. Focus on capital accumulation towards a strengthened central military can be assumed as the first consideration of economic growth. Differing from economic development, economic growth is the measure of domestic production, without heeding to increase in the standards of living. This important difference between ‘growth’ and ‘development’ is illuminated in the mercantilist ideology; the extraction of resources towards the benefit of the central state was not dispersed through social programs, but rather towards the infinite growth of the state. These protectionist policies played the role of early political economy, as mercantilism was an effective tool in strengthening the centralized state. Important to economic development, the birth of the nation-state created a founding institutional centralization of the economy. Despite territorial convergences in later decades, the role of geographic recognition was to create a territorial commonality under a centralized economic institution.
Specific to the 250 years of Mercantilist theory is the concept of extraction. Framed by authors James Robinson and Daron Accemoglu, strong mercantilist nations of Great Britain, France and Spain practiced extractionary politics through colonization. Extraction describes the mercantilist theory of economic growth, described by Acemoglu and Robinson as operating a ‘zero-sum game’, wherein benefit to the state was at a loss to another. Extraction becomes important to economic development of colonized nations, because, unlike the centralized institutions within territorially defined nation-states, colonized nations experienced a decentralized organization of labor, effectively destroying possibilities for a welfare state.
The Role of Inclusive Institutions
Although the idea of economic development was unconceivable in the Mercantilist period, the birth of the centralized nation-state set the institutional and geographic parameters for economic growth, which is essential to economic development. Moreover, Mercantilist economics engaged Western European nations in the forging of institutions through warfare, effectively destabilizing governments and giving rise to labor and unionist movements. Authors Acemoglu and Robinson address this phenomenon as the process of ‘creative destruction’, whereby established power relations are broken and give rise to innovation. Established trade relations, such as the Hudson’s Bay Company, supplemented the changing tide of institutional relationships with the rising economic nationalism. International trade became a vital source of economic growth, while the role of institutions shifted from centralized to representative.
Acemoglu and Robinson organize their book Why Nations Fail around the supremacy of institutional organization in economic development. The premise of this is derived from the Machiavellian persona of Mercantilist nations, whose collapse preceded inclusive institutions, and a ‘virtuous circle’ of economic development. Suggesting that Great Britain’s Glorious Revolution of 1688 was the first step of an institution towards inclusivity, WNF aligns Great Britain’s success in the industrial revolution with redistributed taxation. Beginning with the 1572 Poor Law, British taxation was given a welfare-like status. Unlike welfare, the Poor Law was parochial and redistributed in the form of workhouse care. Tradition of socially-minded taxation allowances were perpetuated through the settlement of Ireland, and transitioned in to lower taxation for plantation land ownership. This increase in land ownership also increased opportunity for profit, growing the middle class. On the other coin, extractive French taxation maintained allowances only for the noble élite, causing disproportionate growth in wealth. Mercantilist economics allowed élite French to hold almost 90% of wealth, and the French could not sustain their wars leading up to the French Revolution from merely taxing 10% of the economy. The burgeoning inclusivity of Great Britain’s institution of taxation exemplifies the ‘virtuous circle’ role that inclusivity has on economic development. The French institution of extractive taxation caused a ‘vicious circle’, resulting in collapse of public finance. Economic nationalism plagued the Western European nations, particularly France, as military spending became unsustainable. The Bourbon Monarchy came to its knees in the face of public upheaval after the dismissal of a land tax proposal in 1776. French élite chose to act in self-interest and maintain extractive taxation, instead of have their lands taxed. Power in the hands of a few resulted in the upheaval by many.
‘Creative Destruction’ of the French Revolution’s power vacuum established governance by multiple ruling classes. Most poignantly, inclusion of the Tiers État, the third class society members, asserted institutional control by the hands of merchants and laborers. Stressing working class issues and trade priorities, the National Constituent Assembly and successive Legislative Assembly involved conflicting interests of the élite and the Tiers État, resulting in the highly symbolic overthrow of the French aristocracy in favor of a Republic. This highly influential succession of institutional development played a significant role in French public policy, under which solidarity was introduced to French governance. Taking the form of a welfare precursor, French solidarity measures were not direct redistribution of government funding to the lower classes, but rather the levying of land tax and restriction of agricultural tax. Allowing the agricultural sector to flourish, while collecting tax from the élite, the French middle class expanded and pushed towards the industrial revolution.
Inclusive taxation institutions grew the middle class in both Mercantilist nation-states of France and Great Britain. In both cases, this allowed investment of both capital and labor to flow from the agrarian sector to the industrial sector, inspiring the industrial revolution. France and Great Britain developed from Mercantilist nation-states in to nationalist production economies, due to changes in the role of institutions as taxation policy.
The Role of Economic Geography
Mobilization of workers was intrinsic to the movement from agrarian society to industrial society. Political geography of France and Great Britain was changing, as demand for labor in to industrial centers encouraged movement from outlying sectors. The role of this geographical transition to economic growth is clear; new industry heightened national production and demanded labor, and the average wage rose, increasing supply of labor. This spatial adjustment of population did increase production and average wage, but had an adverse affect on standards of living. Assumed by economic geographer Paul Krugman to encounter a ‘rent seeking’ ideology, which is unsustainable for economic development, the industrial revolution in Great Britain and France encountered a changing population spatiality, and thereby, an unequal distribution of wages.
First, in discussing the role of geography to Great Britain and France’s economic development, infrastructural developments must be highlighted. Transportation of workers to the industrial centers- the process of urbanization- greatly exaggerated the core-periphery differentiation within nation-states. Still at the forefront of economic growth, and therefore, economic development, France and Great Britain had a cyclical relationship of wanting to attract laborers to the industry, therefore increasing transportation expenditure, and laborers wanting to make higher wages in the industrial sector, therefore increasing transportation innovation (Krugman, 1991). Urbanization effectively created an economy of scale for laborers to participate in, which, like the introduction of small industry to economies of scale, disvalued the labor.
Krugman suggests that under the marginal production theory of income distribution the ‘rental rate’ of a given industry must equal the production value of laborers to maximize profit. So, as industry expands, demand for labor must increase with wages relative to the costs of production. This ‘rent seeking’ ideology is at issue, because in the case of a large supply of labor moving from agrarian to industrial society seeking employment, profit can be maximized by not distributing wages at the ‘rental rate’ equilibrium. Wage inequality is not an institution, because it was not a policy, but is instead the effect of geography by way of population and labor supply. Wage inequality begets the institution of solidarity movements after the transfer of knowledge from the German welfare state.
Economic Growth to Economic Development
Transfer of knowledge between economies is an effect of trade. The impact of the industrial revolution was the increase in demand and supply of labor and goods, because of the heightened middle-class as discussed through the role of institutions. Trade theory, developed significantly after the industrial revolution, explains the nature of trade and its benefit to industrialized economies. Trade theory is important to the role of geography and the role of institutions, as it conceptualizes reasoning for and effect of actualized spatial-political relationships. Trade theory also further explains the intrinsic nature of Mercantilist desire for economic growth, to the beginning of economic development.
Assuming that all actors will act rationally, economic theory always suggests profit-maximizing behavior. Conditioned by Keynesian economics, the gains from trade maximize supply and demand, increasing the opportunity for profit through comparative advantages. The Hecksher-Ohlin model (1933) suggested that even in a situation of absolute advantage, gains from trade were possible due to relative advantages of goods and labor. Relative advantage highlights the disproportionate production possibilities among actors, but does not recognize the disproportionate competition between them. Competition occurs because there is profit-maximizing opportunity in increasing supply, in order to meet the larger demand of trade. With demand increasing through trade, and supply increasing thusly, industries involved in trade will develop increasingly, given that the factors of endowment are also increasing. The Linder hypothesis (1961) shows that competition is essentially dependent on production possibilities, which are dictated by factors of endowment, such as capital, labor, resources and technology. These ‘externalities’ affect growth of industry, creating imperfect competition between actors.
According to Linder, imperfect competition limits the possibilities of trade, because actors with dissimilar factors of endowment are unable to inspire competition in industry. By operating under the assumption that gains from trade are necessary for economic growth, but actors are endowed with different factors, it is reasonable to assume that there are supplementary motivations for trade. The Gravity Model suggests that relative size of economies (their factors of endowment) and relative distance of trade are the contingencies of benefit (Tinbergen, 1962.) Distance of trade is meant to limit transportation costs, similarly to Krugman’s assumption of urbanization as cost saving. Geography’s role in economic growth is shown here- neighboring nations tend to trade with each other.
Tendency to trade with relatively close countries will be analyzed specifically by the parameters of the Gravity Model, to emphasize the process from economic growth to economic development, rather than the socio-political relationships between countries. Although significantly more able to trade due to historical relationships of language and culture, neighboring countries tend to establish trade relations at an institutional level- with underpinnings of geographic spatiality. Coming to a case-in-point, trade relations between Germany and France perfectly represent this Gravity Model, because of their relative distance. Krugman suggests that the geographical relationship supersedes the necessity for relative factors of endowment, and the Linder hypothesis speculates that the syncing of German transportation and industry to the levels of France and French increase in levels of welfare to Germany represents this relationship.
German and French difference in factors of endowment in the industrial revolution must be analyzed first through the difference in institutional arrangement. Present-day Germany did not exist, in that it had not undergone the same pattern of nation-state building as France, due to maintenance of parochial taxation in Germanic territories (Nietzsche, 1885). The reasoning for this 1881 federalization of Germany is speculated as an effect of rising German nationalism, in response to French nationalism and militarization of German territories (Said, 1978), which would correspond to geographic role in synchronization of factors of endowment. Also correspondent, is the upswing in German transportation efforts nearly a century after the industrial revolution began in France and Great Britain. Increasing German nationalism after the Napoleonic Wars threatened German territory began the process of transportation building, especially near the French border and along the Rhein. Germany’s geographic growth in facilitated trade, and the coming of the industrial revolution, under the guise of national protection in warfare.
Learning from France’s regularity in working class institutional change, the development of the German state was based in Otto von Bismarck’s welfare programs. Germany offered the first economic development plan, by learning from the failure of extractive economic growth policies of the French. France, likewise, modeled it’s own welfare program after that of the Germans; policy making in an effort to stabilize the French institutions necessitated working class benefits, because of the severe wage inequality issue due to labor demand and supply. This institutional learning curve is suggested by the Linder hypothesis, because of Germany’s geographical relativity to France. Dialectic of German and French nationalism would soon be overshadowed by the increasing tension over remaining variances in factors of endowment.
Geographic development of infrastructure and institutional development of welfare in the German federation lead to quick expansion in factors of endowment. Coupled with the German access to warfare and industry resources of iron and steel, the French became defensive over the German’s economic development. Political tensions rose and resulted in World Wars I and II, which destroyed both French and German economic development up to that point. Despite the remaining principles in the benefit of a welfare state, when economic growth is depleted like it was due to warfare expenditure, economic development is impossible. Measured empirically by gross domestic product (GDP) per capita, ‘economic development’ is a country-based analysis of quality of life (Krugman, 2010). Measuring economic development by GDP per capita aligns all given factors of endowment with the country’s welfare. Maintenance of the welfare state is considered “economic development” because of the definition of welfare within the industrialized Western European countries. After WWII, the concept of foreign aid became related to economic development, as the welfare of Europe gained assistance from the United States’s Marshall Plan for European Recovery.
International Institutions and Economic Development
Politics of development assistance between the United States and Europe did not rest in pleasant diplomatic relations, seeing as world warfare had just cost both sides great deals of money and citizens. Rather, the United States’ interest in European economic development was towards the end of reconstructing the benefit of trade. As the most developed economy next to the United States’, Europeans had a history in purchasing power for traded goods, based on the Gravity Model’s suggestion of relative factors of endowment in industry. Geographical and institutional significance of foreign aid as a means of economic development lies in the globalization of economic growth, and the regionalization of economic development.
Institutionally, the Marshal Plan was significant in it’s ability to suggest peace negotiations among European nations. Instigating the first supranational free trade and common monetary system, the European Recovery Program recognized the tensions between trade barriers, and disregarded the geographically disjointed Europe. The European Union’s force as both an intergovernmental and supranational regime is unique in its configuration, and shares historical commonalities. The successful binding of national economies is fluid in nature, allowing for moderation and stabilization when necessary. With the recent Euro Crisis, this economic unity is threatened by the vacuum of power towards a higher authority, the European Central Bank. Economic development, the process towards increasing welfare, has become a supranational institution, threatening the sovereignty of nations involved. Geographically transcendent, the European Union still maintains tensions between institutional roles of intergovernmental actors.
Shown by the activity of the Development Assistance Committee, international aid is disproportionately decided upon by the 55 wealthiest nations in the world (Ragnar, 1961). The implications of this disproportionate aid include economic development dependence, resulting from the unstable institutions began during the extractionary period of colonization (WNF). Recent global politics suggest that the effect of development assistance created a tertiary extraction regime, whereby trade benefits only the country with greater factors of endowment. Trade between countries with varying factors of endowment can obviously result in tension and warfare, but if the one country is institutionally and geographically disadvantaged, the Linder model fails in applying the logic that it can essentially “scale up” to the factors of endowment of its larger trading partners. Subsumption of smaller economic industry in to economies of scale is represented through trade agreements like NAFTA, suggesting that despite the relativity in distance, the disproportionate factors of endowment negate efficient trade models. Specifically NAFTA represents this issue; the United States, although attempting to boost economic growth of Mexico towards the benefit of its agricultural relative advantage, effectively destroyed welfare of it’s farmers. The cyclical relationship between economic growth and economic development is realized by the downturn in economic growth due to lack of farming development. Farmers, dependent on United State’s investment, are economically unsustainable and suffer severe weaknesses thereby.
Implications of the institution of foreign investment and aid resonate in dependency theory. Unlike the Marshal Plan investment in Europe, which aided the re-growth of economically competent countries, the introduction of small economies with relatively little economic history, to large economies with significant economic competence assumes a sort of dominance of “development” (Ragnar, 1961). Derived from the French concept of the unfolding of political-spatial relationships, is development aid a mechanism of instituting foreign policy? Benefits derived from trade with developed countries are empirically visible in the increase of competition, and the significance of industrial growth to economic development. The role of institutional policy on economic development can be assumed as positive, in it’s responsive nature towards inclusive demands. The role of geography problematizes institutional benefit, because it suggests that a necessary institutional cohesion between geographically different nations, despite their different factors of endowment. Institutional cohesion, as seen on the supranational level of regional free trade agreements NAFTA and the EU, must respect the sovereignty of the country’s policy creation. If policy makers have little experience with economic development and no history in the welfare state, like NAFTA, they can fall in to a ‘vicious circle’ of economic dependence.
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Krugman, Paul R., and Maurice Obstfeld. Internationale Wirtschaft: Theorie Und Politik Der Außenwirtschaft. München [u.a.: Pearson Studium, 2010. Print.
Krugman, Paul R. Cities in Space: Three Simple Models. Cambridge, MA: National Bureau of Economic Research, 1991. Print.
Nietzsche, Friedrich Wilhelm. Thus Spoke Zarathustra. New York: Modern Library, 1995. Print.
Nurkse, Ragnar (1961). Problems of Capital Formation in Underdeveloped Countries. NY: Oxford University Press.
Tinbergen, Jan. Mathematical Models of Economic Growth. New York: McGraw-Hill, 1962. Print.
 This phenomenon of geographic and institutional implications in economic development will be discussed further in relation to foreign aid and economic development.