Daily Times

Given their cultural differences, various countries responded differently to the challenges of the 19th century. Japan and China, for example, diverged dramatically in the face of the critical juncture created by the Industrial Revolution. While Japanese institutions underwent a transformation and the Japanese economy embarked on a path of rapid growth, the forces pushing for an institutional change in China were not strong enough.

Inclusive economic and political institutions emerged in England to make the Industrial Revolution possible. Some countries benefited from the Industrial Revolution and embarked on the path to growth, while others did not or, in fact, steadfastly refused to allow even the beginning of industrialisation. Whether a country did embark on industrialisation or not was largely a function of its institutions.

The United States, which underwent a transformation similar to the English Glorious Revolution, had already developed its own brand of inclusive political and economic institutions by the end of the 18th century. It would thus become the first nation to exploit the new technologies coming from the British Isles, and soon surpass Britain and become the forerunner of industrialization and technological change.

Australia and the United States were able to industrialise and grow rapidly because their relatively inclusive institutions would not block new technologies, innovation, or creative destruction

Australia followed a similar path to inclusive institutions, even if somewhat later and somewhat less noticed. Its citizens, just like those in England and the United States, had to fight for inclusive institutions. Once these were in place, Australia would launch its own process of economic growth. Australia and the United States could industrialise and grow rapidly because their relatively inclusive institutions would not block new technologies, innovation, or creative destruction.

Not so in most of the other European colonies. Their dynamics were quite opposite to those in Australia and the United States. In the Moluccas, as in many other places Europeans colonized in Asia, in the Caribbean, and in South America, citizens had little chance of winning such a fight. In these places, European colonists imposed new extractive institutions or took over whatever extractive institutions they found, in order to be able to extract valuable resources, ranging from spices and sugar to silver and gold.

In many of these places, they put in motion a set of institutional changes that would make the emergence of inclusive institutions very unlikely. Some of them explicitly stamped out whatever burgeoning industry or inclusive economic institutions existed. Most of these places would be in no situation to benefit from industrialisation in the nineteenth century or even in the twentieth.

The dynamics in the rest of Europe were also quite different from those in Australia and the United States. While Industrial Revolution was gathering pace in Britain by the end of the 18th century, most European countries were ruled by absolutist regimes, controlled by monarchs and by aristocracies whose major source of income was from their landholdings or from trading privileges they enjoyed thanks to prohibitive entry barriers. The creative destruction that would be wrought by the process of industrialization would erode the leaders’ trading profits and take resources and labour away from their lands. The aristocracies would be economic losers from industrialization. More importantly, they would also be political losers, as the process of industrialisation would undoubtedly create instability and political challenges to their monopoly of political power.

But institutional transition in Britain and the Industrial Revolution created new opportunities and challenges for European states. Though there was absolutism in Western Europe, the region also shared much of the institutional drift that had impacted Britain in the previous millennium.

The situation was very different in Eastern Europe, the Ottoman Empire, and China. These differences mattered for the dissemination of industrialization. The critical juncture created by industrialization intensified the ever-present conflict over institutions in many European nations. A major factor was the French Revolution of 1789. The end of absolutism in France opened the way for inclusive institutions, and the French ultimately embarked on industrialization and rapid economic growth. The French Revolution, in fact, did more than that. It exported its institutions by invading and forcibly reforming the extractive institutions of several neighbouring countries. Way to industrialization was opened to Belgium, the Netherlands, Switzerland, and parts of Germany and Italy, in addition to France itself.

There was a negative reaction, in some countries, as feudalism intensified. The Ottoman Empire, among others, fell even further economically, even though their absolutist monarchies managed to stay in place until the World War I. The institutional dynamics ultimately determined which countries took advantage of the major opportunities presented by the 19th century onward and which ones failed to do so.

The roots of global inequality we observe today can be found in this divergence with a few exceptions. Rich countries of today are mostly those that embarked on a process of industrialisation and technological change in the early 19th century, the poor ones are those that did not.

The writer is a former director of the National Institute of Public Administration