The Science of Everything Podcast - Episode 105: Agriculture, Urbanisation, and Structural Change

Episode Date: April 30, 2020

In this third part of the series on economic growth, I discuss the process of structural change as economies progress from underdeveloped to developed, beginning with an overview and historical analysis of Rostow's Stages of Growth model. I then discuss the structures of agricultural production around the world, focusing on barriers to adoption of more modern agricultural techniques and proposed reforms, such as adoption of cash crops, land reform, and improving the security of land tenure. I conclude with an analysis of the benefits and problems associated with urbanisation, incorporating a discussion of agglomeration economies, spillover effects, urban gigantism, and the informal urban sector. Recommended pre-listening is Episode 104: Economic Growth and Development Part II. If you enjoyed the podcast please consider supporting the show by making a paypal donation or becoming a patreon supporter. https://www.patreon.com/jamesfodor https://www.paypal.me/ScienceofEverything

You're listening to The Science of Everything podcast episode 105. Economic Growth and Development Part 3. Structural Change. I'm your host, James Fodle. This obviously is a continuation of my series of economic growth and development. I hope you're enjoying it so far. In this episode, I'm going to talk about the what aspect of economic development. So in previous episode, we looked at the when and the where, with the history of the world economy.

Now we're looking more at the what. So what that means is what exactly happens in a country when it develops. when it industrializes and when it goes from being a poor to a rich country. And there's a series of structural changes that happen in that economy that takes it from being a pre-modern economy, which I talked about in the previous episode, to a modern industrialized economy. And there's quite a lot of things involved in that. And so that's what's going to be the focus of this episode. In particular, I'm going to talk about Rosto's stages of growth model, which is still influential.

I'm going to talk about the changes in agriculture and in urbanization. I'm also going to talk about the importance of capital accumulation, and then the importance of institutional change and modernizations and reform that go along with that. Recommended pre-listening is Episode 108, Economic Growth and Development Part 2, which again I would strongly recommend before listening to this, as we're going to just continue directly from the line of thought that we left off with then. So we know a little bit about when industrialization and development occurred, and some of the factors that related to that,

but we don't really know much about how it happens. We don't really know much yet about what exactly it involved. And so that's what's going to be the focus of this episode. And I'm going to start by talking about Rostow's stages of growth, which is an older model. It's not exactly a narrative account, but it's sort of a narrative model of the stages that a country passes through as it develops. I don't think that we should read too much into exactly his way of dividing things up, and it's being criticized, but I still think it's a useful way of thinking about it, which is exactly what the point of a model is, as I discussed in the first part of this series.

So I'm going to broadly stick to this, but just bear in mind that. it's just an approximation and simplification for the purpose of analysis and not to be interpreted too literally. So the first stage in Rostow's stages of growth is the traditional society. So this is basically the pre-modern economy that I talked about in part two, characterized by subsistence agriculture or even hunting or gathering, almost wholly a primary sector economy, so no very little services or manufacturing. Urbanization, education are very limited. There are some advancements and improvements in processes, but overall a limited ability for economic growth because of an absence in modern,

technologies, lack of individual or class mobility, and a prioritization of stability, and change generally seen as a bad thing, especially by those in power, because it threatened their power and the sort of delicate system they had for maintaining it. Centralization of political power was often emphasized in theory, but in practice very limited, for the reasons that we discussed. It was difficult to maintain and exercise control. Now, the second stage of Rosto stages of growth is the preconditions for takeoff. So this roughly corresponds, I think, to the early modern period in Europe, where there was a beginning of the development of more productive, commercial agriculture, greater use of cash crops, so things you sell on the market and don't consume

directly, more widespread use of investment strategies and banking that allows for a greater investment in productive enterprises, such as the building of irrigation, canals, ports, and other things like that. We see this a lot in the early modern period, the development of more modern banking techniques and investments and the limited liability company and other other technologies of that sort. Increasing use of more sophisticated technologies and advances in existing technologies. A change in social structure, so social equilibrium now being undermined by particularly the rise of new, educated, commercial and industrial classes that are distinct from the old aristocratic landowners and also the religious class, which is very

important in most societies. This new sort of middle class, or bourgeoisie, as it's called in the European context, threatened the existing order because they were relatively wealthy, but had relatively little political power, and whenever there's a discrepancy between wealth and political power, you often have a clash there. There was also a development of national identity and a sense of shared economic and political interests, and increased urbanization and levels of literacy, also very important. So this economic change in clash between interests ultimately led to the English Civil War and the glorious revolution, which occurred in the late 17th century, and then later to the French Revolution and various other revolutions in Europe throughout the 19th century.

The third stage of Rosto's model is called the takeoff. This is really when urbanization dramatically increases, industrialization really gets going, and dramatic new technological breakthroughs either occur or are brought in from overseas or from other countries. So the secondary sector that produces goods, and so basically industry rather than agriculture, expands dramatically. You have a dramatic increase in enrollment in schools and an increase in literacy more so than previously, an increase in returns to investment as industrialization gets going and you're able to save capital and then reinvest that for returning growth. So you're really seeing those returns to scale that previously were only just sort of begun to be realized

during the earlier period. Now they're really taking off and you're seeing that exponential growth of capital. Techdiles and apparel are often a first takeoff industry. This happened in Great Britain and also later in China, but that's not a requirement. It's just common. The timing of takeoff is different in different countries. It began probably around the 1780s in the UK, maybe a little bit earlier than that. The first country in continental Europe to experience takeoff was Belgium in the 1820s.

France didn't have as obvious a takeoff period. Many countries you can see a pretty clear bump in the growth rate that occurs in one decade, usually around a decade. France, it's a bit harder to see in their data, but maybe around the 1830s they started to industrialize, but they were slower at it than some of the later comers. United States, 1840s is usually considered the time they start. to industrialize. You had the building of railroads really getting going in that time in the first industry. Germany began to industrialize in the 1870s, a bit before they unified. Italy and Austria-Hungary,

sort of Central Europe, were a bit later, so they began to industrialize in the 1870s. Obviously, something that takes time. It's not, doesn't happen all in one go, but this is the sort of beginning of it. Mexico, under the Porphyriato, and Japan, after the Meiji Restoration, began to industrialized in the 1880s. Russia in the 1890s in the reign of Alexander II, the finals are. Turkey and Iran began to industrialize around the end of, sorry, around the period just following the end of the First World War, so the 1920s, there was a little bit of industrialization in the Ottoman Empire before World War I, but I wouldn't really say it was when the takeoff began. That was really after the First World War in my view. Brazil, around the

1930s. Then Eastern Europe and much of the Middle East, around the 1950s, around the 1950s, so following the Second World War, Korea and Taiwan began to industrialize and they had that big takeoff in the 1960s, China in the 1970s, India in the 1980s. It's a bit harder to say since then because you kind of have to see in retrospect when the takeoff began, but it seems that there have been takeoff in at least some other countries in Southeast Asia since this period. Much of sub-Saharan Africa, the poor countries that I talk about, have not yet industrialized to any significant extent. Now, I should also note that there are some countries that have kind of always been rich, rich by modern standards, but at least rich by pre-modern standards. So these countries didn't have an obvious take-off in quite the same way. These include generally countries that had

a large amount of land and natural resources, and so they started off being rich and kind of gradually used this wealth to invest in industries and cities and therefore had a less clear take-off. The US is sort of an example of this, but they still have a clearer take-off period, Partly because prior to widespread settlement west of the Mississippi River, they didn't have as much available land as some of the other countries. I'm about to mention, but it's a complicated situation there. But these countries that I'm talking about include Australia and New Zealand, Chile, Argentina, and South Africa.

So interestingly, they're all kind of in the southern hemisphere, all areas in which there was substantial immigration from Europe and a lot of land that was previously, well, not unoccupied, but at least not occupied by much settled agriculture. So what that means, it was relatively easy for the white settlers to usurp the land from the indigenous populations because they were relatively sparse, they're relatively sparse and not well settled in terms of having existing state institutions or large population densities in those areas. This meant that the incoming white populations were able to obtain very high amounts of land per person

and exploit quite rich natural resources, especially if we see this in the gold rush in Australia in the 1850s, example, and later discovery of golden diamonds in South Africa. There was a lot of cattle ranching and particularly Argentina in the 19th century. I mean, I think there still is, but particularly at that time, they were one of the wealthiest regions in the world. So these countries didn't exactly have a clear takeoff period. They've kind of always been rich, and as they sort of transitioned more away from agriculture and primary industries into industrialization over the course of the 19th and 20th centuries. I think this is an interesting observation because it's not clear that there's just one model of industrialization. Rosto's model seems to apply best to many

of the old European countries and to some extent also say the US and Japan, but perhaps not as well to some other countries. At any rate, after the takeoff, the next stage in Rostow's stages of growth is what he calls the drive to maturity, which I think is a little bit of a silly name, but nevertheless that's what he called it. This involves a diversification of the industrial base, so expansion into multiple industries, so away from just the, say, railroads, roads and mining and the textiles that were the basis of the first take-off in many countries and diversification. Manufacturing shifts in being focused on making capital goods towards producing consumer durables and domestic consumption. So often this is a period in which you have

the first establishment of a large-scale domestic market for mass-manufactured goods. So this occurred from around the mid-19th century, mid- to late-19th century in many European countries, and marks the kind of beginning of the modern age in the sense if we think about daily life. So things like all over the board from canned goods through to newspapers, through to mass-manufactured furniture to automobiles, a little bit later, you know, using soap that's been mass-manufactured, any number of things that we just sort of take for granted. A lot of them develops, and even many firms that arose in that period are still around today. So this takes place during the sort of drive to maturity, when there's enough, when people have enough income to

buy mass manufactured goods and you have enough of economies of scale and specialisation in those to be able to produce them at a low cost. There's also rapid development of transportation infrastructure, so with railways and then later on automobiles. Large-scale investment in social infrastructure, so schools, universities, hospitals also become a big focus during the drive-to-matured period as there's sufficient wealth and demand for them to be really invested in. Previously, the focus would be mostly on primary age education, with only a small elite being able to go to universities, but during the drive-to-matured is a much stronger push for secondary and then later tertiary education and better health care and other things.

And then the final stage is the age of high mass consumption, which is basically like you've arrived, you've reached the pinnacle of economic development. This is a point where you can say the countries become fully developed. So during this stage, you have a dominant industrial base in the economy. The primary sector is of fairly small importance. There's a rise during this period of the service sector with much more complicated quality and branding-based consumer goods, widespread and normative consumption of high-value consumer goods. So you think about all of the

things that even middle-class people in developed countries can afford. These days, a lot of consumer electronics, cars, houses, overseas vacations, eating out at restaurants. We don't even think of a lot of these as sort of high-value consumer goods, but these would have all been luxuries that very few people could have afforded even in the late 19th and early 20th centuries, depending on exactly what country you're talking about. So the US was the first country to reach this age of high mass consumption, I think in the 1920s, although it kind of regressed a little bit during the Great Depression. This is not saying that everyone was wealthy by that stage, but it's sort of if you have enough enough of a substantial middle class that reaches this stage to kind of count.

The UK was probably only a little bit behind, but what wasn't quite as mature as the US was. Western Europe, and most of Western Europe reached this stage. They may have reached it in the 30s and 40s if you hadn't had the Great Depression in World War II, but I think they properly reached it in the 1960s once they'd rebuilt after the war. to 1960s, I'd say, and then other parts of the world sort of progressively after that. This age of high mass consumption roughly corresponds to the stage that basically all countries that I say are developed countries, the high-income countries that I talked about in the first episode of the series. They're all in this stage at the moment. Many of the middle-income countries

are probably what you'd say is the drive-to-m maturity phase, and the take-off phase is a mixture. Some of the low-income countries are just taking off now. Others are not, and they're probably just in the preconditions for growth stage. And even in some of the... the extreme cases, maybe they're still stuck in a traditional society, or more realistically, regions of different countries are still in the traditional societies and don't even really have those preconditions for growth yet. But this is just a qualitative model. It's not precise in terms of exactly which countries at what stage. That's not necessarily the best way to use it. It's just a way to think about the types of changes that happen. I would say that Roster wrote

this, I think, in the 60s, perhaps the 70s, and it's a bit out of date now, because I'd say that the age of high mass consumption kind of represents the stage that the West reached during the Bread and Woods era, so we're talking 50s, 60s and 70s. Since then, I think we've begun to shift away from this, at least in the most developed Western countries, away from an industrially based economy towards a service-based economy. So Rosto sort of saw this, but didn't really see the extent to which it would happen. We've actually seen a de-industrialization of many developed countries, especially in the US, UK, and other parts of Western Europe since the 1970s. A loss of manufacturing jobs, a massive reduction in the share of manufacturing in GDP and a huge shift towards the

services, towards a lot of skill-intensive work that requires high educational requirements and a lot of sophisticated medical infrastructure or financial infrastructure or educational infrastructure. So a lot of people these days are working in, directly or indirectly for finance, in the finance sector or education or healthcare in developed countries. And these are all service sector. So I'll talk a bit more about that later, but that's been a big change. it's kind of happened a little bit after, so maybe represents a sixth stage after high mass consumption. But at any rate, I want to talk a bit more now about agriculture specifically,

because it is extremely important as a driver of industrialization. Basically, what happens to happen for industrialization and modernization to occur is that you have to get most of the people who previously were working in agriculture to now be living in cities and working in factories, making manufactured goods. That's kind of core behind the whole idea of the take-off. And in order to do that, you have to have a way of feeding your population. Prior to the development of more modern agricultural techniques, let's say in the 18th century, this just wasn't possible.

No country could afford to feed more than 20, 30% an absolute max of its population who weren't directly engaged in food production. And many countries, it was closer to maybe 10 or 15% of its population wasn't engaged in food production. Remember, everyone who's not engaged in food production has to have someone who's making the food for them. And you have to be efficient enough in order to be able to grow enough food to support these people who are doing other things. And this is a big limitation on how many people you can have working in a non-agricultural sector.

You have to be able to feed them. So that's a key role of agriculture as providing a source of food for urban and agricultural workers. It's also a source of the labour supply for people who will be working in these factories. They've got to come from somewhere. They're coming from rural areas. they're coming from agriculture. It's also a major source of capital for industrialization through food exports. I don't think this was as much the case in the UK,

but certainly in many countries like Russia, for example, used this extensively, and I think countries like China as well to some extent, you need to be able to fund industrialization. Basically, that's importing the expertise and the machinery and probably also some raw materials needed to fuel the factory, or to build and then fuel the factories and to set them up. You've got to pay for that somehow, and you've got to pay for it through exports because, you know, you've got to provide something that people in other countries want that you have.

And you don't have manufactured goods because, you know, you haven't industrialized yet. You might have some raw materials, which some countries have used, for example, you might have large oil deposits, but a lot of countries don't have that. Japan, for example, famously doesn't have much in the way of natural resources. So how do you industrialize if you don't have natural resources? Well, basically, you fund it through food exports. So you export food and import manufactured goods. what many countries around the world have done to fund their industrialization, at least at first, before they've got any domestic industry that they can use to fund it.

So basically, it's important for agricultural productivity to rise sufficiently so that the smaller proportion of the population can feed everyone else and can also provide for food exports. In the 1920s, one of the things that Stalin did during enforced industrialization is kept up food exports to pay for the advisors and the raw materials and the factories that they were importing from overseas and the machinery and so forth, even while, at least in some parts of the country like Ukraine and parts of Central Asia, parts of Russia as well, but particularly in the Ukraine, millions of people were starving.

The point is that the logic behind that is not so much just because, well, we want these people to die, so we're going to export the food, but it's that from Stalin's point of view, they absolutely needed that capital to fund the industrialization that he thought was essential to the survival of socialism. I don't intend that to come across as a defense. It's just in terms of an explanation of the logic behind the decision. comparing agricultural systems in different parts of the world is of interest to see how the agricultural systems are sort of doing in terms of whether they might be suitable for transitioning to an industrialized economy. The agricultural productivity gap between the most productive farms in the first world and the least developed, leased productive farms in the third world, is about 50 to 1, which is similar to the GDP productivity gap. So that's saying that in developed countries, farmers can produce 50 times as much food per person as they can in developing countries, which is a massive difference.

This is caused by continual technological innovation in the developed world with improved crops, new fertilizers, use of machinery, improvements in the supply chain, and many other things that are just not adopted in many parts of the world. So the share of labour force employed in agriculture is proportionally different. Obviously, if you're only producing one-fifth of the amount of food as farmers in the industrialized world are, then you're going to need way more of your population in agriculture, unless you're importing a lot of your food, which some countries do, but most developing countries can't afford to import huge amounts of their food, because they'd have to export something, and they don't have things that would be worth exporting in many cases. Again, some do. Some have a lot of oil or other raw materials, but many don't. So in the Central African Republic, which is one of the poorest countries in the world,

about 85% of their population is employed in agriculture. Now, this is about what you would expect to see from a sort of standard pre-modern economy in the 18th century. So it's perhaps shocking that there are still countries that are kind of at that level, that much of Europe was, in fact, much of Europe was even more developed than that in the 18th century. You're talking maybe 16th century levels of development.

So some parts of the world are literally like 400 years or more behind the West in terms of just levels of economic development. even though they do have access to modern technologies, at least to some degree. So this is sort of one of the big questions. It's like the modern technologies are there, the seed varieties are there. Why are they not being used more by the poorest countries in the world? Maybe they wouldn't have the latest of everything, but at least they're using 18th century levels of technology in some cases.

How can we understand this? This is one of the big questions that I'll try to address in some of the later episodes of this series. But coming back to the share of labour force in agriculture, So it's about 85% in the Central African Republic. Many African countries, sub-Saharan African countries, is not quite that high. Mozambique, as an example, it's about 73%. Afghanistan, 62%. So that's a poor country in Central Asia.

India, it's about 42%. So that's a lot lower than Sub-Saharan Africa, but it's still very high. Country like Turkey, which, as I said, is kind of a borderline developed country, it's about 20%. So still quite a lot of people in agriculture. But comparing that to developed countries, so Japan, it's about 3.5%. and they deliberately try to protect their rice industry, so it's probably exaggerated by that. France is about 3%. In the US and Germany, it's about 1.5%.

And so most developed countries, you're talking, say, 1 to 3% range of the proportion of the population in agriculture. It varies obviously by climate and agricultural policies and other things, but it doesn't vary by that much. Middle-income countries like Brazil, 10%, China, 18%, Egypt, 24%. So they're kind of in the middle there, and you'll see that the very poorest countries like 70, 80%. So you can tell a lot of country about a country's development by how much of its country, of its labour force, is working in agriculture. But this also reflects differences in productivity, as I also mentioned. If we look at some of the other differences in the way the agriculture system works in different parts of the world, in Latin America, there's a land tenure system

that's called the Latifundia-minifundia system. Apologies for pronunciation, that's probably not very good. This is a dualistic land tenure system in which there's a small number of huge commercial estates, these are the Latifundios, that are large and employ many laborers to work on them. And then there are large numbers of very small properties that are called the mini fundios, much, much smaller, and are generally worked by the people who own them, so they're sort of small holdings, subsistence-oriented, generally found by peasant households. I think this system, this is a very old system that dates back to the colonial times. I think it's been undermined a little bit in recent decades, but as I understand, it's still largely

descriptive of the land tenure system in large parts of land America. Many of these very large estates are not as efficient as the small family-owned estates, which might be counterintuitive because we often think, well, those economies are scale and you can use more machinery, and you might have the capital to invest in technological improvements and so on. In principle, that's the case, but in practice, there don't seem to be very high returns to scale for a lot of types of agriculture. This isn't true for all types of crops, but empirical evidence that I've scenes seems to indicate that for many types of crops, there aren't very high returns to scale. So having a bigger farm doesn't help that much. Plus, there seem to be costs to

having larger farms. So it's harder to monitor how much effort people are putting in, and that's much easier to do for family farms. Also, it seems that many of these larger states have a lot of special political advantages, and there's a lot of social clout that's gained from having that large land earnings. We talked about this in previous episodes, that land was, gave you status and political power, and it was often held for that reason, less so directly for economic gain, although it was held for that as well, but that wasn't like the primary reason that it was held in the way we would tend to think of it in a developed sort of commercialized economy where the purpose of land is to yield a return, not predominantly to provide political advantages and social prestige.

So this seems to be still the case to a significant extent in many Latin American countries, as far as I can gather. And so because they get a lot of special political and tax and other advantages to holding their land. They're not under the same commercial pressures to be able to provide the highest return. And there are other issues as well. There's probably restrictions on foreign ownership in many cases, and it's difficult for any people domestically to get enough capital to buy out the landowners and implement more modern techniques, as you might expect, would happen, because, as I said, there's restrictions on who can do that, and many of them don't want to sell because of the other advantages they get from large land holdings.

So for a combination of reasons, it seems that these large states are not. not very efficient and that reduces the effectiveness of agriculture in Latin America. Sharecropping is a different form than the two sorts that I've mentioned. It's a form of agriculture in which you have a landowner and a tenant. The tenant uses the land in exchange for a share of the crops that goes to the landlord. Whether share cropping is efficient is controversial. There's a disincentive effect on the part of the tenant because basically they have a tax. They might only be able to keep half or maybe two-thirds of their produce and so there's a a disincentive for them to work quite as hard as they would if they got to keep all of it.

But also there's a reduction in the incentive for them to invest, because, again, they're not going to gain all of the benefit of that increased productivity. Also, they don't actually own the land themselves, so there might be an issue of whether they'll be able to continue working that land long enough to gain the benefit of that investment. However, it is a fairly widespread institution. It's used quite a lot, as I understand in, at least traditionally, in Southeast Asia. It may be changing with modernization there.

and it's been used all over the world. They're economists who've argued it both ways. Some say that it's inefficient because of their sort of high tax that implicitly you have, with the landowner taking a big chunk of it. But then others say that it reduces transaction costs because it's much easier to work out sort of who's working what and you don't have to sort of monitor them to pay a wage. You can just kind of they pay their own wage in a sense

based on how hard they work and how much they invest in their land. And so it might be relatively efficient compared to other possible institutions. So anyway, this is rarer in Latin America, but more common in Asia. Then we've got subsistence agriculture. These other forms may be subsistence as well, but subsistence agriculture particularly refers to when a farmer just grows food crops just to meet their own personal needs and doesn't sell anything to anyone else. In the true form, they would own land through traditional land rights,

and they wouldn't even have a landowner of any sort that they have to pay to, maybe there's a small tribute that they have to pay, as a village to some local landlord or political ruler or some sort, but directly they only produce basically for their own use. Subsistence agriculture of this sort is mostly found in sub-Saharan Africa. It is found in parts of Latin America and Southeast Asia, but typically the most primitive forms of agriculture are seen in sub-Saharan Africa, which use traditional tools, small plots of land. Labor is scarce during harvest and planting seasons, but it's relatively abundant in other times of year

when labor is under-employed because there's not as much to do. And so in some parts when there are jobs available, the men will move to the cities or the mines or other places to get wage labor during these relatively slack times of year. There's another type of agricultural practice called shifting cultivation. This is an agricultural system in which there are plots of land that are cultivated only temporarily, and then they're abandoned and allowed to go fallow

and return to natural vegetation as the cultivator moves on to another plot. The idea is basically it's typically used in areas in which the soil is relatively sparse in terms of nutrients. So this is particularly common in tropical areas of rainforest, where, although there's lush vegetation, so you can burn that vegetation, and it leaves all of those nutrients for the soil, which is good for a few years. But because they have the heavy rain, basically leeches a lot of the nutrients through the soil, the soil is actually fairly not very dense in nutrients. it is in other parts of the world. And so basically the soil is only good to support agriculture for a few years until you need to move on and burn a new part of the rainforest. Shifting cultivation can work well if the population densities are sufficiently small such that the rate at which they burn down the rainforest is the same as the rate at which the rainforest

recovers. It takes a long time for rainforest to recover, so you can't have large populations. And the indigenous peoples that practice this, particularly in the Amazon and in other areas as well, of rainforest, therefore were restricted in terms of the population densities by this fact. But when you have people moving in from other regions to practice shifting a cultivation in particularly the Amazon these days, it's done at a grossly unsustainable rate, and it's a major cause of deforestation in many areas of the rainforests, especially the Amazon. Now, in order for agriculture to modernize beyond these traditional systems of share cropping, or the Latifundia-Muni-Fundia system in Latin America, or subsisting agriculture, there need to be a wide range of things that happen. In particular, basically, more modern agricultural practices need to be developed, which includes use of fertilizers,

pesticides, modern crops, modern machinery, and proved just management overall. There's many modern management techniques that are used in agriculture, which can increase yields as well. So there's a whole range of things that need to be adopted in order to improve the productivity of agriculture. So one question that I raised before is, why are these modern agricultural practice is not more widely adopted in developing countries. They can yield massive increases in productivity, so you'd think that there'd be strong motivations to do so. Even if you're a sharecropper and they're getting half of your return, still, a half return on a tenfold increase is still a big increase, so you'd think you'd want to do that, right? Well, this is still

subject to ongoing research, because it's complicated. It depends on the location. One reason that modern seed varieties are not used everywhere is because they're not always appropriate to the native soil and climate. This seems to particularly be a problem for sub-Saharan Africa, although it's hard to be certain because there's a lot of other things that are going on as well, and it's hard to compare like with like. The Green Revolution was a huge series of research technology transfer initiatives that occurred between roughly 1950 and 1970, that dramatically increased agricultural productivity around the developing world, mostly in India and Southeast Asia and to a lesser extent in Latin America. It didn't have as much of an effect on sub-Saharan Africa

for reasons that seem to be complicated, but partly are related to climate and also widespread corruption and lack of infrastructure in those regions. But at any rate, this resulted in the adoption in many places of high-yielding varieties of cereals, such as dwarf wheats and ricees, and also the more widespread use of commercial fertilizers and pesticides and other chemicals. So this has had a particularly big impact in India, and is thought to be, have significantly saved many lives throughout the world by increasing agricultural yields. Also, presumably, although I don't know if this has been directly tested, enabled further economic development in these regions by freeing up people to move into the cities who can then work in industrial jobs and contribute to the take-off period.

So there has been adoption of these more modern techniques in some regions, but it's been patchy and not all modern techniques have been adopted and some things have been faster to grow than others. So one reason that I've just mentioned is that crop varieties aren't always appropriate, but that doesn't seem to explain everything. Another reason is certainly mechanization is a difficult thing to do if you're not used to working with machinery, it's hard to get access to spare parts, you don't have roads to bring those spare parts to you

or to even ship enough of the product away to sell. And markets locally might be pretty thin, so it'd be difficult to sell the extra produce anyway. So it's kind of hard to just sort of be the one farmer who modernizes everything because the surrounding infrastructure and institutions don't necessarily exist. That's particularly the case for mon machinery. To a lesser extent, it's also true for pesticides and fertilizers, but generally

those are easier to use in terms of you don't need to, you know, regular maintenance or as much skill to use those. That's relevant factor as well. Often when these things are used, they're used in the incorrect quantities or in the incorrect way just because there's a lack of education. Risk aversion does seem to be a significant factor here as well, and that's not necessarily irrational because you might have a mon technique, which probably will give you a big boost, but might be higher variance, especially if something goes. is wrong. You know, you've never used this fertilizer before. No one in your villages use this, or the new crop variety, or whatever it is. Probably it's going to be good, but there's a small

chance that it might go very badly for you if you screw something up or just, you know, something that you don't expect happens, or perhaps just intrinsically, it's a bit more variable than the old crop. But the thing is that for a person in developing country, if you have a bad year, well, you might have to tighten the belt, you might have to go on welfare, you might have to borrow money, but you're not going to starve. You're probably not going to be homeless, whereas if you're on the edge of extreme poverty and you have a bad year, that could literally be life and death for your family, or at least it could result in you going into large amounts of debt that you have very little prospect of being able to repay, and you know, you don't

have bankruptcy laws in the same way that you do in developed countries. So basically, it can be rational for farmers to be quite risk-averse for these new technologies or new techniques and crops, and so that's thought to be one reason for why there's a resistance to using new untried techniques, especially when they haven't been tried locally, when you have the difficulty of transferring that information and the techniques of how much of things do you need to use and what time of year do you plant this and what fertilizers the best and all of these locally specific knowledge that might be quite hard to develop, and you can't just directly transport from overseas.

Another big problem for subsistence agriculture is credit constraints, so you generally have to borrow money to buy the new seeds or to buy the fertilizer or whatever machinery or tools that you want to purchase. Now, in theory, you could borrow money against the money you're going to make by the return to your investment, but that requires a properly functioning capital market and borrowing market that often doesn't exist in developing countries at all, least of all for subsistence farmers, and often they don't have the capital needed to be able to borrow that money anyway. This is changing a little bit with the rise of microcredit, which is basically making small loans to people in developing countries, but it's still a significant

problem. Another problem that seems to impede change in agricultural markets, especially in the poorest countries, is what's called interlocking factor markets. This refers to if you have a tenant and a landlord, generally they're not just a tenant and a landlord. Generally, the landlord's also going to hire them to work in various capacities on their land, or perhaps they have a mine or other things as well. The tenants often also likely to borrow money from the landlord, or at least like a client of the landlord. They may also share costs for purchasing inputs or marketing their outputs. They might combine and sell to the same seller.

So the point is that there's many interlocking interactions that they have. And basically, if you try to rock the boat in one of them, then that might upset the arrangements you have in other areas. And so it can be difficult to change one thing without potentially causing a lot of issues in other areas. And remember that elites in, well, arguably everywhere, but especially in developing countries, are generally quite risk-averse,

because, you know, they've got a pretty good deal, And you don't want to rock the boat and do things that might disrupt the status quo. I'm not saying that's the case everywhere, but it does seem to be a significant factor historically and probably is still the case in a lot of areas. So these reasons, risk aversion, the fact that mon techniques aren't always as applicable, especially new crop varieties in the local climate, credit constraints and interlocking factor markets all contribute to the fact that there's often the difficulty in adopting the latest agricultural techniques and technologies in developing countries.

But it's not fully understood exactly the nature of all these barriers and which are the most important, and some of them seem to be important in some cases, but not others. So this is still an ongoing area of research. So there are a number of ideas that people have come up with to promote agricultural reform to try to help improve agricultural productivity and therefore free up the labor and surplus food to be able to fuel the industrial takeoff. I mentioned the Green Revolution. Use of cash crops is another one.

This has been promoted a lot recently by the World Bank. as a way of increasing earnings, and it has been somewhat successful, as I understand in that, cash crops is a crop that's grown to sell for profit rather than locally used as a subsistence crop. So in regions with a tropical climate, as most developing countries are these days, the main cash crops are coffee, cocoa, sugarcane, bananas, oranges, and cotton. I feel like tobacco is one as well, and that's not in the list they had. But anyways, so there's a range of these crops. One issue is that often there's capital investment to starting out in these. But also, if things go badly, at least if you're a subsistence farmer,

if you have a bad year, you can at least eat your crop. But if you're a subsistence farmer and, say, the world price for coffee or sugar cane or whatever goes way down, or there's some disaster that makes it difficult for you to transport it to the port or whatever, and there's many different things that can go wrong into developing country whose institutions and infrastructures generally aren't as good, then you're kind of stuffed. You can't eat the sugar cane or the coffee or the cocoa. I guess you could eat the oranges and bananas, but you can't really survive just on bananas, nor can they be stored for as long. So anyway, you get the point is that it potentially causes a significant downside risk to transitioning to that. But also, there's the instance that

income is typically just more variable because the prices of all these things fluctuate quite rapidly. Cash incomes are also easier for the national governments to tax. So previously, you might have been able to not pay very much tax because you were just producing mostly for your own consumption, maybe consumption in a village, maybe you sell a little bit to on the market to own a little bit of cash, but that would have been harder for the state to tax, whereas if all your income is in cash, then it's easy for them to tax, and people are going to ask you for more bribes because they know you've got the cash to provide it. That's a big problem in a lot of developing countries we'll talk about later on. So there's downsides to cash crops as well,

so it's not a fix-all solution, although it does seem to have helped in some countries. Another potential reform is land reform, so this basically means breaking up land ownership and giving it in smaller holdings to the people that work the land. So breaking up the Latifundios, for example, and distributing the land to its tenant workers. A few countries have done this. Mexico, for example, did so following its revolution. Transfers could be with compensation or without compensation,

and there's evidence that land reform does actually increase the efficiency and the intensity of the use of land, so it can be beneficial, not just from an equity point of view, but from an efficiency point of view. There is the concern about the political risks, though, expropriating people's land that might reduce investment and cause a flight of capital or perhaps some of the better educated or wealthier farmers. This seems to have happened as a classic example of this as a result of the confiscation of land from white farmers in Zimbabwe.

This does not seem to have been good for their economy. So it seems to be partly an issue of the political landscape and the way that it's done. Another mechanism that's sometimes used or advocated at agricultural boards. So an agricultural board is basically just like an agricultural ministry that's involved in regulating agricultural products and marketing, maybe involved in stabilising agricultural prices. In some countries, they have a monopoly over agricultural exports. That's usually done for the government's benefit, not for the farmer's benefit,

although they often like to argue that it's for the farmer's benefit. Often the boards act under political pressure to provide employment for basically people in the cities to work on the board and not necessarily do anything very productive, and also to ensure that they pay farmers low prices so that the agricultural board can get more export earnings and also often provide subsidized food to urban dwellers. This is important because it's generally the urban dwellers

who have the most political influence, either through sometimes through elections, but also just through rioting or instigating a coup or something like that. So you've got to keep them on site. Mostly the subsistence farmers out in the rural areas are of much less interest to non-democratic or authoritarian governments. It's read that they pose much of a threat. Sometimes they can, but it's less common.

So anyway, agricultural boards have lost a lot of their powers that they used to have. They were very powerful in many developing countries back during the Bretton Woods era. These days, they're still around and there's still a lot of subsidies, but I think that their activity has usually been reduced. And I think that a big reason for this is because generally they weren't there to help farmers. They were there to raise revenues for the government to help subsidize food for the urban dwellers. Another potential reform is increasing the security of land tenure.

So in theory, the stronger land rights that someone has over their land, then the more eager they'll be to invest in that land, the more certain they'll be that they won't be the land or the products of it won't be confiscated by the government or by the landlord or by someone else. It should also provide them for the freedom to innovate and introduce new techniques without having to get permission from other people in the village or the land owner or whoever else they might have to ask. So in theory, providing for stronger land property rights should be very beneficial for promoting investment. In practice,

such gains have been quite difficult to measure. There have been some gains that have been documented from empirical studies, but often it's not resulted in as much of an improvement in efficiency as we might have hoped. There have been some types of investment that do seem to be significantly affected, including tree plantations, fencing and manuring of agricultural fields, but not for other types of activity or other types of investments. It seems that one of the reason for this is that the ability of states in many of the poorest countries, particularly sub-Saharan Africa, to effectively implement and enforce property rights is just often not very high. So trying to do it doesn't actually necessarily get you very far.

But that doesn't seem to be the only thing. It also seems that expropriation of land is just not a very big risk for many people in sub-Saharan Africa. It happens sometimes, it just generally not that often, and so it might be reducing a risk that's not the main reason that they weren't investing previously. In addition, traditional land rights, which are generally based around the village or the family level often seem to be just actually quite good compared to the fairly bad modern protection of rights that's provided by many sub-Saharan African states. So you're replacing a traditional thing that works kind of well with an in theory better but in practice often not very effective modern land rights system. So it's not necessarily that much of improvement in a lot

of cases. The final reason this doesn't seem to have been really lived up to its promise is that credit markets in sub-Saharan Africa are just generally not very functional. So you can't really use your land as collateral to get a loan anyway, and that's one of the potential big advantages. And so that's not really possible, even if you have a good title, so it doesn't really help that much. In fact, there often seems to be a case where people will make investments in their land precisely in order to increase the security over it, because if you fence in a land or build something on it or change it in some way, that increases your claim over it, especially if there's, as in many traditional land cases, there can be a bit of an ambiguity as to exactly who's, you know, plot ends where or

who owns this. In many cases, it's well, known, but when disputes arise, you know, if you've done more to the land, then it's going to account for your case more. Because people are making investments not just for the return, but actually to increase security of the land, that makes it difficult to measure the effects of improving land security, because you've got kind of this reverse causation sort of thing. At any rate, to sum up the issue of agriculture, there's still a lot of inefficiency in agriculture in many developing countries. There are a number of things that people have proposed to promote change, including reforming the, including land reform, agricultural boards, or reforming agricultural boards,

improving land tenure, and introducing more cash crops or other improved crops from overseas. All of these have helped somewhat, but none of them have really been a sort of singular fix, and that's perhaps not surprising, and there are many reasons for this which we discussed. So let's move then to talk about urbanization and the growth of industries and cities. So urbanization is a critical component of economic growth, because you've got to have enough concentration of urban workers in a single place to engage in manufacturing. Even in advanced pre-industrial economies, only about 10% of the population typically lives in cities. That's, again, largely limited by the fact that it's very difficult to feed very large cities

in terms of producing the food and then getting the food to the one place. In England and Wales, the proportion of the population living in cities with more than 20,000 people, jumped from about 17% in 1801, so that's already just started industrial evolution. to about 54% in 1891, so a massive move from the country to the city. And this is characteristic of essentially every industrialisation that's really ever happened is a massive movement to the cities. One of the big reasons for this is what's called agglomeration economies. It's a rather long and confusing word, but it basically just means economies from coming together,

agglomerating. Cost savings thought to arise as a result of firms being located near to each other because it means they have lower transportation costs. If you're all located near the port and your suppliers are near the port and the people you sell to are near the port and the port is where you transport goods away or perhaps it's the railway station or wherever else, then obviously that's going to reduce costs. Also, you're going to have a greater supply of labour because the labour all goes to the one place. You've got people with special skills or just a larger pool of unskilled labour all readily available. It's going to be much more economical for everyone to have one rather than have them spread across many small villages. There's also thought to be knowledge spillover between firms.

this is a big subject of research. Recently, I'm slightly skeptical about this. There's no doubt that it does occur. It's a question of the degree of magnitude. A classic example of this is like Silicon Valley, where you have all the tech, not all of them, but lots of the tech companies working in like the same small area.

Why do they do that? Well, one reason is because that that's where the workers go. We have these skills, and so it's easier for them to be concentrated. The workers can find work easier, and the employers can find laborers easier. And that doesn't just happen for tech industries. It happens elsewhere as well. That's just a good example.

But also the idea of the knowledge spillover is that, you know, if someone comes up with an innovation, a new process or technique or a product or whatever it is in one firm, then, you know, they, because they're in one place, they talk to each other, they socialize over coffee, that they know people who used to work in one firm and so on. So there's a much easier exchange of information between people when they're in, when they're in one place. It makes a lot of sense in the context of, you know, the 19th and early 20th century that this would be important. It's less obvious as to why it would still be important in the internet age, but it still seems to be someone important, perhaps because a lot of this knowledge is hard to write down or transmit in a way that's sort of easy to do over the internet, or just less likely that people would take the time to do that for cutting-edge technological stuff. Another reason why it's helpful for firms to agglomerate is that there can be greater specialization due to a larger market for the suppliers of those inputs. So if there's only, if you're in a city of 50,000, then there's probably only going to,

to be, you know, one firm that specialises in making, I don't know, a particular type of industrial component. Maybe you need a city of 500,000 in order to support three or four different firms, but the more firms you have, the more they can specialize in doing just the niche particular things that you want for your factory, plus more firms means more competition, which generally increases efficiencies. So there's all sorts of these reasons, transportation, specialized labor, knowledge billovers, competitiveness, that produce advantages. for firms and therefore workers concentrating in a few urban areas. And to try to take advantage of this, some countries have established industrial districts

to try to deliberately attract firms, particularly from overseas to invest in. So there are many of these in China. So for example, I just love this example, Chiao Do, which is in eastern China, city in eastern China, produces 60% of the world's clothing buttons and 80% of the world zippers. So if you have a zipper, almost certainly, or very high likelihood, it was produced in this one specific city in China. That's kind of crazy, but it seems to support this notion that it's not just because there's one factory, there's like lots of firms, they're just all in this one city.

I presume that's because they have all of the specialized workers who know about the techniques and the tools, and that this is where you go for the knowledge, and this is where the suppliers ship the stuff. So if you're going to open a zipper factory, that's the place to do it. And that's a very extreme example, but it seems to happen in many industries as well. And so you need urbanization to be able to support that. urbanization has increased throughout the world dramatically in the past 200 years. I gave the example of the statistics from the UK. I think just a few years ago, the world passed 50% urbanization for the first time ever in its history.

That's a huge milestone. China also has a few years ago past 50% urbanization. They've been urbanizing like crazy since the late 70s. There are, however, problems with urbanization. So one is called urban bias. Basically, this means that because you've got all these business and also labor interests, concentrated in a central location, often near the national government, there's a strong political pressure for the government to protect their interests.

So this can mean restricting foreign trade or providing subsidies from them that are taken essentially from rural dwellers, such as subsidized food prices. But it's not just industries as well. So labor unions, political parties, students, civil servants, these are all sort of tightly clustered groups of people who are situated in urban areas who are then, because of their organized and sort of relatively homogenous status, able to put pressure on the government to adopt particular policies that are beneficial for them, but might not be beneficial for the rest of the country.

So that's a problem that's occurred in many developing countries. Another problem is the urban gigantism problem. So there's such things as agglomeration economies where it's good to be together, but there's also dis-economies to having too much agglomeration, and this is called urban gigantism. Cities get too big that they grow larger than their optimal size, because there's a cost, obviously, for everyone living together. Government services become more difficult to provide because there's just so many people and such a density of the population. Congestion of traffic is obviously a huge problem in these big cities, especially in developing countries that often don't have very good infrastructure.

And also, poor government policies and failure to provide the proper incentives and infrastructure to develop in a sort of organized or sustainable way. There's also such thing as a first city bias, which is a bit strange, but it's the fact that a country's larger city, Usually it's capital city, but not always. So, for example, in Brazil, it's not Brazil, it's Sao Paulo. But it's often the capital city receives a disproportionately large share of public investment and incentives for private investment. So examples of such cities include Buenos Aires, Santiago, Mexico City, and Lima, where you have the one city that is huge, and then the second biggest city is tiny in comparison to it. And this is generally not efficient.

It's generally better to have a smaller number of medium-sized. cities rather than one massive city and then nothing else, just because you avoid these dis-economies of having one really large city. It's generally made worse in dictatorships where you have firms that are clustering to try to get political favors, which are most important when you don't have that same democratic oversight. Another issue is the informal urban sector, which is the fact that the majority of people living in these really big cities in developing countries work in the in small, unregulated, untaxed, low-technology enterprises. I mentioned this in the first episode as Well, these include rickshaw services, food vendors, small crafts, junk collecting and reselling, prostitution, street entertainment, just random day laborer, other sorts of tasks.

These are not very efficient. It does provide a lot of employment for unskilled workers and generally higher wages than you could earn in rural areas. But it's thought that the productivity, well, the productivity of these is demonstrably low because they're just not really using any human capital or industrial skills of any sort. And so you're not taking full advantage of your labor force. But the proportion of people working in the informal sector is large. In many cities, it's as much as 60 or 70%. Cities like Jakarta, which is a bit more developed. It's about 30%.

Belgrade in Serbia is another example. This is a slightly out-of-date information. But it gives you the sense that in many developing countries, there's at least half of the urban labor force is working in the informal sector, and therefore not taking advantage of much in the way of modern technology or productivity. So, moving on from the pros and cons of urbanization, I want to talk a little bit about capital accumulation, because this is another very important component that we need to understand about

structural change. So we talked about the importance of agriculture, the importance of cities and urbanization, capital accumulation is vital as well. Basically, you need to acquire large amounts of capital in order to purchase the machinery, the raw material inputs, the expertise, and the technology from developed countries to modernize your economy. And you need to also be able to reinvest the returns of the investments that you make in order to continue to add to your capital stock and to grow and to generate returns for the future.

So you need to be able to save enough domestically. It's often difficult to get those savings going because poor countries are poor and so don't have a lot of savings or ability to save because they're poor. And I also mention that in pre-modern economies, there's often not a lot of incentive or ability for those who do have money to invest in productive enterprises, often because to do so would be to instigate economic change, which is generally not in the interests of the people who are in elite.

positions in these countries. So it's difficult to get that situation to change. Sometimes it will change when a government decide that it's going to push through industrialization. That's happened in different cases such as in South Korea or in Indonesia in the 1960s or in the Soviet Union during the 20s and 30s. Different policies were pursued there but there was still a general idea that the state wanted to pursue industrialization. Often these governments come to power by disposing or being put into power by an external party. They deposed the existing elite. So a new elite comes to power, which has an interest in industrialising, ideologically, and often to reinforce and sustain their claim to power.

If it's still a traditional elite that's in power that doesn't have an interest in engaging in these sorts of investments, then it's much less likely you'll be able to get the initial capital needed to start the process. Generally, the initial capital in cases where the state's pushing it will come through, as I said, the rural sector and some combination also of natural resources, exporting those, keeping the prices they pay to farmers relatively low so that they can essentially engage in forced savings by keeping those prices low. You can also get the money through tax revenue. Often these developing countries don't have a great ability to extract tax revenue, and so they do it through basically purchasing agricultural products at cheap prices and then selling it at much higher prices,

which really is just a form of taxation, but it's an indirect form. Once you get growth going, you can sustain very high rates of domestic savings, such as in China of, I think, 40%. I think it's gone down a little bit recently, but that's a result of government policy, partly because you can get very high returns to capital, because you're investing in an area that didn't have very high capital before. We'll talk about in the next series of episodes how you expect to have much higher returns of capital in poor countries compared to rich countries as long as you meet certain prerequisites.

So this capital accumulation is an exceptionally important part of the growth process, and you just can't get growth happening without that capital. So moving to the final thing that I want to talk about in terms of the structural change aspect is modernization and reform. So economic growth is not a one-time thing. It's a continually dynamic process in which you have regular change, adoption of new improved technologies and also business practices. You had to have new firms coming along, old firms dying, new technologies going away, old technologies coming away, new technologies being adopted. And economies, therefore, must balance between adopting existing technologies from overseas,

so imitating things that have already been done, and also developing new domestic technologies that are relevant to them and they can have an advantage in that's innovation. So when you're really poor, you're probably going to mostly just do imitation. Why we invent the will, people have already got better techniques overseas, let's just do them here. That's what China's mostly been doing over the last few decades. They're trying to move a bit more in the innovation direction,

which is developing new novel things. It's important that an economy has the institutions that permit continued innovation and also allow for domestic innovation. And that was one of the big problems with central planning is that it was set up to engage in imitation, import those technologies from overseas to build up a big industrial sector,

but it wasn't set up to allow really any significant innovation to develop new technologies or even import new technologies from overseas that didn't fit into their models, like electronics, for example, which never really took off in the Soviet Union to any significant extent. And as countries get closer to the frontier, that is the richest developed countries, they'll have to rely more on their own innovation because they've basically picked all the low-hanging fruit. They've already picked all the

imitations that they can use. And so there's going to need to be a transition there if growth is to be able to sustain. Some countries don't succeed in doing that. They get to a level where they're kind of imitating other countries and they're kind of in a middle income level, but they're not able to reform and bring in the innovations and the newest techniques and also innovate their own techniques to achieve the highest levels of income. And this is what's known as the middle income trap, which we'll talk more about, future episodes. Another thing that's necessary for modernization is bringing corruption under control. So corruption is ubiquitous in really all developing countries, some worse than others, but it's a

problem everywhere. But you really need to get it under control once you start reaching the middle income level, because you need businesses to be able to have more certainty about their returns so that they're willing to engage in riskier, higher cost, more sophisticated types of investments that you're going to be able to need. And also, you're going to need states that can provide those public goods necessary for modern economy, like a sophisticated medical system and a tertiary education and so on. It's harder to do those things when you have high levels of corruption. So we'll talk more about the sorts of institutions that are necessary in order to sustain

growth, but it's important to understand that it's not just about moving workers from agriculture to industry and importing those technologies. That's the first step, which is sort of equivalent to Rosto's takeoff. But then for the drive to maturity and particularly reaching the age of high mass consumption, you need continual innovation and economic and political reforms to enable you to reach that of sophistication in the economy and not just rely on the sort of same old things, which can only get you so far. Part of this reform process is this really become evident in the developed world since the 1970s, and I'd say particularly from the 1990s onwards, is de-industrialization.

So this is the process of moving away from industry, in terms of employment in terms of output, towards the service sector, which is kind of everything that's not industry and agriculture. So the percentage of the US economy that was focused on manufacturing peaked in the 1950s at about 25 to 30%. Since then, it's fallen significantly down to about 12% today, as of a couple of years ago. So this is recorded in 2020. For those of you listening in the future, it's probably even lower than that. Canonical example of this is a city of Detroit, which had a large auto industry, which employed a large traction of the city's population in the 50s.

But since especially the 1970s, the auto industry declined substantially there as many of those jobs moved overseas, and the population of the city declined from 1.8 million in 1950 to 0.7 million in 2018. So that's a decline to less than half of the previous level. I think the population, as a recording, is still declining, although I think it's beginning to level off. And large parts of the city just became abandoned and reverted to basically urban wasteland, or urban wilderness. It's a very strange phenomenon. That's an extreme case, obviously. Most cases, it doesn't lead the city to decline that much, but there have been declines in many sectors, so in northern England, for example, has seen similar declines because many of those

cities like Manchester were very big industrial cities in the 19th and early 20th centuries, and that's declined substantially. And the economy of Western countries has shifted a lot towards the service sector. Some people have the view that it's really manufacturing that counts, and of if you're not making something, it's somehow it's not real or it's not really adding value. This is really just, I think, a slight modernization of the old view that it was all just about agriculture. Remember I talked about in episode two,

and anything else was pretty much not really adding value. This isn't true, and it's a misunderstanding about where value comes from. It doesn't come from physical stuff. It comes from the value that people gain and consuming and using goods and services. And these days, just as in the 19th century, developed, currently developed countries, were able to, just as in the 19th century countries that

are now developed in Europe and the US and Australia and so forth, were able to shift a lot of their workforce away from agriculture towards manufacturing because a smaller proportion of the population was able to meet the agricultural needs of the country. Likewise today, many workers who previously were in manufacturing of being able to shift into services because a smaller proportion of the population is able to meet the manufacturing needs of the country. There's also a lot of imports as well, but it's just another step along the process of economic change, because remember, development is not something that happens once. It's not a series of steps. There are stages to it, but it's a process that's continually ongoing. An economy can never just stand still and keep doing the same thing forever,

because there's constant social change, political change, technological change, environmental changes, all sorts of things that you need to adapt to. And this was, again, the big problem with the centrally planned economies, the Soviet Union because basically by the late 1970s, the economy that they were trying to deal with it had already become so complicated and the system had become so entrenched that they just kind of wanted to keep going on with the same thing. And it didn't work. They were not able to sustain growth. It was increasingly clear to the people living there that their living standards was stagnating, whereas those in the Western countries continued to improve, and therefore it led to pressure for political reform that ultimately brought down the system. Obviously there's more factors than that to

it, but that was important. Sometimes there's this idea that we've sort of reached the end of history and this is the way the economy is going to look, and then if we lose jobs to automation or to overseas competition or to artificial intelligence, then somehow there will just be nothing left for us to do. There are some issues to discuss there, but I think the fundamental mistake in that kind of reasoning is to think that the way the economy is kind of fixed and won't change, and that therefore basically just what we have now minus the things that we're going to lose. Ignoring the many things that we will gain and the new things that will be developed and the totally new jobs that we can't even conceive currently or that don't make sense to do, that aren't economical,

that will come to exist. This is a process that's nothing new. It's happened continuously since the beginning of the Industrial Revolution's, and even a bit before that, actually, with the early buildup stages. So it's a process that's been going on for at least 250 years now, maybe a bit more than that. And it's important to understand this process of structural change and how it's a continual process, not only for understanding how poor countries become middle-income countries, but also for understanding how middle-income countries become rich countries and how rich countries can continue to grow,

or perhaps maybe fail to continue to grow, due to various problems institutionally and otherwise. That concludes what I wanted to talk about today. In the next episode, we'll talk about growth theories and try to put a bit more sort of theoretical structure on some of the things that we've been talking about. So hopefully you found this episode interesting. If you enjoyed the podcast,

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