Taking a Long-term View of Asia’s Economy: Two Millennia Bank and a Century Forward
Asia Society Hong Kong Center

Jeffrey D. Sachs
Columbia University

Hong Kong, April 13, 2004

I was going to try to tell more about Asia’s past than Asia’s future, which is a little bit safer probably. I said that I wanted to look back a bit so that we could try to look forward and I guess I’m probably going to take the easiest way out. The part of the future I want to tell you about is not the absolutely imponderable part about what’s going to happen in the next six months. Nobody knows that. But something about what might happen in the next 100 years because whether I’m right or not we’ll all forget that and it will be safer and maybe interesting at least to speculate on the long horizon.

Development economists struggle with the age-old question that Adam Smith got us started on, why some parts of the world are rich and others are poor, why some parts achieve economic development and others don’t. It is a question that inevitably one asks and it’s probably about the most important question for the world economy: What Asia’s prospects are and what Asia’s long and quite remarkable trajectory has been, how we can understand the past to better understand what the real economic challenges are for the future.

So, if you will indulge me I thought in the brief time that I’d like to share some ideas. In the half hour we could take a quick tour of 2100 years. I did want to look back to the beginning of the first millennium up until today and with the prospect of the 21st century. So, to get a long running start in order to peer a little bit into the future.

When one does this there is, of course, probably economic history’s most pertinent question and that is what happened to the Asian economy over a long and difficult stretch, which I believe Asia is now decisively coming out of. And so decisively coming out of that, as I’ll try to suggest, the 21st century is not the American century, it is really the Asian century unless things go seriously awry in ways that they need not to. Because the puzzle for Asia is how it is that Asia arrived at the beginning of this century, with few exceptions, still relatively poor, still relatively underdeveloped in the best parts of Asia after a long history which would not have lead us to expect where we are today.

If you start back in the year 1, there being no year 0, but start back in the year 1AD there’s one thing that has remained fairly constant on the shape of the planet and then a lot that has changed.

But the one thing that was as true in the year 1 as it is today is that the preponderance of the world’s population was in Asia then as it is today. As best one can reconstruct the long history of human population in at least the last two millennia and probably a bit beyond that, about 70% of the world has lived in Asia. Today it’s about 60%, of course I’m counting South Asia and East Asia and the much smaller populations of Central Asia.

Back in the year 1AD, according to Angus Madison, the best guess of the world’s population was something on the order of about 170 million people and Asia had about 115 million at the time.

It’s actually quite a fascinating question of why Asia was so populous then and remains so populous now. And the best guess is probably ecology and that is a combination of monsoons and rice growing which from as long as there has been history, modern history, has enabled a more dense human settlement in Asia than in any other part of the world. And the deeper reason for that seems to be some of the remarkable features of growing rice compared to growing any other crop in the world and that is before the 20th century discovery of modern fertilisers.

Perhaps the key limiting factor to growing food in the world was mixing nitrogen in the soil. Nitrogen being one of the predominant nutrients that all food crops need, if you don’t replenish the nitrogen you lose the capacity to grow food and one of the beauties of paddy rice is the natural fixation of nitrogen. And so the fact that without adding any fertiliser paddy rice discovered millennia ago could fix about 15 kilos per hectare of nitrogen and thereby replenish the capacity of the earth to provide food probably was the greatest single shaper of world population dynamics and of Asia’s incredible population from the very beginning.

Of course we have learned a lot since then about how to grow food and that led to a burgeoning worldwide population. And by the 20th century a great discovery of how to fix nitrogen through chemical processes through using fossil fuels freed up or allowed a multiplication of the world’s population in all parts of the world, including the green revolution in Asia. But Asia got the early start, Asia took advantage even of these 20th century discoveries and the one thing we see about population it’s always been centred here.

Now, the other thing that one sees in the year 1, as best one can judge, and the National Income Accounts statistics for the year 1 are incomplete, let’s say. But one thing we can be pretty sure of is that there were no significant differences in per capita economic output in any major region of the world. Every part of the world was living at the edge of survival in the most basic humble circumstances. And what that means is that as one looks back, in the year 1, Asia would have been the site of about 70% of the world’s economic activity as it was 70% of the world’s population.

The mystery from a very broad two millennium perspective is what happened to that 70% of the world’s economy that was in Asia? What we know is that by the late 1970s when the share of Asia in the world economy reached its smallest share in history, that share of economic activity taking place in Asia reached about 17%. So, from about 70% to about 17%.

And a long stretch of history at the time that Adam Smith was writing and then certainly for the next two centuries was the European period. And one of the great mysteries of economic development was why Europe, why not China? Why Europe and America, why not Asia more generally playing the kind of leadership role in the world economy.

Of course that question takes on added significance by realising that while everybody stayed poor for most of human history, up until the last couple of centuries, if one starts at the year 1 and takes a kind of ticker through the period up to the explosion of industrialisation two centuries ago, there were about 1,000 years where clearly Asia was in the lead from around 500AD to around 1500AD. Where the technology, the wealth, the relative income, the share of global economic activity, culture, art and science was clearly emanating from this region. And so the question of how Asia fell so far behind is even starker in light of a 1,000 year period of dynamism that was reversed substantially in the most recent 500 year period.

So, we know that the greatest flowering of relative economic activity for Asia was probably around 1000AD during the Song Dynasty in China. Not unusually it started with a great technological break through and, not surprisingly with the green revolution at the time, China was a northern Chinese civilisation up to around the beginning of the Song Dynasty in 900 and then by new crop breeding a new variety of rice, probably brought from Vietnam, allowed the massive settlement of the Yangtze River valley. And China moved from being largely a northern China settlement to a Yangtze River valley civilisation.

Interestingly, the population of China went from about three-fourths north of the Yellow River to about three-fourths around the Yangtze and south during the Sung period. And that was the greatest flowering of early capitalism that the world had ever seen and that’s when paper money was first established, when great technologies of printing paper, of the compass, of great navigational advances and so forth flowered.

Of course, China suffered terribly soon after that with the Mongol invasions and that whole story of the Chinese northern frontier, the constant invasions from the north, Chinese civilisation is one of the great beings of history and one of the reasons for what subsequently occurred.

But the story actually is probably more interesting from an economist’s point of view to understand that even after the Mongols had departed from China and the new Ming Dynasty came to power, China was probably in its most dramatic ascendant period at the beginning of the 15th century. And this, of course, is now well known and made famous by the eight great expeditions of the great eunuch admiral, Admiral Zheng He, who led a flotilla that was unrivalled in the world. And if any of us had been in a position in 1405 to take a survey of the world we would have all bet hands down, without exception, that China was on its way to global dominance for the next millennium and forever after because the quality of the flotilla, the power of China, the technological ascendancy, the startling ability of China to trade and have political, if not (?) controlled, respect all through the Indian Ocean made it just what China felt itself to be, the Middle Kingdom, the centre of the universe and it pretty darn well was just about all of that.

And yet, as history shows, it’s a cruel fate. That was also the very zenith of China’s relative power because it was not much after that first ocean voyage that the long downslide of Asian history can really be reported.

Those great eight voyages took place from 1405 to 1433 and they ended in 1433 with what must be the single worst piece of economic policy making in all of world history. And that’s saying a lot because we have some pretty bad policy making now in the United States. But this was even worse actually because, of course, what happened in that year, you will all remember, was China went protectionist, as it were. After this incredible unprecedented glory of navigation demonstrating China’s ability to reach virtually all corners of the known world and probably with a little bit of extra effort to have rounded the Cape of Good Hope and discovered the sea route from Asia to Europe rather than Vasco da Gama discovering it almost a century later from Europe to Asia and a lot of history being changed.

The Ming Emperor, under the strong influence of his powerful bureaucrats decided to scrape these voyages, to scrap the navy, to scrap the flotilla and actually to close China down for business for a couple of centuries. And those were the centuries that made all the difference.

China was under threat again of northern invasions so the capital was moved from the south back to the north. The international trade was deemed a frivolous luxury, the navy was scrapped, the voyages ended, the navigation and all the science that underpinned that basically brought to a close. And all of a sudden, through this unique and absolutely extraordinary episode in human history the Indian Ocean was opened up for these relatively impoverished and small number of barbarians at the other end of the Eurasian land mass, the Portuguese and the Spaniards and others who would soon come and find open sailing, as it were, to begin their trade with vessels 1/8th the size of what Admiral Zheng He was commanding and with the navigational techniques and technology in general that was far behind where China was.

But China began a 500 year history, well not 500 years, I would say 300 year history, 400 year history, from 1433 almost exactly 400 years, 406 years, of relatively self imposed isolation. For 150 years it was almost completely self imposed then by the time China opened up again for allowing a merchant marine and trade already the Europeans were swarming through military bases, military outposts and ports all through Asia and with superior military technology by that time.

And, of course, it was 406 years later that China rejoined the world but not on its own terms, but rather on the terms of an imperial navy sent by the British to make the world safe for drug trafficking. These were the opium wars. It just is striking to imagine the cali cartel coming to demand the opening of US borders because somehow the US was too protectionist against Colombian cocaine. And that’s exactly what the opium wars were, Britain’s play for free trade to be able to sell Indian opium in order to be able to afford Chinese tea. And so goes history.

But, you know, it wasn’t just the 406 years, it was one damn thing after another for the next 150 years. China really never got out of its self imposed policy disaster from 1433 until 1978. And that is a very, very long slide from a bad policy.

It does suggest that we should take care of our economic policies and think hard because once you start getting on the wrong direction you can’t be sure where it’s going to stop. It usually doesn’t last half a millennium but it can be a very long period of time of very serious errors.

Of course this isn’t all that determined human history. I want to mention a couple of other things because it’s very important for us to understand the future 100 years.

There was the policy, there was the geo-politics, that always together form one of the great shapers of human history. There was the demography and especially the demography coupled with the discovery of the routes of the Americas, not the discovery of the Americas those were discovered probably about 20,000 years ago over the Baring Straits, but Europe’s discovery of the way to the Americas after 1492. And, of course, the opening of the Americas was one of the prime movers of Europe’s ascendancy because all of a sudden all of the constraints of growing food, of adequate timber, of other natural resources were eased for centuries to come by this great, relatively open, space made even more open by the slaughter and mass death of the native inhabitants through disease and war brought by the Europeans.

There was one other huge, probably decisive, aspect of Europe’s ascendancy, which is as important as anything for the 21st century. We don’t know whether with all of China’s marvellous technology, which has been wonderfully documented in fabulous studies led by Joseph Needham and others, which clearly demonstrates China’s technological leap for at least 1,000 years in the world, where China had not pulled together from that and had not consolidated was a scientific revolution. And so there were technological revolutions one after another in China with great discoveries. But there was not clearly a scientific revolution.

So, I would say on top of all the great geo-politics and on top of all of the wondrous effects of the opening up of the Americas, the demographic changes, probably one would add in equal standing as the third great dimension of global change the names Copernicus, Galileo and Newton, who did something unique in Europe which had never been done before and which changed the world for all time to come. And that was to show the basic scientific principles that explain the operations of the earth as well as the heavens. And with those discoveries came the scientific revolutions of the next two or three centuries, which meant by the time of opium wars and given China’s isolation during that long stretch, the scientific and technological advantage of the west over all of Asia, I am using the China example just as a short-hand. But the technological advantage of the west over Asia was so remarkable and decisive that it allowed a relatively small population contingent of the world to utterly dominate a vast part of the world population for more than a century to come.

It was the wonders of science, fundamentally, which made all the difference for the breakout of mass poverty. There is no other fundamental mover of economic development than science and technology. It’s not the long saving and accumulation that did almost nothing under traditional pre-science circumstances. It only led to a slight advance above starvation levels and above subsistence but it never allowed a breakthrough. What allowed fundamentally the long term breakthrough of human society as a whole was the scientific revolution and the technological revolution that it unleashed.

Now, what I think is really important for Asia and what we’re seeing right now, referring to the present and the future, is that no matter where that revolution started it is a common heritage of humanity and any part of the world that wants to partake of science and technology has the ability to do so. Societies that are closed to the world, however, cheat themselves fundamentally. And the most that they cheat themselves is the absence of the knowledge, the self exclusion from that common pool of knowledge which is the fundamental mover of long term progress.

And such was true with China, such was true in Japan, such was true in other parts of Asia that the scientific revolution not only started in Europe but it stayed in Europe for centuries and it advanced in Europe with the literacy, with printing, with the mass scientific education. And it was only much, much later that it came to the rest of the world.

Now, in Asia we know, for a lot of very fascinating and important reasons, Japan was the first country to see that western science could be harnessed to eastern values to produce a revolution in living standards and that was the Meiji Restoration. So, the greatest economic revolution was the 1868 capitalist revolution which understood that at the core was a science and technology revolution that needed to be mastered. And Japan did that very quickly.

China didn’t have the benefit of that, nor did India. India was formally under colonial rule, of course. China informally so until 1910 and then in the spirit of one damn thing after another, even after 1910 and after the revolution, there was the disintegration of the state, the Japanese invasion, the civil war, Mao, this is really bad luck by the way. This is really a long, long unfortunate stretch starting from a bad policy in 1433. But it did and it was only with Deng Xiaoping’s arrival to power in 1978 that China could do what Japan had done 110 years earlier, which was to begin its own catching up revolution.

Now, what we see in Asia is that from that nadir of reaching about 17% of the world’s economy, virtually all of Asia is on to a remarkably dynamic path of catching up. It’s the Magee Restoration a hundred years later.

It is based fundamentally on mobilising knowledge, science and technology through openness. And this time, unlike the Meiji Restoration, it’s done under national sovereignty, which is one of the great advantages, I think, for the world. That we are not in an imperial age right now, we’re in an age largely of national choice and that choice, if well grasped, can make all the difference.

So, what we’ve seen throughout Asia is a boom that is unrivalled in human history partly because the gap between potential and actual was bigger than ever before in human history. How could China have become so poor after having led the world for 1,000 years? It took that one damn thing after another to open up such a gap but it took such a huge gap to allow such an incredible explosion of economic activity.

China is growing at 9% or 10% per year right now, not because it’s discovered an elixir of growth that the United States or Europe doesn’t have but because the gap of where the technological leaders are, and where China finds itself, is so absolutely vast. It is harnessing that gap to spring forwards which is the essence of the change that’s under way.

It started with the green revolution, mobilising science to lead to massive crop productivity increases that allowed a reliable feeding of the vast populations of Asia which, for centuries, had been always at the edge of disaster of hunger and famine. No longer because of science and technology.

There was a health revolution which raised life expectancy remarkably, even during the Maoist period. But it took the end of Maoism and the beginning of globalisation in China to take the next step which was the remarkable expansion of economic activity.

India followed China by about 15 years and even though India is still not in the world vision what it really is today, that is an incredibly dynamic country, also benefiting now from the rapid catching up. India is actually growing faster than China this year, at least over the last four quarters, growing at about 11% annual rate. It can’t maintain that rate most likely but it can, pretty reliably, grow at least at 6% per year and probably at 8% per year for the coming decade. So, India too, with its nearly 1 billion people, will begin to match the performance of China with its 1.3 billion people. And just those two countries by themselves that’s almost 40% of the world’s population. This is the most remarkable catching up in human history and there is every reason to expect that it can go forward.

But the challenges are huge and so, in the last minute, let me talk about the next 100 years if I might because I want to leave a little bit of time for discussion.

I think that if we understand how we got where we are we can also understand what some of the risks are going forward. So, let me pick up the same themes that I’ve mentioned already of demography, of politics, geo-politics, science and the environment as shapers of human destiny and let me talk about each of those in the Asian context.

First, demography. It is a good thing that population growth is slowing down in Asia. The one child policy has been extremely important for economic development and ecological survival in China. It is not a good thing that India is getting back to where it was in 1AD and that is more populous than China. Now, however, with the multiplication of perhaps 30 fold of the population I have not made the calculation but India will overtake China in population probably by the year 2050, reaching perhaps 1.6 billion people to China’s 1.5 billion on the most recent median variance of the UN population division.

This is no great prize that anyone would want. Trying to find prosperity for 1.5 billion people in India, or 1.4 billion in China, is not something that you can do. The faster the basic demographics get under control the better for these societies and the better for the world because the environment stresses are also phenomenal. The more we also attend to the remaining parts of both the Chinese, Indian and rest of Asia economies, the more reliably we’ll be completing the demographic transition, stabilisation of population and improving health conditions. So, we should remember that even though China is as dynamic as it is there are hundreds of millions of very poor people still largely invisible in the countryside. But they’re there, they’re very poor and there still is that huge demographic challenge of addressing rural poverty in China. And I know, I’ve been working with the Chinese government over the last three years on western development issues. This is not an easy task to accomplish.

The second major challenge I would mention is politics. China does not have a political system yet that is compatible with its long term aspirations of development. China has, what I think probably fairly could be said to be, the most successful model of statecraft when looked at over a 2,000 year period. And that is the centralised bureaucratic administration that led to long stretches of peace and relative unity but it is not compatible with a modern society.

There will need to be change in China over the coming decades and there will be democratisation in China but how it happens and in what context it happens is a major question for the world as well as for China.

But one thing is clear, the Chinese statecraft model which is so deeply embedded of a central authority, a professional skilled bureaucracy, reaching down to the villages, that is fine for a sedentary village based society as China was for 2,000 years. It is not compatible with a mass mobility, knowledge-based society where you need local governance and you need local representation, you need legitimacy in new ways and it’s not just administrative management over the sea of a million villages. It is something quite different and that’s the great political challenge that China faces.

Third, there is also a mammoth political challenge. It’s going to be one of the most important issues that our current generation of students will face and that is the difficult problem of the great rising powers. Will the United States accept the rise of China’s power and India’s power smoothly in the next decade? Will India and China act in a way that facilitates that transition to whole development?

And I raise this because while the Meiji Restoration is the best analogy for what’s happening right now economically in China, one of the aftermaths of the Magee Restoration was the Pacific war. And while there is no linear relationship certainly from one thing to the other rising powers, whether it was Germany or Japan, always challenged and threatened the already leading powers and the accommodation of rising powers by leading powers is one of the most difficult things to accomplish in geo-politics.

So, already we have a far right in the United States that talks about containing China, which is a pretty ridiculous concept of course because how are 280 million people going to contain 1.3 billion people anyway? It’s ludicrous. But lots of ludicrous things are believed in the world. I sometimes wonder whether any rational things are believed in the world.

But, in any event, this question about whether China will be given the space to develop, because it will mean overtaking the US economy in absolute size without question, will that happen smoothly? “Will it be allowed by the United States?” or will there be mutual recriminations and I what would, at this point, be a world devastating conflict.

Well, we didn’t handle this well in the 20th century at all. We handled it quite disastrously two times, Britain and Germany fought World War I and the US and Japan and Germany fought World War II. There were others involved as well but both involved fundamentally the problems of rising powers who felt that their place in the sun was being threatened, rightly or wrongly, in a paranoid way or not, by others that were in the lead.

And this is the great geo-political challenge. Helping to explain to the world that China’s prosperity is good for the world, not dangerous for the world. Helping to explain to the American people that the development of Asia is a wondrous and one of the great world stabilising features, not some threat out of outsourcing and all the things we’re hearing now. And if this is the glimmer that you hear with the first 200,000 jobs created in India imagine what we could hear in decades ahead. We’re just not very good at this, as a human species, of trusting others and accommodating mutual interests and acting in an empathetic …