Hamish McRae: Empires rise and fall while the economic wheel keeps turning

A holiday weekend – and maybe one spent abroad experiencing a culture other than our own. Modern travel has made it astoundingly easy to get to places that are utterly different from home, and different not just in language and culture but in the level of economic development.

Of course, this raises the question of why? Specifically, why do North America, western Europe and Japan dominate the world economy? The difference in wealth per head between those three regions and the rest of the world is seven to one. It was not always so: in 1820 it was only double, while 1,000 years ago wealth per head was much the same everywhere.

Those facts come from a study of the past millennium, The World Economy, by the economic historian Angus Maddison, published by the OECD earlier this year. For anyone interested in the reasons why the world is now so diverse, this paper contains some powerful insights. We naturally (and maybe a little arrogantly) accept a world dominated by our technology, but that does not explain how and why we developed those technologies, still less whether that lead will be sustained.

To catch a feeling for the way North America, western Europe and Japan have so outpaced the rest, have a look at the pie charts above. Go back 1,000 years and Asia (excluding Japan) accounted for two-thirds of world GDP. Africa accounted for nearly 12 per cent, much more than western Europe. We learn our history through European eyes. We can see physical evidence of that period in buildings like the Tower of London, designed to show the might of the victorious Normans. But in global economic terms the whole of western Europe was only just on the map. Even by 1500 Asia accounted for more than 60 per cent of world output and Europe for less than 18 per cent.

Then Europe's run picked up pace, so that by 1870 it was responsible for one-third of world output. During the past century the baton of economic power was taken over by the US, and by 1950 western Europe and the US (plus Canada, Australia and New Zealand) accounted for 57 per cent of world output, while Asia was down to little more than 15 per cent.

The east-west balance of economic power was almost a mirror image of the balance in 1000 or 1500. But look what has happened since then. In the past 50 years Asia has pulled up dramatically. Even excluding Japan, it is now a larger economic power than Europe or America. We have moved to a far more evenly balanced world.

Economic power is not just about total wealth. It is also about wealth per head. Even small countries, if they are very rich, have access to the most advanced technology and can influence the world to an extent that larger but poorer ones cannot.

There are, of course, many more people in Asia than in western Europe or North America, but even in terms of GDP per head the gap is narrowing. To the right of the pie charts, you can see changes in wealth per head – essentially living standards – over the past 1,000 years. In 1000 the world was running close to subsistence, with an income of around $400-$450 a head measured in 1990 dollars. Africa and Asia actually were very slightly richer than Europe. The whole world had gone backwards for 1,000 years, for the living standards of the Roman empire seem to have been about $450 a head – though I'm sure the spread of wealth was very uneven (not much fun being a galley slave).

Now people in western Europe, Japan and particularly the US are vastly richer than in other regions: on a per-head basis, the US is 20 times as rich as Africa; in 1820 it was only about three times as rich. In several African countries – including Chad, Tanzania and Sierra Leone – people have to make do with living standards that are on average little higher, maybe no higher, than those of the Roman Empire. Parts of Asia are narrowing the gap fast; but parts of Africa are still going backwards both in relative and absolute terms.

How can one begin to explain why first Europe and then Europeans living in North America and Australasia have outpaced everyone else? Angus Maddison's answer comes in three parts: conquest and settlement of relatively empty areas, international trade and capital movements, and technological and institutional innovation.

In the first category, the most dramatic example was the European conquest of the Americas, after which population, productivity and living standards rose sharply. The best example of the second was the development of trade and financial services in Europe, first by the Venetians and then by the Portuguese, Dutch and British. As for the third, after the Reformation, Europe became good at disseminating knowledge, developing a culture of learning that enabled technology first to move slowly for-ward and then, after about 1820, to race along.

Well, if that is the past, what happens next? Angus Maddison is an economic historian, not a futurist, so the paper does not go into that – though he does note that the pace of technical advance seems to be slowing, notwithstanding the internet revolution. But I think there are some conclusions that are implicit in this analysis.

One is that economic success has deep cultural roots, in particular an open-mindedness to new ideas and a commercial and legal environment that fosters growth. Another is that no country or region has a monopoly of these qualities: Asia's growth over the last half-century shows how an underperforming region can quite suddenly start to narrow the gap. I would expect Asia to continue to increase its share of world output over the next 50 years, as it has in the last.

A further conclusion is that if Africa is to reverse its relative decline – and all humankind must hope and pray for such a reversal – it has to make profound changes in culture, attitudes and organisation. Otherwise the sad experience of the last 1,000 years is likely to be continued.

A final conclusion, surely, is that the present dominance of the world economy by the US, western Europe and Japan will gradually ebb. We are, in relative terms, already losing ground. That is not a catastrophe – such a shift is natural and inevitable. But we need to be sensitive and thoughtful about this shift in power: to use the power we do have sensitively and to be thoughtful about the interests of the (at present) less powerful parts of the world. For the times, they are a-changing.