DP12278 Industrial Development and Long-Run Prosperity

Author(s): Raphael Franck, Oded Galor
Publication Date: September 2017
Keyword(s): Economic Growth, Human Capital, Industrialization, Steam Engine
JEL(s): N33, N34, O14, O33
Programme Areas: Economic History, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12278

This research explores the long-run effect of industrialization on the process of development. In contrast to conventional wisdom that views industrial development as a catalyst for economic growth, the study establishes that while the adoption of industrial technology was conducive to economic development in the short-run, it has had a detrimental effect on standards of living in the long-run. Exploiting exogenous geographic and climatic sources of regional variation in the diffusion and adoption of steam engines during the French industrial revolution, the research establishes that regions in which industrialization was more intensive experienced an increase in literacy rates more swiftly and generated higher income per capita in the subsequent decades. Nevertheless, intensive industrialization has had an adverse effect on income per capita, employment and equality by the turn of the 21st century. This adverse effect reflects neither higher unionization and wage rates nor trade protection, but rather underinvestment in human capital and lower employment in skilled-intensive occupations. These findings suggest that the characteristics that permitted the onset of industrialization, rather than the adoption of industrial technology per se, have been the source of prosperity among the currently developed economies that experienced an early industrialization. Thus, developing economies may benefit from the allocation of resources towards human capital formation rather than towards the promotion of industrial development.