Why Europe grew rich

It could have been because of political decentralisation

Until the industrial revolution of the late 18th century, much of the world enjoyed similar standards of living that barely kept people from dying of starvation. In other words, most of the world was equally poor until the industrial revolution pushed some countries on to the path of high economic growth, while others were left behind in abject poverty. In particular, it was countries in Western Europe, like England, that witnessed rapid improvements in the living standards of their people. Economic historians have famously called this divergence in economic fortunes between the West and the East as the “Great Divergence”. Over the years, many of them have also put forward a variety of theories to explain the phenomenon.

Some, for instance, have made the interesting case that it was political decentralisation that caused Europe to race past the rest of the world. They argued that the continent over the centuries has been deeply fragmented in terms of its politics, with hundreds of rulers exerting power over tiny land masses. How could this be good for Europe’s economy? In the absence of an overwhelming authority, these economic historians argue, there was huge scope for competition between rulers for the continent’s resources. In such a political environment, a ruler who imposed high taxes in his jurisdiction, for instance, would see people and other resources leave his jurisdiction to move over to competing regions that offered lower tax rates. He could prevent such emigration either by cutting down his taxes or by imposing restrictions on movement. The former would help him retain his resources and also possibly attract more resources from outside his jurisdiction. The latter would only earn him the wrath of his own people and of his competing rulers who now cannot take away resources from his territory except through war. Such institutional competition, it is argued, led increasingly to the adoption of pro-growth policies in Europe.

“Political Institutions, Economic Liberty, and the Great Divergence”, a 2017 paper by Gary W. Cox published in the

Journal of Economic History , provides evidence in support of this particular thesis. Prof. Cox finds that growth was more uniform, or correlated, in regions of Europe that were more fragmented than other regions.

This, he argues, suggests that the fragmented regions as a whole saw great improvements in economic liberty, which is likely the result of institutional competition between rulers.