Working Paper

The Globe as a Network - Geography and the Origins of the World Income Distribution

How important are falling transport costs for patterns of population and income growth since 1000 CE? To answer this question, I build a quantitative dynamic spatial model with an agricultural and a non-agricultural sector, and endogenous fertility, migration, innovation and technology diffusion. In this model there exists an endogenous threshold for global transport costs, which is characterized by a simple network statistic. If transport costs are above this threshold, the world converges to a Malthusian steady state. If transport costs fall below this threshold, the world economy enters a process of sustained growth in population and income per capita. Taking this model to the data, I divide the globe into 2,249 3 degree by 3 degree quadrangles. I assign each location an agricultural potential determined by exogenous climate and soil characteristics. I infer bilateral transport costs by calculating the cheapest route between each pair of locations given the natural placement of rivers, oceans and mountains. I calibrate the model so that in the year 1000 the world is in a Malthusian steady state. I then drop the cost of water and land transport exogenously in a way that is consistent with historical evidence and track the endogenous evolution of population and income until the year 2000. Qualitatively, this exercise generates slow but accelerating growth in both population and income per capita for the first 800 years, an abrupt takeoff in growth after 1800 CE with Europe in the lead, and a large increase in the dispersion of income per capita after 1800 CE. Quantitatively, the model accounts for 55% of the variation in population density across 10 major regions in 1000 CE, 44% of the variation in income per capita across regions in 1800 CE, and is able to generate 43% of the overall dispersion in income per capita in 2000 CE.

Keywords: Geography, trade, diffusion, structural change, networks.
JEL Classification Numbers: R12, O18, F22, F12.

The demographic transition, i.e., the move from a regime of high fertility/high mortality into a regime of low fertility/low mortality, is a process that almost every country on Earth has undergone or is undergoing. Are all demographic transitions equal? Have they changed in speed and shape over time? And, how do they relate to economic development? To answer these questions, we put together a data set of birth and death rates for 188 countries that spans more than 250 years. Then, we use a novel econometric method to identify start and end dates for transitions in birth and death rates. We find, first, that the average speed of transitions has increased steadily over time. Second, we document that income per capita at the start of these transitions is more or less constant over time. Third, we uncover evidence of demographic contagion: the entry of a country into the demographic transition is strongly associated with its geographic neighbors having already entered into the transition even after controlling for other observables. Next, we build a model of demographic transitions that can account for these facts. The model economy is populated by different locations. In each location, parents decide how many children to have and how much to invest in their human capital. There is skill-biased technological change that diffuses slowly from the frontier country, Britain, to the rest of the world.

We study the impact of trade on a country catching up to the industrial leader. We calibrate our dynamic, two-country model to Spain and UK from 1850 to 2000, accounting for the inter-war trade collapse (IWTC) and the subsequent catch up by Spain. In our model, the effects of trade disruptions are stronger with more distance to the leader and more openness. A collapse today (less distance, more openness) similar to the IWTC (more distance, less openness) decreases the capital stock thrice as much
(12% instead of 4%). Importantly, traded varieties would fall today but increased during the IWTC.

Work in Progress