ID number: 14330529

Module code: ECON3005

Module title: Advanced Economic Development
Word count: 999
Poor households are generally involved in low-skill labour through
informal employment and have a shorter period of payment reflecting
their lower earnings. Trade’s impact on these households is context-
specific but the two major channels through which trade affects poor
household’s welfare are price transmission and labour markets.

Price transmission refers to the relationship between world-trade prices

and domestic- consumption and production prices. It is the situation
where changes in world-trade prices are completely transmitted to
domestic prices. The application of import tariffs allows international price
changes to be fully transmitted to domestic markets in relative terms
(Conforti, 2004).

The labour market channel refers to the structure of household

occupational characteristics which impacts the distributional aspects of
poverty. Households with unskilled workers will generally be more
poverty-stricken because of their limited low-income generating
employment choices i.e. labourers in the informal or agricultural sector.
The distribution effects of trade may benefit different sectors and each
sector has different labour structure. Trade benefits certain sectors
through increased wages and employment opportunities. These effects
largely depend on firm performance.
Both of these channels influence the magnitude and degree of poor-
household welfare and poverty reduction by the effects of trade. Growth
benefits of trade largely depends which sector is affected and does that
sector deal with poor households.

The price transmission channel would be the most important if a

low-income country reduces tariffs on food imports. This is because
globally commodity markets are integrated through the mechanism of
price transmission. The reduction of tariffs would affect the transmission
of world price signals of food commodities in domestic markets through
change in relative prices for both producers and consumers (Nicita,
2008).

The effects of tariff reduction are corresponding to the result of Leyaro

and Morrissey’s study on Tanzania. In a low-income country, high import
tariffs are usually put to protect local producers from international
competition. Majority of individuals in a low-income country do not work
for wages and are self-employed through a household farm or business
(UNCTAD, 2014).

Tariff reduction induced lower prices of imports will reduce the domestic
prices of food commodities, assuming full pass-through of tariff reductions
on domestic prices. All households, at all income levels, will benefit
through the consumption channel. Reductions in the prices of food staples
will be particularly significant for poor households because in low-income
economies, poor households often spend 60-80 % of their household
budget on consumption (UNCTAD, 2014). Tariff reduction will benefit poor
consumers more compared to non-poor consumers and this will lead to
real income gains for poor households.

However, this price change will reduce the welfare of domestic producers
and would lead to income losses. Since the majority of poor households
work in the agricultural sector, the income loss will reduce if not offset the
consumer benefit of lower domestic prices. Poor households have net
positive welfare from tariff reduction induced price transmission.

We focus on first-order effects of price changes on the welfare of

households, holding the consumption and production of households
constant. Households might respond to price changes by altering
consumption and production. Consequently, the poor households will gain
from the price reduction. Although, urban poor will benefit most and rural
poor the least because urban poor have more substitution opportunities in
consumption. This is because urban households consume more imports
whereas rural households rely on locally produces food.

.
China was a global economic leader in the premodern era during the Song
(960-1279) dynasty, possessing the most advanced technology, highest
iron output and urbanisation rate (Zhu, 2012). However, between 15-
18th century China’s per capita GDP started lagging behind Western
Europe’s and between the 18-19th century, China’s growth got derailed
(figure 1). This unpredictable conjuncture between China and Europe that
appeared quite suddenly is known as “The Great Divergence” (Brandt,
2012). There is a huge debate supported by diverse factors arguing the
timing for the diversion.
As attributed by Pomeranz, the "great divergence" was mainly brought by
the success of the Industrial Revolution because of England’s strategic
access to coal and colonies (Vries, 2001). The industrial revolution in
Europe was fast-tracked by the discovery of coal and it brought the age of
steam (1846-1914). European heat-intensive and transportation
industries gained from substituting costly energy resources with coal.
Sinking energy costs simulated innovative activities across a wide range
of industries leading to economic prosperity and growth. England’s coal
reserves were located very near to the manufacturers which reduced the
transportation costs for energy resources. Contrastingly, in China the
majority of deposits were located in the thinly populated northwest region
away from the southern business cities. The favourable geographic
locations of coal deposits played to Europe’s advantage which made coal
cheaper and easily available in Europe compared to China (Gary M.
Anderson, 2004).

Pomeranz argues that because of the industrial revolution supported by

preferential access to coal the divergence took place because China was
unable to efficiently take part in the industrial revolution. He supports his
argument by analysing the deep similarities between China and Europe
until the 19th century (before the industrial revolution). Market
integration in Southern China was similar to Western Europe, as
attributed by Shiue and Keller. The authors find a cointegration between
grain prices in Qing China (1644-1911) and European markets (Shiue and
Keller, 2007).

The contrary school of thought argues that the "great divergence" started
as early as in the 15th century (Brandt, 2014). They contradicted market
integration similarities by arguing that in the 18th century, cities like
London and Amsterdam had a better standard of living than Suzhou,
Beijing, or Canton (ALLEN and BASSINO, 2011).
Thus, other than the incidence of industrial revolution supported by
preferential access to coal, many other factors may have caused China’s
economic slowdown. The policy changes after the Song-peak regressed
China’s growth (Zhu, 2012). The derailment of China’s economic
superiority was because of the inward-looking political systems of the
Ming (1368-1644) and Qing (1644-1911) dynasty that discouraged new
technological innovations and commercial activities (Brandt, 2014).
During these dynasties, both state capacity and fiscal revenues were
decreasing which prevented China to exploit the new opportunities arising
from the industrial revolution. Moreover, the presence of rampant
corruption and nepotism in institutions prevented China to economically
expand (Brandt, 2014).

Concludingly, preferential access to coal may have a huge impact on

accelerating the divergence but it can’t be the only evaluating factor for
figure 1. The institutional and state inadequacies played a vital part to
derail China from its expected economic growth. By reforming their
institutional framework after 1949, China was able to successfully
structurally transform its economy making it the largest economy in 2020
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