Topic 2: The Great Divergence

When did economic divergence between Europe and the rest of the World occur and what forces drove this
process?

Keywords:

 Divergence: Trend of the gap between 2 things widening

o Great Divergence: trend of Western Europe forging ahead compared to China, Japan and India in 19 th
century.
o Little divergence: income gaps before 1800.
 Productivity: amount of output produced divided by input (labour productivity/agricultural productivity)
o Early 19th century agricultural inputs: Days worked per acre 8x higher in China than England.
o Agricultural output: Output per acre 9x higher in China.
o Output per worker in Yangtze 84% of output per worker in England.
 Real wages: Nominal wages adjusted for price  higher in Europe than in China.
o Welfare ratios: Earnings of worker/Living cost for his family (Measure of living standards)
o UK: 4.5 (1738)  8 (1913)
o Beijing: 1.8 (1738)  1.6 (1913)
 GDP per capita: GDP/total population (Measure of living standard)
o England – 1800: $2100  1850: $3000 ($ 1990)
o Netherlands – 1800: $1750  1850: $2400
o China – 1800: $600  1850: $600
o India – 1800: $570  1850: $560

GDP per capita, 1800- Low growth countries:

1950 o China and India: stagnant GDP throughout period.
o Japan: stagnant but experiences some growth in early 1900s.
o Spain, Italy, Germany: not far from other countries in 1800s.
 High growth countries:
o Netherlands: Gap in GDP widening over 1800s.
o UK and US: highest growth in world over 1800s and 1900s.

1) Initial Differences in Development in 1800  Determines when divergence occurred?

Stylized facts of  World divided into high and low income zones:
incomes in 1800 o High income – England, Netherlands, North America
o Low income – Rest of World
o Indicates divergence had begun before 1800 (Broadberry)  “Little Divergence”
as income gaps were relatively small compared to 1800s “Great Divergence”.
Europe (England) vs  China and Europe had same level of development in 1800 (Pomeranz)
China (Yangtze): o After 1800: Divergence occurred in 19th century.
Pomeranz  Need to compare right geographical units:
o China huge compared to England  per capita comparison is unfair.
o Must compare developed parts of Europe with developed parts of China (Yangtze
Delta).
Sub-National  Compare England, Netherlands and Yangtze Delta in:
Divergence 1. Agricultural productivity  Similar
2. Real wages for large cities (welfare ratio)  China lower
3. Technological sophistication  China not improving

Conclusions:
 China not ready for “industrial take-of” in 1800 (“take-off” not till 1952).
1. Agricultural  Yangtze:
productivity in o Rice dominant crop  higher yield per acre but intensively cultivated (large
 1800: SIMILAR labour inputs required).
o Output per acre: £26 (Early 19th)
o Days worked per acre: 120 (High labour intensive)
o Output per day: 51 (Only slightly below England)
 England:
o Wheat, barley and oats dominant crop  lower yield per acre but not
intensively cultivated (less labour intensive).
o Output per acre: £3 (Early 19th)
o Days worked per acre: 13 (Low labour inputs)
o Output per day: 61 (High productivity)

 Western Europe and China: Similar agricultural productivity (1750-1800)  output/day

similar
2. Real wages in  Measurement with Welfare Ratio:
1800: LOWER IN o Total Family Earnings/Cost of Feeding Family.
CHINA o 1 = Family has just enough money to survive (subsistence level).
o >1 = Family has some spending money above subsistence  enables higher
consumption or substitution with better goods.

 Yangtze: declining wages from 1650 suggests population growth with slow technological
improvements.
o Welfare ratio below 1 (1800-49)
 London: increasing real wages in 17th century
o Welfare ratio maintained around 4 in 18th and 19th century (high living
standards).
 Shows large initial difference in real wages
3. Technological  China: machinery relatively advanced by 1400:
Sophistication: o Textiles, blast furnaces, shipbuilding.
NOT IMPROVING o BUT: Stagnant technological development post-1400.
IN CHINA
Rest of the World  Europe’s “Little Divergence”:
o Welfare ratios:
 Valencia (1), Milan (1), Leipzig (<1) vs
 London (4) and Amsterdam (3).
 Asia Divergence:
o Delhi, Bengal, Beijing and Lower Yangtze declined by 1800-49.
 North American Convergence:
o Boston (>4), Philadelphia (5), Maryland (4) > London.
 Latin American Divergence:
o Potosi (<2), Bogota (2), Mexico (1.5)  significantly lower than London (<2) and
North America.
Latin vs North  Labour markets and migration:
American Divergence: o Real wages in Latin America (equal to Spanish wages) < North America wages
Explanations (equal to English wages) from early colonial period
o Integrated labour markets across Atlantic: no migration if living standard fell from
migrating  high wages in colonies attract migrants from Europe to New World
 until wage equal in colonies and metropole.

 Natural Resource Endowments:

o Extractive colonies in Brazil and Caribbean: suited for sugar production 
Europeans set up sugar plantations (slaves)  persistent unequal society 
government supported elite  no investment in human capital.
o Settler colonies in North America: temperate climates favoured small family
farms  Europeans settle  created participatory, representative government
 investment in human capital.
Why was Africa  Abundance of land:
underdeveloped?
 Low population densities:
 No livestock production possibility:
2) Why did economies diverge after 1800?
Fundamental question: Why did modern economic growth begin in Europe and not in Asia?
Colonies and silver
(Pomeranz) – Post-1800
Competition and coal
(Parthasarathi):
“Pressures and needs in
combination with state
policies…neither found in
India”.
o Shifting agriculture production  lack of incentive to improve land  low
productivity.
o Unsustainable  soil degradation  unable to use land again.
o Switching to new techniques risky  farmers just satisfying subsistence
requirements with shifting cultivation.
o Tropical diseases (malaria, yellow fever)  low population density  limited
trade and specialisation.
o Tsetse fly (sleeping sickness) killed livestock  correlates with low development.
 Colonies:
o Eurasia faced ecological crisis  lack of land to produce natural resources
(food, fibre and wood).
 Colonies allowed gain of land intensive resources from colonies
(sugar, cotton and timber)  allowed Europe to continue
expansion.
 China and India not able to gain land intensive products from its
periphery.
o Agriculture 
 New World increase supply of land for agriculture  rises in
agricultural productivity facilitate shift of labour into
industrialisation  frees capital for investment in industry 
lowers cost of food relative to total returns to labour.
 Lack of colonial peripheries for India/China.
 Silver bullion:
o Silver from Americas allowed Europeans to buy more Asian goods 
traded textiles, spices, tea, silk and ceramics with China and India 
allowed trade with Asia and purchase a higher standard of living.
o NW Europe ate higher-quality goods (Asian imports c.18)
 Criticisms:
o Silver fails to explain pre-1800 British/Dutch divergence from Asia or
differences within Europe.
 Spain and Portugal: largest colonies and received most silver bullion
 did not benefit most from Asian trade.
 England/Netherlands largest importers of Asian goods.
o Inflation risk in Europe  silver/bimetallic standards in early modern
period  silver imports leading to money supply expansion and inflation.
o No ecological crisis in England:
 No shortage of “fibre” as exported large amounts of wool.
 Food imports made up 9% of calories available to population
(1800).
British industrialisation driven by 2 pressures:
 Competition in cotton textiles with India:
o Cotton as the most important traded good.
o Desire to replicate Indian cotton textiles (economic factor)  India
largest producer of cotton textiles at end of 18th century.
o Competitive challenge of Indian cotton textiles for English textile
merchants  British imitation of Indian cloth
o Shift in competitive advantage: High wages in Britain (4x Indian wages in
18th century) and cheap coal/capital  adoption of machine-intensive
 technology  new techniques of production (spinning technology of late
18th century)  increase efficiency of production.
 Shift centre of global manufacturing from Asia to Europe: Cotton
accounted for 1% (1770) to 10% (1841) of manufacturing.
o Protectionism: Britain’s exclusion of Indian imports to protect infant
cotton industry at expense of Indian cotton textiles.
 Preferential trading terms with colonies.
o Pressures not found in India cheap labour  no need for investment.

 Shortages of wood  incentivised use of coal:

o Deforestation  shortage of wood  substitute coal for wood (desirable
factor endowments: abundant coal deposits)  steam engine/smelting
iron/new transport.
o Coal yields higher amount of energy per mass than wood  more efficient
and accessible.
o Pressures not found in Asia  no ecological problem (India heavily
forested) and Chinese coal out of reach (not accessible).

 Pressures not found in India/China  change unnecessary.

Traditional view: Property  Markets and property rights:
Rights, Population and o Smithian and Neo-Classical  fewer restrictions on commerce and
Rationality property rights more respected in Europe.
o Increase incentives to raise productivity.
o China: ban on foreign trade  blocked benefits of overseas commerce.
o India: Caste based system  limit occupational mobility and incentives.

 Population size:
o Malthusian argument  Europe struck balance between people and
resources
o Preventive checks in Europe  Later age of marriage and limited fertility
 saved more and increase in capital.
o Positive checks in Asia  Famine, pestilence, disaster.
o Populations larger in Asia  more likely to outstrip available resources.
o Age at marriage (c.18): India: 13, China: 16, England: 25.

 Rationality:
o Credit to Protestantism and Enlightenment  explains scientific
excellence.
o Individual ideas in India and China stemmed from caste/clan situation
blocking individual freedom.
Enlightenment and  Europe experienced an “Enlightenment and Scientific Revolution”.
technology: European o Exchange of ideas  scientific approach to innovation (Rationality due to
Exceptionalism (Mokyr) Enlightenment)  expansion in innovation.
 China diverted from new technology post-1400.
o Innovation driven by state and bureaucracy  Ming and Qing China:
officials less interested in commerce/technology  lack of investment in
innovation  stagnation in technological progress.

 Criticism:
o No strong link between “Enlightenment” and inventors driving Industrial
Revolution.
o Instead: Technological development due to:
 Historical conjunctures more important in producing Europe’s
technological development (combinations of circumstances) 
Placement of large deposits of coal in UK allowing steam.
 Specific economic conditions made technology more profitable 

Deindustrialisation of Asia
vs Industrialisation of
Europe
(Cause or Consequence?)
Modern economic growth
= Underlying Driver of
Divergence
Conclusions
high wages and cheap energy/capital  incentive to substitute
capital for labour.
o Scientific culture not unique to Europe  also present in India.
 Post-1800, West = rapid industrialisation, East = rapid deindustrialisation
o Britain sold products on international market  competing with foreign
markets with cheap industrial products e.g. cotton textiles exports to India.
o US put up trade barriers (tariffs) to protect industry (steel industry)
o China (First Opium War) and India (Colonial status) did not/could not
protect domestic industries.
 West specialised in manufactured goods.
 Asia specialised in natural resources.
o Leads to deindustrialisation in Asia (India/China)
 1750: Asia/Rest of World produced 80% of world manufacturing.
 1900: Asia/Rest of World produced 20% of world manufacturing.
 Mechanisation/Industrialisation produce conditions for modern economic growth
o Occurs where labour is expensive and capital is cheap (substitute).
o European shift towards capital intensive methods of production across 19 th
century:
 Britain’s labour = expensive and capital/energy = cheap  first
to shift to capital intensive production of manufactured goods.
 BUT: specialisation in natural resources does not always lead to low productivity
and income  Australia (mining), Argentina (livestock) and Denmark
(butter/bacon).
o HOWEVER: These examples had high wages from beginning  included
investment in human capital.
 Modern economic growth (from 1840) not a direct consequence of
Industrialisation (but related to).
 Explanations for Modern Economic Growth:
o General Purpose Technology  pervasive productivity enhancing (Allen)
o Threshold of General Knowledge  exchange of ideas (Mokyr)
o Mineral Energy: Organic to energy-rich economy (Wrigley)
 When was the Great Divergence?
o “Little Divergence” in early modern period (before-1800)
 NW Europe and N. America wages 2-3x rest of world
o Great Divergence increased post-Industrial Revolution (post-1800) where
industrialised (Britain, North America and Western Europe) and
deindustrialised (Africa, Latin America, India and China) nations diverged.
 Main causes (widely debated):
o Colonies, silver, coal, competition, scientific culture, deindustrialisation
o Causes of modern economic growth = Driver of Divergence.