The Great Divergence - When

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The Global Economy

Dr. Sheikh Selim

Dr. Nikos Fatouros
The Great Divergence - When

Winter 2022
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This lecture

• In this lecture we will examine “when” the great divergence

happened
• We will link this analysis to previous growth models that were
mentioned in the introductory lectures
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The Great
Divergence - When

• Understanding key growth models

• Why did modern science, the mathematics of hypotheses

about Nature, with all of its implications for advanced
technology, take its meteoric rise only in the West at the time
of Galileo [but] had not developed in Chinese civilization or
Indian civilization? (Needham, 1969)
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• China had been richer and more scientific than Europe
• China was urbanized and had strong sophisticated government
• China developed inventions - paper, gunpowder, printing, the
compass
• Europe underwent an industrial revolution and was then
clearly ahead
• Europe opened up an increasing gap that became known as
the “Great Divergence”
⇒ “Needham’s Question”: Why [and when] has China and India
been overtaken by the West in science and technology?

Extra reading: List of Chinese inventions

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Stylised view of “The Great Divergence”
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What everyone (mostly) agrees on
• China was the world leader in terms of GDP per capita at the
turn of the first millennium (Song Dynasty)
• China remained the largest and most advanced Asian
economy until the Industrial Revolution
• China produced much of the world’s manufacturing output
(1/3 of the manufacturing output of the 19C)
• By the 19C China was considerably behind North Western
Europe in terms of GDP per capita
• Japan began catching up on both China and Europe in the
18C
• Japan eventually overtook China (18C) and Europe (20C) in
GDP per capita reversing the divergence
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The Revisionist
View - Late

• Western Europe was a “non-too-unusual economy:

it became a fortunate freak only when unexpected
and significant discontinuities in the late eighteenth
and especially nineteenth centuries enabled it to
break through the fundamental constraints of energy
and resource availability that had previously limited
everyone’s “horizons” (Pomeranz, 2000)
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• Divergence was a product of 19C increasing returns (Europe
= Asia before 1800)
• This was likely the result of coal, colonial policy and historical
shocks (Opium Wars 1940s, Taiping rebellion 1850-1864 and
the Nian rebellion 1851-1868)
• Emphasis on resources advantages and constraints, negative
colonial rule, European trade network, and inappropriate
national comparisons
• Empirically based on “grain” wage comparisons between
Europe and select Asian regions (Yangzi Delta, Southern
India)
• Main authors include Pomeranz (2000), Frank (1998), Wong
(2000), Goldstone (2002) and Parthasarathi (1998)
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The Traditionalist
View - Early

• “If weextend the comparisons of living standards to Asia,

English performance looks even more impressive. Low silver
wages in the East were not counterbalanced by even lower
food prices. Welfare ratios for labourers in Canton, Beijing,
and Japan were ... as low as those in the backward parts of
Europe.” (Allen, 2011)
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37• Classical view - (Europe > Asia 1800) but with a focus on
North West Europe
• NW Europe was likely ahead at an early stage due to its
institutions
• Emphasis is on commercial expansion (“Commercial
revolution”), urbanisation, agricultural productivity
(“Agricultural revolution”), high wages and cheap energy
(“Industrial Revolution”)
• Empirically based on “silver” wage comparisons between
Europe and select Asian regions (Yangzi Delta, Southern
India)
• Main authors include Maddison (1998), Broadberry and
Gupta (2006), Allen (2005, 2007, 2011), Saito (2009) and Li
and Van Zanden (2012)
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New estimates of the Great Divergence
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The Great Divergence - When

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Little Divergences

• New data suggests there are a number of

“Little Divergences”
• Within Europe:
• Southern Europe was ahead in 1400 - falls behind
by 1600
• The Netherlands was ahead by 1600 - falls behind
by 1700
• Britain was ahead around 1700 - remains ahead
until 20C
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Little Divergence - Europe
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Little Divergences

• Within Asia:
• China was ahead in 900 - falls behind by 1700
• Japan was ahead in 1700 - remains ahead until 20C
• India effectively catches up to China around 17C
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Little Divergence - Asia
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What do we learn
from this?
• Countries rise and fall - long-run success vr. short-run success
• ‘Golden Ages” do not lead to sustained growth - not until the
Industrial Revolution
• Trade matters - Italy, Netherlands and Britain all had trading
empires

• Overall, Europe has had a long history of economic success

• Asia has had a long history of economic decline
So we must ask, what was so special about Europe and what was
the problem with China?
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Now:

• We have examined how. Now, we will examine “why” the

great divergence happened
• We will consider the characteristics of the other great powers
• We will cover demographics, institutions and the glorious
revolution
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The Great
Divergence - Why?
• Why did Europe diverge from Asia?
• There are a number of reasons according to the
Classical/Traditional School:
• China has different demographic characteristics
• China had poor government institutions
• China was less urban and more commercialised
• China had less productive agriculture
• China has expensive energy sources
• China was less innovative - hence lower productivity
• China had poor informal/cultural institutions
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Demography focus
• What do we mean by a different demographic
regime?
• China had universal marriage (women)
• Births and Deaths were higher in China
• Population suffered from famines as late as the 19C
(and later)

• China may have had lower real wages due to

institutions governing marriage and fertility
• Chinese demographic characteristics did not
change in this period
• Hence, changes in England/Europe
reflect different demographics
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How did the
demographics differ?

• England’s population pattern was unique in a

number of ways
• Europe was the first to undergo the “demographic
transition”
• Europe differed from the rest of the world - fertility
was central
• England differed from the rest of Europe -
nuptiality was central
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Defining population growth -
components
∆Population
• Population = Natural Rate of Increase + Net Migration Rate

• Natural Rate of Increase =

Crude Birth Rate − Crude Death Rate

Births
• Crude Birth Rate = Population

Deaths
• Crude Death Rate = Population
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• CBR is determined by the fertility rates of married and

unmarried women, the marriage rate and female age of first
marriage (FAFM)
• Maximum CBR is about 50/1000 based on traditional
communities

• CRD is determined by war, famine, plague etc.

• CDR was characterised by sudden peaks as high as 150/1000,
300/1000 and even 500/1000
So what did the demographics look like in England?
The Great Divergence - Why

23 / England’s population growth

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England’s fertility
• Fertility was not at its biological max since 1541 = CBR was
approximately 30/100 from 18C (CBR was 49/1000 for
Sub-Saharan Africa in the 1980s)
• Female age of first marriage (FAFM) was high in England
• England’s FAFM was 23.1 from 1800-1837 vs. 16 for
Bangladesh in 1970
• Celibacy was high - 10-15% of women never married vs. close
to 0% for 20C LDCs
• Illegitimacy was low - unmarried fertility rate was relatively
minor

• Fertility does appear to have been linked to wages before the

18C but became disconnected from income in the 18C
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25 / England’s fertility
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Malthusian Theory and European Success
39 Explaining the Great Diversion

Consider the equilibrium forces on population:

• “Positive” checks
• Events that increase mortality (war, plague, famine etc.)
• The mechanism of lower average income societies
• Malthus argued that Asia relied on “positive” checks

• “Preventative” checks
• Events that lower fertility (abstinence, delayed marriage)
• The mechanism of higher average income societies
• Malthus argued Western Europe relied on “preventative”
checks
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What is empirically correct?

• Famous study by Hajnal (1965) looked at fertility

• The key aspects were age of marriage and the proportion of
single women
• Western Europe has a lower marriage rate and higher
FAFM
• Confirmed that Western Europe relied on preventative checks
• Area separating Western Europe from the rest of the world
was called the “Hajnal Line”
• NW Europe was distinct from the rest of Europe as it limited
nuptiality - Italy, France, Spain etc. limited fertility within
marriage
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28 / Preventative check in Western Europe

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Why did this matter?

• Allen (2009) argues that a more elastic CBR was key to

European success
• Western Europe had higher wages due to preventative checks
• Higher wages meant high labour costs for industry
• This spurred industrialisation by promoting labour saving
technology
• The IR was impacted by this K intensive technological change
- Solovian growth
• Specialisation and organization of production is easier along K
intensive path - Smithian growth

Europe and Asia were on different demographic paths

The Great Divergence - Why

30 / Two stable equilibria in the Malthusian model

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Government - institutions

• What aspects of government might have mattered?

• China was very centralised

• Chinese bureaucracy faced no challenge from an independent
aristocracy, church, judiciary, military etc.
• Lack of institutional tensions equated to little institutional
change
• The bureaucracy prevented emergence of an independent
commercial and industrial class
• Europe had decentralised governments, powerful aristocracies,
merchants, and churches

So why do these differences in government matter?

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Why do we have
governments?
• Theory of Bandits (Olson 1993)
• Consider a world in anarchy with roving bandits
• No incentive for anyone to produce beyond subsistence
• Society will seek security but free-rider problem will prevent
cooperation
• Eventually an enterprising bandit decides to monopolise theft -
regular taxation
• This roving bandit becomes stationary so it can tax regularly -
no need to bother roving any more

• Is this a worse situation? No

The Great Divergence - Why

Why
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are stationary bandits better
than roving bandits?
The Great Divergence - Why

34 /• Lower taxation encourages greater production since people

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keep some for themselves
• Lower taxes on higher output means greater revenue than full
taxation (theft)
• Roving bandits tax everything T*(R)
• Stationary bandits maximize revenue at a low tax rate T*(S)
• Stationary bandits will provide public goods
• Citizens are protected (military and police) as a source of
revenue
• It is in the bandit’s best interest to be stationary but everyone
benefits

Was this the best we could expect? What is wrong with an

autocrat? Compare this with “democracy”
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Why is democracy better than
the Stationary Bandit?
Olsen has two main arguments for democracy:

• Production argument
• Society itself acts like an autocrat
• MB = MC will occur at a lower (net) tax rate

• Competition argument
• Leaders have an incentive to sacrifice some revenue to win an
election
• Others are competed down to the minimum revenue for
winning
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36 / Why is democracy better than the stationary

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bandit
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Olsen’s Government theory - explaining the
39 Great Divergence

• We can see how a roving bandit becomes stationary but WHY

would they become democratic and how did Europe fit into
the story?
• Europe was not particularly fast in transitioning to autocracy -
China was autocratic with a central bureaucracy
• Europe was fast transitioning towards democracy - the English
glorious revolution of 1688
• Timing suggests that this transition towards democracy may
have caused the Great Divergence
• So what changes took place at the end of the 17C in
England/Europe?
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Conclusions

• There are a number of explanations for WHY the Great

Divergence happened
• Some of these we have touched on in this lecture
• Some of which we will explore in more detail in the future