The Great Divergence: Understanding the Economic Growth Disparity Between Europe and Asia, Slides of Economics

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Comparative Economic Systems 3 – The Great Divergence Tenured Professor HSE Leonid Grigoryev 19.09. WWW.LEONIDGRIGORYEV.COM

The Great Divergence

 (^) The process by which the Western world overcame pre-modern growth constraints and emerged during the 18 th / th centuries (“Industrial Revolution”) as the most powerful and wealthy world civilization, eclipsing India, China, the Ottoman Empire, Japan, and Korea.  (^) Europe went ahead of Asia in terms of wealth thanks to a continuous and consistent economic growth led, in the first place, by the UK.  (^) European specifics: high competition between states and producers, visible efforts in technological, legal and entrepreneurial approaches, adventurism.  (^) Internal issues in Asia in 15-16 centuries: high interest rate, low competition, high consumption, and issues in social mobility (?)…  (^) One start or two? Domestic V External factors

Source: Maddison's estimates of GDP per capita at purchasing power parity in 1990 international dollars for selected European and Asian nations between 1500 and 1950 An explosive growth

Earlier explanations (until about second half of 1900):

• (^) Western exceptionalism: a. Scientific revolution b. Enlightment c. Protestant mentality (Northen Europe)
• (^) Adam Smith’s free market, pursuit of efficiency through individual action
• (^) Karl Marx’s capitalist exploitation
• (^) Mercantilism

Orthodox approach: standard of living

• (^) Higher in Europe than in Asia
• (^) The difference is already evident in 1500s  the Great Divergence is rooted in the begnning of the Modern Era
• (^) Stimulates technical innovations and favorable intitutions for economic growth
• (^) …how do we measure it?

Wag

es

The tables above are all based on S. N. Broadberry and B. Gupta “The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, Economic History Review 59 (2006): 2-

GDP per capita Sources: Derived from Broadberry et al. (2015a); van Zanden and van Leeuwen (2012); Malanima (2011); Álvarez-Nogal and Prados de la Escosura (

Beyond standard of living

• (^) Economic integration
• (^) Legal certainty
• (^) However, data proved Asia and Euope to be comparable in these two respects
• (^) Institutions and policies (e.g.: British Parliament and protectionism…)

Pomeranz : contingencies model

• (^) The gap between Europe and Asia has opened due to…
  • (^) Not livestock
  • (^) Not life expectancy
  • (^) Not technology
  • (^) Not standard of living
  • (^) Not luxury demand
  • (^) But…

… Resource endowments and Imperialism Argument:

• (^) England escaped resource scarcity and became Europe’s economic engine thanks to easily exploitable coal supplies (no longer need for wood) and New World resources (silver, timber, sugar and cotton)
• (^) Institutes = Trade Companies: instrument of coercion and control
• (^) Colonization granted England a more efficient exploitation by connecting all the geografical contingencies and thus increasing the quantity of available resources and the velocity at which they wold move.
• (^) Critics…

A more recent approach: Broadberry, sustaining growth

• (^) By 1750, a discernible gap had opened up even between Asia and the poorest region of Europe.

g = {f(+) g(+)} + {f(-) g(-)}  g = {[1-f(-)] g(+)} + {f(-) g(-)} f(+)  positive growth frequency g(+) rate of positive growth f(-)  negative growth frequency g(-)  negative growth rate

Variables involved in growth

• In mid-fourteenth century, after the Black Death, northwestern Europe began to dampen growth reversals
• Although there were alternating periods of positive and negative growth until the eighteenth century, there was also a clear upward trend , with the gains following the Black Death being retained , and the growth reversals eventually disappearing with the transition to modern economic growth.

Why?

• Black Death : boost to per capita GDP due to mortality shock.
• (^) European countries (except for Spain) enjoyed substantially higher per capita incomes, but only Britain and the Netherlands maintained them even after the return of population growth from the mid-fifteenth century.
• Institutional approach (better than growth theory)  focus on the means of enforcement of agreements.
• (^) “Indentity rule” vs impersonal rule societies” : “changes in elite ordering can bring about shrinking episodes in identity rule societies, but not in impersonal rule societies. In identity rule societies, business relations which were viable in the old ordering may cease to be viable in the new ordering, and it takes time for new relationships to develop, since they depend on establishing credible commitment. Long run development, where episodes of growth are not routinely followed by episodes of shrinking, therefore requires a transition from a world of identity rules to a world of impersonal rules.”
• (^) In the early modern period, England, the “engine” of Europe, and Netherlands managed to develop an impersonal rule kind of institutional structure thus sustaining growth.