1. The Big Picture and The Great Divergence Flashcards Preview

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Timeline of the long view

  • 1500 CE: Mercantilist era (increase a nation's wealth by imposing government regulation that oversaw all of the nation's commercial interests)
  • 1800-1913: Great divergence and catch up (idea of globalization)
  • 1913-2008: Big push era (mostly applied to eastern countries, e.g. HK, Singapore, South Korea, Japan, China)


Overview of what happened during Mercantilist era (1500-1800)

  • Early modern globalization - new sea routes to East Indies and Americas
  • Rise of north-western Europe (Britain, Netherlands, France) - discovery of Americas and new sea routes => took advantage of their geographical advantage
  • Atlantic trade which develops into triangular trade hinging on slavery (Americas, Africa and Europe) - refer to graph on slide
  • Decline of the Mediterranean region 


Characteristics of Mercantilist era

  • Based on understanding that national strength could be maximized by limiting imports via tariffs and maximizing exports
  • Economic policy: secure plenty to build up political power, strong focus on fiscal policy
  • States engage in a resource race to become rich
  • Aim is not so much on economic growth but more on gaining political power
  • Because mercantilism was prevalent in Europe during the imperialistic era of the 16th to 18th centuries, it is often seen as the economic system that drives imperialism


What is the GD?

  • Term coined by Kenneth Pomeranz 
  • also known as the European miracle, referring to the process by which the Western world overcame pre-modern growth constraints and emerged during the 19th century as the most powerful and wealthy world civilization, eclipsing Medieval India, Qing China, the Islamic World, and Tokugawa Japan.
  • The GD was the consequence of European industrialisation.

  • Around 1750, core regions of China and Japan were no less developed than West Europe. Yangzi delta global leader in craft production. 


What is the Needham puzzle?

Song China was much more advanced scientifically than medieval Europe.

=> So, how did Britain,a medieval backwater, industrialise first? 


Close up on Yangzi Delta and why was it significant?

  • 4 of China’s 10 largest cites
  • Nanjing: old capital of China
  • Centre of textile production
  • Major inland trade route
  • GDP p.c. 50% higher than Chinese average ca. 1500 


Breaking of the Needham puzzle

  • Britain: large consumer surpluses for a century before the Industrial Revolution => money to invest in tools and in new manufacturing goods
  • China: wages close to subsistence level in the 18th century => No supply of capital, no demand for manufactures 


Set of economic policies that led to the GD

• unification of the domestic market

• protectionism

•  modernization of banking

•  mass education 


What was the big push in 20th century?

A few countries manage to join the “rich club”

• Japan, SouthKorea, Taiwan

• They have made it thanks to a degree of planning and coordination of investment (⟶ “developmental government”) 


Facts and figures of GD

  • 1750: China's share = 33%, India's = 25%
  • 1913:
    • China has 4%, India 1 %
    • UK+USA+Europe=75%

=> As Britain industrialized, its Asian compeFtors were forced out of business 


Other noteworthy changes in 20th century

  • Industrialization in the USSR
  • Industrialization of Japan and the Asian Tigers
  • Industrialization of China 


Tools used to measure divergence

  • GDP - captures econ size
  • GDP per capita
  • HDI (Human Dev Index) - limited availability
  • Real wages of unskilled labour


Cons of using GDP per capita

  • Estimates prior to 1870 are scarce, inaccurate, derived from different ‘proxy’ indicators across countries.
  • Point estimates, no continuous series (comparisons with previous year but limited availability)


Pros of using real wages 

  • Simpler measure, easier to construct
  • Direct measures based on actual historical data
  • More comparable
  • Usually collected for simple trades in every country
  • Nominal wages are deflated using the same approach 


How to construct nominal income/wage?

  1. Average wages or national income from statistics
  2. Values in different currency converted into common unit 


How to construct real GDP/wage?

  1. Nominal income or wage divided by the price level of basket of goods and services -> purchasing power
  2. Composite price index (cost of living):
    1. Determine typical consumer basket (quantities)
    2. Collect data on prices for each item in the basket
    3. Price the basket or take the weighted average of prices to determine price level 


What is subsistence ratio?

Construct a ‘bare-bone’ basket of goods needed to sustain a family of four at a very modest standard. 


Subsistence ratio calculation

formula: nominal wage / price of the bare-bone basket

•  determines how many times larger the breadwinner wage is than what is needed for a family to survive

•  Ratio greater than one: consumer surplus 


RW and subsistence ratio during the GD

  • The evolution of RWs in the 19th and 20th centuries indicates that Chinese labourers today are about as well off as the British some 150 years ago
  • In 1990, the World Bank set the poverty line (≈ subsistence) at $1 per person per day ⟶ $365 per year
  • Going back to Allen’s GDP per capita table, we get an idea of subsistence ratios over time around the world
    • 1820: world average = 1.8; west Eur and the USA ≥ 3;
    • 1913: world average = 4.2; west Eur ,western offshoots, AR, UR, CL ≥ 10; China, India, Sub-Saharan Africa, Asia (excl. JP), Middle East & N.Africa ≤ 3 


Why is poverty a trap?

when wages decrease people cut back on extras such as education,luxury goods, healthy diet (less productive and healthy)
=> where labour abound and is cheap the incentive to increaseproductivity via capital equipment is minimum-to-non-existent 


Note on the meaning of growth

• The Great Divergence has seen a few countries growing way faster than the rest of the world

• Growth was not a merely quantitative phenomenon

• It entailed huge qualitative changes as well

• This combination of quantitative and qualitative change is what Simon Kuznets labels ‘modern economic growth’ 


General summary of GD

• According to Pomeranz,the Great Divergence occurred in the 19th century between Europe and the Asia.

• Economic historians revised Pomeranz:

–  Divergence began earlier, from ca. 1650 (started long before modern times)

–  It occurred between North-Western Europe and the rest of the world, including other European regions.

–  It resulted from declining wages in the Rest more than from rising wages in the West. 

Research findings

i. Modern economic growth has increased our wealth, but also inequality tremendously.