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Accounting for the Great Divergence: Measurement and Explanation

Learn about the historical accounts and reasons for the economic divergences in Europe and Asia before 1870. Discover the methods used to estimate GDP per capita and the shifts in income levels over time.

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Accounting for the Great Divergence: Measurement and Explanation

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  1. EH1: SB TOPIC 4 ACCOUNTING FOR THE GREAT DIVERGENCE

  2. OVERVIEW • Title of this topic is “Accounting for the Great Divergence” and I use the word “accounting” in 2 ways • Measurement: use HNA framework to compare GDP p.c. in Europe and Asia, c.1000-1870 • Explanation: provide a historical account of why the divergence happened

  3. Overview • Measurement: revisionist claim that richest parts of Asia on par with richest parts of Europe as late as 1800 rejected, but emphasis on regional variation fruitful • Explanation: need to account for divergence of North Sea Area (GB & Holland) from rest of Europe as well as Asia, but also some similarities between GB and Japan, which made first transition to MEG in Asia

  4. TOPIC 4: ACCOUNTING FOR THE GREAT DIVERGENCE • A. ECONOMIC GROWTH IN EUROPE AND ASIA • 1. A Short-Cut method for estimating GDP per capita • 2. Europe’s Little Divergence • 3. Asia’s Little Divergence • 4. The Great Divergence • 5. The Transition to Modern Economic Growth

  5. A. ECONOMIC GROWTH IN EUROPE AND ASIA BEFORE 1870 • Now possible to provide historical national accounts on an annual basis for some countries reaching back to c.1270 • Derived from data collected at the time, in contrast to Maddison’s “guesstimates” • Picture that emerges is of reversals of fortune within both Europe and Asia, as well as between the two continents

  6. 1. A SHORT-CUT METHOD FOR ESTIMATING GDP PER CAPITA • In Topic 1, we saw how GDP per capita has been reconstructed in GB on an annual basis back to 1270, using a wealth of information gleaned from archives (Broadberry et al., 2015) • A similar approach has also been possible in the case of Holland (van Zanden and van Leeuwen, 2013) • For Italy and Spain, where less information is currently readily accessible, researchers have developed a short-cut method that requires data only on: population; wages & prices; urbanisation rate

  7. Agricultural output • Agricultural output is estimated from the demand side • Allen (2000) begins with identity: QA = r c N Where: QA = real agricultural output, r = ratio of production to consumption c = consumption per head N = population

  8. Agricultural output • Agricultural consumption per head is a function of its own price in real terms (PA/P), real price of non-agricultural goods & services (PNA/P) and real income per head (y): ln c = α0 + α1 ln (PA/P) + α2 ln (PNA/P) + β ln y • Constraint: α1 + α2 + β = 0 • For Italy, Malanima (2011) suggests on basis of evidence from developing countries that β = 0.4 and α2 = 0.1, which constrains α1to be -0.5

  9. Agricultural output • Corroborating evidence is usually available for individual countries (e.g. Malanima confirms his elasticities with evidence from Italy, 1861-1910) • In other cases, supply side evidence of changing grain yields and the cultivated land area is available (e.g. Broadberry, Custodis & Gupta, 2015, on India) • For early modern period, also reasonable to assume zero net trade in grain (high weight to value ratio in an era of very high transport costs) so agricultural consumption is equal to production (r = 1)

  10. Non-agricultural output • Share of population living in towns (urbanisation rate) is used as a measure of size of non-agricultural sector • Output per head (q) is derived from agricultural output per head (qa) using the urbanisation rate as a measure of non-agricultural share of output per head (qna/q)

  11. Non-agricultural output • Again, it is possible to incorporate additional information for individual countries • E.g., Álvarez-Nogal and Prados de la Escosura (2013) have to take account of “agro-towns” needed to provide security for rural workers during reconquest era

  12. 2. EUROPE’S LITTLE DIVERGENCE • Data sources for Europe: • England/GB: Broadberry, Campbell, Klein, Overton and van Leeuwen (2011; 2015) • Holland/NL: van Zanden and van Leeuwen (2012) • Italy: Malanima (2011) • Spain: Álvarez-Nogal and Prados de la Escosura (2012) • Per capita income data produced in national currencies, then converted to 1990 international dollars

  13. TABLE 1: GDP per capita levels in Europe (1990 international dollars) Sources: Broadberry et al. (2015); van Zanden and van Leeuwen (2012); Malanima (2011); Alvarez-Nogal and Prados de la Escosura (2013)

  14. Europe’s Little Divergence • Before Black Death in 1348, p.c. incomes substantially higher in Italy and Spain than in England and Holland • Reversal of fortunes between North Sea Area and Mediterranean Europe: by 1800 p.c. incomes substantially higher in GB and NL than in Italy and Spain • First turning point was Black Death: Italy, England and Holland all experienced substantial increase in p.c. incomes, as population fell sharply

  15. Europe’s Little Divergence • GB and Holland received permanent boost to p.c. incomes from this • Italian p.c. incomes increased at first but fell back to pre-Black Death level as population growth returned after 1450 • Spain did not experience any increase in p.c. income after Black Death

  16. Europe’s Little Divergence • Second turning point around 1500, as new trade opportunities opened up between Europe and Asia around southern Africa and between Europe and Americas across Atlantic • Around 1500, p.c. incomes c. $1500 in Italy and Holland • Little Divergence assured with surge in p.c. incomes in NSA, led initially by Holland with Golden Age 1570-1650, then by GB after 1650

  17. FIGURE 1: Real GDP per capita in European countries, 1270-1870 (1990 international dollars, log scale) Sources: Broadberry et al. (2015); van Zanden and van Leeuwen (2012); Malanima (2011); Alvarez-Nogal and Prados de la Escosura (2013)

  18. FIGURE 1: Real GDP per capita in European countries, 1270-1870 (1990 international dollars, log scale) Sources: Broadberry et al. (2015); van Zanden and van Leeuwen (2012); Malanima (2011); Alvarez-Nogal and Prados de la Escosura (2013)

  19. FIGURE 1: Real GDP per capita in European countries, 1270-1870 (1990 international dollars, log scale) Sources: Broadberry et al. (2015); van Zanden and van Leeuwen (2012); Malanima (2011); Alvarez-Nogal and Prados de la Escosura (2013)

  20. Annual data • FIGURE 1: growth booms alternated with growth reversals • For Italy and Spain, no long run growth of p.c. GDP • For GB and Holland, do get positive trend, as a result of dampening of growth reversals • Europe’s Little Divergence (and also Great Divergence) not so much about getting growth going as dampening growth reversals

  21. 3. ASIA’S LITTLE DIVERGENCE • Data sources for Asia: • Japan: Bassino, Broadberry, Fukao, Gupta and Takashima (2014) • China: Broadberry, Guan and Li (2014) • India: Broadberry, Custodis and Gupta (2015)

  22. Chinese data sources • Official historical literature, compiled at the time to assist imperial court • Private historical works by distinguished historians of their era • Local Gazetteers • Pioneering work of Chinese quantitative economic historians

  23. Output by sector • GDP reconstructed from output side: agriculture, industry and services • Although some series are available annually, grain yields (crucial for annual cycle) are not, so estimates presented at 10-year frequency • Agriculture: results driven by cultivated land area per capita • FIGURE 2: Cultivated area grew over time, but failed to keep pace with population growth

  24. FIGURE 2: Cultivated land per capita of the Northern Song, Ming and Qing dynasties (mu, log scale)

  25. Agricultural output • FIGURE 3: Output of cash crops increased in line with population • But grain output failed to keep pace with population growth • So agricultural output per head declined between Northern Song and Qing periods.

  26. FIGURE 3: Indices of agricultural output (1840=100)

  27. Industrial production • FIGURE 4: Metals and mining more volatile than other industries, with burst of rapid growth during mid-Song period, then stagnation after 1078. Boom driven by iron (Hartwell) • Metals and mining remained depressed during Ming dynasty (less iron for warfare and less copper for coinage in state sector), before picking up again during Qing dynasty (rapid growth phase in private sector during C18th) • Food processing, other manufacturing and building all grew rapidly, but with setbacks across dynastic changes.

  28. FIGURE 4: Indices of industrial output (1840=100)

  29. Service sector shares • Service sector data collected primarily on value rather than volume basis • FIGURE 5: shares of the main service sub-sectors • Most significant long term trend was decline in share of government (tax revenue stable as population increased) • This was offset by growing share of commerce and housing • Share of finance remained stable

  30. FIGURE 5: Subsectoral shares of service sector output

  31. REAL GDP PER CAPITA • FIGURE 6: Sectoral outputs are aggregated into GDP and divided by population to produce real GDP per capita • Northern Song dynasty was peak level of Chinese economic development • Consistent with traditional views of Hartwell, Elvin, Wittfogel, Needham • But contrary to California School (good Chinese performance until C19th)

  32. FIGURE 6: Real GDP per capita of the Northern Song, Ming and Qing dynasties (1990 international dollars, log scale)

  33. Explaining Chinese decline • Agriculture accounted for 65-75% of GDP • Given decline of cultivated land per capita and failure of grain yields to rise sufficiently to offset this, decline in living standards inevitable • Huang called this a process of involution

  34. TABLE 2: GDP per capita levels in Asia (1990 international dollars) Sources: Bassino et al. (2014); Broadberry et al. (2014); Broadberry et al. (2014)

  35. Asian Little Divergence • China was Asia’s p.c. GDP leader at start of 2nd millennium, but then on a downward trajectory from high-point during Northern Song Dynasty • Japan had very low levels of p.c. GDP at start of 2nd millennium, but then experienced episodic growth phases without major growth reversals • Japan followed similar path to GB, but at slower rate of growth and starting from lower level

  36. Asia’s Little Divergence • India shared in Chinese pattern of declining p.c. GDP from 1600, at height of Mughal Empire under Akbar • Japan overtook China and India during C18th

  37. Regional variation • But China is a large economy. Perhaps Yangzi Delta was on a par with Japan until C19th? • Li and van Zanden find per capita GDP in Yangzi Delta 53.8% of level in NL in 1820s • This suggests p.c. GDP of c. $1,000 for Yangzi Delta (in 1990 international dollars), above Japanese level

  38. 4. GREAT DIVERGENCE • Table 3 puts together Europe and Asia to focus on Great Divergence

  39. TABLE 3: GDP per capita levels in Europe and Asia (1990 international dollars)

  40. Great Divergence • China richer than England in 1086, but England was a relatively poor part of Europe in C11th • Comparing China with richest part of medieval Europe, likely that Italy already ahead by 1300 • But smaller region of China such as Yangzi Delta may still have been on a par with Italy in 1500

  41. Great Divergence • But even allowing for regional variation, Great Divergence clearly underway long before 1800 • Holland well above China by 1600, even allowing for regional variation • But Holland is small • GB also clearly ahead of China by 1700, even allowing for regional variation • Pomeranz (2011) now accepts this

  42. Little and Great Divergences • Asian Little Divergence parallels European Little Divergence • In Europe, GB and Holland overtake Spain and Portugal by having growth spurts without growth reversals • In Asia, Japan overtakes China and India • Great Divergence • Japan started from lower level than GB, grew more slowly, and achieved transition to MEG much later • Hence the 2 continents diverged as reversals of fortune occurred within each continent

  43. 5. THE TRANSITION TO MODERN ECONOMIC GROWTH • The timing of the Great Divergence as measured using historical national accounts fits well with the start of what Kuznets called “modern economic growth” • Kuznets was keen to distinguish MEG from pre-modern growth, which he believed was Malthusian • For Kuznets, temporary gains in living standards could be achieved when population declined, as after the Black Death, for example

  44. Transition to modern economic growth • One of the conditions for MEG suggested by Kuznets was therefore that there should be sustained growth of population as well as output per head • The new historical national accounting evidence suggests that on this definition, MEG began in GB around 1700 • FIGURE 4: Earlier p.c. GDP growth episodes in 2nd half of C14th after the Black Death and in 2nd half of 17th after the Civil War were accompanied by declining population

  45. FIGURE 4: Real GDP, population, and real GDP per head, England 1270-1700 and Great Britain 1700-1870 (averages per decade, log scale, 1700 = 100)

  46. Transition to modern economic growth • After 1400, p.c. income growth petered out and p.c. incomes remained on a plateau • After 1700, population growth returned and GDP p.c. growth remained positive, rather than the level of p.c. income remaining on a plateau • This was the first case of modern economic growth

  47. TOPIC 4: ACCOUNTING FOR THE GREAT DIVERGENCE • B. EXPLAINING THE GREAT DIVERGENCE • 1. Shocks and Structural Differences • 2. Sectoral Diversification • 3. Institutions and the Role of the State • 4. The Quantity and Quality of Labour • 5. Interaction between Shocks and Structural Factors

  48. B. EXPLAINING ECONOMIC GROWTH 1. SHOCKS AND STRUCTURAL DIFFERENCES • Can now “account” for Great Divergence, in sense of measurement, providing quantitative picture of when and where it occurred • Full “account” requires explanatory narrative • Divergences can be seen as arising from differential impact of shocks hitting economies with different structural characteristics

  49. Key shocks • Black Death began in western China and spread to Europe, reaching England in 1348 • New trade routes c. 1500 between Europe and Asia around south of Africa and between Europe and Americas

  50. Underlying factors • These shocks had asymmetric effects on different economies because of 3 important underlying factors: • Sectoral diversification: agriculture, industry & services • Institutions: fiscal state & executive constraints • Quantity & quality of labour: “industriousness” and human capital

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