EH1: SB TOPIC 4 ACCOUNTING FOR THE GREAT DIVERGENCE.

EH1: SB TOPIC 4

ACCOUNTING FOR THE GREAT DIVERGENCE

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

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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

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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

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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

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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

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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 headN = population

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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 α1 to be -0.5

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Agricultural output

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• 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)

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)

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qq

qq

na

a

/1

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

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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

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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)

England/ GB

Holland/ NL

Italy Spain

1086 754 1270 759 957 1300 755 1,482 957 1348 777 876 1,376 1,030 1400 1,090 1,245 1,601 885 1450 1,055 1,432 1,668 889 1500 1,114 1,483 1,403 889 1570 1,143 1,783 1,337 990 1600 1,123 2,372 1,244 944 1650 1,100 2,171 1,271 820 1700 1,630 2,403 1,350 880 1,563 1750 1,710 2,440 1,403 910 1800 2,080 2,617 1,244 962 1,752 1820 2,133 1,953 1,376 1,087 1850 2,997 2,397 1,350 1,144

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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

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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

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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

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FIGURE 1: Real GDP per capita in European countries, 1270-1870 (1990 international dollars, log scale)


200

400

800

1,600

3,200

6,40012

7012

9513

2013

4513

7013

9514

2014

4514

7014

9515

2015

4515

7015

9516

2016

4516

7016

9517

2017

4517

7017

9518

2018

4518

70

Italy Spain

18



200

400

800

1,600

3,200

6,40012

7012

9513

2013

4513

7013

9514

2014

4514

7014

9515

2015

4515

7015

9516

2016

4516

7016

9517

2017

4517

7017

9518

2018

4518

70

GB NL

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200

400

800

1,600

3,200

6,40012

7012

9513

2013

4513

7013

9514

2014

4514

7014

9515

2015

4515

7015

9516

2016

4516

7016

9517

2017

4517

7017

9518

2018

4518

70

GB NL Italy Spain

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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

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)

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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

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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

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

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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.

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

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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.

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

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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

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FIGURE 5: Subsectoral shares of service sector output

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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)

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

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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

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TABLE 2: GDP per capita levels in Asia (1990 international dollars)

Sources: Bassino et al. (2014); Broadberry et al. (2014); Broadberry et al. (2014)

Japan China India 725 551 900 476 980 1,247 1020 1,518 1050 1,458 1086 1,204 1120 1,063 1150 508 1280 552 1300 1400 960 1450 552 983 1500 1,127 1570 968 1600 605 977 682 1650 619 638 1700 597 841 622 1750 622 685 573 1800 703 597 569 1850 777 594 556

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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

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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

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

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4. GREAT DIVERGENCE

• Table 3 puts together Europe and Asia to focus on Great Divergence

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

England/

GB Holland/

NL Italy Spain Japan China India

725 551 900 476 980 1,247 1020 1,518 1050 1,458 1086 754 1,204 1120 1,063 1150 508 1280 679 957 552 1300 755 1,482 957 1348 777 876 1,376 1,030 1400 1,090 1,245 1,601 885 960 1450 1,055 1,432 1,668 889 552 983 1500 1,114 1,483 1,403 889 1,127 1570 1,143 1,783 1,337 990 968 1600 1,123 2,372 1,244 944 605 977 682 1650 1,110 2,171 1,271 820 619 638 1700 1,563 2,403 1,350 880 597 841 622 1750 1,710 2,440 1,403 910 622 685 573 1800 2,080 1,752 1,244 962 703 597 569 1850 2,997 2,397 1,350 1,144 777 594 556

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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

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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

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

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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

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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

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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)

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20

40

80

160

320

640

1,280

1270 1320 1370 1420 1470 1520 1570 1620 1670 1720 1770 1820 1870

GDP GDP per head population

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

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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

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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

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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

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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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2. SECTORAL DIVERSIFICATION

• Pre-modern growth typically based on TOT boom in a staple product, followed by growth reversal when TOT returned to equilibrium

• Diversification helped to dampen growth reversals

• Within agriculture, NSA more diversified than rest of Europe or Asia: mixed farming

• GB & NL also saw early shift of labour from agriculture to industry & services

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TABLE 1: Share of agriculture in the European labour force (%)

Sources: Broadberry et al. (2015); Allen (2000).

England Netherlands Italy France Poland 1300 -- -- 63.4 -- -- 1400 57.2 -- 60.9 71.4 76.4 1500 58.1 56.8 62.3 73.0 75.3 1600 -- 48.7 60.4 67.8 67.4 1700 38.9 41.6 58.8 63.2 63.2 1750 36.8 42.1 58.9 61.1 59.3 1800 31.7 40.7 57.8 59.2 56.2

3. INSTITUTIONS AND THE ROLE OF THE STATE

• Epstein/O’Brien: Medieval state power fragmented, with “freedoms” granted to interest groups

• Needed centralisation of state power for market integration and expansion of state capacity for provision of public goods

• Link to sectoral diversification: access to food guaranteed for those who left the land through integrated markets and system of poor relief (Solar)

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AJR: need executive constraints

• In GB & Holland, constraints on rulers sufficient to ensure rulers unable to act arbitrarily in dealings with merchants

• In Spain & Portugal, merchants unable to stop powerful rulers intervening in business matters

• Dincecco: needed regime that was both fiscally centralised and politically limited

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Institutions and Europe’s Little Divergence

• Early modern GB & Holland dominated Spain & Portugal in terms of:– (1) ability to raise taxes that allowed expansion of

state capacity (Table 2)– (2) control exercised by mercantile interests over

state through parliament (Table 3)

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TABLE 2: Per capita fiscal revenues, 1500/09 to 1780/89 (grams of silver)

Sources: Karaman and Pamuk (2010); Brandt et al. (2013); Broadberry et al. (2015)

1500/09 1550/59 1600/09 1650/59 1700/09 1750/59 1780/89 Dutch Republic 76.2 114.0 210.6 189.4 228.2 England 5.5 8.9 15.2 38.7 91.9 109.1 172.3 France 7.2 10.9 18.1 56.5 43.5 48.7 77.6 Spain 12.9 19.1 62.6 57.3 28.6 46.2 59.0 Venice 27.5 29.6 37.5 42.5 46.3 36.2 42.3 Austria 10.6 15.6 23.0 43.0 Russia 6.3 14.9 26.7 Prussia 2.4 9.0 24.6 53.2 35.0 Ottoman Empire 5.6 5.8 7.4 8.0 9.1 7.1 Poland 1.5 0.9 1.6 5.0 1.2 0.8 11.2 China 7.0 7.2 4.2 3.4 India 11.1 17.4 21.9 17.6 5.5

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TABLE 3: Activity index of European parliaments, 12th to 18th centuries (calendar years per century in which parliament met)

Source: van Zanden et al. (2012).

12th 13th 14th 15th 16th 17th 18th North Sea Area England 0 6 78 67 59 73 100 Scotland 0 0 10 61 96 59 93 Netherlands 0 0 0 20 80 100 100 Mediterranean Castile and Leon 2 30 59 52 66 48 7 Catalonia 3 29 41 61 16 14 4 Aragon 2 25 38 41 19 11 1 Valencia 0 7 28 29 12 4 0 Navarre 2 7 17 33 62 30 20 Portugal 0 9 27 47 12 14 0

Institutions and the role of the state in Asia

• Asian states sometimes portrayed as holding back development because more centralised and autocratic than European states

• But easier to see problems of state weakness

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Institutions

• India: declining revenue per capita with collapse of Mughal Empire (Roy)

• China: per capita fiscal revenue on downward trajectory since Northern Song peak (Brandt, Ma & Rawski)

• Japan: per capita tax revenue and provision of local public goods higher in Tokugawa Japan than in Qing China (Sng & Moriguchi)

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4. THE QUANTITY AND QUALITY OF LABOUR

• Quantity of labour: “Industrious Revolution” increased supply of labour effort

• Basic idea: people worked harder to obtain new goods made available by long distance trade and industrial innovation

• English data consistent with this pattern

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TABLE 4: Annual days worked per person in England

Sources: Allen and Weisdorf (2011); Clark and van der Werf (1998); Voth (2001).

Period Blanchard/Allen

and Weisdorf Clark and

van der Werf Voth

1433 165 1536 180 1560-1599 257 1578 260 1584 210 1598 259 1600-1649 266 1650-1699 276 1685 312 1700-1732 286 1733-1736 295 1760 258 1771 280 1800 333 1830 336 1867-1869 293-311 1870 318

Industrious revolution

• De Vries finds similar pattern in NL, but slower elimination of saints’ days in Catholic Europe so average days worked lower

• Term “industrious revolution” often associated with de Vries writing on Europe

• But phrase was coined by Hayami writing on Tokugawa Japan

• Highlights similarities as well as differences between Japan and GB

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Labour quality: human capital

• Northwest Europe had different demographic regime from rest of world, characterised by later marriage and hence limited fertility

• This facilitated human capital accumulation:– labour market opportunities for females – fewer children associated with more investment

in human capital

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TABLE 5: Female age of first marriage

Sources: Dennison and Ogilvie (2013); Mosk (1980); Lee and Wang (1999); Bhat and Halli (1999).

A. Northwest Europe 16th century 17th century 18th century 19th century mean n mean n mean n mean n England 24.8 3 25.7 66 25.4 110 24.4 48 Netherlands -- 25.2 2 27.1 11 26.4 12 Italy 19.5 8 21.6 31 22.7 72 24.0 94 Spain 19.3 2 20.3 2 23.7 26 23.9 4 B. Asia Period Range Mean Japan 1680-1860 18.8 to 24.6 22.1 China 1550-1931 17.2 to 20.7 18.6 India 1911-1931 12.9 to 13.3 13.0

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Marriage patterns and fertility• Relatively high age of first marriage for females in NSA

by C16th • Upward trend in Mediterranean Europe but sizeable

gap with NSA before C19th • Age of marriage in China and India much lower than in

NW Europe • Japan an intermediate case, with average age 22.1,

compared with 25.4 in England, but 18.6 in China and 13.0 in India

• Highlights similarities between Japan and GB

5. INTERACTION BETWEEN SHOCKS AND STRUCTURAL FACTORS

A. Effects of the Black Death•Catching-up process of NSA with Mediterranean Europe and China started with Black Death of mid-C14th •Same shock had different effects in different parts of Europe through interaction with structural features of the different economies

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Black Death

• Italy: classic Malthusian response to mortality crisis. Rise in incomes for survivors, followed by decline in incomes as population recovered

• GB, NL: per capita income gains sustained:– Diversified structure– State strong enough to ensure integrated market– Industrious revolution (more work days per year)

plus high age of marriage of females (more human capital)

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Black Death

• Spain: no rise in per capita incomes• Land-abundant frontier economy during

Reconquest • Population decline further isolated an already

scarce population, reducing specialisation and division of labour

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Black Death

• Asia: no signs of a positive Black Death effect: – Japan: remained isolated so disease never took

root – China: population declined sharply in C14th, but

Mongol interlude undermined institutional framework that had underpinned Northern Song boom

– India: no record of mortality crisis

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B. Effects of the new trade routes

• Opening of new trade routes from Europe to Asia and the Americas c. 1500 also had asymmetric effects through interaction with structural features of the different economies

• Might have expected Spain and Portugal to gain most from these changes, since they were the pioneers and both had Atlantic as well as Mediterranean coasts

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New trade routes

• But early modern GB and Holland dominated Spain and Portugal in terms of institutional structures:– ability of states to raise taxes to finance the

expansion of state capacity– control exercised by mercantile interests over the

state through parliament

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New trade routes

• China adopted restrictive closed door policy towards long distance trade after “voyages to the western oceans” (1405-1433)

• Following an initial period of openness to relations with European traders, Tokugawa Japan adopted policy of seclusion from 1630s

• So any Japanese advantage from earlier Chinese turn inwards was short lived

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New trade routes

• Extent to which trade really was closed off by these policies remains unclear

• But striking contrast with outward orientation of European states which sponsored voyages of discovery from C15th

• With early modern China and Japan turned inwards, India was the Asian country most open to trade

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New trade routes

• However, this did not lead to Indian prosperity because of low levels of state capacity

• Low state capacity had consequences for enforcement of property rights e.g. major problems of piracy in Indian Ocean

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CONCLUSION• HNA has now made a substantial contribution to

understanding the Great Divergence, but there is more to be done

• Historical national accounts needed for more countries, reaching further back in time

• More regional disaggregation needed within large countries

• More comparative data needed on explanatory variables

• Need to pay more attention to Japan

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EH1: SB TOPIC 4 ACCOUNTING FOR THE GREAT DIVERGENCE.

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Transcript of EH1: SB TOPIC 4 ACCOUNTING FOR THE GREAT DIVERGENCE.