The Great Divergence in World Incomes: Why Are Some Countries Rich and Others Poor?

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The Great Divergence in World IncomesWhy Are
Some Countries Rich and Others Poor?

• Bob Allen
• Professor of Economic History
• Nuffield College, Oxford
• 2008

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Part 1 When did Northwestern Europe pull ahead
of the Rest of the World?
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The Great Divergence Debate

• The classical economists and most scholars since
  have argued that Europe was ahead of Asia for a
  very long time. They try to explain why
• Smith Minimal government and openness to trade
• Malthus Differences in marriage patterns
• Marx capitalist versus other institutions
  (Asiatic mode of production)

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The California School has challenged this.

• Key books
• Ken Pomeranz, The Great Divergence
• Bin Wong, China Transformed
• James Lee and Wang Feng, One Quarter of Humanity
  Malthusian Mythology and Chinese Realities
• They claim that income differences between Europe
  and Asia were small c. 1800 and Asian
  institutions were adequate for development.
• Evidence for incomes is very weak.

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I will argue that the California School is wrong
and that northwestern Europe pulled ahead of Asia
1500-1750.

• I begin by measuring income differences.
• Maddisons GDP estimates are very unrealiable.
• Instead I rely on real wages. They measure the
  incomes of workers and perhaps other people as
  well.

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Measuring real wages requires data on wages and
consumer prices.

• These are available for many European cities in
  price histories.
• Many have been written in last 150 years
• Historian finds an institution that has lasted
  hundreds of years and copies prices of all
  transactions.
• Published in books
• I have computerized these
• Weights and measures converted to metric
• Money converted to grams of silver
• This work is being extended to Asia

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The first efforts were for Europe,followed
quickly by the Ottoman Empire

• Jan Luiten van Zanden, Wages, and the Standards
  of Living in Europe, European Review of Economic
  History, 1999, 175-98.
• Robert C. Allen, The Great Divergence in
  European Wages and Prices, Explorations in
  Economic History, 2001, 411-447.
• S. Ozmucur and S. Pamuk, Real Wages and
  Standards of Living in the Ottoman Empire,
  Journal of Economic History, 2002, 293-321.

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Now this research is being extended to Asia

• D Ma and J-P Bassino, Japanese Unskilled Wages
  in International Perspective, Research in
  Economic History, 2005.
• RC Allen, J-P Bassino, D Ma, C Moll-Murata, J-L
  van Zanden, Wages, prices, and Living Standards
  in China, Japan, and Europe, 1738-1925
• RC Allen, India in the Great Divergence, in
  Hatton, ORourke, Taylor, eds., The New
  Comparative Economic History Essays in Honor of
  Jeffery G. Williamson, 2007, pp. 9-32.

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These studies involve comparing

• Wage rates, which are usually expressed in grams
  of silver per day.
• Consumer prices usually the cost of a basket
  of goods.
• Welfare ratio a full years earnings divided by
  the cost of maintaining a family for a year.

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Heres how daily wages compared
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Did high silver wages translate into a high
standard of living? The answer depends on the
cost of living!
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To measure the cost of living

• Collect prices of all of the important consumer
  goods.
• These must be converted to grams of silver per
  metric unit.
• A basket of goods must be specified and its cost
  computed.

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A basket is specified for an adult male covering
a whole year.

• Various standards of comfort could be chosen.
• My first basket was what I now call the European
  respectability basket. This is supposed to
  represent total, annual spending for a man.
• This supplies 1940 kcalories per day.
• It was inspired by eighteenth century budgets and
  poor house diets.
• Bread is the main carbohydrate. Beer or wine and
  meat are included.
• Non-foods are included.
• Rent at 5 is added on.

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Welfare ratio for a family

• WRAnnual income/annual cost of subsistence
• Annual income mans annual income assuming full
  time, full year work
• Annual cost of subsistence 3 times cost of
  basket (including 5 for rent).
• This annual subsistence cost includes man, woman,
  and children
• If WR1, income is just enough to buy the
  specified basket or standard of living.

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Roman Empire c. 300 AD
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The problem with this basket is that it is too
expensive for most people in the world!

• Therefore, I constructed a bare bones minimum
  basket. This is supposed to represent total,
  annual spending for a man.
• This also supplies 1940 kcalories per day, mainly
  from the cheapest grain.
• Small amounts of meat, beans, butter, or oil to
  supply protein and fat in keeping with local
  diet.
• Small quantities of non-foods are included.
• Rent at 5 is added on.

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The Great Divergence in Living Standards Happened
1400-1750
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Workers around the World earned incomes 3 4
times subsistence in 1400.

• Some of the surplus was spent on more calories.
• Much of the surplus was spent on better quality
  foodmeat, alcohol.

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The Great Divergence preceded the Industrial
Revolution

• English and Dutch workers still earned 3 4
  times subsistence.
• They provided the mass market for the consumer
  revolution.
• Workers in India, China, and south and central
  Europe earned only enough to survive (Welfare
  Ratio 1).

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Part II Why did northwest Europe pull ahead?
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The immediate explanation is that the high wage
economies were economically more developed
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Wage was maintained in northwest Europe (W) and
fell elsewhere (W1)
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Why was northwest Europe more successful?

• Legal, constitutional, institutional development?
• Culture?
• In keeping with the assessment of Marxism, I
  investigate
• Agrarian structure? No
• Commercial expansion? Yes
• I will review evidence about agriculture and
  about energy to argue that urban growth was a
  cause of these developments.

Agricultural revolution
Urban growth
Commercial expansion
Cheap energy (coal)
High wages
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Agriculture did play an important roleoutput
per worker
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Output per worker is agricultural output divided
by the agricultural population from earlier
population breakdown.

• Agricultural output is calculated from a demand
  curve.
• Other investigators have used this procedure for
  Spain, the Netherlands, and Italy.
• This procedure makes per capita consumption of
  agricultural products a function of income and
  price.
• Q P-.6W.5M.1N
• P price, W wage income, Mprice
  manufactures, Npopulation
• Estimates of net agricultural exports must be
  added to go from consumption to production.
• The output estimates are consistent with direct
  calculations for England and the Netherlands.

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Standard explanation emphasizes enclosures and
capitalist farming
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Surviving medieval ridge and furrow
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In fact, these institutional changes made only
minor contributions to productivity growth
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Much of the incentive to increase productivity
was a response to the growth of cities
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Sir James Steuart (1767) had the essential
insight a farmer will not labour to produce a
superfluity of grain relative to his own
consumption, unless he finds some want which may
be supplied by the means of the superfluity.
Sixty years later, Gibbon Wakefield spelled out
the global context In England, the greatest
improvements have taken place continually, ever
since colonization has continually produced new
desires amongst the English, and new markets
wherein to purchase the objects of desire. With
the growth of sugar and tobacco in America, came
the more skillful growth of corn in England.
Because in England, sugar was drank and tobacco
smoked, corn was raised with less labour, by
fewer hands.
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If farmers increased output, they could keep up
with high wage economy
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The Growth of London created cheap energy

• London population
• 1500 50,000
• 1600 200,000
• 1700 500,000
• 1800 1,000,000
• This growth created the British coal industry,
  which was unique in the world.
• The British coal industry gave Britain the
  cheapest energy in the world.
• Cheap energy led to invention of energy using
  technology and the expansion of energy using
  industries.

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As a result, northern and western Britain had the
cheapest energy in the world.
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Next challenge Put these ideas together in a
model that separates out the causes of success
and failure in the early modern economy

• Things to explain (endogenous variables)
• Real wage
• Urbanization
• Agricultural productivity
• Proto-industrialization
• Explanatory factors (exogenous variables)
• population
• Agricultural land
• Productivity in textiles (new draperies)
• Intercontinental trade (result of imperial
  policy)
• Price of energy
• Prince or republic
• literacy

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A data base is put together

• Countries at fifty or one hundred year intervals
• Uses earlier occupational distribution data
• Agricultural total factor productivity estimated
  from output, land, and labour
• Other variables like textile productivity,
  literacy, trade data are calculated.

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Textile productivity is measured as the ratio of
input prices (wool, labour) to cloth price
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Energy price
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The model is tested by seeing if it replicates
the various national histories. Here is the
simulated wage
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Simulated agricultural TFP
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Simulated urbanization rates
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We can use the model to identify the causes of
Englands advance. Can we turn England into
France?Here are simulated wages
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Simulated urbanization
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Simulated agricultural TFP
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The Great Divergence was mainly the result of
English and Dutch success in the world economy.

• To a significant extent, this was successful
  mercantilism.
• England and the low countries were the high wage
  part of the world.
• England was also the cheap energy region of the
  world.

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Part III Why did the early modern Great
Divergence lead to the Industrial Revolution?
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The problem is explaining why the steam engine,
cotton spinning, coke smelting, etc., were
invented and adopted in Britain in the 18th
century.

• These were macro-inventions
• Radically changed factor proportions (biased
  technical change)
• Great potential for elaboration
• Ideas came from outside industry
• Despite their revolutionary potential, they were
  barely viable commercially even under the most
  favourable circumstances.

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Were these technologies invented because of
better fundamentals?

• Better property rights or limited government? No
• Better culture? No
• Better science? No
• Better geography?
• Not better agricultural resources
• Britain had developed coal but other countries
  had it.

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The macro-inventions were made in 18th century
Britain because that was the first time and place
that it paid to invent them.

• The macro-inventions were biased technical
  changes.
• They used inputs that were cheap in Britain and
  saved inputs that were dear.
• Even under British conditions, they were barely
  profitable to operate.
• They were not profitable to use elsewhere.

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Invention was an economic activity influenced by
factor prices.

• Invention is 1 inspiration and 99
  perspiration. (Edison)
• Inspiration for macro-inventions came from
  outside the industry (science, copying, and so
  forth)
• Sometimes banal
• Perspiration refers to RD.
• Perfecting the engineering was most of invention.
• This entailed costs.
• Factor prices determined adoption
• Adoption determined benefits
• Benefits necessary for RD
• Therefore, factor prices affected invention.

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Micro-inventions

• Realized the potential of the macro-inventions
• Came from local learning
• Tended to produce neutral technical change
• Unleashed path dependent trajectory of
  improvement.
• Eventually cut costs enough to make the adoption
  of the macro-inventions profitable outside of
  Britain
• When the tipping point occurred, the Industrial
  Revolution spread abroad.

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The British inventions led to modern economic
growth because they were more transformative.

• Cotton was a global industry
• Demand for British cotton was very price elastic
• Technical improvements led to enormous output
  growth
• This led to Manchestervast urbanization
• Also a very large demand for machinery
• Steam engine and iron industries allowed
• General mechanization of industry, railway, steam
  ship
• Basis of 19th century global economy
• Account for almost half of growth in British
  labour productivity in 19th century.
• Engineering industry was the most important
  creation of British industrial revolution.

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The Great Divergence led to Modern Economic
Growthnot the other way around.