INTRODUCTION TO GLOBAL ECONOMIC HISTORY
1. The great divergence
Economic history is the queen of the social sciences and has become verry exciting in recent years
since the scope of the fundamental question
‘Why are some countries rich and others poor?’
has gone global. 50 years ago, the question was
‘Why did the Industrial Revolution happen in England rather than France?’
Research on China, India, and the Middle East has emphasized the inherent dynamism of the world’s
great civilizations, so today we must ask why economic growth took off in Europe rather than Asia or
Africa.
↓
Data on incomes in the distant past are not solid, but it looks as though the differences in prosperity
between countries in 1500 were small → the present division between rich and poor largely
emerged since Vasco da Gama sailed to India and Columbus discovered the Americas.
We can divide those last 500 years into 3 periods:
• 1500-1800 → the mercantilist era
• 19th century → period of catch-up
• 20th century → period of the Big Push
The mercantilist era
This was a period that lasted from 1500 to about 1800. It began with the voyages of Columbus and
da Gama, which led to an integrated global economy, and ended with the Industrial Revolution. The
Americas were settled and exported silver, sugar, and tobacco; Africans were shipped as slaves to the
Americas to produce these goods (we can link this to the written paper); and Asia sent spices,
textiles, and porcelain to Europe.
The leading European countries sought to increase their trade by acquiring colonies and using tariffs
and war to prevent other countries from trading with them. Because of all this European
manufacturing was promoted and economy started to grow rapidly in Europe. However, this was all
at the expense of the colonies + economic development, as such, was at that time not the objective
for Europe.
↓ (all this changed in the second period)
Period of catch-up
After the mercantilist era, we had the period of catch-up in the 19th century. By the time Napoleon
was defeated at Waterloo in 1815, Britain had established a lead in industry and was out-competing
other countries → Western Europe and the USA made economic development a priority and tried to
achieve it with a standard set of 4 policies:
- creation of a unified national market by eliminating internal tariffs and building
transportation infrastructure
- the construction of an external tariff to protect their industries from British competition
- the chartering of banks to stabilize the currency and finance industrial investment
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, - the establishment of mass education to upgrade the labour force
These policies were successful in Western Europe and North America, and the countries in these
regions joined Britain to form today’s club of rich nations.
↓
Period of the Big Push
In the 20th century, the policies that had worked in Western Europe (especially in Germany), and the
USA proved less effective in countries that had not yet developed → Why???
Most technology is invented in rich countries, and they develop technologies that use more and
more capital to increase the productivity of their ever more expensive labour. The problem is that
much of this new technology is not cost-effective in low-wage countries, but it is what they need in
order to catch up to the West → Most countries have adopted modern technology to some degree,
but not rapidly enough to overtake the rich countries. The countries that have closed the gap with
the West in the 20th century have done so with a Big Push that has used planning and investment
coordination to jump ahead.
Before we can learn how some countries became rich, we must establish when they became rich
Between 1500-1800 (the mercantilist era), today’s rich countries forged a small lead that can that can
be measured in terms of GDP (gross domestic product) per person. In 1820, Europe was already the
richest continent → GDP/head was 2x that much of the world
→ most prosperous country: the Netherlands with average income (GDP) of $1.838/person
So the Low countries (the Netherlands, Belgium and Luxembourg) had boomed in the 17 th century.
This resulted in the fact that the main question of economic policy elsewhere was: ‘How can we
catch up with the Dutch?’ → Well, the British were catching up. The Industrial Revolution had been
under way for 2 generations, and Great Britain was the second richest economy, with an income of
$1,706 in 1820. Western Europe and Britain’s offshoots (=de uitlopers van Groot Brittannië) (Canada,
Australia, New Zealand, and the USA) had incomes of between $1,100 and $1,200.
The rest of the world lagged behind, with per capita incomes between $500 and $700. Africa was the
poorest continent at $415.
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,Between 1820 – present, the income gaps have expanded (with only a few exceptions).
→ The countries that were richest in 1820 have grown the most → today’s rich countries have
average incomes of $25000-$30000
→ Much of Asia and Latin America have average incomes of $5000-$10000
→ Sub-Saharan Africa has only reached an average income of $1387
The phenomenon of divergence is highlighted in
Figure 1 , in which the regions plotted towards the
right with higher incomes in 1820 had the
greatest income growth factors, and the regions
on the left with lower initial incomes had smaller
growth factors.
- Europe and the British offshoots realized income gains of 17- to 25-fold
- Eastern Europe and much of Asia started with lower incomes and realized increases of 10-
fold
- South Asia, the Middle East, and much of sub-Saharan Africa were less fortunate → only 3- to
6-fold → they have fallen further behind the West
The ‘divergence equation’ summarizes this pattern.
Like already said, there are some exceptions to income divergence → East Asia is the most important
exception, for it is the one region that went against the trend and improved its position.
For example: Japan was the greatest success of the 20th century, for it was indubitably a poor
country in 1820 and yet managed to close the income gap with the West. Equally dramatic has been
the growth of South Korea and Taiwan.
The Soviet Union was another, although less complete, success.
Some causes of the divergence in world incomes
Industrialization and de-industrialization have been major causes of the divergence in world incomes.
→ 1750: most of the world’s manufacturing took place in China (33% of world total) and the Indian
subcontinent (25%). Production/person was lower in Asia than in the richer countries of Western
Europe, but the differentials were comparatively small.
→ 19th century: Asia was transformed from the world’s manufacturing centre into classic
underdeveloped countries specialized in the production and export of agricultural commodities.
→ by 1913: world had been transformed → the Chinese and Indian shares of world manufacturing
had dropped to 4% and 1% respectively. The UK, the USA, and Europe accounted for 3/4 of the total.
Manufacturing output/head in the UK was 38 times that in China and 58 times that in India. Not only
had British output grown enormously, but manufacturing had declined absolutely in China and India
as their textile and metallurgical industries were driven out of business by mechanized producers in
the West
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, A key turning point in all this was the British Industrial Revolution from 1750-1880. In this period,
Britain’s share of world manufacturing increased from 2% to 23%, and it was British competition that
destroyed traditional manufacturing in Asia.
The period from 1880-WW2 was marked by the industrialization of the USA and continental Europe
including Germany, in particular → their shares reached 33% and 24%, respectively, in 1938.
↓
Britain lost ground to these competitors, and its share dropped to 13%.
Since WW2 we also saw that the USSR’s (=Union of Soviet Socialist Republics) share of world
manufacturing output rose sharply until the 1980s and then crashed suddenly as the post-Soviet
countries went into economic decline.
The East Asian miracle saw a rise in the share of world manufacturing in Japan, Taiwan, and South
Korea to 17%.
→ China has also been industrializing since 1980, and produced 9% of world manufactures in
2006. If China catches up to the West, the world will have come full circle.
REAL WAGES
When we look at the economic development/growth, we often use the GDP as a measurement.
However, GDP is not an adequate measure of well being
• It leaves out many factors such as health, life expectancy, and educational attainment
(opleidingsniveau)
• Absence of data often makes GDP hard to compute
• It may be misleading because it averages the incomes of the rich with poor
These problems can be solved by calculating ‘real wages’
Real wages → the standard of living that can be bought with one’s earnings → real wages tell us
much about the standard of living of the average person and help explain the origins and spread of
modern industry, because the incentive to increase the amount of machinery used by each worker is
higher where labour is more expensive.
To measure the standard of living of those labourers, their wages must be compared to the prices of
consumer goods, and those prices must be averaged to calculate a consumer price index.
In this course we’ll use the index of the cost of maintaining a man at ‘bare-bones subsistence’ (the
least-cost way of staying alive) → it’s an index that consists out of a diet that is quasi-vegetarian.
→ Boiled grain or unleavened bread provide most of the calories, legumes are a protein-rich
complement, and butter or vegetable oil provides a little fat. This was typical fare around the world in
1500.
* Francisco Pelsaert, a Dutch merchant who visited India in the early 17th century, observed
that the people near Delhi ‘have nothing but a little kitchery made of green pulse mixed with rice . . .
eaten with butter in the evening, in the day time they munch a little parched pulse or other grain’. The
workmen ‘know little of the taste of meat’. Indeed, most meats were taboo.
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