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 2

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 3

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 4

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 5

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 6

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

8. Agricultural output Agricultural consumption per head is a function of its own price in real terms (P A /P), real price of non- agricultural goods & services (P NA /P) and real income per head (y): ln c = α 0 + α 1 ln (P A /P) + α 2 ln (P NA /P) + β ln y Constraint: α 1 + α 2 + β = 0 For Italy, Malanima (2011) suggests on basis of evidence from developing countries that β = 0.4 and α 2 = 0.1, which constrains α 1 to be -0.5 8

9. Agricultural output 9 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 (q a ) using the urbanisation rate as a measure of non-agricultural share of output per head (q na /q) 10

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 11

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 12

13. 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. 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. 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. 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. 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. 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. 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. 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) 21

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 22

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 23

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

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. 25

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

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 C18 th ) Food processing, other manufacturing and building all grew rapidly, but with setbacks across dynastic changes. 27

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

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 29

30. FIGURE 5: Subsectoral shares of service sector output 30

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 C19 th ) 31

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

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 33

34. 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. 35 Asian Little Divergence China was Asia’s p.c. GDP leader at start of 2 nd 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 2 nd 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. 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 C18 th

37. Regional variation But China is a large economy. Perhaps Yangzi Delta was on a par with Japan until C19 th ? 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 37

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

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

40. 40 Great Divergence China richer than England in 1086, but England was a relatively poor part of Europe in C11 th 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. 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 42

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 43

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 2 nd half of C14 th after the Black Death and in 2 nd half of 17 th after the Civil War were accompanied by declining population 44

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) 45

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 46

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 47

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 48

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 49

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 50

51. 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 51

52. 52 TABLE 1: Share of agriculture in the European labour force (%) Sources: Broadberry et al. (2015); Allen (2000).

53. 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) 53

54. 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 54

55. 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) 55

56. 56 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)

57. 57 TABLE 3: Activity index of European parliaments, 12 th to 18 th centuries (calendar years per century in which parliament met) Source: van Zanden et al. (2012).

58. 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 58

59. 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) 59

60. 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 60

61. 61 TABLE 4: Annual days worked per person in England Sources: Allen and Weisdorf (2011); Clark and van der Werf (1998); Voth (2001).

62. 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 62

63. 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 63

64. 64 TABLE 5: Female age of first marriage Sources: Dennison and Ogilvie (2013); Mosk (1980); Lee and Wang (1999); Bhat and Halli (1999).

65. 65 Marriage patterns and fertility Relatively high age of first marriage for females in NSA by C16 th Upward trend in Mediterranean Europe but sizeable gap with NSA before C19 th 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

66. 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-C14 th Same shock had different effects in different parts of Europe through interaction with structural features of the different economies 66

67. 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) 67

68. 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 68

69. Black Death Asia: no signs of a positive Black Death effect: – Japan: remained isolated so disease never took root – China: population declined sharply in C14 th, but Mongol interlude undermined institutional framework that had underpinned Northern Song boom – India: no record of mortality crisis 69

70. 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 70

71. 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 71

72. 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 72

73. 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 C15 th With early modern China and Japan turned inwards, India was the Asian country most open to trade 73

74. 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 74

75. 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 75