Lecture 4 - The Great Divergence Flashcards
What led to the Great Divergence
Begins with industrial revolution
In some world regions, transition to modern economic growth thereafter
In many regions, onset of modern economic growth is delayed by many decades
ASCENT OF THE RICH
After UK, Western Europe and North America transition to modern economic growth
Both region = accessible coal and high wages
Possible to adopt Britain’s new labour saving technology
Standard Model of Development
=> Helped countries catch up to Britain
1) Railways: integration of domestic market
2) School: promotion of mass eduction
3) Banks: finance industrialisation
4) Tariffs: protection of domestic industry (western characteristic: trade based economies and military imbalances promoting asymmetric free trade agreements for alliances)
IMPORT COMPETITION & DEINDUSTRIALIZATION
Industrial revolution => Import competition
Unlike west, little tariff protection for East domestic proto industries
East also geographic mistfortune: large distance between manufacturing centres and coal
==> Led to deindustrialization
Example deindustrialization.
Anglo / Indian Cotton textile production
1680s: UK cotton textiles cost 2x more than Indians
1820s: UK cotton textiles cost 1/2 of Indians (despite UK 5x higher wages)
=> Reversal due to 3fold increase in TFP
=> Comparative advantage of the east shifted to primary goods production (labour intensive)
New Economic Geography Models
Explains simultaneous occurrence of trade specialisation and income diversification through increasing returns to scale and agglomeration effects
Core periphery patterns
If region A specialised in production with increasing returns, and region B in constant return production, region A will grow faster than region B
=> Leads to deindustrialization of region B
=> Region B will do primary production
Core periphery patterns
If region A specialised in production with increasing returns, and region B in constant return production, region A will grow faster than region B
=> Leads to deindustrialization of region B
=> Region B will do primary production
C19th transportation costs plummet
Through steamship, railways
Leads to Great Specialisation & ultimately Great Divergence
Caveats to deindustrialization
Counterexamples: Australia and Canada achieved modern economic growth with specialising in primary production
Caveats to deindustrialization
Counterexamples: Australia and Canada achieved modern economic growth with specialising in primary production
ToT effect: Manufacturing growth = engine for primary goods exports
Timing: p.c. income in China and India had fallen long before western import competition began
MODERNIZATION CHALLENGES
Technology transfer challenges: not all technology could be applied everywhere the same
Japan US Tech
Imported US agricultural tech does not suit Japan
Japan has low land-labour ratio vs high US land-labour ratio
Solution: land saving biological innovations (fertilisers)
Hayami - Ruttan thesis
different endowments require different technologies
Output per capita can be increased in different ways:
Y/L = Y/A * A/L
=> US (land abundant): machines increased Y/L, by increased land area each worker could farm (A/L)
=> Japan (land scarce): bio-chemical tech increased Y/L by increasing output per hectare (Y/A)
POVERTY TRAPS
1) No infrastructure <=> No economic activity
2) No savings <=> No income growth
3) No steel mill <=> No coal mine
Big push
May be required for transition to modern economic growth
Gerschenkron thesis
late industrialisation may require greater state initiative to overcome missing prerequisites
=> Heavy gvt. involvement in C20th east Asia interpreted this way
=> After big push, rapid transistory growth sets it
Caveats to big push
Big push policies often rely, on close, informal relations between gvt., and firms
Relation based system often hard to reconcile with economic growth
Transitioned need from relation based system to rule based system
=> Push gone wrong: Stalinist industrialisation (central planning could not cope with mass customisation and application of ICT)
DEEP ROOT PROBLEMS
1) Institutional legacy effects
2) Cultural legacy effects
3) Information institutions
1) Institutional legacy effects
= Different colonisation processes
Extractive states = in region with high European mortality rates
=> No checks & balances, little property rights
=> Bad for long-run growth
Neo-Europes = regions more hospitable to European settlement
=> Opposite
=> Institutional differences may account for half of today income differences
Caveats to institutional legacy effects
Hard to separate from cultural factors and human capital effects
Bad disease environment also affects native population
2) Cultural legacy effects
Ethnic groups affected by slavery still today have
1) lower levels of trust in relatives / neighbourhood local officials
2) Lower per capita incomes
=> Transmission of trust occurred internally (family norms) or externally (institutions)
3) Informational institutions
Hindering knowledge diffusion
Artisanal knowledge controlled by kin based collectives (entry barriers)
Little communication across occupational group, insular knowledge
Engerman-Sokoloff thesis
Geography leads to institutions
Eg.
Suitable geography for plantation crops => Scale economies favour large slave plantations => Inequality in wealth, eduction, political power, etc. => Exclusive institutions restrict commercial opportunities to small elite
