THE ‘GREAT DIVERGENCE’ IN LIVING STANDARDS BETWEEN RICH AND POOR
COUNTRIES: LESSONS FOR DEVELOPMENT TODAY
Changing patterns of trade and technological change explain the ‘great divergence’ in
living standards between the rich and poor countries that took place in the late
nineteenth century, according to research by Ahmed Rahman and colleagues.
Their study, presented at the Royal Economic Society ‘s 2011 annual conference,
explains how the North launched into modernity while the South languished in
underdevelopment. And it serves as a cautionary tale for developing economies today:
countries can adopt all the ‘right’ institutions and still fail to converge with the wealth of
the West.
Because of the abundance of unskilled labour in the world during the nineteenth
century, the innovations of the early Industrial Revolution were predominantly simple
techniques that could be used by workers who were not formally educated. Thus, early
industrialisation was through unskilled intensive technological growth, which fostered
population increases and limited education in both the North and the South. Living
standards in the two regions did not diverge during this time.
Once trade became possible, however, the North started specialising in skill-intensive
innovation and production. This led to falling fertility and rising education rates in the
North. The South meanwhile specialised in unskilled-intensive production, leading to
further population growth. The South was forced to produce more and more primary
commodities in exchange for skill-intensive products from the North. This generated
even more fertility increases, holding the South back while the North steamed ahead.
More…
The last two centuries have witnessed dramatic changes in the global distribution of
income and population. At the dawn of the Industrial Revolution, living standards
between the richest and poorest economies of the world were roughly two to one. With
industrialisation came both income and population growth within a few core countries.
But massive divergence in living standards across the globe did not take place until the
latter half of the nineteenth century, the time when the first great era of globalisation
began to take shape. It seems an interesting coincidence that such unprecedented
growth in intercontinental commerce (conceivably creating a great force for
convergence by exploiting comparative advantages and facilitating flows of knowledge)
coincided so precisely with unprecedented divergence in global living standards.
Why did incomes diverge just as the world became flat? This paper argues that trade
and technological growth patterns together sowed the seeds for divergence,
contributing enormously to today’s great wealth disparity.
There are of course many stories over why the Great Divergence took place. Some
focus on institutional differences between regions around the world. From this
perspective economic growth is a matter of establishing the right ‘rules of the game,’
and underdevelopment is simply a function of some form of institutional pathology.
In the end, however, it is unclear if institutions made any difference to the course of
European growth, or if inefficient institutions had any quantifiable and meaningful effect
on growth in peripheral regions. After all, China and India seemed to have economic
systems as developed and market driven as those in Europe.
Another potential explanation is that peripheral countries were specialising in inherently
less productive industries. But this too is not very convincing, since so-called low
technology endeavours such as agricultural and raw-materials production enjoyed huge
productivity advances during the early stages of the Industrial Revolution.
This paper develops and simulates a theoretical model that describes both the North’s
launch into modernity and the South’s vicious cycle of underdevelopment. It is quite
distinct in a number of ways.
First, the researchers suggest that because of the great abundance of unskilled labour
in the world, the innovations of the early Industrial Revolution were unskilled-biased –
that is, they were simple techniques that could be used by workers not formally
educated. Thus early industrialisation was characterised by unskilled intensive
technological growth, which fostered population increases and limited education both in
the North and the South. Consequently, living standards in the two regions did not
diverge during this time.
Once trade became possible, however, the North started specialising in skill-intensive
innovation and production. This induced a demographic transition of falling fertility and
rising education rates in the North.
The South on the other hand specialised in unskilled-intensive production, inducing
further unskilled-biased technological growth and population growth. This population
divergence also fostered deterioration in the South’s terms of trade – the South was
forced to produce more and more primary commodities for skill-intensive products. This
generated even more fertility increases. Thus the South’s static gains from trade
became a dynamic impetus to prosperity, and living standards between the two regions
diverged dramatically as a result.
This work not only constitutes a fair description of economic history, but also serves as
a cautionary tale for developing economies today. Countries can adopt all the ‘right’
institutions and still fail to converge to the wealth of the West.
Further unfettered trade with rich nations and robust innovative activity are boons to
wealth in themselves; but these authors suggest that certain combinations of the two
can potentially form a barrier to prosperity.
ENDS
‘Trade, Technology and the Great Divergence’ by Kevin O’Rourke, Ahmed Rahman
and Alan Taylor
Contact:
Ahmed Rahman, Assistant Professor, Department of Economics, United States Naval
Academy
Phone: 1.410.980.8392 (cell)
Email: rahman@usna.edu