The Great Divergence : Two ranks of globalised regions

The globalisation is the process of international integration. By integration, we have to understand, for the economic part, the economic international interaction. Globalisation is not a new phenomena: empires like the Roman Empire, the Parthian Empire or the Han Dinasty are good exemples of an archaic globalisation.

But the globalisation started to be more and more important, firstly with the colonial empires in the 15th and 16th and even more since the Industrial Revolution with the significant reduce of the cost of international transports.

800px-Colonisation2

As we can see, colonisation shaped the world to the advantage of the colonizing countries and the disadvantage of  colonized countries. As we can see on this dynamic map (made by Andrei Nacu), there were 3 main waves of colonisation.
The firt one is from Spain and Portugal on the 15th and 16th century : it is the discovery of America.
The second one is from industrialised European countries (France, England, Denmard and Netherlands…) in the 19h century : it is the conquest of Africa and Asia.
The third one is the extension of Russia and the birth of USSR.

Economically, these colonisations had an impact until today: the colonised countries, even after their independance, came lately and are still behind in the economic globalisation as we can see on the next table from Maddison.

The value of World Exports by Regional Constant Prices of Western Europe in 1913 is 127 839 million whereas for Africa it is 14 625, this means that Western Europe exports more than 8,7 times more than Africa.
In 1998, for Europe it is of 2 490 696 millions whereas for Africa it is of 154 290, this means that Western Europe exports more than 16,1 times more than Africa.

ImageSource: Angus Maddison, The World Economy: A Millennial Perspective


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This difference of dynamic is visible on this graph using the number of the first table (from the Maddison’s book): the values of Africa or Eastern Europe exports is increasing more and more, but not as fast as the World one.

To conclude, we can see that all countries are becoming more and more globalised and integrated. Nevertheless, colonised countries arrived later and are slower in the World integration.

The Great Divergence : why Industrial Revolution happened firstly in Europe?

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Two main factors explain this : geographic circumstances and ratio of the wage relative to the price of capital.

For Kenneth Pomeranz, author of The Great Divergence (2000), the industrial revolution occured in England because geographic circumstances. Indeed, he explains that the availability of cheap coal in England was a decisive advantage not shared by other countries.

The ratio of the wage relative to the price of capital created an incentive to substitute the capital instead of maintaining the use of labour.

In China, it was the contrary : the important population permitted a lower wage whereas the price of energy was expensive because of the rareness. Thus, the Industrial Revolution was not a necessity.

Thus, as we can see on the graphic, China and India, during the first millenar, where the most important countries in the share of world GDP because of their relative important demography. After the 1800, the revolution industrial improved the productivity of industrialised countries, first of them Great Britain, Germany, France and more later United State. These countries became the most important countries in the share of GDP during the 19s and until today.

Today, as we can see on the next table, the USA represents 5% of the world population but 21% for its GDP whereas Asia (minus Japan) represents 60% of the world population but only 30% of its GDP.

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The World Economic History: a constantly evolving field

The World Economic History, like all human sciences, does not fit predefined templates, scientific and applicable systematically. The example of the development theories are in this way interesting. Indeed, in the context of development theories, there are discussions, authors proposing different models in order to explain how the industrialization occurred.
The two most imminent authors are Walt Whitman Rostow, who explained a linear theory of economic development, and Alexander Gerschenkron who replied by a theory more dynamic.
I will explain this two main theories and illustrate them by the Meiji’s Japan case.

I)                    The Theory of Rostow : the linear economic development

Walt Whitman Rostow is an economist and American political theorist. He formulated a theory of development and growth conditions that marked the sixties. This linear theory is outlined in steps of economic growth in “The Process of Economic Growth”, 1952.

According to him, there are five stages of development for industrial societies.

1)      The traditional society: the society is based on the exploitation of the earth and is relatively hostile to progress. Social hierarchies are fixed. The investment rates tend to be the same as that of population growth.

2)      The preconditions for take-off: Change begin to be accepted. The Agricultural Revolution enables economic growth and invests increase more than the demography. The increase of agricultural production and productivity allows the reallocation of human resources (the labor) to other sectors. By the way, this reminds the Alfred Sauvy’s theory “La théorie du déversement”. Capital accumulation appears. Formal education is improved and many political and religious upheaval occur (The Reformation, the French revolution, the War of Independence of the United States, the French Revolution…).

3)      The Take-off: The capital accumulation allows massive investments in industry that fuels growth and improves the living standards. The growth process becomes endogenous.

4)      From Drive to maturity: the economic acceleration is spread to other economic sectors that had not yet taken off. When the share of investment begins to decline, increasing resources are allocated to consumption leading the transition to mass consumption.

5)      The Age of High mass consumption: this is the final stage of the industrialized society. Society reaches a high living standard. (The roaring twenties in the USA, Les Trentes Glorieuses in Europe). The purchasing power is well distributed.

Rostow

II)                  The theory of Gerschenkron : the dynamic economic development

Gerschenkron is the main critic of the theory of the development of Rostow, accusing its linear view. He was a Russian-born American Jewish economic historian. His work is obviously concentrated on the development in the Soviet Union and Eastern Europe.

Using the example of Japan in the Meiji era and the countries of the Soviet Union, countries that are developing later benefit from the history of nations holders before. Thus, their take-off is faster and they even jump steps in development. According to Gerschenkron, the type of development depends on the historical period: countries with a relative delay may adopt other technological advances to find their faster development.
In order to illustrate his theory, I choose to work on the case of Brazil.

Brazil
Source: Maddison Project

As seen in the case of Brazil, we can see a strong growth of GDP per capita from 1960 to 1980. Despite the double oil shock, we see here a very important development resulting from the massive investment from the United States, Europe and Japan. Foreign direct investment is an excellent illustration of the effect of catch that can cause the international environment on the economic development of a country.

III)                Case study: development of Japan in the Meiji era.

In a decade, Japan’s Meiji era is experiencing a rapid development, achieving a higher growth than Germany, allowing it to reach the rank of major industrial powers. This is mainly due to the implementation of the zaibatsu, that are large group of companies, present in almost all sectors of the economy, such as Mitshubishi, Sumitomo and Yasuda.
One of the main reforms was the creation of the national education system based on the American model and created ex nihilo.
The Meiji opened the country to foreign country, helping him to adapt and going faster in his development. This openness, by the way, had for consequences the emergence of new diseases such as cholera and typhoid. The Yen was created in 1871 to promote trade between Japan and the West.

As we can this on the graph bellow, from 1889 to 1907, a period of catch-up of Japan, the GDP per capita (1900 Int. $ GK) increases by nearly 50%, from 933 to 1325

Japan