Differential takeoffs and the great divergence
The last two centuries have witnessed dramatic changes in the distribution of income and population across the globe. The differential timing of the take-off from stagnation to growth across countries and the corresponding variations in the timing of the demographic transition have led to a great divergence in income, as depicted in Figure 32, and to significant changes in the distribution of population around the globe, as depicted in Figure 33.
Some regions have excelled in the growth of income per capita, while other regions have been dominant in population growth.Inequality in the world economy had been insignificant until the 19th century. The ratio of GDP per capita between the richest region and the poorest region in the world was only 1.1 : 1 in 1000 AD, 2 : 1 in 1500 and 3 : 1 in 1820. In contrast, the past two centuries have been characterized by a ‘Great Divergence’ in income per capita among countries and regions. In particular, the ratio of GDP per capita between the richest and the poorest regions has widened considerably from a modest 3 : 1 ratio in 1820, to a large 18 : 1 ratio in 2001. An equally impressive transformation occurred in the distribution of world population across regions, as depicted in Figure 33. The earlier take-off of Western European countries generated a 16% increase in the share of their population in the world economy within the time period 1820-1870. However, the early onset of the Western European demographic transition, and the long delay in the demographic transitions of less developed regions, well into the second half of the 20th century, led to a 55% decline in the share of Western European population in the world in the time period 1870-1998. In contrast, the prolongation of the Post-Malthusian period of less developed regions and the delay in their demographic transitions, generated a 84% increase in Africa’s share of world population, from 7% in 1913 to 12.9% in 1998, an 11% increase in Asia’s share of world population from 51.7% in 1913 to 57.4% in 1998, and a four-fold increase in Latin American’s share in world population from 2% in 1820 to 8.6% in 1998.
The phenomenon of the Great Divergence in income per capita across regions of the world over the past two centuries, that was associated with the take-off from the epoch of near stagnation to a state of sustained economic growth, presents intriguing questions about the growth process. How does one account for the sudden take-off from stagnation to growth in some countries in the world and the persistent stagnation in others? Why has the positive link between income per capita and population growth reversed its course in some economies but not in others? Why have the differences in per capita incomes across countries increased so markedly over the last two centuries? Has the transition to a state of sustained economic growth in advanced economies adversely affected the process of development in less-developed economies?
6.1. Non-unifiedtheories
The origin of the Great Divergence has been a source of controversy. The relative roles of geographical and institutional factors, human capital formation, ethnic, linguistic, and religious fractionalization, colonialism and globalization have been at the center of a debate about the origins of this remarkable change in the world income distribution in the past two centuries.
The role of institutional and cultural factors has been the focus of influential hypotheses regarding the origin of the great divergence. North (1981), Landes (1998), Mokyr (1990,2002), Hall and Jones (1999), Parente and Prescott (2000), and Acemoglu, Johnson and Robinson (2002) have argued that institutions that facilitated the protection of property rights and enhanced technological research and the diffusion of knowledge, have been the prime factors that enabled the earlier European take-off and the great technological divergence across the globe.[192]
The effect of geographical factors on economic growth and the great divergence have been emphasized by Jones (1981), Diamond (1997) and Gallup, Sachs and Mellinger (1998).[193] The geographical hypothesis suggests that advantageous geographical conditions made Europe less vulnerable to the risk associated with climate and diseases, leading to the early European take-off, whereas adverse geographical conditions in disadvantageous regions (e.g., harsh climate, prevalence of diseases, scarcity of natural resources, high transportation costs, limited regional diffusion of knowledge and technology), generated permanent hurdles for the process of development, contributing to the great divergence.[194]
The exogenous nature of the geographical factors and the endogenous nature of the institutional factors lead researchers to hypothesize that initial geographical conditions had a persistent effect on the quality of institutions, leading to divergence and overtaking in economic performance.
Engerman and Sokoloff (2000) provide descriptive evidence that geographical conditions that led to income inequality, brought about oppressive institutions designed to preserve the existing inequality, whereas geographical characteristics that generated an equal distribution of income led to the emergence of growth promoting institutions. Acemoglu, Johnson and Robinson (2002) provide evidence that reversals in economic performance across countries have a colonial origin, reflecting institutional reversals that were introduced by European colonialism across the globe.[195] [196] “Reversals of fortune” reflect the imposition of extractive institutions by the European colonialists in regions where favorable geographical conditions led to prosperity, and the implementation of growth enhancing institutions in poorer re- gions.145 Furthermore, the role of ethnic, linguistic, and religious fractionalization in the emergence of divergence and “growth tragedies” has been linked to their effect on the quality of institutions. Easterly and Levine (1997) and Alesina et al. (2003) demonstrate that geopolitical factors brought about a high degree of fractionalization in some regions of the world, leading to the implementation of institutions that are not conducive for economic growth and thereby to diverging growth paths across regions.The role of human capital in the great divergence is underlined in the unified growth theories of Galor and Weil (2000), Galor and Moav (2002), Doepke (2004), Fernandez- Villaverde (2005), Lagerlof (2006), as well as others. These theories establish theoretically and quantitatively that the rise in the technologically-driven demand for human capital in the second phase of industrialization and its effect on human capital formation and on the onset of the demographic transition have been the prime forces in the transition from stagnation to growth and thus in the emergence of the associated phenomena of the great divergence.
In particular, they suggests that once the technologically-driven demand for human capital emerged in the second phase of industrialization, the prevalence of human capital promoting institutions determined the extensiveness of human capital formation, and therefore the rapidity of technological progress, the timing of the demographic transition, the pace of the transition from stagnation to growth, and thus the distribution of income in the world economy.Empirical research is inconclusive about the significance of human capital rather than institutional factors in the process of development. Some researchers suggest that initial geographical conditions affected the current economic performance primarily via their effect on institutions. Acemoglu, Johnson and Robinson (2002), Easterly and Levine (2003), and Rodrik, Subramanian and Trebbi (2004) provide evidence that variations in the contemporary growth processes across countries can be attributed to institutional factors whereas geographical factors are secondary, operating primarily via variations in institutions.
Glaeser et al. (2004) revisit the debate whether political institutions cause economic growth, or whether, alternatively, growth and human capital accumulation lead to institutional improvement. In contrast to earlier studies, they find that human capital is a more fundamental source of growth than are the institutions. Moreover, they argue that poor countries emerge from poverty through good policies (e.g., human capital promoting policies) and only subsequently improve their political institutions.
A theory that unifies the geographical and the human capital paradigms, capturing the transition from the domination of the geographical factors in the determination of productivity in early stages of development, to the domination of human capital promoting institutions in mature stages of development has been proposed by Galor, Moav and Vollrath (2003). The theory identifies and establishes the empirical validity of a channel through which favorable geographical conditions, that were inherently associated with inequality, affected the emergence of human capital promoting institutions (e.g., public schooling, child labor regulations, abolishment of slavery, etc.), and thus the pace of the transition from an agricultural to an industrial society.[197] They suggest that the distribution of land within and across countries affected the nature of the transition from an agrarian to an industrial economy, generating diverging growth patterns across countries.
The accumulation of physical capital in the process of industrialization raised the importance of human capital in the growth process, reflecting the complementarity between capital and skills. Investment in human capital, however, was sub-optimal due to credit market imperfections, and public investment in education was growth-enhancing. Nevertheless, human capital accumulation did not benefit all sectors of the economy. Due to a low degree of complementarity between human capital and land, universal public education increased the cost of labor beyond the increase in average labor productivity in the agricultural sector, reducing the return to land. Landowners, therefore, had no economic incentives to support these growth enhancing educational policies as long as their stake in the productivity of the industrial sector was insufficient. Land abundance, which was beneficial in early stages of development, brought about a hurdle for human capital accumulation and economic growth among countries that were marked by an unequal distribution of land ownership.[198]6.2. Unified theories
Unified theories of economic growth generate direct hypotheses about the factors that determine the timing of the transition from stagnation to growth and thus the causes of the Great Divergence. The timing of the transition may differ significantly across countries and regions due to historical accidents, as well as variations in geographical, cultural, political, social and institutional factors that affected the vital interaction between population and technology in the Malthusian epoch, and the fundamental links between technological progress, human capital formation, and the demographic transition, in the Post-Malthusian Regime as well as in the Modern Growth Regime.[199]
6.2.1. Human capital promoting institutions
The role of human capital in the take-off from stagnation to growth and thus in the great divergence was underlined in the unified theories of Galor and Weil (2000), Galor and Moav (2002), Doepke (2004), Fernandez-Villaverde (2005), Lagerlof (2006), as well as others, as explored in Section 4.
These theories establish theoretically and quantitatively that the rise in the demand for human capital in the second phase of industrialization, and its effect on human capital formation, and the onset of the demographic transition that swept the world in the course of the last century, have been the prime forces in the transition from stagnation to growth and thus in the emergence of the associated phenomena of the Great Divergence. Furthermore, they suggest that variations in the timing of the transition from stagnation to growth (e.g., England’s earlier industrialization in comparison to China), and thus differences in economic performance across countries, may reflect initial differences in geographical factors and historical accidents and their manifestation in variations in institutional, demographic, and cultural factors, trade patterns, colonial status, and public policy.Consistently with the findings of Glaeser et al. (2004), these unified theories suggest that once the technologically-driven demand for human capital emerged in the second phase of industrialization, the prevalence of human capital promoting institutions determined the swiftness of human capital formation, the timing of the demographic transition, the pace of the transition from stagnation to growth, and thereby the observed distribution of income in the world economy.
6.2.2. Globalization and the great divergence
This subsection explores a unified growth theory that generates a transition from stagnation to growth along with a great divergence, focusing on the asymmetric effect of globalization on the timing of the transition of developed and less developed countries from Malthusian stagnation to sustained economic growth. Galor and Mountford (2003) suggest that sustained differences in income and population growth across countries could be attributed to the contrasting effect of international trade on industrial and non-industrial nations. Consistent with the evidence provided in Section 2, their theory suggests that the expansion of international trade in the 19th century and its effect on the pace of individualization has played a major role in the timing of demographic transitions across countries and has thereby been a significant determinant of the distribution of world population and a prime cause of the ‘Great Divergence’ in income levels across countries in the last two centuries. International trade had an asymmetrical effect on the evolution of industrial and non-industrial economies. While in the industrial nations the gains from trade were directed primarily towards investment in education and growth in output per capita, a significant portion of the gains from trade in non-industrial nations was channeled towards population growth.[200]
In the second phase of the Industrial Revolution, international trade enhanced the specialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor induced a gradual investment in the quality of the population, expediting a demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade has generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The absence of significant demand for human capital has provided limited incentives to invest in the quality of the population, and the gains from trade have been utilized primarily for a further increase in the size of the population, rather than in the income of the existing population. The demographic transition in these non-industrial economies has been significantly delayed, increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skilled intensive goods, and delaying their process of development. The research suggests, therefore, that international trade affected persistently the distribution of population, skills, and technologies in the world economy, and has been a significant force behind the ‘Great Divergence’ in income per capita across countries.[201]
The historical evidence described in Section 2 suggests that the fundamental hypothesis of this theory is consistent with the process of development over the last two centuries. As implied by the trade patterns reported in Table 1, and the evolution of industrialization depicted in Figure 14, trade over this period induced the specialization of industrialized economies in the production of industrial goods, whereas non-industrial economies specialize in the production of primary goods. The asymmetric effect of international trade on the process of industrialization of developed and less developed economies, as depicted in Figure 14, affected the demand for human capital as analyzed in Section 2.3.3, and thus the timing of the demographic transition in developed and less-developed economies, generating a great divergence in output per capita as well as significant changes in the distribution of world population, as depicted in Figure 33.151
The diverging process of development of the UK and India since the 19th century in terms of the levels of income per capita and population growth is consistent with the theory of Galor and Mountford (2003) and provides an interesting case study. During the 19th century the UK traded manufactured goods for primary products with India.[202] [203] Trade with Asia constituted over 20% of UK total exports and 23.2% of total imports throughout the 19th century [Bairoch (1974)].[204] Consistentwiththeproposedhypoth- esis, as documented in Figure 14, industrialization in the UK accelerated, leading to a significant increase in the demand for skilled labor in the second phase of the Industrial Revolution, a demographic transition and a transition to a state of sustained economic growth.
For India, however, international trade played the reverse role. The period 1813-1850 was characterized by a rapid expansion in the volume of exports and imports which gradually transformed India from being an exporter of manufactured products - largely textiles - into a supplier of primary commodities [Chaudhuri (1983)]. Trade with the UK was fundamental in this process. The UK supplied over two thirds of its imports for most of the 19th century and was the market for over a third of India’s exports. As depicted in Figure 14, the rapid industrialization in the UK in the 19th century was associated with a decline in the per capita level of industrialization in India.[205] The setback in the process of industrialization and consequently the lack of demand for skilled labor, delayed the demographic transition and the process of development.[206] Thus, while the gains from trade were utilized in the UK primarily towards an increase in output per capita, in India they were significantly channeled towards an increase in the size of the population. The ratio of output per capita in the UK relative to India grew from 3 : 1 in 1820 to 11 : 1 in 1998, whereas the ratio of India’s population relative to the UK’s population grew from 8 : 1 in 1870 to 16 : 1 in 1998.[207]
7.