Great Divergence (Asia and Europe)

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Published on March 9, 2014

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VIVEK KUMAR (54) DEBARATI BIR (12) ANIRUDH SOOD (04) SUKRITI BHARDWAJ (48) ANINDITA CHANDA (03) SUNIDHI JAIN (49) “ THE GREAT DIVERGENCE “

$ 195000 BILLION WEALTH IN THE WORLD MADE AFTER AROUND 1800 ARE BEING OWNED BY THE WESTERNERS 19 % OF THE WORLD POPULATION OWN 66% OF THIS WEALTH WESTERNERS -> 10 X RICHER THAN INDIANS AMERICANS -> 20 X RICHER THAN CHINESE ECONOMIC HISTORIANS CALLED IT AS A GREAT DIVERGENCE

15 GNI per capita 1280 1500 1700 1801 1806 1811 1816 1821 1826 1831 1836 1841 1846 1851 1856 1861 1866 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 25 RATIO OF PER CAPITA GDP:UK/INDIA & US/CHINA 20 Ratio Uk/INDIA Ratio US/China 10 5 0 SOURCE : Maddison Data Base.xl, Author :J. Bolt

RASSELAS’ QUESTION ??? “BY WHAT MEANS……ARE THE EUROPEANS THUS POWERFUL? OR WHY, SINCE THEY CAN SO EASILY VISIT ASIA AND AFRICA FOR TRADE OR CONQUEST, CANNOT THE ASIATICKS AND AFRICANS INVADE THEIR COASTS, PLANT COLONIES IN THEIR PORTS, AND GIVE LAWS TO THEIR NATURAL PRINCES? “ GREAT DIVERGENCE ACCOUNTANCY & FINANCIAL INSTI. REAL WAGES & PRICES MARITIME TECHNOLOGY & TECHNOLOGY UNIVERSITY TRADE & COMM INDUSTRIAL REVOLUTION CULTURE & INSTITUTION INNOVATION

RESEARCH QUESTION…. ???? WHAT WAS THE MOST CRUCIAL DRIVING FORCE BEHIND THE GREAT DIVERGENCE ? & WILL RE - CONVERGENCE TAKE PLACE ?

GREAT DIVERGENCE UNDER A UNIFIED ENDOGENOUS GROWTH MODEL WITH TRADE THE UNIFIED GROWTH THEORY INTENDS TO CAPTURE IN A RAPID EXPANSION OF SINGLE FRAMEWORK THE MAIN INTERNATIONAL TRADE HAS CHARACTERISTICS OF THE PLAYED A MAJOR ROLE IN THE TRANSITION FROM THE TIMING OF THE DEMOGRAPHIC MALTHUSIAN ERA TO THE TRANSITIONS AND HAS MUCH MODERN ERA, AS WELL AS THE CONTRIBUTED TO THE RISE OF ASSOCIATED PHENOMENON OF THE GREAT DIVERGENCE GREAT DIVERGENCE AND DEMOGRAPHIC TRANSITION. THE GAINS FROM TRADE IN THE 2ND A PERIOD OF PHASE OF I.R WAS STAGNATION DIRECTED DUE TO TOWARDS EDU. & ALMOST SAME PCI IN DCs AND IN BIRTH & POPN GROWTH IN DEATH RATES LDCs WHEN A PERIODBOTH BIRTH & DEATH WHEN BIRTH RATES FELL..PCI RATES SHOT INCREASEDUP ALONGWITH DECLINING DEATH RATES

TECHNOLOGY THE CHANGES IN PCI & PRODUCTIVITY SINCE THE 1800s CAN BE EXAMINED AS FOLLOWS: WHY DID INCOME PER CAPITA DECLINE IN POOR COUNTRIES SUCH AS INDIA AND CHINA RELATIVE TO THE ADVANCED ECONOMIES SUCH AS THE UNITED STATES SINCE 1800?  VAST INEQUALITIES IN PCI DESPITE IMPROVEMENTS IN MOBILITY OF GOODS,CAPITAL & TECH. Yi = Ai Kiα Liβ Tiϒ……..(1)…… i = (ASIA,EUROPE)  THIS DIVERGENCE WAS PRIMARILY DUE TO DIFFERENCES IN TFP OR EFFICIENCY (Yi / Li ) = A (Ki / Li )α L i β (Ti / Li)ϒ ………(2)  THIS DIFFERENCE IN TFP WAS BASICALLY DUE TO THE INABILITY TO MAKE USE OF THE NEW TECHNOLOGIES TAKING CAPITAL STOCKS AS EXOGENOUS, THE INCOME PER CAPITA OF OTHER ECONOMIES RELATIVE TO INDIA WOULD BE---- DIFFERENTITING EQN (1) W.R.T KI ……WE GET, (Ki / Li ) = Ai1/(1-α) (Ti / Li )ϒ/(1-α) ……………..(3) SUBSTITUTING EQUATION (3) INTO EQUATION (2), WE OBTAIN THE FOLLOWING EXPRESSION FOR OUTPUT PER CAPITA….. (Yi / Li ) = Ai1/(1-α) (Ti / Li )ϒ/(1-α) ………………(4) IT FOLLOWS FROM EQUATION (4) THAT WE CAN CALCULATE RELATIVE EFFICIENCIES IN THE WORLD ECONOMY CIRCA 1910 AS---- Ai = (Yi / Li )1-α (Ti / Li )-ϒ …………….(5)

GREAT DIVERGENCE: WAGES, PRICES AND ECONOMIC DEVELOPMENT

A MODEL OF THE SILVER WAGE GAP THUS, ASSUMPTIONS: WE CONSIDER A 2-COUNTRY WORLD (ASIA & EUROPE) WITH A SINGLE FACTOR OF PRODUCTION,LABOUR THERE IS ONLY 1 TRADEABLE GOOD(SILVER) & 1 NON— TRADEABLE GOOD(GRAIN) PTi = PT …………..(1) WITH A SINGLE FACTOR OF PRODUCTION, WAGES IN THE 2 ECONOMIES IS GIVEN BY--- Wi = PT * Wti ……………………(2) P N = Wi / αiN ………………….(3) ALSO,……… i SUBSTITUTING FROM (2),..WE GET….. PiN = (PT * Wti )/ αiN ……….(4) REARRANGING EQUATION (3), WE HAVE : DUE TO ARBITRAGE,THERE IS ONLY 1 INTERNATIONAL PRICE, PT WAGES ARE EQUALIZED BETWEEN THE 2 SECTORS Wi / PiN = αiN ……………(5) CONSIDERING REAL CONSM WAGES IN 2 COUNTRIES & MAKING RELEVANT SUBSTITUTIONS, WE GET…… Wi / Pi = (αiT)ϐ (αiN)1-ϐ ……(6) IF GRAIN WAGES ARE ROUGHLY EQUAL IN THE TWO COUNTRIES (i.e αAN = αEN ), BUT SILVER WAGES ARE HIGHER IN EUROPE → THAT THE REAL CONSUMPTION WAGE IS LOWER IN ASIA, BY A FACTOR WHICH DEPENDS ON THE WEIGHT ϐ

CULTURE AND INSTITUTIONS “A DESIRE FOR IMPROVEMENT AND EVEN THE EUROPEAN ENLIGHTENMENT „RIGHT‟ OF INSTITUTIONS BY WAS KIND ASSOCIATED WITH THEMSELVES DO NOT RELIGIOUS AND DEVELOPMENT POLITICAL COMPARING ECONOMICPRODUCE SUSTAINED IN THE GROWTH UNLESS SOCIETY PRODUCES NEW TOLERANCE, HUMAN RIGHTS EAST CULTUREKNOWLEDGEAND NATURALTHAT CHINESE ANDAND IS AWEBER AND UNLESS OF THE WEST, KEY DETERMINANT THE ARGUED USEFUL FREEDOM GROWTH OF KNOWLEDGE AND 2005). LAW AND JUSTICE (MOKYR, SUSTAINED PATRIMONIALISM AND OFFICIALDOM, AND VALUES, PREFERENCES CAN BE BELIEFS OF OVERIN TIME. SOCIETIESPOTENTIAL GROWS USEFUL KNOWLEDGE THESE INDIVIDUALS AND SOCIETIES THE AREAS IN WHICH CHINESE RELIGION WERE AND IS ADVOCATED TO BECAUSE IN EACH IDEAS AMONG „OUTRAGEOUS‟ SOCIETY THERE ARE THE HAVE BEEN AN IMPORTANT FACTOR CHINESE ECCENTRIC INNOVATORS WEREBEHIND MOST DIFFERED PEOPLEDEVELOPMENTCREATIVE WHO ARE AND INDUSTRIAL REVOLUTION SOME ORIGINAL, AND MOTIVATED BY TOLERATED WITHOUT VIOLENT DISTINCTIVELY FROM THE EUROPEAN ROUTE. COMBINATION OF RESPONSES GREED, AMBITION, CURIOSITY, AND ALTRUISM” ……….. MOKYR (2005, P. 60).

A MODEL A TWO-STEP PROCEDURE IS ADOPTED HERE IN WHICH PER CAPITA INCOME IS INFLUENCED BY INSTITUTIONS AND CULTURE INDIRECTLY THROUGH S&T AND HUMAN CAPITAL AND DIRECTLY THROUGH CHANNELS INDEPENDENTLY OF S&T AND HUMAN CAPITAL FOR COUNTRY I AT TIME T AS FOLLOWS: WHERE Y IS PRODUCTIVITY OR PER CAPITA INCOME, S&T IS SCIENCE AND TECHNOLOGY, HC IS HUMAN CAPITAL, CUL IS CULTURE, CON IS CONTRACTING INSTITUTIONS, PRO IS PROPERTY RIGHT INSTITUTIONS, CD IS FIXED EFFECT DUMMIES, AND Ε IS A STOCHASTIC ERROR TERM. THE MODEL IS ESTIMATED USING DATA OVER THE PERIOD 950 TO 1850 FOR 12 COUNTRIES. THE DATA COVER ONE OBSERVATION PER CENTURY; THUS, YIELDING 120 OBSERVATIONS IN TOTAL. THE VARIABLES S&T AND HC ARE INSTRUMENTED USING CULTURE AND INSTITUTIONS AS INSTRUMENTS:

15 GNI per capita 1280 1500 1700 1801 1806 1811 1816 1821 1826 1831 1836 1841 1846 1851 1856 1861 1866 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 25 RE - CONVERGENCE 20 Ratio Uk/INDIA Ratio US/China 10 5 0 SOURCE : Maddison Data Base.xl, Author :J. Bolt

30,000 1280 1550 1750 1804 1810 1816 1822 1828 1834 1840 1846 1852 1858 1864 1870 1876 1882 1888 1894 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020 2026 2032 2038 35,000 England/GB/UK USA 25,000 China India Japan 20,000 15,000 10,000 5,000 0 10TH OCT,2052 SOURCE : Maddison Data Base.xl, Author :J. Bolt

Bibliography • • • • • • • Maddison Data Base.xl, Author :J. Bolt. Maddison, A. (2005) Measuring and interpreting world economic performance, 1500- 2001. Review of Income and Wealth, 51, March, pp. 1–36. Gupta and Ma, pp. 267-282 Rose, Mike. The Mind at Work: Re-Convergence. New York: Penguin Group, 2004. Acemoglu, D., Johnson, S. and Robinson, J. (2002): “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” Quarterly Journal of Economics, 117, pp. 1231-1294. Allen, Robert C., 2000. Economic Structure and Agricultural Productivity in Europe,1300-1800. European Review of Economic History 4, 1-26. Bruland, Kristine. 1989. British technology and European industrialization: The Norwegian textile industry in the mid-nineteenth century. Cambridge: Cambridge University Press.

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