Economic History - Lesson 1 Notes

Economic History (L-Z Group) - Lesson 01 - A.Y. 2024-2025

Agenda

• The Great Divergence: Long-term dynamics
  • When did Western countries become rich?
• The Rise of the West

Part I: The Great Divergence - Long Term Dynamics

• When did Western countries become rich?

Outcomes

• Understanding the Great Divergence: meaning and economic perspectives.
• Understanding the economic growth model of Western Countries.
• Knowing the background of the first globalization.

The Great Divergence

• A fundamental question for economic historians: Why are some countries rich and others poor?
• This question arises from studying historical income data.
• In the distant past, prosperity differences between countries were not so high.
• The concept of a division between rich and poor countries emerged at the end of the Middle Ages, particularly around the time of the great ocean explorations.

The Great Divergence - Robert Allen's Three Periods

• Robert Allen divides the last 500 years into three periods:
  • 1500-1800: The Mercantilist Era
    • Mercantilism Definition: A school of thought emphasizing the balance of trade. It defined a nation's wealth by its holding of precious metals, seeking to minimize imports and maximize exports through subsidies and tariffs.
    • Maritime conquests led to the first economic integration across the world.

The Great Divergence - Mercantilist Era cont.

• Europe at the center of the world:
  • From the Americas, Europeans acquired precious metals (silver, gold) and goods (sugar, tobacco).
  • From Asia, Europe imported spices, textiles, and porcelain.
  • Africans were shipped as slaves to the Americas to work on large plantations.

The Great Divergence - Mercantilist Era cont.

• The mercantilist era was ruled by protectionism:
  • European countries used tariffs and economic barriers to prevent trade with other countries.
  • Economic development wasn't a primary issue for countries; the aim was to control the balance of payments (positive) and accumulate wealth.

The Great Divergence - The Catching Up (19th Century)

• 19th Century: The Catching Up
  • Great Britain (GB) was the most industrialized country and the leader in manufacturing.
  • Establishment of the free market economy.
  • Laissez-faire replaced Mercantilism in GB.
  • Economics became an established discipline, and economic theory spread.
  • Western Europe and America started catching up, focusing on economic development through industrialization (second sector).
  • Laissez-faire began to be challenged, with a return to protectionism and state interventionism, even within free trade.

The Great Divergence - Policies to Achieve Development

• Policies to achieve development:
  1. Creation of unified national markets.
  2. Re-introduction of protectionism (to reduce GB leadership).
  3. Establishment of complex financial systems (to sustain industrial development).
  4. Establishment of educational systems (to improve human capital).
• This set of policies was successful in Western Europe (WE), especially Germany, and North America, which joined Great Britain in the "rich nations club."
• In other regions, these policies failed to produce the same effects.

The Great Divergence - The 20th Century

• 20th Century
  • Distances between countries increased further in some cases.
  • New technologies required more capital, which were not cost-effective in low-wage countries.
  • Most countries adopted modern technologies to some extent, but not enough to catch up.
  • Nations that closed the gap used a "Big Push" (government interventions).
• From 1500 to 1800, the countries that are now the richest began distancing themselves from the rest of the world.
• This gap widened, especially towards certain countries/regions that remained in a stationary state of poverty.
• GDP and data analysis support this point.

GDP Data Analysis

• R. Allen, Global Economic History, pp. 4-5
• Table: Countries GDP, benchmark years (1820-2008)
  • 1820: Netherlands led the West.
  • 1820: Europe led the world.
  • 1820: Africa was the poorest continent.
  • Income disparities between countries have increased over time.
  • 2008: The African continent remains the poorest; Asia and Latin America have intermediate incomes but still far behind the richest countries.

The Great Divergence - Income Growth Figures

• R. Allen, Global Economic History, p. 6
• Figure: The Great Divergence
  • Regions with higher incomes in 1820 also had larger quantities of growth factors.
  • Europe and the British offshoots realized income gains of 17- to 25-fold.
  • Exceptions: East Asia and Japan.

Distribution of World Manufacturing

• R. Allen, Global Economic History, p. 7
• Figure: Distribution of world manufacturing
  • 1750: China was the manufacturer of the world (33% of the world total); by the early 1900s, its relevance dropped to 4%.
  • 1913: The UK, USA, and Europe accounted for around 75% of the world total.
  • Main reason for great income divergence: industrialization and de-industrialization processes.
  • 4 stages: 1750-1880s; 1880-WWII; 1950s-1970s; >1980s.

Wellbeing Measurement

• R. Allen, Global Economic History, p. 7
• Figure: A measure of wellbeing (subsistence ratio for laborers)
  • In 1400, living conditions in Europe were similar.
  • The Industrial Revolution in England led to a marked improvement in welfare for the English.
  • In contrast, on the continent, there was a sharp decline in wellbeing.
• Other observations:
  • Bare-bones subsistence removes the economic motivation for economic development (poverty trap).
  • Some scholars argue that the Industrial Revolution resulted from high wages.

Part II: The Rise of the West

Outcomes - Rise of the West

• Know the fundamentals of the rise of the West.
• Be clear on the background of the first globalization.

The Rise of the West: Commercial Capitalism

• What drove the growth of the West?
• Fundamentals like geography, institutions, and culture were relevant to the rise of the West.

The Rise of the West: Factors

• Geography: The presence of certain diseases, such as malaria in the tropics, limited development possibilities.
• Culture: Culture is a popular explanation for economic success, including literacy and numeracy.
• Institutions (political and legal): Economists are divided on the role of institutions in economic development:
  • Some argue that economic success is due to the assertion of property rights, lower taxes, and a minimal state (classical economics).
  • Others point out that Oriental despotism also worked, providing peace, order, and good government.

The Rise of the West: Conclusion

• Political and legal institutions, geography, and culture all played a role in the great divergence.
• However, the great divergence was primarily the result of:
  • Technological change
  • Globalization
  • Economic policies

The First Globalisation Background

• Long-distance trade is a distinctive feature of Europe-Asia relations dating back to ancient times.
• The Silk Road, a land route, connected Eurasia.
• Towards the end of the Middle Ages, Europeans launched expeditions to exploit waterways.
• Technical improvements (full-rigged ships) facilitated this.
• The trade axis shifted first to the Iberian Peninsula and then to the north-west regions of Europe.
• East Indie companies (privileged trading companies) (early 1600s) exemplified colonialism exploitation.
  • This model, used by the Dutch and GB, combined imperialism with private enterprise.
  • They were highly capitalized joint stock companies that traded in Asia or in Americas, maintained military and naval forces, and set up trading posts abroad
• The process culminated in Great Britain with the Industrial Revolution.

The First Globalisation - Summary

• Success in the global (commercial) economy had major implications for economic development:
  • Growth in manufacturing and urbanization increased labor demand --> increase in wages (and in living standards).
  • Increase in urban population and manufacturing activities led to development in agriculture (agricultural revolution in both Dutch and England).
  • Increase in urban population required development in energy resources: coal became the substitute for wood (GB).
  • The high-wage economy generated a high level of literacy and numeracy (human capital).