The Great Divergence Analysis

Kenneth Pomeranz‘s The Great Divergence tries to examine the classic question of ‘How do we account for the economic divergence between Europe and Asia? He acknowledged that ‘a surge in European technological inventiveness was a necessary condition of the Industrial Revolution’, but stressed on the crucial role of ‘coal and colonies’ and their critical geographic location, in lifting the constraints for sustained growth of per capita income. First the local coal deposits in Europe were closer to the cities than in China and this gave Europe a clear advantage. Second, the off-shore colonies, in particular, the closeness of Europe to the New World resources (Jones 1981, Wrigley 1988, Allen 2009) helped Europeans to overcome the difficulties

associated with scarce land.
Quite recently Rosenthal Jean-Laurent and Roy Bin Wong have argued that this divergence can be explained by comparing the differences in the political scale and state within China and Europe, an argument that I found very coherent and consistent. What I particularly liked about their argument is that they have built it up step by step by addressing various topics- the dynasties, the tax regime, trade, factor incomes, demography, technology etc.

which are important variables while considering divergence. By 1300 European political scenario was that of fragmentation while that of Chinese was of integration. Due to settled politics and reliance on agricultural taxes for revenue, there was little interference by the Chinese rulers in the development of trade whereas Europe experienced a commercial revolution dating back to the Roman era. Even the wages evidence clearly supported the Great Divergence because as early as 1650 till 1850 there was stagnation in wages in China while in Europe it saw a surge upwards (cited). Europe was involved in frequent wars and as a result the Europeans were forced to build walled cities to protect themselves and their property. This had a direct consequence on labor cost (wages) which became more expensive relative to capital (Allen 2008) . This created an incentive to use machines to save the labor costs. Thus Europe’s violent politics was responsible for its urban manufacturing and urban bias leading to a higher demand for capital markets, stimulating governments to increase investment in technical advances. In

other words, in Europe, technology became the focus due to wars. According to Rosenthal and Roy Bin,“ over the long term, Europe credit markets grew ( Clark 2007 , Van Zandan 2007 ) and interest rates fell. The best evidence comes from very long term mortages , rent charges, (Schnapper 1957, Epstein 2001, Clark 2007, Van Zanden 2007). “ (cited) . In contrast, China’s subsistence economy combined with lasting peace and low taxes did not have much demand for credit. Due to peaceful conditions China did not feel the need to protect its people behind walled cities. Since labor was cheap relative to capital, they relied more on using labor intensive technologies. There was a lack of urban manufacturing in China as capital markets were less active and cost of capital was high. Overtime they became technically less adaptable. Thus the unintended consequence of geopolitics was the changes in institutions and technology, an important indicator of divergence that cannot merely be due to God-given resource endowments as stressed by Pomeranz. Chinese fiscal regime saw a high expenditure in public goods for promoting welfare of the population whereas even though the investment in public goods by the Europeans was low yet it produced positive results for them. Divergence had clearly set in by the eighteenth century.
China and Europe after 1850
China needed to finance military expenses - put down first the massive midcentury rebellions and then to build armaments – and thus it moved from a low tax regime to a high tax one. After 1850 the Chinese empire started levying new domestic and foreign trade taxes. Also their ability to invest in public goods took a sharp fall as compared to the levels they had maintained a century earlier. However, European states ceased to engage in costly warfare and instead got involved in fiscal innovation, supplying more public goods, moving towards free trade and increasing government involvement in promoting economic growth. Hence the political transformation that began with the French Revolution propelled Europe in a direction opposite to China’s movements.
CONCLUSION
There is more to the emergence of modern economic growth than coal and colonies.

Pomeranz’s arguments have indeed set off a chain of responses from numerous scholars . However the summary of the book by Rosenthal and Bin Wong does reduce the qualified arguments put forth by Pomeranz. Clearly distortions produced by war propelled Europe towards urbanization and capital-using technologies several centuries before 1700. By implication, one can conclude that a competitive and innovative Europe outperformed an imperial and traditionalist

China.