China has been one of the world’s most dynamic economies in recent decades, but how did it fall so far behind? This column argues that the industrial revolution occurred in Europe rather than China because European entrepreneurs were eager to adopt machines to cut down on high labour costs. China didn’t “miss” the industrial revolution – it didn’t need it.
Explanation:
One of the big debates in economics is about the causes of the arguably most dramatic change in development trajectory in (recent) world history, the industrial revolution.
Before about 1800, growth did occur, but it was mainly “extensive”, leading to more people but almost no growth in income per capita.
After about 1800 this changed, and growth became (increasingly) “intensive”, focused on an almost continuous growth of GDP per head.
There is consensus about the fact that this change in growth pattern started in northwestern Europe, and gradually spread to large parts of the western and, after a lag, eastern and southern world.
Why this happened, and where it happened are topics of heated debate among historians. The recent “Chinese miracle” – fabulous growth since about 2000 – has had an important impact on this debate.
How could the Chinese economy, which is clearly capable of dramatic economic change (in view of what happened since 1979), manage to “miss” the industrial revolution of the 19th century?
How developed was China in the 18th century, when it was (under the Qing) experiencing a long period of economic stability and development?
The Great Divergence debate
Recent literature, most famously Kenneth Pomeranz’s The Great Divergence (2000), has suggested that China’s level of economic performance was more or less at par with that of Western Europe. Moreover, the lower Yangzi delta formed a core of economic prosperity comparable with the North Sea area, the most developed part of Western Europe.
In Pomeranz’s view, the fact that the industrial revolution occurred in England was due to fortunate geographic circumstances (the availability of cheap coal in the right places) and the fact that European countries had access to colonies, which China lacked.
This thesis has started a large international debate about ‘the Great Divergence’ among economists and economic historians. Pomeranz’s interpretation was perhaps not entirely convincing as it was largely based on qualitative evidence and some snips of quantitative information that could be interpreted in various ways.
Indeed, recent research by my colleagues and I on the development of wages and prices in China and Western Europe has produced results that do not support the Pomeranz hypothesis. It turns out that real wages in various parts of the country were at best half of those in the North Sea area (Allen et al. 2011). But it was also argued that wage labour was a rather marginal phenomenon in the Chinese economy, implying that real wage estimates are a poor guide to economic performance.
New comparative research
In a recent CEPR working paper with Bozhong Li (Li and van Zanden 2010), we go one step further and make detailed estimates of the structure and level of GDP per capita of two regions, which are among the most advanced parts of Western Europe (the Netherlands, with a level of GDP per capita comparable to that of England) and China (a more or less comparable region within the Yangzi delta, the Hua-Lou district).
The two regions have a lot in common.
They are both situated in a river delta controlling trade with a vast hinterland, causing them to both specialise in services and related manufacturing activities.
They are both highly urbanised; about 39% of the population of Hua-Lou lives in cities, in the Netherlands this share is 35%.
Agricultural conditions were similar as well; both have difficult to work clay soils and water management is key to the high levels of agriculture productivity found there.
Finally, perhaps because of the advanced state of their economies and societies, in both regions relatively good economic statistics were collected, making it possible to estimate the level and structure of GDP in the 1820s.
But the picture changes radically when levels of productivity and income are compared. GDP per capita in the Netherlands is 86% higher than that of Hua-Lou district. Much of this is caused by a particularly large productivity gap in industry and services, where labour is at least twice as productive in the Netherlands. Only in agriculture is the gap between ‘East and West’ very small.
