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Economics: What is the Great Divergence?

Updated on February 1, 2016
Medvekoma profile image

Medvekoma studies economics and the history of economic thought in the wonderful city of Durham, United Kingdom.

IMF's GDP nominal per capita world map, from 2009
IMF's GDP nominal per capita world map, from 2009 | Source

Introduction

The world economy is polarized, between the developed and the developing worlds. Economists however have been interested in the question: what actually caused this polarization? What happened in history that shifted the world's economic and scientific center from the east to the west, specifically to Europe? Why is there a growing divide between the developed and the developing world?

This article aims to provide an explanation for the large differences in world economy, based on a simple mathematical formula that I'll explain.

John Linnell, painting of Malthus from 1834
John Linnell, painting of Malthus from 1834 | Source

Thomas Robert Malthus and the Malthusian trap

Malthus was an English scholar in the late 18th and early 19th century, he published the book An Essay on the Principle of Population in 1798. He claimed population would grow exponentially, while food production would only grow linear, leading to famines and the so-called Malthusian catastrophe sooner or later. He wasn't too optimistic about mankind, but he had his reasons.

Later studies conducted by Angus Maddison, another English economist, provided the reason why Malthus' opinions on humanity were so bleak. Maddison's data confirmed that there wasn't any real growth in gross domestic product per capita over the course of thousands of years.

Why? Because more production meant the ability to sustain more people, and so the world population was always dancing on the border of famine, for the sake of expanding itself. While technology was in fact improved, especially agriculture, there was no lasting effect on the average person's life because the population growth negated it.

There was however something Malthus didn't count with. Something that had been boiling for a while when he wrote his book on population, something that would re-shape Britain first, then the rest of the world: the first Industrial Revolution.

What did the Industrial Revolution change?

One could compose a whole book, or a series of books on the topic of what the first Industrial Revolution changed in the world. I, however, will attempt to grab the core though, the reason behind all the changes.

The industrial revolution was a series of scientific advancements that allowed production to exceed population growth. To state it bluntly, humans could no longer reproduce as fast as the rate of production increased, which led to a rise in GDP per capita.

This is why some economists refer to the Industrial Revolution as the escape from the Malthusian trap: for thousands of years, humanity saw no major change to production per capita. Yet within the span of fifty years, the ratio exploded.

Which meant that the average peasant or citizen was no longer forced into a life of subsistence. They had spare utility, spare time and resources to spend on innovation and improvements.


Source

To provide an example, the peasant who beforehand tried to work as many fields as possible to sustain his family (falling into the large family trap - he needed the workforce of children so the family multiplied, but the multiplied family needed a larger workforce to be sustained, etc). After the industrial revolution, all the new technologies introduced allowed the father to work his fields all by himself, all other family members free to do what they wanted to do.

And what did they do? Bought and worked more lands. Set off to study. Created their own enterprises in the nearby city. One thing for sure, humanity's focus was no longer on "survival" and "sustaining their life" but instead on "advancement" and "improving their lives".

Source

The Great Divergence and compound interest

Let's take a break here and look at the term coined by Samuel Huntington: The Great Divergence. It refers to a constantly growing gap between the "developed" and the "developing" world, that doesn't seem to be bridged by technology, aid or politics.

Why is the gap widening? I ended my description of the industrial revolution with a thrive for improvement. Those nations who went through the Industrial Revolution achieved a stable and sustained GDP growth, meaning an increased growth in production per capita.

This is however subject to compound interest. The more you grow, the faster you grow. I'll show you the effects of compound interest over two hundred years in the next table. Each economy starts off with the same GDP per capita, but with different growth rates.

Country name:
Wellestria
Tellestria
Mellestria
Growth rate
3%
2%
1%
GDP per capita in 1800
3000
3000
3000
GDP per capita in 1850
13,151.72
8,074.76
4,933.90
GDP per capita in 1900
57,655.90
21,733.94
8,114.44
GDP per capita in 1950
252,758.03
58,498.81
13,345.27
GDP per capita in 2000
1,108,067.45
157,454.69
21,948.05

Now that's the long-term importance of growth rates. A single percent makes for a world-shaking change in the very long run. Countries that couldn't reach a high-enough GDP growth rate technically lagged behind and while they are in fact developing and advancing, the gap between them and those running in the front still increases.

Now let's take these three countries with the same growth level, just have them start ten years apart.

Country name:
Wellestria
Tellestria
Mellestria
Growth rate
3%
3% (from 1810)
3% (from 1820)
GDP per capita in 1800
3000
3000
3000
GDP per capita in 1810
4,031.75
3000
3000
GDP per capita in 1820
5,418.33
4,031.75
3000
GDP per capita in 1850
13,151.72
9,786.11
7,281.79
GDP per capita in 1900
57,655.90
42,901.40
31,922.67
GDP per capita in 1950
252,758.03
188,075.71
139,945.99
GDP per capita in 2000
1,108,067.45
824,506.24
613,510.08

Yes, you see it right. Twenty years, only twenty years passed between the hypothetical escape from the Malthusian trap in Wellestria and Mellestria, yet almost all the way through (taken that they managed to sustain the same rate of growth), the early bird has little less than twice the product per capita.

The big picture

In the world, growth cannot be sustained like that, and most countries enjoy a large, prosperous start after they industrialize. Yet the differences will remain, and will increase due to compound interest.

The Industrial Revolution was sparked in Britain, it spread to the USA and Western Europe first, which left these regions the "big economies" today. They had almost two hundred years of growth, starting 70 ahead of central Europe, 120 years ahead of eastern Europe, 140 years ahead of the far east and, sadly, there are still some developing countries in the world that have yet to industrialize.

Can this divide be bridged? Attempts can be made to help the developing countries get through their phase of industrialization faster. But the Great Divergence is not bound to stop, only to pick up pace over the course of the next years.

Rest assured, the world is improving in fact. The divide is there because one side runs faster than the other, not because they run from each other. The developing world improves and world poverty rates are falling. This isn't a dire outlook for the world as it is, yet it poses a question to be answered: will the Great Divergence lead to further conflicts between the economic poles of the world?

Questions

Why did the industrial revolution happen? Why did it happen in the United Kingdom? Why did some countries "fall" out of the growth-race and ended up lagging behind?

These are further questions that I may answer later in other articles. For the while, I hope you enjoyed learning about the Great Divergence, and I hope you are looking forward to more articles on the history of world economy and the economic thought.

© 2016 Medvekoma

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