The ‘Great Divergence’
Nothing in human history compares with the impact that the Industrial Revolution
has had on the living conditions for the world’s population. Sustained
growth of both total GDP and GDP per capita date from the great transformation
unleashed by this event. While economic historians continue to debate
the origins, timing and quantitative aspects of the Industrial Revolution, there
is no doubt that during the last 250 years the main consequence of this event
has been a distinctive regime change as the world economy began to experience
a new epoch of what Kuznets (1966) called ‘modern economic growth’.
It should also be noted that modern economic growth and capitalism are
synonymous, for as Baumol (2002) writes:
what is clear to historians and laypersons alike is that capitalism is unique in the
extraordinary growth record is has been able to achieve in its recurring industrial
revolutions that have produced an outpouring of material wealth unlike anything
previously seen in human history.
Baumol’s point had been recognized by Karl Marx and Friedrich Engels over
150 years earlier in their Communist Manifesto of 1847 when they observed
that ‘the bourgeoisie has created more massive and more colossal productive
forces than have all preceding generations together’.
In contrast to most of human history, the modern epoch has been characterized
by a population explosion, rising life expectancy, rapid urbanization,
diversified patterns of employment and steadily rising income per capita for
the world as a whole (Easterlin, 1996). However, because the Industrial
Revolution and economic growth have spread unevenly across the world, the
modern era of human history has also witnessed the emergence of unprecedented
global inequality. Since the beginning of the nineteenth century the
world economy has experienced what Pomeranz (2000) calls the ‘Great Divergence’
and Pritchett (1997) refers to as ‘Divergence, Big Time’. International
differences in living standards, measured by real income per capita, are
enormous even after making adjustments to the estimates that take into account
variations in purchasing power and household production.
The ‘Great Divergence’ of income per capita is a modern phenomenon.
Before the nineteenth century, for the vast majority of the economies and
peoples of the world, the process of economic growth was ‘sporadic and
inconsistent’. It was not until the second half of the twentieth century that
growth spread to many living in the Third World.
Notes:
a Measured in 1990 international dollars.
b Annual average compound growth.
Source: Maddison (2001), Table 1.2.
582 Modern macroeconomics
standards across the world, as measured by GDP per capita, did not improve
in any significant way during the first one thousand years AD. However, since
about 1750, beginning in Great Britain, the phenomenon of sustained modern
economic growth has become ‘the defining feature of human history’ and by
1950 embraced a third of the population of the earth.
Contemporary differences in living standards are themselves the product of
differences in growth rates that have been observed during the last 200 years
and are highlighted in Table 11.2. Three important commonly used measures
of living standards are represented, namely gross national income (GNI) per
capita measured in international dollars (PPP – purchasing power parity – $),
life expectancy, and the Human Development Index (HDI). The HDI is a
composite measure of three equally weighted basic components, namely, real
income per capita (PPP US$ = Ypc) adjusted to reflect the assumption of
rapidly diminishing marginal utility of income above the world average;
longevity as measured by life expectancy at birth (L); and educational attainment
(E) captured by the adult literacy rate (weighted 2/3) and the combined
gross primary, secondary and tertiary enrolment ratio (weighted 1/3). Therefore,
the HDI estimate for any economy (j) is a simple weighted average of
Ypcj + Lj + Ej. Although there are serious index number problems in using
the HDI as a measure of living standards and the HDI has come in for a
considerable amount of criticism, it has nevertheless proved to be a useful
additional development indicator, complementing, but not replacing, the traditional
‘commodity’-based measures of progress such as income per capita.
While there has been unprecedented divergence between the income per
capita of the OECD economies and many developing countries, Crafts (1999,
2000) has argued that a more optimistic picture of the progress of human
welfare emerges if we examine long-run trends in the HDI. For example, the
HDI scores for many poor countries in 2002 are well ahead of the estimated
1870 HDI scores for the leading countries of that time (current G7 countries)
as measured by their per capita income. Crafts concludes that by taking a
broader view of progress, it is ‘likely that the growth of living standards since
1870 as measured by real national income per capita is substantially underestimated’
(Crafts, 2001; see also Becker et al., 2003; Crafts, 2003).
Data on total population for each country is also included in Table 11.2.
The 40 countries included accounted for 4795.7 million (79 per cent) of the
world’s population of 6054 million in 2000. Important points to note include
the close correlation between income per capita, life expectancy and the HDI;
the underperformance of Botswana and South Africa on their life expectancy
and HDI scores relative to their position in the income per capita ranking; the
ratio of the USA’s GNI per capita to Sierra Leone’s is a staggering 72–1
(note, the highest GNI per capita recorded by the World Bank for 2002 was
Luxembourg, with 51,160 PPP$).
Notes:
a Gross national income per capita, PPP$, World Development Indicators, 2003, World Bank.
b Human Development Index and Life Expectancy, Human Development Report 2002, United
Nations.
c Total population, World Development Report 2002, World Bank.
d Hong Kong and Singapore data from Human Development Report 2002.
e A = Average, T
Nothing in human history compares with the impact that the Industrial Revolution
has had on the living conditions for the world’s population. Sustained
growth of both total GDP and GDP per capita date from the great transformation
unleashed by this event. While economic historians continue to debate
the origins, timing and quantitative aspects of the Industrial Revolution, there
is no doubt that during the last 250 years the main consequence of this event
has been a distinctive regime change as the world economy began to experience
a new epoch of what Kuznets (1966) called ‘modern economic growth’.
It should also be noted that modern economic growth and capitalism are
synonymous, for as Baumol (2002) writes:
what is clear to historians and laypersons alike is that capitalism is unique in the
extraordinary growth record is has been able to achieve in its recurring industrial
revolutions that have produced an outpouring of material wealth unlike anything
previously seen in human history.
Baumol’s point had been recognized by Karl Marx and Friedrich Engels over
150 years earlier in their Communist Manifesto of 1847 when they observed
that ‘the bourgeoisie has created more massive and more colossal productive
forces than have all preceding generations together’.
In contrast to most of human history, the modern epoch has been characterized
by a population explosion, rising life expectancy, rapid urbanization,
diversified patterns of employment and steadily rising income per capita for
the world as a whole (Easterlin, 1996). However, because the Industrial
Revolution and economic growth have spread unevenly across the world, the
modern era of human history has also witnessed the emergence of unprecedented
global inequality. Since the beginning of the nineteenth century the
world economy has experienced what Pomeranz (2000) calls the ‘Great Divergence’
and Pritchett (1997) refers to as ‘Divergence, Big Time’. International
differences in living standards, measured by real income per capita, are
enormous even after making adjustments to the estimates that take into account
variations in purchasing power and household production.
The ‘Great Divergence’ of income per capita is a modern phenomenon.
Before the nineteenth century, for the vast majority of the economies and
peoples of the world, the process of economic growth was ‘sporadic and
inconsistent’. It was not until the second half of the twentieth century that
growth spread to many living in the Third World.
Notes:
a Measured in 1990 international dollars.
b Annual average compound growth.
Source: Maddison (2001), Table 1.2.
582 Modern macroeconomics
standards across the world, as measured by GDP per capita, did not improve
in any significant way during the first one thousand years AD. However, since
about 1750, beginning in Great Britain, the phenomenon of sustained modern
economic growth has become ‘the defining feature of human history’ and by
1950 embraced a third of the population of the earth.
Contemporary differences in living standards are themselves the product of
differences in growth rates that have been observed during the last 200 years
and are highlighted in Table 11.2. Three important commonly used measures
of living standards are represented, namely gross national income (GNI) per
capita measured in international dollars (PPP – purchasing power parity – $),
life expectancy, and the Human Development Index (HDI). The HDI is a
composite measure of three equally weighted basic components, namely, real
income per capita (PPP US$ = Ypc) adjusted to reflect the assumption of
rapidly diminishing marginal utility of income above the world average;
longevity as measured by life expectancy at birth (L); and educational attainment
(E) captured by the adult literacy rate (weighted 2/3) and the combined
gross primary, secondary and tertiary enrolment ratio (weighted 1/3). Therefore,
the HDI estimate for any economy (j) is a simple weighted average of
Ypcj + Lj + Ej. Although there are serious index number problems in using
the HDI as a measure of living standards and the HDI has come in for a
considerable amount of criticism, it has nevertheless proved to be a useful
additional development indicator, complementing, but not replacing, the traditional
‘commodity’-based measures of progress such as income per capita.
While there has been unprecedented divergence between the income per
capita of the OECD economies and many developing countries, Crafts (1999,
2000) has argued that a more optimistic picture of the progress of human
welfare emerges if we examine long-run trends in the HDI. For example, the
HDI scores for many poor countries in 2002 are well ahead of the estimated
1870 HDI scores for the leading countries of that time (current G7 countries)
as measured by their per capita income. Crafts concludes that by taking a
broader view of progress, it is ‘likely that the growth of living standards since
1870 as measured by real national income per capita is substantially underestimated’
(Crafts, 2001; see also Becker et al., 2003; Crafts, 2003).
Data on total population for each country is also included in Table 11.2.
The 40 countries included accounted for 4795.7 million (79 per cent) of the
world’s population of 6054 million in 2000. Important points to note include
the close correlation between income per capita, life expectancy and the HDI;
the underperformance of Botswana and South Africa on their life expectancy
and HDI scores relative to their position in the income per capita ranking; the
ratio of the USA’s GNI per capita to Sierra Leone’s is a staggering 72–1
(note, the highest GNI per capita recorded by the World Bank for 2002 was
Luxembourg, with 51,160 PPP$).
Notes:
a Gross national income per capita, PPP$, World Development Indicators, 2003, World Bank.
b Human Development Index and Life Expectancy, Human Development Report 2002, United
Nations.
c Total population, World Development Report 2002, World Bank.
d Hong Kong and Singapore data from Human Development Report 2002.
e A = Average, T
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