Are economic historians wasting time on “divergence”?

What is the divergence question?
From around 1820, possibly well before, the world witnessed increasing inequality between countries and regions. Modern economic growth – growth led by productivity increases – transformed Western Europe and North America, but it appeared in other regions much later. These facts lead us to one of the central questions for economic history: “Why do some countries grow rich while others stay poor”?
The question is as old as modern economic growth itself. Karl Marx and Max Weber, among others, tried to answer it. In the last twenty years, the debate around the question has revived, thanks to dialogue between economists and historians. The current short-hand for the question, “divergence”, comes from the title of a book (by Kenneth Pomeranz) that has played a part in the revival.
Economic theorists are encouraged by new theoretical approaches, and the availability of large datasets. Conventional theory of economic growth was not comfortable with cultural and political explanations of modern economic growth. New institutional economic history, associated with Douglass North and others, showed a way to bring in these variables into growth theory. In the early-2000s, historians criticized institutionalism. The current phase of the divergence debate began with these criticisms and responses to these criticisms.
Cross-country historical income datasets became available from the 1990s, thanks to Angus Maddison’s work. Maddison collected and processed the data, often from detailed building blocks (like income from agriculture, trade, industry, etc.), but reported mainly one set of results, per capita or average real income by country for centuries. The simple format of reporting drew attention to inequality between countries.
Where do I fit in in the divergence debate? From time to time, those who took part in the debate would look at historians who specialized in regions, and ask questions like, “what about India?” For a region-specialist like me, the invitation to offer one’s expertise to answer a big question like this one was too strong to resist. But that fascination wore off. Increasingly, I have come to believe that the debate has had a stunting influence on economic history as a field.
My scepticism is based on seven arguments.

1. The debate has a built-in tendency to simplify the economic history of the non-western world
Making inequality-between-countries the core problem works badly for many countries. This is so because there is only one way in which one can use a country’s history to answer why some countries grew rich while others stayed poor, that is to show either why it grew rich or why it stayed poor. There is only one way that Indian evidence can inform the debate – and that is to show why India stayed poor. But this is not the most important or interesting question about India, and it misreads Indian history (see below).

2. Divergence debate takes bad data too seriously
Maddison’s work shows growing inequality in average incomes between countries (Figure 1). The data is – to put it mildly – bad data. Look closely, you will see that the average income of India was USD533 for 1820-1870. Year after year for 50 years Indians earned exactly USD533 on average (and exactly USD550 for 320 years before that). These numbers contain no worthwhile information about Indian history. Such is the quality of the statistics on which the divergence debate has so far been based.

Figure 1 Divergence

3. The divergence question is based on an erroneous reading of the data
In this dataset (Figure 1), every country is represented by exactly one attribute, average income. Every country’s history is represented by one number. By considering only national income, the rise in international inequality becomes the only fact there is to explain. But this is not necessarily the right reading of the data.
Suppose that poor countries contain more arid lands in their domain, and that it is harder for arid zones to experience sustainable income growth than it is for temperate zones or seaboards. Modern economic growth had owed to overseas trade, which favoured the seaboard, and to agricultural revolution, which favoured the temperate zones. In these statistics, inequality between geographical regions and that between countries are mixed up, whereas what we should really do is study inequality between geographical zones, and not between countries.

4. Too much focus on inter-country inequality obscures inter-regional inequality
How might location matter? Consider this example. In 1900, Bombay was one of the most advanced port cities , a huge railway hub, with institutions and markets as good as in any city in Europe, some of the best colleges and schools of the tropics, and the fourth largest cotton mill industry of the world. About 500 miles to the east, in the central Indian uplands, Chanda district had no industry, only 15 per cent of its land under cultivation, practically no roads and railways, and a literacy rate of two per cent. The capital of this district, which was as large in area as Belgium, was a town of 17,000 people. For me, the big puzzle is why these two regions – both governed by the same state, the same formal institutional regime, with zero barriers to transactions between them – could have such diverse economic experience. Divergence, with its focus on country averages, cannot answer this question, in fact obscures many patterns of regional inequality from view.

5. The divergence question is based on the false assumption that national income and the nation are the right units of analysis
Maddison’s dataset reports national incomes when nations did not exist. This practice encourages historians to exaggerate the role of the state in world inequality, when states were of different kinds or just did not exist. In the eighteenth century, for example, India was ruled by hundreds of small and large states. With one or two partial exceptions, we have zero statistical data to show how these states functioned.

6. The rise of the western world is too overdetermined to explain world history
Why did Britain experience modern economic growth from 1800? By last count, there were sixteen answers to the question. These included knowledge and enlightenment, credible commitments and constraints on state power, common law, energy-intensity, marriage patterns, transformation in the handicrafts and in household labour, industrious revolution, expansionist and activist state, high wages, overseas trade, intergenerational transfer of cultural traits, financial revolution, protection and import substitution, consumer revolution, agricultural revolution, and violence and exploitation. World history, if we start from the British angle, offers a much too confusing bundle of lessons for the rest of the world.

7. Divergence models do not explain current convergence
The theoretical models that predict divergence cannot predict the present-day convergence in an easy way, and therefore, they are unreliable as theories about the past. Did the growth reversal in India in the last quarter-century happen because of an improvement in institutions, or a rise of the activist state? In fact, the state withdrew by some measures since 1990, and as the World Bank’s metrics show, the quality of institutions is just as bad after the growth reversal as it was before. Should we then have a different theory for every episode of growth in the world?

What question should world economic historians be asking?
Imagine I am lecturing a classroom of management or economics students in an Indian school about economic history (which I do often). I could start by saying that economic history is a fascinating because it tells us why India fell behind the rest of the world, or why it was at the wrong end of the growth game. It will not only be a wrong way to understand Indian history (remember that the fourth largest cotton mill industry emerged in India in the nineteenth century), it will also sound outlandish. In a region where seven per cent GDP growth has become the norm, my opening line will make economic history sound like a joke.
I should say instead that economic history is fascinating because it shows the historical roots of emergence in the developing world, except that economic history is not doing that. It cannot, because a preoccupation with divergence and an overdetermined explanation of the rise of the western world makes the field unable to explain the biggest economic revolution of the present times, the phenomenon of economic emergence.
More on the emergence question later.

Tirthankar Roy

Professor of Economic History, London School of Economics

July 2018

The South Asian miracle: Why did it happen? Is it sustainable?

South Asia contains five large countries (India, Pakistan, Bangladesh, Nepal, and Sri Lanka) and several smaller ones. Together, the region contains a sixth of the world’s population. its share in world income is smaller (less than five per cent), but increasing fast, thanks to an average growth rate that is almost double that of the world average.
Its size is not the most interesting feature of the recent economic history of South Asia. The more interesting feature is a dramatic reversal in its economic performance that took place around 1980-85. Between 1947-48, when British colonial rule ended in the region, and 1980-85, South Asia saw slow economic growth, followed by rapid economic growth. Alongside, there was another reversal, from a belief that nation states should manage and lead the process of economic development to a loss of that belief. Why was there a reversal? What, if anything, had the nation states to do with it?
Experts on India explain the turnaround by choices made by the political classes or economists. Such people, they say, decided to enlarge the states in the 1950s by collecting more money through taxes, aid and debt, and used the money to achieve state-led industrialization and redistribution to the poor. At the same time, they underestimated the power of the market and private enterprise to achieve investment and economic growth. Realizing this error, they took steps to reduce state intervention and increased the role of the market, and the miracle followed. The story differs in detail, but most country-specific accounts tend to be state-centric in this fashion.
There are two problems with a state-centric explanation. Politicians and their economic advisers differed a lot between the South Asian countries, and yet all experienced the reversal. Besides, there is no direct evidence to suggest that politicians had a change of heart around 1980-85. It is no more than a guess that they had.

I offer an alternative view in The Economy of South Asia: From 1950 to the Present (Palgrave Studies in Economic History, 2017). The alternative view is that the world economic conditions in which these countries functioned changed for the better around 1980-85. Politicians and economists in the region were always weaker than they imagined them to be. Even as national governments grew bigger and more interventionist, they still needed to buy technology and skills from the world. During the British colonialist era, South Asia exported agricultural commodities and purchased skills and knowhow from abroad with the proceeds. After 1947, this balance was upset. The shared enthusiasm for state-intervention and industrialization undermined the power of foreign trade and the export capacity of the region.

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The regimes after 1947-48, therefore, became more exposed to foreign exchange crises, and found it difficult to sustain state intervention. They responded by erecting even stricter control on foreign trade. The two oil shocks of 1973 and 1979 made conditions worse. Paradoxically, it was oil that saved South Asia. From the late-1970s, the region led the world in exporting the millions of wage-workers needed by the expanding Persian Gulf states. The remittances that followed made the politicians in the region willing to relax controls of foreign trade and allow import of technologies. The South Asian miracle began.

From the 1980s, China and South Asia both re-joined globalization offering a new basket of export articles, while buying technology with export earnings. There was a difference between the two regions, China’s basket contained more industrial goods, South Asia’s contained more services (Bangladesh is a partial exception). Still, the two regions had a common history. Both China and South Asia had, in their zeal for state-led development in the 1950s, 1960s and 1970s, neglected the power of trade. They exported less than before, and yet needed technology more than before. Both successfully reset the relationship between the regional economy and the world economy.
What promises does the South Asian miracle hold for the future of the region, and the future of the world? Given the huge size of the population of South Asia, a growth turnaround has tremendous positive potential for the people who live here. It also sends out strong vibes throughout the world economy.
But is it sustainable? Economically, yes, it is sustainable. Every emerging economy needs to perform a macroeconomic balancing act, export enough to buy knowledge and skills from abroad. South Asian countries managed this well, by exporting of services (like people, and software) and labour-intensive goods (like clothing) to import technology and skills. By getting this act right, they gave the miracle a stability.
Politically, the scenario is less certain. Any market-led economic growth is likely to be unequal, it favours those with goods and skills the world market demands. Those livelihoods which do not trade much suffer. In the region, agriculture is in a crisis, environment is under severe pressure, many remote regions have not seen much growth, poverty persists, gender inequality takes extreme forms because women still struggle to gain a share of the benefits, and often take enormous risk and trouble to work away from home. Discontents are rife and should temper any celebratory view that we may take about the miracle.

Tirthankar Roy
Professor of Economic History
London School of Economics and Political Science