Understanding the Great Divergence and the Great Convergence

Prior to the beginning of the 19th century, economies around the world were highly localised and agrarian. Commerce was seemingly restricted to domestic production and self-consumption, compelling countries to thrive independently; transnational trade was underdeveloped at the time. However, with the advent of the Industrial Revolution in Western Europe around 1760, nations discovered new methods of production and advanced ways of transportation that employed inventive machinery and steam power. This facilitated trade by lowering the costs of moving goods across borders, thus marking the dawn of an age of globalisation.

Such an unprecedented change in the environment for trade gave way to what scholars term the “Great Divergence”. Between 1820 and 1990, the Great Divergence is said to have sponsored a rise in the share of global income going to the Western world from one-fifth of the total to an estimated two-thirds. Conversely, however, today that share has plunged to where it was in 1900, thus representing what academics have named the “Great Convergence”. Identified with reduced communication costs in addition to low trade costs, the Great Convergence has endorsed the rapid growth of developing and underdeveloped countries, collectively bringing them almost at par with the share of global GDP going to the Western world today.

Throughout the history of humankind, there have been three elaborate phases that have led to the development of today’s global economy. Phase One, which existed between 200,000 BCE and 10,000 BCE, was predominantly characterised by the procurement of food over various seasons and regions. The early man moved around in search of new locations where he could hunt or cultivate. Food was the primary good of exchange. Hence, this phase was characterised by self-locomotion, rather than the movement of goods. In Phase Two, the global economy progressed towards localisation, and witnessed the exchange of diverse goods and services between 10,000 BCE and 1820 CE. Revolutions in agriculture and science triggered population growth, which led to the formation of civilisations and food surpluses.  Countries termed the Ancient Seven or the A7 flourished extensively and witnessed sizeable economic growth. These were India, China, Egypt, Turkey, Iran, Iraq, and Greece/Italy. It was more profitable for these countries to manufacture and sell within domestic territories rather than globally. Local market conditions determined prices, while international factors had almost no role to play. Although trade did emerge with the development of the Silk Route and Spice Route among other means, globalisation in its modern understanding had not yet begun on account of high trade costs, high communication costs, and high face-to-face costs. It was only after 1820 that Phase Three witnessed true globalisation.  

Having harnessed steam power, the Industrial Revolution in Western Europe emphasised the importance of iron and steel in modern manufacturing while augmenting the establishment of factories and industrial districts. Production was micro-clustered to gain from economies of scale by channeling specialisation, division of labour and better allocation of resources. With the development of railroads and steamships, trade costs dipped, thus enlarging international trade volumes significantly. Incomes of Western countries subsequently diverged and marked the beginning of the Great Divergence. Kenneth Pomeranz’s book, The Great Divergence, is accredited with making the term popular among business historians and economists.

But, why did the incomes of the West and the Rest diverge? Since 1500, India and China had been enjoying the largest shares of world output with high per capita incomes and wealthy trade. What caused the sudden divergence of Western incomes that led to what some have termed the “North-South income gap”? There are three prominent explanations. The first explanation stresses on cultural factors. Niall Ferguson, author of Civilization: West and the Rest, identifies the Protestant work ethic as a killer model of capitalist enterprise. The Group of Seven or G7 countries: United States, Britain, France, Germany, Canada, Japan, and Italy, underwent rapid industrialization and overtook the A7 in world dominance and wealth. The West apparently had the ‘right’ culture while the Rest had the ‘wrong’ culture for sustenance in the international market post Phase Three. Unsurprisingly, this explanation is highly contested and lacks adequate evidence for its validity.

The second explanation highlights institutional factors. It is said that the West had at its disposal, access to better institutions and progressive political establishments, thus facilitating faster growth in the modern era. On the contrary, countries like India suffered adverse colonial rule while countries like China witnessed regular instabilities with changing regimes and leaders. Similarly, the legal systems in G7 countries were more advanced and accountable relative to their A7 counterparts. There is sufficient evidence to back these claims, however, the Great Divergence was not entirely based on the foundations of this explanation. And reinforcing this criticism, the final explanation talks about educational factors as determinants of global wealth and poverty.  

As Claudia Goldin claims in the research paper The Human-Capital Century and American Leadership: “the unique egalitarian mass provision of post-elementary schooling achieved in the United States during the early twentieth century” validates the educational superiority of the West compared to the Rest. Western Europe and North America witnessed higher literacy rates and more spending on education in the modern era, thus augmenting their abilities in trade and commerce.

I would say that the harmonisation of all these factors can be said to have led to the Great Divergence. For most of the modern era, the West outshone the Rest in all three – cultural, institutional, and educational factors. But then, what really led to the Great Convergence? Was it the West that lost pace or the Rest that gathered it? Well, both happened simultaneously…

The growth of the West is said to have slowed down after attaining a certain degree of development, while growth of the Rest is said to have sped up so as to attain that certain degree of development. The mutual decrease in trade and communication costs is what facilitated the Great Convergence. With the advent of information technology, the cost of moving ideas across borders, besides goods, fell significantly. This made it possible for multinational firms to shift labour-intensive work to underdeveloped and developing nations, thus saving private as well as social costs. However, in order to preserve and maintain the entire production process, in addition to outsourcing jobs, these firms also had to transfer their technical, managerial, financial, and marketing know-how to these countries – mainly the currently Industrialising Six or I6 – China, India, Poland, Korea, Thailand, and Indonesia.  

The West aimed at gaining from the unification of advanced technology and skilled workers, both of which were easily and economically available in these countries. While this promoted the industrialisation of the I6, it also triggered the deindustrialisation of the G7. Moreover, towards the end of the 20th century, I6 countries began investing considerably in improving their institutions and extending education to more citizens. Most exploited countries were no longer under colonial rule; there was more political stability within nations and greater international peace after the Second World War. These factors collectively helped developing countries amplify their growth, and secure higher incomes with better standards of living for their people. Therefore, investment brought into developing countries by developed ones, and self-investment by developing countries themselves, are what mutually led to a decline in the Western share of global GDP and a convergence of income inequalities between the global North and South. The stagnated and shrunken economies of China and India, among others, in the I6 revived remarkably.  

Today, I6 countries and G7 countries enjoy more or less the same share of global income and output. Although the G7 might still be richer than the I6, they no longer treasure the dominance that they once did. Poverty in developing countries is on the fall owing to an increase in employment and improved quality of life. Contrastingly, wealth in developed countries is on the fall owing to debt burdens, reduced employment, brain-drain, and monetary advances to the rest of the world.  

We may affirm that the two final phases in the evolution of globalisation were responsible for both the Great Divergence and the Great Convergence; only these two phases differed vastly from one another. The former of the two phases witnessed the growth of the Asian economies until the 19th century, after which the European-Atlantic Economy surpassed the income levels and growth rates prevalent in pre-modern Asia. The latter of the two phases is accredited with subduing the growth of modern European-Atlantic countries, while elevating Asian ones to better income levels and improved growth rates. This reversed cycle confirms that both phases of globalisation are opposite to each other in nature. Currently, we live in its second phase attributed to advanced information technology and global income parity. And there is no better way to end this economic-history article than asking, “What Next?”


Shivang Singh

An ambitious, perseverant, and all-rounded parliamentarian in the making...

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