The great divergence between the East and the West: the role of institutions, demography and culture

Abstract

This thesis includes three chapters across the areas of cliometrics, growth theory, and economic development. The cliometric study surveys the Great Divergence in the last millennium. The growth model provides the explanation for the demographic transition in the East between the 15th and the 19th centuries. The development study documents how income influences inequality in India since the late 1950s. This chapter briefly introduces the three studies. Apart from confirming the effect of culture and institutions on the Great Divergence, the first study suggests a new timing for Great Divergence which is the 10th century instead of between the 15th and the 18th centuries. The relative standstill of per capita income and technology in the East over the last millennium, in terms of the theory of Malthus, however, contradicts the tremendous population expansion in China and India after the 15th century. The second study examines the paradoxical demographic transition in China and India during the 15th and the 19th centuries. In simple words, at the same wage level, the increase of output resulting from more use of unskilled workers relative to skilled workers brings about neither higher average production costs nor higher marginal production costs. Because of the resultant scale economies, China and India overcame the checks of diminishing returns through population expansion. Finally, the third study turns its attention to income distribution of modern India. It argues that higher income resulting from the expansion of productivity frontier is the cause of higher income disparity. Since productive workers in urban areas are paid at a higher wage rate, workers migrate from less productive rural areas to more productive urban areas. Such migration not only enlarges economic duality between urban and rural areas but also make the poor’s life in cities more grievous under the work of the impersonal labor market. The economic duality hides the complexities of political economy. How to make resource allocation fairer is crucial to the economy of India. In a nutshell, the investigation from old civilizations to modern India seems to imply no ending of the divergence among world economies. Since, as is shown in this study, there has been world divergence between the West and the East since 750 years ago, the relevance between geography and economic development can hardly be regarded as a coincidence. More specifically, in long human history, that the West experienced modification of institutions and expansion of the set of values could be attributed to its geographical limits that prevented it from pursuing scale economies to overcome the threat of diminishing returns. By contrast, that the East lacked good institutions or a larger set of values that favoured innovation and technological development could be accounted for by its geography that imposed limits on its production. Because of such limits, the East’s production pattern must be agricultural; and, its labor inputs must be unskilled. Can the East catch up to the West in the future? This question indeed triggers more questions that await resolution.