Unexpected Convergence: Disintegration of World Economy 1919-39, and Income Convergence Among Rich Countries

Abstract

Some economists have argued that the process of disintegration of world economy between the two World Wars has led to increased income divergence between the countries. This is in keeping with the view that economic integration leads to income convergence, and consequently that income divergence should follow upon economic disintegration. The paper shows that, empirically, the view that the period 1919-39 was associated with divergence of incomes among the rich countries, is wrong. On the contrary, convergence of their incomes continued and even accelerated. Since the mid-19th century, rich countries' incomes always tended to converge in peacetime regardless of whether their economies were more or less integrated. This, in turn, implies that it may not be trade, and capital and labor flows that matter for income convergence but some other, less easily observable, forces like diffusion of information and technology.