Monetary and real aspects of the great divergence between europe and asia, 1500-1800

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Silver wages in Asia were a small fraction of those in Europe during the early modern period. Broadberry and Gupta (2003) argue that this reflected real differences in the level of economic development, along the lines of the modern relationship between a developed country and a less developed country (LDC). The fact that grain wages in early modern Asia were much closer to European levels, despite the low level of silver wages, is analogous to the modern situation, where: (1) Wages in the LDC meet the food needs of the population given the price of food in the LDC, but would not purchase sufficient food in the developed country at developed country prices (2) Manufactures produced in the LDC are relatively expensive within the LDC at LDC relative prices, but are competitive on world markets because of the low wages measured in developed country prices. Higher silver wages in northwestern Europe can thus be seen as providing greater purchasing power over traded goods and hence delivering higher real consumption wages. These findings conflict with the claim of writers such as Pomeranz (2000) and Parthasarathi (1998) that the most developed parts of Asia were on the same development level as the most advanced parts of Europe as late as the end of the eighteenth century.

Our earlier paper focused on establishing the extent of the silver wage gap between Europe and Asia during the early modern period, and demonstrating that it could be explained by real productivity differences. Space constraints did not allow us to explore fully the role of monetary factors or to pursue the sources of the productivity differences. Both issues are explored in this paper. Dealing first with monetary factors, we provide quantitative evidence to demonstrate that the higher silver wages in northwest Europe cannot be explained simply by inflation following the inflow of bullion from the New World since: (1) Bullion flows from the New World entered Europe via Spain, but price levels moved together in most European countries, consistent with the monetary approach to the balance of payments (2) While price levels moved together, silver wages diverged, with Britain and the Netherlands pulling ahead of Spain and Italy (3) There were also significant bullion inflows to Asia, consistent with significant changes in Asian price levels, and again consistent with the monetary approach to the balance of payments. (4) Although there were long periods of disequilibrium in bimetallic exchange ratios between Europe and Asia, arbitrage ensured an eventual return to equilibrium. No such equilibration occurred between European and Asian price levels. (5) Silver wages remained low, even in the most advanced parts of Asia, including the Yangzi delta region of China and south India.
Turning, secondly, to the sources of productivity differences between Asia and Europe, we draw on the new economic geography literature to explore the link between higher productivity in Europe and agglomeration effects associated with urbanisation (Ciccone and Hall, 1996). Core and peripheral regions emerge in this framework, with increasing returns to scale leading to high productivity in areas with high economic mass as a result of Marshallian external economies despite the presence of constant returns to scale at the level of the individual firm (Fujita et al, 1999; Fujita and Thisse, 2002).
The paper proceeds as follows. The next section sets out silver wage differences between Europe and Asia, extending the results presented in Broadberry and Gupta (2003) to include more cities and regions. This is then followed in sections III and IV by an investigation of monetary explanations of the “price revolution” in Europe, the Near East and Asia. Section V examines real aspects of the silver wage gap, focusing on the link between urbanisation and productivity, while Section VI concludes.

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