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Before and Beyond Divergence: The Politics of Economic Change in China and Europe

Author(s):Rosenthal, Jean-Laurent
Wong, R. Bin
Reviewer(s):Ma, Debin

Published by EH.Net (February 2012)

Jean-Laurent Rosenthal and R. Bin Wong, Before and Beyond Divergence: The Politics of Economic Change in China and Europe. Cambridge, MA: Harvard University Press, 2011. xi + 276 pp. $45 (hardback), ISBN: 978-0-674-05791-3.

Reviewed for EH.Net by Debin Ma, Department of Economic History, London School of Economics.

This book is the latest installment in the Great Divergence debate, which could also be simplified as the question of why the Industrial Revolution (IR) happened in England or Europe, but not in China or Asia. Written by two leading scholars on French and Chinese economic history, respectively, this book makes a new contribution to this debate with a focused, theme-by-theme comparison of similarities and differences between China and Europe. Too often, as the two authors correctly point out, our views of long-run economic growth and the IR have been informed by the English experience, from which a unilinear model of growth is drawn. Their book, by carefully pairing and meshing the narratives of Europe and China with relatively equal weight, is a welcome departure in this genre. It is also a stylistic success, with economic theory seamlessly woven into the narrative and with schematic economic models usually spelled out in separate boxes within the chapters.

The book is, however, more than a stylistic or methodological contribution. The seven substantive chapters examine a far greater array of themes on the issue of Great Divergence than was originally surveyed by Ken Pomeranz and others. The book mounts a careful and thoughtful critique on the traditional wisdom by laying out alternative hypotheses and explanations. Distinguished from the Pomeranz thesis, which emphasizes resource endowments, they stake their claim on differences in political structure, namely the dichotomy between a unified and centralized imperial China versus a politically fragmented Europe. Turning the traditional thesis upside down that Europe?s economy and institutions triumphed because of political fragmentation and inter-state competition while China stagnated under a single despotic autocratic emperor, they argue that for too long we may have underestimated the costs of fragmentation or the damages of constant warfare in Europe, and at the same time neglected the benefits of peace and stability in a unified imperial China. Indeed, they argue that peace and stability help explain not only China?s initial economic lead and, but also ? somewhat surprisingly ? her falling behind or the absence of a Chinese IR in the early modern era ? but not in the way the traditional wisdom had proposed. Below, I will start with some of the more enlightening insights from this book before I turn to its fundamental thesis, which I find more problematic.?

Chapter 1 is an overview of two millennia of contrasting patterns of centralization versus fragmentation in China and Europe. Chapter 2 offers an excellent critique of the traditional thesis on the connections between household structure (nuclear versus extended family), fertility patterns, labor markets and economic growth. The authors argue that, when introducing the concept of transaction cost, the comparative economic efficiencies of an open and external labor market (often associated with a nuclear family structure in Western Europe) versus an internal labor market as existed within extended households in China, becomes far more ambiguous than is traditionally claimed. One implication of their model is that the use of Chinese and European real wages as an indicator of average per capita income may actually underestimate Chinese living standards. Their argument is that if family business could take advantage of private information to retain the high-productivity workers within the household, average wage rates in the external labor market in China were likely to be over-represented by low-productivity workers released from the family business. My own suspicion is that, even allowing for the logic of their model, it may well be the high-productivity workers that were more inclined to exit the household business to enter the external labor market for the potential of high wages. Such disagreement aside, I see great value in their approach to set out a testable hypothesis on the possible linkages between real wages and average real income.?

Chapter 3 counters the simplistic dichotomy on the choice of formal and informal mechanisms for dispute resolution in business transactions. Rosenthal and Wong point out that the two mechanisms are often more complimentary than substitutive. They demonstrate this with a matrix of categories displaying the choice of these two mechanisms as a function of the nature of the transactions, such as frequency, the duration of each exchange, the value of each trade and the distance between trading partners, rather than purely cultural and institutional factors. I find this a very useful correction of the current literature, despite my disappointment at their scant attention paid to the possible differences in the nature of formal justice between China and Europe. Indeed, many scholars, including some cited in the chapter, have long argued for profound differences in the notions and trajectories of law, contract, property, legal jurisprudence, procedures and legal enforcement between the two regions. Although the degree and magnitude of these differences are themselves a source of debate, neglecting them must leave out something that could be potentially important.?

Jumping to Chapter 5, which takes on the thesis of differential factor prices of capital and labor between China and Europe, the authors challenge the accepted thesis of China being a high interest rate and capital scarce country. They argue that empirical observations of a very large differential in interest rate spreads between China and Europe are not based on the comparison of likes for likes. The pairing of long-term interest rates for Europe often derived from public credit (or government debt) ? a credit instrument largely non-existent in China ? with short-term interest rates from the private sector (particularly consumption loans from pawnshops) in China is highly misleading. Indeed, they argue that when Chinese pawnshop rates are compared with similar European ones, the interest rate differentials narrow considerably. The chapter is also mindful of the looming issue of how to account for the absence of a market for public credit or the general relative under-development of formal financial institution in China. Their thesis of an insufficient demand for public debt in China due to the absence of European type of inter-state warfare is not entirely convincing to me as after all, supply and demand are difficult to separate. Historically, there were sustained periods of inter-state warfare in Chinese history particularly in the pre-modern era and there had been various forms of ?forced contributions? or ?advances in tax collection,? none of which developed into a regularized and formal public debt. But public debt of some form caught on very quickly from the second half of the nineteenth century after the arrival of Western imperialism in China. There seems to be more than just an insufficient level of demand behind the absence of sustainable public debt in traditional China. Again despite my disagreement, I like many of the insightful discussions in this chapter.??????

I now turn to the book?s central thesis, as spelled out in chapters 4, 6 and 7. Chapter 4 starts with the premise that China was more peaceful under a unified political regime than European nations were in that continent?s fragmented state between the fourteenth and nineteenth centuries. Warfare, however, impacted the European countryside far more severely than cities, which were often better fortified and defended. In contrast, in China levels of security and peace were better and also spatially more even across both urban and rural locations. The implication of this was a greater degree of concentration of trade and manufacturing in urban locations (and likewise a higher degree of urbanization) in Europe than in China. With higher urban wages and greater concentration of industry in urban locations, technological innovation in Europe, as in the good old Habakkuk thesis (recently resurrected by Robert Allen), would be more biased towards saving labor than in China. Hence the Industrial Revolution, founded as it was on labor-saving mechanical technology, was more like to take off in Europe than in China.

This stimulating and striking hypothesis is supported by fairly meager evidence in the chapter. For a chapter and a book that rely so much on warfare, there is no concrete comparative data on actual incidences, frequencies, duration and costs of warfare in both regions for these five centuries apart from some rather sketchy or vague narrative. China may have been more unified than Europe throughout this time, but was not necessarily short of external threats and internal rebellions, some of which led to phenomenal losses of lives and property perhaps not seen anywhere else in the world. It would have been more helpful if a bit more details had been spelled out in the chapter. Similarly, the claim that the Chinese countryside was comparatively safer, or Chinese urban-rural cost differentials were smaller, are treated almost like stylized facts backed by no empirical data except some ad hoc narrative.

Towards the end of this chapter, the authors focus on why the IR happened in England rather than the European Continent. Here, England becomes the equivalent of China in contrast with the European continent. Relative peace and more centralized? territory within England allowed the location of a rapidly mechanizing cotton textile industry in the low-wage and coal abundant region of Lancashire rather than in high-wage and coal-deficient London, or more poignantly in coal-abundant Belgium of the often war-torn European Continent. While I find this argument as an insightful and valid critique of or supplement to the recent Allen version of why the IR happened in England, I am troubled by the logic that exactly the same condition of peace and stability allowed the IR to take off in England but not in China. I assume that this paradox could be reconciled if we add in the fact that eighteenth century England was already a high-wage economy, possibly driven by the rise of her eminence in the booming Atlantic trade, which itself may be an outcome of the inter-state competition within Europe. I just wonder how much of their urban-rural cost differential argument would stand after controlling for this and other factors.??

One of the long-standing arguments of European urban-rural differentiation has been the peculiar institution of urban autonomy and the resultant inter-city or inter-state rivalry that could lead to successive improvements in institutions in order to attract and retain capital and labor ? a dynamism generally absent or weak in the unitary and isolated regime of imperial China. The book rarely addresses this particular mechanism in comparative perspective. In Chapter 6, the authors? major attempt is to show that imperial governance, at least under Qing, was far less predatory in terms of fiscal extraction and provided a higher level of public goods than European polities, largely because a unified empire engaged in less military warfare and expenditure. The chapter could benefit from a more concrete presentation and direct comparison of fiscal revenue. But overall, their argument of a low level of central fiscal revenue per capita in Qing China in peace time as compared with the relatively smaller western-European polities is credible given other evidences I have seen.

The problem concerns their interpretation of the fiscal revenue data. There is a large and burgeoning literature that links low levels of central taxation with low state capacity, characterized by low administrative efficiency, high agency costs of revenue collection, local corruption and so on. The vast literature on Imperial Qing or earlier dynasties including those by Chinese intellectuals of the time, the reformers of the twentieth century as well as more contemporary secondary scholarship, tends to point to various aspects of Chinese imperial governance as symptomatic of what we today refer as ?low state capacity.? I agree there perhaps has come the time for a reassessment of this literature, but the chapter expends little effort in dispelling the prevailing interpretations. Instead, the authors attribute the phenomenon of low taxation mainly to the imperial ideology of benevolence and good governance. They readily acknowledge that Chinese imperial rule faced no constitutional or other form of formalized institutional constraint on their predation, except the threat of revolt or insurrection. To resort to individual or collective revolt (often at the expense of one?s life or property) is an option available even under the most repressive and despotic regime. Why such a nearly universal threat or constraint in a typical stationary banditry equilibrium would somehow generate peculiarly good governance in Qing China is puzzling to me.

The evidence presented to support the claim that China provided higher levels of public goods is even shakier. To name a couple of problems here: There is no presentation of aggregate expenditure (military or civilian), let alone matching of comparable expenditure per capita between Europe and China. Selective discussions of specific public goods in the chapter are very vague, subject to multiple or even opposite interpretations and often with little clarification on whether they were actually provided by central, local or even the private or civil sectors (see p.177-178 and 189-191). The chapter plays down the role of political representation and parliament as an effective constraining device on ruler extraction. While this may be a valid argument on its own, the statement (p. 195) that ?representation was as unique to Europe as good governance was to China? seems way overdrawn and even rhetorically problematic (after all, ?good governance? is good by definition).???

In sum, the book represents a good contribution in the Great Divergence debate as it addresses some of the key issues beyond what has been done recently by Pomeranz, Allen and others and hence lays out a large research agenda for future scholarship. Overall, the arguments are particularly effective and insightful when it comes to opening our minds and the discipline to alternative hypotheses but far less so when it comes to providing credible support for its own thesis.

Debin Ma is a faculty member of the Economic History Department of the London School of Economics (personal website at http://personal.lse.ac.uk/mad1/). He is the co-editor (with Jan Luiten van Zanden) of Law and Long-term Economic Change: A Eurasian Perspective (Stanford University Press, 2011).

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Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Europe
Time Period(s):Medieval
16th Century
17th Century
18th Century
19th Century