The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500-1800* Contrary to the claims of Pomeranz, Parthasarathi and other 'world historians', the prosperous parts of Asia between 1500 and 1800 look similar to the stagnating southern, central and eastern parts of Europe rather than the developing northwestern parts. In the advanced parts of India and China, grain wages were comparable to those in northwestern Europe, but silver wages, which conferred purchasing power over tradable goods and services, were substantially lower. The high silver wages of northwestern Europe were not simply a monetary phenomenon, but reflected high productivity in the tradable sector. The 'Great Divergence' between Europe and Asia was already well underway before 1800.JEL Classification: N10, N30 and O10

Estimates of Indian GDP are constructed from the output side for 1600-1871, and combined with population data. Indian per capita GDP declined steadily during the seventeenth and eighteenth centuries before stabilising during the nineteenth century. As British growth increased from the mid-seventeenth century, India fell increasingly behind. Whereas in 1600, Indian per capita GDP was over 60 per cent of the British level, by 1871 it had fallen to less than 15 per cent. These estimates place the origins of the Great Divergence firmly in the early modern period, but also suggest a relatively prosperous India at the height of the Mughal Empire. They also suggest a period of "strong" deindustrialisation during the first three decades of the nineteenth century, with a small decline of industrial output rather than just a declining share of industry in economic activity.JEL classification: N10, N30, N35, O10, O57

Despite being the first Asian economy to achieve modern economic growth, Japan has received relatively little attention in the Great Divergence debate. New estimates suggest that although the level of GDP per capita remained below the level of northwest Europe throughout the period 730-1874, Japan experienced positive trend growth before 1868, in contrast to the negative trend growth experienced in China and India, leading to a Little Divergence within Asia. However, growth in Japan remained slower than in northwest Europe so that Japan continued to fall behind until after the institutional reforms of the early Meiji period. The Great Divergence thus occurred as the most dynamic part of Asia fell behind the most dynamic part of Europe.JEL classification: N10, N30, N35, O10, O57

In the early eighteenth century, wages in Britain were more than four times as high as in India, the world's major exporter of cotton textiles. This induced the adoption of more capital-intensive production methods in Britain and a faster rate of technological progress, so that competitive advantage had begun to shift in Britain's favour by the late eighteenth century. However, the completion of the process was delayed until after the Napoleonic Wars by increasing raw cotton costs, before supply adjusted to the major increase in demand for inputs. D uring the early modern period, India was the world's main producer of cotton textiles, with a substantial export trade. Indian textiles were exported to Britain on a large scale from the seventeenth century. 2 By the early nineteenth century, however, Britain had become the world's most important cotton textile producer, dominating world export markets, and even exporting to India. 3 This dramatic change in international competitive advantage, which must surely rank as one of the most important developments of the industrial revolution period, is often described entirely in terms of developments within Britain, without any reference to India, and with little or no reference to factor prices. 4 This paper attempts to redress the balance. This paper links the development of the Lancashire cotton textile industry during the industrial revolution to factor price developments in Britain and India. The import substitution emphasized by Inikori is characterized as a two-stage process: first, a shift from production using traditional skills to production with machine-intensive technology; second, a faster rate of innovation in the machineintensive technology. 5 The process was begun and sustained by a major difference in factor prices between Britain and India, with wages in Britain being much 1 We are grateful to Huw Bowen and Sumit Guha for making unpublished data available to us. We would also like to thank higher during the eighteenth century. 6 This idea of factor price differences driving technological choice is well established in accounts of American industrial development during the nineteenth century. The argument is most closely associated with the work of Rothbarth and Habakkuk, who emphasized the role of land abundance in creating a labour shortage in the New World, and hence higher wages in the United States compared with Britain. 7 Faced with high labour costs, American entrepreneurs developed a more capital-intensive technology with higher labour productivity. 8 Mokyr writes, after a discussion of the Habakkuk debate, that 'Most of the debate is carried out in the context of Anglo-American differences, with Britain, interestingly enough, considered the low-wage economy (though in the period of the Industrial Revolution it would, relative to the rest of Europe, be the high-wage economy). A comparison between Britain and the Continent during the Industrial Revolution would be worthwhile, but so far has not been attempted seriously'. 9 In fact, a wider compari...

Overall labour productivity in India was already only around 15 per cent of the UK level between the early 1870s and the late 1920s. Between 1929 and 1950 India fell further behind and remained at around 10 per cent of the UK level until the 1970s. India has been catching-up since the 1970s, but by the end of the twentieth century was still further behind than in the late nineteenth century. Agriculture has played an important role in India's relative decline to 1950 and subsequent delay in catching up, since comparative India/UK labour productivity in this sector has declined continuously and agriculture still accounts for around two-thirds of employment in India. Comparative India/UK labour productivity in industry has fluctuated around a level of around 15 per cent. The only sector to exhibit trend improvement in comparative India/UK labour productivity over the long run is services, rising from around 15 per cent to around 30%. India's recent emergence as a dynamic service-led economy appears to have long historical roots.JEL classification: N10, N30, O47, O57