The Lowy Institute’s International Economy Program has to cover a lot of ground.  The program’s mandate is to ‘monitor and analyse trends that are contributing to fundamental changes in the international economic environment within which Australian businesses and policymakers operate.’  A bit of a mouthful, and not exactly a small task, although I am lucky enough to have two distinguished colleagues – Professorial Fellow Professor Warwick McKibbin and Visiting Fellow Dr Stephen Grenville to help make it somewhat more manageable.

One way to deal with the vast range of issues that potentially fall under our mandate is to look for some overarching themes or stories that can provide a degree of coherence to the various topics we choose to tackle.  One theme that I’ve found particularly useful, and one that I’ve deployed in a fair few of the presentations and speeches I’ve given over the past couple of years, is the idea that the world economy is currently in a period that can best be described as The Great Convergence.  (The term was also given a recent outing in a 17 October column by the Financial Times’ Martin Wolf.)

So what is The Great Convergence?  To explain the idea, I’m going to borrow a chart from the provocative new book by Greg Clark, A Farewell to Alms: A Brief Economic History of the World. The introductory chapter, which includes the chart in question, is available for download here. Its title promises the reader a concise, sixteen page economic history of the world, and Clark then takes the possibilities of compression even further, with Figure 1.1 providing us with World Economic History in One Picture (reproduced below; apologies for the poor resolution).  This chart plots out an estimate of income per person for the period between 1000 BC and 2000AD.  The resultant line is roughly horizontal from 1000 BC until about 1800AD, whereupon it begins a steep ascent.    


One way to interpret this picture is to say that modern economic history comprises just two Big Developments: the Industrial Revolution and the Great Divergence.  Up until around 1800, the chart depicts world income per head as basically flat, describing a world in which there is no sustained improvement in average living standards for century after century.  Throughout most of human history, the world economy is mired in the poverty and misery of a Malthusian trap, such that any increase in income is eventually offset by a commensurate rise in population growth that returns income per head back to subsistence level.  In other words, the material lot of the average eighteenth century English labourer was probably little different from that of a medieval peasant or even a slave in Periclean Athens. 

Then, sometime in the eighteenth century, the Industrial Revolution in England marks the point when the world economy, or, more accurately, one part of it, begins to escape from the trap.  The onset of what Nobel Prize-winner Simon Kuznets has taught us to call modern economic growth meant that sustained increases in income per head became possible.  The line plotting out income per person in Clark’s Figure 1.1 abruptly departs from the horizontal at this point and begins its sharp climb, as the world economy enters a new epoch of rising living standards.  This is Big Development number one.

Big Development number two is that not every economy gets to embark on Kuznets’ modern economic growth at the same time, or even in the same century.  Initially, economic take-off is concentrated in Northwestern Europe and then the United States, before gradually spreading outwards to other economies and regions of the globe.  Inevitably, this pattern has profound implications for the world income distribution.  While the world economy as a whole was stuck in a Malthusian trap, the gap between living standards across countries was relatively small.  But once some countries started to experience strong growth in income per head, while others did not, the outcome is what Kenneth Pomeranz calls The Great Divergence.

As Richard Easterlin describes in the opening chapters of his excellent Growth Triumphant, this internationally staggered growth take-off goes a long way towards explaining the current economic (and indeed political) configuration of the world.  On the one hand, the spread of modern economic growth brought with it both a transformation in the structure of national economies, and an increase in economic relations between them, in the form of international trade and finance, that drove both the first age of global capitalism between (say) 1879 and 1914, and its current successor.  On the other hand, differences in timing and distribution also produced dramatic shifts in the international balance of power, which included the rise and fall of the Pax Britannica and enhanced prospects for (especially) European imperialism.  The fact that for much of modern history the world economy has been centred on the North Atlantic, and that even today, the old Atlantic powers still dominate much of the international economic architecture, is in many ways a product of this great divergence. 

Yet by the late twentieth century, modern economic growth had already spread well beyond the confines of the Atlantic economy and its offshoots, with the economic emergence of Japan in the twentieth century, followed by parts of East Asia and Latin America, a clear indicator that the great divergence need not be a permanent feature of the international economic landscape.  Granted, despite these successes, for much of the twentieth century, the overall story, when it came to the average human standard of living, was still one of ‘divergence, big time’.

But crucially, for the average level of income per person, modern economic growth is now beginning to spread to the more than one in three of the world’s population who live in the great Asian economies of China and India.  Sustained, rapid economic growth in the world’s two billion-people-plus economies has the potential to start to unwind the great divergence, and replace it with a great convergence.  It is the possibility of adding a third Big Development to modern economic history that argues for treating The Great Convergence as a useful way of thinking about the nature of today’s international economy.

In my next post, I'll talk about how the International Economy Program tries to track The Great Convergence.