Economic History in Economic Terms,

Economic History

In economic terms, globalization is the process of increasing economic integration between countries, leading to the emergence of a global marketplace or a single world market. Many had hoped that globalization would lead to conditional convergence for developing countries as they grew faster, that is, conditional on their faster rate of factor accumulation. However, Lant Pritchett (1997) in Divergence, big time argues that there has instead been divergence in relative productivity levels and livings standards between developed and developing countries from 1870 to 1990. While there are some issues with Pritchett's analysis, it appears that developed and developing countries are not equally enjoying the intended benefits of comparative advantage

Pritchett finds that, between 1870 and 1985, the ratio of incomes in the richest and poorest countries increased six fold, the standard deviation of per capita incomes increased by between 60 and 100%, and the average income gap between the richest and poorest countries grew almost nine fold (from $1,500 to over $12,000). In contrast, there is strong convergence in per capita incomes for developed countries, although not at a uniform rate, over time. Since 1870, there has been no obvious acceleration in their growth rates; the average growth rate of the 17 developed countries between 1980 and 1994 is almost the same as that between 1870 and 1960. Hence, developing countries were not outpaced; they simply could never catch up to their developed counterparts.

Although Pritchett's analysis is compelling, this author does acknowledge shortcomings of the historical analysis. Most notably, analysis of long-run convergence or divergence is hindered by the lack of reliable historical estimates of per capita income for poor countries. To compensate, the author makes certain assumptions regarding the least possible levels of incomes in the developing countries. Further, Pritchett states that,

"Defining the set of countries as those that are the richest now almost guarantees the finding of historical convergence, as either countries are rich now and were rich historically, in which case they all have had roughly the same growth rate (like nearly all of Europe) or countries are rich now and were poor historically (like Japan) and hence grew faster and show convergence."

For example, Pritchett admits that the sample of developed countries does not include countries such as Argentina or India which are countries that tend to find convergence.

There are other limitations of Pritchett's article which the author does not mention. The 1997 timing of Pritchett's article as well as the cut off date for data analysis, 1990, limits inclusion of a recent decade which experienced rapid globalization with countries such as India and China experiencing tremendous growth. Some may argue for various reasons beyond this scope of this paper that this period is more indicative of true globalization and its effects. Further, while inequality may have increased, on average, within countries, inequality measured across all the people of the world, may actually be falling. Pritchett does not address this issue. In addition, Pritchett provides no explanation of why globalization is not rendering conditional occurrence a reality. This would have been useful for supporting the author's conclusion that divergent polices are needed to address the unique needs of specific countries.

The most noted international trade theories that support the concept of globalization and conditional convergence are the laws of comparative advantage and absolute advantage. Comparative advantage states that mutually beneficial exchange is possible whenever relative production costs differ prior to trade (Comparative advantage and absolute advantage). According to this source, nations gain by producing goods at relatively low costs and exchanging their outputs for different goods produced by others at relatively low cost. Thus, all potential trading partners can gain enormously through appropriate specialization and exchange. A country has an absolute advantage in producing a good if production of the good absorbs fewer resources than are required in other countries or by other individuals or firms (Comparative advantage and absolute advantage).