Business History, the Great Divergence and the Great Convergence

by Geoffrey Jones

Overview — Among economic historians, the Great Divergence means the rise of the income gap between the West and the Rest since the beginning of the Industrial Revolution. The more recent Great Convergence is a narrowing of that gap. This paper integrates a business history perspective into debates surrounding these macro transformations. It calls for greater attention to micro processes that generate productive firms and entrepreneurs.

Author Abstract

This working paper provides a business history perspective on debates about the Great Divergence, the rise of the income gap between the West and the Rest, and the more recent Great Convergence, which has seen a narrowing of that gap. The literature on the timing and causes of the Great Divergence has focused on macro analysis. This working paper identifies the potential for more engagement at the micro level of business enterprises. While recognizing that the context of institutions, education, and culture plays a role in explanations of wealth and poverty, the paper calls for a closer engagement with the processes of how these factors translated into generating productive firms and entrepreneurs. The challenges of catching up were sufficiently great in the Rest that initially ethnic and religious minorities held significant advantages in raising capital and trust levels, which enabled them to flourish as entrepreneurs. Yet by the interwar years, there is evidence of a more general emergence of modern business enterprise in Asia, Latin America, and Africa. Many governmental policies after 1945 designed to facilitate catch-up ended up crippling such emergent business enterprises without putting effective alternatives in place. The second wave of globalization from the 1980s provided more opportunities for catch-up from the Rest. Firms from emerging markets had the opportunity to access the global networks that replaced large integrated firms. There were also new ways to access knowledge and capital, including through management consultancies and hiring graduates from business schools. The upshot was the rise to global prominence of firms based in the Rest, including Foxcomm, Huawei, HNA, Cemex, and TCS.

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