A Pomeranzian Growth Theory of the Great Divergence

Abstract: This study constructs a growth model of the Great Divergence that formalizes Pomeranz's (2000) hypothesis that the relief of land constraints in Europe has caused divergence in economic growth between Europe and China since the 19th century. The model consists of the agricultural and manufacturing sectors. The agricultural sector produces subsistence goods from land, intermediate goods from the manufacturing sector, and labor. The manufacturing sector produces goods from labor, and its productivity grows through the learning-by-doing of full-time manufacturing workers. Households make fertility decisions. In the model, a large exogenous positive shock in land supply causes the transition of the economy from the Malthusian state, in which all workers are engaged in agricultural production and per capita income is constant, to the non-Malthusian state, in which the share of workers engaged in agricultural production gradually decreases and per capita income grows at a roughly constant growth rate. The quantitative predictions of the model provide several insights into the causes of the Great Divergence.