Markets in China and Europe on the Eve of the Industrial Revolution

TLDR

Western Europe industrialized first because its well‑functioning markets and supporting institutions created incentives for investment. The study tests whether strong market performance is a prerequisite for industrialization by comparing market integration in Western Europe and China. The authors compare market integration performance between Western Europe and China, two preindustrial regions that industrialized roughly 150 years apart. Market performance in China and Western Europe was comparable in the late eighteenth century, but England outperformed the Yangzi Delta and continental Western Europe, suggesting that strong market performance may be necessary but not sufficient for industrialization, as improvements in market performance and growth occurred simultaneously. JEL codes: N13, N15, O47.

Abstract

Why did Western Europe industrialize first? An influential view holds that its exceptionally well-functioning markets supported with a certain set of institutions provided the incentives to make investments needed to industrialize. This paper examines this hypothesis by comparing the actual performance of markets in terms of market integration in Western Europe and China, two regions that were relatively advanced in the preindustrial period, but would start to industrialize about 150 years apart. We find that the performance of markets in China and Western Europe overall was comparable in the late eighteenth century. Market performance in England was higher than in the Yangzi Delta, and markets in England also performed better than those in continental Western Europe. This suggests strong market performance may be necessary, but it is not sufficient for industrialization. Rather than being a key condition for subsequent growth, improvements in market performance and growth occurred simultaneously. (JEL N13, N15, O47)