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Abstract

This paper looks at the role of textile exports in Japan and China's economic development in the period of 1868–1930 as a major explanation for the “Little Divergence” between the two countries in the context of the “Great Divergence” between Europe and Asia. Because of textiles' large weighting in proto-industrialization gross domestic product (GDP), we postulate that China's initial 20-year lag in textiles vis-à-vis  Japan turns out to be fatal for its industry and that it eventually ordains totally different development patterns for the textile industry in the two countries, which ultimately led to different growth patterns for the overall economy. Although both countries saw rapid growth of textile exports, the nature of those exports and the entailed position of each country in the industry value chain of trade were quite different. We then use Granger causality tests to show that in one case (Japan) it is in support of the export-led-growth hypothesis (ELG) while in another (China) it is not. Our study then also explains why Japan's industrial revolution took place much earlier than China's.