Trade and income growth in the Ottoman Empire: assessing the role of volatility and trend growth in terms of trade

This paper focuses on the Ottoman economy from the beginning of the nineteenth century until the early twentieth century when the first wave of economic globalization coupled with the sweeping forces of rapid industrialization in the West led to major structural changes that are deemed to be responsible for the Great Divergence in income levels. An important part of this process for the Ottoman economy and the rest of the Periphery was secular improvements and increased volatility in the relative price of exports compared to imports, i.e., the terms of trade (ToT). A large body of literature suggests that both the changes in and the volatility of ToT may affect economic development in different ways. We present empirical predictions for Ottoman income growth under various counterfactual ToT scenarios to offer a perspective on the absolute and relative importance of ToT volatility and ToT growth for the Ottoman economy. According to our findings, Ottoman GDP per capita could have grown about 0.63–0.80 $$\text{percentage}$$ percentage points faster on average per year over the period 1800–1870, if the Empire faced only half the decadal ToT volatility it actually experienced over the same period.