The ascent of the rich
# 13
4 April 2016
Industrialising Europe (and the West)
From 1815 to 1870 industrialisation spread from Britain to Europe (at least partly) and to the Western offshoots (USA)
Catching up processes coincided with the formation of the “innovation club”, a group of countries, all of them able to push forward the world’s
technology frontier
Catching up with the leader (Britain) entailed overcoming a consistency problem
as the technologies of the industrial revolution were forged according to a specific endowment (UK)
Technology gap
and infant industries
Industrialisation outside Britain required appropriate technology and protection from British competition
The followers needed a strategy to emulate the British industrialisation
The idea was that followers had uncompetitive
industries as they were at the infancy stage and so they were to be protected (infant industries) Hamilton (USA, 1790) and List (Germany, 1841)
Development strategies
The standard development strategy had four points:
to unify the national market by abolishing internal tariffs and promoting transports to protect national manufacturers by
means of external tariffs (protectionism) to modernise the financial system
to promote mass education: human capital and technology
A national market
The German case is a good case in point After Vienna (1815) Prussia led the
creation of a less segmented market
through a customs union (the Zollverein) common external tariffs were introduced to
keep out British manufacturers
In the 1850s mainline railways were laid out and branch lines in the 1860s
In 1913 Germany had a railway network of about 63,000 km
The protectionism
Improved technologies made profitable to transfer mature technologies to the
Continent (Belgium, Germany, France) the cotton industry (a light sector), 1830s- 1860s
Whereas technologies incoherent with the followers’ endowment needed protection to catch up with cutting edge technology
the iron industry (a heavy sector), 1860s- 1890s
The second industrial revolution
In the 1880s the technological discontinuity in capital-intensive sectors was an
opportunity for the second comers
Germany in steel and chemical industries France in steel industry and mechanical
engineering (+ the car industry)
USA in steel and chemical industries,
mechanical engineering and car-making From 1870 to 1913 the followers caught up
with the UK in manufacturing production
The British (relative) decline
From 1870 onwards Britain lose her
relative positions in international trade and manufacturing
By 1913 the followers outpaced Britain in industrial output
Britain’s share of the world’s manufactures dropped from 23% in 1880 to 14%
The continental industrialisation extended and pushed forward the technology
frontier (a collective and shared effort)
How to finance investments?
But the new technologies were capital-
intensive and required more capital and in a shorter time
The universal banking (commercial +
investment banking) allowed to reduce the gap by bridging savings and investments
Société Générale de Belgique (1822/1832) Crédit Mobilier in France (1852)
Kredit Banken in Germany (Dresdner B., Darmstadter B., Commerz B., Berliner HG, Deutsche B.)
R&D and human capital
The key point in the industrialisation of the second comers (USA, Germany, France) is represented by technology innovation and transfer through adaptive strategies The second industrial revolution sectors
needed investment in human capital (mass education) and R&D
as technological innovation was more and more science-based
the German primacy in the chemical sector
The macroeconomic
character of innovation
The global aggregate production function
suggests that technological progress has a macroeconomic character
the rich countries have developed
technologies suitable to their specific
circumstances addressing their own needs e.g., in Britain high wages favoured
technologies which economised labour by increasing the use of capital
The spiral underlies the rising income of rich countries (and inequalities as well)
The world aggregate production function:
USA, Germany and Italy (1820-1990) over time
Today’s
development has been created yesterday and it depends on technologies invented by rich countries that became such yesterday
The ascending spiral of progress
further increases the advantage of rich countries
The great empires
# 14
5 April 2016
Europe and the Empires
In the long run the European political
segmentation [Rosenberg & Birdzell 1987]
was in contrast with the great Empires
Russian, Ottoman, Persian, Mogul, Chinese and Japanese
Were the Empires richer than Europe? Or less dynamic exactly because empires?
not open to the international trade [Smith]
with an inefficient demographic model [Malthus]
or an inefficient socio-political structure [Marx]
The California School
These views have been challenged by the California School [Pomeranz; Li; Feng]
in particular, China had a legal system (property rights) comparable to Europe’s
the demographic structure, although different, had similar dynamics
productivity and living standards were similar at both ends of Eurasia (and Yangzi Delta quite close to England’s)
The big difference was that empires had no coal reserves and did not profit from globalisation
Asia’s deindustrialisation
Asia started the 19th century with the largest manufacturing share and ended the “long century” de-industrialised (neither modern factories nor state-of-the-art technologies) Three factors determined Asia’s (but, partly,
J and RUS) deindustrialisation technology
globalisation
economic policies
A lack of competitiveness
The industrial revolution technology were cost-effective in Europe but not in India or China, where the cost of labour was lower than the cost of capital
Thus, Asian producers had
to wait for the improvement of European technologies so that became cost-
effective for Asia too
to adapt them to their specific factor endowment (as Japan did first)
… in a global world
The growing productivity differential between Europe and Asia became a direct
competitiveness differential as a result of globalisation
The cutting of costs (cheaper transports) boosted the integration of international markets and the international competition outcompeted the inefficient Asian makers So, the “Resteners” de-industrialised and
regressed to commodity producers
→ backward economies
How comparative advantages worked
How to explain Asia’s regression to a backward continent: the theory of
comparative advantages [Ricardo, 1819]
The international trade implies the
specialisation of each economy according to its own comparative advantage
economies make what they make more efficiently comparatively
with long-term effects vs short term effect
when an world market emerged in the early 19th cent. Asia specialised in commodities
The importance of being a colony
In a global world only independent states or polities had the power to pursue
development strategies (USA, Western Europe) to adjust to international
competition (Britain, initially)
But colonies are not independent, they were subordinated to colonial powers
Institutions were not efficient as they were
efficient for colonial powers not for colonies preventing them to adopt such strategies
The cotton industry in Britain and India
During the industrial revolution mechanisation fostered the productivity of the British textile producers
The international competition made directly comparable the differences in the relative efficiency of manufacturing in Britain
(increasing) and India (stagnant)
Britain’s industrialisation provoked an imbalance in the global productivity growth
pushing India towards primary productions
for which now she had a relative advantage
The direct competition
The price of British and Indian cotton in London was similar, although British cotton prices plunged more quickly
In 1812 the request by British manufacturers to repeal the East India Co. monopoly is consistent with the relative
competitiveness for yarns (and then clothes)
As a consequence India specialised in
cotton raw production, lesser value added
The real price of cotton in England and India, 1781-1913
The real price of raw cotton in England and India, 1781-1913
De-industrialising India
India’s deindustrialisation was a
consequence of specialisation in primary products (raw cotton)
with cumulative effects over time (path dependence) confirming the Indian specialisation (in the primary sector) Neither the “railroadisation” (from the
1860s onwards) of India positively
stimulated local manufacturers because of the British imperial policies
The Americas
# 15
6 April 2016
The two Americas:
the divergent trajectories
North and South Americas followed two different trajectories
replicating divergence tendencies emerging within the world economy as a whole
Continental divergence dating back to the colonial epoch and originated from
geography and demography
North America had a geographical advantage being closer to Europe as the main market for colonial goods (+ “connecting” rivers)
Two demographies
Pre-Colombian populations fell dramatically, natives collapsed for arms and disease
North America, a temperate climate: not densely populated (in 1500 0,25m in the original 13
colonies)
the asymmetrical mortality rate between natives and settlers allowed of the “transplant” of England
South America, more densely populated (1500:
57m; 1750: 5m, but the drop was even larger)
The ethnic structure and deep social (and income) polarisation was a brake to growth
The colonial economy of North America
The settlement of North America (New
England + Canada) derived from exporting The staples thesis [Innis, 1930]: the growth of
British colonies was determined by the growth of their exports to Europe
Staples were: wheat, timber and wood products (ships), whale oil, fish, furs
Colonies exported staples to Europe and imported manufactures whose
competitiveness depended by the production scale
The staple economy
Staple colonies had three characteristics:
Staples had lower prices and were
correlated to Europe’s as they were linked by trade (+ Navigation’s Acts) Exports amounted to a large share of
colonial aggregate income (+ services) The returns exceeded returns in Europe by
a margin covering costs and risks of moving to colony: labour + capital
Pennsylvania (1681) illustrates these principles
The wheat prices in Philadelphia and London were
synchronised (with two exceptions
confirming the rule) Exports amounted to 30% ca of
colony’s aggregate output (1770)
So the colony could pay for British
consumer goods
The differences within the colonies
The growth of the British colonies in the 18th century attracted immigrants from Europe (UK)
The dynamics of real wages was similar to London’s, but to a higher level to balance costs and risks
Yet, in the colonies without staples, or
where staples prices were on a par with London, real wages were quite similar to London’s
Real wages in Europe and New England, 1700-1855
The sugar colonies
The sugar colonies in the Caribbean (sugar &
coffee) had different dynamics
sugar cultivation in large plantations staffed by
African slaves (N) grew as well as exports proving hugely profitable (K by European investors)
a very high mortality rate made suitable to replenish slaves by purchasing new slaves more than by natural increase (BWI: 4m vs 0,4m in 1832)
profits were invested in the UK not in the Caribbean
The model was replicated in the Southern US (rise + tobacco + cotton) (SC, MD, VA)
One size does not fit all
British colonies actually evolved along three different models in terms of social
structure, income and inequality (+ rights) New England: high real wages, abundant &
cheap land, an equal society, a few slaves Caribbean (Jamaica): large plantations, a few
settlers, the most of the population was slaves, extreme inequality
Southern US: in the middle, inequality in large plantations and egalitarianism of small-
scale farmers
Colonial economy of Latin America
Latin America follows three trajectories, all of them different from the USA’s
Caribbean and Brazil
Cono Sur (Argentina, Chile and Paraguay) Mexico and Andes
Spanish colonies combines enslavement forms (low cost) with productions
unrelated to the European markets for high transportation costs
The three models
The Brazilian economy was a sort of
Caribbean economy on an expanded size The Portuguese introduced sugar and
substituted native slaves with African slaves But Brazilian crops producers were undercut by
Dutch who transplanted the “sugar model”
into the Caribbean, closer to Europe
Brazil experienced a staple boom after another (gold in the early 18th c; coffee in 1840-1930,
rubber in 1879-1912)
Cono Sur, Mexico and Andes
Cono Sur means Pampas: wheat and meat Thus, Cono Sur economies were similar to
New England but with higher transportation costs (at least, until 1860 ca)
Mexico and Andes differed as the Spanish conquistadores encountered complex civilisations, in not a sparsely populated area like New England
Polities and societies, cities and agriculture, hierarchies and religions (Incas, Aztecs)
The silver vs staples
The Spanish colonies exported silver (Potosi in Bolivia), not staples, with negative long-term effects
silver provoked inflation but no specialisation
(they just swapped silver for Chinese silk and tea shipped with galleons from Acapulco and Manila)
no significant exports nor employment (a mere 4% of GDP)
an uneven income distribution (only a few rich) did not attract labour and capital from Europe
as competing New England did
Wages of unskilled labourers in London and Mexico, 1525-1900
Mexico was a low wages economy as agriculture was largely inefficient, nor its products could be efficiently exported to Europe for an
unlucky geography (the plateau and no rivers to Vera Cruz)
Inverse correlation
between wages and population for demand expanded much faster (integration of crops and animals)
Independence: USA
The American economy grew significantly after independence (1776-1787)
population by 8, income per capita by 2 prior 1860
raw cotton production in the Southern States and wheat and meat in the Mid-West
But it was not just a staple economy
Hamilton doctrine (1792) for the “American model”
It became the standard model for the entire 19th century
The standard model
The Hamilton’s doctrine introduced the four-point standard model
universal education (egalitarian societies) improvements in transport infrastructures a national bank to stabilise the currency
and promote investments and trade
external tariffs to foster a unified national market
An import-substitution model
The standard model aims to substitute British imports (duties on imports 20-25%)
The abolition of state tariffs and new
infrastructures created a national market
Cumberland Road (1811-1818), Erie Canal (1817-1825)
A characteristically American protectionism emerged
Tariff of 1816; Morrill Tariff, 1861; Smoot-Hawley, 1929
An experiment in bank of issue
Bank of the United States (1791 and 1816)
The industrialisation of the USA
From 1800 to 1860 the cotton industry took off in the USA
After 1825 American real wages continued to grow while the British ones stagnated
The immigration from Europe should have aligned the American wages to Europe’s (and UK’s)
But it did not happen as the American wages were linked to specific technological
trajectories
That’s why it was not a staple growth
The end of the Atlantic labour market
High wages, technology and productivity
The Habakkuk hypothesis [1962] is based on the relationship between labour
(population size) and resources (cheap land and the frontier)
The technological dynamics is a function of high wages
So that the USA pioneered high-productivity and capital intensive technology to save expensive labour
Independence in Latin America
The colonial societies dilemma:
protectionism or international trade but at a cost (de-industrialisation)?
Since the early 19th century Mexico adopted a spurious standard model
“external” protectionism, but no national market integration, and a national bank no infrastructures to cut transport costs,
nor mass education to improve human capital
Industry without innovation
Growth phases during Alamàn and Porfirio Diaz (1877-1911) were depending on
machinery and technology transfer (typically, railways)
Yet, such policies did not ignite an
endogenous process of technological innovation
so that growth was only in the State- backed sectors
and real wages stagnated as a result!
A most courteous reminder…
Please, remember that you have to register yourselves online for the mid-term exam!
(segreteria online at
https://segreteriaonline.unisi.it/Home.do)
References: slides + Blanchard (chap. 2 + 10) + Acemoglu, Johnson & Robinson (selected parts); Allen (chap. 1-6)
