The Americas
# 13
24 October 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 18
thcentury 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 (rice +
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 19
thcentury 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!
Africa
and the Great Divergence
# 14
26 October 2016
Was Africa poor?
Sub-Saharan Africa poverty is a long-run matter, as Africa was poor even before European colonialism (prior to 1500), at least as far as estimates suggest:
a low and stagnant GDP per capita
GDP per capita (Geary-Khamis 1990$)
1500 1600 1700 1820
Core Western Europe (12)
798 908 1033 1245
Western Europe (27)
771 890 998 1204
Asia + Middle East
568 572 608 581
Africa 414 422 421 420
Why is Africa poor?
The colonial ideologies:
Africans are bound by traditions more than to commercial values
The institutional approach:
The slave trade (but also areas not involved are amongst the poorest)
Colonialism as extraction of wealth without development strategies
Too much globalisation (a dependency from exporting commodities and primary products)
Inefficient governments (authoritarianism, corruption)
Africa
and the Great Divergence?
Sub-Saharan African poverty is related to a specific agricultural regime before 1500
hence, the highest income per capita in
North Africa (from Morocco to Egypt) and the Middle East
and the absence of advanced agrarian civilisations,
like in South East Asia, Northern Eurasia, Polynesia and North America, with a few exceptions (Ethiopian Plateau)
The importance of agriculture
Advanced agrarian civilisations had many advantages:
productive agriculture + diversified
manufacturing (labour specialisation) institutional and cultural resources (from
property rights to complex expressions of a written culture → literacy and numeracy)
specialisation between private property of land and landless labourers
long-lasting effects on the ability to generate technological progress
The African agriculture
Prior to 1500 African agriculture had some
momentous innovations (so, no “unchanging traditions”):
Ethiopia (2500-1500 BC): a sophisticated agrarian civilisation (crops + husbandry) including
investments in terracing and irrigation
Nigeria (1500-onwards): introduction of yams and palm oil fitting to the rainforest environment
West Africa: introduction of new crops such as yams, bananas and beans (1st-8th cent. CE) + maize, manioc, tobacco from America (16th
cent.)
Diverging demographies
Wherever agriculture domesticated crops and allowed of permanent villages
population grew and a complex society took place with a written culture and
sophisticated institutions (polities)
e.g., Ethiopia (Kingdoms of D’mt and Aksum)
In West Africa the population growth was
restrained because of tropical diseases
malaria + sleeping sickness (↑ CMR)The shifting cultivation
In a land-abundant area shifting cultivation represented a rational response to
specific circumstances
e.g., the Yakö group from the Eastern
Nigeria rainforest farming region, 1930s
But with permanent effects
no specialisation between land owners and labourers, no land to buy or lend (and no property rights)
a low population density as a result
and the resulting politics
This production system generated two different styles of politics
a relatively egalitarian political system based on “confederation” of the
cultivators (“band” or “tribe”)
vs the West African Empires (states),
like Ghana, Mali and Songhai, vastly
centred upon revenues from trans-
Saharan trade, gold production and
slavery
The slave trade
From the 16
thcentury the slave trade greatly modified African societies, although slavery and slave trade preceded the Europeans (as well as West Africa exported gold to Europe and the Arab world)
Kingdoms of Dahomey, Ashanti and Kongo responded to the increased demand for
cheap labour coming from the Americas (the sugar economy) by slave-raiding
1500-1850: 10-12 million slaves were traded to the New World (and even more to Asia)
The “legitimate commerce”
The end of the slave trade within the British Empire (1807) called for the substitution of exports from Africa,
such as palm oil in demand as a lubricant and for candles and soaps
The new legitimate commerce used the old commercial networks in West Africa
The wild stands production depended on
how much Africans could buy with a
given extra work (oil/manufactures)
Prices of palm oil and cocoa
relative to the price of cotton cloth, 1817-2000
Likewise, cocoa prices oscillated, plummeting
conspicuously between 1920 and 1950, quite remarkably in the 20th century >
< palm oil prices relative to prices of cotton cloth
in relative terms the incentive to produce palm oil grew in the 19th century and diminished throughout the 20th century
35
Colonialism in Africa
The European colonialism in Africa
developed during the 19
thcentury in order
to have access to raw materials andcommodities as well as Africa being a market for their manufactures
as Africa was a territory for European settlers and offered profitable investments
opportunities
But it created particularly inefficient
institutions by introducing “indirect rule”
Colonialism
as a brake to growth
European colonialism was remarkably
detrimental to African growth by pursuing inefficient policies
infrastructures to facilitate exporting of primary goods (e.g., railways)
tariffs were tuned low for revenue purpose globalised Africa at worst by specialising its
regions in low value added primary goods low investments in human capital
land and (forced) labour policies not favourable to native interests
Why are Africans poor?
Today Africans have a WWI living standard as the continent’s agriculture has low
levels of productivity
as technological progress keeps low the price of its products with substitute
products (mineral oil vs palm oil)
because of the Asian competition and the extension of cultivation in Africa as well
But above all as productivity has been
stagnating or even falling
productivity trap + cheap labour
The standard model
and late industrialisation
# 15
27 October 2016
Does one size fit all?
By 1850 Western Europe and the USA were ahead of the rest of the world
Colonies
could not opt for development
strategies as they had “external” constraints as colonies
The “Resteners” could rely on the standard
model, but it proved less and less effective as
time went by (e.g., peripheral Europe)
as the “technology gap” deepened (was it also a capital gap?)
Why didn’t the standard model work any more?
Two new constraints arose with second industrial revolution sectors and
technologies
the minimum efficient scale of production increased (capital to labour ratio – K/N) the market size (how large is the domestic
market?)
Such constraints may explain why the
standard model did not work any more in
late industrialisation cases
Three cases: Russia, Japan and Latin America
Although Russia, Japan and most of Latin America adopted development strategies (late 19
thcentury to mid-20
thcentury) catch- up efforts did not always result in a full-
fledged industrialisation process
Russia: “half-baked” by merely importing technologies, without any adaptation Japan: first in Asia, succeeded in
industrialisation by hybridising former models Latin America: an inefficient equilibrium
Imperial Russia
Russia was for a long time a backward part (a frontier?) of Europe, despite modernisation attempts (Peter the Great, 1672-1725)
After the Crimean War (1853-1856) Alexander II launched a string of modernising reforms, such as abolishing serfdom
but there was no adequate response to this attempt to create a proper labour market and a market for private property
A modified standard model
The Tsarist governments (Witte and Stolypin) adopted a modified standard model:
promoting the railway construction (71,000 km by 1913) to link Russia to the global economy
building up a “national” industry through tariffs (1891) both for heavy sectors (iron and steel sectors, engineering industry) and light sectors (textiles, cotton)
fostering investments by luring FDIs more than reforming the financial system → a major pitfall:
foreign capital built up plants regardless of the specific context
Witte’s successes, 1890-1916: FDIs and industrial production
FDIs, in million of roubles
1880 98
1890 215
1895 911
1914 2000
in millions of tonnes
coal pig iron oil
1880 3.2 0.42 0.5
1890 5.9 0.89 3.9
1900 16.1 2.66 10.2
1910 26.8 2.99 9.4
1913 35.4 4.12 9.1
1916 33.8 3.72 9.7
Trans-Siberian Railway
Why didn’t this model work?
The standard model did not work as
technologies were imported but not adapted to specific circumstances
Mass education was too slow in spite of the higher earnings for literate workers
Thus, heavy industry progressed but Russian economy remained based on agriculture
(1885:1913: slightly slipped from 59% to 51% of GDP)
Tsarist economic growth was an agricultural boom depending on international prices
Japan: the first Asian country to industrialise
Japan has been the first Asian country to catch up with the West
The Japanese history may be divided in four periods:
Tokugawa (1603-1868); Meiji (1868-1905); Imperial (1905-1940); the Era of high speed growth and catch up (1950-1990)
Tokugawa period had mixed dynamics:
political fragmentation (shoguns) and property
insecurity, restricted international trade (Nagasaki) technology was compatible with endowment (labour)
The deep roots of growth
Even though prosperity was uneven distributed, both income and population grew, as well as technological innovations introduced (but they were labour-intensive as labour was cheap) Productivity was improved in manufacturing and
agriculture (irrigation – new crops)
Technological improvements were based on
reverse-engineering or manufacturing copies (e.g., cannon foundry)
Literacy spread and large cities grew (Edo, Osaka, Kyoto)
The Meiji Restoration
The Meiji Restoration represented a reaction to military and economic weakness (1868) Technocrats modernised Japan so as to
have a “rich country” and a “strong army”
the four-order society was abolished, a
constitutional monarchy established, samurai were substituted by a Prussian-style army
property rights and land taxes were introduced railways were constructed (and Western 24-hour
time!) and mass education adopted
The Meiji economic development
Japanese governments could adopt only two measures of the four ones of the standard model
Japan encountered difficulties in modernising her financial system so the State initially
acted as a sort of “venture capitalist”
as international treaties prevented Japan to adopt external tariffs industrial targeted policies were applied by MITI
and State-owned firms privatised in the 1880s
Hybridising Western technologies
Western technologies needed to be
amended to specific circumstances (cheap labour and expensive capital)
a low labour cost and dependency on
Western technologies imposed a creative, adaptive response to make them cost-
effective in a low-wage economy
→ less capital and more labour through a re- engineering of Western technologies
e.g., silk and cotton industries
The Imperial period
Economic growth was relatively slow in the Meiji period as Japan exported traditional products (tea, silk, cotton) to pay for imported
machinery and raw materials
Industrial output accelerated between 1905 and 1940 (20 to 35% of GDP) as Japan could
implement the standard model entirely protectionism
universal banks
universal education + studying abroad heavy sectors
Mitsubishi Zero Fighter
Mitsubishi Zero Fighter (1940) was a typical
technological effort along the Japanese trajectory:
500 km/h, 4,000 m were not achieved by
increasing the power of its engine but reducing its weight
Targeted industrial policies
State intervened to transfer and adapt
technologies to reduce the gap in strategic sectors (heavy + automotive industries
subsidised steel sector: Yawata Steel Works (1905)
During WWI imports were substituted by a mix of private and State intervention
zaibatsu (conglomerate groups) to increase saving and investment rates
R&D departments + inventory techniques to save capital, such as “just in time” in the 1930s
Latin America
Many South American countries were too
small to industrialise, others experimented the standard model in the late 19
thcentury (until the 1980s)
Yet the import-substitution industrialisation [Prebish, 1950] proved to be ineffective as protectionism and subsidies were
misdirected with no regards to plants’
efficiency and the market size
The car industry case
The car industry case may be a case in point
Argentina and Brazil promoted car making in the 1950s-1960s also by strong
protectionism variants
Argentina law (1959) restricted imports allowing to produce cars by 13 firms
In 1965 the largest plant could produce 57,000 cars per year (the overall car production
amounted to 195,000 per year)
but the MES was 200,000 cars per year
Ousted from Detroit,
established in Argentina
Kaiser-Frazer Corp was an
American car maker ousted from Detroit by more efficient
competitors (GM, Ford Motor Co., Chrysler) established in
Argentina as protectionism and alliances (with Industrias
Aeronauticas y Mecanicas de Estado) allowed to breath… but beneath efficiency cost levels
A growing gap
Smaller firms (plants) had to deal with higher costs and their inefficiency
burdened the overall productivity as their relative weight was relatively high:
10%/GDP
As a result real wages stagnated thus
affecting the actual size of the domestic market (aggregate demand)
Thus, it was not a K/N problem but a MES
issue!
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 + Acemoglu, Laibson & List (chaps. 6, 7 and 8) + Allen (chaps. 1, 2, 3, 4, 5, 6, 7 and 8)
The Big Push
industrialisation
# 16
2 November 2016
The Big Push
Late joiners in the 20th century had to reduce a wider gap than previously, starting from a
lower income per head level in a shorter time Large economies has been able to grow fast by
constructing all the elements of an advanced economy simultaneously: this is the big push:
everything is built ahead of supply and demand:
steel mills before car plants, car plants before rolled sheets, both of them before occurring the actual demand for them
The Big Push, the income gap and scale economies
The Big Push strategy is an alternative strategy to the import-substitution strategy, as the MES
affects industrialisation strategies after 1910 The Westerners widened the gap but some
countries were able to reduce it
The higher starting differential in income and
productivity is to be compensated by a higher growth rates (approx. 6%) to catch up
The Big Push anticipates investments by a
planning authority to coordinate them before both supply and demand materialise
Number of years to develop from low- to middle- income economy [Prescott & Parente, 2001]:
Thus, growing means growing faster
country starting year number of years
UK 1835 54
The Netherlands 1855 64
Belgium 1856 55
USA 1856 44
Italy 1870 54
Russia/USSR 1870 66
France 1872 54
Germany 1872 55
Japan 1894 38
Mexico 1950 22
Iran 1955 17
Brazil 1957 17
Hong Kong & Singapore 1960 10
Taiwan 1965 10
Breaking out of poverty
in the 20
thcentury means planning
Three national cases suggest that growing in the 20
thcentury require a certain amount of planning, although planning apparatus vary Only a few countries have been able to catch
up with the West after 1950, except for small city states (Hong Kong, Singapore)
USSR: a successful but too rigid a model Japan: heading towards the technology
frontier
China: the next candidate?
USSR
A successful case but at a cost, at least until 1980
The Soviet solution to backwardness was central planning to build up a modern economy by transferring state-of-the-art technology in capital-intensive sectors
The Five Year Plan (1928): state-owned
enterprises receiving instructions from the top, not from the market
The target: capital equipment production, instead of consumer goods
Maximizing the output
The growth strategy had four legs:
channelling investment into heavy sectors and machinery production (↑ investment rate)
output targets to direct business operations without financial restrictions (“soft budget constraints”)
agriculture collectivisation (famine in 1933) mass education (universal and compulsory
schooling)
Soviet + electrification
The Soviet planning economy fostered the investment rate:
9%/GDP in 1928 to 19%/GDP in 1938
The industrial output tilted rapidly and significantly The creation of large scale in the steel sector and
power industry furthered productivity growth rates and, generally, living standards
education and public health improved
despite mortality rate increases related to
collectivisation and famine episodes (+ WWII: a huge blow to USSR economy and population)
Comparing USSR national accounts, 1927-1987
Too rigid a model
Although capital stock was restored by 1950 development strategies proved effective only, or especially, in capital- and
technology-intensive sectors
also because it was a surplus labour economy
The increase in income per capita was partly a result of a decrease in CBR
The model was too rigid to be effective once USSR reached the technology frontier
Japan as a “rich country”
After WWII Japan renounced to get a “strong army” and concentrated on economic
growth
GDP per capita: 1950-1990: ↑ 5.9% per year (a peak: 1953-1973: ↑ 8% per year
The growth strategy focused on reversing its adjusting policy:
instead adjusting modern technology to its
factor prices, Japan adopted the most
modern and capital-intensive technology
Reversing the Meiji model
Investment in capital stock (30%/y) succeeded in adjusting factor prices to the most
advanced technology, shifting to the frontier The Japanese strategy consisted in investing
in scale efficient plants – a green field choice
Thus, Japan rapidly fostered productivity in second industrial revolution technologies (+ just in time) through the MITI coordination in the 1960s
In car and steel industries and shipbuilding outcompeted the USA by 1970
Investment and economic growth in
Japan after WWII
The Japanese big push
The big push strategy required to overcome some constraints:
MITI opted for efficient scale plants through
green field sites (different from Latin America) but who would consume low-cost steel? A scale
efficient car industry (Honda, Toyota)
and who would consume cars? Increasing
income at home thanks to adequate industrial
relations + international markets (exports)
The end of big push in Japan?
The high growth period in Japan ended in
1991 when the real estate bubble collapsed Could Japan grow faster during the “lost
decade”?
Hard to assess, unlikely, perhaps no…
Once caught up with the leader, as Japan did, growth rates depend on variations of the
technology frontier, slower by definition
China’s miracle
South Korea and Taiwan followed the
Japanese big push model with a time lag
They substituted Japan in some sectors with a two-decade delay
Successful cases of Asian Tigers have been dwarfed by the Chinese miracle in recent decades
How did China do it? Just free-market
reforms?
Economic growth in East Asia after 1960
(and China after 1980)
A two-period story
Mao’s Soviet-style planning (1949-1978)
a planning policy pursued along Soviet lines but income per capita increased slowly
(2.9% per year on average)
A market reform (1978), not a shock therapy
producing over targets was stimulated bystate procurement agencies
collective cultivation was replaced by the Household Responsibility System – small farms leased to families
China’s performance, 1952-2007
A gradual strategy
China’s success depends on market reforms (animal spirits) but also on previous policies
agriculture productivity growth deriving from new technologies (water supply, fertilisers, IR-8 rise)
adapting technology to the specific factor endowment (prices)
large-scale plants in capital-intensive sectors mass education and investment in R&D
lowering CBR and CMR
…adapting big spurt strategies
China has been adapting big spurt
strategies by adopting both institutional innovations
special economic zones (SEZ) in South East
and macroeconomic policies
exchange rate and reserve policies
relatively soft budget constraints (banks vis- à-vis firms)
surplus labour economy (Northern regions)