and the Great Divergence

Africa

and the Great Divergence

# 13

25 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 (1^st-8^th cent. CE) + maize, manioc, tobacco from America (16^th

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

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

century 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 20^th century >

< palm oil prices relative to prices of cotton cloth

in relative terms the incentive to produce palm oil grew in the 19^th century and diminished throughout the 20^th century

12

Colonialism in Africa

The European colonialism in Africa

developed during the 19

century in order

commodities 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

# 14

26 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

century to mid-20

century) 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

century (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!

The Big Push

industrialisation

# 15

27 October 2016

The Big Push

Late joiners in the 20^th 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 Westeners 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

century means planning

Three national cases suggest that growing in the 20

century 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)

URSS: 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

state 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)