Were later industrialisations systematically different from earlier?

The splitting industrialisations into “late” and “early” varieties owes a lot to Alexander Gerschenkron (1962). He argued that industrialisation would not occur spontaneously or quickly  in backwards countries, thus later industrialisations would be different to earlier ones. To overcome these deficiencies he argued that i) institutional substitutes would have to be created and that ii) later industrialisers would need qualitatively different substitutes to earlier industrialisers. In contrast, Jones (1988) argues that growth occurs naturally on the removal of restraints; hence, later industrialisers would appear similar, in that they would industrialise once their poor institutions are removed. Of course, industrialisation cannot be thought of too broadly otherwise our question becomes useless. That China now makes iPods and Germany then made railway tracks should not lead us to argue that their industrialisations are therefore irreconcilably different. Technology changes through time and sets an upper limit on a society’s potential wealth (North, 1996, part II), it is the convergence on a contemporary upper limit which we should examine. Institutions play a dominant role in prescribing the incentives affecting how individuals and organisations behave (North, 1996), the structure of these institutions in industrialising countries must be the focus of our study.

Arguably, the first state to begin to industrialise was Sung China (Jones, 1988, ch 4). This is somewhat problematic for Gerschenkron’s theories on late industrialisation, as it exposes the limits of his linear pattern for industrialisation. An alternative theory suggests that the removal of obstacles to growth, for example the removal of self reinforcing rent seeking (Murphy et al, 1993), may offer a better schematic for successful industrialisations. While some of Gerschenkron’s work on Europe has been questioned by the later historiography his general approach “still seems a fruitful way of approaching the problem of European industrialisation” (1991, 24).

Gerschenkron argued that there are a number of identifiable trends in the institutions of late industrialisers which set their experience apart from earlier industrialisers (1962, 353-354). Institutional substitutes appear to have operated in a number of developing countries. Active industrial policies in Germany (Chang, 2002, pp 32-35) and America (Chang, 2002, pp 24-32) have been credited some with their industrial success in catching up and overtaking England in the 19th Century. Amsden (1988, pp 143-144), citing data from East Asia, argues further that industrial policy has been different depending on the context of industrialisation.

However, the importance of avoiding rent seeking remained central in the experience of all industrialisers, whether late or early. For example, while the institutions of South Korea certainly seem more activist than those of early modern England, one thing which unites the two is the importance of evading rent seeking activities. While rent-seeking in Latin America helped the continent fall behind the rest of the world (North et al, 2000), the South Korean government remained “cold-blooded” in allowing poorly managed firms to fail where necessary. Furthermore, some of the evidence from industrialising Europe suggests that there is continuity between many different industrialisations. In Imperial Russia, before the 1850s, the state’s policy sought to “impede rather than promote economic development,” (Gregory, 1991, pg 77), a pattern closely matching Jones’ own description of a state of “greed and lethargy… sufficient to smother the prospects of re-growth” (1988, pg 146).

Once again, in this case the impetus to growth rests more on the elimination of rent-seeking growth impeding institutions than on the creation of Gerschenkronian institutional substitutes. One of the reasons that there is a continuity in the institutions of industrialising countries is the damage done by rent seeking, and the improvement in growth prospects that results in rent seeking’s elimination. Murphy et al. explain that rent seeking can put “a severe tax on innovative activities and thereby move resources into established production or the public rent-seeking sector. The result would be a sharp reduction in economic growth.” (1993, pg 413) There are are therefore large returns to the elimination of rent-seeking.

However, there are a number of differences identifiable in the institutions of later industrialisers than in the earlier industrialisers of the North Atlantic. Alice Amsden argues that there are unique institutions adopted in South Korea (and other East Asian “Tiger” economies) which aided its industrialisation. In her words, “Korea is evidence for the proposition that if and when late industrialization arrives, the driving force behind it is a strong interventionist state.“ (1988, pg 55) Furthermore, she argues that this modern, or post-war, interventionist state has behaved in a qualitatively different manner to states in the past.

“The First Industrial Revolution was built on laissez-faire, the Second on infant industry protection. In late industrialization, the foundation is the subsidy—which includes both protection and financial incentives. “ (1988, pp 143-144)

Amsden may have resorted to hyperbole in the above quotation in order to downplay the continuity in the success of industrialising states in adopting institutions which avoid rent-seeking, however the pattern of industrialisation does appear to roughly match her sentiment. Similarly, Wade approvingly cites Krugman and Stiglitz expressing similar sentiments to Gerschenkron that the financial system best suited to industrialising countries does not conform to an ideal type, but rather needs to be suited to the country’s individual circumstances (2003, pg 368). There do appear to be notably differences in the institutions adopted by later industrialisers even if there remain significant continuities also.

While the institutions which foster (or fail to stifle) growth may appear somewhat similar through time as examined above, there remains debate on the extent to which later industrialisers rely on past technological advancement compared with earlier industrialisers. Amsden has argued that South Korea’s industrialisation proceeded through a process of “Industrializing through Learning.” In this process imported technologies allow a country to industrialise by leapfrogging on the achievements of the already developed. She claims that the “First Industrial Revolution in Britain… [had] the distinction of generating new products and processes,” whereas the Korean did not, at least initially (Amsden, 1988, pg 3). In fact, as Mokyr argues, the British Industrial Revolution relied a great deal on imported technology (1993, pp 36-37). The experience of industrialisation often, if not always, involves the adoption of best practice techniques from abroad, the technological “trade deficit” may have been greater in South Korea than in England, but both relied on external invention and innovations to varying degrees.

While institutions and technology remain important, geography play a very real role in shaping economic performance (see Kruman 1991; Diamond 1997; Harman, 1999 esp. part 1) . As Sachs (2003) argues, even under conditions where either Jones’s “bad” institutions have been removed, or where Gerschenkron’s enlightened state has created the “good” institutions, there may still be large barriers to economic development. This geographic constraint is one reason to argue firmly that “late” industrialisers will always be different, from past industrialisations and from one another. Likewise, South Korea’s industrialisation took place despite its domestic paucity of natural resources (Amsden, 1989, pg 11), England may not have industrialised were it not for abundant supplies of coal (Allen, 2009).

With a world as geographically varied as our own and with the swift technological progress of the last two centuries there will always be differences in economic experience across space and time. However, as Karl Polanyi (2001 [1944]) argues, all industrialisation constitute a “Great Transformation” for the societies and people involved; in this broad way all “late” and “early” industrialisations are, in fact, very similar. There is evidence that this similarity extends deeper, the institutions adopted in different countries during industrialisation bare striking similarities given the disparate locations, cultures and technologies involved. The removal of institutions which encourage rent-seeking or actively seek to discourage growth, such as those followed in Imperial Russia, seem vital for industrialisation. For example, even where institutions appear different to those in earlier industrialises, compare South Korea’s industrial policy with Germany’s, the importance of avoiding rent seeking remains paramount. However, the focus on removing bad institutions should not lead us to ignore the very real institutional differences which appeared in later institutions. The financial arrangements present in England, Germany and South Korea certainly differed in significant respects. However as Acemoglu and Johnson (2003) argue secure property rights have far stronger positive effects on growth than do the different forms of financial intermediation practised in each country. Therefore, although it is possible to identify significant differences in later industrialisers I do not think it is necessary to label these differences systematic.

Bibliography

Acemoglu, D. and Johnson, S. (2003) “Unbundling Institutions”, NBER Working Paper No. 9934

Allen, Robert C. (2009) “Why was the Industrial Revolution British?”  http://www.voxeu.org/index.php?q=node/3570 (last accessed 11am 1st November 2010)

Amsden, Alice H. (1992) Asia’s Next Giant – South Korea and Late Industrialization (New York: Oxford University Press)

Chang , H. J. (2002) Kicking Away the Ladder (Glasgow: Anthem Press)

Diamond, J (1997) Guns, germs, and steel : the fates of human societies (New York; W.W. Norton & Co)

Harman, C. (1999) A People’s History of the World (London : Bookmarks)

Gerschenkron, A. (1962) Economic Backwardness in Historical Perspective by (USA: Harvad Univerity Press)

Gregory, (1991) “The role of the state in promoting ecoomic development: the Russian case and its general implications” in Sylla, R. and Toniolo, G. (eds), Patterns of European Industrialization (Great Britain: Routlege)

Jones, E.L. (1988) Growth Recurring (USA: The University of Michigan Press).

Krugman, P (1991) “Increasing Returns and Economic Geography” in Journal of Political Economy, vol. 99, no. 3 pp. 483-499

Mokyr, J (1999) “‘Editor’s Introduction: the new economic history and the industrial revolution”, in Mokyr, J. ed, The British industrial revolution. An economic perspective (Boulder, CO : Westview Press)

Murphy, Shleifer and Vishny (1993) “Why Is Rent-Seeking So Costly to Growth?” in Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association  Vol. 83, No. 2 , pp. 409-414

North, D. (1996) “Epilogue: Economic Performances Through Time” in Alston, L. Eggerston T. and D. North (eds.) Empirical Studies in Institutional Change, (USA: University of Cambridge Press) pp 342-356

North, D. Summerhill, W. & Weingast B. (2000) “Order, Disorder and Economic Change: Latin America versus North America” in B. Bueno de Mesquita & H.L. Root (eds.) Governing for Prosperity (New Haven, Yale University Press) pp 17-58

Polanyi, K. (2001 [1944]) The Great Transformation (Boston, MA : Beacon Press)

Sachs, J.(2003) “Institutions Matter, but not for Everything”, in Finance and Development 38-41.

Sylla, R. & G. Toniolo (1991) “Introduction: patterns of European industrialistion during the nineteenth centruy” in Sylla, R. and Toniolo, G. (eds), Patterns of European Industrialization (Great Britain: Routlege) pp 1-28

Sylla R. (1991) “The Role if the Banks” pp 45-63 in Sylla, R. and Toniolo, G. (eds), Patterns of European Industrialization (Great Britain: Routlege)

Wade, R (1990) Governing the Market (USA: Princeton University Press)

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Welcome to Global History @ LSE

This is the blog of a student taking the Global History MSc at the London School of Economics.

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