Development

How Developed Countries Got That Way

Can we summarize how the most advanced of the G20 got their seats at the table? Does it say anything helpful for development today? 

Here’s a broad, obviously simplified overview of how some developed countries got that way.

The United Kingdom:  This is perhaps the longest story, given that a lot needed to be in place to not just participate in but lead the Industrial Revolution–we have to start somewhere in the 1500s. Around this time Britain exported raw wool to the Netherlands, Europe’s leading “manufacturer” (light, in textiles). Britain also developed a widespread textile industry–again, labor intensive, no factories–as there was a lot of wool and labor lying around. More importantly, it found markets for exports in the 1600s–America and Asia–and set up companies for trade with Russia, Canada, Africa, and India. Mercantalism worked as such: Britain created colonies and protected its merchants, which created trade surpluses, which allowed its Treasury to accumulate gold and silver, which it spent on a navy to maintain trade and fight for new colonies, and to merchants, who could invest in more trade. This system made Britain rich, but not industrialized per se.

Then in the 18th century, due to improvements in technology (ploughs) and land use, agricultural productivity spiked, freeing up labor for more manufacturing. This, combined with a number of technological changes, made factories and thus industrialization economical. Perhaps also important to the story was the substantial protection the government provided to its industry, until repeal of the Corn Laws in the 1840s when Britain committed to dumping its products in other markets free trade.

France: France had something of a disastrous 18th century, culminating in the Revolution in the 1790s. French institutions were in flux through the Revolution and Napleonic period, and only in peace did France have a chance to seriously industrialize. It was helped by Paris, where labor was plentiful, a national bank was established, and financial center began to develop; it was weighed down by undeveloped towns and villages outside. However, with a large population, engineers and education, and a strong banking system, France quickly caught up in the 19th century.

The United States: Hamilton created America’s first development strategy–obviously in song–known as “the American system.” In three parts, 1) use tariffs to protect domestic industry, 2) a national bank to develop finance and help fund the government, and 3) subsidize infrastructure, Hamilton’s strategy set out to create a modern, industrialized country (something like 98% of the population was in agriculture at the time). America industrialized after Samuel Slater snuck factory plans over from England. The banking system flourished as it was relatively easy to start a bank, which made capital readily available to entrepreneurs. Interestingly, however, America suffered chronic labor shortages; despite a growing population, it was hard to get people into the factories. Immigration mid-century helped relieve this.

No, not from Westworld.

Meanwhile, the federal government, states, and private sector went on a road and canal building frenzy through the early 1800s, which succeeded in bringing down the substantial costs of transporting goods. Being a largely coastal country, the U.S. developed a strong export industry; with westward expansion, a considerable market developed domestically to sell goods. Infrastructure only increased growth potential; railroads, which required substantial government investment, made it easier to ship everything, from cattle to clothes to oil. American business boomed in the late 19th century, and the rest is history.

One hotly debated question, to which I will return, is the role of tariffs, which remained high throughout the 19th century, in American development. I would add that in America’s case, even if tariffs didn’t aid industry, they were essential to government financing in this era of high infrastructure need, before income taxes. You can read more about the role this played here.

Germany: Germany had a lot going for it in the early 1800s, with a skilled labor force, education, and a customs union among the German states, but it lagged the other countries. The customs union allowed textile industry to develop, but once railroads were brought to Germany (engineers used imported British technology), industry really developed, particularly around Germany’s natural deposits of iron and coal. The unification of Germany in 1871 consolidated both the state and the national market, and the government’s promotion of heavy industry through protectionism and the welfare system that kept labor from emigrating allowed Germany to surge ahead and challenge Britain in the 20th century. Interestingly, both times it has unified (1871 and 1990), Germany has become an economic powerhouse.

Japan: Japan was a sophisticated feudal society by the time American gunboats arrived in 1854. It had a well educated population and had become scientifically literate via the Dutch. But in contrast to Britain, Japan had closed itself off to the world under the shogun. However, the threat from the West induced an institutional crisis that culminated in the Meiji Restoration, which transformed Japanese society and set it on the path to modernization. The government undertook land reform, built railroads and roads, imported technology, brought over American advisers, sent people to learn from Germany, built factories and sold them to private owners, and developed a banking system. When it beat Russia in a war in 1905, the world knew to reckon with Japan.

Pretty sure trains aren’t supposed to run that close to the water, but hey, they were figuring it out

Soviet Union (sort of): The USSR is an interesting study in contrast. Though all of the above economies had heavy state intervention, the Soviet Union was obviously something different. Russia had always been powerful, but largely because of its size–in 1917, it was very much a developing country, with little capital and a very rural population. The Bolsheviks sought to change that, and Lenin even initially experimented with state capitalism, rather than outright communism. However, agricultural productivity continued to pose a problem as people were still dying in famines. With Stalin’s first five-year plan in 1928, the Soviet economy grew rapidly to such an extent that it made the Depression-hit capitalist economies worry they were doing it all wrong; factories were built, labor productivity increased, medical services improved and infant mortality fell. But 1) it’s hard to say how much growth was due to recovery from years of war, 2) Stalin’s brand of industrialized induced a famine that killed millions, and 3) a large amount of labor was unpaid, prisoners in camps. That said, the USSR did become “industrialized” in a strict sense and a large exporter of goods, though I can’t speak for the quality. In addition, the standard of living was probably shit (my dad can confirm) and it was estimated that the economy was at most half the size of the U.S. in 1990.

South Korea: Korea was much more productive with state intervention. After splitting for the long term with the North in the 1950s, Korea became a recipient of enormous U.S. aid, both military and developmental. In this pre-Washington Cnsensus era, American committees came up with recommendations that largely supported some state intervention that would move Korea out of its backward, rural condition. But it was not until dictator Park Chung-Hee took over that Korea made its “Miracle on the Han.” Park knew U.S. military aid would not be forever and that his country needed to industrialize to fend off the North, especially if it was backed by China. His development scheme involved heavy subsidy of industry; importing technology from the Japanese; working with the chaebol, or largest conglomerates like Samsung and Hyundai, to loosen bottlenecks; high savings rate, particularly among nationalistic housewives; and vicious suppression of labor to keep costs low. It worked–even USAID says it was a good idea not to listen to them. Korea went from an aid recipient to one of the largest donors of development assistance in the world today.

Israel: As the most developed country in its region, Israel’s case is instructive. An obvious factor is immigration, as the Jews who came here pre- and post-Independence tended to be educated and urban, meaning they came in with a developmental mindset. But that wasn’t all. The government’s funding scheme? Guilt reparations from Germany that amounted to nearly 90% of income in the 1950s; add to that aid from the Americans and bonds issued to Jews abroad and Israel had plenty of revenues to invest in industrial and agricultural projects.

Tel Aviv, 1950s.

China: After things going horribly, horribly wrong after 1949, the Communist Party under Deng Xiaopeng moved to state capitalism and opened the country up in 1980. With a series of reforms, such as special economic zones and allowing in entrepreneurs from Taiwan and Hong Kong, the government created a “dual system,” one half in which state-owned enterprises continued to dominate, and another whether private enterprise began to take root. That is, China moved from pure communism to state capitalism. Its factories started on the low end of the value chain and used an undervalued exchange rate to build wealth out of exporting to the world, especially after its accession to the WTO.

So, what matters?

  • The state. It is quite clear that some combination of state intervention and private enterprise is needed for development, but the right balance and appropriate roles is not. What is clear is that the extremes–neoliberal austerity and Soviet-style control do not work. In addition to direct intervention, the state needs a stable funding scheme to perform essential functions like the military and infrastructure, which reduce the cost of business.
  • Entrepreneurship. Because you need people to run business and innovate.
  • The threat of conflict. The European powers prioritized development to keep ahead of each other; Japan did not industrialize until gunboats were on its shores; South Korea industrialized largely for defense reasons; Hamilton’s development strategy was partially inspired from watching Britain beat France repeatedly. This alone doesn’t do it, like in 19th century China.
  • Expansion and the creation of national markets. A number of these countries expanded and exported into empires. The U.S. expanded westward and united via railroads. Germany unified. China has also gone into an infrastructure frenzy to cohere the country.
  • Agriculture/food security. You’ve got to feed people enough to move them off the farm. India’s agricultural productivity has historically been weak and unsurprisingly too many of its people are still in agriculture. Either that or you need to have a reliable source of food, or the result is massive starvation as in the USSR.
  • Education. All these countries had largely educated populations which made them more employable for higher skill industries.
  • Technology and copying. Each of these countries copied technology from those at the frontier–the U.S. the textile factory from  Britain, Germany the train from Britain, Japan from Germany.
  • Trade. All these countries found ways to sell their stuff abroad, accumulate wealth in the process, and further industrialize. Did protectionism help? One economist certainly thinks so. Other economists find that if anything, it was harmful. The answer remains relevant as countries like Rwanda try to defend protectionist policies in a free trade world.

Why isn’t this relevant? The world is pretty different now, each of these countries was for the most figuring things out for themselves–“crossing the river by feeling the stones,” in the words of Deng–no guiding hand of a development bank or aid agency. Trade and capital flows are huge, with a massive market following developing country governments’ every move. Even things like conflict are difficult motivators in a world characterized mostly by interstate order and more threatened by terrorism and other internal problems. Also, some messed up stuff happened, like repressed labor or environmental destruction, which we’d rather do without today.

All that said, what we know about development when it has actually happened is from history, so it bears remembering.

 

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