Lecture Two Supplement. Other Industrialized Countries than Britain

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1 Lecture Two Supplement Other Industrialized Countries than Britain

2 I. U.S. Bairoch (1993) notes that throughout the nineteenth century and up to the 1920s, the U.S. was the fastest growing economy in the world, despite being the most protectionist during almost all of this period.

3 Chang (2002) notes that there was a short break in high protection in the U.S.: between 1846 and The U.S. economy did not grow faster in that period than in others. Quite on the contrary, U.S. s growth for was at its highest during (2.1 percent per annum) and (2 percent) periods, and both of these periods were marked by very high protectionism.

4 Chang also notes that it was Alexander Hamilton, the first Secretary of the Treasury ( ), and not Friedrich List as is often thought, who first systematically set out the infant industry argument.

5 In Hamilton s Reports of the Secretary of the Treasury on the Subject of Manufactures, he argued that competition from abroad and forces of habit would mean that new industries that could soon become internationally competitive would not be started in the U.S., unless their initial losses were guaranteed by government aid, which could take the form of import duties or even prohibition of import (Chang, 2002, p.25).

6 Chang further cites Henderson (1983) and Reinert (1998) and points out that List started out as a free trade advocate and only converted to the infant industry argument following his period of exile in the U.S. While he was there, Chang writes: he was exposed to the works of Hamilton and the then leading US economist and strong advocate of infant industry protection, Daniel Raymond (Chang, 2002, p. 25).

7 According to Chang, the U.S. Civil War ( ) was mainly fought over the issue of tariff, which the Southern states (as big exporters of agricultural products and importer of British manufactured goods) hated while the northeastern manufacturing states (as producers to compete with the imported products) wanted.

8 Prior to the War, tariff rates were successively raised: (1) 1816: laws required all manufactured goods subject to tariffs of around 35 percent; (2) 1820: average tariff was around percent according to Bairoch (1993; see Table 3.1 below); (3) 1832: average tariff for manufactured goods was around 40 percent, while those for woolen manufactured goods (40-45 percent) and for clothing (50 percent) were particularly high;

9 (4) : protectionism became moderate as cloth manufacturers wanted raw wool and railroad interests wanted tariff-free iron from abroad; (5) : this was one of the most protectionist periods, particularly as the pro-protectionism North won the Civil War;

10 (6) : tariff remained high in spite of some reforms made possible by the Democratic electoral victory in 1913, as WWI interrupted their courses and the Republicans returned to power in 1921; (7) 1930: the Smoot-Hawley Act in response to the Great Depression raised tariffs to new highs at 48 percent in 1931 according to Bairoch.

11 Considerable reductions came only after the WWII by which time the U.S. industrial supremacy had been established. However, Chang notes: the USA never practiced free trade to the same degree as Britain did during its free-trade period (1860 to 1932), as it never had a zero-tariff regime and it was much more aggressive in using hidden protectionist measures [such as] VERs (voluntary export restraints); quotas on textile and clothing (through the Multi-Fiber Agreement), protection and subsidies for agriculture and unilateral trade sanctions (especially through the use of anti-dumping duties (Chang, p. 29).

12 Other measures taken by the U.S. government included: (1) from the 1830s, the government supported agriculture by giving land grants to agricultural colleges and establishing government research institutes; (2) in the second half of the nineteenth century, it expanded public educational investments; and (3) it granted land and subsidies to railway companies in order to promote transportation infrastructure.

13 In the post-war period, the federal government became much bigger and important. Its share in R&D spending was only 16 percent in 1930 but rose to between one-half and two-thirds after the WWII. Its defense-related procurements gave rise to such leading edge industries as computers, aerospace, and the internet. The government s National Institutes of Health (NIH) has been critical in supporting R&D in pharmaceutical and biotechnology industries.

14 II. Germany and Russia Tariff rates were moderate compared to Britain and the U.S., but the government was active in direct involvement in key industries:

15 1. Frederick the Great ( ) promoted textiles (mostly linens), metals, armaments, porcelain, silk, and sugar refining by providing monopoly rights, trade protection, export subsidies, capital investments, and skilled workers from abroad. Chang notes: he also retained a number of business houses to function as today s management consultants in order to pioneer development of new industries.

16 Fig. 2-A Map of Silesia Prussian Silesia, 1871, outlined in yellow; Silesia at the close of the Seven Years' War in 1763, outlined in cyan (areas now in the Czech Republic were Austrian-ruled at that time). Map showing post-1994 state borders.

17 2. Frederick the Great also annexed Silesia (see Graph 2.A) and developed it into the arsenal of Germany. A few dynamic bureaucratentrepreneurs continued the task after his death by using such measures as industrial espionage and poaching of skilled workers during the late eighteenth and early nineteenth centuries, setting up Craft Institutes in 1820 to train skilled workers, subsidizing foreign trips to gather information, collecting foreign machines for copying, and supporting business start-ups in machinery, the steam engine and locomotive industries.

18 3. Reorientation of education from theology to science and technology, which was at the time not taught in Oxford or Cambridge.

19 The role of the state in the development of Germany was also emphasized by Gerschenkorn (1962). His study points to the efforts made by the European late developers to catch up with the forerunners.

20 In his study of the Tsarist industrialization in Russia ( , with emphasis placed on the Witte period), he highlights five important aspects of the Russian efforts towards industrialization: railway construction, heavy industry development, tariff protection, adoption of gold standard, and forced savings. Gerschenkron s main thesis is that while the early developers relied very little on the state, the greater the degree of backwardness, the greater the degree of state intervention among the later developers.

21 Weiss and Hobson (1995: ch. 4) agree with Gerschenkron on the importance of the role of state in economic development, but dispute with him on the interpretation of the experiences of Britain (an early developer) and Russia (a late developer). They argue that British industrialization during was accompanied by a proliferation of relatively long and costly wars. They estimate that by 1815, national debt has risen to some 180 percent of British national income.

22 The accumulation of debt from was therefore higher than that accumulated from 1914 to 1965, the period covering two world wars (1995: ch.4). Taxation in Britain, consisting mainly of indirect taxes, was the heaviest among European countries.

23 Under the influence of mercantilism, Britain s tariff rates were also very high, the average rate amounting to 27 percent in , and 40 percent in , which were among, if not the highest in Europe (Weiss-Hobson, 1995: 124), as argued in earlier Lectures. Also, as noted earlier, the state cultivated the financial market so it could borrow from the private sector at reasonably low cost.

24 So Weiss-Hobson argue that the state played a major role in promoting capitalism, mainly for the purpose of engaging in wars. The autocracy (as opposed to the Finance Ministry) in Tsarist Russia, on the other hand, did not promote capitalism with similar levels of effort, because they did not consider their defeat in the Crimean War a very serious matter. So although Tsarist Russia did industrialize to a certain degree, its per capita income was still among the lowest in Europe prior to the Revolution.

25 If the state did play major roles in either the early or late European developers, there could still be functional substitutes as Shin (1996) and others argue. Shin notes that during the period of British industrialization in the eighteenth and early nineteenth century, the leading sectors were cotton textiles and machinery industries, where economies of scale were not so important.

26 In its attempt to catch-up, there emerged investment banks in Germany, a semibackward country, that financed and coordinated large investment in capital goods industry ( growth sectors ) and achieved economies of scale comparable to that of the forerunner at the firm level (although the overall or national capital investment was lower).

27 It was therefore a functional substitute for the British unorganized market at that time, just as Japan s and Korea s business groups replaced the part of the function of capital market that deals with big-ticket and long-term investment in our own times (Shin, 1996: 55-57).

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