Monthly Archives: March 2012

Of Good and Better Companies: Reflections On Agency and Economic History

In Good Company: About Agency and Economic Development in Global Perspective
Jan Luiten van Zanden (j.l.vanzanden@uu.nl) University of Utrecht (The Netherlands) and Stellenbosch University (South Africa).
Abstract: The paper discusses some evidence, based on a review of new literature on economic history, about what is referred to as the Sen-hypothesis, that increasing human agency (of both men and women) is a key factor in economic development. It briefly discusses various dimensions of agency (or its absence): slavery (as the absolute suppression of human agency), access to markets, agency concerning marriage, and political participation. This concept perhaps also allows economic historians to move beyond the historical determinism that is central to much recent work in this field.
“Economic history is very trendy these days” (Zanden 2011: 3)

J. L. van Zanden

This paper distributed by NEP-HIS on 2012-01-03 raises a challenge to economic historians: how can we improve our current explanations of differential development and escape the common rhetorical places of path dependency and institutional persistence in our explanations of material stagnation and change? By placing human agency of men and women in the center of our stories, says Jan Luiten van Zanden, in the form advocated years ago by Amartya Sen in his best-selling book Development as Freedom.

Amartya Sen

It might be useful to remember Sen’s definition of agency, a concept that diverged from the usual meaning of the term in economics:

The use of the term “agency” calls for a little clarification. The expression “agent” is sometimes employed in the literature of economics and game theory to denote a person who is acting on someone else’s behalf (perhaps being led on by a “principal” and whose achievements are to be assessed in the light of someone else’s (the principal’s) goals. I am using the term “agent” not in this sense, but in its older -and “grander”- sense as someone who acts and brings about change, and whose achievements can be judged in terms of her own values and objectives, whether or not we assess them in terms of some external criteria as well. This work is particularly concerned with the agency role of the individual as a member of the public and as a participant in economic, social and political actions (varying from taking part in the market to being involved, directly or indirectly, in individual or joint activities in political and other spheres) (Sen 1999: 18-19, my own emphasis added).

Zanden’s reading of agency in Sen is “the capacity for autonomous decision making” that ultimately drives “economic and social-political change” (Zanden 2011: 4). Agency is also a synonym of “participation, or autonomy” (Zanden 2011: 5). But two questions remain. How does agency affect economic change? How does freedom impact agency? Sen responds:

Development as Freedom

Expansion of freedom is viewed both as the primary end and as the principal means of development. Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency. The removal of substantial unfreedoms is constitutive of development (Sen 1999: xii).

Zanden advances the usefulness of Sen’s framework and formulates what he calls the dual Sen hypothesis, this is, if “development is defined as freedom [... that] freedom -or rather -agency- is an important precondition and driver of long-term economic and socio-political change” (Zanden 2011: 5).

The second part of the “Sen hypothesis”, agency as a determinant of historical change, can be tested with proxy variables such as the gross domestic product or the human development index. However, what is behind these indicators? Zanden advances a suggestive explanation drawn from the new growth theory of Paul Romer and Robert Lucas: human capital is the crucial determinant of economic growth and human development. Human capital is embedded in the other variables for “one has to possess the right skills -the human capital- to really participate in markets, political events and the civil society” (Zanden 2011:5).

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Latin American Economic History: new questions, new data, old problems

Intraregional trade in South America, 1913-50. Economic linkages before institutional agreements

by José Peres Cajías, Marc Badia-Miró (mbadia@ub.edu) and Anna Carreras-Marín (annacarrerasmarin@ub.edu) (Universidad de Barcelona)

URL: http://econpapers.repec.org/paper/barbedcje/2012270.htm

Abstract

With the exception of the North American Free Trade Agreement (NAFTA), trade integration is still modest in Latin America, at around 20% of total trade. Surprisingly, these levels were higher in 1945, when the figure for imports stood at 25.6%. Paradoxically, this result shows that trade integration reached its peak before trade integration agreements were signed. To understand the reasons for this, we examine intraregional trade throughout the interwar period (1913-1950). We analyze five national cases: Argentina, Bolivia, Brazil, Chile and Peru. As far as we know, this is the first paper in the literature on intraregional trade during the interwar period. There are other papers on intraregional trade in Latin America, but they focus on the period after the 1960s. The analysis of intraregional trade in the interwar period is also useful to the Latin American industrialization debate. Given the disruption in world trade flows and the existence of some industrial capacity, the paper looks at any possible increase in intra-industry trade. There are two main conclusions: a) with the exception of the World War periods, intraregional trade has been low since 1913; b) in general, intraregional trade reflects the overall trade specialization: there is a high concentration of low value added products.

Review by Sebastián Fleitas

This paper was distributed by NEP-HIS on February 20, 2012 and deals with the fact that in spite of the many trade agreements that have been signed since the 1990s, actual international trade between Latin American Countries (LACs) remains quite low. The authors tell us that low trading volume is not at all new. This by looking at intraregional trade between 1913 and 1950, They construct a new database to describe the intensity and characteristics of trade for five LACs: Argentina, Bolivia, Brazil, Chile and Peru.

Two main conclusions arise from their analysis. The first one is that trade among Latin American countries was low during the first half of the 20th Century, but similar to the current levels. Interestingly, intraregional trade only increased during the WWI and WWII. The second conclusion by Peres Cajías and colleagues is that the flow of goods and services in intraregional trade reflect the same pattern as the flows with countries outside the region, namely there is a high concentration of low value added products.

These results are very important in the context of the early industrialization and the state-led industrialization process that was typical of LACs in the early 20th Century. Intraregional trade provides an opportunity to develop new goods, to attempt technological catch up under better conditions and to export to extra-regional markets. This process allows countries to make the structural change that is the basis for any process of economic development. In this sense, the failure to develop a dense network of intraregional trade could explain some of the difficulties to implement structural transformations and to find a more successful international trade pattern.

Upside-down Map, Joaquín Torres García (1943)

Even when this working paper describes in a very clear way the stylized facts, I think that there are two issues to improve that would contribute to a better understanding of the problem addressed. The first issue is that, in order to see what are the characteristics of the intraregional trade, the authors could compare the data with that of the trade with extra regional countries. A deeper and more formal comparison between these flows for each country can allow us to answer very important questions, for example if these flows were attempts to develop new goods that were frustrated when the developed countries came back to the international markets or if they simply were desperate attempts to increase exports when the international markets were closed. These two scenarios lead to totally different inferences about the role and the performance of the intraregional trade.

The second issue is that, even when the paper describes the findings in a very clear way, it is really important to go one step forward and try to see what factors are determining the intraregional trade flows. During the 20th Century LACs suffered many strong international shocks, followed very different policies and tried to implement a variety of institutional agreements of trade. In this context it is important to have a theoretical framework that provides clear interpretations over periods and countries. Such a theoretical framework would answer why and when we should expect higher levels of intraregional trade. Also, what is the role of some specific factors in the intraregional trade: endowments, (low) levels of productivity, the excessive volatility in macroeconomics variables or the balance of payments constrained growth (Bértola and Ocampo, 2010); what these low amounts of intraregional trade tell us about these factors or about the whole variety of trade agreements that the countries tried to implement over the 20th Century.

Finally, it is important to remark that one very important contribution to this working paper is to construct a new database based on LACs’ sources. As the authors state, the construction of databases of international trade has frequently relied on the use of official sources from developed countries (especially the United States, the United Kingdom and Germany, for example for reliability issues Federico and Tena, 1991). However, some key problems of the development of LACs can only be addressed using Latin American data and a methodology that assures their reliability, even when the sources have different problems as in many


The Economies of Latin America:
New Cliometric Data
César Yáñez and Albert Carreras (Editors)

periphery countries. The task of understanding the process of development in Latin America by the use of new databases is a joint effort of scholars from LAC, Europe and other regions. A privileged example of that is the collective work “The Economies of Latin America: New Cliometric Data”, edited by Carreras and Yañez, which has been released in these days and in which the authors of this paper participate. The volume contains twelve very interesting chapters showing new evidence and their interpretation about key issues from LACs’ Economic History. This new contribution, together with the Montevideo-Oxford Latin American Economic History Database (MOXLAD) among others, makes new data available to better understand old problems but to try to come up with new and better answers.

Mafianomic history

On the Historical and Geographic Origins of the Sicilian Mafia

By Paolo Buonanno, Ruben Durante, Giovanni Prarolo (giovanni.prarolo@unibo.it) and Paolo Vanin

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:37009

Abstract

This research attempts to explain the large differences in the early diffusion of the mafia across different areas of Sicily. We advance the hypothesis that, after the demise of Sicilian feudalism, the lack of publicly provided property-right protection from widespread banditry favored the development of a florid market for private protection and the emergence of a cartel of protection providers: the mafia. This would especially be the case in those areas (prevalently concentrated in the Western part of the island) characterized by the production and commercialization of sulphur and citrus fruits, Sicily’s most valuable export goods whose international demand was soaring at the time. We test this hypothesis combining data on the early incidence of mafia across Sicilian municipalities and on the distribution of sulphur reserves, land suitability for the cultivation of citrus fruits, distance from the main commercial ports, and a variety of other geographical controls. Our empirical findings provide support for the proposed hypothesis documenting, in particular, a significant impact of sulphur extraction, terrain ruggedness, and distance from Palermo’s port on mafia’s early diffusion.

Review by Chris Colvin

What are the economic determinants of organised crime? This working paper, written by Paolo Buonanno (University of Bergamo), Ruben Durante (Sciences Po), Giovanni Prarolo and Paolo Vanin (both University of Bologna), attempts to answer this question by looking at the origins of protection rackets on the island of Sicily in the nineteenth century. The authors ask the question: why did the mafia emerge in the west nearly one hundred years before it did elsewhere on the island?

Diego Gambetta, a sociologist at Nuffield College Oxford, has long argued that eastern landlords were better equipped to maintain control as they were present on their lands, whilst western absentee-landlords left their tenants vulnerable to violence by bandits, therefore creating a market for mafiosi. Oriana Bandiera, an economist at the LSE, advances a model that implies that the mafia were more active where landholdings were fragmented. Buonanno et al. add another explanation: there was a high demand for protection in those areas in which citrus crops and sulphur mining were the most important economic activities. These commodities were vulnerable to predatory attacks by bandits when being transported to markets. Property rights on the island were weak, and so areas which specialised in these vulnerable commodities demanded protection services in order to stay in business.

Sketch of a 1901 trial of suspected mafiosi in Palermo (L'Ora, May 1901).

The authors use a sociological survey of Sicily’s mafia conducted in 1900 to code the level of mafia presence at the municipality level. This dataset, which the authors argue has never before been analysed quantitatively, covers more of the island than any other historical source, and does not suffer from the biases inherent in government-collected data. The authors use regression analysis to explain mafia activity with geomorphological (topography), census and road infrastructure data. They find evidence of their hypothesis: the mafia were most present in areas with the right conditions for citric fruits and sulphur extraction. They challenge Bandiera: land fragmentation is not an explanation, but is rather a result of geographic endowment; rugged landscapes lead to small landholdings, which in turn created a demand for mafia services.

Whilst the authors claim to explain the emergence of Sicily’s mafia, I think that they are actually doing something slightly different. Their data on mafia activity refer to 1900, some fifty years after the authors claim that protection racketeers emerged on the island. I think that what they are actually doing is explaining where the mafia was most successful at the end of these 50 years, not where it originated per se. I think that the authors could benefit from using some tools from spatial analysis to strengthen their results. For instance, they could look into spatial autocorrelation, and perhaps need to consider the implications of the fact that western municipalities appear to be much larger than eastern ones. Finally, I think they could be more explicit about how they are addressing the ecological fallacy if they want to prove causality; how do we know that an area’s orange growers and sulphur miners are the ones seeking the mafia protection?

A brief note for those wishing to distribute their working papers using the NEP-HIS email: The working paper reviewed here was added to NEP using the Munich Personal RePEc Archive. This great on-line service allows economic historians with no access to an established institutional working paper series to add their paper directly to the RePEc database.

Financial Reporting and Consolidation in the French Interwar Aluminium Industry

Beginnings of financial reporting and premises of consolidation of accounts in the French aluminium industry, 1921-1939

by Didier Bensadon (didier.bensadon@dauphine.fr)
Associate Professor in Financial Accounting, University Paris-Dauphine, DRM

URL http://EconPapers.repec.org/RePEc:hal:journl:halshs-00640503

Abstract
The expansion of groups of companies during the inter-war years is one of the most profound transformations in the structure of French capitalism. Studies in economic history have shown the importance of the subsidiary creation phenomenon in relation to Compagnie Générale d’Electricité, Energie industrielle or Schneider. By contrast, these studies are less interested in the specific arrangements for auditing subsidiaries and managing Company Groups. This article seeks to show how and why the directors of Alais, Froges et Camargue – The largest French company in the aluminum sector- established specific audit measures from the 1920s onwards. This research is essentially based on the company’s archives (annual reports, general organisation chart and memoranda from the general secretariat). Even if the results published in the annual reports should be treated with the utmost caution, in particular owing to the absence of accounting regulation in France in the inter-war years, they remain essential for assessing the important position of subsidiaries and main shareholdings in assets. The scope of the subsidiary creation phenomenon, which is behind the establishment of specific controls, is highlighted. This trend, far from being linear, is strongly influenced by the economic and political situation. The size of the Group’s growth gave rise to two types of requirements for the directors of Alais, Froges et Camargue, namely to audit the subsidiaries and to measure the group’s net cash flow. The response to the need for auditing the subsidiaries was provided by the introduction of financial reporting from 1921. Faced with the increasing number of subsidiaries and main shareholdings held by Alais, Froges et Camargue, this control mechanism was to be strengthened in 1931. Furthermore, the necessity of measuring the Group’s net cash flow led the directors in 1927 to draw up a financial statement whose conceptual foundations were based on those of the consolidation of accounts.

Review by Masayoshi Noguchi

This is an interesting piece of work distributed by NEP-HIS on 2011-11-03. Its analytical method is the traditional archival research and the object of the analysis is ‘the company’s archives (annual reports, general organisation chart and memoranda from the general secretariat)’ of Alais, Froges et Camargue. Citing Bouvier (2005) on Compagnie Générale d’Electricité, Vuillermont (2001) on Energie industrielle and d’Angio (2000) on Schneider, the author assesses the prior research as being less interested in specific arrangement for controlling subsidiaries and managing a group of business enterprises. To rectify the deficiency, Bensadon exemplifies the case of Alais, Froges et Camargue, born out of the merger in 1921 of the Produits Chimiques Alais et Camargue Company (PCAC) and Société électrométallurgique française (SEMF) engaging in energy and electrochemistry related activities along with activities in the production of aluminium. Recognizing the importance of the subsidiary creation phenomenon during the inter-war years for transforming the structure of French capitalism, the research proposes to explore how and why the directors of Alais, Froges et Camargue established a new management structure from the 1920s onwards.

Didier BENSADON

To answer the question of ‘why’, Didier Bensadon argues that ‘[t]he size of the Group’s growth gave rise to two types of requirements for the directors…namely to audit the subsidiaries and to measure the group’s net cash flow’, preceding the legal framework under which ‘corporate confidentiality’ to protect the business interest of private enterprises was still stressed, the same pattern more or less recognized in the experience of Great Britain during the period from the late nineteenth to the early twentieth centuries (see for example Dick Edward’s A History of Financial Accounting).

For the ‘how’ question, the Bensandon forwards the idea that ‘the necessity of measuring the Group’s net cash flow led the directors in 1927 to draw up a financial statement whose conceptual foundations were based on those of the consolidation of accounts’. Specifically, the author’s indication is intriguing that a prototype of consolidated statement of cash flows came out spontaneously as a management tool to control the group’s financial strategies, rather than the means for external reporting. In fact, it has been pointed out, from the viewpoint of group formation of businesses, that greater importance may be attached to the consolidated statement of cash flows rather than to the balance sheet or income statement (for example see Heath, 1978; Heath and Rosenfield, 1979). Bensadon’s research on the Alais, Froges et Camargue helps to support the case, though unclear to what extent the findings would be generalized in French industrial society during the interwar period. Probably, his future research agenda will include the issue of how the argument for preceding origination of consolidated cash flow statement could be applied to other companies.

Bensadon’s analysis on the attributes of subsidiaries and the relationships with the required frequency of reporting will provide a useful guide for future research. However, he arrives at important conclusions in some places but without showing sufficient evidence. Sorting out of associated companies classified in ‘shareholdings’ category which became the subject of ‘close monitoring’ in relation to his Table 4 is a typical case. The reference system is also coarse.

In contrast, there is persuasive power in the author’s analysis on the shareholdings of Alais, Froges et Camargue for its subsidiary network created in accordance with the business strategy of the parent company making heavy investments on several strategic sectors, i.e. energy supply and chemical production. The archives utilized also vastly extends covering the company’s articles of incorporation, the notice of meetings and the minutes of ordinary and extraordinary general meetings, balance sheets and profit and loss accounts, minutes of board meetings, copies of large contracts, the complete set of annual reports and various other reports (especially those affecting financial programmes) for the subsidiaries. Effectively utilizing these materials, this piece of work has attained its objective.

References

Edwards J R (1989) A History of Financial Accounting, London: Routledge.

Heath L C (1978) Financial Reporting and the Evaluation of Solvency, Accounting Research Monograph No.3, AICPA.

Heath L C and Rosenfield P (1979) Solvency: Forgotten Half of Financial Reporting, Journal of Accountancy, January, pp.48-54.