Category Archives: Economic History

They must have done something different: currency controls, industrial policy and productivity in postwar Japan

Effects of Industrial Policy on Productivity: The case of import quota removal during postwar Japan

Kozo KIYOTA (Keio University and RIETI) and Tetsuji OKAZAKI (University of Tokyo and RIETI)

URL: http://www.rieti.go.jp/jp/publications/dp/13e093.pdf

Abstract This paper attempts to provide a systematic analysis on the effects of industrial policy in postwar Japan. Among the various types of Japanese industrial policy, this paper focuses on the removal of de facto import quotas through the foreign exchange allocation system. Analyzing a panel of 100 Japanese manufacturing industries in the 1960s, we find that the effects of the quota removal on productivity were limited—the effects were significantly positive, but time was required before they appeared. On the other hand, the effects of tariffs on labor productivity were negative although insignificant. One possible reason for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward. As a result, the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature.

Reviewed by Sebastian Fleitas

“I haven’t got anything against open competition. If they can build a better car and sell it for less money, let ‘em do it. But what burns me up is that I can’t go into Japan. We can’t build, we can’t sell, we can’t service, we can’t do a damn thing over there … I think this country ought to have the guts to stand up to unfair competition” Henry Ford II (1969)

People used to say that a miracle happened in Japan during the sixties. By 1960, the Gross Domestic Product per capita (GDPpc) of the US was 2.8 times that of Japan. In the same year, the GDP per capita of Chile was the same of the Japanese while Argentinian was 40% higher. One decade later the situation had dramatically changed. By 1970, US GDPpc was only 1.5 times greater than the Japanese. In addition, Japan GDP pc was 85% higher than the Chilean and 33% higher compared to the Argentinian. While comparison of GDPpc actually raise more questions than answers, the comparison with these Latin-American countries can be appealing because Japan and these countries had very aggressive currency controls and industrial policies during this period. The difference of results makes us think that Japan must have done something different, something better. To find these differences it is needed to evaluate separately the effects of each of the policies applied during those times, understanding the incentives that they provided to the firms. As Lars Peter Hansen – recent Nobel Prize in Economics- suggested, one key important thing in Economics is that we can do something without doing everything.

This paper, circulated in NEP-HIS 2013-11-09, focuses on the removal of de facto import quotas through the foreign exchange allocation system during the sixties in Japan. This system was used as a powerful tool for industrial policy in the 1950s, and hence their removal was supposed to have a substantial impact on industries. After direct control of international trade by the government ceased in 1949 as a part of the “Dodge Plan,” the Japanese government regulated trade indirectly through the allocation of foreign exchange. This implies that, given the prices, there was a de facto import quota for some goods, since the upper limit of the import quantity was determined by the foreign exchange budget. Under continuing pressure from the IMF, the Japanese government swiftly removed the de facto import quotas.  However, this process was different from what the literature in economics refers to as trade liberalization. The removal of import quotas did not necessarily constitute trade liberalization because tariff protection was substituted for import quotas. Therefore, to correctly quantify the effects of the quota removal, it is needed to control for the effects of the tariff protection.

In order to estimate the effect of quota removal, this paper utilizes detailed industry-level data from the Census of Manufactures (100 Japanese manufacturing industries in the 1960s) and data on trade protection. This enables them to control for industry (not firm) heterogeneity while covering the majority of manufacturing industries. Based on governmental information, the authors precisely identify the timing of the quota removal for each commodity, using original documents of the Ministry of International Trade and Industry (MITI). The authors estimate the parameters of interest (effect of the quota removal and the tariffs) using least square estimation including industry and time fixed effects. In this sense, the identification strategy of the effect of the quota removal is based on the variation in the timing of the quota removal across industries.

The authors find that the effects of the quota removal on productivity were limited. None of the industry performances are systematically related to the removal of the import quotas. Additionally, an increase in tariffs generally has significantly negative effects on the number of firms, output per establishment, and industry value added. The concern about reverse causality (higher tariffs were imposed on small industries in terms of the number of establishments and value added) is addressed using leads of the tariff and quota variables. The authors also check the effects on the growth rate of the result variables, finding that the quota removal had significantly positive effects, but time was required before they appeared. One explanation they provide for this is that the Japanese government increased tariff rates before removing the import quotas and maintained high tariff rates afterward.

I think that the main takeaway from the paper is that it suggests that the effects of the Japanese industrial policy in the 1960s might be smaller than widely believed in the Japanese economic history literature. However, I think the paper will benefit if the authors discuss more clearly some aspects. First, it is important to clarify what are the intended effects of the policy and what are the mechanisms for the effect of the quota removal on productivity. A clear discussion about mechanisms and intended effects could help the reader to understand the evaluation of the policy and what are the expected results. For example, is it a good or a bad result to see increases in productivity along with a decrease in the number of establishments? It seems natural to think that the government could impose de facto quotas to limit external competition and provide a handicap for the firms during the learning process. However, it is not clear what the intention of the government was when they removed the quota. Sometimes, the quota removal could be the result of the government thinking that some firms of the industries already have an appropriate level of productivity and that the less productive firms need to exit to allocate the resource to more productive production. But sometimes, the quota removal compensated with an increase in tariffs could be just a way to update the protectionism against the lobby of the new world financial institutions.

Second, I think the paper would benefit from a more detailed discussion about the identification strategy used and its suitability. A relevant challenge to the identification is the potential endogeneity of the timing of the quota removal. Since the Outline of the Plan for Trade and Foreign Exchange Liberalization was announced before the actual liberalization took place, the firms should have had incentives and time to adjust their behavior. Additionally, as mentioned above the criteria of the government could have been based on the observed trends of the industries. Suppose that the government decided to increase more the tariffs in those sectors that already have the lowest increases in productivity and that they suppose would be the most affected from the quota removal. Since the authors do not control for the pre-existing trends of the productivity of the industries, this issue can undermine the identification strategy, which is based on the idea that the timing of the quota removal varied exogenously across industries. Controlling for time trends per industry could help to capture these potential trends, and help to control for at least this potential source of endogeneity.

just an American cartoon. Jan 1969

Finally, a third issue is related to the identification of the coefficients for tariffs and quota removal. Even assuming that the timing of the quota removal was exogenous, an issue raises from the fact that while the tariff rate is a continuous variable the quota removal is a binary variable. However, this quota removal binary variable tries to represent a treatment effect that is potentially different by industry. In this sense, the dummy variable is only a proxy for the actual severity of the removed protection. At the same time, as it was discussed before, the loss of protection via quota removal could be correlated with the tariff increases since the authorities would have tried to compensate the affected industries. If this is the case, the tariff effect is not precisely identified since it can be capturing the unobserved heterogeneity on the severity of removed protection. In this sense, maybe the use of a continuous variable that represents the magnitude of the removed protection via the quota removal could help to better identify the effects of those variables separately.

To sum up, I think this and other papers from the same authors are making important contributions to better understand the effects of the industrial policy during postwar Japan. In this paper the authors point out that the effects of quota removal might be smaller than widely believed in the Japanese economic history literature. Even more, they point out that the effects of different policies generally overlap and that any assessment of these effects needs to take care of this fact. I cannot stress enough how important industrial policy was for postwar Japan, but if you still have doubts, you should have asked Henry Ford II.

“The Otherness of the Past:” (Economic) History and Policy in the Age of Disenchantment

On history and policy: Time in the age of neoliberalism
Francesco Boldizzoni (francesco.boldizzoni@unito.it), University of Turin
URL: http://econpapers.repec.org/paper/zbwmpifgd/136.htm
Abstract: It is often said that history matters, but these words are often little more than a hollow statement. In the aftermath of the Great Recession, the view that the economy is a mechanical toy that can be fixed using a few simple tools has continued to be held by economists and policy makers and echoed by the media. The paper addresses the origins of this unfortunate belief, inherent to neoliberalism, and what can be done to bring time back into public discourse.

“How will the 2008/09 crisis influence historical scholarship? [...] The recent crisis reminds us that the policy response is as much a matter of ideology and politics as it is a matter of economics. [...] The widespread use of the Great Depression analogy in the recent crisis having reminded us that historical narratives are contested, we will see more explicit attention to the question of how such narratives are formed.” – Eichengreen (2012: 303-304, my own emphasis added)

This paper, based on a lecture Francesco Boldizzoni gave as a scholar in residence at the Max Planck Institute for the Study of Societies, and distributed via NEP-HPE on July the 15th, 2013, explores the difficult relationship between history and policy, focusing on the ways in which scholars and policymakers have used and abused history in recent times.
Francesco Boldizzoni

Francesco Boldizzoni

The unnamed field in the title of Boldizzoni’s paper is no other but economic history, which comes as no surprise for those following the reception of his book The Poverty of Clio. Resurrecting Economic History, a controversial and dismal depiction of the state of economic history published in 2011. In his book, Boldizzoni (research professor of economic history at the University of Turin, and fellow at Clare Hall in Cambridge University) argues that economic history is dead, sickened by the epistemological and methodological faults of cliometrics and the new economic institutionalism (NEI), as well as “a lack of historical sensibility, linguistic skills, and by an amazing level of scholarly illiteracy” amidst her practicants and followers (Boldizzoni 2011b). Boldizzoni claims that if scholars are to “resurrect” economic history, they must draw inspiration from the example set by historians of the Annales school, the historicized socioeconomic modeling of Karl Polanyi, Moses Finley, Alexander Chayanov and Witold Kula, and insights taken from the neighboring disciplines of economic sociology and economic anthropology.
The paper now reviewed problematizes the relationship between history and policy, and more specifically, the interaction of economic history with economic policy, with particular attention to the uses and abuses of history and memory. Standing in the crossing of economic history, the history of economic knowledge and thought, memory studies, and the history of economics and science, Boldizzoni’s paper demonstrates the merits of interdisciplinary and multidisciplinary work, as his approach offers a nuanced, cautious answer to the role of historically-informed policymakers during economic downturns and illuminates what stance should economic historians have in the public sphere. Boldizzoni argues that history “is both a search for meaning and an injection of antibodies:” honest economic historians should necessarily denounce poor scholarship that mobilizes and abuses the past for political purposes in the present, and inform their audiences that the economic system is a “historically determined [...] social construction, a man-made environment.” (Boldizzoni 2013: 10).

Converting for tax reasons

On the road to heaven: Self-selection, religion and socioeconomic status

By Mohamed Saleh (Toulouse School of Economics)

Abstract: The correlation between religion and socioeconomic status is observed throughout the world. In the Middle East, local non-Muslims are, on average, better off than the Muslim majority. I trace the origins of the phenomenon in Egypt to a historical process of self-selection across religions, which was induced by an economic incentive: the imposition of the poll tax on non-Muslims upon the Islamic Conquest of the then-Coptic Christian Egypt in 640. The tax, which remained until 1856, led to the conversion of poor Copts to Islam to avoid paying the tax, and to the shrinking of Copts to a better off minority. Using a sample of men of rural origin from the 1848- 68 census manuscripts, I find that districts with historically stricter poll tax enforcement (measured by Arab immigration to Egypt in 640-900), and/or lower attachment to Coptic Christianity before 640 (measured by the legendary route of the Holy Family), have fewer, yet better off, Copts in 1848-68. Combining historical narratives with a dataset on occupations and religion in 640-1517 from the Arabic Papyrology Database, and a dataset on Coptic churches and monasteries in 1200 and 1500 from medieval sources, I demonstrate that the cross-district findings reflect the persistence of the Copts’ initial occupational shift, towards white-collar jobs, and spatial shift, towards the Nile Valley. Both shifts occurred in 640-900, where most conversions to Islam took place, and where the poll tax burden peaked. Occupational barriers to entry and the religiously segregated schools both led occupations to persist in 900-1848.

URL: http://EconPapers.repec.org/RePEc:tse:wpaper:27573

Review by Chris Colvin

This paper, which was distributed by NEP-HIS on 2013-10-18, forms an important contribution to the growing literature on the economics of religion. In it, Mohamed Saleh attempts to explain why Egypt’s Coptic Christians are historically better off than its Muslim majority, and why their elite status has persisted in the long run. Using a variety of different archival sources, some of which required extensive and expensive data collection and digitisation, Saleh advances the hypothesis that poor Copts converted to Islam to escape taxes levied on non-Muslims in the period 640-900.

In contrast with Maristella Botticini and Zvi Eckstein’s explanation of the distinctive occupational selections of Jews, which requires conversion for religious reasons (failure to read the Torah), Saleh’s explanation for Coptic socioeconomic superiority is that they were responding to an economic incentive (exemption from the Poll Tax). Those who were sufficiently well off to bear the tax imposed on them by their new Islamic overlords remained Christian; those who were better off if they joined the growing ranks of the new Arabic religion decided instead to register at their local Islamic authorities. On average, both groups were better off by the move. The institutional design of the Islamic faith incentivised voluntary conversion out of pursuit of worldly rather than heavenly riches. Taxes led to the virtual eradication of Coptic Christianity, or at least its switch from being the faith of Egypt’s majority to the faith of a very small minority, by rewarding new members financially.

Poor Copts voluntarily abandoned Christianity for tax reasons

Salah argues that poor Copts voluntarily abandoned Christianity for tax reasons

Saleh discounts religious reasons for conversion using a carefully constructed historical narrative backed by time series evidence. Coptic Christianity and the Islam practiced in the Nile Valley were quite similar in the period when most conversion took place in terms of their mystical ritualization and worship; Islam was neither more nor less costly to practice than the incumbent religion. Copts were not required to read to be good Christians and so unlike Jews in this period had no religious incentive to invest in human capital; the Botticini-Eckstein hypothesis does not work here. Districts where the poll tax was more strictly enforced witnessed wider conversion among poor Copts to Islam, further solidifying the status of the Coptic elite. Their socioeconomic position was subsequently maintained for over a millennium through segregated schooling and the fact that reverse-conversion was punishable by death, among other things.

Saleh is poised to expand his research to other parts of what is now the Muslim world. In his paper, he sets out how other yet-to-be digitised tax registers can used to find out why Christianity survived to varying degrees in the Levant and North Africa, or, conversely, can help explain the historical process of Islamization. I look forward to reading the results of such work.

ECONOMIC HISTORY (NOT) PREDICTING CITY GROWTH

Gibrat’s Law and the British Industrial Revolution

Alexander Klein (University of Kent) and Tim Leunig (LSE)

URL: http://ideas.repec.org/p/cge/warwcg/145.html

Abstract This paper examines Gibrat’s law in England and Wales between 1801 and 1911 using a unique data set covering the entire settlement size distribution. We find that Gibrat’s law broadly holds even in the face of population doubling every fifty years, an industrial and transport revolution, and the absence of zoning laws to constrain growth. The result is strongest for the later period, and in counties most affected by the industrial revolution. The exception were villages in areas bypassed by the industrial revolution. We argue that agglomeration externalities balanced urban disamenities such as commuting costs and poor living conditions to ensure steady growth of many places, rather than exceptional growth of few.

Reviewed by Sebastian Fleitas

On August 24th a couple of philosophers of science asked themselves: ¨What is Economics good for?¨ and they provided a provocative answer in the Opinionator blog of the New York Times. The main argument of the philosophers was that:

¨..the fact that the discipline of Economics hasn’t helped us improve our predictive abilities suggests it is still far from being a science, and may never be.¨

Although tempted, I will not enter the debate here but will discuss something related. Suppose you are asked to predict the population of English cities 100 years from now. Do you think London, Birmingham, Manchester and Liverpool will still be the most populated ones? Will the medium size cities of today grow as much as the smaller cities? I suppose that you will be inclined to think that the size that the city already has will be correlated with its future growth and then it is useful for prediction. Why? I imagine that you could think that the causes that have generated the growth of the cities for the last 50 or 100 years will be in one way or the other pushing their growth in the next 100 years. Alexander Klein and Tim Leunig show that this intuition is not correct, at least for England and Wales during the nineteenth and the first decade of the twentieth century.

Prediction: The image in the NYT Blog

Prediction: The image in the NYT Blog

Klein and Leunig’s work is part of a growing scholarship who has given greater attention to Gilbrat’s Law: an empirical regularity that postulates that the growth rate of places is identical for places of all initial sizes. This paper, circulated in NEP-HIS 2013-08-16, tests Gibrat’s law for the period of the most important event in the recent economic history: the British Industrial Revolution.

The Industrial Revolution seems to be such an important ¨shock¨ as to change completely the process behind the growth of the cities in the past. As the authors point out, the British Industrial Revolution implies four major interrelated changes: population grew at an unprecedented rate, both total and per capita income rose, England ceased to be a largely agrarian nation in which people’s locations were tied to the land, and the nineteenth century witnessed a transport revolution covering almost every form of transport and the energy used for transportation. Even more, this period is even more relevant given that it encompasses stage without planning nor zoning rules, so that urban growth was the result of many interacting forces.

The authors find that Gibrat’s law broadly holds, although small villages in areas bypassed by the industrial revolution tended to violate it. Moreover, although the results are similar during the entire nineteenth and the beginning of the twentieth century, it is possible to find some qualitative differences. In the nineteenth century they find a more rapid growth of large towns and cities than small ones. In contrast, at the beginning of the twentieth century in the areas that had been affected by the industrial revolution there are no differences in the growth rates of places of different sizes, because counties were at that time mature. Based on the models of Eeckhout (2004) and Córdoba (2008), the paper also offers an explanation for why Gibrat’s law largely holds even during the rapidly changing environment of the British Industrial Revolution because of the balance between positive agglomeration externalities and negative externalities of high commuting costs and large disamenities of urban life.

Ashton, T. S.. The industrial revolution, 1760-1830. London: Oxford University Press, 1948.

Ashton, T. S.. The industrial revolution, 1760-1830. London: Oxford University Press, 1948.

Two methodological factors in this paper are worth noting. First, the authors have set a unique, authoritative and comprehensive data set of all cities, towns and villages in England and Wales in the periods 1801-11, 1841-51, and 1901-11. They take advantage of the fact that Great Britain undertook the first census in 1801, and has had decennial censuses ever since. A very important factor for the test is that the descriptive statistics show that the growth in population was led primarily by the growth in the size of existing places, rather than the emergence of new places. The fact that England and Wales were populated in 1801 implied that there was no frontier to open up and that, even when some new settlements were developed (for instance along railway lines), population growth took place overwhelmingly in places that already existed. Therefore, the key urban issue in the period then is to understand what caused the growth of some cities instead of what originated new cities.

The second methodological issue is that they use a non-parametric regression analysis to test Gilbrat’s Law. In a first approach, they approximate Gilbrat’s Law using the unconditional relationship between the standardized growth rate (defined as the difference between the growth rate of the place and the sample mean divided by the sample standard deviation) and the log of population size of the place at the start of the period. The non-parametric approach (generally used in this literature) is a key factor here. Since it allows for more flexibility in the functional form of the relationship between growth and initial size, the authors are capable of showing patters of the unconditional relationship between these two variables and can test whether Gilbrat’s Law holds for the whole initial size distribution. In a second approach, the authors test another characterization of Gibrat´s Law that makes the relationship between the variance of the growth rate and the initial size. This second approach is very useful since even when the initial size could not be useful to predict the growth of the cities it could be a predictor of the variance of the growth rate.

birningahm

Birmingham 1732 (taken from Wikipedia)

At this point, I would like to say that I think this research line would advance significantly if the authors considered the inclusion of other factors to explore the relation between growth and size conditional on these factors. As they establish, the Industrial Revolution completely changed many factors that can be influencing the growth rates of the cities. Just as an example, imagine what could happen with two cities that are identical in all aspects except that one is close to a coal mine. It is likely that the city close to a coal mine will grow more, just because the transport costs of this new energy source are lower. Obviously these factors included in the agglomeration externalities that balance with the commuting cost or disamenities of urban life (negative externalities). But including those factors in a regression between growth and size would provide a more reliably consistent estimation of the (partial) effects of size and the other factors on city growth. In this sense, a multivariate regression of the growth rates over size and other factors would have a more clear the interpretation (and measure) of the economies (and diseconomies) of agglomeration that are suggested and discussed in this paper and that drove the growth of the cities during the period.

To sum up, I think the paper made a very important contribution robustly showing that there is no unconditional relationship between growth and initial size (besides some small villages bypassed for the Industrial Revolution). The authors provide useful explanations of why this could have happen along of the lines of the models in Eeckhourt (2004) and Cordoba (2008). In short, the authors show that the British Industrial revolution was such an important ¨shock¨ that changed completely the process of growth of the cities, changing the balances between economies and diseconomies of agglomeration. With this in hand and with the incredible database they have constructed, they have also opened the possibility of formally testing the conditional (partial) effects of size and other factors on city growth. This would help to understand the dynamics behind city growth during this key period of time. Furthermore, while the (lack of) unconditional relation between city size and growth rate leaves us ill-equipped for predicting future city growth, the identification of the conditional partial effect of size on growth could improve our “predictive abilities”.

“A fluid, ever-evolving, and organic process of improvement, misstep and improvement”: The Long Road to Monetary Union in the USA

Politics on the Road to the U. S. Monetary Union

Peter L. Rousseau (peter.l.rousseau@vanderbilt.edu), Vanderbilt University

URL: http://econpapers.repec.org/paper/vanwpaper/vuecon-sub-13-00006.htm

Abstract: Is political unity a necessary condition for a successful monetary union? The early United States seems a leading example of this principle. But the view is misleadingly simple. I review the historical record and uncover signs that the United States did not achieve a stable monetary union, at least if measured by a uniform currency and adequate safeguards against systemic risk, until well after the Civil War and probably not until the founding of the Federal Reserve. Political change and shifting policy positions end up as key factors in shaping the monetary union that did ultimately emerge.

Review by Manuel Bautista Gonzalez

Peter L. Rousseau

Peter L. Rousseau

In this piece published in NEP-HIS 2013-04-13, Peter Rousseau argues for the need to complicate the widely-held, simplistic view that political union is a necessary condition for a successful monetary union. By studying the intersection of politics, money and finance in the United States from the American Revolution to the Great Depression, Rousseau posits that there is no automatic mechanism to ensure the concurrence of political and monetary union.

Although Rousseau begins his paper with a rather narrow definition of monetary union as a “system with a uniform currency and adequate safeguards against systemic risk” (Rousseau 2013: 1), he expands it throughout the paper to take into account other characteristics and consequences of processes of monetary unification.

The most obvious element of monetary union is the adoption of a single unit of account and uniform currency throughout a territory. To function, monetary union requires credible authorities with effective powers to control the supply of money while properly backing liabilities to minimize uncertainty. To reduce transactions costs, monetary union also demands institutional arrangements between the government and the banking system as a private supplier of means of payment. With monetary union, short-term and long-term capital markets become part of a payments system, whereby due to network effects, the reduction of borrowing costs in regular conditions can meet rapidly-spreading liquidity squeezes in times of financial distress. To recapitulate, monetary union has a dual, difficult nature, for it requires the virtuous alignment of public and private interests; henceforth, politics will mold for better or for worse the actual operation of any monetary union.

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guernica

Internal Migration and Trade Unions Strength: an Alternative Look on Pre-Civil War Spain

Structural change, collective action, and social unrest in 1930s Spain

by

Jordi DOMÈNECH FELIU (jdomenec@clio.uc3m.es)  Universidad Carlos III

Thomas Jeffrey MILEY (thomas.j.miley@gmail.com) University of Cambridge

ABSTRACT

The Spanish 2nd Republic (1931-1936) witnessed one of the fastest and deepest processes of popular mobilization in interwar Europe, generating a decisive reactionary wave that brought the country to the Civil War (1936-1939). We show in the paper that both contemporary comment and part of the historiography makes generalizations about the behaviour of the working classes in the period that stress idealistic, re-distributive and even religious motives to join movements of protest. In some other cases, state repression, poverty, and deteriorating living standards have been singled out as the main determinants of participation. This paper uses collective action theory to argue that key institutional changes and structural changes in labour markets were crucial to understand a significant part of the explosive popular mobilization of the period. We argue first that, before the second Republic, temporary migrants had been the main structural limitation against the stabilization of unions and collective bargaining in agricultural labour markets and in several service and industrial sectors. We then show how several industries underwent important structural changes since the late 1910s which stabilized part of the labour force and allowed for union growth and collective bargaining. In agricultural labour markets or in markets in which unskilled temporary workers could not be excluded, unions benefitted from republican legislation restricting temporary migrations and, as a consequence, rural unions saw large gains membership and participation. Historical narratives that focus on state repression or on changes in living standards to explain collective action and social conflict in Spain before the Civil War are incomplete without a consideration of the role of structural changes in labour markets from 1914 to 1931.

URL: http://e-archivo.uc3m.es/bitstream/10016/17160/1/wh1305.pdf

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2013-06-30. The authors, Jordi Domenech from Carlos III and Thomas Miley from Cambridge, aim to explain why and how workers’ protests rose in Spain during the Second Republic (1931-1936). This question is very interesting from a historiographical point of view, as this period of popular mobilization is considered to be one of the causes of the subsequent Civil War (1936-1939). Standard explanations include state repression, poor economic conditions, economic inequality and possibly the flourishing of socialist ideologies in Spain. The authors detach from these standard explanations and follow an institutional approach. They claim that a significant part of this social process can be attributed to changes in the labour markets. In particular, that increasing mobilization was due to a decrease of temporal migrations in labour markets.

Republique-allegorie-2

Spanish Republic Allegory displaying Republican paraphernalia and symbols of modernity

The conceptual argument underpinning their effort is roughly as follows: collective action theory contends that the greater the diversity of workers’ preferences (for example over their type of contract or their work conditions), the lesser the workers will be able to organize effectively. These preferences also include decisions to enter labour contracts. For instance, temporary workers accept to be paid pro-rata (i.e. by unit of output) while permanent workers accept (or prefer) to be paid by hour of in-the-job labour.

Domenech and Miley remind us that at in the first third of the 20th century, Spain characterized by substantial internal migrations that enabled the rise of temporary workers within manufacturing and agriculture. However, in the early 1930s Spain experienced changes in both the markets for its products and the demand for labour. These changes led to the introduction of legal limitations over temporary migrations. The result of regulatory innovations was the strengthening of unions by increasing their membership and also as union leaders increasingly faced more homogeneous requests by they represented workers and all this, therefore, led to greater social mobilization.

Wall painting during the Spanish Civil War

To prove their point, Domenech and Miley make a remarkable use of qualitative evidence which, let me emphasize, is not always easy to find. They collected oral testimonies, reports and newspaper articles to show the increasing tension between permanent and temporary workers. The work on original qualitative sources is vast and necessary to fill the gap left by quantitative estimates. In fact, to my surprise, this paper does not propose any formal model or empirical test on quantitative data. The reason is well explained on page 29, where the authors point out that census data would not cover this period: the relevant laws that imposed restrictions were passed just after the 1930 census and abrogated before the next census of 1940. The fact that census data are not of any use for this work is surely a severe limitation to any attempt to study the causality between migrations, union power and social unrest. However, looking at the extensive sources used for the qualitative analysis, the impression is that a further step to at least quantify the changing role of unions could be taken. Possibly,  a measure of union power (for example by number of strikes, number of members, etc) could be proposed. At the same time, conceptual framework is not all together clear, particularly when dealing with specific relationships leading to the increase of union power. For instance, poor economic conditions and greater income inequality have been proposed as causing of popular unrest and social mobilization. It is not clear why greater union power rather than the changes in labour regulation could have also been a contributing force.

Comisiones Obreras (one of the main Spanish unions – circa 1970s)

To conclude, this paper proposes an innovative explanation to social unrest in Spain in the 1930s based on labour markets and provides comprehensive qualitative evidence. This is a very important topic in light of the subsequent events: popular mobilization has been followed by four years of civil war and the beginning of Franco’s dictatorship. In spite of the severe restrictions on the data, some further quantification (even just descriptive) would improve a paper which casts light on such an fundamental period of Spanish history.

Are Cartels Pragmatic Responses to Market Failures?

The International Mercury Cartel, 1928 – 1949

By Miguel López-Morell (mlmorell@um.es), Universidad de Murcia and Luciano Segreto (segreto@unifi.it), Università degli Studi di Firenze.

URL: http://d.repec.org/n?u=RePEc:pra:mprapa:46772&r=his

Abstract

Mercury has been one of the most persistent cases in contemporary history of international market regulations and this in spite of its having been affected by important technological changes and the regular discovery of new deposits. This paper offers an approach to the least known period, although perhaps the one in which the greatest rises in process and production occurred as a consequence of market manipulation. The period coincides with a series of agreements between the Spanish and the Italian producers and the outcome was a worldwide cartel known as “Mercurio Europeo” which came into being in 1928. The aims of this work will, therefore, be first to describe the features of the various stages of development of the international mercury market during the first half of the twentieth century, with emphasis on the characteristics and conditioning factors in each period. Secondly, the objective is to analyse the various market agreements that came about, the effectiveness of the clauses therein, the construction of distribution networks and the influence that the increase in production had on other mines and on certain technological developments.

Review by Beatriz Rodríguez-Satizábal

There are two sides to every argument and the different forms of competitive collaboration is no exception. On the one hand, the claim against cartels and other forms of collusion is the loss of efficiency and the dampening of incentives for technological progress. These are exacerbated by the potential to influence the political process (e.g. lobbying, regulatory capture, etc.) and the potential to augment economic inequality through biased distribution of profits. On the other hand, business historians have documented the importance of cartels for industrialisation in Germany as well as to achieve network externalities in banking (particularly around payment systems). Legally sanctioned competitive collaboration can provide an industry with a guaranteed profitability and a secure competitive path by being more stable, dividing up markets, and securing price and production.

The case of competitive collaboration around the extraction of mercury documented by López-Morell and Segreto, distributed by NEP-HIS on 2013-05-11, looks at the cartel known as Mercurio Europeo, to advance arguments which favour collaboration in industries were collusion allows producers to achieve economies of scale as well as foster technological change and reduce market prices in the long-term. The central question is whether a cartel was or not a pragmatic response to the imperfect allocation of the resources between the Spanish and Italian mercury producers from 1928 to 1949.

Based on the assumption that cartel agreements have been around for a while, López-Morell and Segreto present a thorough revision of the strategies during its early years. The agreement between Minas de Almaden y Arrayanes (Spain) and Monte Amiata (Italy) was signed in 1928 as a way to control the supply of mercury in a very stable market. In other words, the cartel was organized in order to deal with an unchanging demand. The result was a cartel with a complex internal organization that, in a very short time kept, managed to place the price of mercury close to monopoly levels but, at the same time, failed in achieve greater efficiency in production and/or increase sales volume.

López-Morell and Segreto explore in detail the reasons for the formation of the Spanish-Italian mercury cartel while arguing that there was a desire to stabilise production levels in order to increase profits without losing market share nor, as it was mainly in the Italian case, to invest in new technology. The cartel strategy proved to be effective because the demand for the product was inelastic and the collusion between the two producers increased the profit without harming the individual production targets.

Although, López-Morell and Segreto omit a discussion of the relative efficiency of collusion and competitive collaboration, from their empirical evidence it would seem that a carel was the best organisational option for the case of mercury. Mercurio Europeo was successful at least in part because during the 1928-1949 period mercury was a key input in the production of other metals and at the time there were only a handful of mines around the world. A cartel, therefore, became the answer to best manage scarcity.

Benito Mussolini (1883-1945)

However, the argument by López-Morell and Segreto is in need of a counter factual. Perhaps one that explores the option of a monopoly with private ownership (such as the Rothschild family) rather than a cartel agreement. In other words, could the absence of a cartel change ownership structures, market share, and international price levels? Further, there is a need to understand the role of both governments in the agreement. The 1928-1949 period coincides with fascist governments in both Spain and Italy, which characterised by radical nationalistic ideas, peculiar forms of corporatism, the role of the state (e.g. protectionism, interventionism), economic self-sufficiency and autarky, among others. Hence, the particular form of cooperation between Spanish and Italian mines could well be the result of institutional pressures (including, the war effort) rather than the behaviour of consumers.

Francisco Franco y Bahamonde (1892-1975)

In summary, the paper by López-Morell and Segreto is an interesting contribution to the study of collaboration because it focuses on the strategies taken by two national companies to organise a cartel. It builds upon surviving internal documents (e.g. analyses of Board meeting minutes) of each company to bring about a better understanding of changes in the market. Moreover, it shows that the strategic decision to whether co-operate or cheat within the cartel has a profound effect on the market outcome.