Category Archives: Globalization

Immigration and the Economy: An Interdisciplinary Subject

Immigrant Diversity and Economic Development in Cities: A Critical Review

By Thomas Kemeny (London School of Economics)

Abstract: This paper reviews a growing literature investigating how ‘immigrant’ diversity relates to urban economic performance. As distinct from the labor-supply focus of much of the economics of immigration, this paper reviews work that examines how growing heterogeneity in the composition of the workforce may beneficially or harmfully affect the production of goods, services and ideas, especially in regional economies. Taking stock of the existing literature, the paper argues that the low-hanging fruit in this field has now been picked, and lays out a set of open issues that need to be taken up in future research in order to fulfil the promise of this work.

URL: http://econpapers.repec.org/paper/cepsercdp/0149.htm

Revised by: Anthony C. Evans (final year graduate Business Studies & Marketing, Bangor University – Wales)

Summary

Kemeny’s paper was circulated by NEP-HIS on 2013-12-06 and it seeks to understand the relationship between immigrant diversity and economic performance, primarily by considering the effects of “interactions among a diverse populace” (p.1).

The review is motivated by the theory that “immigrant-diverse individuals could simultaneously improve economic outcomes by bringing together different perspectives and heuristics, and reduce performance by making co-operation more costly.” (p.2) This additional cost of co-operation is associated with Tajfel’s (1974) Social Identity theory, and is supported by the quoted findings of Richard et al. (2002), Bandiera et al. (2005) and O’Reilly et al. (1989); that teams who share few commonalities find it hard to integrate and suffer from reduced co-operation and higher staff turnover. Empirical studies by Hoffman and Maier (1961) and Joshi and Roh (2009) are cited, and display a modest positive economic impact of workplace diversity.

TomKemeny-238x239

Kemeny quotes Ottaviano and Peri’s (2006) findings that a 0.1 increase in the Fractionalization index increased native wages by 13% and rents more so within the US. Kemeny (2012) and Spaber (2010) find similar results, as does Bellini et al.’s (2013) European work. Alesina et al.’s (2013) global study finds birthplace diversity is positively related to GDP per capita and total factor productivity, with the strongest association in rich countries for high-skill workers.

However, Kemeny notes that many studies, including Suedekum et al.’s (2009) study of Germany and Nathan’s (2011) study of the UK, have demonstrated a negative economic effect of immigrant diversity, especially upon those in lower skilled jobs.

Citing empirical studies by Stephan and Levin (2001), Bosetti et al. (2012) and Hunt and Gauthier-Loiselle (2010), immigrant diversity is found to be positively linked to the number of research papers published and to the number of patent applications for highly skilled industries.

Kemeny finds that there is inconsistent evidence as to the link between immigration and entrepreneurship in Mariano et al. (2012), Audretsch et al. (2010) and Cheng and Li’s (2011) extant work.

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Through his review Kemeny identifies a number of stylised facts across the relevant literature. Some of these follow.

The paper refers to a growing body of work supporting Bakens et al.’s (2013) findings that the individual’s characteristics emerge as the primary determinants of variation in wages and rents. Kemeny proposes individual heterogeneity may overstate diversity’s positive impact upon productivity, as immigrants may self-select areas based upon higher wages, personal interests and their skill level. The validity of the shift share instruments used to address reverse causality rely upon initial waves of immigrants having chosen locations based upon extra-economic concerns, which likely may not be the case.

Kemeny’s (2012) previous work finds that wages in areas with high levels of social capital, often promoted by regional institutions, are typically 7% higher than those living in equally diverse areas with lower levels of social capital, a consideration not accounted for by other authors.

Overall the paper finds little consensus as to the impact of team diversity within the organizational literature.

Several issues with the measurements currently used are highlighted. Productivity gains for lower-skilled labour may not necessarily result in wage increases, and process innovation within this segment may not be patented. Kemeny cites Alesina et al.’s (2013) findings that skin colour or language spoken at home are less likely to result in production complementarities than social values are. Their research finds ethnic fractionalization and birthplace diversity are largely unrelated, whilst birthplace also fails to capture the importance of second-generation immigrants. Under Roback’s (1982) Spatial Equilibrium, higher wages may either reflect greater productivity brought about by diversity, or compensate workers for the disutility of living in a diverse area. Because of this paradox one cannot determine from wages alone how productivity and diversity may be linked.

Kemeny condemns an inherent assumption of urban studies; that “bio-diversity reflects intellectual diversity” (p.35) and contends “the idea that national culture shapes heuristics and perspectives ought to be subject to empirical validation.” (p.37)

Kemeny argues, that based upon the literature reviewed, diversity is generally positively related to wages, and either rents, productivity or cultural amenities, with least square analysis’ demonstrating the direction of causality is from diversity to economic gain. It is reasoned that this indicates the productivity augmenting effects of immigrant diversity outweigh the cost of transacting across cultures.

Kemeny proposes that further work into the role of institutions, the relative importance of city specific manifestations of diversity and the differing impact of diversity between skill levels and industries would advance this modern field.

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Critique

Value and Implications of the Research

Kemeny provides a useful viewpoint by combining the findings of both economic geography and organizational theory. In identifying limitations in the methodologies of both fields, future work can seek to address these issues and generate a better understanding of the relationship between immigrant diversity and economic development. This understanding may help inform frequently inaccurate (Economist, 2013) popular debates on immigration, which argue that immigration results in fewer jobs for natives (Kemeny, 2013) and a drain on state welfare (Economist, 2013). Furthermore greater understanding of how immigration affects the economy should result in better-informed immigration policy. The finding that institutions can augment economic gains may be beneficial to both immigrants and natives, and represent a pragmatic way to enhance the quality of life for both parties.

Limitations and Future Research

By omitting the level at which quoted results were found to be statistically significant, the paper makes it difficult to interpret the frequently contradicting results of the various research cited.

One issue Kemeny fails to address is whether mild racial or cultural preferences can produce extreme segregation in urban areas, as is illustrated by Schelling’s (1978) famous checkerboard model. Becker (1971) observed that the economic penalty to employers who display taste-based discrimination increased as the size of the group being discriminated against increased, therefore larger populations of immigrants should experience less discrimination and thus higher wages than smaller populations. Further discussion of the link between immigration and discrimination, and the economic impact of the latter may provide valuable insight to public policy debate and formulation.

Whilst Kemeny addresses the fact that many studies fail to acknowledge that individual competencies play a significant role, an issue the research does not expand upon is difference between immigrants of different cultural backgrounds. Immigrants from nations with similar language and cultural values will experience lower transactional costs (Rokeach, 1979), which correspond with Hofstede’s (2001) organizational research findings. Goodhart (2013) finds significant differences in economic prosperity between immigrants of different national origin in Britain during the 20th Century.

Whilst a controversial topic it must be noted that the recent consensus in psychology research is that there is a strong heritability of “intelligence” (Bouchard, 2004). As measures of “intelligence” have been shown to be linked to wage differentials (Benjamin et al. 2012), then it should be considered that the economic prosperity brought by immigrants may be related to their genetic makeup and enhancing genetic diversity (Ashraf and Galor, 2013; Ager and Bruckner, 2013). There is a growing body of work in this field of genoeconomics, broadly covered in Benjamin et al. (2012) and Navarro’s (2009) reviews of the existing literature, which could further enhance Kemeny’s spatial economics paper.

An additional source of heterogeneity is the individuals’ decision to emigrate. Ruiz and Vargas-Silva’s (2013) work finds that forced migration produces different economic effects to that of voluntary migration. An improved understanding of the reason for immigration may help explain the differences between skilled and unskilled labour, as one could hypothesise that those in skilled segments may be moving due to prearranged employment. The effect of capital stock brought by immigrants is also not considered, which would increase the steady state under the Solow (1956) model.

With the growing economic importance of Asia and Latin America (Mpoyi, 2012) future research considering immigration from the West to these nations would be of value to this field.

References

Ager, P.; Bruckner, M.; (2013) Immigrants’ Genes: Genetic Diversity and Economic Development in the US. Munich Personal RePEc Archive. Paper No. 51906

Ashraf, Q. and Galor, O. (2013) The ‘Out of Africa’ Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review. Vol. 103(1) pp.1-46

Becker, G. (1971) The Economics of Discrimination. 2nd Edition. University Of Chicago Press. Chicago.

Benjamin, D.; Cesarini, D.; Chabris, C.; Glaeser, E.; Laibson, D.; Guðnason, V.; Harris, T. et al. (2012) The promises and pitfalls of genoeconomics. Annual Review of Economics. Vol. 4 pp.627-662.

Bouchard, T. (2004) Genetic Influence on Human Psychological Traits: A Survey. Current Directions in Psychological Science. Vol. 13(4) pp.148-151

Goodhart, D. (2013) The British Dream: Successes and Failures of Post-war Immigration. Atlantic Books. London.

Hofstede, G. (2001) Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd Edition. Sage Publications. Thousand Oaks, CA.

Kemeny, T. (2013) Immigrant Diversity and Economic Development in Cities: A Critical Review. Spatial Economics Research Centre. London School of Economics. Discussion Paper 149

Mpoyi, R. (2012) The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business & Economics. Vol. 13(3) pp.36-47

Navarro, A. (2009) Genoeconomics: Promises and Caveats for a New Field. Annals of the New York Academy of Sciences. Vol. 1167 pp. 57–65

Rokeach, M. (1979) Understanding Human Values. The Free Press. New York. NY.

Schelling, T. (1978) Micromotives and Macrobehavior. Norton. New York, NY.

Solow, R. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics. Vol. 70(1) pp. 65-94

The Economist (Dec 21st 2013) British immigration. You’re Welcome.

The Economist (Nov 9th 2013) Little England or Great Britain.

Zhang, J. (2009) Tipping and residential segregation: a unified Schelling model. IZA Discussion Papers. No. 4413

On Macroeconomics After the Financial Crisis

Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis?

By Oliver Landmann (Albert-Ludwigs-University Freiburg)

Abstract: The Financial Crisis of 2008, and the Great Recession in its wake, have shaken up macroeconomics. The paradigm of the “New” Neoclassical Synthesis, which seemed to provide a robust framework of analysis for short‐run macro not long ago, fails to capture key elements of the recent crisis. This paper reviews the current reappraisal of the paradigm in the light of the history of macroeconomic thought. Twice in the past 80 years, a major macroeconomic crisis led to the breakthrough of a new paradigm that was to capture the imagination of an entire generation of macroeconomists. This time is different. Whereas the pre‐crisis consensus in the profession is broken, a sweeping transition to a single new paradigm is not in sight. Instead, macroeconomics is in the process of loosening the methodological straightjacket of the “New” Neoclassical Synthesis, thereby opening a door for a return to its original purpose: the study of information and coordination in a market economy.

Persistent Link: http://EconPapers.repec.org/RePEc:fre:wpaper:27?

Reviewed by Catherine Dorman (final-year BSc Business Economics student, Bangor University, Wales)

Summary

This paper was distributed by NEP-HIS on 2014-02-08, and it addresses the impact that the recent financial crisis has had upon macroeconomic thought. Specifically in terms of how the New Neoclassical Synthesis has held up to scrutiny following the most recent economic debacle. Landmann offers an overview of the history and progression of macroeconomic thought from the “Keynesian revolution” (p.4) to New Neoclassical Synthesis economics, right up to modern day contemporary economics, and its response to current macroeconomic issues.

The purpose of Landmann’s paper is to explain how economics has evolved since the Keynesian school of thought emerged in the aftermath of the 1930s depression, and to show how the macroeconomic community has been left splintered as a result of the recent financial crisis, without a consensus in sight. It asks the questions: Why has this occurred? How did the New Neoclassical Synthesis fail to foresee or explain the worst economic downturn since the 1930s? Finally, it asks the all-important question: Is it necessarily a bad situation to be in? Or has having smashed the previous concept to pieces resulted in an environment in which macroeconomics can really explore and develop itself without the shackles of archaic and contextually inapplicable economic theory?

Prof. Dr. Oliver Landmann -Bild Schneider

Landmann introduces his paper by assessing the state of macroeconomic affairs, operating within a New Neoclassical Synthesis environment, in the run up to the financial crisis of 2008. The ‘Great Moderation’, described a period of economic constancy spanning from the 1980s to 2008, which was characterized by a continually stable business cycle (Davies and Kahn, 2008). Famously, Ben Bernanke, who coined the phrase ‘Great Moderation’, is quoted as having attributed this period of economic success to structural change, improved macroeconomic policies, and good luck (Bernanke, 2004). Ultimately, Landmann describes a period in which the great moderation had lulled the economic community into a false sense of stability, much like that described by Hymen Minsky (Minsky, 1992).

The next section of the paper is dedicated to creating a contextual understanding, and this is achieved through showing the evolution of economics thought from Keynes to the New Neoclassical Synthesis.

Consider Fig 1 for a brief overview of the changes of economic thought from the 1930s to 2008:

Fig. 1
Figure1

As is evident across each of these theories, their explanatory power tends to be relatively finite. In the case of Adam Smith and John Keynes’ theories, they were deconstructed and meshed in order to explain the economy’s operations at a specific point in time, and this came to be known as the Neoclassical Synthesis. This was largely credited to the work of Paul Samuelson during the 1950s (Samuelson, 1955). It took the underlying idea of Keynesian theory of underemployment, with the notion that monetary and fiscal policy can be employed to reduce this. It could therefore use classical equilibrium analysis to explain resource allocation and relative prices (p4). The economic policy was successfully adopted in developed countries as an effective treatment for the economy after the Second World War.

It was from the stability and growth that was created through the adoption of this macroeconomic approach, which helped to develop confidence in the prescriptive capabilities of economic theory. However, as history has taught us, ceteris paribus does not hold in reality. The theory was largely nullified in the 60’s and 70’s, because it had been unable to predict stagflation, and the Philips Curve was completely undermined (Motyovszki, 2013).
Consider Fig 2 for a concise history of the economic theory covered in this paper.

Fig. 2
Figure 2
(Source: Short-Run Macro After the Crisis: The End of the “New” Neoclassical Synthesis? By Oliver Landmann.)

The result of this was a new hybrid economic theory: New Classical economics. From this theory came the Real Business Cycle model, which argued that cycles result from the reactions of optimizing agents to real disturbances, for example, changes in technology.
In the 1970s, the New Neoclassical Synthesis emerged, with a combination of New Keynesianism and New Classical theories, and the basis of economic practice during the Great Moderation. It was felt amongst policy makers that the short term interest rate was enough of an instrument in economic management, and that the business cycle was believed to have been overcome (Aubrey, 2013).

Landmann’s paper addresses how the economic crash of 2008 threw macroeconomics into turmoil. The New Neoclassical Synthesis had not fully appreciated the effects of the financial market within its model, and the result was that it was inadequate as a means of remedying problems in the economy (Pike, 2012). Landmann makes a good point of acknowledging that although financial economics took great consideration of the behavioural antics of the banking sector, within the actual practiced model of the New Neoclassical Synthesis, these were fundamentally disconnected.

In light of this, the once unquestioned macroeconomic doctrine was suddenly under scrutiny. One of the greatest criticisms of the New Neoclassical Synthesis is its reliance upon “elegant” (p12) mathematical equations, which are often predictively insufficient due to the sheer number of assumptions that have to be made in order to create a working model. It doesn’t fully estimate factors such as irrationality and uncertainty (BBC NEWS, 2014) and the result of this is that the results can be wildly inaccurate (Caballero, 2010). This can also create coordination problems from assumptive behavioural models, such as the Robinson Crusoe model, which become overly stylized to the detriment of economic viability (Colander, 2009).

Consequentially, macroeconomics has begun to pay more focus to realistic behaviour, given that information is rarely perfect in actuality (Caballero, 2010; Sen, 1977).

Landmann concludes that out of the financial crisis, there has been a flood of new macroeconomic theories develop, and that the New Neoclassical Synthesis still has pedagogic merit. He does, however, primarily blame the era of Great Moderation for a period of complacency amongst economic academics. The simple acceptance of one concept of economics based purely on its merit during a stable business cycle, without inquisitive forethought into how it would respond when faced with an exogenous or endogenous shock, is Landmann’s greatest criticism.

Critique

This paper is incredibly relevant, and its themes and messages are certainly ones that economists need to be considering in the aftermath of such a fresh and colossal economic recession. There is perhaps an over simplification of some of the timeline of economics: broadly defining all economists during the Great Moderation as being one school of thought is unfair and inaccurate, but for the purpose of the paper, it is perhaps forgivable.

Landmann makes little mention of the pattern by which economic thought often evolves. Gul, Chaudhry and Faridi describe economic thought as developing from “quick fixes” (Gul et al. 2014: 11), and this would help to explain why, during the Great Moderation, very little new economic thought was developed: the need wasn’t there. Through their histories of economic development, Gul et al. (2014) and Landmann,suggest that macroeconomics is reactionary as opposed to precautionary, despite its attempts to be prophetic.

This echoes the “Lucas Critique”, the understanding that economic equations developed and implemented during one policy system, are unlikely to remain relevant or explanatorily applicable during another (Lucas, 1976).

Finally, it does little to explore the external factors that led to the period of Great Moderation. Globalisation had really taken a hold during this time, with containerization in full flow (at 90% of all non-bulk cargo worldwide being moved by containers on transport ships (C. E. Ebeling, 2009)), and advances in computation and communication technology (Bernanke, 2004) which helped to stabilize inventory stocks – something that is acknowledged as a contributory factor in cyclical fluctuations (McConnel and Quiros, 2000).

Ultimately, the paper makes the same conclusions that most macroeconomic papers do. There is no definitive explanation for everything that occurs within the economy, and certainly no blanket approach that will procure the most lucrative outcomes on every occasion. This paper goes a step further to explain why it can be damaging to rigidly subscribe to one theory of macroeconomics: it discourages continual change and forethought, which in turn can stunt the evolution of explanatory macroeconomic thought.

References

Aubrey, T., 2013. Profiting from Monetary Policy: Investing Through the Business Cycle. 1 ed. New York: Palgrave MacMillan.

BBC NEWS, 2014. Did Hyman Minsky find the secret behind financial crashes?. Available at: http://www.bbc.co.uk/news/magazine-26680993 [Accessed 07 April 2014].

Bernanke, B. S., 2004. Remarks by Governor Ben S. Bernanke At the Meeting of the Eastern Economics Association Available at: http://www.federalreserve.gov/Boarddocs/Speeches/2004/20040220/ [Accessed 07 April 2014]

Ebeling, C. E. 2009. Evolution of a Box. Invention and Technology 23(4): 8-9.

Caballero, R. J., 2010. Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome. Journal of Economic Perspectives 24(4): 85-102.

Colander, D. C. et al., 2009. The Financial Crisis and the Systemic Failure of Academic. Kiel: Kiel Institute for the World Economy.

Davies, S. J., and Kahn, J.A., 2008. Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels. Cambridge, MA: National Bureau of Economic Research. Available at: http://EconPapers.repec.org/RePEc:nbr:nberwo:14048 [Accessed 07 April 2014]

Gul, E., Chaudhry, I. S. and Faridi, M. Z., 2014. The Classical-Keynesian Paradigm: Policy Debate in Contemporary Era. Munich: Munich Personal RePEc Archive. Available at: http://econpapers.repec.org/paper/pramprapa/53920.htm [Accessed 07 April 2014]

Lucas, R. E., 1976. Econometric Policy Evaluation: A Critique. Carnegie‐Rochester, Carnegie‐Rochester Conference.

McCombie, J. S. L., and Pike, M., 2012. The End of the Consensus in Macroeconomic Theory? A Methodological Inquiry. Unpublished. Cambridge Centre for Economic and Public Policy WP02-12, Department of Land Economy: University of Cambridge. Available at: http://www.landecon.cam.ac.uk/research/real-estate-and-urban-analysis/ccepp/copy_of_ccepp-publications/wp02-12.pdf [Accessed 07 April 2014]

McConnell, M. M., and Perez Quiros, G., 2000. Output Fluctuations in the United States: What Has Changed Since the Early 1980s?. Federal Reserve Bank of San Francisco. Available at: http://www.frbsf.org/economic-research/events/2000/march/structural-change-monetary-policy/output.pdf [Accessed 07 April 2014]

Minsky, H. P., 1992. The Financial Instability Hypothesis. New York: The Jerome Levy Economics Institute of Bard College.

Motyovszki, G., 2013. The Evolution of the Phillips Curve Concepts and Their Implications for Economic Policy. Budapest: Central European University.

Samuelson, P., 1955. Economics. 3rd ed. New York: McGraw-Hill.

Sen, A. K., 1977. Rational Fools: A Critique of the Behavioral Foundations of Economic Theory. Philosophy and Public Affairs. 6(4): 317-344.

When did Globalization Actually Start?

West versus East: Early Globalization and the Great Divergence’

By Rafael Dobado-González (Complutense), Alfredo Garcia-Hiernaux (Complutense), and David E. Guerrero-Burbano (CUNEF)

Abstract: This paper extends our previous work on grain market integration across Europe and the Americas in the eighteenth and nineteenth centuries (Dobado, García-Hiernaux and Guerrero, 2012). By using the same econometric methodology, we now present: 1) a search for statistical evidence in the East of an “Early Globalization” comparable to the one ongoing in the West by mid eighteenth century; 2) a study on the integration of grain markets in China and Japan and its functioning in comparison to Western countries; 3) a discussion of the relevance of our findings for the debate on the Great Divergence. Our main conclusions are: 1) substantial differences in the degree of integration and the functioning of grain markets are observed between East and West; 2) a certain degree of integration may be reached through different combinations of factors (agents, policies, etc.) and with dissimilar effects on long-run economic growth; 3) the absence of an “Early Globalization” in the East reveals the existence of some economic and institutional limitations in this part of the world and contributed to its “Great Divergence” with the West from at least the eighteenth century.

URL: http://econpapers.repec.org/paper/pramprapa/48773.htm

Circulated by NEP-HIS on: 2013-08-10

Guest Entry by Elizabeth Meagher (Bangor University)

NB: In January 2014, Chris Colvin and I started an experiment involving the use of Web 2.0 tools and third year undergraduate students. The aim was to incentivise active participation in academic exchange by reviewing recent additions to the broad literatures of business and economic history whilst following the same format as the NEP-HIS blog and limited to 1,000 words or less. The best entries are then published in the blog with minimal editing. This is the first of such entries.

We appreciate comments and inspiration from John Turner (Queen’s Belfast), Mar Rubio (Publica de Navarra) and Marcel Salles (ITESO). (BBL – Ed)

Summary

This paper examines the causes of early Globalization and the rise of the Industrial Revolution, analysing the divide between the East and West known as the ‘Great Divergence’. The literature suggests that globalization began steadily in the first half of the eighteenth century, taking off rapidly after the French Revolution and Napoleonic Wars and their aftermath. Once globalization ‘regained momentum’ it was supported by the rise in the Industrial Revolution across Europe and the US (Dobado-Gonzalez et al, 2013).

Source: The Economist "What was the Great Divergence"

Source: The Economist “What was the Great Divergence”

De Vries (2010) separates Globalization into two categories, ‘soft’ and ‘hard’. Flynn and Giraldez (2004) claim that ‘soft globalization’ began when the ‘old world’ merged with the US back in 1571. O’Rourke and Williamson (1999) defined ‘hard globalization’ as the integration of markets across a geographical location. An earlier study by Dobado and Guerrero (2009) claims that literature has often ignored earlier influences of globalisation on economic growth and focuses more on the results after the Industrial Revolution from 1700s onwards. It cannot be disregarded that integration between countries across Europe was evident between 1500 and 1800 before the first Industrial Revolution began. It is from these early stages of market and trade integration across Europe that industry and globalisation developed. The paper also suggests that in the first half of the eighteenth century, the rise in the West was due to the fact that China and the East had little to compete with, leaving the gates wide open for the West to expand its operations.

A panoramic view of London, c.1670 by Wenceslaus Hollar. Photograph: Heritage Image Partnership Ltd/Alamy Source:http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

A panoramic view of London, c.1670 by Wenceslaus Hollar. Photograph: Heritage Image Partnership Ltd/Alamy Source:http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

Additionally Dobado and colleagues focus on the impact of the dramatic expansion of foreign trade on economic growth within the West which has continued through to today. The paper also compares the differences and separation between the West and East during the first major economic growth in Europe between 1500 and 1800, known as the ‘First Great Divergence’. The authors suggest that the openness of the West resulted in dynamic trading across the Atlantic between the US with Britain and the Netherlands in particular (Dobado et al, 2013). The East however was not so far behind with the Opium Wars and the Silk Road increasing trade across Eastern countries moving towards the West which had never been done before. Nevertheless, before this point, the paper suggests that Eastern governments made one of the greatest economic mistakes in closing their economies, giving way to the ‘Great Divergence’ and ‘exceptionalism’ within the West (Dobado et al, 2013; Dobado and Guerrero, 2009). The restrictive trade policy practiced by the East is claimed to have prevented that part of the world from taking advantage of both direct and indirect benefits resulting from the expansion of trade during the Early Modern Era (Dobado et al, 2013). The paper recognises the absence of international grain market integration within the debate on the ‘Great Divergence’ and therefore seeks to examine the different markets within both the East and West.

St Paul's Cathedral viewed from Southwark, across the River Thames, in 1859. Photograph: William England/Getty Images Source: http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

St Paul’s Cathedral viewed from Southwark, across the River Thames, in 1859. Photograph: William England/Getty Images Source: http://www.theguardian.com/cities/gallery/2014/apr/21/london-historic-skylines-in-pictures

The paper found that despite geographical proximity and the easiness of transportation between China and Japan in the East, no statistical evidence of grain market integration is found between the two countries. This finding contrasts with the increasing expansion of trade in the West both before 1792 and after the 1840s (Dobado et al, 2013). As a result the East and West were dissimilar in terms of market integration both before and after the Industrial Revolution. Therefore this supports the concept of the ‘Great Divergence’ between the East and West and early Globalization presented direct and indirect benefits for the West which left the East to fall behind. In closing their economies in the Early Modern Era, governments within the East had committed what might be considered one of the biggest economic policy mistakes ever made, losing out on the greater benefits of early Globalization (Dobado et al, 2013).

Comments

One aspect of the research which could be criticised is that the samples used for comparing the different grain markets in both the East and West are unequal, with twelve studied within the West, and eleven in the East (Dobado et al, 2013). This could suggest the results may be biased towards the wheat market within the West. In addition to this, the study works with “[…] long yearly data series covering most of the eighteenth and the nineteenth centuries for most markets” (Dobado et al, 2013, p.6). This could also alter the results as using the same data is critical for a fair analysis. Another valuable point to consider is that the only countries which gained from ‘Early Globalization’ in Latin America were Peru and Chile who traded wheat.

It may also be beneficial to take into account cultural differences between the East and West at this time. The demand for wheat across Europe and the US would have been greater than the demand for rice from the East, causing further integration within the East.

Based on the points discussed above, it is apparent that there is a strong divide between the economic activity within both the East and West before the Industrial Revolution gained momentum. Additionally, it is evident that Globalization was present within Europe between 1500 and 1800 with the integration of markets within the West.

References

De Vries, J. (2010) ‘The Limits of Globalization in the Early Modern World’, The Economic History Review, Vol.63, pp 671-707.

Dobado-Gonzalez, R., Garcia-Hiernaux, A., and Guerrero-Burbano, D. (2013) ‘West verus East: Early Globalization and the Great Divergence’, accessed 6 March 2014.

Dobado, R. and Guerrero, D. (2009) ‘The Integration of Western Hemisphere Grain Markets in the Eighteenth Century: Early Progress and Decline of Globalization’, http://EconPapers.repec.org/RePEc:ucm:wpaper:09-09 Accessed 9 March 2014.

Flynn, D.O. and Giraldez, A. (2004) ‘Path Dependence, Time Lags and the Birth of Globalisation: A Critique of O’Rourke and Williamson”, European Review of Economic History, Vol.8 No.1, pp 81-108

O’Rourke, K.H. and Williamson, J.G. (1999) Globalization and History, Cambridge, MA: The MIT Press.

Does educational stratification put toffs at the top?

Social mobility at the top: Why are elites self-reproducing?

by Elise S. Brezis (Azrieli Center for Economic Policy, Israel) & Joël Hellier (EQUIPPE, Univ. de Lille, Bar-Ilan University, Israel and LEMNA, Univ. de Nantes, France)

URL: http://EconPapers.repec.org/RePEc:inq:inqwps:ecineq2013-312

This paper proposes an explanation for the decrease in social mobility that has occurred in the last two decades in number of advanced economies, as well as for the divergence in mobility dynamics across countries. Within an intergenerational framework, we show that a two-tier higher education system with standard and elite universities generates social stratification, high social immobility and self-reproduction of the elite. Moreover, we show that the higher the relative funding for elite universities, the higher the elite self-reproduction, and the lower social mobility. We also analyse the impacts of changes in the weight of the elite and of the middle class upon social mobility. Our findings provide theoretical bases for the inverted-U profile of social mobility experienced in several countries since World War II and to the ‘Great Gatsby Curve’ relating social mobility to inequality.

Reviewed by Mark J Crowley

This paper was circulated by NEP-HIS on 2014-01-10, and was of particular interest to me, primarily since I spent my formative years attending primary and secondary school in an area of the South Wales valleys prioritised by the European Union for what was then termed as ‘Objective One funding’ in recognition of its lack of social inclusion and opportunity – a position precipitated by the closure of the coalmines in the 1980s, which deprived thousands of their livelihoods. It stored up numerous social problems for the future, primarily owing to the absence of a cogent plan to replace and maintain the community’s employment following the completion of the area’s pit closures in the late 1980s, but was exacerbated, following the removal of these employment opportunities, by the deeply-embedded mindset of the coalfield communities vis-à-vis academic and/or cultural education, symptomatic of that seen in the movie ‘Billy Elliot’ (2000). Although disliked, inequality was largely accepted almost as a fait-accompli. For the Conservative Party of the 1980s, as Peter Dorey has argued, it was regarded as inherently necessary and positive in contemporary Thatcherite political thought (Dorey, 2010).Economic inequality became deeply clear from the 1908s in Britain

Summary

Citing the fact that society has been ‘constructed’ since medieval times, enforcing people’s ‘place’, whether it be as a member of the Feudal society or as a designated member of a particular ‘social class’, scholars have traditionally argued that inequalities have primarily been enforced according the socially-assigned opportunities during childhood. In the UK, the frequent use of the vernacular such as ‘toff’ and ‘poshboy’ by those of the opposition Labour Party (despite many of them, too, having received an elite education) in response to the perception of the British government’s inability to connect with the grassroots, picks up on the main concerns of this paper, that being that the current social and educational construct in many advanced European economies helps to perpetuate the development of an elite social class who, despite forming the smallest percentage of the nation’s overall population, receive the greatest power and highest chances of success.

This paper claims that the stratification of universities according to ‘elite’ and ‘secondary’ categories propagates an inequality that helps nurture the protection and development of an ‘elite’ through better resources afforded to those universities according to their finances and staffing. The transition of graduates to a higher social class, facilitated by their better education, and affording them with the skills maybe not available to their parents to secure a middle-class, white collar job enforces, at least superficially, the so-called ‘New right’ rhetoric of an ‘upwardly mobile’ society, but one which is fundamentally and inherently contradictory.

The methods used by the authors to convey their point are very persuasive.  The use of the intergenerational earnings elasticity model, with the use of gender and parental income as the variable helps to demonstrate the extent of the ‘elite construction’ which is the main theme of this paper, and is used as a method to measure intergenerational social mobility. Their findings suggest a constant increase in intergenerational social mobility in the countries where the so-called ‘dual’ (i.e. elite and secondary) education exists, namely France, the UK and the USA, but are contrasted with Nordic countries that do not have this system to show that such a trend does not exist here.  However, they are also keen to emphasise that a range of factors could have contributed to these changes, with sociological factors after the Second World War being cited as a major example of changes to the demographic of society in the post-1945 period, such as the number of blue collar workers entering the elite class in the USA during the 1960s being double that of countries such as Britain, France and Germany, although after the 1980s, the extent of their social mobility was severely decreasing. (Brezis & Hellier, 2013:6)

Yet the authors believe that the growth of tertiary education is possibly one of the largest reasons to explain this shift, with this form of education accounting for 60% of students in the present period, compared with 10% in the post-war period, representing an increase of 525% in enrolment to the ‘non-elitist colleges’ in the USA between 1959-2008, and an increase of 250% in elite colleges for the same period.  (Brezis & Hellier, 2013: 7)  Coupled with this of course is the fact that elite universities (Ivy League), particularly in the USA, have become more selective in their recruitment, recruiting only those with the highest grades and thus creating a small student body, and in turn spending treble the money per head  compared to secondary universities.  On the other hand,  recruitment to secondary universities has increased, largely, according to what the authors believe to be a more lenient admissions policy, but one that has led to a larger student body, and less money per head being spent on students.( Brezis & Hellier, 2013, 8)

However, the authors are also keen to correlate educational attainment with family background.  Citing the fact that at its highest, children of upper class families were 40 times more likely to enter an elite educational institution compared to those from lower social classes clearly demonstrates this class divide, and that, to a large extent, this divide is possibly ever-increasing.  (Brezis & Hellier, 2013, 8)

Using the idea that a two-tier education system prevailing in many advanced economies could be considered as a major source pertaining to rising inequality and reduced social mobility, this paper asserts that stratification of universities has also affected the level of spending per head on students, and thus influenced their educational opportunities and attainment. Declaring that the so-called ‘elite universities’ tend to recruit students from the higher social classes, it implicitly suggests that those from the lower social orders are disadvantaged at the recruitment stage, despite possessing requisite, identical and in some cases better evidence of academic attainment. Although the latter issue remains controversial, the authors have certainly identified a phenomenon that the universities concerned attempt to rebuff, and policymakers try to ‘level out’, but one that remains virtually impossible to eradicate, especially in view of the fact that many of the elite universities are in receipt of significant funds from rich benefactors, many of whom are alumni.

Those with the most power in society have appeared to be in the minority - a position influenced by growing affluence in the higher classes

Critique

The authors have engaged in a very deep analysis of the social class and its impact on entry into elite universities, and have also clearly shown the divergence between social class and educational attainment at university level. Drawing on a large range of quantitative methods and materials, this research clearly attests to the ‘Gatsby Curve’ pertaining to social mobility and inequality, demonstrating that this is relevant across several nations in developed economies.

To further amplify the impact of this research, perhaps the authors could consider exploring the difficulties faced by universities today in terms of marketing themselves to students? In the UK, and also in the US, this has become especially pertinent over recent years, and has, superficially at least, made the distinction of ‘elite universities’ more blurred, particularly in view of the spike in tuition fees implemented in the UK by the Conservative-Liberal coalition. Tied with these was the option for universities to level fees within a prescribed range, leaving many universities, even those considered among the ‘secondary’ level, to charge higher fees to avoid enforcing, or indeed accepting a position both statistically and in the public mind, as a lower-level institution. In fact, this position does raise deeper questions concerning the definition of ‘elite’ institutions. Is it based on its historical tradition, research output (as is often used as the arbiter of much government funding), student satisfaction, quality of teaching, or student attainment after graduation?

Additionally, in an age where having staff whose capabilities extend beyond the traditional realms of research and teaching has become ever-more necessary in view of the growing commercialisation of universities in the twenty-first century, with its leaders becoming more financially-savvy, and turning more towards international outreach to attract large external funding, perhaps the authors could explore whether they think the growing commercialisation of universities has deepened the class divide, thus forcing many away from pursuing a university education on the grounds of cost, or whether the growing competition among educational institutions, much of which now has a strong business-orientated approach, especially with the creation, in some universities, of the position of ‘Chief Executive’, will work to level out the ubiquitous class divide.

References

Dorey, Peter (2010) British Conservatism : The Philosophy and Politics of Inequality , London : I.B. Tauris.

David Cameron and Boris Johnson in the livery of the Oxford University Bullingdon Club (crica 1986)

David Cameron and Boris Johnson in the livery of the Oxford University Bullingdon Club (crica 1986)

Past and Present: Brazil’s Unfulfilled Expectations

Industrial Growth and Structural Change: Brazil in a Long-Run Perspective

by Dante Aldrighi (aldrighi@usp.br) and Renato P. Colistete (rcolistete@usp.br)

Abstract: This paper presents a long-run analysis of industrial growth and structural change in Brazil, from the coffee export economy in the nineteenth century to the present day. We focus on Brazil’s high economic growth in most of the twentieth century and the disruption caused by the collapse of debt-led growth in the early 1980s. We then examine the recent trends in economic growth and structural change, with a sectoral analysis of output, employment and productivity growth. Employing new data and estimates, we identify a sharp break with the earlier period of high output and productivity growth in Brazil’s manufacturing industry before the 1980s. From the 1990s, the relatively successful process of learning and technological advance by manufacturing firms that took place since the early industrialization has lost strength and Brazil’s productivity growth has declined and stagnated.

URL: http://ideas.repec.org/p/spa/wpaper/2013wpecon10.html

Review by Sebastian Fleitas

They are playing soccer here.
There is much samba, much crying and rock’n’roll.
Some days it rains, on others, it shines.
But the thing I want to tell you is that things are really bad*

Chico Buarque, Brazilian musician, 1976

In four months time Brazil will be in everyone’s mind. Love it or hate it, coming June the FIFA World Cup 2014 will be in full swing and held in South America for the second time. According to Goldman Sachs, host nations can typically expect a 54pc increase in medals at the Olympic games. Assuming the relationship holds for football, this further increases the odd for the home team, which more often than not is marked as favourite by pundits across the globe, to win later this year in its home turf. Indeed, we are already hearing about Brazil because of the anti-World Cup protests. Protest which are more likely driven by unfulfilled economic expectations of Brazilians than by their rejection of the tournament.

Brazil occupies the biggest landmass in South America and has often been thought of as a big economic promise. For instance, large GDP growth rates in the late 1960s and early 1970s led people to talk about the “Brazilian miracle”. More recently, in 2009, Brazil was again a sound bite for big economic promise and the financial press coined the term “BRICs” to denominate it plus Russia, India and China as the “bright stars” in an otherwise gloomy world that was facing recession following the financial crisis. Such expectations, both in the past and today, have been fuelled by the idea of Brazil achieving a higher rate of development than others on the back of a big and highly productive manufacturing sector and long standing (and dynamic) agriculture. But Brazil has consistently failed to deliver on expectations. Even more, there is already talk of the “BIITS” to referrer to Brazil, India, Indonesia, Turkey and South Africa, while focusing on their current-account deficits and structural weaknesses (as exposed by the cooling of demand from China and the potential of the Federal Reserve hiking interest rates in the USA). But just as the Brazilian manufacturing industry has fuelled expectations, it has also been a large part of the reason behind these apparent failures.

Patrick Chappatte, Protests in Brazil, New York Times (http://goo.gl/AFevcF)

Patrick Chappatte, Protests in Brazil, New York Times (http://goo.gl/AFevcF)

Dante Aldrighi and Renato Colistete in this paper, circulated by NEP-HIS on 2013-08-31, offer a very detailed long-run description of industrial growth and structural change in Brazil: from the coffee export economy in the nineteenth century to the present day. They examine the recent trends in economic growth and structural change, with a sectoral analysis of output, employment and productivity growth.  Their estimates show that the expansion and diversification of Brazil’s manufacturing industry from the nineteenth century until the late 1970s was a remarkable process. Despite distortions and inefficiencies, the experience of accelerated industrialization provided the country with a diversified and relatively complex industrial structure. In the 1980s and 1990s, the debt crisis and the ensuing macroeconomic imbalances undermined the manufacturing industry’s performance, weakening the incentives to invest and to improve technological capabilities.

A point of particular importance in the paper by Aldrighi and Colistete is the study of productivity. The authors show that in the last two decades the productivity growth of Brazil’s manufacturing industry has been much lower that that achieved during the earlier period of accelerated industrialization. Moreover, using a shift-share analysis they suggest that before the 1980s productivity gains within industries were a stronger driving force for aggregate productivity growth than shifts of labor to higher productivity activities. However, since the 1980s the role of structural change has become relatively more important to explain productivity growth in Brazil’s manufacture. For the economy as a whole, structural change also revealed to be more important than sectoral productivity growth in the 1990s and 2000s. They conclude that there is evidence that the relatively successful process of learning and technological advance by manufacturing firms that took place since the early industrialization has lost strength as a major source of economic growth in Brazil during the recent decades. Most of productivity growth has now been coming from agricultural activities. They also show that, during most of the period of accelerated industrialization, industrial workers saw their wages, measured in local currency, lagging consistently behind labor productivity, which led to a declining share of wages in the total income of the manufacturing sector. Later, the unit labor costs adjusted by the exchange rate increased, mainly as a result of currency appreciation and lower productivity growth. However, the authors show that labor compensation growth was modest in real terms and had a minor role in increasing unit labor costs.

FIFA World Cup 2014

FIFA World Cup 2014

The paper concludes that the main sources of concern about the performance of the manufacturing sector in Brazil rests in its very low productivity growth and the tendency to currency appreciation, which together affect unit labor costs and competitiveness. They understand that the competitiveness of manufacture might be significantly higher if the costs of inputs and services other than labor (such as capital, taxes, infrastructure, bureaucracy and innovation) were lower or declining. However, they are not optimistic about the prospect of this happening. Some of the factors that they understand have conspired to reduce efficiency and productivity growth are the complex and burdensome tax system that tends to push firms to the informal, low-productivity sector; high and unstable real interest rates; a relatively low-skilled workforce; and expenditures on R&D below the levels attained in the most dynamic developing countries, which limits the technological spillovers that might benefit the whole economy. They also state that innovation activities have been negatively affected by uncertainty and the inability to make long-horizon investment plans, increased by low and volatile public investments and economic growth rates. All these factors explain why Brazil’s investment rates remain much lower than those prevailing in most developing countries. As a consequence, the authors think that it is unlikely that Brazil’s manufacturing sector’s low productivity growth is being offset by appropriate incentives or reductions in the costs of key components that affect competitiveness in the long run.

In my opinion, the authors’ description and conclusions clearly point out the need to go beyond description and embrace new lines of research that address the specific causes of the low productivity in Brazil. These new venues of research will lead to a better understanding of the Brazilian situation and will provide a better understanding of the policy instruments that could enhance Brazil’s development. This agenda would be very beneficial for other countries in Latin and South America too, which face similar problems. Focusing on the behavior of the productivity and from a microeconomic perspective.

I would like to very briefly mention here two recent lines of research that may shed light on the causes of low productivity. The first line is related to the productivity via labor supply. Productivity seems to be affected by the poor performance of Latin American students at school. In a recent paper, Hanushek and Woessmann (2012) find that in growth regressions, the positive growth effect of educational achievement fully accounts for the poor growth performance of Latin American countries. In addition, they find through a development accounting analysis that, once educational achievement is included, human capital can account for between half and two thirds of the income differences between Latin America and the rest of the world. More efforts than those already in place (see among others Carvalho Filho and Colistete, 2010; Colistete, 2013) are necessary to better understand the links between the development of education in the region and its impact on productivity in Brazil and the region as a whole.

Picture of the city of Sao Paulo, Brazil http://goo.gl/uTni0a

Picture of the city of Sao Paulo, Brazil http://goo.gl/uTni0a

The second line I would like to mention is related with the productivity of firms in Brazil (and Latin America), especially managerial abilities and their impact on productivity. Managerial abilities were for long time considered in the residual of the productivity or production function equations and no consistent efforts to measure managerial abilities had been carried out. Recently, Nicholas Bloom and John Van Reenen with different coauthors have been working on surveys, based on interviews to firms, to determine management practices scores**. They have conducted interviews to more than 10,000 firms in 20 countries in the period 2004-2010. They have used this data to publish several papers on the issue that are worth looking at. Their general conclusions are that management practices scores in manufacturing vary significantly across countries and are strongly linked to the level of development. In particular, the average management practices score appears in the place 18th in the ranking only above China and India and below countries like Mexico, Chile, Argentina and Greece. The methodology the authors use for these surveys is not easy to replicate for other periods. However, this type of study provides a good insight to causes of low productivity that are often forgotten in Latin American countries and in our historical explanations and that, when measured, show our relative backwardness.

To sum up, Colistete and Aldrighi do a great job describing the evolution of the manufacturing industry in Brazil in the long run. They show how, even with very important problems, Brazil’s period of import substitution generated increases in productivity and structural change. They also document the problems that Brazil has had since the early 1980s in terms of growth and productivity. Fortunately, in all aspects besides football (ie soccer in the US), samba and rock and roll, the Brazil we have now is not the Brazil that Chico Buarque described in 1976. Among other examples, income inequality in a country that has one of the worst income distributions in the world has been improving consistently during the last few years. However, the challenges of productivity remain. Focusing in understanding the causal relationships between microeconomic factors (e.g. education achievement or managerial abilities) and productivity could help to a better understand the historical evolution of economic development and to design better policies oriented to overcome these problems.

Footnotes

*Aqui na terra tão jogando futebol, Tem muito samba, muito choro e rock’n’roll,  Uns dias chove, noutros dias bate o sol, Mas o que eu quero é lhe dizer que a coisa aqui tá preta.

** Check Nicholas Bloom website at Stanford University (http://www.stanford.edu/~nbloom/)

References

Hanushek, A. and Woessmann, L (2012): Schooling, educational achievement, and the Latin American growth puzzle, Journal of Development Economics 99 (2012) 497–512

Carvalho Filho, I and Colistete, R (2010): Education Performance: Was It All Determined 100 Years Ago? Evidence From Sao Paulo, Brazil, MPRA working paper

Colistete (2013): A Política do Atraso Educacional: Visões e Conflitos sobre a Instrução Pública em São Paulo entre 1851 e 1892, Departamento de Economia, FEA-USP, working paper

The challenges of updating the contours of the world economy (1AD – today)

The First Update of the Maddison Project: Re-estimating Growth Before 1820

by Jutta Bolt (University of Groningen) and Jan Luiten van Zanden (Utrecht University)

Abstract: The Maddison Project, initiated in March 2010 by a group of close colleagues of Angus Maddison, aims to develop an effective way of cooperation between scholars to continue Maddison’s work on measuring economic performance in the world economy. This paper is a first product of the project. Its goal is to inventory recent research on historical national accounts, to briefly discuss some of the problems related to these historical statistics and to extend and where necessary revise the estimates published by Maddison in his recent overviews (2001; 2003; 2007) (also made available on his website at http://www.ggdc.net/MADDISON/oriindex.htm).

URL http://www.ggdc.net/maddison/publications/wp.htm

Review by Emanuele Felice

Angus Maddison (1926-2010) left an impressive heritage in the form of his GDP estimates. These consider almost all of the world, from Roman times until our days, and are regularly cited by both specialists and non-specialists for long-run comparisons of economic performance. The Maddison project was launched in March 2010 with the aim of expanding and improving Maddison’s work. One of the first products is the paper by Jutta Bolt and Jan Luiten van Zanden, which aims to provide an inventory while also critically review the available research on historical national accounts. It also aims “to extend and where necessary revise” Maddison’s estimates. This paper was circulated by NEP-HIS on 2014-01-26.

The paper starts by presenting, in a concise but clear way, the reasons that motivated the Maddison’s project and its main goals. It also tells that some issues are left to be the subject of future work, particularly thorny issues left out include the use of 2005 purchasing power parities rather than Maddison’s (1990) ones; and the consistency of benchmarks and time series estimates over countries and ages.

Jutta Bolt

Firstly (and fairly enough, from a ontological perspective) Bolt  and van Zanden deal with the possibility of providing greater transparency in the estimates. Instead of presenting the margins of errors of each estimate (which in turn would be based “on rather subjective estimates of the possible margins of error of the underlying data”), the authors, following an advice by Steve Broadberry, choose to declare explicitly the provenance of the estimates and the ways in which they have been produced. This leads to classifying Maddison’s estimates in four groups: a) official estimates of GDP, released by national statistical offices or by international agencies; b) historical estimates (that is, estimates produced by economic historians) which roughly follow the same method as the official ones and are based on a broad range of data and information; c) historical estimates based on indirect proxies for GDP (such as wages, the share of urban population, etc.); d) “guess estimates”.

Jan Luiten van Zanden

Then the article moves on to review and discuss new estimates: although revisions for the nineteenth and twentieth century (mostly falling under the “b” category) are also incorporated, the most important changes come from the pre-industrial era (“c” kind estimates). For Europe, we now have a considerable amount of new work, for several countries including England, Holland, Italy, Spain and Germany (but not for France). The main result is that, from 1000 to 1800 AD, growth was probably more gradual than what proposed by Maddison; that is, European GDP was significantly higher in the Renaissance (above 1000 PPP 1990 dollars in 1500, against 771 proposed by Maddison); hence, growth was slower in the following three centuries (1500-1800), while faster in the late middle ages (1000-1500). For Asia, the new (and in some cases very detailed) estimates available for some regions of India (Bengal) and China (the Yangzi Delta), for Indonesia and Java, and for Japan, confirm Maddison’s view of the great divergence, against Pomeranz revisionist approach: in the late eighteenth and early nineteenth century, a significant gap between Europe and Asia was already present (for instance GDP per capita in the whole of China was 600 PPP 1990 dollars in 1820, as in Maddison; against 1455 of Western Europe, instead of 1194 proposed by Maddison).

New estimates are also included for some parts of Africa and for the Americas, with marginal changes on the overall picture (for the whole of Latin America, per capita GDP in 1820 is set to 628 PPP 1990 dollars, instead of 691). For Africa, however, there are competing estimates for the years 1870 to 1950, by Leandro Prados de la Escosura (based on the theoretical relationship between income terms of trade per head and GDP per capita) on the one side, and Van Leeuwen, Van Leeuwen-Li and Foldvari (mostly based on real wage data, deflated with indigenous’ crops prices) on the other. The general trends of these differ substantially: the authors admit that they “are still working on ways to integrate this new research into the Maddison framework” and thus at the present no choice is made between the two, although both are included in the data appendix.

New long-run estimates are presented also for the Near East, as well as for the Roman world, in this latter case with some differences (smaller imbalances between Italy and the rest of the empire) as compared to Maddison’s picture. The authors also signal the presence of estimates for ancient Mesopotamia, produced by Foldvari and Van Leeuwen, which set the level of average GDP a bit below that of the Roman empire (600 PPP 1990 dollars per year, versus 700), but they are not included in the dataset.

Per capita GDP in Roman times, according to Maddison (1990 PPP dollars)

Per capita GDP in Roman times, according to Maddison (1990 PPP dollars)

What can we say about this impressive work? First, that it is truly impressive and daring. But then come the problems. Needless to say Maddison’s guessed estimates is one of the main issues or limitations, and this looks kind of downplayed by Bolt and van Zanden. As pointed out by Gregory Clark, in his 2009 Review of Maddison’s famous Contours of the World Economy:

“All the numbers Maddison estimates for the years before 1820 are fictions, as real as the relics peddled around Europe in the Middle Ages (…) Just as in the Middle Ages, there was a ready market for holy relics to lend prestige to the cathedrals and shrines of Europe (…), so among modern economists there is a hunger by the credulous for numbers, any numbers however dubious their provenance, to lend support to the model of the moment. Maddison supplies that market” (Clark 2009, pp. 1156-1157).

The working paper by Bolt and Van Zanden makes significant progress in substituting some fictitious numbers (d), with indirect estimates of GDP (c), but then in discussing the results it leaves unclear which numbers are reliable, which not, thus still leaving some ground for the “market for holy relics”.

Image

This is all the more problematic if we think that nominally all the estimates have been produced at 1990 international dollars. It is true that there is another part of the Maddison project specifically aiming at substituting 1990 purchasing power parities with 2005 ones. But this is not the point. The real point is that even 2005 PPPs would not change the fact that we are comparing economies of distant times under the assumption that differences in the cost of living remained unchanged over centuries, or even over millennia. This problem, not at all a minor neither a new one − e.g. Prados de la Escosura (2000) − is here practically ignored. One indeed may have the feeling that the authors (and Maddison before them) simply don’t care about the parities they use, de facto treating them as if they were at current prices. For example, they discuss the evidence emerging from real wages, saying that they confirm the gaps in per capita GDP: but the gaps in real wages are usually at the current parities of the time, historical parities, while those in GDP are at constant 1990 parities. If we assume, as reasonably should be, that differences in the cost of living changed over the centuries, following the different timing of economic growth, then the evidence from real wages (at current prices) may actually not confirm the GDP figures (at constant 1990 PPPs). Let’s take, for instance, China. It could be argued that differences in the cost of living, as compared to Europe, were before the industrial revolution, say in 1820, lower than in 1990, given that also the differences in per capita GDP were lower in 1820 than in 1990; hence, prices in 1820 China were relatively higher. The same is true for China when compared to Renaissance or Roman Italy (since prices in 1990 China were arguably significantly lower than prices in 1990 Italy, in comparison with the differences in the sixteenth century or in ancient times). This would mean that real GDP at current PPPs would be in 1820 even lower, as compared to Europe; or that 1820 China would have a per capita GDP remarkably lower than that of the Roman empire, maybe even lower than that of ancient Mesopotamia. Is this plausible?

References

Clark, G. (2009). Review essay: Angus Maddison, Contours of the world economy, 1-2030 AD: essays in macro-economic history. Journal of Economic History 69(4): 1156−1161.

Prados de la Escosura, L. (2000). International comparisons of real product, 1820–1990: an alternative data set. Explorations in Economic History 37(1):1–41.

La Deutsche Vida

Foreign family business and capital flight. The case for a fraud to fail

By Giovanni Favero, Università Ca’ Foscari Venezia (gfavero@unive.it)

Abstract:
The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company’s path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This ‘refractive error’ may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further.

URL: http://econpapers.repec.org/paper/vnmwpdman/63.htm.

Reviewed by Bernardo Bátiz-Lazo

This paper was distributed by NEP-HIS on 2013-12-15 and offers an interesting combination of business and accounting history around the long-term performance of the Italian assets of an Austrian family business (named Westens). The investment relates to a enamelling plant in the town of Bassano in 1925 (called Smalteria Metallurgica Veneta or SMV, today part of BDR Thermea). The Bassano plant was one of the largest factories of glazed products (for use in electric water heaters, bathtubs and heating products like radiators). Favero’s story takes us from its origins until the Westens leave the company in 1975. Activities, however, continued and by “the end of the 1970s the company focused its production in the heating sector… In the mid-eighties the company expanded into foreign markets. “[see further here].

Air photo of original factory (Source: http://www.baxi.it/storia/)

Air photo of original factory (Source: http://www.baxi.it/storia/)

The narrative gyrates around the Bassano plant, some three generations of Westens and an equal number of internal grown talent at the helm of SMV. Favero argues that the reason behind the origins of SMV and other similar investments in Central and Easter Europe by the Westens was to overcome growing protectionism and the end of Empire. However, the number of secondary references suggests the SMV case is relevant for Italian business history and perhaps, more could have been said about this. Nevertheless, we can follow the changes in corporate governance, the attitude of the family to foreign investments, the changing relationship between national branches and SMV’s “strategy” (a term used rather loosely by the author) as the 20th century progresses. Also how the plant was established on the basis of a then unique process of enamelling, a source of competitive advantage that also erodes as time goes by. Some discussion about the role of Chandler’s “first mover advantage” within family business would have been desirable here.

It is evident that Favero has had access to a large number of source material (including oral histories and fiscal authority memoranda and investigative papers). Yet the case is rather short and this result in the narrative progressing some time in jumps rather than a smooth flow. For instance, it is only until the end that we learn why the fraud was discovered five years after the original owners declared bankruptcy. Namely the intervention of the Italian government to maintain employment kept the plant (or the company, its not clear) afloat. There is also reference to some “bad blood” between the Westens and the Italians but we are not totally sure why and when. There are indications of growing tensions with unions and Favero tries to make a case about “management’s “obsession with labour costs”. We could also benefit from learning about the inconsistencies Favero between different sources. Perhaps an idea would be to add a timeline where one side maps changes in strategy, corporate governance or in the ruling family and the other side maps changes in the environment.

However, in its present form this makes a potentially useful teaching case in a world economic history, international business or globalisation course. Favero also claims the SMV case is part of a larger project looking at Westens’ investments in different countries. I certainly look forward to future instalments.

Giovanni Favero

Giovanni Favero