Models of Safe Banking? The European Savings and Cooperative Banks

Savings banks and cooperative banks in Europe

By: Dilek Bülbül, Reinhard H. Schmidt and Ulrich Schüwer (all at Goethe University Frankfurt am Main)

Abstract: Until about 25 years ago, almost all European countries had a so-called three pillar banking system comprising private banks, (public) savings banks and (mutual) cooperative banks. Since that time, several European countries have implemented far-reaching changes in their banking systems, which have more than anything else affected the two pillars of the savings and cooperative banks. The article describes the most important changes in Germany, Austria, France, Italy and Spain and characterizes the former and the current roles of savings banks and cooperative banks in these countries. A particular focus is placed on the German case, which is almost unique in so far as the German savings banks and cooperative banks have maintained most of their traditional features. The article concludes with a plea for diversity of institutional forms of banks and argues that it is important to safeguard the strengths of those types of banks that do not conform to the model of a large shareholder-oriented commercial bank.

URL: http://econpapers.repec.org/paper/zbwsafewh/5.htm

Review by Anthony Gandy

In recent years I have had the pleasure of teaching banking strategy and banking regulation to professional bankers, the vast majority from the Anglo-Saxon sphere. This is a real challenge, they have greater experience of retail, business and corporate banking than I will ever obtain. However, one thing I do know is that they struggle to cope with the concept that the listed, publicly traded, universal bank is not the only institutional model in town. It is of course not the dominant model in many countries. There are real rivals many different backgrounds that challenge the listed banks and have many strengths; to a large degree these strengths maybe due to the restrictions placed upon them.

Summary

The paper Bülbül, Schmidt and Schüwer is a White Paper (No. 5) on Policy from the Center of Excellence SAFE – Sustainable Architecture for Finance in Europe (Goethe University Frankfurt) and was distributed by NEP-HIS on 2014-01-17. It outline the characteristics of savings banks (those with a public ownership foundation, even if that is no longer the whole case) and cooperative banks across Europe and detail the history of these two institutional forms in German, Austria, France, Spain and Italy. Clearly the primary example is Germany where the three-tier banking structure is live and well (if we exclude a few issues!). In Germany there is a co-existence of public savings banks, cooperative banks and private banks. In other regimes the model has changed, but in the case of say France, the cooperatives are incredibly strong even if some of the localism of these institutions has now been lost.

The authors define seven features of savings banks; however, through the passage of reform (some they argue may have been misguided) only the first two are now common across the markets they have reviewed:

  1. A focus on savings and savings mobilization
  2. A clear regional and even local focus
  3. They were/are “public” banks owned or sponsored by a public body in a specific region or locality, and those authorities had/have “obligations” in respect of these local institutions
  4. They are organised under a “public” law, though the authors do not really define this
  5. They were expected to support the local economy and the local people and financially sustainable enterprises
  6. They were expected to adhere to the region or locality of the sponsoring public body – thus avoiding competition between such banks
  7. Maybe most importantly they were part of a “dense and closely cooperating networks of legally independent institutions that constitute a special banking group”

While, to all intense and purposes the seven criteria still hold good in Germany for savings banks, elsewhere it now tends to be just the cooperative banks which maintain the sense of locality, network and non-competition between local and regional players. Even here though, many cooperatives look and act like major national banking groups, some are even competitors in the investment banking markets.

The authors review the two hundred year history of the German savings and cooperative banks, and that of other nations. Though, of course, this is done very swiftly given the space limitations they have. They also try to illustrate how changes in the system has led to weaknesses in some industries which have moved away from the German model. As is outlined in the discussion below, the end of cooperation and coordination of between savings banks in Spain, where local savings banks did not compete in other regions, has had enormous consequences.

While the history is brief, it is informative. I for one was not aware that Raiffeisenbank was named in honour of Friedrich Wilhelm Raiffeisen who in the 19th Century established the concept of rural cooperative banks networked to centralised services organisations. The name is also common to Austrian cooperative banks and is the foundation of the movement elsewhere. I feel I should have known this. The history, especially in recent years is also important in showing why Germany has performed differently in this sector than other countries which ostensibly had similar three-tier frameworks in the past.

In the other country reviews, the focus is more on the last twenty five years. In France for example the cooperative banks have come to dominate much domestic and even international banking. They absorbed the smaller French public savings institutions (through the mergers which resulted in Banque Populaire Caisse d’Epargne (BPCE)) while Crédit Mutuel (CM) and incendie-du-credit-lyonnais[1]Crédit Agricole (Credit A) have acquired a number of private banking groups building corporate and investment franchises. Of course the ultimate expression of this was Credit A’s acquisition of, how shall we put it, the accident prone Crédit Lyonnais giving it stake in corporate and international banking in France.

The author conclude by reviewing (as they do also in the country reviews, especially in the German one) past and current literature on whether public savings banks and cooperatives are inefficient, not incentivised to be competitive or even whether they carry higher risk. Their conclusion is that older research which support these points have now been supplanted by newer research which invalidates these arguments, especially in the light of recent events.

Discussion

One could argue that the case they make in their paper that German local public savings banks did not suffer to any large degree in the financial crisis could be countered by two points. Firstly, while the local savings banks had little exposure to securitised markets or to southern European debt, the structure of their industry would not really allow this anyway. These banks are local, however, they also provide funds to the Landesbanken which act as the central services and, effectively, the centralised treasury. It is they which then use funds to access corporate, investment and international markets. As the authors have point out, the Landesbanken have been hard hit in the financial crisis. Effectively the savings bank and the cooperative banking sector disaggregate the banking activity network into those which take in deposits and fund local projects and those which play a centralised role supporting the local institutions with an infrastructure and acting as their representatives in international wholesale markets. So they do not make perfect comparators to the more integrated large commercial banks. Secondly, while German has suffered from exploring the deposits of its savings banks and other banks abroad to fund various assets, the local German economy has not suffered, so the savings and cooperative banks have not been tested at local level, not this time around anyway.cartoon120621_2_full_600x400[1]

Secondly, the Italian section is a maybe little brusque. While savings banks and cooperatives along the German model have existed since the late 19th century, it is stated that they have not really established themselves to such a large extent and have been privatised. However, some of the arguments put forward for the benefits of public savings and cooperative banks are that they maintain localism. While Italy has clearly done much to privatise and get local politics out of their banks, they still certainly maintain more local banks than say a UK or Ireland as a proportion of their banking industry. In addition, while the word “Foundations” is mentioned iceberg-montepaschi[1]once, we rather skip over the important role they play in the governance and ownership of certain Italian banks in which the Foundations play such a large role and which still own a large proportion of the bank, including and rather notably the oldest of them all, Banca Monte dei Paschi di Siena, which so obviously faces an existential crisis.

Policy and Teaching

The public savings industry which the authors really find was badly hit by financial crisis was the Spanish one. However, they make a very interesting point that the industry in Spain had already abandoned many of the seven characteristics of public savings banks the authors identified. Indeed they make the very strong case that by allowing the savings banks in Spain to become national and to expand in areas they had little experience, they were attracted to the booming area of commercial mortgages, the vast majority used to fund the property bubble which would so damage Spain when it burst.

This last point is an interesting one as it shows the consequences of changing a system of ownership and governance under pressure to reform for only one reason, in this case the European standardised view of competition. Given banks are at the heart of the monetary system, consequences elsewhere in the economy have to be considered. Until the 1970s the Spanish savings banks were public institutions and somewhat politicised. Accession to the EU in 1986 brought pressure to reform and to liberalise, and yet while elements of competition were reformed, the governance of these institutions was not improved; fiefdoms remained, spurred on by growing competition. Of course the EU is hardly to blame for house price falls of up to 53.5% in Spain, but it does emphasise the importance of working through the long term consequences of policy changes which may interact with other events.

This paper not only gives teaching staff the opportunity to expose students to other banking governance and ownership possibilities, it discusses how changes to the model once common to all public savings and cooperative banks have potentially undermined some of their advantages and led to unintended consequences. It will be in the student reading list next year for sure.

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.

italia

On the many failures of (southern) Italy to catch up

Regional income inequality in Italy in the long run (1871–2001). Patterns and determinants

by

Emanuele FELICE (claudioemanuele.felice@uab.cat) Departament d’Economia i d’Història Econòmica, Universitat Autònoma de Barcelona

ABSTRACT

The chapter presents up-to-date estimates of Italy’s regional GDP, with the present borders, in ten-year benchmarks from 1871 to 2001, and proposes a new interpretative hypothesis based on long-lasting socio-institutional differences. The inverted U-shape of income inequality is confirmed: rising divergence until the midtwentieth century, then convergence. However, the latter was limited to the centrenorth: Italy was divided into three parts by the time regional inequality peaked, in 1951, and appears to have been split into two halves by 2001. As a consequence of the falling back of the south, from 1871 to 2001 we record s-divergence across Italy’s regions, i.e. an increase in dispersion, and sluggish ß-convergence. Geographical factors and the market size played a minor role: against them are both the evidence that most of the differences in GDP are due to employment rather than to productivity and the observed GDP patterns of many regions. The gradual converging of regional GDPs towards two equilibria instead follows social and institutional differences – in the political and economic institutions and in the levels of human and social capital – which originated in pre-unification states and did not die (but in part even increased) in postunification Italy.

URL:  http://d.repec.org/n?u=RePEc:aub:uhewps:2013_08&r=his

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2013-12-29. The author, Emanuele Felice, engages  with the mother of all research questions in the economic history of post-Unification Italy, which is “why did the south fall behind?”. The large and widening economic gap between the north and south of Italy remains one of the “big topics” in Italian economic history and one upon which consensus is far from being reached. The paper by Felice aims at providing both new quantitative data to assess this gap and a discussion on what caused and, equally important, what did not cause the formation and persistence of the north/south divide. 

Emanuele Felice

Emanuele Felice

Let us start with the quantitative assessment. Felice provides new estimates of regional GDP at present borders. Given the long-run perspective adopted, it is necessary to make sure that we are comparing the same regions through time. This is not straightforward for Italy as it experienced several changes in its borders between 1871 and 2001. Felice collected detailed data from foreign (mostly Austrian) sources on territories that eventually become part of northern Italy. This data enables him to produce regional GDP per capita estimates for 10 year benchmarks from 1871 to 2001.

Felice then measures convergence and divergence across regions. The bottom line is that Italian regions diverged during most of the period under study. This divergence exacerbated the most between World War I (WWI) and the late 1950s. Then during the so called “Economic Miracle” of the 1960s, Italian regions experienced a degree of convergence. This convergence took place during a period of very high economic growth in the north and Felice attributed this convergence to the heavy subsidising of the southern economy. Felice also observes that while the south failed to catch up with the rich north, the northeast and centre succeeded in the task, reaching similar GDP per capita levels to those of the original Industrial Triangle towards the end of the 20th century. 

After the number crunching, Felice moves on to tackle the determinants of the income inequality. Following the path of a debate almost as old as Italy, he focuses on some well known hypothesis. The first one is that the south had a geographical disadvantage either in terms of factor endowment or market access. Felice discards the first hypothesis noting that differences between the north and south were not as marked and that the macro-areas were more different within than between them. Are a result the endowment argument is not a good candidate to explain the north-south divide. On market access, Felice notes that the south had a fairly high access to markets in the period before WWI compared to the north and the situation reversed gradually. Also, after WWI regions with a quite low access to markets (Trentino Alto-Adige and Valle d’Aosta) managed to reach high levels of GDP and regions in the south with a good access to markets performed poorly in GDP growth. 

Trentino Alto-Adig

After excluding geographical factors, Felice discusses the human element to explain divergence. He looks at human capital, social capital and institutions. At the time of unification, the south was lagging behind in both human and social capital (for a more detailed discussion and some numbers see Felice (2012)). Felice’s thesis is that economic development in the south was highly affected by its low human capital until WWII. In spite of the catch up in literacy rates after WWII, measures of social capital show that the south has never reached the level of the north. The persistence of the gap has therefore to be attributed to persistence of low levels of social capital that allowed the consolidation of poor institutional settings as well as the flourishing of organized crime.  

Reading Felice’s paper, one’s impression is that the author managed to convey several years of quantitative research into a nice narrative on how the south fell behind. He uses a mix of hard data and qualitative reasoning to guide the reader through. In particular, he takes timing of turning points (i.e in market access, state intervention or catch up in literacy rates) to explain how different elements could or could not explain the divide. He also uses the case of the northeastern regions to explain how path dependence can be overcome (the northeast had very low levels of human capital at the time of unification but managed to catch up with the rest of the north).  

For the Italian readers, Emanuele Felice, 2014, "Perche' il Sud e' rimasto indietro", Il Mulino, Bologna.

For the Italian readers, Emanuele Felice, 2014, “Perche’ il Sud e’ rimasto indietro”, Il Mulino, Bologna.

To conclude, it is often the case that this narrative argues that the south was not disadvantaged in all the factors and that different periods were driving economic growth in the country. However, it seems like it was advantaged in a given factor of growth only when that factor was not important. For example, it had a good market access before WWII, when human capital was more important; it had cough up in terms of human capital after WWII but at that time social capital started being more important. The picture that emerges from this work is that the south suffered from a mix of poor starting conditions, bad timing and unfortunate development strategies that trapped it into the gap that we still observe today.

 

References

Emanuele Felice, 2012. Regional convergence in Italy, 1891–2001: testing human and social capital, Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 6(3), pages 267-306, October.

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

So, who was lightning the bulb in Latin America?

Foreign Electricity Companies in Argentina and Brazil: The Case of American and Foreign Power (1926 – 1965)
[Original title: Companhias estrangeiras de eletricidade na Argentina e no Brasil: o caso da American & Foreign Power (1926-1965]

By Alexandre Macchione Saes (alexandre.saes@usp.br), Universidade de São Paulo – FEA/USP and Norma S. Lanciotti (nlanciot@unr.edu.ar), Universidad Nacional de Rosario – CONICET

URL: http://econpapers.repec.org/paper/spawpaper/2013wpecon14.htm

Abstract

The article analyses the evolution, strategies and position of American & Foreign Power subsidiaries in electric power sector in Argentina and Brazil from their entry in the mid-1920s to their nationalisation. We compare the economic performance and entry strategies followed by the American holding in different host economies. We also examine the relations between the American electricity firms and the Governments of both countries, focusing on the debates and policies that explain American & Foreign Power’s withdrawal from Argentina and Brazil in 1959-1965. Finally, the article reviews the role of foreign direct investment in the development of electric power sector in both countries. The study is based upon the Annual Reports and Proceedings of American & Foreign Power (1923-1963) and other corporate reports, Government statistics and official Reports from Argentina, Brazil and the United States.

Review by Beatriz Rodríguez-Satizábal

This paper was circulated by NEP-HIS on 2013-11-02. Its topic deals with the popular subject of energy provision. Indeed, there has been no shortage of turning points in the history of the energy markets around the world. Since the development of the electricity in the late nineteenth century, energy markets have been a constant cause for debate. The discussion ranges from technical and engineering issues (such as heated debates around Nikola Telsa and Thomas Alva Edison), to the adoption of common standards, to questions as to who will provide the service, to a wider debate on government policies such as pricing and, more recently, on how to become “greener” (see for example the debate on UK gas and electricity providers).

Kilowatt

In the developing countries, the debate on energy has been tied to the relation between the foreign direct investment, the efficient provision of electricity, and nationalization policies (topics that, by the way, were picked up from a business history perspective in William J. Hausman, Peter Hertner & Mira Wilkins “Global Electrification” (2008, CUP). The question on the relation between foreign companies investing in such countries and the debate on the effects of imperialism is also latent in recent research (see for example the work of Marcelo Bucheli, Stephanie Decker, or Niall Ferguson). In this line of work, the paper by Macchione Saes and Lanciotti further explores the intricate relationship between a foreign company and its host countries but, at the same time, offers a contribution to the literature on Latin American foreign investment during the second half of the twentieth century.

According to Alexandre Macchione and Norma Lanciotti, the arrival of the American and Foreign Power Co in Brazil and Argentina marked the start of an expansion of US direct investment in those countries, while seeking new consumer markets during the 1920s (p. 2). However, it is important to notice that the company arrived to the region more than 20 years after the first electricity companies had established. Therefore, the case of American and Foreign Power Co offers an example of the aggressive expansion of an electricity company that only few years after its arrival suffered the effects of the crisis of 1929 and later on, had to deal with centralization and nationalization policies.

AlexandreNorma

The aim of the paper is to analyse the evolution, strategies, and position of the American and Foreign Power Company in both countries between 1926 and 1965. Divided in four sections, including an introduction and the concluding remarks, it presents first the greater attention that US companies gave to Latin America after the First World War, looking mainly to the evolution of the company in the US market and the subsidiaries in Brazil and Argentina. Then, the paper discusses the shift of the regulation and describes the complex relation between the state and the company. As a result, the main sections widely discuss the investment strategies which focus was in improving the service while achieving higher returns.

Three important issues emerge from this paper, namely:

1) The US investment was dominated by a few large holding companies that controlled the utilities supply in various countries. The localization in South America answers to both the search of economies of scale through new consumer markets and the need to diversify investment (p. 3). In order to keep growing in the local markets, the electricity companies acquired small and medium concessions keeping their organizational structure. Clearly, this served to the purpose of increasing returns, but there is no mention of the effects of this choice in the need for improving the service. In other words, how efficient the company became as a result of greater scale.

2) The effects of the Great Depression were greater than expected for the directors of the company. As explained by Macchione and Lanciotti, their main concern was that currency devaluation would damage the sustainability and profitability of their investments (p. 13), but they did not expect the shifted in the regulation that followed in the 1930s and 1940s. The link between government policy and business strategy is then questioned by the authors and the company strategies are evaluated. Small differences between the two countries are noticed, opening space for a future discussion on how foreign companies deal with diverse economic and political contexts, including an analysis of their role as regulators.

American and Foreign

3) One of the main factors for the company’s decision to withdraw from the region was the expropriation lead by the Latin American governments since the late 1950s (p.22). But to what extent expropriations responded to the inefficiency of the company? Macchione and Lanciotti explained that the low quality of the service added to the fluctuation of the long-term revenues and, in some cases, led to the confiscation of assets by the local national government. These arguments, of course, are not to minimise political and nationalistic ideas driving the confiscation of assets in Latin America during the twentieth century.

In summary, the paper Macchione and Lanciotti offers a case study that brings together elements from Latin American economic history that deserve more attention. These include the role of state, the interaction between businesses and regulators, foreign direct investment, and the relative efficiency of domestic acquisitions by foreign companies in the long-term. This paper is an important contribution to understand from the company perspective the links between strategy and government policies.

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.