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.

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

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

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

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

Francesco Boldizzoni

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

Converting for tax reasons

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

By Mohamed Saleh (Toulouse School of Economics)

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

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

Review by Chris Colvin

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

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

Poor Copts voluntarily abandoned Christianity for tax reasons

Salah argues that poor Copts voluntarily abandoned Christianity for tax reasons

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

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