Northern Lights: Computers and Banks in Nordic Countries

ICT the Nordic Way and European Savings Banks

by J. Carles Maixé-Altés (maixe@udc.es) Universidad da Coruña

Abstract: This paper discusses the world industry of savings banks, a genuine world collaborative consortium, through which, from the 1950s, the International Savings Banks Institute (nowadays, the World Savings Banks Institute and European Savings Banks Group) was highly active in introducing ICT to retail banking. In this environment, Nordic savings banks, Sweden, Norway, Finland and Denmark, their Central Savings Banks and their industry associations occupied a separate place in European movements around developments of computerization and automation in retail financial services. The synergies in Nordic countries were superior to the rest of Europe and collaboration was intense. This paper highlights the leadership and the influence that the ICT development models of Nordic savings banks had on their European retail banking associates.

URL http://econpapers.repec.org/paper/pramprapa/58252.htm

Review by Bernardo Bátiz-Lazo

Introduction

In today’s world Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups. Swedish success stories include familiar names such as file sharing site The Pirate Bay (established 2003), video chat and calls Skype (established 2003) and music streaming Spotify (established 2008). These developments have not gone unnoticed by the media (see article by Forbes) nor by historians. There is a growing and vibrant body of systematic studies on the economic, business and technological history of Nordic computing as reflected by the fourth edition of History of IT in the Nordics (HiNC4) confrence on August, 2014. All of these HiNC conferences have been followed by an edited book of accepted papers, published by Springer’s increasingly succcessful History of Computing series (a series under the stewardship of Martin Campbell-Kelly (Warwick)).

Nordic-Startup-Awards

Summary

The paper by Joan Carles Maixé-Altés contributes to above mentioned literature and was distributed by Nep-His on 2014-11-1. In it he succesfully intertwined topics of great importance which, with the exception of Scott & Zachariadis (2012 and 2013), have been dealt in isolation, namely: not for profit financial institutions, technological innovation in the late 20th century and international competitive collaboration.

Maixé-Altés gained access to previously unexplored archival material from the International Savings Banks Institute (nowadays the World Savings Banks Institute and European Savings Banks Group). The focus of this first instalment of Maixé-Altés’ research deals with the efforts by Nordic savings banks (i.e. Denmark, Finland, Norway and Sweden) to gain scale in information and comunication technology (ICT) through co-operation. Savings banks were born in 1810 in Rothwell, Scotland as part of the 19th century “thrift movement”. This organizational form was replicated across Europe and British colonial dominions. Today savings banks have dissapeared from Australia, New Zealand, the USA and most European countries. This regardless of whether they had narrow (e.g. UK) or broad operations (e.g. Sweden, Spain). However, they remain important players in retail banking in Germany, Norway and Portugal.

Denmark, Norway and Sweden are considered to be the Scandinavian countries and the Nordic Countries are these three plus the Åland Islands, the Faroe Islands, Finland, Iceland and Greenland.

Denmark, Norway and Sweden are considered to be the Scandinavian countries and the Nordic Countries are these three plus the Åland Islands, the Faroe Islands, Finland, Iceland and Greenland.

Analytically, this paper proposes a double point of view. Firstly, Nordic countries are considered early adopters of computer technologies and, simultaneously, ingintegral to the processes of dissemination and appropriation of foreign business models. Secondly and whilst detailing the efforts by Nordic savings banks on computarisation, Maixé-Altés reminds us of the heteregoneity of organizatonal forms in retail finance during the 20th century. Also how the democratic principles behind these particular form of corporate governance led to an “open door” policy for the sharing of best organizational practice as well as to collaborate across borders with “sister institutions” to faclitate their economic and social objetives. But as was pretty much the case across retail banking in the 1960s and 1970s, savings banks in Nordic countries adopted computer technology with the twin hope of increasing efficiency of operation and counter attack the growth of commercial banks within the market for retail deposits.

With those analytical aims in mind the paper structures in four main sections while preceeded by an introduction and finalised by a concluding section. Maixé-Altés starts his story with the first steps of co-operation within national borders. These led, for instance, to the establishment of “central savings banks” or institutions that help gain critical mass in whole sale financial markets. This to substantiate his claim that collaboration is well embeded within savings banks. He then moves to explore co-operation within electronic data processing in general while providing details of an “emblematic case” of this collaboration: Nordisk Spardata.

J. Carles Maixé-Altés

J. Carles Maixé-Altés

Critique / Comentary

I very much liked the paper. However, I will advance a couple of ideas which future work on these archives could bear in mind.

First, Maixé-Altés’ emphasis on changes in hardware as an index for co-operation in data processing suffers from a common shortcoming in this literature (an issue shared by many econometric studies of technological change in financial institutions), namely its focus on back-office transaction processing and an over reliance in hardware and central processing units while “missing .. the choices being made between operating systems, programming languages, network technologies, databases, or the source of application software.” (Gandy 2013: 1228). More could then be said about these choices and the formation of standards and computer networks.

Secondly, I fundamentally disagree with Maixe-Altes’ claims around the use of “real time” computing. As I have argued in Bátiz-Lazo et al. (2014) as well by Martin (2012) (and evidence in Scott & Zachariadis (2012 and 2013)), in the late 1960s and throughout the 1970s distant devices and computers could be connected but the nature of the banking business meant that form of “on line” communitation still required human intervention and therefore it was not “real time”. Moreover, Haigh’s (2006) seminal contribution documents how database and database management systems were still in its infancy in the 1970s. This effectively meant there was no random access to electronic data. Updates had to be run in “batches”. Full digitalization of customer accounts was “work in progress” and very much an effort that starts in the late 1950s in Sweden (as documented by Bátiz-Lazo et al., 2014) but doesnt materialise until at least the late 1980s.

There is some indirect evidence of this in, for instance, the fact that in the 1980s, human tellers at retail branches supplied indiviuals with balance of available funds “as of last night”, that is, once a central processing unit had been able to gather and sort through all the transactions earlier in the working day (Indeed, I have personal recollections of programming with COBOL in the mid 1980s and having to script sorting programmes). Another telling example is that automated teller machines (ATM) relied on combination of information stored on the activation token’s magnetic stripe and a list of overdrawn or otherwise delinquent and cancelled accounts stored on a cassette tape inside the machine itself (see image below). In short, Maixe-Altes’ claims around the use of “real time” computing’could be tone down a notch.

Back of RT650 by Burroughs Corp. (undated)

Back of RT650 by Burroughs Corp. (circa 1980). Source: Charles Babbage Institute (Ascension 90, Series 75, Box 44, Folder 2).)

In summary, Maixe-Altes’ is an interesting part of the history of computing, banking and financial history. It points out there is much more to be said about understanding the technologies of the late 20th century as well as the economic history of competition, cross-border collaboration and not-for-profit financial institutions. On top of this Maixe-Altes ventures into histories of networking and real-time computing, and, more importantly, puts the historical discussions in the context of banking strategy. As such, an intersting new addition to this growing literature.

References

Bátiz-Lazo, B., Karlson, T. and Thodenius, B. (2014) “The Origins of the Cashless Society: Cash Dispensers, Direct to Account Payments and the Development of On-line, Real-time Networks, c. 1965-1985″, Essays in Economic and Business History 32(May): 100-137.

Gandy, A. (2013) “Book Review: Technological Innovation in Retail Finance (2012, Routledge)”, Economic History Review 66(4): 1227-12278.

Haigh, T. (2006) “’A Veritable Bucket of Facts':Origins of the Data Base Management System”, ACM SIGMOD Record 35(2): 33-49.

Martin, I. (2012) “Too Far Ahead of Its Time: Barclays, Burroughs and Real-Time Banking”, IEEE Annals of the History of Computing 34(1): 2-16.

Scott, S., Zachariadis, M. (2012) “Origins and Development of SWIFT, 1973–2009″ Business History 54(3): 462-483.

Scott, S., Zachariadis, M. (2013) The Society for Worldwide Interbank Financial Telecommunication (SWIFT): Cooperative Governance for Network Innovation, Standards, and Community. London: Routledge (Global Institutions Series).

The postman always rings twice: measuring market access and endowment in the German Empire through postal data

It’s all in the Mail: The Economic Geography of the German Empire

by

Florian PLOECKL (florian.ploeckl@adelaide.edu.au) University of Adelaide

ABSTRACT

Information exchange is a necessary prerequisite for economic exchange over space. This relationship implies that information exchange data corresponds to the location of economic activity and therefore also of population. Building on this relationship we use postal data to analyse the spatial structure of the population distribution in the German Empire of 1871. In particular we utilize local volume data of a number of postal information transmission services and a New Economic Geography model to create two index measures, Information Intensity and Amenity. These variables respectively influence the two mechanisms behind the urban population distribution, namely agglomeration forces and location endowments. By testing the influence of actual location characteristics on these indices we identify which location factors mattered for the population distribution and show that a number of characteristics worked through both mechanisms. The model is then used to determine counterfactual population distributions, which demonstrate the relative importance of particular factors, most notably the railroad whose removal shows a 34% lower urban population. A data set of large locations for the years 1877 to 1895 shows that market access increases drove the magnitude of the increase in urban population, while endowment changes shaped their relative pattern.

URL: http://econpapers.repec.org/scripts/search.pf?aus=Florian%20Ploeckl

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2015-04-11. The work by Florian Ploeckl lays in the expanding branch of historical economic geography, which looks at, broadly speaking, the role of geographical factors in regional development. In particular, the author looks at the effect of actual location characteristics on the information exchange and endowment (calculated through two indices) in the German Empire between 1877 and 1895. The empirical model used in the paper uses the indices that describe market access and endowments effects as dependent variables and test which geographic, institutional and cultural characteristics shaped them.

220px-Bundesarchiv_Bild_146-1990-023-06A,_Otto_von_Bismarck

Otto Von Bismarck (1815-1898), First Chancellor of Germany

The paper relies on detailed data on the postal system to measure the diffusion of information across 41 districts in the Empire. The creation, after the German unification, of a common and homogeneous postal system with the same rates across locations allows the author to use postal flows as proxy for “information intensity”.   This measure tells us the level of information exchange for each location considered. The author meticulously identifies business related correspondence for each location by selecting specific types of mail for the analysis and relating it to the general mail. The empirical exercise appears very well engineered and executed.

220px-Kaiserlich

 Kaiserliches Postamt sign, about 1900

The next step is to relate this indirect measure of economic activity to the access to markets for any given location. Following a well-established practice in the discipline, Ploeckl relies on the concept of market potential. Market potential is a measure of the centrality of a given location and can be constructed in two main ways. The first option, when trade volumes among locations are available, is a gravity model. This is the method used nowadays by economic geographers but also economic historians lucky enough to have access to internal trade flows (see Redding and Venables, 2004 for the former and Wolf, 2007 for the latter). This method basically looks at actual levels of trade and derives from these the potential for a location. The second option, used when trade flows are unknown, relies on the methodology proposed by Harris (1954) which uses GDP of the locations weighted by the inverse of distance to calculate the potential levels of trade across the locations given the size of their economies. Examples of this estimation procedure are Crafts (2005), Schulze (2007) and more recently Crafts and Klein (2012). This paper approaches the issue in a very innovative way, escaping the dichotomy that normally characterizes the calculation of market potential. As we understand, neither trade volumes nor regional GDP are available for Germany in this period. Therefore the author relies on the assumptions that “market potential translates in commercial transactions” and that “each transaction causes the same amount of mail” to claim that the measure from step 1 is able to capture the access to markets of the locations. The first assumption is shared with the broader group of scholars that use gravity models for market access and is perfectly reasonable when dealing with trade volumes. The use of quantitative evidence on correspondence to proxy for economic activity is not new in the literature: Crafts (1983) provided GDP estimates based, among the others, on letters per capita. The method proved to be quite misleading applied for instance to the Italian case (Esposto, 1997). Because of the indirect measure used in the paper, the relationship between information flows, market potential and actual exchange is of course much more questionable. However, it must be pointed out that the empirical effort in this paper makes its use of postal data more convincing compared to other more dated attempts.

The paper is also very interesting in that it finds a way to split market access into firm market access and consumer market access. This is a crucial point in the analysis of market forces as the two measures could well be following very different trajectories.

The last step is to calculate an endowment index based on real wages and the trade cost matrix across locations (the details on the methodology are explained in Ploeckl, 2012).

The bottom line results of the paper are that important factors like railroads and coal were important in the location of population (and therefore economic activity) both through the market channel and the endowment channel. The impact of these channels is quantified through counterfactual analysis, leading for instance to a 30% impact of the removal of the railroads on the population level.

Summing up, this paper contributes to a very hot debate on the determinants of the location of economic activity. It does so by finding an innovative empirical method to overcome the chronic lack of data in historical research. The limitations of these indirect methods should not, as usual, be neglected. However, the exercise appears more than reasonable and some features of these papers could find fruitful applications in a variety of other lines of research in historical economic geography.

REFERENCES

Crafts, N., 1983, Gross National Product in Europe 1970-1910: Some New Estimates, Explorations in Economic History, Vol. 20, No. 4, 387-401.

Crafts, N., 2005, Market Potential in British regions, 1871-1931, Regional Studies, Vol. 39, pp. 1159-1166.

Esposto, A., 1997, Estimate Regional Per Capita Income: Italy, 1861-1914, Journal of European Economic History, Vol. 26, No. 3, p.585-604.

Ploeckl, F., 2012, Endowments and Market Access; the Size of Towns in Historical Perspective: Saxony 1550-1834, Vol. 42, p. 607-618.

Redding, S. and A. Venables, 2004, Economic Geography and International Inequality, Journal of International Economics, Vol. 62, No. 1, pp. 53-82.

Schulze, M. S., 2007, Regional Income Dispersion and Market Potential in the Late Nineteenth Century Hapsburg Empire, LSE Working Papers no. 106/07.

Wolf, N., 2007, Endowments vs. Market Potential: What Explains the Relocation of Industry after the Polish Reunification in 1918?, Explorations in Economic History, Vol. 44, (2007), 22-42.

 

 

Is it Possible to Escape the #ResourceCurse?

Mining and Indonesia’s Economy: Institutions and Value Adding, 1870-2010

By Pierre van der Eng, The Australian National University (Canberra) (pierre.vandereng@anu.edu.au)

Abstract: Indonesia has long been a major producer of minerals for international markets. Starting in 2014, it implemented legislation banning exports of unprocessed minerals and requiring producers to invest in processing facilities to add more value before export. This paper establishes what light past experiences in Indonesia with mining sheds on this recent development. It quantifies and discusses the growth of mining production in Indonesia since 1870. It analyses the institutional arrangements that past governments used to maximise resource rents and domestic value adding. The paper finds that production and exports of mining commodities were long dominated by oil, but increased and diversified over time, particularly since the 1960s. The development of the mining sector depended on changes in market prices, mining technologies and the cost of production, but particularly on the institutional arrangements that guided the decisions of foreign investors to commit to mining production and processing in Indonesia.

URL http://econpapers.repec.org/paper/hitprimdp/57.htm

Review by Miguel A. López-Morell

Mining is an economic activity that abounds with paradoxes and differs greatly from manufacturing and agriculture. Mining involves sourcing underground natural resources which, in turn, depends on the presence of certain minerals in the area, on the total costs of extraction, transport, refining, etc. and the current and expected demand for the mineral(s). The exact amount to be sourced is uncertain. Furthermore, mining is often environmentally unfriendly and as a rule, non-regenerative. It has a limited life as it ends the moment the material is exhausted. This unless new technologies or price hikes turn the extraction of any remanents profitable. Mining also associates with important negative externalities, as a consequence from the changes to the landscapes and the pollution it causes. Hence, teh potential market failures make case for state intervention and in regulating mining activity, the state has to strike a balance between wealth generation, employment and the ensuing negative factors. This sort of considerations and issues gain greater weight when extraction is to be carried out by foreign companies.

mining_0

There are two broad areas that encompass an ongoing debate around the degree of state intervention in mining. On the one hand, ownership and control of the deposits and, on the other hand, taxation. The debates around taxation dwell on the extent to which the state can generate revenue through compulsive contributions based on local production and/or exports. The debate about ownership and control essentially starts with the idea that, regardless of who owns the top soil, whatever is underground belongs to the state. The discussion that ensues deals with how the state should enable individuals and/or companies to explore and exploit underground riches by ceding rights of explotation through concessions and permits. For instance atttutes towards mining in Germany, Peru, Mexico, Japan and Uruguay at the beginning of the 20th century resulted in a system of almost absolute freedom for domestic and foreign individuals and companies to make claims and exploit their mines. Examples of restrictive policies include the nationalization of oil in Mexico (1938), tin in Bolivia (1952) as well as that of copper in the Democratic Republic of Congo (1967 and again 2010) and Chile (1971).

Dewi Sukarno (also spelled Soekarno)  (1901-1970). President of Indonesia, 1945 to 1966.

Dewi Sukarno (also spelled Soekarno) (1901-1970). President of Indonesia, 1945 to 1966.

A large number of studies on the mining sector have emphasized the role of lobby groups in achieving better legislative conditions for exploiting and exporting mineral resources. At the same time, however, these studies also document how widespread administrative corruption has given rise to what is known as the “mineral resource curse” hypothesis or the apparent paradox that countries endowed with large mineral resources have not seen this wealth reflected in their GDPs. Morover, that these same countries often suffer sinificant imbalances in the distribution of the income, with mining districts falling into abandonment or in a precarious state. These are countries that have been unable to develop alternative economic activities to mining, suffer from poor infrastructure, and pollution from mining.

Haji Mohammad Suharto (also spelled Soeharto) (1921-2008). President of Indonesia,  1967 to 1998.

Haji Mohammad Suharto (also spelled Soeharto) (1921-2008). President of Indonesia, 1967 to 1998.

The paper by Pierre van der Eng, distributed by NEP-HIS on 2014-09-25 offers an important contribution to better understanding the “mineral resource curse”. Van der Eng takes a long-term view to address the policies undertaken by the Indonesian authorities to maximize income form their mining, be it through direct or shared exploitation or through specific tax policies. Over a 140 year period he establishes the various historical stages that have characterized the evolution of the Indonesian mining industry in terms of employment, exports, production and generation of added value and, most importantly, income absorbed by the national economy through the various types of mining.

Pierre van der Eng

Pierre van der Eng

At is birth in 1945, the Indonesian Republic inherited a system of tight control over the deposits in the region (as excercise by th Dutch through the former monopoly of the Chartered East Indies Company). In the decades following independence, the Indonesian governments maintained and reinforced the policy of tight control. At the same time, it set up an interesting shared management model of the deposits between a specialized public body and foreign mining companies (known as Contracts of Work or CoW). The CoW resulted in a significant improvement in both the control of production and revenue from taxes.

The CoW legally ceased to exist in 2009. Since then Indonesia began to decentralized a significant part of the collection of mining taxes. The loss of this revenue has been compensated with measures designed to increase the effort of the mining companies in the country and by retaining higher percentages of the added value generated by the mining industry. For example, in early 2014 the Indonesian government introduced a prohibition on mining firms exporting raw or concentrated minerals, which effectively force multinationals like Freeport-McMoRan to develop copper refineries inside the country while, at the same time, compensate for the lost revenue assosiated with the fall of the international oil price.

images

The Indonesian case is considered “paradigmatic” example of a good management policy of mineral resources. This thanks to Indonesia avoding the state-monopoly model (popular amongst oil producing countries). The Indonesian approach also shows that it is possible to find ways for the country to absorb a high proportion of the value added by mining productions while, at the same time, direct or manage investment in a strategic sector. The Indonesian approach seems to suggest that it is possible to align the incentives and outcomes of state companies and foreign multinationals. Specially as the latter complement a lack of capital and the country’s know-how. In the Indonesian case the lattter occurred while relating to a number of Japanese investments, which contributed to the Indonesian economy with capital, workers and technology. In these circumstances, the Indonesian government was able to supply oil and other raw material needs of the Japanese, who in turn reduced their dependence on more distant suppliers.

In short, the paper by Pierre van der Eng is opportune. A much welcome contribution to the world of mining history. There are few historical economic studies available on the micro and macroeconomic effects of mining on the economies of countries rich in mining resources. The view offered may also set off deeper reflection about how much pressure can be brought to bear on the profits of businesses whose presence in an area is fleeting. It may also inspire more comparative studies by countries.

References

Crowson, P. (2008) Mining Unearthed: The definitive book on how economic and political influences shape the global mining industry. London: Aspermont.

Harvey, C. and Taylor, P. (1987) “Mineral Wealth and Economic Development: Foreign Direct Investment in Spain, 1851 – 1913”. Economic History Review, XL(2): 185-205.

Hillman, J. (2010) The International Tin Cartel. London: Routledge.

Pérez de Perceval Verde, M. Á. (2006) “Minería e instituciones: papel del Estado y la legislación en la extracción española contemporánea”, in M. Á. Pérez de Perceval Verde, M. Á. López-Morell, and A. Sánchez Rodríguez (Eds.) Minería y desarrollo económico en España. Madrid: Síntesis/IGME, pp. 69-93.

Schmitz, C. (1986) “The rise of Big Business in the World copper Industry 1870-1930”. Economic History Review, 2ª serie, XXXIX(3): 392-410.

Schmitz, C. (ed.) (1995) Big Business in Mining and Petroleum. Cheltenham: Edward Elgar.

White, N. (1996) Business, Government & the End of Empire: Malaya, 1942-57. Oxford: Oxford University Press.

An International Comparison of #Inherited #Wealth (#OldEurope vs the #USA)

Inherited Wealth over the Path of Development: Sweden, 1810–2010

by Henry Ohlsson (henry.ohlsson@riksbank.se), Jesper Roine (jesper.roine@hhs.se) and Daniel Waldenström (daniel.waldenstrom@nek.uu.se)

Abstract: Inherited wealth has attracted much attention recently, much due to the research by Thomas Piketty (Piketty, 2011; 2014). The discussion has mainly revolved around a long-run contrast between Europe and the U.S., even though data on explicit historical inheritance flows are only really available for France and to some extent for the U.K. We study the long-run evolution of inherited wealth in Sweden over the past two hundred years. The trends in Sweden are similar to those in France and the U.K: beginning at a high level in the nineteenth century, falling sharply in the interwar era and staying low thereafter, but tending to increase in recent years. The levels, however, differ greatly. The Swedish flows were only half of those in France and the U.K. before 1900 and also much lower after 1980. The main reason for the low levels in the nineteenth century is that the capital-income ratio is much lower than in “Old Europe”. In fact, the Swedish capital-income ratio was similar to that in the U.S., but the savings and growth rates were much lower in Sweden than in the U.S. Rapid income growth following industrialization and increasing savings rates were also important factors behind the development of the capital-income ratio and the inheritance flow during the twentieth century. The recent differences in inheritance flows have several potential explanations related to the Swedish welfare state and pension system. Sweden was “un-European” during the nineteenth century because the country was so poor, Sweden is “un-European” today because so much wealth formation has taken place within the welfare state and the occupational pension systems.

URL http://econpapers.repec.org/paper/hhsuulswp/2014_5f007.htm.

Review by Guido Alfani (Bocconi University, Milan)

Summary

The paper by Ohlsson, Roine and Waldenström was distributed by NEP-HIS on 2014-08-25. It provides annual estimates of inheritance flows and of the share of inherited wealth over total wealth for Sweden covering fully two centuries, from 1810 to 2010. In this period, Sweden changed deeply: originally a relatively poor and mostly agrarian country, by the 1970s it was one of the wealthiest areas of the world. It also became known for its particularly extensive welfare state.

Artillerie1810_Schiavonetti6

Building upon earlier research conducted by Roine and Waldenström on wealth concentration and on the wealth-income ratio in Sweden, the paper points out a striking difference between such country and other European areas: while in nineteenth-century France and U.K. the wealth-income ratio was in the 600-700 percent range, in Sweden it stayed within the 300-500 percent range until the early twentieth century. These values are similar to those characterizing the U.S., and the authors argue that they go hand in hand with the limited importance of inheritance flows in nineteenth century Sweden and the U.S. compared to France and the U.K. In both Sweden and the U.S., limited historical accumulation of wealth explains initial low wealth-income ratios.

However, the similarities stop here as the authors describe the first as a poor country characterized by sustained out-migration, and the second as a “land of opportunity”. By 1950, in all the four countries wealth-income ratios had converged to low levels (generally speaking, in the 200-400 percent range, with Sweden even falling below 200 in the 1970s). In recent decades, all four countries experienced a tendency to the increase in the wealth-income ratio. In Sweden, however, the increase has been smaller and what is more, it has resulted into an only minimal increase in inheritance flows.

imgres

The core of the paper consists in an attempt to reconstruct the long-term evolution of inherited wealth (b), which is shown to have been around 11 percent of the national income throughout the nineteenth century (half the figure for France and the U.K.), later dropping to just 5 percent around 1970. Following Piketty’s approach, the authors decompose the inheritance flow into its determinants which comprise, apart from the wealth-income ratio (β), the ratio of the average wealth at death to the average wealth of the living (μ) and the mortality rate (m). This can be described with a simple formula:

b= β·μ·m

The reason why we are interested in the share of inherited wealth is that, according to what Piketty (2014) suggests, if the share of inherited wealth is too high then it may result incompatible with the principles of meritocracy and social justice which characterize modern democracies. The authors find that in Sweden, in the long run the wealth-income ratio was the main driver of changes in the share of inherited wealth (in its turn, the wealth-income ratio was influenced by changes in private savings and by fluctuations in the growth rate). However in recent decades, an increase in the wealth-income ratio has only partially translated into an increase in the share of inherited wealth, essentially due to a decline in the ratio of the average wealth at death to the average wealth of the living. The authors provide two possible explanations for this: the fact that new wealth was accumulated among the relatively young, or the retirement savings pattern which, in comparison to France and the U.K., would lead the Swedish to be keener on decumulating private wealth.

Comment

Ohlsson, Roine and Waldenström provide a novel perspective on an old story – how Sweden became an exceptionally “egalitarian” Western society – by making excellent use of the analytical tools produced by the recent wave of research on long-term changes in inequality. They provide many interesting and useful insights into two centuries of Swedish history, although sometimes more detail would be useful. For example the statement, that maybe the recent increases in the wealth-income ratio translated only partially into an increase in the share of inherited wealth because new wealth was accumulated mainly by the relatively young, would probably require more supporting evidence.

Particularly interesting is the analysis of the role played by the public in transferring wealth inter-generationally, by means of an exceptionally generous welfare state which basically replaces part of the private inheritance (and influences the pattern of private savings). Perhaps this aspect would have been worthy of further discussion, clarifying for the international reader how such welfare state system came into being, but also pointing out at possible cultural differences between the Swedish and others which might explain a preference for both a more developed welfare state, and lesser wealth (and income) inequality in general. Instead, Ohlsson and colleagues simply suggest that Sweden was «un-European» essentially because «old wealth was not as important in Sweden as it was in France and the U.K. in the 1800s», this in turn being due to the fact that «Swedes were so poor that they simply needed to eat almost all their income in the pre-1900 era» (pp. 21-22). But, looked at from the view point of continental Europe, Sweden has many other peculiarities which might be relevant in explaining the dynamics that the authors so convincingly reconstruct. This being said, the paper is clearly an important contribution to current debates on long-term changes in inheritance and inequality, pointing out many aspects which would well be worthy of more international research.

References and Suggested Further Reading

Alafani, G. (2014) “Economic Inequality in Northwestern Italy: A Long-Term View (Fourteenth to Eighteenth centuries)”, Dondena Working Paper, n. 61, March 2014.

Atkinson, A.B. (2012) “Wealth and Inheritance in Britain from 1896 to the Present”, Working Paper, Oxford University.

Lindert, P.H. (1991) “Toward a Comparative History of Income and Wealth Inequality”, in Y.S. Brenner, H. Kaelble, M. Thomas (eds.), Income Distribution in Historical Perspective (Cambridge: Cambridge University Press), pp. 212-231.

Piketty, T. (2014) Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press).

Piketty, T., G. Postel-Vinay, and J-L Rosenthal (2006) “Wealth Concentration in a Developing Economy: Paris and France, 1807-1994”, American Economic Review, 96(1): 236-256.

Piketty, T. and Zucman, G. (forthcoming 2014), “Capital is Back: Wealth-Income Ratios in Rich Countries 1700-2010″, Quarterly Journal of Economics 129(3).

Roine, J. and D. Waldenström (2009), “Wealth Concentration over the Path of Development: Sweden, 1873-2006″, Scandinavian Journal of Economics , 111(1): 151-187.

Putting Round Pegs in Square Holes

Economía Neoinstitucional: Prueba Falsable a las Hipótesis de Douglass North en Colombia
(Neoinstitutional Economics: The Falsification of Douglas North Hypothesis in Colombia)

by Fernando Estrada (Universidad Externado de Colombia)

Abstract: This article aims to propose a reading of political (dis) order in Colombia, using as a theoretical source Douglass North’s reflections on the economic formation of political institutions. The contributions of this letter are very preliminary in nature and can better be understood taking into account two objectives of the research project: (1) explain why, in Colombia there are very limited conditions for coordinating collective action, (2) what direct and indirect effects has the armed conflict and civil war had on the political (dis) order.

URL: http://econpapers.repec.org/paper/pramprapa/58515.htm

Revised by Stefano Tijerina

This paper was distributed by NEP-HIS on 2014-11-17. In it Fernando Estrada argues that a historically weak state, the prolonged civil war, political corruption, institutional failure, the lack of political accountability, a culture of dishonesty, and the numerous armed conflicts currently succumbing Colombia have led to citizen’s loss of credibility on its institutions, thus today’s “political (dis) order.” He uses the case of Colombia to test the falsifiability of the theory on political order developed by Douglass North, William Summerhill, and Barry R. Weingast in Order, Disorder, and Economic Change, concluding that there is an urgent need for political and institutional structural change, accountability, and an effective and firm implementation of the rule of law, in order to achieve the political and economic stability necessary for the effective implementation of a market economy. If these positive initiatives are achieved, says Estrada, then it will be possible for Colombians to construct a long-term political order that will “foment credible commitments” between citizens and their political institutions.

Throughout the paper Estrada focuses on current issues that illustrate why Colombia is suffering from a systemic political (dis) order. Through the use of commentaries from Colombian public and academic figures, he points out that private-public relations within the market system have failed due to political corruption and institutional failure, and that there is an urgent need for social, political, and institutional reform that sets the course for what North, Summerhill, and Weingast refer to as consensus based political order that provides the necessary conditions for the advancement of a market economy.

Fernando Estrada

Fernando Estrada

Implicitly, Estrada reveals that the theory of political order withstood the falsifiability test since his conclusions on citizenship rights, the absence of economic, political and judicial guarantees, the predominance of political corruption and dishonesty, and the lack of “productive and entrepreneurial” incentives, have resulted in a complete loss of credibility on the political system. Colombia, according to the theory on political order, is not democratic or able to effectively function within a market economy, it is a country with an “authoritarian” political order where “political officials cannot sustain a set of universal rights, and instead abuse the rights of a major portion, if not all of the citizenry.”

Estrada however does not question the reasons why the nation’s economic, social, and political development has followed the “authoritarian” path for the construction of political order. His disregard for historical evidence impedes him from better understanding and explaining the realities of the development of Colombia’s political order. An analysis on Path Dependency would have allowed Estrada to center on the historic constrains imposed on the definition of citizenship, why economic, political and judicial status quo has prevailed over time, why political corruption and dishonesty has been perpetuated over time, and why economic and political regional elites have opposed the expansion of the market economy. The historical analysis would have provided a local explanation to a local reality and would have allowed Estrada to move away from the generalizations of imported models and theories that only partially explain the outer layers of the nation’s realities.

Douglass North

Douglass North

A historical analysis would have provided clarity that seems to be missing in Estrada’s argument. This would have provided empirical evidence that showed that Colombian citizens distrust their institutions because they were never part of the process of creating them in the first place. It was the case of democracy, policy, and the majority of the key institutions that have shaped the national distributive, financial, and security policies, including the Departamento Nacional de Planeación (DNP), Banco de la República, and the Departamento Administrativo de Seguridad (now known as Agencia Nacional de Inteligencia Colombiana – ANIC); all the result of foreign mandates to fit the needs of both domestic “power individuals” and the international system.

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

It is important to look at theoretical models but it is more important to contextualize the theory and situate it within its local reality. There is a need to develop local theoretical models and explanations based on a self-evaluation of the nation’s particular historical trajectory and experiences. The solution lies in analyzing the uniqueness of Colombia’s institutional and programmatic development and the historical implementation of the idiosyncratic definition of democracy and capitalism.

Political (dis) order has been one of the pillars of nation building since independence. It has been the political and economic elite’s way of securing their own personal sources of livelihood, and it has been the formula used by foreign capitalist interests to secure resources and influence in Colombia. Their preservation over the control of the political order has relied on the state, its institutions, and policies that throughout the twentieth century achieved a high level of sophistication and arte now capable of disenfranchising sectors of society and limiting the rights of citizenship and personal security vis-à-vis one of the most progressive and pluralist constitutions in the international system.

Contrary to North, Summerhill, and Weingast fundamental requirements for the creation of political order within a market economy, Colombia’s historical trajectory shows that political order may also be achieved by constricting and limiting citizen’s access to institutions that guarantee their personal security, economic security, and that of their families, yet capable of guaranteeing institutional security to local elites and foreign interests. For example the land use policies of the 1920s that guaranteed access of the Colombian subsoil to Tropical Oil or the current mining policies and the supportive institutions and programs that provide access to foreign transnational corporations while at the same time limiting the rights of local artisan miners; past and present realities that allow the effective operation of the market system while at the same time limiting the actions of citizens within the political order.

Colombia’s founding fathers, the leaders that carried the nation into modernity, and those of the present time have never had as their central objective the construction of an open society or political order based on consensus. Citizen’s credibility on the political system and its institutions never impeded economic and political elites from insisting on the implementation of their own and unique political order, even after the emergence of guerrilla movements in the 1950s, the escalating pressure of labor unions throughout the Cold War, the indigenous movements, the emergence of narcotics trafficking as a parallel economy, the emergence of highly sophisticated criminal organizations, and the current array of armed conflicts that are asphyxiating Colombia’s society. Surprisingly, what seems to have mounted pressure on Colombia’s elites to consider moving toward a political order based on consensus has been the international system and their demand for a change in the political order that will allow Colombia to effectively integrate itself into the market system.

Foreign investors, transnational corporations, global resource extraction companies, and the powers of the global market system require new nurturing grounds for the expansion of capitalism, narrowing in on nations such as Colombia. It is these forces that are pushing for changes in the structural nature of the nation’s political order. Aware or unaware, Estrada advocates for changes that could transform Colombia’s political and institutional system into North, Summerhill, and Weingast’s consensual based political order.

Following a neoliberal line of thought, Estrada concludes that Colombia needs to move toward the consensus model in order to effectively navigate the international system and fully immerse in the complexities of a market economy, and that it must bring to an end the civil war and the numerous other armed conflicts that impede the nation from moving forward. What is ultimately recommended is that Colombia finds its own unique ways of establishing and securing political order, even it if means constructing a reality that projects institutional and programmatic order, and that generates civil credibility under a system that favors the interests of the international system.

The problem of constructing realities that project institutional and programmatic order.

The problem of constructing realities that project institutional and programmatic order.

Estrada uses the falsifiability test on North, Summerhill, and Weingast’s theory on political order to justify the promotion of neoliberal institutional change in Colombia. He suggests changes that apply to the particular idiosyncrasies of Colombia, including greater accountability, eliminating clientelism from political relations, the establishment of a system that fosters political and economic competition, consensus among elite groups, society’s unquestionable trust on the consensus based political order, a decreasing role of the state in economic and social matters, cultural change toward a model of meritocracy and self-discipline, and judicial, programmatic, and institutional adjustments aimed at improving investor’s confidence. These changes however do not guarantee the “creation of credible commitments” that, according to North, Summerhill, and Weingast, are necessary for the transition from an authoritarian political order to a consensus based political order.

The theorists suggest that in order to achieve this transition, citizens’ own belief systems must “translate into the institutions that shape performance.” Legitimacy and credibility may only be achieved if constructed by the majority; in other words, if Colombian’s collectively decide to move forward with a market economy. However this is impossible to achieve under current distributive realities. Politicians, representatives, and the bureaucracy must “honor” the rights and norms that regulate the consensus based political order, leading to the “self-enforcement” of the model. This, in the Colombian context, is impossible based on current realities and it would require a revision of the status quo, something that has historically lead to armed conflict. According to the theory, credibility on political and economic policies and institutions may only be achieved if the system guarantees citizens the rights and freedoms to prosper economically; security of income and investment become the crucial drivers of national economic growth. This again would require political and economic elites to accept a change in the status quo as well as the international system’s acceptance of a non-commodity supply role for Colombia, changes that seem utopic at this time.

The implementation of consensus based political order in Colombia seems unrealistic today. The foreign model does not fit with the nation’s current reality. Estrada’s approach forces us to question how effective is the implementation of foreign models and theories to explain local phenomena, knowing well that theorists like North are developing ideas and solution to complex problems that depart from their own cultural and social biases? Why rely on foreign solutions and explanations to resolve and transform local realities when it is clear that they are not a perfect fit? As in the case of Colombian political institutions, the dependency on foreign models at the end result in a frustrating experience of “putting round pegs in square holes.” The falsifiability test fails when one does not compare apples with apples; when one tries to force external realities into local contexts. The consensus-based model of political order fits well with the realities of the United States but not in Colombia. This is a country in the early stages of nation building, in the one hand closing the long chapter of a civil war while on the other juggling the complex realities of the market system.

The problems of importing foreign models to solve local problems of economic development.

The impact of importing foreign models to solve local economic development problems.

Further Readings

North, Douglass C.; William Summerhill, and Barry R. Weingast. (2000) ‘Order, Disorder, and Economic Change: Latin America Versus North America’. In Bruce Bueno de Mesquita and Hilton L. Root (eds) Governing for Prosperity. New Haven: Yale University Press, pp. 17-59.

North, Douglass C.; John Joseph Wallis, and Barry R. Weingast. (2012) Violence and Social Order: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.

Page, Scott E. (2006) ‘Path Dependence’ Quarterly Journal of Political Science, 1: 87-115.

#Productivity, #Employment and #Structural Change in #Developing Countries

Patterns of Structural Change in Developing Countries

by Marcel Timmer (University of Groningen), Gaaitzen de Vries (University of Groningen), Klaas de Vries (The Conference Board, Brussels)

Abstract This paper introduces the updated and extended Groningen Growth and Development Centre (GGDC) 10-Sector database. The database includes annual time series of value added and persons employed for ten broad sectors of the economy from 1950 onwards. It now includes eleven countries in Asia (China has been added compared to the previous release), nine in Latin America and eleven in Sub-Saharan Africa. We use the GGDC 10- Sector database to document patterns of structural change in developing countries. We find that the expansion of manufacturing activities during the early post World War II period was related to a growth-enhancing reallocation of resources in most countries in Asia, Africa and Latin America. This process of structural change stalled in many African and Latin American countries during the mid-1970s and 1980s. When growth rebounded in the 1990s, workers mainly relocated to market services industries, such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic and have been falling behind the world frontier.

URL: http://econpapers.repec.org/paper/dgrrugggd/gd-149.htm

Review by Sebastian Fleitas

As economies evolve and develop tremendous changes in the composition of goods and services take place. For instance, by start of World War II, one in three workers in the United States were employed in manufacturing and agriculture. A steady shift towards the service sectors since then, means that today manufacturing and agriculture only employ approximately one in eight workers. These structural changes imply the reallocation of resources and particularly labor across sectors with different productivity levels. The rate and intensity of these process has important impact on economic growth. Structural changes, therefore, have important implications for economies mainly because of three factors:

a) technological changes occur at different paces for different goods,

b) there are different patterns of demand for different goods, and

c) relative prices in the world economy do not fully reflect relative marginal productivities and marginal utilities among goods.

Industrialised nations have, generally speaking, closely followed the United States in increasing the weight of the service sector since the 1980s (if not before). It is also widely known that during the same period, recently industrialised nations such as Brazil, Mexico China, Korea or other Asian Tigers expanded employment in their domestic manufacturing sector at the same time as their GDP was increasing. But what happened with the rest of the world? The short answer is that it is remarkable how little we know about the process in the rest of the world.

Structural Change in the US Economy (taken from The Atlantic http://goo.gl/WvRIHu)

Structural Change in the US Economy (taken from The Atlantic http://goo.gl/WvRIHu)

In the paper distributed by NEP-HIS 2014-09-25, Timmer, Vries and Vries describe similarities and differences in the patterns of structural change across developing countries in Asia, Africa, and Latin America since the 1950s. In order to do that, Timmer and colleagues created, updated and (more than once) expanded the Groningen Growth and Development Centre (GGDC) Sector database. This database includes data from 1950 onwards on value added and persons employed for ten broad sectors of the economy for a group of countries. In its current version, the database includes eleven Asian countries (with the good news that China is now included!), nine Latin American countries, and eleven from Sub-Saharan Africa.

There are some important stylized facts that can be learned from the paper. First, since the 1950s workers relocated from agriculture into the manufacturing and to a lesser extent the (formal and informal) services sectors. Second, employment in manufacturing grew in the 1960s and early 1970s in the three continents. These changes responded to policies through which individual countries pursued to promote industry development. Along the same lines, an result from the study by Timmer and colleagues is that there has been a clear decline of the manufacturing employment share in Africa and Latin America since the mid 1970s while production and employment increasingly originate from services activities. In 2010, only 7 percent of the African and 12 percent of the Latin American workforce was employed in manufacturing. These figures contrast with what happened in Asia, where the share of manufacturing in value-added was on average 20 percent of GDP for the same year.

According to the productivity measures by Trimmer et al., the gaps for developing countries are still huge and increasing for most countries. On one hand, the authors find that labor productivity in agriculture is much lower compared to services and even lower in relation to manufacturing. In 2010, for example, the agricultural value added share in Africa was 22 percent, while the employment share was 51 percent. This suggests agricultural labor productivity is about half of that of the average in the economy. In contrast, the services value added share was 50 percent while the employment share was 37 percent, and the shares for manufacturing are 10% and 7% respectively. On the other hand, productivity levels in manufacturing and market services have been falling behind the technology frontier (US in this paper) in Latin America and Africa, and they have been increasing (at a lower rate than I would expect, though) in Asia.

Word Cloud of the introduction of the paper (made using Wordle.com)

Word Cloud of the introduction of the paper (made using Wordle.com)

Finally, Timmer et al. follow Fabricant (1942) in decomposing the change of productivity in three factors namely:

a) the change in productivity of the sector holding the share of employment fixed (within-effect),

b) the change of employment in sectors with different productivity holding the productivity fixed (static-effect), and

c) the effects of the interaction between the changes in sector productivity and employment share per sector (dynamic effect).

Their results suggest that the within-effect as well as the static reallocation effect are both positive. However, the authors find that the dynamic effect is substantially negative in Africa and Latin America suggesting the reallocation of employment to sectors (services) where the productivity increase is lower. In other words, this fact suggests that the marginal productivity of additional workers in these expanding sectors was below the productivity of existing activities.

this_is_file_name_1700The paper has two main contributions. First, it is hard to stress enough how valuable the contribution of these authors is of constructing this new database. This task is not always valued at its worth. Creating a new database from different sources takes a large amount of work in order to achieve the consistency of concepts and definitions used in various primary data sources. Thanks to the authors, these data and documentation are now freely and publicly available online and it encourages us to continue the study of these issues. Second, the authors focus on the comparison of the productivity among these developing countries with the productivity of the technological leaders. This is the main point in this literature given that we still observe dynamic losses of relative productivity in many countries. The main challenge in order to make productivity comparisons is how to convert real value added into common currency units. To do this, the authors use this database and combine it with previous work or their own (mainly Inklaar and Timmer, 2013) to construct sector specific purchase power parity (PPP) prices. In their comparisons, they use United States as the frontier country and measure labor productivity relative to the frontier using the sector-specific PPPs.

 

1171bwcThe bottom line of the paper is that most of these developing countries have failed to generate dynamic increases in relative productivity since they reallocated workers into the sectors where productivity grows at a lower rate. Thus, the main challenges are to reallocate excess agricultural workers if they exist, and to increase the productivity in the manufacturing and services sectors. With the agricultural and (sometimes) manufacturing sectors shrinking in their employment share, the relative dynamic productivity performance of the sectors where these workers are going to locate is the crucial part of the process of convergence. The decomposition of the economies in ten sectors provides a necessary step to understand the process of structural change and its effects on productivity. However, the change in the composition of what a country produces is a result of changes at the firm level in particular markets. This stresses the need for more studies at the firm level on the determinants of the productivity relative to the frontier by sector. This is even more important in the services sector where the evidence seems to suggest the existence of a duality, where some services have a high productivity level and others are informal activities with very low productivity that just hide unemployment.

In sum, this paper adds to other excellent previous work from the same authors and gives us the big picture of structural change over the last 60 years for a larger set of developing countries. In addition, the authors have made available a new database that, combined with other data sources, can help to answer important development questions. As usual, we have made progress but still more work is needed to understand the key topic of structural change. This knowledge is necessary to implement policies that boost the productivity of firms in developing countries and, therefore, to improve the standard of living of their populations.

The Trespassing Thinker: Albert #Hirschman & #economic #development

The working paper used to source this post was found to have

PLAGIARISED

its contents from work by Michele Alacevich (Loyola) and Ana Maria Bianchi (Sao Paolo). Further details are to be found here:

RePEc plagiarism accused offender: Pier Giorgio Ardeni

This finding does not demerit Beatriz Rodríguez-Satizábal’s review below. But do bear in mind that any reference to Ardeni should in fact read as pointing to the ideas of Alacevich and Bianchi.

– Bernardo Batiz-Lazo, General Editor NEPHIS (2015-01-12).

Being a Consultant “Expert” in a Developing Country: the Legacy and Lessons of Albert Hirschman

By Pier Giorgio Ardeni, Department of Economics, University of Bologna

URL: http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon14&r=his

Abstract

After more than half a century, the reflections of Albert O. Hirschman on development assistance, the role of consultant “experts” in providing policy advice and the “visiting economist’s syndrome” are still very current. In as much as Hirschman argued against all-encompassing policy frameworks, overall development plans and universal models, “one-size-fits-all” models abstracting from the local, historical, geographic and institutional conditions have remained the prevailing modus operandi of international development agencies and governments in development assistance. In spite of Paul Krugman’s criticism of Hirschman’s lack of a mathematically-consistent approach in favour of an ad hoc pragmatism, Hirschman’s avoidance of assuming a toy model to deal with practical issues and the specificities of development problems in different countries – while still using rigorous and detailed analysis– appears to be a promising attitude of enormous relevance even today. If the rejection of large-scale models of the hey days of development theory was due to the neoliberal policy wave that led to the “Washington consensus” – more market and less State –, development assistance has remained firmly entrenched in the principles of balanced growth, all-encompassing liberalizing policy reforms and diffused marketization with an increasingly limited role for the State. Development assistance approaches have maintained a standard list of prescriptions, policy-reform recipes for all sectors, social, institutional and even political objectives, under the justification that “everything depends on everything”. In this paper, I briefly review the evidence regarding the active pursuit of a paradigm that, sidelining Hirschman’s unorthodox approach, has confirmed that we have “forgotten nothing and learned nothing”, as Hirschman once said. While Hirschmanian concepts like “linkages” and “leading sectors” and some of his famous parables – like the “tunnel effect” on inequality – have left an enduring mark on economists’ perspectives, his “unbalanced-growth” has been dismissed on ineffectual grounds, while his “empirical lantern” has been derided and abandoned. The lessons of Hirschman’s consultant experience in the tropics have left a legacy that goes beyond his prescriptions: it is a philosophy, a conception of the world, a guiding sets of principles that survives time. From that wilderness where Hirschman led his followers, it is only by re-igniting that lantern that we can wisely contribute to the “development” of others as savvy and informed “experts”.

Review by Beatriz Rodríguez-Satizábal

Since his death in December 2012, Albert Otto Hirschman (1915-2012) his life’s work has been celebrated by specialists and the mass media: a great lateral thinker, an optimist economist and resistance figure, a planner who believed in doubt, and a worldly philosopher are just some of the adjectives used to describe him. But perhaps his contributions to theories of economic development and other useful views to approach economic behaviour have yet to receive all the attention they deserve. Hirschman was an economist who gently trespassed to other disciplines, while consulting for governments in developing countries (i.e. Colombia).Through these efforts he offered a unique strategy for economic development.

His approach began by understanding the conditions of each country, disregarding generalizations based on mathematical, one size fits all, models. Hirschman argued that disequilibria should be encouraged to stimulate growth and to help mobilize resources. Moreover, he noted that developing countries required more than financial capital to implement important economic decisions. He understood economic development as the product of successful habits, which began by observing, identifying and tackling “economic needs”. This view again departed from recipes emanated from general equilibria models. Moreover, he argued that a strategic, opportunistic approach, enabled making the best of what was available in each country. Including elements such as the latent entrepreneurial activity and what government policy could realistically achieve.

Pier Giorgio ArdeniInspired by his own experience studying at Berkeley in the 1980’s and, later, as a development economist in Africa, Pier Giorgio Ardeni’s paper (distributed by NEP HIS on 2014 09 29) explores the potentialities of Hirschman work for future discussions on how to promote development in countries that have had a taste of all the known formulas. The first half of the essay, combines a concise summary of Hirschman’s work with a critical review of Ardeni’s own experience. The second half, discuses broadly the evolution of the development debate and the lessons from Hirschman’s work.

Moving on from Krugman’s (1996) criticism about the lack of a mathematical consistent approach in Hirschman’s work, Ardeni brings together the resilience of Hirschman’s strategy with the reigniting interest in specialized consultancy. As a follower of Hirschman, Ardeni uses his empirical work as an example that working in the field is not overrated for a development economist. Concluding (p. 25) that after more than a half century, Hirschman’s reflections on the role of consultant experts on development assistance are still current.

Hirschman asked more from the so-called consultant experts. On his books, and in Adelman (2013) biography, the emphasis is on their role as educated readers of reality. These ‘readers’ will avoid the use of ‘models’ to later championship the creation of specific strategies, which will include diverse sectors of the society in similarly diverse activities. Nowadays, this assumption is more relevant than ever.

The main challenge in bringing Hirschman back to the scope of twenty-first century development discussions, is to call the attention over the need to witness, being that the one who is invited as a ‘consultant’, what other ways are proliferating around the world. Does each country can reach its potential their own way? As Hirschman recalled, if any country developed in a certain way, that does not mean that other countries will do it the same way. However, each country should be able to learn from the mistakes witnessed in other more advanced countries.

Drawing on Hirschman’s work, Ardeni brings three lessons which are useful today for those planning on economies that have not still reach the highest possible level of development (hopefully, a level measured in their own terms): 1) large-scale development models should be rejected, 2) local and historical conditions matter, 3) the empirical lantern remains very much needed.

Further readings:

  • Adelman, J. (2013) Worldly Philosopher: The Odyssey of Albert O. Hirschman. Princeton, NJ: Princeton University Press.
  • Hirschman, A. (1995) A Propensity to Self-subversion. Cambridge, MA: Harvard University Press.
  • Hirschman, A. (1970) Exit, Voice, and Loyalty Responses to Decline in Firms, Organizations, and States. Cambridge, MA: Harvard University Press.
  • Hirschman, A. (1958) The Strategy of Economic Development. New Haven, Yale University Press.
  • Krugman, P. (1994) ‘The Fall and Rise of Development Economics’, pp. 39-58. In Rodwin, Ll. and Schon, D.L. (eds) Rethinking the Development Experience. Essays Provoked by the Work of Albert O. Hirschman. Washington, D.C.: The Brookings Institution.