Monthly Archives: February 2012

History matters: the influence of pre-industrial China’s institutions on post-1978 economic boom.

From divergence to convergence: re-evaluating the history behind China’s economic boom

by  Loren Brandt  (,  Debin Ma ( and  Thomas G. Rawski (



“China’s long-term economic dynamics pose a formidable challenge to economic historians. The Qing Empire (1644-1911), the world’s largest national economy prior to the 19th century, experienced a tripling of population during the 17th and 18th centuries with no signs of diminishing per capita income. In some regions, the standard of living may have matched levels recorded in advanced regions of Western Europe. However, with the Industrial Revolution a vast gap emerged between newly rich industrial nations and China’s lagging economy. Only with an unprecedented growth spurt beginning in the late 1970s has the gap separating China from the global leaders been substantially diminished, and China regained its former standing among the world’s largest economies. This essay develops an integrated framework for understanding this entire history, including both the long period of divergence and the more recent convergent trend. The analysis sets out to explain how deeply embedded political and economic institutions that had contributed to a long process of extensive growth subsequently prevented China from capturing the benefits associated with new technologies and information arising from the Industrial Revolution. During the 20th century, the gradual erosion of these historic constraints and of new obstacles created by socialist planning eventually opened the door to China’s current boom. Our analysis links China’s recent economic development to important elements of its past, while using the success of the last three decades to provide fresh perspectives on the critical obstacles undermining earlier modernization efforts, and their removal over the last century and a half.”

Review by: Anna Missiaia

China’s economic performance in the long run is one of the hot topics in economic history today. The growth pattern followed by China since the mid-14th century until today has been characterized by one of prosperity until the end of the 18th century, a period of falling behind in the 19th century and throughout the Revolution, to later observe a reversal in post-1978 years until today. In particular, economic historians face the riddle of China having had comparable economic conditions to Western Europe until the eve of the British Industrial Revolution when China missed the opportunity for the industrial take off. The debate is also focused on how China managed to reverse this trend after the death of Mao Zedong in the 1970s, experiencing very high levels of economic growth that we still see today. The paper by Loren Brandt (University of Toronto), Debin Ma (London School of Economics) and Thomas G. Rawski (University of Pittsburgh) is concerned with the link between the historical picture that underlays China’s long term economic performance. The main questions addressed here are why China was unable to industrialize in the 19th century in spite of similar starting conditions of Britain; why it did not take advantage of the new technology and information made available by the British Industrial Revolution and how China managed to catch up in the post-1978 period. The paper proposes a very detailed and exhaustive review of existing literature on Chinese economic history. In particular, the view proposed by Pomeranz (2000) in his work The Great Divergence is the one that has recently taken root. The claim is that the divergence of the 19th century was due to a better factor endowment (such as coal abundance and access to land-intensive goods) by Britain. In this view there is little room for institutional factors, such as differences in the financial, political and legal system. The main contribution of the paper by Brandt , Ma and Rawski is to propose an alternative view based on institutional factors that seeks to explain both the 19th century divergence and the 20th convergence within the same analytical framework. The authors adopt a political economy perspective and guide us through the historical roots of present China’s economic boom, finding many analogies (and influences) between past and present Chinese institutions. The authors identify several institutional continuities between the Qing period (1644-1911) and the People’s Republic today: both systems were authoritarian and lacked of a checks and balances; both had monitoring problems in their implementation of central policies, suffering from corrupt diversion of tax payments;  in both periods economic policy was quite decentralized; education was in both periods a primary concern of the state;  finally, both today and in the Qing era, the state was able to align the incentives of the leading class and those of common people, achieving prosperity and stability. In the view of the authors, these elements were present in the Qing period until the beginning of the 19th century and were fully re-established after the death of Mao Zedong. According to the authors, the reasons for the period of divergence during the British Industrial Revolution lay in Qing China’s inadequate response to this new phenomenon. In particular, they offer a few institutional departures between People’s Republic in the reform era and the Qing rule that can help understand how post 1978 China managed to reverse its fortune. In particular they underline the increased ability to effectively implement and enforce policies at national level and the opening of the Chinese economy to foreign trade and investment. The analysis proposed in this work points at institutional obstacles that prevented China from joining the West in its 19th century Industrial Revolution. It also describes the slow changes that took place over the 19th century until 1970s that culminated in the boom we see today. According to the authors, today’s success is due to two factors. One is the slow erosion of constraints from the Qing period, such as lack of monitoring and closeness to the foreign trade. The other is the reversal of new obstacles created during the pre-1978 Revolutionary period, such as the creation of conflicts of objectives among different social groups and the loss of focus on education. The parallel between the early Qing period and the post-1978 period has major implications for policy-makers today: according to the authors the Chinese model for economic growth is far from being applicable to any other low income nation. This is because Chinese history and past institutions had a major role in shaping post-1978 Chinese success.  In its conclusions, this paper provides a very detailed historic and literature review of Chinese economic growth and proposes a unified institutional framework to link pre-industrial and present China, challenging the established endowment view on the 19th century divergence.

VISA and the Origins of the Global, Retail, Electronic, Payments System

Electronic Value Exchange: Origins of the VISA Electronic Payments System
By David L. Stearns
London: Springer-Verlag, 2011.
xvii+240, hardcover 9781849961387 (RRP £45.00)


Abstract – Although those born after the 1990s might never have known a time without them, payment cards and the electronic and computing networks they activate went through an explicit process of creation and adoption—a process which actively shaped these ubiquitous systems into what they are today. To understand why these systems ended up the way they did, one first needs to understand their origins, and how decisions made in their early years fundamentally shaped the way they evolved.

Electronic Value Exchange recaptures the origins of one of these systems in particular: the electronic payment network known as VISA. The book examines in detail the transformation of the VISA system from a collection of non-integrated, localized, paper-based bank credit card programs into the cooperative, global, electronic value exchange network it is today. Following an introductory chapter that sets the context, chapters adhere roughly to chronological order, building the story in a logical fashion.

Review by Bernardo Bátiz-Lazo

This is another instalment of Springer’s efforts under Martin Campbell-Kelly to offer an alternative to venue for publication in the History of Computing. It is also the book version of David Stearns’ dissertation (read under Donald MacKenzie at Edinburgh). One would ask what is novel, particularly on the back of David Evans and Richard Schmalensee’s Paying with Plastic, , a pioneering research on multi-sided markets through the study of credit cards. Well, Stearns offers a fascinating narrative that navigates somewhere between the sociology of finance, social studies of technology, retail banking and business history.

The book has a preface, an introduction, eight chapters and a conclusion. Length is well balanced with each chapter representing about 10% of the total. There is an alphabetic index and most references appear as footnotes. Sending citations, sources, references to interviews, and other material to the endnotes and leaving comments as footnotes, by the way, could have a better use of the lower margin. There are four illustrations and a handful of tables. This was a shame given that the subject mater was prone to both. For instance, see the very interesting yet inaccurate representation of the history of credit card debt in the “info graph” entitled Indebted to Plastic. So it is a pity as many more of the macro dimensions of the discussion could have been illustrated through active use of tables and graphs. There is also a list of interviewees and a helpful list of acronyms.

The preface offers a crystal clear map to the book (pp. xiv-xv), which I freely and unashamedly borrow as the backbone of my review. The style is open and quite engaging, the discussion is easy to follow but based on deep, detailed and authoritative fieldwork. However, at times one can still come across its roots as a dissertation and particularly the end section of several chapters. Another such example is that in spite of a clarification on page ix, we really learn about how the title relates to VISA’s story until page 136 (chapter 7). Here some of the end sections of the early chapters could have been used to explain how developments up to that point took Visa a step closer (or not) towards their dominant role in facilitating electronically-processed transactions and the emergence of a global retail payments system.

Chapter 1 begins the story with a brief stroll amongst the origins and early forms of charge cards, travel & entertainment cards, and store cards. Some of these plus the peculiarities of the Federal Reserve’s cheque clearing system are important, Stearns argues, to understand the path of development that credit cards took later on as well as the context in which one of these cards in particular, the BankAmericard licensed by Bank of America, is born. In this first chapter Stearns deals with why this system was born in California and not in any other of the 20 states that allowed inter-state branching (pp. 19-20). The US-centred view that emerges in the first chapter dominates the discussion onwards as, for instance, he fails to point out that correspondence banking and inter-bank clearing were well established in Europe long before the 1900s.

Chapter 2 analyses the national network built around the BankAmericard, pointing out its various operational and organizational problems. Here is when we are introduced to Dee Ward Hock, Visa’s founder and first chief executive.

Dee Ward Hock, Visa’s founder and first chief executive

Throughout the reminder of the book Stearns will describe how Hock’s philosophical ideas and strong personality shaped the structure and development of the Visa organization (initially known as National BankAmericard Incorporated or NBI) from its inception until Hock’s acrimonious departure in 1984. Stearns convincingly argues that Hock’s strong personality and ideas have a major impact on the growth of Visa. But although he endeavours to present these in their context and tries to have different ‘voices’ speak, the narrative often reads more like a biography of Hock than a business history of Visa. Stearns does note that Hock had little schooling and goes on to explain his ideas on biological evolution but not that these were also common amongst US management scholars of the 1950s and 1960s (such as Russell Ackoff and Edith Penrose). He presents inter-bank collaboration as somewhat of an epiphany for Hock. This could have had more impact if the limitations of US regulation had been explained in a bit more detail or presented in a wider context, that is, along side the fact that collusive and non-collusive collaboration was common amongst European banks whilst this was an anathema to the predominant conception of competition in US retail banking. Alternatively, he could have argued how in the search for scale and scope capitalist organizations are ready to embrace principles that would be typical of mutual and co-operative forms.

Stearns takes a bit of a sociological detour in Chapter 3 to discuss the role of the operating regulations in a co-operative network like NBI/Visa. His aim is to link the social dynamics of the system to the establishment of the operating regulations. His point is that these emerge from the almost collapse of the NBI network. Therefore, he says, these regulations are a key part of what makes the Visa system ‘work’ at the inter-organizational level. Stearns also argues that Visa’s role in adjudicating these rules helps establish just enough ‘trust’ between the competing participants for the system to function and grow. Although he could have used the more ‘sophisticated’ framework of transaction cost economics rather than ‘trust’ to explain how Hock and the regulations are able to realign incentives and avoid renegotiating contracts, his argument here is nevertheless clear, namely that Visa’s technical infrastructure was and still is, very adept at moving transactional information between participants in the system, but the operating regulations were and are the one thing which allows participants to coordinate their work in response to that information.

Chapters 4 to 7 offer some of the most thrilling and well research aspects of the book. Here is where Stearns background as a computer programmer comes to the fore, as he is able to explain in simple, layman terms the intricacies of building a major computer system. I must admit my eyes did water in incomprehension … but only once! (during the explanation of ACP/TPF installations, circa p. 128-9 – which I skipped without much loss). In any event, these chapters make a real contribution to the field as he is able to grasp the importance of details that would have escaped the researcher with an economics or history background. As I said, developments are explained largely without jargon and with the non-specialist reader very much in mind.

Their iconic ad, which was intended to communicate Hock’s vision for the card.

In Chapter 4 he begins to deal with the technological aspects of Visa by describing in detail NBI’s first computerized authorization and clearing systems, known mostly by their acronyms BASE I and II. NBI was of course not the only organization building such systems in the early 1970s, and these chapters put their systems in the context of other similar efforts by individual banks, independent processors, and bank service organizations. Chapter 5 also discusses NBI’s first significant technical failure, a program intended to run within the member banks’ processing centres, known as BASE III.

Chapter 6 charts the various ways in which the system was expanded throughout the 1970s, both technically and organizationally. On the organizational side, he discusses the formation of the international version of the organization and the name change to ‘Visa’. It was a pity that the story of the judiciary process around the antitrust battles narrated in this chapter relied mainly on articles published in American Banker and no attempt was made to look at actual court records. However, the story behind the institution of ‘duality’ offers further ammunition to show that the so-called random events that lead to path dependence are not so random after all but often based in organizational logic. Specifically, his research show that Visa predominates over Mastercard among other thing because at the critical point after the introduction of ‘duality’, Visa is able to respond limit opportunities for banks (and their customers) to migrate to Mastercard.

On the technical side, Chapter 6 discusses the shift of BASE I to the Airline Control Program (ACP) running on IBM hardware, the creation of a second cooperative data centre, the expansion of the electronic authorization network internationally, and multi-currency settlement. By holding organizational and technical aspects together he offers interesting insights into the so called ‘productivity paradox’, in other words, he can tell exactly when and how computer systems enabled the organization to grow and expand. This is somewhat a departure from previous studies on the history of computing in business (and certainly in banking), which have documented the use of technology to increase efficiency. Stearns’ focus on Visa gives us the first glimpses of early computer applications that enhance effectiveness in financial service organizations.

Chapter 7 returns to the technological aspects of authorization, describing how Visa helped fully-automated the point-of-sale. It discusses the various debates surrounding how to make the cards machine readable, and Visa’s role in stimulating the development and widespread adoption of inexpensive merchant dial terminals. Here Stearns sometime dwells into multi-sided markets but without really tackling the issue head on.

Point of Sale Terminal, circa 2012

Chapters 8 and 9 examine the ways in which the role of the central organization had to be worked out through a series of power struggles with the member banks. Chapter 8 chronicles an episode of the ‘cashless society’ through the history of Visa’s debit card, first introduced in 1975, but not widely issued until several decades later. This chapter argues that this delay had more to do with the ways in which the debit card clashed with the member banks’ existing electronic funds transfer (EFT) plans, and disputes about Visa’s role in the deposit side of the banks. Chapter 9 continues the theme of negotiations by discussing other controversial moves by the central organization: the creation of a Visa-branded travellers cheque; the direct signing of the national retail giant JC Penney by Visa USA; and various signs of empire building that eventually resulted in Hock being forced out of the organization.

Chapter 10 concludes the book by summarizing the narrative. Again there is perhaps a little bit too much of this and echoes a dissertation rather than a research monograph. It frames the book’s contribution around the grand themes discussed at the start. But I feel the reader can get easily lost in his attempt to offer two new dynamics that Stearns thinks may apply to the study of other payment systems or cooperative transactional networks in general. A number of terms and concepts emerge here that were not introduced before and its really rather late in the text to ask the reader to reflect on this rather than flagging them at the start as it is the convention.

You can read Stearns’ witty and insightful musings regularly on his tech.soul.culture blog.

Acknowledgements A shorter version of this review is forthcoming in Business History. Many thanks to Kevin Tennent and the editorial board of NEP-HIS Blog for allowing early publication.

Poscript Click here for David Mason’s review in (02.Mar.2012).

On the Explanations of How Latin America Fell Behind

Between Conquest and Independence: Real Wages and Demographic Change in Spanish America, 1530-1820

By Leticia Arroyo Abad (, Elwyn A.R. Davies, Jan Luiten van Zanden (



On the basis of a newly constructed dataset, this paper presents long-term series of the price levels, nominal wages, and real wages in Spanish Latin America – more specifically in Mexico, Peru, Bolivia, Colombia, Chile, and Argentina – between ca. 1530 and ca. 1820. It synthesizes the work of scholars who have collected and published data on individual cities and periods, and presents comparable indices of real wages and prices in the colonial period that give a reasonable guide to trends in the long run. We show that wages and prices were on average much higher than in Western Europe or in Asia, a reflection of the low value of silver that must have had consequences for competitiveness of the Latin American economies. Labour scarcity was the second salient feature of Spanish Latin America and resulted in real wages much above subsistence and in some cases (Mexico, Bolivia, and Argentina) comparable to levels in Northwestern Europe. For Mexico, this was caused by the dramatic decline of the population after the Conquest. For Bolivia, the driving force was the boom in silver mining in Potosi that created a huge demand for labour. In the case of Argentina, low population density was a pre-colonial feature. Perhaps due to a different pattern of depopulation, the real wages of other regions (Peru, Colombia, Chile) were much lower, and only increased above subsistence during the first half of the 18th century. These results are consistent with independent evidence on biological standards of living and with estimates of GDP per capita at the beginning of the 19th century.

Review by: Beatriz Rodríguez-Satizábal

This paper was distributed in the NEP-HIS report issued on January 25th, 2012. In it the authors contribute to the debate on how Latin America fell behind the developed world during the early twentieth century while presenting an alternative explanation to the widely spread argument that underperformance had its roots in the Colonial period (see for example Engerman and Sokoloff, 2005; Prados de la Escosura, 2009; Coathsworth, 2005; Acemoglu, Johnson, and Robinson, 2001; among others).

To support their idea Arroyo, Davies, and van Zanden offer a new integrated long-term data series of price levels, nominal wages, and real wages in Mexico, Peru, Bolivia, Chile, Colombia, and Argentina (silver and gold mining centres) for the years between the Conquest (16th century) and the Independence (19th century). The data emerges mainly from other studies which were published during the last 50 years.

The chief empirical aim of Arroy and colleagues is measuring real wages as welfare ratios while following the methodology developed by Allen (2001) and then compare their estimates with those for Western European countries. In order to estimate the welfare ratio, they first constructed a series based on the annual wage income of an unskilled worker (mostly in mining and construction) and then an estimate the value of a basket of goods for a family of four, focusing on the cheapest staples (maize, beans, and meat for Mexico, Peru, Bolivia, and Colombia; wheat and meat for Argentina and Chile).

As a result, their basic hypothesis that the Latin American region had similar conditions with the European developed countries is revealed. More specifically, they argue that although living in colonial Latin America was costly –prices were high throughout the region when compared with Europe-, nominal wages were also high and the real wages reacted to the decline in population following the same patterns as Europe after the Black Death. Therefore, they conclude that the “Latin American price experience was far from unique in historical perspective. The long-term evolution of prices was similar to the one experienced in Western Europe (…) The wage data suggests that in long-term wages responded to market conditions rather than the coercive colonial institutions” (pp. 29 – 30). The reason for this, they argue, is related to the nature of the Latin American economy: an economy where the markets affected prices and wages rather than a feudal one dominated by non-market institutions.

This paper offers a new approach to one of the fundamental questions regarding Latin American development: why did Latin-Americans countries fell behind despite the fact that during the 18th and 19th century wages were more attractive for Europeans in South America than in North America? Was the Spaniard rule the cause? Arroyo and colleagues point towards the effect of variables such as the labour demand, the monetary incentives as part of the labour relationship, and the market conditions that were not only marked by the institutions created for the exploitation of labour in an economy based on the extraction of natural resources. Moreover, the efforts by the authors to produce a new data series suggests that the assumption made by Angus Maddison in “The world economy: a millennial perspective” regarding estimates of the GDP per capita could be way off the mark because, according to Arroyo and her colleagues, the effect of the changing indigenous population did not have a great effect on real wages.

This paper encourages a new analysis of the long-term development of Latin America. Although there is an emphasis on regional analysis, the paper does show differences in estimates between countries within the region. This is again a departure from “classic” or “canonical” works on Latin America, all of which have a tendency to assume heterogeneous developments across geographies.

The analysis by Arroyo and colleagues shows that although countries were dominated by the same metropolitan power (namely the Spanish crown), individual territories observed different paths in wages and population growth. This could result in a new orientation for future development and inequality debates. More so as significant gaps are emerging between two groups of countries in the region namely, the largest economies classified in the literature as LA6 (Brazil, Chile, Argentina, Mexico, Colombia, and Peru) and the rest of the countries (labelled as LA13). This substantial gap between them has been suggested by the work of Astorga, Berges and Fitzgerald (2005).

Furthermore, in terms of the future economic development, those Latin American countries that are catalogued within the BRICs (Brasil, Russia, India, and China) or the CIVETs (Colombia, Indonesia, Vietnam, Egypt, and Turkey) will need new explanations over the reasons why they are becoming part of the developed world in the twenty first century.

The European Debt Crisis in an American Fiscal Mirror

Fiscal federalism: US history for architects of Europe’s fiscal union

By C. Randall Henning ( and Martin Kessler (


Abstract: European debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The “fiscal compact” agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as “debt brakes” in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are “sovereign”: The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important caveats. First, debt brakes are likely to be more durable and effective when “owned” locally rather than mandated centrally. Second, maintaining a capacity for countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and create a common fiscal pool for restructuring the banking system.

Review by: Manuel Bautista González

This paper was included in the NEP-HIS report issued on January 18th, 2012, through it C. Randall Henning and Martin Kessler contribute to the debate on fiscal solutions to the current European debt crisis. This by offering insights drawn from the past and present of U. S. fiscal federalism.

Henning and Kessler periodize their historical overview in five moments, namely, the financial reforms enacted after the adoption of the U. S. constitution, the state defaults of the 1840s, the financial troubles of state and local levels during the Reconstruction period, the fiscal instability during the Great Depression, and some recent experiences of state and local troubles from the 1970s to the current economic recession.

Later, in the analytical section of the paper, the authors study the probable adoption of balanced budget rules in the European Union with regards to their political enactment, their diversity across the Union and their effectiveness in preventing fiscal disarray. Henning and Kessler assess the need for (federal) countercyclical policies that complement the procyclical fiscal discipline at the state and local levels. They also review the literature on the relationship between state and local debt and capital and banking markets and offer preliminary conclusions relevant to both policymakers and scholars of monetary unions and fiscal federalism.

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