Author Archives: berodsat

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.

So, who was lightning the bulb in Latin America?

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

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

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

Abstract

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

Review by Beatriz Rodríguez-Satizábal

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

Kilowatt

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

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

AlexandreNorma

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

Three important issues emerge from this paper, namely:

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

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

American and Foreign

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

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

Are Cartels Pragmatic Responses to Market Failures?

The International Mercury Cartel, 1928 – 1949

By Miguel López-Morell (mlmorell@um.es), Universidad de Murcia and Luciano Segreto (segreto@unifi.it), Università degli Studi di Firenze.

URL: http://d.repec.org/n?u=RePEc:pra:mprapa:46772&r=his

Abstract

Mercury has been one of the most persistent cases in contemporary history of international market regulations and this in spite of its having been affected by important technological changes and the regular discovery of new deposits. This paper offers an approach to the least known period, although perhaps the one in which the greatest rises in process and production occurred as a consequence of market manipulation. The period coincides with a series of agreements between the Spanish and the Italian producers and the outcome was a worldwide cartel known as “Mercurio Europeo” which came into being in 1928. The aims of this work will, therefore, be first to describe the features of the various stages of development of the international mercury market during the first half of the twentieth century, with emphasis on the characteristics and conditioning factors in each period. Secondly, the objective is to analyse the various market agreements that came about, the effectiveness of the clauses therein, the construction of distribution networks and the influence that the increase in production had on other mines and on certain technological developments.

Review by Beatriz Rodríguez-Satizábal

There are two sides to every argument and the different forms of competitive collaboration is no exception. On the one hand, the claim against cartels and other forms of collusion is the loss of efficiency and the dampening of incentives for technological progress. These are exacerbated by the potential to influence the political process (e.g. lobbying, regulatory capture, etc.) and the potential to augment economic inequality through biased distribution of profits. On the other hand, business historians have documented the importance of cartels for industrialisation in Germany as well as to achieve network externalities in banking (particularly around payment systems). Legally sanctioned competitive collaboration can provide an industry with a guaranteed profitability and a secure competitive path by being more stable, dividing up markets, and securing price and production.

The case of competitive collaboration around the extraction of mercury documented by López-Morell and Segreto, distributed by NEP-HIS on 2013-05-11, looks at the cartel known as Mercurio Europeo, to advance arguments which favour collaboration in industries were collusion allows producers to achieve economies of scale as well as foster technological change and reduce market prices in the long-term. The central question is whether a cartel was or not a pragmatic response to the imperfect allocation of the resources between the Spanish and Italian mercury producers from 1928 to 1949.

Based on the assumption that cartel agreements have been around for a while, López-Morell and Segreto present a thorough revision of the strategies during its early years. The agreement between Minas de Almaden y Arrayanes (Spain) and Monte Amiata (Italy) was signed in 1928 as a way to control the supply of mercury in a very stable market. In other words, the cartel was organized in order to deal with an unchanging demand. The result was a cartel with a complex internal organization that, in a very short time kept, managed to place the price of mercury close to monopoly levels but, at the same time, failed in achieve greater efficiency in production and/or increase sales volume.

López-Morell and Segreto explore in detail the reasons for the formation of the Spanish-Italian mercury cartel while arguing that there was a desire to stabilise production levels in order to increase profits without losing market share nor, as it was mainly in the Italian case, to invest in new technology. The cartel strategy proved to be effective because the demand for the product was inelastic and the collusion between the two producers increased the profit without harming the individual production targets.

Although, López-Morell and Segreto omit a discussion of the relative efficiency of collusion and competitive collaboration, from their empirical evidence it would seem that a carel was the best organisational option for the case of mercury. Mercurio Europeo was successful at least in part because during the 1928-1949 period mercury was a key input in the production of other metals and at the time there were only a handful of mines around the world. A cartel, therefore, became the answer to best manage scarcity.

Benito Mussolini (1883-1945)

However, the argument by López-Morell and Segreto is in need of a counter factual. Perhaps one that explores the option of a monopoly with private ownership (such as the Rothschild family) rather than a cartel agreement. In other words, could the absence of a cartel change ownership structures, market share, and international price levels? Further, there is a need to understand the role of both governments in the agreement. The 1928-1949 period coincides with fascist governments in both Spain and Italy, which characterised by radical nationalistic ideas, peculiar forms of corporatism, the role of the state (e.g. protectionism, interventionism), economic self-sufficiency and autarky, among others. Hence, the particular form of cooperation between Spanish and Italian mines could well be the result of institutional pressures (including, the war effort) rather than the behaviour of consumers.

Francisco Franco y Bahamonde (1892-1975)

In summary, the paper by López-Morell and Segreto is an interesting contribution to the study of collaboration because it focuses on the strategies taken by two national companies to organise a cartel. It builds upon surviving internal documents (e.g. analyses of Board meeting minutes) of each company to bring about a better understanding of changes in the market. Moreover, it shows that the strategic decision to whether co-operate or cheat within the cartel has a profound effect on the market outcome.

Knowing the Who: Identifying the effect of entrepreneurs on firms

Do entrepreneurs matter?

Sascha O. Becker (s.o.becker@warwick.ac.uk), CAGE University of Warwick

Hans K. Hvide (hans.hvide@econ.uib.no), University of Bergen, CEPR and University of Aberdeen

Abstract

Within the broad literature on firm performance, economists have given little attention to entrepreneurs. We use deaths of more than 500 entrepreneurs as a source of exogenous variation, and ask whether this variation can explain shifts in firm performance. Using longitudinal data, we …find large and sustained effects of entrepreneurs at all levels of the performance distribution. Entrepreneurs strongly affect firm growth patterns of both very young firms and for firms that have begun to mature. We do not find significant differences between small and larger firms, family and non-family firms, nor between firms located in urban and rural areas, but we do find stronger effects for founders with high human capital. Overall, the results suggest that an often overlooked factor –individual entrepreneurs plays a large role in affecting firm performance.

URL: http://d.repec.org/n?u=RePEc:wrk:warwec:1002&r=his
Review by Beatriz Rodriguez-Satizabal

Promoting entrepreneurship has been fashionable since the 1980s and there are no signs of it going away. Messages about the importance of becoming your own boss, giving something back to the society, and be an active agent of the economy are there to be seen everywhere on a daily basis. Governments around the world are constantly discussing new ways to increase the number of entrepreneurs and we also see on a regular basis articles within broadsheet newspapers and the popular media trying to identify and challenge those who see themselves grow by creating firms and markets.

In this paper, distributed by NEP-HIS on 2013-01-28, Hvide and Becker question the outcomes of investments to promote entrepreneurship during the last 20 years: Do the entrepreneurs really deliver technological change? Is it sustainable for an emerging country to allow a growing number of entrepreneurs? Is the longevity of the firm related to the characteristics of the founder? Should entrepreneurs be employees in their firms?

The idea of the entrepreneur as an important agent is not entirely new. But studying the role of the entrepreneur within the firm and its effect over its performance has been neglected. In this regard evidence documented in this paper is a step towards a better understanding of the effect of the entrepreneur over the performance of the firm.

Picture1

Based on the assumption that the death of an entrepreneur has an immediate effect on the firm due to the changes in corporate governance that it implies, Becker and Hvide constructed a database of Norwegian firms consisting of incorporated, limited liability companies for the period 1999 to 2007. The authors identified a total of 500 firms where the founding entrepreneurs died, providing an opportunity to quantify whether entrepreneurs have a causal effect on firm performance or not.

As a result of a thorough statistical analysis, the authors find that the effects are large and strong. The entrepreneur shapes the firm and affects its growth patterns. Entrepreneurs matter because of the loss of human capital (but, interestingly, the effect could be also negative as higher performance takes place after death of the founder). Surprisingly, Becker and Hvide do not find any difference between small and large firms, family and non-family owned, nor between firms located in rural or urban areas. This last result is certainly, in my view, an open call to bring the individual characteristics of the entrepreneur to the study of the firm, which is a unit that needs the human capital factor to success.

This paper is a valuable contribution to those studying entrepreneurship because it positions the role of the individual deep into the nature of firm performance rather than having it as a separate unit. It calls our attention over the widely spread assumption that entrepreneurs also innovate within the organization (Schumpeter) and have effects in and out of it (Baumol). If entrepreneurs matter, then knowing the who, why and how must be part of the discussion on public policy to promote entrepreneurship. Moreover, when in emergent countries the close relationship between the successful entrepreneurs and the government still persists.

On the effects of income tax to the private businesses

Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century

By Li Liu (li.liu@sbs.ox.ac.uk), Centre for Business Taxation, University of Oxford

URL: http://d.repec.org/n?u=RePEc:btx:wpaper:1205&r=his

Abstract

If the corporate income tax is set at a different rate from non-corporate income tax, it can play an important role in a firm’s choice of organizational form. The impact and interdependency of income tax incentives are crucial factors to take into account when designing efficient tax policies. In this paper I exploit the substantial variation in income taxes across U.S. states in the early twentieth century to estimate these sensitivities. The potential endogeneity of state taxes is addressed using an IV approach. The results demonstrate that the relative taxation of corporate to personal income has a significant impact on the corporate share of economic activities. Raising the entrepreneur’s tax cost of incorporation by 10% decreases the mean corporate share of economic activities by about 11-18%. In addition, higher personal tax rates may affect the share of corporate activities through tax evasion and tax progressivity.

Review by Beatriz Rodríguez-Satizábal

What are the implications of income tax on the organizations? As Li Liu claims in this paper distributed by NEP-HIS on 2012-10-20, the interplay of corporate and personal income taxes are central to tax policy design. As we have all witnessed, the new century has been marked by a turbulent corporate world. Politicians, economic-policy makers, and citizens are calling for new regulation and control over the giant corporations ruling the economies of most countries.

After almost a century of dealing with corporations, the issue is still which is the best way to keep the corporations within the limits of what is right for a country’s economy without having a negative effect on the firm’s growing path. The fact that the taxation lies in the heart of the relation between the businesses and the rest of the society, implies that its understanding needs both sides of the story (even shown from different perspectives): the policy-maker decision on how, when, and whom to tax; and, the effects of taxation in the structure, productivity, and revenues of the firm. The former commonly studied, and the latest still open to include case studies of firms and countries.

CNN Money online / 20 September 2011

Studying the case of the United States during the first two decades of the twentieth century, Liu brings together a period of tremendous changes in the income regimes –including the introduction of the income taxes (corporate in 1909, personal in 1913)- with the appearance of the first well-known big corporations. In other words, this paper is a step forward to fill the gap in the literature on the contribution of income taxes in the spread of corporate forms during an early period.

Using a dataset that includes the tax rates, the corporate share of establishment, employment, and production in the manufacturing sector, Liu builds a theoretical framework that starts with a simple model to illustrate how firms make decisions about whether to incorporate based on comparison of the profits they are likely to obtain from each organizational form (p. 7). This offers a result that shows the complexity of the business decisions and the reality which the policy-maker has to deal with: the taxation of firms differs by organizational form.

Interestingly, Liu adds to the discussion the degree of incorporation making a case on the economic importance of corporations and the fact that a great number of firms incorporate in response to tax incentives, rather than productivity options. Therefore, there is a strong relationship between business incorporation and income taxes when the big transformation occurred.

In other words, firms were not keeping it simple for the policy-maker! As a dynamic unit, the decision on the organizational form they were going to take while growing depended not only on the complexity of the production, the financial options available, or the size of the markets, but also on how they relate with the taxation system that at the end could increase or decrease the degree of incorporation.

Being this intuition not new for those who study the evolution of firms, this paper adds data to a methodological approach that combines the advances of the corporate governance on the structure of the firm and the accounting concern on how to deal with what they have to give back to the society.