Category Archives: Economic History

Was Stalin’s Economic Policy the Root of Nazi Germany’s Defeat?

Was Stalin Necessary for Russia’s Economic Development?

By Anton Cheremukhin (Dallas Fed), Mikhail Golosov (Princeton), Sergei Guriev (SciencesPo), Aleh Tsyvinski (Yale)

Abstract: This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin’s economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin’s policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios.


Distributed by NEP-HIS on 2013-09-28

Review by Emanuele Felice

Until the late 1950s, the era of rapid Soviet growth and of Sputnik, the main question among Western scholars was: When would the Soviet Union catch up with and overtake the U.S.?*

As Cheremukhin et al. correctly emphasize, the subject of this paper – Soviet industrialization in the 1930s – is one of the most important in economic history, and in world history: Soviet Union was the country which played by far the biggest role in the defeat of Nazi Germany, standing almost alone against the land force of the Third Reich and its allies for most of the war and causing 87% of the total Axis’ military deaths (in sharp contrast with World War I, when the Tsarist empire was defeated by a German Reich fighting on two fronts). Emerging from World War II as a superpower, the victorious Soviet Union contributed to shape the next four decades of human history, boasting among its technological achievements the first voyage of a human being to the space. At the same time and during the Stalin regime (1922-1953), the scale of (politically caused) human suffering has had few parallels in world history. Furthermore, as early as the 1930s Stalin’s rule was one of the first totalitarian regimes capable of reaching levels of oppressiveness and manipulation over society unobserved before.

For these reasons Stalin’s Soviet Union should continue to be interrogated by systematic studies. At the core of that regime was industrialization, which aimed to be the material pillar of a new «civilization» (e.g. Kotkin, 1995). Regarding its impact over policy making in the twentieth century, Stalin’s forced industrialization was a source of inspiration for both economists and politicians throughout the world: its planned, top-down, implementation was widely considered to be a successful, though harsh, strategy by some contemporaries.

Joseph Stalin (b 1878 - 1953), Leader of the Soviet Union (1922-1953)

Joseph Stalin (b 1878 – 1953), Leader of the Soviet Union (1922-1953)

And yet, we still have relatively little macro-economic evidence about the Stalinist period. The article Cheremukhin et al. aims to partially fill this gap, by providing consistent figures, some new arguments and insightful counterfactuals. It builds upon a remarkable amount of original research. First, it provides a comprehensive and coherent reconstruction of data on output, consumption, investments, foreign trade and labour force. These figures are presented separately for the agricultural and non-agricultural sectors. Data begins in the last decades of Tsarist Russia (1885-1913) and for the the Soviet Union covers the launch of the first five-year plan until the Nazi’s invasion (1928-1940).

Secondly, Cheremukhin et al. propose and elaborate a growth model for the Russian economy in those two periods (i.e. Tsarist Russian and pre-Nazi invention Soviet Union). This is a multi-sector neoclassical model, which is modified to allow for the peculiarity of the economy under scrutiny; namely, due to the institutional frictions and policies that distorted household and firm decisions, three wedges are defined, corresponding to the intratemporal between-sector distortions in capital and labor allocations and to an intertemporal distortion, and price scissors in agricultural prices (between producers and consumers) − which may also be thought of as a fourth wedge − are also introduced for the Stalin’s period.

It may be worth adding that when connecting wedges to policies, the Cheremukhin et al. appear to be adequately aware of the historical context and of the differences between a planned economy and a free-market one: for instance, the response of the Stalinist economy to a drop in agricultural output is likely to be the opposite − because of the price scissors policy which kept producer’s agricultural prices artificially low − to the predictions of a frictionless neoclassical growth model: it will probably lead to a further reallocation of labour from agriculture to industry and services and, therefore, to an additional reduction of agricultural output; such a distortion is here acknowledged and reasonably calibrated.

 “Smoke of chimneys is the breath of Soviet Russia”, early Soviet poster promoting industrialization, 1917-1921

“Smoke of chimneys is the breath of Soviet Russia”, early Soviet poster promoting industrialization, 1917-1921

Thirdly, the paper by Cheremukhin et al. further elaborates on data and models, by providing a number of counterfactuals. Comparisons are made with the Tsarist economy by extrapolating Tsarist wedges for 1885-1913 to the 1928-1940 years. Also by comparing the performance of both economies (Tsarist and Stalinist), for the years following 1940 under the assumption that World War II never happened.

Another comparison takes place with Japan, a country similar to Russia before World War I in terms of GDP levels and growth rates. Early in the twentieth century Japan suffered similar distortions as Russia but during the interwar period Japan undertook an economic transformation which provided Cheremukhin et al. an alternative scenario to both the Tsarist and the Stalin policies (the Japanese projections are based upon previous reconstructions of the Japanese macro-economic figures, which happen to be available for the same period as for Russia, 1885-1940).

Japanese assault on the entrenched Russian forces, 1904

Japanese assault on the entrenched Russian forces, 1904

And what is probably the most intriguing counterfactual, at least in actual historical terms, is yet one more alternative scenario, constructed by assuming that Lenin’s New Economic Policy or NEP (launched in 1921 and outliving Lenin until 1927) would have continued even after 1927: such a counterfactual requires elaborating a model for the NEP economy as well, but unfortunately the lack of reliable data for the years 1921 to 1927 makes the discussion for this scenario «particularly tentative». Furthermore, it is worth mentioning that two more alternative scenarios are provided for the Stalin economy based on alternative growth rates for the years 1940 to 1960 and again under the assumption that World War II never happened; and that robustness exercises are also performed (with further details provided in the appendix).

Broadly speaking, the results are not favourable to Stalin. According to Cheremukhin et al., Stalin was not necessary for Russian industrialization − neither, it could be consequently argued, to the defeat of Nazism and to the Russia’s rise to a superpower status. Actually, by 1940 the Tsarist economy would probably have reached levels of production and a structure of the economy similar to the Stalinist one, but which far less short-term human costs. This result may not be irreconcilable to Gerschenkron’s (1962) theses about substitute factor − in Russia this was the State, already exerting such a role in late Tzarist times − and the advantages of backwardness: these latter would have permitted to backward Russia, once its industrialization had been set in motion at the end of the nineteenth century, to see its distance to the industrialized West reduced by the time of World War II more than in World War I, in any case – that is, also under the Tzarist regime. It does contrast, however, with other findings from pioneering cliometric articles on the issue, such as the one by Robert Allen published almost twenty years ago, according to which Stalin’s planned system brought about rapid industrialization and even a significant increase of the standard of living (Allen, 1998). Similarly, but from a different perspective, long-run reconstructions of Soviet labour productivity tend to emphasize as a problem the slow-down in the period following post World War II, rather than the performance the 1930s (Harrison, 1998) – both Allen and Harrison are cited in this paper, but not these specific articles.

The Dnieper Hydroelectric Station under construction, South-Eastern Ukraine (the work was begun in 1927 and inaugurated in 1932)

The Dnieper Hydroelectric Station under construction, South-Eastern Ukraine (the work was begun in 1927 and inaugurated in 1932)

Now, at the core of the results by Cheremukhin et al. is the finding that, according to their estimates, total factor productivity of the USSR in the non-agricultural sector did not grow from 1928 to 1940. Maybe it is worth discussing this point in a little more detail. Is such a finding plausible? At a first sight it seems puzzling, given the technological advance of that period especially in the heavy sectors. And yet, at a closer inspection it may turn out to be entirely logical: the growth of output was a consequence of massive inflows of inputs, both machinery (capital) and labour. But all considered these were not used in a more efficient way.

In the model by Cheremukhin et al., capital and labour are computed through a Cobb-Douglas production function, with constant elasticity coefficients for labour and capital (0.7 and 0.3 respectively in the non-agricultural sector; 0.55 and 0.14 in the agricultural one, thus assuming a land’s elasticity of 0.31). The authors make a point that the new labour force entering the non-agricultural sector was largely unskilled and, often, was not even usefully employed. Actually exceeding the real needs of that sector: this politically induced distortion could hardly have increased TFP (although, under different assumptions, it could be alternatively modeled through a decreasing elasticity of labour: but the results in terms of total output would not change). This may also explain the good performance of Soviet Union during World War II, when due to manpower shortage the exceeding labour force finally could be profitably employed. The capital stock is calculated by the authors at 1937 prices, for the years 1928-1940.

Anti-Nazi propaganda poster, 1945

Anti-Nazi propaganda poster, 1945

We do not have enough information in order to judge whether a bias can be caused by the use of constant prices based on a late-year of the series. But this possible bias should lead to an underestimation of capital growth in that period  − given that quantities are probably weighted with relative prices lower in 1937 for the heavy sectors, than in 1928 − which would then produce an overestimation in the TFP growth proposed by the authors: in actual terms, therefore, the growth of TFP may be even lower than what estimated; in more general terms – and although caution is warranted for the lack of detailed figures – their results look realistic in this respect.

The most interesting finding, however, is the one relative to the NEP counterfactual. It is the most interesting because, in genuine historical terms, the Tzarist model was no longer a viable option to Stalin, while NEP’s strategy was. But of course, data for the NEP years are much more precarious and thus this counterfactual can only be a particularly tentative one. Nonetheless, the authors build two scenarios for the NEP policy: a lower-bound one, where a growth rate of TFP in manufacturing after 1928 similar to the average Tsarist 0.5% is tested; and an upper-bound one, with a growth rate of 2% similar to the one experienced by Japan in the same interwar period. In the first scenario the results for the Soviet economy would have been slightly worse, but in the second one much better. Given that the two scenarios correspond to the boundaries of the possibility frontier, we may conclude that probably, under the NEP, the performance of the Soviet economy would have been better than both the one observed under the Stalin and that predictable under the Tzar. This may confirm the view that the 1920s were somehow the “golden age” of Soviet communism, as well as the favourable assessment of Lenin’s and later of the collective Soviet leadership in that decade (although, admittedly, Lenin intended the NEP only as a temporary policy). After all, a more inclusive leadership – as opposed to the harshness of Stalinist autocracy in the 1930s, as well as to Hitler despotic conduct of war since the winter of 1941 – was also the one which helped the Red Army to win World War II.

“The victory of socialism in the USSR is guaranteed”, 1932

“The victory of socialism in the USSR is guaranteed”, 1932


Allen,  Robert C., Capital accumulation, the soft budget constraint and Soviet industrialization, in «European Review of Economic History», 1998, 2(1), pp. 1-24.

Gerschenkron, Alexander, Economic backwardness in historical perspective, Cambridge, Mass., The Belknap Press of Harvard University Press, 1962.

Harrison, Mark, Trends in Soviet Labour Productivity, 1928−85: War, postwar recovery, and slowdown, in «European Review of Economic History», 1998, 2(2), pp. 171-200.

Kotkin, Stephen, Magnetic Mountain: Stalinism as a Civilization, University of California Press, Berkeley, Los Angeles, and London, 1995.

Source of quote:
Gur Ofer (1987) “Soviet Economic Growth: 1928-1985,” Journal of Economic Literature, Vol. 25, No. 4, pp. 1767-1833 (cited in this paper, p. 2).

Who Pays the Bills?

Sovereign Debt Guarantees and Default: Lessons from the UK and Ireland, 1920-1938

By Nathan Foley-Fisher (Federal Reserve Board) and Eoin McLaughlin (St. Andrews)

Abstract We study the daily yields on Irish land bonds listed on the Dublin Stock Exchange during the years 1920-1938. We exploit structural differences in bonds guaranteed by the UK and Irish governments to find Irish events that had long term effects on the credibility of government guarantees. We document two major events: The Anglo-Irish Treaty of 1921 and Ireland’s default on intergovernmental payments in 1932. We discuss the political and economic forces behind the Irish and UK governments’ decisions. Our finding has implications for modern-day proposals to issue jointly-guaranteed sovereign debt.


Distributed by NEP-HIS on: 2015-05-16

Review by Sarah Charity (Queen’s University of Belfast)

This working paper abets us in shedding some light on the financial implications for current economic events. One that dominated the headlines most prominently was Scotland’s decision to vote on independence in their recent referendum. Hard-line fiscal policy makers held their breath while questions simmered such as; would an independent Scotland continue debt repayments to Britain? What if they defaulted on these payments? The authors investigate how public debt in Ireland was dealt with during their severance from the political state of the United Kingdom in the early 20th century, focusing on the implementation of UK- and Irish-backed land bonds over this period of significant Irish land reform, when ownership was transferred from landlords to tenants. From this episode in Irish history, we can draw comparisons and learn lessons for today.


Foley-Fisher and McLaughlin look to previous studies in which yield spreads between UK and Irish government bonds are analysed, such as that of Nevin (1963) and Ó Gráda (1994). They contribute to the existing literature by concentrating on land bonds. They base their methodology on the idea of particular structural breaks occurring in their time-series data. They build on the discoveries of Willard et al. (1996) who defined breaks as a change in the intercept of the time series – ‘a shift in the mean’ (p.11-12), while Zussman et al. (2008) also searched for ‘breakpoints’ (p.4) in their methodology. They analyse the shifts in ‘perceived value of sovereign guarantees’ (p.11) by looking for changes in the mean of the yield spreads.

The impact of bond spreads ‘diffused’ (p.15) around three significant events. The first break coincides with the Anglo Irish Treaty passing in 1921 while the second occurred a decade later when the default by Ireland on land bond payments beckoned. Around this time, Eamon De Valera, founder of Irish political party Fianna Fáil, announced the ‘Free State would not honour the bi-annual payments due under various financial agreements between Ireland and the UK’ (p.14). The final break came at the end of the sample period, however this is discounted as irrelevant due to trade war negotiations being ‘unlikely…(to be) sufficient’ (p.15).

Parliamentary acts sanctioned the used of generous government guaranteed land bonds to finance state mortgages, rather similar to the volatile mortgage backed securities of the recent credit crisis, allowing farmers to borrow significant amounts of credit at lower rates. The idea was to curtail the Irish Nationalists, however it proved unsuccessful and the ‘hardline republicans’ (p.6) received independence through the signing of the Treaty in December 1921. A new dawn was on the horizon, bringing with it the promise of a new government – but it was lamentably overshadowed by the onset of the Irish Civil War. The newly established Free State was released from its obligation towards UK public debt in return for permanent partition; however it agreed to maintain annuity payments along with issuance of more land bonds.

The authors calculate the credibility of UK guarantees, otherwise known as sovereign risk, post-independence using yield spreads controlling for risks of inflation and exchange rate alternations. They acknowledge other scholars in assessing the importance of credibility in economic features such as the ‘cost of government finance’ (p.5) as investigated by Flandreau & Zumer (2009) and the estimated behaviour of the government as a ‘counterparty in other contracts’ (p.5) as seen in Cole & Kehoe (1998). Foley-Fisher and McLaughlin found the spread over UK government bonds to be 60 basis points indicating a low credit risk for the UK- and Irish-backed land bonds. Through their estimations they suggested that the increased yield spread of the land bonds during the ‘benchmark’ years from 1921 to 1932 was highly significant. After Ireland defaulted, the land bonds were no longer considered risky and the spread on UK-backed land bonds returned to zero. The authors are perhaps slightly restricted by their sample period. Mercille (2006, p.3) tells us little research exists on the significant long-term costs related to yield spreads, forcing us to seek answers elsewhere.


Foley-Fisher and McLaughlin suggest that the cost of Ireland’s default was greater for their British counterparts. They give reasons for the UK’s intervention such as the insignificant cost to the UK Treasury, who continued making interest repayments to ensure bond holders remained intact; UK war loan negotiations and the fact land bonds were mostly held in the UK ensured Whitehall was an interested party. The authors provide us with a contrasting government reaction to default in another commonwealth country, using the contemporaneous case of Newfoundland, whose debt profile bore echoes of Ireland’s. As previously mentioned, the cost for the UK government of bondholders’ losses through passing on Ireland’s default far outweighed the benefits. In the Newfoundland example, the UK government’s reaction was to withdraw from the imminent burden of financial instability and force confederation of the Dominion with Canada, thus shedding the burden for bondholders’ losses – a consequence independence-seeking Scotland may have wanted to consider.

In the absence of case studies, Ireland’s historical sovereign break up ensures Foley-Fisher and McLaughlin’s ‘simple empirical strategy’ (C.R, 2014) is applicable to and useful in multiple current financial situations whether it be the aforementioned Scottish referendum, or the pending disintegration of Catalonia from Spain. Moodys (2014) discovered that 75% of the 17 country break ups which have occurred since 1983 resulted in sovereign default by the preceding or the new state – albeit these implications ‘cannot be easily applied’ (p.3) to more recent breakups, paving the way for this exploration of Ireland as the model to follow.

This paper describes apportioning fiscal liabilities as ‘complex’ and provides advice for states in the process of seeking dissolution – uncertainty is persistent. Debt must be paid and it may be guaranteed by the Treasury of the former union in the wake of default, but the ambiguity in the outcome remains. According to the blogger C.R., writing in The Economist (2014), it seems as if partition is more straightforward politically rather than financially or economically. From what Foley-Fisher and McLaughlin have taught us in their empirical study, the cost of default and fiscal uncertainty lingers long after secession. In conclusion, the exploits of our Irish ancestors from the previous century are what we, alongside other state governments, must contemplate when the sword of political state break-up strikes again.


Cole, H. L. & Kehoe, P. J. (1998), ‘Models of Sovereign Debt: Partial versus General Reputations’, International Economic Review 39(1), 55–70.

C.R (Feb. 21st 2014) The economics of Scottish Independence- a messy divorce, Blighty Britain Available at: (Accessed: March 22nd 2015)

Ferguson, N. (2006), ‘Political risk and the international bond market between the 1848 revolution and the outbreak of the First World War’, Economic History Review 59, 70– 112

Flandreau, M. & Zumer, F. (2009), The Making of Global Finance 1880-1913, Paris: OECD Publishing.

Hancock, W. (1964), Survey of British Commonwealth Affairs. Volume I Problems of Nationality 1918-1936, Oxford: Oxford University Press.

Mauro, P., Sussman, N. & Yafeh, Y. (2006), Emerging Markets and Financial Globalization, Oxford: Oxford University Press.

Mercille, J. (2006) ‘The Media and the Question of Sovereign Debt Default in the European Economic Crisis: The Case of Ireland’, University of Sheffield, Available at: (Accessed August 18, 2015).

Moodys (May 21st. 2014) When countries broke up, sovereign default risk spiked, Available at:–PR_299968?WT.mc_id=NLTITLE_YYYYMMDD_PR_299968 (Accessed: March 23rd. 2015).

Nevin, E. (1963), ‘The Capital Stock of Irish Industry’, Economic and Social Research Institute(ESRI) paper No. 17, Dublin. Available at: (Accessed August 18, 2015).

Ó Gráda, C. (1994), Ireland: A new Economic History 1780-1939, Clarendon Press, Oxford.

Willard, K. L., Guinnane, T. W. & Rosen, H. S. (1996), ‘Turning points in the Civil War: views from the Greenback market’, American Economic Review 86, 1001–1018.

Zussman, A., Zussman, N. & Nielson, M. O. (2008), ‘Asset Market Prespectives on the Israeli-Palestinian conflict’, Economica 75, 84–115.

By failing to prepare, you are preparing to fail

The European Crisis in the Context of the History of Previous Financial Crisis

by Michael Bordo & Harold James

Abstract – There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis –a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fuelled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.


Circulated by NEP-HIS on: 2015-01-26

Reviewed by: Stephen Billington (Queen’s University of Belfast)


In this paper Bordo and James seek to analyse the impact of the financial crisis of 2007-8 in the context of previous crisis. Specifically by comparing the experience of periphery countries of the Eurozone with those of the “classic” Gold Standard.


In their paper Bordo and James give a synopsis of the similarities which emerged between both monetary regimes. By adhering to a gold parity there was an expansion in the banking system, through large capital inflows, which was underpinned by a strong effective state to allow for greater borrowing. A nation was effective if it held an international diplomatic commitment, which in turn required them to sign into international systems, all the while this played into the hands of radical political parties who played on civilian nationalism[1]; these events combined lead to great inflows of capital into peripheral countries which inevitably led to fiscal instability and a resulting crisis. Similar dilemmas occurred within the EMU, but much more intensely.


This brings me to the main point that the authors emphasize, that of the contingency rule of the classic gold standard. The latter allowed member countries a “safety valve for fiscal policy”. Essentially this was an escape clause that permitted a country to temporarily devalue its currency in an emergency, such as the outbreak of war or a financial crisis, but would return to normalcy soon after, that is, they would return to previous levels. Bordo and James’ argument is that this lack of a contingency within the EMU allowed for a more severe financial crisis to afflict the periphery countries (Greece, Ireland and Portugal) than had affected gold standard peripheries (Argentina, Italy and Australia) as modern day EMU countries did (and do) not have to option to devalue their currency.


Bordo and James point out that crisis during the gold standard were very sharp, but did not last as long as the 2007-8 crisis. This because the exclusion clause during the gold standard enabled a “breathing space” and as a result most countries were back to growth within a few short years. The EMU story is quite different, say Bordo and James. Mundell (1961) argued that a successful monetary union requires the existence of a well-functioning mechanism for adjustment, what we see in the EMU are a case of worse dilemmas due primarily to this absence of an escape clause.

“Gold outflows, and, with money and credit growth tied to gold, lower money and credit growth. The lower money and credit growth would cause prices and wages to fall (or would lead to reductions in the growth rates of prices and wages), helping to restore competitiveness, thus eliminating the external deficits”

The above quote provided by Gibson, Palivos and Tavlas (2014) highlights how the gold standard allowed a country to adjust to a deficit. This point reinforces how Bordo & James argue that due to the constricting nature of the EMU there is no “safety valve” to allowed EU countries to release the steam from increasing debt levels. With respect to the Argentine Baring Crisis of 1890, while the crisis was very sharp in terms of real GDP, pre-crisis levels of GDP were again reached by 1893 – clearly a contrast with the Euro as some countries are still in recession with very little progress having been made as suggested by the following headline: “Greece’s current GDP is stuck in ancient Greece” – Business Insider (2013).

The following graph highlights the issue that in Europe most countries are still lagging behind the pre-crisis levels of GDP.


Bordo and James clearly support this argument. Delles and Tavlas (2013) also argue that the adjustment mechanism of core and periphery countries limited the size and persistence of external deficits. They put forward that the durability of the gold standard relied on this mechanism. This is reinforced by Bloomfield (1959) who states it “facilitated adjustments to balance of payments disequilibrium”.

Vinals (1996) further supports the authors’ sentiments by arguing that the Treaty of Maastricht restricts an individual member’s room to manoeuvre as the Treaty requires sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP – meaning a member cannot smooth over these imbalances through spending or taxation.

Gibson, Palivos and Tavlas (2014) state “a major cost of monetary unions is the reduced flexibility to adjust to asymmetric shocks”. They argue that internal devaluations must occur to adjust to fiscal imbalances, but go on to argue that these are much harder to implement than in theory, again supported by Vinals (1996).


Bordo and James focus primarily on three EU periphery countries which are doing badly, namely Greece, Ireland and Portugal. However they neglect the remaining countries within the EU which can also be classed as a periphery. According the Wallerstein (1974) the periphery can be seen as the less developed countries, these could include further countries such as those from eastern Europe[2]. By looking at a more expansive view of peripheral countries we can see that these other peripherals had quick recoveries with sharp decreases in GDP growth, as in the case of the Gold standard countries, but swiftly recovered to high levels of growth again while the main peripheral countries the authors analyse do lag behind.

Untitled2See note 3

Bordo and James do provide a strong insight into the relationship between an adjustment mechanism to combating fiscal imbalances as a means of explaining the poor recovery of certain peripheral countries (i.e. Greece, Ireland, Portugal) and highlight the implications of this in the future of the EMU. If the EMU cannot find a contingency rule as the gold standard then recessions may leave them as vulnerable in the future as they are now.


1) This process can be thought of as a trilemma, Obstfeld, Taylor and Shambaugh (2004) give a better explanation. In the EU the problem was intensified as governments could back higher levels of debt, and there was no provision for European banking supervision, the commitment to EU integration let markets believe that there were no limits to debt levels. This led to inflows in periphery countries where banks could become too big to be rescued.

2) Latvia, Lithuania, Slovakia, Slovenia, and even Cyprus can be included based on low GDP per capita which is equivalent to Greece.

3) Data taken from Eurostat comparing real GDP growth levels of lesser developed countries within the Eurozone who all use the euro and would be locked into the same system of no adjustment.


Bloomfield, A. (1959) Monetary Policy under the International Gold Standard. New York: Federal Reserve Bank of New York.

Business Insider (2013). Every Country in Europe Should be Glad it’s Not Greece. [Accessed 19/03/2015].

Eurostat, Real GDP Growth Rates [Accessed 21/03/2015].

Dellas, Harris; Tavlas, George S. (2013). The Gold Standard, The Euro, and The Origins of the Greek Sovereign Debt Crisis. Cato Journal 33(3): 491-520.

Gibson, Heather D; Palivos, Theodore; Tavlas, George S. (2014). The Crisis in the Euro Area: An Analytic Overview.Journal of Macroeconomics 39: 233-239.

Mundell, Robert A. (1961). A Theory of Optimum Currency Areas. The American Economic Review 51(4): 657-665.

Obstfeld, Maurice. Taylor, Alan. Shambaugh, Jay C. (2004). The Trilemma in History: Trade-Offs among Exchange Rates, Monetary Policies and Capital Mobility. National Bureau of Economic Research (NBER working paper 10396).

Vinals, Jose. (1996). European Monetary Integration: A Narrow or Wide EMU?. European Economic Review 40(3-5): 1103-1109.

Wallerstein, Immanuel (1974). The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press.


The Neoliberal Model is not Sustainable but State Driven Models have not Proven to be Any Better: How About We Just Redistribute the Wealth?

State Versus Market in Developing Countries in the Twenty First Century

by Kalim Siddiqui (University of Huddersfield)(

This paper analyses the issue of the state versus the market in developing countries. There was wide ranging debate in the 1950s and 1960s about the role of the state in their economy when these countries attained independence, with developing their economies and eradicating poverty and backwardness being seen as their key priority. In the post-World War II period, the all-pervasive ‘laissez-faire’ model of development was rejected, because during the pre-war period such policies had failed to resolve the economic crisis. Therefore, Keynesian interventionist economic policies were adopted in most of these countries.

The economic crisis in developing countries during the 1980s and 1990s provided an opportunity for international financial institutions to impose ‘Structural Adjustment Programmes’ in the name of aid, which has proved to be disastrous. More than two decades of pursuing neoliberal policies has reduced the progressive aspects of the state sector. The on-going crisis in terms of high unemployment, poverty and inequality provides an opportunity to critically reflect on past performance and on the desirability of reviving the role of the state sector in a way that will contribute to human development.


Revised by: Stefano Tijerina (University of Maine)

This paper was distributed by NEP-HIS on 2015-04-19. In it Kalim Siddiqui indicates that the global economic crisis that began in 2007 “provides an opportunity” to reconsider Keynesian interventionist models, thus “reviving the role of the state sector” for purposes of protecting the interests of the majority. Siddiqui centers his argument on the modern economic development experiences of the developing world, juxtaposing it with the experiences of advanced industrialized nations. He particularly emphasizes the economic development experiences of the United States and the United Kingdom, in efforts to advance the argument that Keynesian interventionist policies and protectionist agendas are instrumental in securing a transition into advance industrialization. He argues that the developing world needs to experience a similar transition to that of the UK and the US in order to achieve similar levels industrial competitiveness. However the neoliberal discourse promoted by the industrial powers and the multilateral system after World War Two, and the implementation of neoclassical liberal policies after the 1980s, impeded the developing world from moving in the right direction.


Siddiqui begins the construction of his argument by providing a brief history of the modern economic development patterns of both the UK and the US. This lays the foundation for his main argument that developing nations should return to the Keynesian patters of economic development in order to achieve advanced levels of industrialization that will eventually allow them to correct present market failures, reducing unemployment, poverty, and environmental degradation.

He points out that in the 1970s and 1980s the UK and US moved away from interventionist policies and adopted a neo-classical model of economic development in response to “corruption, favoritism, and other forms of self-seeking behavior,” that lead to the economic crisis of the times. This model would then be promoted across the international system by the economists of the World Bank and the IMF who found in the same neo-classical model an explanation for the failed Import Substitution Industrialization (ISI) policies implemented across the developing world to cope with the crisis of the 1970s and 1980s.

Kalim Siddiqui

Kalim Siddiqui

What Siddiqui does not address is that the failure of the implementation of the ISI policies across the developing world were the direct result of the same corruption and self-centered tendencies of leadership that forced a move away from interventionist policies in countries like the UK and the US. I agree with Siddiqui that the structural changes introduced by the multilateral financial agencies did more damage than good, however I disagree with his idea that the developing world should return once again to Keynesian solutions, since the implementation of these structural adjustment programs were in fact forms of interventionism that catapulted most of these economies into debt.

Siddiqui then lays down a series of reasons why the role of the state should be reconsidered across the developing world, highlighting that greater interventionism would be more beneficial than an increasing role of the market system. He uses the recent success stories of state driven capitalist experiments such as China’s, Brazil’s, India’s, and Malaysia’s, disregarding the fact that these state driven models continue to be tainted with problems of corruption and self-rewarding management styles that are inefficient and wasteful. For example, he points out the success of Petrobras in Brazil, not following up on the fact that the state-run oil company is now under investigation for high levels of corruption that has sent its stock price in a critical downward spiral.


At the end Siddiqui’s argument is debunked by more contemporary realities; including decreasing global unemployment patters, economic recovery, and the downfall of state run economies such as those that moved to the Left in Latin America during recent times. Moreover, the bailout policies implemented by the United States and the European Union during the peak of the latest financial crisis contradicts Siddiqui’s argument that neoliberal economies “do not countenance any economic intervention by the state.” I argue that interventionism is an integral part of the advancement of neoliberal agendas; the question that Siddiqqui should be asking is what degree of interventionism is ideal for the developing world under a global neoliberal reality that is inevitable to avoid?

Siddiqui’s work represents yet another criticism to neoliberal capitalism, centering on the agendas set by the administrations of Margaret Thatcher and Ronald Reagan in the 1980s. It does not provide a convincing method or strategy for reviving state driven capitalism under an increasingly intertwined global economic system. It is rich in criticism but short of offering any real solutions through state interventionism. Current case studies that have returned to interventionist models, as in the case of Brazil or India, have failed once again to resolve issues of poverty and income inequality. I agree with the author’s conclusion that the implementation of neoliberal models across the developing world has distorted inequality and social justice even further but disagree with the simplistic solution of increasing state interventionism in the management of market driven economies for the sake of it. More so when the historic evidence indicates that the leadership across the developing world has consistently pursued self-interests and not the interests of the masses. From my point of view, the revival of interventionist models across the developing world will just complete the vicious cycle of history one more time, particularly now that the interests of private global actors has permeated the internal political economy decision making processes of the developing world. If in the early stages of the modern economic development of the developing world foreign political and business interests directly and indirectly penetrated local decision making, thanks in part to the intervention of the World Bank and the IMF as it was pointed out by Siddiqui, then it is inevitable to impede such filtrations under a global system, unless the nation state is willing to pay the high costs of isolationism.


Siddiqui indicates that self-marginalization from the market system worked for the UK and the US, allowing them to strengthen their internal market and generate the technological and human capital capabilities necessary for advanced industrialization, but that was more than one hundred years ago when the globalization of the market had not reached the levels of sophistication of today. If these industrial powers were to try this same experiment today, the outcome would have been very different. In the past decade developing nations such as Venezuela, Argentina, Bolivia, and Ecuador have experimented with Siddiqui’s model and the results have been no different than the old experiments of Import Substitution Industrialization and other interventionist approaches of the post-Second World War Two era. Corruption, political self-interest, lack of internal will to risk investment capital, lack of infrastructure, lack of an internal sophisticated consumer market, the absence of technology and energy resources, and the inability to generate short-term wealth for redistribute purposes in order to guarantee the long-term projection of the interventionist model has resulted in failed revivals of the Keynesian model. It is the reason why Cuba is now willing to redefine its geopolitical strategy and reestablish relations with the United States; clearly the interventionist model is and was not able to sustain a national economy under a market driven international system.


The solution lies inside the market system. It is futile to denigrate neoliberalism unless the developing world leadership is willing to construct a parallel market system, as once envisioned by Hugo Chavez, but we are far from that reality. Instead each nation state should reevaluate its wealth distributive and resource allocation policies, moving away from defense spending and refocusing on infrastructure, technology, human capital, health, and the construction of a solid and self-sustainable middle class. Van Parijs’s pivotal work, Real Freedom for All speaks to this idea, indicating that the solution to securing policies that center on what Siddiqui calls the majority, lies in capitalism and not in socialism. If, through a more equal distribution of capital across all sectors of society, capitalism is able to outperform any socialist or interventionist model, then there is no need to attack capitalism and its neoliberal ideas. A replication of this model across the developing world would boost economies into a more sophisticated level of economic development. More competition among states’ private sectors would lead to a more efficient international system, a dynamic that would be enhanced even further by less and not more government intervention. However, the current realities pointed out by Siddiqui indicate that political and corporate elites are not willing to redefine their views on capitalism and therefore we need greater government intervention for redistribute purposes. The redistribution of the pie is the only way to avoid Marx’s inevitable revolution, I agree with Siddiqui. But I do not trust the role of the state as a redistributive agent. I am more in favor of what Michael Howard calls “basic income capitalism” that secures sustainable expendable income in the hands of all consumers through the market system. The dilemma of interventionism continues to be at the forefront, yet it could easily be resolved by the market itself, as long as the actors, workers and owners of capital, are willing to redefine the outreach and potential of capitalism; as long as the social construction of freedom of capital is redefined?


Michael W. Howard, “Exploitation, Labor, and Basic Income.” University of Maine (work in progress).

Kalim Siddiqui, “State Versus Market in Developing Countries in the Twenty First Century,” Institute of Economic Research (working paper), submitted at VIII International Conference on Applied Economics, Poland, June 2015, p.1.

Van Parijs, P. Real Freedom for All: What (If Anything) Could Justify Capitalism. Oxford: Oxford University Press, 2005.

Does Technological Progress Lead to more Human Capital Formation? Evidence from the French Industrial Revolution

The Complementarity between Technology and Human Capital in the Early Phase of Industrialization

By Raphael Franck (Bar-Ilan University and Brown University, and Oded Galor (Brown University,



The research explores the effect of industrialization on human capital formation. Exploiting exogenous regional variations in the adoption of steam engines across France, the study establishes that in contrast to conventional wisdom that views early industrialization as a predominantly deskilling process, the industrial revolution was conducive for human capital formation, generating broad increases in literacy rates and education attainment.

Review by Natacha Postel-Vinay (University of Warwick)

While human capital is often thought to be at the root of any development process, early industrialization itself is often thought to be de-skilling. Images of children working long hours executing repetitive tasks usually come up when one thinks of the Industrial Revolution (Humphries, 2010). Yet there is also the idea that industrial and technical development might lead to a greater need for skilled labour to maintain, fix and adapt new machinery. In this case industrial development might lead to a greater supply of schooling and might result in significant human capital improvements. Focusing on early French industrialization in a recent working paper (distributed by NEP-HIS on 2015-05-02), Franck and Galor attempt to demonstrate just this.

Featured image

Steam engine from Lille (Nord departement)

Making use of data from the 1840s, the authors find a positive correlation across French departements between the number of steam engines and human capital indicators such as the share of literate conscripts, the share of pupils in the population, and the number of teachers (which would be more suggestive if also set relative to population). This correlation is best illustrated in a series of shaded maps (Figure 3), although the strikingly high levels schooling and literacy in the north-eastern part of France remain to be explained. Of course, correlation does not necessarily imply causation: it may be that other factors caused both the number of steam engines and the number of teachers to increase in certain areas, which could render any relationship between the two fortuitous.

Figure 3 in Franck and Oded Galor (2015).

Figure 3 in Franck and Oded Galor (2015).

To tackle this endogeneity problem, the authors make clever use of the fact that the first steam engine was introduced in 1735 in Fresnes-sur-Escaut in the Nord departement, near the northern tip of France. Since technology diffusion can be reasonably assumed to occur first around the region where the new technology was first introduced (which was indeed the case), it seems possible to use each departement’s distance from Fresnes-sur-Escaut as an instrument in the regression. In the first stage of the regression, they successfully show that the shorter a departement’s distance from the first steam engine location, the larger the number of steam engines in the departement, which seems quite reasonable.

To prove the exogeneity of the instrument, the authors have to show that human capital formation was not higher closer to the first steam engine location. This is trickier. To support their case, Franck and Galor investigate the relationship between distance from Nord and economic development indicators from around 1700, such as urban population, literacy rates and university location. They find that there is no correlation (although this may be surprising in light of Figure 1). More importantly, human capital may be quite imperfectly captured by these indicators in the pre-industrial era, when human capital may have developed in ways that are quite difficult to measure: through the transmission of skills from masters to apprentices, or learning-by-doing. It has often been shown that there was no clear relationship between technological progress and literacy rates in the early modern era (Mitch, 1999). Accordingly perhaps more detail should be provided in the paper as to why the steam engine was first introduced in this region and not elsewhere.

Figure 1 in Franck and Galor (2015)

Figure 1 in Franck and Galor (2015)

Which brings me to a broader point about the paper. Although its stated aim is to investigate the causal relationship running from technological progress to human capital formation, causality could run the other way around. Although endogeneity issues are explicitly addressed in the paper from (and confounding factors such as land suitability, rainfall, access to waterways, distance from Paris, and market integration duly controlled for), the specific problem of reverse causality is not explicitly dealt with in the text. Reassuringly the IV model should theoretically take care of reverse causality, but the authors could still discuss this possibility in more detail.

Featured image

Boys at school in Nord departement in the 19th c.

Overall though, Franck and Galor rather successfully tackle a very important and highly complex aspect of industrialization processes. By showing that technological improvement led to advances in human capital accumulation, these results in turn trigger a number of questions. Through which mechanism did industrialization lead to better schooling and literacy rates? Was the process demand-driven? Or did parents’ higher wages mean that children no longer had to work to help the family? Finally, could child labour abuse in factories have led to local initiatives to promote schooling? This latter hypothesis is discussed by Weissbach (1989), who emphasizes a particularly strong will to change the status quo in Alsatian and nearby regions — which could partly explain the greater spread of schooling in this part of France. Such inquiries could be the subject of fascinating future research.

Featured image

Children in a textile factory in 19th c. Provence


Humphries, Jane. 2010. Childhood and Child Labour in the British Industrial Revolution. Cambridge: Cambridge University Press.

Mitch, David. 1999. “The Role of Education and Skill in the British Industrial Revolution.” In Joel Mokyr, ed., The British Industrial Revolution: An Economic Perspective, 2 ed. Boulder, nd CO: Westview Press, pp. 241–79.

Weissbach, L. S. 1989. Child Labor Reform in Nineteenth Century France: Assuring the Future Harvest. Louisiana State University Press.

The Godfactor

Religion and Innovation

By Roland Bénabou (, Davide Ticchi ( and Andrea Vindigni (



In earlier work (Bénabou, Ticchi and Vindigni 2013) we uncovered a robust negative association between religiosity and patents per capita, holding across countries as well as US states, with and without controls. In this paper we turn to the individual level, examining the relationship between religiosity and a broad set of pro- or anti-innovation attitudes in all five waves of the World Values Survey (1980 to 2005). We thus relate eleven indicators of individual openness to innovation, broadly defined (e.g., attitudes toward science and technology, new versus old ideas, change, risk taking, personal agency, imagination and independence in children) to five different measures of religiosity, including beliefs and attendance. We control for all standard socio-demographics as well as country, year and denomination fixed effects. Across the fifty-two estimated specifications, greater religiosity is almost uniformly and very significantly associated to less favorable views of innovation.

Review by Stuart Henderson (Queen’s University Belfast)

What is the effect of religion on innovation? A recent working paper by Bénabou, Ticchi and Vingini (2015) (henceforth BTV), and distributed by NEP-HIS on 2015-04-02, suggests that religious differences contribute to significant variation in attitudes towards innovation. In particular, BTV find a consistent and robust negative relationship between various measures of religiosity and attitudes which are considered more favourable to innovation and change.

BTV use individual-level data from all waves of the World Values Survey from 1980 to 2005. This provides a variety of innovation measures which are categorised under the following three headings: “attitudes toward science and technology”, “attitudes toward new ideas, change, and risk taking” and “child qualities”. On the right-hand-side of the regression specification, religiosity is measured using the following alternatives: “identifying as a religious person, belief in God, importance of religion and importance of God in your life, and finally church attendance”. In addition, further socio-demographic controls are included.


BTV builds especially on Bénabou, Ticchi and Vingini (2013), who similarly find a negative relationship between religiosity and patents per capita across countries and US states. However, their more recent work benefits from a wider spectrum of innovation indicators, as well as the use individual-level data which helps to ameliorate concerns such as the ecological fallacy problem. More generally, their work also adds to a growing economics of religion literature, which has increasingly developed a more nuanced understanding of the causal mechanism associating religion with economic outcomes.

As BVT posit, their work fills a neglected niche which should provide greater clarity on how religiousness (and potentially secularisation) can drive innovation, and thereby long-run growth. Related literature such as Guiso et al. (2003) has emphasised that religious beliefs have a positive association with economic attitudes and growth respectively. However, Barro and McCleary (2003) find that this is tempered by the extent of religious participation, in what can be seen as a believing-belonging trade-off. Similarly, recent work by Campante and Yanagizawa-Drott (2015), and focusing on Ramadan, demonstrates how religious participation enhances the well-being of participants, but negatively affects economic outcomes. As such, while BVT advocate a strong relationship between religion and innovation, there is potentially room for a more refined consideration of religiosity differences especially between those of beliefs and participation. (This seems to be evidenced in that the church attendance religiosity measure is generally weakest across the specifications used by BVT.)


There are a number of further considerations and extensions which may be beneficial for BVT in future work. Take for example when BVT focus on “attitudes toward science and technology”. Here the statistical significance and magnitude of the coefficients fall as we go down the list of statements analysed:

  • “We depend too much on science and not enough on faith”
  • “Science and technology make our way of life change too fast”
  • “The world is better off because of science and technology”

Intuitively, this makes sense. The first and second statements are made in a negative manner, as opposed to the latter which is positive. Furthermore, the first more clearly juxtaposes religion and innovation. Hence, it is possible that the framing of the statements is driving the perceived negative association. Similarly, for the “child qualities” variables, respondents select five they consider “especially important”. The ranking nature of this question, means that if religious faith (which appears as one of the options) is selected, then the values perceived as innovative will on average move down the list, even if people perceive them as important (since only five can be selected). It also seems unusual that religious faith would feature as an alternative choice given the position of religiosity on the other side of the regression specification.

One solution to this potential bias is to examine differences between and within denominations (as BVT already allude to). Indeed, previous work such as Arruñada (2010) has demonstrated how denominational groupings (Catholics vs. Protestant) differ in their economic attitudes. Moreover, by excluding those who are not religious, and then focusing on the gradation in religious practice, BVT could more precisely understand how the intensity of religious practice influences innovation attitudes. In addition, by focusing not only on denominational differences, but also on religious intensity, BVT could potentially deal with the issue of nominal religious identity/cultural labelling, something which has received little attention in previous work.


The issue of causality is also important, with recent literature employing a variety of novel approaches to deal with such problems. In particular, instrumental variables have become especially popular, and have helped to alleviate concerns such as reverse causality and endogeneity. More broadly, for BVT there exists an opportunity to address how their attitudinal indicators of innovation are reflected in innovation outcomes. While difficult, this would potentially have much greater policy implications, especially if one believes in the functional nature of religion. (There also exists opportunity to examine how socio-demographic factors such as gender interact with religion and thereby affect innovation.)

In sum, BVT have effectively added a much-needed innovation perspective to the economics of religion literature. These initial results suggest that various forms of religiosity have a negative association with attitudinal measures of innovation at the individual-level, complementing previous work by Bénabou, Ticchi and Vingini (2013) across countries and US states. Moreover, their rich data set provides much opportunity to more precisely focus on what facets of religion influence innovation, and thereby not only understand how religion affects society across a recent period of economic history, but also better understand the very nature of religion itself.


  • Arruñada, Benito, “Protestants and Catholics: Similar Work Ethic, Different Social Ethic,” Economic Journal, 120 (2010), 890–918.
  • Barro, Robert J., and Rachel M. McCleary, “Religion and Economic Growth Across Countries,” American Sociological Review, 68 (2003), 760–781.
  • Bénabou, Roland, Davide Ticchi and Andrea Vindigni, “Forbidden Fruits: The Political Economy of Science, Religion and Growth,” Princeton University, Research Paper No. 065‑2014, Dietrich Economic Theory Center, (2013).
  • Bénabou, Roland, Davide Ticchi and Andrea Vindigni, “Religion and Innovation,” NBER Working Paper No. 21052, (2015).
  • Campante, Filipe, and David Yanagizawa-Drott, “Does Religion Affect Economic Growth and Happiness? Evidence from Ramadan,” Quarterly Journal of Economics, 130 (2015), forthcoming.
  • Guiso, Luigo, Paola Sapienza, and Luigi Zingales, “People’s Opium? Religion and Economic Attitudes,” Journal of Monetary Economics, 50 (2003), 225–282.

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) (

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.


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.


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.


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.


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.