Tag Archives: institutions

Computers and Business History: Mira Wilkins Prize Winner

IBM Rebuilds Europe: The Curious Case of the Transnational Typewriter
By Petri Paju (Turku) and Thomas Haigh (Wisconsin, Milwaukee).

Abstract: In the decade after the Second World War IBM rebuilt its European operations as integrated, wholly owned subsidiaries of its World Trade Corporation, chartered in 1949. Long before the European common market eliminated trade barriers, IBM created its own internal networks of trade, allocating the production of different components and products between its new subsidiaries. Their exchange relationships were managed centrally to ensure that no European subsidiary was a consistent net importer. At the heart of this system were eight national electric typewriter plants, each assembling parts produced by other European countries. IBM promoted these transnational typewriters as symbols of a new and peaceful Europe and its leader, Thomas J. Watson, Sr., was an enthusiastic supporter of early European moves toward economic integration. We argue that IBM’s humble typewriter and its innovative system of distributed manufacturing laid the groundwork for its later domination of the European computer business and provided a model for the development of transnational European institutions.

Enterprise & Society 17(2, June 2016): 265-300

DOI: https://doi.org/10.1017/eso.2015.64

URL: https://www.cambridge.org/core/journals/enterprise-and-society/article/ibm-rebuilds-europe-the-curious-case-of-the-transnational-typewriter/35D5A3FD95F5948F12754DBE07E9D89F

Free download (for limited time): https://www.cambridge.org/core/services/aop-file-manager/file/59e769bb60a7c0f73791cd84

Review by James W. Cortada (Charles Babbage Institute, Minnesota)

Prizes are awarded all the time for “best article” in a particular field, calling our attention to a well-executed, thoughtful one. But, occasionally, a prize winning article signals bigger shifts in a discipline than might otherwise be noticed. With this year’s award of the Business History Conference’s “Mira Wilkins Prize,” for the best article published in Enterprise & Society, we have such a signal.

Petri Paju and Thomas Haigh wrote “IBM Rebuilds Europe: The Curious Case of the Transnational Typewriter,” published in June 2016. They were recognized for “the best article on international business history,” the objective of this prize, but it is far more than good international business history.

The article chronicles how IBM created an internal network across eight national electric typewriter plants in post-World War II Europe to manufacture parts and to assembly these products. While electric typewriters were in great demand and IBM made what many considered to be the best one, the company created an internal network for their manufacture and distribution that transcended international borders in the decade after the war, presaging what would happen for some European products after the establishment of the European Union. But that was never solely the point—to create a European-wide market by governments—rather, it was to drive down production costs, increase demand for and the ability to deliver enough machines, while promoting IBM management’s belief that “World Peace through World Trade” could be a global objective for nations and companies. The authors trace how parts were made in one country, shipped to another, put together then sold, called the “Interchange Plan.” This experience taught IBM management how to create a more formal pan-European wide, later worldwide organization in 1949 that could manufacture, sell, and support its products called IBM World Trade. Within a half generation, World Trade did as much business as the American side of IBM.

Lessons learned in forming a pan-European typewriter business made it possible for IBM to develop a pan-European computer business that quickly dominated the mainframe business in Western Europe and in other parts of the world. Just as important, when IBM moved into the computer business, it already had factories, sales offices, and experienced employees in those countries that would become its best customers. These include Great Britain, France, West Germany, the Nordics, Italy, Spain, and a sprinkling presence in every country that eventually became part of the EU. The authors explain how the company created and learned from its “Interchange Plan,” operationally and strategically. They explored the accounting level to explain how money and budgets were exchanged across borders when governments had yet to sort out those issues, let alone even allow such exchanges.

The benefits to IBM were both obvious and extraordinary. Obvious ones included reduced operating costs for the manufacture and increased sale of typewriters. Less obvious, but ultimately more important, “this system would also foster interdependence among the various national [IBM] firms,” while spreading capabilities across multiple countries so that if one nation were to nationalize or block local IBM production, as occurred during World War II, another plant could pick up the slack. The company used its system in its public relations campaign to promote international trade through American managerial leadership and “to meet the challenges of communism” in the Cold War. Other American corporations—all of them with close ties to IBM’s management—took note of what IBM was learning and applied those lessons as well. IBM’s country organizations could also claim to be local, since each employed nationals, Fins in Finland, French in France, and so forth.

The lesson urged by these two young historians is an appropriate one at the moment: “think more carefully about the assumption that postwar globalization of European trade can be reduced to ‘Americanization’,” because IBM’s experience reflected a “hybridization of U.S. technology and management in postwar Europe.” Apply their suggestion worldwide. IBM was also prepared to experiment and operate in ways that valued expansion into new markets even at the costs of profits. That is one reason why it came to dominate the mainframe market so fast and for so many decades. The wisdom of today’s corporate fixation on shareholder value is challenged by this study of how IBM ran its typewriter business.

Perhaps the greater lesson, the more significant observation for why this prize this year is so important, lies elsewhere. For the past two decades, a month has barely gone by without an historian or economist publishing on the interactions of computing technology and business management. E&S is not alone in doing so; Technology & Culture has published some two-dozen similar articles in the new century, and Information & Culture is rapidly becoming another journal with a mix of business/information technology conversations. Petri Paju and Thomas Haigh are more than two gifted prolific article writers, they are teaching a new generation of scholars how to understand the role of information technologies and of management, business operations, and corporate strategy in a world filled with computers. Simply put, this article is seminal, worthy of being studied across multiple disciplines. The Mira Wilkes Prize Committee is to be congratulated for not letting this paper slip through the cracks.

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Governance structures and market performance

Contractual Freedom and Corporate Governance in Britain in the Late Nineteenth and Early Twentieth Centuries

by Timothy W. Guinnane (Yale University), Ron Harris (Tel-Aviv University), and Naomi R. Lamoreaux (Yale University)

Abstract: British general incorporation law granted companies an extraordinary degree of contractual freedom. It provided companies with a default set of articles of association, but incorporators were free to reject any or all of the provisions and write their own rules instead. We study the uses to which incorporators put this flexibility by examining the articles of association filed by three random samples of companies from the late nineteenth and early twentieth centuries, as well as by a sample of companies whose securities traded publicly. Contrary to the literature, we find that most companies, regardless of size or whether their securities traded on the market, wrote articles that shifted power from shareholders to directors. We find, moreover, that there was little pressure from the government, shareholders, or the market to adopt more shareholder-friendly governance rules.

Business History Review, Volume 91 (2 – Summer 2017): 227-277.

DOI: https://doi.org/10.1017/S0007680517000733

Review by John Turner (Centre for Economic History, Queen’s University Belfast)

Tim Guinnane, Ron Harris and Naomi Lamoreaux are three scholars that every young (and old) economic historian should seek to emulate. This paper showcases once again their prodigious talent – there is careful analysis of the institutional and legal setting, a lot of archival evidence, rigorous economic analysis, and an attempt to understand how contemporaries viewed the issue at hand.

In this paper, Guinnane, Harris and Lamoreaux (GHL) examine the corporate governance of UK companies in the late nineteenth and early twentieth centuries. The UK liberalised its incorporation laws in the 1850s and introduced its first Companies Act in 1862. From a modern-day perspective, this Act enshrined very little in the way of protection for shareholders. However, the Appendix to the 1862 Companies Act contained a default set of articles of association, which was the company’s constitution. This Appendix, known as Table A, provided a high level of protection for shareholders by modern-day standards (Acheson et al., 2016). However, the majority of companies did not adopt Table A; instead they devised their own articles of association.

The aim of GHL’s paper is to analyse articles of associations in 1892, 1912 and 1927 to see the extent to which they shifted power from shareholders to directors. To do this, GHL collected three random samples of circa 50 articles of association for 1892, 1912 and 1927. Because most (if not all) of these companies did not have their securities traded on stock markets, they also collected sample of 49 commercial and industrial companies from Burdett’s Official Intelligence for 1892 that had been formed after 1888. However, only 23 of these companies had their shares listed on one of the UK’s stock exchanges.

GHL then take their samples of articles to see the extent to which they deviated from the clauses in Table A. Their main finding is that companies tended to adopt governance structures in their articles which empowered directors and practically disenfranchised shareholders. This was the case no matter if the company was small or large or public or private. They also find that this entrenchment and disenfranchisement becomes more prominent over time. However, GHL unearth a puzzle – they find shareholders and the market appeared to have been perfectly okay with poor corporate governance practices.

How do we resolve this puzzle? One possibility is that shareholders (and the market) at this time only really cared about dividends. High dividend pay-out ratios in this era kept managers on a short leash and reduced the agency costs associated with free cash flow (Campbell and Turner, 2011). Interestingly, GHL suggest that this may have made it more difficult for firms to finance productivity-enhancing investments. In addition, they suggest that the high-dividend-entrenchment trade-off may have locked in managerial practices which inhibited the ability of British firms to respond to future competitive pressures and may ultimately have ushered in Britain’s industrial decline.

Another solution to the puzzle, and one that GHL do not fully explore, is that the ownership structure of the company shaped its articles of association. The presence of a dominant owner or founding family ownership would potentially lessen the agency problem faced by small shareholders. In addition, founders may not wish to give too much power away to shareholders in return for their capital. On the other hand, firms which need to raise capital from lots of small investors on public markets may adopt more shareholder-friendly articles. The vast majority of companies in GHL’s sample do not fall into this category, which might go some way to explaining their findings.

A final potential solution is that the vast majority of firms which GHL examine may have raised capital in a totally different way than public companies, and this shaped their articles of association. These firms probably relied on family, religious and social networks for capital, and the shareholders trusted the directors because they personally knew them or were connected to them through a network. Indeed, we know precious little about how and where the multitude of private companies in the UK obtained their capital. Like all great papers, GHL have opened up a new avenue for future scholars. The interesting thing for me is what happens when private firms went public and raised capital. Did they keep their articles which entrenched directors and disenfranchised shareholders?

Unlike the focus of GHL on mainly private companies, a current Queen’s University Centre for Economic History working paper examines the protection offered to shareholders by circa 500 public companies in the four decades after the 1862 Companies Act (Acheson et al., 2016). Unlike GHL, it takes a leximetric approach to analysing articles of association. Acheson et al. (2016) have two main findings. First, the shareholder protection offered by firms in the nineteenth century was high compared to modern-day standards. Second, firms which had more diffuse ownership offered shareholders higher protection.

How do we reconcile GHL and Acheson et al. (2016)? The first thing to note is that most of Acheson et al’s sample is before 1892. The second thing to note is that in a companion paper, Acheson et al. (2015) identify a major shift in corporate governance and ownership which started in the 1890s – companies formed in that decade had greater capital and voting concentration than those formed in earlier decades. In addition, unlike companies formed prior to the 1890s, the insiders in these companies were able to maintain their voting rights and entrench themselves. This corporate governance turn in the 1890s is where future scholars should focus their attention.

References

Acheson, Graeme G., Gareth Campbell, John D. Turner and Nadia Vanteeva. 2015. “Corporate Ownership and Control in Victorian Britain.” Economic History Review 68: 911-36.

Acheson, Graeme G., Gareth Campbell, John D. Turner. 2016. “Common Law and the Origin of Shareholder Protection.” QUCEH Working Paper no. 2016-04.

Campbell, Gareth and John D. Turner. 2011. “Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain.” Economic History Review 64: 571-97.

Assessing the Determinants of Economic Growth in South East Asia

The Historical State, Local Collective Action, and Economic Development in Vietnam

By Melissa Dell (Harvard University), Nathaniel Lane (Stockholm University), Pablo Querubin (New York University)

Abstract – This study examines how the historical state conditions long-run development, using Vietnam as a laboratory. Northern Vietnam (Dai Viet) was ruled by a strong centralized state in which the village was the fundamental administrative unit. Southern Vietnam was a peripheral tributary of the Khmer (Cambodian) Empire, which followed a patron-client model with weaker, more personalized power relations and no village intermediation. Using a regression discontinuity design across the Dai Viet-Khmer boundary, the study shows that areas historically under a strong state have higher living standards today and better economic outcomes over the past 150 years. Rich historical data document that in villages with a strong historical state, citizens have been better able to organize for public goods and redistribution through civil society and local government. This suggests that the strong historical state crowded in village-level collective action and that these norms persisted long after the original state disappeared.

URL: http://econpapers.repec.org/paper/nbrnberwo/23208.htm

Circulated by nep-his on 2017/03/19

Review by Fernando Arteaga (George Mason University)

What was the impact of the ancient Vietnamese Dai Viet empire in promoting long-term economic development? That is the main question the authors try to assess. Their inquiry is embedded within the now large literature on the importance of culture and institutions, as deep determinants of growth. The contribution the paper makes is, however, not restricted to adding one more piece of evidence in favor of it, but, more importantly, in providing empirical support for a specific transmission channel: how state capacity can be built through time via the fostering of local self-organization capabilities.

The paper’s main story builds on the idea that two distinct meta-societies existed within East Asia, and idea around which, by the way, there is general agreement. One of these societies based on Chinese precepts, prevalent in the Northeastern region; and other spread in the Southeast throughout the Indian Ocean.  Societies of the former category were historically constituted around a sort of Weberian professional bureaucracy that consolidated the working of a central state. The latter depended more on informal networking mechanisms among local elites to survive, and hence, tended to promote hierarchical patriarchal relationships.

Today’s Socialist Republic of Vietnam (henceforth Vietnam) is an interesting case study precisely because it arose out of the union of those two distinct cultures. The northern part, the Dai Viet, is an example of a Sino-style state, while the southern part of Vietnam (initially part of the Champa State and later as part of the larger Khmer Empire) resulted from a Indo-style society.  Figure 1 below offers map of present day Vietnam aligned with the size of the historical Dai Viet empire. Figure 1 suggests the Dai Viet expanded southwards through time but ended up establishing its final frontier in 1698 (orange color). It is this border the authors think provides a natural experiment that allows a clean regression discontinuity (RD) strategy that permits the disentanglement of the effect of being part of a bureaucratized state vis a vis a patriarchal state.

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Figure 1: Dai Viet Historical Boundaries (Dell et al., 2017)

The use of the RD design is appropriate, the authors argue, because the chosen border resulted from exogenous contingencies that do not reflect any difference in future economic potential. The 1698 demarcation was settled on the ridges of a river, but there was nothing else particular to it that made that boundary preferable to other potential borders. The Dai Viet stopped its expansion because of constrains imposed by a local civil war (something that has nothing to do with the river itself). Moreover, the environmental characteristics of both sides of the river are almost identical (or vary smoothly), so there is no important geographical difference either. The only thing that changes abruptly is that on the east shore of the 1698 border, Dai Viet settlers occupied and controlled the land, while Khmer villagers occupied and controlled the land to the west of the river. Another possible counterargument to the use of the 1698 border as a natural experiment is the relevance of migration: if settlers moved across villages (at any time after the establishment of the original border), then the boundary becomes inconsequential. The authors argue that, even though they do not have historical data to control for it, there is qualitative evidence that refers to negative attitudes towards outsiders within the villages, which constitutes an important constraint to any major migratory flow. Today, both sides are part of Vietnam. It is then possible to assess if Die Viet institutions still exert some type of effect in current economic outcomes.

Figure 2 portraits the main outcome of the paper. Using household expenditure data from recent censuses (2002-2012), the authors find that today, villages situated along the historical Die Viet side of the border earn a third more than those communities that are situated on the historical Khmer side (Within the figure, the darker the zone depict lower earnings).

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Figure 2a: Household Consumption, RD Graph (Dell et al., 2017)

The authors, however, not content with establishing the effects on current outcomes, look for historical evidence too. They collect data from different periods of Vietnamese history: 1878-1921 for the French Colonization, 1969-1973 for the South Vietnam State, and 1975-1985 for the early Communist Period; and find that the pattern is persistent through time: The Diet Viet zone is, in general, more developed than the Khmer side.

How can these results be interpreted?  The income differences must be due to the Die Viet heritage of greater state capacity that acted through local community self-organization that made them more co-operative and facilitated the resolution of local collective action problems. To test whether this transmission channel matters, the authors looked for data on social capital. Their main sources were the surveys and census of the South Vietnamese period. What they find corroborates their story: villagers on the Diet Viet side were more prone to participate in community activities, to collect more taxes (that at the time were local responsibility, not provincial), to have greater access to public goods (health, school and law enforcement), to be skeptical of central government in favor of local, and to give more to charity.

Comment

All in all, the authors do a thorough job in assessing the robustness of their main story. They control for several of potential alternative stories and/or possible variables that could affect the results and mechanisms.  Any critique of it may sound redundant or unreachable.  Yet, I would point to three different aspects that may be important.

First, and perhaps most importantly, I would stress that although the argument makes sense, the narrative is unclear as to how specifically the Dai Viet, which supposedly was a centralized bureaucratized state, fostered local governance. As the authors mention in the introduction, the literature on social capital is ambivalent on its effects on economic outcomes. As it is, the paper’s contribution is the finding of empirical evidence on the presence of a particular transmission channel (from state to local governance), but without a clear model and/or an analytical narrative, we are left in the dark about how explicitly this mechanism worked its way throughout society.

Second, and pushing the level of pickiness even further, one can always speak of a potential omitted variable bias. I must ask then: what about genes? The authors minimize ethnic fragmentation as a problem because they find the studied area is cataloged as being almost entirely composed of homogeneously ethnic Vietnamese. The problem is that censuses and surveys may under-report true ethnicity, and cannot capture genetic differences at all. By the authors’ own account, we are told the Diet Viet State originated as, and remained for a long time, Chinese. Moreover, as Tran (1993) attests, Chinese ethnicity may conflate the results of the paper in other several ways:

  • the largest Chinese migration occurred between the late 17th century and early 19th century, just at the time that the Dai Viet-Khmer border was being established;
  • The Chinese settled mostly in southern Vietnam, the part that the authors use as study case;
  • Chinese early importance resided precisely in that they helped establish new villages and trade outposts. They (not merely the Diet Viet heritage) helped to build local governance structures.

If ethnicity has been underreported and/or Chinese genetics matter in fostering economic development in any way (as suggested by Ashraf-Galor, 20013a, 2013b) then the interpretation of the paper could dramatically change: the importance of the Dai Viet state would be downplayed in favor of just being more ethnic/genetic Chinese. After all, it is known that there is a correlation between having larger ethnic Chinese minority and larger economic growth (Priebe and Rudulf, 2015).

Third, related to the last point: one would expect that given the importance of the result – the long-term reach of Diet Viet institutions–, its impact would feel more broadly across all the territory, not only in the immediate zones of the frontier which were the last to be incorporated into the state.  Figure 3, for example, shows the level of poverty in Vietnam (Epprecht-Heinmann,2004). It is visible that the area under study (along the last border of the historical Diet Viet) has the lowest share of poverty in the whole country. The immediate area to the left (which coincides with the area that historically belonged to the Khmer Empire) is poorer indeed. But the differences are minor if we compare them to the rest of current Vietnam, which belonged almost entirely to the Diet Viet, and has the largest poorer areas.  The RD design may be identifying a non-observable variable that is concentrated in the southern part (like ethnicity or/and genes) and is not broadly distributed across the rest of Vietnam.

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Figure 3: Incidence of Poverty in Vietnam (Epprecht-Heinmann, 2004: 155).

Additional References

Ashraf, Q., Galor, O., 2013a. Genetic Diversity and the Origins of Cultural Fragmentation. The American Economic Review: Papers on Proceedings 103, 528–533.

Ashraf, Q., Galor, O., 2013b. The “Out of Africa” Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review 103, 1–46.

Epprecht, M., Heinemann, A., 2004. Socioeconomic Atlas of Vietnam: A depiction of the 1999 Population and Housing Census. Swiss National Centre of Competence in Research, Bern.

Priebe, J., Rudolf, R., 2015. Does the Chinese Diaspora Speed Up Growth in Host Countries? World Development 76, 249–262.

Trần, K., 1993. The Ethnic Chinese and Economic Development in Vietnam. Institute of Southeast Asian Studies, Singapore.

How do we eliminate wealth inequality and financial fragility?

The market turn: From social democracy to market liberalism

By Avner Offer, All Souls College, University of Oxford (avner.offer@all-souls.ox.ac.uk)

Abstract: Social democracy and market liberalism offered different solutions to the same problem: how to provide for life-cycle dependency. Social democracy makes lateral transfers from producers to dependents by means of progressive taxation. Market liberalism uses financial markets to transfer financial entitlement over time. Social democracy came up against the limits of public expenditure in the 1970s. The ‘market turn’ from social democracy to market liberalism was enabled by easy credit in the 1980s. Much of this was absorbed into homeownership, which attracted majorities of households (and voters) in the developed world. Early movers did well, but easy credit eventually drove house prices beyond the reach of younger cohorts. Debt service diminished effective demand, which instigated financial instability. Both social democracy and market liberalism are in crisis.

URL: http://EconPapers.repec.org/RePEc:nuf:esohwp:_149

Distributed by NEP-HIS on: 2017-01-29

Review by: Sergio Castellanos-Gamboa, Bangor University

Summary

This paper emerged from Avner Offer’s Tawney Lecture at the Economic History Society’s annual conference, Cambridge, 3 April 2016 (the video of which can be found here).

In this paper Offer discussed two macroeconomic innovations of the 20th century, which he calls “the market turn”. These are the changes in fiscal policy and financialisation that encompassed the shift  from social democracy to market liberalism from the 1970s onwards. Social democracy is understood as a fiscal innovation which resulted in the doubling of public expenditure (from aprox. 25 to 50 per cent of GDP between 1920 and 1980). Its aim was reducing wealth inequality. Market liberalism encompassed a monetary innovation, namely the deregulation of credit which allowed households to increase their indebtedness from around 50 to 150 per cent of personal disposable income, mainly for the purpose of home ownership. According to Offer the end result of market liberalism was increasing wealth inequality. See Offer’s depiction of this process in the graph below.

Two macroeconomic financial innovations in the 20th century, UK calibration. (Note: Diffusion curves are schematic, not descriptive.)

Two macroeconomic financial innovations in the 20th century, UK calibration.
(Note: Diffusion curves are schematic, not descriptive.)

Offer considers that both social democracy and market liberalism are norms captured by the single concept of a “Just World Theory” (Offer & Söderberg, 2016).The ideals behind social democracy are said to be supported by ideas found in classical economics, while the ideals behind market liberalism are said to have emerged from a redefinition of the origins and nature of economic value found in neoclassical economics. Contrasting the ideas behind social democracy and market liberalism brings about  questions such as:

  • Where does value come from?,
  • Is it from production or is it from personal preferences and demand for the good/service?,
  • What is just and fair?,
  • What do we as individuals deserve as reward?, and
  • Is there really a trade-off between equality and efficiency?

Answering any of these question is not simple and heated debates abound around them. Offer, however, rescues the idea of life-cycle dependency, where the situation of the most vulnerable individuals is alleviated through collective risk pooling rather than financial markets. According to Offer,  life-cycle dependency was the dominant approach to reducing poverty in most developed countries until the oil crisis of the early 1970s. Then collapse of the Bretton Woods accord that followed, led to the liberalization of credit by removing previous constraints. This in turn resulted in the “market turn”.

Avner Offer

Professor Avner Offer (1944). MA, DPhil, FBA. Emeritus Fellow of All Souls College, Oxford since 2011.

Offer then turns to analyse the events after the collapse of Bretton Woods that led to the increase of household indebtedness while focusing on the UK. The 1970s was a very volatile decade for Britain.  For instance, oil price increases and the secondary banking crises of 1973 resulted in the highest annual increase of the inflation rate on record. Offer argues, while citing John Fforde (Executive Director of the Bank of England at that time), that the Competition and Credit Control Act 1971 was as a leap of faith in the pursuit of greater efficiency in financial markets. This Act was accompanied by a new monetary policy where changes in interest rates (the price of money) by the central bank was to bring about the control of the quantity of money. Perhaps unexpectedly and probably due to a lack of a better understanding of the origins of money, that was not the case. Previously lifted credit restrictions had to be reinstated.

Credit controls were again lifted in the 1980s. This time policy innovations went further by allowing clearing (ie commercial) banks to re-enter the personal mortgage market. The Building Societies Act 1986  allowed building societies to offer personal loans and current accounts as well as opened a pathway for them to become commercial banks (which many did after 1989 and all those societies that converted  either collapsed or were taken over by clearing banks or both). Initially and up to the crash of house prices in September, 1992, personal mortgage credit grew continuously and to levels never seen before in the UK. According to Offer, during this period both political parties supported the idea of homeownership and incentivised it through programs like “Help to Buy”. However, the rise in the demand for housing combined with the stagnation in the supply of dwellings pushed up house prices, making it more difficult for first-time buyers to become homeowners. Additionally, according to Offer, the wave of easy credit of the 1980s brought with it an increase in wealth inequality and an increase in the fragility of the financial system. As debt repayments grew as proportion of income, consumption was driven down, with subsequent effects on production and services. On this Offer opined:

“In the quest for economic security, the best personal strategy is to be rich.” (p. 17)

The paper ends with possible and desirable futures for public policy initiatives to deal with today’s challenges around wealth inequality and mounting personal credit. He argues that personal debt should be reduced through rising inflation,  a policy driven write-off or a combination of both. He also argues to reinstate a regime where credit is rationed. He states that financial institutions should not have the ability to create money and therefore the housing market funding should return to the old model of building societies. He has a clear preference for social democracy over market liberalism and as such argues that austerity should end, since it is having the exact opposite effects to what was intended.

Brief Comment

Offer’s thought provoking ideas comes at a time when several political and economic events are taking place (e.g. Brexit, Trump’s attack on Dodd-Frank, etc.) which, together, could be of the magnitude as “the market turn”. Once again economic historians could help better inform the debate. Citing R. H. Tawney, Offer opened the lecture (rather than the paper) by stating that:

“to be an effective advocate in the present, you need a correct and impartial understanding of the past.”

Offer clearly fulfils the latter, even though some orthodox economists might disagree with his inflationary and credit control proposals. As per usual his idea are a great contribution to the debate around market efficiency in a time when the world seems to be in constant distress. Perhaps we ought to generate more and better research to understand the mechanisms through which market liberalism generated the current levels of wealth inequality and financial instability that Offer describes. More importantly though, is analysing if social democracy can bring inequality down as it did in the past. In my view, however, in a world where productivity seems to be stagnated, real wages are decreasing, and debt keeps growing, it is highly unlikely that the public sector can produce the recipe that will set us in the path of economic prosperity for all.

Additional References

Offer, A., & Söderberg, G. (2016). The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn. Princeton University Press.
(Read an excellent review of this book here)

A New Take on Sovereign Debt and Gunboat Diplomacy

Going multilateral? Financial Markets’ Access and the League of Nations Loans, 1923-8

By

Juan Flores (The Paul Bairoch Institute of Economic History, University of Geneva) and
Yann Decorzant (Centre Régional d’Etudes des Populations Alpines)

Abstract: Why are international financial institutions important? This article reassesses the role of the loans issued with the support of the League of Nations. These long-term loans constituted the financial basis of the League’s strategy to restore the productive basis of countries in central and eastern Europe in the aftermath of the First World War. In this article, it is argued that the League’s loans accomplished the task for which they were conceived because they allowed countries in financial distress to access capital markets. The League adopted an innovative system of funds management and monitoring that ensured the compliance of borrowing countries with its programmes. Empirical evidence is provided to show that financial markets had a positive view of the League’s role as an external, multilateral agent, solving the credibility problem of borrowing countries and allowing them to engage in economic and institutional reforms. This success was achieved despite the League’s own lack of lending resources. It is also demonstrated that this multilateral solution performed better than the bilateral arrangements adopted by other governments in eastern Europe because of its lower borrowing and transaction costs.

Source: The Economic History Review (2016), 69:2, pp. 653–678

Review by Vincent Bignon (Banque de France, France)

Flores and Decorzant’s paper deals with the achievements of the League of Nations in helping some central and Eastern European sovereign states to secure market access during in the Interwar years. Its success is assessed by measuring the financial performance of the loans of those countries and is compared with the performance of the loans issued by a control group made of countries of the same region that did not received the League’s support. The comparison of the yield at issue and fees paid to issuing banks allows the authors to conclude that the League of Nations did a very good job in helping those countries, hence the suggestion in the title to go multilateral.

The authors argue that the loans sponsored by the League of Nation – League’s loan thereafter – solved a commitment issue for borrowing governments, which consisted in the non-credibility when trying to signal their willingness to repay. The authors mention that the League brought financial expertise related to the planning of the loan issuance and in the negotiations of the clauses of contracts, suggesting that those countries lacked the human capital in their Treasuries and central banks. They also describe that the League support went with a monitoring of the stabilization program by a special League envoy.

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Empirical results show that League loans led to a reduction of countries’ risk premium, thus allowing relaxing the borrowing constraint, and sometimes reduced quantity rationing for countries that were unable to issue directly through prestigious private bankers. Yet the interests rates of League loans were much higher than those of comparable US bond of the same rating, suggesting that the League did not create a free lunch.

Besides those important points, the paper is important by dealing with a major post war macro financial management issue: the organization of sovereign loans issuance to failed states since their technical administrative apparatus were too impoverished by the war to be able to provide basic peacetime functions such as a stable exchange rate, a fiscal policy with able tax collection. Comparison is made of the League’s loans with those of the IMF, but the situation also echoes the unilateral post WW 2 US Marshall plan. The paper does not study whether the League succeeded in channeling some other private funds to those countries on top of the proceeds of the League loans and does not study how the funds were used to stabilize the situation.

InterWar-League-Of-Nations-USA-Cartoons-Punch-Magazine-1919-12-10-483

The paper belongs to the recent economic history tradition that aims at deciphering the explanations for sovereign debt repayment away from the gunboat diplomacy explanation, to which Juan Flores had previously contributed together with Marc Flandreau. It is also inspired by the issue of institutional fixes used to signal and enforce credible commitment, suggesting that multilateral foreign fixes solved this problem. This detailed study of financial conditions of League loans adds stimulating knowledge to our knowledge of post WW1 stabilization plans, adding on Sargent (1984) and Santaella (1993). It’s also a very nice complement to the couple of papers on multilateral lending to sovereign states by Tunker and Esteves (2016a, 2016b) that deal with 19th century style multilateralism, when the main European powers guaranteed loans to help a few states secured market access, but without any founding of an international organization.

But the main contribution of the paper, somewhat clouded by the comparison with the IMF, is to lead to a questioning of the functions fulfilled by the League of Nations in the Interwar political system. This bigger issue surfaced at two critical moments. First in the choice of the control group that focus on the sole Central and Eastern European countries, but does not include Germany and France despite that they both received external funding to stabilize their financial situation at the exact moment of the League’s loans. This brings a second issue, one of self-selection of countries into the League’s loans program. Indeed, Germany and France chose to not participate to the League’s scheme despite the fact that they both needed a similar type of funding to stabilize their macro situation. The fact that they did not apply for financial assistance means either that they have the qualified staff and the state apparatus to signal their commitment to repay, or that the League’s loan came with too harsh a monitoring and external constraint on financial policy. It is as if the conditions attached with League’ loans self-selected the good-enough failed states (new states created out of the demise of the Austro-Hungarian Empire) but discouraged more powerful states to apply to the League’ assistance.

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Now if one reminds that the promise of the League of Nations was the preservation of peace, the success of the League loans issuance was meager compared to the failure in preserving Europe from a second major war. This of course echoes the previous research of Juan Flores with Marc Flandreau on the role of financial market microstructure in keeping the world in peace during the 19th century. By comparison, the League of Nations failed. Yet a successful League, which would have emulated Rothschild’s 19th century role in peace-keeping would have designed a scheme in which all states in need -France and Germany included – would have borrowed through it.

This leads to wonder the function assigned by their political brokers to the program of financial assistance of the League. As the IMF, the League was only able to design a scheme attractive to the sole countries that had no allies ready or strong-enough to help them secure market access. Also why did the UK and the US chose to channel funds through the League rather than directly? Clearly they needed the League as a delegated agent. Does that means that the League was another form of money doctors or that it acts as a coalition of powerful countries made of those too weak to lend and those rich but without enforcement power? This interpretation is consistent with the authors’ view “the League (…) provided arbitration functions in case of disputes.”

In sum the paper opens new connections with the political science literature on important historical issues dealing with the design of international organization able to provide public goods such as peace and not just helping the (strategic) failed states.

References

Esteves, R. and Tuner, C. (2016a) “Feeling the blues. Moral hazard and debt dilution in eurobonds before 1914”, Journal of International Money and Finance 65, pp. 46-68.

Esteves, R. and Tuner, C. (2016b) “Eurobonds past and present: A comparative review on debt mutualization in Europe”, Review of Law & Economics (forthcoming).

Flandreau, M. and Flores, J. (2012) “The peaceful conspiracy: Bond markets and international relations during the Pax Britannica”, International Organization, 66, pp. 211-41.

Santaella, J. A (1993) ‘Stabilization programs and external enforcement: experience from the 1920s’, Staff Papers—International Monetary Fund (J. IMF Econ Rev), 40, pp. 584–621

Sargent, T. J., (1983) ‘The ends of four big inflations’, in R. E. Hall, ed., Inflation: Causes and Effects (Chicago, Ill.: University of Chicago Press, pp. 41–97

Where is the growth?

Mismeasuring Long Run Growth: The Bias from Spliced National Accounts

by Leandro Prados de la Escosura (Carlos III)

Abstract: Comparisons of economic performance over space and time largely depend on how statistical evidence from national accounts and historical estimates are spliced. To allow for changes in relative prices, GDP benchmark years in national accounts are periodically replaced with new and more recent ones. Thus, a homogeneous long-run GDP series requires linking different temporal segments of national accounts. The choice of the splicing procedure may result in substantial differences in GDP levels and growth, particularly as an economy undergoes deep structural transformation. An inadequate splicing may result in a serious bias in the measurement of GDP levels and growth rates.

Alternative splicing solutions are discussed in this paper for the particular case of Spain, a fast growing country in the second half of the twentieth century. It is concluded that the usual linking procedure, retropolation, has serious flows as it tends to bias GDP levels upwards and, consequently, to underestimate growth rates, especially for developing countries experiencing structural change. An alternative interpolation procedure is proposed.

Source: http://econpapers.repec.org/paper/cgewacage/202.htm

Distributed in NEP-HIS on 2015 – 01 – 09

Reviewed by Cristián Ducoing

Dealing with National Accounts (hereafter NA) is a hard; dealing with NA in the long run is even harder…..

Broadly speaking, a quick and ready comparison of economic performance for a period of sixty years or more, would typically source its data from the Maddison project. However and as with any other human endevour, this data is not free from error. Potential and actual errors in measuring economic growth is highly relevant economic history research, particularly if we want to improve its public policy impact. See for instance the (brief) discussion in Xavier Marquez’s blog around how the choice of measure can significantly under or overstate importance of Lee Kuan Yew as ruler of Singapore.

The paper by Leandro Prados de la Escosura, therefore, contributes to a growing debate around establishing which is the “best” GDP measure to ascertain economic performance in the long run (i.e. 60 or more years). For some time now Prados de la Escosura has been searching for new ways to measure economic development in the long run. This body of work is now made out of over 60 articles in peer reviewed journals, book chapters and academic books. In this paper, the latest addition to assessing welfare levels in the long run, Prados de la Escosura discusses the problems in using alternative benchmarks and issues of spliced NA in a country with a notorious structural change, Spain. The main hypothesis developed in this article is to ascertain differences that could appear in the long run NA according to the method used to splice NA benchmarks. So, the BIG question is retropolation or interpolation?

Leandro Prados de la Escosura. Source: www.aehe.net

Leandro Prados de la Escosura. Source: http://www.aehe.net

Retropolation: As Prados de la Escosura says, involves a method that is …, widely used by national accountants (and implicitly accepted in international comparisons). [T]he backward projection, or retropolation, approach, accepts the reference level provided by the most recent benchmark estimate…. In other words, the researcher accepts the current benchmark and splits it with the past series (using the variation rates of the past estimations). What is the issue here? Selecting the most recent benchmark results in a higher GDP estimate because, by its nature, this benchmark encompasses a greater number of economic activities. For instance, the ranking of relative income for the UK and France changes significantly when including estimates of prostitution and narcotrafic. This “weird” example shows how with a higher current level and using past variation rates, long-run estimates of GDP will be artificially improved in value. This approach thus can lead us to find historical anomalies such as a richer Spain overtaking France in the XIXth century (See Prados de la Escosura figure 3 below).

An alternative to the backward projection linkage is the interpolation procedure. This method accepts the levels computed directly for each benchmark year as the best possible estimates, on the grounds that they have been obtained with ”complete” information on quantities and prices in the earlier period. This procedure keeps the initial level unaltered, probably being lower than the level estimated by the retropolation approach.

There are two more recent methods to splice NA series derived from the methods described above: the “mixed splicing” proposed by Angel de la Fuente (2014), which uses a parameter to capture the severity of the initial error in the original benchmark. The problem with this solution is the arbitrary value assigned (parameter). Let’s see it graphically and using data for the Maddison project. As it is well known, these figures were recently updated by Jutta Bolt and Jan Luiten van Zanden while the database built thanks to the contributions of several scholars around the world and using a same currency (i.e. the international Geary-Kheamy dollar) to measure NA. Now, in figure 1 shows a plot of GDP per capita of France, UK, USA and Spain using data from the Madison project.

GDP per capita $G-K 1990. France, UK, USA and Spain. 1850 – 2012

The graph suggests that Spain was always poorer than France. But this could change if the chosen method to split NA is the retropolation approach. Probably we need a graph just with France to appreciate the differences. Please see figure 2:

GDP pc Ratio between Spain and France. Bolt&vanZanden (2014) with data from Prados de la Escosura (2003)

GDP pc Ratio between Spain and France. Bolt&vanZanden (2014) with data from Prados de la Escosura (2003)

Figure 2 now suggests an apparent convergence of Spain with France in the period 1957 to 2006. The average growth rate for Spain in this period was almost 3,5% p.a. and in the case of France average growth shrinks to 2,2% p.a. Anecdotal observation as well as documented evidence around Spainish levels of inequality and poverty make this result hard to believe. Prados de la Escosura goes on to help us ascertain this differences in measurement graphically by brining together estimates of retropolation and interpolation approaches in a single graph (see figure 3 below):

Figure 3. Spain’s Comparative Real Per Capita GDP with Alternative Linear Splicing (2011 EKS $) (logs).

Figure 3. Spain’s Comparative Real Per Capita GDP with Alternative Linear Splicing (2011 EKS $) (logs).

In summary, this paper by Prados de la Escosura is a great contribution to the debate on long run economic performance. It poises interesting challenges scholars researching long-term growth and dealing with NA and international comparisons. The benchmarks and split between different sources is always a source of problems to international comparative studies but also to long-term study of the same country. Moving beyond the technical implications discussed by Prados de la Escosura in this paper, economic history research could benefit from a debate to look for alternative measures or proxies for long-run growth, because GDP as the main source of international comparisons is becoming “dated” and ineffective to deal with new research in inequality, genuine savings Genuine Savings, energy consumption, complexity and gaps between development and developed countries to name but a few.

References

Bolt, J. and J. L. van Zanden (2014). The Maddison Project: collaborative research on historical national accounts. The Economic History Review, 67 (3): 627–651.

Prados de la Escosura, Leandro  (2003) El progreso económico de España (1850-2000). Madrid, Fundación BBVA, , 762 pp.

PS:

1) This paper by Prados de la Escosura has already been published in Cliometrica and with the same title

2) Prados de la Escosura’s A new historical database on economic freedom in OECD countries | VOX, CEPR’s Policy Portal.

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.

URL: http://EconPapers.repec.org/RePEc:nbr:nberwo:19425

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

References

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).