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April 01, 2008

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F. Gerard

Francois GERARD
Memo 10: Why did the European settler colonies industrialize?

Given the basic theories of international trade, the United States, Canada, Australia and New-Zealand should have specialized in the activities that were intensive in the factor those countries were particularly endowed with: resources. So why did they industrialize? In this memo, I would like to emphasis two main problems: the use of a static theory to explain a dynamic process and the denial of some strategic considerations in these economic interactions. First, the basic models of international trade (Ricardo comparative advantage, Heckscher-Ohlin,…) do not present any detailed dynamics and this is crucial for the welfare results they provide. For example, let’s suppose that producing manufactured goods creates some positive externalities for the future (technology improvement, human capital, modification of the comparative advantage leading to higher revenue, etc.). Then it may not be optimal anymore for a country to specialize in the production of only resources. If we abstract from the previous argument, we must still underline that the basic models of international trade do not take into account that the trading partner may default (voluntarily or not). If a country wants to preserve itself to such situations that may lead to the under-provision of vital goods (foodstuff, energy,…), it may decide not to entirely rely on the trading partner.

My claim is that those two remarks are relevant for the questions we are addressed this week. The positive dynamic externalities of industrialization are obvious. The same is true for the risk of default of the main trading partner, when we consider that the main trading partner of the former colonies we consider here was in general at that time the former colonial power. To reply to Temin, that could explain for example why a higher interest rate in New York than in London does not per se imply the presence of more labor intensive industries in the US because Americans did not want to rely only on the UK for the provision of manufactured goods!

The question then turns to become: why do so few countries actually industrialize given that the technologies were available? On this question, I think that the “inequality” argument of Engerman and Sokoloff is particularly relevant. Some pre-conditions may be required for industrialization to take place. As we saw in previous lectures, a high degree of industriousness and the enforcement of correct property rights are such kind of conditions. But what will happen if political power, human capital and wealth are entirely in the hands of a small group that has nothing to gain from industrialization (and if that group is supported by some foreign powers that want to prevent any industrialization to take place to preserve the current international economic order)? In a more equal society, it is more likely for industrialization to take place, because more people may perceive the gains from that process, because more people may have the skills to start an industrial business and because there are fewer political obstacles for that process to take place. It seems a coherent argument to explain the relatively limited extent of industrialization in countries characterized by large concentrations of Native Americans or large concentrations of former slaves. The intriguing fate of Argentina may also justify a careful look at the equality of the societies that provided the most immigrants (if immigrants are used to inequalities that may affect the shape of institutions).

Alexandre Poirier

The United States and Canada are both resource-rich countries, in absolute terms. But were they resource-rich at the time of colonization, relative to other American countries? Islands of the Caribbean had fertile grounds for sugar production, Peru had silver mines, while the northern United States were vast plains, covered with snow during parts of winter. During the early period of colonization, real wages were higher in these Southern, resource-rich colonies, as shown in Engermann and Solokoff (ES(1994)). ES(1994) argue that there is a causal relationship between colonies' factor endowments and the quality of their institutions. Then, the quality of institutions affects economic development, such as the timing of industrialization. They argue that countries can be divided in three categories: the first are countries with highly productive crops and small native population (e.g. Brazil), the second are countries which had a large native population and mining opportunities (e.g. Peru) and the third are countries that produced crops like wheat that presented no economies of scale and in which farms were small.

The first type of country has a very high land to labor ratio, which makes importing slaves more profitable than paying wages (see Domar). These countries develop great inequality between the rich landowners and their slave laborers, and this inequality hinders the development of better institutions, which, in turn, stymies economic growth. These plantation countries still face great inequality, and have poor economic performance.

The second type is of countries that use a large native population to exploit the large quantity of resources readily available. These countries usually gave out their land to the ruling elite, and the native population was usually kept in poverty; both of these create large inequalities. Eventually, these countries did not develop good institutions in time to industrialize early. Finally, the last category was of countries that had small native populations, and brought fewer slaves from Africa. These countries also didn't have a ruling landowning elite, as their crops were suited for independent family farms. These countries exhibited low levels of inequality, and developed relatively efficient institutions.

GS(1984) establish that the low relative productivity of females in agriculture in the Northern US relative to the southern US accelerated the transition to an industrial economy. This low productivity was caused by the type of crops grown in the North, such as wheat. Therefore, it can be argued that even though the Northern US was resource rich, the low productivity of females, combined with lower inequality promoted manufacturing and good institutions, which led to strong economic development. On the other hand, Southern American countries had high inequality, a large slave population, which led to poor institutions and the continuation of intensive agricultural production.

Omar Nayeem

The United States, Canada, Australia, and New Zealand share two important features that may shed some light on an answer to the question of why these countries industrialized rather than exported agricultural products while importing manufactures: (1) all of them were British colonies at some point, and (2) all of them were geographically removed from Europe. The first factor may play a role because Britain was the first nation to industrialize in the early nineteenth century, and Britain’s direction may have influenced those of its colonies (or, in the case of the United States, its former colony). The second factor is important because geographical isolation makes trade more costly; an isolated nation is more likely to seek self-sufficiency. That is not to say that these (and other isolated) nations did not engage in trade, but they certainly had greater incentives to pursue self-sufficiency than European countries (for example) did, all else being equal. It is therefore much less likely that they would have pursued the path chosen by Denmark; rather, they would have sought to create their own markets for industrial goods.

Lewis (1977), in the reading from last week, talks about countries’ responses to British industrialization. Some of the facts he notes are consistent with the explanations given above. On page 5, he mentions that the United States (and other leading industrial nations) were “virtually self-sufficient” and traded little with the Third World. Lewis also notes that agricultural productivity tends to be higher in nations with temperate climates than in nations with tropical climates. All four of the nations that we are considering fall into the former category. Indeed, as Lewis notes on page 13, Australia began by exporting primary products, but had industrialized by the early twentieth century. Lewis also talks (page 18) about how the factoral terms of trade favored temperate settlements: “Trade offered the temperate settlements high income per head, from which would immediately ensue a large demand for manufactures, opportunities for import substitution, and rapid urbanization.” He mentions on page 19 that, although Australia, New Zealand, and Canada (all of which, again, had temperate climates) were officially British colonies, they set up their own institutions and even created barriers to British imports. Finally, when comparing the divergent paths taken by Argentina and Australia after World War I, Lewis notes (page 25) that, unlike in the case of Argentina, which had a powerful landed aristocracy, Australia was controlled by its urban communities, who would naturally promote industrial interests. This key factor helped promote industrialization in Australia. I am not very familiar with the history of either Canada or New Zealand, but it seems that the absence of a landed aristocracy (given, of course, that it is consistent with the facts) may have been relevant in their cases too. In the case of the United States, a sort of landed aristocracy did exist in the antebellum South in the form of plantation owners, who relied heavily on slave labor. We know that the South lagged significantly behind the North in terms of industrialization, so the adverse effect of a landed aristocracy apparently existed in the United States, which managed to industrialize overall in spite of its presence.

This week’s readings do not say very much about this specific question. Temin’s (1966) paper about labor and technology in the United States as compared to Britain (which was itself an industrial nation) takes the United States’ choice to industrialize as given and explores the consequences of that choice. He notes (page 293) that, “[T]he Americans could have chosen to concentrate exclusively on agriculture. … To enter manufacturing would have been a choice … and the reasons for this hypothetical choice have not been explored.” Goldin and Sokoloff (1984), on page 470, provide an explanation for the United States’ decision to industrialize: “The proximate cause of industrialization, though, was the increase in the relative price of manufactured goods with the cessation of trade during the Napoleonic Wars and, possibly, the maintenance of a high relative price with the imposition of a tariff on manufactured goods. But it was only in the American Northeast, where the wages of females and boys relative to those of adult men were initially low, that this industrial development flourished.”

One interesting point made on page 15 of the Engerman-Sokoloff (1994) working paper is that the United States and Canada had a much higher proportion of whites than other New World colonies, which led to less racial discrimination and hence less exclusion of large groups from participation in the market economy. To the extent that exclusion of large groups from participation in the economy hinders growth, the United States and Canada had more potential for growth, simply by virtue of their relative homogeneity, than many of the other New World colonies. This paper is concerned only with New World colonies, though, and does not consider the cases of Australia and New Zealand, but circumstances there may have been similar.

The above evidence suggests that there are a number of possible reasons behind the four countries’ choices to industrialize, and often we do find common, or at least similar, motives that are offered. The literature on the industrialization, however, appears to be focused more on the consequences of the choice rather than on the factors that led to the choice itself.

James Zuberi

The question of why the resource rich temperate colonies industrialized is an absolutely excellent one. One aspect of the countries in our question that is not overly emphasized is the fact that these were colonized by white settlers. With them I think that they took much of the so-called protestant ethic. In addition many of these settlers were from countries that were either industrialized or industrializing and so the jump to industrialization probably was not as large as for other non-white colonies. Although I don't have any data, I suspect that the communication and travel between the temperate colonies and home countries was significant; therefore there was more access to newly made technologies than colonies which became independent with a mostly indigenous population.

One point that Goldin and Sokoloff provide is the fact that, at least in America, it was mostly the north which industrialized; there was a large region of the country that did indeed become agricultural or gigantic Denmarks. At least for America, the country was so large that the complex economy that emerged was neither wholely industrial nor wholely agricultural.

Tariff barriers were emphasized in our readings as a possible reason why the countries in question developed as they did. As we have seen in other countries (from last week's reading), the tariff barriers can only help nascent industries if there is willingness to industrialize from political elements and there is a large enough agricultural sector and so the fact that there were tariff barriers may have helped America and other countries to industrialize but they were not the cause.

The countries being considered also have a similarity that probably helped them to industrialize and that is the fact that they were relatively new colonies and did not have the landed elite that, for example, south american countries had which would have politically tried to block reforms aimed at industrialization. This is probably another reason why industrialization was successful in the United States, Canada, Australia, New Zealand.

Mark Borgschulte

In the global perspective, I believe the answer involves the market system established by Europeans in those colonies which came to be dominated by their settlers. This has the most in common with Engerman/Sokoloff and Goldin/Sokoloff, and is a variant of Domar's argument, too. I argue here that the development of relatively sophisticated markets in the countries identified in the prompt arose from, and created a virtuous cycle with, pressure to increase labor productivity in these countries.

In many of the tropical countries, colonial monopolies persisted for long periods of time, and returns on capital were more dependent on the stability and security of the project to which they were attached, than underlying economic fundamentals (such as productivity). As well, extraordinarily low wages created a "labor sink," as labor could be shuffled between different groups at subsistence wages, resulting in few incentives to improve labor productivity. Domar makes this point in pointing out motivations for the rise of slavery and serfdom in certain parts of the world. As labor AND capital markets were highly segmented in the tropical countries, we might think that efficiency (ie marginal products) was less of a concern- Europeans focused upon profit and extraction through quantity rather than quality channels, taking advantage of their cheap labor supply. Competition was nil, and financial development lagged behind.

Goldin and Sokoloff focus on specialization into an industrial North and agricultural South within the US, arguing that relative productivity between men vs women and children induced earlier development in areas where this gap was the highest. Their emphasis is on relative differences, rather than absolute abundance or shortage of labor. This seems to be a more subtle view of the question, and does not rely upon the lower bound on income to generate differential development. Goldin and Sokoloff provide evidence for my argument, in that the development of relatively sophisticated market systems would be a pre-requisite for their model to operate. The fact that we see relatively rapid identification of productive investment patterns in the US suggests that energy was being put into determining marginal returns, leading to specialization of labor and land, and ultimately,
better legal, political and economic systems.

As labor productivity rose, wages did as well. These developments increased the ability and returns to investment in human capital, and greater opportunities for upward mobility. Ultimately, these developments led to greater innovation, technologically, organizationally, politically, and financially.

Ernie Tedeschi

Were we to judge the relative success of early modern colonialism on the subsequent economic development of colonies, then Great Britain would surely take the prize, having mothered Australia, most of Canada, New Zealand, and the United States, among others. Yet the industrialization of these countries is somewhat of a mystery to modern economists. After all, neither Britain nor any other colonial power for that matter founded colonies with the intent of forging manufacturing rivals with diverse, dynamic economies. Their purpose instead was often to provide raw materials to the master country, and their location (as well as levels and recipients of foreign investment) were explicitly directed toward this end. The readings this week lay out several arguments for why, then, the temperate British colonies industrialized in the 19th century. First, Temin argues that information asymmetries existed. Second, Goldin and Sokoloff argue that trade barriers (and, I would add, inherent transportation costs) during the Napoleonic Wars made industrialization profitable. Third, they also argue that women and children -- a rich source of industrial labor -- had lower productivities relative to men in future industrial areas than in agricultural areas.

Temin argues in his paper debunking the hypothesis that the United States faced a labor shortage in the 19th century that industrial technology often evolved in parallel between British colonies and Britain itself. What gave colonies an advantage was what one might term imperial hubris: colonial innovators paid close attention to British technology and incorporated it into their own ideas, whereas their British counterparts ignored innovations coming out of the colonies. While I buy his rebuttal to the labor scarcity hypothesis, I find it hard to believe that information between, in the case of the US and the UK, two countries sharing language, culture, and a former colonial relationship, not to mention a fierce economic rivalry in the 19th century, would only have flowed one way.

The Sokoloff hypothesis that trade barriers erected during the Napoleonic Wars -- embargoes and tariffs -- contributed to industrialization is more convincing. Manufactured goods would already have been more expensive in the colonies due the vast transportation costs, especially for Australia and New Zealand. To add the economic turmoil of the Napoleonic period and increased protectionism would have made domestic industrialization more profitable for places like the US, a premium that may have been the last necessary incentive to lead to widespread investment in industrial advances. However, public policy here varies between colonies and across time; the United States, for example, was not uniformly protectionist to the same degree through the first half of the 19th century. Perhaps the trade barriers by happenstance came at an optimal time to motivate industrial development, but they probably do not explain the entire story.

K. Powers

Many theories exist as to why the economies settled from northwestern Europe industrialized despite being resource rich. In their article “The Relative Productivity Hypothesis of Industrialization,” Claudia Goldin and Kenneth Sokoloff assert that, “The lower the relative productivity of females and children in the pre-industrial agricultural or traditional economy, the earlier will manufacturing evolve, the proportionately more will the relative wage for females and children increase, and the higher will be the ratio of manufactured to agricultural goods” (462). The authors cite the northern and southern regions of the U.S. in the early nineteenth century as illustrations; women and children were seen as “redundant” laborers in the North, since their pre-industrialization relative productivity levels were low in the regions producing hay, wheat, and dairy. However, in the South, where the production of sugar, rice, cotton, and tobacco was common, the pre-industrial relative productivity of females and children was high, and the “industrial development lagged behind that of the Northeast and differed in form” (462). Thus, although U.S. industrial development was encouraged most directly by “the increase in the relative price of manufactured goods with the cessation of trade during the Napoleonic Wars and, possibly, the maintenance of a high relative price with the imposition of a tariff on manufactured goods,” it was only in the North that industrial development thrived (470-471).

According to Goldin and Sokoloff, “slavery, politics, agricultural efficiency, and capital markets” are other frequently cited explanations for the earlier industrialization of the northern U.S. relative to the South (463). Though their model of industrialization does not emphasize any of these factors, Evsey Domar argues in his paper “The Causes of Slavery or Serfdom: A Hypothesis” that, “The presence of vast expanses of empty fertile land in a warm climate, land capable to producing valuable products if only labor could be found,” is reason enough to understand the mass importation of slaves into the South. The assumed profitability of agriculture produced using slave labor may well have been responsible for the delay in industrialization in the South relative to the North, an idea also touched upon by Goldin and Sokoloff (474).

In their article “Factor Endowments, Institutions, and Differential Paths of Growth Among New World Economies,” Stanley Engerman and Kenneth Sokoloff contend that differing factor endowments and related circumstances predisposed certain colonies to industrialization. In particular, the climate in the northern U.S. encouraged the up-cropping of family-sized farms that produced grains and livestock and which exhibited no economies of scale. The widespread existence of these farms contributed to a “more equal distribution of wealth, more democratic political institutions, more extensive domestic markets, and the pursuit of more growth-oriented policies” relative to other colonies (4).

On the other hand, colonies in the Caribbean, Brazil, and the southern North American mainland featured climates well suited for cash crops like tobacco, coffee, sugar, rice, and cotton—the efficient production of which often included large plantations using slave labor (3,14). These colonies, in addition to Spanish colonies where claims on native labor, land, and mineral resources were awarded to the elite, experienced great inequality in the distribution of wealth and political power, and were thus less likely to implement policies that benefitted the majority (3). Indeed, Engerman and Sokoloff contend, productivity increases in early industrialization result primarily from “changes in organizations, methods, and designs which did not require much in the way of capital deepening or dramatically new capital equipment” (28). Ease of land acquisition is also important in determining the society that developed, as greater access to land, combined with high per capita income, can encourage “broad participation in commercial activity, a large middle-class market permitting mass production of standardized goods” (25). In conclusion, though industrialization is likely a result of myriad different factors, relative productivity gains by certain demographic groups, in addition to the nature of and policies controlling factor endowments found in the economies settled from northwestern Europe, probably had significant impacts on the evolution of industrialization in different regions.

M Larrain

Memo Question for April 9
M Larrain


According to the basic neo-classical international trade model, relative endowments of the factors of production determine a country’s comparative advantage. Countries have comparative advantages in those goods for which the required factors of production are relatively abundant locally. If the economies settled from northwestern Europe -the United States, Canada, Australia, New Zealand- were all resource rich, then according to the model these countries should export resource-intensive goods to Europe and the rest of the world. However, in reality this is not the case. These countries, as opposed to countries with similar relative endowments (e.g. Denmark), export industrial goods. Why did this happen?

We can extract some explanations from the readings of this week. One way to think of the problem is that the neo-classical model is not a good description of the world. If there are large barriers to trade, then we can expect the predictions of the model not to hold in the real world. According to Goldin and Sokoloff (1984) and Temin (1966), this could be a plausible explanation. On the one hand international trade in Europe decreased dramatically during the Napoleonic wars. On the other hand, the United States imposed high tariffs to manufactured goods imported from Europe. These trade barriers would have prevented the United States of using its comparative advantage.

An alternative explanation can be derived from the paper of Engerman and Sokoloff (1994). According to the authors; even though the United States was relatively highly endowed in factors such as land; the country was not endowed with the necessary labor needed to make use of the comparative advantage in the production of crops. As a result, the United States would have searched for an alternative activity, namely industrial production.

Eva

This is actually a sligher shorter version of what I handed in, but I thought it would be fun to post for its vehemence.

The “accepted” reason why the economies settled from northwestern Europe – the U.S., Canada, Australia and New Zealand – industrialized despite being resource-rich is that they had societies which were both equal and unequal in the appropriate ways. Engerman and Sokoloff argue that inequality is bad for growth and the unequal South in the U.S. thus didn’t progress as quickly as the North (1994); more importantly, Goldin and Sokoloff instead argue that when wages for women and children relative to those for adult men are relatively low, a country will industrialize faster and have a higher ratio of manufactured to agricultural goods (1984).

However, this latter is a blazingly awful argument.(*1) The main problems are that the cherry-picked cases are not representative of wages being relatively low for women and children in general and, worse, the fact that wages not being high for women and children relative to men is correlated with all sorts of things that we would consider relevant to whether the country focused on manufactures.

Whether or not women in a society are encouraged to work depends a great deal on the social mores of the society and what is considered “decent work”, with agriculture often not considered decent due to its being conducted outdoors, while chaste women or women of upper classes, with associated untanned skin, are to be inside. In much of Africa, women do the vast majority of agricultural work and are expected to carry heavier loads than men; it is estimated that they contribute 60-80% of the labour that is used to produce food both for household consumption and for sale.(*2) Thus, Goldin and Sokoloff’s claim that the Northern farmwork was naturally too demanding for women requires more justification, at the very least. The relative price of female labour also may not be primarily an indicator of how unused female labour is but how unequal a society is or other cultural mores.

In truth, Goldin and Sokoloff’s argument relies on the culture and institutions of the countries they study, all the while denying the importance of any such institutions. Temin notes that labour was not short in America, just paid more relative to capital costs. One can easily imagine that Americans were paid more perhaps for more intensive work from the Protestant work ethic and from America’s related emphasis on meritocracy and its people wanting to reward people for work more than people elsewhere do as evidenced by studies in behavioural economics. The point is that Goldin and Sokoloff don’t explore institutional or cultural explanations. They proclaim: “we believe these results are applicable to contemporary phenomena in developing countries” without discussing any potential differences in developing countries at all, which is absurd.

(*1): We shall set aside debates about whether inequality is good or bad for growth, as this is tangential to the matter at hand; however, it should be noted that it is a quite contentious issue.
(*2): Economic and Social Department, FAO, 2003. Indeed, their superior agricultural productivity compared to men (even if for social reasons) is the main reason advanced as to why brideprice (a dowry paid to the woman’s family rather than to the man’s) is the norm in far more countries than dowry. Brideprice occurs in roughly 2/3rds of countries while dowry only occurs in less than 4%, and serves to reimburse the woman’s family for her labour, which they lose (Anderson, 2007).

Insook Lee


History might be full of coincidence but with hidden reason always stimulates researchers and usually gives some biting implication to the current situation in a way. In this sense, why resource rich countries of United States, Canada, Australia, New Zealand flourish manufacturing industry rather than agriculture shed a new light on how the natural environment can effect the industrialization as well as international trade. At a glance, these countries have comparative advantage in natural resource, like other Latin American countries. Thus, it might be puzzling that those countries find their competitiveness in the items for which natural resource is not that vital. This question, might be related with the argument of Arthur Lewis(1978) that temperature is not so high for tropical product yielding. Thus, in the division of international production, these countries ended up to find industrial development as their optimal strategy comparing to others. Since the highly productive agriculture in England and Europe made importers demand tropical product like sugar and other crop from outside, large land itself could not constitute a comparative advantage for the profitable food seller. However, even if it is so, how and why earlier industrialization was possible was not answered.
For this aspect, similar but more focusing on the intrinsic and complicated part was pointed out by Engerman and Sokoloff(1994). United States was different in the component of the immigrant and share of white immigrant, which resulted in different institution for earlier onset or bloom of industry and therefore the sustainable growth in the future. With environment that is not suitable for sugar or tobacco, which exhibits economy of scale and thus heavily relied on slavery, absorbed less slaver and more white as immigrant. In stark contrast of colonies in other part of the world only about 20% or 25% of residents were from white, 80 % of population of Canada and United States was white, and furthermore latter were mainly from the northeast part of Europe that had underwent the remarkable economic growth. On the top of this, these group were highly qualified human capital, which served the development of institution as well as technology in the nineteenth century and later in the long run. More importantly, without large scale of plantation, small holding of land among the people and relatively equal distribution of the wealth contributed the improvement of institution and thick middle class who cherished the market development. Exogenously given initial condition of climate and soil for those countries might be coincidence but the consequences were propelled by rationality. That is, the government without small elite of landowner wielded discretionary power designed policy better for sustained growth. Thus, in this sense, those countries with large land does not entail the serfdom as Evsey Domar(1970) hypothesis predicted.
Also, Temin(1966) buttresses that the technology development of United States as high as that of England which had lead the world economy and that human capital in these countries was highly productive. Critical analysis on the anecdotal evidences of the British visitor’s observation about United States, he argued that even though nominal wage of United States was high and labor saving machine was conspicuously developed, labor scarcity was not a culprit of these phenomenon but different relative price food and large depreciation rate and above all, highly competitive marginal product in industrial sector. Answering whether it applies to other, the relevant data for Canada, Australia, and New Zealand is to be checked. However, comparative advantage of the price that stemmed from different natural setting and people with better labor productivity could play a role even in explanation of relative absence of industrialization of South compared to North within United States during late nineteenth century.
Using two factor and two good model, for this matter, Goldin and Sokoloff(1984) suggested difference in “relative productivity” could make better bed for developing factory. Putting another way, the lower relative wage of female and children to adult male within agricultural sector, the more competitive for manufacturing to bloom. With empirical evidence as well as theoretical model, children and female of low relative wage was largely involved in the mechanization of industry in North part of United States, comparing to South. However, this is unique feature to North America, thus for the cases of Canada, New Zealand, Australia, we need another compelling argument if the initial environment was not powerful determinant for industrialization of resource rich countries.

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