The main objective of this essay is to explore two distinct theories of the industrialisation process as a basis for explaining institutional differences amongst major economies. I shall discuss the different effects caused by launching industrial processes in both backward and more advanced economies. Meier and Baldwin (1957) defined ‘late development’ as the relative lateness of economies increasing their real national incomes over a period of time.
Industrialisation, a synonym for modern economic growth, has changed forever the ways in which people live and work, usually for the better but not without political, social and ideological strains. In 1960, Walt W. Rostow, the American economic historian, suggested that countries pass through five stages of industrialisation. The first stage is the Traditional society or ‘a natural state of undevelopment’. The economy is dominated by subsistence activity where output is consumed by producers rather than traded. Goods are exchanged for other goods and production is labour intensive using limited quantities of capital.
The next stage is the Transitional stage or the pre-conditions for ‘take-off’. The formation of the transport infrastructure supports trade and there is greater economic progress. There is the creation of national political institutions. The third stage is ‘take-off’. This is the turning point in a country’s status as the rate of industrialisation increases; “it is the interval when the old blacks and resistance to steady growth are finally overcome” (W. Rostow 1960) There is a shift to the manufacturing sector. Political and social institutions evolve to support the industrialisation.
This stage is the naturalistic interpretation of development or growth. The fourth stage or drive to maturity, sees the economy diversifying into new areas. Technological innovation, entrepreneurial spirit and major investments have overcome the values and institutions of traditional society. The final stage or high mass consumption depicts an economy geared towards mass consumption. The consumer durable industries flourish and the service sector becomes highly dominant. This stage is characterised by American Fordism. Karl Marx’s influential theory on late development can be seen as a simplified basis for Rostow’s theory.
According to Marx; “the industrially more developed country presents to the less developed country a picture of the latter’s future” (Karl Marx, Das Kapital, First Edition) From Marx’s standpoint the development of the economic formation of society is viewed as a process of natural history as it gives one generalised rule for the industrialisation for all countries, which have been shaped by the past. This concept maybe generally accepted looking at Germany in the mid-late end of last century followed the path of England from an earlier time.
However, according to Alexander Gerschenkron, an economic historian, Marx’s theory is a generalisation that must be treated with caution; “In several respects the development of a backward country may, by the very virtue of its backwardness, tend to differ fundamentally from that of an advanced country. ” (Gerschenkron) Gerschenkron reacted negatively to the uniform paths of development and rigid determinism that in order to industrialise, a society must move from one stage to another. His theory states that the rate and pattern at which a country’s economy will grow, is determinant upon the ‘degree of backwardness’ of that economy.
According to Gerschenkron, relative backwardness is a powerful explanatory variable of such characteristics of industrial development as timing, growth rates and structural change. There are considerable differences between advanced and backward countries such as the intellectual climate, for example its spirit or ideology, within which industrialisation proceeded. A backward country would be less endowed with such factors of production as skilled labour, up to date technology, infrastructure and financial capital and would be likely to encounter many obstacles on its path to industrialisation.
Prior to industrialisation there would be a build up of tension between economic potentialities or the ‘great promise’ and the economic actualities and the obstacles to development. Gerschenkron argues against Rostow’s theory as he believes history is not rigid or guaranteed to repeat itself. He suggested that each country’s industrialisation is a unique process with different speeds, structures and institutional underpinnings of development. The example of investment banking in Germany illustrates the fact that not every major economy takes the same uniform path to industrialisation.
Britain was the very first industrialised nation and this unique position was not states led but as a result of entrepreneurial talent. The industrialisation of England had proceeded without any substantial utilisation of banking for long term investment purposes. This advanced economy gradually accumulated capital firstly from earnings in trade and agriculture and later from the industry itself. The undevelopment of the banking sector may be the reason as to why the industrialisation process was slower than in Germany. The institutions in Germany did not follow the same developmental path as Britain.
At this time Germany was a relatively backward country where its capital was scarce and diffused and there was considerable distrust of industrial activities, there was also a larger pressure for ‘bigness’ due to the scope of the industrial movement. There was also a lack of entrepreneurial talent. Industrial investment from the German banks is accepted as the specific instrument of industrialisation in this backward country, as this was the only means any industrial ventures obtained significant amounts of capital in order to develop.
The last three decades of the nineteenth century was marked by a rapid concentration movement in banking. German banks had begun to merge and benefit from opportunities of cartelization, so Germany had taken full advantage of being a relatively late industrial developer. Due to different instruments of industrialisation and Germany’s degree of backwardness, Germany and England followed different paths but as a result, both achieved industrialisation. This case highlights the main flaw of Rostow’s theory, which is generalising across all countries, implying that all economies follow the same growth pattern.
The unreality of this is that no single sequence can fit the development of all countries, because of natural differences in countries which is what Gerschenkron’s theory takes in to account. Rostow also implies that the stages are completely separate; however stages may be inter-linked and countries such as Germany may not necessarily go through them all. Similar industrial processes were seen in other European countries such as Austria, Italy, Sweden, France and Belgium. This supports Marx’s viewpoint on more industrially developed countries setting an example for others to follow.
However generalisations can not be made due to essentially different institutional instruments of industrialisation. Gerschenkron viewed that industrialisation always seemed the more promising the greater the backlog of technological innovations which the backward country could take over from the more advanced country. This ‘borrowed technology’ is a significant factor ensuring a high speed of development in a backward country entering the stage of industrialisation. The large imports of foreign machinery and knowledge will increase the economic potentialities for a backward country.
Conditions vary from industry to industry and from country to country. Industrial labour is extremely scarce in a backward country and the creation of this type of stable and disciplined labour force is very difficult. Backward countries can hope to achieve great successes by the application of modern and efficient techniques created by more advanced economies. Much of the technology in Japan is said to have been borrowed from the west and little actually originated domestically.
It is fair to say that to an extent Japanese success has come not from creating new inventions but from being the best at manufacturing other people’s inventions. The modern army and huge navy that made Japan an imperial great power of the early twentieth century and a permanent member of the League of Nations Council likewise in imitation of the west. However, Japan has now evolved to become one of the most important economic powers of the world. In the early 1950’s, the Japanese economic situation was not much different from that of a developing country.
By the mid-1960’s Japan emerged as the lowest cost steel producer in the world and was outselling the United States steel industry. By 1975 Japan had overtaken Germany as the largest exporter of automobiles in the world and now produces more automobiles than the United States. This is ironic, as the US were the very first producers in the automobile industry thanks to Henry Ford. Buy buying and upgrading technology knowledge, Japan has been able to catch up almost simultaneously with its counterparts and even earn competitive advantage on a global scale.
A great deal of historical analysis on the rise of economic growth has linked variations in performance to variations in organisations. The British economy has a heavy reliance on market organisation and generally small firms, which perform poorly compared to the US and Germany, whose economies are organised with greater emphasis on hierarchies, especially in larger firms. In the inter-war years the British industry restrained rationalisation. The economy would have benefited from more co-ordinated planning.
The industry had failed to procure ‘economies of speed’ available from mass production as the US had done previously, and ignored the success of industrial investment banking in Germany. However Gerschenkron and Williamson state that systematic differences in institutions arise from different circumstances. The circumstances in Britain in the late nineteenth century therefore can be used to suggest that Britains institutions were appropriate. There are many process and institutional differences between early and late developers.
The length of the industrial process is a major difference as early developers such as Britain industrialised in a very gradual and lengthy manner whereas late developers such as Germany industrialised rapidly. The reason for this difference, as mentioned earlier, was due to the intervention of important institutions. Another important factor is whether technology is developed (US) or imitated (Japan). External institutional factors such as ownership and finance of the industry also vary considerably.
In early developers capital is generated privately and shareholders play an important role in this. However in late developers capital was most likely not as readily available so institutions such as banks finance the industry and help to enhance economic growth. Overall, the policies of early industrialised institutions are fairly short-term, for example less money is spent on research and development, industrial training and management education as this cuts their costs which in turn increases profit margins and keeps shareholders happy.
Late industrialised institutions favour more long-term policies and have mixed objectives rather than purely maximising profits. There is more money spent on training, research and development, education and there is greater job security. Rostow’s theory of industrialisation does not have much support for effectively explaining the origins of institutional differences between economies as it is too simplistic, rigid and purely relies on history as its basis. His concept of ‘one best way fits all’ has been proven to be incorrect.
It is difficult to compare across nations as there are so many different factors that also have a bearing on its economy and industrialisation, but is unique to each nation. These may include political conditions, natural resources, historical background, population, education, standard of living and institutions. Economists state that a countries successful economic performance can be attributed to its institutional structure. From this viewpoint and the uniqueness of each nation, Gerschenkron’s theory of different degrees of backwardness offers a more powerful explanation of critical differences among major economies.
These varying degrees of backwardness decide the characteristics industrialisation will have and therefore the structures the organisations and institutions will form. As a result this will explain variations in national performance. Each nation has industrialised at different times and in different contexts so it is only natural that this will lead to differences in economies. However, it is still possible that a late developer can possess the same institutional structure as an early developer.