06_mich_industrialisation, foreign investment and development full size_njz24

Lecture 6: Industrialisation, Foreign Investment &Development

Part IIA, Paper 4: Settler Economies in the Long Nineteenth Century

Dr. Nick Zammit

University of CambridgeFaculty of Economics

Room [email protected]

March 5, 2014

Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 1 / 51

1 Foreign InvestmentA History of Foreign K FlowsThe Lucas ParadoxIssues With Foreign Investment

2 Industrialisation in the Settler EconomiesRelative Success in ManufacturingForeign Technology Adoption & AdaptationLessons for Modern Developers?

Industrialisation in the Developing World

We know that development theory placed a strong emphasis on movingfrom primary production to manufacturing

Rostow’s stages of growth were based on successful industrialisation→ Britain, Germany and the USA became models for industry led growth

Developing countries in 19C & 20C have been occupied (obsessed?) withindustrial led growth on Euro model

Unfortunately they have faced several issues in following this model:

1 A high demand for K that could not be satisfied domestically

2 Difficulties in developing sufficient infrastructure

3 Failure to diversify the manufacturing sector

Issues in Industrialisation

These issues forced policy makers to consider several questions:

Should trade policy be used to aid industrialisation?

I Infant industry approach?I ISI vs EOI?

How can developing countries attract foreign K?

I Does FDI vs portfolio matter?I Is foreign investment good in LR?

Should foreign technology be imported?

I SR gains in cost cutting vs. LR innovative activity

Lets consider k flows and technology → trade next lecture

Should trade policy be used to aid industrialisation?I Infant industry approach?I ISI vs EOI?

How can developing countries attract foreign K?

I Does FDI vs portfolio matter?I Is foreign investment good in LR?

How can developing countries attract foreign K?I Does FDI vs portfolio matter?I Is foreign investment good in LR?

Should foreign technology be imported?I SR gains in cost cutting vs. LR innovative activity

A History of Foreign K Flows

Who has been responsible for foreign K transfers?

UK was dominant source before WWI (over 50%)

France & Germany were also important sources before WWI

After WWI the United States came on as a significant source

After WWII the US overtook the UK as source of foreign K

Japan came on to overtake UK by 1990s as source of foreign K

Much greater diversity in suppliers of foreign K by 1980s

→ Sources of foreign K have changed!

Share of Global Foreign Assets Held by Country (%)

1825 1855 1870 1900 1914 1930 1938 1945 1960 1980 1985 1990 1995 2000

Share of Total (%

United Kingdom

France

Germany

Netherlands

United States

Canada

Source: Obstfeld and Taylor [2004]

What type of foreign assets have been held?

Composition is different for developed & developing countries

After WWII FDI & FI have been rising as a share of GDP fordeveloped countries

Both FDI & FI had surpassed pre-WWI levels by the 1990s fordeveloped countries

FDI has fallen since as a share of GDP for developing countries

FI is still below pre-WWI levels as a share of GDP for developingcountries

For both developed & developing countries FDI/FI has fallen sincethe interwar period

→ Composition of foreign assets have changed!

Foreign Investment in the Core & Periphery

Where have foreign K transfers gone?

Before WWII most foreign K flows went from core to periphery(W.E. to Settler Economies & L.America)

Since WWII foreign K flows have been increasingly between corecountries

Developing countries have fared worse in attracting K since WWIIthan before WWI!

Foreign K Flows to Settler Economies

1865-‐9 1870-‐4 1875-‐9 1880-‐4 1885-‐9 1890-‐4 1895-‐9 1900-‐4 1905-‐9 1910-‐4

Share of Total (%

Bri1sh Overseas Investment by Des1na1on (%)

Europe

Se6lers & L.America

Rest of World

Source: Magee and Thompson [2010]

Foreign K Flows to Periphery

1865-‐9 1870-‐4 1875-‐9 1880-‐4 1885-‐9 1890-‐4 1895-‐9 1900-‐4 1905-‐9 1910-‐4

Share of Total (%

Bri1sh Overseas Investment by Des1na1on (%)

Core (USA&EUR)

Periphery (ROW)

Source: Magee and Thompson [2010]

Before WWII most foreign K flows went from core to periphery (W.E.to Settler Economies & L.America)

Since WWII foreign K flows have been increasingly betweencore countries

Inward Foreign K Flows by Development

1986-‐1990 1991-‐1995 1996-‐1999

Share of Total (%

Least Developed

Less Developed

Developed

Developing countries have fared worse in attracting K sinceWWII than before WWI!

Inward Foreign K/GDP by Development

WHY!?! What explains this?

Lucas (1990)

Lucas looked at the issue of 20C developers access to K and asked:→ ‘Why doesn’t capital flow from rich to poor countries?’

Developing countries have low K/L ratio

Labour is cheap and K is expensive (low w/r)

If MPKpoor = rpoor > rrich = MPKrich

K should flow to poor countries!

This is called the ‘Lucas Paradox’

Lets consider Lucas’ question

Lucas (1990)

‘Lucas Paradox’

Consider a neoclassical Cobb-Douglas type production function withconstant returns technology:

y = Akβ

where y = YL and k = K

We can solve for MPK = r = Aβkβ−1 and substitute in k

r = A1β βy

β−1β

If β = 0.4 and yUSAyIND

rINDrUSA

(yUSAyIND

MPK is 58x higher than in the USA! K should flow to India!

‘Lucas Paradox’

Consider a neoclassical Cobb-Douglas type production function withconstant returns technology:

y = Akβ

where y = YL and k = K

We can solve for MPK = r = Aβkβ−1 and substitute in k

r = A1β βy

β−1β

If β = 0.4 and yUSAyIND

rINDrUSA

(yUSAyIND

MPK is 58x higher than in the USA! K should flow to India!

Answers to the Lucas Paradox

How do we explain the paradox?

Institutions matter again!

Insecure property rights in poor countries

No constraints on the executive in poor countries

Confirmed by ↓ FDI/FI since FDI is more vulnerable

Hold up problems, expropriation & taxes are an issue with FDI

Liquidity of FI (non-FDI) has made this more popular in poorcountries

Some argue foreign K is bad! Maybe Lucas Paradox is a realisation ofbetter practices in 20C (isolate foreign K flows to stable regions)!→ Consider L. America in the 1970s & 80s! (lecture 8)

Is Foreign Investment Good?

Some argue that developing countries are better off without foreign K!

They generally make the following claims:

Risk of financial crisis increases → K flows can be destabilising

Constraints on policy choices → Washington Consensus

Foreign control & ownership → Inappropriate investment (tech)

Is there evidence of this?

Risk of Financial Crisis

Table 1.17. Foreign Capital Stocks (%) 1870 1914 1980 2000 UK 63.6 50.4 19.7 15.4 Other Europe 36.4 42.6 40.3 38.5 USA 6.5 27.7 25.4 Japan 5.7 10.2 Rest of World 0.5 6.6 10.5 Total ($ billion current) 7.7 38.7 2800 28984 Source: Obstfeld & Taylor (2004) Table 1.18. Annual Probability that Country has Crisis (%) Banking Currency Twin All Crises Crises Crises Crises 1880-1913 2.30 1.23 1.38 4.90 1919-1939 4.84 4.30 4.03 13.17 1945-1971 0.00 6.85 0.19 7.04 1973-1997 2.29 7.48 2.38 12.15 Source: Eichengreen & Bordo (2002) Table 1.19. Average Crisis Depth: Cumulative GDP Loss (%) 1880-1913 1919-1939 1973-1997 Currency 8.3 14.2 5.9 Banking 8.4 10.5 6.2 Twin 14.6 15.8 18.6 All 9.8 13.4 8.3 Source: Bordo et al. (2001) Table 1.20. Social Transfers in Old OECD Countries (%GDP in median country) 1910 0.7 1930 1.7 1960 10.4 1980 20.1 2001 22.9 Sources: Lindert (2004) updated using OECD (2005).

Period of free K flows from 1880-1913 had lowest probability of crisis!(despite no active monetary policy)

Constraints on PolicyIMF loans and ‘The Washington Consensus’ are perceived by some to beproblematic for development! → austerity conditions attached

Consider The Washington Consensus:

Fiscal policy discipline → avoidance of large deficits

Redirection of public spending into education, health care and infrastructure

Tax reform → moderate taxation

Positive and moderate Interest rates

Competitive exchange rates

Legal security for property rights

Trade Liberalisation → low and uniform tariffs

Liberalisation of inward FDI → no attempt to block K flows

Privatisation of state enterprises

Deregulation of markets and financial institutions

Good reason to believe these should all increase growth!

Good reason to believe these should all increase growth!Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 21 / 51

Foreign Control and Ownership

Issues of foreign control have manifested themselves in a fear ofentrepreneurial failure

Foreign control creates an environment of indifference and lethargy

Entrepreneurs are assumed to have failed by not adopting best practicetechnology

Others argue that countries might be adopting too much foreigntechnology without adapting it

Was tech adoption or adaptation a problem for 20C developers? Was it aproblem for 19C developers?

Technology Adoption and 20C Development

Have 20C developers failed to adopt best tech?

In order to answer this Jerzmanowski (2007) disaggregated TFP into techadoption (T) and tech use (E)

This is done using efficiency frontier analysis→ Assume CRS or VRS to get an efficient tech frontier (E)→ Assume most efficient firm tech to get universal tech frontier (T)

Lets see his results!

Method

of the section investigates the contributions of efficiency and available technology todifferences in TFP levels and growth rates.

5.1. Levels

The results for 1995 are summarized in Fig. 4, which plots the estimated technologyfrontier T!k=h", as well as the actual observations (i.e., (ki=hi;TFPi) pairs). There areclearly significant differences in the levels of technologies that countries can access giventheir factor mix; the best technology is about three times better than the least productivetechnology. Notice also that the frontier has a maximum at the physical–human capitalmix close to that of the United States, which is consistent with the results of Acemoglu andZilibotti’s appropriate technology model, namely that the best technologies areappropriate for the factor mix of the R&D leaders.23

Since in 1995 the United States had access to the most productive technology, relativetechnology is calculated by dividing the estimates by the US value. The mean of therelative level of available technology is 0.76 and the standard deviation is 0.12. There are42 countries with available technology equal to more than 75% of US technology. Onlytwo countries have relative levels of technology below 40% of the United States’: theDemocratic Republic of Congo and Uganda.The results for selected countries are shown in Table 4. The first column presents the

levels of TFP relative to that of the United States in 1995. Columns two and three give therelative levels of efficiency and available technology, respectively.24 Clearly, poor countries

ARTICLE IN PRESS

Fig. 3. Decomposition of output difference between countries 1 and 2 under appropriate technology. y # A!k"ka

is the true production frontier, where productivity depends on the stock of capital; y # A2ka is the productionfrontier under the assumption that TFP of country 2 (A2) is available to every country, regardless of the capitalendowment. Left panel: Standard decomposition into difference due to TFP and capital !k". Right panel:Decomposition into differences due to technology !T", efficiency !E", and capital !k".

23The Acemoglu–Zilibotti model predicts that productivity will be an inverse-U shaped function of the ratio ofskilled to unskilled workers.

24The efficiency numbers are, of course, identical to those in Table 1.

M. Jerzmanowski / European Economic Review 51 (2007) 2080–21102096

Source: Jerzmanowski [2007]

DEA Results

lack access to the most productive technologies. For example, India, given its factor mix,could at best use a technology equal to only two-thirds of the US potential. In most cases,however, the technologies that are available to poor countries, given their factorendowment, are only moderately inferior to those available to developed nations. A moreimportant source of low TFP seems to be the fact that they do not use availabletechnologies efficiently. For example, Kenya has a TFP equal to only 27% of that of theUnited States; however, given its mix of physical and human capital, it could potentiallyuse a technology that has a productivity level equal to as much as 62% of the US value.However, Kenya uses only 43% of its potential. The bottom row gives the averages for thesample. If all countries were fully efficient, the average level of TFP would climb from thecurrent value of 59% to as much as 76%.

ARTICLE IN PRESS

Table 4The 1995 levels of TFP, appropriate technology !T" and efficiency !E" relative to the United States level forselected countries

Country TFP E T!k=h"

United States 1.00 1.00 1.00France 0.78 0.87 0.90Norway 0.70 0.83 0.84

Hong Kong 0.90 0.98 0.92Japan 0.68 0.79 0.86Korea 0.49 0.49 0.99

Brazil 0.50 0.60 0.84Mexico 0.48 0.58 0.83India 0.29 0.44 0.66

Kenya 0.27 0.43 0.62Zambia 0.13 0.20 0.66

Average 0.49 0.62 0.76

) 1995

0 1 2 3 4 5

Fig. 4. Technology frontier: 1995.

M. Jerzmanowski / European Economic Review 51 (2007) 2080–2110 2097

TFP Disaggregation

which, when Eq. (8) is incorporated, becomes

"1# a$gT %

"1# a$gE % growth of factors,

where gE and gT denote growth rates of efficiency and technology.Table 6 presents the results of the growth accounting exercise for selected countries. The first

column is the average annual growth rate of output per worker between 1960 and 1995, thesecond and third columns present the growth in factors and the growth in TFP, which sum tothe growth of output per worker in the first column. It is apparent from Table 6 that on averageboth factor growth and TFP growth contributed significantly to per-worker output growth; therelative contributions are 60% and 40%, respectively. This is consistent with previous findings(e.g., Klenow and Rodriguez-Clare, 1997). How did the relative contributions of technologygrowth and efficiency change determine TFP growth? The last two columns break down thegrowth of TFP into the growth of available technology, which includes both the shifts of thefrontier and movement along it, and the growth of efficiency. Most of the average growth inTFP was due to growth in available technology; the average efficiency change was close to zero.This means that most countries experienced either a shift of the frontier or moved to its morefavorable region. Of course, the average masks individual countries’ diverse efficiencybehaviors: ‘‘Miracle’’ countries usually experience large efficiency gains, while ‘‘growthdisasters’’ are almost exclusively caused by dramatic collapses of efficiency.26

ARTICLE IN PRESS

Table 6Decomposition of average annual output growth (in %)

Country Output growth Factors TFP Efficiency Technology

United States 2.05 0.77 1.29 0.00 1.29France 2.53 0.88 1.65 0.86 0.79United Kingdom 2.03 0.87 1.16 #0.21 1.37New Zealand 0.75 0.66 0.09 #0.98 1.07

Hong Kong 5.40 0.81 4.59 3.12 1.47Japan 4.43 1.69 2.74 1.44 1.30Korea 5.63 2.56 3.07 1.22 1.85

Brazil 2.50 0.48 2.02 0.85 1.17Mexico 1.26 1.24 0.02 #0.92 0.94India 2.16 1.04 1.12 0.29 0.83

Tanzania 0.44 0.70 #0.25 #1.19 0.94Congo #2.88 1.52 #4.40 #3.78 #0.63Zambia #1.88 0.39 #2.27 #2.28 0.01

Average 1.67 0.98 0.70 #0.13 0.83

Average for 76 countries. TFP contribution to output growth is given by 1="1# a$DTFP=TFP.

26Some papers decompose the variance of growth rates. The results typically show that most of the variation inoutput growth rates is due to a variation in TFP growth rates. This is because TFP growth rates range from very highto negative, while the rates of factor accumulation are much less variable (both across and within countries) and rarelytake on negative values. In the current sample, 87% of the variation in output growth rates is due to variation in TFPgrowth. Of this, 59% reflects variation in efficiency growth. Again, this suggests that growth disasters are mostly a‘‘falling further behind the frontier’’ phenomenon, while growth miracles reflect catching up to the frontier.

M. Jerzmanowski / European Economic Review 51 (2007) 2080–2110 2099

Africa suffered from low TFP because it used tech inefficiently! Indiasuffered because it failed to adopt best tech!

Lessons for Modern DevelopersWhat can we learn about industrialisation from Settler Economies?→ How successful were the settler economies? Were there differences?How did they solve the issues discussed?

The staples/resource approach has biased many views on the industrialdevelopment of settler economies

Rostow’s Stages Theory assumes ‘take-off’ and ‘maturity’ will bedetermined by resource endowments (ex. timber to wood-pulp & paper)

However, only Canada has been successful in developing a strongdiverse manufacturing sector

There is a widely held misconception that Canada, although a‘developed’ country is not an industrialised nation, but owes herwealth solely to abundant natural resources. The wheat fields ofthe Prairies, her mineral and timber wealth, and thehydroelectric schemes in the North should not distract from thesignificance of the geographically concentrated manufacturingsector. (Pomfret [1993])

Relative Success in Manufacturing

Several facts support CAN manufacturing success:

Canada was able to diversify its manufacturing sector

Canada had faster growth in industrial labour productivity

Canada used more advanced energy in manufacturing

Canada was able to export manufactures

Canada had higher TFP in manufacturing

Manufacturing Diversity

Table 3.1: Share of Value Added in Manufacturing

Canada Victoria New ZealandCategory 1890 1900 1910 Category 1890 1900 1910 Category 1890 1900 1910

Food & Drink 16.9 18.7 18.5 Food & Drink 24.9 36.5 24.0 Food & Drink 42.2 48.3 24.9Textiles 15.1 15.3 11.3 Clothing & Textiles 11.1 18.5 20.2 Textiles 12.4 11.4 16.7Iron, Steel & Metals 11.8 14.9 17.9 Metals & Jewellery 19.5 15.3 18.2 Metal Works 6.5 6.6 9.5Timber & Lumber 19.5 19.2 16.0 Wood & Furniture 17.0 7.0 8.2 Wood & Furniture 15.0 14.4 16.4Leather Products 7.5 6.1 5.0 Leatherware 0.2 0.2 0.5 Harness & Saddlery 10.7 5.7 3.3Paper & Printing 3.8 6.2 5.2 Paper & Printing 10.5 8.2 9.8 Paper & Books 4.6 5.1 10.0Chemicals & Allied 1.8 2.2 2.4 Chemals & Oils 2.3 2.6 4.0 Chemicals 0.3 0.4 0.2Clay, Glass & Stone 3.7 2.9 3.9 Stone, Clay & Glass 7.1 4.0 4.3 Stone, Clay & Glass 1.4 1.6 3.7Vehicles for Land 5.0 4.4 6.2 Vehicles & Saddlery 3.4 2.9 3.3 Carriages & Vehicles 1.8 1.6 2.7Vehicles for Water 1.0 0.6 0.8 Shipbuilding 0.1 0.2 0.2 Ships & Boats 0.8 0.5 1.3Miscellaneous 13.5 9.5 12.6 Small Wares & Power 4.1 4.7 7.4 Small Wares & Power 4.3 4.4 11.4

Total 100.0 100.0 100.0 Total 100.0 100.0 100.0 Total 100.0 100.0 100.0

Sources: See appendix tables B.3-B.7 for list of sources. See section III.1 for a description of data.

Notes: Categories are not matched across countries, for example saddlery is included with vehicles for land in Victoria and not leather. Food & Drink

includes tobacco products in Canada and raw materials and animal products in Victoria and New Zealand

Source: Zammit [2013]

Several facts support CAN success:

Comparative Productivity

Rela%v

al GDP

/ Employmen

1936 Benchmark

1997 Benchmark

Industry Productivity

Rela%v

al GDP

/ Employmen

1936 Benchmark

1997 Benchmark

Agricultural Productivity

Rela%v

al GDP

per Cap

ita (C

1936 Benchmark

1997 Benchmark

Industry Output

Rela%v

al GDP

per Cap

ita (C

1936 Benchmark

1997 Benchmark

Agricultural Output

Engine Horse Power in ManufacturingTable 3.3: Horse Power Used

Horse Power Per Establishment (Ontario & Quebec = 100)

1900 1910

Category VIC NSW NZL CPE VIC NSW NZL CPE

Food Products 351 492 372 151 214 335 303 132

Textiles 50 17 52 0 24 23 41 0

Iron & Steel 18 19 20 17 9 21 15 8

Timber & Lumber 20 20 29 6 20 33 39 17

Leather Products 14 19 11 10 17 32 17 15

Paper & Printing 40 22 26 16 18 24 29 13

Liquors & Drinks 20 16 11 25 26 17 15 23

Chemicals & Drugs 21 19 26 5 47 52 26 35

Clay, Glass, & Stone 166 134 130 175 29 65 60 8

Metal Manufactures 10 351 2 1 4 134 3 2

Tobacco Products 122 151 – 113 291 749 16 87

Vehicles for Land 20 30 6 9 6 30 6 5

Vehicles for Water 65 114 33 40 153 113 14 –

Miscellaneous 20 26 20 52 16 22 13 12

Power & Light 20 10 15 51 38 90 50 41

Hand Trades 133 4 6 96 44 13 7 54

Unmatched 11 4 23 3 6 9 35 6

TOTAL 39 44 38 20 25 74 40 21

Notes: Horse Power is for steam, gas, oil & electric engines only (excludes water wheels).

Source: Zammit [2013]Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 33 / 51

Manufacturing Exports

1867/68

1872/73

1877/78

1882/83

1887/88

1892/93

1897/98

1902/03

1907/08

1912/13

1917/18

Share of Total Exports (%

Manufactured

Manufacturing Efficiency (1890)Table 3.7: 1890 DEA Results

Technical E�ciency Scale E�ciency

Category CAN VIC NSW NZL CPE CAN VIC NSW NZL CPE

Food 1.000 1.000 – 1.000 0.812 1.000 1.000 – 1.000 0.963

Textiles 1.000 1.000 – 1.000 0.800 1.000 1.000 – 1.000 1.000

Iron & Steel – 0.956 – 0.910 1.000 – 0.956 – 0.993 1.000

Lumber 1.000 1.000 – 1.000 1.000 1.000 – – 1.000 –

Leathers 0.868 0.791 – 1.000 1.000 1.000 1.000 – 1.000 1.000

Printing 1.000 1.000 – 0.918 1.000 1.000 1.000 – 1.000 1.000

Drinks 1.000 0.874 – 1.000 0.917 1.000 0.874 – 1.000 1.000

Chemicals 1.000 1.000 – 0.813 1.000 1.000 1.000 – 1.000 1.000

Clay, &c 1.000 0.957 – 1.000 0.974 1.000 0.957 – 1.000 0.995

Metals 1.000 1.000 – 1.000 0.946 1.000 1.000 – 1.000 1.000

Tobacco 1.000 0.959 – – 0.740 1.000 0.959 – – 1.000

Carriages 1.000 0.751 – 1.000 0.842 1.000 0.751 – 1.000 1.000

Ships 1.000 0.769 – 1.000 0.578 1.000 1.000 – 1.000 0.578

Misc. 1.000 1.000 – 1.000 1.000 1.000 1.000 – 1.000 1.000

Power 1.000 0.948 – 1.000 0.687 1.000 0.948 – 1.000 1.000

Trades 1.000 1.000 – 1.000 0.599 1.000 1.000 – 1.000 0.647

Other 1.000 0.984 – 1.000 – 1.000 0.984 – 1.000 –

AVERAGE 0.992 0.941 – 0.978 0.869 1.000 0.964 – 1.000 0.946

Overall E�ciency Allocative E�ciency

Category CAN VIC NSW NZL CPE CAN VIC NSW NZL CPE

Food 0.777 0.648 – 1.000 0.681 0.777 0.648 – 1.000 0.839

Textiles 1.000 0.762 – 0.656 0.539 1.000 0.762 – 0.656 0.673

Iron & Steel 1.000 0.868 – 0.817 0.653 – 0.908 – 0.898 0.653

Lumber 0.999 0.954 – 1.000 0.964 0.999 0.954 – 1.000 0.964

Leathers 0.838 0.689 – 1.000 0.726 0.965 0.871 – 1.000 0.726

Printing 1.000 0.854 – 0.725 0.879 1.000 0.854 – 0.790 0.879

Drinks 1.000 0.588 – 0.867 0.721 1.000 0.673 – 0.867 0.786

Chemicals 1.000 0.737 – 0.640 0.326 1.000 0.737 – 0.787 0.326

Clay &c 1.000 0.526 – 0.444 0.824 1.000 0.549 – 0.444 0.846

Metals 1.000 0.603 – 0.616 0.212 1.000 0.603 – 0.616 0.224

Tobacco 1.000 0.668 – – 0.599 1.000 0.696 – – 0.809

Carriages 1.000 0.549 – 0.725 0.819 1.000 0.731 – 0.725 0.972

Ships 1.000 0.029 – 0.143 0.192 1.000 0.038 – 0.143 0.332

Misc. 1.000 0.853 – 0.800 0.718 1.000 0.853 – 0.800 0.718

Power 1.000 0.573 – 0.437 0.446 1.000 0.604 – 0.437 0.649

Trades 1.000 0.422 – 0.726 0.442 1.000 0.422 – 0.726 0.738

Other 0.833 0.372 – 1.000 – 0.833 0.378 – 1.000 –

AVERAGE 0.968 0.629 – 0.725 0.609 0.973 0.664 – 0.743 0.696

Notes: Canadian $s converted to £s at 4s 2d per $. Inputs include Wages, Value of Fixed K (Land,

Buildings & Machinery), and Value of Materials. Output is Value of Gross Output. Lumber

includes timber, printing includes paper, drinks includes liquors, chemicals includes drugs,

clay includes glass and stone, carriages includes all vehicles for land, ships includes all

vehicles for water, power includes light, trades includes all hand trades, other includes all

unmatched and undisclosed subcategories

Why Did Canadian Industrialisation Succeed?

Success and failure in manufacturing has been a hotly debated topic inCanadian economic history!

Most of this debate has focused on the role of foreign investment andinfluence

There are several views on Canadian industrial performance:

Continentalist View

Nationalist View

Revisionist View

Continentalist View

Nationalist View

Revisionist View

Continentalist View

Nationalist View

Revisionist View

The Continentalist View

Continentalist View:

Canadian industrial performance had mixed success in early 20C

Issue was in government control and lack of competition

Policies of openness and integration were proposed

Foreign influence was considered vital to growth

Transferred technology could be adapted to domestic conditions

Manufacturing should become technologically efficient

The Nationalist View

Nationalist View:

Canadian industrial performance was poor in early 20C

Based on labour productivity comparison with the United States

Blame is placed on ‘myopic’ entrepreneurs

Foreign influence is considered detrimental to growth

Technology transfer stifled domestic innovation

Manufacturing became technologically dependent, inefficient &backward

Nationalist View:

The Revisionist View

Revisionist View (Wylie 1989, Keay 2000 & Zammit 2013):

Canadian industrial performance was good in early 20C

Based on TFP comparison with the United States & other settlereconomies

Blame and praise are laid on particular industries

Foreign influence is not considered detrimental to growth per se

Technology transfer did not stifle domestic innovation

Manufacturers did the best they could to adapt best practice tech tomkt conditions

Lets look at relative success in more detail!

Foreign Influence and 19C Development

Canada imported the most foreign technology of the settler economies!

Zammit (2013) has shown foreign patenting was beneficial to CANsuccess

Wylie (1989) has shown CAN was adapting foreign technology to suitdomestic factor prices

Keay (2000) has shown CAN had an efficient manufacturing sector relativeto USA

Evidence suggests foreign tech adoption was beneficial to 19Cdevelopment!

Foreign Patenting in Canada

100 18

Share of Total (%

Canadian Inventors

American Inventors

Bri<sh Inventors

Other Foreign Inventors

Zammit (2013) has shown foreign patenting was beneficial to CAN success

Wylie (1989) has shown CAN was adapting foreign technology tosuit domestic factor prices

Keay (2000) has shown CAN had an efficient manufacturing sector relativeto USA

Technical Change and Factor Substitution580 Wylie

\\ ~~~~~ 1900

-5 ~ \

labor (electricity) FIGURE 3

A VIEW OF FACTOR SUBSTITUTION AND TECHNICAL CHANGE IN CANADIAN MANUFACTURING, 1900-1929

are a simple characterization of readily available U.S. manufacturing technology.25

What opportunities might have existed for Canadians to adapt this technology to their own patterns of resource abundance and scarcity? One possibility, of course, would have been for Canadians to costlessly substitute for inputs using the blueprints of developed and available American technology. Since the relative price of labor to capital and of electricity to coal fell in Canada vis-a-vis the United States until 1929, then the simple transfer and use of appropriate American technology

25 In order to draw this figure, I assume separability between the primary inputs (labor and capital) and the energy inputs (electricity and coal). Separability implies that the marginal rate of substitution between labor and capital is unaffected by changes in the usage of electricity or coal and vice versa. This is not an assumption employed in the later empirical work in this article.

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Source: Wylie [1989]

Analysis of Technical Change

Canadian tech biases differ substantially from the USA

Canadian tech chng was K saving & L using

Canadian tech chng was more coal saving & less coal using than theUSA

Canadian tech chng was less electricity saving & more electricityusing than the USA

Canada did not passively adopt USA technology

Zammit (2013) has shown foreign patenting was beneficial to CAN success

Wylie (1989) has shown CAN was adapting foreign technology to suitdomestic factor prices

Keay (2000) has shown CAN had an efficient manufacturing sectorrelative to USA

TFP Estimates

Figure: Canadian/USA TFP EstimatesTable 2.5: Canadian Re ative to American T.F.'. D. By Industry

1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s Mean Steel 0.74 0.98 1.19 0.88 1.03 0.99 0.92 0.95 0.96 Cotton 0.90 0.87 0.92 0.85 0.64 0.72 0.82 0.82 Silk 1.10 0.95 0.81 0.81 1.15 1.36 1.44 1.51 1.14 Cement 0.80 0.71 0.94 1.00 1.09 1.15 1.27 1.08 1.01 Sugar 0.95 1.14 1.33 1.12 1.15 1.52 1.01 1.21 Oil 1.20 0.90 0.83 0.91 0.84 1.08 0.90 0.95 Paper 1.30 1.83 1.47 1.39 1.25 1.22 1.22 1.39 Wine 1.77 1.22 1.34 1.64 1.62 1.53 Spirits 0.72 0.90 0.81 0.87 1.19 2.30 1.15

More surprising is the performance of the silk and synthetic fibre textile firms during

the post-WWII era. The Canadian firms have consistently exhibited greater T.F.P. than

the U.S. firms in the sample after 1950. The dramatic improvement in Canadian silk and

synthetic fibre textile producers' relative T.F.P. performance coincides very closely with

the movement of both Canadian and American firms into synthetic fibres and out of silk.

Another interesting feature of the Canadian industry is that the Canadian firms' output

was dominated by production for the Canadian auto industry. The signing of the Auto

Pact in 1965 solidified this source of demand for the Canadian firms. It is unlikely that

these events were unrelated to the Canadian silk and synthetic fibre textile mills' T.F.P.

success after WWII.

In cement we see a very interesting pattern of relative T.F.P. performance. Prior to the

mid-1950s the Canadian market was dominated by one large producer, Canada Cement.

During this period the U.S. firms' T.F.P. was significantly greater than Canada Cement's

T.F.P.. However, as more firms entered the Canadian market the trend was reversed and

from the 1950s until the end of the sample period Canada's cement producers were more

technically efficient than the U.S. firms in my sample, despite the fact that Canada Cement

continued to be the largest single Canadian producer. Increased competition may have

played a role in the improvement in the Canadian industry's relative T.F.P. performance.

Cement is the only industry in the sample for which the Canadian firms were, on average,

Source: Keay [2000]

CAN manufacturing had relatively high TFP over the entire 20C!

Lessons for Modern Developers

The relative 19C experience seems to present some lessons:

CAN attracted lots of direct investment from USA

AUS & ARG attracted much more portfolio investment from GBR

CAN imported USA tech and adapted it

AUS & ARG attracted little USA tech

Results indicate CAN had more successful & diverse manufacturingsector

20C developers should benefit from more foreign technology → bigissue for some

Conclusions

Industrialisation has been limited in 20C by access to K

19C industrialisers received significant K flows

FDI has proven to have been especially important for CAN growth

Although disputed, adoption of foreign tech has aided industrialisation

CAN has received the most foreign tech and adapted it successfully

Some 20C developers could benefit significantly from this approach

Supplementary References

M. Jerzmanowski. Total factor productivity differences: Appropriate technology vs. efficiency.European Economic Review, 51:2080–2110, 2007.

I. Keay. Relative productivity performance: Canadian and american manufacturing firms,1907-1990. Canadian Journal of Economics, 33:1049–1068, 2000.

G. Magee and A. Thompson. Empire and Globalisation: Networks of People, Goods and Capitalin the British World, C.1850-1914. Cambridge University Press, 2010. ISBN 9781139487672.URL http://books.google.co.uk/books?id=dVfEQmRuPC0C.

M. Obstfeld and A.M. Taylor. Global Capital Markets: Integration, Crisis, and Growth.Japan-US Center UFJ Bank Monographs on International Financial Markets. CambridgeUniversity Press, 2004. ISBN 9780521633178. URLhttp://books.google.co.uk/books?id=GlOI8UBo9PQC.

R. Pomfret. The Economic Development of Canada. Nelson Canada, 1993.

P. Wylie. Technological adaptation in canadian manufacturing, 1900-1929. The Journal ofEconomic History, 49(3):569–591, 1989.

N. Zammit. Three Essays on the Comparative Growth of Settler Economies. PhD thesis, TheUniversity of Warwick, 2013.

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