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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
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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?
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 2 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 2 / 51
![Page 5: 06_mich_Industrialisation, Foreign Investment and Development FULL SIZE_njz24](https://reader033.vdocuments.mx/reader033/viewer/2022051821/5695d23b1a28ab9b02999e7a/html5/thumbnails/5.jpg)
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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 2 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 2 / 51
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 3 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 3 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 3 / 51
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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!
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 4 / 51
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Share of Global Foreign Assets Held by Country (%)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
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
Japan
Source: Obstfeld and Taylor [2004]
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A History of Foreign K Flows
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!
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A History of Foreign K Flows
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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 6 / 51
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A History of Foreign K Flows
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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 6 / 51
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A History of Foreign K Flows
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!
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A History of Foreign K Flows
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!
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A History of Foreign K Flows
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!
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A History of Foreign K Flows
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!
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Foreign Investment in the Core & Periphery
Source: Obstfeld and Taylor [2004]
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A History of Foreign K Flows
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!
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Foreign K Flows to Settler Economies
0
10
20
30
40
50
60
70
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 (%)
USA
Europe
Se6lers & L.America
Rest of World
Source: Magee and Thompson [2010]
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Foreign K Flows to Periphery
0
10
20
30
40
50
60
70
80
90
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]
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A History of Foreign K Flows
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 betweencore countries
Developing countries have fared worse in attracting K since WWIIthan before WWI!
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Inward Foreign K Flows by Development
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
1986-‐1990 1991-‐1995 1996-‐1999
Share of Total (%
)
Least Developed
Less Developed
Developed
Source: Obstfeld and Taylor [2004]
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A History of Foreign K Flows
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 sinceWWII than before WWI!
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Inward Foreign K/GDP by Development
Source: Obstfeld and Taylor [2004]
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A History of Foreign K Flows
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!
WHY!?! What explains this?
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 16 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 16 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 16 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 16 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 16 / 51
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‘Lucas Paradox’
Consider a neoclassical Cobb-Douglas type production function withconstant returns technology:
y = Akβ
where y = YL and k = K
L
We can solve for MPK = r = Aβkβ−1 and substitute in k
r = A1β βy
β−1β
If β = 0.4 and yUSAyIND
= 151
rINDrUSA
=
(yUSAyIND
)1.5
=
(15
1
)1.5
=58
1
MPK is 58x higher than in the USA! K should flow to India!
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‘Lucas Paradox’
Consider a neoclassical Cobb-Douglas type production function withconstant returns technology:
y = Akβ
where y = YL and k = K
L
We can solve for MPK = r = Aβkβ−1 and substitute in k
r = A1β βy
β−1β
If β = 0.4 and yUSAyIND
= 151
rINDrUSA
=
(yUSAyIND
)1.5
=
(15
1
)1.5
=58
1
MPK is 58x higher than in the USA! K should flow to India!
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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)
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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)
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 18 / 51
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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)
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 18 / 51
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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)
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 18 / 51
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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)
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 18 / 51
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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)
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 18 / 51
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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)
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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?
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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?
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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?
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 19 / 51
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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?
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 19 / 51
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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?
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Risk of Financial Crisis
14
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)
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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!
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 21 / 51
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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!Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 21 / 51
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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?
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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?
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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?
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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?
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 22 / 51
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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?
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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!
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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]
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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
0
0.5
1
1.5
Pote
ntia
l TF
P T
(K/H
) 1995
0 1 2 3 4 5
K/H
Fig. 4. Technology frontier: 1995.
M. Jerzmanowski / European Economic Review 51 (2007) 2080–2110 2097
Source: Jerzmanowski [2007]
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TFP Disaggregation
which, when Eq. (8) is incorporated, becomes
gy !1
"1# a$gT %
1
"1# a$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
Source: Jerzmanowski [2007]
Africa suffered from low TFP because it used tech inefficiently! Indiasuffered because it failed to adopt best tech!
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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])
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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])
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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])
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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])
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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
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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
83
Source: Zammit [2013]
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Relative Success in Manufacturing
Several facts support CAN 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
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Comparative Productivity
0
50
100
150
200
250
1871
18
75
1879
18
83
1887
18
91
1895
18
99
1903
19
07
1911
19
15
1919
19
22
1926
19
30
1934
19
38
1942
19
46
1950
19
54
1958
19
62
1966
19
70
1974
19
78
1982
19
86
1990
19
94
1998
20
02
2006
Rela%v
e Re
al GDP
/ Employmen
t (CA
N/A
US)
1936 Benchmark
1997 Benchmark
Industry Productivity
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1871
18
75
1879
18
83
1887
18
91
1895
18
99
1903
19
07
1911
19
15
1919
19
22
1926
19
30
1934
19
38
1942
19
46
1950
19
54
1958
19
62
1966
19
70
1974
19
78
1982
19
86
1990
19
94
1998
20
02
2006
Rela%v
e Re
al GDP
/ Employmen
t (CA
N/A
US)
1936 Benchmark
1997 Benchmark
Agricultural Productivity
0
20
40
60
80
100
120
140
160
180
1871
18
75
1879
18
83
1887
18
91
1895
18
99
1903
19
07
1911
19
15
1919
19
22
1926
19
30
1934
19
38
1942
19
46
1950
19
54
1958
19
62
1966
19
70
1974
19
78
1982
19
86
1990
19
94
1998
20
02
2006
Rela%v
e Re
al GDP
per Cap
ita (C
AN/A
US)
1936 Benchmark
1997 Benchmark
Industry Output
0.0
50.0
100.0
150.0
200.0
250.0
1871
18
75
1879
18
83
1887
18
91
1895
18
99
1903
19
07
1911
19
15
1919
19
22
1926
19
30
1934
19
38
1942
19
46
1950
19
54
1958
19
62
1966
19
70
1974
19
78
1982
19
86
1990
19
94
1998
20
02
2006
Rela%v
e Re
al GDP
per Cap
ita (C
AN/A
US)
1936 Benchmark
1997 Benchmark
Agricultural Output
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Relative Success in Manufacturing
Several facts support CAN 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
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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
Sources: See appendix tables B.3-B.7 for list of sources. See section III.1 for a description of data.
Notes: Horse Power is for steam, gas, oil & electric engines only (excludes water wheels).
85
Source: Zammit [2013]Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 33 / 51
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Relative Success in Manufacturing
Several facts support CAN 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
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Manufacturing Exports
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1867/68
1872/73
1877/78
1882/83
1887/88
1892/93
1897/98
1902/03
1907/08
1912/13
1917/18
1923
1928
1933
1938
1943
1948
1953
1958
1963
1968
1973
Share of Total Exports (%
)
Manufactured
Source: Zammit [2013]
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Relative Success in Manufacturing
Several facts support CAN 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
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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
Sources: See appendix tables B.3-B.7 for list of sources. See section III.1 for a description of data.
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
89
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 38 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 38 / 51
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 39 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 39 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 39 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 39 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 39 / 51
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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
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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
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 40 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 40 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 40 / 51
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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!
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 41 / 51
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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!
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Foreign Patenting in Canada
0
10
20
30
40
50
60
70
80
90
100 18
69
1872
18
75
1878
18
81
1884
18
87
1890
18
93
1896
18
99
1902
19
05
1908
19
11
1914
19
17
1920
19
23
1926
19
29
1932
19
35
1938
19
41
1944
19
47
1950
19
53
1956
19
59
1962
19
65
1968
19
71
1974
Share of Total (%
)
Canadian Inventors
American Inventors
Bri<sh Inventors
Other Foreign Inventors
Source: Zammit [2013]
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Foreign Influence and 19C Development
Canada imported the most foreign technology of the settler economies!
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
Evidence suggests foreign tech adoption was beneficial to 19Cdevelopment!
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Technical Change and Factor Substitution580 Wylie
0
\\ ~~~~~ 1900
-5 ~ \
A A
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.
This content downloaded by the authorized user from 192.168.72.231 on Mon, 10 Dec 2012 07:07:26 AMAll use subject to JSTOR Terms and Conditions
Source: Wylie [1989]
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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
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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
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 46 / 51
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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
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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
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Foreign Influence and 19C Development
Canada imported the most foreign technology of the settler economies!
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
Evidence suggests foreign tech adoption was beneficial to 19Cdevelopment!
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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,
36
Source: Keay [2000]
CAN manufacturing had relatively high TFP over the entire 20C!
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
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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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
![Page 118: 06_mich_Industrialisation, Foreign Investment and Development FULL SIZE_njz24](https://reader033.vdocuments.mx/reader033/viewer/2022051821/5695d23b1a28ab9b02999e7a/html5/thumbnails/118.jpg)
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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
![Page 119: 06_mich_Industrialisation, Foreign Investment and Development FULL SIZE_njz24](https://reader033.vdocuments.mx/reader033/viewer/2022051821/5695d23b1a28ab9b02999e7a/html5/thumbnails/119.jpg)
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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
![Page 120: 06_mich_Industrialisation, Foreign Investment and Development FULL SIZE_njz24](https://reader033.vdocuments.mx/reader033/viewer/2022051821/5695d23b1a28ab9b02999e7a/html5/thumbnails/120.jpg)
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
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 49 / 51
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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
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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.
Dr. Nick Zammit (Cambridge) Lecture 6 March 5, 2014 51 / 51