Economics and Business Review, vol. 1(15), no. 1, 2015

Economics and Business Review Volume 1 (15) 1 2015 Volume 1 (15)Number Number 1

ISSN 2392-1641

2015

CONTENTS From the Editor Tadeusz Kowalski Editorial introduction: Cliometrics of transition Claude Diebolt, Jacek Wallusch ARTICLES Why did the knowledge transition occur in the West and not in the East? ICT and the role of governments in Europe, East Asia and the Muslim world Ralph Hippe An exploration of the cliometric relationship between gender equality and economic growth Faustine Perrin Cliometrics and general equilibrium: a pathbreaking analysis revisited Claude Diebolt Synthetic ‘real socialism’: a counterfactual analysis of political and economic liberalizations Ilaria Petrarca, Roberto Ricciuti (Un)finished transition. Stock of knowledge in Poland, 1924–2012 Jacek Wallusch BOOK REVIEWS Tadeusz Kowalski, Globalization and Transformation in Central European Countries: The Case of Poland, Poznań University of Economics Press, Poznań, 2013 (Stanisław Rudolf) Katarzyna Szarzec, Adam Baszyński, Dawid Piątek, Michał Pilc, Institutions in Transition Countries, Katarzyna Szarzec (ed.), Global Development Research Group, Poznań, 2014 (Beata Stępień)

Poznań University of Economics Press

Editorial Board Ryszard Barczyk Witold Jurek Cezary Kochalski Tadeusz Kowalski (Editor-in-Chief) Henryk Mruk Ida Musiałkowska Jerzy Schroeder Jacek Wallusch Maciej Żukowski International Editorial Advisory Board Wojciech Florkowski – University of Georgia, Griffin Binam Ghimire – Northumbria University, Newcastle upon Tyne Christopher J. Green – Loughborough University John Hogan – Georgia State University, Atlanta Bruce E. Kaufman – Georgia State University, Atlanta Steve Letza – Corporate Governance Business School Bournemouth University Victor Murinde – University of Birmingham Hugh Scullion – National University of Ireland, Galway Yochanan Shachmurove – The City College, City University of New York Richard Sweeney – The McDonough School of Business, Georgetown University, Washington D.C. Thomas Taylor – School of Business and Accountancy, Wake Forest University, Winston-Salem Clas Wihlborg – Argyros School of Business and Economics, Chapman University, Orange Jan Winiecki – University of Information Technology and Management in Rzeszów Habte G. Woldu – School of Management, The University of Texas at Dallas Thematic Editors Economics: Ryszard Barczyk, Tadeusz Kowalski, Ida Musiałkowska, Jacek Wallusch, Maciej Żukowski • Econometrics: Witold Jurek, Jacek Wallusch • Finance: Witold Jurek, Cezary Kochalski • Management and Marketing: Henryk Mruk, Cezary Kochalski, Ida Musiałkowska, Jerzy Schroeder • Statistics: Elżbieta Gołata, Krzysztof Szwarc Language Editor: Owen Easteal • IT Editor: Piotr Stolarski

© Copyright by Poznań University of Economics, Poznań 2015 Paper based publication

ISSN 2392-1641

POZNAŃ UNIVERSITY OF ECONOMICS PRESS ul. Powstańców Wielkopolskich 16, 61-895 Poznań, Poland phone +48 61 854 31 54, +48 61 854 31 55, fax +48 61 854 31 59 www.wydawnictwo-ue.pl, e-mail: wydawnictwo@ue.poznan.pl postal address: al. Niepodległości 10, 61-875 Poznań, Poland Printed and bound in Poland by: Poznań University of Economics Print Shop Circulation: 300 copies

Volume 1 (15) Number 1 2015

CONTENTS From the Editor Tadeusz Kowalski............................................................................................................................... 3 Editorial introduction: Cliometrics of transition Claude Diebolt, Jacek Wallusch........................................................................................................ 5 ARTICLES Why did the knowledge transition occur in the West and not in the East? ICT and the role of governments in Europe, East Asia and the Muslim world Ralph Hippe.................................................................................................................................... 9 An exploration of the cliometric relationship between gender equality and economic growth Faustine Perrin............................................................................................................................... 34 Cliometrics and general equilibrium: a pathbreaking analysis revisited Claude Diebolt................................................................................................................................ 55 Synthetic ‘real socialism’: a counterfactual analysis of political and economic liberalizations Ilaria Petrarca, Roberto Ricciuti ................................................................................................... 69 (Un)finished transition. Stock of knowledge in Poland, 1924–2012 Jacek Wallusch................................................................................................................................ 89 BOOK REVIEWS Tadeusz Kowalski, Globalization and Transformation in Central European Countries: The Case of Poland, Poznań University of Economics Press, Poznań, 2013 (Stanisław Rudolf)..... 103 Katarzyna Szarzec, Adam Baszyński, Dawid Piątek, Michał Pilc, Institutions in Transition Countries, Katarzyna Szarzec (ed.), Global Development Research Group, Poznań, 2014 (Beata Stępień)................................................................................................................................... 105

Economics and Business Review, Vol. 1 (15), No. 1, 2015: 3

From the Editor Dear Readers, With this issue, we celebrate our 15th anniversary as a journal and introduce a new and expanded version of it. The first issue of the Poznań University of Economics Review was published as a bi-annual, peer-reviewed journal in 2001.

Papers were written by scholars from the Poznań University of Economics and covered such topics as economic transformation, European integration, regional development and mathematical economics. Reflecting the university’s long-term strategy of internationalization the Review provided a platform for academics to publish in English.

Over time the Poznań University of Economics Review has broadened its scope and range and consequently has attracted an increasing number of European and American authors and readers. The Editorial Board moved it to a quarterly publication in 2012 to accommodate the increased international interest.

The growing international nature of the journal is now reflected both by the number of papers written and submitted by international academics and by its International Advisory Editorial Board.

2015 marks the fifteenth anniversary and has inspired the Editorial Board to take further steps to develop the review. The cover and layout have been modernized and the title has also been changed to better mirror its growing international focus. The newly titled Economics and Business Review that we are launching in 2015 is the direct successor to the Poznań University of Economics Review and reflects the next stage in the development of the journal.

The Economics and Business Review is a quarterly journal focusing on theoretical and applied research work in the fields of economics, finance and management. A very important and distinctive feature of the new journal is that it explores the links between and among these areas from an international perspective. The Review welcomes the submission of papers for publication dealing with micro, mezzo and macro issues. All papers are subject to double-blind peer review prior to acceptance.

On behalf of Editorial Board and its International Advisory Board, Tadeusz Kowalski Editor-in-Chief of Economics and Business Review

Economics and Business Review, Vol. 1 (15), No. 1, 2015: 5–8

Editorial introduction: Cliometrics of transition The New Economic History (a term proposed by Jonathan Hughes) or Cliometrics (coined by Stanley Reiter), meaning literally the measurement of history, is of very recent origin. The first to claim involvement in it were Conrad & Meyer in 1957 and 1958.

The birth of cliometrics amounts to a revolution, a total break with traditional economic history. A defender of the new school as Robert Fogel perceives a clear continuity between old and new economic history. What is certain is that economic history has assigned an increasingly important position to theory since the end of the 1950s. It also used increasingly rigorous statistical and econometric analysis for the simple reason that a fair number of the problems that remain unsolved in economic history are such that the only intellectually satisfactory answers are quantitative by definition.

Cliometrics does not concern economic history in the limited, technical meaning of the term. It modifies historical research in general. It represents the quantitative projection of social sciences in the past. For example, the question of knowing whether slavery benefited the United States before the Civil War or not, or whether the railways had substantial effects on the development of the US economy is as important for general history as for economic history and will necessarily weigh on any interpretation or appraisal (anthropological, legal, political, sociological, psychological, etc.) of the course of American history.

Furthermore cliometrics challenges one of the basic hypotheses of the idealistic school that history can never provide scientific proof as it is never possible to subject to experiment historical events that are by definition unique. It replies, that on the contrary, it is possible – at least in suitable cases – to construct a fictitious (contra-factual) situation that can be used to measure the deviation between what actually happened and what could have happened under different circumstances. This methodological principle, that is to say the measurement of the influence of a factor on a development by using the difference between the development actually observed and the hypothetical development that would have been observed if the factor in question had not existed, is perhaps, along with the historical econometrics of historical data series, the most important contribution of cliometrics for researchers in social science in general and historians in particular.

Fogel defined the methodological features of cliometrics. He considers it fundamental that cliometrics should lay stress on measurements and that it should recognise the existence of close links between measurement and the-

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ory. There is no doubt that the distinguishing feature of the new school is the second characteristic and not the first. Indeed unless it is accompanied by statistical and/or econometric processing and systematic quantitative analysis, measurement is just another form of narrative history. It is true that it replaces words by figures but it does not bring in any new factors. In contrast cliometrics is innovative when it is used to attempt to formulate all the explanations of past economic development in terms of valid hypothetico-deductive models. In other words the essential characteristic of cliometrics is the use of these hypothetico-deductive models that call on the closest econometric techniques with the aim of establishing the interaction between variables in a given situation in mathematical form. This generally consists of constructing a model – of general or partial equilibrium – that represents the various components of the economic evolution in question and showing the way in which they interact.

Williamson’s general equilibrium model is a key reference here. Correlations and/or causalities can thus be established to measure the relative importance of each over a given period of time.

So far hypothetico-deductive models have mainly been used to determine the effects of innovations, institutions and industrial processes on growth and economic development. As there are no records stating what would have happened if the innovations in question had not occurred or if the factors involved had not been present, this can only be found out by drawing up a hypothetical model used for deducing a fictitious situation, that is to say the situation as it would have been in the absence of the circumstances in question. It is true that the use of propositions contrasting with the facts is not new in itself. Such propositions are implicitly involved in a whole series of judgements, some economic and others not. What would have happened, for example, if there had been opposition to Hitler’s remilitarisation of the Rhineland in 1936?

The use of propositions contrary to the facts has not escaped criticism. Many scientists still consider today that the use of hypotheses that cannot be verified does not produce history but quasi-history. Furthermore the results obtained by the most elaborate cliometric applications have been less decisive than many cliometrics’ specialists had hoped for. Critics are doubtless right to conclude that economic analysis in itself, with the use of econometric tools, is unable to provide causal explanations for the process and structure of change and development. There appear to be non-systematic breaks in normal economic life (wars, bad harvests, collective hysteria during stock market crashes, etc.) that require overall analysis but that are too frequently considered as extrinsic and abandoned in favour of an a priori formulation of theoretical suppositions.

Nevertheless in spite of the disappointments resulting from some of its more extreme demonstrations, cliometrics also has its successes together with continuous theoretical progress. The risk would obviously be that of allowing economic theory to neglect a whole body of empirical documentation that can enrich our knowledge of the reality of economic life. Conversely theory can

Editorial introduction: Cliometrics of transition

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help to bring out certain constants and only mastery of theory makes it possible to distinguish between the regular and the irregular, between the foreseeable and the unforeseeable.

At the present stage the main achievement of cliometrics has been to slowly but surely establish a solid set of economic analyses of historical evolution by means of measurement and theory. Nothing can now replace rigorous statistical and econometric analysis based on systematically ordered data. Impressionistic judgements supported by doubtful figures and fallacious methods whose inadequacies are padded by subjective impressions have now lost all credibility with serious, honest scientists. Economic history in particular should cease to be a story illustrating material life during different periods with facts and become a systematic attempt to provide answers to specific questions. By extension the more the quest for facts is dominated by the conception of the problems, the more research work will address what forms the true function of economic history in the social sciences. This change of intellectual orientation, of cliometric reformulation, can thus reach associated disciplines (law, sociology, political science, geography, etc.) and engender similar changes. Indeed the most vigorous new trend in the social sciences is, without a doubt, the preoccupation with quantitative and theoretical aspects. It is the feature that best distinguishes the concepts of our decade from those current from after World War 2 until the 1980s. Everybody is ready to agree to this – even the most literary of our colleagues. There is nothing surprising about this interest. One of the characteristic features of today’s younger generation is most certainly that its intellectual training is much more deeply marked by science and the scientific spirit than that of the generations that preceded us. It is therefore not surprising that young scientists should have lost patience with regard to the tentative approach of traditional historiography and have sought to build their work on foundations that are less artisanal.

The social sciences are thus becoming much more elaborate technically and it is difficult to believe that a reversal of the trend might occur. However, it is clear that many social scientists have not yet accepted the new trends aimed at using more elaborate methodology and clear concepts conforming to new norms in order to develop a truly scientific human and social science. This special issue on Cliometrics of Transition is a belief in these statements.

A quarter of a century has passed since the beginning of transition from centrally planned to market economies in Central Europe. Yet, post-Soviet economies still struggle with their past. Other transitions have taken many more decades but there is always a part of the globe where they have not reached their final stage. Cliometrics provides an additional insight into the evolution of institutions, customs, constraints, opportunities, failures and successes. In this volume, the authors elucidate various aspects of transitions. Ralph Hippe shows how governments affected the invention, adoption as well as the dissemination of the printing press and therefore how they triggered the long-run transition

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from the low-level of knowledge to the current explosion of knowledge in the West. The Great Divergence may have also originated due to the different impact of the printing press on the production of knowledge in Europe and Asia.

Faustine Perrin investigates the long-run relationship between gender inequality and economic growth. Gender equality contributes to economic growth through the distribution of roles within the households. A whole variety of factors closely related to gender equality explains the origins of human capital accumulation and the demographic transition. Claude Diebolt presents one of the cornerstones of the conceptual transition of economic history: Jeffrey Williamson’s contribution to the development of cliometrics. It was the general equilibrium approach that allowed for the application of the most celebrated method inside the cliometric toolbox, namely the counterfactual analysis. Ilaria Petrarca and Roberto Ricciuti test the impact of political and economic liberalisation on Central European economies. Interestingly, the authors do not ignore the institutional background, showing that institutional variables might in fact be incorporated into the general equilibrium framework. Jacek Wallusch shows the persistence of technological underdevelopment in Poland. For the last 90 years the stock of knowledge has repeatedly returned to its long-run average.

Even after the accession to the European Union the danger of returning to the slower increase of the stock of knowledge is still present.

Claude Diebolt and Jacek Wallusch

Economics and Business Review, Vol. 1 (15), No. 1, 2015: 9–33

Why did the knowledge transition occur in the West and not in the East?

ICT and the role of governments in Europe, East Asia and the Muslim world1 Ralph Hippe2

Abstract : The invention of a new ICT, the printing press, may have been a fundamental turning point in knowledge transition. But did Gutenberg’s printing press succeed in Europe because of, or despite of, government intervention? To answer the question, this paper endeavours to make a comparative analysis of the role of governments in the invention, adoption and dissemination of the printing press in Europe, Korea and the Ottoman Empire. It shows that governments had a major impact on printing technology in both the West and the East.

Keywords : knowledge, ICT, government policy, Europe, Korea, Ottoman Empire.

JEL codes : N33, N35, I28, O31.

Introduction One of the major debates in recent times has been the Great Divergence, i.e. the divergence of the West and Asia after the Industrial Revolution [e.g. Pomeranz 2000]. The Industrial Revolution itself and the reasons that led to it have sparked important controversies over centuries. Some authors have pointed out the crucial role of human capital and knowledge for long-run economic growth.3 1

Article received 30 June 2014, accepted 22 September 2014.

Acknowledgements: I would like to thank Alex Bowen for his inspirational queries that have led to this paper and Roger Fouquet for his valuable comments and suggestions. Financial support by the Global Green Growth Institute is gratefully acknowledged.

2 Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, Houghton Street, London WC2A 2A, United Kingdom, e‑mail: r.hippe@lse.ac.uk.

3 For a summary of the literature on human capital and economic growth, see Demeulemeester and Diebolt [2011].

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For example, Mokyr [2011] proposes that Britain’s ‘Enlightened Economy’ was fundamental to economic growth. However, where did this economy first come from? What triggered the transition from an agriculture-based to an industry­ ‑based economy and potentially to a future knowledge-based economy? And why did it not occur elsewhere?

While nothing is certain, one major invention has long been singled out as an important turning point in European history: the printing press.4 The invention of the printing press is seen as a major trigger of the enormous increase in knowledge production after the middle of the 15th century. More precisely, it caused the cost of production and the price of books to drop substantively.

In other words, the access costs to knowledge were significantly reduced. This was a crucial change because innovation is dependent on the level of access costs [Mokyr 2005]. Larger parts of the European population were now able to acquire and read books. As a consequence, book (and thus knowledge) production took off [see van Zanden 2009; Buringh and van Zanden 2009]. Thus, the printing press represents an innovation that might have caused a slow but continually advancing transition from an economy characterised by a low intensity of knowledge to the potential future knowledge economy. Furthermore, the cumulative long-run effects caused by the new technology may have led to important changes in society. Authors such as Eisenstein [1979] suggest that the printing press was an ‘agent of change’ that may have ultimately caused the (success of the) Protestant reformation, the Enlightenment and the Industrial Revolution.5 Although such ideas have been quite popular there was some lack of more direct evidence on the effects of the printing press for a long time and revisionist ideas have challenged the relevance of the printing press [Johns 1998]. Still, more recent empirical studies point out the significant role of the printing press on subsequent economic growth in Europe [e.g. Baten and van Zanden 2008; Dittmar 2011].

While these studies emphasise the effect of the printing press in Europe, they only partly answer the question as to why the printing press did not spur socio-political change and economic growth elsewhere. This fact is even more surprising as the technology was available in the largest economic hub of the time – Asia. Indeed, the most important inventions upon which the European printing press relied were invented in China, such as paper and movable type printing. In addition metal movable type printing was invented in Korea centuries before Gutenberg’s times. Korea is a particularly interesting case because it also had an alphabet (in contrast to China). A pure ‘alphabet effect’ [Logan 1986] could not apply to this country. But why did metal movable type print 4 The printing press is only one possible explanation. Alternative explanations include, for example, the development of new trade routes [Broadberry 2013] and the Black Death [Voigtländer and Voth 2012; Broadberry 2013].

5 For printing and the Protestant reformation, see also Rubin [2013].

R. Hippe, Why did the knowledge transition occur in the West and not in the East?

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ing not lead to a breakthrough and an Industrial Revolution in Korea? While many studies focus on China [e.g. Pomeranz 2000; Landes 2006; Brandt, Ma, and Rawski 2014], Korea appears to have received – somewhat surprisingly – only little attention in Western economic literature. This makes the analysis of the Korean case even more valuable. Similarly, why did the Ottoman Empire, another major technological, scientific and political power of the time, not reap the benefits of the printing press? As a crucial intermediary between the West and East Asia, the Muslim world had a long history of adopting major technologies from other regions, as shown by the adoption of paper for the sake of knowledge production.

In consequence this paper investigates the role of the printing press in the cases of Europe, Korea and the Ottoman Empire. In particular it analyses the role of governments and their underlying religious or philosophical legitimacies (i.e. Christianity in Europe, Islam in the Ottoman Empire, Buddhism and Neo-Confucianism in Korea) in this crucial phase of knowledge transition.

The paper shows that this relationship between the rulers and the ruled was significantly affected by the printing press. First of all it emphasises that governments had a major influence on the invention, adoption and dissemination of printing technology in both West and East. Governments (and religious authorities) were often important (producers and) demanders of immaterial and knowledge goods. In addition the printing press, as a major information and communication technology (ICT), had a major impact on the legitimacies of powerful societal stakeholders, particularly of the government and religious authorities. Accordingly they prevented a further dissemination of the printing press. Powerful vested interests, rent seeking and specific values appear as the crucial determinants of the adoption and dissemination of this fundamental new knowledge technology. Moreover the Korean example shows that innovation may be the response to a lack of natural resources for a particular existing technology.

The paper is structured as follows. First, we distinguish between different forms of government legitimacy. Second, we consider the role of governments and religious authorities in the invention, adoption and dissemination of the printing press in Europe. We then take a similar glance at the Ottoman Empire and Korea. Finally, we compare the different experiences. A conclusion sums up the results of the paper.

1. Forms of government legitimacy The printing press may have been an important factor bringing about a crucial shift not only in knowledge production but also in the political authority and legitimacy of central authorities in Europe. This shift may have caused

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the political system to make a transition from feudalism to what we call the modern state [Eisenstein 2002]. Therefore the legitimacy of authorities is an important point of reference for evaluating the socio-political impact of the printing press. We will refer to legitimacy in different parts of the paper. For this reason it is necessary to define what is meant by legitimacy. Legitimacy can be defined as “the feelings, attitudes and trust that the ruled have for the rulers” [Kertcher and Margalit 2005: 3]. This relationship between the rulers of a country and the people is crucial because the rulers may need to ensure sufficient support in order to stay in power.6 In this context let us briefly distinguish between different ways of legitimising a government during this long time span. More specifically, Kertcher and Margalit [2005] distinguish amongst three different categories: performance-based, constructed and legal-formal legitimacy.

First, performance-based legitimacy is the most recent and current form in many countries. It was first created with the French Revolution, emphasising that the state rules in a direct way over its citizens. At the same time the state provides security and other rights to citizens. In sum “rulers bargain with their citizens for collective citizens’ rights guaranteed by the state in exchange for duties. In return for regularly paying taxes and participation in wars the provisions of security, education, and welfare are assured” [Kertcher and Margalit 2005: 12, referring to Tilly 1992].

Second, constructed legitimacy is derived from morality and has at its core some unifying myths. These unifying myths are repeated and upheld by communication media and the education system. Sometimes they are also emphasised by particular religious practices and specific myths. If these unifying myths are neglected the level of legitimacy falls. The political system may then break down due to the rise of alternative myths that challenge the previous one. One striking example is nationalism which builds upon different myths of the existence of a certain nation. The same can be said for regionalist movements.

Third, legal-formal legitimacy emphasises the role of law and formal processes. They become accepted as being legitimate by a process of socialisation and allow the government to employ force and coercion. This last category backs the other two legitimacies and these other two back each other. In fact all three legitimacies are used by all governments but the emphasis is different according to the specific regime. Some regimes stress constructed legitimacy at the expense of the other two. These regimes are particularly more authoritarian regimes (such as China under Mao). In other cases the performancebased legitimacy is more highlighted (e.g. China after Mao).

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In addition, legitimacy may also ensure future revenues to rulers [Cosgel, Miceli, and Rubin 2012]. We will comment on this alternative consequence in more detail later on.

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2. Governments and the printing press in Europe 2.1. Legitimacy of authorities and the impact of the printing press After this brief review of the legitimation devices of governments let us consider in more detail the effects of the printing press on the legitimation of spiritual and secular rulers in Europe. Before the printing press the Middle Ages were characterised by a share of power between the secular powers (i.e. the king, the lords) and the Church. For this reason there was no clearly defined political authority in the modern sense. The organisation of the Church was modelled on the one of the Roman Empire. More specifically, Logan [1986: 164] notes that [W]ith the fall of Rome there was a total discontinuity in the form of political organization and a natural displacement of the Roman autocracy or ruling class, which no longer held temporal power. In an attempt to preserve their way of life this political elite became members of the hierarchy of the Roman Catholic Church. They borrowed many of the organizational forms of Imperial Rome, which they incorporated into the Church structure. These legacies included the Curia and the office of Pontifex Maximus (the Pope). The canon law […] [was] based on the principles of Roman law. […] As had Imperial Rome, the fathers of the Church organized and regulated human affairs through written legal codes.

In contrast, the organisation of ‘government’ was organised around a deeprooted oral tradition in the Germanic tribes, leading to the feudal order.

Government was organised around personal relationships between the governor and his people. Loyalty and trust were key elements in this form of government, and verbal oaths were the symbolic ways of showing allegiance [Logan 1986]. In this feudal order the king did not have the total political authority, whereas (in theory) the Church had it. For example Finer illustrates this fact by stating that “[t]he church was not only a state, it was the state; it was not a society, it was the society” [Finer 1997: 874]. The king was only the temporal ruler, whereas the Church was the spiritual ruler and was in many areas quite independent of the feudal order.

The Church had the power of unchallenged constructed legitimacy, at least for some centuries.7 One crucial element of this legitimacy was education.

Why was education in general and literacy in particular so important for the Church? In fact Christian beliefs are based on a book (i.e. the Bible). This literary tradition had to be defended and preserved. Literary skills were essen 7 From the 13th century onwards, its legitimacy may have been decreasing with the formation of secular national kingdoms, new state theories and internal criticisms [Tierney 1988; Feldman 1997; Cosgel, Miceli, and Rubin 2012].

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tial for this tradition to be passed on.8 Thus the Church had been concerned about (heretical) books to some extent over the centuries before the printing press. Already in 150 AD a ban on heretical books was decreed. However books were not a major concern because few books were produced, the production of books was a slow process and their distribution was limited. In addition, most books could only be accessed in libraries which were generally within religious monasteries. In consequence the Church was the supreme educational authority because it trained the vast majority of educated individuals. Therefore the Church enjoyed an almost exclusive monopoly over book production and thus controlled the diffusion of knowledge and public opinion [Logan 1986].9 The invention of the printing press profoundly changed this world order in Europe. Many more books were produced, the production time was drastically reduced and the price of books decreased tremendously. Thus the demand for books rose to previously unknown high levels. This demand did not only concern spiritual works but also secular ones which were written in European vernacular languages. New political, philosophical and religious ideas spread much more rapidly than before. Importantly, whereas the Church’s unifying myths were almost not contested beforehand alternative ideas could now more openly challenge the roots of the belief system and the organisation of the Church. An example might illustrate this. Before the invention of the printing press, John Huss contested the principles of the Church. Thus his writings were burned in 1415 and he was burned himself in 1416 [Putnam 1906; Kertcher and Margalit 2005]. After the invention of the printing press, Luther criticised the Church in a similar way as Huss had done before him. However his use of the printing press made it impossible for the Church to burn all his writings. His pamphlets, translated into the vernacular languages, quickly reached several thousand copies.10 New religious, regional and national identities were gradually developing in addition to the unifying myths of the Catholic Church. In consequence the Church was not able to control public opinion anymore and its unifying myths, which were the foundation of its authority and its constructed legitimacy, eroded. Finally, the centuries-old feudal order began to change.

Therefore, the printing press may have been a crucial factor in the transition of political authority, from God to the newly developing nation-state.11 8

See the same consequence for Islam and Judaism.

However, the educational leadership may have already been decreasing before the printing press with the creation of universities since the 13th century [Febvre and Martin 1976; Cosgel, Miceli, and Rubin 2012].

10 Thus Latin also lost its pre-eminence as a vehicle for international communication until the 17th century [Febvre and Martin 1976].

11 Kertcher and Margalit [2005] note that the printing press was only one factor that led to the loss of control of the Church. Other factors include the Black Plague, the 100 Years’ War, and possibly to some extent the introduction of gunpowder into Europe, significantly facilitating war.

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2.2. The reaction of the Church and governments Initially the Church did not realise the potential threat of the printing press.

Instead it saw the press as a useful means to propagate its faith. Indeed it had been an active promoter of its invention. It had been a major institution creating demand for manuscripts and books for many centuries. Moreover it had long been interested in technology, particularly if it saved labour: its “desire to free clerics from time-consuming earthly tasks led to the introduction and diffusion of power machinery”, eventually leading “to an awareness of and attention to time and productivity” [Landes 2006: 9]. Thus its demand importantly influenced Gutenberg’s perception of the potential commercial profits that could generate a labour-saving printing press [Guellec 2004]. Once Gutenberg invented the printing press the Catholic Church was also his first customer.12 Importantly it only realised too late that it was not able to control its use effectively.13 Hence it took more than 70 years for the Church to adjust its existing censorship regulations to the new political and technological situation. Its reaction was to broaden its censorship progressively over time. Thus as Kertcher and Margalit [2005: 18] outline, [I]n 1479, Pope Sixtus IV authorized the University of Cologne to use ecclesiastical censures against printers, purchasers, and readers of heretical books. The focus was directed at suppressing heretical writing. In 1487, Pope Innocent III published a bull that decreed excommunication, fines, and book burning as punishments for those dealing with heretical books. In 1501, Pope Alexander VI issued an additional bull authorizing universal censorship with the desired goal of homogenizing censorship throughout Christendom. […] In 1515, […] Pope Leo X issued a bull forbidding the printing of any book without the church’s authorization. The Roman Inquisition was established in 1542 and in 1543 it was ordered that no book, regardless of its contents, should be published or sold without the permission of the Inquisition.

However enforcement was a different matter and it was in many cases rather lax, even in Italy. The French crown was also rather more interested in the potential economic benefits derived from printing than in pursuing the goals of the Church. Similarly England passed an Act of Parliament in 1484 with the aim of attracting foreign printers to the country [Febvre and Martin 1976; Guellec 2004]. In addition there was no unique central religious authority in Protestant countries (e.g. England, parts of Germany, Holland) so that cen 12

Further demand came afterwards from universities and finally from individuals [Guellec 2004].

13 Still almost half of all printed materials were religious works at the end of the 15th century [Martin 1988; Guellec 2004]. It is interesting to note that the demand created by the Catholic Church eventually may have indirectly led to its loss of power.

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sorship took place under the auspices and according to the ideas of secular monarchs. These monarchs aimed more at influencing and controlling public opinion to maintain their own legitimacy [Putnam 1906; Kertcher and Margalit 2005]. For example a royal authorisation was needed in order to become an editor in France. But also kings such as Henry VIII attempted to control the printing industry and the trade of printed materials but again without conclusive success [Guellec 2004]. The most liberal printing regulation probably existed in Holland where only the act of criticising authorities was banned. In addition printers were actively striving to obtain market share in foreign countries. Ironically the setting up of lists of forbidden works might have worked as an unintentional marketing tool for these books. Similar to bestseller lists today being on an index might have increased their publicity and thus their attractiveness, increasing demand and prices [Steinberg 1959; Houston 1988; Kertcher and Margalit 2005].

3. The Ottoman Empire The printing press was not only exported to European countries. Other countries also became acquainted with this innovation, such as the Ottoman Empire.

The Ottoman Empire was a major military, economic and scientific power to Gutenberg’s times. One could expect that the printing press would have had a similar impact on this advanced economy as it had had in the West. However this was not the case. Therefore we need to explore the reasons in more detail.

To this end we begin with a short glance at the characteristics of this empire.

First of all and most evidently, the Ottoman Empire was a Muslim empire.

Indeed Islam and the production of books had been inherently intertwined for centuries. To better understand the relationship between Islam and the written word we have to go back to the foundations of Islam. According to Logan [1986] there was a very close connection between the introduction of the written word and alphabetic literacy to Arabia and the rise of the Arab and Muslim culture.

Perhaps in some respects similar to the Germanic tribes in Europe, before the foundation of Islam the Arabic peoples consisted of nomadic tribes that were illiterate and did not trust the written word. Their transmission of knowledge and culture was almost exclusively based on oral traditions. The teachings of the Prophet Mohammad made a crucial change to this culture and the central mover in this transformation was the Koran. The effects of the Koran were so fundamental that the oral traditions were to some extent replaced by a new literate, written tradition.14 Some authors suggest that this was one of Muhammad’s 14 In contrast, Hesse [2002] emphasises that oral transmission was still highly regarded in Islam: “[t]he word «Koran» itself means «recitation», and oral transmission of the living word was always to be preferred over a written transcription. The book was merely an instrument,

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intentions: “[e]vidently what was primarily weighing on Muhammad’s heart was the observation that the Jews had a book, a revelation, and the Christians had a book and were all progressive and prosperous, whereas the Arabians had no book and were comparatively backward” [Hitti 1964: 31, in Logan 1986: 140]. Logan [1986] believes that this interpretation may be at least partly true.

In any case the spread of Islam was facilitated by writing and vice versa in Arabia and other countries [Logan 1986].15 At least in part due to the new literary traditions Islamic culture prospered during the following centuries bringing about major innovations and discoveries. In addition it preserved ancient knowledge from earlier civilisations and later on transmitted this knowledge to the emerging European societies. In fact the developing literary traditions in the Muslim world were importantly boosted by the introduction of a new innovation: paper. This new writing material was originally invented in China and came to the Arab world around the middle of the 8th century. It had a major impact on its literary culture because it was much cheaper than previous media, such as parchment, papyrus and leather [Gibb 1963; Logan 1986]. In consequence the willingness to use this novel writing material probably facilitated the spread of literacy and of the Islamic faith.

Still the reaction to the printing press was quite different. The Ottoman government outlawed the use of printing. Possibly this decision was one of the factors that could have eventually led to the Ottoman’s slowly falling behind the emerging West. Why was printing prohibited here ? The first explanation focuses on religious beliefs. Printing may have been seen to desacralise the Arabic word and thus the word of Allah in the Koran [Shleifer 1987; Roper 2007]. Similarly, “even though the Islamic religion had accepted paper in order to record the word of Allah, it may have refused to permit the word of Allah to be reproduced by artificial means” [The New Encyclopaedia 1998: 72]. The recreation of these letters was seen to be allowed by qualified individuals only.

Cosgel, Miceli, and Rubin [2012] present an alternative political economy hypothesis focusing on government legitimacy. Note that they define legitimacy in a different way as in the previous sections. More precisely legitimacy is made up here of two sources. The first one is force where military authorities have a comparative advantage. The second one is loyalty which can be particularly used by religious authorities (but also secular authorities such as the nobility). a lowly tool, to facilitate faithful memorization of the word” [Hesse 2002: 27]. Similar arguments are made by Cosgel, Miceli, and Rubin [2012].

15 Logan further compares the importance of the introduction of the alphabet to Arabia with what happened in earlier societies: “[w]hat is important about [the] development [from tribal systems of law to Islamic conceptions] is the parallel with the transformation that occurred in Mesopotamia, ancient Israel, and Rome in which the alphabet (or phonetic writing) was accompanied by three developments: 1. The demise of tribal society, 2. The rise of law based on the rights and the responsibilities of the individual, 3. The creation of a universality of mankind that transcends family and tribal links” [Logan 1986: 145].

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Educators in general and books in particular can serve to create loyalty. In this way religious authorities are supposed to have been a major source of loyalty and thus of legitimacy for governments throughout history. In the view of the authors greater legitimacy brings greater revenues to the rulers. New innovations such as the printing press can significantly influence the sources of legitimacy and increase or decrease revenues.

In consequence, Cosgel, Miceli, and Rubin [2012] argue that Ottoman rulers were still more dependent on the loyalty of religious authorities in the 15th century than their European counterparts on the legitimacy of the Catholic Church. To take Kertcher and Margalit’s [2005] terms constructed legitimacy was still more important for the Ottoman rulers. Islamic religious authorities traditionally derived their power through the oral transmission of knowledge.

Therefore the printing press might threaten the legitimacy of religious authorities in the Ottoman Empire as it had done in Europe. This would have given an incentive to the rulers not to introduce the technology in order to protect this crucial source of legitimacy and their revenues. The vested interests of particular societal stakeholders and the rent seeking of the rulers would have then prevented the use of this new technology.

In any case the printing of Arabic scripture was forbidden in 1485 in the Ottoman Empire. It may have even been punishable by death [Cosgel, Miceli, and Rubin 2012].16 The centralized structure of the empire assured a strict enforcement of such orders [Macioti 1989; Kertcher and Margalit 2005].17 It took several centuries to open up the Ottoman Empire to printing in Arabic. In fact a first printing press for Arabic was introduced to Istanbul in 1728 but it was closed down again in 1742 due to religious concerns [Kertcher and Margalit 2005]. Printing was at first only allowed on non-religious subjects. This was only relaxed much later. The printing sector was also heavily regulated [Cosgel, Miceli, and Rubin 2012]. Kreiser [2001] claims that the printing press did not have such a great impact on the Ottomans as on the Europeans some centuries earlier. Perhaps this was due to a lack of commercial demand because it would have meant producing a product which was incompatible with religious beliefs. In contrast Cosgel, Miceli, and Rubin [2012] interpret the eventual move to allow printing in Arabic as a consequence of a decrease in the power of religious authorities to confer legitimacy to the Ottoman rulers. Secular authorities had become an increasingly important source of legitimacy during the centuries. These authorities did not derive their power from the transmission of any type of knowledge so that the printing press did not represent a direct threat to 16

Yet there is some controversy on this point. However most of the literature considers it a fact [Cosgel, Miceli, and Rubin 2012].

17 This is not to say that printing was not allowed in other (than Arabic) scripts. For example scripts were printed in Roman, Greek or Armenian scripts in the Ottoman Empire [Cosgel, Miceli, and Rubin 2012].

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them. In Kertcher and Margalit’s [2005] terms their power was more based on performance legitimacy than on constructed legitimacy. The revenues could also be expected to be positive from the permission to print in Arabic. In consequence the Ottoman rulers were not that dependent on religious authorities as a source of legitimacy anymore and may have decided to increase their revenues. Still it took until 1875 for the first Koran to be printed in the Ottoman capital of Istanbul [Macioti 1989; Kertcher and Margalit 2005].

If we see this development from a perspective on the facilitation of the spread of knowledge and books, the handwritten book (in the form of the Koran) seems to have been perceived to be holy but the printed book to be unholy by contemporary Muslims. In consequence Muslim beliefs, being influenced by the legitimacy of religious authorities, were possibly a fundamental driver of literacy and progress until the printing press when it reversed its stance on the dissemination of the word (in its printed form). The importance of the Muslim religious authorities for the generation of knowledge might have been similar to that of Christianity in the form of the Catholic Church. Whereas the Catholic Church was the most important defender of the literary tradition in Europe after the fall of the Roman Empire and a major supplier and demander of books through book production in monasteries, the political, economic and religious threats to its legitimacy caused by the printing press meant that it might have reversed its prior role as an overall promoter of knowledge.18

4. Korea 4.1. The role of government policy and philosophical beliefs Finally let us turn to East Asia. East Asia was the most important economic and scientific hub for many centuries. Why was the printing press not invented in these advanced Asian societies? In fact it was invented earlier in East Asia than in Europe. However it did not have such a significant effect as in Europe.

Some explanations for this paradox focus on the ‘alphabet effect’ [Logan 1986], i.e. that China and other countries did not have an alphabet but thousands of characters. The high number of characters considerably increased the costs of the production of movable types and of printed documents and gave disincentives to the use of movable type.

18 However Logan believes that the role of the Catholic Church for scholarship was more limited, arguing that the Church “had a very narrow set of interests and […] was not a very innovative institution. […] Not many new scholarly works arose out of this milieu […]. The one valuable service the Church provided to scholarship was preservation […]. The efforts of the Church, together with the preservation of texts by the Islamic and Byzantine cultures, permitted the eventual transmission of Greek and Latin learning to Renaissance scholars” [Logan 1986: 171].

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In this context a fascinating case is Korea. Both movable metal type and a phonetic alphabet were invented in Korea before Gutenberg’s printing press [Evon 2009].19 Therefore the two most important fundamental technologies that were essential for Gutenberg’s breakthrough existed in Korea. However a key difference to the European case is that in Korea the advantages of alphabetic print (i.e. the organisation of movable type focussing on individual letters) were not seen for many centuries and Korea has not adopted it until this day. The role of the government and philosophical beliefs are fundamental to understand the invention of the printing press and of the Korean alphabet.

These elements further allow us to see the European case in the Asian mirror and to comprehend why the printing press had such a success and impact in Europe but not elsewhere.

First of all let us begin with the Korean language system. Literary Sinitic (i.e. Chinese characters) was used in Korea as a written language. Thus it was in some respects similar to the use of Latin in Europe. However, in contrast to Latin, Literary Sinitic was never used as an oral language. In fact Literacy Sinitic was basically a foreign language for Koreans. It was difficult to master, even for the Chinese. Given the particular respect for this writing system, this fact had the effect that the oral language and vernacular writing were devalued in the eyes of the Korean elites [Evon 2009].

This lack of appreciation of the vernacular language was further increased by the significance of Neo-Confucianism over many centuries, in particular during the Choson dynasty. This dynasty ruled Korea for many centuries from 1392 to 1910. Neo-Confucianism in the Korean orthodox interpretation was inherently intertwined with the predominant use of Literary Sinitic which some see as somewhat paradoxical and antagonistic to Confucian theory.20 To defend this orthodox interpretation of Confucian teachings the government had to control the use of Literary Sinitic and anything that was read. Hence Literary Sinitic had an important socio-political use [Evon 2009].

In addition this Neo-Confucian approach put emphasis on the moral aspects of knowledge and not its economic effects. As Sohn writes, “[s]ince a society oriented towards Confucianism did not favour the commercialization of book printing, the selling of books was disapproved” [Sohn 1959: 101].

Finally the mastering of Literary Sinitic necessitated high auditory and visual mnemonic skills and memory. This feature once again reinforced the neces 19 We are aware of the fact that there were periods in Korean history when it was divided amongst different rulers. To simplify matters we only refer to Korea as one country.

20 For example, Evon points out that “Korean’s overwhelming use of Literary Sinitic for verse was paradoxical due to the Confucian theory of poetry’s socio-political function. In this conception, the oral/aural foundations of poetry were emphasised. Yet education in Literary Sinitic ran counter to this theory. Not only did it represent a radical disjunction between speech and writing, but moreover, it put the students’ own vernacular in service of an unsayable language” [Evon 2009: 4–5].

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sity of a stable knowledge base which was founded on the written word. In more general terms knowledge was seen to be permanent and not evolving.

Thus the written word was the representation of this permanent knowledge and the means of expressing and communicating it. Therefore innovations in knowledge production could harm the knowledge base upon which society was built. In consequence they could menace the stability of the socio-political system [Evon 2009].

4.2. Education and the beginnings of printing in Korea In correspondence to the high importance of Neo-Confucianism elite education was not aiming at particular commercial skills in Korea. Instead elite education focussed on mastering Literary Sinitic.21 Interestingly, “[w]ithout this, no other recognisable intellectual accomplishments were possible” [Evon 2009: 3]. Therefore the oral language was not deemed to be important for the Korean elites, not even oral vernacular Chinese, nor written vernaculars.22 It is helpful to have a short glimpse at the educational history of Korea to better comprehend the centrality of Chinese characters and Confucianism. In fact the Korean education system was modelled on the Chinese system. This system was first brought to Korea in the 4th century. Given the important influence of China, the demand for Chinese writings and especially Confucian teachings, increased over time. Furthermore the Chinese system of civil service examinations was adopted and used in Korea from the 10th century. Thus the interest in Confucianism gained further ground. Another consequence of the examination system was the creation of new educational facilities, in particular the National Institutes of Higher Education and many new private schools.

Clearly the creation of these different types of educational facilities, their relevance for the civil service and their competition brought about an increasing demand for books. This increased demand, in turn, made it necessary to print books. In consequence the government began to print books with woodblocks.

Furthermore the rise of Buddhism in the region was another reason which led to increased printing activity. Accordingly the government printed a range of Buddhist works. Therefore demand grew in Korea for both Buddhist and Confucian materials [Sohn 1959].

21

This ideology of elite education somewhat corresponds to the importance attributed to literacy skills in elite education in Europe, where numeracy skills and other practical skills were largely neglected for a many centuries [Hippe 2012a; see also Hippe 2012b; Hippe and Baten 2012]. However these literacy skills could often be used for oral communication in Europe which was not possible in Asia.

22 In contrast Latin was challenged in Europe as a literature language by an ever increasing vernacular movement in literature. This movement originated in Italy around 1300 with Dante’s works. Subsequently it spread to other countries such as England, France and Germany [Logan 1986].

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In consequence domestic production became insufficient to satisfy this demand. Thus the government was eager to obtain books from abroad. An large number of books was imported from China. However there were voices in China against the export of books. In fact it was pointed out that China might lose competitiveness to Korea. Books may have been seen as a means of power.

In addition a more powerful Korea might endanger Chinese security. However it was not until 1127 that Chinese book supplies to Korea were severely limited and this only because the Chinese (Sung) government had to flee to Southern China. In the same year the Korean royal palaces and libraries were destroyed in a royal power struggle, destroying a part of the royal book collection. Therefore a new situation arose in which domestic demand for books was very high but foreign supplies from China were (almost) unavailable and the domestic stock of books had been partly destroyed [Sohn 1959, 1993].

For these reasons supply-demand pressures may have incentivised the development of woodblock printing in Korea. However woodblock printing was not the ideal printing technology in Korea. Woodblock printing was a Chinese invention. Yet the type of wood normally used for woodblock printing in China was scarce in Korea limiting the further improvement of woodblock printing at a higher level . This lack of a crucial natural resource may have stimulated the use of other materials. Indeed Korea was very rich in metals and specialised in metallurgy. Therefore metal type casting was invented. In sum, “it is most probable that the invention of metal type casting was a result of the urgent need for book printing after 1127 […], certainly before the Mongol invasion” [Sohn 1959: 98].23 Sohn [1959] suggests that metal type casting was probably invented in either a religious or a military context. On the one hand the technical use of metals was particularly promoted by the army. The army used metals to manufacture arms and coins.24 On the other hand metals played an important role for Buddhists as they employed them for creating statues and other decorations. The Korean (i.e. Koryo) government at that time also actively promoted Buddhism by publishing Buddhist works. This connection was reversed by the Choson Dynasty (1392–1910) which favoured Neo-Confucianism.

In addition a printing press was a perfect means to facilitate the study of Chinese culture. Therefore new Chinese type casting methods were introduced in Korea in the 14th century and these were merged with local knowhow in the use of metals to create a printing press using metal type casting [Sohn 1959].

23

The Mongol invasions of Korea began in 1231.

Similarly warfare was also a major driver of metallurgy in Medieval Europe. Logan points out that “the motivation for improvements in metal-working likely grew out of the increased violence of warfare made possibly by […] the stirrup” [Logan 1986: 168].

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4.3. The Korean alphabet and the printing press Despite the central importance of Sinitic characters in Korea the Korean alphabet was invented in 1443 [Sohn 1993]. Buddhism appears to have had an impact on the proliferation of Korean alphabetic texts. In fact a range of Buddhist texts were written in the new alphabet in the bureau. Although the Korean King Sejong (reigning from 1418 to 1450) initially rejected Buddhism and enforced corresponding actions he might have been somewhat sympathetic to the religion. His deceased wife was a Buddhist. Still Buddhism was not a state religion in Korea anymore. Thus it had lost its economic foundations. This situation made it important for Buddhists to have an efficient writing system to diffuse their teachings. In consequence the alphabet was welcomed and extensively used by Buddhists [Evon 2009].25 In contrast to what one might expect the new alphabet was never supposed to replace Literary Sinitic. The arguments for and against the creation of the script by King Sejong illustrate this. The loss of social control was one important argument raised by the elites against the introduction of the alphabet. More widespread reading in the population and higher literacy skills could lead to comments embarrassing the government, such as maladministration. In addition literacy should serve the study of Neo-Confucianism and Confucian moral values and this link could be endangered by the new alphabet. Similarly “if one could learn to read and write with ease, there would be no need for the labourintensive, time-consuming study required to master the classics upon which the business of government was based” [Evon 2009: 12; Lee 1993]. Therefore the legitimacy of the government would be in question.26 In light of these dangers why did King Sejong favour the construction of an alphabet? According to Lee [1993] he explicitly aimed at facilitating the communication amongst his (common) people because he sought to live up to Confucian values. In other words one could say that the constructed legitimacy, derived from Confucian philosophy, was very important for the king. Amongst others this meant that he strove to provide fairer legal proceedings because Literary Sinitic was not understood by the uneducated lower classes. The new alphabet, in contrast, could be learned rather quickly. But also in other respects the new alphabet was important for the king. First, the alphabet allowed the transcription of Chinese characters that did not have any equivalent in the Korean language.

25 In some sense this fact parallels the use of the printing press for Protestant purposes in Europe. However in contrast to Buddhism, Protestantism had not previously been a state religion because it had not existed before. Still both Buddhism and Protestantism used the alphabetic script and the printing press, respectively, to facilitate the spread of their ideas, being confronted by a state religion.

26 In addition the mastering of Literary Sinitic appears to have provided the social elites with an educational monopoly similar to the predominance of Latin in Europe. This monopoly would be potentially lost with the introduction of a new alphabet.

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Second, it was possible to translate portions into the vernacular language that did not have ambiguous equivalents in Korean. In sum, the new alphabet allowed an easier study of Literary Sinitic texts. Third, another important feature of the Korean alphabet was that it represented sounds much better. Therefore it could be used to write the vernacular Korean language [Evon 2009]. Finally, he was aware that not only the use of written Literary Sinitic was relevant for the government. Oral Chinese as practised at the Chinese court was also crucial. On the one hand he needed skilled translator-interpreters who were able to accurately transcribe the oral Chinese sounds. However just this was not possible with Literary Sinitic. On the other hand King Sejong was concerned with the training of his local elites. In fact there was no unique, accepted way of correctly pronouncing Chinese characters in Korea. For this reason there was a chaos of different pronunciations in the country. Therefore King Sejong needed the phonetic script of the alphabet to solve this problem which would facilitate governance in the future [Evon 2009].

However Chinese characters were still central in printing activities in Korea.

In addition the king believed in Neo-Confucian traditional values which stated that the most important use of literature was for moral and ethical purposes.

Commercial uses were not so important. The successive Korean governments had the exclusive and monopolistic control of the printing press technology which was developing mostly within the foundry of the royal dynasty. Therefore the dynasty’s opposition to any commercialisation of printing activities significantly limited its use and dissemination. Only official printing activities were allowed and any other activities were suppressed. The wider circulation of new information and knowledge was seen by the elites as generating potential disorder and, hence, was deemed to be dangerous.27 In consequence the printing press was only helpful for the elites but not the wider society [Sohn 1959]. Thus the “protection of Choson’s Neo-Confucian orthodoxy […] entailed control over Literary Sinitic and this, in turn, required control over what was read” [Evon 2009: 16].

In economic terms one has to be aware that the Korean alphabet works in a different way than the Roman one. The Korean alphabet is organised around syllabic blocks and not individual letters as the Roman alphabet. This crucial difference has the effect that in the former case a Korean printer needs potentially 2350 individual syllables whereas in the latter he only needs the 24 letters 27 Looking at the consequences of Gutenberg’s invention the Korean elites might have been quite right in their interpretation because the European socio-political structure was rapidly shaken by the printing press. Indeed the use of the Korean alphabet was temporarily banned in Korea after a document (written with this alphabet) criticised the contemporaneous King Yeonsangun. In addition the king ordered that books in the Korean script were to be burned. Only years later, after his tyrannical reign was terminated by a coup, was the script revived [National Institute 2008].

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of the alphabet [Evon 2009].28 Therefore although this system has reduced the number of characters with regard to Sinitic characters it is still far more complex than the Roman system.29 Thus it is easy to see the economies that are possible with the use of alphabetic print. Therefore Gutenberg’s success is in part directly derived from the underlying alphabet and its organisation around individual letters. Still the Korean alphabet might have had a much more significant impact if it had been used more widely. For example Sohn claims that “[i] f this excellent alphabet had been used, typography would have made a great impact on the Korean people just as it did in the West” [Sohn 1959: 101]. The lack of the new alphabet’s use and the government’s monopoly of the printing press meant that they did not cause increased entrepreneurship and wider reading activities which were fundamental for scientific and technological progress in Europe.

5. The European, Ottoman and Korean experiences in perspective We have seen that the power struggle between the Church and the multitude of kings in Europe meant that power was shared between these institutions.

Therefore the overall power was not as concentrated as in Korea or the Ottoman Empire. European countries were also actively competing against each other.

For this reason it was not possible to effectively control the printing press and decree its non-utilisation in the European countries. However an outright ban of the printing press was not considered by the Church either. The control of the printing press opened many more possibilities. Although government and Church attempts to control the medium were important in Europe they were less successful than in the Ottoman Empire or Korea. Ottoman authorities could also learn from the European experiences and better understood the challenges the printing press posed to their authority [Pedersen 1984; Huff 1993; Cosgel, Miceli, and Rubin 2012]. Their religious convictions and their dependence on religious legitimacy further deteriorated their vision of the printing press so that they outlawed its use (in the Arabic script). In contrast Martin Luther saw printing as “God’s highest and most extreme gift by which the business of the Gospel is driven forward” [Childress 2008: 122]. The contrast is quite striking. In Korea Buddhists also used the new alphabet to diffuse their teachings whereas (state-supported) Neo-Confucianism rejected it. ‘Subversive’ move-

28 In fact theoretically there are many more combinations possible. More specifically there are 11,172 possible combinations but only the reduced number mentioned actually exists in the Korean language [Evon 2009].

29 The Roman alphabet is based on the Phoenician alphabet.

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ments, such as Protestantism in Europe and Buddhism in Korea, clearly understood the benefits of the new ICT and used them correspondingly.

Thus the duality of European power structures and religious perceptions might have been a factor that involuntarily favoured the (more or less) efficient use of market forces that ultimately unleashed European economic success. The religious legitimacy conferred by the Church to secular rulers may have already been insufficient to enforce effective control according to its own imperatives.

In contrast the philosophical legitimacy of Neo-Confucianism may have been the underlying power basis of the Korean rulers (during the Choson dynasty).

Thus the government monopoly of the printing press in Korea meant that it could not unleash its effects as in Europe where it was in the hands of businessmen. Similarly to Korea the power of the central authorities in the Ottoman Empire combined with particular spiritual beliefs and legitimacies (in Korea the centrality or in some distant sense the ‘holiness’ of Literary Sinitic; in the Ottoman Empire, the holiness of the Arabic script) appear to have been major impediments to the commercial use of the printing press and thus the spread of ideas and knowledge which may have been crucial for Europe’s future economic and socio-political development.

In addition, Guellec [2004] argues that the Chinese might not have moved to metal movable type printing because they had invented wood printing many centuries before Koreans invented the use of metals for the same purpose. For this reason the author suggests that the switching of costs from moving from one technology (woodblock printing) to another (metal movable type printing) might have been very high. Path dependency might, thus, be an important issue in this context of technology adoption. These switching costs were much lower in Europe because Europe was a late-comer that could directly use the new technology without incurring significant sunk costs. Korea might have also had higher sunk costs in the older technologies. In this sense we may suggest that Europe was perhaps leap-frogging at that time.30 Furthermore, in both Korea and Germany, the invention of the printing press with metal movable type was the result of a conscious perfectionist reassembling already existing technologies in areas which were specialised in the use of metals. Korea had already acquired sophisticated knowledge in metallurgy by the time of its invention of the printing press. The lack of a particular natural resource (i.e. a specific type of wood used for wood printing) meant that it may have concentrated its efforts in an area in which it was particularly good.

In Germany Gutenberg’s printing press was invented in Mainz, a city which was part of the Rhine valley. This valley was an important ‘industrialised’ re-

30 Still woodblock printing was also used for smaller scale printing activities in Europe. In Korea woodblock printing was not replaced by metal movable type printing either. Instead both forms co-existed for different purposes.

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gion particularly specialised in metallurgy. Thus it could be seen as a ‘Silicon Valley of metallurgy’ of the 15th century [Guellec 2004].

Accordingly the printing press was directly invented in a business context in Europe. Gutenberg’s incentive was to have commercial success with his invention seeing that there was a high demand for such an invention [Guellec 2004]. In fact manuscript production had been increasing for almost a century in Germany [Neddermeyer 1996]. This evolution generated a demand pull for a new technology. The actions of Gutenberg could thus be seen as a consequence and culmination of a larger trend, and not the arbitrary inventiveness of one single person.31 Interestingly the case of Korea offers a similar story.

Korean metal movable type printing was probably also invented as a response to a significant demand pull – although apparently neither for commercial incentive nor was it invented by a commercial entrepreneur. Instead it was probably invented in a religious or military setting [Sohn 1959].

Given Gutenberg’s entrepreneurial spirit and the commercial context of its invention the diffusion of the printing press in the economy was possibly much easier attained in Europe than in Korea where it might have been invented in an environment more directly related to the government. In such a context the technology could be kept away more easily from the markets. The question that remains is why no individual in contact with the technology at the royal court in Korea attempted to use the printing press for his own commercial interests.

One could speculate that the loyalty to the king was an important factor. In addition the power of the king meant that such an individual would have to emigrate to another country in order to effectively use the technology and be safe from the punishment of the king. Finally the economic potential might not have been clearly seen given the predominance of Literary Sinitic and its associated high cost in printing thousands of characters. Comparing Europe with China Logan emphasises this point by stating that the European alphabet “permitted the mechanical production of large numbers of the same type fonts at relatively low cost, encouraging mass production. Relatively small-scale entrepreneurs were able to set up printing shops in every major urban centre in Europe. In China, however, it was only in government-sponsored enterprises that printing could be managed” [Logan 1986: 178, referring to Innis 1971].

31

One fundamental prerequisite of the invention of the printing press was the availability of paper. The importance of paper can be highlighted that, still at the end of the 15th century, the cost of paper represented about 50 % of the production costs of a book [Febvre and Martin 1976; Guellec 2004]. Previously the cost of paper had already fundamentally decreased throughout the first half of the 15th century. Note that paper first arrived in Germany in 1228 and its manufacturing only began in 1391, around 60 years before Gutenberg’s invention [Gunaratne 2001].

After 1430 different techniques were invented by a number of individuals to produce more written materials with lower costs. These were also the years when Gutenberg began his investigations to create a printing press which took him about 15 years. However Gutenberg’s invention eventually proved to be the best solution for book production [Guellec 2004].

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In contrast the Korean alphabet consists of 24 letters. However remember that these are used in syllabic blocks and not as individual letters as in Europe.

In consequence more than 2000 combinations would potentially be needed, increasing significantly the financial costs in any entrepreneurial undertaking and lowering any commercial incentives. The financial hurdle may have been simply too heavy. This fact may have also been central in limiting printing activities.32 Finally the market size of Korea might have also been much smaller than the potential market in Europe. In an historical perspective the existence of large consumers is often crucial for the initial success of new technologies [Guellec 2004]. The government was the most important potential client but the government had a monopoly on the technology. This contrasts sharply with Europe where the Catholic Church actively demanded printed books from private printers once the printing press was invented. Thus it represented a large and potentially reliable customer to businessmen.33 The same case could possibly be made for the Ottoman Empire. In addition religious beliefs, the importance of religious legitimacy combined with the political power of the Ottoman rulers might have been a major factor that the printing press was not introduced to the Ottoman Empire for centuries. The fact that religious beliefs were opposed to the use of the printing press may have both significantly discouraged the entrepreneurial spirit of individuals and decreased the potential demand for printed books. The power of the central authorities and their proscription of the printing press increased the financial and physical risk of any such enterprise.

These different reasons might have led to the fact that a potential groundbreaking innovation was not employed to the extent that it could have been used in Korea or the Ottoman Empire. In contrast Europe might have benefitted enormously from the printing press which lifted it into a new stage of knowledge production and a new era of sustained economic growth.

32 Still one may wonder whether a more active policy for the diffusion of the Korean alphabet would have led to further innovations. In other words if the government had focused on reducing the printing costs and increasing the printing output, a demand pull could have motivated a change to a more Roman-style letter system. After all the invention of the Korean alphabet appears much more radical and innovative than a subsequent re-ordering of the existing alphabet. But, for sure, it would have needed a king like King Sejong or possibly an ingenious entrepreneur like Gutenberg.

33 In addition clients normally ordered manuscripts ex-ante in Europe. This was dramatically changed by the printing press when individual clients were needed to be found ex-post in many cases [Guellec 2004]. This European way of manuscript production finds its counterpart in Korea and China where the government ordered manuscripts or printed documents. Therefore there might possibly not have been an entrepreneurial spirit of creating demand for a product (with its often high associated risks, but production was often only considered once it was explicitly ordered. Such a commercial perception would clearly also limit entrepreneurial activities in this area.

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Conclusions This paper has analysed the role of governments in the knowledge transition.

The knowledge transition describes the long-run transition from societies characterised by overall low levels of knowledge to the current explosion of knowledge. The printing press may have played a crucial role in this transition.

In this paper the focus has been on the government’s impact on the invention, adoption and dissemination of the printing press in the case of Europe, Korea and the Ottoman Empire.

The printing press using metal movable types was first invented in Korea but only Gutenberg’s European invention led to a breakthrough in the production of knowledge. This is even more surprising as Korea was a country that possessed both the metal movable typing technology and later on an alphabet (in contrast to China which still uses Literary Sinitic). Nevertheless the printing press did not cause a major social, economic and political shift in this country, a major difference to Europe. In addition the Ottoman Empire, although an important economic, military and scientific power, did not adopt the printing press for printing the Arabic script for several centuries. Thus this paper emphasises the role of the governments which may have led to the different impact of the printing press in these three cases. Every case had its own sociopolitical structure based on specific legitimacies and its particular religious or philosophical beliefs (Christianity in Western Europe, Islam in the Ottoman Empire, Neo-Confucianism and Buddhism in Korea).

In particular religious authorities may have had a positive influence on the invention of the printing press in Germany and Korea. Gutenberg’s endeavours to invent the printing press were driven by commercial interests. The Catholic Church had been producing manuscripts for centuries and its representatives were potentially interested in such an innovation. Overall demand for manuscripts had also been rising for almost a century. Therefore the Church as a potential large and reliable customer may have given him an important indirect incentive to continue working on a machine for many years. Moreover the European market was potentially huge. In contrast the Korean printing press may have been invented in a military unit or religious environment after a significant demand pull for printed materials.34 Whilst quickly rising demand played a crucial role in both cases the motivations may have been quite different – in Europe they were clearly commercial, in Korea they were possibly not. In a more general perspective future transformative innovations may possibly occur when there is a significant demand pull for them, coming from commerce, religion, the military or other areas. For example the threats of climate change may potentially generate a demand pull for cleaner technologies in the future.

34

Note that also the next transformative ICT, the internet, was invented in a military context. That is, it was invented by the US military.

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Furthermore once the printing press was invented authorities may have feared the loss of important parts of their legitimacy which could have led to a loss of their power and rents. In Europe the Catholic Church saw the printing press at first as a tool to promote its faith and only too late understood the transformative (and for its organisation, subversive) character of the invention.

Even if the Church had reacted earlier and would have wanted to suppress the printing press it would not have had sufficient power (see also Cosgel, Miceli, and Rubin 2012). Seeing its legitimacy and powerbase declining it reacted through censorship and control. However the plurality of European power relations and the self-interests of secular governments did not allow strict enforcement. Indeed European governments saw the potential to increase their own economic rents and were already sufficiently independent of the Church as a source of legitimacy. They attempted to control the printing business themselves but only with often temporary and incomplete success due to international competition and piracy.

In contrast Ottoman rulers were aware of the political consequences of this invention in Europe and feared the loss of their power and legitimacy (similar to the one of the Church) [Pedersen 1984; Huff 1993; Cosgel, Miceli, and Rubin 2012]. Religious authorities still conferred an important degree of the overall legitimacy to the rulers. Religious beliefs, in particular the sacredness of the Arabic script, may have been another factor in outlawing the printing of Arabic letters in their empire.

Similarly, although the Korean government was probably a major promoter of the invention of the printing press, it did not allow its commercial use given its Neo-Confucian values. The potential loss of philosophical legitimacy could also have played an important role in this case. Thus the government had a monopoly of this technology and controlled and limited printing.

Whilst the Korean king invented the Korean alphabet in the 15th century it was not supposed to replace the prevalent Sinitic characters. Sinitic characters were still predominantly used for more than the next 400 years. To some extent (although not comparable to Islamic traditions), Sinitic characters were also viewed as sacred in the Neo-Confucian tradition and the introduction of the new alphabet was opposed by the elites, having important vested interests in the status quo. In contrast Buddhism as a non state-sponsored religion used the advantages of the technology for its own purposes (similar to Protestantism in Europe). The specific characteristics of the alphabet (i.e. organisation of words around syllabic blocks) did not facilitate printing to the same extent as the Roman alphabet either. For these reasons the Korean printing press could not unfold its potential social, economic and political effects as in Europe where its commercial use and the competition amongst printers and nations were probably key elements of its success. In consequence, the printing press was an important factor leading to the transformation of power relations within society.

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An exploration of the cliometric relationship between gender equality and economic growth1 Faustine Perrin2

Abstract : This paper develops the foundations and the implications of the mechanisms proposed as possible triggers for the demographic transition and the process of socio-economic development. In particular it examines the role played by gender equality and its significance for the understanding of the development process which allowed economies to move out of a long period of stagnation into a state of sustainable economic growth. Based on a renewed cliometric approach, the analysis suggests that the rise in gender equality was a key trigger for the transition to modern growth.

Keywords : cliometrics, demographic transition, economic growth, gender, human capital.

JEL codes : J1, N33, O11.

Introduction The long-term evolution of the production potential of nations is at the centre of today’s most pressing economic discussions. Throughout most human existence the process of economic development has been characterized by the stagnation of living standards. After a substantially flat evolution for centuries per capita income displayed a sudden and brutal increase. The timing of the rise in living standards varied widely across the globe. The take-off occurred first in Western countries in the early 19th century (i.e. Western Offshoots and Western Europe), followed by Eastern Europe and Latin America about a century later and by Asia in the second half of the 20th century (see Figure 1). This 1

Article received 14 August 2014, accepted 4 December 2014.

Any and all errors and omissions are my own. Financial support from the University of Strasbourg Institute for Advanced Study (USIAS) and the Bureau d’Économie Théorique et Appliquée (BETA) is gratefully acknowledged.

2 Department of Economics, BETA/CNRS (UMR 7522) & USIAS, Université de Strasbourg, 61 avenue de la Forêt Noire, France, e-mail: faustine.perrin@unistra.fr.

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32,000 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

1600 1612 1624 1636 1648 1660 1672 1684 1696 1708 1720 1732 1744 1756 1768 1780 1792 1804 1816 1828 1840 1852 1864 1876 1888 1900 1912 1924 1936 1948 1960 1972 1984 1996 2008

GDP per capita (1990 Int$)

F. Perrin, An exploration of the cliometric relationship

Western Europe Latin America

Western Offshoots Asia

Eastern Europe Africa

The Western Offshoots are Australia, New Zealand, Canada and the United States. The Eastern Europe gathers Albania, Bulgaria, Czecho-Slovakia, Hungary, Poland, Romania and Yugoslavia

Figure 1. Evolution of regional income per capita, 1600–2008 Source: Maddison [2008]

variation in the timing of the take-off generated large inequalities between the regions of the world.

What can explain the divergence at the international level between growth rates in the long run? Why do all countries not progress at the same levels exogenously of technical progress? In the same line, why do not we observe the transfer of capital from the richer towards the poorer countries as suggested by the convergence hypothesis?

Improving our understanding of economic history may help to understand today’s current situation and comparative development. The discussion can be opened up to a second set of questions. What are the determinants of sustainable economic growth? Which production factors lead to sustainable economic growth? What is the role played by environmental capital, human and demographic capital, social and cultural capital? What are the dynamics that drive the accumulation of capital? Which mechanisms can provide a market economy with long term economic growth?

Theoretical background The concern about the long-term evolution of the production potential of nations is far from being new. Classical economists were already preoccupied with the issue of how to improve the welfare and increase growth at the same time.

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After World War II and the theoretical debate on long-term stability of market economies at international level the question remains a controversial topic.

Lucas and Romer in the 1980’s expressed a real renewal with the emergence of the theories of endogenous growth. The progress of endogenous neoclassical growth models improved the understanding of the modern experience of economic growth in developed economies and has been instrumental in highlighting the key role played by the technological progress and the accumulation of factors of production in Western countries during the 20th century.

However economic evolutions are just one aspect of the drastic changes that have characterized the evolution of Western countries over the last centuries.

Profound demographic changes transformed the structure of the population.

The simultaneity of economic and demographic transition led researchers to investigate the causal relationship between population and economic growth and to question the underlying forces behind economic and demographic developments. Based on the long-term relationship between population and output growth, human history can be divided into three fundamental regimes: the Malthusian Epoch, the Post-Malthusian Regime and the Modern Growth Regime [Galor and Weil 2000].

During the Malthusian Era the population growth was positively affected by the level of income per capita. The absence of significant changes in the level of technology trapped the income per capita around a subsistence level and population size remained relatively stable for centuries. The Post-Malthusian Regime is characterized by a significant increase in output growth, driven by technological progress, and by an unprecedented increase in population growth.

Finally, the Modern Growth Regime shows a reversal of the relationship between income per capita and population growth which indicated a transition towards a state of sustained economic growth.3 With the demographic transition the economy leaves the Malthusian causality between output and population growth implying a large increase in the standard of living.

Figure 2 displays the long-run relationship between output and population growth in Western and Eastern Europe. The figure shows that both regions experienced the same pattern of development. Although the timing differs the take-off in the growth rate of per capita income was associated with a take-off in the growth rate of population. Ultimately both Western and Eastern Europe underwent a demographic transition whilst output growth continued to progress at a sustained level.

Galor and Weil [1999, 2000] have raised the idea of a theory that could capture in a single framework the characteristics and underlying forces of the en 3 Western countries observed a complete reversal with high and sustained income per capita, low fertility [Becker, Cinnirella, and Woessmann 2012; Klemp 2012]. Despite some trans-national variations in the timing and speed of changes, Western countries experienced similar trends [Galor 2012]. Similar contemporaneous patterns can also be observed in emerging countries.

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F. Perrin, An exploration of the cliometric relationship (a) Western Europe

2.2 Average growth rates per year (in %)

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

1000–1500

1500–1700

1700–1820

Output growth

1820–1870

1870–1913

1913–2008

Population growth

(b) Eastern Europe

2.2 Average growth rates per year (in %)

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

1000–1500

1500–1700

1700–1820

Output growth

1820–1870

1870–1913

1913–2008

Population growth

Figure 2. GDP per capita and population growth rates, 1000–2008 Source: Data from Maddison [2008]

tire process of development: (i) the epoch of Malthusian stagnation that characterized most of human history, (ii) the escape from the Malthusian trap, (iii) the emergence of human capital formation in the process of development, (iv) the onset of the demographic transition, (v) the origins of the contemporary

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era of sustained economic growth, and (vi) the divergence in income per capita across countries.

The unified growth theory suggests that the transition from stagnation to sustained growth is an “inevitable by-product” [Galor 2011] of the process of development. Common to most unified models is the rise in the rate of technological progress (through the emergence of new technologies) during the process of industrialization that increased the demand for human capital and induced parents to invest more in the education of their offspring. Investing in education increased, in turn, the opportunity cost of having children and forced parents to choose between the number and the education of their children (the child quantity-quality trade-off). This process ultimately triggered the economic and demographic transitions.

Motivation and research questions One remaining issue is the reason why individuals chose at some point to favour the quality of children to the detriment of their quantity? One aspect often neglected in the literature on economic growth is the role played by women.

Understanding gender roles is difficult in that it requires a global understanding of family organization and its interaction with the marketplace. As a consequence the related literature has predominantly omitted one of the most profound changes that have affected households’ behaviour, i.e. the historical process of women empowerment. Gender relations underwent slow but profound transformations over the course of economic development. The deployment of women from the home to the market place and their expanded contribution to family income marked an unprecedented transformation in women’s life and family organization. Changes in gender relations have affected both demographic developments and social-economic developments through various channels (e.g. fertility decisions, human-capital formation of the following generations, or as a potential source of productive workforce).

Beyond the importance in itself of integrating gender issues in the study of long-run economic developments, additional, challenging puzzles still need to be addressed. Countries’ demographic profiles are similar but they witnessed the demographic transition with different timing. Why were demographic developments so early in France comparatively to other European countries? What underlying aspects of the development process explain these various timings?

The exploration of changes in gender relations may provide plausible explanations of this puzzling question and improve the understanding of the process of development and the associated phenomenon of the demographic transition.

Along the lines of Galor’s work this paper seeks to dwell on the questions of understanding and explaining the mechanisms and determinants underpinning the development process which allowed economies to move out of a long period of stagnation into a state of sustainable economic growth. In particular

F. Perrin, An exploration of the cliometric relationship

39

it questions the role played by gender equality in the demographic transition and socio-economic developments. This paper is stimulated by a twofold motivation: on the one hand, the conviction that the understanding of comparative economic development requires a global view of the entire process of development; on the other hand, the belief that the promotion of gender equality together with the economic and social empowerment of women is essential to achieve sustainable development and may contribute to the determination of the timing and space of the transition to sustained growth.

In particular the paper aims to provide preliminary insights into the following questions: To what extent and through what mechanisms does gender equality affect the process of development? This first question encompasses a broader set of underlying questions: Could changes in gender relations explain the dramatic reversal of the positive relation between income per capita and population? What are the underlying behavioural forces behind the process of demographic transition? What forces caused the process of human capital accumulation? What mechanisms are at the origin of the substitution of child quantity for quality? Could gender equality account for the endogenous interactions between education and fertility that resulted in the transition phase?

Would the transition to sustained economic growth have been feasible without improvements in gender equality? Could female empowerment account for the observed take-off from stagnation to sustained growth in Western countries?

Satisfactory answers are difficult to provide mainly because of a lack of data and guiding theories. Based on a renewed cliometric approach the aim of this paper is to offer a preliminary reflection towards a better economic theory.

Central to this paper is the consideration that the development process is linked with the changing economic role of women. I argue that the deployment of women from the home to the market place has been a necessary condition to achieve sustained economic growth. My hypothesis is that the empowerment of women has played a key and necessary role in the transition towards modern societies through the essential role it played on the accumulation of human capital and on the fertility transition.

Methodology – cliometric analysis The purpose of this study is located at the crossroads of several areas of economic and social sciences. In order to carry out this study and deepen the analysis of social groups it is essential to rely on insights from sociologists, demographers, historians and anthropologists. My approach is therefore that of an economist specialized in cliometrics4 with the ambition to build a bridge between economic history and other scientific communities.

4

Literally cliometrics is defined as a projection of quantitative social sciences in the past, structured by the economic theory and informed by the statistical and econometric tools.

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That cliometrics is an indispensable tool in the study of long-run economic growth is no longer a very controversial statement [Goldin 1995; Diebolt 2012]. At the theoretical level it enables the researcher to formulate problems precisely, to draw conclusions from postulates and to gain insight into workings of complicated processes. At the applied level it allows the measurement of variables, the estimation of parameters and the organization of the elaborate calculations involved in reaching empirical results. This paper, which provides preliminary hints of the role played by gender equality over long-run economic and demographic development path of industrialized countries, is an illustration of my belief in this principle. The projected innovation is twofold: first, building a bridge between the theoretical models of growth and economic history, and second, investigating the theories based on history, whilst seeking to formulate general laws. This line of research between pure empiricism and abstract theory could pave the way towards a better economic theory allowing the interpretation of economic issues taking into account the past and in so doing, to understand more deeply the economic and social historical processes [Diebolt and Perrin 2013].

The remainder of the paper is structured as follows. I first consider historical facts related to the long-run relationship between gender equality and the process of development in France. This involves the examination of the social and cultural context that forms the framework constraining individuals’ behaviour. Hence I focus on the genesis of the relationship between men and women to determine in which socio-economic context the issue of gender equality emerged and evolved. In a second step, I propose possible triggers through which the improvement of equality between men and women acted as a phenomenon of demographic transition – and even more – as a process of past, present and future economic and social development of developed and developing economies.

1. Understanding the French process of development As a field of experiment I choose the iconic case of France. This choice is motivated by: (i) the peculiarity of France in terms of demographic aspects – France was the most populated European country at the turn of the 19th century and the first European country to experience the demographic transition; (ii) the specific institutional and economic context that has followed (and preceded) the French Revolution in 17895; and (iii) the lack of studies having been dedicated to France so far. Although gender equality may not be confidently considered as a causal factor driving economic development and the empirical regularities 5

France was subject to huge variations in the cost of living throughout this period [Sharp and Weisdorf 2012].

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question its potential long-term interaction with economic and demographic variables. The analysis of a unique collection of transversal and longitudinal data from France, ranging as far back as the mid-eighteenth century, uncovers key socio-economic, demographic, geographic and cultural patterns that have marked a turning point in economic history.6

1.1. The mutation of demographic and socio-economic structures The incremental changes in the means of production impacted the society in various ways. From its original cradle in the North of France to other new hubs of industrialization the dynamics of capitalism reshaped the landscapes of the country. The industrialization caused a transition to new manufacturing processes which influenced many aspects of daily life.

Demographics The study of long-run trends puts into perspective several important findings.

Despite an overall increase in the availability of resources, the number of offspring radically declined; coupled with improvements in life expectancy both mortality and fertility rates reduced sharply within the space of a century.

Profound transformations have affected the marriage pattern in France in the course of the demographic transition. I distinguish three main stages in the evolution of marriage practices since the 18th century: (i) prior to the French Revolution, marriage practices were characterized by the classical features of the European Marriage Pattern: a large share of definitive celibacy, marriage at a late age and low frequency of illegitimate fertility; (ii) A reversal occurred after the French Revolution. The share of definitive celibacy fell sharply, the median age at marriage started on an impressive downward path and illegitimate births rose substantially; (iii) From the 1960–70’s the median age at marriage reversed its course as did the share of single individuals (see Figure 4 in Appendix).

During a large part of the 18th century individuals have acted authentically in a very Malthusian way accepting more and more late marriage and a larger proportion of definitive celibacy in order to maintain a sustainable number of offspring (whilst the rate of infant mortality was falling). The change in marriage patterns towards larger celibacy numbers and a younger age at marriage occurred at the same time as the decline in fertility. This interesting paradox can be explained by the evolution of individuals’ behaviour with regards to fertility regulation. The investigation of regional specificities in the mid-19th century shows the coexistence of two types of fertility regulation: control via 6 Most raw data come from the Statistique Générale de la France; data on population, statistics of primary education and industrial statistics contain much valuable information.

Other data have been collected from books, archives manuscript and a variety of additional sources.

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marriage (Malthusian regulation) versus control within marriage (birth limitation). Religious practices, family structure and the system of inheritance, help the understanding of the geographical distribution and the regional dynamics of nuptiality and birth control within marriage [Perrin 2013b: 56]. Whilst the counties characterized by larger share of Catholic and Protestant were using the Malthusian regulation, secular areas were more likely to use the control of birth within marriage. The Malthusian regulation played an important role in areas with stronger religious practices until the beginning of the 20th century. The fertility transition occurred later in these areas than in the rest of France where the Malthusian regulation was early replaced by birth limitation.

The difference in the family structure and the system of inheritance [see Todd 2011] also display a close link with the geographical distribution and speed of diffusion of the fertility decline. In general France can be divided into two main areas: the northern part of France characterized by a more egalitarian, nuclear family and the southern part of France more preferential and organized around the stem family.

Labour force The exploration of the evolution of the female labour force, in particular the transformation of the female life cycle at work, helps understanding of the reasons of the changing demographic behavioural patterns. The kinds of jobs women occupied were historically limited in terms of number and of type. The study of the evolution of their labour force participation however reveals that the female labour force in paid activities increased substantially over time, both in its proportion and in its structure. Economic development leads to strong upheaval in the social structure of the workforce. The rural exodus drove agricultural workers to cities; a decline in the peasantry (craftsmen and tradespeople) occurred slowly in favour of manufacturing workers during the 19th century [Marchand and Thélot 1991].

In the North of France women entered the labour market mainly through the development of textile industries [Perrin 2013b: 105]. Women working in industry were usually young and single. However the evolution of the female labour force by marital status and age reveals a significant increase in the share of married women and women of childbearing age in the labour force. At the same time the share of women aged 15–24 in the labour force experienced considerable decline [Perrin 2013b: 83].

The variations in the female labour force suggest the evolution of gender relations on the labour market. The attention paid to the study of gender differences reveals an important decline of the gender gap in occupation and earnings over time, however the differences persist. Women did not turn towards the same types of jobs and were less likely than men to perform skilled jobs.

The differences observed cannot be fully explained by economic factors and raise the question of the access to educational opportunities.

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Education The investigation of educational investments shows strong differences between boys and girls. During the 19th century women were, on average, less trained than men. Women’s opportunities and access to education were limited and restricted. Additional education was often limited to specific knowledge related to housework and skills required for their future role within the household as mother and wife. The 19th century marked however deep improvements in individuals’ investments in human capital. Formal education became accessible to the vast majority of the population. Whilst a huge share of the population was illiterate in the early 19th century only a small fraction of the population remained unable to read and write at the turn of the 20th century [Perrin 2013b: 128]. The feminization of education notably through the implementation of laws and decrees (e.g. Pelet 1836; Duruy 1867; Sée 1879 or Bert 1879) allowed girls to fulfill a large part of their delay in schooling. Female literacy rates caught-up with male rates at the turn of the 20th century.

Educational investments diffused across the French departments throughout the 19th century from the most industrialized areas of France to the dominantly agrarian part of the country. The massive and widespread access to education occurred gradually from primary education to secondary education and later in time (during the 20th century) from secondary education to tertiary education. Women became more and more trained. Long-run trends reveal strong improvements in the quality of the labour force that had turned in favour of women by the early 20th century [Diebolt and Perrin 2014].

Human capital is an important factor in understanding the distribution of earnings and occupations. Nonetheless the evolution of gender differences in educational investment remains insufficient to fully explain the persistence of gender differences in wages and specialization. This observation therefore questions the role played by the status of women in society, i.e. the roles, behaviours and activities socially established as being appropriate for women.

Gender roles and family organization Economic factors and market forces cannot explain alone the gender division of labour. Inequalities between men and women seem to be rooted in the cultural, social and political systems of many countries. The evidence collected with regard to demographic behaviours, involvement in the labour market and educational investment in France emphasizes the existence of slow but profound changes in the structure of gender relations over time.

The study of family organization over time and across modes of production allows a better understanding of the evolution of the distribution of roles between members of the household. There exist three main fundamental functions that family members have to perform: (i) the economic function – production of goods and services within and outside the home; (ii) the social function – production of education and well-being, transmission of norms and values,

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inheritance; (iii) the reproduction function – renewal of generations. These functions are shared between the members of the household.

The distribution of roles between the members of the household and the time spent performing the different tasks differ according to the historical, sociological, cultural or economic context in which a society evolves. Two extreme organizations emerged: the patriarchal organization, characterized by a sexual division of the tasks within the household, (family sphere versus professional sphere), and the dual-earning organization in which the tasks are more equally distributed between wife and husband. The investigation of family organization suggests that a gradual transition occurred from a sexual division of labour to a more egalitarian distribution of the tasks within the household. The emergence of married women into the paid workforce has contributed profoundly in the modification of gender relations and has weakened the patriarchal family organization in favour of a more egalitarian distribution of roles within the household. The position of women evolved within the family and there within the society (and conversely).

With the development of industries it became more difficult for women to combine the family and professional spheres. An important indicator of the evolution of the status of women is the joint evolution of marriage patterns and fertility behaviours, as described above. The 1851 gender gap index, built from a collection of county-level data by gender, demonstrates the degree and the amplitude of gender-based disparities in France in the mid-19th century [Perrin 2013b: 189]. The geographical distribution of the gender gap index suggests the improvement in women’s status was driven by counties dedicating important effort to educational investment (more educated areas), i.e. counties located in the northeastern diagonal part of France (see Figure 5 in Appendix).

1.2. The socio-economic and demographic regional profile of France in the mid-19th century The study of cross-sectional data sketches an interesting picture of the geography of economic activities, educational investment, demographic behaviour and gender relations. The analysis of socio-economic and demographic profiles of French counties helps to shed new light on the specificity of regional characteristics of France.

The typology of French departments (using the Principal Component and Hierarchical Cluster Analyses) enables the division of French territory into six classes based on their socio-economic and demographic characteristics [see Perrin 2013b: 197, for more details]. The analysis emphasizes the key role played by education, religion, industrialization and urbanization and the level of gender equality in the comparative economic and demographic developments of French areas. The most apparent dimensions separating French counties are the productive structure (agriculture versus industry), the educational

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Figure 3. The Typology French Counties Source: Perrin [2013b: 209]

structure (rural uneducated versus urban educated) and the marital-fertility structure (no birth control versus birth control within marriage). Figure 3 displays the geographical distribution of the six classes that have been determined through the analysis of socio-economic and demographic characteristics of French counties in the mid-19th century.

The class 1 groups counties oriented toward agricultural activities – activities in which women are more represented than the average of other counties. Nonetheless the class is marked by a gender gap index strongly below the national average. These departments present an age at marriage of both men and women and a share of definitive celibacy higher than the average.

Despite these patterns the marital fertility rate is a lot higher than the average of all counties as the crude birth rate remains above the average. These departments are also marked by relatively higher child and infant mortality rates. In addition these departments have less reliable means of communication and display low manufacturing output. Therefore class 1 groups less developed counties, dominantly agrarian and located in remote areas. They are characterized by low gender equality, high fertility despite a control of nuptiality and a low living standard.

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The class 2 is characterized by counties displaying a high share of illiterates amongst married individuals, a lack of educational infrastructure and predominantly agrarian. The industrial production is low in these districts, as are both male and female employment rates in industry. Contrary to class 1 counties a large share of the population married young and the share of definitive celibacy is below the national average, although marital fertility remains a little below the national average. Similarly to class 1 the gender gap index is low.

Class 2 groups counties located in rural areas where the population is poorly educated compared to the average of other classes and so is the living standard.

Fertility rates are at the national average. Individuals marry young but tend to exercise some control of their fertility within marriage.

The departments that make up class 3 clearly display a concentration of population in urban areas. These departments are industrialized and urbanized.

The average wage of men and children within these departments is high – it may be driven by a larger proportion of professional as well as by a stronger industrial production. In addition we note that this class is characterized by educational infrastructures for boys below the national average. Finally these departments present high fertility rates. Class 3 groups rich and industrial counties. They present large gender inequalities with regards to education and wages and high fertility rates.

The class 4 is very interesting with regard to the educational indicators.

Enrollment and literacy rates and educational structures are larger than in any other districts for both genders. Religion appears strongly devisive for these departments – closely located to Prussia and characterized by the largest share of Protestants amongst the population. Men and women in these departments married on average later than in other departments. Furthermore the departments of this class show a relatively rich industrial production, but outside urban areas. The class is also marked by a gender gap index somewhat larger than in other counties. Class 4 is then composed of counties characterized by a highly educated population of both genders. These counties are mainly rural and present high living standards. Gender equality is high and average fertility rates are close to the national average.

The departments forming class 5 are characterized by a high availability of arable land and are mostly rural. The female population of these departments is highly educated despite a low number of schools for girls. Female education and literacy is a strongly divisive indicator. Similarly the gender gap index is clearly larger than the national average. Female average wages are higher than in any other department. Men’s and children’s wages are also higher but to a lesser extent those of women. These departments have a dynamic industry as revealed by high employment rates in industrial activities but remain also largely rural. Finally the counties of this class present low fertility rates within marriage although women marry younger than the national average. Class 5 differs mainly from class 4 with regard to fertility. Whilst counties of class 5

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limit fertility within marriage, counties of class 4, being more religious, tend to “regulate” fertility through nuptiality.

Seine (Paris) is a peculiar county and forms class 6 on its own. The population density is 29 times larger than the national average. Seine is more industrialized than any other county and the manufacturing output is five times that of the national average. The level of gender equality is close to the average.

However this level hides the fact that education and literacy rates are very low for both genders. Total fertility is very high although marital fertility is lower than the national average. Individuals marry late; the share of definitive celibacy is high and the share of illegitimate births is twice the national average.

At the same time the rate of child and infant mortality is the highest in France.

Two opposing profiles emerge from the French formalized facts and the analysis of the socio-economic and demographic profiles of French counties conducted. On the one hand, we find agrarian counties characterized by a poorly educated population, considerable gender inequalities, high mortality, high fertility rates and low living standards. On the other hand, we find industrialized but still rural areas putting significant emphasis on education for both genders; gender equality is high, women tend to be more integrated in the labour market, fertility rates are lower and living standards are higher. Based on these observations I emphasize the importance of considering the gender relations and family as a unit of analysis in the investigation of the mechanisms underlying the development process. My claim is therefore that the transition from stagnation to sustained economic growth occurred in parallel to the transition from a patriarchal organization of society towards a more egalitarian organization, characterized by a better distribution of the tasks between the members of the household.

2. Underlying mechanisms of the relationship between gender equality and economic growth The research conducted on French data produces a complex story of national and regional variations. It suggests the existence of interconnected relationships between the process of the historical emancipation of women, demographic transition and economic development. The application of the theory enables transformation of this complex set of information into a more simple system with the target of improving our understanding of the mechanisms underlying the formalized facts. I propose here some possible triggers by which the improvement of equality between men and women acted as a phenomenon of demographic transition – and even more – as a process of past, present and future economic and social development of developed and developing economies.

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2.1. Additional and novel mechanisms in a Unified Growth Model The literature review on the theories of economic growth emphasizes the need for a Unified Growth Theory that could capture in a single framework the main characteristics of the process of development. However the growth models that differentiate the role of men and women in their analysis are rare considering rather the effect of household decisions on fertility. This section aims to shed light on the theoretical foundations and mechanisms through which the evolution of gender relations might have affected the development processes that have triggered the transition from a long period of stagnation to a state of sustained growth.

The intuition is that the development process occurred in parallel to the transition from a “Patriarchal” organization of the society (male-breadwinner model), characterized by a sexual division of labour based on the desire for households to maximize both their income and the number of children, towards a “Modern” organization of the society (dual-earnings model), characterized by a better distribution of duties within the household, where both men and women work on the labour market. This transition is at the core of both the process of human capital accumulation and the demographic transition experienced by developed countries.

Diebolt and Perrin [2013] developed a unified cliometric growth model that captures the interplay between technology, income per capita, gender equality and fertility in the transition from stagnation to sustained growth. In particular they consider a two-sex overlapping-generations framework with two types of human capital and integrating gendered aspects. The key state variables for individuals’ decisions are the technological environment and the powerimbalance ratio between sexes. The first element of the model is that technological progress raises the rate of return of skilled human capital. As long as there is a clear division of the tasks between the members of the households, men who participate in the productive sphere are encouraged to invest in education. The subsequent rise in income provides the necessary resources for the members of the household to bear more children (income effect). Such an effect would explain the difference of schooling observed between boys and girls and the positive relationship between income and fertility. The second element of the model is that technological progress is skill-biased; the rise in educational investment affects positively the growth rate of technological progress. When the technological progress is low, population and output growth remain stable. Sufficiently large technological progress, however, provides the necessary resources to observe the joint rise of output and population growth.

The third element of the model is the positive externality on the level of gender equality generated by the acceleration of skill-biased technological progress. The female marital bargaining power within the decision process of the household is conditional on the stock of human capital of the members of the

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household. The rise in the female marital bargaining power leads to a better distribution of the tasks between the members of the household; both man and woman work on the labour market and provide a wage to the household. The rate of return of skilled human capital encouraged women to invest in skilled education. The rise in women’s role in human capital is the key ingredient allowing the transition to the Modern Growth Regime. Women face a trade-off between the time they spend getting educated and working on the labour market and the amount of time necessary to have and to rear children. The rise in the time spent by women becoming educated and working on the labour market raises the opportunity cost of having children and triggers an increase in income and a decline in fertility (substitution effect). Besides, women’s role in human capital is considered primordial in the educative development of children. The rise in women’s educational investment impacts positively children’s role in human capital. Women have fewer children but they are better educated. Higher gender equality in turn triggers the substitution of the “quantity of children” towards the “quality of children”. Such an effect would be an explanation for the dramatic rise in schooling for both genders and the onset of the demographic transition that have occurred in Europe over the course of the 19th and 20th centuries.

2.2. Dynamic mechanisms of the transition to Modern Growth In the early stage of development the low rate of technological progress does not provide an incentive to invest in skilled education. Therefore the proportion of skilled individuals is low and the economy remains trapped in Malthusian steady-state equilibrium, with low education, low living standards and low gender equality. Technological progress is assumed to increase monotonically from generation to generation. Thereby, as technological progress grows, we observe a qualitative change and the subsequent income effect triggers (temporarily) higher fertility rates. After many generations increases in the returns from investment in skilled education (productivity growth) – driven by the rise in technological progress – makes investing in skilled education more profitable so that gender equality improves. The dynamic system of skilled human capital and gender equality is therefore characterized by multiple steady-state equilibriums.

When gender equality becomes high enough a substantially larger proportion of individuals acquires skilled human capital which triggers rapid developments and reinforces gender equality. Due to larger educational investment the female opportunity cost of having children increases and average fertility declines: the demographic transition occurs along with the process of human capital accumulation. Ultimately, in later stages of development, gender equality and the proportion of skilled individuals converge towards their maximum. Thereby the economy is characterized by a Modern Growth steady-state equilibrium, where living standards are high, gender equality is high and fertility is low.

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2.3. Preliminary empirical verification of the key role of women for the development process The trade-off between the women’s role in human capital and their number of children is the crucial ingredient of the transition to Modern Growth. Greater opportunities for women to invest in education increases the opportunity cost of having children and implies that women have to face a trade-off between education and fertility, which ultimately leads to a fertility transition.

Perrin [2013a], and Becker, Cinnirella and Woessmann [2013] have tested the effect of the rise in women’s human capital on fertility for France and Prussia respectively. Using a dataset of 86 county-level observations in the 19th century, Perrin [2013a] runs simple OLS tests to compare the effect of the changes in men’s and women’s human capital on the change in fertility. In accordance with the theory the paper shows: (i) the existence of a significant and negative effect of women’s role in human capital on fertility during the French demographic transition, but (ii) no significant effect of men’s role in human capital.

In the same research Becker, Cinnirella and Woessmann [2013] shed light on the relationship between women’s formal education, measured in terms of female school enrollment rates and their fertility. Using least-squares estimates they show that increases in women’s education played a substantial role in reducing fertility already before the demographic transition in Prussia, results corroborated by the use of IV and panel models.

Conclusions Differences between men and women have certainly existed throughout history and are still a feature of many contemporary social arrangements. The objective of this paper was to provide a first insight into the long-run relationship between gender equality and economic growth and to highlight the advantage of using the cliometric analysis for that purpose. The findings emphasize the need to consider the evolution of gender relationships in the understanding of the process of development.

Our reflection provides a new track for the specification of this relationship. It puts into perspective the impact of female empowerment on demographic and economic transitions. It therefore appears that the particular organization of the society, and more precisely the distribution of roles within households, is an influential aspect of the contribution of gender equality to economic growth. The socially constructed roles, behaviours, activities and attributes that a given society considers appropriate for men and women has evolved significantly in the Western world over the past two hundred years.

Changes in gender roles have affected the economic performance of Western countries and demographic behaviour in a number of ways. The participation

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of women in economic life, the educational investment of girls and their increasing empowerment in these areas have been essential to strengthen their rights. It enabled women to have control over their lives and influence within the society. Improving women’s status led to larger investments in the education of their children, as well as in their health and well-being. At the same time, it resulted in a voluntary reduction of fertility. Combined together they contribute to explain the origin of the process of human capital accumulation and the demographic transition that have been at the origin of the transition of Western economies towards sustained economic growth.

The underlying mechanism of the theory suggests that female empowerment has been at the origin of the demographic transition and caused the take-off that allowed economies to move from the post-Malthusian regime to modern economic growth. In line with empirical evidence the theory characterizes the conditions under which the process of human capital accumulation started.

Changes in the share of population acquiring skilled human capital have substantial effects on fertility patterns. Human capital being a factor with increasing returns of scale, the reallocation of resources towards this factor sets the economy on a growing path dependency.

Through the use of an original method this paper puts into perspective evidence of the interplay between gender equality and economic development.

In particular it shows that gender equality was necessary to allow economies to move from Malthusian Stagnation to Modern Economic Growth. This paper has the aim of being an original illustration of the main achievement of cliometric research in recent years. In particular it aimed at bringing together theoretical growth models and economic history in order to interpret more deeply the historical working and path of dependence of the socio-economic processes of developed and developing countries.

0

1911–1913

1901–1910

1891–1900

1881–1890

1871–1880

1861–1870

1851–1860

1841–1850

1831–1839

1820–1829

1810–1819

1801–1809

30

1790–1799

1660–1664 1665–1669 1670–1674 1675–1679 1680–1684 1685–1689 1690–1694 1695–1699 1700–1704 1705–1709 1710–1714 1715–1719 1720–1724 1725–1729 1730–1734 1735–1739 1740–1744 1745–1749 1750–1754 1755–1759 1760–1764 1765–1769 1765–1769 1770–1774 1775–1779 1780–1784 1785–1789 1790–1794 1795–1799 1800–1804 1805–1809 1810–1814 1815–1819 1821–1825 1826–1830 1831–1835 1836–1840 1841–1845 1846–1850 1851–1855

155

1780–1789

10

1770–1779

1760–1769

1740 1748 1756 1764 1772 1780 1788 1796 1804 1812 1820 1828 1836 1844 1852 1860 1868 1876 1884 1892 1900 1908 1916 1924 1932 1940 1948 1956 1964 1972 1980 1988 1996 2004

35

1750–1759

1740–1749

Appendix (a) Female definitive celibacy, 1660–1865

135

115

95

75

55

(b) Female average age at marriage, 1740–2008

29

28

27

26

25

24

23

22

9 (c) Frequency of illegitimate birth, 1740–1913

8

7

6

5

4

3

2

1

(a) The measure of definitive celibacy is made from the study of permanent celibacy built up from the classification of deaths of each sex for periods of five years, from 1740–1744 to 1825–1829, groups of five generations and marital status

Figure 4. The transformation of the marriage patterns in France

Sources: Data from (a) Henry and Houdaille [1979]; (b) Henry and Houdaille [1979] – INSEE; (c) Segalen and Fine [1988]

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Indices equal to 0 and 1 reflect perfect gender inequality and perfect equality, respectively

Figure 5. Geographical distribution of the gender gap index in France, 1851 Source: Perrin [2013b: 194]

References Becker, S.O., Cinnirella, F., Woessmann, L., 2012, The Effect of Investment in Children’s Education on Fertility in 1816 Prussia, Cliometrica, vol. 6: 29–44.

Becker, S.O., Cinnirella, F., Woessmann, L., 2013, Does Women’s Education Affect Fertility? Evidence from Pre-demographic Transition Prussia, European Review of Economic History, vol. 17: 24–44.

Diebolt, C., 2012, The Cliometric Voice, AFC Working Paper, vol. 12: 1–9.

Diebolt, C., Perrin, F. 2013, From Stagnation to Sustained Growth: The Role of Female Empowerment, American Economic Review, Papers & Proceedings, vol. 103, no. 3: 545–549.

Diebolt, C., Perrin, F., 2014, The Foundations of Female Empowerment Revisited, Revue d’Économie Politique, vol. 124, no. 4: 585–595.

Galor, O., 2011, Unified Growth Theory, Princeton University Press.

Galor, O., 2012, The Demographic Transition: Causes and Consequences, Cliometrica, vol. 6: 494–504.

Galor, O., Weil, D.N., 1999, From Malthusian Stagnation to Modern Growth, American Economic Review, vol. 89: 150–154.

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Galor, O., Weil, D.N., 2000, Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond, American Economic Review, vol. 90: 806–828.

Goldin, C., 1995, Cliometrics and the Nobel, The Journal of Economic Perspectives, vol. 9, no. 2: 191–208.

Henry, L., Houdaille, J., 1979, Célibat et âge au mariage aux XVIIIe et XIXe siècles en France : II. Age au premier mariage, Population, vol. 34: 403–442.

Klemp, M., 2012, Price, Wages and Fertility in Pre-Industrial England, Cliometrica, vol. 6: 63–78.

Maddison, A., 2008, Statistics on World Population, GDP and Per Capita GDP, 1–2008 AD, http://www.ggdc.net/maddison/Maddison.htm.

Marchand, O., Thélot, C., 1991, Deux siècles de travail en France, Institut national de la statistique et des études économiques.

Perrin, F., 2013a, Retour sur les origines de la transition démographique. Une analyse en termes de genre, Économies et Sociétés, Série «Histoire économique quantitative», AF, vol. 7, no. 46: 1185–1211 Perrin, F., 2013b, Gender Equality and Economic Growth in the Long-Run. A Cliometric Analysis, PhD Dissertation, University of Strasbourg and Sant’Anna School of Advanced Studies.

Segalen, M., Fine, A., 1988, Famille et mariage, Histoire de la population française, vol. III, Presses Universitaire de France: 403–465.

Sharp, P., Weisdorf, J., 2012, French Revolution or Industrial Revolution? A Note on the Contrasting Experiences of England and France up to 1800, vol. 6, no. 1: 79–88.

Todd, E., 2011, L’origine des systèmes familiaux, Gallimard.

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Cliometrics and general equilibrium: a pathbreaking analysis revisited1 Claude Diebolt2

Abstract : This paper aims to contribute to the renaissance of the general equilibrium analysis applied to history. It discusses Jeffrey Williamson’s seminal contribution in the field of cliometrics giving an explicit indication of all the interdependences and for simultaneously taking into account all the problems separated artificially in analysis of Marshallian partial equilibrium.

Keywords : cliometrics, general equilibrium.

JEL codes : B13, N01, N11.

Introduction Jeffrey G. Williamson […] has been the pathbreaking figure in the application of general equilibrium models to economic history […]

[James 1984: 237].

In his seminal [1974] contribution Williamson’s objective was to analyse the structure of the American economy from the Civil War to the First World War. It was a clear advance in literature as the great majority of cliometric works had hitherto focused almost exclusively on the period preceding the Civil War: […] while cliometricians had made great strikes in improving our understanding of ante bellum economic experience, the post-Civil

1

Article received 15 August 2014, accepted 8 September 2014.

The author is particularly grateful to Jean-Pierre Dupuis, Jérôme Lallement and Jean-Luc De Meulemeester for their valuable comments. An earlier version of this paper was presented during different PhD lectures in France and abroad, at the European Society for the History of Economic Thought Conference in Strasbourg, and at a Research Seminar on General Equilibrium as Knowledge at the University Paris 1 Panthéon Sorbonne. Possible remaining errors are those of the author.

2 BETA/CNRS, University of Strasbourg Institute for Advanced Study, 61 Avenue de la Forêt Noire, 67085 Strasbourg Cedex, France, e-mail: cdiebolt@unistra.fr.

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War still remained a frontier, while the twentieth century could be considered almost virgin territory [Williamson 1974: ix].

His research followed two articles co-authored with Kelley in [1971] and [1973] (consolidated by a book in [1974]) devoted to the setting up of a general equilibrium model of an assumed “dualist economics” (a term first used in the economic literature by Lewis in [1954]) i.e. the Japanese economy during the Meiji period. Later on Lindert and Williamson [1980] used the same modelling philosophy to deal with the issue of inequalities and developed a computable general equilibrium (CGE) model in order to test for the validity of the Kuznets curve. All this research was also influenced by the context of economic research at the time (research on the general equilibrium theory was extremely well regarded amongst the profession) and in a sense pioneering (as the great success of CGE models appeared mainly during the 80’s linked with their use by the World Bank and other international organisations to assess economic policies for least developed countries).

Williamson built a CGE model that ignored much of the institutional characteristics of the post-Civil War economy – it was the price to pay for using this methodology – but a model that hopefully improved our understanding of the late nineteenth-century American economic development or even of the complete century.

The aim of this paper is to discuss these findings whilst keeping in mind the limitations that such a type of modelling exercise can place on our understanding. It is indeed clear that as far as the end of the period is concerned (especially the Great Merger Movement), assumptions of perfect competition are difficult to accept.

1. The cliometric framework Williamson’s book is divided into 11 chapters and 3 statistical annexes (estimation of parameters, details of simulations and statistical series): 1. The Issues 2. Counterfactual History 3. A Model of Late Nineteenth-Century American Regional Growth 4. American History Rewritten: Fact or Fiction?

5. The Great Depression, 1870–96 6. Financial Intermediation, Capital Immobilities and Economic Growth 7. Farmers’ Discontent and Agricultural Performance: Facts, Issues and an Agenda 8. Elements of Agricultural Performance, Land Expansion and Productivity Growth 9. Transportation and American Development during the Gilded Age: 1870–90

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10. Exports, World Markets and American Development 11. Immigration and American Growth.

Williamson’s spatial framework is narrower than the one indicated in the title of the book, Late Nineteenth-Century American Development: A General Equilibrium History. His America is indeed limited to the North-East and the central north (the Midwest) regions of the country. The Rockies, the Pacific coast and the South are not included. Williamson’s framework for regional analysis would thus appear very simplified. His field of investigation is made up of two regions – the first purely industrial and the second both industrial and agricultural. But the choice by Williamson was extremely judicious. The share of farming in the national income of the USA had been limited since 1870 and more than 60% of the population of the US was concentrated in the north-west quarter from the 1880’s onwards, and 75% of national income was generated there. The time span (from 1870 to 1910) was chosen in order to focus on the period following the Civil War and preceding World War 1.

Williamson aimed at going beyond the partial equilibrium approach to follow an old tradition in economics (beginning maybe with the Tableau of François Quesnay in 1758), i.e. modelling the structural relations of an economy to answer questions on its dynamics. Use of the counterfactual method (that is to say measurement of the influence of a factor on a development by the difference between that really observed and the hypothetical influence) allowed by the use of CGE models should make it possible to analyse how the economic development during the period could have been affected by the absence of certain factors considered as essential by more traditional economic historical approaches.

The fruitfulness of his counterfactual approach is heavily dependent on the researcher skills in formulating useful and pertinent historical questions. What would have happened in the American economy if the Civil War had not taken place or if transport had not been improved by the railways, or if the deterioration of terms of trade at world level had not worsened for American grain, and so on? It is the art of asking useful questions: Instead, the art is to develop models of historical development which capture the essential and suppress the trivial [Williamson 1974: 17].

Williamson considers that the counterfactual method should make it possible to use simulation as a means for testing various assumptions concerning the behaviour of variables and on the way introducing a form of comparative dynamics as an extension of the comparative static models that he criticises, as did Temin [1971]), because they are valid only if it is assumed that the equilibrium positions are stable. It is however not realist to consider a constant technology for a long period of time. In other words, as an economic historian, Williamson’s use of CGE models is one that allows some disequilibrium (if we

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may say that). Technology is not considered as time-invariant but changing.

He even departs from pure competition assumptions as there are some barriers to the mobility of factors between the two regions in his model (the USA is assumed to be an open economy with relative prices set at world level for the Eastern regions but that have to be adjusted for transportation costs in the Midwest).

His procedure follows four stages: formulation of the model, calibration/estimation, test and analysis. It is predictive in Friedman’s philosophy [1953] in the sense that he considers that a theory cannot be tested by direct comparison of its postulates with reality. A theory is only realist if the predictions derived from it are good or better than those of other theories. Finally, the only satisfactory test of the validity of a hypothesis is the comparison of its predictions with experience. The hypothesis is discarded if its predictions are contradicted.

Factual evidence can never prove a hypothesis but may simply not disprove it.

Williamson’s idea was to build a model whose calibrated chronological series would be as close as possible to observed series or numerical data.

These series referred to as ‘actual’ describe observed reality. In concrete terms Williamson assessed the role of a factor by assuming that the latter remains constant throughout the period of analysis. He measured the impact of this constancy on the other endogenous variables. He aimed at better assessing the true impact of the historical variation of this factor. As is explained on page 63 of his book he considers the model favourably when it makes it possible to detect turning points in the time series, without seeking to detect any particular pattern.

Williamson follows the conventional rule of CGE modelling and uses a Cobb-Douglas production function of the type with constant returns to scale.

The model is suitable for representing a stable economy but is more questionable for addressing the problem of disequilibrium dynamics. For example, what form has the adjustment between investment and saving (not forgetting that neoclassic economists hold that investment comes from saving and that for Keynesians savings come from investment)? In addition how can capital be measured (Joan Robinson [1956], comes to mind!)? Williamson is aware of the relevance of such objections and specifies that for him there is no total mobility of the factors. In other words once capital goods are installed they cannot be transferred to another sector. As a result there is no equalisation of the price of factors between regions and sectors, ruling out any instantaneous reallocation.

Williamson constructs his long-term growth model in Chapter 3 of his book.

It is based essentially on supply with no cycles and with no variations in overall demand (demand functions only affect interregional or international trade). In fact, it is a neoclassical growth model based on two regions (the Midwest, producer of agricultural and manufactured goods and the East, producing manufactured goods) and with three factors of production (labour, capital and land).

Williamson uses 72 equations (pp. 46–50) that reflect production conditions,

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returns and prices of factors, savings and investment allocation levels, consumer demand, transport costs, real interest rates, real wages and labour migration between sectors and regions. The money supply is constant and Williamson assumes balanced growth and full employment.

His starting point is the American Civil War that he considers as a decisive turning-point for the American economy, reducing subsequent growth rate and generating disequilibrium. The decline of the growth rate of the economy is considered to have resulted from a fall in capital accumulation rates and a decrease in land expansion rates. Variations of productivity of the various factors of production played only a marginal role in the economic slowdown of the country. These results are implied by the core-assumptions of the theoretical model centred essentially on the determinant factors of revenue and on the inter-regional and inter-industry flows of products and factors, with the exception of other sources of growth considered as exogenous (in particular technical progress and variations in labour flows).

We have to stress at this point that these results are not always validated by historical reality. Let us consider, for example, the stagnation during the 1890’s.

The imbalances on the capital markets are analysed as being mainly the result of transaction costs involved in capital transfers between regions. This explanation is incomplete. Indeed the Williamson’s general equilibrium model classical assumptions of full use of resources and perfect competition appear quite incorrect in a context of depression, accelerated economic concentration and increasing unemployment—three characteristic features of the American economy in the late nineteenth century.

However Williamson’s simulations lead economic historians to challenge 7 commonly-held views concerning economic growth at the time.

2. The Great Depression Williamson raises new questions about the much discussed Great Depression in the USA. He first eliminates the role of monetary factors and the Keynesian explanation based on demand, above all because he does not note any significant increase in unemployment. The answer must therefore be sought on the supply side. Williamson considered that the cause of the depression did not lie in a border effect or in the slowing-down of the growth of factors total productivity but is to be found in the long-term determinants of capital and savings formation rates. The Great Depression would thus in no way be accounted for by a decrease in savings efforts or even pressure on profits. The overall savings rate increased and prices of investment goods fell during the depression. In fact it remains to be found why the savings rate increased in the 1860’s, why it remained stable until the 1890’s and why it increased again from 1896 onwards.

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These are still fundamentally important and unsolved questions which should attract future research efforts by cliometricians.

3. Financial intermediaries and the creation of an integrated national capital market Analyses developed before Williamson’s drew attention to the slowing-down effect of barriers to mobility of capital and the positive role of financial intermediaries transferring savings from regions with an excess to regions with a deficit. Indeed the development of an integrated national capital market ensuring capital mobility between sectors and regions appears to be a powerful feature enhancing growth. This type of capital market integration emerged gradually in the United States between 1870 and 1914. The relative immobility of capital resulted in differences in interest rates from one region to another.

The convergence of these rates was a sign of increasing integration. Many people consider that the convergence of short-term interest rates resulted from the development of a national commercial-paper market and hence increased competition between bankers and brokers. A similar trend, but slower and less marked, is observed in long-term interest rates as a result of the growth of life insurance companies, the development of mortgage banks and the emergence of a national industrial stock market. In short integration resulted from the rise of financial intermediaries that resulted in the disappearance of the quasi-rents. Williamson’s model perfectly illustrates the convergence of interregional interest rates. He postulates that agriculture financed industry in the Midwest from 1875 onwards. A fifth of savings in the East was transferred to the West in 1870 but the flow direction changed from 1885 onwards, albeit on a reduced scale.

Williamson considers that counterfactual analysis must be performed in order to appraise the capital immobility, assuming that savings are entirely mobile and so transaction costs are nil and adjustment performed without delay.

The results are surprising. The imperfection of capital markets had a strong effect on the economic structure, allowing agriculture to decline more quickly, but had practically no effect on per capita income. Growth was therefore not affected. Furthermore Williamson observes that interest rates were not affected and when they were this would have been less marked if capital mobility had been perfect. In short Williamson showed that the poor functioning of the capital market in no way prevented industrialisation (measured by the decrease in the proportion of the agricultural working population in the total working population or by that of agricultural production in GNP). This approach calls into question a number of well-established ideas and especially those of Gerschenkron [1962, 1968].

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4. Farmers’ discontent Farmers’ discontent emerged periodically in the United States (after 1865 and in the 1890’s). The complaints are well known: fall in the price of agricultural products (and hence of incomes), exaggerated gains by intermediaries benefitting from their monopolistic position, usurious interest rates and substantial debts. Are they justified? Williamson shows that the terms of trade were favourable to farmers as relative farm prices tended to increase. Real interest rates fell strongly after 1880. In addition agricultural labour productivity increased as did yields and average farm acreage. However real land prices jumped in an extraordinary manner during the Great Depression. This boom was not the result of irrational speculation but related to the halving of real farm mortgage rates.

In fact land rent only increased slightly. But land values doubled between 1870 and 1900. Williamson considers that specialists tend to lay too much emphasis on farmers’ incomes without paying attention to the considerable increase in the value of their assets as most had owner-operator status. This is where the paradox lies. Farmers also complained about poor allocation of resources. As in some under-developed countries today, agricultural credit in the 1870’s was inadequate and growth sub-optimal as a result of over-vigorous industrialisation. In contrast industry was in turn the victim of this non-optimal distribution in the 1890’s. Agrarian protests in the Midwest ceased at the same time.

5. Agricultural performance “Abundance of land diverted too much capital and labour to agriculture!” This commonly held view turns out to be false as American agriculture suffered from a shortage of capital in the 1860’s and 1870’s. The hypothesis put forward is that the existence of a border between the two regions studied by Williamson should have reduced the labour supply for industry thus slowing-down industrialisation and causing a rise in real wages.

Williamson used counterfactual analysis to test these proposals comparing what actually happened with two hypotheses. The first involves intensive agricultural development with a constant land stock equal to that of 1870 (indicating the early ‘closing of the frontier’). The second consists of extensive development with a land stock increasing by 4% per year (the real rate was 1.4% per year from 1870 to 1890). Williamson attempts here to assess the relative effects of the disappearance of the frontier by first examining the consequences for farm yields. In 1900 these would have been twice as high with fixed land stock (the use of capital per unit area would have increased considerably at the same rate as the labour factor). Mechanisation is thus not related to the increase in available land but much more to the relative increase in price of labour. In

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addition westward expansion resulted in a decrease in yields after 1890. In short, as was mentioned above for the Great Depression, abundance of land had only a marginal effect on the growth of per capita income. Furthermore the ratios of regional growth rates remained the same. As for wages, according to Williamson, the early closing of the frontier caused a 7% decrease for farm workers and only 2% for workers in the East in 1910. Here again Williamson was led to reject the dominant views of his time and especially that of Turner [1986]. The abundance of available land did not markedly increase wages in industry after 1870. It could not have the effects attributed to it with regard to the use of a capitalist development mode or social relations. Finally, the gradual closing of the frontier favoured industrialisation. Williamson’s counterfactual analysis made it therefore possible to appraise the effects of technical progress and gains in agricultural productivity. Had the total productivity of factors been nil the agricultural working population would have peaked in 1885 instead of 1895. Williamson therefore concluded that the gains in agricultural productivity delayed industrialisation and that the negative effects outweighed the positive effects of the closing of the frontier. This delay had no effect on a possible decrease in per capita income (quite the opposite). An increase in per capita income is therefore not synonymous with industrialisation.

6. Transport and the role of the railways In contrast with Fogel [1964] who uses a partial equilibrium model and, by the way, did not explore the full complexity of interconnected effects, Williamson considered that the social savings generated by the railways were significant.

The main effects originated from the improvement of interregional communication. Simultaneously the decreased transportation costs had side-effects on the industrialisation of regions like the Midwest that depended on goods manufactured in the East. The decrease in the price of domestic transport would also have slowed migration flows to the West as it contributed to the lowering of the relative advantage of real wages in Western regions in comparison with those in the East. Going on from this Williamson considered therefore that urbanisation and industrialisation might have been slowed by the development of railways. This idea radically questioned the thesis of Walt Rostow [1960] in favour of the railways as a key component of the growth of industrialisation, of the colonisation of land and of urbanisation.

From a purely macroeconomic perspective Williamson nonetheless agreed that the railways had a net positive effect on economic growth. Without the railways, (Fogel’s counterfactual hypothesis), Williamson estimated that the American GNP would have been 21% smaller from 1871 to 1890 than it actually was. This point should nonetheless not be taken too seriously as the

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Williamson model cannot truly address the geographic expansion of the market through the spread of the railway system in the country. Furthermore constant yield production functions do not allow him to take into account the increasing economies of scale possibly implied by market expansion. The difficulty of Williamson’s exercise lay above all in the construction or calibration of a price series for transport as the prices published were often very different from the actual prices. Once again, instead of hypothesising a world without railways as Fogel did, Williamson probably asked a more relevant question: what is the effect of the convergence of regional prices on American development? His simulation is based on the assumption that transport prices remained constant at the level reached in 1870, thus assuming a world without progress in the railway sector. With transport prices remaining constant per capita GNP would have increased much less from 1868/1878 to 1884/1893 (at 1.81% per year) than it actually did (2.49%). The capital accumulation rate would have been only 5% per year rather than 6%. Social savings would have reached the impressive figure of 21% in 1890. Although this does not fully prove that the railways were an essential determinant of American economic development, the informed reader must agree with Williamson that the remarkable performance of the American economy during the ‘Gilded Age’ was also related to the improvements in interregional and intraregional transport between the Civil War and 1890. Williamson’s simulations provide us with another very surprising result: the share of agriculture in total GNP would have been markedly lower with a constant price of transport. So, logically, it follows that the decrease in transportation costs had a powerful negative effect on industrialisation and slowed down the shift of the working population away from agriculture to the secondary sector. Industrialisation is therefore not always necessarily synonymous with economic growth.

At the end Williamson considered that the railways slowed industrialisation but nevertheless enhanced economic growth. He considered that this finding (that lower industrialisation and the maintenance of an important agricultural sector does not necessarily translate into slower growth) should make all economists cautious about the use of indexes of employment distribution by sector as a measure of economic development.

7. Exports Were exports (mainly of grains) an engine of economic growth in the US or, in contrast, did they cause only the variation of the growth rate? This question asked by Williamson leads to a more fundamental question on the effect of world market conditions on economic growth in the United States. For farmers the situation was clearly one of worsening terms of trade (especially in the

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early 1870’s) between the prices of imported industrially produced items and the prices of exported agricultural foodstuffs at Eastern ports.

In order to understand the multiple effects Williamson uses a counterfactual by assuming that terms of trade remained constant throughout the period at their 1870 level (the most favourable for agricultural products). The worsening of world market conditions at the expense of American grain exports caused an array of dynamic effects. First, the increase of capital stock was less important than if the terms of trade had remained constant – but the depreciating impact of the Great Depression would have taken place anyway. The roots of this depression did not lie in world market conditions. Nevertheless per capita GNP would have increased a bit more quickly. The possibility that economic instability was partly due to external influences cannot be completely ruled out. The situation of farmers would have been better with constant terms of trade as rents, yields and land prices would have risen faster. External conditions hampered their growth. Farm mechanisation would have benefited from the relative fall in capital goods prices and real wages would have increased resulting from the acceleration of the accumulation rate of capital. In 1910, the agricultural working population would have been 34% larger than it actually was and it would have continued to grow steadily instead of reaching a peak in 1895. With constant terms of trade the country would have not been industrialised before 1895 as the proportion of the working population employed in industry would have remained the same. Industrialisation during the 25 years following 1870 cannot therefore be considered as an (national American) endogenous phenomenon. Williamson considered that it owed much to world market conditions, especially as the elasticity of foreign demand for grain in relation to its price was considerable.

8. Immigration Williamson also revealed a complex mechanism in the evolution of mass-migration by making a clear distinction between the pull factors exerted by America and the push factors in the departure countries. The migration process is considered to be linked mainly to domestic economic and demographic conditions in the European countries of departure. The empty land in the West would therefore once again be just a myth in explaining American economic growth.

We know that traditional economic history tends to give a very considerable weight to mass-migration in the rapid economic growth of 19th century United States. To measure this weight Williamson used the counterfactual hypothesis that there were no push factors in Europe from 1870 to 1910, leaving just the pull forces originating from the endogenous developments of the US economy. Under these conditions the foreign born population would have

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been 19% larger than the one observed but real wages in industry in the East would have remained the same. The attractivity of the frontier territories – the famous mirage of land for the taking – does not seem to have played any role at all with regard to immigration as the overall increase in the foreign-born population remains identical whether the land stock is constant or increases by 4% per year. Likewise the assumption that the demographic pattern of the United States, with a characteristic fall in the natural rate of increase, truly affected immigration through an increase in real wages cannot be accepted.

Williamson considered therefore that the conditions in Europe, treated as exogenous for America, played a much greater role than the frontier or domestic population conditions in the United States. It follows that the key elements to explain European immigration have to be found in the comparative levels of industrialisation and economic growth in the transatlantic economy.

Williamson’s model therefore enables the economic historian to properly gauge the effect of immigration which formed 26% of the total increase of the working population from 1870 to 1910. If America had closed the doors to immigration in 1870, as it did in 1924, industrialisation would have been slowed down even though per capita GNP would have increased slightly faster. We again find the non-complementarity between industrialisation and growth stressed in a preceding section.

Conclusions By applying a CGE methodology and calibration techniques to the important issue of American development between the Civil War and World War I, Williamson’s pioneering approach was, in economic history, the first elaborated form of a neoclassical equilibrium model applied to history aiming at solving the complex problems implied by the interconnection and the integration of markets whilst identifying the influences exerted on these markets by exogenous factors. The message of Williamson’s research is quite simple: to outline and initiate some of the new devices being employed today, at an international level, in cliometrics – the use of economic theory in general and model building in particular, the reliance upon quantification to buttress those models with historical data, the use of the historical discourse and the use of statistical theory and econometrics to combine models with data in a single consistent explanation. The cliometric models are powerful in part because of their internal consistency, in part because, combined with statistical and econometric techniques, they can assure consistency between available data (quantification) and the causal assertions embedded in the model, in part because they may facilitate the derivation of conclusions not intuitively obvious from the outset (counterfactual speculation).

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Williamson’s research could also be seen as being in line with Friedman’s thinking, further investigated by the school of rational expectations (equilibrium business cycles). It was obviously Lucas [1976] who expressed the most severe attack against all current macro-economic models. Lucas criticised the lack of micro-economic foundations in Keynesian based models. Economic variables resulted from individual choices conditioned by expectations on the future state of the economy. It was essential to take into account the way people constructed these expectations otherwise it would be impossible to devise any economic policy.

As early as 1973 Lucas devised a model based on imperfect information and rational expectations. The Walrasian paradigm was abandoned; agents were supposed to have an imperfect vision of prices, after all. The starting point of the analysis rested on a big scale economy and decentralised markets. Hence agents took part in micro-markets and had only very imperfect information on the other markets and the price system. Their perception of random shocks could lead them to false interpretations of the price signals and to undertaking actions which would disturb the whole economic system.

Lucas’ supply curve defined the product as a decreasing function of the price surprise, i.e. the unexpected rise of the general price level; it was Lucas’ criticism of the Phillips curve. As a consequence non-anticipated inflation could lead an individual to believe that the relative price of his output had increased and therefore be tempted to increase production. The result was a money-based cycle around a long term growth path which characterised an economy at equilibrium. The money supply caused shocks to the system, leading to cyclical fluctuations, equilibrium cycles, where the propagation of the cycle can only originate in the agents’ optimizing behaviour in reaction to shock. It was not enough to introduce shocks in the Keynesian system to describe fluctuations: economic movements had to be deducted from the agents’ responses to these external impulses. In fact Lucas’ analysis showed how an equilibrium model with decentralised markets and imperfect information could account for the effects of nominal shocks and real shocks on output. As for demand shocks, they had an impact on output only if they were not anticipated.

Although it was favourably received Lucas’ theory proved incapable of explaining the persistence of output gaps (see for instance Modigliani’s criticism).

Lucas later introduced the costs of capital formation to account for this phenomenon of persistence. But Lucas’ position was not sufficiently convincing for the supporters of the theory of cycles at equilibrium, who called on other types of shocks to reproduce persistence in the observed fluctuations, namely technological shocks.

The supporters of this new line of thought, called Real Business Cycle (RBC), defined it as the result of an optimal adaptation of the economy to equilibrium. They revived the neo-classical explanation of economic fluctuations.

Following Lucas’ initial path, they aimed at integrating the concept of cycle into

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the Walrasian paradigm to express economic phenomena in terms of equilibrium. However they reversed Friedman’s and Lucas’ monetarist analyses as they tried and showed that most fluctuations could be explained without introducing a monetary disturbance. These fluctuations were supposed to result from optimal reactions of economic agents to shocks of the total factor productivity (the overall productivity of factors). As these shocks were exogenous and random the evolution of the cycle had to be of stochastic nature (quasi-cyclical). The economic cycle was, in that case, an oscillatory motion of the natural output and not the output gap to the trend since the factors which caused it were also at the source of growth. Hence the usual dichotomy between the sources of growth and the sources of fluctuations was not justified as the latter corresponded to the very variations of the natural growth rate, to the variations of productivity.

The first Real Business Cycle (RBC) models were developed by Kydland and Prescott [1982] and Long and Plosser [1983], in a complete break with the traditional view of the cycle. Firstly, this approach considers that monetary policies have no bearing in the cycle dynamic; it also insists on the exogenous character of technological shocks. Secondly, it considers that cycles are not an expression of disequilibrium; on the contrary they are the gauges that measure an economy’s best adjustment to equilibrium. Lastly, it prevents cycles from being seen as variations of a same trend rather than changes to the trend. In fact it is an integrated vision of the growth of cycles.

The RBC founding authors’ project is, in fact, clear to the keen observer; it is to understand the cyclical evolution of the economy. To do this the model associates a constant scale-of-economies production function with an equation of capital accumulation, added to various constraints. In fact the RBC theorists construct a model of calculable equilibrium. They introduce chance shocks so that the product resulting from the model’s equilibrium fluctuates as does GDP in real terms.

Concordance between the simulated fluctuations and those of the real economic variables is tested. Where it is found the model is considered to represent the economic dynamic with a strong argument: that the cycles are thoroughly exogenous, with productivity variations coming from climate or international events. However contestable the RBC approach, it is today a major macroeconomic research project. Its advantage obviously lies in its methodology: quantitative simulations to simplify economic representation; however the underlying economic message in this approach remains relatively weak.

With the new century cliometrics develops an increasingly quantitative projection of economics into history for a better understanding (wie es ­eigentlich gewesen ist) and explanation of past events, of path dependence, but also for a more successful conception of present day or even future economic growth!

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References Fogel, R., 1964, Railroads and American Economic Growth. Essays in Econometric History, The Johns Hopkins Press, Baltimore.

Friedman, M., 1953, Essays in Positive Economics, The University of Chicago Press, Chicago.

Gerschenkron, A., 1962, Economic Backwardness in Historical Perspective: A Book of Essays, Harvard University Press, Harvard.

Gerschenkron, A., 1968, Continuity in History, and Other Essays, Harvard University Press, Harvard.

James, J., 1984, The Use of General Equilibrium Analysis in Economic History, Explorations in Economic History, vol. 21: 231–253.

Kelley, A., Williamson, J., 1971, Writing History Backwards: Meiji Japan Revisited, Journal of Economic History, vol. 31: 729–776.

Kelley, A., Williamson, J., 1973, Modelling Economic Development and General Equilibrium Histories, American Economic Review, vol. 63: 450–458.

Kelley, A., Williamson, J., 1974, Lessons from Japanese Development. An Analytical Economic History, The University of Chicago Press, Chicago.

Kydland, F., Prescott, E., 1982, Time to Build and Aggregate Fluctuations, Econometrica, vol. 50: 1345–1370.

Lewis, A., 1954, Economic Development with Unlimited Supplies of Labor, Manchester School of Economic and Social Studies, vol. 22: 139–191.

Lindert, P., Williamson, J., 1980, American Inequality. A Macroeconomic History, Academic Press, New York.

Long, J., Plosser, C., 1983, Real Business Cycle, Journal of Political Economy, vol. 91: 39–69.

Lucas, R., 1976, Econometric Policy Evaluation: A Critique, in: Brunner, K., Meltzern, A. (ed.), The Phillips Curve and Labor Markets, Carnegie-Rochester Conference Series on Public Policy 1, North Holland, Amsterdam: 19–46.

Robinson, J., 1956, The Accumulation of Capital, Macmillan, London.

Rostow, W., 1960, The Stages of Economic Growth. A Non-Communist Manifesto, 3rd ed. (1990), Cambrige University Press, Cambridge.

Temin, P., 1971, General-Equilibrium Models in Economic History, Journal of Economic History, vol. 31: 58–75.

Turner, M., 1986, English Open Fields and Enclosures: Retardation or Productivity Improvements, Journal of Economic History, vol. 46: 669–692.

Williamson, J., 1974, Late Nineteenth-Century American Development: A General Equilibrium History, Cambridge University Press, London.

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Synthetic ‘real socialism’: a counterfactual analysis of political and economic liberalizations1 Ilaria Petrarca,2 Roberto Ricciuti2

Abstract : We evaluate the effect of the 1989 shock over economic development in four Eastern European countries. We apply a counterfactual approach and define the shock alternatively as the trigger for economic openness, political competition, or both. The main result is an effect of economic freedom larger than the one of democratization. In Poland and Bulgaria we find a positive impact of economic freedom, whilst in Bulgaria there is also a smaller effect of democratization. In Albania, after an initial recession, economic freedom helps recovery. Finally Romania does not show any robust effect.

Keywords : economics of transition, synthetic control estimator, democratization, economic freedom.

JEL codes : C21, C23, O11, O43, P27.

Introduction The fall of the Berlin Wall in November 1989 was the final stage of the Soviet Union domination over Eastern Europe and the consequent loss of influence over those countries. The set of reforms that followed determined a transition path from a centrally-planned to a market economy and a simultaneous switch from dictatorship to democracy. The transition represented a season of deep institutional change whose costs sometimes outweighed the benefits. All Eastern European countries experienced an initial output fall which has been more or less dramatic, more or less long-lasting, according to each country’s specificities. Two decades after 1989 disparities between countries still remain.

Our research question is the following: given that the transition affected both economic and political aspects, which was the most responsible for the 1

Article received 12 June 2014, accepted 10 September 2014.

University of Verona, Department of Economics, Vicolo Campofiore 2, 37129 Verona, Italy, corresponding author: Roberto Ricciuti, e-mail: roberto.ricciuti@univr.it.

2

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initial fall and subsequent upsurge in output? That is, which of these freedoms is more important in shaping economic outcomes? Transition countries seem very good candidates to answer these questions given the unique “natural experiment”3 they have been subjected to.

To address these issues we apply a counterfactual approach, the synthetic control estimator [Abadie and Gardeazabal 2003; Abadie, Diamond and Hainmueller 2010, 2014], which is best suited to address quasi-experimental data. This methodology provides data-driven comparative case studies. The synthetic control accounts for the presence of a time-varying impact of country unobservable characteristics and therefore overcomes a major drawback of more standard estimators. The advantage of this approach is the transparent construction of the counterfactual outcome of the treated country, that is, a linear combination of untreated countries. The comparison countries that form the synthetic control (and their relative weights) are selected based on their similarity to the treated country before the treatment takes place, both with respect to past realizations of the outcome and the standard explanatory variables used in the growth literature.

The simultaneity between democratization and liberalization makes our treatment a bi-dimensional one. Therefore, the choice of the donor pool is crucial. If we argue that the fall of the Berlin Wall triggered growth through the democratization of Eastern European countries we should select only the pool of non-democratic countries as donors. Similarly, if we believe that the Berlin Wall stimulated growth through the transition to market economy, we should select only countries that did not implement any economic reform. Therefore we perform three experiments: one in which the donor pool is made of countries that did not experience democratization (we call the non-politically free), one with the countries that did not go through economic liberalization (noneconomically free) and finally a donor pool that included countries that neither implemented political nor economic liberalization (non-free).

The paper is organized as follows. Section 2 reviews the literature on economic transitions in Eastern European countries. Section 3 presents the methodology and the data we use, whereas results are discussed in Section 4. Conclusions are drawn in Section 5.

3

A natural experiment is an empirical study in which individuals (or clusters of individuals) exposed to the experimental and control conditions are determined by nature or by other factors outside the control of the investigators. Thus natural experiments are observational studies and are not controlled in the traditional sense of a randomized experiment. Natural experiments are most useful when there has been a clearly defined exposure involving a welldefined subpopulation (and the absence of exposure in a similar subpopulation) such that changes in outcomes may be plausibly attributed to the exposure. In this sense the difference between a natural experiment and a non-experimental observational study is that the former includes a comparison of conditions that pave the way for causal inference, while the latter does not [Dunning 2012].

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1. Literature This paper is related to more than one strand of the literature drawing insights from the economics of transition and the political economics that explain the role of both economic and political competition on growth.

The economics of transition has as its main object the study of the formerly socialist countries after 1989. This region, albeit geographically welldefined by a number of contiguous states in Eastern Europe and Central Asia, is extremely heterogeneous. Scholars distinguish five main clusters: CentralEastern European countries (CEEC), Baltic Republics, South-Eastern European Countries (SEEC), Yugoslavia and the Commonwealth of Independent States (CIS). For the purpose of this work the argumentation will focus on CEEC’s (Slovenia, Poland, Hungary and the Czech Republic) and SEEC’s (Bulgaria and Romania). Albania does not fit into any category, having the poor income level of some CIS countries and the degree of exposure to Western Europe comparable to Yugoslavia and CEEC’s [Myant and Drahokoupil 2011: xviii].

The attention of scholars to transition economies derives from the uniqueness of the natural experiment provided by the end of the monopolistic political power of the Communist Party. This shock led to political freedom which in turn was followed by economic freedom. The sequence of the two transitions, however, is blurred by the internal country dynamics. As an example, reforms in Hungary started in 1968 with the launch of the New Economic Mechanism (NEM), that is far before the political status quo was questioned. In Poland, before being advised by the IMF in the 1990’s,4 an attempt to move away from central planning was made in the 1980’s, with the generation of severe fiscal imbalances. Interestingly, the negative social impact of the deregulation of prices in Poland was mitigated by the opposition of the Solidarność union which obtained wage indexation. This aspect makes another link between democratization and economic price liberalization.

From the economic perspective the literature usually refers to the two main strategies adopted by those countries as “big-bang” and “gradualism” [Dewatripont and Roland 1993]. They differ according to the speed of the reforming process, and they are supported or criticized on the basis of uncertainty concerns [Dewatripont and Roland 1995]. Interestingly, Marangos [2004] argues that the shock therapy was inconsistent with a democratic process of decision-making and that those governments established after 1989 opted for gradualism to cope with internal consensus. This perspective intensifies the link between the two types of transition we study. Nonetheless, the initial pre-transition conditions seem to be the ones that explain the policy adopted: countries with a good economic situation preferred a big-bang strategy, e.g.

4

For a comprehensive review of the nature and scope of change within post-socialist Polish enterprises, see Stepién and Robinson [2002].

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Poland and the “Balcerowicz programme”. Albania was a poor country and implemented an “aborted” big-bang policy. Finally, also the SEE countries, Bulgaria and Romania, resorted to gradualism. The initial conditions matter also for the attractiveness of FDI which were almost absent before 1994. FDI concentrated mainly in CEE’s, i.e. the Czech Republic, Poland and Hungary [Bevan and Estrin 2004].

In the early stage of transition all the countries experienced an output decline,5 regardless of the strategy adopted. The reason for the depression was explained by the persistence of communism [Brenton, Gros, and Vanadille 1997]. Przeworski [1991], however, describes the time consumption pattern under both gradualism and big-bang as U-shaped curves, with big-bang being narrower and deeper, indicating a stronger negative effect at the beginning of the process and a faster recovery compared with gradualism. Overall, scholars find successful examples of both gradualism and shock therapy reforms [Heybey and Murrell 1999]. Claessens and Djankov [2002] find a beneficial effect of privatization on the productivity of enterprises in all the CEEc and SEEc countries, except for Romania. Two decades after 1989 the CEE and SEE countries have diverged, both in terms of growth measured by GDP per capita and in terms of the Human Development Index, with the CEEC always being the most developed ones. In the light of this information, the question “how a “synthetic ‘real’ socialist” country that did not experience transition would have performed?” gains traction.

In the aftermath of 1989 the attention to economic reforms was combined with a lively debate over institution-building [Roland 2000, 2004]. In particular, the need for intervention was felt in the SEE countries and the Western Balkans, including Albania, which showed the highest rates of corruption in the area,6 the lowest reliability of the rule of law and accountability mechanisms, depicting a dramatically low level of government effectiveness.7 Consistent with these initial conditions, Albania faced a very slow political transition that lasted until the early 2000’s. On the other hand, Poland started from a middle level, followed by Bulgaria and Romania in a rapid democratization process.

The second stream of literature concerns the relationship between democracy and growth. This relationship is one of the most elusive in economics since it is extremely weak (and most often negative).

5 For a discussion regarding the nature of the depression, refer to Myant and Drahokoupil [2011: 54].

6 Some authors claim that corruption was introduced as a ‘greasing the wheels’ mechanism in socialist systems aimed at having access to scarce goods as the Russian practice of blat.

7 Dimitrova-Grajzl [2007] illustrates a return to pre-communist traditions and norms, suggesting the strengthening of a historical legacy over present day development that has been found in other environments. Specifically, Karaja [2013] provides empirical evidence of the impact of both the Ottoman and the Habsburg legacy over growth in this region.

I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis

73

Barro [1996] analyses a cross-section of about 100 countries from 1960 to 1990 using a system of three equations. Estimations are done by instrumental variables: the instruments are the five-year earlier value of log GDP, the actual values of schooling, life-expectancy, rule of law and terms of trade and the earlier values of the other variables (which include the fertility rate, government consumption ratio, public educational spending ratio, black market premium, investment ratio) involved in the estimations. A positive non-linear effect is found: the middle level of democracy is the most favourable to growth, the lowest comes second and the highest third. According to Barro, maintenance of the rule of law, free markets, small government consumption, and high human capital are the most important determinants of growth. Tavares and Wacziarg [2001] identify eight variables that can possibly be endogenous to democracy: political instability, governance distortions, government size, human capital, income inequality, trade openness, and physical capital accumulation. They find that the overall effect of democracy on growth is negative. This result is the outcome of a positive effect on growth through human capital accumulation and reduction of income inequality, and a negative effect of reduced physical capital accumulation and increased government consumption. Persson and Tabellini [2009] argue that because investment reacts to expected returns, and not just actual, regime change affects growth. Growth will accelerate before an anticipated democratization and decelerate well before an anticipated coup. In their model the probability of regime change depends on a country’s “democratic capital”. This capital is assumed to accumulate in years of democracy and in countries with democratic neighbours but to depreciate under autocracy. The results are consistent with the model in two samples: one from 1960 to 2000, and another one dating from 1850 to 2000. Along the same line of “democratic capital” and dealing with a number of issues ranging from measuring democracy to modelling the dynamics of GDP in the years before democratization, Acemoglu et al. [2014] find a significant and positive effect of democratization on GDP (about 20% in three decades, implying that the rise of democracy in the last 50 years has yielded about 6% higher world GDP).

Papaioannou and Siourounis [2008] consider democratization processes for about 65 countries over the period 1960–2000. They employ an event study approach and analyze growth before and after democratizations. The dynamic panel estimates imply that democratizations are associated with a one percent increase in real per capita growth. During the transition, growth is slow and even negative; after the third post-democratization year growth peaks and then stabilizes at a higher level. Persson and Tabellini [2008] explore issues on the relationship between democracy and growth emphasizing the role of heterogeneity. They combine the above mentioned method with the propensity score matching estimator. This semi-parametric methodology relaxes linearity and it is therefore well suited for the study of heterogeneity. They uncover a positive but insignificant effect of transitions from autocracy to democracy.

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The third strand addresses the timing of political and economic liberalizations. Giavazzi and Tabellini [2005] and Persson and Tabellini [2008] apply a difference-in-difference methodology, exploring issues ranging from the relationship between political and economic liberalizations to the effect of democracy on growth. They find positive feedback effects between economic and political reforms. The timing of events indicates that causality is more likely to run from political to economic liberalization, rather than vice versa, but feedback effects in both directions cannot be excluded. The sequence of reforms matters: countries that first liberalize and then become democracies do much better than countries that pursue the opposite sequence. Grosjean and Senik [2011] disentangle the direction of causality from democracy to support for a market economy and from market development to support for democracy in a spatial regression discontinuity approach based on frontier-zones in Central and Eastern Europe and in the former Soviet Union that are under different political regimes but are integrated. They find a positive and significant effect of democracy on support for market economy but no effect of liberalization on support for democracy.

2. Methodology and data The set up of the counterfactual analysis requires a careful description of its main elements: the treated group, the treatment and the donor pool.

The set of treated units consists of Albania, Bulgaria, Poland and Romania.

The choice of the countries is dictated by data availability. These countries represent different clustered regions within Eastern Europe, as described in Section 2: Poland is part of Central Eastern Europe, Bulgaria and Romania are Southern Europeans, whereas Albania is part of the Balkan area and was strongly insulated and deprived during the communist rule and, as seen before, does not belong to any of the groups into which Eastern European transitions countries are usually divided.

The outcome variable that we consider is a proxy for economic development which we label GDP. It is measured as the PPP Converted GDP Per Capita at 2005 constant prices from the Penn World Tables 7.1 [Heston, Summers, and Aten 2012]. The “1989 treatment” is uniquely defined in time [the fall of the Berlin Wall in November] but it does not represent a clear-cut phenomenon.

This step is fundamental, because “using inappropriate comparisons may lead to erroneous conclusions” [Abadie, Diamond, and Hainmueller 2014: 2].

Specifically, for the purpose of the present analysis the 1989 shock may represent: (i) the trigger of economic transition, (ii) the removal of barriers for political transition, (iii) the beginning of a twofold transition. Depending on the treatment that we consider, we define three alternative sets of donors.

75

I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis

First, we include in the non-economically free donor pool all those countries that between 1995 and 2010 show the Economic Freedom index (EFW hereafter, taken from Miller et al. 2014) at the most equal to the maximum initial level in the sample of treated units, that is EFW = 55.2 (see Figure 1). Secondly, we consider political freedom only and we build the non-politically free donor pool with those countries that between 1995 and 2010 show a Polity IV [Marshall, Jaggers, and Gurr 2012] DEMOC value equal to 0 in all the periods. Finally, we consider the 1989 shock as the trigger for a multi-dimensional transition, we include in the most stringent non-free donor pool those countries that are both non-economically and non-politically free. Appendix 1 lists the countries in each donor pool.

Figure 1 shows the two indices for the countries included in the study. The index for democracy (or lack of it) is available for a much longer time than the economic liberalization index, which starts at the middle of the ‘90’s. We see that political liberalization is much more similar across countries than economic liberalization. The former starts in 1989 and, with the exception of Albania that experiences a shortly-lived reversal, it has an upward trend for all Albania

Bulgaria

70

10 8

60

6 4

50

2 40

0 1970

1980

1990

2000

2010

1970

1980

year

1990

2000

2010

year

Poland

Romania

70

10 8

60

6 4

50

2 40 1970

0 1980

1990 year

2000 EFW

2010

1970 DEMOC

1980

1990

2000

2010

year

Figure 1. Economic freedom (EFW) and democratization (DEMOC) in the treated countries Source: Own calculations from EFW [Miller, Kim, and Holmes 2014] and Polity IV [Marshall, Jaggers, and Gurr 2012] DEMOC data

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the countries. In turn, economic liberalization experiences one or more reductions in all the countries over the time-span we consider.

Once the analysis has been set up we build the synthetic control estimator as: k

W * = argmin∑vm ( X1m − X0mW )2, (1) m =1

where: m = 1, …, k is the set of explanatory variables employed as predictors, X1 represents the pre-intervention characteristics of the treated unit, X0 includes the values for the donor pool (never treated), W is the vector of weights, ranging between zero and unity, attached to each observation in the donor pool such that the sum of the weights equals one, vm is a weight that reflects the predictive power of the m-th determinant on the outcome.

The synthetic control estimator of the treatment is given by: J +1

GDP1t − ∑w *j GDPjt, (2) j =2

where: J + 1 is the number of countries, where unit 1 is the treated one and j = 2, …, J + 1 indicates the donor pool, w* is the synthetic control obtained with the minimization in equation 1, GDP is the outcome variable.

Following the literature [Nannicini and Ricciuti 2010; Abadie, Diamond, and Hainmueller 2014] we include in the set of k explanatory variables: the past five-years’ averages of the dependent variable to account for the lagged levels of economic development; the rate of change of population, Population growth; the investment share of the GDP, Investment (all these variables are taken from Heston et al., 2012); the share of population aged 15 and over that completed secondary level school, Schooling [Barro and Lee 2013]; a dummy variable equal to 1 if the country is democratic, Dem;8 the annual GDP deflator, Inflation [World Bank 2012].9 Table provides some descriptive statistics for these variables.

Given the issues raised in the previous Section and the methodology outlined here, we can spell out the specific questions we ask in this paper: 8

Dem = 1 if democ > 5 in the Polity IV dataset, dem = 0 otherwise. This variable has been dropped from the predictors when we use either the non-politically free or the non-free donor pool, because the countries have been already selected according to their degree of democracy.

9 The inflation data has many missing values and this limitation is especially severe for Poland where no information is available before 1990. Therefore we dropped Inflation when assessing the effect of the treatment over Poland.

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I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis

Descriptive statistics Variable

Obs.

Mean

Std. Dev.

Min

GDP

4797

7,963.19

9,789.99

160.8

55,838.6

GDP average 1970–1974

4797

5,566.04

6,393.08

385.3

30,493.4

GDP average 1975–1979

4797

6,256.53

6,999.23

398.5

29,779.7

GDP average 1980–1984

4797

6,658.14

7,506.58

446.9

29,947.2

GDP average 1985–1989

4797

7,243.72

8,492.30

403.8

32,184.6

Economic Freedom index

1729

59.58

10.65

15.6

88.9

Population growth

4680

0.02

0.02

–0.16

0.2

Investment

4797

22.51

10.84

Schooling

4346

14.08

11.78

Dem

4797

0.47

0.5

0

Inflation

4406

533.26

–33.59

39.4

–11.5 0.03

Max

80.4 53.5 1 26,762.02

Sources: See text.

1. Did the 1989 fall of the Berlin Wall cause growth in the Eastern European countries?

2. Was growth stimulated by economic or political transition?

3. Would a ‘synthetic socialist’ regime have performed better in transition countries?

3. Results The counterfactual analysis is performed by inspecting figures reporting the pattern of the treated unit compared with the pattern of the counterfactual.

Figure 2 shows the results of the analysis using the non-politically free pool of donors. The x-axis represents time, and the vertical line indicates the treatment year, i.e. 1989. The y-axis measures the outcome, that is GDP. The solid line describes the pattern of GDP in the treated country considered, whilst the dotted line is the synthetic control unit.

The most striking result is that democratization did not affect the four countries in the same way. Poland and Bulgaria have always been more developed than the synthetic control unit, suggesting a positive impact of political transition over growth. This impact is stronger for Poland, a country that, as already pointed out, implemented the Balcerowicz Plan in 1989, and in the 1990’s was heavily influenced by the IMF guidance through the transition process. Albania, after an initial decade of output fall, started growing more than the counter-

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factual; in Romania, on the other hand, democracy left unaffected, or slightly worsened, the economic conditions.

The limitation of the synthetic control method is that it does not allow the assessment of the significance of the results using standard inferential techniques. As suggested by Abadie, Diamond, and Hainmueller [2010], however, placebo experiments can be implemented to draw inference. They assess whether the estimated effect for the treated country is large relative to the effect for a country chosen at random. Placebo testing compares the estimated treatment effect for the country under investigation with all the (fake) treatment effects of the control countries obtained from experiments where each control country is assumed to leave real socialism in the same year of the treated country.

If the estimated effect in the treated country is larger than those in most of the (fake) experiments, we can safely conclude that the baseline results are not just driven by random chance.

The placebo test in space illustrated in Figure 3 confirms the evidence of Figure 2.10 The y-axis, this time, measures the difference between the treated and the counterfactual for every country in the donor pool. In this way we check Albania

Poland

7,000

20,000

15,000

5,000

rgdpl

rgdpl

6,000

4,000

10,000

3,000 5,000

2,000 1970

1980

1990

2000

2010

1970

1980

year

2000

2010

2000

2010

year

Bulgaria

Romania

8,000

8,000 rgdpl

10,000

10,000

rgdpl

1990

6,000 4,000

6,000 4,000

2,000 1970

1980

1990 year

2000

2010

treated unit

2,000 1970

1980

synthetic control unit

1990 year

Figure 2. Synthetic controls from the sample of non-politically free donors 10 Following Abadie, Diamond, and Hainmueller [2010] we discard all countries from the placebo tests for which the RMSPE for the pre-treatment period is more than three times larger than the RMSPE for the treated unit under consideration for the same period.

79

I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis Albania

4,000

Poland

6,000 4,000

2,000 2,000 0

0 –2,000

–2,000 1970

1980

1990

2000

2010

1970

1980

_time

2000

2010

2000

2010

_time

Bulgaria

Romania

4,000

4,000

2,000

2,000

0

0

–2,000

–2,000 –4,000

–4,000 1970

1990

1980

1990 _time

2000

2010

1970

1980

1990 _time

Figure 3. Placebo tests (non-politically free donors)

whether our synthetic control is different from other possible controls that can be constructed. The bold line represents the treated unit. Democratization caused a significant output fall in Albania, as the extreme values of the bold line in the top-left panel testifies. This evidence is related to the backwardness of this economy which was also plagued by high levels of corruption and informal economic activity, which represented a tighter constraint to growth. At the same time, political competition significantly triggered growth in Poland starting from the early ‘90’s and, to a lesser extent, in Bulgaria. The robustness of the results (Figure 3) are much more blurred for Romania as the placebo tests do not indicate a stronger effect on the treated if compared to other countries.

All in all, the results of the placebo test basically confirm those of the synthetic control: the results of our experiments tend to be different from other possible experiments in three out of four cases. In the fourth case (Romania) the synthetic control itself was not different from the actual path of GDP and it is neither bigger nor smaller than other combinations of countries.

Similar results, but more clear-cut, are shown in Figure 4, where we employ the set of non-economically free donors. The fit of the algorithm improves and we find a definite growth-enhancing effect of economic freedom in Poland and Bulgaria where the effect is larger than in Figure 2. Albania shows once again

Albania

Poland

7,000 14,000

5,000

rgdpl

rgdpl

6,000

4,000

10,000

3,000 6,000

2,000 1970

1980

1990 year

2000

2010

1970

1980

Bulgaria

2000

2010

Romania 10,000

10,000

8,000 rgdpl

8,000 rgdpl

1990 year

6,000

4,000

4,000 2,000 1970

6,000

2,000 1980

1990 year

2000

2010

1970

treated unit

1980

synthetic control unit

1990 year

2000

2010

Figure 4. Synthetic controls from the sample of non-economically free donors Albania

Poland

3,000

6,000

2,000

4,000

1,000

2,000 0

0

–2,000

–1,000 1970

1980

1990 _time

2000

2010

1970

1980

Bulgaria

2000

2010

2000

2010

Romania

3,000

3,000

2,000

2,000 1,000

1,000

0

0

–1,000

–1,000 1970

1990 _time

1980

1990 _time

2000

2010

1970

1980

1990 _time

Figure 5. Placebo tests (non-economically free donors)

Albania

Poland

7,000

20,000

15,000

5,000

rgdpl

rgdpl

6,000

4,000

10,000

3,000 2,000 1970

5,000 1980

1990 year

2000

2010

1970

1980

Bulgaria

2010

2000

2010

Romania

10,000 rgdpl

8,000 rgdpl

2000

12,000

10,000

6,000 4,000 2,000 1970

1990 year

8,000 6,000 4,000

1980

1990 year

2000

2010

treated unit

2,000 1970

1980

1990 year

synthetic control unit

Figure 6. Synthetic controls from the sample of non-free donors Poland

Albania 10,000

6,000 4,000

5,000 2,000 0

0

–2,000 –5,000 1970

–4,000 1980

1990 _time

2000

1970

2010

1980

Bulgaria

2000

2010

2000

2010

Romania

2,000

4,000

1,000

2,000

0

0

–2,000

–1,000 1970

1990 _time

1980

1990 _time

2000

2010

1970

1980

Figure 7. Placebo tests (non-free donors)

1990 _time

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a pattern of recession and subsequent growth with a switching point placed earlier in time: it seems than economic freedom helped recovery during transition better than political competition. This picture is consistent with the very slow path of democratization of Albania depicted in Figure 1. The effect over Romania once again is ambiguous, showing a small gap between the actual pattern of GDP and the counterfactual. Moreover, this difference is not consistent with the placebo tests in Figure 5. This effect is probably related to the lack of benefits from privatization found by Claessens and Djankov [2002]. For the other countries, in contrast, the counterfactual always lies above or below the other fake treatments, therefore showing a robust positive effect of economic openness over growth (with the slight difference of Albania, for which we find a strong negative effect at the beginning and a strong positive effect at the end, whereas in the middle the counterfactual is mostly in line with the other fake treatments).

When we use the donor pool of non-free countries we find results consistent with the previous discussion (Figure 6) mostly in line with the pool of non-economically free countries. An exception is Romania for which the counterfactual is always better than the actual pattern of GDP. Unfortunately, due to the very small size of the donor pool, the robustness of the algorithm is weaker than before (Figure 7) therefore these results should be taken with some caution.

Finally, we comment on the construction of the synthetic control units.

Appendix 2 shows the weights resulting from the algorithms presented in the previous section. As an example we observe that the synthetic control unit for Albania using the non-politically free donor pool is obtained from the linear combination of Syria (0.782), Cuba (0.166) and Morocco (0.053). In general we observe that Cuba contributes to the counterfactual in all the models as expected given its nature of closed economy ruled by a communist regime. Furthermore, the set of matched donors differs with respect to its size and composition.

Appendix 3 shows the predicted balance between the treated unit and the donor pool which is a broad measure of the goodness of fit of the linear combination. We observe that the lagged five-years’ averages of the GDP and population growth fit quite well between the treated unit and the synthetic; Schooling does not fit very well for Albania and Romania, whilst Investment and Inflation show a consistent divergence between the two columns.11 If we look at the fit of the algorithm, we observe a good match between the treated unit and the counterfactual before the treatment limited by the small number of countries in the donor pool. The root mean squared prediction error (RMSPE), in fact, always shows large values. It measures the “lack of fit between the path of the outcome variable for any particular country and 11 In the models for Poland, as already pointed out, the inflation variable has been omitted because of missing data; furthermore, some of the past five-years’ averages have been dropped in the Polish model using non-politically free donors because of computational problems.

I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis

83

its synthetic counterpart” [Abadie, Diamond, and Hainmueller 2010: 18].

Nonetheless, we note that similar values have been found in the literature [e.g.

Billmeier Nannicini and 2013] and that the RMSPE is always larger for Poland and smaller for Albania.

Conclusions In this paper we have performed a number of experiments to analyze the effect of the fall of the Berlin Wall on growth in four Eastern European countries. We applied a new methodology that allows us to address this issue taking into account both the observable and unobservable characteristics and to draw data-driven comparisons. The effect of 1989 is overall positive although the initial effect was negative and in some countries it lasted for a few years.

Therefore the answer to our first question is positive, whereas the answer to the third question is negative.

The fall of the Berlin Wall brought two changes: one on political institutions that became democratic and one on economic institutions that allowed for private property of means of production and price liberalization. Overall, the effect of economic freedom is larger than the effect of democratization: in Poland and Bulgaria we uncover a large positive effect of economic freedom, whilst in Bulgaria we find a smaller effect of democratization. This finding, which answers our second research question, links our work to the larger literature on political and economic liberalizations. This result is in line with most of this literature but has been obtained in a way that allows us to take into account the idiosyncrasies that history causes in each country. Looking at individual countries, in Albania, after a strong initial recession, there is a recovery driven by economic freedom. The political system during transition was plagued by corruption, a Ponzi-scheme destroyed savings, and the initial conditions were quite bad, since the country was the most isolated in Eastern Europe. There was a strong migration that deprived the country of the young and potentially productive workforce. Poland is the opposite: given its historical background in industrial production it was able to build on these foundations and on the path towards the European Union. Dismantling the previous state-owned industrial companies was a demanding task, but the preconditions (also in terms of political leaders that arose during the opposition to the Jaruzelski rule) were more benign than in other countries. Bulgaria and Romania have been lagging behind Poland: they started with the worst political and economic preconditions and their speed towards joining the European Union was slower.

Romania, in particular, is an outlier in our analysis since it does not show any significant effect comparing the actual with the synthetic economic performance. This effect is possibly related to the lack of benefits from privatization found by Claessens and Djankov [2002].

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Appendix 1. Potential comparison units

NON-ECONOMICALLY FREE: Burundi; Congo Kinshasa; Congo Brazzaville; Cuba; Iran; Laos; Lesotho; Nepal; Syria; Togo; Vietnam; Zimbabwe.

NON-POLITICALLY FREE: China; Cuba; Laos; Morocco; Syria; Vietnam.

NON-FREE: Cuba; Laos; Syria; Vietnam.

2. Synthetic control weights Set of donors Albania

Bulgaria

Poland Romania

Non-economically free

Non-politically free

Non-free

Cuba

0.257

Cuba

0.166

Cuba

0.157

Iran

0.068

Morocco

0.053

Syria

0.843

Syria

0.196

Syria

0.782

Togo

0.473

Zimbabwe

0.006

Cuba

0.711

China

0.315

Cuba

0.667

Lesotho

0.289

Cuba

0.685

Laos

0.087

Syria

0.149

Vietnam

0.098

Cuba

0.642

Cuba

0.966

Cuba

0.947

Iran

0.358

Morocco

0.034

Syria

0.053

Cuba

0.801

Cuba

0.867

Cuba

1

Syria

0.199

Vietnam

0.133

Typically the non-free sample is the intersection of the other two samples. When this does not happen, it is due to the algorithm of the software: for example in the case of Bulgaria, Syria belongs to the potential poll of donors for non-politically free countries, but it is not actually chosen in that treatment, whereas it is selected in the non-free treatment.

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I. Petrarca, R. Ricciuti, Synthetic ‘real socialism’: a counterfactual analysis

3. Predicted balance and rmse 1. Non-democratically free donors Albania

Bulgaria

Poland

Romania

Treated Synthetic Treated Synthetic Treated Synthetic Treated Synthetic GDP average 2988.4 1970–1974

2445.42

3195.37

3572.03

–

–

3540.33

4253.97

GDP average 3272.82 1975–1979

3165.83

4448.03

4342.36

–

–

5695.27

5195.79

GDP average 3514.57 1980–1984

3733.67

5602.41

5571.61

–

–

7028.86

6656.87

GDP average 3576.36 1985–1989

3685.42

6733.37

6451.54

8441.79

8444.01

7199.96

7621.49

0.01

0.01

0.01

0.01

0.01

Population growth

0.02

0.03

Investment

46.68

17.67

27.58

16.57

18.38

8.05

35.34

7.64

Schooling

15.08

5.53

12.49

13.55

12.23

15.56

21.02

15.53

Inflation

–0.53

10.58

0.38

2.59

–

–

2.05

54.23

RMSE

342.07

0.003

382.17

1889.72

687.88

2. Non-economically free donors Albania

Bulgaria

Poland

Romania

Treated Synthetic Treated Synthetic Treated Synthetic Treated Synthetic GDP average 2988.40 1970–1974

2899.80

3195.37

3592.92

6640.93

6838.03

3540.33

4261.15

GDP average 3272.82 1975–1979

3334.35

4448.03

4411.65

8564.59

7660.80

5695.27

5254.37

GDP average 3514.57 1980–1984

3476.24

5602.41

5584.61

7841.87

7243.06

7028.86

6667.18

GDP average 3576.36 1985–1989

3583.31

6733.37

6371.36

8441.79

7601.40

7199.96

7483.00

Population growth

0.02

0.03

0.00

0.01

0.01

0.02

0.01

0.02

Investment

46.68

18.99

27.58

13.31

18.38

17.66

35.39

9.48

Schooling

15.08

6.94

12.50

12.25

12.23

14.29

21.02

13.49

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

–0.53

7.82

0.38

5.38

–

–

2.05

4.58

Dem Inflation RMSE

150.31

392.90

961.56

655.61

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3. Non-free donors Albania

Bulgaria

Poland

Romania

Treated Synthetic Treated Synthetic Treated Synthetic Treated Synthetic GDP average 2988.40 1970–1974

2445.39

3195.37

3620.76

6640.93

4672.80

3540.33

4822.23

GDP average 3272.82 1975–1979

3171.48

4448.03

4448.80

8564.59

5726.58

5695.27

5898.00

GDP average 3514.57 1980–1984

3743.88

5602.41

5638.96

7841.87

7329.92

7028.86

7570.50

GDP average 3576.36 1985–1989

3658.63

6733.37

6345.75

8441.79

8350.02

7199.96

8664.76

Population growth

0.02

0.03

0.00

0.02

0.01

0.01

0.01

0.01

Investment

46.68

16.98

27.58

9.19

18.38

7.78

35.39

7.16

Schooling

15.08

5.40

12.50

12.51

12.23

15.32

21.02

15.98

Inflation

–0.53

10.90

0.38

45.28

–

–

2.05

2.63

RMSE

342.43

396.56

1914.42

1065.88

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Miller, T., Kim, A.B., Holmes, K.R., 2014, 2014 Economic Freedom in the World, The Heritage Foundation, Washington D.C. Myant, M., Drahokoupil, J., 2011, Transition Economies: Political Economy in Russia, Eastern Europe, Central Asia, John Wiley and Sons, Hoboken.

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Papaioannou, E., Siourounis, G., 2008, Democratization and Growth, Economic Journal, vol. CXVIII, no. 532: 1520–1551.

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Economics and Business Review, Vol. 1 (15), No. 1, 2015: 89–102

(Un)finished transition. Stock of knowledge in Poland, 1924–20121 Jacek Wallusch2

Abstract : Technological underdevelopment of the Polish economy has been remarkably persistent. In this paper I focus on the stock of knowledge, approximated by the 10% depreciation rate of accumulated patents granted in Poland, to show its longterm structure and to distinguish its growth phases. I test for long memory and run a Markov-switching autoregressive model. The stock of knowledge is found to be nonstationary and mean reverting. I also discover two well-separated regimes representing slower and faster changes in the stock of knowledge. The latter regime characterises the years between the 1920s and mid-1950s (interrupted by the Great Depression and World War II), mid-1970s and the period after accessing the EU. Keywords : patents, transition, stock of knowledge.

JEL codes : N34, O30, P51.

Introduction For Polish economic history, the time span between the 1920s and 2010s marks the final stage of the great transition from feudalism to capitalism. A transition interrupted for almost half a century by centrally-planned socialism. Ironically, socialism was more efficient in speeding up industrialisation than the interwar governments but did not get rid of post-feudal habits, substituting officials of the Polish United Workers Party for the Polish gentry. The time span of 1920s– 2010s also marks the final stage of technological underdevelopment. Its origins can be traced back to the 17th century. The lack and waste of capital (especially human capital) explains the technological underdevelopment and its remarkable persistent. Even during the first 15 years of transition this characteristic has changed only slowly.

1

Article received 11 September 2014, accepted 14 November 2014.

Instytut Kliometrii i Badań nad Transformacją, Nałęczowska 85/9, 60-472 Poznań, Poland, e-mail: wallusch@ikbt.org.

2

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Recent events show that the technological gap has become considerably smaller. Does it mean that the catching-up is successfully over? Economic history has registered at least three similar periods since the 1920s. The initial boom of the 1920s, the fast industrialisation of the early 1950s and the socialism-with-a-human-face of the early 1970s have noticeably sped up technological development. The speed ups ended quickly, and the Polish economy has failed to achieve a long-lasting technological development.

Does the historical background overshadow recent successes? A long-term analysis presented in this paper calls for caution. Focusing on the stock of knowledge (approximated by the accumulated number of granted patents) in Poland between 1924 and 2012, I investigate its long-term structure and distinguish its growth phases. Since the accumulated stock of knowledge returns to its long-run average, the persistence of technological underdevelopment is not surprising. More importantly, the fast technological catch up caused by the accession to the EU might be soon over. The last time the Polish economy enjoyed a similar speed-up was in the 1970s. What followed this short period were 25 years of a decreasing stock of knowledge. Let us hope that this time is different.

The reminder of this paper is as follows. In the next section I describe the historical background of Polish technological underdevelopment. Section 3 presents the accumulated stock of knowledge approximated by the accumulated number of patents with a 10% yearly depreciation rate. Sections 4 and 5 show the results of long-memory tests and Markov-switching autoregressive model estimations. The accumulated stock of knowledge is a mean reverting process. I found two well-separated regimes, first representing faster changes in the accumulated stock of knowledge, second characterised by slower changes in the stock of knowledge. Last section concludes.

1. An inherited underdevelopment The Polish economy during the interwar period has struggled with many structural obstacles. Low capital level, considerable regional disparities, unsolved social problems and unfinished social reforms, as well as the constant threat of military confrontation with neighbouring countries did not allow Poland to transform into an industrial country. Nor have the obstacles allowed Poland to overcome technological underdevelopment.

Baten and Labuske [2004] noted that Poland had belonged to a group of countries with high primary schooling rates combined with average patenting activity. Indeed, the number of patents granted in Poland during the interwar period has never exceeded 20% of the patents granted in Germany (see Figure 1), the educational gap between Western Europe and Poland has fast become smaller but technological progress lagged behind. Agriculture offered the best example [Roszkowski 1989]. Compared to 1921, the number of ag-

91

1938

1937

1936

1935

1934

1933

1932

1931

1930

1929

1928

1927

1926

1925

20 18 16 14 12 10 8 6 4 2 0

1924

J. Wallusch, (Un)finished transition. Stock of knowledge in Poland, 1924–2012

Figure 1. Patents granted in Poland compared with patents granted in Germany (%) Source: Own estimations based on statistisches reichsamt, Główny Urząd Statystyczny Rzeczypospolitej Polskiej, Wiadomości Urzędu Patentowego, various years 12,000

40,000 35,000

10,000

30,000

8,000

25,000

6,000

20,000 15,000

4,000

10,000

2,000

5,000 2012

2008

2004

2000

1996

1992

1988

1984

1980

1976

1972

1968

1964

1960

1956

1952

1948

1944

1940

1936

1932

0 1928

1924

0

Figure 2. Patents granted and the accumulated stock of knowledge in Poland (1924–2012) Source: GUS and Wiadomości Urzędu Patentowego, various years

ricultural primary schools and high schools in 1936 has doubled, whilst the number of students has increased from 1900 to 5000. A similar pattern has applied to university education. Improvement of the soil, the use of fertilisers, and mechanisation, however, stopped or even decreased. The number of patents granted in Poland (1924–2012) is presented by Figure 2.

Technological development also suffered from regional disparities. The technological centre moved from southern voivodeships to Warsaw. Wolf [2007] explains this tendency by the installation of universities in Warsaw and elsewhere, but strong centralisation might be considered as well. Another aspect of regionalisation is connected to the influence of German and Austrian tech-

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Table 1. International comparison of granted patents in 1936 Country

Number of patents

% of patents granted in Poland

Latvia

113

6.3

Estonia

155

8.7

Bulgaria

253

14.1

Yugoslavia

712

39.8

Romania

1,099

61.4

Poland

1,791

100

Hungary

2,009

112.2

Czechoslovakia

3,650

203.8

Austria

3,800

212.2

16,750

935.2

Germany

Source: Schlag nach! and own calculations.

nology on Polish industry. For instance, in 1924 the share of all patents granted to German residents slightly exceeded 40%. (This picture has not changed much, as in 2005 the share was equal to 33%). The entire Central and Eastern Europe, however, shared this characteristic. Even Czechoslovakia, the technological and economic leader among the newly-established countries in Central Europe with a number of granted patents two times larger than Poland, lagged far behind Germany (see Table 1).

After the devastating war, the Polish economy once again struggled with underdevelopment. Ironically, industrialisation, induced by market forces in the West, has been performed by anti-market hardliners. Even more ironically, the development of technology became an integral part of plans at every level.

A plan of technological development at the company level was strictly connected to central administration plans and ‘constituted an organic part of the technological-industrial-financial plan’ [Przewodniczący 1952]. Obviously, the socialist period had its technological highlights. The USSR handed patents and licences to Poland free of charge [Minc 1950]. Technological progress was the central issue of the 4th plenary session of the Central Committee of the Polish United Workers Party in 1969. New R&D centres and institutes were created.

A new government in the early 1970s started a rapid, yet short-lasting, technological boom.

In socialist practice, however, science was never a factor of economic development. The co-operation between science and industry failed, the complexity of research was questionable, and the percentage of implementation was dramatically low [Jezierski and Petz 1980]. The systematic, structural problems

J. Wallusch, (Un)finished transition. Stock of knowledge in Poland, 1924–2012

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connected to planning, determined the inability to catch up at both the macroeconomic and microeconomic level [Winiecki 1988].

Pajestka [1983] noted that economic policy and planning in Poland had almost exclusively focused on economic development through productive capital, investment and employment. Science and technology became an empty platitude without any application to planning practice. But the malady went even deeper and infected the microeconomic structure of centrally-planned economies. Winiecki [1988] presented a detailed explanation at the micro-level: Every innovation, technical or managerial, is introduced into the already existing productive facilities; and personnel operating these facilities are interested in implementing plan targets, first and foremost for the present planning period. […] Even if innovation would result in increased output, the risk associated with introducing it – a risk of too long a period of technology absorption or resource reorganisation and resultant disturbances to production schedules – would cause managers generally to avoid such methods of expansion. In addition […], increased productivity, if successful, would result in having the plan targets raised in the next planning period […], so an extra effort could even be counterproductive, for it would be more difficult to implement the next year’s plan and to get related premium and bonuses (pp. 17–18).

Moreover, the centrally-planned system created specific microeconomic barriers to technological imitations. The scanning of the technological horizon as well as the decisions on the implementation of imitation were made by ministerial bureaucrats outside the targeted enterprise [Winiecki 1988]. Even the Polish Patent Office multiplied bureaucratic boundaries [Roszkowski 1995].

The most symptomatic story on Polish inventors is the celebrated case of Jacek Karpiński,3 a pioneer in computer engineering, whose computers were way ahead (by approximately one decade) of their time. Karpiński described the Institute of Mathematical Machines as a bastion of ignorants and spongers unable to build a modern computing machine. Due to overemployment and costly administration, the Institute had generated a one billion (zloty) deficit every year. Managed in a manorial fashion, the Institute promoted scientists with limited creativity, yet with an obedient attitude to managerial positions.

The Polish economy under transition inherited more than just an inflationary overhang or an industry incapable of fast, market-oriented changes.

Simple remedies had ended the transition recession but wage structure and R&D spending have placed Poland far behind the G7-like countries. Figure 3 depicts the regional distribution of R&D spending in Poland (2002–2012). The horizontal axis presents the per capita intramural expenditure on R&D (con 3

This paragraph is based on Adam Kochajkiewicz’s [2012] paper.

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2012 2010

0.60

2008

0.40

2006

0.20 0.00

2004 0

30

60

90

120

150

180

2002

Figure 3. Distribution of regional R&D spending Source: Own calculations based on BDL and NBP, various years

stant prices, 2002) in voivodeships expressed in Euros. The median spending in 2012 was equal to 52.20 Euros per capita. The distribution is right-skewed and highly leptokurtic. The latter characteristic is produced by Mazowieckie, a voivodship that has stimulated Polish technological development since the mid-1920s. The regional disparities have also not changed as the standard deviation for the spending in 2012 was 40.01.4 Last but not least Figure 2 provides yet another argument that the historical perspective might, in fact, be helpful in analysing current events. Comparing the numbers for 1924 and 2004, the picture has not changed much.

2. Quantifying the stock of knowledge Studying long-term economic growth in transition countries is very challenging. Wars have changed borders (and substantially reduced the primary sources); politics has changed economic systems and social structure. There is also a technical limitation: different economic systems have developed different measures of economic activity. Attempts at unifying the measures have been made but even the most notable by Maddison, Bolt, and Van Zanden did not consider some important socialist specificities.5 4

Compared to the year 2002, however, the disparities are getting smaller. The mean spending in 2002 was equal to 22 Euros (15.56 median) with the standard deviation equal to 23.12 Euros.

5 It is hard to believe that the GDP per capita in Poland was higher in 1978 than in 1996. It is virtually impossible, however, to construct a measure that will quantify shortage, time spent

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Similar problems arise when a long-run measure of the stock of knowledge is considered. Different systems have generated different needs and priorities, ranging from heavy industry in the early socialist era to digital technologies in recent times. Continuity is also an important factor. Therefore, the only available measure is the number of patents. The continuity condition is satisfied.

One may also argue that patents depict the fluctuating needs and priorities.

The yearly information on patents granted provides useful insight into the stock of knowledge but a measure should also focus on the accumulation path of knowledge. Therefore, I decided to apply a similar method as presented by Streb, Wallusch, and Yin [2007]6, and I calculated the accumulated stock of knowledge assuming a 10% yearly depreciation rate. I used the data presented

by GUS and Wiadomości Urzędu Patentowego (a journal issued by the Polish Patent Office). For the period 2005–2012 I combined foreign and domestic patents granted with the European patents validated in Poland.

The solid line in Figure 2 presents the results. The accumulated stock of knowledge obtained is smoother than the original series (bold line, left axis).

The peaks in patenting activities are slightly shifted. For instance the largest number of patents granted occurred in 1975, whilst the accumulated stock of knowledge reached its maximum in 2012. The dynamics of the Polish stock of knowledge is surprisingly similar to those reported for Germany, France, and the UK [Diebolt and Pellier 2009]. In the long run the number of patents in these countries returned to the level observed in the 1920s. The peak also occurred in the early 1970s.

3. Long term structure of the accumulated stock of knowledge The impact of technology shocks on economic fluctuations remains an unsolved puzzle. For the early RBC theorists [e.g. Kydland and Prescott 1982], the business cycle was a technology-driven phenomenon. Their opponents [for an overview see Gali and Rabanal 2005] claim that the demand factors are in fact of vastly more importance to movements in output and labour input. Whatever the conclusion regarding the role that technological changes play in economic activity, it is beyond any doubt that the stock of knowledge should be integrated. In other words, a shock in technology should generate a permanent response of other variables. Even if this feature is rooted in the RBC literature [Nelson and Plosser 1982], the unit root is a universal characteristic of the innovation series, which might be traced back to Kalecki or in queues, and the poor quality of consumer products in terms of GDP per capita. Therefore, the updated Maddison database [Bolt and Van Zanden 2013] is the best available approximation of long-term economic activity in Central Europe.

6 Streb, Wallusch, and Yin [2007] followed the approach stating that technological knowledge should be accumulated over time like real capital (see the discussion on page 212).

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Marx. Changes in technology increase productivity, reduce costs, and increase consumption. Unlike nominal shocks producing transitory effects, technology shocks elevate the system to the new equilibrium level. Thus, the stock of knowledge should be integrated.

What if the economy suffers from unfinished social reforms? What if the economy is enslaved? What if the economic system is unanimously evaluated as ineffective? What if the politicians replicate the same errors that their political ancestors had committed? Is it possible to observe any permanent effects if there is very little economic continuity even within the same political system? In an environment like this the series might be non-stationary but the case of infinite memory cannot be taken for granted. Testing for long memory in a historical time series analysis is not a novelty. In a study addressing similar problems, Diebolt, Guiraud, and Monteils [2003] performed a detailed long memory analysis on education and economic growth series in France and Germany. Interestingly, the investigated time series showed a particular slowness of adaptation to a shock.

To test for long memory I used the Geweke and Porter-Hudak [1983] estimator as well as the Robinson and Henry [1999] estimator. Since the estimation results depend on the chosen number of periodogram points it is reasonable to present the results obtained for various assumptions concerning the chosen bandwidth. Figure 4 depicts the estimated values of d-coefficient (bold solid lines) for different numbers of the periodogram points along with the ± standard error confidence bands (dotted lines). Additionally, I marked the 0.5 and 1 levels to show the regions of long memory 0 < d < 0.5, non-stationarity with mean reversion 0.5 < d < 1 and unit root 1 < d. The majority of the estimated coefficients fall within the interval between 0.6 and 0.8, suggesting that the stock of knowledge has indeed been non-stationary. The process, however, is found to be mean reverting.

This result is by no means surprising and is consistent with the visual inspection of both the original and accumulated stock of knowledge series. A mean reverting process exhibits shock dissipation and may be symptomatic of longswing dynamics [Cheung and Lai 2001]. A short look at the series reveals four phases of different length but with a similar characteristic: after a take-off the system tends towards its very-long-run average. The latter term is non-technical but I believe it depicts, at best, the nature of technological changes in Poland. The first technological take-off was stopped by the Great Depression.

The Second World War marked a turning point producing a disastrous drop in the inventory activity. Notice, however, that the early year of Nazi occupation resulted in an increase of patents granted. Łuczak [1976] stressed that the relatively high level of production in some branches in occupied Poland had resulted from new investments and from modernisation of technological process.

The prolonged recovery eventually gave birth to the true industrial revolution in Poland. Symptomatically enough, communist industrialisation did not give

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rise to technological expansion. The second take-off, this time of a much more spectacular dimension, was observed in the early 1970s. A global maximum was reached in the mid-1970s (original series) or early 1980s (accumulated series). Yet another stagnant period followed the take-off almost completely negating the effects of the early 1970s speed-up. Perhaps this phase is of a particular importance to economists and historians.7 As the socialist 1980s transformed into capitalist 1990s nothing has happened to the stock of knowledge.

For almost a quarter of century the number of patents granted has decreased.

The negative tendency was reversed by the accession to the European Union.

The next few years will decide whether the economic systems in Poland (and in Europe as a whole) will be able to sustain the growth of stock of knowledge or it would validate Gordon Sumner’s thoughts about history teaching (us) nothing.

4. There and back again. Distinguishing the growth phases of the stock of knowledge The application of long memory models to the macroeconomic time series is rather limited. For the macroeconomic time series it is difficult to distinguish between I(1) and long memory [Baillie 1996]. Interestingly, the I(d)-like behaviour of a time series might be accounted for by the occasional breaks in mean [Bisaglia and Garolimetto 2008]. A look at the plotted series may raise suspicions that the estimations of the long memory coefficient are in fact biased. The non-stationary mean reverting properties of the accumulated stock of knowledge, however, are consistent with many qualitative observations described in the previous section.

Another fact behind Figure 1 is connected to the most intriguing problem in economic history, namely to the stages of economic growth. The ups and downs do not fully coincide with the phases of economic growth in Poland. In particular, technology fails to explain the GDP dynamics during the early stages of transition. Figure 5 presents the real GDP growth rate and the growth of the stock of knowledge after the year 1992. The bold line depicts the growth rate (left axis), whilst the dotted line shows the growth rate of the accumulated stock of knowledge (right axis). Prior to the accession to the EU a steady decline in the latter variable has been met by two episodes of economic growth and one recession. The transition boom of mid-1990s has originated from capital and labour force skills but has not been driven by changes in the stock of knowledge.

7

I am fully aware of the qualitative aspects of patents granted before and after 1990. As Winiecki [1988] “wrote what was new in an enterprise or even in a given STE [Soviet-type economies] is rarely new on the world market”. I aim to elucidate, however, the quantitative side of technological progress. I therefore do not distinguish between patents required to produce – in words of Wojciech Charemza – red banners, tanks and barbed wire from those stimulating growth in market economy.

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3.5 3 2.5 2 1.5 1 0.5 0

2

4

6

8

10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44

2

4

6

8

10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44

2.5 2 1.5 1 0.5 0

Figure 4. d-coefficients and number of periodogram points Source: Own estimations

Since the link between the stock of knowledge and GDP growth was weak, I decided to focus on the dynamic properties of the growth of the stock of knowledge. To detect possible changes in its behaviour I applied the Markovswitching AR(1) allowing for regime switches in both autoregressive and the residual variance coefficients. I expected both parameters to vary considerably revealing phases of vigorous and slow changes characterised by higher and lower variances coinciding with smaller and larger autoregression. Table 2 summarises the estimation results8.

Indeed, I discovered two well-separated regimes with the following transition probability matrix P:

0.863 0.093  P= . (1) 0.137 0.907  8 I applied the feasible sequential quadratic programming algorithm. The recursions were started with the estimated probabilities. Robust standard errors were estimated. Strong convergence was achieved.

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J. Wallusch, (Un)finished transition. Stock of knowledge in Poland, 1924–2012

Table 2. MS AR(1) estimation results Coefficient

Regime

Value

Robust std. error

1

0.559

0.066

2

0.895

0.072

1

0.107

0.020

2

0.027

0.005

P(r = 1|r = 1)

–

0.863

0.117

P(r = 1|r = 1)

–

0.093

0.051

AR(1) σ

Source: Own estimations.

2012

2011

2010

2009

2008

2007

–10 2006

0.0 2005

–5 2004

1.0 2003

0

2002

5

2.0

2001

3.0

2000

10

1999

4.0

1998

15

1997

20

5.0

1996

6.0

1995

25

1994

7.0

1993

30

1992

8.0

Figure 5. Real GDP growth and growth of stock of knowledge, 1992–2012 Source: GUS and own calculations

With a smaller autoregressive coefficient accompanied by a larger volatility of the residuals the first regime represents faster changes in the accumulated stock of knowledge. Figure 6 depicts the (smoothed) estimated probabilities of regime 1. The second regime is characterised by slower changes in the stock of knowledge. There are three periods corresponding to the regime 2: Great Depression and the slow recovery of late 1930s, a period between late 1950s and early 1970s, and almost 30 years between the wild 1970s and the moderate 21st century. The first and second periods are consistent with expectations and so is the fact that Poland has entered the transition period in regime 2.

The surprisingly stubborn persistence of this regime between 1990 and 2005, however, is not.

The persistence originated in the socialist economy and can be traced back further than the 1980s. Old customs and habits die hard and technological development in Poland could not be regarded as an exception to this rule. An overregulated market created insufficient incentives for technological devel-

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1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2

2010

2006

2002

1998

1994

1990

1986

1982

1978

1974

1970

1966

1962

1958

1954

1950

1946

1942

1938

1934

1930

0.0

1926

0.1

Figure 6. Estimated regime probabilities (regime 1) Source: Own estimations

opment. Emigration deteriorated human capital. The university system was still more oriented on education than on research (let alone on co-operation with business) which completed the structural barriers for a faster growth of the stock of knowledge.

Despite many critical remarks and scepticism towards the European Union, the stock of knowledge in Poland has been growing faster than ever. Although the probability of staying in regime 2 decreases, there is a huge chance for a permanent upward shift in the long-run mean of the stock of knowledge.

Conclusions Industrial expansion in countries with smaller, more rural manufacturers with less fixed capital requires technological efficiency [Inwood and Keay 2012].

Efficiency at both macroeconomic and microeconomic level, as the productivity growth depends on adaptation, improvement, and refinement [Nuvolari and Tartari 2011].9 Unfortunately, the Great Depression, the Second World War, and central planning have significantly diminished technological efficiency in Poland.

The search for long memory showed that the accumulated stock of knowledge in Poland is non-stationary and mean reverting. Temporary take-offs are possible and, in fact, observed, but in the end the stock of knowledge returns to its long-run average. Even if the number of patents in France, Germany, and the UK follow a similar pattern history matters again: a look at Table 1 and Figure 1 shows the considerable difference between the starting points for 9

Nuvolari and Tartari [2011] refer to the macro ‘prototypes’ and ‘microinventions’ but their conclusions may as well be applied to macroeconomics and microeconomics.

J. Wallusch, (Un)finished transition. Stock of knowledge in Poland, 1924–2012

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Germany and Poland in the interwar period. In other words, in Germany the level of the number of registered patents is almost 10 times larger than in Poland.

Since the accession to the EU Poland has enjoyed a rapid increase in the stock of knowledge. Capital shortage is slowly being overcome, new technologies are transferred. The probability of staying in a regime of fast increase in patents decreases but there is a huge opportunity for a permanent upward shift in the long-run mean of the stock of knowledge. A smart move, especially for economic and education policy, would be not to repeat the mistakes made in the past. History matters again.

References Baillie, R.T., 1996, Long Memory Process and Fractional Integration in Econometrics, Journal of Econometrics, vol. 73: 5–59.

Baten, J., Labuske, K., 2004, Technological Component of Human Capital and Its Determinants, in 51 Countries, 1880–1914, mimeo.

Bisaglia, L., Gerolimetto, L., 2008, An Empirical Strategy to Detect Spurious Effects in Long Memory and Occasional-Break Processes, Communications in Statistics – Simulation and Computation, vol. 38, no. 1: 172–189.

Bolt, J., Van Zanden, J.L., 2013, The First Update of the Maddison Project; Re-Estimating Growth Before 1820, Maddison Project Working Paper, no. 4.

Cheung, Y.-W., Lai, K.S., 2001, Long Memory and Nonlinear Mean Reversion in Japanese Yen-Based Real Exchange Rates, Journal of International Money and Finance, vol. 20: 115–132.

Diebolt, C., Guiraud, V., Monteils, M., 2003, Education, Knowledge, and Economic Growth. France and Germany in the 19th and 20th Centuries, Peter Lang GmbH, Frankfurt am Main.

Diebolt, C., Pellier, K., 2009, Analyse Spectrale de l’Evolution de Longue Periode des Brevets en France, en Allemagne, en Grande-Bretagne, aux Etats-Unis et au Japon (17eme-20eme siecles), Brussels Economic Review, vol. 52, no. 3/4: 341–354.

Galí, J., Rabanal, P., 2005, Technology Shocks and Aggregate Fluctuations: How Well Does the Real Business Cycle Model Fit Postwar U.S. Data?, in: Gertler, M., Rogoff, K. (eds.), NBER Macroeconomics Annual 2004, vol. 19: 225–288.

Geweke, J., Porter-Hudak, S., 1983, The Estimation and Application of Long Memory Time Series Models, Journal of Time Series Analysis, vol. 4, no. 4: 221–238.

Inwood, K., Keay, I., 2012, Diverse Paths to Industrial Development: Evidence from Late-Nineteenth-Century Canada, European Review of Economic History, vol. 16: 311–333.

Jezierski, A., Petz, B., 1980, Historia gospodarcza Polski Ludowej 1944–1975, PWN, Warszawa.

Kochajkiewicz, A., 2012, Działania służb specjalnych Polski Ludowej wobec inżyniera Jacka Karpińskiego w latach 1950–1990, Przegląd Archiwalny Instytutu Pamięci Narodowej, vol. 5: 247–295.

Kydland, F.E., Prescott E.C., 1982, Time to Build and Aggregate Fluctuations, Econometrica, vol. 50, no. 6: 1345–1370.

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Łuczak, Cz., 1976, Basic Assumptions of the Economic Policies of Nazi Germany and Their Implementation in the Occupied Poland, Studia Historiae Oeconomicae, vol. 11: 193–213.

Minc, H., 1950, Sześcioletni Plan Rozwoju Gospodarczego i Budowy Podstaw Socjalizmu w Polsce, referat wygłoszony na V Plenum Komitetu Centralnego, 15 VII 1950 r., Nowe Drogi, no. 4: 8.

Nelson, C.R., Plosser, C.I., 1982, Trends and Random Walks in Macroeconomic Time Series. Some Evidence and Implications, Journal of Monetary Economics, vol. 10: 139–162.

Nuvolari, A., Tartari, V., 2011, Bennet Woodcroft and the Value of English Patents, 1617–1841, Explorations in Economic History, vol. 48: 97–115.

Przewodniczący Państwowej Komisji Planowania, 1952, Zarządzenie Przewodniczącego Państwowej Komisji Planowania Gospodarczego, nr 168 z dnia 26 maja 1952 r. w sprawie opracowania planu w zakresie rozwoju techniki na rok 1953, Wiadomości Urzędu Patentowego, vol. 3–4: 353–366.

Robinson, P.M., Henry, M., 1999, Long and Short Memory Conditional Heteroskedasticity in Estimating the Memory Parameter of Levels, Econometric Theory, vol. 15, no. 3: 299–336.

Roszkowski, W., 1989, Rolnictwo i leśnictwo, in: Problemy gospodarcze Drugiej Rzeczypospolitej, PWE, Warszawa.

Roszkowski, W., 1995, Polityka przemysłowa, in: Landau, Z., Roszkowski, W., Polityka gospodarcza II RP i PRL, Wydawnictwo Naukowe PWN, Warszawa.

Statistisches Reichsamt, Statistisches Jahrbuch für das Deutsche Reich, various years, Berlin.

Streb, J., Wallusch, J., Yin, S., 2007, Knowledge Spill-Over From New to Old Industries: The Case of German Synthetic Dyes and Textiles (1878–1913), Explorations in Economic History, vol. 44: 203–223.

Wiadomości Urzędu Patentowego, various years, Warszawa.

Winiecki, J., 1988, The Distorted World of Soviet-Type Economies, Routledge, London.

Wolf, N., 2007, Endowments vs. Market Potential: What Explains the Relocation of Industry after the Polish Reunification in 1918?, Explorations in Economic History, vol. 44: 22–42.

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BOOK REVIEWS

Tadeusz Kowalski, Globalization and Transformation in Central European Countries: The Case of Poland, Poznań University of Economics Press, Poznań 2013: 231, ISBN 978-83-7417-776-4 Tadeusz Kowalski belongs to the group of contemporary Polish economists whose works are mostly published in English.

In this context it is not surprising that the publication reviewed here is also in English. Tadeusz Kowalski in his research has specialised in two areas: –– the evolution of the theory of political business cycles and the influence of the theory of expectation on changes in economic policy; –– economics and the function of the banking sector as well as the institutional and economic conditions of transformation processes in Poland and other post-communist countries.

Due to the practical experience and comprehensive research of the author the book has special relevance to the role that institutional conditions play in the construction of a market economy.

Globalization and Transformation in Central European Countries: The Case of Poland is divided into two parts. The first three chapters, are devoted to selected aspects of globalization and economic policy whilst the second part discusses transformation processes in Poland against the broad background of Central and South European countries.

The first part of the publication proposes a theoretical basis for further analyses. The first two chapters present and assess the most significant aspects of glo-

balization describing the essence and main features of globalization and identify their interplay with the theory of economic policy and the transformation processes. The author rightly observes that the transformation processes in Poland and in other Central European countries coincided with more and more intensive globalization. Chapter three is particularly important as it presents the relationships between globalization and the financial crises. The author draws on his expertise and experience in the area of finance and banking, giving added force to the pertinence of his analyses of crises and conclusions. The Asian crisis and the global crisis of the years 2007–2008 are further examined in chapter six.

For the reader, regardless of nationality, the second part of the book will be the more interesting. Use is made of new studies concerning transformation processes, both in Poland and in the selected post-communist countries. The transformation processes are analysed from the viewpoint of increasing globalization. The author propounds the hypothesis that the latter were an additional difficulty and serious threat to the countries in the process of transforming their economies.

Initially threats of this type remained unnoticed and thus were not properly addressed in actual economic policy decisions. However it is stated that at first these

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threats were not very significant due to rather shallow economic connections between those countries and the world economy. The author rightly points out that the globalization process constituted not only a threat but was also an opportunity which many Polish companies started to use and benefit from only in recent years.

The final chapter is especially significant as it contains an in-depth, critical analysis of the political and institutional context of the transformation in Poland.

Based on the results of his empirical studies changes are discussed which took place in the institutional environment and, therefore, in the perception and function of public institutions, law-making and law-enforcement agencies. The economic performance of Poland is analysed against the background of the Central and South European countries which are discussed in chapter four. Furthermore an analysis of changes in the economic situation of those countries during the Asian crisis of 1997 and the recent global crisis is made.

Poland appears as a country of economic success story with a big potential for further growth. At the same time a number of proposals for strengthening the competitiveness of Poland’s economy are suggested particularly an improvement in the institutional environment is of the utmost importance.

By means of graphs and descriptive statistics the reader may follow and analyse changes in Poland throughout the whole

period of transformation. Comparative analyses made against the background of the Czech Republic, Slovakia, Hungary, Ukraine and selected southern European countries (Portugal, Spain, Greece and Turkey) highlight the achievements of the Polish economy. In respect of virtually all measures of growth Poland came noticeably closer to the Czech Republic or Slovakia, outperforming at the same time Hungary and in particular Ukraine and even approaching the countries with well-established market economies. The book can serve to form opinions and provide the scientific basis for the reports on Poland’s economic success that have appeared recently in economic journals and newspapers.1 The book by Tadeusz Kowalski is an interesting contribution in methodological and cognitive terms for those interested in globalization and the market transformation in Poland and other Central European countries.

Stanisław Rudolf

University of Łódź, Department of Institutional Economics 1 One such report was published on 28th June 2014 in „The Economist”, Poland’s New golden age.

It is stated that if the European Union were at least half as well governed as Poland, its economic situation would be diametrically different from its current position. A report on Poland’s economic success appeared also in „Financial Times” of 4th June 2014 (Poland, Special Report).

Economics and Business Review, Vol. 1 (15), No. 1, 2015: 105–107

Katarzyna Szarzec, Adam Baszyński, Dawid Piątek, Michał Pilc, Institutions in Transition Countries, Katarzyna Szarzec (ed.), Global Development Research Group, Poznań 2014: 94, ISBN 978-83-939612-1-4 The reviewed monograph is a report based on the studies concerning institutional changes in the countries under transformation over the span of the last 25 years.

This is a group of countries considerably different in many respects, but their common feature is the socialist heritage which effectively imprinted its dogma on their politics and economies. Passing from a command economy to a system dominated by free market mechanisms is an arduous, long-lasting process, which does not guarantees desired outcomes. In most of the countries analysed by the authors, institutional changes in the area of the economy were accompanied by changes in the political system, which then exerted an impact on changes in economic institutions.

The Authors analyse the transformation of the economic and political rules of the game in the countries which were divided into three groups: –– CEB Group (Central Europe and Baltic States), which includes the Czech Republic, Slovakia, Poland, Hungary, Lithuania, Latvia and Estonia; –– SEE Group (South – East Europe), which includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Montenegro, Macedonia, Romania, Serbia and Slovenia; –– CIS Group (Commonwealth of Independent States), consisting of: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kirghizstan, Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

The work consists of 80 pages and has the layout of a standard report, being a collection of information, arranged in an

orderly fashion and which is thoroughly analysed according to a clearly defined schema. Although such a short form may seem to be inadequate for the scientist, it is well argued and appropriate from the viewpoint of its purpose to the reader, because the authors aim their remarks, above all, at state administration officials and persons responsible for the formation and observance of the formal-legal economic and political order. Therefore the aim of the work is to point out what role the state should play in a modern, free market economy so that it can be perceived as effective. In answering this question the authors also show the relationships between the quality of the state, „quantity of state in the state” and the scope of economic freedom and the general condition of the economy. From this viewpoint reading the report will undoubtedly be useful for academics, inquiring students and all those who deal with the problems of how the scope and role of the state are changing in contemporary economies. The report may also be used by enterprises as an element of microanalysis of the region or the country examined and assessed in the report.

The analysis of institutional changes in the countries under transformation concerns the following selected areas: –– the so-called institutions of the state which are a combination of political and economic institutions because they reflect both the political system and the quality of governance, namely a broadly understood efficiency and effectiveness of the state in the sphere of law making, transparency, possibility of civic control and finally execution of the law;

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–– institutions of the labour market whose character and quality are measured, amongst others, by indexes of elasticity, the freedom of the labour market, legal protection of employees, degree of unionization or indicators describing the volume and structure of nonwage related labour costs; –– institutions of the banking sector (as the heart of the economic system, although the term „bloodstream” may be better), within the framework of which the authors studied the pace and scope of interest rate liberalization, progress in determining bank solvency, creation of the frameworks for bank supervision and regulations connected with the stability and safety of this system, including the scope and pace of harmonization of these institutions with the guidelines concerning the standards of the banking system and structure.

Analysis of the dynamics and direction of changes in the area of formal institutions indicates also, how much the factors like informal institutions and cultural heritage, could enrich the conclusions of the report, but regretfully they were not analysed here. Although the analysis of informal institutions would enrich depth of conclusions, it could lead to the loss of transparency and acuity of the reasoning at the same time due to a considerable divergence of terminology in the area of informal institutions and an insufficient basis of empirical data, (which is obtained by means of a separate methodology virtually every time). To retain the cohesion of the reasoning the authors used achievements of several world-renowned research centres as a basis for their report which publish (most frequently at yearly intervals) collective indicators concerning a defined area, describing its condition according to a clearly defined methodological key and each time including most countries of

the world. When describing institutions of these states, the index of political freedom, created and published by Freedom House, the index of economic freedom of the Heritage Foundation and data from the World Bank concerning the quality of governance were used.

Institutions of the labour market in the countries studied were presented, amongst others, by compiling the following indicators: the index of economic freedom on the labour market (data published since 2005 by the Heritage Foundation), the index of labour market elasticity (calculated by the World Economic Forum), the index of employees’ legal protection (EPL elaborated by the OECD), the volume of non-wage related labour costs or the degree of unionization. When analysing the dynamics of changes in the banking sector the authors first used the analyses and reports of the World Bank and the European Bank for Reconstruction and Development (EBRD). Selecting well documented indicators of „firmly established” research methodology.1 Such a wide geographical range undoubtedly strengthens the credibility of comparisons, however, it is worth mentioning that both political and economic freedom indices , as well as the quality of governance index of the World Bank are based on the ideology of neoliberal capitalism so they promote these economies and countries which have recognized such a model as appropriate and are consistent in its implementation.

This seems to be fairly significant because today we are witnessing the symptoms of inefficiency and the destructive impact of 1

Although it has to be admitted that in the case of the indices of economic and political freedom and the World Bank’s index of freedom, research methodology changes practically from year to year but they are not sufficiently significant to prevent dynamic analyses.

Book reviews

the capitalist economic models on a global scale in many spheres of life important for humanity: a visible stratification of the global community into a handful of the richest and the remainder of the poorest countries; of the former hundred have savings bigger than those of half of the world population, or a progressive degradation of the natural environment, due to overconsumption and overproduction, which does not lead to an improvement of the societies’ life, although this may seem striking to many people. One may quote here the well-known saying, so far applied only to democracy, that both democracy and capitalism consist mainly of faults but so far other concepts of the political and economic system have been even worse as many things (including the results of the report) seem to confirm and that they have brought people even less freedom and welfare than those two „favourite monsters”.

The structure of the report is thoroughly planned. It starts from the introduction where the authors explain clearly why they decided to study a given area and to present the results of their research in this and not another form, for whom this form and contents will be useful and why they feel (with the undersigned sharing these feelings) that this work creates added value , not only in the informative but also in the scientific aspect. The successive parts are devoted to collective descriptions of the institutions of the state, the labour market and the banking sector.

Each of those parts presents in a unified way which elements were studied, what research measures were applied and what important conclusions were drawn from the conducted analyses. The largest part of the report contains the so-called “countries’ charts”: of the 28-element group presented in alphabetical order, 2 pages are devoted to each country. Those pages contain a small map showing the location of

107 the country concerned, the most important current data (GDP, GDP per capita, inflation) and a consequent description of changes which took place from the beginning of the process of transformation in the institutions of the state, on the labour market and in the banking sector.

The most interesting part of the report are its conclusions listed and commented about on 3 pages. They show (despite great diversities between the countries) a relation between the speedand quality of political and institutional transformation and a present state of countries analysed.

Relatively the best and most complete model of the free market economy was implemented in the CEB group (Central Europe and Baltic States), which decided – especially in the initial phase of transformation – for quite radical, deep, and frequently controversial changes in their economic and political systems. Despite errors and social sacrifices caused by such decisions, today these countries enjoy a fairly high, though not the highest, economic freedom and consolidation of their democratic systems. The smallest changes, and therefore the biggest number of after-effects (or even all the symptoms) of a communist and a totalitarian state, were observed in the CIS group. The report mentions a much bigger number of dependencies and trends, reading about which will certainly stimulate reflection, not only in scientists but – let us hope – also in the creators of state order. Worth mentioning is the fact that the report is published in two languages and is available online, free of charge, at www.katmakro.ue.poznan.pl/ Instytucje.pdf (Polishversion) and www. katmakro.ue.poznan.pl/Institutions.pdf.

(English version).

Beata Stępień

Poznań University of Economics, Department of International Management

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Robinson Acemoglu [2012], and Robinson Hicks [1965a, [2012], 1965b].

HicksReferences [1965a, 1965b]. shouldReferences should be listed at the endbeoflisted the article at the in end theofstyle the article of the in following the styleexamples: of the following examples: Acemoglu, D., Robinson, Acemoglu, J.A.,D., 2012, Robinson, Why Nations J.A., 2012, Fail.Why The Origins Nations of Fail.

Power, The Prosperity Origins of Power, and Poverty, Prosperity and Poverty, Profile Books, London.

Profile Books, London.

Kalecki, M., 1943, Kalecki, Political M., Aspects 1943, ofPolitical Full Employment, Aspects of Th Full e Political Employment, Quarterly, The Political vol. XIV,Quarterly, no. 4: 322–331. vol. XIV, no. 4: 322–331.

Simon, H.A., 1976,Simon, From Substantive H.A., 1976,toFrom Procedural Substantive Rationality, to Procedural in: Latsis, Rationality, S.J. (ed.),in: Method Latsis,and S.J. Appraisal (ed.), Method and Appraisal in Economics, Cambridge in Economics, University Cambridge Press, Cambridge: University Press, 15–30.

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