In this blog post, we will examine the industrialization process of late-developing countries in 19th century Europe, focusing on Gerschenkron’s theory, and learn about the differences in the industrialization paths of each country.
Introduction
During the period of rapid industrialization in 19th century Europe, the paths and patterns of industrialization varied greatly from country to country. The person who explained these differences theoretically was the economic historian Alexander Gerschenkron. In the mid-20th century, he attracted attention by arguing that the industrialization of European countries did not simply follow the same stages of development, but unfolded in various ways depending on the degree of their “economic backwardness.”
Economic backwardness and differences in industrialization paths
According to Gerschenkron, European countries in the 19th century had different levels of “economic backwardness,” and the degree of this backwardness had a decisive influence on the path and characteristics of industrialization. He believed that the greater the degree of backwardness, the more the following characteristics would appear.
Rapid industrial growth
The greater the economic backwardness, the more industrialization takes the form of a “rapid leap forward in mining and manufacturing.” This is because it was possible to quickly introduce technology from advanced countries. Latecomers were able to achieve industrial growth in a short period of time by importing existing technology and applying it on a large scale.
Establishment of large-scale companies and factories
Latecomers had a small number of skilled factory workers, so they moved toward establishing large-scale, highly mechanized factories. This naturally led to an increase in the size of companies and factories.
Production-oriented industrial structure
Late-developing countries prioritized the development of production industries such as steel and machinery over consumer goods. This was because they followed the example of the successful industrialization of the United Kingdom, where mass production systems were established in production industries such as steel.
High savings and investment through consumption restraint
A high level of capital accumulation is necessary to promote industrialization. Late-developing countries had no choice but to exert greater economic pressure to restrain consumer spending in order to increase the ratio of savings and investment to total income.
Strengthening institutional mechanisms for capital supply
In late-developing countries, it is extremely important to have systems in place to supply the capital needed in the early stages of industrialization and to provide information on companies.
In developed countries, the corporate sector naturally played this role, but in developing countries, it was often played by the state or special financial institutions.
The secondary role of agriculture
It is interesting to note that developing countries did not necessarily consider improving agricultural productivity a prerequisite for industrialization. In other words, even with a weak agricultural base, developing countries were able to promote industrialization, and this was indeed the case in many countries.
Types of industrialization by country: advanced, relatively late, and extremely late
Goshenkron classified European countries into three types according to the degree of their lag: advanced, relatively late, and extremely late. He explained that the methods of capital procurement and the paths to industrialization differed according to these types.
For example, the UK achieved industrialization relatively naturally through organic corporate growth and the accumulation of private capital. In contrast, during the reign of Napoleon III, financial institutions such as Crédit Mobilier, an investment bank founded by the Pierre brothers, played a central role in supplying capital and promoting industrialization.
Germany developed a unique banking model called the “universal bank.” This was a combination of commercial banking and long-term industrial investment, which was a compromise between the British and French financial systems. In particular, Germany was focused on investment and interest in heavy industry, so large-scale financing through banks was essential. As industrialization progressed, reinvestment of corporate profits also became an important source of capital.
Russia, on the other hand, was even more behind than Germany, and in the early stages, there was a lack of trust in banks. In response, the Russian government directly injected funds to promote an industrial policy focused on heavy industry, and as the financial system gradually improved, German-style universal banks emerged and began to replace the state finances.
Differences from the stage theory approach: Gueschenkron vs. Rostow
Gusakron’s approach is clearly different from Rostow’s stage theory, which was the dominant theory explaining economic development at the time.
Rostow believed that all economies go through certain stages of development in sequence. He proposed a five-stage model consisting of pre-modern society, preparatory stage, take-off, maturity, and advanced mass consumption. In particular, he argued that industrialization was only possible in the take-off stage when certain preconditions were met, such as improvements in agricultural productivity, the emergence of an elite class with modern values, and the development of social infrastructure. However, Schumpeter criticized the universality of these stages of development. He believed that applying Rostow’s example of the United Kingdom to all countries distorted reality. In other words, many developing countries were able to successfully industrialize even though they did not have the same conditions as the United Kingdom, such as increased agricultural productivity and social infrastructure. He criticized Rostow’s theory as being overly abstract and general, and not in line with empirical reality. Instead, Gueschenkron sought to explain the diversity and specificity of industrialization in each country based on the concept of “lagging behind.”
His theory is highly regarded in the field of economic history, particularly for its ability to explain the differences between countries within Europe.
Conclusion: Gueschenkron’s implications that are still valid today
Gueschenkron’s theory of latecomer advantage goes beyond a simple historical analysis and provides many implications for the industrialization strategies of developing countries today. The economic development of each country does not follow exactly the same path, and the lesson to be learned is that the more backward a country is, the more it needs to find a strategy that suits it rather than simply following the path of the advanced countries.
Economic development is the result of the interaction of complex factors such as the introduction of technology, the institutional environment, social structures, and the international order. By incorporating this complexity and diversity into his theory, Gueschenkron showed the reality of industrialization, which cannot be explained by a simple model.
Looking back on economic history, what we need to learn now is not the “stages” of development, but how each country was able to bring about change and make leaps forward under its own circumstances. And that may be Gueschenkron’s greatest legacy.
