Hard economic facts were also at work. The decline in world wheat prices forced the Romanian Liberals, the main force behind modernization, to push for an acceleration of industrialization – hence the expansion of rural education under the education minister Spiru Haret (in the hope of turning the peasant into an ‘educated producer’), the Popular Banks laws of 1903, and the establishment of village cooperatives (obştii săteşti) in 1904.42
Romanian Liberals, like Liberals in other east European countries, wanted a strong state with a strong constitution and a proper bureaucracy, the establishment of property rights in land, and labour replacing the corvée and servile obligations with wage labour.43 The problem was that there was no proper banking system and local landlords were not investing. So they borrowed, as did the state. By the beginning of the twentieth century, Romania was one of the leading debtor nations in Europe, with a public debt standing at 116 per cent of national product (1870–1880s), though Serbia’s debt was even worse at 120 per cent.44
The role of the state in developing capitalism was crucial, it was agreed, and not just in Romania. Scientific knowledge was vital for modern economic growth, but had capitalism been just a question of technology, it could have been imported from the West in a less traumatic way. However it was also, and mainly, a question of politics. And this was the real problem facing China and Russia, Romania and the Ottoman Empire, as they faced the West: too little state.
To be prosperous it is not necessary to be a manufacturing industrial nation. White European settlers’ colonies – with the United States as the significant exception – never became major manufacturing countries. In Canada, New Zealand, and Australia, primary products (farming, fishing, and mining) dominated the economic landscape, while their populations remained prosperous by any standards.
The same cannot be said for Latin America, however, which, like Australia and New Zealand, exported primary products mainly to Great Britain, France, Germany and the United States while importing manufactured goods.45 Even in Argentina, the wealthiest country in Latin America, private wealth was not used to develop industry. Although richer, at the end of the nineteenth century, than Sweden or Norway and with a much larger population (which would have provided a home market), Argentina had a lower level of manufacturing than either of them.46 Its significant exports, frozen meat, wheat, and maize, provided Argentina with a higher standard of living than anywhere else in Latin America.47 Indeed, on the eve of the First World War, in 1912, Argentina, in GDP per capita, was on a par with the main western European countries, and higher than France and Germany, below only Belgium, the Netherlands, Switzerland, and Great Britain – hence the high level of immigration, particularly from Italy.48 Uruguay was not far behind Argentina. Here the contrast with Japan is telling. Japan too, like many Latin American countries, was an exporter of primary products (raw silk and tea). But in Chile the export of nitrates enriched those who controlled it; in Brazil the export of coffee enriched the growers. In Japan the revenue from raw silk and tea was used to buy foreign machinery.49
Latin America, or, rather, its elites, became integrated into the world system while remaining peripheral to it, and dependant on the fortunes of industry in the ‘West’, while local production consisted almost entirely of handicrafts.50 Of course there was some industrialization before the First World War, but it was limited to products such as cotton textiles in Mexico, Brazil, and Peru.51 In some countries, such as Chile, there was a transition from the traditional rural estates (the hacienda system) to some kind of agrarian capitalism and the formation of a rural proletariat.52 Nevertheless most Latin American countries, though backward compared with the West in terms of industrialization, did better than colonies such as India.
There were major differences between the success of former non-settler colonies such as India in launching their products into the world market, and countries that were not colonies. For example, Indian products (mainly textiles) were in practice excluded from world trade by the British. India was unable to withstand British competition even in its own market: while it produced almost all its textiles in 1833, by 1877 it was producing only 35–42 per cent of what it consumed. Mexico, not a colony, and which produced 60 per cent of the textiles it consumed in 1879, saw this share reach 78 per cent in the period 1906–8.53
In non-industrialized countries, exports remained firmly confined to primary products. Mexico had a variety of exports (and the luck to be near a market the size of the USA). In 1913 coffee accounted for 50 per cent of Brazilian and Venezuelan exports. In Chile the main export was nitrates; in Honduras bananas; in Peru guano and nitrates (and later sugar and copper); in Argentina it was maize (22 per cent of exports), and meat (20 per cent). Cuba produced 25 per cent of the world’s sugar cane.54 In Ecuador it was cacao but also straw hats (known as panama hats), quinquina (a popular aromatic herb used, among others, by the French in making the popular aperitif Dubonnet), and tobacco. These four products made up 90 per cent of Ecuador’s exports in the middle of the nineteenth century.55
As José Luis González, one of the leading Puerto Rican writers of the twentieth century, exclaimed: ‘Industry! … What interest could have awakened the group of old factories that produced poorly or expensively if consumption could be satisfied by importing from Europe [mainly Britain] or the United States?’56
The more a country exported, the more its cosmopolitan and highly urbanized landowning elite enjoyed a higher standard of living and could bask in the benefits of modernization.57 They imitated their counterparts in the United States and Europe in their lifestyles and consumption patterns, down to the spread of country clubs such as the Hurlingham in Buenos Aires (developed by the British in 1908 and named after a London sports club) and the Chimont in Montevideo (developed by Americans in 1910). At the same time, unsurprisingly, there was a rejection of nordomanía, as the uncritical attitude towards the USA was called. José Enrique Rodó’s essay Ariel, published in 1900, had an immense influence in Latin America. It called for a revival of an idealized Latin American spirit, while indicting American utilitarianism and democratic mediocrity.58 Like many thinkers in the periphery, Rodó (a major Uruguayan modernist writer) exhibited an elitist distaste for the multitude, which can be an instrument of barbarism or civilization, and the spirit of vulgarity (el espíritu de vulgaridad) of American democracy.59
After 1870 this dependency on foreign manufactures decreased, but it took the crisis of 1929 to lead to the establishment of state-led import-substituting policies in a somewhat unsuccessful attempt to lessen imports.60 Until then, during what came to be known as the ‘Liberal’ era, Latin America, unlike the United States, remained vulnerable to external shocks.61 Throughout the nineteenth century, economic issues were seldom central to Latin American debates. What moved the elites was the struggle between centralism and federalism and between Church and State. A pragmatic form of free trade had been widely accepted, tempered by some protection for domestic activity, while both foreign investment and immigration were encouraged.62
Latin American governments were weak, even though authoritarian forms of rule prevailed. While territorial stability was remarkable, political instability was uncommonly pronounced. Change occurred through military coups or fraudulent elections. But this did not perturb big business, which had become more or less independent from the political level (thanks, no doubt, to the weakness of the latter).63 What really impinged on enterprises was not the state within which it was operating but what happened in the wider global economy. This confirmed the peripheral status of Latin America, which largely managed to be modern, though with little or no industry.
Modernity was mixed with backwardness in most European countries, too. For instance, in fin-de-siècle Italy, though most of the country was still relatively ‘backward’, what would become known as the ‘industrial triangle’ (Milan-Turin-Genoa) already possessed many of the preconditions for industrial development, including reasonably high literacy rates.64 The econom
y was becoming more diversified, taking in not just textiles and steel (the latter in Terni, Umbria – a project initiated by the state), but also rubber (Pirelli 1872), chemicals (Montecatini 1888), cars (FIAT began production in 1899), electricity (Edison 1884), and engineering (Cantoni Krumm & Co. in 1874, then Franco Tosi in 1894). The working class was still small: 15 per cent of the labour force, according to the 1901 census, and even this was an overestimate since this figure included artisans and owners of workshops, so that in reality industrial workers were probably some 10 per cent of the working population.65 Elsewhere in Italy modernity took the form of rapid urbanization without a corresponding industrial growth, usually due to the growth of commerce and public-sector jobs.66 During industrialization the gap between north and south increased, partly because the south was incapable of setting up its own enterprises, partly because northern and foreign capital did not invest in the south.67 Public utilities, in a metropolis such as Naples with over 500,000 inhabitants in 1900, were in the hands of foreigners: the French controlled the gas supply; the Swiss electricity; the main water supply was in the hands of a British company; the tram system was Belgian.68
Some countries were relatively high on the industrial league table, while still being socially backward. Thus Russia combined considerable industrial development with an extremely backward agriculture. Serfdom itself had been abolished only in 1861, while in much of Europe it had been done away with long before: 1788 in Denmark, 1771 in Savoy, 1789 in France (where, at the time, there was very little actual serfdom left), 1798 in Switzerland. In Britain the abolition of serfdom had taken place in the fourteenth century. (There were some countries in which serfdom was abolished even later than in Russia: Romania, for example, where it was abolished formally in 1864, and Tibet, where it was abolished only in 1959.)69 In Prussia most feudal rights were abolished late, by 1850, but there was already a powerful class of landlord farmers.70
Industry was advancing, slowly and tentatively, in Russia but not (yet) in Greece or Spain or in the Ottoman Empire. Agriculture was central to the Greek economy: before 1914 agricultural products constituted the main export of Greece (75 per cent in 1887 and 78 per cent in 1912, and they are still a major component of Greek exports one hundred years later). These were mainly wine, raisins, olives, olive oil, and tobacco – none of which required much industrial technology. All you needed to do was to dry the grapes for raisins, ferment them for wine, roll the tobacco leaves, and press the olives for the oil. As late as 1874, even road construction remained rudimentary and investments were mainly involved in distribution and finance.71 Taxes were collected on behalf of the Ottoman Empire by local notables (proestoi), the basis of a later clientele system. In the 1880s some of the preconditions for industrialization came into being (a transport system, a unified internal market, and a strengthening of the mechanism for state intervention), but the Greek working class remained tiny, and peasants remained on the land or emigrated to the United States (the number who left every year was greater than the total number of workers employed in the Greek industry).72 Under Charilaos Trikoupis, several times Prime Minister in the 1880s and 1890s, there was considerable modernization of the military, judiciary, and civil service, but the most significant industrial development was in shipping. By 1920 the Greek fleet was one of the largest in the world.73 In 2015 it still was the largest in deadweight tonnage (a measure of how much vessels can transport), though many are registered in other countries such as Panama for tax reasons.74 Greece did have a remarkable entrepreneurial class, but it was scattered in various parts of the Ottoman Empire, just like the Lebanese and the Armenians, leaving the country with little industry.75
Like Greece, Spain had very little to export to advanced countries such as France, Great Britain, and Belgium, except for its agricultural products like wine (between 1880 and 1914 Spain was the leading wine-exporting country in Europe).76 The control of Spanish mines (as well as the rail infrastructure) was in the hands of foreigners, mainly British, French, and German, with the complicity of corrupt local elites.77 This was no minor affair since, in the last quarter of the nineteenth century, Spain produced more than 23 per cent of the world lead, 16 per cent of its copper, and large quantities of iron ore and sulphur. Then, at the beginning of the twentieth century, decline set in and other competitors emerged.78 These vast resources might have been used to help bridge the gap between backward Spain and the rest of the West. But they weren’t. The state was too bureaucratic to be of much use and the banking system was primitive – two reasons why Spain failed to have an industrial revolution in the nineteenth century.79 As early as 1891 an engineer, Pablo de Alzola, lamented that the mineral industries had failed to promote economic growth.80 The limited industrialization that existed was confined to Catalonia and the Basque country.81 Elsewhere industrial development proceeded at a very slow pace and remained so weak that it could not provide sufficient stimulus to increase production in agriculture. Labour remained, unproductively, in the countryside, acting as a restraint on the Spanish economy, as it also did in the case of Portugal.82
The growth of industry in Europe in the decades leading up to the First World War was concentrated in a few regions of the West. Outside the West (and Japan) there was hardly any modern manufacturing. Industrialization remained firmly in the hands of western Europeans and Americans. Only Japan just about challenged this hegemony as the table below makes clear (see Table 10).83
The circumstances surrounding each industrial country were varied. This is hardly surprising. Within the world of advancing capitalism there was remarkable diversity: new countries (Germany and Italy) and old ones (Britain and Sweden), landlocked countries (Switzerland) and islands (Japan and Britain), large countries (the USA and Russia) and small ones (Belgium and Switzerland), multinational (Russia) and fairly ethnically homogeneous states (Sweden and Japan). Some small countries could follow bigger ones by producing manufactured exports for their markets, as was the case for Belgium and Switzerland, whose exports per capita were far higher than any other country, including Britain, throughout the period 1880 to 1914.84 In the same period Sweden achieved the highest rate of growth per capita GNP in Europe.85 Other small peripheral countries did not do well. Most of the Balkan nations that became independent only in the second half of the nineteenth century faced problems of nation-building while being constrained by unfavourable economic circumstances. Their subsequent history turned out to be most unfavourable to economic prosperity and, as a result, even today they suffer from relative economic backwardness. They lagged behind western Europe before the First World War, between the wars, during communism and after communism.
On the eve of the First World War what we came to call the ‘Third World’ accounted for less than 2–3 per cent of the world’s industrial output.86 Western growth was remarkable only in comparison with that of the periphery, and not in comparison with the growth it would experience in the decades after the Second World War, the real Golden Age of Capitalism, when the advanced economies of Europe and North America grew by leaps and bounds.
Table 10 League Table of Industrial Development, 1810–1910
Source: Paul Bairoch, ‘Niveaux de développement économique de 1810 à 1910’.
5
The State
The idea that minimal state intervention was best was seldom seriously propounded by the political elites in the second half of the nineteenth century (or indeed until sometime around 1980), though it was by many intellectuals. It was generally agreed that the state should play an active role in removing obstacles to growth and at the same time try to alleviate some of the social problems growth created. As globalization proceeds states find it increasingly difficult to control all aspects of a nation’s affairs, particularly international financial transactions. But states matter and will go on mattering for the foreseeable future, which is why not even their opponents would be so bold as to say that state treaties like NAFTA (the North American Free Trade Agreement) and the Euro
pean Union Treaty of 1992 (the Maastricht Treaty) are irrelevant, or that the decision by Richard Nixon to unpeg the dollar from gold in 1971 (effectively abolishing the Bretton Woods agreement) had little impact.
The state was crucial in creating the preconditions of economic transformation, including a set of legislative institutions regulating competition, because capitalism, unlike other economic systems, has strong anarchic tendencies. Taming the beast to save the beast was essential. Capitalists do not control capitalism. They are themselves prisoners of a set of social and economic relations within which they try to improve their position against their competitors. The distribution of winners and losers owes something to the relative distribution of entrepreneurial skills, but it is also due to exogenous elements, even to luck (such as the availability of raw materials), and past decisions taken by others. To some extent success in capitalism as in politics depends on the circumstances facing individuals and their capacity to exploit them to their advantage, or as Machiavelli explains in Chapter 6 of The Prince, on the combination of fortuna (circumstances) and virtù (one’s own capacity and skill). This is where politics comes in. The stability of the state and its own success in expanding its power or protecting itself from enemies came increasingly to depend on the economic performance of its own home-grown entrepreneurial class. At the same time it was essential for entrepreneurs to be protected by a strong state. The two worked in symbiosis.
What if there were no entrepreneurs? ‘Enlightened’ sovereigns like the German-born Catherine of Russia (r. 1762–96) thought that one should create them, producing a ‘middling class’ like Britain’s. That was the way of strengthening the state, she wrote: ‘The object of commerce is to export and import goods for the benefit of the State.’1 Her Manifesto of 22 July 1763, distributed throughout Europe, encouraged, over the following six years, the immigration of thousands of entrepreneurs and craftsmen attracted by loans and concessions.2 A lack of an entrepreneurial middle class was a standard explanation, at least in the nineteenth century, for the lack of industry. It was believed that the problem with the Ottoman Empire, for example, was that it had too many aristocrats and not enough merchants, which is why it imported or developed a middle class from the Greek, Armenian, and Jewish communities.3
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