Gerschenkron and late development

Brief biography:

There have been three great historically-minded development economists. In addition to Rostow and Arthur Lewis, the roster must include Alexander Gerschenkron. He was a fugitive from the Bolshevik revolution who finished up in Harvard. His main work was to explore the costs and benefits of being a latecomer to economic development. His findings were presented first in an essay published in 1952, entitled ‘Economic Backwardness in Historical Perspective’.  Gerschenkron’s research was pre-eminently into Russian economic development, but he had also studied France, Germany, Austria and Bulgaria. From this mass of empirical work Gerschenkron proposed that in certain circumstances there were advantages from a late start into industrialisation. Economically backward countries needed to leap the gap of knowledge and practice that separated them from the advanced nations. If these and other problems could be overcome, success for the latecomer to industrialisation was rewarded by proportionately more rapid growth, signalled by a decisive spurt in industrialisation. There would undoubtedly be within late-starter a tension between the promise of economic development, as achieved elsewhere, and the reality of stagnation.  Such a tension motivates institutional innovation and a search for locally appropriate substitutions to the problems of launching self-sustained growth.

                For Gerschenkron, it would be the state that would have to fill the gap to create institutions conducive to growth in the late industrialiser. The greater the degree of backwardness, the more interventionist must be the successful channelling of capital to nascent industries. Critically, Gerschenkron believed that shortage of funds for investment (capital) was not the significant barrier to development that many more conventional development economists had believed. He argued that the pressure for economic development from within the late starter would lead to the creation of institutions to raise and channel funds into industry. The best examples given by Gerschenkron were the credits mobiliers, the industrial or investment banks active in both France and Germany. Where initial conditions were more difficult, the state had to step in, either by creating or promoting the financial intermediaries, or, more often by using state agencies to finance and, if necessary, to operate directly. The best example here is Russia, which is for Gerschenkron the paradigm of state-driven late development. The state gave direct financial support above all to the capital-intensive parts of heavy industry, to mining and metallurgy, encouraging the formation of large enterprises operating on an enormous scale. Capital was less of a problem than entrepreneurship. Entrepreneurs have essentially two main tasks. They are the risk takers, who should be able to identify new opportunities for profit, whether by the development of new products or of new processes – new ways to develop existing products.  The ability to organise and manage large-scale enterprise is very scarce in developing countries, even those as comparatively favoured as Russia in the early twentieth century. The state itself is often the only source of organisational expertise. But the supply of sound, balanced risk-takers is even scarcer. The state is not the most likely source of those who are skilled in searching out new areas of profit but the state could involve itself in the creation of these skills. Gerschenkron was looking at the historical record, but the practical solution favoured by Hirschman, of an investment strategy that was designed to build up skills in decision-taking, would no doubt have won his support.

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