Wednesday, May 02, 2007

Industrial Development: Hamilton vs. Hamilton

Two weeks back, i promised to post my feedback on Abe Margallos's The Fiction of American Free Market Model. Abe's main point is that the United States, in order to industrialize early in its history as an independent nation, followed a mercantilist approach as advocated by Alexander Hamilton:

"Alexander Hamilton, instead of pursuing laissez-faire free trade capitalism reverted to mercantilism, or neo-mercantilism. Although opposed by Jefferson* who believed that which governs least governs best, Hamilton succeeded in calling for an active (federal) government in infrastructure development and industrialization fortified by tariff protection against British manufactured goods. Hamiltonian economics later became known as the “National System” of the USA, Inc., the key postulates of which were:

1) Protecting industry (new factories or infant industries) through selective high tariffs and later via government subsidies;

2) Government expenditures in infrastructure development targeting internal improvements such as road building and other public works;

3) Creation of big banking such as national banks along with policies promoting productive enterprises.

He then cited Japan as following the same model:

"Little wonder the first Miracle of Asia, Japan, Inc., was built by its own founding fathers, the Meiji leaders, according to Hamiltonian economics under the guiding hand of the state. And the roaring “Tiger, Inc.” and now the awakened Dragon, Inc. simply followed suit in adopting the American way."

While i agree that Japan followed Hamilton's approach, i also believe that there are important differences that have to do with Abe's point #1 above. For one thing, Japan's tariffs were never as high as that of the United States during a similar stage in its development. Going back to what Amsden states in her book The Rise of the Rest:

"In one critical - and ironical - respect the American pattern was very easy to follow: it had high tariffs" [emphasis on the original] "In its early stage of development, the United States adopted tariffs that were among the world's highest. In 1913, the United States average was almost twice that of Japan."

Indicators of Tariff Levels in 1913, USA and Japan
CountryTariffs 1908-1912(%)Tariffs on Manufactures (%)
Source: 'The Rise of the Rest', Table 7.6 page 175

"Japan's tariff (and its variance) rose between 1893 and 1938, but overall remained 'moderate' - only 24 percent at its peak in 1931 compared to a peak of 50-60 percent in the United States."

Moreover, Amsden notes that Japan had a stronger link between its import substitution and export activities:

"The linkage between import substitution and export activity in Japan began to be forged soon after the Meiji restoration. All modern industries were started as import substitutes, but exporting became concentrated in a small number of products and bean almost at once...In 1913, the production-export ratio was 77 percent for raw silk, 25 percent for cotton fabrics, and 30 percent for cotton yarn. Persistently high production-export ratios signal an orientation on the part of producers that trade is not just a 'vent-for-surplus' or a means to dispose of inventory that cannot be sold in the domestic market. Instead exports are built into import substitutes through long-range capacity planning." [Emphasis on the original]

Incidentally, with its success in following a combination of import substitution and export-led growth, Japan's Meiji government has in effect demonstrated what Tyler Cowen points to as the key benefit of international trade i.e. additional output or, in other words, contribution to economic growth. Conversely, it also means that to a certain extent, Cowen (who is known for his libertarian leanings), is employing the logic behind import substitution, something that Dan Rodrik notes with some perceptible degree of glee in his post, where he says: "the reason the" [Tyler Cowen's explanation] "made me jump is the similarity it has to arguments that proponents of import substitution often make in support of trade protection."

[By contrast], "...export promotion in American history was largely restricted to information-gathering by diplomatic consuls, externsive technical assistance for agriculture, and military expenditures to develop defense-related products...These supports apart, American export promotion was virtually nil: 'Foreign sales (in 1893-1921) were achieved for the most part without assistance from the US government'**"

Amsden then states the reason why this is so:

"American exports began to be undertaken primarily by big businesses on the basis of innovative technologies. Therefore, U.S. exporters required little government help and the United States became a poor model for export promotion."

The United States did not need government initiated export promotion because its businesses , This, among other things, enabled American firmsto possess first mover advantage. Japan, being a latecomer early in its development history, by necessity, followed the approach of a second mover.

There is clearly a difference in applying Hamilton's approach depending on whether one is a first- or a second-mover. Amsden and Chu, in their book Beyond Late Development: Taiwan's Upgrading Policies summarize both the challenge and potential benefit to a latecomer country:

"The first latecomer firm to make a three-progned investment - in optimal size plants, technology and management, and distribution - gains 'second-mover advantage' in world markets." [Emphasis in the original] "The more numerous a latecomer's second movers, the better its national economic performance is likely to be."

In choosing which model to replicate, we have to answer the question, to which category do we belong? (Of course, we also have to be open to the question of whether we need to create another category for ourselves.)

*I posted about the distinction between Hamilton's and Jefferson's approach here.
**As cited in W.H. Becker (1982), The Dynamics of Business-Government Relations: Industry and Exports, 1893-1921, Chicago: University of Chicago

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