AN ECONOMIC HISTORY OF MODERN EUROPE: SECTORAL


DEVELOPMENTS, 1870-1914



 



I. INTRODUCTION


Gross domestic product consists of a wide array of activities, and the structure of


those activities has changed over time as the European economy has developed.


Economists have long classified activities on the basis of a distinction between


agriculture, industry and services, although there has been less than complete


agreement on which occupations to include in each sector ( 1951). In this


chapter we will follow the modern European convention of including forestry and


fishing together with farming as “agriculture” and include mineral extraction together


with manufacturing, construction and gas, electricity and water in “industry”. Services


then covers all other activities, including transport and communications, distribution,


finance, personal and professional services, and government.


In 1870, most of Europe still had a majority of the labour force engaged in


agriculture, although this was no longer the case in the most industrialised economies


of northwest Europe. In particular, agriculture accounted for less than a quarter of the


labour force in Britain. The share of the labour force in agriculture was considerably


higher in southern Europe and in eastern and central Europe. Between 1870 and 1914,


agriculture’s share of economic activity continued to shrink throughout Europe, but at


varying rates. Of some importance in western Europe was the contrast between


countries which protected their agriculture in the face of cheap imports from the New


World, and countries where the agricultural interest lost out to the free trade lobby


( 1997). In many east European countries, however, it was the threat of


grain invasion from Russia that was of more significance. Falling food prices and


declining employment opportunities in farming led to worries about economic


depression at the time, particularly in societies dominated by agriculture. However, it


makes more sense to see the declining share of agriculture in employment as arising


from the combination of a relatively low income elasticity of demand for food and a


healthy pace of labour productivity growth due to technological progress and growing


market integration.


The flip side of the declining share of employment in agriculture was the


rising share of industry and services. Much of the existing literature on national


economies focuses on industry, with industrialisation seen as the key to economic


development during this period ( 1969; 1985; 1981). A key


theme here is the Second Industrial Revolution, with the development of modern


industries based on scientific research, such as chemicals and electrical engineering,


and involving the final steps towards genuine mass production (1990). The


new technologies sometimes provided an opportunity for newly industrialising


countries such as Germany or the Netherlands to leapfrog more established industrial


countries such as Britain or Belgium (1997;  1994). A


balanced account of European industry must also cover the less glamorous sectors


such as textiles and food, drink and tobacco, as well as the countries that failed to


make much headway in the process of industrialisation.


Equally important, however, is the need to recognise that for many countries,


services accounted for a larger share of economic activity than industry. Furthermore,


a process of “industrialisation” of services was already underway, leading to high


volumes of activity and high levels of productivity (2005b). In many


ways, this process was linked to the Second Industrial Revolution, with high volume


production in manufacturing only possible given the productivity improvements in


transport and communications, distribution and finance ( 1977). However, it


is important not to treat services as merely subservient to manufacturing. Many


services are provided directly to consumers as well as to producers, and services


matter for aggregate productivity not just because of their impact on industrial


productivity, but because of their own productivity performance ( 1998).


For an economy to have high living standards, it is necessary to have high


productivity in all sectors. However, it is also clear that the structure of the economy


matters, because value added per worker is higher in some sectors than in others.


Since agriculture has historically tended to be the lowest value-added sector, the share


of the labour force in agriculture turns out to be a very good predictor of per capita


income. In general, European countries that remained heavily committed to


agriculture remained poor, while those that reallocated labour to industry and services


became better off ( 2005a).



II. STRUCTURE OF THE ECONOMY


Table 1 provides data on the sectoral distribution of the labour force between


agriculture, industry and services for up to 20 countries in the three major regions of


northwest Europe, southern Europe and central and eastern Europe. In the countries


for which we have data in 1910, agriculture still accounted for around half of all


employment. Our sample of countries for 1870 is smaller, but clearly indicates a


larger share of employment in agriculture than in 1910. For the sample of 14 countries


available in both years, the share of employment in agriculture declined from 51.7 per


cent in 1870 to 41.4 per cent in 1913.


Although on average, agriculture accounted for a larger share of the labour


force in southern Europe than in northwest Europe in 1910, there was considerable


variation across countries, with some south European countries such as France being


less agricultural than some northwest European countries such as Finland. On the


other hand, the share of the labour force accounted for by agriculture in the United


Kingdom was as low as 22.2 percent in 1870, falling to just 11.8 per cent by 1910.On


average, agriculture accounted for a still larger share of the labour force in central and


eastern Europe than in southern Europe in 1910, but again there was considerable


variation across countries, with Germany and Switzerland, for example, having


agricultural shares more in line with many northwest European countries.


As the share of the labour force in agriculture declined, the shares in industry


and services increased, and this trend can also be seen in Table 1. For the fourteen


country sample, industry expanded its share of employment from 26.9 to 32.3 per


cent, while services increased their share from 21.4 to 26.3 per cent. Looking at the


cross sectional variation in 1910, the share of industry was highest in northwest


Europe and lowest in central and eastern Europe, with southern Europe occupying an


intermediate position. However, as with agriculture, there was considerable crosscountry


variation within each region. In the United Kingdom and Belgium, over 40


per cent of the labour force was engaged in industry in 1910, while in Bulgaria the


figure was just 8.1 per cent. The share of the labour force in services in 1910 was


highest in northwest Europe, lower in southern Europe and lower still in central and


eastern Europe, but again with substantial variation across countries within each


region.


It is helpful at this point to note the relationship between these differences in


the sectoral allocation of labour across sectors, and the prosperity of nations and


regions. The point is perhaps most forcefully made with the help of Figure 1, showing


the strong relationship between the level of per capita income and the share of the


labour force in agriculture in 1913. It was already clear by this time that escaping


from poverty required the reallocation of labour away from agriculture, so that


modernising governments across Europe adopted industrialisation as a policy goal.


However, the relationship between GDP per capita and the share of the labour force in


industry was actually much less clear, as can be seen in Table 2. This table formalises


the relationship between GDP per capita and the sectoral allocation of labour using


regression analysis, and pooling cross sectional observations for a number of years


between 1870 and 1992. The first column confirms the statistically significant


negative relationship between living standards and the share of the labour force in


agriculture, and also finds a significant positive relationship between GDP per capita


and the share of the labour force in industry. However, notice that the fit of the


equation, as measured by R


2, is much weaker for industry than for agriculture. Note

also that the fit becomes stronger once again in the regression of GDP per capita on


the share of the labour force in services.



III. AGRICULTURE


1. Opportunities and challenges


Population growth and growing incomes increased the demand for agricultural


products. Total consumption of calories per capita increased in some quite poor


countries, such as Italy and, above all, demand shifted away from cereals towards


more income-elastic goods such as livestock products in Southern Europe and fruit


and vegetables in Northern Europe ( 2003a,  2005). The


reduction in transport costs fostered trade in agricultural products, with a significant


impact on relative prices, especially within agriculture. The real price of agricultural


products remained constant, while the inter-sectoral terms of trade (the price of


agricultural products relative to manufactures) improved in most countries or, at


worst, remained constant ( 2002). Prices of crops (mainly cereals)


declined relative to livestock in all European countries. Figures 2 and 3 show these


trends in the inter-sectoral terms of trade and the relative price of crops to livestock


for France, the United Kingdom and the United States. Industrialisation and modern


economic growth offered opportunities of employment to farmers (or more precisely


to their sons and daughters) and to agricultural capital, while scientific and


technological progress provided new techniques, such as fertilisers.



2. The performance


Conventional wisdom does not rate the performance of European agriculture during


the period 1870-1913 very highly. However, as Table 3 shows, this view needs to be


revised in the light of the quantitative evidence. The growth rate of gross output – i.e.


the total production available for consumption within or outside agriculture – was


quite high for the continent as a whole and also for the main regions. Although


medium-term output trends were remarkably stable, production did nevertheless


fluctuate quite a lot from one year to another, following the vagaries of the weather


(1999). In particular, there is some statistical evidence of a


slowdown in growth between 1873 and 1896 during the so-called Great Depression,


although the severity of this has been somewhat exaggerated in the literature, leading


one writer to coin the phrase “the myth of the Great Depression” (1969).



 



The country rankings of agricultural growth performance in Table 3 are also


somewhat at odds with the conventional wisdom. In fact, the best growth performance


by far was recorded by Russia, where production increased by a factor of 2.5 over 43


years, and the next highest increase was in the Habsburg empire. Clearly, these


figures have to be considered with caution, but there is no doubt that Russia was a


success story, as confirmed by the great increase in its agricultural exports


(1960). Most countries increased agricultural production at a rate of around 1.0 to 1.5


per cent per annum, exceeding or keeping up with the increase in their population. In


only four cases (Portugal, Greece, the Netherlands and the United Kingdom) did


agricultural production per capita decline. Between 1870 and 1913, trade in primary


products, which went almost entirely to Western Europe, increased by a factor of 3.5.


This increase fed Britons and allowed other Western Europeans to improve their


nutritional standards.



3. The proximate causes of growth: factor inputs and TFP


The growth of factor inputs contributed very little to the growth of agricultural output,


as can be seen in Table 4. Unfortunately, it is not possible to measure the total stock


of land in use, because the data on pasture are scarce and hardly comparable across


countries. However, the data on cropland and tree-crops are good enough, and they do


not show any Europe-wide growth. They remained constant or even declined in


Western Europe (with the possible exception of Spain) and rose by a few percentage


points in the East. The same pattern holds true for labour. The number of agricultural


workers increased by almost a half in Russia, increased slightly in Germany and Italy


and declined, by about 10 per cent, only in the most developed countries of Western


Europe. With the exception of Russia, all these movements remain well within the


margins of statistical error. For one thing, the number of permanent workers may not


be a good proxy for the input of agricultural labour in nineteenth century Europe. A


lot of non-agricultural workers helped at peak time (e.g. during harvests), the quality


of work differed according to the age, sex and skill of the worker, and the number of


hours worked or the intensity of work differed by country. Furthermore, all these


features may have changed over time. The evidence on these issues is scarce, but the


least bad guess suggests that these biases, although important if taken separately,


might cancel each other out. For instance, it seems likely that the contribution of nonagricultural


workers declined, while the number of hours worked increased in France,


Ireland and Belgium ( 2005).


Capital is the most difficult factor of production to measure accurately. As a


first approximation, an increase in total agricultural capital would be expected, as a


result of the growing use of modern, capital-intensive techniques. However, fixed


agricultural capital consists largely of land improvements and buildings, which are


bound to grow slowly, if at all, in long-settled areas like Europe. Indeed, the few


available series rule out rapid growth, with the exception of Russia (2005)


Capital stock declined in the United Kingdom and rose at about 1 per cent


per annum in other West European countries. The effect of the diffusion of modern


techniques can be detected in the growth of purchases outside agriculture. A simple


measure of these purchases is the ratio between value added (which excludes them)


and gross output (which includes them). As  demonstrates, the ratio in 1913


shows quite substantial differences among countries, which tally well with the


conventional wisdom about the level of technical development in each country.


The combination of substantial production growth and relatively slow increase


in inputs implies a healthy growth of total factor productivity (TFP). Indeed, without


an increase in TFP somewhere in the world, the agricultural terms of trade, or price of


agricultural products relative to industrial products, would have risen, and this was not


the case. In a well-known paper, (1991) has estimated rates of TFP


growth for many countries, ranging from 0.19 per cent per annum in the United


Kingdom to 1.53 per cent in Germany. Several authors have produced alternative


estimates, including  (2005). Although the results do not always coincide


with van Zanden’s, the story is broadly the same. The average rate of TFP growth for


ten countries was 0.7 per cent per annum, which corresponds to a cumulated 30 to 40


per cent increase over the 1870-1913 period (2005). The


European performance compares quite favourably with that of the countries of


Western Settlement over the same years, with TFP in agriculture growing at a rate of


0.2 to 0.5 per cent per annum in the United States.



4. The underlying causes of growth: technical progress or market integration?


Most authors attribute growth in TFP to technical progress, and there were some


important technological innovations in nineteenth century European agriculture.


Fallow practically disappeared from Western Europe, with the conspicuous exception


of Spain, although it remained important in the East (2000)


 In Russia the cropping ratio was still as low as 0.70 (i.e. about a third of land was


under fallow) on the eve of World War I ( 1930). Tools improved. In


the more backward countries, such as Russia, iron ploughs substituted for traditional


wooden ploughs, while in more advanced areas, better design improved performance


and reduced the need for draft power. Mechanisation proceeded more slowly, making


a significant breakthrough only with the introduction of tractors after World War II.


Machines such as the reaper were still pulled by animals, and the only “modern”


machine widely used in the European countryside in the early twentieth century was


the steam thresher ( 2003b). All these innovations continued the trends of the


pre-1870 period. However, there was a major breakthrough with the massive adoption


of chemical fertilisers. European farmers had used imported guano and nitrates since


the 1830s, and the commercial production of phosphates had started in the 1840s.


However, from the 1860s, the chemical industry made available new products such as


ammonium sulphate and calcium-cyanamide, at lower and lower prices. In the


Netherlands, for instance, the price of fertiliser relative to rye fell by 40 per cent from


the 1870s to World War I ( 1994). Fertiliser consumption per


hectare increased by a factor of 13 in Germany, from 3.1 kg of nutrients per hectare in


1880 to 42 in 1913 ( 2005). Not surprisingly, consumption was


much higher in the Netherlands (163 kg per hectare). Perhaps more surprisingly, Italy


(13.3 kg) and even Russia (6.9 kg) consumed more fertilisers per hectare than the


United States (5.8 kg). Indeed fertilisers, as a land-saving innovation, were


particularly suitable for a land-scarce area such as Europe.


Although surely important, technical progress does not necessarily account for


the whole of the growth in TFP. Productivity growth may also have been due to the


more efficient allocation of resources, as a result of the growing development of


markets. This process included commercialisation and market integration (price


convergence). Although we know very little about the former, there is a substantial


literature on market integration, at least for wheat (1986;  2005).


However, the effects of this increasing market integration on agriculture are not well


explored, with the exception of  (1989) for France, who focuses largely on


the pre-railway age. To what extent did integration cause relative prices to change and


to what extent did production adjust via local specialisation? To be sure, there is


evidence of the growth of specialised production around the cities or in some wellendowed


areas, such as the South Italian and Spanish vineyards. Also, there was a


modest increase in the share of livestock in total gross output, from 41 to 46 per cent,


consistent with the increase in its relative price (2004). However, much


more detailed data would be needed to provide a comprehensive assessment of the


real impact of commercialisation and globalisation.



5. The role of institutions


By and large, farmers were left to themselves. Support for technical progress,


although useful, was very limited and although land reform was much debated, very


little action followed, except in Ireland. Even intervention in product markets was


relatively modest. This statement may seem surprising, given the conventional


wisdom about the protectionist backlash to the grain invasion from the United States


(1997). However, three points need to be considered. First, Russia rather


than the United States was the main invader in most European markets, at least for


wheat. Second, the protectionist backlash developed in only a few Continental


countries and the barriers to wheat imports were not that high, especially compared


with the effects of market regulations since the 1930s. Third, wheat accounted for


only a small part of total output – no more than 15 to 20 per cent. The rest of


agriculture was affected much less by global competition, if at all, and did not trigger


any comparable reaction. Indeed the aggregate Producer Subsidy Equivalent (PSE)


was in the region of 5 per cent, compared with figures around 40 per cent in the


heyday of the later Common Agricultural Policy of the European Economic


Community (2005).


Institutions loom large in the historical literature on agriculture, more often


than not in the role of the villain. Most historians blame institutions for what they


perceive as the disappointing performance of European agriculture. It is argued that


common property of land and traditional contracts, most notably sharecropping,


hindered innovation. The process of enclosing common land in Great Britain had long


finished by 1870, but a similar process was going on in Continental Europe, possibly


until the early twentieth century (1980). In Russia, serfdom had been


abolished only in 1861, and land ownership had typically been vested in peasant


communes, the obschina or mir (1983).  (1966) famously


argued that the periodic redistribution of common land prevented investment and


innovation, and retarded the migration of labour from the countryside to the cities.


However, this interpretation has been severely criticised by (1994), who


argues that communal institutions were in practice much more flexible than appears to


be the case on paper. Sharecropping is often blamed for the poor performance of


Mediterranean agriculture ( 1968). Landlords are said to have been more


interested in accumulating land than in making productivity-increasing investments,


while tenants were too poor to risk anything. The empirical evidence for this


statement is, however, very thin. The failed adoption of innovations such as British


“new husbandry” can be explained by environmental factors, while admittedly crude


econometric tests fail to find any effect of contracts on productivity (1994) 1986)


Note that in seeking to assess the importance of institutions, it is not


appropriate simply to contrast the different growth rates of agricultural output in


Russia and Britain, which are usually seen as the most backward and the most modern


countries, respectively. First, the catching-up perspective suggests that we should


expect a negative relationship between the growth rate and the starting level of


productivity. Since Britain had the highest level of agricultural labour productivity in


Europe in 1870, slow productivity growth was only to be expected. Similarly, the low


initial level of productivity in Russia opened up the opportunity of rapid catching-up


growth. Second, institutions are only one possible reason for the failure of a country


to catch-up, with other factors such as land quality and economic policy also playing


their part.



IV. INDUSTRY


1. Europe’s industrial production, 1870-1913


Industrial production generally grew faster than GDP in Europe between 1870 and


1913, as Europe developed, and agriculture declined in relative importance. Table 5


presents data on the average annual growth rate of industrial production by countries


grouped together in the main regions. The scope for rapid catching-up growth was


greater in the less developed parts of Europe, which in 1870 had still not embarked


upon the development of modern industry. In eastern and central Europe, Germany,


Austria-Hungary and Russia all recorded rapid growth rates of industrial output as


they began the process of catching-up on Britain, the most highly developed country


in Europe. In northwestern Europe, the Netherlands and Sweden also began a


sustained period of industrial development from around 1870. However, being


backward is not sufficient for the achievement of rapid industrial growth, and many


relatively poor countries, particularly in southern Europe, recorded relatively


unimpressive rates of industrial output growth.


It is therefore important to consider both levels and growth rates when


assessing economic performance. Russia, for example, shows rapid industrial growth


after 1870, but starting from an extremely low level of industrialisation. In Table 6,


we thus see that despite this very rapid industrial growth after 1870, Russia had still


reached only 15 per cent of the UK level of industrialisation on a per capita basis by


1900. By 1913, this had crept up only to 17.4 per cent, because the level of


industrialisation was growing in Britain as well as in Russia, and part of the more


rapid output growth in Russia reflected population expansion.


Table 6 provides a good summary of the industrial development gradient


within Europe, with the UK the most heavily industrialised country and with Belgium,


France and Switzerland also substantially more heavily industrialised than Europe as


a whole throughout the whole period 1860-1913. Sweden and Germany started the


period with below average levels of per capita industrialisation, but ended it with


significantly above average levels. Although per capita industrialisation increased in


all countries, the level remained relatively low in much of Europe. European


industrialisation can thus be thought of as geographically concentrated in a series of


Marshallian districts. Marshall [1920] explained the spatial concentration of industrial


production through external economies of scale, which he attributed to learning


(knowledge spillovers between firms), matching (thick markets making it easier to


match employers and employees) and sharing (giving firms better access to customers


and suppliers in the presence of significant transport costs) (1994)


One potential explanation for these patterns is simply geographical, with an


important role for natural resource endowments. In particular, it would be difficult to


understand patterns of industrial location at this time without taking into account


mineral deposits. Put simply, much industrial development in the age of iron and


steam took place around coal and ore fields, although this is not always particularly


well captured by the boundaries of nation states (1981).


However, the period after 1870 also saw the development of a new scientific


approach to industry, which began a process of freeing industry from the constraints


of location around natural resource deposits. This was most obvious in the


development of wholly new industries such as synthetic dyestuffs, based on new


chemical processes, or electrical goods, based around a new source of energy


( 1990;  1969). However, it also affected many old industries, such


as brewing, where research could improve both processes and products, and iron,


where research led to the utilisation of new ores and the production of better products,


such as varieties of steel. Also, the development of “mass production” in engineering


industries on the basis of the assembly of interchangeable parts, allowed the


possibility of substituting machinery for skilled craft labour, threatening the position


of established producers and creating opportunities for newly industrialising nations


without a large stock of experienced workers. The “Second Industrial Revolution”


thus offered countries with little previous industrial experience the opportunity to


replace established producers through the more rapid development and adoption of


new technology.



2. Performance of countries and regions


The United Kingdom was Europe’s most industrialised country in 1860, in terms of


the absolute level of production as well as on a per capita basis. However, Britain’s


position was actually more vulnerable than is often appreciated. For, as (1985)


notes, Britain’s achievement during the Industrial Revolution was not so much the


achievement of high productivity in industry as the redeployment of labour away from


agriculture in a large but still quite labour-intensive industrial sector. Britain had a


very dominant position in world export markets in a small number of products, such


as cotton textiles, iron and coal. Britain’s position was most obviously challenged


during the period 1870-1913 by Germany and the United States. The challenge was


most successful in heavy industry, where the scientific methods of the Second


Industrial Revolution were developed. However, as  (1997) notes, there


has been a tendency to overstate any failings in British industry at this time, and to


ignore success stories. First, comparative labour productivity in manufacturing as a


whole changed little between the three major industrialised countries of Britain, the


United States and Germany during the period 1870-1913. So the proximate cause of


the faster industrial output growth in Germany compared with Britain was simply the


faster growth of the labour input, with labour productivity in Britain and Germany


remaining broadly equal. Labour productivity in manufacturing in both countries


remained substantially lower than in the United States, where higher labour


productivity has usually been attributed to labour scarcity and natural resource


abundance, leading already by the mid-nineteenth century to the development of a


machine intensive technology that was not well suited to European conditions


( 1962; 1997). Second, although Germany did very well in a


number of heavy industries, such as chemicals and iron and steel, where labour


productivity was higher than in Britain, and where Germany took an impressive share


of world export markets by 1913, there were also lighter industries such as textiles


and food, drink and tobacco, where Britain retained a substantial productivity


advantage and remained strong in world export markets


(2005). In the case of shipbuilding, Britain even displaced the United States to become


the world’s major producer as the industry moved from wood and sail to iron and


steam ( 1979).


The traditional view of French industry during the late nineteenth century was


that it was relatively backward and, in contrast with Germany, failed to catch up with


Britain (1964; 1969;  1977). Nevertheless,


this generally negative assessment of French industrial performance was tempered by


the fact that the pace of industrial output growth picked up after 1895, particularly in


sectors based on the new technologies of the Second Industrial Revolution, such as


electrical engineering, electro-metallurgy, electro-chemicals and motor vehicles


(1977, 1979;1989)


 However, the revisionist views of  (1978), who


claimed that levels of industrial labour productivity were higher in France than in


Great Britain for most of the nineteenth century, surely went too far in rehabilitating


French industrial performance. Taking both output and employment from census


sources,  (2004) finds that in 1906, output per worker in French industry was


just 74.1 per cent of the British level. The French may have found an alternative path


to the twentieth century, based on small family firms catering to niche markets, but it


was not without its costs in terms of living standards ( 1978 ;1979)


Most studies of Austria-Hungary emphasise the wide variation in the levels of


economic development within the imperial territories. Austria (Cisleithania) was


generally more industrialised than Hungary (Transleithania), but industry was far


from evenly spread even within Austria ( 1977; 1981;


 1983; 1984). Thus the Alpine lands and the Czech lands were much


more developed than Galicia in the north and the Italian and Slavonic provinces in the


south ( 1981). Viewed as a whole, Austria-Hungary had a relatively low


level of industrialisation per capita, as can be seen in Table 6, but the Empire


nevertheless produced a significant share of Europe’s industrial output on account of


its size. Although early quantitative research indicated a very rapid growth rate of


industrial output in the Austrian part of the Empire, subsequent research has modified


this picture. Whereas  (1976) suggested an industrial growth rate of 3.8 per


cent per annum for the period 1870-1913, the addition of a wider range of industries


and the use of improved value added weights has reduced this to 2.5 per cent


( 1983;  2000). Allowing for a faster rate of growth in Hungary,


however, produces a rate of industrial growth for the Empire as a whole of 2.8 per


cent per annum, reported here in  ( 2000). The downward revision of


the industrial growth rate by the later researchers was concentrated particularly in the


period before 1896, leading to an unfortunate resurrection of the use of the term


“Great Depression” for a period when output did not fall but continued to grow


(1978; 1978). The catching-up perspective leads to the expectation


that Austria-Hungary should have been experiencing rapid industrial growth to catch


up with the leading European industrial nations at this time. From this perspective,


Austria-Hungary clearly under-performed during the period 1870-1913.


We have already noted in our discussion of Table 6 that Russia was a very


backward economy in the mid-nineteenth century, so the rapid rate of industrial


growth exhibited by Russia during the period 1870-1913 in Table 5 conforms to the


predictions of the catching-up framework. Indeed, no other European country


experienced such rapid industrial growth, which was generally of the order of 5 per


cent per annum, with a particularly strong spurt during the 1890s. The experience of


Tsarist Russia led  (1962) to formulate a number of propositions


concerning the link between backwardness and economic development. These


included a greater role for the state, substituting for the lack of private


entrepreneurship, a greater focus on capital goods industries to get around the lack of


consumer demand, a greater role for banks in directing scarce capital into industrial


projects, and a greater role for imported technology. Gerschenkron placed little


weight on the role of agriculture, which he saw as almost immune to change in


backward societies. Although some of Gerschenkron’s generalisations do seem to fit


the Russian case well, others have not stood up so well to quantitative scrutiny. The


state did play a role in fostering industrialisation, fearing that Russia would lose its


great power status without reform, and up-to-date technology was imported from


abroad ( 1972). However, consumer goods such as textiles and


foodstuffs accounted for a large share of industrial production, and banks did not play


a decisive directing role in these industries (1986). Furthermore,


 (1982) data suggest that agriculture made a significant


contribution to Russian development through productivity growth (1986)


Even more than Austria-Hungary, Russia remained an important European


producer of industrial goods despite its relatively low level of per capita industrial


production, because of its large size in population and territory.


The catching-up perspective suggests that we should expect a similar


performance from the countries of the northern and southern peripheries of Europe. In


we see that per capita levels of industrialisation in Italy and Iberia were


similar to levels in Scandinavia in 1860. Industrial growth rates in Table 5, however,


were much higher in the Scandinavian countries than the Mediterranean countries. In


particular, Sweden stands out as having experienced a very rapid phase of industrial


growth, achieving a level of industrialisation by 1913 that was on a par with the


European core. This represents a notable case of leap-frogging on the basis of the


technologies of the Second Industrial Revolution, drawing particularly on Sweden’s


abundant supply of hydro-electric power ( 1981). All the


Scandinavian economies became significant exporters of timber and wood products,


and benefited from the replacement of rags by wood pulp as the major raw material in


paper manufacturing (1997). The relatively slow overall rate of industrial


growth in Italy and Iberia masks some regional sparks of industrial development. The


most important Mediterranean growth spurt was in northern Italy from the 1890s, in a


triangle between Genoa, Milan and Turin, and based again on hydro-electric power


( 1981). There were also some stirrings of industrial growth in


Spain, but based largely on traditional industrial products such as cotton textiles in


Catalonia and iron and steel in the Basque region (1977:)


The Balkan countries remained the least industrialised throughout the period (1997)



3. Developments in particular branches


Industry covers a wide range of activities, and we now dig down below the aggregates


of industrial production to survey briefly a number of important sectors, highlighting


the contributions of the major European producers. We begin with coal, the major


source of energy in the age of steam, but which was being increasingly challenged by


the rise of electricity. As noted earlier, industry was heavily concentrated around


coalfields during the nineteenth century, so it is not surprising to see in Table 7 that


Britain was Europe’s major coal producer throughout the period. Germany was


Europe’s second most important producer of coal at this time, with production


growing more rapidly than in Britain. Belgium, a very small country but an early


industrialiser, was overtaken by Germany, France and Russia as these much larger


countries industrialised. Although coal production also grew rapidly in Austria-


Hungary, it remained behind Belgium throughout the period, despite its much greater


size. Although Britain remained Europe’s largest coal producer, and increased output


significantly, labour productivity stagnated, with technological and organisational


changes such as the replacement of bord and pillar working by longwall working


methods, the mechanisation of cutting, loading, conveying and winding, merely


offsetting diminishing returns, as pits were sunk ever deeper and coal was mined


further from the pithead (1990). German growth was more rapid, and driven


by bank finance, but allegations of entrepreneurial failure for the British industry as a


whole, rather than for individual pit-owners, are probably wide of the mark in an


industry described by (1984) as being as close as it is possible to get in


practice to perfect competition (1971;  1971).


Although European production was still increasing, coal from the New World was


already being mined in more favourable geological conditions and taking an


increasing share of world production ( 1954: 107).


In iron and steel, major technological developments drew on science, with


wrought iron increasingly replaced by varieties of mass-produced steel, following the


introduction of the Bessemer process in 1856, the Siemens-Martin (open hearth)


process in 1869, and the Thomas (basic) process in 1879 (1954). The


general picture of Germany leap-frogging Britain is illustrated in Table 7, which


shows output of pig iron among Europe’s main producers. Allegations of


entrepreneurial failure in Britain have again been overdrawn, since account must be


taken of iron ore endowments and demand side factors such as protective barriers


raised in the rapidly growing markets of Germany and the United States, combined


with Britain’s continued free trade policy (1971;1991). The


Russian growth spurt of the 1890s is also evident, with Russia overtaking France


before the French forged ahead again after 1900. During the period 1895-99, around


60 per cent of Russian iron and steel production was supplied to the railways, while


the French boom was more oriented towards higher grade steels (1986 ;1979)


 Austria-Hungary was also a major iron and steel producer


despite a low per capita level of industrialisation. Like Russia, Austria-Hungary was


dependent on the large home market, with a railway construction boom providing a


substantial boost to demand ( 1977).


During the period 1870-1914, the chemical industry was transformed on the


basis of scientific research. The production of inorganic products such as soda ash,


sulphuric acid and sodium sulphate, that had been produced on an industrial scale


since the early nineteenth century, was revolutionised by new processes such as the


replacement of the Leblanc process by the Solvay process in soda ash, and the


introduction of electricity as an important agent in chemical processes (1954)


 However, of even more significance for the long run development of the


industry was the synthesis of organic (carbon-based) products, such as dyestuffs,


pharmaceuticals, perfumes and photographic chemicals ( 1954).


Since the synthesis of organic products needed large quantities of inorganic


chemicals, the production of sulphuric acid in Table 7 can be taken as an indicator of


the general state of Europe’s national chemical industries ( 1954)


 As in other heavy industries, Germany overtook Britain, although the scale of


the German advantage towards the end of the period is understated, since Germany


was much more dominant in organic products, where Switzerland was the only


serious competitor. In synthetic dyestuffs, for example, Germany produced 85.1 per


cent of world output in 1913 (1954:). The finding by


 (1971) that Britain hung on to the Leblanc process after it was profitable to


switch to the Solvay process is consistent with (1971)


contention that competition generally ensured the adoption of the profit-maximising


technology in pre-1914 Britain, since the soda ash industry was subject to a cartel.


The chemical industry remained relatively underdeveloped in eastern Europe, with


neither Russia nor Austria-Hungary featuring among the major producers. Small,


relatively rich countries such as Belgium and the Netherlands were also significant


producers, alongside France, while Italy showed strong growth from the 1890s.


The Industrial Revolution began in cotton textiles, which continued to be an


important branch of European industry until 1914. Britain remained the largest


producer in the world despite some inevitable loss of market share as other countries


industrialised ( 1974). The switch from mules to rings in spinning and from


the powerloom to the automatic loom in weaving removed some of the skill from the


production process, and enabled countries with a less skilled but cheaper labour force


to compete with Britain, in line with V (1966) product cycle model. Seen from


this perspective,  (1986) forceful allegations of British failure in cotton


textiles are surprising, and it would seem more appropriate to ask how the British


managed to hang on to such a large market share for so long ( 1987).


 (2002) emphasise the importance of external economies of


scale in this industry that was highly localised in Lancashire, but consisted of around


2,000 spinning and weaving firms and another 1,000 merchant companies involved in


marketing. The product cycle perspective also helps to understand the high output


figures achieved towards the end of the period in low-wage countries such as Russia


and Austria-Hungary, with Russia almost catching-up on Germany, and with Austria-


Hungary ahead of Italy and not too far behind France (1986;1977)


The home market was more important for the food, drink and tobacco sector,


although even here tradability was increasing with urbanisation and the emergence of


a substantial urban working class demanding more processed foodstuffs. Data on beer


production are available on a consistent basis in Table 7, and suggest a strong link to


home market size and per capita income, with the highest levels of production and


consumption in Germany and Britain, and with substantial production also in Austria-


Hungary, France and Russia. Although possibilities of transporting such a heavy and


perishable product were limited, a small country such as Belgium was able to export


to a number of neighbouring countries. Of course, it must be borne in mind that


France produced large quantities of wine for export as well as for home consumption,


so that more general data on production of alcoholic drinks would show a much


bigger contribution from the Mediterranean countries, including Italy, Spain and


Portugal (2002).



V. SERVICES


1. Europe’s service sector output, 1870-1914


Most economic histories of the period 1870-1914 pay little attention to services, apart


from railways and banks, which are seen as supporting industry. The national


accounting approach allows us to place the contributions of the railways and banks in


the wider context of the service sector as a whole, and to bring out the contributions to


consumers as well as to industrial producers. Railways moved people and agricultural


produce as well as industrial goods, and it was not the sole purpose of banks to


provide cheap loans to heavy industry. Furthermore, in addition to transport and


communications and finance, services also comprised the important sectors of


distribution, professional and personal services and government.



2. Regional developments


The most highly developed service sectors were in northwest Europe, particularly in


Britain and the Netherlands, where high productivity was achieved in the specialised


and standardised supply of services in a highly urbanised environment. In sectors


where international trade was possible, this played an important role in increasing the


size of the market and allowing economies to benefit from the division of labour.


High productivity required the “industrialisation” of services, involving a transition


from customised, low-volume, high-margin business organised on the basis of


networks, to standardised, high-volume, low-margin business with hierarchical


management (2005b). In some sectors, such as shipping, and insurance,


this involved the emergence of large firms in classic Chandlerian fashion, but in


others, such as investment banking, it involved Marshallian external economies of


scale for the financial districts of London and Amsterdam, on the basis of large


numbers of small firms ( 2002; 2004)


Large firms also grew in importance in a number of sectors where


international trade was impractical, such as retail distribution, retail banking and the


railways.


Germany was a land of contrasts. Although it contained some modernised


service sectors such as the railways and the universal banks, which have been


highlighted in the literature, the continued importance of agriculture and the


associated low levels of urban agglomeration limited the extent of the market for


specialised services. Distribution remained dominated by small wholesalers and


retailers, and although  (1962) focused on the role of the universal


banks in directing funds into heavy industry, a balanced overview of the banking


sector as a whole has to take account of the public savings banks (Sparkassen), credit


co-operatives, mortgage banks and other small institutions that made up the banking


sector, and which pulled down the average productivity performance of the German


banking sector, with municipal control often leading to the sacrifice of profits for


social objectives and the ambitions of local politicians (2002;2004)


The service sector in Italy during the late nineteenth century bears a certain


resemblance to its German counterpart, with the railways playing an important role in


the unification of a new state that was keen to foster modernisation, and with


universal banks channelling resources into heavy industry ( 1977)


 However, recent research has tended to play down the


contribution of these two sectors to economic growth, with


(2001) pointing out that Italy’s per capita railway mileage was still only one-half


that of France in 1913, and with  (1998) claiming that Italy’s universal banks


tended to support large, established companies rather than provide venture capital to


small, promising firms.


The existing literature on services in the Habsburg Empire is also heavily


oriented towards the railways and the banks. The Austro-Hungarian railway system


was one of the largest in Europe, although this owed more to geography than high


levels of economic development. Indeed, the railways were mostly single tracks with


fewer sidings, used fewer locomotives and had a lower ratio of carried freight to the


length of railways than in the rest of Europe (1977). In


 (1962) work, the banks are seen as playing an important role in


mobilising capital for industry and the railways. However, although there were a


number of large joint-stock banks, particularly in Cisleithania, banks became less


involved in financing investment in industry and the railways after the crash of 1873


( 1976). After this date, the state and foreign capital played a greater role


(1977).



3. Developments in particular sectors


Table 8 provides some indicators of activity in Europe’s transport and


communications sector on the eve of World War I. Railways are often seen as playing


an important role in integrating national economies in the nineteenth century, and


were in many cases actively promoted by governments seeking to speed up the


process of industrialisation (1962). The largest railway systems were


inevitably in the countries covering the largest geographical area, with central and


eastern Europe claiming the three largest systems within the empires of Russia,


Germany and Austria-Hungary. Western Europe was more fragmented politically,


with the next largest systems being in France, the United Kingdom and Italy.


To assess the economic significance of the American railways, (1964)


proposed the concept of social savings. For freight traffic, this is calculated as the


extra cost of transporting the quantity of freight shipped on the railways by the next


best alternative. Where a good alternative existed, such as canals in the US case, the


social saving was shown by Fogel to be relatively modest when expressed as a share


of GNP. Fogel saw this as breaking the “axiom of indispensability” of the railways for


US economic growth.  (1983) provides a survey of social savings estimates


for a number of European countries, reproduced here in Table 9. A number of


conclusions can be drawn from these estimates. First, the estimates conform broadly


to Fogel’s pattern of relatively small social savings where a good system of inland


waterways existed, such as in Belgium, England and Wales, France, Germany and


Russia. However, social savings were much larger where there was no good system of


inland waterways, such as in Spain, although even Spanish social savings were


dwarfed by the case of Mexico, where railways do seem to have been indispensable.


Second, the social savings of the railways increased over time, due to technological


progress, which led to freight rates on the railways falling relative to freight rates on


inland waterways.


There was no scope for international competition in railways, so that relatively


under-developed countries in Eastern Europe had the largest systems on account of


their geographical size. In shipping, however, international competition was possible,


allowing the most efficient providers to gain market share. Data on the net tonnage of


the main European merchant fleets are shown in . By far the most successful


nation in shipping was the United Kingdom, which operated around 35 per cent of the


world merchant net tonnage throughout the period 1870-1913 ( [1914]). The


next largest shipping nation was Germany, with less than 10per cent of world net


tonnage, while the third largest owner of merchant tonnage was Norway. Indeed, the


Scandinavian countries, despite their relatively small populations, revealed a strong


comparative advantage in shipping at this time. Although Britain was being


challenged by Germany and the United States in the scheduled liner business, the


most industrialised part of the shipping sector, Britain’s position remained very strong


in the more entrepreneurial tramping business ( 2005;  1995).


Turning to telecommunications, international competition was not possible at


this time, so that population and income per capita were the main determinants of the


level of activity, as with the railways. The highest levels of activity, visible in


were in the rich, large countries of Britain, France and Germany, but the poorer large


countries such as Russia, Austria-Hungary and Italy also show large volumes of


business. By 1913, telephones were becoming more common, and there is some


evidence to suggest that public sector telecommunications monopolies delayed the


development of the telephone system to protect their investments in the older


telegraph technology. Britain’s position in telecommunications therefore looks less


impressive if telephone calls are included with telegrams (1994;2005)


 provides some indicators of activity in finance and distribution in


1913. Financial activity is represented by banknotes in circulation and commercial


bank deposits. Since estimates for individual countries are in national currencies, it is


necessary to convert them to a common currency to make international comparisons,


in this case in terms of 1913 US dollars. Again population size and per capita income


are important determinants of activity. However, per capita income has a negative


effect on the circulation of banknotes but a positive effect on the scale of bank


deposits. This means that the degree of financial intermediation increases with the


level of economic development ( 1987). Hence large, backward


economies such as Russia and Austria-Hungary have high levels of banknote


circulation, whilst even small but highly developed economies such as Belgium have


quite high commercial bank deposits. Note that the United Kingdom, with the most


highly developed financial sector, had very high levels of commercial bank deposits


but very low levels of banknote circulation. The City of London established a


dominant position at the centre of world finance in the second half of the nineteenth


century, which it retained until after World War I, despite challenges from Berlin and


Paris as well as New York ( 1969; 1995).


To capture levels of activity in distribution, it is necessary to turn to indirect


indicators such as the level of exports and domestic consumption of agricultural and


manufactured products. Table 10 provides comparative data on merchandise exports.


The most successful European exporters were the United Kingdom, Germany and


France, whose exports dwarfed those of the large eastern economies, Russia and


Austria-Hungary. Even the small nation of Belgium had exports that were larger than


Austria-Hungary’s and close to the Russian level. Furthermore, if re-exports were to


be added in, the Netherlands would also feature as a major international wholesale


distributor, on account of its links with Indonesia. While wholesale distribution


tended to remain in the hands of entrepreneurial merchant houses, the process of


industrialising services went further in retailing, which saw the emergence of large


scale organisations, including co-operative societies as well as department stores and


multiple (or chain) stores ( 2005; 1992; 1954). This


shift towards large-scale distribution was dependent on the process of urbanisation,


and therefore proceeded more rapidly in industrialised areas than in more rural


societies.


There is less that can be said quantitatively about personal and professional


services and government, and these parts of the economy will not be discussed in


detail here. However, the provision of education is discussed in the chapter on


population, in the context of human capital formation, while the role of government is


considered more fully in the chapter on aggregate growth.



VI. CONCLUSION


This chapter reminds us that GDP consists of a wide variety of activities, and that


prosperity depends both on achieving high productivity in each sector and on


allocating resources efficiently across sectors. In general, we find that within Europe


between 1870 and 1914, achieving high productivity overall required shifting labour


out of agriculture and into industry and services. Although the literature has tended to


focus on industrialisation as the main way out of economic backwardness, the growth


and modernisation of the service sector was of at least equal importance. Indeed,


much of the process of achieving high productivity in services required a kind of


“service sector industrialisation”, with provision on a high volume basis, in a


standardised form, using modern technology, overseen by hierarchical management.


The discussion of individual sectors is organised around the catching-up


framework, with low-productivity countries at the start of the period facing


opportunities to grow rapidly by borrowing technology and organisational forms from


high-productivity countries. However, the mere existence of an opportunity does not


guarantee that catching-up will occur, and Europe’s economic history reminds us that


backwardness can persist. This can be related to institutions, and in particular to the


failure of institutional reforms to enable a country to take advantage of the potential


for catching-up. However, we must be careful not to use institutions simply as a


device to plug gaps in our knowledge. Breaking down economic activity by sector is


one way of doing this, because it also suggests other factors, such as resource


endowments for differences in performance between countries. Thus, for example,


there can be no doubt that not having coalfields was a serious impediment to high


productivity in the coal mining industry. And since coal was a major source of power,


its availability was bound to affect the performance of countries in energy intensive


sectors such as steel. Hence we do not need to appeal to institutional problems to


explain why, for example, Portugal was not a major force in heavy industry.




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