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April 03, 2013
Follow-up to From 1914 to 2014: The Shadow of Rational Pessimism from Mark Harrison's blog
Is the North Korean regime crazy or calculating? Here is a timeline of North Korea's actions since March 10, when I wrote last.
- March 11: North Korea revokes the armistice ending the Korean War in 1953.
- March 12: Kim Jong Un places the North Korean armed forces on maximum alert.
- March 20: Attacks on South Korean news and banking websites, possibly from North Korea.
- March 27: North Korea cuts a military hotline to the Kaesŏng special region (a joint economic project with South Korea).
- March 29: Kim Jong Un places the North Korean armed forces on standby to strike U.S. territories.
- March 30: North Korea warns of a state of war with South Korea.
- April 2: North Korea will restart weapons-related nuclear facilities.
- April 3: North Korea closes entry to the Kaesŏng special region.
In various ways, these are all costly actions. Some are financially costly to Pyongyang, such as restarting nuclear facilities and disrupting Kaesŏng-based production and trade. Other are reputationally costly, because they stake out positions that are hard to retreat from without loss of face. All of them have a common element of danger -- the risk of triggering a ruinous catastrophe.
Why is North Korea doing these things if they are so costly? In a common interpretation, the North Korean regime is crazy. They don't understand the world or know what is good for themselves. I think this is unlikely.
On the basis that the North Korean leaders are not insane, there are several possible ways to think about their actions and understand them, but in the end they all point to the same outcome.
Opportunity cost. While the measures listed above are costly, North Korea believes that it would not find a better alternative use of the resources consumed or put at risk as a result of their actions. There are few profitable opportunities for production in the world's worst economic system. Investing in confrontation may well be, for North Korea, the better alternative.
Diminishing returns.In the past, North Korea has extracted billions of dollars of aid from South Korea and the West by holding its own people hostage and showing a willingness to play with fire. The problem with this strategy is that Western countries and their Asian partners have learned how it works. As a result, the North Korean strategy has run into diminishing returns. Pyongyang can continue to extract an advantage only by going to greater and greater lengths. This means taking greater and greater risks with peace.
Rational pessimism (That's what I wrote about here). North Korea's leaders see two scenarios. In one, there is a peaceful future in which their regime will inevitably disintegrate and howling mobs will drag them into the street and tear them to pieces. In another, there is a high probability of war in which millions might perish but there is some faint chance of regime survival. You wouldn't jump at either, and you might not rush to make a choice. Still, ask yourself: If you were Kim Jong Un, and push came to shove, which would you prefer?
March 10, 2013
Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html
China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.
Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.
Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.
What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:
Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.
But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.
Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.
These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.
Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.
In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:
Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.
The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.
This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:
Now or never.
In Vienna, Kaiser Franz-Josef wrote:
If we go under, we better go under decently.
(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)
From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.
As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.
The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.
Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.
February 04, 2013
Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/
On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:
Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.
As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!
Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!
So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.
What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.
(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)
But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.
And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.
After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.
(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)
After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.
Here's the takeaway.
Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.
Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.
October 25, 2012
Writing about web page http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/403/40302.htm
The House of Commons International Development Committee has reported this morning that:
The future of Afghanistan is uncertain [...] The UK Government may have to recognise that a viable state may not be achievable in Afghanistan.
Is this depressing judgement realistic? It depends partly what you mean by a viable state. Afghanistan had a monarchy until the king was overthrown by a coup in 1973; this was followed by a communist insurrection in 1978. Although not a clean, non-corrupt democracy, the Afghan state was viable at least until 1973. Although some terrible things have happened between then and now, history suggests that a viable state in Afghanistan is not an impossible aspiration.
What the British government means by a viable state is more ambitious than this, however. It is expressed, for example, in DFID targets for popular approval, electoral turnout, spending capacity, and civil service reform. In other words, our own government's goal for Afghanistan is not just a viable state but a stable, clean, non-corrupt democracy.
A stable, clean, non-corrupt democracy: This is what the parliamentary report says will not happen in Afghanistan. For anyone who knows a little history, it is laying claim to the bleeding obvious.
I don't mean just that it is obvious now, after ten years of blood spilt and treasure lost. It was obvious beforehand. Here are things I wrote in 2001 on December 4, updated in 2002 on January 9, and in 2009 on July 18 and August 30, in 2010 on January 1, and in 2011 on October 27. It may seem like I'm bragging, but I'm not. I'm sure I've been wrong about lots of things. I'm not an expert on counter-insurgency and I've never been to Central Asia. I'm saying that even an idiot like me could work this one out.
Even an idiot is helped by knowing a little history. The history I know tells me three things.
- In the past it took hundreds of years to build and agree the rules of the game that we call democracy. Maybe we can compress that a bit, perhaps to within a generation or two. But we cannot shorten it to less than the lifetime of a Westminster government. Note: I am not giving this as a reason to do nothing. On the contrary, a long time horizon is a reason to start immediately! But it is also a reason to set realistic goals, not goals that are so unrealistic that they destroy our chance of ever meeting them.
- Modern liberal capitalism and competitive democracies did not emerge from nothing, by an act of will. They resulted from a long historical evolution. This evolution was not steady and it was not non-violent. But there were staging posts. Many of those staging posts fell short of what we would today consider to be democracy, but they still offered more rights to the citizens than existed before.
- In the world today some societies are so weakened that they cannot choose democracy over non-democracy or clean government over corruption. The best they can hope for is a fairly corrupt, not-very-democratic government that offers stability and shares some of the spoils through basic public goods such as highways, policing, and education. Of course, many societies should work for more: Russia and China for example. But some societies are in such a bad state to begin with that the only alternative to a fairly corrupt, not-very-democratic government is civil war. It's a matter of judgement which places belong in this category, but Afghanistan is one.
In other words, living under what I once called "the right kind of feudalism" Afghan citizens would have only limited rights but they would still have more rights and make more progress than under any feasible alternative. There would still be a loot chain, but a stable loot chain can be consistent with modest prosperity and confer benefits compared with a perpetual struggle of each against all.
Setting the wrong goals for Western involvement in Afghanistan has left a trail of blood and broken promises. There will be more of this before we're through. But the roots of a viable state for Afghanistan must be found in the history of Afghanistan, and nowhere else.
October 15, 2012
Writing about web page http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html
Tail risks are the risks of worst-case scenarios. The risks at the far left tail of the probability distribution are typically small: they are very unlikely, but not impossible, and once or twice a century they will come about. When they do happen, they are disastrous. They are risks we would very much like to avoid.
How can we compare the tail risks of government intervention with the tail risks of leaving things to the market? Put differently, what is the very worst that can happen in either case? Precisely because these worst cases are very infrequent, you have to look to history to find the evidence that answers the question.
To make the case for government intervention as strong as possible, I will focus on markets for long-term assets. Why? Because these are the markets that are most likely to fail disastrously. In 2005 house prices began to collapse across North America and Western Europe, followed in 2007 by a collapse in equity markets. By implication, these markets had got prices wrong; they had become far too high. The correction of this failure, involving large write-downs of important long term assets, led us into the credit crunch and the global recession.
Because financial markets are most likely to fail disastrously, they are also the markets where many people now think someone else is more likely to do a better job.
What's special about finance? Finance looks into the future, and the future is unexplored territory. Only when that future comes about will we know the true value of the long-term investments we are making today in housing, infrastructure, education, and human and social capital. But we actually have no knowledge what the world will be like in forty or even twenty years' time. Instead, we guess. What happens in financial markets is that everyone makes their guess and the market equilibrium comes out of these guesses. But these guesses have the potential to be wildly wrong. So, it is long-term assets that markets are most likely to misprice: houses and equities. When houses and equities are priced very wrongly, chaos results. (And in the chaos, there is much scope for legal and illegal wrongdoing.)
When housing is overvalued, too many houses are built and bought at the high price and households assume too much mortgage debt. When equities are overvalued, companies build too much capacity and borrow too much from lenders. To make things worse, when the correction comes it comes suddenly; markets in long term assets don't do gradual adjustment but go to extremes. In the correction, nearly everyone suffers; the only ones that benefit are the smart lenders that pull out their own money in time and the dishonest borrowers that pull out with other people’s money. It's hard to tell which we resent more.
If markets find it hard to price long term assets correctly, and tend to flip from one extreme to another, a most important question then arises: Who is there that will do a better job?
It's implicit in current criticisms of free-market economics that many people think like this. Financial markets did not do a very good job. It follows, they believe, that someone else could have done better. That being the case, some tend to favour more government regulation to steer investment into favoured sectors. Others prefer more bank regulation to prick asset price bubbles in a boom and underpin prices in a slump. The latter is exactly what the Fed and the Bank of England are doing currently through quantitative easing.
Does this evaluation stand up to an historical perspective?
We’re coming through the worst global financial crisis since 1929. Twice in a century we've seen the worst mess that long-term asset markets can make -- and it's pretty bad. A recent estimate of the cumulative past and future output lost to the U.S. economy from the current recession, by David H. Papell and Ruxandra Prodan of the Boston Fed, is nearly $6 trillion dollars, or two fifths of U.S. output for a year. A global total in dollars would be greater by an order of magnitude. What could be worse?
For the answer, we should ask a parallel question about governments: What is the worst that government regulation of long term investment can do? We'll start with the second worst case in history, which coincided with the last Great Depression.
Beginning in the late 1920s, the Soviet dictator Stalin increasingly overdid long term investment in the industrialization and rearmament of the Soviet Union. Things got so far out of hand that, in Russia, Ukraine, and Kazakhstan in 1932/33, as a direct consequence, 5 to 6 million people lost their lives.
How did Stalin's miscalculation kill people? Stalin began with a model that placed a high value (or “priority”) on building new industrial capacity. Prices are relative, so this implied a low valuation of consumer goods. The market told him he was wrong, but he knew better. He substituted one person’s judgement (his own) for the judgement of the market, where millions of judgements interact. He based his policies on that judgement.
Stalin’s policies poured resources into industrial investment and infrastructure. Stalin intended those resources to come from consumption, which he did not value highly. His agents stripped the countryside of food to feed the growing towns and the new workforce in industry and construction. When the farmers told him they did not have enough to eat, he ridiculed this as disloyal complaining. By the time he understood they were telling the truth, it was too late to prevent millions of people from starving to death.
This case was only the second worst in the last century. The worst episode came about in China in 1958, when Mao Zedong launched the Great Leap Forward. A famine resulted. The causal chain was pretty much the same as in the Soviet Union a quarter century before. Between 1958 and 1962, at least 15 and up to 40 million Chinese people lost their lives. (We don’t know exactly because the underlying data are not that good, and scholars have made varying assumptions about underlying trends; the most difficult thing is always to work out the balance between babies not born and babies that were born and starved.)
This was the worst communist famine but it was not the last. In Ethiopia, a much smaller country, up to a million people died for similar reasons between 1982 and 1985. If you want to read more, the place to start is “Making Famine History” by Cormac Ó Gráda in the Journal of Economic Literature 45/1 (2007), pp. 5-38. The RePEc handle of this paper is http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html.
Note that I do not claim these deaths were intentional. They were a by-product of government regulation; no one planned them (although some people do argue this). At best, however, those in charge at the time were guilty of manslaughter on a vast scale. In fact, I sometimes wonder why Chinese people still get so mad at Japan. Japanese policies in China between 1931 and 1945 were certainly atrocious and many of the deaths that resulted were intended. Still, if you were minded to ask who killed more Chinese people in the twentieth century, the Japanese imperialists might well have to cede first place to China's communists. However, I guess there is less national humiliation in it when the killers are your fellow countrymen than when they are foreigners.
To conclude, no one has the secret of correctly valuing long term assets like housing and equities. Markets are not very good at it. Governments are not very good at it either.
But the tail risks of government miscalculation are far worse than those of market errors. In historical worst-case scenarios, market errors have lost us trillions of dollars. Government errors have cost us tens of millions of lives.
The reason for this disparity is very simple. Markets are eventually self-correcting. "Eventually" is a slippery word here. Nonetheless, five years after the credit crunch, worldwide stock prices have fallen, house prices have fallen, hundreds of thousands of bankers have lost their jobs, and democratic governments have changed hands. That's correction.
Governments, in contrast, hate to admit mistakes and will do all in their power to persist in them and then cover up the consequences. The truth about the Soviet and Chinese famines was suppressed for decades. The party responsible for the Soviet famine remained in power for 60 more years. In China the party responsible for the worst famine in history is still in charge. School textbooks are silent about the facts, which live on only in the memories of old people and the libraries of scholars.
July 29, 2012
Writing about web page http://ideas.repec.org/p/cge/warwcg/91.html
Why has China succeeded where Russia failed?
The explanation that is most widely shared is that the Chinese rulers kept political control and used it to reform the economy gradually. They pursued Deng Xiaoping's "four modernizations" (of agriculture, industry, defence, and science and technology) but rejected calls for the so-called "fifth modernization" (democracy). In the Soviet Union at the same time, in contrast, Mikhail Gorbachev abandoned the levers of totalitarian control. He allowed the Berlin Wall to be pushed over. The Soviet communist party imploded; insiders "stole the state." The Soviet Union collapsed and Russia entered a decade of near anarchy.
This explanation has obvious appeal but is incomplete on closer inspection. It is widely believed that the Soviet leaders did not try the China solution of gradual economic reform without political reform. The historical record shows, however, that this is untrue. Over a period of many years, while their system of one-party rule was completely intact, the Soviet leaders tried all the reforms that the Chinese communists followed to revitalize their economy. This included several experiments with a household responsibility system, the so-called zveno, in agriculture (1933, 1947, and 1966); a regional decentralization (from 1957 to 1965); and several rounds of public sector reform (beginning in 1965), culminating in new laws to reduce the compulsory obligations on state-owned enterprises, allowing them to supply the market directly at higher prices (1987), and to permit private enterprise (1988).
In other words, rash political reforms are not the factor that decided why communism failed in Russia. The collapse of Soviet rule came only after the gradual economic reform initiatives that worked in China failed in Russia.
We must look somewhere else, therefore, to explain China's success. In a survey of Communism and Modernization, I suggest that the answer must begin with China's capacity for continuous policy reform. To break out of relative poverty and catch up with the world technological leader, an economy must undergo continuous reform of its policies and instutions. Continuous policy reform is fragile. The reason for its fragility is that, as the economy undergoes successive stages of modernization, policy reform at each stage must infringe upon the vested interests formed in the previous stage. Where continuous reform becomes blocked (as in Italy, for example), the economy will lag and fall behind. From the 1970s, the Chinese economy institutionalized a capacity for continuous policy reform. This is what has enabled China's spectacular rise.
Continuous policy reform was a by-product of China's system of "regionally decentralized authoritarianism" (described by Xu 2011). This system set China's 31 provincial leaders to compete with each other economically and also gave them considerable freedom to choose how to do so. Those leaders who could make their provincial economy grow faster, if necessary by attracting labour from neighbouring provinces, would rise politically; the laggards would fall. Such incentives were very strong.
Deng Xiaoping allowed the provincial bosses to strike a "China deal" that created new space for private business to come out of the cold and thrive within market socialism. This opening of markets to private entrepreneurs, modest at first, became much more radical than the limited "deals" struck in the Soviet Union and Eastern Europe. Economic reforms under European communism gave legitimacy, at most, to low-powered, short-term profit-based incentives, insider lobbies, and shady sideline trading networks.
In China the main limit that was placed on market access was political: China's new business class must continuously demonstrate its loyalty to the one-party state. The best way to prove loyalty was through political and family connections to the regime. This raised the danger of the new business class exploiting their personal links to power to grow rich without economic effort. One answer, but an imperfect one as we see today, was to expose them to foreign competition. In fact, there was more product market competition in export markets than across China's internal provincial borders.
A crucial and completely accidental advantage on China's side was its size. The Chinese population was so large that its 31 provinces each formed an economic region with tens of millions of people -- the size of a large Western European country. In contrast, the Soviet Union decentralized economic management across a much larger number of much smaller provinces, averaging little more than a million people each. Unlike a Chinese province, the typical Soviet province was highly dependent on its neighbours. The danger was that a Soviet provincial boss could gain more by sabotaging his neighbours than by honest effort within his own limited sphere. In the Soviet Union regional rivalry turned out to carry high costs and few if any benefits.
If regional rivalry was not productive within the Soviet Union, why did it not work across Eastern Europe as a whole? After all, each East European country had considerable freedom to experiment with national economic models, and was more like a Chinese province in size and diversity than a Soviet province. Nonetheless, international competition did not work any better than interprovincial rivalry. Most likely, East European communist leaders had too much job security and tenure, did not depend on doing better than their neighbours to keep their jobs, could not be promoted to Moscow, and, even if they succeeded economically, could not build on success to attract labour from their neighbours because international borders, even within the communist brotherhood of nations, were rigidly sealed.
It may also have been a factor that East European and Soviet leaders just did not "get" continuous policy reform. They thought catching-up growth could be achieved by one-off reforms or interventions. It is also a good question whether Chinese leaders "got" continuous policy reform, or whether they stumbled across a design for it by accident.
Either way, the result was this: The recipe that happened to make communism work in China was tried and did not work in Europe. That raises a question of vast proportions: Will the same recipe continue to work in China's future?
Here we come back to the fragility of continuous policy reform. China's level of output per head has multiplied several times over the level of the 1970s. It must multiply several more times before China can approach the level of the world's richest countries. This is a very long haul. For China to maintain the continuity of policy reform over the distance is beyond unlikely. At some point, some coalition of interests is bound to form that will be strong enough to block it, at least for a time. At that time China's oligarchy must be willing to intervene on the side of movement, not stability. If not, the China deal will come unstuck.
Harrison, Mark. 2012. Communism and Economic Modernization. CAGE Working Papers no. 92. University of Warwick. Repec handle http://ideas.repec.org/p/cge/warwcg/91.html.
Xu, Chenggang. 2011. The Fundamental Institutions of China's Reforms and Development. Journal of Economic Literature 49:4, pp. 1076-1151. Repec handle http://ideas.repec.org/a/aea/jeclit/v49y2011i4p1076-1151.html.
May 28, 2012
Writing about web page http://www.history.navy.mil/photos/events/wwii-pac/midway/midway.htm
Seventy years ago this week, the world looked unspeakably grim.
By the end of May 1942, Germany had occupied France, Belgium, Netherlands, and Luxemburg; all of Eastern Europe not already under control of its allies Bulgaria, Hungary, and Romania, including the Baltic, the Ukraine, and a large chunk of Russia; Greece and Yugoslavia; and the former Italian colonies of North Africa. Italy wasn't helping much, but in the Far East Japan had occupied much of China, all of Indochina, Indonesia, Malaya (including Singapore), the Philippines, and part of Burma. German bombers were battering Britain's cities; German submarines were sinking Allied shipping at half a million tons a month. In Russia and Ukraine the German Army was launchng new offensives; at Khar'kov, in a battle that ended seventy years ago today, the Red Army lost a quarter of a million men. Across Europe and East Asia, millions of non-combatants were being machine-gunned, gassed, starved, and worked to death.
At this very moment, beneath the surface of these terrible events, the tide of the war was beginning to turn. Up to that time, Axis forces were advancing on all fronts. Within a few months they were in retreat everywhere.
In 1942 the war was fought in three main theatres: the Pacific, the Mediterrean, and the Eastern front. In each theatre the turning point of the war was marked by a decisive battle. These were the Battles of Midway (June 4 to 7), the seventieth anniversary of which we are about to mark; El Alamein (July 1 to 30 and October 23 to November 4); and Stalingrad (September 13 to February 2, 1943).
In obvious ways these battles could not have been more different: Midway in the remote northern Pacific, Alamein in the desert sands of Egypt, and Stalingrad in the smoking ruins of a great city on the Volga river. These battles differed also in the orders of magnitude of the forces involved. Japanese losses in four days at Midway were five ships, 250 aircraft, and 3,000 men. German losses in two weeks at the second battle of Alamein were 800 tanks and guns and 30,000 men, and in five months at Stalingrad 7,500 tanks and guns and three quarters of a million men killed or missing. Red Army losses at Stalingrad alone were half a million; do not forget these figures if you want to understand how powerfully the war continues to stir national feeling in Russia.
In other respects, these battles had important common features. Each began with an enemy offensive. The Japanese planned to use Midway Island as a launching pad from which to invade Hawaii. The Germans planned to drive the British out of North Africa; if the Mediterranean could not be an Italian lake, then let it be a German one. From Stalingrad the Germans planned to seal off the Caucasian oilfields and turn north to take Moscow from the rear.
After the offensive came the counter-offensive, which in each case took the enemy by surprise. After the successful surprise attack on the U.S. Pacific fleet at Pearl Harbor in December 1941, the Japanese believed they had finished American naval power. Just six months later, in the summer of 1942, the U.S. Navy was already three times the size of the previous year. Such was the speed of mobilization of America's industrial power, and the resilience of American national feeling, both of which had been entirely discounted in Tokyo and Berlin. The same underestimation of Allied reserves was present in the calculations of the Axis commanders at Alamein and Stalingrad.
The Allied victories of 1942/43 were no accident. Underlying them was the translation of Allied economic power into fighting power. In 1941 the Axis Powers were poised for victory. But victory would be theirs only if they exploited the advantage of the aggressor to the full. With a potential coalition of economically more powerful enemies ranged against them, they had to win every campaign quickly and avoid a stalemate at all costs. Had they done so, the war would have been over and they would have won.
Economic mobilization, the translation of economic power into fighting power, takes time. The Allies bought this time with "blood and treasure." First came the British refusal to surrender in the summer of 1940, followed by the Battle of Britain. Next came the U.S. Lend Lease Act of March 1941 which offered American aid to the British (and a few months later to the Soviet Union). The third thing was the unexpected -- in German eyes, often senseless -- resistance of the Red Army in the summer and autumn 1941, which led through appalling losses to the failure of the German invaders to take Leningrad and Moscow before the end of the year.
Source: Harrison (1998, pp. 15-16).
Having bought time, the Allies used it to mobilize their economies. The chart shows the production of combat aircraft by the main powers year by year through the war. It illustrates how, during 1942, Allied -- and especially American -- mobilization rapidly tilted the military-economic balance against the Axis. The Allies began to outproduce Germany and Japan in aircraft, and also in munitions generally, by a substantial multiple. This advantage persisted through the end of the war, despite belated mobilization of the German and Japanese war economies. In 1942, however, the grit and bloody determination of Allied soldiers, sailors, and airmen was still required to turn material predominance into victory on the battlefield. Midway, Alamein, and Stalingrad were the signals that this had been achieved.
Why was the struggle so much, much more intense on the Eastern front? From mid-1941 through mid-1944 this was where 90 percent of German fighting power was focused. To occupy the territory of Ukraine and European Russia, kill the Jews, decimate the Slavic population, and resettle this vast landmass as a German colony, was Hitler's prime objective. The Soviet economy, although large, remained poor and industrially less developed, so that it was on the Eastern front that German resources were most evenly matched. The Allies' material advantages were much greater elsewhere. If the Axis could not win in Russia, it would not win anywhere else. On the Eastern front a war of mutual annihilation developed, in which both sides threw everything they had and more into the scales. As I discussed in a paper entitled "Why Didn't the Soviet Economy Collapse in 1942?" (Harrison 2005), Hitler had every right to expect final victory. The Soviet Union only just managed to retain a critical advantage over Germany, based on mass production, colossal sacrifice, and utter ruthlessness.
Up to the summer of 1942, the forces of the Axis were advancing everywhere; from the beginning of 1943 they retreated on all fronts. After this it was no longer possible for the Axis powers to win the war against the economically more developed, more mobilized, and more powerful Allies. One of the most horrifying faces of the war is seen in the fact that, despite this, years of intense fighting still lay ahead. Through 1943, 1944, and into 1945 the German and Japanese Armies and Navies retreated continuously, killing and being killed every day and every inch of the way, maintaining discipline and cohesion, not giving up until the last possible moment. Every day of those years their governments persisted in genocidal policies that destroyed millions of lives through famine, overwork, and systematic mass killing.
Without Midway, Alamein, and Stalingrad our world today would be far different from the one we know. The Axis powers might have ended the war victoriously, with consequences that we can only guess at. Alternatively, the war would have been dragged out in some other way, but there would have been no Allied victory in 1945. Or perhaps there could still have been victory in 1945, but the evolution of events would have been entirely different. Regardless of events on the battlefield, by the summer of 1945 the Americans would have had the atomic bomb. If the war still raged in Europe, the first victims of atomic warfare would more likely have been German than Japanese.
- Harrison, Mark. 1998. Economic Mobilization for World War II: an Overview. In The Economics of World War II: Six Great Powers in International Comparison, pp. 1-42. Edited by Mark Harrison. Cambridge: Cambridge University Press.
- Harrison, Mark. 2005. Why Didn't the Soviet Economy Collapse in 1942? In A World at Total War: Global Conflict and the Politics of Destruction, 1939-1945, pp. 137-156. Edited by Roger Chickering, Stig Förster, and Bernd Greiner. Cambridge: Cambridge University Press. RePEc handle: http://ideas.repec.org/p/wrk/warwec/603.html
May 14, 2012
Writing about web page http://www2.warwick.ac.uk/knowledge/culture/dambusters
Written for Warwick's Knowledge Centre in preparation for Wednesday night's sixty ninth anniversary of the dam raids.
The dams of Germany’s industrialized Ruhr valley were an obvious target for the Royal Air Force Bomber Command in World War II. The dams supplied hydroelectric power and water for cities, steel making, and canal transport. In turn, these provided the means to supply Germany with the tanks, aircraft, guns, shells, and ships required for Hitler’s war.
Operation Chastise, the Dam Busters’ raid, took place on the night of May 16/17, 1943. Tactically, it was a partial success. The Möhne and Eder dams collapsed, but the Eder reservoir was of secondary importance and the dam on the Sorpe was not seriously damaged. Some small towns and industrial facilities were flooded, and some roads were washed away. There was a temporary loss of water production and electric power. At least 1,300 civilians died; more than half were Ukrainian forced labourers. Eight of the 19 aircraft were lost and 53 of the 133 aircrew killed.
What were the effects of the dam raids on Germany’s war economy? From the beginning of 1942 through May 1943, German war production expanded at about 5 per cent a month. At the time of the dam raids it was already more than twice the level of two years previously when Germany had been about to launch the greatest land invasion of all time, its attack on the Soviet Union. In the month of the dam raids, however, the increase of German war production was halted and the German economic mobilization marked time for nearly a year.
How much of this was due to the Dam Busters? In 1943 British and American bombers dropped 130,000 tons of bombs on German cities and factories, and ten times that quantity in 1944 (Zilbert 1981). Up to a million German civilians lost their lives (Falk 1995). In this context the dam raids were a pinprick. Thus, while the raid was mounted at an important moment, it would be hard to identify any particular effect of the Dam Busters’ skill and heroism on the German war effort.
The dams were quickly rebuilt and water supplies were restored. Were these indirect costs important? Albert Speer, the minister of armament, had to divert 7,000 forced labourers from building German fortifications in occupied France and Netherlands to rebuild the dams (Speer 1970, p. 281). It has been suggested that this contributed to Allied success in the 1944 D-Day landings (McKinstry 2009), but the claim seems far-fetched. In May 1943 the Germans still had a year to complete their coastal fortifications. Much more important to Allied success on D-Day were numbers, surprise, and the German lack of air cover.
When Operation Chastise was planned, RAF Bomber Command did not take into account either D-Day or the indirect cost to Germany of diverting scarce labour from the fortification of occupied Europe. In fact, the RAF hoped to bomb Germany into defeat before D-Day became necessary. In this way, the operation expressed the persistent belief in a powerful knock-out blow that would somehow disable the German war economy and deprive its armed forces of the means to fight. Somewhere, they thought, if only it could be found and attacked, was a critical weak point of the German war economy that could cause it to collapse. Perhaps the dams were such a weak point.
Speer later suggested that the direct effects of the raid would have been greater if the RAF had organized follow-up raids to disrupt the rebuilding. But the lack of follow-up also expressed the mistaken belief of the time in the efficacy of a single knock-out blow. Two centuries of experience of economic warfare and sanctions (summed up by Olson 1963) have taught us that this belief is generally unfounded.
Bombing Germany did not win the war, but it did bring forward the moment of German defeat. Bombing was highly disruptive and made mobilization ever more costly (see Overy 1994 and Tooze 2006). For a long period the German leaders were able to restrict the consequences to the civilian economy, so that conditions of life, consumption, and work deteriorated but war production could still expand. Civilian life was maintained by the human capacity for adaptation to difficulties and habituation to fear. Disaffection was kept in check by an effective police state, growing hatred of the Allied bombers, increasing awareness of Germany’s own war crimes, and rising fear of the possible consequences of defeat. Requisitioning food and slave labourers from the occupied territories also helped. That was the basis on which Germany was able to fight on against economically more powerful enemies for years.
Only when German territory was directly attacked did the war economy finally unwind. The indirect effects of Allied bombing also helped to bring that moment nearer. Allied bombing weakened the German ground forces because it distracted German air power away from the Eastern Front (against the Red Army) and France (against the 1944 Allied landings). Defending against air attack was very costly for Germany. At the peak of war mobilization, one third of German war production took the form of night fighters, anti-aircraft guns, searchlights, and radar.
Bombing Germany was costly to both sides. On one side the German economy was disrupted and a million civilians died. On the other side 18,000 Allied bombers were lost, along with 100,000 highly trained and educated aircrew.
The Dam Busters were one small element of a total war. They did not provide a breakthrough, but they added to the slowly growing burdens on the German economy, which arose through channels that were largely unintended and unforeseen. The Dam Busters also boosted Allied morale and Churchill’s status with the Americans and the Russians. Without them, the book (Brickhill 1951) and the film of the book could not have been made. These gave a sense of heroism and past glory to many a British schoolboy. I don’t know what the girls thought; we never asked them.
- Brickhill, Paul. 1951. The Dam Busters. London: Evans.
- Falk, Stanley L. 1995. Strategic Air Offensives. In The Oxford Companion to the Second World War, pp. 1067-1079. Edited by I. C. B. Dear. Oxford: Oxford University Press.
- Milward, Alan S. 1965. The German Economy at War. London: Athlone.
- McKinstry, Leo. 2009. “Bomber Harris thought the Dambusters’ attacks on Germany ‘achieved nothing’.” The Telegraph, August 15.
- Overy, Richard J. 1994. War and Economy in the Third Reich. Oxford: Oxford University Press.
- Speer, Albert. 1970. Inside the Third Reich. London: Macmillan.
- Olson, Mancur. 1963. The Economics of the Wartime Shortage. Durham, NC: Duke University Press.
- Tooze, Adam. 2006. The Wages of Destruction: The Making and the Breaking of the Nazi Economy. London: Allen Lane.
- Zilbert, Edward R. 1981. Albert Speer and the Nazi Ministry of Arms: Economic Institutions and Industrial Production in the German War Economy. London: Associated University Presses.
April 02, 2012
Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/news/?newsItem=094d43a2365e99f001366436ff461cde
Tomorrow I'm flying to Moscow to collect a prize, which I will share with my coauthor Andrei Markevich. This is the Russian national prize for applied economics, which was announced last week. The prize, sponsored by a consortium of Russian universities, research institutes, and business media, is awarded every second year. The award is for our paper "Great War, Civil War, and Recovery: Russia’s National Income, 1913 to 1928," published in the Journal of Economic History 71:3 (2011), pp. 672-703. A postprint is available here.
The spirit of the paper is as follows. In 1914 Russia joined in World War I. In 1917 there was a revolution, and Russia’s part in that war came to an end. A civil war began, that petered out in 1920. It was followed immediately by a famine in 1921. We calculate that by the end of all this Russia had suffered 13 million premature deaths, nearly one in ten of the population living within future Soviet borders in 1913. After that, the Russian economy recovered, but was soon swept up in Stalin's five-year plans to "catch up and overtake" the West.
We calculate Russia’s real national income year by year from 1913 to 1928; this has never been done before on a consistent GDP basis. National income can be measured three ways, which ought to give the same answer (but rarely do): income (wages, profits, ...), expenditure (consumption, investment, ...), and output (of industry, agriculture, ...). We measure output. Data are plentiful, but of uneven quality and coverage. The whole thing is complicated by boundary changes. Between 1913 and 1922 Russia gave up three per cent of its territory, mainly in the densely settled western borderlands; this meant the departure of one fifth of its prewar population. The demographic accounting is complicated not only by border changes but also by prewar and wartime migrations, war deaths, and statistical double counting.
Our paper looks first at the impact of World War I, in which Russia went to war with Germany and Austria-Hungary. Initially the war went went well for Russia, because Germany found itself unexpectedly tied down on the western front. Even so, Germany quickly turned back the Russian offensive and would have defeated Russia altogether but for its inability to concentrate forces there.
During the war nearly all the major European economies declined (Britain was an exception). The main reason was that the strains of mobilization began to pull them apart, with the industrialized cities going in one direction and the countryside going in another. In that context, we find that Russia’s economic performance up to 1917 was better than has been thought. Our study shows that until the year of the 1917 revolution Russia’s economy was declining, but by no more than any other continental power. While wartime economic trends shed some light on the causes of the Russian revolution, they certainly do not support an economically deterministic story; if anything, our account leaves more room for political agency than previous studies.
In the two years following the Russian revolution, there was an economic catastrophe. By 1919 average incomes in Soviet Russia had fallen to less than half the level of 1913. This level is seen today only in the very poorest countries of the world, and had not been seen in eastern Europe since the seventeenth century. Worse was to come. After a run of disastrous harvests, famine conditions began to appear in the summer of 1920 (in some regions perhaps as early as 1919). In Petrograd in the spring of 1919 an average worker’s daily intake was below 1,600 calories, about half the level before the war. Spreading hunger coincided with a wave of deaths from typhus, typhoid, dysentery and cholera. In 1921 the grain harvest collapsed further, particularly in the southern and eastern grain-farming regions. More than five million people may have died in Russia at this time from the combination of hunger and disease.
Because we have shown that the level of the Russian economy in 1917 was higher than previously thought, we find that the subsequent collapse was correspondingly deeper. What explains this collapse? The obvious cause was the Russian civil war, which is conventionally dated from 1918 to 1920. However, we doubt that this is a sufficient explanation. First, the timing is awkward, because the economic decline was most rapid in 1918 and this was before the most widespread fighting. Second, there are signs that Bolshevik policies of economic mobilization and class warfare were an independent factor spreading chaos and decline. These policies were continued and even intensified for a year after the civil war ended and clearly contributed to the disastrous famine of 1921.
Because of the famine, economic recovery did not begin until 1922. At first recovery was very rapid, promoted by pro-market reforms, but it slowed markedly as the Soviet government began to revert to mobilization policies of the civil-war type. We show that as of 1928 the Russian recovery was delayed by international standards. The result was that, when Stalin launched the first five year plan for rapid forced ndustrialization, the Soviet economy's recovery from the Civil War was not complete. By implication, some of the economic growth achieved under the five-year plans should be attributed to delayed restoration of pre-revolutionary economic capacity.
In concluding the paper, we reflect on the state in the history of modern Russia. It seems important for economic development that the state has the right amount of "capacity," not too little and not too much. When the state has the right amount of capacity there is honest administration within the law; the state regulates and also protects private property and the freedom of contract. When the state has too little capacity it cannot prevent outbreaks of deadly violence, and security ends up being privatized by gangs and warlords. When the state has too much capacity it can starve and kill without restraint. In Russian history the state has usually had too little capacity or too much. In World War I the state had too little capacity to regulate the war economy and it was eventually pulled apart by competing factions. Millions died. In the Civil War, the state acquired too much capacity; more millions died.
Andrei Markevich and I have many debts. Our first thanks go, of course, to the sponsors of the prize. After that, we are conscious of owing a huge amount to our predecessors, many of whom should be better known than they are, but I'm going to leave the history of the subject to those interested enough to consult the paper. A number of people helped us generously, especially Paul Gregory, Andrei Poletaev, Stephen Wheatcroft, and the journal editors and referees. Of course, I'm personally grateful to Andrei. It’s hard to say which of us did what (between May 2009 and January 2011 our paper went through exactly 50 revisions), but you’ll see that Andrei is named as first author.
Beyond any personal feelings, I'm thrilled by the recognition of economic history. When he announced the award, the jury chairman Professor Andrei Yakovlev was asked if this wasn't an "unexpected" outcome for an award in applied economics. Yakovlev described it as an "important precedent," recognizing that "explanations of many of the processes that we have seen in Russia in the last twenty years lie in history." He pointed out that most western countries have historical national accounts going back through the nineteenth century (and England's now go back through the thirteenth). Such data help us to understand the here and now, by showing how we got here.
December 19, 2011
Writing about web page http://www.bbc.co.uk/news/world-asia-16239693
The death of Kim Jong-il, who ruled North Korea from 1994, reminded me of something a Korean friend told me a few years ago. My friend is an expert on North Korea and told me this "for a fact." Now, I also remember many things I was told "for a fact" in Moscow in Soviet times. This is a fact I've never had the opportunity to verify (and wouldn't know where to look), so I'll put everything in quotes as my friend told it to me.
In order to facilitate his system of personal rule, Comrade Kim Il-sung devised a subcommittee of the party politburo to help him take the most important political and military decisions. The subcommittee had five members, so it became known as the Committee of Five.Initially, the Committee of Five consisted of Kim Il-sung himself, his son Kim Jong-il, and three other senior party figures.
Note. Kim Il-sung was North Korea's first ruler, and the father of Kim Jong-il. The idea of a Committee of Five is very plausible. A key to the personal power of a totalitarian dictator is "divide and rule." One aspect of divide-and-rule is the compartmentalization of information and responsibilities, so as to minimize the number of people that have an overview of everything. Stalin was a master of this technique, and became notorious after the war for dividing the Politburo members into little subcommittees with limited oversight of particular aspects of policy. These subcommittees became known as the the Quintet, the Septet, and so on. Kim Il-sung's Committee of Five would have excluded other members of the Politburo from general oversight.
Time passed and took its toll. In 1994, Kim Il-sung "went to meet Marx." Following his death, he was promoted to the country's President for Eternity.
Note. This part is certainly true.
Since Kim Il-sung continued to be a state official, although dead, it was clearly out of the question to remove him from the Committee of Five, so he was not replaced. As the three other members of the Committee of Five aged and died, they too were not replaced, probably because there was no one that Kim Jong-il trusted sufficiently. Despite this, the Committee of Five lived on.
Eventually, only Kim Jong-il was left.
My friend concluded (this would be around ten years ago):
At the present time when important political and military decisions must be made, the Committee of Five continues to meet, but when it meets Kim Jong-il is alone in the room. After announcing each item on the agenda, he looks to the ceiling, clasps his hands, and says: "Help me, Daddy!"
This seems like a good precedent for Kim Jong-il's son and successor, Kim Jong-un, to follow. He'd better pray to Daddy; there's no one else he can trust.