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. Notealso 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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