Economics of Late Development and Industrialization: Putting Gebrehiwot Baykedagn (1886–1919) in Context

Economics of Late Development and Industrialization: Putting Gebrehiwot Baykedagn (1886–1919)... Abstract During the past few decades, developing countries have been pushed by international economic institutions and developed countries to effectively abandon promotion of industrialization and structural transformation as a key developmental agenda. In addition, the ‘development’ debate of recent decades has tended to focus solely on internal factors as if external economic forces are always benign. Within this context, this paper analyzes the key ideas of Gebrehiwot Baykedagn (GHB) (1886–1919), traces their lineages and considers their feasibility and relevance for current developing economies. In a nutshell, for GHB, the main keys to economic development are the creation, accumulation and use of knowledge and skill, technology, innovation and technical change and the means of economic development are deliberate, dynamic and comprehensive sets of state-directed, synergistic interventions that aim at moving an economy away from ‘nature-intensive’ economic activities towards knowledge-, skill-, technology- and innovation-based ones. Based on analysis of historical and theoretical evidence, this paper argues that the main ideas of GHB and his colleagues are still valid, feasible and relevant for today’s developing economies as long as they are innovatively tailored to the unique context of each country and to the broader international policy context. 1. Introduction There was a general consensus until the late 1970s that economic development is largely about the transformation of the productive structure (and the capabilities that support it); and this was mainly to be achieved through industrialization (Chang, 2010, pp. 1–2). Recent research has also concluded that economic development requires structural change from low- to high-productivity activities, and that the industrial sector is a key engine of growth in the development process (Rodrik, 2007, p. 7; Hesse, 2008, p. 1). This conclusion is supported by the fact that virtually all cases of high, rapid and sustained economic growth in modern history have been associated with industrialization, particularly growth in manufacturing production (Szirmai, 2009). Consequently, the terms ‘industrialized country’ and ‘developed country’ are often used interchangeably (see Chang et al., 2013 and Chang, 2014 on this.) However, since the 1980s, industrialization and structural transformation as key developmental agenda were effectively abandoned in less developing countries (Safaeddin, 2005). This can be partly attributed to complexities and developments in the political economy contexts of the countries themselves. In important ways, it was also due to the intense pressures from international economic institutions and governments of the developed countries.1 Moreover, the dominant global development discourse came to ignore the importance of structural transformation and industrialization to an extent that, at the more formal level, ‘development’ came to mean poverty reduction, provision of basic needs, individual betterment, sustenance of existing productive structure and so on (Chang, 2010, p. 2). Though the past few years have witnessed some sort of revival of interest in industrialization and structural transformation in academia and policy circles, this has been too faithful to the dominant neoclassical economics paradigm which undergirded the initial liberalization drive, and has generated policy recommendations that are not supported by any significant historical evidence (Storm, 2015, p. 670). In addition, the ‘development’ debate has also tended to focus solely on internal factors that determine success/failure in development, ‘‘assuming that external market forces are always benign, with strongly positive influences on economic performance and prospects’’ (Sundrama et al., 2011, p. 2). Under such a context, this paper analyzes the key ideas of Gebrehiwot Baykedagn (1886–1919) (GHB for short, herein after), one of the first African intellectuals to advocate for a coherent and comprehensive program of industrialization and to analyze the nature and impacts of economic integration of late-developing nations with more advanced ones. It also traces the origins and lineages of his ideas, and considers their current relevance with the view to drawback attention to two key issues related to late development: industrialization and the type of external economic relations with advanced economies that facilitate industrialization in a late-developing economy. GHB is an author who has been known by many educated Ethiopians but virtually unknown outside his home country. Even in his home country, we are not aware of any scholarly writing that has properly assessed the intellectual lineages of GHB’s ideas, their validity and how they relate to the current development thinking. Furthermore, no systematic analysis of his policy proposals and whether or not they are relevant to his home country or the wider African context has been done to date. Therefore, it is also the aim of this paper to fill this gap in analyzing his ideas, putting them in their proper intellectual context and assessing their relevance today. In this manner, we aim to argue that the core ideas and policy proposals of GHB in particular and those of the broader intellectual tradition that he represents are valid, relevant and feasible in the current context of late-developing countries as long as they are innovatively adapted to the unique context of each country and to the broader international policy context. The rest of the paper is structured as follows. Section 2 provides biographical highlights about GHB and the context to his writing, and briefly reviews how his ideas have been received. Section 3 looks at GHB’s ideas related to governance, institutions and the political economy that suits economic development. Section 4 presents a summary of the main theoretical arguments of GHB and other economists of the same intellectual lineage regarding determinants of economic development in a late-developing economy. Section 5 discusses GHB’s explanation of the real causes of the observed ‘unequal exchange’ in the economic relations between backward and advanced economies. Section 6 considers GHB’s policy proposals vs. the industrialization policy tool box that has been successfully employed in history for late industrialization. Section 7 relates his ideas with those of later development thinking; and Section 8 concludes. 2. Biographical background and the context of BHB’s writings Gebrehiwot Baykedagn (GHB) was born in 1886 in the village of Zengui/Maimshem, Adwa district, in what is today called Tigrai Region of Ethiopia (Tenkir, 1995, p. 19).2 He attended elementary school at the Swedish missionary school at Minkulu, near Red Sea port of Massawa in present-day Eritrea (Bahru, 2009, p. x). According to Bahru (2002, pp. 49–50), that period was exceptionally turbulent in Tigray region due to the political disintegration and psychological void created by the death of Emperor Yohannes3of Ethiopia, the ravages of one of the longest and most devastating famines the country had ever known and the destruction that attended Emperor Menilek’s campaign of 1890 to assert his new authority (ibid.). It was at this period that GHB fled to Hamasen (Eritrea) at the age of seven (Bahru, 2002, p. 50). During a trip to the Red Sea port of Massawa, GHB and his friends got permission from the captain of a German ship to visit the ship; and on departure, GHB stowed away; on arrival in Europe, the captain entrusted him to a rich Austrian family that adopted him. He studied medicine at Berlin University in Germany (ibid.). After completing his study of medicine in Berlin, GHB returned to Ethiopia as part of a medical team sent from Germany to attend to the ailing emperor Menelik (Bahru, 2009, p. ix).4 Upon his return to Ethiopia, he had to undertake an intensive study of the Amharic language and ‘after seven months of studious application, he was able to master the language to such a degree that he was to emerge as one of the finest writers of Amharic prose’ (Bahru, 2002, p. 50).5 It is reported that, upon the recommendation of an official named Dejjach Yeggazu, GHB was made private secretary and interpreter to the emperor (ibid.). It is also reported that he was attached to the German doctor Steinkuler, and detailed to treat the ailing emperor but ‘failed to win the confidence of Empress Taitu, who reportedly forbade him to touch the invalid. The acrimony that subsequently developed between the empress and the German doctor, who had provoked the controversy about the poisoning of the ailing emperor, could also have reflected badly on his Ethiopian associate [i.e., GHB] … It was probably under these circumstances that he chose to exile himself to the neighboring British colony of the Sudan sometime in November 1909’ (ibid., pp. 50–51; see also Bahru, 2009, p. ix).6 GHB returned from the Sudan to Ethiopia after about two years (Bahru, 2002), was hospitalized in Massawa (present-day Eritrea) and recovered with the financial support of a friend named Paulos Menameno (Gebre-Hiwot, [1912] 2009, p. 2). After recovering from this illness until his death in July 1919, GHB held two posts in the government: first he was assigned as Inspector of the Addis Ababa-Djibouti Railway (the only railway in the country at the time), and he briefly held the post of Naggadras (Chief of Commerce and Customs) of Dre Dawa (an important import-export trade hub) (Bahru, 2002, p. 52). As we shall see later, he apparently used the opportunity offered by these two positions for collecting and compiling the data which he later used to analyze the external trade of the country and to support his theoretical ideas related to economic development. According to one source,7 GHB died of complications from grippe infection (a deadly type of flu) at an age of 33, a pandemic of which a great number of people died in Ethiopia between 1918 and 1919. It is perhaps useful to briefly highlight the internal and external contexts prevailing in the then Ethiopia in order to better understand GHB’s writings. The period during which he was writing was such that, even though Ethiopia was the only independent state in Africa and had repulsed Italy’s attempt to colonize it at the famous Battle of Adwa in 1896 (but had conceded an important part of its territory—today’s Eritrea—to Italy), it was surrounded by technologically and economically superior European colonial powers (Italy, France and Britain) who were competing with each other to take direct and indirect control of the country. Meanwhile, the internal situation was such that poverty and inequality was rampant in Ethiopia—with a very heavy burden of taxation and operation under a brutal feudalist aristocracy. Therefore, throughout his writings, one could clearly see his compassion and concern for the uneducated and downtrodden poor people; and so, using historical experiences of other countries, he warns the leaders of the time that Ethiopia was in an imminent danger of collapse and chaos due to sprouting signs of wealth concentration, exploitation of the poor (by the feudal aristocracy) and the general state of underdevelopment. Therefore, it is likely that these internal and external dynamics may have prompted him to forward reform proposals which were quite radical for their time (and context), and to forward them with such an urgency and earnestness. GHB wrote two books in Amharic (the official language of Ethiopia), both of which were published by his friend Paulos Menameno.8 The first one is Atse Menilik ena Ethiopia (Emperor Menelik and Ethiopia), published in Asmara (present-day Eritrea) by Berhan Yihun in 1912.9 According to Bahru (2002), GHB wrote this book during the time when he was hospitalized in Massawa, ‘apparently while he was convalescing’ (ibid., p. 51). This is a short book of just about 28 pages specifically written as an advice piece to Eyyasu Michael, the young heir-designate to Emperor Menelik.10 In it, one could see clear policy proposals and ideas for reforming the Ethiopian state of the time. Some of the major issues that he highlights include the importance of education, building of constitutional and legal systems and institutions of good governance, the importance of domestic production of necessities (rather than importing) and the importance of learning and emulating from post-Meiji restoration Japan (particularly how Japan was emulating European technology and industrialization while maintaining its independence and cultural identity). In this short work, GHB also argues that political independence without economic transformation (industrialization) is precarious and easily destroyable. However, a fuller exposition of these ideas had to wait for his second work. Thus, Emperor Menelik and Ethiopia is not a complete treatise in itself; rather, it essentially is a pamphlet that makes an urgent call to the emperor-designate to implement a reform package that could enable the country to emulate and adopt the knowledge and technology of Europe and survive and thrive in an age where underdevelopment meant perishing as a polity.11 Nevertheless, it is remarkable for being the first-ever work in Ethiopia explicitly aimed at reforming and modernizing the Ethiopian state and economy. The more significant work by GHB is Mengistina YeHizb Astedader (literally meaning ‘Government and Public Administration’). In the preface to the book, Paulos Menameno (the publisher) states that, following the death of the author, he found the manuscripts of the book scattered in different places, and written partly in ink and partly in pencil. It was published in 1924 by the Berhanena Selam Press.12,13 This book is essentially a treatise on political economy of development (or, in today’s language, economics of development); however, there is no consensus among historians and commentators as to why GHB chose to give it this title. Nevertheless, it is very clear from the very beginning of the book that the author intended it to be specifically about how a people or nation may fail or succeed to develop and attain high standards of living and welfare (ibid., 11–12). The book was annotated, introduced and translated into English by Tenkir Bonger in 1995 (Gebrahiwot, 1995). According to Salvadore (2007), GHB’s contribution to the descriptive and normative understanding of Ethiopian modernity has been investigated by many of the most respected scholars of Ethiopia and thus, he enjoyed a degree of interest by scholars of Ethiopia far superior to that reserved to the other intellectuals (ibid., 62–63). Salvadore (2007) states that the first scholars to look at GHB did so from a Marxist standpoint, as his sharp criticism of the Ethiopian nobility and its economic perspective squared well with the Marxist approach and offered substantial evidence for a class-based analysis of Ethiopian history (ibid.). Some writers described his work as Eurocentric for his conception of history ‘within the paradigm of European historiography’ (Shiferaw, 1994, as cited in Salvadore, 2007, p. 564). Bahru (2002) offered a comprehensive perspective on the Ethiopian Japanizers14and in particular on GHB, contending that he stands apart from most of the other intellectuals since he was arguing not so much for the adoption of Western ways and modes but for an autochthonous path of development (ibid.). But this did not stop others such as Kebede (2006) from continuing to accuse GHB of a purported Eurocentrism15 and for seeing Ethiopia through the eyes of the Western anthropologist rather than those of a native scholar (ibid., p. 815). In any case, no one has ever denied the uniqueness of GHB as an Ethiopian intellectual in the sense that, other than him, none of the early proponents of modernization and development in the country produced any significant theoretical or applied works on economic development.16 Be that as it may, there has not been any significant scholarship in relation to GHB’s core ideas of economic development such as identifying the intellectual lineages of his ideas and theories as well as critical assessment of their validity either in their original or today’s context. For instance, Tenkir (Gebrahiwot, 1995) translated and introduced GHB’s book but did not attempt to trace the main ideas’ origins, inspirations and connection/difference with similar/opposed development theories that preceded GHB’s. Similarly, Alemayehu (2002, 2004, 2012) has not gone seriously into analyzing GHB’s main ideas and theoretical structures, or tracing their intellectual lineage beyond mentioning that GHB was influenced by the scholarly tradition of the nineteenth-century American/German system of political economy (particularly by Henry C. Carey). Consequently, he underestimates the influence of and similarities of GHB’s ideas with those of Carey (and exaggerates the originality of GHB’s ideas and his contributions to development economics).17De Lorenzi (2015) also erroneously associates GHB with Marxism and Marxian analytical frameworks (ibid., p. 50), and finds resemblance to GHB’s core arguments only with ‘positions of Mohandas Ghandi and Romesh Chonder Dutt, who similarly sought to understand the impoverishing impact of unequal exchange in South Asia’ (ibid., pp. 50–51) but not with economists of the nineteenth century who propounded similar ideas or the ‘high-development theorists’ of the mid-twentieth century. We also find misrepresentations of some of GHB’s key ideas in the otherwise excellent exposition of his work by Girma (2012),18 for instance, with respect to sources of finance for industrialization and economic development. Specifically, while, as we shall see later, GHB and other economists of his intellectual linage (including some influential mid-twentieth-century development economists such as Ragnar Nurkse) believed that development should largely be financed through domestic resources, Girma (2012) states that, in GHB’s development program, modernization of Ethiopia is to be achieved through external financing (ibid., p. 72). Failure to fully understand the holistic nature of GHB’s work, and particularly his emphasis on the need for implementation of the various aspects of his modernization program simultaneously, also appears to have led commentators on his work to overemphasize the weight he put on education. (See e.g. Mohammed [2012, p. 75]; Kebede [1999, p. 285] and Beletu and Bureau [1993, p. vii] as cited in Girma (2012).) 3. Governance, institutions and political economy conducive for economic development In Menelik and Ethiopia, GHB makes an interesting note regarding one feature of state vis. economic development: in a developed society, the state is a sort of voluntary association of citizens where their leader’s authority is constitutionally and legally limited and where change of leadership or death of a leader does not significantly affect the existence and continuity of the state (ibid., p. 10). He contrasts this with the situation of the then Ethiopia, where the king/emperor is the state/government and any change of leadership threatened the very existence of the country as a polity—because constitutional and legal frameworks and well-functioning bureaucratic public administration did not exist (ibid.).19 Thus, for him, existence of a stable and constitutionally governed state that has a meritocratic public administration is a necessity for economic development and modernization. Beyond this, his position regarding the form of government appears to be that of a ‘benevolent dictatorship’. He begins the book Government and Public Administration by quoting an author named Estier-Somlo20 arguing that the wealth, stability and strength of a state is intimately linked with the welfare and prosperity of the general population, i.e. the right of the leader to rule is tied to his/her responsibility to deliver widespread prosperity and development. For him, economic development requires a synergistic and mutually supportive/reinforcing relationship between the state and its citizens where human development plays a key role (p. 13). The enlightened self-interest of the state and rulers necessitates ensuring equitable and wide-spread economic growth and development since ‘[a] poor person who lacks food and clothing will have no reason to love his country; and so, will not care whether the state of the nation becomes strong or is devastated’ (p. 119).This view of the state puts him in agreement particularly with the views of Cameralist21 authors such as Veit Ludwig von Seckendorff (1626–92) and nineteenth-century German Historical School writers such as Wilhelm Rocher.22 His view is also similar to that of Friedrich List, for whom nationality without prosperity is meaningless (List, [1841] 1909, p, 341).23 It is to be noted that Cameralism was the dominant school of economics and political writers in Europe in the seventeenth and eighteenth centuries, where writers aimed at convincing the princes, kings and rulers that their right to rule a state also entails a duty to develop the state (Reinert, 2005). Thus, the ‘enlightened ruler’ is to be in charge of this ‘developmental dictatorship’; and the job taken up by the Cameralists was to advise, assist, guide, correct, flatter and cajole the rulers into doing their jobs properly (ibid.).24 In any case, though GHB’s ideas in these area show similarity to those of the two schools of thought, there is no evidence that he was directly influenced by the main protagonists in that intellectual linage; however, it is reasonable to think that their influence on his thinking might be through Estier-Somlo, whom he mentions in the book. The second interesting feature of GHB’s theoretical structure is related to context-specificity of institutions and policies. Unlike the currently dominant development discourse where it is contended that policies and institutions that are good for development are fairly constant and context free, GHB repeatedly argues that appropriate policies, institutions and strategies differ across time and context of a society, and that there is no optimal set of policies and institutions that apply to all contexts (e.g. pp. 15, 78, 124). Moreover, he argues that wholesale copying and importation of ‘best practice’ policies and institutions from developed countries could be counterproductive and a waste of resources since the most appropriate policies and institutions can only be developed from within the country itself based on its specific needs and developmental contexts (pp. 124–25). Overall, his views concerning institutions and policies are close to those of the best of the mercantilists and Cameralist traditions of Europe which understood that economic institutions co-evolve with the mode and structure of production, where institution-building was fundamentally seen as a demand-pull phenomenon, and where the mode of production of a society is thought to determine its institutions (Reinert, 2007).25 Nevertheless, it is impossible to identify any direct or indirect influences of mercantilist, Cameralist and German Historical School authors on GHB’s views on this particular topic, as he does not make any specific reference. Another key feature of GHB’s thinking is his emphasis on fair, equitable and just distribution of wealth, income and opportunities across various sections of the society. Given the fact that Ethiopia (the object of his developmental ideas) was and is a multi-ethnic and very diverse society, he argues that fair and equal treatment of all ethnic groups within a state is not a matter of benevolence but a necessity for long-term survival (p. 14). His emphasis on fair and wide distribution of benefits and wealth also extends to land as well as wealth and economic opportunities in general (pp. 54, 88, 119–20). Furthermore, he is against wealth concentration because it undermines feelings of unity and nationalism in a nation which, for him, are essential ingredients of national development and industrialization (p. 119). Overall, in this respect as well, his views are similar and possibly influenced by authors in the tradition of German Historical School, such as Gustav Schmoller,26 who played a critical role in envisioning and laying the foundations for the modern welfare state in Europe; however, the contexts of their recommendations are very different.27 Before moving into the core of GHB’s development ideas, we would like to note the emphasis he put on the importance of peace and stability for development (pp. 34, 41, 42). While discussing the destructive conflict cycles in the history of Ethiopia, he emphasizes that war and conflict are possibly the biggest obstacles for development, and that poverty and inequality maintain a vicious cycle of underdevelopment. Recently, this nexus between poverty and conflict has been publicized, among others, by Collier (2007), who argues that ‘civil war is much more likely to break out in low-income countries: halve the starting income of the country and you double the risk of civil war’ (ibid., p. 19). However, in contrast to Collier (2007), who goes on to recommend fostering of competition to break this vicious cycle of conflict and poverty (ibid., p. 160), GHB recommends changing the structure of the economy through industrialization because, according to him, synergistic development of increasing returns activities in an agglomerated manner with extensive division of labor and specialization leads to increased social harmony, more trust, less conflict and more cooperative behavior (p. 84). This is similar to the views put forward recently by Reinert et al. (2011), who argue that absence of an increasing returns sectors in an economy creates zero-sum-game societies of static rent-seeking, which makes such nations prime candidates for developing into failing, failed and fragile (FFF) states (ibid., p. 5). Thus, the root causes of poverty and underdevelopment lie in a certain type of economic structure which fails to produce the virtuous circles of economic growth that requires increasing returns and sufficient diversity and diffusion of economic activities in order to become self-sustainable (ibid., p. 4). 4. The nature, causes and mechanics of late development and industrialization In most of the mainstream academic and policy literature, it is argued that some countries and societies have a much better chance of economic development. However, there is no agreement as to what factors play a more important role. For instance, Bloom and Sachs (1998) suggest that 60 to 90% of Africa’s slow growth is attributable to geography and demography—tropical climate and a tropical disease burden, hostile and unfertile soil quality, a high youth dependency ratio, a semi-arid climate with rainfall subject to long cycles and unpredictable failure, etc. Similarly, Diamond (1999) argues that both geography and the environment played major roles in determining the shape of the modern world (ibid., p. 405). Meanwhile, Acemoglu (2001) and Acemoglu et al. (2002) argue that the most important factor is the presence or absence of ‘appropriate’ institutions because, according to them, after accounting for institutional differences, geographic variables have little influence on incomes today (ibid). Yet for others, it is about policies. For instance, Collier (1998) argues that it is quite difficult to achieve structural transformation in Africa since long-lasting and hard-to-reverse effects of poor policies (e.g. trade barriers, transport costs, power costs, transaction costs, information costs, and high risk) make it quite infeasible (ibid., pp. 280–81). Therefore, he suggests, ‘For the present Africa must live with dependence upon primary commodities, and for parts of Africa this is the only likely future’ (Collier, 2002, p. 28). Contrary to these views, GHB argues that the key ingredients of economic development are not geography, climate or environment; and as discussed above, even institutions are not causes of wealth and prosperity per se as they co-evolve with the economic structure. For him, ‘All people have the potential to develop. This [their fate] solely depends on themselves’ (p. 11). This conviction is derived from the fact that, for him, all the key ingredients of economic development are artificial: ‘When man was created, he was endowed with a great mind; over time, he became master over the earth by accumulating knowledge on this great mind’ (p. 16). Thus, man’s key to development lies in creation, accumulation and use of knowledge, technology and skills (pp. 42, 53, and 61). Therefore, any society has the potential to achieve economic development, continually improving its living standards with evermore ease through innovation, skill development, technical change and accumulation of knowledge (pp. 24, 51, and 61). Explicitly acknowledging ‘an American scholar named Carey’ (whose influence on GHB will discussed below) as the source of his ideas, GHB elaborates how accumulation of knowledge and innovation is a circular and cumulative process whereby a generation benefits from and builds upon the knowledge and technical innovation accumulated by its predecessors (pp. 24–25). In addition, innovation and technical change motivate and facilitate further innovation and technical change in a society (p. 29). Increase in productivity due to innovation and technical change leads to an increase in population, which in turn facilitates further division of labor; and this is a mutually reinforcing, continuous process (pp. 26–29). This virtuous cycle facilitates economies of agglomeration and development of public infrastructure, all leading to continuous improvement of living standards.28 With simple but clear examples, he emphasizes the importance of virtuous cycles of discovery, innovation and technical change, leading to increases in productivity, further technical change and decline in the costs of production (p. 50). Later on, he states, ‘It is not difficult to reproduce an item once the first copy is produced…For this reason, once an activity is accomplished, it makes the next step easier’ (p. 58). This is of course the well-known case of increasing returns-to-scale.29 In his theoretical system, value and price are also largely determined by the artificial factors of knowledge, skill and technical change in such a way that ‘as knowledge increases, the price of all things that are needed for living declines since the effort required and obstacles to be surmounted to obtain these things declines’ (p. 45). Furthermore, as determinants of economic development, knowledge and technical change take precedence over natural resource abundance since natural resources become valuable only when knowledge and technical progress creates uses for them: ‘Today, thousands of ships across the world are fueled by coal. The coal had always been available in England. It only began to be [considered as] wealth [a useful resource] to the English after the locomotive train was invented and it was discovered that coal was useful for [fueling] the locomotive. Prior to that, there was as such no one who considered coal as valuable’ (p. 56). For him, investments in human development not only create virtuous cycles of development but are also critical to develop the national capability to maintain the momentum of development; and ‘[t]herefore, if a government educates and trains workers in its territory and brings them closer [e.g. through development of transport infrastructure], if it motivates them to be industrious, if it exerts efforts to maintain their health and wellbeing, and if it spends money [to these ends], the returns would be equivalent to that of putting the money in a bank that not only maintains the principal but credits interest daily, monthly and annually’ (pp. 60–61). In effect, according to GHB, true national wealth is attained not through accumulation of capital or money but through the acquisition and maintenance of the capability to produce (productive capability) (p. 57–58). Moreover, ‘The cause of increases or decreases in the amount of gold and silver [hard currencies, in today’s context] that flows into a state is just one and is clearly known’ (p. 111); it is economic diversification into skill and knowledge based, increasing returns-to-scale activities that ensure very large division of labor within a single macroeconomy (pp. 112–13; p. 128). Also, synergistic development of increasing returns and constant/decreasing returns-to-scale activities side-by-side within a single macroeconomy plays a key role in addressing the development challenge in a late-developing economy. Thus, ‘If we pay close attention to the situation in our country, the chief reason why land ownership is becoming more and more concentrated, the peasants are abandoning their agriculture and idly following officials/aristocrats like dogs, and the benefit of the government is declining is the fact that the market from which the farmer buys all that he needs is located in a far-off foreign country’ (p. 84). The remedy to this problem lies in co-location and co-development of industry and agriculture—and this is good for both sectors (pp. 87–88).30 Thus, his advocacy for industrialization (i.e. focus on development of increasing returns sectors) does not preclude development of the agriculture and other primary sectors. Rather, his view is that agriculture cannot be modernized and made more productive except simultaneously with industry (p. 92). In addition, he argues that development of agriculture presupposes cheap modern inputs and reliable and close-by market (p. 96).31 Another important issue stressed by GHB is the absolute necessity of making synergistic and simultaneous investment in human development, infrastructure, economic diversification (both increasing returns and constant/decreasing returns activities) and financial sector development. With respect to the need to develop physical infrastructure and educating and skilling of the population simultaneously, he argues: Roads and railways are highly beneficial if one is able to quickly understand [their true value]. It is important to immediately set up schools and training facilities that provide training on various professions and skills. And when the population is educated and skilled, it produces whatever it needs by itself. Division of labor would be very extensive and the producers will be located close to each other...Therefore the producers/workers will have more time to engage themselves in their profession. As a result, they will conduct research and discover new production techniques and products. They will make more profit out of the increased profit. Over time, the wealth of the people and power of the government will grow continually as wealth is one form of power. But roads and railways without knowledge and skill [among the population] impoverish the nation and are not useful. Therefore, a government that is interested in the benefit of its people should not separate these two things [educating the workforce and development of infrastructure]; it shall strive to undertake them simultaneously. (p. 76) The risks posed by heavy investment in transport and communications infrastructure without equivalent investment in education, economic diversification and domestic market expansion are related to development of taste for foreign products and exacerbation of the problems of ‘unequal exchange’, as this promotes imports of higher valued products in exchange for low value primary exports (p. 75) (to be discussed in detail below). For him, the financing required to industrialize a late-developing economy has to be raised almost exclusively from domestic sources through creation of economic surplus, domestic savings and channeling of savings into productive investments (p. 65). Another key element in his development theory relates to the need for development of a national financial sector simultaneously and synergistically with the other key elements (human development, physical infrastructure, deliberate/interventionist promotion of increasing returns activities, etc.) (pp. 125–26). This is because the development and expansion of financial institutions and financial services become useful only in a context where savings are channeled into productive investments in increasing-returns sectors; otherwise, these will only promote consumerism and increased demand for imports—further exacerbating the problems of chronic trade deficits (pp. 136–37, 139). Overall, he compares promotion of railways and banking in Ethiopia of his time with ‘digging the grave of the people’ unless done simultaneously with a comprehensive programme of industrialization and human resource development (pp. 127–28). To put GHB’s key ideas into context, it would be important first to consider the intellectual influences on his work. As his major book was not finalized when he passed away, there are only two references in the whole book: Estier-Somlo and ‘an American scholar named Carey’. After some effort, we were able to confirm that, of the two influential American economists of the nineteenth century with that name (Matthew and Henry Carey, father and son), many of the key ideas propounded by GHB actually show unmistakable resemblance to the ideas in Henry Charles Carey’s book Principles of Social Sciences in Three Volumes, Vol. I (1888). In fact, many of the passages in GHB’s book appear to be shorter and contextualized versions of passages in Carey (1888).32 For instance, while GHB borrows the idea of labor theory of value from Carey (1888), he refines it by specifically stating that what creates value is not just labor but the quality of labor and the technology used by labor—i.e. the knowledge, skill and know-how applied by and embodied in the labor and enhanced by technology. One could also say the same thing with respect to other key ideas of GHB, such as ideas related to increasing returns, circular and cumulative causation, importance of diversity of professions and division of labor, economies of agglomeration and co-development of manufacturing industry and primary production within a single economy, unfairness of international trade between technologically ‘unequal partners’ (to be taken up in the next section), etc. In all cases, it could be said that GHB absorbed and refined the core ideas of Carey and left those that are not relevant to his readers, contextualized them and presented them in very clear and concise manner.33 Other major authors who preceded GHB and whose ideas bear close resemblance to his include Antonio Serra (1613) and Friedrich List (1841). According to Reinert and Reinert (2003), Antonio Serra coherently presented the kernel of development economics in his 1613 short book Breve trattato, including some of its key elements such as increasing returns, cumulative and circular causation and synergies (ibid.). For him, the most important causes of ‘the wealth of nations’ are ‘the quantity of industry’, ‘the quality of the population’, ‘the extension of trading operations’, and ‘the regulations of the sovereign’ (ibid., pp. 16–17), which work dynamically and in synergetic conjunction (ibid., pp. 20–21). Thus, one could see that some of GHB’s ideas are similar to those of Serra, who wrote about three centuries before him, but there is no evidence that GHB was directly influenced by Serra’s work; rather, it is possible only to speculate that the influence might have come indirectly through Carey (1888). One also finds many ideas similar to those of GHB in Friedrich List’s magnum opus The National System of Political Economy, which was published in 1841 (English translation, 1909). Therein one finds excellent description of the main causes of development (ibid., p. 87); the process of late development and industrialization (ibid., p. 32); importance of proximity of manufacturing industry and agriculture (ibid., p. 83); the co-evolution and circular causality of institutions, economic structure and culture (ibid., p. 40); social, institutional and political nature of production and economic development (ibid., p. 87); emphasis on productive capability (rather than on static forms of wealth); etc., all of which are quite similar to the ideas of GHB. However, unlike the case of Carey (1888), there is no direct internal evidence showing that List was a major influence on GHB. Since List was closely associated with Carey’s family,34 we can speculate that List’s influence on GHB might have been through Carey, who propounded ideas that are similar to those of List. Be that as it may, even if GHB may have read List’s work (since he lived and studied in Germany), their views widely diverge with respect to one key issue: while List recommends specialization in primary production for ‘tropical’, ‘torrid’ nations’ (e.g. List, [1841] 1909, p. 312), GHB is of the view that industrialization is the only path to prosperity for all nations.35 Furthermore, though GHB and List agree on their policy recommendations, unlike GHB, List’s theoretical expositions and justifications of his proposals are somewhere lacking. In fact, as Reinert and Daastol (2007) rightly observe, ‘No doubt his observations were accurate, but his theoretical concepts are vague and his explanations of the economic mechanisms at work are imprecise’ (ibid., p. 32). Overall, it is clear from his book that GHB had access to and was well acquainted with the then-major contending theoretical frameworks and intellectual debates related to economic development (e.g. p. 78). In addition, his book indicates that he was well versed with the economic history and economic policy history of many industrialized and industrializing countries of his time (e.g. p. 79). Therefore, his choice of the work of Carey as the foundation of his own work was not due to ignorance of alternative intellectual traditions but was intentional and deliberate. 5. Nature and causes of ‘unequal exchange’ in international trade As discussed above, for GHB, what determines the value of products and level of welfare in a society are levels of skill, knowledge, technological and innovation capability. Therefore, any trade, be it domestic or international, is ruled by this same law of value. Consequently, if trade/exchange is to be mutually beneficial, both sides to the transaction should operate under the same level of technology, skill and knowledge; otherwise, the result would be harmful to the nation with lesser knowledge and technological capability: At present day Ethiopia, it is not possible to manufacture bottles, glass, kettle, dishes and table ware. All these are produced in Europe with considerable ease and no great effort. But our countrymen exchange these [items] with things for which they have exerted lots of effort…Therefore, he [an Ethiopian peasant] exchanges products which have required him several days of labor to produce with something [like] abujadi [a type of textile] that was produced in an instant…because he does not possess the knowledge/skill required to produce the cloth…Is this not the case even within our country where the labor of the carpenter is valued more than that of someone who supplies to him wood?.....Thus, when we say that value is determined by amount of labor, knowledge and skill of the producers that exchange their output have to be equivalent. This means that, when a producer of cloth exchanges his products that are made using machines with a farmer, the farmer is harmed [by the exchange] while the producer of cloth benefits, unless he also produces with machines. When the farmer produces with machine [but if the cloth maker does not], then the cloth maker is harmed but the farmer benefits. This is the reason why peoples [nations] that have superior knowledge have advantage in [international trade] over those that are inferior in knowledge. (pp. 52–53) Thus, as the goldsmith buys the labor of the one who makes his fire and the carpenter buys the labor of the log carrier at cheap prices, likewise, people with knowledge [skill and technology] buy the labor of peoples that lack knowledge [skill and technology] at cheap prices...That knowledge rules the world is an unshakable eternal law. (p. 53) Producers of various products could make fair exchanges of outputs of their labor when the knowledge and skill required for their respective products are balanced. If the required knowledge and skills are not balanced, the value of their exchanges cannot be balanced. Therefore, when peoples [nations] that lack knowledge/skill exchange their products with peoples [nations] with advanced knowledge/skill, the level of harm suffered by the peoples lacking knowledge is great. (p. 67) As shown by the above quotes, for GHB, the root causes of the ‘unequal exchange’ in international trade between producers of primary commodities and producers of manufactured products are the knowledge, skill and technology embodied and employed in the products and the production process. Furthermore, he also argues that processing raw materials and primary commodities domestically not only saves a country from the harms of ‘unequal exchange’36 but also creates employment opportunities for the domestic workforce as well as for improving the skill levels of the workforce (p. 68). It will also help eliminate the cost of transportation and the profit that goes to importers, exporters and other middlemen in international trade. Conversely, continuation of the status quo of ‘unequal exchange’ exacerbates poverty in the primary commodity-exporting nation. In addition, a country exporting raw materials and primary commodities while importing manufactured products is bound to suffer persistent trade deficits, which are generally financed through foreign borrowing.37 As he was writing at a time when development aid was unknown, it does not figure at all in his analysis. Moreover, unlike recent times when most mainstream development policy literature sings the virtues of foreign direct investment (FDI), GHB considers this source of external finance as being equivalent to prohibitively expensive loans. This is because, by definition, foreign investors bring capital into a less developed economy to make substantial profits which they will eventually repatriate into their home countries (p. 73). The following is a perceptive description of the essence of FDI that goes into primary commodity production in developing countries (thereby re-enforcing and locking them into the developmental ‘dead-ends’ of specializing in primary commodities), and is also a warning about the risks of taking the route of low wages (‘cheap labor’) that has been recommended to poor developing countries by the mainstream literature: Even if they do not explicitly say it like this, it seems that foreigners who come to Ethiopia [with capital] would say to the Ethiopian people as follows: the reason why we have come to Ethiopia is to take the wealth of your country. However, since the land is yours, you will not let us work on it and take what is in it. [But] if you let us [do this], we will not bring workers from our country as the cost of labor would be high. As the wages of your labor are extremely low, let you, yourself do the work and give us [the output]; we shall pay you a small amount of money for your exertions. But, with this small amount of money we pay you, do not buy the equipment and machinery that is required to manufacture the clothing and other items that you need for your consumption; and never produce them by yourself. From now on, do not manufacture shema (cotton garment produced by Ethiopian traditional textile industry), swords and all the things that have been locally produced. Buy everything from us. Return to us the money we have given you immediately with a large amount of interest. (p. 74) In general, the pessimistic views of GHB regarding FDI and the need for mobilizing domestic resources for economic development were similar to those propounded by Ragnar Nurkse, one of the leading development economists of the 1950s and 1960s. Specifically, Ragnar Nurkse (1961, p. 141; as cited in Kattel et al., 2009) presents arguments that are similar to those of GHB in the sense that development has to be mainly financed from domestic sources. In fact, Nurkse’s position against attempts to finance development from foreign sources such as FDI mirror those of GHB as, according to Nurkse, trade and foreign investment would engender a number of obstacles to development: namely, first, large parts of such financing would seek to utilize poor countries’ resources and eventually lock these countries into undiversified economies with a skewed social structure; and second, there is a clear danger that significant amounts of foreign financing would end up funding private consumption patterns emulating Western living standards and thus creating balance-of-payments problems (ibid., 12). In a similar vein, based on empirical evidence of the twentieth century, Kregel (2004) argues that indeed there have been persistent negative financial flows into developing countries, and that development initiatives dependent on external financing have generally been inextricably linked to the problems of unsustainable debt creation and debt burdens, sharp reversal of external flows and increasing prevalence of financial crises in countries that had experienced periods of positive external capital inflows. Returning back to GHB, using the case of the then Ethiopia, where cheap imports of low-quality textiles and garments from Europe wiped out domestic production of better-quality equivalents, he goes on to show how foreign competition destroys existing ‘uncompetitive’ and less efficient industries (without replacing them with more efficient ones) (pp. 79–81). His examples also show that he was well aware of how development of taste for imported conspicuous luxury consumption items could not only pose risks to domestic manufacturing industry but also would put added pressure on the economy to export more and more primary products (which was already under pressure to cover the unavoidable trade deficits due to the ‘unequal exchange’) in order to cover the ever-increasing costs of imports (pp. 74–75). To put this portion of GHB’s work in context, like the case of the previous section, it is easy to see that GHB’s ideas resemble those of Carey (1888), and probably for the same reasons. However, even though in both cases the key ideas related to ‘unequal exchange’ are directly derived from (or implied by) the underlying theories of key domestic causes and mechanics of development, GHB’s ideas show marked clarity and refinement compared to those of Carey (1888). For instance, unlike GHB, Carey (1888) does not specifically and explicitly ascribe ‘unequal exchange’ to differences in knowledge, skill, technology, returns to scale and agglomeration, though their conclusion is very similar. 6. Strategies for late development and industrialization The main purpose of GHB’s book was to show the people and then state of Ethiopia the sure ways and means of achieving development and real and meaningful political and economic independence as a nation. As such, all his theoretical discussions point to distinct policy directions. For instance, it was already alluded in previous sections that his approach leads to focusing on deliberate and comprehensive set of state-directed, synergistic interventions in the areas of infrastructure development, human development and education, promotion of technology adoption and innovation, internal market expansion, suppression of consumption of imported products, financial sector development and import protection—all aimed at industrialization and structural transformation. In addition to such general policy statements scattered throughout the book, his book also contains a section that outlines a comprehensive set of policies—with particular emphasis on selective and dynamic protective tariff schemes aimed specifically at promoting import substitution industrialization (pp. 81, 84). This includes: Erecting sufficient barriers on import of finished products, where tariff protection is not meant for revenue but for the purpose of creating and sustaining national productive capability (pp. 103, 126); Removing tariffs and other barriers to import of machinery and raw materials; discriminating against imports that can be produced with machinery and equipment that is allowed to be imported duty free; providing incentives to domestic producers of raw materials and agricultural outputs; Encouraging and supporting FDI in the area of manufacturing and import substituting industries; encouraging FDI and immigration of skilled foreigners with an explicit objective of knowledge, technology and skill transfer—as well as creation of industrial and skilled employment (pp. 97–98); Promoting export of finished products (p. 97); discouraging export of raw materials (p. 99)—particularly discouraging export of primary commodities that are based on non-renewable resources (p. 118); Ensuring that export earnings from raw materials and primary commodities are used to import advanced technology but not for consumer products (p. 114). Overall, his stress is on the creation of a diversified economy based on knowledge- and skill-based increasing returns activities (pp. 112–113), which is to be achieved through a dynamic and context-specific combination of import protection/substitution and export promotion strategies, which are to be supplemented and complemented by its three ‘inseparable colleagues’ (pp. 97–98): foundation and expansion of education and training institutions; construction of physical infrastructure; and promotion of technology and skill transfer-oriented inward FDI and skilled immigration. Moreover, his proposals for import substitution/protection with dynamic policy interventions are explicitly aimed at creating synergistic and side-by-side development of agriculture and industry, thereby creating a virtuous cycle of prosperity (pp. 85–87). Looking at the contents of the industrialization policies proposed by GHB, it is easy to see their similarity with most of the policy proposals made by Friedrich List (1841). Similar but cruder sets of policy proposals were made or implemented among others by Jean-Baptiste Colbert, Louis XIV’s General Controller of Finances (France);38 and going even further back, we find many similar policy ideas in Hörnigk’s ‘Nine Points of Economic Policy’, which were proposed in 1684 and implemented in Austria with great success.39 They also bear resemblance to the logic, content and objectives of the famed ‘American System’ that was forcefully and ingeniously sketched for the first time in 1791 by Alexander Hamilton, the first Secretary of the Treasure of the USA, in his famous Report on Manufactures. The long-term impact of the ideas proposed in the Report is such that one author states, ‘[it] contained the embryo of modern America: here, if a date can be assigned to a development so amorphous and far-reaching in its consequences, was conceived the grand design by which the United States became the greatest industrial power in the world’ (Greenfeld, 2001, p. 393). The resemblance is not surprising, as one of the aggressive and relentless promoters of the policy proposals of ‘the American System’ was Henry Carey (who had substantial influence on GHB), as the result of whose ‘vigorous preaching’, ‘it enjoyed wide acclaim around the economically alert world, was regarded with interest in Britain and France, and taken very seriously in Germany and Japan’ (ibid., p. 328). In fact, according to Kaplan (1931), Carey’s intellectual influence was such that, at the completion of his Principles of Social Science (1857–60), ‘he had attained not only the fruition of his own thought; he had awakened a European interest in the “American School” and the “American System”’ (ibid., p. 9). Principles of Social Science, which was the main source for many of GHB’s ideas, was very influential during the second half of the nineteenth century and was translated into five European languages and Japanese (ibid.). Moreover, in Germany, where GHB also spent his formative years and must have witnessed the achievements firsthand, List’s proposals, which were very similar to his own and those of Carey, were successfully implemented particularly under Bismarck (Reinert, 2004, p. 32; see also Chang, 2002). In addition, Erasmus Peshine Smith, one of the most influential economists of the American School and the protégé of Henry Carey, was an economic advisor to the Japanese government following the Meiji restoration.40 As a result, key figures in the design and implementation of the economic policies following the Meiji restoration in Japan (such as Wakayama Norikazu, Okubo Toshimichi and Fukuzawa) were all followers of Carey’s and List’s ideas (Greenfeld, 2001, pp. 328–34). And therefore, it is not surprising that GHB’s policy proposals resemble those that propelled Japan from a poor feudal society to an industrialized nation. Nor should we be surprised that he advised the then-Ethiopian government to learn from and emulate Japan. Later on, while somewhat modified by the experiences of the Second World War and indeed the aftermath of the war, these ideas again played a major part in influencing Japanese development from the 1960s (Reinert and Daastol, 2004, p. 33, Reinert, 1994: 174-175). Since Taiwan, South Korea and Singapore were greatly influenced by the Japanese model of industrialization, their spectacularly successful industrialization policies also greatly resembled those of Japan.41 Thus, when GHB’s ideas regarding the causes and nature of economic development and the strategies that he proposed for late development and industrialization of the then Ethiopia are put into their proper and wider historical and intellectual context, the characterization of GHB as ‘Japanizer’ appears too narrow. This is because, whereas Japanizers refers to the strong interest of the early twentieth-century Ethiopian intellectuals in the successes of the Meiji restoration in Japan, GHB’s suggestion for Ethiopia to learn and adopt the policies and industrialization strategies of the then Japan had much more to do with the fact that Japan was the one place where the strategies and policy ideas implied by his theoretical framework were being applied at the time of his writing. This is like Alice Amsden, one of the leading proponents of GHB’s kind of development economics in recent decades, exclaiming ‘[Raul] Prebisch lives in Asia!’—referring to how leading governments in Asia were actively and effectively promoting import-substitution in high-tech industries during the late twentieth century and early twenty-first century (and therefore proving Prebisch correct about import substitution industrialization) (Amsden, 2004, p. 75). (For a striking similarity between GHB’s policy proposals and the policies and industrialization strategies which were being implemented in Japan during the early twentieth century—i.e. around the time GHB was writing his book—see Chang [2002, pp. 47–50].) Therefore, in our view, GHB should not be narrowly considered as a ‘Japanizer’ but as one of a long line of intellectuals subscribing to and writing in the tradition of what can broadly be called historical, evolutionary and pragmatic economics.42 7. GHB’s ideas and later theoretical developments: are the core ideas theoretically valid? Moving forward in the history of economic thought, we could clearly see that the main ideas of List, Carey and GHB underlie much of the kernel of the development economics of the 1940s, 1950s and 1960s when the field was thriving. The group that promoted these ideas, which collectively form what is now called ‘classical development economics’ or ‘pioneers of development’, typically consists of the following key thinkers: Paul Rosenstein-Rodan, Hans Singer, Arthur Lewis, Albert Hirschman, Gunnar Myrdal and Ragnar Nurkse (Kattel et al., 2009). Two key ideas of these ‘high development theorists’ that are particularly similar to those of GHB are that (a) financing for development has to come to a large extent from the developing country itself (‘Capital is made at home’; Nurkse 1961, p. 141; as cited in Kattel et al., 2009, p. 12), and the key areas to be financed need to exhibit increasing returns in order to trigger dynamics of development or, as Myrdal argued, virtuous circles of growth (ibid., p. :12). Unfortunately, however, the key ideas of both groups of economists (List, Carey, GHB, et al., and the ‘high development theorists’ of the twentieth century) have been ignored and by-passed in the mainstream development literature of recent decades to the extent that Krugman (1995) confidently states, ‘By the 1980s or so, virtually all vestiges of high development theory had disappeared from development economics’ (ibid., p. 28). This is despite the fact that their key ideas ‘remain intellectually valid and may continue to have practical applications’ (ibid., p. 7); and so, ‘[t]he irony of course is that high development theory was right’ (ibid., p. 28). The reason he gives for the disappearance of these valid and logically sound ideas is the fact that mainstream economics became ‘essentially a collection of models. Broad ideas that are not expressed in model form…do not endure unless they are codified in reproducible—and teachable form’ (ibid., p. 27); and leading development economists of the time ‘failed to turn their intuitive insights into clear cut models that could serve as the core of an enduring discipline’ (ibid., p. 24). In effect, mainstream economics has sacrificed theoretical/logical validity, relevance and practical applicability in favor of mathematical elegance and simplicity. Meanwhile, as noted earlier, the ‘development’ debates over the past few decades have tended to focus solely on internal factors that determine success/failure in development as if external economic forces are always benign. In fact, the powerful countries are pressing the developing world to adopt wholesale trade liberalization on the grounds that the best way to raise global living standards is to maximize trade (Rodrik, 2001, pp. 5, 10; Shaikh, 2007, p. 50). This view is supported by the conventional economic theory which concludes that trade and financial liberalization will lead to increased trade, accelerated economic growth, more rapid technological change and a vastly improved allocation of national resources away from inefficient import-substitutes towards more efficient exportable goods (Shaikh, 2007, p. 51). This conclusion is arrived at through patently unrealistic assumptions of the standard trade theory including fixed labor (fixed endowments); full employment of resources; constant returns to scale; balanced trade; no transportation costs; perfect competition in all products; internally mobile but internationally immobile factors of production and differing production technologies across countries (Feenstra, 2004, pp. 1–2; Sen, 2005, pp. 1012–13). The well-recognized empirical failures of both the classical and neoclassical theories of free trade led in the 1980s to the flourishing of a set of theories collectively known as New Trade Theories. The overall thrust of these theories is to extend the analysis of the standard theory by incorporating market imperfections, increasing returns, strategic behavior, new industrial economics and the new growth theory (Deranyagala and Fine, 2000, p. 4). The results of these ‘new’ models, particularly when they assume the presence of increasing returns activities (industries) in the developed ‘North’ while assuming decreasing/constant returns activities in the underdeveloped ‘South’, confirm the conclusions of GHB et al. in the sense that free trade would harm the ‘South’ while benefiting the ‘North’. However, even the major contributors to this line of theorizing, such as Paul Krugman, recanted these possibilities and continue to advocate for free trade.43 One could say that the only notable recent mainstream work in the tradition of ‘New Trade Theory’ that unequivocally presents results that are similar to those of GHB et al. is Gomory and Baumol (2000), which shows that there are in fact inherent conflicts in international trade. Accordingly, once realistic assumptions are adopted, whether a nation benefits or loses from international trade critically depends on ‘what countries actually choose to do, what capabilities, natural or human-made, they actually develop…. The existence of this range of outcomes, with such different consequences for the countries involved, implies that... a country’s welfare is critically dependent on the success of its industries in international trade’ (ibid., p. 5) This is hardly surprising to any of the intellectuals of GHB’s tradition such as Ha-Joon Chang because, all along, they have been arguing, ‘When it comes to high-productivity activities whose existence determines whether a country is economically developed or not, countries become good at something only because they deliberately decide to become so—there is really no “natural” reason for the Japanese to be good at building cars, the Finns at making mobile phones, and the Koreans at making steel’ (Chang, 2013, p. 9). The implication of this line of thinking is that ‘If we left things to the market, high-productivity industries simply will not get established in developing countries, as there are already superior producers from the more advanced countries. If they want to develop those industries, they have to protect and nurture those industries through tariffs, subsidies and other means of industrial policy’ (ibid.)—and this is precisely the logic of GHB et al. 8. Concluding remarks: are GHB’ core ideas feasible today? We set out to identify the core ideas of GHB that are particularly related to economic development, trace their intellectual linages and see if they are theoretically valid. In a nutshell, his major work contains a comprehensive set of mutually reinforcing ideas and policy proposals aimed at industrialization and structural transformation of an economically and technologically backward society. Their underlying aim (and those of the school of economic thought to which GHB belongs) is to gradually and sustainably improve the income and welfare of the nation and its peoples through a progressive move of the economy away from low-technology, low-skill, low-knowledge intensive, constant/decreasing returns-to-scale activities to higher-technology, higher-skill and knowledge-intensive and historically increasing returns-to-scale economic activities. However, as attested by almost all cases of successful industrialization, this kind of structural transformation from ‘matter’ and ‘nature’ -based activities to artificial and ‘mind’ -based economic activities does not happen spontaneously and automatically through ‘the market mechanism’ as claimed by the dominant economics literature and policy discourse; instead, it requires pervasive and deliberate government interventions, as indicated in the previous section. Meanwhile, though the mainstream economics literature has grudgingly come to admit that more or less all past developmental success stories were achieved with pervasive government interventions like those suggested by GHB and other intellectuals of the same school of thought, it still refuses to admit that it has failed to come up with adequate theories that correctly identify and encapsulate the underlying principles and causes of the process of economic development. In the words of Servaas Storm, Development economics appears to have come full circle, as interest in and concern for industrialization have made a comeback, echoing major concerns of the early development economists. However, when it comes to the practice of industrialization strategy and industrial policy, the default recommendation is still the market and static comparative advantage—the main task of governments, in the new view, is to impose institutional reforms and improve governance so as to allow markets to perform more efficiently. (Storm, 2015, p. 669) Thus, in recent years, the mainstream development discourse has admitted the theoretical possibility that ideas and policy proposals like those of GHB could work, and that the historical evidence is overwhelmingly behind them. However, when it comes to the current context of today’s late-developing economies, the mainstream literature reverts back to its default position where what matters is the market mechanism and static comparative advantage; and the role of industrial policy is just to try to address ‘market failures’, ‘externalities’, ‘coordination failures’ (UNECA, 2016, p. 2), and to provide a ‘nudge’ for structural change in the right direction (Storm, 2015, pp. 687–88). Beyond these, the policy advice given to aspiring late developers appears to be ‘Don’t try this at home!’ because, it is argued, industrialization policies and programs similar to those of GHB may have worked in the past but could not work in countries like those in Africa for wide-ranging reasons such as excessive natural resource endowments (the so-called ‘resource curse’ thesis), pathological politics, the lack of bureaucratic capabilities and the changes in the global economic rules—but the implication is that these countries would be better off sticking to their natural resource advantages, rather than trying to develop manufacturing industries through industrial policy (Chang, 2013, p. 3). However, even if an in-depth scrutiny of each of these reasons is beyond the scope of this paper,44 it is easy to see why the excuses against transformative industrial policies in today’s developing countries do not hold water. For instance, countries like Canada and Australia have successfully industrialized despite being rich in natural resources. Or if we consider the issue of the global economic (World Trade Organization, or WTO) rules not permitting the kinds of industrial policy interventions that were successfully employed by the now-developed countries, a closer look shows that ‘In many places, the multilateral rules allow significant room for making interventions of choice. The WTO appears most tolerant in the use of tariffs, and developing countries have significant scope in this area. Even with subsidies, smart policies can evade several constraints. Flexibilities are largely available in investment policies. While many policies are allowed under TRIMS, the GATS regime allows even more space’ (UNECA, 2016, p. 142; see also Amsden, 2004, p. 76 on this). Therefore, the general conclusion that can be drawn from the forgoing discussion is that the main ideas propounded by GHB and other similar thinkers of the past and present are theoretically valid; have been proven to work under vastly different geographical, historical and socio-political contexts; and are feasible even under the current global economic rules. Thus, while bearing in mind GHB’s emphasis on context-specificity of development policies and institutions, policymakers of the present late-developing countries would do well to learn from him and other like-minded scholars of the past. However, it has to be borne in mind that the journey is not going to be easy because, as a recent perceptive report on the subject put it: In orienting themselves towards transformative industrial strategies, policy-makers are likely to face several hurdles. Pressures from developed countries and international institutions will have to be resisted, if they decide to move away from free market dictates. Moreover, these countries would have to intelligently balance their needs for enhanced market access, which bring certain short-term benefits, and restrictions on industrial policy choices, which harm their long-term development prospects. They will also have to risk facing legal disputes and punishing tariffs from various countries... Those that are not yet part of the WTO or of bilateral agreements could be forewarned to negotiate more smartly when negotiating their deals. (UNECA, 2016, p. 142) Acknowledgements: I would like to thank Prof. Rainer Kattel for motivating me to write this article and for very helpful comments and suggestions on an earlier draft. Comments and suggestions from two anonymous referees were very helpful. The research for this article has been supported through Estonian Research Council Grant No. IUT19-13. 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Advanced International Trade: Theory and Evidence , Princeton, NJ, Princeton University Press Gebrahiwot, Baykedagn 1995. The State and Economy in Early 20th Century Ethiopia by Gebre-Hiwot Baykadgn , Bonger, T. (ed.), London, Karnak House Gebre-Hiwot, B.[ 1912] 2009. Emperor Menilek and Ethiopia , Asmara, Berhan Yehun Girma, M. 2012. Understanding Religion and Social Change in Ethiopia , Palgrave Macmillan Google Scholar CrossRef Search ADS   Gomory, R. E. and Baumol, W. J. 2000. Global Trade and Conflicting National Interests , Cambridge, MA, MIT Press Greenfeld, L. 2001. The Spirit of Capitalism, Nationalism and Economic Growth , Cambridge, MA, Harvard University Press Hesse, H. 2008. ‘ Export Diversification and Economic Growth’, Working Paper No. 21, Commission on Growth and Development Jomo, K. S. 2008. Economic Liberalisation and Development in Africa , Dakar, CODESRIA, http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.475.6309&rep=rep1&type=pdf Kaplan, A. D. H. 1931. Henry Charles Carey: A Study in American Economic Thought , Baltimore, Johns Hopkins Press Kattel, R., Kregel, J. A. and Reinert, E. S. 2009. The life and work of Ragnar Nurkse, pp. 9– 21 in Kattel, R., Kregel, J. A. and Reinert, E. S. (eds.), Ragnar Nurkse: Trade and Development , London, Anthem Kebede, M. 1999. Survival and Modernization: Ethiopia’s Enigmatic Present: A Philosophical Discourse , Asmara, Red Sea Press Kebede, M. 2006. Gebrehiwot Baykedagn, Eurocentrism, and the decentering of Ethiopia, Journal of Black Studies , vol. 36, no. 6, 815– 32 Google Scholar CrossRef Search ADS   Kregel, J. 2004. ‘ External Financing for Development and International Financial Instability’, G-24 Discussion Paper No. 32, October, UN Krugman, P. 1995. “The Fall and Rise of Development Economics”, in Krugman, P. (1995), Development, Geography, and Economic Theory. Cambridge, MA, MIT Press. pp. 1–29 Krugman, P. 2009. The increasing returns revolution in trade and geography, American Economic Review , vol. 99, no. 3, 561– 71 Google Scholar CrossRef Search ADS   List, F. 1827. Outlines of the American System of Political Economy , Philadelphia, National Gazette List, F. [1841] 1909. The National System of Political Economy , Lloyd, S. S. (ed.), Longmans, Green & Co., London Reinert, E.S. 2000. Full circle: economics from scholasticism through innovation and back into mathematical scholasticism. Journal of Economic Studies , vol. 27, no. 4/5, pp. 364– 376 Google Scholar CrossRef Search ADS   Reinert, E. S. 2005. German economics as development economics—from the Thirty Years’ War to World War II, in Jomo, K. S. and Reinert, E. S. (eds.), The Origins of Development Economics—How Schools of Economic Thought Have Advanced Development , London, Zed Books Reinert, E. S. 2007. How Rich Countries Got Rich...and Why Poor Countries Stay Poor , London, Constable Reinert, E. S. 2009. Emulation versus comparative advantage: competing and complementary principles in the history of economic policy, in Cimoli, M., Dosi, G. and Stiglitz, J. E. (eds.), Industrial Policy and Development: The Political Economy of Capabilities Accumulation , Oxford, Oxford University Press Google Scholar CrossRef Search ADS   Reinert, E. S., Amaïzo, Y. E. and Kattel, R. 2011. The economics of failed, failing, and fragile states: productive structure as the missing link, in Khan, S. and Christiansen, J. (eds.), Towards New Developmentalism: Market as Means rather than Master , Routledge, Abingdon Reinert, E. S. and Daastol, A. 2004. The other canon: the history of Renaissance economics, pp. 21– 70 in Reinert, E. S. (ed.), Globalization, Economic Development and Inequality: An Alternative Perspective , NewHorizons in Institutional and Evolutionary Economics Series, Cheltenham: Edward Elgar Google Scholar CrossRef Search ADS   Reinert, E. S. and Kattel, R. 2004. ‘ Qualitative Shift in European Integration: Towards Permanent Wage Pressures and “Latin Americanization” of Europe?’, PRAXIS Working Paper No. 17, Estonia, Praxis Foundation Reinert, S. A. 2011. Translating Empire: Emulation and the Origins of Political Economy , Cambridge, MA, Harvard University Press Google Scholar CrossRef Search ADS   Reinert, S. A. and Reinert, E. S. 2003. An early national innovation system: the case of Antonio Serra’s 1613 Breve Trattato, Institutions and Economic Development/Istituzioni e Sviluppo Economico , vol. 1, no. 3, pp. 1–24 Reinert, E. S. 1994. ‘ Catching-up from way behind: A third world perspective on first world history’, in Fagerberg, J., Verspagen, B. and N. van Tunzelmann, The Dynamics of Technology, Trade and Growth , Aldershot, UK and Brookfield, US: Edward Elgar, pp. 168– 97 Rodrik, D. 2001. ‘ The global governance of trade: as if trade really mattered’, Background paper to the UNDP Project on Trade and Sustainable Human Development, October, New York, UNDP Rodrik, D. 2007. Industrial development: some stylized facts and policy directions, in United Nations (ed.), Industrial Development for the 21st Century , United Nations, New York Safaeddin, M. 2005. Towards an alternative perspective on trade and industrial policies, Development and Change , vol. 36, no. 6, 1143– 62 Google Scholar CrossRef Search ADS   Salvadore, D. M. 2007. A modern African intellectual: Gabre-Heywat Baykedagn’s quest for Ethiopia’s sovereign modernity, Africa: Rivista trimestrale di studi e documentazione dell’Istituto italiano per l’Africa e l’Oriente Anno 62, No. 4 (Dicembre 2007), pp. 560–579 Schumpeter, J. A.[ 1954] 2006. History of Economic Analysis , Taylor& Francis e-Library, New York: Routledge Sen, S. 2005. International trade theory and policy: what is left of the free trade paradigm?, Development and Change , vol. 36, no. 6, 1011– 29 Google Scholar CrossRef Search ADS   Serra, A. 1613. A Brief Treatise on the Causes Which Can Make Gold and Silver Plentiful in Kingdoms Where There Are No Mines (Breve trattato delle cause che possono far abbondare li regni d’oro e argento dove non sono miniere) , Naples, Lazzaro Scoriggio Shaikh, A. 2007. Globalization and the myth of free trade, pp. 50– 68 in Shaikh, A. (ed.), Globalization and the Myths of Free Trade , New York, Routledge Shiferaw, B. 1994. Gäbrä-Heywät Baykädañ and the emergence of a modern intellectual discourse, Sociology Ethnology Bulletin , vol. 1, 106– 21 Stein, H. 2000. ‘ Economic Development and Anatomy of Crisis in Africa: From Colonialism Throught Adjustment’, Occasional Paper, Center for African Studies, Copenhagen University Storm, S. 2015. Debate: structural change, Development and Change , vol. 46, no. 4, 666– 99 Google Scholar CrossRef Search ADS   Sundrama, J. K., Schwank, O. and von Arnim, R. 2011. ‘ Globalization and Development in Sub-Saharan Africa’, DESA Working Paper No. 102, New York, UNDESA Szirmai, A. 2009. ‘ Industrialization as an Engine of Growth in Developing Countries’, UNUMERIT Working Papers 2009–010 Tenkir, B. 1995. “ Introduction”, in Gebrahiwot Baykedagne. 1995. The State and Economy in Early 20th Century Ethiopia by Gebre-Hiwot Baykadgn . Translated by Tenkir Bonger. London: Karnak House. pp. 1– 46 UNECA. 2016. Transformative Industrial Policy for Africa , Addis Ababa, UNECA Wade, R. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization , Princeton, NJ, Princeton University Press Footnotes 1 For instance, following decolonization in Africa, the internal political economy contexts and development management approaches followed by African governments were far from ideal and effective. According to Stein (2000), bureaucracies often expanded based on politics, not professionalism; states had a general antipathy for the private sector or patrimonialism that greatly affected the character of the private sector; both greatly weakened the group; state-owned or partly owned industries relied on aid frequently tied to technology from developed countries with high import coefficients and little linkage to local capabilities (ibid., p. 19). However, the onset of sweeping liberalization programs was forced upon African economies by the international financial institutions and their major donors following the Berg Report, which justified the sweeping liberalization initiatives arguing that Africa’s comparative advantage lies in agriculture (Jomo, 2008, p. 9). 2 All Ethiopian authors in this paper are referred to using their first names since this is the norm in the country. 3 Dejazmach Kassa, governor of Tigray region, was crowned as Emperor Yohannes (‘King of Kings’) of Ethiopia in 1871. He died in March 1889 after being fatally wounded at the Battle of Metema, where his army defeated (Sudanese) Mahadists. 4 Apparently he joined the German medical team and came back to Ethiopia, as he was unable to get employment in Europe because of the color of his skin (Alemayehu, 2004, p. 4). 5 His language and writing skills are indeed very impressive in terms of clarity, conciseness and ability to express complex ideas in the economics of his times in simple and easily accessible manner. For instance, Tenkir (1995) states, ‘Reading through the work of GHB in Amarina, I was impressed by the modernity of the prose and the clarity and simplicity of his exposition’ (ibid., p. 18). 6 Surprisingly, despite all that he had endured at her hand, GHB had a balanced view of Empress Taitu: ‘the major fault that he finds in her otherwise illustrious career is her attempt to disrupt Iyyasu’s succession to Menilik, not the hard time she gave him and fellow intellectuals like Afawork [Gabra-Iyyesus] and Gabru [Dasta]’ (ibid., pp. 51–52). 7 Prince-Duke (Leul-Ras, in Amharic) Emru Hailesellasie (2008), From What I Have Seen and What I Recall (Kayehut ena Kemastawusew, in Amharic). Addis Ababa: Addis Ababa University Press, pp. 88–90. 8 Paulos Menameno (circa 1884–1936) was an Ethiopian progressive intellectual, diplomat and English translator (GHB, [1912] 2009, Editor’s note 1). 9 Translated by Beletu Kebede and Jacques Bureau into French in 1993 as ‘L’Empereur Menelik et L’Ethiopie’. Addis Ababa/Paris: Maison des Etudes Ethiopiennes Institut National des Langues et Civilizations Orientales. 10 Eyasu was emperor-designate from 1909 until he was deposed by the nobility and clergy and imprisoned in 1916—never officially assumed the throne. 11 The proposed reforms include, among others, separation of the property of the emperor and that of the state; formation of a single formal national army; introduction of formal, clear and progressive taxation system and monetization of taxation, formulation of standardized school curriculum, promotion of science and technology education, introduction of written national constitution and declaration of religious freedom. 12 Paulos states in the preface that he had to put together and copy the scattered manuscript by himself and obtain the permission of then Crown Regent Teferi Mekonnen (later crowned as Emperor Haileselassie) to publish it. 13 The second edition was published in 1960. A reprint of this edition came out in 2007, but Addis Ababa University Press published an annotated and re-edited version in 2009 (2002 Ethiopian Calendar) as Works of GHB, where his two books were combined. Unless and otherwise specifically mentioned, all references to this work in this paper refer to the 2007 reprint of the 1960 edition. Translations from Amharic to English are our own. 14 The term Japanizers refers to the strong interest of the early twentieth-century Ethiopian intellectuals in the successes of the Meiji restoration in Japan. The use of the term is itself controversial because the intellectuals offered a wide variety of perspectives and recipes for change, often bearing little resemblance to the reforms of late nineteenth-century Japan (Salvadore, 2007, p. 563). 15 According to Samir Amin, Eurocentrism is a ‘culturalist phenomenon in the sense that it assumes the existence of irreducibly distinct cultural invariants that shape the historical paths of different peoples. Eurocentrism is therefore anti-universalist [because Europe is different…] but it presents itself as universalist, for it claims that imitation of the Western model by all people is the only solution to the challenges of our time’ (Amin, 1989, p. vii; as cited in Salvadore, 2007, p. 561). 16 See Bahru (2002) for a comprehensive discussion of all the major reformist intellectuals of early twentieth-century Ethiopia. 17 See for example Alemayehu (2012) (which unfortunately is available only in Amharic) for details on this. 18 The author is indebted to the anonymous referees for bringing to his attention the works of Mohammed Girma and James de Lorenzi. 19 GHB was well placed to observe how the sickness of Emperor Menelik and his subsequent death created intense power struggles among the nobility and threatened the stability and continuity of the then Ethiopia. The power struggles and uncertainty were abated several years later only after Ras [Duke] Tafari Mekonnen came out as the dominant figure in Ethiopian politics and eventually assumed the throne as Haile Selassie I. 20 Most likely Fritz Stier-Somlo (1873–1932), who was an Austria-Hungarian-German legal scholar and political scientist who served from 1925 to 1926 as rector of the University of Cologne. He studied law, economic and philosophy in Berlin University, but it is very unlikely that GHB studied with him or under him, as Stier-Somlo obtained his PhD in 1896—well before GHB may have joined the university. 21 According to Reinert (2005), the term Cameralism itself originates in the camera principis, or Kammer, i.e. treasury; and the perspective of the Cameralists was that of public management, of taxes and institutions, laws and regulations. 22 See Reinert (2005) for details on the views of these authors on this topic. 23 Similar views are found in the works of Renaissance economists of Naples such as Antonio Genovesi (1713–1769), who argued that national independence was as meaningless as it was fleeting without the economic power, and more specifically the industrial and thus military power, to guard it from foreign interests. See Sophos Reinert (2011) for an excellent discussion of these and other ideas within this tradition. 24 As indicated in the previous section, just like the Cameralists, GHB’s main objective in writing both books is to ‘enlighten’, advise and guide the rulers of Ethiopia with respect to development policies. According to Reinert (2005), the origin of this idea dates back to the thirteenth-century idea of a common good—originating in Italian humanism—which was slowly transformed into an idea of public happiness, and the ruler is put in charge of the project; Wilhelm Roscher (1868) coined the descriptive term ‘enlightened despotism’ for this kind of rule (Reinert (2005: 54)). 25 Reinert (2007) reports that in 1620, Francis Bacon formulated a view that was to dominate in the social sciences for almost the next two centuries: ‘There is a startling difference between the life of men in the most civilized province of Europe, and in the wildest and most barbarous districts of New India. This difference comes not from the soil, not from climate, not from race, but from the arts’. Reinert (2000: 371) further argues that, when German economist Johan Jacob Meyen stated in 1770 that ‘It is known that a primitive people does not improve its customs and institutions, later to find useful industries, but the other way around’, he expressed an understanding of causality considered common sense at the time. See particularly Reinert (2007) for detailed examples on this point. 26 See, for example, Backhaus (2011) on Schmoller’s influence on today’s German Social Market Economy (Soziale Marktwirtschaft) (ibid., p. 391). 27 The time when GHB was writing was such that poverty and inequality was rampant in Ethiopia—with a very heavy burden of taxation and operation under a brutal feudalist aristocracy. In contrast, the social question in Europe of, say, Schmoller’s time was essentially that of advanced capitalism. 28 He also argues that development of infrastructure, technical knowledge and skill in a society leads to reduction in costs of production (and prices), improvement in living standards, increase in the profit of producers, decrease in the profit that accrues to middlemen and merchants and increase in division of labor (pp. 49–50). See also pp. 59–60 on how development tends to create positive and cumulative inertia to achieve more development. See pp. 61–63 and p. 129 on the positive relationship between specialization, division of labor, innovation and technical change; see pp. 65–67 and p. 78 on his emphasis on economies of agglomeration and reducing the costs of transaction and transportation. 29 According to Reinert (2009), increasing returns-to-scale means that, as the volume of production increases, fixed costs per unit of production fall. Importantly, increasing returns invalidate the core assumption of standard economics: perfect competition (ibid., p. 17). The higher the increasing returns, the larger will be the barriers to entry and the more imperfect the competition. Presence of increasing returns tends to lead to higher wages, which in turn increase the relative price of labor, which in turn makes mechanization increasingly profitable. This spiral of increasing wages (i.e. increasing demand) and increasing productivity due to mechanization is at the core of the impressive growth of developed economies since the 1850s (ibid.). 30 Later ‘high development theorists’, particularly Ragnar Nurkse make similar point in his ‘balanced growth’ approach. See Kattel, Kregel and Reinert (2009) on this. 31 According to Reinert (2009), the importance of the linkages and synergies for agricultural development, i.e. the benefits that accrue to agriculture from the proximity of manufacturing, was perhaps the most important new insight in economics during the early 1700s; for instance, David Hume in his History of England (1767, vol. 3) states: ‘Husbandry … is never more effectually encouraged than by the increase of manufactures’ (Reinert, 2009, p. 17). 32 It is worth nothing here that Carey’s work is voluminous: ‘His voluminous writings aggregated, according to his literary executor, thirteen octavo volumes, about three thousand pages of published tracts, and perhaps an equal quantity of newspaper articles, editorials and correspondence dealing with economic and political subjects’ (Kaplan, 1931, p. 13). Just the first volume of Carey’s magnum opus, The Principles of Social Science (which he completed as a three-volume work in 1860 [ibid., p. 54]), is 474 pages. 33 Carey was not only an economist but, like his father Matthew, an agitator and zealous promoter of the ideas of what was referred to as the American System. Kaplan (1931) describes him as the “devoted champion of diversified industry and an adequate home market, matching the zeal of his father before him. In newspaper, magazine, pamphlet and book, he hammered away (with ‘unwearying wearisomeness’, according to Professor Roscher) at the theme that national prosperity consists in ‘placing the consumer by the side of the producer’ so that ‘with every step in this course he will obtain increased returns from a diminished surface” (ibid., p. 54). Meanwhile, GHB distills Carey’s main ideas that are relevant to the Ethiopian context while avoiding the irrelevant polemics and arguments against the classical school of economic thought that litter Carey’s work. In short, while GHB’s work can be noted for brevity and conciseness, Carey’s is verbose and long. This is partly due to Carey’s ambition of not only disproving the major tenets of the then dominant classical economics but also because, ‘bent on the creation of a system of universal harmonies, Carey trespasses over the grounds of natural history and natural science so that he may demonstrate the close relationship between the order of nature and the affairs of mankind’ (Kaplan, 1931, p. 54). 34 List was the protégé of Carey’s father, Matthew Carey, who was the publisher and promoter of List’s ideas in America. 35 List argues that Britain’s proposals to open German market for manufactured goods in return for its removal of barriers to German export of timber and agricultural produce amount to trying to make Germany an agricultural colony of Britain (ibid., p. 323). However, a few pages later (pp. 336–37) he recommends Asia and other ‘inferior’ civilizations to be suppliers of raw materials and markets for European manufactures. Later on, he outlines how Germany should colonize less developed countries, in order to make them sources of raw materials and markets for German manufactures (pp. 347–49). On the other hand, Carey avoids the hypocrisy of writers like Smith and List in terms of recommending the underdeveloped nations to specialize in raw materials and avoid trying to industrialize. In fact, he strongly criticizes America’s policy of pushing the Republic of Mexico and native American Indians towards primitive economic activities and raw material production as short-sighted and narrow-minded (Carey, 1888 p. 372; see also pp. 360 and 367 on how forced specialization due to British colonial policy left ‘vast heaps of humanity, festering in compulsory idleness’, leading to ‘barbarism, leading to famines and pestilences, ending in decay and death, and thus giving color to the theory of over-population’). 36 He corroborates this phenomenon of ‘unequal exchange’ with the export import export data of the then Ethiopia, comparing the quantity and value of raw materials and other primary commodities Ethiopia exported and the quantity and value of finished products imported from abroad (pp. 67–68). He also shows that, in general, any trade between raw materials and finished products creates unequal exchange in favor of the later (p. 114). 37 Using the relatively modest trade deficit encountered by Ethiopia in 1911–12 (Ethiopian Birr 191,950.00), he argues that somehow this deficit was financed through some form of borrowing, and goes on to argue that a nation that imports for consumption beyond what its exports earn will have to pay for this deficit, not just the principal but also the interest (p. 73). 38 See List ([1841] 1909, pp. 57–58) for a succinct summary of the main elements of Colbert’s industrialization program. 39 Philipp Wilhelm von Hörnigk (1640–1714) published his ‘Nine Points of Economic Policy’ in 1684 in the book Österreich über alles, wann es nur will (‘Austria above everyone else, if only she had the will to’) (published anonymously), and the book was the most successful German-language economics book of the period (Reinert, 2005; Schumpeter, [1954] 2006, p. 192). 40 According to Reinert (undated), in 1871—four years after the Meiji restoration—the Japanese government requested from the government of the USA an advisor in international law. The Secretary of State recommended Peshine Smith, who was to spend eight years in Japan as the first US citizen to serve the Japanese government in an official capacity. When he left, he proudly commented that the ‘American System’ of economic theory—as opposed to English theory—had become ‘common thinking among Japanese statesmen, government officials and philosophers’. 41 An excellent source for the Taiwanese case is Wade (1990); for that of Korea, it is Amsden (1989). Chang (2002) provides a comprehensive and well-researched historical narrative for several ‘old’ and newly industrialized countries. 42 In this tradition of economics which dates back to at least Antonia Serra (1613), as mentioned previously, capitalism is seen as a system of production (rather than exchange) and the main elements of capitalist dynamics and drivers of development are not capital, (undifferentiated) labor or markets but new knowledge, entrepreneurship, innovations and organizational ability (Reinert and Kattel, 2004, pp. 2–3). In contrast to the mainstream approach, here the main development policy goal is not static efficiency of resource allocation but increasing the productive capability of an economy (List, 1827, p. 189). In more modern terminology, the core aspect of development is considered to be transforming productive structures based on superior technology, skill, knowledge and organizational capability embodied in institutions (Chang, 2011). 43 See for example Krugman’s Nobel Prize acceptance lecture (Krugman, 2009). 44 See Chang (2013) and UNECA (2016) for a detailed assessment of the reasons put forward against transformative industrial policies in Africa. © The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Cambridge Journal of Economics Oxford University Press

Economics of Late Development and Industrialization: Putting Gebrehiwot Baykedagn (1886–1919) in Context

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Abstract

Abstract During the past few decades, developing countries have been pushed by international economic institutions and developed countries to effectively abandon promotion of industrialization and structural transformation as a key developmental agenda. In addition, the ‘development’ debate of recent decades has tended to focus solely on internal factors as if external economic forces are always benign. Within this context, this paper analyzes the key ideas of Gebrehiwot Baykedagn (GHB) (1886–1919), traces their lineages and considers their feasibility and relevance for current developing economies. In a nutshell, for GHB, the main keys to economic development are the creation, accumulation and use of knowledge and skill, technology, innovation and technical change and the means of economic development are deliberate, dynamic and comprehensive sets of state-directed, synergistic interventions that aim at moving an economy away from ‘nature-intensive’ economic activities towards knowledge-, skill-, technology- and innovation-based ones. Based on analysis of historical and theoretical evidence, this paper argues that the main ideas of GHB and his colleagues are still valid, feasible and relevant for today’s developing economies as long as they are innovatively tailored to the unique context of each country and to the broader international policy context. 1. Introduction There was a general consensus until the late 1970s that economic development is largely about the transformation of the productive structure (and the capabilities that support it); and this was mainly to be achieved through industrialization (Chang, 2010, pp. 1–2). Recent research has also concluded that economic development requires structural change from low- to high-productivity activities, and that the industrial sector is a key engine of growth in the development process (Rodrik, 2007, p. 7; Hesse, 2008, p. 1). This conclusion is supported by the fact that virtually all cases of high, rapid and sustained economic growth in modern history have been associated with industrialization, particularly growth in manufacturing production (Szirmai, 2009). Consequently, the terms ‘industrialized country’ and ‘developed country’ are often used interchangeably (see Chang et al., 2013 and Chang, 2014 on this.) However, since the 1980s, industrialization and structural transformation as key developmental agenda were effectively abandoned in less developing countries (Safaeddin, 2005). This can be partly attributed to complexities and developments in the political economy contexts of the countries themselves. In important ways, it was also due to the intense pressures from international economic institutions and governments of the developed countries.1 Moreover, the dominant global development discourse came to ignore the importance of structural transformation and industrialization to an extent that, at the more formal level, ‘development’ came to mean poverty reduction, provision of basic needs, individual betterment, sustenance of existing productive structure and so on (Chang, 2010, p. 2). Though the past few years have witnessed some sort of revival of interest in industrialization and structural transformation in academia and policy circles, this has been too faithful to the dominant neoclassical economics paradigm which undergirded the initial liberalization drive, and has generated policy recommendations that are not supported by any significant historical evidence (Storm, 2015, p. 670). In addition, the ‘development’ debate has also tended to focus solely on internal factors that determine success/failure in development, ‘‘assuming that external market forces are always benign, with strongly positive influences on economic performance and prospects’’ (Sundrama et al., 2011, p. 2). Under such a context, this paper analyzes the key ideas of Gebrehiwot Baykedagn (1886–1919) (GHB for short, herein after), one of the first African intellectuals to advocate for a coherent and comprehensive program of industrialization and to analyze the nature and impacts of economic integration of late-developing nations with more advanced ones. It also traces the origins and lineages of his ideas, and considers their current relevance with the view to drawback attention to two key issues related to late development: industrialization and the type of external economic relations with advanced economies that facilitate industrialization in a late-developing economy. GHB is an author who has been known by many educated Ethiopians but virtually unknown outside his home country. Even in his home country, we are not aware of any scholarly writing that has properly assessed the intellectual lineages of GHB’s ideas, their validity and how they relate to the current development thinking. Furthermore, no systematic analysis of his policy proposals and whether or not they are relevant to his home country or the wider African context has been done to date. Therefore, it is also the aim of this paper to fill this gap in analyzing his ideas, putting them in their proper intellectual context and assessing their relevance today. In this manner, we aim to argue that the core ideas and policy proposals of GHB in particular and those of the broader intellectual tradition that he represents are valid, relevant and feasible in the current context of late-developing countries as long as they are innovatively adapted to the unique context of each country and to the broader international policy context. The rest of the paper is structured as follows. Section 2 provides biographical highlights about GHB and the context to his writing, and briefly reviews how his ideas have been received. Section 3 looks at GHB’s ideas related to governance, institutions and the political economy that suits economic development. Section 4 presents a summary of the main theoretical arguments of GHB and other economists of the same intellectual lineage regarding determinants of economic development in a late-developing economy. Section 5 discusses GHB’s explanation of the real causes of the observed ‘unequal exchange’ in the economic relations between backward and advanced economies. Section 6 considers GHB’s policy proposals vs. the industrialization policy tool box that has been successfully employed in history for late industrialization. Section 7 relates his ideas with those of later development thinking; and Section 8 concludes. 2. Biographical background and the context of BHB’s writings Gebrehiwot Baykedagn (GHB) was born in 1886 in the village of Zengui/Maimshem, Adwa district, in what is today called Tigrai Region of Ethiopia (Tenkir, 1995, p. 19).2 He attended elementary school at the Swedish missionary school at Minkulu, near Red Sea port of Massawa in present-day Eritrea (Bahru, 2009, p. x). According to Bahru (2002, pp. 49–50), that period was exceptionally turbulent in Tigray region due to the political disintegration and psychological void created by the death of Emperor Yohannes3of Ethiopia, the ravages of one of the longest and most devastating famines the country had ever known and the destruction that attended Emperor Menilek’s campaign of 1890 to assert his new authority (ibid.). It was at this period that GHB fled to Hamasen (Eritrea) at the age of seven (Bahru, 2002, p. 50). During a trip to the Red Sea port of Massawa, GHB and his friends got permission from the captain of a German ship to visit the ship; and on departure, GHB stowed away; on arrival in Europe, the captain entrusted him to a rich Austrian family that adopted him. He studied medicine at Berlin University in Germany (ibid.). After completing his study of medicine in Berlin, GHB returned to Ethiopia as part of a medical team sent from Germany to attend to the ailing emperor Menelik (Bahru, 2009, p. ix).4 Upon his return to Ethiopia, he had to undertake an intensive study of the Amharic language and ‘after seven months of studious application, he was able to master the language to such a degree that he was to emerge as one of the finest writers of Amharic prose’ (Bahru, 2002, p. 50).5 It is reported that, upon the recommendation of an official named Dejjach Yeggazu, GHB was made private secretary and interpreter to the emperor (ibid.). It is also reported that he was attached to the German doctor Steinkuler, and detailed to treat the ailing emperor but ‘failed to win the confidence of Empress Taitu, who reportedly forbade him to touch the invalid. The acrimony that subsequently developed between the empress and the German doctor, who had provoked the controversy about the poisoning of the ailing emperor, could also have reflected badly on his Ethiopian associate [i.e., GHB] … It was probably under these circumstances that he chose to exile himself to the neighboring British colony of the Sudan sometime in November 1909’ (ibid., pp. 50–51; see also Bahru, 2009, p. ix).6 GHB returned from the Sudan to Ethiopia after about two years (Bahru, 2002), was hospitalized in Massawa (present-day Eritrea) and recovered with the financial support of a friend named Paulos Menameno (Gebre-Hiwot, [1912] 2009, p. 2). After recovering from this illness until his death in July 1919, GHB held two posts in the government: first he was assigned as Inspector of the Addis Ababa-Djibouti Railway (the only railway in the country at the time), and he briefly held the post of Naggadras (Chief of Commerce and Customs) of Dre Dawa (an important import-export trade hub) (Bahru, 2002, p. 52). As we shall see later, he apparently used the opportunity offered by these two positions for collecting and compiling the data which he later used to analyze the external trade of the country and to support his theoretical ideas related to economic development. According to one source,7 GHB died of complications from grippe infection (a deadly type of flu) at an age of 33, a pandemic of which a great number of people died in Ethiopia between 1918 and 1919. It is perhaps useful to briefly highlight the internal and external contexts prevailing in the then Ethiopia in order to better understand GHB’s writings. The period during which he was writing was such that, even though Ethiopia was the only independent state in Africa and had repulsed Italy’s attempt to colonize it at the famous Battle of Adwa in 1896 (but had conceded an important part of its territory—today’s Eritrea—to Italy), it was surrounded by technologically and economically superior European colonial powers (Italy, France and Britain) who were competing with each other to take direct and indirect control of the country. Meanwhile, the internal situation was such that poverty and inequality was rampant in Ethiopia—with a very heavy burden of taxation and operation under a brutal feudalist aristocracy. Therefore, throughout his writings, one could clearly see his compassion and concern for the uneducated and downtrodden poor people; and so, using historical experiences of other countries, he warns the leaders of the time that Ethiopia was in an imminent danger of collapse and chaos due to sprouting signs of wealth concentration, exploitation of the poor (by the feudal aristocracy) and the general state of underdevelopment. Therefore, it is likely that these internal and external dynamics may have prompted him to forward reform proposals which were quite radical for their time (and context), and to forward them with such an urgency and earnestness. GHB wrote two books in Amharic (the official language of Ethiopia), both of which were published by his friend Paulos Menameno.8 The first one is Atse Menilik ena Ethiopia (Emperor Menelik and Ethiopia), published in Asmara (present-day Eritrea) by Berhan Yihun in 1912.9 According to Bahru (2002), GHB wrote this book during the time when he was hospitalized in Massawa, ‘apparently while he was convalescing’ (ibid., p. 51). This is a short book of just about 28 pages specifically written as an advice piece to Eyyasu Michael, the young heir-designate to Emperor Menelik.10 In it, one could see clear policy proposals and ideas for reforming the Ethiopian state of the time. Some of the major issues that he highlights include the importance of education, building of constitutional and legal systems and institutions of good governance, the importance of domestic production of necessities (rather than importing) and the importance of learning and emulating from post-Meiji restoration Japan (particularly how Japan was emulating European technology and industrialization while maintaining its independence and cultural identity). In this short work, GHB also argues that political independence without economic transformation (industrialization) is precarious and easily destroyable. However, a fuller exposition of these ideas had to wait for his second work. Thus, Emperor Menelik and Ethiopia is not a complete treatise in itself; rather, it essentially is a pamphlet that makes an urgent call to the emperor-designate to implement a reform package that could enable the country to emulate and adopt the knowledge and technology of Europe and survive and thrive in an age where underdevelopment meant perishing as a polity.11 Nevertheless, it is remarkable for being the first-ever work in Ethiopia explicitly aimed at reforming and modernizing the Ethiopian state and economy. The more significant work by GHB is Mengistina YeHizb Astedader (literally meaning ‘Government and Public Administration’). In the preface to the book, Paulos Menameno (the publisher) states that, following the death of the author, he found the manuscripts of the book scattered in different places, and written partly in ink and partly in pencil. It was published in 1924 by the Berhanena Selam Press.12,13 This book is essentially a treatise on political economy of development (or, in today’s language, economics of development); however, there is no consensus among historians and commentators as to why GHB chose to give it this title. Nevertheless, it is very clear from the very beginning of the book that the author intended it to be specifically about how a people or nation may fail or succeed to develop and attain high standards of living and welfare (ibid., 11–12). The book was annotated, introduced and translated into English by Tenkir Bonger in 1995 (Gebrahiwot, 1995). According to Salvadore (2007), GHB’s contribution to the descriptive and normative understanding of Ethiopian modernity has been investigated by many of the most respected scholars of Ethiopia and thus, he enjoyed a degree of interest by scholars of Ethiopia far superior to that reserved to the other intellectuals (ibid., 62–63). Salvadore (2007) states that the first scholars to look at GHB did so from a Marxist standpoint, as his sharp criticism of the Ethiopian nobility and its economic perspective squared well with the Marxist approach and offered substantial evidence for a class-based analysis of Ethiopian history (ibid.). Some writers described his work as Eurocentric for his conception of history ‘within the paradigm of European historiography’ (Shiferaw, 1994, as cited in Salvadore, 2007, p. 564). Bahru (2002) offered a comprehensive perspective on the Ethiopian Japanizers14and in particular on GHB, contending that he stands apart from most of the other intellectuals since he was arguing not so much for the adoption of Western ways and modes but for an autochthonous path of development (ibid.). But this did not stop others such as Kebede (2006) from continuing to accuse GHB of a purported Eurocentrism15 and for seeing Ethiopia through the eyes of the Western anthropologist rather than those of a native scholar (ibid., p. 815). In any case, no one has ever denied the uniqueness of GHB as an Ethiopian intellectual in the sense that, other than him, none of the early proponents of modernization and development in the country produced any significant theoretical or applied works on economic development.16 Be that as it may, there has not been any significant scholarship in relation to GHB’s core ideas of economic development such as identifying the intellectual lineages of his ideas and theories as well as critical assessment of their validity either in their original or today’s context. For instance, Tenkir (Gebrahiwot, 1995) translated and introduced GHB’s book but did not attempt to trace the main ideas’ origins, inspirations and connection/difference with similar/opposed development theories that preceded GHB’s. Similarly, Alemayehu (2002, 2004, 2012) has not gone seriously into analyzing GHB’s main ideas and theoretical structures, or tracing their intellectual lineage beyond mentioning that GHB was influenced by the scholarly tradition of the nineteenth-century American/German system of political economy (particularly by Henry C. Carey). Consequently, he underestimates the influence of and similarities of GHB’s ideas with those of Carey (and exaggerates the originality of GHB’s ideas and his contributions to development economics).17De Lorenzi (2015) also erroneously associates GHB with Marxism and Marxian analytical frameworks (ibid., p. 50), and finds resemblance to GHB’s core arguments only with ‘positions of Mohandas Ghandi and Romesh Chonder Dutt, who similarly sought to understand the impoverishing impact of unequal exchange in South Asia’ (ibid., pp. 50–51) but not with economists of the nineteenth century who propounded similar ideas or the ‘high-development theorists’ of the mid-twentieth century. We also find misrepresentations of some of GHB’s key ideas in the otherwise excellent exposition of his work by Girma (2012),18 for instance, with respect to sources of finance for industrialization and economic development. Specifically, while, as we shall see later, GHB and other economists of his intellectual linage (including some influential mid-twentieth-century development economists such as Ragnar Nurkse) believed that development should largely be financed through domestic resources, Girma (2012) states that, in GHB’s development program, modernization of Ethiopia is to be achieved through external financing (ibid., p. 72). Failure to fully understand the holistic nature of GHB’s work, and particularly his emphasis on the need for implementation of the various aspects of his modernization program simultaneously, also appears to have led commentators on his work to overemphasize the weight he put on education. (See e.g. Mohammed [2012, p. 75]; Kebede [1999, p. 285] and Beletu and Bureau [1993, p. vii] as cited in Girma (2012).) 3. Governance, institutions and political economy conducive for economic development In Menelik and Ethiopia, GHB makes an interesting note regarding one feature of state vis. economic development: in a developed society, the state is a sort of voluntary association of citizens where their leader’s authority is constitutionally and legally limited and where change of leadership or death of a leader does not significantly affect the existence and continuity of the state (ibid., p. 10). He contrasts this with the situation of the then Ethiopia, where the king/emperor is the state/government and any change of leadership threatened the very existence of the country as a polity—because constitutional and legal frameworks and well-functioning bureaucratic public administration did not exist (ibid.).19 Thus, for him, existence of a stable and constitutionally governed state that has a meritocratic public administration is a necessity for economic development and modernization. Beyond this, his position regarding the form of government appears to be that of a ‘benevolent dictatorship’. He begins the book Government and Public Administration by quoting an author named Estier-Somlo20 arguing that the wealth, stability and strength of a state is intimately linked with the welfare and prosperity of the general population, i.e. the right of the leader to rule is tied to his/her responsibility to deliver widespread prosperity and development. For him, economic development requires a synergistic and mutually supportive/reinforcing relationship between the state and its citizens where human development plays a key role (p. 13). The enlightened self-interest of the state and rulers necessitates ensuring equitable and wide-spread economic growth and development since ‘[a] poor person who lacks food and clothing will have no reason to love his country; and so, will not care whether the state of the nation becomes strong or is devastated’ (p. 119).This view of the state puts him in agreement particularly with the views of Cameralist21 authors such as Veit Ludwig von Seckendorff (1626–92) and nineteenth-century German Historical School writers such as Wilhelm Rocher.22 His view is also similar to that of Friedrich List, for whom nationality without prosperity is meaningless (List, [1841] 1909, p, 341).23 It is to be noted that Cameralism was the dominant school of economics and political writers in Europe in the seventeenth and eighteenth centuries, where writers aimed at convincing the princes, kings and rulers that their right to rule a state also entails a duty to develop the state (Reinert, 2005). Thus, the ‘enlightened ruler’ is to be in charge of this ‘developmental dictatorship’; and the job taken up by the Cameralists was to advise, assist, guide, correct, flatter and cajole the rulers into doing their jobs properly (ibid.).24 In any case, though GHB’s ideas in these area show similarity to those of the two schools of thought, there is no evidence that he was directly influenced by the main protagonists in that intellectual linage; however, it is reasonable to think that their influence on his thinking might be through Estier-Somlo, whom he mentions in the book. The second interesting feature of GHB’s theoretical structure is related to context-specificity of institutions and policies. Unlike the currently dominant development discourse where it is contended that policies and institutions that are good for development are fairly constant and context free, GHB repeatedly argues that appropriate policies, institutions and strategies differ across time and context of a society, and that there is no optimal set of policies and institutions that apply to all contexts (e.g. pp. 15, 78, 124). Moreover, he argues that wholesale copying and importation of ‘best practice’ policies and institutions from developed countries could be counterproductive and a waste of resources since the most appropriate policies and institutions can only be developed from within the country itself based on its specific needs and developmental contexts (pp. 124–25). Overall, his views concerning institutions and policies are close to those of the best of the mercantilists and Cameralist traditions of Europe which understood that economic institutions co-evolve with the mode and structure of production, where institution-building was fundamentally seen as a demand-pull phenomenon, and where the mode of production of a society is thought to determine its institutions (Reinert, 2007).25 Nevertheless, it is impossible to identify any direct or indirect influences of mercantilist, Cameralist and German Historical School authors on GHB’s views on this particular topic, as he does not make any specific reference. Another key feature of GHB’s thinking is his emphasis on fair, equitable and just distribution of wealth, income and opportunities across various sections of the society. Given the fact that Ethiopia (the object of his developmental ideas) was and is a multi-ethnic and very diverse society, he argues that fair and equal treatment of all ethnic groups within a state is not a matter of benevolence but a necessity for long-term survival (p. 14). His emphasis on fair and wide distribution of benefits and wealth also extends to land as well as wealth and economic opportunities in general (pp. 54, 88, 119–20). Furthermore, he is against wealth concentration because it undermines feelings of unity and nationalism in a nation which, for him, are essential ingredients of national development and industrialization (p. 119). Overall, in this respect as well, his views are similar and possibly influenced by authors in the tradition of German Historical School, such as Gustav Schmoller,26 who played a critical role in envisioning and laying the foundations for the modern welfare state in Europe; however, the contexts of their recommendations are very different.27 Before moving into the core of GHB’s development ideas, we would like to note the emphasis he put on the importance of peace and stability for development (pp. 34, 41, 42). While discussing the destructive conflict cycles in the history of Ethiopia, he emphasizes that war and conflict are possibly the biggest obstacles for development, and that poverty and inequality maintain a vicious cycle of underdevelopment. Recently, this nexus between poverty and conflict has been publicized, among others, by Collier (2007), who argues that ‘civil war is much more likely to break out in low-income countries: halve the starting income of the country and you double the risk of civil war’ (ibid., p. 19). However, in contrast to Collier (2007), who goes on to recommend fostering of competition to break this vicious cycle of conflict and poverty (ibid., p. 160), GHB recommends changing the structure of the economy through industrialization because, according to him, synergistic development of increasing returns activities in an agglomerated manner with extensive division of labor and specialization leads to increased social harmony, more trust, less conflict and more cooperative behavior (p. 84). This is similar to the views put forward recently by Reinert et al. (2011), who argue that absence of an increasing returns sectors in an economy creates zero-sum-game societies of static rent-seeking, which makes such nations prime candidates for developing into failing, failed and fragile (FFF) states (ibid., p. 5). Thus, the root causes of poverty and underdevelopment lie in a certain type of economic structure which fails to produce the virtuous circles of economic growth that requires increasing returns and sufficient diversity and diffusion of economic activities in order to become self-sustainable (ibid., p. 4). 4. The nature, causes and mechanics of late development and industrialization In most of the mainstream academic and policy literature, it is argued that some countries and societies have a much better chance of economic development. However, there is no agreement as to what factors play a more important role. For instance, Bloom and Sachs (1998) suggest that 60 to 90% of Africa’s slow growth is attributable to geography and demography—tropical climate and a tropical disease burden, hostile and unfertile soil quality, a high youth dependency ratio, a semi-arid climate with rainfall subject to long cycles and unpredictable failure, etc. Similarly, Diamond (1999) argues that both geography and the environment played major roles in determining the shape of the modern world (ibid., p. 405). Meanwhile, Acemoglu (2001) and Acemoglu et al. (2002) argue that the most important factor is the presence or absence of ‘appropriate’ institutions because, according to them, after accounting for institutional differences, geographic variables have little influence on incomes today (ibid). Yet for others, it is about policies. For instance, Collier (1998) argues that it is quite difficult to achieve structural transformation in Africa since long-lasting and hard-to-reverse effects of poor policies (e.g. trade barriers, transport costs, power costs, transaction costs, information costs, and high risk) make it quite infeasible (ibid., pp. 280–81). Therefore, he suggests, ‘For the present Africa must live with dependence upon primary commodities, and for parts of Africa this is the only likely future’ (Collier, 2002, p. 28). Contrary to these views, GHB argues that the key ingredients of economic development are not geography, climate or environment; and as discussed above, even institutions are not causes of wealth and prosperity per se as they co-evolve with the economic structure. For him, ‘All people have the potential to develop. This [their fate] solely depends on themselves’ (p. 11). This conviction is derived from the fact that, for him, all the key ingredients of economic development are artificial: ‘When man was created, he was endowed with a great mind; over time, he became master over the earth by accumulating knowledge on this great mind’ (p. 16). Thus, man’s key to development lies in creation, accumulation and use of knowledge, technology and skills (pp. 42, 53, and 61). Therefore, any society has the potential to achieve economic development, continually improving its living standards with evermore ease through innovation, skill development, technical change and accumulation of knowledge (pp. 24, 51, and 61). Explicitly acknowledging ‘an American scholar named Carey’ (whose influence on GHB will discussed below) as the source of his ideas, GHB elaborates how accumulation of knowledge and innovation is a circular and cumulative process whereby a generation benefits from and builds upon the knowledge and technical innovation accumulated by its predecessors (pp. 24–25). In addition, innovation and technical change motivate and facilitate further innovation and technical change in a society (p. 29). Increase in productivity due to innovation and technical change leads to an increase in population, which in turn facilitates further division of labor; and this is a mutually reinforcing, continuous process (pp. 26–29). This virtuous cycle facilitates economies of agglomeration and development of public infrastructure, all leading to continuous improvement of living standards.28 With simple but clear examples, he emphasizes the importance of virtuous cycles of discovery, innovation and technical change, leading to increases in productivity, further technical change and decline in the costs of production (p. 50). Later on, he states, ‘It is not difficult to reproduce an item once the first copy is produced…For this reason, once an activity is accomplished, it makes the next step easier’ (p. 58). This is of course the well-known case of increasing returns-to-scale.29 In his theoretical system, value and price are also largely determined by the artificial factors of knowledge, skill and technical change in such a way that ‘as knowledge increases, the price of all things that are needed for living declines since the effort required and obstacles to be surmounted to obtain these things declines’ (p. 45). Furthermore, as determinants of economic development, knowledge and technical change take precedence over natural resource abundance since natural resources become valuable only when knowledge and technical progress creates uses for them: ‘Today, thousands of ships across the world are fueled by coal. The coal had always been available in England. It only began to be [considered as] wealth [a useful resource] to the English after the locomotive train was invented and it was discovered that coal was useful for [fueling] the locomotive. Prior to that, there was as such no one who considered coal as valuable’ (p. 56). For him, investments in human development not only create virtuous cycles of development but are also critical to develop the national capability to maintain the momentum of development; and ‘[t]herefore, if a government educates and trains workers in its territory and brings them closer [e.g. through development of transport infrastructure], if it motivates them to be industrious, if it exerts efforts to maintain their health and wellbeing, and if it spends money [to these ends], the returns would be equivalent to that of putting the money in a bank that not only maintains the principal but credits interest daily, monthly and annually’ (pp. 60–61). In effect, according to GHB, true national wealth is attained not through accumulation of capital or money but through the acquisition and maintenance of the capability to produce (productive capability) (p. 57–58). Moreover, ‘The cause of increases or decreases in the amount of gold and silver [hard currencies, in today’s context] that flows into a state is just one and is clearly known’ (p. 111); it is economic diversification into skill and knowledge based, increasing returns-to-scale activities that ensure very large division of labor within a single macroeconomy (pp. 112–13; p. 128). Also, synergistic development of increasing returns and constant/decreasing returns-to-scale activities side-by-side within a single macroeconomy plays a key role in addressing the development challenge in a late-developing economy. Thus, ‘If we pay close attention to the situation in our country, the chief reason why land ownership is becoming more and more concentrated, the peasants are abandoning their agriculture and idly following officials/aristocrats like dogs, and the benefit of the government is declining is the fact that the market from which the farmer buys all that he needs is located in a far-off foreign country’ (p. 84). The remedy to this problem lies in co-location and co-development of industry and agriculture—and this is good for both sectors (pp. 87–88).30 Thus, his advocacy for industrialization (i.e. focus on development of increasing returns sectors) does not preclude development of the agriculture and other primary sectors. Rather, his view is that agriculture cannot be modernized and made more productive except simultaneously with industry (p. 92). In addition, he argues that development of agriculture presupposes cheap modern inputs and reliable and close-by market (p. 96).31 Another important issue stressed by GHB is the absolute necessity of making synergistic and simultaneous investment in human development, infrastructure, economic diversification (both increasing returns and constant/decreasing returns activities) and financial sector development. With respect to the need to develop physical infrastructure and educating and skilling of the population simultaneously, he argues: Roads and railways are highly beneficial if one is able to quickly understand [their true value]. It is important to immediately set up schools and training facilities that provide training on various professions and skills. And when the population is educated and skilled, it produces whatever it needs by itself. Division of labor would be very extensive and the producers will be located close to each other...Therefore the producers/workers will have more time to engage themselves in their profession. As a result, they will conduct research and discover new production techniques and products. They will make more profit out of the increased profit. Over time, the wealth of the people and power of the government will grow continually as wealth is one form of power. But roads and railways without knowledge and skill [among the population] impoverish the nation and are not useful. Therefore, a government that is interested in the benefit of its people should not separate these two things [educating the workforce and development of infrastructure]; it shall strive to undertake them simultaneously. (p. 76) The risks posed by heavy investment in transport and communications infrastructure without equivalent investment in education, economic diversification and domestic market expansion are related to development of taste for foreign products and exacerbation of the problems of ‘unequal exchange’, as this promotes imports of higher valued products in exchange for low value primary exports (p. 75) (to be discussed in detail below). For him, the financing required to industrialize a late-developing economy has to be raised almost exclusively from domestic sources through creation of economic surplus, domestic savings and channeling of savings into productive investments (p. 65). Another key element in his development theory relates to the need for development of a national financial sector simultaneously and synergistically with the other key elements (human development, physical infrastructure, deliberate/interventionist promotion of increasing returns activities, etc.) (pp. 125–26). This is because the development and expansion of financial institutions and financial services become useful only in a context where savings are channeled into productive investments in increasing-returns sectors; otherwise, these will only promote consumerism and increased demand for imports—further exacerbating the problems of chronic trade deficits (pp. 136–37, 139). Overall, he compares promotion of railways and banking in Ethiopia of his time with ‘digging the grave of the people’ unless done simultaneously with a comprehensive programme of industrialization and human resource development (pp. 127–28). To put GHB’s key ideas into context, it would be important first to consider the intellectual influences on his work. As his major book was not finalized when he passed away, there are only two references in the whole book: Estier-Somlo and ‘an American scholar named Carey’. After some effort, we were able to confirm that, of the two influential American economists of the nineteenth century with that name (Matthew and Henry Carey, father and son), many of the key ideas propounded by GHB actually show unmistakable resemblance to the ideas in Henry Charles Carey’s book Principles of Social Sciences in Three Volumes, Vol. I (1888). In fact, many of the passages in GHB’s book appear to be shorter and contextualized versions of passages in Carey (1888).32 For instance, while GHB borrows the idea of labor theory of value from Carey (1888), he refines it by specifically stating that what creates value is not just labor but the quality of labor and the technology used by labor—i.e. the knowledge, skill and know-how applied by and embodied in the labor and enhanced by technology. One could also say the same thing with respect to other key ideas of GHB, such as ideas related to increasing returns, circular and cumulative causation, importance of diversity of professions and division of labor, economies of agglomeration and co-development of manufacturing industry and primary production within a single economy, unfairness of international trade between technologically ‘unequal partners’ (to be taken up in the next section), etc. In all cases, it could be said that GHB absorbed and refined the core ideas of Carey and left those that are not relevant to his readers, contextualized them and presented them in very clear and concise manner.33 Other major authors who preceded GHB and whose ideas bear close resemblance to his include Antonio Serra (1613) and Friedrich List (1841). According to Reinert and Reinert (2003), Antonio Serra coherently presented the kernel of development economics in his 1613 short book Breve trattato, including some of its key elements such as increasing returns, cumulative and circular causation and synergies (ibid.). For him, the most important causes of ‘the wealth of nations’ are ‘the quantity of industry’, ‘the quality of the population’, ‘the extension of trading operations’, and ‘the regulations of the sovereign’ (ibid., pp. 16–17), which work dynamically and in synergetic conjunction (ibid., pp. 20–21). Thus, one could see that some of GHB’s ideas are similar to those of Serra, who wrote about three centuries before him, but there is no evidence that GHB was directly influenced by Serra’s work; rather, it is possible only to speculate that the influence might have come indirectly through Carey (1888). One also finds many ideas similar to those of GHB in Friedrich List’s magnum opus The National System of Political Economy, which was published in 1841 (English translation, 1909). Therein one finds excellent description of the main causes of development (ibid., p. 87); the process of late development and industrialization (ibid., p. 32); importance of proximity of manufacturing industry and agriculture (ibid., p. 83); the co-evolution and circular causality of institutions, economic structure and culture (ibid., p. 40); social, institutional and political nature of production and economic development (ibid., p. 87); emphasis on productive capability (rather than on static forms of wealth); etc., all of which are quite similar to the ideas of GHB. However, unlike the case of Carey (1888), there is no direct internal evidence showing that List was a major influence on GHB. Since List was closely associated with Carey’s family,34 we can speculate that List’s influence on GHB might have been through Carey, who propounded ideas that are similar to those of List. Be that as it may, even if GHB may have read List’s work (since he lived and studied in Germany), their views widely diverge with respect to one key issue: while List recommends specialization in primary production for ‘tropical’, ‘torrid’ nations’ (e.g. List, [1841] 1909, p. 312), GHB is of the view that industrialization is the only path to prosperity for all nations.35 Furthermore, though GHB and List agree on their policy recommendations, unlike GHB, List’s theoretical expositions and justifications of his proposals are somewhere lacking. In fact, as Reinert and Daastol (2007) rightly observe, ‘No doubt his observations were accurate, but his theoretical concepts are vague and his explanations of the economic mechanisms at work are imprecise’ (ibid., p. 32). Overall, it is clear from his book that GHB had access to and was well acquainted with the then-major contending theoretical frameworks and intellectual debates related to economic development (e.g. p. 78). In addition, his book indicates that he was well versed with the economic history and economic policy history of many industrialized and industrializing countries of his time (e.g. p. 79). Therefore, his choice of the work of Carey as the foundation of his own work was not due to ignorance of alternative intellectual traditions but was intentional and deliberate. 5. Nature and causes of ‘unequal exchange’ in international trade As discussed above, for GHB, what determines the value of products and level of welfare in a society are levels of skill, knowledge, technological and innovation capability. Therefore, any trade, be it domestic or international, is ruled by this same law of value. Consequently, if trade/exchange is to be mutually beneficial, both sides to the transaction should operate under the same level of technology, skill and knowledge; otherwise, the result would be harmful to the nation with lesser knowledge and technological capability: At present day Ethiopia, it is not possible to manufacture bottles, glass, kettle, dishes and table ware. All these are produced in Europe with considerable ease and no great effort. But our countrymen exchange these [items] with things for which they have exerted lots of effort…Therefore, he [an Ethiopian peasant] exchanges products which have required him several days of labor to produce with something [like] abujadi [a type of textile] that was produced in an instant…because he does not possess the knowledge/skill required to produce the cloth…Is this not the case even within our country where the labor of the carpenter is valued more than that of someone who supplies to him wood?.....Thus, when we say that value is determined by amount of labor, knowledge and skill of the producers that exchange their output have to be equivalent. This means that, when a producer of cloth exchanges his products that are made using machines with a farmer, the farmer is harmed [by the exchange] while the producer of cloth benefits, unless he also produces with machines. When the farmer produces with machine [but if the cloth maker does not], then the cloth maker is harmed but the farmer benefits. This is the reason why peoples [nations] that have superior knowledge have advantage in [international trade] over those that are inferior in knowledge. (pp. 52–53) Thus, as the goldsmith buys the labor of the one who makes his fire and the carpenter buys the labor of the log carrier at cheap prices, likewise, people with knowledge [skill and technology] buy the labor of peoples that lack knowledge [skill and technology] at cheap prices...That knowledge rules the world is an unshakable eternal law. (p. 53) Producers of various products could make fair exchanges of outputs of their labor when the knowledge and skill required for their respective products are balanced. If the required knowledge and skills are not balanced, the value of their exchanges cannot be balanced. Therefore, when peoples [nations] that lack knowledge/skill exchange their products with peoples [nations] with advanced knowledge/skill, the level of harm suffered by the peoples lacking knowledge is great. (p. 67) As shown by the above quotes, for GHB, the root causes of the ‘unequal exchange’ in international trade between producers of primary commodities and producers of manufactured products are the knowledge, skill and technology embodied and employed in the products and the production process. Furthermore, he also argues that processing raw materials and primary commodities domestically not only saves a country from the harms of ‘unequal exchange’36 but also creates employment opportunities for the domestic workforce as well as for improving the skill levels of the workforce (p. 68). It will also help eliminate the cost of transportation and the profit that goes to importers, exporters and other middlemen in international trade. Conversely, continuation of the status quo of ‘unequal exchange’ exacerbates poverty in the primary commodity-exporting nation. In addition, a country exporting raw materials and primary commodities while importing manufactured products is bound to suffer persistent trade deficits, which are generally financed through foreign borrowing.37 As he was writing at a time when development aid was unknown, it does not figure at all in his analysis. Moreover, unlike recent times when most mainstream development policy literature sings the virtues of foreign direct investment (FDI), GHB considers this source of external finance as being equivalent to prohibitively expensive loans. This is because, by definition, foreign investors bring capital into a less developed economy to make substantial profits which they will eventually repatriate into their home countries (p. 73). The following is a perceptive description of the essence of FDI that goes into primary commodity production in developing countries (thereby re-enforcing and locking them into the developmental ‘dead-ends’ of specializing in primary commodities), and is also a warning about the risks of taking the route of low wages (‘cheap labor’) that has been recommended to poor developing countries by the mainstream literature: Even if they do not explicitly say it like this, it seems that foreigners who come to Ethiopia [with capital] would say to the Ethiopian people as follows: the reason why we have come to Ethiopia is to take the wealth of your country. However, since the land is yours, you will not let us work on it and take what is in it. [But] if you let us [do this], we will not bring workers from our country as the cost of labor would be high. As the wages of your labor are extremely low, let you, yourself do the work and give us [the output]; we shall pay you a small amount of money for your exertions. But, with this small amount of money we pay you, do not buy the equipment and machinery that is required to manufacture the clothing and other items that you need for your consumption; and never produce them by yourself. From now on, do not manufacture shema (cotton garment produced by Ethiopian traditional textile industry), swords and all the things that have been locally produced. Buy everything from us. Return to us the money we have given you immediately with a large amount of interest. (p. 74) In general, the pessimistic views of GHB regarding FDI and the need for mobilizing domestic resources for economic development were similar to those propounded by Ragnar Nurkse, one of the leading development economists of the 1950s and 1960s. Specifically, Ragnar Nurkse (1961, p. 141; as cited in Kattel et al., 2009) presents arguments that are similar to those of GHB in the sense that development has to be mainly financed from domestic sources. In fact, Nurkse’s position against attempts to finance development from foreign sources such as FDI mirror those of GHB as, according to Nurkse, trade and foreign investment would engender a number of obstacles to development: namely, first, large parts of such financing would seek to utilize poor countries’ resources and eventually lock these countries into undiversified economies with a skewed social structure; and second, there is a clear danger that significant amounts of foreign financing would end up funding private consumption patterns emulating Western living standards and thus creating balance-of-payments problems (ibid., 12). In a similar vein, based on empirical evidence of the twentieth century, Kregel (2004) argues that indeed there have been persistent negative financial flows into developing countries, and that development initiatives dependent on external financing have generally been inextricably linked to the problems of unsustainable debt creation and debt burdens, sharp reversal of external flows and increasing prevalence of financial crises in countries that had experienced periods of positive external capital inflows. Returning back to GHB, using the case of the then Ethiopia, where cheap imports of low-quality textiles and garments from Europe wiped out domestic production of better-quality equivalents, he goes on to show how foreign competition destroys existing ‘uncompetitive’ and less efficient industries (without replacing them with more efficient ones) (pp. 79–81). His examples also show that he was well aware of how development of taste for imported conspicuous luxury consumption items could not only pose risks to domestic manufacturing industry but also would put added pressure on the economy to export more and more primary products (which was already under pressure to cover the unavoidable trade deficits due to the ‘unequal exchange’) in order to cover the ever-increasing costs of imports (pp. 74–75). To put this portion of GHB’s work in context, like the case of the previous section, it is easy to see that GHB’s ideas resemble those of Carey (1888), and probably for the same reasons. However, even though in both cases the key ideas related to ‘unequal exchange’ are directly derived from (or implied by) the underlying theories of key domestic causes and mechanics of development, GHB’s ideas show marked clarity and refinement compared to those of Carey (1888). For instance, unlike GHB, Carey (1888) does not specifically and explicitly ascribe ‘unequal exchange’ to differences in knowledge, skill, technology, returns to scale and agglomeration, though their conclusion is very similar. 6. Strategies for late development and industrialization The main purpose of GHB’s book was to show the people and then state of Ethiopia the sure ways and means of achieving development and real and meaningful political and economic independence as a nation. As such, all his theoretical discussions point to distinct policy directions. For instance, it was already alluded in previous sections that his approach leads to focusing on deliberate and comprehensive set of state-directed, synergistic interventions in the areas of infrastructure development, human development and education, promotion of technology adoption and innovation, internal market expansion, suppression of consumption of imported products, financial sector development and import protection—all aimed at industrialization and structural transformation. In addition to such general policy statements scattered throughout the book, his book also contains a section that outlines a comprehensive set of policies—with particular emphasis on selective and dynamic protective tariff schemes aimed specifically at promoting import substitution industrialization (pp. 81, 84). This includes: Erecting sufficient barriers on import of finished products, where tariff protection is not meant for revenue but for the purpose of creating and sustaining national productive capability (pp. 103, 126); Removing tariffs and other barriers to import of machinery and raw materials; discriminating against imports that can be produced with machinery and equipment that is allowed to be imported duty free; providing incentives to domestic producers of raw materials and agricultural outputs; Encouraging and supporting FDI in the area of manufacturing and import substituting industries; encouraging FDI and immigration of skilled foreigners with an explicit objective of knowledge, technology and skill transfer—as well as creation of industrial and skilled employment (pp. 97–98); Promoting export of finished products (p. 97); discouraging export of raw materials (p. 99)—particularly discouraging export of primary commodities that are based on non-renewable resources (p. 118); Ensuring that export earnings from raw materials and primary commodities are used to import advanced technology but not for consumer products (p. 114). Overall, his stress is on the creation of a diversified economy based on knowledge- and skill-based increasing returns activities (pp. 112–113), which is to be achieved through a dynamic and context-specific combination of import protection/substitution and export promotion strategies, which are to be supplemented and complemented by its three ‘inseparable colleagues’ (pp. 97–98): foundation and expansion of education and training institutions; construction of physical infrastructure; and promotion of technology and skill transfer-oriented inward FDI and skilled immigration. Moreover, his proposals for import substitution/protection with dynamic policy interventions are explicitly aimed at creating synergistic and side-by-side development of agriculture and industry, thereby creating a virtuous cycle of prosperity (pp. 85–87). Looking at the contents of the industrialization policies proposed by GHB, it is easy to see their similarity with most of the policy proposals made by Friedrich List (1841). Similar but cruder sets of policy proposals were made or implemented among others by Jean-Baptiste Colbert, Louis XIV’s General Controller of Finances (France);38 and going even further back, we find many similar policy ideas in Hörnigk’s ‘Nine Points of Economic Policy’, which were proposed in 1684 and implemented in Austria with great success.39 They also bear resemblance to the logic, content and objectives of the famed ‘American System’ that was forcefully and ingeniously sketched for the first time in 1791 by Alexander Hamilton, the first Secretary of the Treasure of the USA, in his famous Report on Manufactures. The long-term impact of the ideas proposed in the Report is such that one author states, ‘[it] contained the embryo of modern America: here, if a date can be assigned to a development so amorphous and far-reaching in its consequences, was conceived the grand design by which the United States became the greatest industrial power in the world’ (Greenfeld, 2001, p. 393). The resemblance is not surprising, as one of the aggressive and relentless promoters of the policy proposals of ‘the American System’ was Henry Carey (who had substantial influence on GHB), as the result of whose ‘vigorous preaching’, ‘it enjoyed wide acclaim around the economically alert world, was regarded with interest in Britain and France, and taken very seriously in Germany and Japan’ (ibid., p. 328). In fact, according to Kaplan (1931), Carey’s intellectual influence was such that, at the completion of his Principles of Social Science (1857–60), ‘he had attained not only the fruition of his own thought; he had awakened a European interest in the “American School” and the “American System”’ (ibid., p. 9). Principles of Social Science, which was the main source for many of GHB’s ideas, was very influential during the second half of the nineteenth century and was translated into five European languages and Japanese (ibid.). Moreover, in Germany, where GHB also spent his formative years and must have witnessed the achievements firsthand, List’s proposals, which were very similar to his own and those of Carey, were successfully implemented particularly under Bismarck (Reinert, 2004, p. 32; see also Chang, 2002). In addition, Erasmus Peshine Smith, one of the most influential economists of the American School and the protégé of Henry Carey, was an economic advisor to the Japanese government following the Meiji restoration.40 As a result, key figures in the design and implementation of the economic policies following the Meiji restoration in Japan (such as Wakayama Norikazu, Okubo Toshimichi and Fukuzawa) were all followers of Carey’s and List’s ideas (Greenfeld, 2001, pp. 328–34). And therefore, it is not surprising that GHB’s policy proposals resemble those that propelled Japan from a poor feudal society to an industrialized nation. Nor should we be surprised that he advised the then-Ethiopian government to learn from and emulate Japan. Later on, while somewhat modified by the experiences of the Second World War and indeed the aftermath of the war, these ideas again played a major part in influencing Japanese development from the 1960s (Reinert and Daastol, 2004, p. 33, Reinert, 1994: 174-175). Since Taiwan, South Korea and Singapore were greatly influenced by the Japanese model of industrialization, their spectacularly successful industrialization policies also greatly resembled those of Japan.41 Thus, when GHB’s ideas regarding the causes and nature of economic development and the strategies that he proposed for late development and industrialization of the then Ethiopia are put into their proper and wider historical and intellectual context, the characterization of GHB as ‘Japanizer’ appears too narrow. This is because, whereas Japanizers refers to the strong interest of the early twentieth-century Ethiopian intellectuals in the successes of the Meiji restoration in Japan, GHB’s suggestion for Ethiopia to learn and adopt the policies and industrialization strategies of the then Japan had much more to do with the fact that Japan was the one place where the strategies and policy ideas implied by his theoretical framework were being applied at the time of his writing. This is like Alice Amsden, one of the leading proponents of GHB’s kind of development economics in recent decades, exclaiming ‘[Raul] Prebisch lives in Asia!’—referring to how leading governments in Asia were actively and effectively promoting import-substitution in high-tech industries during the late twentieth century and early twenty-first century (and therefore proving Prebisch correct about import substitution industrialization) (Amsden, 2004, p. 75). (For a striking similarity between GHB’s policy proposals and the policies and industrialization strategies which were being implemented in Japan during the early twentieth century—i.e. around the time GHB was writing his book—see Chang [2002, pp. 47–50].) Therefore, in our view, GHB should not be narrowly considered as a ‘Japanizer’ but as one of a long line of intellectuals subscribing to and writing in the tradition of what can broadly be called historical, evolutionary and pragmatic economics.42 7. GHB’s ideas and later theoretical developments: are the core ideas theoretically valid? Moving forward in the history of economic thought, we could clearly see that the main ideas of List, Carey and GHB underlie much of the kernel of the development economics of the 1940s, 1950s and 1960s when the field was thriving. The group that promoted these ideas, which collectively form what is now called ‘classical development economics’ or ‘pioneers of development’, typically consists of the following key thinkers: Paul Rosenstein-Rodan, Hans Singer, Arthur Lewis, Albert Hirschman, Gunnar Myrdal and Ragnar Nurkse (Kattel et al., 2009). Two key ideas of these ‘high development theorists’ that are particularly similar to those of GHB are that (a) financing for development has to come to a large extent from the developing country itself (‘Capital is made at home’; Nurkse 1961, p. 141; as cited in Kattel et al., 2009, p. 12), and the key areas to be financed need to exhibit increasing returns in order to trigger dynamics of development or, as Myrdal argued, virtuous circles of growth (ibid., p. :12). Unfortunately, however, the key ideas of both groups of economists (List, Carey, GHB, et al., and the ‘high development theorists’ of the twentieth century) have been ignored and by-passed in the mainstream development literature of recent decades to the extent that Krugman (1995) confidently states, ‘By the 1980s or so, virtually all vestiges of high development theory had disappeared from development economics’ (ibid., p. 28). This is despite the fact that their key ideas ‘remain intellectually valid and may continue to have practical applications’ (ibid., p. 7); and so, ‘[t]he irony of course is that high development theory was right’ (ibid., p. 28). The reason he gives for the disappearance of these valid and logically sound ideas is the fact that mainstream economics became ‘essentially a collection of models. Broad ideas that are not expressed in model form…do not endure unless they are codified in reproducible—and teachable form’ (ibid., p. 27); and leading development economists of the time ‘failed to turn their intuitive insights into clear cut models that could serve as the core of an enduring discipline’ (ibid., p. 24). In effect, mainstream economics has sacrificed theoretical/logical validity, relevance and practical applicability in favor of mathematical elegance and simplicity. Meanwhile, as noted earlier, the ‘development’ debates over the past few decades have tended to focus solely on internal factors that determine success/failure in development as if external economic forces are always benign. In fact, the powerful countries are pressing the developing world to adopt wholesale trade liberalization on the grounds that the best way to raise global living standards is to maximize trade (Rodrik, 2001, pp. 5, 10; Shaikh, 2007, p. 50). This view is supported by the conventional economic theory which concludes that trade and financial liberalization will lead to increased trade, accelerated economic growth, more rapid technological change and a vastly improved allocation of national resources away from inefficient import-substitutes towards more efficient exportable goods (Shaikh, 2007, p. 51). This conclusion is arrived at through patently unrealistic assumptions of the standard trade theory including fixed labor (fixed endowments); full employment of resources; constant returns to scale; balanced trade; no transportation costs; perfect competition in all products; internally mobile but internationally immobile factors of production and differing production technologies across countries (Feenstra, 2004, pp. 1–2; Sen, 2005, pp. 1012–13). The well-recognized empirical failures of both the classical and neoclassical theories of free trade led in the 1980s to the flourishing of a set of theories collectively known as New Trade Theories. The overall thrust of these theories is to extend the analysis of the standard theory by incorporating market imperfections, increasing returns, strategic behavior, new industrial economics and the new growth theory (Deranyagala and Fine, 2000, p. 4). The results of these ‘new’ models, particularly when they assume the presence of increasing returns activities (industries) in the developed ‘North’ while assuming decreasing/constant returns activities in the underdeveloped ‘South’, confirm the conclusions of GHB et al. in the sense that free trade would harm the ‘South’ while benefiting the ‘North’. However, even the major contributors to this line of theorizing, such as Paul Krugman, recanted these possibilities and continue to advocate for free trade.43 One could say that the only notable recent mainstream work in the tradition of ‘New Trade Theory’ that unequivocally presents results that are similar to those of GHB et al. is Gomory and Baumol (2000), which shows that there are in fact inherent conflicts in international trade. Accordingly, once realistic assumptions are adopted, whether a nation benefits or loses from international trade critically depends on ‘what countries actually choose to do, what capabilities, natural or human-made, they actually develop…. The existence of this range of outcomes, with such different consequences for the countries involved, implies that... a country’s welfare is critically dependent on the success of its industries in international trade’ (ibid., p. 5) This is hardly surprising to any of the intellectuals of GHB’s tradition such as Ha-Joon Chang because, all along, they have been arguing, ‘When it comes to high-productivity activities whose existence determines whether a country is economically developed or not, countries become good at something only because they deliberately decide to become so—there is really no “natural” reason for the Japanese to be good at building cars, the Finns at making mobile phones, and the Koreans at making steel’ (Chang, 2013, p. 9). The implication of this line of thinking is that ‘If we left things to the market, high-productivity industries simply will not get established in developing countries, as there are already superior producers from the more advanced countries. If they want to develop those industries, they have to protect and nurture those industries through tariffs, subsidies and other means of industrial policy’ (ibid.)—and this is precisely the logic of GHB et al. 8. Concluding remarks: are GHB’ core ideas feasible today? We set out to identify the core ideas of GHB that are particularly related to economic development, trace their intellectual linages and see if they are theoretically valid. In a nutshell, his major work contains a comprehensive set of mutually reinforcing ideas and policy proposals aimed at industrialization and structural transformation of an economically and technologically backward society. Their underlying aim (and those of the school of economic thought to which GHB belongs) is to gradually and sustainably improve the income and welfare of the nation and its peoples through a progressive move of the economy away from low-technology, low-skill, low-knowledge intensive, constant/decreasing returns-to-scale activities to higher-technology, higher-skill and knowledge-intensive and historically increasing returns-to-scale economic activities. However, as attested by almost all cases of successful industrialization, this kind of structural transformation from ‘matter’ and ‘nature’ -based activities to artificial and ‘mind’ -based economic activities does not happen spontaneously and automatically through ‘the market mechanism’ as claimed by the dominant economics literature and policy discourse; instead, it requires pervasive and deliberate government interventions, as indicated in the previous section. Meanwhile, though the mainstream economics literature has grudgingly come to admit that more or less all past developmental success stories were achieved with pervasive government interventions like those suggested by GHB and other intellectuals of the same school of thought, it still refuses to admit that it has failed to come up with adequate theories that correctly identify and encapsulate the underlying principles and causes of the process of economic development. In the words of Servaas Storm, Development economics appears to have come full circle, as interest in and concern for industrialization have made a comeback, echoing major concerns of the early development economists. However, when it comes to the practice of industrialization strategy and industrial policy, the default recommendation is still the market and static comparative advantage—the main task of governments, in the new view, is to impose institutional reforms and improve governance so as to allow markets to perform more efficiently. (Storm, 2015, p. 669) Thus, in recent years, the mainstream development discourse has admitted the theoretical possibility that ideas and policy proposals like those of GHB could work, and that the historical evidence is overwhelmingly behind them. However, when it comes to the current context of today’s late-developing economies, the mainstream literature reverts back to its default position where what matters is the market mechanism and static comparative advantage; and the role of industrial policy is just to try to address ‘market failures’, ‘externalities’, ‘coordination failures’ (UNECA, 2016, p. 2), and to provide a ‘nudge’ for structural change in the right direction (Storm, 2015, pp. 687–88). Beyond these, the policy advice given to aspiring late developers appears to be ‘Don’t try this at home!’ because, it is argued, industrialization policies and programs similar to those of GHB may have worked in the past but could not work in countries like those in Africa for wide-ranging reasons such as excessive natural resource endowments (the so-called ‘resource curse’ thesis), pathological politics, the lack of bureaucratic capabilities and the changes in the global economic rules—but the implication is that these countries would be better off sticking to their natural resource advantages, rather than trying to develop manufacturing industries through industrial policy (Chang, 2013, p. 3). However, even if an in-depth scrutiny of each of these reasons is beyond the scope of this paper,44 it is easy to see why the excuses against transformative industrial policies in today’s developing countries do not hold water. For instance, countries like Canada and Australia have successfully industrialized despite being rich in natural resources. Or if we consider the issue of the global economic (World Trade Organization, or WTO) rules not permitting the kinds of industrial policy interventions that were successfully employed by the now-developed countries, a closer look shows that ‘In many places, the multilateral rules allow significant room for making interventions of choice. The WTO appears most tolerant in the use of tariffs, and developing countries have significant scope in this area. Even with subsidies, smart policies can evade several constraints. Flexibilities are largely available in investment policies. While many policies are allowed under TRIMS, the GATS regime allows even more space’ (UNECA, 2016, p. 142; see also Amsden, 2004, p. 76 on this). Therefore, the general conclusion that can be drawn from the forgoing discussion is that the main ideas propounded by GHB and other similar thinkers of the past and present are theoretically valid; have been proven to work under vastly different geographical, historical and socio-political contexts; and are feasible even under the current global economic rules. Thus, while bearing in mind GHB’s emphasis on context-specificity of development policies and institutions, policymakers of the present late-developing countries would do well to learn from him and other like-minded scholars of the past. However, it has to be borne in mind that the journey is not going to be easy because, as a recent perceptive report on the subject put it: In orienting themselves towards transformative industrial strategies, policy-makers are likely to face several hurdles. Pressures from developed countries and international institutions will have to be resisted, if they decide to move away from free market dictates. Moreover, these countries would have to intelligently balance their needs for enhanced market access, which bring certain short-term benefits, and restrictions on industrial policy choices, which harm their long-term development prospects. They will also have to risk facing legal disputes and punishing tariffs from various countries... Those that are not yet part of the WTO or of bilateral agreements could be forewarned to negotiate more smartly when negotiating their deals. (UNECA, 2016, p. 142) Acknowledgements: I would like to thank Prof. Rainer Kattel for motivating me to write this article and for very helpful comments and suggestions on an earlier draft. Comments and suggestions from two anonymous referees were very helpful. The research for this article has been supported through Estonian Research Council Grant No. IUT19-13. 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Gäbrä-Heywät Baykädañ and the emergence of a modern intellectual discourse, Sociology Ethnology Bulletin , vol. 1, 106– 21 Stein, H. 2000. ‘ Economic Development and Anatomy of Crisis in Africa: From Colonialism Throught Adjustment’, Occasional Paper, Center for African Studies, Copenhagen University Storm, S. 2015. Debate: structural change, Development and Change , vol. 46, no. 4, 666– 99 Google Scholar CrossRef Search ADS   Sundrama, J. K., Schwank, O. and von Arnim, R. 2011. ‘ Globalization and Development in Sub-Saharan Africa’, DESA Working Paper No. 102, New York, UNDESA Szirmai, A. 2009. ‘ Industrialization as an Engine of Growth in Developing Countries’, UNUMERIT Working Papers 2009–010 Tenkir, B. 1995. “ Introduction”, in Gebrahiwot Baykedagne. 1995. The State and Economy in Early 20th Century Ethiopia by Gebre-Hiwot Baykadgn . Translated by Tenkir Bonger. London: Karnak House. pp. 1– 46 UNECA. 2016. Transformative Industrial Policy for Africa , Addis Ababa, UNECA Wade, R. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization , Princeton, NJ, Princeton University Press Footnotes 1 For instance, following decolonization in Africa, the internal political economy contexts and development management approaches followed by African governments were far from ideal and effective. According to Stein (2000), bureaucracies often expanded based on politics, not professionalism; states had a general antipathy for the private sector or patrimonialism that greatly affected the character of the private sector; both greatly weakened the group; state-owned or partly owned industries relied on aid frequently tied to technology from developed countries with high import coefficients and little linkage to local capabilities (ibid., p. 19). However, the onset of sweeping liberalization programs was forced upon African economies by the international financial institutions and their major donors following the Berg Report, which justified the sweeping liberalization initiatives arguing that Africa’s comparative advantage lies in agriculture (Jomo, 2008, p. 9). 2 All Ethiopian authors in this paper are referred to using their first names since this is the norm in the country. 3 Dejazmach Kassa, governor of Tigray region, was crowned as Emperor Yohannes (‘King of Kings’) of Ethiopia in 1871. He died in March 1889 after being fatally wounded at the Battle of Metema, where his army defeated (Sudanese) Mahadists. 4 Apparently he joined the German medical team and came back to Ethiopia, as he was unable to get employment in Europe because of the color of his skin (Alemayehu, 2004, p. 4). 5 His language and writing skills are indeed very impressive in terms of clarity, conciseness and ability to express complex ideas in the economics of his times in simple and easily accessible manner. For instance, Tenkir (1995) states, ‘Reading through the work of GHB in Amarina, I was impressed by the modernity of the prose and the clarity and simplicity of his exposition’ (ibid., p. 18). 6 Surprisingly, despite all that he had endured at her hand, GHB had a balanced view of Empress Taitu: ‘the major fault that he finds in her otherwise illustrious career is her attempt to disrupt Iyyasu’s succession to Menilik, not the hard time she gave him and fellow intellectuals like Afawork [Gabra-Iyyesus] and Gabru [Dasta]’ (ibid., pp. 51–52). 7 Prince-Duke (Leul-Ras, in Amharic) Emru Hailesellasie (2008), From What I Have Seen and What I Recall (Kayehut ena Kemastawusew, in Amharic). Addis Ababa: Addis Ababa University Press, pp. 88–90. 8 Paulos Menameno (circa 1884–1936) was an Ethiopian progressive intellectual, diplomat and English translator (GHB, [1912] 2009, Editor’s note 1). 9 Translated by Beletu Kebede and Jacques Bureau into French in 1993 as ‘L’Empereur Menelik et L’Ethiopie’. Addis Ababa/Paris: Maison des Etudes Ethiopiennes Institut National des Langues et Civilizations Orientales. 10 Eyasu was emperor-designate from 1909 until he was deposed by the nobility and clergy and imprisoned in 1916—never officially assumed the throne. 11 The proposed reforms include, among others, separation of the property of the emperor and that of the state; formation of a single formal national army; introduction of formal, clear and progressive taxation system and monetization of taxation, formulation of standardized school curriculum, promotion of science and technology education, introduction of written national constitution and declaration of religious freedom. 12 Paulos states in the preface that he had to put together and copy the scattered manuscript by himself and obtain the permission of then Crown Regent Teferi Mekonnen (later crowned as Emperor Haileselassie) to publish it. 13 The second edition was published in 1960. A reprint of this edition came out in 2007, but Addis Ababa University Press published an annotated and re-edited version in 2009 (2002 Ethiopian Calendar) as Works of GHB, where his two books were combined. Unless and otherwise specifically mentioned, all references to this work in this paper refer to the 2007 reprint of the 1960 edition. Translations from Amharic to English are our own. 14 The term Japanizers refers to the strong interest of the early twentieth-century Ethiopian intellectuals in the successes of the Meiji restoration in Japan. The use of the term is itself controversial because the intellectuals offered a wide variety of perspectives and recipes for change, often bearing little resemblance to the reforms of late nineteenth-century Japan (Salvadore, 2007, p. 563). 15 According to Samir Amin, Eurocentrism is a ‘culturalist phenomenon in the sense that it assumes the existence of irreducibly distinct cultural invariants that shape the historical paths of different peoples. Eurocentrism is therefore anti-universalist [because Europe is different…] but it presents itself as universalist, for it claims that imitation of the Western model by all people is the only solution to the challenges of our time’ (Amin, 1989, p. vii; as cited in Salvadore, 2007, p. 561). 16 See Bahru (2002) for a comprehensive discussion of all the major reformist intellectuals of early twentieth-century Ethiopia. 17 See for example Alemayehu (2012) (which unfortunately is available only in Amharic) for details on this. 18 The author is indebted to the anonymous referees for bringing to his attention the works of Mohammed Girma and James de Lorenzi. 19 GHB was well placed to observe how the sickness of Emperor Menelik and his subsequent death created intense power struggles among the nobility and threatened the stability and continuity of the then Ethiopia. The power struggles and uncertainty were abated several years later only after Ras [Duke] Tafari Mekonnen came out as the dominant figure in Ethiopian politics and eventually assumed the throne as Haile Selassie I. 20 Most likely Fritz Stier-Somlo (1873–1932), who was an Austria-Hungarian-German legal scholar and political scientist who served from 1925 to 1926 as rector of the University of Cologne. He studied law, economic and philosophy in Berlin University, but it is very unlikely that GHB studied with him or under him, as Stier-Somlo obtained his PhD in 1896—well before GHB may have joined the university. 21 According to Reinert (2005), the term Cameralism itself originates in the camera principis, or Kammer, i.e. treasury; and the perspective of the Cameralists was that of public management, of taxes and institutions, laws and regulations. 22 See Reinert (2005) for details on the views of these authors on this topic. 23 Similar views are found in the works of Renaissance economists of Naples such as Antonio Genovesi (1713–1769), who argued that national independence was as meaningless as it was fleeting without the economic power, and more specifically the industrial and thus military power, to guard it from foreign interests. See Sophos Reinert (2011) for an excellent discussion of these and other ideas within this tradition. 24 As indicated in the previous section, just like the Cameralists, GHB’s main objective in writing both books is to ‘enlighten’, advise and guide the rulers of Ethiopia with respect to development policies. According to Reinert (2005), the origin of this idea dates back to the thirteenth-century idea of a common good—originating in Italian humanism—which was slowly transformed into an idea of public happiness, and the ruler is put in charge of the project; Wilhelm Roscher (1868) coined the descriptive term ‘enlightened despotism’ for this kind of rule (Reinert (2005: 54)). 25 Reinert (2007) reports that in 1620, Francis Bacon formulated a view that was to dominate in the social sciences for almost the next two centuries: ‘There is a startling difference between the life of men in the most civilized province of Europe, and in the wildest and most barbarous districts of New India. This difference comes not from the soil, not from climate, not from race, but from the arts’. Reinert (2000: 371) further argues that, when German economist Johan Jacob Meyen stated in 1770 that ‘It is known that a primitive people does not improve its customs and institutions, later to find useful industries, but the other way around’, he expressed an understanding of causality considered common sense at the time. See particularly Reinert (2007) for detailed examples on this point. 26 See, for example, Backhaus (2011) on Schmoller’s influence on today’s German Social Market Economy (Soziale Marktwirtschaft) (ibid., p. 391). 27 The time when GHB was writing was such that poverty and inequality was rampant in Ethiopia—with a very heavy burden of taxation and operation under a brutal feudalist aristocracy. In contrast, the social question in Europe of, say, Schmoller’s time was essentially that of advanced capitalism. 28 He also argues that development of infrastructure, technical knowledge and skill in a society leads to reduction in costs of production (and prices), improvement in living standards, increase in the profit of producers, decrease in the profit that accrues to middlemen and merchants and increase in division of labor (pp. 49–50). See also pp. 59–60 on how development tends to create positive and cumulative inertia to achieve more development. See pp. 61–63 and p. 129 on the positive relationship between specialization, division of labor, innovation and technical change; see pp. 65–67 and p. 78 on his emphasis on economies of agglomeration and reducing the costs of transaction and transportation. 29 According to Reinert (2009), increasing returns-to-scale means that, as the volume of production increases, fixed costs per unit of production fall. Importantly, increasing returns invalidate the core assumption of standard economics: perfect competition (ibid., p. 17). The higher the increasing returns, the larger will be the barriers to entry and the more imperfect the competition. Presence of increasing returns tends to lead to higher wages, which in turn increase the relative price of labor, which in turn makes mechanization increasingly profitable. This spiral of increasing wages (i.e. increasing demand) and increasing productivity due to mechanization is at the core of the impressive growth of developed economies since the 1850s (ibid.). 30 Later ‘high development theorists’, particularly Ragnar Nurkse make similar point in his ‘balanced growth’ approach. See Kattel, Kregel and Reinert (2009) on this. 31 According to Reinert (2009), the importance of the linkages and synergies for agricultural development, i.e. the benefits that accrue to agriculture from the proximity of manufacturing, was perhaps the most important new insight in economics during the early 1700s; for instance, David Hume in his History of England (1767, vol. 3) states: ‘Husbandry … is never more effectually encouraged than by the increase of manufactures’ (Reinert, 2009, p. 17). 32 It is worth nothing here that Carey’s work is voluminous: ‘His voluminous writings aggregated, according to his literary executor, thirteen octavo volumes, about three thousand pages of published tracts, and perhaps an equal quantity of newspaper articles, editorials and correspondence dealing with economic and political subjects’ (Kaplan, 1931, p. 13). Just the first volume of Carey’s magnum opus, The Principles of Social Science (which he completed as a three-volume work in 1860 [ibid., p. 54]), is 474 pages. 33 Carey was not only an economist but, like his father Matthew, an agitator and zealous promoter of the ideas of what was referred to as the American System. Kaplan (1931) describes him as the “devoted champion of diversified industry and an adequate home market, matching the zeal of his father before him. In newspaper, magazine, pamphlet and book, he hammered away (with ‘unwearying wearisomeness’, according to Professor Roscher) at the theme that national prosperity consists in ‘placing the consumer by the side of the producer’ so that ‘with every step in this course he will obtain increased returns from a diminished surface” (ibid., p. 54). Meanwhile, GHB distills Carey’s main ideas that are relevant to the Ethiopian context while avoiding the irrelevant polemics and arguments against the classical school of economic thought that litter Carey’s work. In short, while GHB’s work can be noted for brevity and conciseness, Carey’s is verbose and long. This is partly due to Carey’s ambition of not only disproving the major tenets of the then dominant classical economics but also because, ‘bent on the creation of a system of universal harmonies, Carey trespasses over the grounds of natural history and natural science so that he may demonstrate the close relationship between the order of nature and the affairs of mankind’ (Kaplan, 1931, p. 54). 34 List was the protégé of Carey’s father, Matthew Carey, who was the publisher and promoter of List’s ideas in America. 35 List argues that Britain’s proposals to open German market for manufactured goods in return for its removal of barriers to German export of timber and agricultural produce amount to trying to make Germany an agricultural colony of Britain (ibid., p. 323). However, a few pages later (pp. 336–37) he recommends Asia and other ‘inferior’ civilizations to be suppliers of raw materials and markets for European manufactures. Later on, he outlines how Germany should colonize less developed countries, in order to make them sources of raw materials and markets for German manufactures (pp. 347–49). On the other hand, Carey avoids the hypocrisy of writers like Smith and List in terms of recommending the underdeveloped nations to specialize in raw materials and avoid trying to industrialize. In fact, he strongly criticizes America’s policy of pushing the Republic of Mexico and native American Indians towards primitive economic activities and raw material production as short-sighted and narrow-minded (Carey, 1888 p. 372; see also pp. 360 and 367 on how forced specialization due to British colonial policy left ‘vast heaps of humanity, festering in compulsory idleness’, leading to ‘barbarism, leading to famines and pestilences, ending in decay and death, and thus giving color to the theory of over-population’). 36 He corroborates this phenomenon of ‘unequal exchange’ with the export import export data of the then Ethiopia, comparing the quantity and value of raw materials and other primary commodities Ethiopia exported and the quantity and value of finished products imported from abroad (pp. 67–68). He also shows that, in general, any trade between raw materials and finished products creates unequal exchange in favor of the later (p. 114). 37 Using the relatively modest trade deficit encountered by Ethiopia in 1911–12 (Ethiopian Birr 191,950.00), he argues that somehow this deficit was financed through some form of borrowing, and goes on to argue that a nation that imports for consumption beyond what its exports earn will have to pay for this deficit, not just the principal but also the interest (p. 73). 38 See List ([1841] 1909, pp. 57–58) for a succinct summary of the main elements of Colbert’s industrialization program. 39 Philipp Wilhelm von Hörnigk (1640–1714) published his ‘Nine Points of Economic Policy’ in 1684 in the book Österreich über alles, wann es nur will (‘Austria above everyone else, if only she had the will to’) (published anonymously), and the book was the most successful German-language economics book of the period (Reinert, 2005; Schumpeter, [1954] 2006, p. 192). 40 According to Reinert (undated), in 1871—four years after the Meiji restoration—the Japanese government requested from the government of the USA an advisor in international law. The Secretary of State recommended Peshine Smith, who was to spend eight years in Japan as the first US citizen to serve the Japanese government in an official capacity. When he left, he proudly commented that the ‘American System’ of economic theory—as opposed to English theory—had become ‘common thinking among Japanese statesmen, government officials and philosophers’. 41 An excellent source for the Taiwanese case is Wade (1990); for that of Korea, it is Amsden (1989). Chang (2002) provides a comprehensive and well-researched historical narrative for several ‘old’ and newly industrialized countries. 42 In this tradition of economics which dates back to at least Antonia Serra (1613), as mentioned previously, capitalism is seen as a system of production (rather than exchange) and the main elements of capitalist dynamics and drivers of development are not capital, (undifferentiated) labor or markets but new knowledge, entrepreneurship, innovations and organizational ability (Reinert and Kattel, 2004, pp. 2–3). In contrast to the mainstream approach, here the main development policy goal is not static efficiency of resource allocation but increasing the productive capability of an economy (List, 1827, p. 189). In more modern terminology, the core aspect of development is considered to be transforming productive structures based on superior technology, skill, knowledge and organizational capability embodied in institutions (Chang, 2011). 43 See for example Krugman’s Nobel Prize acceptance lecture (Krugman, 2009). 44 See Chang (2013) and UNECA (2016) for a detailed assessment of the reasons put forward against transformative industrial policies in Africa. © The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

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Published: Mar 19, 2018

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