By Professor Erik S. Reinert, Tallinn University of Technology, and Dr. Richard Itaman, King’s College, London
Learn more about this timely topic at the upcoming
18th International Economic Forum on Africa
At the OECD’s origin, we find the 1947 Marshall Plan that re-industrialised a war-torn Europe. At the very core of the Marshall Plan was a profound understanding of the relationship between a nation’s economic structure and its carrying capacity in terms of population density. We argue that it is necessary to rediscover this theoretical understanding now, in the mutual interest of Africa and Europe.
In early 1947, worries grew in Washington that an impoverished Germany – where manufacturing industry had been forbidden under the Morgenthau Plan – would fall an easy prey to the Soviet Union. US President Truman therefore sent former president Herbert Hoover on a fact-finding mission to Germany. One powerful sentence in Hoover’s Report of March 18 that year zeroed in on the basic problem:
‘’There is the illusion that the New Germany left after the annexations can be reduced to a ‘pastoral state’. It cannot be done unless we exterminate or move 25.000.000 out of it’.1
Hoover understood that the population density of a country is determined by its economic structure: Industrialisation makes it possible to dramatically increase the population carrying capacity of a nation. ‘Exterminate’ was an extremely strong word to use after the horrors of World War II, and everyone understood that there was no place where 25 million Germans could be sent: Re-industrialisation was the only option.
The lesson from the Marshall Plan is that only extreme danger – in this case a communist takeover of Germany – will convince the West temporarily to give up what has been called ‘free trade imperialism’. Temporarily, we argue, two events come together that may enable a rediscovery of the relationship between the economic structure and population densities of nations, and consequently benefit Africa.
At the moment – facing a situation similar to what England did after the 1929 crisis – the United States under Donald Trump is withdrawing from the ideology of free trade. ‘’Donald Trump can embed a single visceral truth in a welter of falsehoods,’’ wrote Rana Foroohar in The Financial Times recently. The ‘visceral truth’ is that David Ricardo’s 1817 trade theory is being marginalised. Last time Ricardian trade theory collapsed – in the 1930s – this marked the start of a process of industrialisation in Latin America that lasted for decades. We argue that the current situation presents a major opportunity for Africa in a similar way.
A second event is migration. In 1947, Herbert Hoover stated the facts regarding industrialisation and population density. However, Alfred Marshall – the founder of neo-classical economics – in his 1890 textbook Principles of Economics 2 gives a framework to understand why: Activities subject to diminishing returns (agriculture, mining, fisheries) must after a point shed population, while activities subject to increasing returns attract population. Says Marshall: ‘’This tendency to Diminishing Returns was the cause of Abraham’s parting from Lot, and of most of the migrations of which history tells’’. This includes the present migration from Africa, we argue. In an attempt to show us the age of this fundamental insight, Marshall refers to the Bible’s Genesis xiii: 6: “And the land was not able to bear them that they might dwell together; for their substance was great so they could not dwell together’’ (Marshall 1890: 201).
Alfred Marshall essentially rediscovered what was already old knowledge. All over Europe, development economics of the 1600s and well into the 1700s was dominated by the insights of Giovanni Botero’s work On the Greatness of Cities (1591)3, a work that appeared in more than 60 editions in all the main European languages. Botero explained why the only ‘islands’ of wealth in Europe were a few cities – like Venice, Amsterdam and Florence – where adding value to raw materials, producing manufactures, was the key to wealth. In 1613, Antonio Serra4 added the basic theoretical foundation to this: The production of raw materials is subject to diminishing returns, while manufacturing was subject to increasing returns. Consequent productivity increases and barriers to entry made it possible for manufacturing cities simultaneously to raise wages and lower the cost of their goods.
Centuries of trade policy followed the principles of Botero and Serra, all over Europe and in the United States. Former World Bank Chief Economist Justin Yifu Lin put it very succinctly: ‘’Except for a few oil-exporting countries, no countries have ever gotten rich without industrialisation first’’5.
In line with this analysis, we suggest it is time for Africa to follow Alfred Marshall’s recommendation: ‘’One simple plan would be the levying of a tax by the community on their own incomes, or on the production of those goods which obey the Law of Diminishing Returns, and devoting the tax to a bounty on the production of those goods with regard to which the Law of Increasing Returns acts sharply.’’ (Marshall 1890: 452). Here Marshall describes what all presently wealthy countries have done, mostly through the protection of increasing returns activities through tariffs, ever since England in the 1400s started to tax the export of raw wool, while at the same time subsidising the local production of woollen cloth. This was the essence of import-substitution industrialisation that took some non-Western countries out of economic colonialism. For centuries, colonies were essentially areas where the production of most industrial products was prohibited, as in the United States until 1776.
The United States under Donald Trump is now ideologically and indirectly paving the way for the industrialisation of Africa. This must be an industrialisation not primarily focused on the nation-state, like Latin America’s industrialisation was. Nor can it be based primarily on supplying global markets, as East Asia’s industrialisation was. It must be focused on the African continent, producing industrial goods that rich countries take for granted, but whose production has not reached Africa to any extent.
An unintended consequence of the Apartheid boycott of Zimbabwe (Southern Rhodesia) was the rapid growth of the industrial sector, reaching more than 30% of GDP. Recently, de-industrialisation there has rapidly increased outward migration, proving the principle Herbert Hoover explained in 1947 still true.
A consequence of Africa’s industrialisation could very well be reduced migration because more Africans will be able to find jobs in Africa. In 1947, a possible communist takeover of Germany was a threat big enough for the West to temporarily abandon free-trade imperialism. The threat now is the 821 million people worldwide who were undernourished in 2017 according to the FAO. Migration cannot solve their problems. Industrialisation can. We can only hope the West sees the light as it did in 1947.
1 Quoted in Baade, Fritz (1955), ‘Gruß und Dank an Herbert Hoover’, Weltwirtschaftliches Archiv, 74(1), 1–6.
2 Marshall, Alfred, Principles of Economics, London, Macmillan, 1890
3 Symcox, Geoffrey (ed.), Giovanni Botero, On the Causes of the Greatness and Magnificence of Cities (1589), Toronto, University of Toronto Press, 2012.
4 Reinert, Sophus A. (ed.), Antonio Serra, A Short Treatise on the Wealth and Poverty of Nations (1613), London, Anthem Press, 2011.
5 Lin, Justin Yifu, New Structural Economics: A Framework for Rethinking Development and Policy, Washington DC, World Bank Publications, 2012, p. 350.
This blog is part of an ongoing series evaluating various facets
of Development in Transition. The 2019 “Perspectives on Global Development” on “Rethinking Development Strategies” will add to this discussion