The big push

How will history judge Kazakhstan’s industrial policy?


The government of Kazakhstan has made industrialization its top economic priority for the next few years, hoping to rev up economic growth and to create jobs for all, reports Kursiv’. Political leaders claim that only industrialization can vault Kazakhstan into the ranks of the top 30 nations. Turkmenistan’s president has also said that he wishes to industrialize. How likely, in Central Asia, is success?

History may provide a clue. In his cogent survey, Global economic history: A very short introduction, Robert Allen of Oxford University suggests this: While careful (or lucky?) planning may ignite economic growth, it cannot ignore the resource – workers, machines, or land – that the nation holds in relative abundance.

Consider Japan of the late 19th century. In the West, the ratio of capital to labor was unusually high, because workers were relatively few. This scarcity drove up the value of another worker and consequently wages. To hold down costs, Western firms innovated ways to produce that relied more on capital than on labor. Their production of silk used metal machines powered by a steam engine. But in Japan, the ratio of capital to labor was low. The relative abundance of workers reduced their wages, rendering labor-intensive methods of production the cheapest. To reel silk, firms used wooden machines powered by men who turned cranks.

Labor scarcity played a key role in the West’s Industrial Revolution. By 1820, Europeans were rich in part because their high wages had expanded demand for their own products. Manufacturers sought to satisfy the new demand by substituting cheap capital – buildings and machines -- for expensive labor. This raised the capital-labor ratio and consequently wages, creating a virtuous circle. Karl Marx had thundered that increasing reliance on capital would destroy jobs, but in reality the ascent of wages raised the worker’s standard of living over the long run in the West. “The countries that were richest in 1820 have grown the most,” Allen writes. This may not surprise you, since richer nations have more wealth for financing expansions of economic capacity.

Standard model, sluggish performance

Early in the 20th century, economists, observing the economic growth of the United States and Western Europe, recommended to poorer nations the “standard model” – “railways, tariffs, banks and schools,” as Allen puts it. Tsarist Russia illustrates the pitfalls and opportunities of this approach. Russia built rail links to the rest of Europe and raised tariffs (import taxes) on pig iron to encourage domestic production of it. Also, education expanded: By World War I, almost half of Russia’s adults could read.

Yet the nation still depended on the West for stimuli to growth. Rather than adapt Western technology (knowhow) to its own peculiar mix of inputs, Russia simply imported it, by permitting foreigners to build plants of their own design on its soil. “Tsarist economic growth was mainly an agricultural boom, souped-up with some tariff-induced industrialization.” The nation still had far more workers than could be employed, so wages remained at rock-bottom. Any gains from industrialization went to the owners of firms and land. Add a world war, stir vigorously, and you have 1917.

In the wake of World War II, the need to quickly rebuild European and Asian economies led to tinkering with the standard model. “Big Push” industrialization, as Allen calls it, emphasized timing. “The only way large countries have been able to grow so fast is by constructing all of the elements of an advanced economy – steel mills, power plants, vehicle factories, cities, and so on – simultaneously.” The glaring example of the Big Push, Stalin’s Soviet Union, demonstrated its limits. Markets lack time to adjust to consumer wants, so a dictator must impose his own preferences (and will be none too shy).

Kazakhstan seems to have embarked upon a variant of the Big Push, and the impact on the transition to markets remains to be seen. The only verity is that consumers will not have the last word but may have the last laugh. -- Leon Taylor, tayloralmaty@gmail.com


Good reading

Robert C. Allen. Global economic history: A very short introduction. Oxford University Press. 2011.


References

Aleksandr Constantinov. Razgovor nachyctotu. Kursiv’. Page 1. January 24, 2013.

Catherine A. Fitzpatrick. Turkmenistan: President concedes need to industrialize. Eurasianet.org. January 10, 2012.