Economic Backwardness & Industrial Revolutions

Relative Backwardness in Economies

Some of the countries considered to have backward economies are Sweden, Norway, Denmark, Holland, Italy, Spain, Portugal, and Russia. In backward economies, the biggest sector is agriculture, with higher income and employment. Backward economies’ growth is analyzed in the Gerschenkron model. Gerschenkron states that the slow growth of these countries is due to a lack of prerequisites to generate economic growth in the industrial sector. The more likely certain conditions are to occur, such as:

1. Special institutions, including banks or the state, will be necessary to properly channel physical capital and human capital to industries.
2. There will be an emphasis on the production of producer goods rather than consumer goods.
3. There will be an emphasis on capital-intensive production rather than labor-intensive production.

Gerschenkron states that these countries should look for substitutes for the prerequisites in order to promote economic growth.

Differences Between the 1st & 2nd Industrial Revolutions

There are significant differences between the first and second industrialization periods. It is important to mention that the second period was building on the ideas and products of the first period. While the First Industrial Revolution focused on textile manufacturing and the innovation of the steam engine, the Second Industrial Revolution focused instead on steel production, the automobile, and advances in electricity. Discoveries in the field of electricity improved communication technologies. The Second Industrial Revolution featured the introduction and expansion of the railroad. The railroads were important in accessing and transporting raw materials, such as steel, which were required by the large industries. In addition, the Second Revolution developed efficiency in the production and distribution process. This was achieved through mobilization of the labor force into factory production units, improvement of transportation, and mining.

Reactions to Globalization

The first reaction to globalization was the increase in tariffs in order to compensate for the decrease in transport costs, and in this way, protecting the economy of their own country. Countries were forced to do so as some goods, like wheat, were cheaper in Western countries (importer) than in the exporter country where they were produced. This was because of the fall in transport costs, and by increasing import tariffs, the price would rise, protecting the proper industry of the country from foreign goods.

Gold Standard in World War II

Under the Bretton Woods international monetary agreement of 1944, the gold standard was kept without domestic convertibility. The role of gold was severely constrained, as other countries’ currencies were fixed in terms of the dollar. Many countries kept reserves in gold and settled accounts in gold. Still, they preferred to settle balances with other currencies, with the American dollar becoming the favorite. The International Monetary Fund was established to help with the exchange process and assist nations in maintaining fixed rates. Within Bretton Woods, adjustment was cushioned through credits that helped countries avoid deflation. Under the old standard, a country with an overvalued currency would lose gold and experience deflation until the currency was again valued correctly. Most countries defined their currencies in terms of dollars, but some countries imposed trading restrictions to protect reserves and exchange rates. Therefore, most countries’ currencies were still basically inconvertible. In the late 1950s, the exchange restrictions were dropped, and gold became an important element in international financial settlements.

Gold Standard After World War II

After World War II, a system similar to a gold standard, and sometimes described as a “gold exchange standard,” was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar. All currencies pegged to the dollar thereby had a fixed value in terms of gold.

Long-Term Reasons for Spanish Economic Backwardness

In the 19^th century in Spain, related to commercial policies, we found a trade balance with a constant deficit. In terms of trade evolution, we find two phases:

1. Terms of trade improved clearly from 1815-1880.
2. A moderate deterioration from 1890-1913.

Exports of food and raw materials were more than 80%. Imports were mostly manufactured goods and industrial machinery. The commercial policy over the 19^th century followed the trend of European policy.

Unemployment in the Interwar Period

During the interwar period, one of the main human problems was unemployment. At the end of World War I, there was a boom in industry, but it was short-lived as the rapid expansion caused a slump of oversupply. Industries were obliged to employ fewer people. All this was aggravated by the Wall Street Crash in 1929, which caused a worldwide downturn in trade, which led to the Great Depression. In the USA, unemployment rose to 25% at its highest level because of the Great Depression. Literally, a quarter of the country’s workforce was unemployed.