Pioneers for Profit: Foreign Entrepreneurship and Russian Industrialization, 1885-1913
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Pioneers for Profit: Foreign Entrepreneurship and Russian Industrialization, 1885-1913
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| ISBN-13: | 9780226559926 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 03/12/2015 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 456 |
| File size: | 6 MB |
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Pioneers for Profit
Foreign Entrepreneurship and Russian Industrialization, 1885â"1913
By John P. McKay
The University of Chicago Press
Copyright © 1970 The University of ChicagoAll rights reserved.
ISBN: 978-0-226-55990-2
CHAPTER 1
INTRODUCTION
1
In the latter part of the nineteenth century the ever widening waves of the Industrial Revolution launched in Great Britain a century earlier broke upon economically backward agrarian Russia with great force. Military defeats and economic stagnation in the 1850s had forced a hesitant feudal society to begin in earnest the arduous task of modernization and industrialization. Then in the 1860s and early 1870s a whole series of developments—such as the emancipation of the serfs, the real beginnings of a railroad system, an expanding internal market, and the creation of a considerable banking system—helped establish the preconditions of modern economic growth. The initial overall effect of these changes was limited, however, and it was a generation before the tempo of industrial progress quickened to revolutionary proportions in the 1890s. After the Russian industrial revolution of that decade (or "big spurt" or "take-off," to use somewhat analogous current terminology), the pace of industrial development marked time during the serious depression from 1900 to about 1908. But it recovered impressively and was probably "self-sustaining" in the second surge, which lasted from 1909 to the outbreak of World War I. The pattern of two great booms broken by a long depression may be seen in table 1.
The rate of growth for Russian industrial production compares favorably with rates of industrial growth in other countries during both their respective industrial revolutions and the years at the turn of the century. Indeed, in the 1890s Russia's rate of industrial growth was perhaps the highest in the world. Even after 1900 it was still higher than rates in the major European countries, as table 2 shows.
At the same time the weight of the large and backward agrarian sector, the rapid rate of population increase, and the very low level of industrial development in 1860 (or 1890 for that matter) meant that Russia remained far behind other industrial nations in 1913 in all per capita comparisons of income or consumption in spite of its industrial achievement after 1885. In 1913 per capita income in Russia was only 101.4 rubles, as opposed to the equivalents of 300.4 rubles in Germany, 460.6 rubles in Great Britain, and 682.3 rubles in the United States. That rapid growth left Russia poor in absolute and comparative terms probably helps account for the great divergency of judgments concerning the nature of the Russian economy on the eve of the First World War and related historical what-might-have-beens. Those drawing an essentially optimistic interpretation stress (among other things) the relatively high and sustained rate of industrial growth as decisive, while pessimists cite the low level of development as symptomatic of fundamentally unaltered backwardness in 1913. Thus the arguments of optimists and pessimists often go past each other. They refer to two different sets of facts, and perhaps to different fundamental conceptions of what is important in history.
In analyzing this considerable Russian industrialization after 1885 many investigators have focused on the primary influence of the state. As Professor Gerschenkron puts it, "The strategic factor in the great industrial upsurge of the 1890s must be seen in the changed policy of the government.... Industrial development became an accepted and in fact the central goal." The centrality of the state in Russian economic development in the last years of the nineteenth century almost seems, then, to connect the reforms of Peter the Great with the accomplishments of the commissars in a seamless pattern: Russian economic development was always directed by political authority for political goals. For another respected scholar in an expansive mood the finance minister, Count Witte, who was chief architect of Russian economic policy in the 1890s, even becomes basically "a forerunner of Stalin rather than a contemporary of Nicholas II" or, presumably, John D. Rockefeller. And Russia in the 1890s becomes "the pioneer of all modern experiments in deliberate economic development."
Certainly no one would deny the general importance of active governmental involvement in Russian industrial development in the 1890s. Yet on the basis of Professor Gindin's marvelous study on the State Bank from 1861 to 1892, one might well argue that the decisive change in governmental attitudes really occurred in the late 1860s and early 1870s. Similarly, one may well question whether Witte was a civilized Stalin, and whether economic planning in today's underdeveloped countries is derived from projects formulated by a tsarist finance minister. Indeed, one should. For the role of the state in Russian development in these years is actually quite subtle. And an understanding of that role is extremely important for any study on foreign entrepreneurship.
"What in fact did the state do? Three activities stand out. First, it provided high tariff protection for industry—very much like that associated with the contemporary governments of Méline in France, or McKinley in the United States. Second, it accounted for the greater part of new railroad construction, which almost doubled the Russian system from 1889 (18,600 miles) to 1901 (35,000 miles). The government simultaneously bought numerous private companies for top prices, so that by 1901 government roads constituted two-thirds of the total rail network. Third, the government engaged in a vast public relations campaign to enlist support for industrialization at home and abroad.
Of these three activities, only large-scale construction of railroads by the government might seem to be a radical departure from the earlier experience of industrializing countries. Yet, as every undergraduate has been taught for a long time, only Great Britain built its railroads without benefit of extensive state aid. And several continental railway systems, like those of Belgium or Imperial Germany, became essentially state-owned and state-operated by the end of the nineteenth century. At first glance the case for radical government experiment and novel intervention seems exaggerated.
With further investigation it becomes even more so. Surely the model for Stalin and future planners would have seen the state blazing some sort of trail as producer and industrial manager, complete with pilot plants, quotas, and ruthless elimination or control of possible competitors. The Russian state did nothing of the sort. In fact, with the exception of previously mentioned state-owned railroads, almost all of Russian industry remained in private hands. Almost all increase in industrial output came from private enterprise producing for profit within a relatively free market system. And when on occasion the state, as banker of last resort, came to hold an industrial enterprise, like the Putilov Works in the 1880s, or the Kerch Metallurgical Company in the first decade of the twentieth century, it did so reluctantly and returned such plants to private owners as quickly as possible.
One may argue of course that demand is almost always crucial in economic development: where it leads supply will follow. Accordingly, whether Russian demand came mainly from large state purchases, or from some state demand combined with propaganda and public relations adding up to an investment boom, the state would remain crucial. Different societies and their businessmen will invariably respond to increased demand and opportunities for large gain, since alleged differences in social attitudes influencing business activity are largely illusory or inconsequential. Yet even if one accepts this argument, it is clear that the state only bought goods; it did not produce them. At most, the state embarked upon an important program of public works in an attempt to create adequate effective demand, a demand that could be substituted for the weak private market.
In reality, this alleged substitution by the state has also been exaggerated, at least among Western scholars. As a recent study of the period shows, "the specific criticism which can be brought against the Russian government is that only a minute part of its budget expenditures went directly for the purposes of developing the industrial sector." Thus direct railroad construction and subsidizing of private railroad construction, by far the government's most important economically productive activity, totaled little more than one billion rubles between 1880 and 1900, the period of greatest construction. This sum did not exceed government custom revenue from imports of tea, coffee, alcoholic beverages, salt, and herring in these years. Or, to put it another way, the state spent less than 5 percent of its budget during this period on railroad construction. Yet this was by far the largest item for industrialization purposes. Direct subsidies to industrialists were not even a close second.
Nonetheless, I would argue that government did have a key role in the crucial 1890s. That role was, however, very largely one of public relations, propaganda, and radiation of enthusiasm. If "historians tend often to disregard the existing features of the reality of government policy and to pass judgment on the basis of general pronouncements," their failure is understandable. The public relations campaign was well organized and resourceful. And it had real significance for development, as we shall see later. Yet even so, the Witte system emerges as a wager, though perhaps a safe one, on capitalists and private entrepreneurs. Such a strategy would seem to have much more in common with a market economy than with the command economy of Stalin, or the planned economies of parts of the underdeveloped world, where the state is an important or predominant producer.
The wager on private capital was of course anything but safe. The nearly automatic supply of creative entrepreneurship to increased opportunity in backward countries is all too rare. Many observers have noted, for example, that the price system often does not seem to work in such countries, in part because large groups of the population refuse to alter methods or outlook in the face of changing market conditions. Certainly Finance Minister Witte believed Russia lacked local businessmen who had the incentive and the know-how, not to mention the capital, necessary for accelerated development. He believed there was nothing automatic about the supply of entrepreneurship or knowledge, but that it could only grow gradually hand-in-hand with the growth of industry. And since industry itself was dependent upon entrepreneurship, industrial know-how, and capital, which were all insufficient, Russia was apparently caught in the vicious cycle of backwardness and slow change. Yet it was precisely in the context of this analysis that the entire Witte system bet on a massive response from private producers.
Or more precisely, it bet on private foreign entrepreneurship and its financial resources. Witte himself summed up the matter in 1899 in a secret memorandum for Tsar Nicholas II. "The inflow of foreign capital is, in the considered opinion of the Minister of Finance [i.e., Witte], the only way by which our industry will be able to supply our country quickly with abundant and cheap products. Each new wave of capital, rolling in from abroad, knocks down the excessively high level of profits to which our monopolistic businessmen are accustomed and forces them to seek equal profits through technical improvements which lead to price reductions." This suggests that the state believed it could content itself with creating some real demand and great investment enthusiasm because, although the Russian market was very imperfect and its entrepreneurship inadequate, the international market system of capitalistic Europe and its businessmen was highly responsive to new opportunities. Not only would foreign capitalists enter Russia for high profits, but they would continue to do so even as profits fell through increased competition. Thus the sharp rise in demand would not result only in windfall profits for local monopolists. Rather it would elicit such a response and increase in productive facilities that eventual market equilibrium would give both lower prices and lower rates of profit. Therefore Russia's great asset, which would allow it to escape the fatal dilemma of underdevelopment, was a vast external pool of entrepreneurship, knowledge, and capital waiting to be tapped.
Here indeed Russian economic policy was striking out in a new direction. But it seems that the ensuing developmental experience had more in common with those of contemporary Puerto Rico or the Ivory Coast than with those of Mao's China or even Nehru's India. The wager on massive response by foreign capitalists to profit opportunities which government helps create is the common strand in these policies. The successes and failures of this truly pioneering experiment in Russia are the subject of our investigation.
2
At this point it is necessary to pause and consider some of the general theoretical questions related to such a developmental plan. First, there is the question of definitions. In the quote cited above, Witte spoke of "foreign capital," which might include all foreign investment and not just foreign entrepreneurial investment. At the same time it seems clear that he is referring primarily to investment in private corporations and excluding foreign loans to the Russian government. Tsarist and Soviet studies conventionally make the same distinction: analysis of "foreign capital" in Russia focuses on foreign investment in joint-stock corporations; "foreign loans" to the Russian government and its agencies are discussed separately. The term "foreign capital" is approximately equivalent to foreign corporate investment, which will be used often in this study as a less ambiguous rubric.
There is second consideration. Foreign corporate investment does not necessarily mean foreign decision-making power, power normally prerequisite for effective foreign entrepreneurship. Thus the meaningful distinction in current discussion between direct investment and portfolio investment in corporations operating in foreign countries. The former exercises foreign control based on concentrated foreign ownership; the latter often goes with foreign ownership that is small, or fragmented, or passive, and this ownership pattern may be quite compatible with local management and decision making. In the real world the line between active foreign direction and passive portfolio participation is often unclear, but the conceptual distinction is clear and important. For our purposes foreign entrepreneurship and direct foreign investment are roughly analagous. Both presuppose foreign decision-making capability.
Are there sound reasons supporting an industrialization policy which encourages, or even relies upon, foreign entrepreneurship and direct foreign investment? Or is it more likely that foreign entrepreneurs exert a negative influence, promoting unwittingly (or intentionally) the same backwardness they are intended to cure? If both positive and negative contributions are possible, how may the positive be maximized and the negative minimized? To answer these questions fully would require an elaborate analysis of foreign investment, economic development, and even cultural change far surpassing our empirical investigation and historical inclination. Nevertheless an attempt to construct an explicit conceptual framework should provide tools to attack our problem, and it may eventually produce conclusions of interest to many students of economic development and foreign investment, as well as to specialists in European economic history.
It is often claimed that direct foreign investment contributes to development by employing idle resources, such as unexploited mineral deposits or underemployed labor, which usually abound in poor countries. By putting idle resources to work foreign investment adds to both output and income in the host country. The most common explanation of this possibility is the lack of adequate capital for the development of existing resources. First, poor countries have a limited stock of capital, and this means that even a high rate of savings provides only modest sums for investment. Second, the rate of savings is generally quite low (Rostow's 5 percent), and therefore investable funds barely cover replacement of existing equipment. Capital available for new projects (net capital formation) is heartbreakingly inadequate. Thus an inflow of foreign investment can supplement insufficient domestic savings and permit increased investment leading to more rapid economic progress.
It seems likely, however, that direct investment responds to more than a shortage of local capital. Albert Hirschman has argued that in poor but developing countries there may be less a lack of savings than a lack of investment ability, which he defines as the ability to direct existing or potentially existing savings into productive investment. The shortage of investing ability is often so acute that total savings actually exceeds total investing capacity and results in frustrated savings. A variant of this argument is found in recent historical studies of early industrialization in continental Europe. These studies stress the importance of financial intermediaries in the far from automatic linking of savings from the traditional agricultural and commercial sectors with farsighted entrepreneurs in the industrial sector. Thus industrial development may be limited in part by an entrepreneurial failure, the failure to join savings and investment opportunity. Foreign businessmen may provide this successful entrepreneurship—precisely the missing agent in backward areas. Then their example and the expansion of the modern sector itself may create a large and previously missing supply of local entrepreneurship.
(Continues...)
Excerpted from Pioneers for Profit by John P. McKay. Copyright © 1970 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Table of Contents
List of MapsAbbreviations
Preface
Part I. Dimensions of Entrepreneurship
1. Introduction
2. Entrepreneurs: Sources and Types
3. The Basic Strategy
4. Advanced Technology in Steel and Coal
5. Patterns of Management
6. The Mobilization of Capital
7. The Problem of Labor
8. Relations with State and Society
Part II. Case Studies and Conclusions
9. A Pioneering Innovator: The John Cockerill Company in Southern Russia, 1885-1905
10. Boom-Time Speculation: The Rykovskii Coal Company
11. The Huta-Bankova Steel Company and the Bonnardel Group
12. Toward Passive Investment: The Banque de L'union Parisienne and the Bogatyr Rubber Company, 1910-1914
13. Conclusions
Appendix
Bibliography
Index