The Economic History of Central, East and South-East Europe: 1800 to the Present 9781138921979, 9781138921986, 9781315686097

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THE ECONOMIC HISTORY OF CENTRAL, EAST AND SOUTH-EAST EUROPE

The collapse of communism in Central, East and South-East Europe (CESEE) led to great hopes for the region and for Europe. A quarter of a century on, the picture is mixed: in many CESEE countries, the transformation process is incomplete, and the economic catch-up has taken longer than anticipated. The current situation has highlighted the need for a better understanding of the long-term political and economic implications of the Central, East and South-East European historical experience. This thematically organised text offers a clear and comprehensive guide to the economic history of CESEE from 1800 to the present day. Bringing together authors from both East and West, the book also draws on the cutting-edge research of a new generation of scholars from the CESEE region. Presenting a thoroughly modern overview of the history of the region, the text will be invaluable to students of economic history and CESEE area studies. Matthias Morys is Senior Lecturer in the Department of Economics at the University of York (UK). He earned a Ph.D. (2006) from the London School of Economics and worked as a postdoctoral research fellow at the University of Oxford prior to coming to York. His research interests include monetary and financial history of the 19th and 20th centuries, globalisation in historical perspective, and the economic history of Central, East and South-East Europe.

THE ECONOMIC HISTORY OF CENTRAL, EAST AND SOUTH-EAST EUROPE 1800 to the Present

Edited by Matthias Morys

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 selection and editorial matter, Matthias Morys; individual chapters, the contributors The right of Matthias Morys to be identified as the author of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN: 978-1-138-92197-9 (hbk) ISBN: 978-1-138-92198-6 (pbk) ISBN: 978-1-315-68609-7 (ebk) Typeset in Bembo by Apex CoVantage, LLC

To my parents Peter and Ingrid Morys who opened my eyes for Eastern Europe

CONTENTS

List of figuresx List of tablesxiv List of contributors xviii Prefacexxi   1 Editor’s introduction Matthias Morys

1

  2 Living standards in the very long run: the place of Central, Eastern and South-Eastern Europe in the divergence debate Stephen Broadberry and Mikołaj Malinowski

13

The long 19th century: 1800–1914

37

  3 Economic growth and sectoral developments, 1800–1914 Michael Kopsidis and Max-Stephan Schulze

39

  4 Economic policy during the long 19th century Michael Pammer and Ali Coşkun Tunçer

69

  5 Economic integration with Western Europe and the global economy, 1800–1914 Steven Nafziger and Matthias Morys

97

viii Contents

  6 Population and living standards, 1800–1914 Tomáš Cvrček

128

The interwar period: 1918–1939

159

  7 Economic growth and structural change in Central, East and South-East Europe, 1918–1939 Matthias Morys

161

  8 Economic policy, 1918–1939 Nathan Marcus, Stefan Nikolić and Tobias Straumann

188

  9 Between disintegration and convergence, 1918–1939: flows of capital, goods, and labor Jari Eloranta, Stefan Nikolić and Flóra Macher

216

10 Population and living standards: Central, East and South-East Europe, 1918–1939 Matthias Morys and Martin Ivanov

243

The state socialist period: 1945–1989/1991

275

11 Economic growth and structural developments, 1945–1989 Tamás Vonyó and Andrei Markevich

277

12 Economic policy under state socialism, 1945–1989 Andrei Markevich and Tamás Vonyó

303

13 Economic integration within COMECON and with the Western economies Sándor Richter 14 Population, living standards and well-being, 1949–1989 Bas van Leeuwen and Peter Foldvari The transition period: since 1989 15 Economic growth and sectoral developments during the transition period, 1990–2008 Ilya Voskoboynikov

324 352

381 383

Contents  ix

16 Economic policy: path dependency and path creation, 1989–2015413 László Csaba 17 Political and economic integration with the Western economies since 1989 Kiril Kossev and William Tompson 18 Population, living standards and well-being since 1989 Peter Foldvari and Bas van Leeuwen

434 468

Index496

FIGURES

2.1

2.2 2.3

2.4

2.5

3.1 3.2 3.3 4.1 6.1 6.2 6.3 6.4 6.5

Silver wages of unskilled construction workers in London, Amsterdam and a range of Central, East and South-East European cities, 1500–1800 16 Grain wages, i.e. purchasing power of an unskilled daily wage in Southern England, Poland, and Northern Italy, 1500–1800 17 Average real wages of unskilled workers in London and a range of Central and East European cities expressed in terms of subsistence ratio, 1500–1800 18 Average real wages of unskilled workers in London and a range of Central, East and South-East European cities expressed in terms of respectability ratios, 1500–1800 20 Real wages of unskilled workers in London based on different baskets of goods divided by real wages of unskilled workers in a range of Polish cities based on the same baskets, 1600–180021 GDP per capita in East and South-East Europe, 1840–1913 45 σ-convergence across Eastern Europe, 1870–1913 47 β-convergence across Eastern Europe, 1870–1913 48 Monetary standards in Central, East and South-East Europe, 1800–191379 Austria-Hungary and the Hajnal line 134 Crude birth rate in several South-East European countries, 1830–1913136 Crude birth rate in several Central and East European countries, 1830–1913137 Infant mortality in parts of the Habsburg Empire, 1820–1913 141 Infant mortality in the Balkans and Russia, 1820–1913 141

Figures  xi

6.6 6.7 7.1 9.1 9.2 9.3 9.4 9.5 10.1 10.2 11.1 11.2 11.3 11.4 11.5 12.1 14.1 1 4.2A 14.2B 14.2C 14.3 14.4A 14.4B 14.5 14.6 14.7 1 4.8 14.9 1 4.10 14.11 14.12

Real day wages of unskilled workers in various European cities, 1800–1913143 Welfare ratios among agricultural labourers in Central Europe and England, 1825–1910 145 Beta-convergence of European economies, 1913–1938176 Borrowing through bond issues by Central and South-East Europe, 1919–1932, according to lending country 222 Borrowing by Central and South-East Europe, 1919–1937, according to borrowing country 223 Total trade of CESEE countries, 1920–1938 226 Trade openness of eight East European countries, 1920–1938 227 Trade integration: total trade by trading partner, 1924–1938 229 Vital rates of Bulgaria, 1890–1940 249 Real wages in Bulgarian cities, 1898–1943 269 Economic growth in Europe, 1950–1989 282 Economic growth and convergence in Europe, 1950–1989 283 The share of agriculture in the total labour force 285 Average rates of investment in Europe, 1950–1989 290 The Soviet defence share: alternative estimates, 1950–1989 293 A command-economy hierarchy 307 Population in European regions as percentage of total European population, 1938–1990 353 Crude birth rate in European regions, 1950–1990 355 Crude death rate in European regions, 1950–1990 356 Crude birth rate minus crude death rate, 1950–1990 356 Life expectancy at birth in European state-socialist and market economies, 1950–1989 361 Number of hospital beds in European state-socialist economies, 1960–1989363 Number of hospital beds in European market economies, 1960–1989363 Computed tomographic (CT) scanners per million residents in Finland, Hungary and Luxembourg, 1980–1991 364 Average calorie intake per day in selected European countries, 1960–1990365 Average protein consumption per day in selected European countries, 1960–1990 365 Average years of education in Europe, 1938–1990 366 Income-based human capital stock in West Germany, Austria, Spain and four European state-socialist countries, 1938–1989 368 GDP per capita in European regions, 1950–1990 369 Income inequality (Gini coefficient) in European market economies and state-socialist countries, 1950–1989 372 Human Development Index by European region, 1950–1989 374

xii Figures

1 4.13 Human Development Index in Europe in 1950 375 14.14 Mortality due to hypertension-related causes in European regions, 1952–1989 377 14.15 Alcohol consumption per capita in selected European countries, 1960–1990 377 15.1 GDP per capita in Central, East and South-East Europe, 1990–2010389 15.2 Annual GDP growth in the CESEE economies in 1990–2011  392 15.3 Sectoral shares in total employment and value added in CESEE, 1990, 1994, 1999 and 2008 397 15.4 Inter-sectoral productivity variation and aggregate labour productivity levels in 1995 400 15.5 Labour productivity growth decomposition into within- and between-sector contributions in CEE10 and Russia in 2007 401 15.6 Labour productivity growth decomposition CESEE, 1990–2008 404 15.7 Sectoral structure of yearly average labour productivity growth of market economies in 1995–2007 405 17.1 Trade as percentage of GDP, 1990–2014 442 17.2 Economic complexity index, selected countries, 1995–2014 445 17.3 Direct investment into the East and South-East European economies, by region, 1992–2014 448 17.4 Portfolio equity, net inflows; by region, 1993–2014 448 17.5 Net migration as a percentage of total population of East European economies, by country, 1987–2012 454 17.6 Personal remittances as a percentage of GDP, 1996–2014 455 18.1 Population in European regions as percentage of total European population, 1980–2010 469 18.2a Crude birth rate in European regions, 1980–2012 470 18.2b Crude death rate in European regions, 1980–2012 472 18.2c Crude birth rate minus crude death rate, 1980–2012 472 18.3 Total fertility rate trends in European regions, 1980–2012 473 18.4 Life expectancy at birth in European regions, 1980–2012 475 18.5 Hospital beds in selected European countries, 1980–2011 476 18.6 Computed tomographic (CT) scanners per million residents in selected European countries, 1980–2014 477 18.7 Daily average calorie intake in selected European countries, 1980–2010477 18.8 Average protein consumption per day in selected European countries, 1980–2010 478 18.9 Average years of education in European regions, 1980–2010478 18.10 Gross tertiary enrolments in selected European countries, 1970–2015479

Figures  xiii

18.11 Income-based human capital per capita estimates for selected European countries, 1980–2010 481 18.12 GDP per capita for selected European countries, 1980–2012 482 18.13 Public debt to GDP ratio in selected European countries, 1980–2010484 18.14 Annual inflation in selected CESEE countries, 1980–2012  485 18.15 Income inequality (Gini coefficient) in European market economies and state-socialist countries, 1970–2010 487 18.16 Human Development Index by European region, 1970–2012 490 18.17 Happiness in selected CESEE countries, 1989, 2000 and 2010 490 18.18 Hypertension-related deaths in European regions, 1980–2010 491 18.19 Alcohol consumption per capita in selected European countries, 1980–2014 491

TABLES

1.1 Countries in Central, East and South-East Europe since 18004 2.1 GDP per capita around the globe, 1400–1820, in 1990 USD PPP 23 3.1 GDP levels in East and South-East Europe, 1840–1913, millions, 1990 int’l dollar 42 3.2 Population in East and South-East Europe, 1840–1913, millions 43 3.3 GDP per capita in East and South-East Europe, 1840–1913, 1990 int’l dollar 44 3.4 Growth of GDP per capita in East and South-East Europe, 1840–1913, percent 46 3.5 Sector growth and relative contributions to GDP growth, 1840–191348 3.6 Sector composition of real GDP, 1840–1913, percent 50 3.7 Sectoral shares in the labour force, 1870–1910, percent 50 4.1 Direct taxes as a share of total tax revenue, 1860–1913, percent 76 4.2 Military spending as a share of total government expenditure, 1860–1913, percent 77 4.3 Trade volume as a share of GDP, 1860–1913, percent 82 4.4 Trade volume (% change), 1860–1913 83 5.1 The spread of transportation and communications in Central, East and South-East Europe, 1840–1913 101 5.2 Trade openness (exports plus imports as share of GDP) in European countries, 1870–1913 104 5.3 Trade shares of Central, East and South-East European countries, 1872–1913, percent 105 5.4 Tariffs in Central, East and South-East Europe, 1870–1913, percent 108 5.5 Foreign investment into Central, East and South-East Europe, 1880–1913110

Tables  xv

6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4

7.5 7.6 7.7 8.1 8.2 8.3

8.4 8.5 8.6

8.7 8.8 9.1

Total population in Central, East and South-East Europe, 1810–1910, thousands 130 European population developments, 1820–1913 131 Singulate mean age at marriage (SMAM) of women in various Central and East European provinces around 1900 132 Living standards in Central and East Europe, 1870–1910 147 Average height of male army recruits in Austria-Hungary and Russia, 1861–1889 148 Percentage of children aged 5 to 14 years enrolled in primary schools, 1820–1910 150 GDP: levels and growth rates in six CESEE countries, 1913–1938167 Population: levels and growth rates in six CESEE countries, 1913–1938168 GDP per capita: levels and growth rates in six CESEE countries, 1913–1938 169 GDP per capita (levels and growth rates) and GDP (growth rates), 1913–1938, Central, East and South-East Europe versus Western, Northern and Southern Europe 175 Sectoral shares in six CESEE countries, ca. 1900–1945 (in percent) 179 Sector growth and relative contributions to GDP growth in six CESEE countries, ca. 1913–1938 180 Sectoral shares in the labour force in six CESEE countries, ca. 1890–1950 (in percent) 181 Post-war currency stabilisations (year) and their value in percent of 1914 in Central, East and South-East Europe 192 Annual foreign debt service requirements in 1924 and 1930 193 Balance of payments of Central, East and South-East European countries, 1922–1930: net inward (-) or outward (+) capital movement, measured by estimated deficits or surpluses on account of goods, services and gold in millions of USD 194 Change of reported imports from 1926 to 1929, in percent 195 Trade deficit in percent of exports, 1919–1929 197 Depression and recovery according to GDP per capita developments, CESEE and rest of Europe during the interwar period199 Dates of policy measures affecting exchange rate regimes, CESEE during the 1930s 200 Exports plus imports as share of GDP (openness ratio), CESEE 1929–1937, percent 202 Borrowing through bond issues by Central and South-East Europe in 1919–1932, per sub-region, according to lending country, percent 220

xvi Tables

9.2

9.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 11.1 11.2 11.3 13.1 13.2 13.3 13.4 13.5 13.6a 13.6b 13.6c

Number of East Europeans living outside their country of birth (or nationality), their distribution across European regions, and their share in neighbouring countries, ca. 1930 233 Five-year average continental emigration rates, 1920–1939, per one thousand inhabitants 234 Population in Europe in 1913, 1920 and 1939 and onset of fertility decline 246 Living standard indicators for Central, East and South-East Europe, interwar period 258 Living standard indicators for the United Kingdom, Germany, Italy and Sweden, interwar period 259 Life expectancy at birth in Central, East and South-East Europe, 1879–1941 261 Literacy rates in Central, East and South-East Europe, 1807– 1965, percent 262 Percentage of children aged 5 to 14 years enrolled in primary schools, 1850–1950 263 Urbanisation in Russia/the Soviet Union and Bulgaria, 1870–1946, percent 266 Sectoral shares in Russia/the Soviet Union and Bulgaria, 1900–1945, percent 266 Literacy rates in Russia/the Soviet Union and Bulgaria, 1897–1946, percent 267 Daily calorie intake per adult person in Bulgaria, 1848–1963 268 GDP per capita in Eastern Europe, 1938–1989, 1990 int’l Geary-Khamis dollars 281 The share of agriculture in the total labour force, 1950–1989, percent 284 Estimated rates of investment to GDP in Eastern Europe, 1950–1989, percent 288 COMECON countries’ imports by region, 1960–1990, percent 327 COMECON countries’ exports by region, 1960–1990, percent 328 Hungary’s trade with the Soviet Union: the commodity pattern, 1971–1985, percent 333 Hungary’s trade with the Soviet Union: commodity patterns in trade in manufacturing products, 1989, percent 333 Indicators of selected COMECON countries’ competitiveness in international comparison, 1970–1987 336 Czechoslovakia: share of selected countries/regions in total trade, 1985–1992 337 Hungary: share of selected countries/regions in total trade, 1985–1992337 Poland: share of selected countries/regions in total trade, 1985–1992338

Tables  xvii

13.7

Commodity patterns in mutual trade of selected CESEE countries based on export statistics, 1989, 1995 and 1998 338 13.8 Commodity patterns in exports of selected CESEE countries to EU (15), 1989, 1995 and 1998 340 13.9 Structure of Yugoslavia’s foreign trade by main trading partners, 1961–1990 342 13.10  External debt of the COMECON countries and Yugoslavia, 1971–1991, million USD 346 13.11 Per capita gross debt of selected countries, 1989 347 14.1 Total fertility rate in different European regions, 1955–1990 (Births per women of childbearing age) 357 14.2 European Migration, main destinations around 1960 359 14.3 European Migration, main destinations in 1987/1988 360 14.4 Life expectancy at birth in European regions, 1955–1990 362 14.5 Average years of education in different European regions, 1938–1990366 14.6 GDP per capita growth in different European regions, 1951–1990369 14.7 Ratio between average real wage and GDP in selected European countries, 1950–1990 370 14.8 Human adult height by year of birth in different European regions, 1938–1980 371 14.9 Human Development Index in different European regions, 1950–1990373 14.10 Share of respondents with category “rather happy” or above in different European regions in the 1980s 376 15.1 Population and GDP per capita in Central and East European countries in 1990 and 2008 387 15.2 The year of the trough and minimum GDP level in CESEE economies in the 1990s 391 15.3 Summary of the shock therapy vs. gradualism debate 393 15.4 Structural change in CEE and Russia in comparison with 12 “core” Western European countries, 1995 versus 2008 398 17.1 Economic complexity index ranking, transition countries, 1995, 2000, 2006 and 2014 446 17.2 Current exchange rate arrangements in the transition economies450 17.3 International institutional membership by East European countries458 18.1 European Migration, main destinations, ca. 2008 474 18.2 Average years of education in European regions, 1980–2010 479 18.3 Share of respondents with category “rather happy” or above in selected European countries, 1991–2011 489

CONTRIBUTORS

Stephen Broadberry is Professor of Economic History, Department of Economics, University of Oxford, UK. László Csaba is Distinguished Professor of International Political Economy in the International Relations Department of the Central European University, Budapest/Vienna, and a Member of the Hungarian Academy of Sciences. Tomáš Cvrček is Associate Professor in Economics at the School of Slavonic and East European Studies, University College London, UK. Jari Eloranta is Professor of Economic History at the Faculty of Social Sciences at

the University of Helsinki, Finland. Peter Foldvari is Lecturer in Economics at the Amsterdam School of Economics

at the University of Amsterdam, the Netherlands. Martin Ivanov is Professor of Economic History at the Faculty of Philosophy,

University of Sofia, Bulgaria. Michael Kopsidis  is Professor of Economic History and Deputy Head of the Department of Agricultural Markets, Marketing and World Agricultural Trade at the Leibniz Institute of Agricultural Development in Transition Economies (IAMO) in Halle (Saale), Germany. Kiril Kossev is an economist at the Directorate for Financial and Enterprise Affairs, OECD, France.

Contributors  xix

Bas van Leeuwen is Senior Researcher at the International Institute of Social His-

tory, Amsterdam, the Netherlands. Flóra Macher is an independent scholar and professional investment fund manager

based in Budapest, Hungary. Mikołaj Malinowski is Assistant Professor in Economic History at the Department

of Economics, Econometrics, and Finance at the University of Groningen in the Netherlands. Nathan Marcus is Senior Lecturer in Modern European History at the Depart-

ment of General History, Ben Gurion University of the Negev, Beer Sheva, Israel. Andrei Markevich is Professor of Economic History at the Department of Eco-

nomics at the New Economic School, Moscow, Russia. Matthias Morys  is Senior Lecturer in Economic History at the Department of Economics and Related Studies, University of York, UK. Steven Nafziger is Professor of Economics and Faculty Affiliate in History, Wil-

liams College, USA. Stefan Nikolić is Postdoctoral Research Fellow at the Dondena Centre for Research

on Social Dynamics and Public Policy at Bocconi University, Milan, Italy. Michael Pammer is Associate Professor in Economic and Social History at the

Department of Social and Economic History, Johannes Kepler University, Linz, Austria. Sándor Richter is Senior Research Associate at the Vienna Institute for Interna-

tional Economic Studies. Max-Stephan Schulze is Professor of Economic History at the London School of

Economics, UK. Tobias Straumann is Senior Lecturer in Economic History in the History Department of the Faculty of Arts and Social Sciences, University of Zurich, Switzerland. William Tompson is Head of the Eurasia Division in the OECD Global Relations

Secretariat, Paris, France.

xx Contributors

Ali Coşkun Tunçer is Associate Professor of Economic History at the Department

of History, University College London, UK. Tamás Vonyó is Associate Professor in Economic History at the Department of Social and Political Sciences at Bocconi University, Milan, Italy. Ilya  Voskoboynikov is Senior Research Fellow at the Laboratory for Research in Inflation and Growth and Assistant Professor at the Department of Applied Economics, National Research University Higher School of Economics, Moscow, Russia.

PREFACE

I am grateful to a large number of people for their help in writing and editing this book. First and foremost, I would like to thank all 24 contributing authors for their time and effort since launching the book project in 2015. One of the obstacles we faced in writing a regionally balanced economic history of Central, East and South-East Europe was that each of the three sub-regions had developed their own historiography largely independently from each other. We needed the different research traditions to communicate with each other, which would not have been possible without the great intellectual curiosity of the participants and their active involvement with this project. This often involved forming co-authorships by bringing together experts on the different sub-regions. An important step in this process was a contributors’ conference held in Regensburg, Germany, on 19th and 20th May 2016, where authors presented a first version of their book chapters. I would like to thank Prof. Dr. Ulf Brunnbauer, director of the Leibniz Institute for East and South-East European Studies, for hosting the event; and the Deutsche Forschungsgemeinschaft and the Economic History Society for financial support. Stephan Barisitz, Carsten Burhop, Konrad Clewing, Richard Frensch, Mark Harrison, Jüren Jerger, Uwe Müller, Stefano Petrungaro, Sabine Rutar, Ekaterina Selezneva, Mark Spörer and Peer de Vies provided excellent comments on this occasion. I am grateful to my wife Marianna for her support, patience and encouragement for a research project that took much longer than anticipated. Marianna was inspirational in one important aspect of this edited volume. She reinforced my determination to incorporate her native Greece into the book chapters as far as possible. As I will explain in chapter 1 in more detail, Greece is sometimes included but more often excluded in historical work covering Central, East and South-East Europe. Excluding the country often was a consequence of its unique position in

xxii Preface

South-East Europe during the Cold War, but this is not something which should bind us any longer today. Finally, I would like to thank my parents Prof. Dr. Peter and Ingrid Morys for the deep interest in Eastern Europe which they fostered in me early on. When I grew up in West Berlin (and later in Bavaria), they regularly took my siblings and me to East Berlin and East Germany; trips into an utterly different and often very strange world, it seemed to me back then. Yet my parents always made clear to us that anything to the East of the Brandenburg Gate belonged to Europe as much as the lands to the West of it, and that Eastern Europe awaited exploration once the political circumstances allowed. I dedicate this book to them.

1 EDITOR’S INTRODUCTION Matthias Morys

Introduction The collapse of communism in Central, East and South-East Europe (CESEE) led to great hopes for the region and Europe as a whole in the early 1990s. Freed from the constraints of central planning and transformed into liberal democracies based on the rule of law, the CESEE countries would catch up quickly with their West European counterparts. Three decades on, the initial optimism has given way to a more mixed assessment. While the political transformation appears irreversible in most parts of CESEE, a relapse to more authoritarian forms of government has occurred in others. In many CESEE countries, the transformation process remains incomplete despite a superficially successful emulation of the West European prototype. This is evidenced, among others, by the encroachment on the freedom of the press and on the independence of the judiciary in some countries in the region. Similarly, the economic catch-up process appears to take far longer than originally anticipated. Ukraine, the largest CESEE country (bar Russia), remains stuck at about 10% of British, French and German income levels.1 Even Slovenia and the Czech Republic, arguably the two most successful transition economies, have achieved only half of the West European average income after three decades of post-communist growth. Of greater concern still is a growing sense that some of the challenges facing the eastern half of the European continent are not a communist legacy but might well be more deeply rooted. During the course of the European debt crisis (2009– 2015), Greece acquired notoriety for characteristics commonly associated with other CESEE countries, such as tax evasion, lack of transparency, corruption and nepotism, yet it was the only country in the region that did not undergo the state socialist experience but remained aligned to the West during the Cold War period.

2  Matthias Morys

The current situation has highlighted the need for a better understanding of the long-term political and economic implications of the Central, East and South-East European historical experience. The book aims to be a clear and comprehensive guide to the economic history of CESEE from about 1800 to the present day, and it understands itself as the first quantitative economic history of Eastern Europe. It comes at a crucial juncture of historical research on CESEE. For the past 10 to 15 years, we have been witnessing a first generation of promising young scholars from the CESEE region who have obtained their PhDs at leading Western academic institutions and are keen on using new methodological approaches to understand better the historical experiences of their home countries. In tandem with this process, interest in the region has increased considerably among economic historians in Western Europe and North America and moved beyond Russia and the Soviet Union (to which Western academic interest was largely confined during the Cold War period) to include all countries in the region. Arguably, for the first time since the fall of Iron Curtain in the late 1940s, we are in a position to write a balanced and up-to-date economic history of CESEE drawing on a good mixture of junior and senior scholars from West and East.

Structure of the text and geographic coverage The structure of this edited volume is thematic and chronological. It revolves around four themes for four distinct historical periods. The four themes are: 1 2 3 4

Economic growth and sectoral developments Economic policy Economic integration with Western Europe (and the rest of the world) Population and living standards

The four periods are: 1 2 3 4

The “long” 19th century (1800–1914) The interwar period (1918–1939) The state socialist period (1945–1989/91) The transition period (1989/91 to the present)

The resulting 16 chapters (Chapters 3–18) are preceded by this introduction and a chapter offering an overview of economic development in the region before 1800 (Chapter 2). The thematic approach followed in this book is more modern than a conventional country-by-country approach. It helps to highlight common patterns of economic development, which is one of the main objectives of this edited volume.

Editor’s introduction  3

The book covers Central, East and South-East Europe. For “Europe” we follow a geographic definition of Europe stretching to the Ural Mountains and the Bosporus in the east. If followed to the letter, this would mean (for the current period for instance) to include the European part of Russia, the Baltic countries, Belarus, Moldova and Ukraine, but to exclude all other successor states of the Soviet Union.2 As we are interested in the development of national economies, differentiating between the European and the Asian parts of Russia (and the Soviet Union) would be a pointless exercise. Consequently, this book refers to all of Russia (and to all of the Soviet Union) unless otherwise indicated in the text. Reflecting a long and well-established scholarly tradition, we will distinguish between Central Europe, East Europe and South-East Europe. Central Europe refers to the Czech Republic, Hungary, Poland and Slovakia. East Europe relates to the European successor states of the Soviet Union (Belarus, Estonia, Latvia, Lithuania, Moldova, Russia, and Ukraine). South-East Europe encompasses Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Kosovo, Montenegro, North Macedonia, Romania, Serbia, and Slovenia. The number of independent countries on this vast land mass has increased from three (Austria, Russia, and the Ottoman Empire) to 22 over the past two centuries, and the sharp distinction between the three sub-regions has become blurred in the process. We will occasionally refer to “Eastern Europe” to avoid repetition of the acronym CESEE; in this case (“Eastern” as an adjective) we mean CESEE as a whole. Table 1.1 shows the changing pattern of countries in Central, East and SouthEast Europe for the four periods we study. By the early 20th century, the number of countries had risen from three to seven after a century dominated by national independence movements in the Balkans. Greece (1821/1832), Serbia (1817/1878), Romania (1859/1878) and eventually Bulgaria (1878/1908) obtained some form of political autonomy and later full-fledged independence from the Ottoman Empire. Hence Chapters 3–6 on the 1800–1914 period will typically refer to seven countries.3 The interwar period saw the number of countries rise to 12 as a result of the dismemberment of the Dual Monarchy and the independence of the Baltic countries from Russia. The number of countries fell to nine in the state socialist period (annexation of the Baltic countries in 1940) and increased again after 1989/91, when the dismemberment of the Soviet Union and of Yugoslavia more than doubled the number of independent countries within a decade. There are clearly borderline cases. Should Prussia/Germany be included in the long 19th century? As this book aims to compare national economies, we decided against this. While the Eastern provinces of Prussia/Germany (i.e., the lands to the East of the Elbe River, or ostelbisch in German) shared many of the economic, social and demographic features of the countries covered in Chapters  3–6, including them would have required going to sub-national data. In the interwar period, the position of Austria is ambiguous. Substantially reduced

4  Matthias Morys TABLE 1.1  Countries in Central, East and South-East Europe since 1800

East Europe

Long 19th century Interwar period (1800–1914) (1918–1939)

State socialism Transition period (1945–1989/91) (since 1989/91)

Russia

Soviet Union

Soviet Union

Russia

Estonia

Estonia

Latvia

Latvia

Lithuania

Lithuania Belarus Moldova Ukraine

sum

1

4

Central Europe Austria-Hungary Hungary

1

7

Hungary

Hungary

Czechoslovakia Czechoslovakia

Czech Republic Slovakia

Poland

Poland

Poland

3

3

4

sum

1

South-East Europe

Ottoman Empire Albania

Albania

Albania

Bulgaria

Bulgaria

Bulgaria

Bulgaria

Greece

Greece

Greece

Greece

Romania

Romania

Romania

Romania

Serbia

Yugoslavia

Yugoslavia

Bosnia and Hercegovina Croatia Kosovo Montenegro North Macedonia Serbia Slovenia

sum

5

5

5

11

Sum of all countries

7

12

9

22

Editor’s introduction  5

in size compared to Imperial Austria, the centre of gravity of the First Austrian Republic moved west, and most chapters exclude it (with the exception of Chapter 8 on economic policy). Finally, we decided to include Greece in the long 19th century and the interwar period but to exclude it for the state socialist and transition periods. In terms of geography and historiographical tradition, Greece is a South-East European country (Mazower 2000). Yet its unique position during the Cold War period resulted in some ambiguity, and scholars came to refer to Greece as a “Southern European country” alongside Portugal, Spain and Italy. In this unclear situation, economic historians working on periods before World War II sometimes included Greece (Lampe & Jackson 1982) and sometimes excluded it (Kaser  & Radice 1985). As the main objective of this book is to identify long-term patterns of economic development, we reinserted Greece into its historiographical context of Balkan/South-East European studies. Chapters 3–10 vindicate this approach, with most authors stressing similar patterns to neighbouring countries.

Central Europe, East Europe and South-East Europe This book is about Eastern Europe as a whole, yet it tries to take the distinction between Central Europe, East Europe and South-East Europe seriously. What exactly is this distinction, and does it matter? Only South-East Europe is a relatively well-defined geographic concept, building on the earlier terminology of “the Balkans”. The Balkans are the SouthEastern part of Europe demarcated by the Danube, Sava, and Kupa Rivers to the north and the west. The Ottoman legacy, the predominance of the Orthodox faith, and high levels of multi-ethnicity created a sense that the Balkan Peninsula was different not only from Western Europe but also from Central Europe and Eastern Europe (Todorova 2009). In this geographic definition, Albania, Bulgaria, Greece and most Yugoslav predecessor and successor states are Balkan countries. South-East Europe is a slightly larger concept that also encompasses Croatia, Slovenia and Romania, three countries that have typically resisted inclusion into “the Balkans” as a result of the negative connotations associated with the terminology. Central Europe and East Europe are more ambiguous concepts than SouthEast Europe, and linguistic usage differs between countries and languages. Arguably, both concepts reflect the legacy of two earlier empires, namely Austria(-Hungary) for Central Europe and Russia for East Europe. In today’s borders, Central Europe encompasses many of the successor states of AustriaHungary, namely the Czech Republic, Hungary and Slovakia. It also includes Poland, of which only a part belonged to the Dual Monarchy. The terms “Central Europe” and “Visegrad countries” are often used interchangeably for the current period.

6  Matthias Morys

East Europe, in turn, encompasses the European successor states of the Soviet Union. This is a widespread (and largely uncontroversial) practice for Russia, Ukraine, Belarus and Moldova but more ambiguous  – and contentious  – for Estonia, Latvia and Lithuania. The latter three countries typically form a category of their own as the “Baltic countries”, and they resist the label “East Europe” in an attempt to create more “linguistic” distance from Russia. While acknowledging these sensitivities, we include the region covered by today’s Baltic countries into East Europe largely because they belonged to Russia/the Soviet Union for most of the period covered in this book, namely the long 19th century and the period of state socialism. The research summarised in this book suggests that the Baltic region was an early developer in CESEE. If this has, or should have, any bearings on how to classify the three countries, only future research can reveal. Is this typology anachronistic? Does it prevent us from conducting unbiased research? It could be argued that four decades of state socialism levelled the difference between the three distinct regions, as all CESEE countries followed the same political and economic framework (with minor variations). This common experience certainly helped pave the way for a much broader geographic concept labelled “Eastern Europe”, which effectively combines Central, East and SouthEast Europe. When I started conceptualising this book project in 2015, my expectation was that “Eastern Europe” was the more relevant concept. Yet the old concepts remained well and alive as the book project progressed and the authors presented their first draft chapters at a contributors’ conference held in Regensburg, Germany, in May 2016. First, it is very difficult for modernday scholars to escape the weight of three distinct historiographical traditions. Each of the three regions has its own research agendas, circle of scholars, publication outlets and funding bodies. A question that had attracted great interest in one region failed to excite in another region, sometimes for no obvious reason. On some level, one of the main tasks as an editor was to make three different historiographical traditions and scholarly communities communicate with each other. Second, the three distinct regions have re-asserted themselves in powerful ways after the fall of communism in 1989/91. Chapters 11–14 show that regional variation within CESEE declined during the state socialist period, even though it never went away completely. Yet Chapters 15–18 demonstrate that this trend has been reversed since the early 1990s. Chapter 17 in particular (on economic integration of the transition countries with Western Europe) makes this argument very forcefully. Kiril Kossev and William Tompson show, based on a large range of indicators, that “Central Europe” has integrated the best with Western Europe, followed at some distance by “South-East Europe”. By contrast, they argue that East European countries such as Belarus, Moldova and Ukraine have largely remained in the political and economic orbit of Russia. Their main argument is based on the modern concept of economic geography. Central Europe has better market access to Western Europe, while East European countries will

Editor’s introduction  7

be drawn towards Russian markets. Incidentally, their research also shows that the Baltic countries form a group of their own, much closer to Central Europe than to East Europe (vindicating on some level the Baltic countries’ sensitivity over terminology mentioned above).

Relationship to earlier literature The book covers new ground in three directions: the inclusion of all CESEE countries (22 countries at present), the length of the period under study (1800– present) and a quantitative (cliometric) approach to economic history. The closest case of a forerunner of this book is The Economic History of Eastern Europe, 1919–1975, published in five volumes between 1985 and 1989 by Clarendon Press and edited by M. C. Kaser and E. A. Radice. The book was a remarkable achievement at the time in that it drew on scholars from West and East. Yet the book covers a much shorter period, excludes the Soviet Union entirely and is outdated. Two more books deserve mention in this context, namely Berend and Ránki’s Economic Development in East-Central Europe in the 19th and 20th Centuries (published in 1974 by Columbia University Press) and Lampe and Jackson’s Balkan Economic History, 1550–1950 (published in 1982 by Indiana University Press). They are focussed on only one of the three regions (Central Europe and South-East Europe, respectively) and are not quantitative in nature, yet they share with this book a comparative approach. The historiography on Russia has always been a separate strand of the literature, but no broad economic history overview has ever been published in the English language. The main reference source for Russia has been overviews in edited volumes where Russia is typically well covered given its size and importance (cf. the nine-volume Cambridge Economic History of Europe, published by CUP in 1989 and edited by P. Mathias and S. Pollard). There is no direct forerunner to this book, but it is important to acknowledge the great inspiration this book has drawn from the Cambridge Economic History of Modern Europe, published in two volumes in 2010 by Cambridge University Press and edited by Stephen Broadberry and Kevin O’Rourke. This book shares the thematic approach of the Cambridge Economic History but aims at advancing the research on Central, East and South-East Europe by specifically looking at this particular European region on its own.

Main themes of this book It would be futile, or even counterproductive, to try to summarise the main findings of an edited volume, when one of the basic ideas of the book is to introduce the reader to a plethora of lively academic debates presented by some of the best scholars in the field. Different readers often read the same book in different ways

8  Matthias Morys

and hence take away different messages. My own summary would probably be as follows. One of the main findings is the compelling evidence that Eastern Europe has lagged consistently behind the Western European economies for 200 years – and arguably even longer, as Broadberry and Malinowski argue in Chapter  2, which puts CESEE in the context of the Great Divergence Debate. The various chapters document notable differences across Eastern Europe and over time, yet on balance Eastern European economies achieved only 30%–50% of Western European income levels. This finding is true despite the fact that the CESEE countries have tried out any possible economic policy framework available to them, from feudalism and (more or less) liberal capitalism in the 19th and early 20th centuries, to four decades of state socialism, to today’s westward-leaning liberal democracies. The top-performing countries and regions, all of which have been located in Central Europe and in the Baltics with surprisingly little change over time, have often exceeded 50% of Western European income levels, but even they have found it difficult to close in with Western Europe. Economic policy frameworks might matter less for economic outcomes than is commonly assumed. In a longer-term perspective, the evidence presented in this book suggests that proximity to Western European markets has been of crucial importance, putting the Central European countries in a better position compared to East and South-East Europe. This overall finding has resulted in four main research questions, which are addressed in many chapters in one way or another.

What were the long-term factors impeding economic growth in CESEE? The persistence of serfdom and feudal institutions were proposed as an early answer, going back to the seminal works of Gerschenkron (1962, 1965). Chapters 2–6 show that the academic discussion on serfdom is far from closed but has been broadened by including competing schools of thought such as demography, institutional weaknesses and, more recently, market access and market integration. The long 19th century emerges as a period in which the CESEE countries left behind many of the factors impeding growth. This involved, among others, abolishing serfdom in places where it was still in operation after the Napoleonic Wars, reforming existing institutions and launching new ones, and gaining better market access by improving infrastructure. Yet while the 19th century saw farreaching change in all parts of Eastern Europe, the transformation was often slow and remained uneven across the region. In terms of per capita output, all economies grew substantially, but there was no catching-up of the East with the West. Notwithstanding notable exceptions and significant differences in performance between countries, the region as a whole fell further behind the more advanced Western economies.

Editor’s introduction  9

The academic discussion on long-term factors impeding economic growth in the region plays out mainly in the chapters dedicated to the long 19th century, but it is not confined to them. Chapters 16 and 17, for instance, weigh the relative importance of institutions versus economic geography for the transition period since 1989. This is not surprising, given that a region cannot escape its geography and institutions have often proven difficult to change.

How backward was Eastern Europe by the time state socialism was introduced? For Russia, this question relates to the interwar period and for all other countries to the mid- to late 1940s. Authors do not confine this question to a narrow GDP per capita comparison but embark on a broad analysis of structural change and the preconditions for sustainable income per head growth. State socialism was often justified on the ground that it provided a better, or even the only, means to achieve fundamental structural change and catapult the CESEE economies into the industrial age. The two chapters dedicated to growth in the interwar period (Chapter 7) and in the state socialist period (Chapter 11) find it difficult to square the historical evidence with this once popular view. In their revisionist assessment, most interwar “capitalist” economies in the region (i.e., all CESEE countries except for the Soviet Union) delivered high economic growth and some generated profound structural change. With the level of industrialisation achieved by the outbreak of World War II, a country such as Hungary could have industrialised further after the war based on a conventional market-based economic structure. If Chapter 7 shows that the achievements of the interwar economies were larger than previously acknowledged in the literature, the reverse is the case for state socialism. Chapter 11 demonstrates that structural change between 1950 and 1989 was less impressive and less far-reaching than claimed by proponents of forced industrialisation.

How to assess the state socialist period? In the absence of political and civic liberties, economic history from Gerschenkron (1962) onwards has focussed on an evaluation of the economic achievements of the state socialist period. Chapters  11 (on economic growth and structural change) and 14 (on living standards) both come out as “pessimists” in this discussion. While acknowledging the achievements of state socialism in the early post-war period, economic growth and improvements in living standards slowed down considerably in the 1970s and 1980s. In their assessment, the CESEE countries only did well compared to their own past performance, but not in comparison to the simultaneous experience of countries on the “western periphery” such as Portugal, Ireland or Finland (or indeed Greece, which serves as a regional counterfactual experiment

10  Matthias Morys

for the 1945–1989/91 period). Within the broader European context, CESEE was falling behind. Market economies on the western periphery grew more rapidly, invested more in physical capital, achieved faster structural transformation and delivered more rapid increases in living standards according to a wide range of indicators.

How successful has the economic transition been since 1989/91? The collapse of communism led to great hopes in the early 1990s. Three decades on, the initial optimism has given way to a mixed assessment. The political transformation process remains incomplete, and the economic catch-up is taking longer than anticipated. Even the most successful transition economies have achieved only half of the West European average income after three decades of post-communist growth. Instead of following a widespread public perception of “doom and gloom” inside and outside of the region, Chapters 15–18 deliver a more positive message but hedge it with important caveats. Overall, the transition process has been a remarkable success, and average living standards in the region are far higher today than they were three decades ago. Yet the region has splintered in the process. During the Cold War period, differences between countries became smaller, and referring to the European state socialist economies as one region called “Eastern Europe” seemed sensible. Since 1989/91, however, the (almost forgotten) historical regions of Central Europe, East Europe and South-East Europe have re-asserted themselves in powerful ways. Chapters  15–18 acknowledge country-specific idiosyncrasies, but a common thread is that success and failure depend, to a considerable degree, on the region to which a particular country belongs. The Central European countries (Czech Republic, Slovakia, Hungary, and Poland) and the Baltic countries (Estonia, Latvia and Lithuania) have been more successful than the South-East European countries (Albania, Bulgaria, Romania and the Yugoslav successor states), which in turn have had a better experience than Russia, Belarus, Ukraine and Moldova. These different fortunes might be the result of better market access and market integration for some than for others, but institutional legacies or even cultural factors might also play a role.

Conclusion The quantitative economic history research conducted over the past two decades has greatly changed our picture of the historical development of Central, East and South-East Europe. Summarising this vast body of research, relating it to the older literature on Eastern Europe and describing the emerging new perspectives

Editor’s introduction  11

in a thematic and chronological framework have been the main objectives of the book. In the process of presenting the existing knowledge, it also became clear how much remains to be uncovered by future research. Our knowledge of the economic history of Eastern Europe is far more limited than that of Western Europe, let alone of well-researched countries such as England and the Netherlands. Changing this will require dedicated researchers, ambitious research agendas by universities and academic institutions in addition to the necessary financial support. The hope is that this book not only accurately summarises the status quo of our knowledge but also provides areas where future research appears particularly promising. Historical research is not l’art pour l’art. Understanding the past also serves the purpose of building a better future. We mentioned earlier that the percentage gap in income levels between the two halves of Europe has remained high (and stubbornly stable) over the past two centuries. Some of the scholarly debates summarised in this book are not confined to the ivory tower of academia but have their counterparts in the streets, living rooms and parliaments of Eastern Europe. For instance, the controversial assessment of the achievements of state socialism is mirrored by a political discourse in the region between veneration for an idealised communist past on the one hand and a complete rejection of the state socialist experience on the other. For better or for worse, the fragile economic and political situation in much of Central, East and SouthEast Europe will ensure that historical research remains high on the agenda in years to come.

Notes 1 Based on conventional gross domestic product (GDP) data. If the GDP data are adjusted by purchasing power, the difference is smaller. Yet even in this more benign perspective (which has its merits but also its drawbacks), Ukraine only achieves about 30% of Western European income levels. 2 There is some controversy whether Armenia, Azerbaijan and Georgia form part of Europe or not. This debate has had little practical implications for the concept of this book, and we will not go into it as a result. 3 Albania became independent only after the Balkan Wars of 1912/13.

References Berend, I. and Ránki, G. (1974). Economic Development in East-Central Europe in the 19th and 20th Centuries. New York: Columbia University Press. Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective. A  Book of Essays. Cambridge, MA: Belknap Press. Gerschenkron, A. (1965). Agrarian policies and industrialization, Russia 1861–1917. In H. Habakkuk and M. Postan (eds.), The Cambridge Economic History of Europe (VI). The

12  Matthias Morys

Industrial Revolution and After: Incomes, Population and Technological Change (2). Cambridge: Cambridge University Press, 706–800. Kaser, M. C. and Radice, E. A., eds. (1985–1989). The Economic History of Eastern Europe, 1919–1975. 5 volumes. Oxford: Clarendon Press. Lampe, J. R. and Jackson, M. R. (1982). Balkan Economic History, 1550–1950. Bloomington: Indiana University Press. Mazower, M. (2000). The Balkans. London: Weidenfeld & Nicolson. Todorova, M. (2009). Imagining the Balkans. Oxford: Oxford University Press.

2 LIVING STANDARDS IN THE VERY LONG RUN The place of Central, Eastern and South-Eastern Europe in the divergence debate Stephen Broadberry and Mikołaj Malinowski In 2000, Kenneth Pomeranz coined the phrase the ‘Great Divergence’ to capture the growing gap in productivity and living standards between the West and the rest (Pomeranz 2000). Focusing on regional differences within both Europe and Asia, Pomeranz argued that there was no substantial difference between the two continents as late as 1800. In particular, he claimed that the Yangzi delta, one of the richest parts of Asia, was just as developed as Britain and Holland, the richest part of Europe. Although these claims are now widely seen as exaggerated, and Pomeranz (2011) has pushed back the first appearance of the Great Divergence to the first half of the 18th century rather than the first half of the 19th century, the emphasis on regional variation in both Europe and Asia has continued to have a profound effect on our understanding of the first transition to modern economic growth. Rather than seeing the whole of Europe as developed and the whole of Asia as backward, a more nuanced picture of the process of development on both continents has emerged. In Europe, economic historians have come to see the North Sea area as the location of the first transition to modern economic growth, with Britain and Holland first catching up with the richer parts of Mediterranean Europe in Central and North Italy and in Spain, and then forging ahead after 1500 (Broadberry 2015; de Pleijt and van Zanden 2016). This process has become known as the ‘Little Divergence’, but whilst the debate has tended to focus on Western Europe, there is also an eastern dimension covering the territories of Central, Eastern and South-Eastern Europe. Bringing the east of Europe into the divergence debate will involve two aspects. First, it is important to provide reliable measures of economic performance, to ensure that we know when the region fell behind and by how much. Although data are not always available for the whole of this area, we will provide city-level estimates of living standards for Istanbul, Leipzig, Vienna, Cracow, Warsaw, Gdansk, Lviv and Moscow, and macro-level estimates for Germany,

14  Stephen Broadberry and Mikołaj Malinowski

Poland and the Ottoman Empire. Second, having established the economic underperformance of the East, it is natural to seek to explain that under-performance. The first part of this chapter will thus focus on issues of measuring economic performance, focusing on real wages and gross domestic product (GDP) per capita. Issues of income distribution will be addressed by considering (1) the differential between skilled and unskilled wages; (2) wages compared to the cost of a subsistence or ‘bare-bones’ basket of basic commodities and a ‘respectability’ basket containing a greater variety of items; and (3) the relationship between real wages and GDP per capita. We will see that, if attention is confined to how much grain or other basic products can be purchased with an unskilled labourer’s wage, living standards in the eastern part of Europe did not lag substantially behind those in the North Sea area between 1500 and 1800. However, if more luxury items are added to the consumption basket, then the gap between the East and the North Sea area emerged earlier and grew larger. Living standards in the region thus lagged behind those in North-Western Europe largely as a result of the restricted growth of the non-agricultural sector, providing processed foodstuffs and other manufactured goods and services. The East-West gap widened especially in the 18th century. In the second part of the chapter, we turn to explaining why the divergence between the eastern part of Europe and North-Western Europe occurred. In part, of course, this involves explaining the success of Britain and Holland, which forged ahead of the rest of the world as well as the rest of Europe. However, different regions of the world began the process of catching up at very different times, which suggests that the factors holding them back were not identical. In addition to providing a very brief overview of the reasons for the breakthrough to modern economic growth in the North Sea area, we will therefore consider two main factors which have been seen by economic historians as helping to explain economic under-performance in the East. These issues are (1) the re-emergence and persistence of serfdom and (2) trade dependency. Although some have argued that serfdom can be seen as an efficient solution to various adverse economic and political conditions, the majority view has remained that serfdom was a rent-seeking institution that had a negative impact on economic development. Criticisms of the trade dependency view and the whole World Systems approach that underpins it have been more damaging, and this view no longer commands much support amongst economic historians. To a large extent, then, a full explanation of the underperformance of the East must rely on the absence of the forces making for success in North-Western Europe, including (1) late and limited adoption of fertility restriction; (2) limited access to dynamic markets; and (3) poor institutions of governance.

Measuring economic performance Material standards of living: wages One of the simplest and most intuitive ways of comparing material standards of living in different places and different periods of time is to measure wages and the

Living standards in the very long run  15

amount of goods and services that they can purchase. An important issue that arises here is the units of comparison, since wages are typically paid in different currencies across space, and currencies can also change over time. One simple way of making the comparison during the period 1500–1800 is via the silver content of daily wages paid to an unskilled building worker, since the world was largely on a silver standard at this time: different currencies could be converted to their intrinsic silver content, which thus determined their exchange rates. The silver wage is defined here as the value of the daily wage expressed in grams of silver. Data on the wages of building workers have been systematically collected for many cities in all regions of Europe, including the East, and the unskilled wage is most representative of the urban working class, although the wages of skilled building workers can also be used to shed light on the distribution of income. It is important to keep in mind, however, that wages tended to be significantly higher in urban than in rural locations. For this reason, urban wages are not representative of the standard of living of the majority of the population living in the countryside. However, urban wages do nevertheless depict economic conditions in the most advanced sectors of the economy and hence allow for a meaningful comparison of different trajectories of economic development. To establish the purchasing power of these wages, it has been common to divide the silver wage by the silver price of the common local grain to yield the grain wage, which has often been taken as a crude measure of the standard of living in very poor societies, where most income has to be spent on basic foodstuffs. However, Engel’s law states that as income rises the proportion of income spent on food falls, so that the grain wage becomes a less accurate indicator of living standards. Since we are interested in measuring the growing gap between the developing North Sea area and the lagging eastern parts of Europe, we also need to consider real wages based on the wider range of commodities that were available for consumption in early modern Europe. Here we will consider the purchasing power of wages measured against a ‘subsistence’ basket of commodities that were essential for survival, and also measured against a ‘respectability’ basket that also included some more luxurious items available for those workers who could afford more than the subsistence or ‘bare-bones’ basket and sought to lead a ‘respectable lifestyle’. The baskets are defined in terms of the amounts of consumables needed to support a family consisting of two adults and two children. Allen (2001, 2009) established the cost of these baskets using expenditure weights derived from the budget studies of Sir Frederick Eden and other social investigators from the late 18th and early 19th centuries, making sure that they provided sufficient calories to enable the family to work. Allen expressed the real wage as a ‘welfare ratio’, or the number of baskets of consumables that can be purchased with the daily wage. If the welfare ratio using the subsistence basket (known as the subsistence ratio) is above 1, then the worker earns enough to work and reproduce, but if it falls below 1 then the family will be living in absolute poverty. If the welfare ratio using the respectability basket (known as the respectability ratio) is below 1, then the worker can still support a

16  Stephen Broadberry and Mikołaj Malinowski

family, but will be forced to do without some of the more luxurious items making up the respectable lifestyle.

Silver wages The silver wage, or daily nominal wage represented in terms of its intrinsic silver content, has commonly been used to compare material standards of living around Europe. Figure 2.1 depicts daily silver wages of unskilled building workers for various time periods between 1500 and 1800 in the North Sea area cities of London and Amsterdam, in the Central European cities of Vienna, Leipzig, Gdansk, Warsaw and Cracow, in the Eastern European cities of Moscow and Lviv and in the South-Eastern European city of Istanbul. Since the second half of the 16th century, the wages of unskilled urban workers in London and Amsterdam were higher than wages in Central, Eastern, and South-Eastern Europe. Figure 2.1 also depicts differences in incomes within the East. Within the studied sample, Lviv and Moscow were the poorest cities and Istanbul, Gdańsk, Leipzig, and Vienna were the richest.

Average daily wage in grams of silver

12

10

8

6

4

2

0

1500-49 London Cracow

1550-99

1600-49

Amsterdam Lviv

1650-99 Moscow Leipzig

1700-49 Vienna Gdansk

1750-99 Warsaw Istanbul

FIGURE 2.1 Silver wages of unskilled construction workers in London, Amsterdam and

a range of Central, East and South-East European cities, 1500–1800 Sources: Broadberry and Gupta 2006; Allen 2001; Moscow from Malinowski 2013; Istanbul from Özmocur and Pamuk 2002.

Living standards in the very long run  17

The picture based solely on silver wages suggests that Eastern Europe might have been less economically successful than Central and South-Eastern Europe already in the early modern era. None of the cities in the more successful regions holds the position of uncontested leader throughout the whole period. This indicates that there has been no stable hierarchy of income levels between the Baltic and Marmara seas. In the cities shown in Figure 2.1, silver wages generally increased during the 16th century and into the early 17th century in both eastern and western parts of Europe. This was a direct result of substantial silver flows from the New to the Old World, which resulted in a decrease in the value of the precious metal. For this reason, in order to gauge if the increase in silver wages was indicative of an increase in living standards, it is necessary to examine real wages.

Real wages The simplest real wage is the grain wage, or the amount of grain that can be purchased with the daily silver wage. Figure 2.2 shows the average number of litres of wheat or rye that could be bought by unskilled workers living in a range of European cities. The figure depicts grain wages in the Central European cities of Warsaw, Cracow and Gdansk, and in some West European cities of Southern England and Northern Italy. The figures for the Central European cities are based on prices of rye, the principal grain consumed in those cities, while the Western wages are deflated by the price of wheat, more widely consumed there. In general, grain prices were substantially lower in the eastern part of Europe, which specialised in exports of raw materials and unprocessed foodstuffs, compared with the

Average litres of grain

50 40 30 20 10 0

1500-1520

1600-20

1680-1700

Southern England

Northern Italy

Cracow

Gdansk

FIGURE 2.2 Grain

1780-1800 Warsaw

wages, i.e. purchasing power of an unskilled daily wage in Southern England, Poland, and Northern Italy, 1500–1800

Source: van Zanden 1999.

18  Stephen Broadberry and Mikołaj Malinowski

West, which specialised in exports of manufactured goods. Based on this measure, material standards of living were thus higher in the East than in the West. The only exception to this general rule was Gdańsk – the entrepôt of the grain trade in the Baltic Sea. Due to its close economic ties with the North Sea region, the city was characterised by much higher prices than the other eastern localities (Malinowski 2016a). Whereas grain wages in Cracow and Warsaw followed a clear downward trend between 1500 and 1800, wages in Western Europe remained at a stable and lower level throughout the period. Figure  2.2 thus shows that the higher silver wages of Western Europe did not translate into higher grain wages, which were in fact higher in Central Europe throughout the period. However, before concluding that the East performed relatively well during the early modern period, it is necessary to widen the range of products that could be purchased with the silver wages earned in the different parts of the continent. It is also necessary to broaden the analysis geographically beyond Central Europe to include Eastern and SouthEastern Europe into the comparative framework. Figure  2.3 shows welfare ratios obtained using the subsistence or bare-bones basket. This is composed of a selection of goods that were indispensable for a single breadwinner to support a household of two adults and two children for a

3.5

3

2.5

2

1.5

1

0.5

1500-49 London

1550-99 Moscow

1600-49 Lviv

1650-99 Gdansk

FIGURE 2.3 Average

1700-49 Warsaw

1750-99 Cracow

real wages of unskilled workers in London and a range of Central and East European cities expressed in terms of subsistence ratio, 1500–1800

Sources: Malinowski 2016a; Moscow from Malinowski 2013.

Living standards in the very long run  19

year. Allen (2009) assumed that the minimum daily nutritional needs of an adult are 1,945 calories and 78 grams of protein. In the subsistence basket, the family are assumed to purchase the cheapest available source of calories and protein, grain. The bare-bones basket does not contain processed, and therefore more expensive, foods like beer or bread, even though they were widely consumed. In addition to foodstuffs, the subsistence basket includes small quantities of soap, light, clothing, and fuel. The bare-bones basket also includes the cost of housing. Given that historical information on house rents is very limited, accommodation is assumed to be an additional 5 per cent premium on top of the cost of the listed commodities, in line with historical budget studies. Finally, the consumption needs of a child are assumed to be half those of an adult. All in all, a household is assumed to need 3.15 times an adult’s basket (one for the woman, one for the man, one for the two children, and 0.15 for housing). In order to compute the annual income, a male labourer is assumed to work for 250 days at the average daily wage. If we divide the annual income by the cost of the bare-bones basket for the household, we obtain the real wage expressed as a subsistence ratio. If the ratio is greater than unity, this hypothetical household was able to sustain itself. It is notable that the methodology does not account for any source of income other than paid labour of the male breadwinner. It does not, therefore, include (1) female labour participation, which as we will see later could have differed between regions; (2) income from various rents or savings; or (3) consumption of food produced by the workers themselves, which was not uncommon in preindustrial cities. For this reason, ratios smaller than one indicate that, in order to survive, households had to seek additional sources of income or adjust their size. Figure 2.3 shows subsistence ratios for North-Western Europe (London), Central Europe (Gdańsk, Warsaw and Cracow) and Eastern Europe (Lviv and Moscow). Unfortunately, however, it does not include any information about South-Eastern Europe. These ratios indicate that in the 16th and 17th centuries, real wages based on the subsistence basket were no higher in London than in Central and Eastern European cities. In fact, between 1500 and 1650, all observations in the sample oscillated within a similar range of values and did not show any signs of the Little Divergence. Higher subsistence ratios in England can be seen only for the 18th century. At that time, real wages in London were higher than those in Gdańsk and any other Central and Eastern European city for which data are available. Moreover, according to Figure 2.3, there was a divergence between Central and Eastern Europe. Whereas in the 16th century real wages were at a similar level in all the included cities, by the 18th century there was a growing income gap between the successful cities like Gdańsk, Cracow and Warsaw, which maintained their standards of living from the 16th century, and Lviv and Moscow which became impoverished. This suggests that the General Crisis of the 17th century, a period of unrest in Europe related to economic, military, political and ecological instability, affected different regions in different ways, resulting in a wide range of economic outcomes. Finally, Figure 2.4 shows respectability ratios, based on a basket of consumables that contains bread and beer instead of grains and also contains larger amounts

20  Stephen Broadberry and Mikołaj Malinowski

1.5 1.3 1.1 0.9 0.7 0.5 0.3

1500-49

1550-99

1600-49

1650-99

1700-49

London

Amsterdam

Vienna

Leipizig

Warsaw

Cracow

Istanbul

Lviv

1750-99 Gdansk

FIGURE 2.4 Average

real wages of unskilled workers in London and a range of Central, East and South-East European cities expressed in terms of respectability ratios, 1500–1800

Sources: Values for London, Amsterdam, Vienna, Leipzig, Gdansk and Warsaw from Table 6 in Allen 2001. Values for Istanbul from Figure 2 in Özmocur and Pamuk 2002. Respectability ratios for Lviv based on own computations; Wages in Lviv from Table 3 in Malinowski 2016a. Costs of the respectability basket in Lviv calculated using information in Tables 3 and 4 in Allen 2001.

of manufactured products than the bare-bones basket. In contrast to Figure 2.3, based on subsistence ratios, the available research on respectability ratios allows us to bring Istanbul and thus South-Eastern Europe into the comparative framework. Whereas the bare-bones basket represents the biological minimum of consumption, the respectability basket denotes a more accurate ‘historical’ consumption behaviour. Substitution of grains with beer and bread when measuring real wages has a tremendous impact on the picture of the Little Divergence between the East and West of Europe. According to the respectability ratios in Figure 2.4, London and Amsterdam were clearly richer than the Central European cities. This is very different from the impression given by the subsistence ratios in Figure 2.3, which identified cities in the East that had similar standards of living to Amsterdam and London, and it is even more different from the picture painted by grain wages in Figure 2.2, which suggested higher living standards in the East. However, it is clearly much more consistent with the general conclusions based on the silver wage in Figure 2.1, which suggested a clear economic supremacy in the West. Figure 2.4 shows living standards in London and Amsterdam clearly ahead of Central, Eastern and South-Eastern European cities throughout the period 1500–1800, with the gap widening during the 17th and 18th centuries as real wages grew in the North

Living standards in the very long run  21

Ratios of real wages in London to Polish wages

Sea area and stagnated in the East. Moreover, it is notable that whereas Istanbul and Leipzig were among the richest of the studied eastern cities in terms of silver wages, they were also the poorest in terms of real wages. Lastly, the evidence based on respectability ratios also suggests that there was a divergence in economic development between Central and Eastern Europe after the 17th century with most Central European cities defending a certain equilibrium level and Lviv slowly declining. It is instructive to consider the evidence of Figures 2.2 to 2.4 together to shed light on the nature of the emergence of the West to economic leadership. Western supremacy only shows up as the comparison of real wages moves away from basic grain products to more highly processed foods (such as bread and beer) and other manufactured goods (soap, candles, linen and oil). Figure 2.5 provides a convenient demonstration of the importance of the composition of the basket of consumables for the comparison of living standards between the West and the East over three periods from the first half of the 17th century to the second half of the 18th century. The figure compares the welfare ratios of unskilled building workers in London with the welfare ratios of unskilled workers in three Polish cities: Gdańsk, Cracow and Warsaw. A value above unity indicates higher real wages in London, and a value below 1 indicates higher real wages in Poland. The baseline ratio is based on the bare-bones basket (i.e. the subsistence ratio) and shows at best only 3

London/Gdańsk

London/Cracow

London/Warsaw

2.5 2 1.5 1 0.5

1601-50 1651-00 1751-00 1601-50 1651-00 1751-00 1601-50 1651-00 1751-00

Premium if we also include more soap, linen, candles, and oil Premium if we also include 182 liters of beer instead of 24 kg of rye/wheat Premium if we include 182 kg of bread instead of 135kg of rye/wheat Baseline ratio based on the bare-bones basket FIGURE 2.5 Real

wages of unskilled workers in London based on different baskets of goods divided by real wages of unskilled workers in a range of Polish cities based on the same baskets, 1600–1800

Source: Malinowski 2016a.

22  Stephen Broadberry and Mikołaj Malinowski

a slightly higher real wage in London, with the Polish cities even slightly ahead in the first half of the 17th century. The London premium increases somewhat if processed foodstuffs such as bread and beer are substituted for unprocessed grains. As further manufactured products such as soap, candles, linen and oil are added, and the basket of consumables approaches the respectability basket, the London premium increases further. The reason for the growing London premium as more highly processed foods and other manufactured products are added is that these products were relatively more expensive in the East than in the North Sea area. The low relative price of manufactures in the West and the low relative price of grain in the East reflected the comparative advantage of the two regions, with the West increasing its comparative advantage in manufacturing as it developed. This difference between the two regions can also be seen in the skill premium (i.e. the inequality in incomes between the skilled and unskilled labourers). The ratio of the skilled urban wage to the unskilled urban wage was much higher in the East, as was the difference between the urban and rural unskilled wage (van Zanden 2009; Malinowski 2016a). This suggests that skilled labour involved in manufacturing was expensive. The relative price of processed foods was high because the price of grain was being kept low by the effects of serfdom on the cost of production. We will return to the economic impact of serfdom later.

Gross domestic product per capita Gross domestic product (henceforth GDP) is a measure of the annual flow of all goods and services in an economy. It can be measured from the production, income and expenditure sides, and in principle all three measures should yield the same total. In historical national accounting, however, GDP is normally calculated primarily from the output side, but also making use of some income data, particularly on wages. It is worth distinguishing between the estimates of GDP for economies such as Britain and the Netherlands, where data are relatively abundant, so that the total can be built up from highly disaggregated data on individual sectors, and economies for which data are more limited, for which a ‘short-cut’ method has been developed. These GDP data can be combined with estimates of population to produce GDP per capita, which is often taken as a measure of the average standard of living. However, caution must be exercised in using these estimates for international comparisons of living standards, since the distribution of income varies considerably across societies. That is a strong argument for considering the GDP per capita data together with the data on real wages of unskilled workers presented in the previous section. The GDP per capita data for early modern Britain and the Netherlands have been constructed by Stephen Broadberry et al. (2015a) and Jan Luiten van Zanden and Bas van Leeuwen (2012) using a wide range of information on production and prices in each of the main sectors: agriculture, industry and services. For the other European economies considered in this section, GDP per capita estimates have been constructed using the short-cut method (Malanima 2011; Álvarez-Nogal and

Living standards in the very long run  23

Prados de la Escosura 2013; Malinowski and van Zanden 2017). This involves the use of a more limited range of data, covering wages, prices, population and urbanisation rates. Agricultural output per capita is estimated from a demand function, with the demand for food related to real wages and the relative price of food, and this is scaled up to total output per capita by using the urbanisation rate as a measure of the relative importance of the non-agricultural sector. A number of authors have shown consistency between the short-cut and direct methods where sufficient data are available to conduct cross-checks (Broadberry et al. 2015b; Álvarez-Nogal and Prados de la Escosura 2013). Table 2.1 presents GDP per capita estimates for Great Britain and the Netherlands in the North Sea area, Central and Northern Italy and Spain in Mediterranean Europe, Germany and Poland (Voivodship of Cracow) in Central Europe, with the Ottoman Empire including all the Balkan states from the 16th century, but excluding present-day Egypt and Iraq from the estimates (Pamuk 2009), thus offering coverage of South-Eastern Europe. Japan and India are included to represent Asia. The global comparison of GDP per capita yields several important generalisations about the place of Central and South-Eastern Europe in the narratives of the Great and Little Divergences of income levels around the world and within Europe. In general, the region was already lagging behind North-Western Europe during the early modern era. According to the figures presented in Table 2.1, GDP per capita differed between the studied Central European countries. Poland was already poorer than Western Europe in the 15th century, and its level of economic development was closer to that of Asian rather than Western European countries. By 1600, as a result of economic expansion during its Golden Age of the 16th century, Poland had grown richer, but its relatively high growth rate at the time was insufficient to reach the level of Western European countries. During the 17th TABLE 2.1  GDP per capita around the globe, 1400–1820, in 1990 USD PPP

Year

GB

NL

Italy CN

Spain

Germany

Polandd

Ottoman Empire

Japan

India

1400 1500 1600 1700 1820

1,053 1,041 1,037 1,513 2,074

920 1,119 2,049 1,620 1,886

1,596 1,398 1,243 1,346 1,378

892 919 1,005 905 1,062

– 1,146 807 939 986e

562 702 810a 569b 634c

– 622 640 730 788

545f – 667 675 828e

– – 682 622 520

Sources: Great Britain (GB): Broadberry et al. 2015a; Netherlands (NL): van Zanden and van Leeuwen 2012; Italy Central and North (CN): Malanima 2011; Spain: Álvarez-Nogal and Prados de la Escosura 2013; Germany: Pfister 2011; Poland: Malinowski and van Zanden 2017; Japan: Bassino et al. 2019; India: Broadberry et al. 2015b, The Ottoman Empire based on Pamuk 2009 who calculated GDP per capita in the empire (excluding Egypt and Iraq) as a share of British GDP in 1820. We converted these estimates into 1990$PPP by linking it to the British figure for 1820 used in this table. Note: (a) value for 1578; (b) value for 1662; (c) value for 1776; (d) Voivodeship of Cracow; (e) value for 1804; (f ) value for 1450.

24  Stephen Broadberry and Mikołaj Malinowski

century, the Polish economy contracted even below the low levels characteristic of India and Japan, so that Poland became the poorest country in the sample. By the end of the 18th century, despite a return to growth, Polish GDP per capita was barely above that of India and had fallen further behind the level in the more rapidly growing Japan. On the other hand, standards of living in Germany were on a par with most of Western Europe around 1500, lagging only behind Central and Northern Italy. However, according to Pfister’s (2011) GDP per capita estimates, German standards of living declined during the 16th century and stagnated in the 17th and 18th centuries. As a result of economic growth in England and the Netherlands, Germany fell substantially behind the North Sea area from 1600. Turning to South-Eastern Europe, which was a part of the Ottoman Empire, the levels of GDP per capita in the region were already significantly lower than in the North Sea area by the beginning of the early modern period. Standards of living in the empire were similar to those in India and Japan. However, it must be borne in mind that these results are based on averages for the whole of the empire (excluding Egypt and Iraq), and it is possible that the situation in the Balkans was significantly different from that in Anatolia. The GDP per capita data tend to support the pessimistic interpretation of economic performance in Central and South-Eastern Europe during the early modern period derived from the welfare ratios based on the respectability basket. The more optimistic picture obtained from welfare ratios based on the subsistence basket can only be sustained by leaving out of account those parts of the economy associated with modernisation and economic development: the move to higher value added processing of foodstuffs and the wider availability of manufactured goods. Unfortunately, there are no comparable estimates of GDP per capita for preindustrial Eastern Europe  – an important gap that needs to be filled. It would be particularly useful if researchers could establish how Russia and eastern parts of the Polish-Lithuanian Commonwealth fit into this picture. However, since real wages (Figure 2.3) and urbanization levels in these areas were relatively low, it is likely that Eastern European GDP per capita levels fell somewhere between Central European and Asian levels.

 xplaining economic performance: why did Eastern E Europe lag behind the North Sea area? One way of understanding why the eastern part of Europe lagged behind the North Sea area is to focus on the reasons for the success of the North Sea area and note their absence in the East. However, this would not be entirely satisfactory for at least two reasons. First, explaining the transition to modern economic growth in the North Sea area at the time of the Industrial Revolution is the Holy Grail of economic history, and it would be impossible to do it justice within the confines of this short chapter. But second, not all regions of the world lagged behind

Living standards in the very long run  25

the North Sea area to the same extent, and different regions began to catch up at very different times, which suggests that local factors must also have been of some importance.

F actors explaining retarded Central and Eastern European economic performance Here we will focus on two factors which have featured in the literature on explaining the retarded economic performance of the East. One of the most widely cited factors is the re-emergence and persistence of serfdom in early modern Central and Eastern Europe, in contrast to its disappearance in the West. Second, this re-emergence of serfdom is sometimes linked to trade relations, with Central and Eastern Europe characterised as becoming a peripheral region in a system of unequal trade with the North Sea area as the core. The ‘second serfdom’ has been seen by some as underpinning the growth of exports of agricultural goods and raw materials within this system of unequal trade. These discussions will not offer an explanation of the economic underperformance of South-Eastern Europe, where the institution of serfdom was not widespread and trade relations with North-Western Europe were not strong. Moreover, because South-Eastern Europe was a part of the Ottoman Empire in the early modern period, its economic circumstances were very different to those of the independent states located in Central Europe (see more in Lampe and Jackson 1982).

The second serfdom In the early Middle Ages, serfdom, the signature social relation of feudalism, was prevalent all over Europe. This system of surplus extraction from peasantry weakened gradually throughout the continent in the late Middle Ages. In Western Europe, the rise of powerful monarchs, towns, and an improving economy weakened the manorial system during the 13th and 14th centuries. However, east of the river Elbe serfdom was never fully abolished, and coerced labour re-emerged as the ‘second serfdom’ in the late Middle Ages and in the early modern period (Cerman 2012). This created an institutional division between East and West, which is often regarded as one of the fundamental causes of underdevelopment of Eastern Europe, although it should be noted that the absence of serfdom did not lead automatically to early development in much of Western Europe. The definition of serfdom differs between individual studies, partly because the precise nature of the institution and its severity varied over time and across regions. In general, serfdom was most severe in Russia and least harsh in Prussia. Serfdom was based on a contractual relationship between a legally privileged group of landowners and their tenant farmers and landless peasants. Coerced workers were forced to work on the manors and demesnes of their landlords in exchange for the right to use land. The system rested on lack of juridical protection of the

26  Stephen Broadberry and Mikołaj Malinowski

peasants by the state against the landlords. In Poland and Russia, serfs were not allowed to appeal to the ruler if their rights were violated. This allowed landlords to make one-sided changes to the contractual obligations of the villagers and increase their rent and labour duties. Serfdom was also based on limitations on peasants’ mobility, which allowed landlords to charge higher rents. Therefore, serfdom is different to wage slavery, a situation where poorly paid workers are free to move, but are unlikely to find better-paid work. Moreover, serfdom is closely connected with landownership. Landlords could trade in land with serfs tied to it but could not trade in serfs themselves. This is a crucial difference between serfdom and slavery. Serfdom, however, could become very like slavery when the nobility held the right to sell their serfs without families and independent of the land to which they were attached, as briefly occurred in late 18th-century Russia (Markevich and Zhuravskaya 2018). There are three main hypotheses to explain why serfdom re-emerged and persisted in Central and Eastern Europe. According to the first point of view, serfdom is likely to appear in societies that have abundant land but scarce labour. Evsey Domar (1970) argued that high land-labour ratios in the East forced landlords to compete over workers. Had labour been abundant, workers would have competed with each other over employment, which would have kept the incomes of the landlords high. However, labour scarcity potentially allowed workers to demand favourable contracts. This motivated the landed elite in the region to use their political influence and change the ‘rules of the game’ by limiting peasants’ mobility and introducing forced labour on their demesnes. The fact that the landlords needed political leverage to organize the society in their favour links to the second point of view, which interprets serfdom as a front line in the ongoing class conflict over redistribution of resources. Most notably, Robert Brenner (1976) argued that serfdom had little to do with the land-labour ratio and all to do with the success of the elites in banding together collectively against the peasants. According to Brenner, serfdom was primarily an extractive institution imposed by landlords to exploit the villagers. This point of view links directly to the World Systems interpretation of economic history developed by Immanuel Wallerstein (1974). In this approach, the rise of international trade between the Baltic region and the West increased the demand for grain produced in the East, which in turn, increased the demand for labour in Central and Eastern Europe. Export opportunities are thus seen as having encouraged landlords to increase the output of their demesnes, which they accomplished by increasing the labour duties of the peasants (Małowist 2010; Topolski 1965). We will discuss the World Systems school in more detail later in this chapter. Serfdom is usually seen as having a negative impact on economic growth and development, being characterised as a rent-seeking institution tailored to the benefit of landlords. In the older qualitative and theoretical literature on the subject, serfdom has been held responsible for (1) constraining mobility between the agricultural and non-agricultural sectors; (2) discouraging improvements in agricultural

Living standards in the very long run  27

productivity by undermining incentives; (3) hampering the accumulation of human capital; (4) being wasteful because of the costly way that it transferred resources from workers to employers; and (5) decreasing the purchasing power of villagers (Ogilvie and Carus 2014; Acemoglu and Wolitzky 2011). Recently, a number of authors have complemented these qualitative and theoretical investigations with quantitative analysis. Alexander Klein and Sheilagh Ogilvie (2016), by analysing a dataset covering nearly 7,000 villages in mid-17th-century Bohemia, have established that serfdom discouraged rural non-agricultural activities of the peasants. These authors demonstrate that, even though landlords might have stimulated some demand for non-agricultural goods and services, they tended to crowd out serf crafts and commerce by siphoning off labour and stifling enterprise through surveillance and rent extraction. The negative economic impact of serfdom has also been documented by Jörg Baten and Mikołaj Szołtysek (2016), who identify a negative correlation between the proportion of serfs in a population and the level of human capital in the 19th century Russian Empire. Similarly, Andrei Markevich and Ekaterina Zhuravskaya (2018), who investigate the economic effects of the abolition of serfdom in the country, document that emancipation resulted in a substantial increase in agricultural productivity, industrial development and living standards. These findings suggest that serfdom was hindering the development of the economy. This negative assessment of the impact of the second serfdom on economic development in Eastern Europe remains the dominant view. However, a number of writers have also challenged the view that serfdom was a very damaging institution that held back growth. One of the strongest statements of this view is by Douglass North and Robert Thomas (1971, 1973), who argue that serfdom can also be seen as an efficient solution to various adverse economic and political conditions rather than just a rent-seeking practice. North and Thomas (1971: 778) write: ‘serfdom in Western Europe was essentially not an exploitative arrangement .  .  .  [it] was a contractual arrangement where labour services were exchanged for the public good of protection and justice’. A related argument is that serfdom can be seen as an institutional response to the risk- and market-aversion of peasants (Chayanov 1966). According to Stephan Epstein (2000), even if the enserfed villagers had been provided with secure property rights, they would still have been unwilling to increase their market participation above the bare minimum. According to Michael Bush (1996), corvée duties (unpaid manual labour duties) and high monetary rents provided a solution to this unwillingness of the peasants to commercialise their production. Surplus extraction by the demesne allowed for large-scale commercial farming in societies with scarce supplies of labour and thin markets. Mikołaj Malinowski (2016b) has recently tested this idea empirically by investigating the impact of serfdom on urban growth in early modern Poland. The author identified that even though labour coercion constrained the long-term growth of urban settlements, it also made them less vulnerable to market crises in the short term. This could have delayed the abolition of serfdom.

28  Stephen Broadberry and Mikołaj Malinowski

Trade dependency and the World Systems approach Dependency theory emerged at the time of deepening globalisation in the 1960s and 1970s. A question that concerned economists at the time was why, despite the growing liberalisation of international trade and increasing economic specialisation, so many countries around the world were failing to develop. A group of scholars was not convinced by the dominant explanation that the lack of growth in the underdeveloped countries was primarily a result of poor policies and corruption. They suggested an alternative explanation: that the underdevelopment and income inequality between countries was the result of a particular international ‘system’ that perpetuated economic stagnation of the poorer countries to the benefit of the rich nations. In particular, Immanuel Wallerstein (1974) hypothesised that the global economy was governed by a so-called World System that was exploitative in nature and was characterised by the political and economic dominance of some countries over others. Economic historians who shared this point of view, such as Marian Małowist (2010), argued that the system originated in the late Middle Ages and developed and expanded throughout the early modern period. As a result of this system, England and the Netherlands flourished economically at the time, whereas other regions – Central and Eastern Europe in particular – remained stagnant. Dependency theorists argue that there are different kinds of states within the World System. There are two ideal types of countries at both ends of the system’s spectrum, the ‘core’ or ‘centre’ countries and their ‘peripheries’. According to dependency theory, there is an international division of labour within the World System, with different roles assigned to different kinds of countries. The division is fuelled by trade and integration of international markets. The core countries dominate in terms of industry and technology, producing capital-intensive and high-value-added final products. On the other hand, the peripheral countries specialise in resource extraction, agricultural production and cheap labour availability. They supply raw materials and manpower, and they create a demand for the high-end products from the core. As a result of this division, the peripheral countries serve the economic interests of the core states. The core countries have the political, economic and military power to enforce unequal rates of exchange between the core and the periphery. Furthermore, according to dependency theorists, there is a class distinction within each country between the elite and the working class, with the elites, even in the poorer countries, having a vested interest in maintaining the status quo. In order to ensure the continuation of the system, the elites cooperate with one another internationally, and this perpetuates the underdevelopment of the periphery. According to dependency theorists, the whole system of international surplus extraction is made possible and reinforced by trade rather than formal political mechanisms, with trade in the system seen as a zero-sum game where the weaker side of the exchange loses to the stronger trade partner.

Living standards in the very long run  29

According to economic historians such as Jacek Kochanowicz (1989), the trade that developed during the early modern era between the North Sea and the Baltic Sea had a tremendous impact on the development of economies on both sides of the trade route. Significant amounts of grain, wood and other raw materials were shipped west in exchange for manufactured products. The demand for raw materials and foodstuffs in the West is seen by Jerzy Topolski (1965) as leading to an increase in exports from the East, which led to the reintroduction of serfdom east of the river Elbe, as discussed in the previous section. The landed elites (such as the Polish Szlachta, the German Junkers, or the Russian Dvoryanstva) extracted surplus from disenfranchised peasants in order to cheaply produce export goods. This World Systems approach is very much at odds with orthodox economic analysis, which sees specialisation according to comparative advantage leading to benefits for all, to be shared out through a competitive process determining the terms of trade. The World Systems approach has therefore been very much a minority view amongst Western economic historians, but has had some influence in Central and Eastern Europe, particularly during the socialist era (for a discussion, see Sosnowska 2004). However, the idea that market access can play a role in the success or failure of individual countries or regions has now been incorporated within the orthodox approach through the ‘new economic geography’. Recognising the importance of agglomeration effects in a world of increasing returns, Paul Krugman and Anthony Venables (1995) show how declining transport costs can lead to a reorganisation of activity so that industry concentrates in a rich core and agriculture in a poorer deindustrialising periphery. In these circumstances, being located in the wrong region can make it very difficult for a country to succeed, however good its institutions. Nicholas Crafts and Anthony Venables (2003) apply this approach to the historical record since 1750, concluding that it is helpful in understanding unequal growth from the 1870s, when transport costs declined sharply. However, this is too late to aid the understanding of the divergence of the East during the 17th and 18th centuries. These conclusions, drawn from the work of Crafts and Venables (2003), are echoed by recent empirical studies of market integration between East and West and within Eastern Europe. According to David Jacks (2004), there was a decline in the extent of market integration between East (Poland) and West (Amsterdam and London) during the 17th and 18th centuries. Similarly, Mikołaj Malinowski (2016c) has identified a corresponding crisis of the Polish domestic market. This underperformance of international and domestic markets occurred at precisely the time of the increase in the income gap between the North Sea region and the East. These findings challenge the importance of the World Systems as the driver of the Divergence. In fact, after investigating a link between real wages and market conditions, Malinowski (2015) has also suggested that the decline in Central and Eastern European living standards might have been caused by segmentation of the domestic market. In short, it is possible that it was the decline rather than the rise of markets in the East that reinforced the East-West Divergence.

30  Stephen Broadberry and Mikołaj Malinowski

Factors explaining the success of the North Sea area In this section we highlight three approaches to explaining the success of the North Sea area, which point to factors where developments in Eastern Europe were very different: (1) the Malthusian approach, based on the work of Thomas Malthus (1766–1834), focusing on the balance between population and resources; (2) the Smithian approach dating back to Adam Smith (1723–1790), with its emphasis on access to markets and the division of labour; and (3) the more recent Northian approach developed by Douglass North (1920–2015), which sees institutional change as the key to development.

Demographic factors According to the Malthusian view, persistent economic growth in the preindustrial period was only possible if a society managed to regulate its population so as to remain within limits determined by its resources. Malthus assumed feedback from income per capita to fertility (the preventive check) and mortality (the positive check) together with diminishing returns to land (the resource constraint). Growth of per capita income occurs in response to anything which reduces population (an increase in mortality or a decline in fertility) or increases the availability of land. This approach points to the family system in the North Sea area as a driver of development, with Hajnal (1965) arguing for the emergence of what he called the European Marriage Pattern in Western Europe. This (Western) European Marriage Pattern involved late marriage for women, a high proportion of singles, and nuclear families, which all helped to control fertility and prevent countries like Britain and the Netherlands from having wages driven down to subsistence levels. The (Western) European Marriage Pattern has been linked by de Moor and van Zanden (2010) to their hypothesis that late-age marriage of women in NorthWestern Europe resulted from the strong position of women in those societies (what they call ‘Girl Power’), as a result of inheritance patterns and labour market opportunities. This late-age marriage led to greater accumulation of human capital, both as a result of the labour market experience of women and the higher levels of education that could be afforded for the smaller number of children resulting from later marriage. This increased the productivity of labour and, in turn, economic growth. Despite its benefits, not all of Europe followed this fertility pattern, however. In particular, Hajnal (1965) proposed that there was a divide, known in the literature as the Hajnal line, stretching from St. Petersburg to Trieste that split Europe into a ‘West’ – characterised by the supposedly beneficial fertility regime – and an ‘East’, with a higher quantity but lower ‘quality’ of offspring. Jörg Baten and Mikołaj Szołtysek (2016) have recently demonstrated that family systems in general and female autonomy in particular had a strong impact on human capital formation. They showed that numeracy in early modern Central and Eastern Europe was strongly correlated with the late age of marriage of women. The authors also demonstrated that numeracy levels in the East were lower than in

Living standards in the very long run  31

the West. Their findings suggest that the difference in marriage patterns could have significantly affected economic outcomes and could therefore have contributed to the Little Divergence. The supposed causal link between the differences in marriage patterns and economic growth has been challenged by Tracy Dennison and Sheilagh Ogilvie (2014), who compiled information from 365 individual research studies to construct a dataset on historical demographic behaviour. They argued that, according to the empirical evidence, the (Western) European Marriage Pattern was not a predictor of early industrialisation or economic success. Furthermore, the authors have identified that the regions of Slovenia and Bohemia were characterised by relatively late female marriages. The very existence of the Hajnal line has also been challenged by Mikołaj Szołtysek (2015) and Piotr Guzowski (2013), who have identified numerous regions characterised by the (Western) European Marriage Pattern within the Polish-Lithuanian Commonwealth.

Trade and market access Turning to the Smithian approach, the origins of economic growth in England and the Netherlands can be linked to their access to international markets. Access to the Atlantic coast and active participation in the trans-continental trade could have affected economic growth by allowing England and the Netherlands to profit from market exchange, specialising according to comparative advantage and raising productivity through the division of labour. For example, the Netherlands, a country with limited natural resources but with high population density and a relatively skilled labour force, was able to specialise in its areas of comparative advantage, the production of a range of manufactured products and tradeable services with high value added (de Vries and van der Woude 1997). This generated economic growth in the country. In this framework, rather than seeing the falling behind of Eastern Europe as a result of unequal exchange or class struggle, as in the World Systems approach considered earlier, any advantage or disadvantage arises in the orthodox Smithian approach simply as a result of accidents of geography. Due to their convenient position, the countries located in the North Sea area profited from being the ‘middle man’ between the Baltic and the Mediterranean trade zones (van Tielhof 2002). In short, suitable geographical position gave access to markets which promoted economic growth in the North Sea area, while Eastern Europe remained too distant from those markets to reap the same benefits. This is also broadly consistent with the new economic geography approach of Paul Krugman and Anthony Venables (1995). Moreover, as has been mentioned, by studying the Polish-Lithuanian Commonwealth, Mikołaj Malinowski (2016c) has recently demonstrated that market conditions in the East worsened at the time of increasing market development of the West in the 18th century (i.e. precisely at the time of the increase in the income gap between the regions). This new evidence reinforces the Smithian explanation of early economic growth.

32  Stephen Broadberry and Mikołaj Malinowski

Institutions and economic development In the Northian framework, the key to development lies in institutional change. Institutions are defined as the ‘rules of the game’, which set the incentives for economic agents so as to either encourage or discourage socially productive activities such as investment and innovation rather than socially unproductive or rent-seeking activities. Daron Acemoğlu and James Robinson (2012) argue that inclusive political institutions, which allowed for representation of the political interests of significant parts of the population and constrained the executive, brought about a fruitful balance between citizens and political elites. This argument has been especially well developed for England. According to Douglass North and Barry Weingast (1989), the English Glorious Revolution of 1688, a political change that weakened the king and reinforced Parliament, was the dividing line between ‘absolutism’ and some form of ‘parliamentary’ government, and thus an important cause of the Industrial Revolution. However, it has also been argued that these growthfostering institutions did not materialise from thin air, and that forms of power sharing between the ruler and his subjects go back to the Middle Ages (van Zanden et al. 2012). The idea that constraints on the executive was a predictor of economic growth has been challenged by Stephan Epstein (2000), who argued that far from constraining over-strong rulers, what was needed to break out of medieval stagnation was the strengthening of the central state so that sufficient tax could be raised to provide the public goods necessary for the integration of fragmented markets and the enforcement of property rights. According to Epstein, political centralisation deprives local elites of jurisdictional power and displaces rent-seeking from the local to the ‘national’ arena. This makes rent-seeking more transparent and, therefore, harder to implement. Furthermore, political centralisation reduces the costs of coordination, allowing for concerted decisions and policies. This should result in a convergence of legal, monetary and measurement systems, which should lower transaction costs. Although the views of Epstein (2000) and North and Weingast (1989) may at first sight appear contradictory, Mark Dincecco (2011) shows that in early modern Europe, economic success depended on both fiscal centralisation and parliamentary control. The state needed to be strong enough to ensure market integration and enforcement of property rights but not so powerful as to be able to intervene arbitrarily in business affairs. Britain and the Netherlands led early modern Europe in both the fiscal revenue per capita that they were able to raise, and also in the frequency with which parliaments met to exercise control over how those revenues were spent (Karaman and Pamuk 2010; van Zanden et al. 2012). Central and Eastern European states lagged a long way behind in both respects: per capita fiscal revenues stagnated at a low level and parliamentary control was weak. Germany unified only in the 19th century while the Holy Roman Empire of the German Nation through the early modern period remained a union of semi-independent polities that kept various degrees of autonomy from the central institutions. At the same time, the Polish-Lithuanian Commonwealth managed to integrate laws within its vast territory and establish a strong parliamentary regime

Living standards in the very long run  33

in the 16th century. This even resulted in a period of economic growth known as the Golden Age of Poland. However, the country succumbed to protracted political crisis and political fragmentation that eventually even led to its partitions in the late 18th century. At the other end of the spectrum, Russia managed to create an empire with a strong and largely unconstrained absolutist ruler.

Conclusions This chapter juxtaposes known accounts of silver and real wages in the North Sea area with the figures for cities located in Central, Eastern and South-Eastern Europe between 1500 and 1800. It also discusses the available estimates of gross domestic product per capita in Germany, Poland and the Ottoman Empire at the same time, with the latter being used as an imperfect proxy for living standards in South-Eastern Europe. The comparison indicates that the North Sea area was more economically successful than the East already before the Industrial Revolution. The income gap between the regions widened especially in the 18th century. However, according to the GDP per capita evidence, the dissimilarity can be observed even before 1500. The picture based on wages is more complex and dependent on the composition of the basket used to deflate them. If we look only at the silver wages, the Divergence happened already in the Middle Ages. The same conclusion can be made if we divide the wages by the cost of a basket that is rich in processed grains and manufactured products. However, due to the relative cheapness of grains and raw materials in Eastern Europe, the use of a basket containing only grains or very basic products provides a more favourable picture of the East. However, this simply reflects the fact that economic development involved the production and consumption not of an increased volume of basic grains but rather of more processed foodstuffs and other manufactures. Excluding such products from the comparison may show the East in a more favourable light, but it does not remove the fact that Eastern Europe was falling behind economically. The historiography suggests many potential explanations of the Divergence in development levels between the West and the East of Europe during the early modern period. To some extent, the Divergence can be explained simply by the economic development of England and the Netherlands in this era, which can be linked to late marriage and demographic restraint, a favourable location to benefit from international trade and favourable political institutions. However, there were differences between the performances of lagging economies, which suggests a need to consider some specific regional factors. The stagnation or even decline of living standards in Eastern Europe between 1500 and 1800 has been linked traditionally to the re-emergence of serfdom and also, perhaps less plausibly, to a complex system of exploitative trade dominance by the West. New research has suggested that the underdevelopment could have been stimulated by underperformance of the domestic markets that has been most likely related to inadequate institutions of governance. Adverse market conditions not only stifled Smithian growth processes but also reinforced the coercive institution of serfdom.

34  Stephen Broadberry and Mikołaj Malinowski

References Acemoglu, D. and Robinson, J. (2012). Why nations fail. New York: Crown Publishing Group. Acemoglu, D. and Wolitzky, A. (2011). The economics of labor coercion. Econometrica 79(2), 555–600. Allen, R.C. (2001). The great divergence in European wages and prices from the middle ages to the first world war. Explorations in Economic History 38, 411–447. Allen, R.C. (2009). The British industrial revolution in global perspective. Cambridge: Cambridge University Press. Álvarez-Nogal, C. and Prados de la Escosura, L. (2013). The rise and fall of Spain (1270– 1850). The Economic History Review 66, 1–37. Bassino, J.-P., Broadberry, S., Fukao, K., Gupta, B. and Takashima, M. (2019). Japan and the great divergence, 730–1874. Explorations in Economic History 72, 1–22. Baten, J. and Szołtysek, M. (2016). ‘Girl power’ in Eastern Europe? The human capital development of Central-Eastern and Eastern Europe in the seventeenth to nineteenth centuries and its determinants. Paper presented at WEast workshop in Prague in July. Brenner, R. (1976). Agrarian class structure and economic development in pre-industrial England. Past & Present 70, 30–75. Broadberry, S. (2015). Accounting for the great divergence. Oxford: Nuffield College. www.nuffield.ox.ac.uk/People/sites/stephen.broadberry/SitePages/Biography.aspx. Broadberry, S., Campbell, B., Klein, A., Overton, M. and van Leeuwen, B. (2015a). British economic growth, 1270–1870. Cambridge: Cambridge University Press. Broadberry, S., Custodis, J. and Gupta, B. (2015b). India and the great divergence: An Anglo-Indian comparison of GDP per capita, 1600–1871. Explorations in Economic History 56, 58–75. Broadberry, S. and Gupta, B. (2006). The early modern great divergence: Wages, prices and economic development in Europe and Asia, 1500–1800. Economic History Review 59, 2–31. Bush, M. (1996). Introduction. In: M. Bush (ed.). Serfdom and slavery: Studies in legal bondage. London-New York: Longman. Cerman, M. (2012). Villagers and lords in Eastern Europe, 1300–1800. New York: Palgrave Macmillan. Chayanov, A.V. (1966). The theory of peasant economy. D. Thorner, B. Kerbay and R.E.F. Smith (eds.). Manchester: Homewood. Crafts, N. and Venables, A. (2003). Globalization in history: A geographical perspective. In: M.D. Bordo, A.M. Taylor and J.G. Williamson (eds.). Globalization in historical perspective. Chicago: University of Chicago Press. de Moor, T. and van Zanden, J.L. (2010). Girl power: The European marriage pattern and labour markets in the North sea region in the late medieval and early modern period. Economic History Review 63, 1–33. de Pleijt, A.M. and van Zanden, J.L. (2016). Accounting for the ‘little divergence’: What drove economic growth in Preindustrial Europe, 1300–1800? European Review of Economic History 11, 387–409. de Vries, J. and van der Woude, A. (1997). The first modern economy: Success, failure and perseverance of the Dutch economy, 1500–1815. Cambridge: Cambridge University Press. Dennison, T. and Ogilvie, S. (2014). Does the European marriage pattern explain economic growth? Journal of Economic History 47(3), 651–693.

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Dincecco, M. (2011). Political transformations and public finances: Europe, 1650–1913. Cambridge: Cambridge University Press. Domar, D. (1970). The causes of slavery or serfdom: A hypothesis. The Journal of Economic History 30, 18–32. Epstein, S. (2000). Freedom and growth: The rise of states and markets in Europe, 1300–1750. London: Routledge. Guzowski, P. (2013). The origins of the European marriage pattern in the early modern period from the perspective of polish historiography. Acta Poloniae Historica 108, 5–44. Hajnal, J. (1965). European marriage pattern in perspective. In: D.V. Glass and D.E.C. Eversley (eds.). Population in history. London: Edward Arnold. Jacks, D. (2004). Market integration in the North and Baltic seas, 1500–1800. Journal of European Economic History 33, 285–329. Karaman, K.K. and Pamuk, S. (2010). Ottoman state finances in European perspective, 1500–11914. Journal of Economic History 70, 593–629. Klein, A. and Ogilvie, S. (2016). Occupational structure in Czech lands under the second serfdom. Economic History Review 69(2), 496–521. Kochanowicz, J. (1989). The polish economy and the evolution of dependency. In: D. Chirot (ed.). The origins of backwardness in Eastern Europe. Berkeley: University of California Press. Krugman, P. and Venables, A. (1995). Globalisation and inequality of nations. Quarterly Journal of Economics 60, 857–80. Lampe, J.R. and Jackson, M.R. (1982). Balkan economic history, 1550–1950. Bloomington: Indiana University Press. Malanima, P. (2011). The long decline of a leading economy: GDP in Central and Northern Italy, 1300–1913. European Review of Economic History 15, 169–219. Malinowski, M. (2013). East of Eden: The Polish living standards in a European perspective. CGEH Working Paper No. 4. Malinowski, M. (2015). The bliss of market integration: Polish commodity and labour markets and their positive impact on living standards, 1500–1772. Perspectives on Europe 45(2), 43–51. Malinowski, M. (2016a). Little divergence revisited: Polish living standards in a European perspective, 1500–1800. European Review of Economic History 31, 253–276. Malinowski, M. (2016b). Serfs and the city: Market conditions, surplus extraction institutions and urban growth in Poland, 1500–1772. European Review of Economic History 20, 123–146. Malinowski, M. (2016c). Market conditions in preindustrial Poland, 1500–1772. Economic History of Developing Regions 31, 253–276. Malinowski, M. and van Zanden, J.L. (2017). National income and its distribution in preindustrial Poland. Cliometrica 11, 375–404. Małowist, M. (2010). Western Europe, Eastern Europe and world development, 13th–18th centuries: Collection of essays of Marian Małowist. J. Bataou and H. Szlajfer (eds.). Leiden-Boston: Brill. Markevich, A. and Zhuravskaya, E. (2018). Economic effects of the abolition of serfdom: Evidence from the Russian Empire. American Economic Review 108, 1074–1117. North, D.C. and Thomas, R.P. (1971). The rise and fall of the manorial system: A theoretical model. Journal of Economic History 31, 777–803. North, D.C. and Thomas, R.P. (1973). The rise of the Western world. Cambridge: Cambridge University Press. North, D.C. and Weingast, B.R. (1989). Constitutions and commitment: Evolution of institutions governing public choice in seventeenth-century England. Journal of Economic History 49, 803–832.

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Ogilvie, S. and Carus, A.W. (2014). Institutions and economic growth in historical perspective. In: P. Aghion and S.N. Durlauf (eds.). Handbook of economic growth. Vol. 2. Burlington: Elsevier Science. Özmocur, S. and Pamuk, Ş. (2002). Real wages and standards of living in the Ottoman Empire, 1489–1914. Journal of Economic History 62(2), 293–321. Pamuk, Ş. (2009). Estimating GDP per capita for the Ottoman Empire in a European comparative framework, 1500–1820. Paper presented at the XVIth World Economic History Congress, August 2009, Utrecht. Pfister, U. (2011). Economic growth in Germany, 1500–1850. Paper presented at the Conference on Quantifying Long Run Economic Development, Venice, 22–24 March. Pomeranz, K. (2000). The great divergence: China, Europe, and the making of the modern world economy. Princeton: Princeton University Press. Pomeranz, K. (2011). Ten years after: Responses and reconsiderations. Historically Speaking 12(4), 20–25. Project Muse. https://muse.jhu.edu/login?auth=0&type=summary&url=/ journals/historically_speaking/v012/12.4.coclanis.html. Sosnowska, A. (2004). Understanding underdevelopment (Zrozumieć zacofanie). Warsaw: Trio. Szołtysek, M. (2015). Rethinking East-Central Europe: Family systems and co-residence in the Polish-Lithuanian commonwealth. Bern-Berlin-Bruxelles-Frankfurt am Main-New YorkOxford-Wien: Peter Land. Topolski, J. (1965). The birth of capitalism in Europe (Narodziny kapitalizmu w Europe). Warsaw: PWN. van Tielhof, M. (2002). Mother of all the trades. Leiden-Boston-Koln: Brill. van Zanden, J.L. (1999). Wages and the standard of living in Europe, 1500–1800. European Review of Economic History 2, 175–197. van Zanden, J.L. (2009). The skill-premium and the ‘great divergence’. European Review of Economic History 13, 121–153. van Zanden, J.L., Buringh, E. and Bosker, M. (2012). The rise and decline of European parliaments, 1188–1789. Economic History Review 65, 835–861. van Zanden, J.L. and van Leeuwen, B. (2012). Persistent but not consistent: The growth of national income in Holland 1347–1807. Explorations in Economic History 49, 119–130. Wallerstein, I. (1974). The modern world-system. New York-London: Academic Press.

The long 19th century 1800–1914

3 ECONOMIC GROWTH AND SECTORAL DEVELOPMENTS, 1800–1914 Michael Kopsidis and Max-Stephan Schulze

Introduction This chapter explores the patterns of economic growth, stagnation and structural change in 19th-century Central, East and Southeast Europe. Throughout the period, this extremely diverse part of the European continent  – in terms of geography, language, culture, religion and political organization – remained economically far less developed and far more dependent on agriculture than its northern and north-western counterparts. Though industrialization gathered momentum in the latter half of the century, the pace of economic change across the region as a whole was insufficient to narrow the substantial income and developmental gap to the more advanced Western economies evident already in the early decades of the century. There was no catching-up of the East with the West. If anything, the region was falling further behind not just the richest or fastest growing countries but also Europe outside of the region taken together. On the eve of the First World War, average domestic product per head of the six economies considered here – Austria, Bulgaria, Greece, Hungary, Romania and Russia – had declined from about 36 per cent of the United Kingdom’s level in 1870 to less than one-third. Relative to the region’s German neighbour, the decrease was from almost 60 per cent to little more than 40 per cent, while the comparative income position vis-à-vis Europe as a whole deteriorated by about 13 points to 47 per cent.1 However, this broad-brush picture of relative decline masks important differences between and within the economies of the region. These differences extend inter alia to the level and rates of growth of aggregate and per capita output, the sectoral structure of the economies, their resource endowments, the timing of their industrialization and the nature and role of institutional change. Much of Central, East-Central and Southeast Europe was under Habsburg rule until the end of the

40  Michael Kopsidis and Max-Stephan Schulze

First World War. The empire’s geographical location, ‘straddling the dividing line between Inner and peripheral Europe’ (Pollard 1986: 222), meant that the timing, speed and spatial diffusion of growth and industrialization there reflected many of the features characteristic of the broader European experience, including far-reaching regional differences (Klein et al. 2017). It was the Habsburg domains closest to Western Europe, Alpine Austria and the Czech lands that first proved responsive to the ‘growth impulses from England and of the continental northwest’ (Good 1984: 15) and where modern manufacturing first began to replace proto-industrial forms of production in the late 18th and early 19th centuries (Good 1984; Komlos 1983, 1989). These parts of the Habsburg realm were economically in as promising a position as the territories of Germany (Freudenberger 2003) – for instance, in the 1820s Austrian per capita incomes were at least on a par with those in Germany. While that advantage was to be eroded very rapidly over the second half of the 19th century and in relation to the continent’s West and North-West (Klein et al. 2017; Schulze 2000, 2007a), the Habsburg Empire, including a Hungarian economy that was expanding comparatively fast after 1870, maintained a position of economic leadership in Central, Eastern and South-Eastern Europe. Elsewhere in the region comparable advances were at best muted in the first two-thirds of the century, meaning that any progress made in later decades would be on the basis of low initial levels of economic activity. The following three sections map out and evaluate the record of macro-economic and sectoral change in the region. First, and in light of the data problems pertaining to the area compared to most Western economies, we set out briefly the territorial coverage of the chapter and the main data sources used to trace the region’s and its constituent economies’ trajectory over the 19th century. The next section is concerned with documenting economies’ growth, the growth differentials between them and their sectoral origins. In a sense, it sets out the explanandum. Section 4 explores sectoral developments in some detail, followed by a conclusion that summarizes the main findings and points to some major implications for the interpretation of economic growth and development in the region up to the First World War.

Coverage and data The available quantitative evidence on aggregate and sectoral growth in the region is uneven across the six economies with regards to period coverage, estimation methods and underlying data quality. Reasonably solid measures of macroeconomic and sectoral activity that can be employed for comparative purposes are available only from mid-century onwards. David Good (1984) referred to the ‘statistical dark age’ that, for a time, hampered quantitative analysis of economic development in the Habsburg Empire. By extension, one might say, this applies even more so to the broader region that is of interest here. Of course, to a significant extent this is to do with political history – Bulgaria gained autonomy only in 1878 and independence

Economic growth and sectoral developments  41

from the Ottoman Empire as late as 1908, while Romania became an independent state in 1877. As a result, relevant statistical source materials for the decades prior to the foundation of nation-states are either not existing or not as readily accessible as they have been for many or most of the Western economies. In short, we know a lot more about the quantitative aspects of economic growth after the 1850s or 1860s than the preceding decades. For an assessment of Russia’s economic trajectory, the paucity of pre-1860 data raises serious issues, too. Thus it is difficult to identify and measure the quantitative impact of the emancipation of the serfs in 1861 on growth and structural change when fairly little is known about aggregate output and productivity changes before. The following discussion draws on recent time series estimates of national product and its main sectoral components for Bulgaria, Greece, the Habsburg Empire (Imperial Austria and Imperial Hungary), Romania and Tsarist Russia in their 1913 borders. The emphasis is necessarily on the years after mid-century. While not comprehensive in the sense of covering every economy in the region – leaving aside, for instance, Serbia and the European part of the Ottoman Empire – this country sample captures most of the population and economic activity at the aggregate level of Central, Eastern and South-Eastern Europe.2 The output series for Austria and Hungary are taken from Schulze (2000); for 1870–1913, only minor corrections have been made that do not materially affect estimated sector and aggregate growth. The gross domestic product (GDP) series has been extended backwards to 1840 using sector-specific indices from Kausel (1979) and Komlos (1983). For Bulgaria and 1870–1913, the discussion relies on Ivanov’s recent (2012) GDP estimates, correcting for a minor mismatch between GDP in current and constant 1911 prices in the 1911 base year and normalizing for the population within the country’s 1911 (i.e. pre-Balkan Wars) borders throughout. The data on Greece and their use here require some more explanation. Kostelenos et al. (2007) provide annual estimates of nominal and constant (1914) price domestic product in historical boundaries which, however, changed significantly over the course of the century with the acquisition of new territory. Without adjustment, these data do not lend themselves to the purpose of growth measurement. We first revised their original real GDP series using a smoothed deflator3 and then adjusted this amended GDP series and the corresponding population series, taking account not just of the increase in size but also the variation in output per capita that each border change involved. Finally, the new GDP and population series have been used to derive real GDP per capita for Greece in her pre-Balkan Wars borders.4 Axenciuc (2012) has produced a new annual estimate of Romania’s domestic product for 1860 to 1913. In the following, we draw on his series of gross value added in constant 1913 prices but re-allocated the output of largely part-time domestic industry from manufacturing to the agricultural sector. This helps avoid an over-estimation of manufacturing’s size relative to other economies where these

42  Michael Kopsidis and Max-Stephan Schulze

hard-to-observe and predominantly rural economic activities have either not been recorded at all or counted as part of agriculture, as in Ivanov (2012). For Russia, a new aggregate output series has been constructed for 1861–1913. Gregory (1982) offers annual series of net national product in current and constant 1913 prices for 1885–1913, which have been estimated from the expenditure side, as well as spot estimates of gross value added by sector for 1883/1887 and 1909/1913. The latter estimates have been reworked by Allen (2003), replacing Gregory’s underlying industrial output series. However, this material does not allow assessing the rates of growth and structural change prior to the early 1880s and on an annual basis. We have, therefore, compiled a new annual series of GDP at constant 1913 prices that is based on sectoral gross value added and stretching back to 1861. The starting point is Gregory (1982) and Allen (2003), whose common 1913 sectoral value added levels have been projected backwards, drawing on Goldsmith (1961) for agriculture (crops and livestock) and Suhara (2006) for industrial output, crafts and construction, while trade, transport and communications have been estimated using a weighted index of commodity output.5 Together, these sectoral components of GDP accounted for over 90 per cent of Russian GDP in 1913. Output of the remaining service sector branches has been approximated as a residual. The new annual GDP results match well with Allen’s (2003) and Gregory’s (1982) spot estimates for 1885 and 1899.6 To facilitate cross-country level comparisons, all GDP and GDP per capita data are expressed in 1990 international dollars.7

 uantitative dimensions of growth, relative stagnation Q and decline Table  3.1 and 3.2 document the huge differences in size between the ‘national’ economies of the region. On the eve of the First World War, Tsarist Russia was TABLE 3.1 GDP levels in East and South-East Europe, 1840–1913, millions, 1990 int’l dollar

 

1840

1860

1870

 

 

 

 

1,046 34,061 22,236 11,825

1,372 42,797 28,123 14,674 3,184a 77,381b

3,031 1,592 49,260 32,633 16,627 3,823 94,457

Bulgaria Greece Habsburg Emp. Austria Hungary Romania Russia a

1890

1913

Δ (% p.a.)

 

 

1870–1913

4,066 2,212 67,018 42,971 24,047 6,748 1,227,882

5,604 3,983 111,461 71,320 40,141 12,537 251,621

1.44 2.15 1.92 1.83 2.07 2.80 2.30

1862; b 1861.

Sources: Austria, Hungary (Habsburg Empire) – for 1870–1913 Schulze (2000) with minor corrections, for 1840–1860 see text; Bulgaria – Ivanov (2012) with minor adjustments; Greece – Kostelenos et al. (2007) with major adjustments and border corrections; Romania  – Axenciuc (2012); Russia  – own calculations based on Allen (2003), Goldsmith (1961), Gregory (1982) and Suhara (2006).

Economic growth and sectoral developments  43 TABLE 3.2  Population in East and South-East Europe, 1840–1913, millions

 

  1840

  1860

  1870

  1890

  1913

Δ (% p.a.)

 

   

   

   

   

   

1870–1913

Bulgaria Greece Habsburg Empire Austria Hungary Romania Russia

1.19 28.58 16.60 11.98 62.4

1.52 32.89 18.70 14.19 4.02 74.1

2.59 1.71 36.12 20.59 15.53 4.29 84.50

3.25 2.22 41.36 23.90 17.46 5.32 117.80

4.53 2.74 50.61 29.20 21.41 7.35 170.90

1.31 1.10 0.79 0.82 0.75 1.26 1.65

Sources: See Table 3.1 and Mitchell (2007).

the second largest economy in Europe in terms of total GDP, just behind Germany, and ahead of the United Kingdom, France and the Habsburg Empire (Table 3.1; Broadberry and Klein 2012). This was the outcome of rapid aggregate growth over the course of the late 19th century and, in particular, from the mid-1880s. However, much of Russia’s growth was extensive, driven by an exceptionally fast increase of her population which expanded from an initially already much higher level than that of her European peers (Table  3.2). The result was slow growth in Russia’s per capita output (Tables  3.3 and 3.4). In the region, only Bulgaria, another economy characterized by rapid population expansion, did worse with almost stagnating per capita incomes, albeit against a background of comparatively weak aggregate growth to start with.8 This is in stark contrast to the evidence from Hungary and Romania. Both economies displayed comparatively strong per capita income growth at or above the European average but differed significantly in terms of population growth. These two were the only two Eastern European economies that by 1913 had narrowed the initial 1860 income gap to the region’s richest economy (Austria), at least in percentage if not in absolute terms (Table 3.3). The long-run performance of Greece falls somewhere in the middle of the sample. While aggregate growth there was marginally faster than in Hungary, the more rapid expansion of the population meant that per capita income grew only at a rate similar to Austria’s. How does the growth performance of the Eastern and South-Eastern economies compare within the broader European context? Significant intra-region income level and growth differentials notwithstanding, Eastern and South-Eastern Europe on the whole fell further behind in terms of per capita income during the 19th century. This holds not just vis-à-vis the UK, Europe’s leading economy, or the region’s rapidly industrializing German neighbour but also  – and more tellingly  – other initially less developed economies on the continent’s southern and northern ‘peripheries’ (Table 3.3). In 1870, average per capita GDP across the region was about $1,178 in 1990 purchasing power parity (PPP)-adjusted terms (1860: $1,108). Its subsequent growth up to 1913 (0.76 per cent per annum) is well below the record for any of the northern and southern economies (except

44  Michael Kopsidis and Max-Stephan Schulze TABLE 3.3 GDP per capita in East and South-East Europe, 1840–1913, 1990 int’l dollar

 

  1840

  1860

  1870

  1890

  1913

Δ (% p.a.)

 

   

   

   

   

   

1870–1913

Bulgaria Greece Habsburg Empire Austria Hungary Romania Russia

880 1,192 1,340 987

900 1,301 1,504 1,034 792a 1,051b

1,170 932 1,364 1,585 1,071 890 1,118

1,252 996 1,620 1,798 1,377 1,269 1,042

1,237 1,455 2,202 2,443 1,875 1,705 1,472

0.13 1.04 1.12 1.01 1.31 1.52 0.64

UK Germany

2,294 1,629c

2,904    1,877

3,328    2,041

4,055   2,726

5,030 3,902

0.97 1.52

Denmark Finland Norway Sweden

1,428 911c 935 1,013

1,741 959 1,137 1,260

2,003 1,140 1,360 1,392

2,523 1,381 1,709 1,691

3,912 2,111 2,447 2,951

1.57 1.44 1.38 1.76

Italy Spain Portugal

1,575 1,109 847

1,501 1,307 883

1,635 1,225 975

1,902 1,668 1,128

2,749 2,015 1,250

1.22 1.16 0.58

a

1862; b 1861; c 1851.

Sources: Central, Eastern, South-Eastern Europe – See Tables 3.1 and 3.2. UK – Broadberry and Klein (2012), Broadberry et al. (2015). Germany – Hoffmann (1965), Burhop and Wolff (2005). Denmark, Finland, Norway – Maddison up-date (2013). Sweden – Schön and Krantz (2015). Italy – Malanima (2011). Portugal – Palma and Reis (2018). Spain – Alvarez-Nogal and Prados de la Escosura (2013) and Prados de la Escosura (2017).

Portugal), irrespective of their initial comparative income levels. Of course, part of this is an effect of Russia’s weight in the calculation. However, growth at rates broadly comparable to those prevailing in the Nordic countries was achieved only in Hungary and Romania; elsewhere in the region, per capita incomes rose at rates below those in Italy and Spain. Economic growth in the region was a process characterized by pronounced annual fluctuations in activity and, in some instances, longer phases of expansion alternating with periods of stagnation (Figure 3.1). Greece and Romania experienced particularly strong year-on-year variations in per capita output throughout the period. Like Bulgaria and Russia, the Greek economy faced extended episodes of slow growth below 0.5 per cent per annum. For those economies where the available data allow comparison with earlier decades, the numbers indicate a significant increase in per capita output growth in the years after 1870. The timing of these up-swings in activity, however, varied markedly between countries. As a means to more clearly identify the periodicity of economic growth and to avoid the distortions brought about by measuring output changes between points

Economic growth and sectoral developments  45 3200.0

1990 int’l dollar, log scale

1600.0

800.0

Austria

FIGURE 3.1 GDP

Hungary

Bulgaria

Greece

Romania

1911

1908

1905

1902

1899

1896

1893

1890

1887

1884

1881

1878

1875

1872

1869

1866

1863

1860

1857

1851

1854

1848

1845

1842

400.0

Russia

per capita in East and South-East Europe, 1840–1913

Sources: See Tables 3.1 and 3.2.

in time that are unsystematically related to the business cycle, we compute growth from peak-to-peak in per capita GDP (Table 3.4). The impression of Hungarian and Romanian growth as particularly strong in the given regional context is confirmed, and so is that of a comparatively weak record for Bulgaria and Russia. After a period of slow growth in the 1870s and 1880s, Greek GDP per capita growth rose in the 1890s and early 1900s, though not nearly enough to keep pace with the most dynamic economies in the region. Note the reversal in growth fortunes between Austria and Hungary in the late 1880s/early 1890s. This had to do with the effects of the ‘Great Depression’ after 1873. Both the periodicity and differential rates of Austrian and Hungarian growth support the argument that the outflow of Austrian capital to Hungary after the 1873 Vienna stock market crash was crucial in prolonging slow growth in the western half of the Habsburg Empire, whilst stimulating the first wave of industrialization in the eastern, Hungarian half. The reversal of this capital outflow in the early 1890s was associated with an increase in Austrian and a decrease in Hungarian economic growth (Komlos 1983; Schulze 1996, 1997, 2000). Russia’s post-1890 doubling in per capita GDP growth reflects the onset of modern industrialization which Markevich and Nafziger (2017: 37) locate in the early 1890. To what extent was economic growth in Eastern Europe associated with changes in the income distribution among the region’s economies? One can think about the issue in terms of so-called σ-convergence – a reduction over time in the

46  Michael Kopsidis and Max-Stephan Schulze TABLE 3.4  Growth of GDP per capita in East and South-East Europe, 1840–1913, percent

  Bulgaria Greece Habsburg Empire Austria Hungary Romania Russia a

1840–1870

1870s–1890s

1890s–1910s

1870s–1910s

0.19a 0.45 0.56 0.27

peak-to-peak 0.85 0.76 1.01 0.62 1.55 1.68 0.49

0.19 1.04 1.36 1.50 1.12 1.35 0.97

0.52 0.91 1.15 0.98 1.38 1.55 0.72

0.51 per cent if measured between peaks in 1840 and 1867.

Sources: Tables 3.1 and 3.2. Note: Peaks in per capita economic activity differed between the economies but were typically in the early 1870s, late 1880s to mid-1890s and between 1910 and 1912.

dispersion of per capita income levels across economies (Barro and Sala-i-Martin 1991; Sala-i-Martin 1996). A typical measure of σ-convergence is the coefficient of variation. A decline in the coefficient is indicative of a fall in dispersion. Figure 3.2 documents two measures: CVI, which covers all sample economies except Bulgaria, and CVII where Bulgaria is included.9 Though there are minor differences in dispersion levels, the two measures tell in essence the same story: while fluctuating strongly over time, there is no uniform linear trend decline or rise. At the end of the period under review, the extent of inter-country inequality in terms of GDP per capita was more or less the same as in 1870 – there is no evidence of sustained σ-convergence in late 19th Eastern and South-Eastern Europe. However, one can nevertheless distinguish three major phases, driven by the six economies’ different periodicities and rates of expansion. During the 1870s and up to the late 1880s, income dispersion declined to its overall lowest level. This decline was associated with low-income economies – especially Hungary and Romania, but also Greece – recording significantly higher per capita growth than Austria and moving in percentage terms somewhat closer to the richest economy in the sample. This shift was reversed in the 1890s when Austria began expanding at the fastest rate and increasing its income lead. There was some reduction in income dispersion again towards the very end of the period, but that did not entail any significant decline below its 1870 level. The concept of β-convergence offers a different, but related, perspective on the convergence problem. The hypothesis is that poor economies will tend to catch up with and grow faster than rich ones, with all economies converging eventually in terms of per capita income.10 Low-income countries have the potential to grow faster than more developed, richer countries because they are not faced with as rapidly diminishing returns to capital as high-income and capitalrich economies. In addition, poor economies can potentially adopt and adapt the

Economic growth and sectoral developments  47 0.400 0.350 0.300 0.250 0.200 0.150 1870

1875

1880 CVI

FIGURE 3.2 

1885 CVII

1890

1895

Poly. (CVI)

1900

1905

1910

Poly. (CVII)

σ-convergence across Eastern Europe 1870–1913

Sources: See Tables 3.1 and 3.2.

technologies, production methods and institutions that are typical features of the leading, rich economies.11 Though a necessary condition, β-convergence is not a sufficient condition for σ-convergence (Young et al. 2008). The most basic variant of testing for unconditional convergence involves regressing the growth rate of real income per capita over a given period on the initial income level at the start of the period. An inverse relation between the growth rate and initial income implies poorer economies are growing faster and catching up with the rich. Figure  3.3 illustrates this relationship for our sample of Eastern European economies. While the slope is negative, suggesting some catching-up of the poor with the rich across the region, this evidence is weak. It lends little, if any, support to the notion of intra-regional convergence. Leaving aside the small number of observations, the fit of the regression line is poor and the estimated coefficient on initial income is statistically insignificant. The question that now arises is to what extent the stark differences in aggregate performance between the six economies were driven by differences in sector growth and economic structure. The data in Table  3.5 combine these two aspects to assess the relative contribution that the primary, secondary and tertiary sectors made to GDP growth.12 Relative growth contributions are measured as each sector’s growth rate weighted by its share in GDP at the beginning of the period. Both panels (A. 1840–1870, B. 1870s–1910s) reflect the different timing and pace of countries’ industrialization. Apart from Imperial Austria and especially its western and northern lands, the region industrialized late in European comparison (Klein et al. 2017; Pollard 1986: 191–251). The initial industrial – or, more

48  Michael Kopsidis and Max-Stephan Schulze

Growth Rate GDP per capita

1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 6.700 FIGURE 3.3 

6.800

6.900

7.000

7.100

Ln GDP per capita 1870

7.200

7.300

7.400

β-convergence across Eastern Europe, 1870–1913

Sources: See Tables 3.1 and 3.2. TABLE 3.5  Sector growth and relative contributions to GDP growth, 1840–1913

Sector growth (per cent per annum)  

Contribution to GDP growth (per cent)

Primary Secondary Tertiary GDP GDP p.c. Primary Secondary Tertiary GDP

A. 1840–1870         Greecea Habsburg Empire Austria Hungary

0.80 0.73

6.56 3.06

2.68 0.92

1.41 1.24

0.19 0.45

43.4 22.0

24.6 45.5

32.1 32.5

100.0 100.0

0.43 1.10

3.19 2.45

0.92 0.91

1.29 1.14

0.56 0.27

10.3 47.2

57.4 19.7

32.3 33.1

100.0 100.0

B. 1870s–1910s: peak-to-peak      Bulgaria Greecea Habsburg Empire Austria Hungary Romania Russia a

1.55 1.58 1.86

0.77 3.75 2.52

3.14 2.62 1.60

1.83 2.05 1.96

0.52 0.91 1.15

53.5 50.5 30.1

5.0 22.2 38.8

41.6 27.4 31.1

100.0 100.0 100.0

1.40 2.08 1.99 1.79

2.21 4.00 4.42 3.92

1.69 1.33 3.87 2.56

1.81 2.14 2.89 2.39

0.98 1.38 1.55 0.72

18.4 46.8 37.4 42.1

43.9 32.3 24.2 34.2

37.7 20.9 38.4 23.7

100.0 100.0 100.0 100.0

Approximations based on sector shares in nominal GDP applied to real GDP.

Sources: See Table 3.1. Note: Relative contributions to growth are measured as each sector’s growth rate weighted by that sector’s share in GDP at the beginning of the period. Panel B: Measurement for all sectors from peak to peak in GDP. Since the peaks in economies’ GDPs do not correspond exactly with one another, the periods of measurement are not always identical.

Economic growth and sectoral developments  49

broadly, secondary sector – base upon which Austria’s subsequent expansion built was far larger than anywhere else in the region in the early 19th century.13 Hence during 1840–1870, more than 57 per cent of the increase in total value added was the result of growth in the secondary sector, though slow expansion in agriculture played a role, too, in shifting the balance towards industry. This contrasts with the Greek experience. Our approximation would suggest that expansion in non-farm goods production there was about twice as fast as in Austria during this period; however, it left much less of a mark on GDP growth, contributing about 25 per cent – a reflection of the secondary sector’s extremely small initial size (Table 3.6).14 Here, as in Hungary, it was agriculture where most of aggregate growth was generated. The richer evidence on the post-1870 period allows drawing a more detailed and nuanced picture of sectoral growth across the region. The case of Bulgaria marks one end of the range of Eastern and South-Eastern Europe’s growth and industrialization experiences. Whatever catch-up potential its economy might have had in the early 1870s, Bulgaria realized little if any of that potential. The country’s small and only slowly growing secondary sector made an almost negligible contribution of a mere 5 per cent to aggregate growth (Table 3.5, lower panel) and over time assumed a falling share in aggregate output (Table  3.6). Further, structural change in terms of significant shifts in the sectoral composition of the labour force was practically absent (Table 3.7). On the eve of the First World War, Bulgaria was hardly more industrialized than it had been 40 years earlier and, compared to the rest of the region, had become relatively poorer. If there is a place in the region where Palairet’s (1997) dictum of evolution without development might apply, it would be Bulgaria (and, perhaps even more so, Serbia). The pattern of development was distinctly different in the region’s fastest growing economy in terms of both total and per capita GDP – Romania. Starting off from an income per head level in 1870 that was well below Bulgaria’s (if the conversions in 1990 international dollars are about right in comparative terms) and, likewise, a much lower initial secondary sector share in GDP, the output structure of the Romanian economy changed significantly over the late 19th century (Table 3.6). By 1913, the proportion of GDP generated in mining, manufacturing, crafts and construction had more than doubled to 23 per cent and the sector contributed almost a quarter of total GDP growth since the 1870s, while expansion in services added about 38 per cent. In Greece, the secondary sector made a similar contribution to aggregate growth. However, reliance on expansion in primary production remained far larger in comparative terms than in Romania, with the sector contributing half of total output growth and accounting for as much as 59 per cent of Greek GDP in 1913. The persistent dominance of agriculture was also characteristic of development in the region’s largest economy. Despite Russia’s rapid industrialization from the early 1890s, in particular, it was mainly its huge rural sector that shaped aggregate growth into the early 20th century. In 1870, more than 80 per cent of the total

50  Michael Kopsidis and Max-Stephan Schulze TABLE 3.6  Sector composition of real GDP, 1840–1913, percent

 

1840

1870

1890

1913

Prim. Sec. Tert. Prim. Sec. Tert. Prim. Sec. Tert. Prim. Sec. Tert. Bulgaria Greecea Habsburg Empire Austria Hungary Romania Russia a

  67.2 84.0 2.2 13.8 70.0 40.0 13.8 46.2 34.4 35.0 17.2 47.8 27.1 49.5 7.5 43.0 48.8   64.3   65.1

14.9 9.9 23.6 30.0 11.0 9.3 13.6

17.9 20.1 42.0 42.9 40.1 26.4 21.3

64.4 63.7 36.5 27.0 53.3 56.6 57.9

11.4 11.6 26.3 32.0 16.2 13.4 20.1

24.2 24.7 37.2 41.0 30.5 30.0 22.1

60.7 59.1 31.5 22.2 48.0 41.5 50.7

9.7 19.4 31.9 37.2 22.6 22.9 26.5

29.5 21.5 36.6 40.6 29.5 35.6 22.8

Composition of nominal GDP.

Source: See Table 3.1.

TABLE 3.7  Sectoral shares in the labour force, 1870–1910, percent

Primary sector

Russia Bulgaria Greece Romania Hungary Austria

1870

1890

1900

1910

82.1 – – – 78.3 62.7

77.4 85.5 – – 79.5 61.5

73.8 82.7 – – – –

– 81.9 49.6 79.6 73.0 54.0

8.9 6.9 – – 9.0 22.3

11.4 7.5 – – – –

–

13.7 7.6 – – 11.6 16.1

14.8 9.8 – – – –

– 10.0 34.2 12.4 13.5 20.1

Secondary sector Russia Bulgaria Greece Romania Hungary Austria

5.6 – – – 7.1 20.3

8.1 16.2 8.0 13.5 25.9

Tertiary sector Russia Bulgaria Greece Romania Hungary Austria

12.3 – – – 14.6 17.0

Sources: Austria, Hungary – Schulze (2007a: 216); Russia  – own interpolations based on data from Mironov (2000: 452); South-East Europe  – unpublished data from Ivanov (2012) for Bulgaria and Mitchell (2003: 143–162).

Economic growth and sectoral developments  51

labour force were engaged in agriculture (including forestry and fishing), which generated about 64 per cent of the economy’s total output (Tables 3.6 and 3.7). Between the early 1870s and early 1910s, the primary sector contributed over 42 per cent of the increase in GDP – significantly more than mining, manufacturing, crafts and construction put together. Such numbers raise the issue of how ’industrialized’ the region had become before the First World War. In this respect, comparisons with the Habsburg Empire, especially Imperial Austria, as a benchmark are particularly instructive precisely because it straddled the boundaries between Europe’s industrial core and its eastern periphery. Austria was the only economy in Central, Eastern and SouthEastern Europe where it was not agriculture but industry that made the largest sector contribution to economic growth (about 10 percentage points higher than in Hungary and Russia; Table 3.5). Further, nowhere else in the region was the share of the secondary sector in total economy output nearly as high as in Austria, either at the beginning or end of the period under review.15 Reflecting both far higher levels of labour productivity and a far higher proportion of the labour force employed in non-agricultural goods production, secondary sector output per head of the population in Austria remained at more than twice the level of the closest followers (Hungary, Romania, Russia) throughout the period. Finally, manufacturing in Austria and, to a lesser extent, Hungary, as distinct from mining, handicrafts and construction, played proportionally a much bigger role than in the rest of the region.16 In short, despite rapid industrial growth in Greece, Romania and Russia during the late 19th century, on the eve of the First World War the countries of Eastern and South-Eastern Europe remained heavily dependent on agriculture and, compared to Austria and even more so its Western peers, a long way off from becoming ‘industrial’ economies.

Growth without structural change Between 1860 and 1914, no other part of Europe experienced a higher rate of population growth than South-East Europe, where demographic stagnation turned into a sustained expansion (Jackson 1985: 223–272; Botev 1990). In the Tsarist Empire, population growth doubled from 0.96 per cent (1719–1782) to 1.94 per cent (1897–1914) (Mironov 2000: 18). The demographic boom was significantly weaker but still noticeable in the Habsburg Empire, the most economically developed part of the region (Table 3.2). Even if the interdependencies of 19th-century demographic and economic growth – which differed between and changed over time within countries – are far from clear for Eastern and South-Eastern Europe, we can be reasonably confident that the sustained demographic upswing was only possible because growth in economic activity in the region had begun to accelerate well before 1870. The evidence on per capita output growth suggests that almost the entire region participated in the international economic upswing of the ‘first globalization’,

52  Michael Kopsidis and Max-Stephan Schulze

albeit to very different degrees at the individual economy level. However, even during the period of accelerating growth after 1870, which also saw the beginning of industrialization in the lands east and southeast of Imperial Austria, there was no catching-up to the leading industrial nations in Western Europe. Despite high growth rates in manufacturing and transport, structural change was painfully slow and little headway was made in the transition from agricultural to industrial economies and societies. On the eve of the First World War, primary production (agriculture, forestry and fishing) still formed by far the largest economic sector across Eastern and South-Eastern Europe except Imperial Austria (Table 3.6).17 The dominance of agriculture is put into even sharper relief when looking at sectoral labour force shares. Apart from Greece with her large maritime sector and Imperial Austria, across the region agriculture still counted for no less than 70 per cent of the total labour force in 1910 (Table 3.6). Even after three to four decades of industrialization efforts and growth in manufacturing and transport, the proportion of labour engaged in farming remained far higher in most East and South-East European countries than in the early industrializing countries of the ‘European core’ at the beginning of their modern industrialization (Pollard 1981: 45–83).18 It is one of the striking features of the eastern ‘European periphery’ that structural transformation as a conditio sine qua non for the transition to broad-based modern growth advanced only very slowly even after industrialization had started in the late 19th century. By contrast, in the European core productivity-enhancing structural transformation towards an industrial economy had started long before the emergence of modern Industry. Thus, among the early industrializing economies of North-Western and, up to a point, Central Europe, the weight of manufacturing and export-orientated ‘proto-industries’ in total output at the onset of their modern industrialization was far larger than in the Eastern and South-Eastern European ‘newcomers’. These had to build up modern, factory-based industry almost from scratch for a range of structural and institutional reasons. ‘It is the absence of structural change rather than the absence of growth that primarily calls for explanation and interpretation,’ Gerschenkron (1962: 213) observed in his seminal study of Bulgaria’s failed industrialization around the period 1890– 1940. This assessment can serve as a starting point for a discussion of the broader region’s economic development before the First World War. Building upon Lenin’s analysis of capitalist development in Russia, Gerschenkron established a still highly influential explanation of retarded structural change and industrialization in the Tsarist Empire and South-East Europe (Gerschenkron 1962, 1965; Lenin 1899; Gatrell 1986: 70–83). Here, the argument goes, an inherently backward and unproductive peasant agriculture and its community-based institutions were preserved either by misguided, half-hearted agrarian reforms as in Russia or peasant-friendly agricultural policies as in Bulgaria.19 Agricultural development was blocked for decades with far-reaching negative consequences for industrialization and economic growth.20 In Gerschenkron’s view, the alternatives would have been to follow the ‘Prussian way’ by imposing a radical reform

Economic growth and sectoral developments  53

from above and so change the institutional framework of capitalist agriculture in a backward society or to imitate the British development based on unrestricted land and labour markets as well as mass eviction of allegedly less productive peasants (Gerschenkron 1965). The preservation of a tradition-bound small peasantry, it is argued, stifled agricultural productivity and income growth, restricted demand for manufactures and hindered the creation of a larger home market for industry. It delayed the release of labour out of agriculture to build up an ‘industrial reserve army’ and ultimately slowed down capital accumulation in modern industry. The original sin in the Gerschenkron view was the economic survival of a pre-modern, pre-capitalist peasantry which retarded industrialization and structural change in most of Eastern and South-Eastern Europe before the First World War. This view, though controversial, is still highly influential today. Some authors support Gerschenkron’s negative view of both small peasant and communal farming (Palairet 1997: 111–120, 298–341, 357–370; Sundhaussen 1989a: 219, 1989b). However, recent empirical research has challenged the traditional picture of Eastern Europe’ small peasantry as an almost insurmountable obstacle to growth, market orientation and agricultural development. The impact of communal farming on growth in large parts of the region remains an issue of lively debate (Castañeda and Markevich 2016; Markevich and Zhuravskaya 2018; Allen 2003: 21–46; Gregory 1994; Gatrell 1986: 99–140; Kopsidis and Ivanov 2017b; Kopsidis 2014; Kopsidis et al. 2015). However, the Habsburg case cautions against a general argument for strong positive (or negative) growth effects of 19th-century legal and institutional reforms (or the failure to introduce them). Whatever the merits of Gerschenkron’s view with respects to Russia and South-East Europe, it does not hold for the 19th-century Habsburg Empire. While earlier historical scholarship emphasized the significance of the reforms implemented in the aftermath of the 1848 revolutions for agricultural growth and development, in particular (e.g. Dinklage 1973; Hanák 1975; Katus 1970), Komlos’ (1983: 25–51, 214–220), quantitative research shows that the rate of economic growth was largely independent of state policy in two core areas. First, the formation of the Habsburg customs union (1850) had little effect on the expansion of either Austrian industry or Hungarian agriculture since the barriers to intra-empire trade were already fairly low by the time internal free trade and a common external tariff were introduced. Second, the full emancipation of the peasantry of 1848/1849 did not mark a turning point. The reforms separated lords from peasants without overcharging the peasantry and aided land and labour markets conducive to large estate agriculture based on wage labour (Hidas 1980; Niederhauser 1998; Kopsidis 2008). Yet Hungarian liberals were disappointed that their exemplary policies had no immediate impact on agricultural development and blamed peasant ‘stupidity’ (Voros 1980: 24–30). However, they missed an important point: in the late 18th century, the feudal obligations of the peasantry had been lowered already to such an extent that they were no longer a serious impediment to growth and development in the half century thereafter (Komlos 1983: 215).

54  Michael Kopsidis and Max-Stephan Schulze

Hence the impact of discrete reform packages on long-term growth should not be exaggerated, especially compared to factors such as increasingly integrated domestic and international food markets. Further doubts about the Gerschenkron approach arise when looking at agricultural growth, which was either significantly stronger than population growth (Austria, Hungary, Greece and Romania) or more or less on par with rapid demographic expansion as in Bulgaria and Russia (Tables  3.2 and 3.5). Imperial Hungary and the Tsarist Empire, the region’s third-largest and largest economies respectively, were also by far the two biggest agricultural producers in absolute terms whose farming sectors expanded rapidly, as did Romania’s (Tables 3.1 and 3.5). Overall, the region’s agricultural output grew significantly faster than in North-West Europe (Federico 2015: Table 3.7, 132).21 Weak agricultural growth per se, then, seems an unlikely cause of slow industrialization and retarded structural change in Eastern and South-Eastern Europe. On average, farming delivered the bulk of aggregate growth across the region (Table 3.5). Even if relatively early industrializing Austria and her comparatively sluggish agriculture are included, almost 40 per cent of the entire region’s growth in total GDP over 1870–1913 accrued out of agriculture, a third out of secondary and a quarter out of tertiary production (calculation based on data from Tables 3.1 and 3.5).22 Given the small initial size of industry, and especially manufacturing, for most of the region’s economies, it was the expansion of their agricultural sectors that was crucial for raising total and per capita output levels. Russia, Romania and Bulgaria can be best described as wheat or grain economies benefitting from the international agricultural commodity boom.23 The small Southeast European economies gained primarily from turning into agrarian export economies whilst pursuing industrialization strategies based at least partially on import substitution (Kopsidis 2012a: 21–22). Russia’s agriculture benefitted also from a large and expanding domestic food market in the industrializing parts of her vast empire. The position of Imperial Hungary was different. Over the course of the late 19th century, she withdrew from international grain markets to concentrate on the readily accessible Austrian market that was largely uncontested by foreign competition because of the Habsburg customs union’s common external tariff (Komlos 1983: 218–219). While total agricultural output in the region expanded rapidly during the 19th century, doubts remain as to whether and to what extent farming shifted to productivity-based modern growth. In the case of Hungary with its comparatively highly developed farming sector, the evidence for 1870–1913 shows that growth in total agricultural output was associated with rapid increases in output per worker and output per unit of land. Gaining from a large and highly integrated domestic market, most of this growth in labour productivity – above the rate for the aggregate economy – was an outcome of significant capital investment in agriculture (financed in part by large capital inflows from Austria) and associated increases in the capital/labour ratio. It was much less a result of growth in total factor productivity, that is improvements in technology and organization, or advances in human capital, though these were not negligible (Schulze 2007a, Table 3.8).24

Economic growth and sectoral developments  55

However, the Hungarian productivity growth record is not characteristic for the region. Consistent and reliable sectoral labour productivity and total factor productivity (TFP) estimates are not available for the other pre-1914 economies of Eastern and South-Eastern Europe in the sample.25 Yet on balance, the evidence on agricultural employment shares (Table 3.7) and on growth in per capita agricultural output (Tables 3.2 and 3.5) points to only very modest increases in labour productivity in the long term. At the same time, the sources provide no reason to assume that TFP growth elsewhere in the region was on a par with or faster than in Hungary. In summary, extensive growth based on increases in factor inputs likely dominated in most parts of Europe’s east and south-east. What probably mattered most for economic change in Europe’s eastern half was the positive demographic response to the agricultural export boom. Under the conditions of poorly developed agrarian economies and ‘non-European’ demographic regimes characterized by high nuptiality and fertility (Hajnal 1965), any efforts aimed at raising living standards substantially were frustrated in much of Eastern and South-Eastern Europe at the end of the 19th century (Allen 2003: 13; Gatrell 1986: 56; Botev 1990). This was, evidently, not the case in the Habsburg Empire and Romania. However, in the worst case literally all gains in farm output could have been eaten up by an equally increasing population.26 ‘Immiserizing growth’ may have happened in Bulgaria (Ivanov and Tooze 2007; Palairet 1997: 298–341), though the GDP per capita estimates used here indicate stable or slightly increasing rather than falling average incomes (Table  3.4).27 This would suggest that at least some productivity-enhancing factors were effective in most parts of the region, neutralizing for a certain period the negative impact of a rising labour force (population) on agricultural productivity. Modern development economics has shown that under the conditions of an agrarian, low-skill and low-productivity economy characterized by inferior technology, poor education and high levels of widespread illiteracy, a positive exogenous shock such as integration into rapidly expanding world markets for food and agricultural raw materials induces rural population growth to accelerate (Lipton 1989; Galor 2005: 280–283). Theoretically, the more land is abundant, the stronger and more durable is this positive demographic effect. Moreover, the demographic reaction to contracting international demand typically appears to be delayed with a lag of one generation. Rurally based population growth can thus be stronger for long periods of time in poor, purely agrarian economies than in industrializing countries. The demographic expansion of the rural poor is often connected with dynamic agricultural growth but without structural change by tying resources to the rural sector. Yet both historical and present-day experience suggests that demographic expansion without structural change works strongly against the transition to self-sustaining modern growth. Under these conditions, population growth has the potential to put real incomes under severe pressure in the long run. This theoretical scenario helps explain why structural change proceeded so sluggishly in Eastern and South-Eastern Europe and why there was no catching-up to the industrial economies of North-Western Europe before the First World War. However,

56  Michael Kopsidis and Max-Stephan Schulze

it cannot account for the rise in living standards for large parts of the rural population observable in most countries under consideration before the First World War (Table  3.3; Gregory 1979, 1994: 37–54; Eddie 1968; Lampe and Jackson 1982: 143; Franghiadis 2011: 120, 130). During the 19th century until around 1870, a strong international terms of trade effect in favour of farm commodities worked against industrialization in less developed agrarian economies. Rather, this effect directed resources – labour, capital and land – into the agrarian export sector. In the short run, growth accelerated and living standards improved in the agrarian periphery, but in the long run any structural change in the direction of industry was discouraged (Williamson 2006, 2011; Pamuk and Williamson 2011). The driving force of this development was the deep integration of the European eastern periphery into the international trading system during the ‘first globalization’. As a result of a ‘commercial and transport revolution’, value added in trade, transport and communication increased faster than GDP.28 In the course of the ‘European grain invasion’, the international terms of trade slowly deteriorated for grain exporters after around 1870 (O’Rourke 1997). However, the concurrent railway boom in Russia, the Habsburg Empire and Romania opened up formerly isolated, landlocked regions with a high agrarian potential for market-orientated grain farming. The rapid fall in overland transport costs per ton to a fraction of their pre-railway levels connected local producers to regional, national and international markets. Thus at the farm level, demand for grain increased significantly and farm gate prices rose. As long as transport costs declined sufficiently strongly, local farm gate prices in areas previously disconnected from the railway network (and thus wider markets) could rise even if the international market price for grain fell. Such increases in local prices facilitated by the ‘transport revolution’, in turn, made more intensive commercial grain farming profitable for the first time in much of the eastern periphery. This held even under the conditions of the ‘European grain invasion’ (Metzer 1974; Allen 2003: 24–30; Eddie 1977; Katus 1983; Kopsidis 2008: 291).29 Increasing regional specialization connected with the labour- and capital-intensive opening up of new land in the Tsarist Empire, Imperial Hungary and the plains of South-East Europe very likely had a significant positive impact on agricultural yields, counterbalancing the negative effects of rural population growth on farm productivity and rural incomes (Gregory 1994: 30; Schulze 2000, 2007a: 197; Eddie 1968). Note, though, that population growth in Hungary was far slower than in Russia and Romania, making the net gains likely higher in the former than the latter. Under the conditions of competitive but expanding export markets, these productivity gains should have contributed to maintaining a high proportion of the total labour force in agriculture until the First World War (Table  3.6). In Imperial Hungary  – with her close connection to the higher income markets in Austria – and Russia, agricultural specialization benefitted as well from growing food demand of the rising urban-industrial population. So-called backward eastern peasant economies such as, for instance, Russia’s exploited the new commercial opportunities of expanding

Economic growth and sectoral developments  57

markets within institutional frameworks which often included communal farming. In fact, the existence of small peasants and communal peasant farming did not per se obstruct substantial increases in farm output and productivity as claimed by Gerschenkron (Kopsidis et al. 2015; Löwe 1987; Gregory 1994: 37–54; Gatrell 1986: 98–140; Kopsidis 2008, 2012b, 2014; Reinold 2017). Markevich and Zhuravskaya’s (2018) recent analysis concludes that ‘the abolition of serfdom had a substantial positive effect on agricultural productivity, industrial development, and peasants’ nutrition in nineteenth century Russia because the 1861 emancipation had transformed ‘serfs with no rights over their own labor or human capital into free small-scale farmers’ (1113). They also argue for strong negative effects of communal farming on farm productivity measured by grain yields (Markevich and Zhuravskaya 2018; cf. Castañeda and Markevich 2016). However, the alleged benefits of so-called private farming are distinctly less evident once the entire crop production complex is considered and not just grain production (Kopsidis et al. 2015: 440). Further research is necessary to ascertain whether the new post-reform communal farming systems actually formed a severe obstacle to growth and commercialization of farming. In Eastern and South-Eastern Europe, an increasingly market-orientated agriculture developed during the period 1830–1914. However, the transition of the agricultural sector to modern, that is productivity-driven, output growth as a key ingredient in substantial structural change required a growing capacity of industry to absorb the emerging agricultural labour surplus. For significant labour transfers out of the primary sector to materialize, secondary sector activity, especially manufacturing, needs to have reached a certain minimum extent before the onset of modern industrialization and expand rapidly during industrialization (Hayami and Ruttan 1985: 421; Kopsidis and Ivanov 2017b: 68). The main hindrance to structural change in the region was not sluggish agricultural growth acting like a brake on aggregate expansion, as once thought. Rather, across much of Eastern and South-Eastern Europe the industrial sector was simply too small to absorb a large proportion of the emerging rural labour surplus, despite the rapid expansion of manufacturing after 1880. To re-state an earlier observation: the contribution of modern industry (manufacturing) to aggregate economic growth up to 1913 was distinctly limited except in Imperial Austria (Kopsidis and Ivanov 2017a; Allen 2003: 21–46; Klein et al. 2017; Markevich and Nafziger 2017).30 Finally, answering the question why around mid-century manufacturing and, more broadly, the industrial sector in Europe east of Imperial Austria was so small contributes a lot to our understanding of the delay in structural change. Pollard differentiates between an ‘outer’ and an ‘inner Europe’, the latter situated in the North-West which was able to imitate and adapt Britain’s industrial revolution quickly ‘but then there came a line where the process stopped, sometimes for generations, . . . Beyond it, there were only scattered outposts [of industrialization; authors’ addition], too weak to affect much the surrounding country as the more densely spaced industrial regions in Britain and in ‘inner Europe’ had been able to do’ (Pollard 1981: 46).

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According to the literature, South-East Europe was the part of the continent least qualified to industrialize – a statement with far-reaching consequences as argued by Berend and Ránki and other scholars. A certain minimum degree of development (and GDP per head) had to be reached already at the outset so as be able to fully exploit Gerschenkronian advantages of relative backwardness for industrialization (Berend and Ránki 1982: 71–72, 155–160; Pollard 1981: 245–246; Lains 2002; Teichova 1985: 253; Kopsidis 2012a). Given the historical heritage of extremely sparsely populated, embattled imperial border lands and more than a century of anarchy within the Ottoman Empire before 1830, none of the South-East European counties had been able to cross this threshold by the middle of the 19th century. Exceptionally low living standards and low saving rates hampered capital formation, agrarian progress and industrialization. Severe institutional deficits in public administration, the legal system, commerce and industry as well as education made South-East Europe the least developed region of Europe even compared to the Tsarist Empire. It was this lack of initial economic development that, in contrast to Hungary and her integration into a relatively large and rich Habsburg home market, encouraged South-East Europe’s and also Russia’s specific reaction to the terms of trade-shock of the first globalization in the shape of an agricultural export boom. Integration into the capitalist world economy fostered the expansion of the agricultural sector and thus hindered structural transformation towards an industrial society. In other words, the relative underdevelopment of South-East Europe and, up to a point, Russia was in fact cemented by the first globalization. Mainly focusing on SouthEast Europe, this view finds support in a diverse historiography whose theoretical foundations range from a liberal, non-dogmatic Marxism to certain strands of neoclassical economics (Berend and Ránki 1982: 107–141, esp. 124; Williamson 2006, 2011; Pamuk 1987; Pamuk and Williamson 2011). Reclaiming land on a large scale over a long period as a way of labour-based ‘non-monetary capital formation’ was a task which was perfectly in tune with the factor endowments and factor qualities of Balkan rural societies (Kopsidis 2012b).31 It required and encouraged a strong demographic reaction to increasing demand for farm labour, which, as has been shown, was forthcoming, and the establishment of rural trade and credit markets able to meet the comparatively low capital demand of small peasant producers. Balkan rural societies and merchants were fully capable of building up sophisticated socalled interlocked rural factor and product markets. However, it was an altogether different and, before the 1870s, largely unachieved task to mobilize resources and capabilities in terms of infrastructure, institutions, and physical and human capital formation on a scale sufficient for the development of a sizeable industrial sector. The limited size of their domestic markets was another major constraint on the Balkan economies, but far less so on Tsarist Russia.

Conclusion East-Central, Eastern and South-Eastern Europe experienced profound economic changes during the 19th century. On the eve of the First World War, average

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incomes across the region were far higher than they had been a century earlier. However, despite rapid aggregate growth from the 1870s, this part of the continent remained significantly less developed and far more reliant on agriculture than Europe’s Northern and North-Western economies. In terms of per capita output, there was no catching-up of the East with the West. Rather, the region as a whole was falling further behind the more advanced Western economies. Notwithstanding significant differences in performance, even within the region the initially least developed economies failed to exploit the potential to catch up with Austria.32 The Habsburg economy displayed an early and significant developmental lead over Tsarist Russia and South-East Europe that was maintained throughout the 19th century. It was in the western domains of the Habsburg Empire, Alpine Austria and the Czech lands where industrialization first took roots and gathered pace in the late 18th and early 19th centuries. This process and its gradual, though uneven, spread across the imperial lands built inter alia on the far-reaching reforms implemented during the ‘enlightened absolutism’ of the later 18th century (Ingrao 2000). These reforms led to the development of institutional and legal arrangements conducive to the beginnings of self-sustained, productivity-based Kuznetsian Modern Economic Growth (Komlos 1989) – and far earlier so than anywhere else in the region. In this process, the empire and, especially Austria, could rely on a significantly larger human capital stock as an outcome of earlier and growing commitments to schooling than the other Eastern and South-Eastern European economies.33 The economic union between Austria and Hungary encouraged economic development in the poorer, mainly agrarian eastern half of the empire: here, in contrast to the other economies of the region, growth in agricultural output equalled the rate of GDP growth. Most significantly, output per worker in Hungarian agriculture increased faster than in all other economic branches except mining (1870–1910), and productivity growth in farming was a key factor in intraempire catching-up, augmenting the impact of the rise in modern industry.34 This was unique among the eastern European grain economies, where growth in total agricultural output was far less shaped by gains in labour productivity and far more by increases in labour and land used. In the agrarian eastern parts of Europe, the spread of modern manufacturing as one of the main drivers of unconditional convergence did not nearly have the same deep impact on aggregate and productivity growth than another channel of economic modernization: the rise of export orientated agriculture in the course of the first globalization. In a world where the demographic transition had not yet taken place and where capital was scarce, rapidly expanding international demand for grain led to a strong increase in demand for rural labour to facilitate both the intensification of farming (more units of labour per unit of land) and the expansion into new farm lands on a continental scale. As a result, rural population growth was pushed up. While yields per hectare likely increased significantly, it is far less certain that agricultural output per worker in the eastern grain economies grew at rates even remotely as fast as those observed for Hungary. The evidence on growth in primary output per head cautions against an overly optimistic view on this

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score. What seems far more likely is that in an environment of rapid population growth, a large proportion of the work force remained tied to a large rural sector characterized by comparatively low labour productivity and at best modest productivity growth. The consequences for longer-term aggregate growth, productivity advance and structural change in Eastern and South-Eastern Europe were serious. In much of the region outside the Habsburg Empire, a key constraint on the expansion in aggregate per capita output was the small initial size of the industrial sector. This restricted the capacity to absorb rural demographic growth and slowed down structural change despite fairly rapid increases in manufacturing and mining output. Agriculture remained the dominant sector by a large margin. Yet the productivity advances associated with eastern farming’s rising market orientation were not nearly equivalent to the gains that modern manufacturing realized in the advanced western European economies before the First World War. Consequently, the region was falling further behind the leading industrial economies of the West. However, in this view it was less ‘eastern backwardness’ and more the integration into the world economy in the course of the first globalization and its demographic consequences which prevented convergence to western income levels.

Notes 1 See Table 3.3 on the eastern European economies’ GDP per capita in comparative perspective. For recent PPP-adjusted estimates of GDP in Europe, see Broadberry and Klein (2012), Maddison Database (2010), Maddison Project Database (2013) and Bolt et al. (2018). Note the differences in country-specific income levels reported in these sources which are due to either different underlying GDP series (in national currency) and/or the use of different PPP converters. Further, long-run time-series projections of PPP-adjusted output or income levels (e.g. of 1990 GDP per capita) into the past are by construction affected by index number problems. In short, any level comparisons should be treated with some caution. See Prados de la Escosura (2000) and Bolt et al. (2018) for a fuller discussion. 2 The sample composition here is conditioned by data availability. For example, annual reconstructions of GDP and its sectoral composition over the period of review are not available for either Serbia or the Ottoman Empire/Turkey. Lampe and Jackson (1982) offer an approximation of Serbian gross output (as distinct from gross value added or GDP) on the eve of the First World War. Palairet (1997) presents detailed estimates of Serbia’s GDP (by sector of origin), net domestic product (NDP) and net national product (NNP) but these, too, are limited to just one benchmark year (1910); however, he compares 1910 NNP with an earlier estimate for 1863 (Palairet 1995), suggesting a decline in real per capita income over the half century. For Turkey and the Ottoman Empire, Pamuk (2006) and Altug et al. (2008) have produced benchmark estimates of GDP per capita for 1820, 1870/1880 and 1913. Their data would suggest that Turkish GDP per capita increased by about 0.5 per cent per annum from 1820 to 1870 and 0.7 per cent per annum over the period 1870–1913. The limited evidence on levels and growth of per capita product and what we do know about the structure of the Serbian and Turkish economies  – on the eve of the First World War, both were still heavily dominated by the agricultural sector – do not materially affect the findings and conclusions of this chapter. Rather, this material lends support to the main argument developed below. 3 We used three-year moving averages to smooth the deflator employed by Kostelenos and his co-authors to derive constant price GDP from nominal GDP. Their deflator

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reflects price changes for only a very small number of items and shows some extremely pronounced year-on-year fluctuations that likely exert unduly strong effects on the real GDP measure. 4 Mining has been re-allocated from the primary to the secondary sector to align with practice in other GDP reconstructions used here. 5 Details on the derivation of the new GDP series are available from the authors. 6 The comparative growth rates are 3.04 (Gregory 1982), 3.06 (new estimates) and 3.12 per cent per annum (Allen 2003). Note that Gregory’s national income series (NNP, variant 2) displays somewhat faster growth of 3.34 per cent per annum than any of the gross value-added series. 7 Cf. footnote 1. Except for Bulgaria, the Habsburg Empire and Russia, 1913 levels in GDP per capita have been taken from Broadberry and Klein (2012) and projected backwards using indices based on the sources listed in Tables 3.1 and 3.2. For Bulgaria, we draw on Ivanov (2012), for the Habsburg Empire on an adjusted version of Maddison’s (2010) implicit converter for Austria, and for Russia on Markevich and Nafziger (2017) to convert real GDP per capita in national currencies into 1990 international dollars. 8 Note, however, that according to Palairet’s (1997) calculations real per capita income (NNP) in Serbia declined by about 0.22 per cent per annum (or about 10 per cent overall) between 1863 and 1910. Further, his estimates would suggest that by 1910 Serbian GDP per capita (NNP per capita), measured in 1910 francs, was about 26–27 per cent below the levels of Bulgaria. If these comparative measures are about right, Serbia was by far the region’s worst performing economy in the late 19th century among those on which at least some domestic product estimates are available. On the eve of the First World War Serbia was also the poorest, with per capita income levels well below those not only of Bulgaria but also of Turkey ($1,200 in 1990 PPP-adjusted terms; Pamuk 2006). 9 GDP data for Bulgaria are available only for 1870, 1880 and then, annually, the period 1888 to 1913. 10 In its ‘unconditional’ or ‘absolute’ form, the convergence hypothesis implies that income per capita differentials between economies will disappear in the long-run. The ‘conditional’ convergence hypothesis, on the other hand, takes also account of (i.e. β-convergence is conditional on) economies’ different structural characteristics (and not just initial income differentials). Here the implication is that an economy’s income per capita (or per worker) converges to a long-run level that is specific to this economy and determined by its structural features. 11 Cf. Abramovitz (1986) on catch-up growth and threshold levels of social capabilities that an economy must have attained in order to be able to exploit its catch-up potential. 12 Primary sector: agriculture, fishing, forestry. Secondary sector: manufacturing, mining, handicrafts, construction. Tertiary sector: trade, transport, communications, public and private services, housing. 13 By 1840, output in the secondary sector accounted for more than 17 per cent of GDP in Austria – a share that Russia achieved only about half a century or so later; cf. Table 3.6. See Table 3.7 for sectoral shares in the labour force after 1870 which confirm Austria’s comparative industrial ‘lead’ over the period under review. 14 Note that the sectoral composition of Greek real GDP is a very rough approximation based on sector shares in nominal GDP. Intertemporal changes in relative prices between sectors make for differences in the composition of current price and constant price output. The results should, therefore, be interpreted cautiously and seen as at best indicative. 15 In 1913, the sector’s share in GDP in Russia, the closest of the eastern economies on this measure, was less than 27 per cent compared to more than 37 per cent in Austria (Table 3.6). 16 In 1913, manufacturing accounted for 67 per cent of secondary sector output (25 per cent of GDP) in Austria, 64 per cent (14 per cent) in Hungary, 47 per cent (11 per cent) in Romania and – including mining – 56 per cent (15 per cent) in Russia; cf. Table 3.1

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for sources. For a more detailed discussion of manufacturing growth and its regional dimensions in the Habsburg Empire, see Klein et al. (2017: 66–74). 17 The contrast in development is particularly stark when considering the economically most advanced parts of Imperial Austria, Alpine Austria and the Czech lands, where agriculture’s share in real GDP was already down to 23 (22) per cent by 1870 with the secondary sector accounting for 31 (39) per cent. By 1913, the share of agriculture had fallen to 16 (19) per cent, while that of mining, manufacturing, crafts and construction had risen to 38 (45) per cent (unpublished revised regional GDP estimates for the Habsburg Empire based on methods and sources set out in Schulze (2007b)). 18 To give an example: Germany was one of the least urbanized and most agrarian economies among the earlier continental European industrializers. In 1849, at around the beginning of her industrial takeoff, less than 58 per cent of the total labour force worked in primary production, already 27 per cent in secondary and 15 per cent in tertiary production (own calculation, data from Frank 1994). 19 With the exception of Romania, which was ruled by great land owners, the internal political stabilization as well as the military power of the emerging new states in SouthEast Europe was based on the alliance between the (urban) elites and small peasants, whose claims to the land were widely met at the expense of large estate agriculture (Calic 1994: 43–52; Franghiadis 2011; Lampe and Jackson 1982: 200; Palairet 1997: 174–186; Sundhaussen 1989a: 197–200). 20 According to Gerschenkron, the Russian emancipation reforms of the 1860s that were to end serfdom were implemented in such way that they ‘reinforced the communal organization of rural society and installed collective redemption payments in return for communal land rights. These features undermined agricultural incentives, reduced labour mobility and kept rural demand low’ (Markevich and Nafziger 2017: 28). 21 Federico’s (2015) estimates of world agricultural production 1870–1913 show that within Europe, value added in agriculture grew the fastest in Eastern Europe at 2.1 per cent per annum (North-Western Europe: 0.9 per cent, Southern Europe: 1.0 per cent). Only South America displayed a higher rate of growth at 4.9 per cent (world: 1.5 per cent). 22 Allen’s comment on the Russian grain economy probably applies just as well to Romania, Bulgaria and Hungary: ‘Since grain was the main cargo of the railroads and since the wholesaling of grain was a major activity of the trade sector, agriculture, probably accounted for over half of the growth in the Russian economy’ (Allen 2003: 26). 23 By 1913, Russia and Romania, respectively, had become the largest and fourth-largest grain (mainly wheat) exporter in the world. Bulgaria ranked sixth. For 1909/1914 the grain export ranking is (1) Russia (=100); (2) Canada (= 49); (3) United States (=39); (4) Romania (= 31); (5) India (= 29); (6) Bulgaria (= 5) (Lampe and Jackson 1982: 170; Roberts 1951: 56–60, Schmalz 1921: 27). In 1901–1914, Romania exported 44 per cent of her grain harvest (wheat, rye, barley, oats and maize), Russia 14 per cent, and Bulgaria almost 18 per cent (own calculation based on data from Mitchell (2003: C2, 261–319, C10, 402–410; and Schmalz 1921: 27)). In Romania and Bulgaria, cereals accounted for 80 per cent and 64 per cent of all exports in 1906–1910 (Lampe and Jackson 1982: 169). Interestingly, in Russia the share of raw materials (including agricultural commodities) in total exports actually increased from 49 (1762) to 93 per cent (1856–1860) to reach 96 per cent (1909–1913) during rapid industrialization. Over the same period, the share of manufactured goods in exports fell from 50 per cent to less than 5 per cent (Mironov 2000: 36). To a large extent, Russia paid with wheat for the capital and capital goods imports during her ‘first industrial spurt’. 24 Sector-specific estimates of TFP growth in Austria and Hungary are not available, but at the aggregate economy level TFP expanded at 0.37 and 0.30 per cent per annum, respectively (0.46 and 0.62 per cent if livestock is included in the capital stock), Note that in Austria, agricultural (and by extension aggregate) labour productivity growth was held back by a rural sector displaying far lower rates of capital formation than in Hungary.

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25 Note, though, Altug et al.’s (2008) discussion of the sources of long-term growth in Turkey. Their results for 1880–1913 point to low overall TFP growth and a small TFP contribution to aggregate growth. 26 Hajnal (1965) identified a western European pattern of late and non-universal marriage which strictly restricted fertility west of the so-called Hajnal line going from St. Petersburg to Trieste. East of this line, even in Europe, universal marriage and much higher fertility prevailed, as in most parts of the world. The economic consequences of these different demographic patterns were far-reaching because a ‘non-European marriage pattern’ reacting positively to economic growth reinforced population growth and thus worked against convergence of per capita incomes across Europe until the First World War. 27 For Bulgaria, Palairet’s ‘immiserizing growth’ thesis rests on a very small and heterogeneous data base for the late Turkish period. Even for the 1880s the data situation is critical. However, Ivanov’s GDP data for 1887–1911 point to very slowly increasing incomes at best. 28 Within tertiary production, the transport, communications, trade and finance sector (TCTF) increased the strongest. In Imperial Austria, Imperial Hungary and the Tsarist Empire, TCTF grew annually at 3.25 per cent (1870–1913), 3.98 per cent (1870–1913) and 3.52 per cent (1885–1913), respectively (own data and calculation; see Table 3.1 for sources). 29 However, in contrast, the mountainous parts of South-East Europe before 1914 only reluctantly experienced a revolution of transport costs – certainly a major obstacle to agricultural development since large inlands of South-East Europe found themselves isolated, excluded from supra-local market relationships (Ehrlich 1985; Palairet 1997: 113–120; Papakonstantinou 2011; Petmezas 2011: 471–472; Kopsidis 2012b, 2014). These disfavoured regions ‘exported’ their labour force to booming regions within or outside South-Eastern and Eastern Europe. 30 Cf. note 16. 31 Balkan rural societies reacted to the terms of trade-shock of the first globalization in the same way, although they had different prevailing Agrarverfassungen (agrarian institutions). Allegedly subsistence-orientated Bulgarian or Greek small but free peasant farmers as well as reputedly ‘semi-feudalist’ but nonetheless ‘more capitalist’ Romanian land magnates had swiftly enhanced production for export since the 1830s. 32 Romania was the only Eastern economy outside the Habsburg customs union where the percentage per capita income gap to Austria decreased before the First World War. In absolute terms, though, this gap widened further during the late 19th century (Table 3.3). 33 See Fernandes and Schulze (2009) for a comparative discussion of human capital formation based on average years of schooling in Austria, Hungary and Germany; the online data appendices to Lindert (2004) provide broadly comparable information on school enrolment rates across the region (http://economics.ucdavis.edu/people/fzlinder/ peter-linderts-webpage/data-and-estimates/lindert-data-for-cup-book). 34 On the causes of these output and productivity gains, see Eddie (1968), Good (1984), Komlos (1983), Schulze (2000, 2007a).

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4 ECONOMIC POLICY DURING THE LONG 19TH CENTURY Michael Pammer and Ali Coşkun Tunçer

Introduction In the course of the 19th century, economic policy in Eastern and South-Eastern Europe was confronted with problems which were either entirely new or became more pronounced in the course of time. One of them was the growing lag to the advanced economies of Western Europe, which required administrative reforms in order to enable the state to effectively pursue its agenda in economic policy. Around 1850 and well into the second half of the century, the governments pursued a liberal agenda of laissez-faire and free trade. The late 19th century and the remaining time up to the war saw a rise in protectionism, a growing share of state ownership in infrastructure, and a growing government share in GDP. In part, this was meant to strengthen the economy in competition with other countries; in part, it was motivated by the requirements of foreign policy and armament. Another problem relevant throughout the century was political disintegration. At the beginning of the 19th century, the region was divided up among the Austrian Empire, the Ottoman Empire, and the Russian Empire (in addition, there were some small states, the Republic of Ragusa, the Monastic State of Mount Athos, and the de facto independent prince-bishopric of Montenegro). In the following decades territorial changes happened, mostly at the expense of the Ottoman Empire. Remarkably, not a single attempt at independence from the Ottoman Empire that was launched in the Balkans in the 19th century was unsuccessful in the end (Clewing 2002). The Greek revolution started in 1821, leading to full independence in 1832. The Danubian principalities of Wallachia and Moldavia had enjoyed a relatively autonomous status under the Ottoman rule and were unified under the name of the Romanian United Principalities in 1861. Serbia became an autonomous principality as a result of the Serbian revolution in 1817, with terms of autonomy defined in 1833. Following the Berlin Treaty in 1878, the independence

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of Romania, Serbia and Montenegro was recognised by the Great Powers. The same treaty was the basis for the occupation of Bosnia and Herzegovina by the Austro-Hungarian Empire and for Bulgarian autonomy. The newly formed Principality of Bulgaria (the northern part of modern Bulgaria) became a de facto independent state, while East Rumelia (the southern part) became an autonomous Ottoman province which was governed by the Prince of Bulgaria from 1886 on. At that time, all independent countries, de facto independent regions, and occupied territories comprised 60% of the territory, and 70% of the population of the whole part of Europe that had been Ottoman in 1800 (Reclus 1886: 45, 152). In 1908, Austria-Hungary annexed Bosnia and Herzegovina in accordance with the Russian government. On the same day, the Bulgarian Prince seized the opportunity and declared full independence (Berend 2003: 245–247; Jelavich 1983; Mishkova and Daskalov 2014). Following the Balkan Wars of 1912/1913, the independent Republic of Albania was declared in 1912, and recognised internationally in 1913. At the same time, most of the remaining Ottoman territory in Europe was divided up among Serbia, Montenegro, Greece, and Bulgaria. By 1914, the Ottoman Empire had lost about 96% of the territory it had held in Europe in 1800. The Austrian Empire, which was formally constituted in 1804 as a unified empire of lands which had been connected by personal union before, remained in existence until 1867. Apart from territorial losses in northern Italy, a major threat to the Austrian Empire resulted from the 1848/1849 revolution, when Hungary tried to secede. In 1867, the Hungarian lands finally and definitively gained their own constitution and government, and the rest of the country received a similar political order. Henceforth, Hungary and Austria formed the Austro-Hungarian monarchy, basically a union of two separate states with a common foreign minister, military, central bank and currency. In the remainder of this chapter, we first provide an overview of the political decision-making process and the modernisation of the state apparatus during the 19th century. We also briefly discuss the legal capacity of the states which acted either as a constraint on policymakers or enabled them to pursue and enforce a certain set of economic decisions. This is followed by a discussion of different components of economic policy including fiscal policy, monetary policy, trade policy, agricultural policy, industrial policy and infrastructure policy. We provide a summary and discussion of our findings in the conclusion.

Modernisation, legal capacity and political decision-making In the late 18th century, modernisation and political reform became the agenda of the governments of the three empires in the region. The enlightened emperors of Austria pursued an ambitious policy of emancipation of serfs, codification of core legal matters, administrative reforms, general compulsory education and health measures, and a large number of other important reforms. The Russian governments, though less radical in substance, proved still capable of a number of

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reforms in education, agriculture and the promotion of trade, and of wage labour as opposed to serfdom. Likewise, the Ottoman state introduced a set of fiscal, monetary and administrative reforms. In any case, the reforms were aimed at improving military and economic capabilities, economic independence, catching up with more advanced Western countries, speeding up political centralisation against local authorities and improving general welfare and happiness. For much of the 19th century economic, social and administrative reforms would continue in both authoritarian and constitutional regimes. In Russia, due to the late and limited success of the constitutional movement, reform measures happened from above in an authoritarian environment for most of the time. The ministerial system established by Alexander I (1801–1825) remained intact until the collapse of the empire in 1917. This administrative reform gave way to the emergence of a large bureaucratic apparatus; however, given the absence of parliamentary institutions it had limited efficiency and led to political cleavages within the bureaucratic system. The 1864 judicial reform introduced some degree of limited government, since it separated the judiciary from the legislative and executive institutions, but the autocratic system changed only in 1905 when a semi-constitutional monarchy was established with a two-house system. The authoritarian and increasingly despotic government of revolutionary leader Prince Miloš (in power from 1816 to 1839) was still able to lay the foundations of the modern Serbian state and enjoyed much popularity amongst the peasantry for its measures in agriculture. The Tanzimat reforms of the Ottoman Empire (1839–1876) took place in an authoritarian environment, yet they aimed at political and economic liberalisation and modernisation, giving way to the first parliament and the constitution in 1876. This was followed by the authoritarian rule of Abdulhamid II (1876–1909) and the nationalist Young Turk Era (1908–1914). In Austria the neo-absolutistic era after the 1848 revolution was a period of intense reform in administration, trade, agriculture, industry and other fields, focusing on property rights and a restrained role of the state. In part, this economically liberal approach was unavoidable due to fiscal limits, but much of it was simply a continuation of acts issued by the shortlived revolutionary parliament and in turn continued well into the constitutional era. This is not to say that political events such as revolutions or wars were unrelated to economic policy: the outbreak of the 1848 revolution in Vienna, the 1905 revolution in Russia, and the 1908 revolution in the Ottoman Empire were triggered by demands for political participation and by economic dissatisfaction, and the German-Prussian War of 1866 and the Russo-Japanese War of 1905 induced fiscal crises and crises of confidence which would lead to profound constitutional changes in Austria and Russia, respectively (Baberowski 2006; Shakibi 2006; Shaw 1975; Sundhaussen 1977). Throughout the region, some kind of constitution became unavoidable at some point in time. Differences lay in the de facto relevance of the constitutions, the role of political parties in the parliaments, and in the voting rights of the population. Constitutional solutions were by no means permanent. A typical example is Serbia, which received its first rather liberal constitution as early as 1835. Until

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1901, the country changed its constitutional order six times, either yielding to external pressure by Austria, Russia and the Ottoman Empire, which meant a restriction of constitutional rights, or to internal reactions to repression and unsuccessful war, which compelled the government to make concessions (Sundhaussen 1977: 203–204). Similarly, Greece, initially an absolute monarchy, received several constitutions (1844, 1864, 1909), each of them the result of a coup d’état (Clogg 1992; Spyropoulos and Fortsakis 2009). The Austrian, Hungarian and Romanian constitutions of the 1848/1849 revolution were short-lived statutes which were either regarded as insufficient and revoked quickly or did not become effective from the beginning. In both Austria and Hungary, and in Romania, a successful constitutional movement began in the 1860s and led to the Romanian constitution of 1866, and the Hungarian and the Austrian ones of 1867. The Ottoman constitution of 1876 was suspended just two years later, and a representative assembly was not successfully established until after the Young Turk Revolution of 1908 (Shaw 1975; Quataert 1994: 855). The separation of powers, a key element of any constitution, was shaped differently in these statutes. Usually legislation was done jointly by parliament and the monarch, but there were exceptions such as the Ottoman constitution of 1908 which gave the representative assembly the power to pass legislation over the sultan’s authority (Brown 2002: 23–26). Parliaments would contain at least one chamber intended to represent the population. A second chamber would be appointed by the monarch (sometimes under parliamentary assistance) and might contain persons who had hereditary rights or were members of the high clergy (Cox 2002; Clogg 1992; Spyropoulos and Fortsakis 2009). According to the Russian constitution of 1906, the half-elected State Council became the upper house and the Duma made up the lower house. The Tsar could dissolve the lower house any time and at discretion, which he did two times, and dismiss the elected members of the upper house (in addition, he changed the electoral laws without parliamentary consent). Governments were appointed by the monarch and were usually responsible to parliament; an exception was Russia again, where ministers were responsible only to the tsar. A special element in the formation of new states on the Balkan peninsula was the leading role of foreigners in government and administration. In Greece, after the arrival of King Otto, a Bavarian prince, the key political positions were occupied by Bavarians. Following the coup of 1862, Greece received a new king of Danish origin. The Romanian principalities before unification were governed by Greek princes who owed their allegiance to the Porte, called Phanariots. Following the 1866 coup, another German prince, Karl of Hohenzollern-Sigmaringen, ascended to the Romanian throne. Likewise, the German prince Alexander von Battenberg became the Prince of Bulgaria after the Congress of Berlin, and, following the 1886 coup, another German, Ferdinand of Saxe-Coburg, accepted the Bulgarian throne and was finally crowned in 1887. The countries of the region saw a large number of political parties, which developed along the lines of economic interests, nationalistic agendas, foreign policy references, religious affiliation and so on. Foreign policy was a major issue in parties

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of the young Balkan states which had to define their position vis-à-vis Russia and Austria-Hungary. A typical example is the party scene in Serbia, where the Liberal Party (dominating the 1870s) was pro-Russian and pan-Slavist; the Progressive Party, governing from 1880 to 1887, was less enthusiastic towards Russia and had stronger inclinations to Austria-Hungary; and the Radical Party, the dominating force from 1887 on, was strongly pro-Russian again (Cox 2002: 51–52). In AustriaHungary, the balance between the two states was among those points that defined party profiles. Especially for Hungary, contemporaries as well as other observers have remarked that parties concentrated more on constitutional and less on social issues (Péter 2000: 462). Austrian politics was dominated by nationalistic agendas for much of the time: At the turn of the century, almost 50 parties were represented in parliament because each of the nine nationalities organised the political spectrum separately. In Russia, in contrast, there were no political parties until the early 20th century. The emergence of the bureaucracy during the 19th century changed the balance of power between crown and landowning nobility but not in favour of the latter. The 1905 revolution brought the crown and the nobility together against the peasantry. The new parliament was dominated by representatives of the land-owning elite who were involved in direct industrial enterprise as well as the financial sector through investment in stocks and bonds (Lieven 2006). Concerning economic policy, most countries had liberal parties, such as the Liberal Entente in the Ottoman Empire, Trikoupis’s New Party in Greece, and the Liberal Party in Serbia and Romania, which advocated Westernisation, industrialisation and social reforms and were often perceived as the parties of urban and educated people; these parties were also advocates of civil rights and liberties and the improvement of representative and parliamentary institutions, and they were opposed to privileges by birth. They stood for industrial development, a rather ambitious infrastructure policy, and at least for some time, for economic and fiscal stabilisation. The main competitors of the liberal parties were usually conservative or populist parties. In Romania, the Conservative Party was closely linked to the landowning class, and supported the existing land tenure and free trade, and less so a free labour market (Jelavich 1983: 23–24; Berend 2003: 243–244; Love 2001). A typical example of a populist party is Serbia’s People’s Radical Party, which remained in power from 1887 to World War I. It was pro-Russian in foreign policy and, at home, stressed local autonomy at the expense of the central government, partly because they mistrusted the educated, urban social groups. The success of any kind of economic policy depended on the “legal capacity”, that is the sheer potential of states and their ability to subject a certain matter to their regulation, and administer and finance the proceedings. In the late 18th and early 19th centuries, states developed a growing ability to establish and enforce legal norms and regulate expanding areas of economy and society. This process was partly related to the level of development in certain fields that had mostly not existed before, such as introducing compulsory schooling. Likewise, states developed the administrative ability to assume ever more competences in areas that had been administered by other actors before, such as local administration and judiciary,

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a responsibility of large landholders in Central and Eastern Europe until the mid19th century. Similarly, the outsourcing of parts of the administration to private agents either for reasons of simplicity or due to lack of state capacity was common. One example was tax farming, that is, licencing private persons to collect taxes in return for a fee subject to certain legal guidelines and control by the state. In the Ottoman Empire, tax farming emerged as the dominant tax collection method as the efficiency of the traditional tax collection system (tımar) by cavalry officers (sipahis) declined with the slowdown of the territorial expansion from the early 18th century. Tax farming contracts were initially granted for the short term; however, due to fiscal difficulties the central government began to increase their terms from one year to three years and then to five years, and eventually granted them on a lifetime basis. (Karaman and Pamuk 2010; Çizakça 2009; Shaw 1975). This meant that the Ottoman government had to share a significant part of tax revenues with local groups. Yet several efforts to replace tax farming with central tax collection did not succeed, because the central government lacked the local network and influence to collect more taxes. In the young Balkan states, tax farming was not as persistent as the Ottoman Empire, as their small scale possibly facilitated fiscal and political centralisation. In the first half of the 19th century, tax farmers in Greece were usually members of the local notable families whose role was mostly restricted to calculating the local taxable production while the actual collection was in the hands of state authorities. Serbia pursued a stricter and centrally directed course of tax collection from the start. Fearing that regional governors might establish territorial fiefs on the basis of their delegated powers of tax collection, the prince treated them as salaried officials, holding them responsible for collecting the head tax without letting them get a share from the proceeds (Tunçer 2015). In Russia, the government could only consider abolishing the system of tax farming by the middle of the century when the bureaucracy developed sufficient capacity to monopolise tax collection. In 1863, the tax farming system in the production and sale of vodka was abolished, resulting in increased revenues through state monopoly and steady decline in the cost of tax collection for the rest of the period (Waldron 2006). During the course of the 19th century, the legal capacity of the states in different aspects of economic life was undermined also by foreign factors. In the Ottoman lands, capitulations enabled foreign and non-Muslim Ottoman merchants a considerable degree of extraterritoriality and freedom (Exertzoglou 1999; Ahmad 2000; Kuran 2010). For the small Balkan states, increasing commercial integration with major trading partners based on monoculture acted as a restricting force over economic policy throughout the period. Another limiting factor was international financial control organisations. Booming government bond markets in London, Paris, Berlin and Vienna led to increasing flows of capital to the region in the form of sovereign debt. In the last quarter of the 19th century, this process culminated in waves of defaults, then gave way to the establishment of the international financial control organisations in the Ottoman Empire, Greece, Serbia and Bulgaria. In fiscal matters, these organisations gained control over a share of taxable revenue

Economic policy in the long 19th century  75

sources and transferred their receipts to the foreign bondholders for the unpaid debt. In monetary terms, they limited the ability of governments to expand the money supply to finance deficits (Tunçer 2015). Moreover, the inability of the Ottoman government to establish a national central bank of issue led to the transfer of the monopoly of issuing bank notes to the British-French owned Imperial Ottoman Bank with headquarters in London and Paris (Eldem 1999; Autheman 2002). The newly independent Balkan states were quick to establish their national central banks of issue, yet their ability to pursue an independent economic policy was established gradually throughout the 19th century by limiting the power of several domestic forces and increasing the power of the central governments (Kostis 2005).

Fiscal policy As states became more active in the second half of the 19th century, their revenues and expenses increased both in absolute terms and as a share of GDP. This increase was accompanied by a considerable change in the structure of revenues and expenses, that is, the shares of direct and indirect taxes, monopolies and state enterprises on the revenue side, and the shares of different budget chapters on the expense side. Taxes on property and on the consumption of specific goods proved easier to administer in a pre-modern environment than taxes on income, given that a large portion of income was subsistence income and thus was hard to measure. Likewise, state monopolies in the production and merchandising of specific goods, which were easy to control, remained an important source of revenue. Generally, lawmakers had to choose between effectively taxing the agricultural sector, which was large and earned low incomes, and the industrial and service sectors, which were small and had higher incomes. The state debt, mostly contracted in foreign markets, rose in absolute terms, but it would even decrease in some countries towards the end of the period as a share of GDP. In the Ottoman Empire, tax revenues mostly relied on the traditional tithe from agricultural produce. Despite the modernisation and centralisation attempts of the fiscal system from 1840s onwards, the personal tax, a symbol of transition to the modern tax state, was introduced only in 1903. Overall, the Ottoman central government revenues relied heavily on direct taxes and lagged significantly behind compared to the other countries in the region and the rest of Europe (see Table 4.1) (Shaw 1975; Özbek 2010; Karaman and Pamuk 2010: 598). Unlike the Ottoman Empire, the Russian state revenues were dominated by indirect taxes which represented between 60% and 70% of all state revenues, and 75% to 85% of tax revenues. Up to a quarter of indirect taxes was from customs duties. Therefore, between 45% and 55% of all state revenues were excise alone, which was levied on alcohol, sugar, tobacco, matches and (until 1881) salt (Hobson 1997: 85–87; Kahan 1980: 69–73). In Russia, after the emancipation of serfs in the 1860s, the predominant source of revenue, the poll tax, became increasingly more difficult to collect. In the late 1870s and early 1880s the government had to make a fundamental review of its taxation system to address the peasant discontent, which

76  Michael Pammer and Ali Coşkun Tunçer TABLE 4.1  Direct taxes as a share of total tax revenue, 1860–1913, percent

1860–1869 1870–1879 1880–1889 1890–1899 1900–1909 1910–1913 Russia AustriaHungary Ottoman Empire Greece Romania Bulgaria Serbia

31.4 32.4

31.1 40.2

23.2 38.3

14.6 32.4

12.8 31.5

14.0 30.0

n.a.

85.9

82.7

81.3

78.6

70.6

n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a.

28.9 33.6 75.3 51.8

35.3 35.4 63.2 46.9

29.7 40.9 51.1 39.8

27.0 31.4 27.6 37.4

Sources: Pammer (2010), SEEMHN (2014), Sundhaussen (1977), Tunçer (2015). Notes: Decadal averages. The data for Austria-Hungary 1860–1869 is based on Austria 1860–1867 figures.

led to the abolition of the poll tax. In order to compensate the loss of revenue, in 1885 the government introduced a 3% tax on business profits, increasing this to 5% in 1893 and making it progressive in 1898. Indirect taxation of liquor was an important part of the government revenues averaging 31% government revenue during the 19th century. This was supported by other indirect taxes from tobacco and sugar, which doubled their revenues from 1880 to 1895. By 1911, the share of indirect taxes in total government revenues rose to 84% (Waldron 2006). The Austrian and Austro-Hungarian state revenues improved throughout the 19th century following the general trend in the region. At the beginning of the century, direct taxes were the most important source of revenue, accounting for 40% of tax revenues. Personal taxes were of minor importance, fluctuating between 15% and 20% of direct taxes in the early 19th century. A fundamental change came with a tax reform in 1896, which introduced a comprehensive personal income tax, and led to an increase in absolute revenue from income taxes by 50% within three years. Changes in Hungary went in the same direction, but income taxes delivered a larger share than in Austria from the beginning, and eventually less than 40% of Hungarian direct tax revenues were property taxes. At the same time, indirect taxes in Austria-Hungary became ever more important. The share of excise and customs duties in the total of direct and indirect taxes grew from 30% in the early 1820s to 50% in 1848, and from the mid-1890s onwards it stood for more than 70% of all taxes (Pammer 2010). In the smaller states of the region, we see a similar shift from direct to indirect taxation. The Greek fiscal policy of the 1870s constantly aimed at lowering the tax burden on the peasants, replacing direct taxation with indirect taxes on consumption. Under-taxation of the peasantry, which constituted the largest voting group in Greece, started progressively from 1864 and reached a landmark with the abolition of tithe and tax farming in 1880, shifting the fiscal burden to the middle class and the urban sector. Greece was amongst the last countries in Europe to apply an income tax, introduced in 1910. Following

Economic policy in the long 19th century  77

independence, the Serbian government also introduced a new set of laws which aimed at taxing large landowners, merchants and professionals, and tried to avoid placing a burden on peasantry and civil servants. Despite the extensive protests from the rising middle class and the wealthy landowners, the populist party backed by the peasantry reduced the land tax and increasingly relied on the taxation of the urban sector and merchants (Stead 1909: 209; Tunçer 2015; Hinic et al. 2014; Lampe 1971; Palairet 1979). On the other side of the budget, the volume and structure of state expenses in the region depended very much on international relations. Due to the large number of international conflicts, military spending remained one of the important items in budgets (see Table  4.2). Military expenses were highly volatile because every war or international crisis demanded armament and mobilisation efforts, which led to an enormous increase in spending within a short period and, accordingly, a reduction as soon as the crisis was over. Otherwise and in peacetimes, state budgets mirror the rising importance of new policy matters such as infrastructure and communication and, to a lesser extent, agriculture, trade and education. Overall, military spending constituted on average 27% of the total expenditure and roughly 4.5% of the GDP across the region. Another important spending item in the budget was the interest service of the outstanding debts. State debts in the region grew in absolute terms (in part, due to rising military expenses), but their extent in relation to GDP and the ability to service the debt differed between countries. In Russia, military expenditure dominated the budget with sharp increases during the Crimean War and the Russo-Turkish war of 1878–1879, and by 1914 Russian military expenditure exceeded that of Britain in absolute terms. The Russian government, however, was able to contain the spending on debt service as the interest on its loans fell from 4.9% to 3.86% from 1890 to 1902 (Waldron 2006: 480–482). In Austria-Hungary, expenses for the state debt were usually large and not particularly volatile because most of the outstanding debt TABLE 4.2  Military spending as a share of total government expenditure, 1860–1913,

percent 1860–1869 1870–1879 1880–1889 1890–1899 1900–1909 1910–1913 Russia AustriaHungary Ottoman Empire Greece Romania Bulgaria Serbia

46.9 20.0

48.4 21.5

30.0 17.9

25.1 14.9

26.1 15.5

22.6 16.2

33.1

22.9

38.3

37.8

36.1

47.7

n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a.

38.1 20.4 32.8 11.4

34.2 20.4 26.6 15.5

33.6 16.8 26.0 19.1

49.2 14.8 38.2 29.0

Sources: Pammer (2010), SEEMHN (2014), Singer (1987), Sundhaussen (1977), Tunçer (2015). Notes: Decadal averages. The data for Austria-Hungary 1860–1869 is based on Austria 1860–1867 figures.

78  Michael Pammer and Ali Coşkun Tunçer

consisted of long-term contracts, and short-term debts were often rescheduled. In absolute terms, the costs of the state debt rose throughout the period but not as fast as overall expenses (Pammer 2010). From 1854 onwards the Ottoman Empire began to issue increasing number of bonds in international financial markets and eventually declared a moratorium on its outstanding debt in 1876. As mentioned before, this crisis led to the establishment of international financial control, which led to a drastic decline in the cost of borrowing until 1914. A similar process of rapid accumulation of foreign debt, default and introduction of international financial control took place in Greece, Serbia and Bulgaria from 1890s onwards. In each case, international financial control and governments’ willingness to cooperate had a positive impact on the creditworthiness of states, leading to a gradual decline in interest service (Avramov 2003; Tooze and Ivanov 2011; Tunçer 2015). The only exception in the region was Romania, which managed to avoid default, and continued to meet the debt service until 1913 regularly. More importantly, especially after 1900, the Romanian government successfully channelled the proceedings of these loans to productive activities including construction of railways and roads, infrastructure and agricultural credit (Lampe and Jackson 1982: 210; Feis 1974: 269; Berend 2003). Other budget chapters such as roads, agriculture, justice, interior and education, were mostly of minor importance. The big exception was railways, which became ever more important from the late 1870s on, when most states nationalised railways and constructed new lines. In Russia, the tsarist government produced seven issues of consolidated railroad bonds during 1870–1884 to fund railway companies. Gradually railways became the second most important spending item after military, rising from 2.5% of the budget in 1885 to 20% in 1908, and the construction of the Trans-Siberian railway contributed significantly to this rise (Ananich 2006; Waldron 2006). In Austria, nationalisation was done by simply assuming state liability for railway bonds in circulation and converting railway shares into special state railway bonds. Therefore, this part of the state railway debt remained clearly identifiable up to 1918. In Hungary the railway debt was mostly converted into ordinary perpetual state bonds. Whenever the states constructed new lines they issued ordinary state bonds as well. By 1905, railway expenses were in the same order of magnitude as interest service and military spending, and from 1907 on railway expenses were clearly above. The nationalisation of railways and state railway construction accounted for about one-third of the state debt in 1913. Considering the credit standing of the two states, the fact that much of state borrowing happened in connection with investment and enlarging state property was clearly an advantage (Pammer 2010). Unlike Austria-Hungary, in the Ottoman Empire railway construction was predominantly financed by foreign direct investment. The government distributed long-term concessions to selected British, French, German and Austrian groups for the construction and operation of certain lines. At the end of concession periods, lines were to be handed to the government. In the majority of cases, the Ottoman government was also required to pay annually kilometric guarantees to the railway firms, which was usually paid

Economic policy in the long 19th century  79

by issuing new loans, hence contributing to the overall indebtedness (Geyikdağı 2011: 75–79).

Monetary policy In general, the trends in monetary policy in the region followed the major shifts in international monetary standards (see Figure 4.1). At the beginning of the 19th century, the countries of the region experimented with different combinations of silver and paper money standards, and this era was characterised by monetary instability. Towards the middle of the century, the transition to the bimetallism, mostly in line with the standard of the Latin Monetary Union (LMU), helped to the modernisation of the monetary systems and contributed to the price stability. The march towards the gold standard was the major characteristic of the European monetary systems from the 1870s onwards, and the countries of the region followed suit. In theory, the adherence to the gold standard under free capital flows implied loss of independent monetary policy as postulated by the macroeconomic trilemma hypothesis. Yet, in practice, the gold standard appeared with unusual peripheral characteristics and asymmetries. Many countries of the region did not have enough resources to withdraw from circulation existing fiduciary and/ or silver coinage, they were subject to cyclical gold flows because of their exportoriented agricultural sectors, they lacked an efficiently functioning banking system, and their central banks of issue were not always able or willing to follow the “rules of the game” for the purpose of maintaining fixed exchange rates. Serbia Russia Romania Ottoman Empire

Greece Bulgaria Austria-Hungary 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910

Silver FIGURE 4.1 

Bimetallism

Gold

Monetary standards in Central, East and South-East Europe, 1800–1913

Source: Cf. main text. Note: Black lines refer to the date of foundation for the central banks of issue.

80  Michael Pammer and Ali Coşkun Tunçer

To start with Austria-Hungary, the state started issuing limited amounts of paper money as early as 1762. However, following a series of wars, the government declared the notes as forced tender and stopped their conversion. In 1811, when the circulation of paper money reached an untenable level, the government reduced them to a fifth of their face value. In order to restore the currency, the Austrian National Bank, a private joint stock company, was founded with the exclusive privilege of note issue and the obligation to redeem the circulating state notes. Bank notes could be normally exchanged for silver florins at face value until 1848, when the state violated the provision of note issue. The emission of state notes led to the emergence of so-called agio on silver and delayed adherence to the gold standard (Pressburger 1966; Jobst and Scheiber 2014). The political separation between Austria and Hungary in 1867 did not fundamentally concern the monetary system. The Austro-Hungarian monarchy kept the currency of the Austrian Empire, the silver florin, up to 1892, when the de facto gold standard was adopted with the introduction of the new currency, the crown. From 1896 on, up to World War I, the bank was able to maintain exchange rates close to mint, although convertibility was never established ( Jobst and Scheiber 2014: 59). The distinguishing feature of Russian central banking lay in its role in financing commerce and industry (Garvy 1972). The Russian State Bank (Gosbank) was founded in 1861, and it became the bank of issue in 1897 when Russia joined the gold standard. It stood under complete control by the Ministry of Finance and became a tool of the government’s commercial and industrial policy. Although direct lending to the private sector was common among European central banks in general, in the Russian case the state bank acquired an uncommonly important role in this respect, by direct lending and de facto subsidising commerce, industry and banking. Deposits by the treasury, which had minor importance for the Gosbank up to the early 1890s, by and by became its main source of resources, due to surpluses in the government budgets from the late 1880s on, and to foreign borrowing (Garvy 1972: 884; Stepanov 2004). In 1914, more than three-quarters of deposits in Gosbank were treasury deposits, and government obligations to the State Bank were insignificant (Drummond 1976: 665, 668). The adoption of the gold standard was the end of a long struggle to stabilise the currency and part of the government’s efforts to attract foreign capital, which was deemed indispensable for the development of Russian industries (Crisp 1953). The Ottoman Empire went through similar stages in modernising its monetary system but was faced with additional challenges due to structural economic differences. In 1844, the Ottoman Empire abandoned debasements, which had been the most common method of raising revenue for centuries, and established a new bimetallic system. To address fiscal difficulties, this time the government started experimenting with silver-backed paper money. The system worked well as long as the number of notes in circulation remained low, however the rapid increase in state notes during the Crimean War turned the experiment into a crisis. Similar to Austria-Hungary, in order to contain the crisis, the Ottoman Bank was founded in 1856 with British capital (renamed the Imperial Ottoman Bank (IOB) in 1863 following a merger with a French

Economic policy in the long 19th century  81

capital group). The bank was granted the monopoly of issuing bank notes, and in return it successfully withdrew the state notes from circulation. During the RussoTurkish War of 1877/1878, the government once again suspended the privileges of the IOB and started issuing its own state notes. In 1880, the privileges of the IOB were restored, and state notes were withdrawn from circulation with the help of foreign loans. Moreover, the government declared the gold lira to be the legal tender and closed down the minting of silver coinage, thus adopting a “limping standard”. Despite formal adherence to the gold standard, gold coins were rarely seen in circulation apart from major trade centres and port cities. As the monetary base continued to rely on silver rather than gold or gold-convertible notes, the silver currency served as fiduciary money, with only a limited connection to its intrinsic value. The IOB notes never became widespread across the empire but circulated only within a small segment of the Istanbul economy. This was not only because the banknotes could never become a widely used means of exchange but also because the IOB, primarily a foreign commercial bank, did not act as central bank of issue on behalf of the state, as in other parts of the region (Pamuk 2000; Eldem 1999; Tunçer and Pamuk 2014). An important implication of this monetary system was the lack of control over monetary policy and inability of the Ottoman government to raise seigniorage revenue with issue of notes. For the smaller, export-oriented agricultural economies of the region, the main challenge was to establish and maintain monetary sovereignty under conditions of free capital movement. Greek monetary history, starting with its independence from the Ottoman Empire, was marked by experiments with silver in the early years, bimetallism in the middle of the 19th century (through participation to the LMU) and the gold standard (which later became the gold-exchange standard) in the last quarter of the century. The National Bank of Greece (NBG) was founded as early as 1841 as a symbol of monetary independence, and its notes were declared legal tender (Palamas 1930; Kokkinakis 1995). During this period, however, the NBG was not the sole bank of issue in the Kingdom of Greece. The Ionian Bank was authorised to issue bank notes in the Ionian Islands, and when the islands were joined with Greece in 1864, it retained this privilege. From 1864 to 1870, Ionian bank notes represented about 13% of the total in circulation (Thomadakis 1985). Although Greece officially joined to the LMU in 1868, the convention was enforced only in 1882. However, the convertibility of bank notes into gold and silver, which was reinstated in 1884, was again suspended in 1885. Only in 1910 did Greece adopt the gold-exchange standard under the administration of international financial control (Kostis 2003; Lazaretou 2005; Tunçer 2015). Other newly independent countries in the Balkans had more or less similar experiences. An important dimension of Serbia’s gradual political independence from the Ottoman Empire was establishing the dinar as the national currency. The country had the right to mint its own coins already under the Ottoman rule starting from 1868. Moreover, in this early period, Serbia applied for membership to LMU three times in 1874, 1879 and 1880 but was rejected on all occasions. In 1884, the National Bank of Serbia was founded and it was granted with the

82  Michael Pammer and Ali Coşkun Tunçer

monopoly to issue notes (Hinic et al. 2014). In 1867, Romania adopted a bimetallic standard similar to LMU countries by declaring the leu as the national currency. Similar to Serbia, Romania’s request for membership to LMU was turned down. In 1880, the National Bank of Romania was established by private capital with the help of the Romanian government and it was granted the monopoly of banknote issue. In this early period, the bank issued both gold and silver convertible notes. In 1890, as a result of the deteriorating international gold-silver ratio, Romania switched to the gold standard, and the bank started issuing only gold convertible notes with a cover ratio of 40% (Stoenescu et al. 2014). The Bulgarian National Bank (BNB) was established right after Bulgaria gained its independence in 1878. Two years later the lev was recognised as the legal tender and a bimetallic system was established following the model of the LMU. However, the Bulgarian economy still suffered from the problem of foreign coins, all of which were finally withdrawn from the circulation in 1887. In the meantime, in 1885, the BNB was granted the monopoly of note issue. Similar to Romania, Bulgaria also attempted to switch to the gold standard in 1890, however the transition finally took place only in 1902 (Dimitrova and Ivanov 2014).

Trade policy The weight of the foreign sector in overall economic activity differed significantly from country to country. In general, smaller economies of the region were more dependent on the gains from the international trade, and the fluctuations in trade volume followed the shifts in trade policy (see Tables 4.3 and 4.4). Nineteenth-century trade policy followed an alternating path between free trade (1860–1870s) and protectionism (1890–1900s) (Portal 1966: 805). After 1900, customs duties decreased, but not to the level of the free trade period. The shifts in trade policy were largely driven by three factors: increasing state revenues via custom duties, protecting domestic production from foreign competition, and TABLE 4.3  Trade volume as a share of GDP, 1860–1913, percent

1860–1869 1870–1879 1880–1889 1890–1899 1900–1909 1910–1913 Russia AustriaHungary Ottoman Empire Greece Romania Bulgaria Serbia

n.a. n.a.

n.a. 19.6

n.a. 19.6

14.1 19.6

13.2 21.0

14.7 21.3

25.0

27.9

20.3

20.2

23.4

28.5

n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a.

75.4 34.7 n.a. n.a.

58.3 39.3 17.1 30.8

57.3 33.3 19.3 36.8

57.5 36.1 20.4 48.8

Sources: SEEMHN (2014), Sundhaussen (1977), Tunçer (2015). Notes: Decadal averages. Trade volume is based on the sum of exports and imports.

Economic policy in the long 19th century  83 TABLE 4.4  Trade volume (% change), 1860–1913

1860–1869 1870–1879 1880–1889 1890–1899 1900–1909 1910–1913 Russia AustriaHungary Ottoman Empire Greece Romania Bulgaria Serbia

6.9 4.5

7.9 4.7

0.5 0.8

1.9 3.0

6.5 4.0

5.5 5.2

7.9

−1.9

0.5

0.3

5.2

4.3

n.a. n.a. n.a. n.a.

n.a. n.a. n.a. n.a.

3.1 n.a. 13.2 n.a.

−1.9 −1.5 −1.9 5.0

5.4 6.9 11.3 4.5

7.3 11.5 2.7 4.7

Sources: SEEMHN (2014), Sundhaussen (1977), Tunçer (2015). Notes: Decadal averages. Trade volume is based on the sum of exports and imports.

the domestic and international political economy. The weight of each factor differed by country and time. The fiscal drive depended on the tariff levels and the effect on imports. In Russia, at the low point in the mid-1870s, customs revenues equalled about 12% of imports; in 1902, the corresponding number was 38%. For food, the largest numbers surpassed 90%; for raw materials and manufactured goods, 30% (Hobson 1997: 94; Barnett 2004: 371). Customs contributed 20% of all state net revenues (taxes and income from state property) around 1900, up from 14% in the 1870s. In 1910–1913 they were back to 17%. As a proportion of taxes alone (excluding income from state property), revenues from customs peaked at 26% in the early 1890s (Hobson 1997: 86). By way of comparison, customs duties collected in the Austrian part of Austria-Hungary represented less than 10% of all net tax revenues in the 1820, grew to almost 14% before 1848, and decreased over a long period afterwards. The low point was in the early 1870s, with a proportion of about 6% of all net tax revenues. Afterwards customs revenues increased again, hitting almost 14% of all net tax revenues in 1898, and decreased to 11%–12% in the following years. The effectiveness of the policy of protecting domestic production from foreign competition also depended on the taxed sectors and products. The basic assumption was that the underdeveloped manufacturing sector would profit from protectionism, and the free-trade would benefit the export-oriented agricultural sector. The manufacturing sector profited only from duties on those goods that could be produced domestically. In Russia the tariffs on raw materials and semimanufactured goods, which had to be imported and represented the major cost input, were so high that they actually amounted to negative protection in some manufacturing branches, such as the cotton industry (Hobson 1997: 101–102). Apart from the advantages delivered by protectionism and state revenues, trade policy offered opportunities of political integration. When the Austrian Empire was constituted in 1804, the western lands and Hungary were not fully integrated in terms of customs policy. Following the 1849 constitution, the whole empire

84  Michael Pammer and Ali Coşkun Tunçer

including Hungary turned into one customs and trade area, the existing internal tariffs were removed and the introduction of new ones was forbidden (Komlos 1983). At the same time, Austria attempted an integration of the Austrian Empire into the German Customs Union, which was launched in 1834. If successful, this would have resulted into the creation of an economic block of 70 million inhabitants, probably dominated by Austria, but Austria had to be content with limited treaties with Prussia in 1853 and the German Customs Union in 1865. In the Ottoman Empire, due to the capitulatory privileges and tax exemptions granted by the Ottoman sultans to foreign merchants as early as the 16th century and bilateral free trade treaties signed with major trading partners in the early 19th century, the Ottoman government was not able, and at times not willing, to modify the custom rates. Until 1838 the ad valorem duty on exports and imports was 3%, but all merchants had to pay an additional 8% duty on commodities transported within the empire. The free trade treaties raised the tariff on exports to 12% and on imports to 5% but exempted the foreign merchants from paying 8% internal custom duty. In the 1860s, the Ottoman government gradually reduced the duties on exports to 1% and on imports to 8%. Only in 1907 the great powers agreed on an additional minor increase in the import duties to 11%, but overall barriers to foreign trade remained very low (Pamuk 1987: 20–21). The trade policy of the smaller states of the region were also heavily influenced by international factors. In 1879, Serbia concluded a provisional bilateral trade treaty with England on the basis of the most favoured nation principle to break the monopoly of Austria-Hungary over Serbian international trade. Following the protests and threats of Austria-Hungary to raise duties on exports, the Serbian government lost power and the new government concluded a treaty of commerce with Austria-Hungary in 1881, which locked Serbia to Austria-Hungary as an exporter of agricultural products. Moreover, Serbia agreed not to conclude any treaties with other nations without the consent of Austria-Hungary (Petrovich 1976: 410–411). Greek exports were also little diversified, and correspondingly, easily affected by single changes in trade regulations. The major export item, currants, provided the necessary exchange for the payment of wheat imports, and determined the income level of the countryside, state revenues from customs, and exchange rates. The imposition of the Méline tariff in France in 1892, aimed at protecting French industries, had a direct impact on Greek exports (Andreades 1906; Kostis and Petmezas 2006; Petmezas 2000). Romania’s experience of laissezfaire was relatively short-lived compared to other newly independent Balkan states. In 1885 it denounced its commercial convention with Austria-Hungary and raised the tariff walls, which marked the beginning of a customs war between the two countries that lasted until 1893. This policy was complemented with a series of industrial protection laws in 1886/1887 and 1904/1906, which introduced high tariffs on manufactured products and domestic tax exemptions for industry as well as exemptions from tariffs on industrial inputs and railway freight subsidies (Love 2001: 110). Bulgaria followed the footsteps of Romania, but only after the 1890s. Until then, the country was not able to renegotiate the tariffs, which were set as the

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basic Ottoman rate of 8% ad valorem. With greater independence, the Bulgarian government signed bilateral trade treaties with its neighbours and the great powers, raising the tariffs to 14%. The rates were increased one more time between 1900 and 1905 with the introduction of Bulgarian tariff regulation and reached 25%, a similar level to protectionist Romania (Lampe 1986: 40).

Agricultural policy At the beginning of the 19th century, the legal basis of agriculture in the region still had pre-modern characteristics. The main differences to modern law lay in the definition of property rights and in the personal legal status of the rural population. The common variety of an unfree status was serfdom. Typical features of serfdom were restrictions of moving, of marrying, and of learning a trade; all this would be allowed upon approval by the lords only. Traditionally, serfdom was a widespread institution in Central and Eastern Europe, but not in the Balkans and the Ottoman Empire. Some of the Austrian lands (Bohemia, Hungary, and others) preserved serfdom up to the 1780s (the other parts of Austria had been free of serfdom for centuries already). In Russia, where serfs belonged either to the state or to private persons and accounted for more than half the population at the beginning of the 19th century, the emancipation of state serfs started in the 1840s, and that of serfs in the private sector followed in 1861 (Blum 1961: 420, 427–429; Gerschenkron 1966). Typically, emancipated serfs were endowed with the land they had previously worked on; this was so in the eastern parts of Austria and in Russia (Kahan 1980: 23–24). Meadows, pastures, and forests, however, became the exclusive property of the former lords in Russia. Property rights followed a number of different systems, depending on the role of the state and local communities, and the share and precise definition of tenure arrangements. State ownership of arable land was the classical pattern in the Ottoman Empire. The assumption was that land for crop production was state property. It could be recognised as private given sufficient proof, but otherwise it could only be held in possession and could not be sold. Throughout the 19th century, the distinction between private and state-owned land became weaker and transmission of land by inheritance started to become widespread. A significant transformation took place with the Land Code 1858, which extended the rights of transfer, sale, purchase, mortgaging and inheritance of agricultural land. The Code recognised private property of land, and introduced de facto land ownership by seizure of otherwise untilled land for a period of ten years. Similarly, if the land remained unproductive for three years, its title became subject to transfer. The idea behind the regulation was to create a direct relationship between the government and the individual cultivator of land without the intermediary of a landlord or a tax-farmer (İslamoğlu 2000; Pamuk 1987; Gerber 1987; Aytekin 2009). In much of the European parts of the Ottoman Empire (except Romania), private land-ownership by small farmers was widespread. Greek, Serbian, and Bulgarian peasants were personally free, they could not be expelled from their land, they

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had freedom to cultivate their own land and they owned the produce. In Bulgaria, the large estates started losing their power from 1830s onwards due to the policies of the Porte, and the major production unit in the Bulgarian lands was small-scale peasantry similar to the rest of the Balkans. After 1878, the newly formed Bulgarian government only accelerated this process by handing the large estates owned previously by Muslims to Bulgarian peasants (Berend and Ránki 1974: 38–39). In Greece, the Greek diaspora attempted to acquire large landholdings after 1881, and the Greek government promoted the operation as large estates were thought to intensify the production. However, in reality the scheme was not successful, and the situation only started changing after 1913 with the annexation of northern Greek provinces, where large estates and sharecropping were common (Andreades 1906; Kostis and Petmezas 2006; Petmezas 2000). Although the Balkan agriculture did not operate along feudal regulations, Serbian peasants in the first period of autonomy were confronted with the aspirations of would-be feudal aristocrats who started as tax collectors, but wanted to use this as a basis to accumulate latifundia and compel peasants to corvée (obligatory and unpaid labour service) in the 1820s. Eventually, the Serbian Prince decided for an alignment with the peasants and a suppression of the politically more dangerous landholders. In the constitution of 1835 the peasants’ rights were protected, and the right to demand corvée was suppressed, which was a major obstacle to the formation of large estates (Palairet 1979, 1997: 85–87). Unlike the rest of the Balkans, in Romania, due to its semiautonomous nature from the Ottoman Empire, serfdom was the norm until its abolition in 1859. This was followed by a land reform in 1864 which distributed two-thirds of large landowners’ estates to peasants (Berend and Ránki 1974: 36–37; Constantinescu 1994: 169–179). The manorial system in Austria, which functioned until 1848, was basically a system of hereditary tenure: it was tenure since peasants had to pay duties (or render services) as a rent for their land, but it was hereditary since lords were not free to choose their peasants. Peasants were free to sell, bequeath or give away their land without authorisation of the manor, upon which duties devolved onto the new landholder. In the 1780s, Hungarian, Bohemian and other serfs were entitled to receive these rights of hereditary tenants like other peasants upon emancipation. When the manorial system was abolished in 1848, rent duties and services lapsed and the former lords were recompensed. Thus, the abolition of the manorial system resulted in full ownership of land by the peasantry, be it full individual ownership (such as in Austria) or ownership by peasant communes (such as in Russia). The abolition of the old system in Austria was one of the lasting achievements of the short-lived constitutional assembly of the 1848 revolution, but at the same time it fulfilled the government’s aim for a centrally directed local administrative and judicial system. Similarly, the Russian government regarded the emancipation of serfs not only as inevitable but also as a means to modernise the country by way of industrial and commercial growth (Gerschenkron 1966). After 1861, peasant assemblies and district courts were established at the village level, and these peasant self-governing institutions were placed under the supervision of the local

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government to defend the interests of the peasants against the landowners. Yet the reform did not immediately give way to an independent small peasant economy as it preserved much of the arable land in the hands of the nobility. Only by the end of the century were peasants able to buy their land allotments by paying instalments in ‘redemption’ schemes administered by the government (Zakharova 2006: 602–604; Moon 2006: 388).

Industry and infrastructure At the beginning of the 19th century, the industrial sector still constituted a very small part of the economy, even in the more advanced parts of the region. Although the share of industry grew in the following decades, mechanisation went ahead slowly, particularly in the south-east. The main issues of industrial policy were competition within the domestic market (with its implications for productivity and overall production), protection of the domestic market against foreign competition, subsidies for industry, external effects of industrial production, and unrelated political interests of the state, for instance in foreign affairs. In addition, states would own industrial enterprises themselves. Traditionally, the domestic market was regulated by guilds and local organisations of small-scale businesses, which limited the numbers of enterprises and competition. In the Ottoman Empire, guilds mostly disappeared in 1826 with the abolishment of Janissary troops, which were closely linked to the guilds. In the Austrian lands, the enlightened despots of the 18th century admitted factories outside the guild system, equipped with the privilege to produce and market certain products in one or several provinces exclusively. In the 19th century, the government increasingly steered a liberal course guided by the explicit understanding that the state had to remove obstacles to free enterprise. The 1859 trade regulation act distinguished between licenced trades and free ones. Licenced trades required certain qualifications on the part of the persons who ran them, mainly for reasons of consumer safety; other trades could be pursued without restrictions. The act included loose provisions for working hours of children and juveniles only, which were amended by a more restrictive law in 1885. The general tendency towards deregulation and domestic competition was offset by the emergence of industrial cartels in practically all industrial branches in Austria, particularly from the 1890s on (Resch 2002). Contrary to the guilds, the cartels were purely private associations. Hundreds of industrial cartels became possible after the emergence of ever more large enterprises, which allowed the organization of effective cartels with relatively few participants. Cartel agreements could not be legally enforced, but firms were permitted to collude. In Russia, industrial production followed a long-term trend from 1861 to 1913 with annual growth rates of 5% to 6% (Barnett 2004: 371). The rising tariff rates even in the liberal period of the 1880s, and even more so in the following years, were supposed to protect Russian industry (Stepanov 2004: 17; von Laue 1953: 432; Gregory and Sailors 1976: 837; Barnett 2004). Yet the 1880s do not appear to

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be the start of a spurt in industrial growth, and changes in tariffs had no appreciable effect on growth rates which were on average 5.3% per annum during 1880–1889 compared to 5.4% during 1870–1879. During the incumbency of the proindustrial finance minister Sergei Witte (1892–1903), labour mobility and railway construction pushed the industrial growth rates to an average of 5.9% per annum. Although 1890s marked a change in economic policy narrative inspired by the teachings of F. List, it is difficult to identify a corresponding turning point in industrial growth rates. The world economic crisis of 1900–1903, the Russo-Japanese War in 1904–1905 and finally large-scale worker rebellions during the revolution of 1905 slowed the growth of Russian industry, which was only reversed after the domestic and international stability was established in 1906 (Ananich 2006; Barnett 2004; Zelnik 2006). Foreign competition was a major issue in countries with an underdeveloped manufacturing sector. In the Balkans, exemptions from the tariff became a means of industrial promotion: duty-free imports of machinery, raw materials and semifinished products were granted to industrial firms in Romania, Bulgaria and Serbia from the late 1880s. Some of the policy targets had backfired, since customs exceptions led several manufacturers to import inputs for the purposes of selling them in the domestic market (Berend 2003: 142; Berend and Ránki 1974: 89, 141; Constantinescu 1994: 179–195; Lampe 1975). In addition to these exemptions, states promoted industry by subsidising transport costs and offering free building sites for industrial companies, such as in Romania, and offered them tax exemptions or reductions, such as in Serbia. State ownership in manufacturing played a major role in the early Ottoman industry. The machinery and skilled labour for key military goods, such as arms and uniforms, were imported from Europe. In 1838, however, the Ottoman government abandoned most state monopolies and other import-export controls. Even after the 1870s, when the Ottoman government issued a new set of laws promoting industrialisation, the free trade ideology remained prevalent within the Ottoman bureaucracy because policymakers believed in the advantages of having cheap industrial imports. In the end, the traditional small manufacture mainly survived in the countryside in the form of cottage industry for the production of silk, cotton, wool and carpets, albeit at the price of low wages and much unpaid family labour. Moreover, positive trends in the Ottoman terms of trade encouraged the shift towards export-oriented agriculture and accelerated the decline of manufacturing activities or de-industrialisation (Clark 1974; Faroqhi 2006; Quataert 1993; Pamuk and Williamson 2011). Infrastructure building was also subject to intense regulation by the state due to its relevance for state finances and the economy. This is especially true for the railway business. From the beginning of the railway era on, it was clear for governments that railways demanded action regarding capital raising, the standards of superstructure, and safety standards in general. A particular problem was the route, which depended on companies’ commercial considerations, environmental conditions, and on the demands of regional and trade policy, military requirements, and

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the impact of international railway connections (Röll 1912–1923; Metzer 1974; Stöckl 1975; Gregory and Sailors 1976; Köster 1999; Milić 1993). In many cases, governments issued earnings guarantees to stockholders, which were often combined with the explicit option to nationalise a railway some time later. Apart from these contracts, states assumed the ownership of major parts of their railway systems by simply buying shares in the stock market or by taking over lines at one go, or by constructing new lines themselves. Railway construction started in Austria in the 1820s, in Russia in the 1830s, in the Ottoman Empire in the 1850s, and in Greece in the 1860s. Austria was an early case of a nationalised railway system in the region. In the 1840s, in the course of a price slump of railway shares, the state acquired a majority of the existing railway system within a few years in order to stabilise the market, to contain the prevailing private commercial interests in the railway business, to make allowance for regional interests and to allow for military exigencies. This era of nationalised railways came to a quick end in the 1850s when state finances came under increasing stress by unusually high military expenses. Therefore, the government decided to sell off its railways, and from the late 1850s on all Austrian railways were private again. This period lasted until the 1870s, when both the Austrian and Hungarian governments began to nationalise railways again. In 1914 about 84% of the Austro-Hungarian railway system (about 46,000 kilometres) was run by the state railway administration. The Russian railway system started a few years later, but otherwise there were strong parallels with the Austrian case. The very first Russian line, a short connection between St. Petersburg and Pavlovsk which opened in 1838, was a private railway. The first major lines, however, were constructed as state railways in the 1840s. Up to the end of the 1850s, the state owned close to 100% of the still small Russian railway system. Similar to Austria, fiscal problems in connection with the Crimean War made the retention of the state railway system difficult. In the 1860s, the state privatised almost all of its lines, and the remarkable growth of the Russian railway system from the late 1850s to 1880 was almost entirely a private matter. At the same time, the government acknowledged the importance of railways for the military and for the industrial sector. In the 1890s, railway construction was meant explicitly to stimulate the expansion of the heavy and mining industries, of subsidiary industrial branches (von Laue 1953: 428). In addition, private railways owed the government 600 to 850  million roubles (more than their equity and equivalent to about one-third of invested capital) due to interest guarantees and loans by the state. From 1881 on, the Russian government built new state railways and nationalised private lines on a large scale. In 1873 all preparatory work for the construction of railways (even private ones) became a legal right and obligation of state agencies. The right of the state to acquire private lines after a limited period became part of the charters of new railway companies. Between 1881 and 1911, private companies built about 18,000 kilometres of new railways in European Russia, and the state nationalised about 21,000 kilometres of private lines. In addition, the state constructed about 18,000 kilometres of new lines in European Russia (and 11,000 kilometres in Asia) by itself. Eventually, the state owned more than 70%

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of all Russian railways in 1910. Public ownership was predominant with railways which led to any Russian border and in border regions in general; these were also the regions where a major part of those lines were situated which had been constructed by the state authorities themselves. Railway construction in Ottoman Southeast Europe started much later (Röll 1912–1923: vol. III/155–161, vol. V/371–374, vol. VIII/247–255, vol. IX/31–34, vol. IX/373–380). The first railway, opened in 1860, was a short line in Dobruja; the second one connected Ruse and Varna in northern Bulgaria from 1866 on. In 1868, after repeated trials, the Porte concluded a contract with Maurice de Hirsch’s Société impériale des chemins de fer de la Turquie d’Europe, which was supposed to construct a vast private railway network connecting Constantinople with Austria-Hungary and Serbia via Rumelia and Bosnia, and the Black Sea with the Aegean Sea. The government guaranteed minimal earnings. Within a few years, this arrangement was reversed: now, Hirsch constructed the railway not as private lines but on behalf of the state, and he leased them afterwards through his operating company. By and by, the Ottoman government came to own a network of more than 3,000 kilometres in Europe which was operated privately. In the course towards autonomy and full independence of new states, major parts of this network came into the possession of new governments who mostly pursued a policy of a railway system that was both owned and operated by the state. The Principality of Bulgaria established a system of state railways by law in 1884. In the following, the state built and administrated new lines (Romania did so already in 1869) and took over older railways from private operators after full independence in 1908. In the last years before the First World War, about 90% of the Bulgarian network, 90% of the Romanian network and 70% of the Serbian network were owned and run by the respective states (Bouvier 1960: 89–94, 98–102; Milić 1993). In Greece, on the contrary, the state had no role in the ownership and operation of railways. Railway construction started late, hindered by the scarcity of capital. A connexion to the rest of Europe, which would have depended on the cooperation of the Ottoman government, became feasible only after the Balkan Wars.

Conclusion The period from the late 18th century to the First World War saw a deep change in the economic role of states throughout the region. States started to deal with issues that either had little relevancy or had previously been administered by non-governmental authorities. Most of these issues had existed before, but they appeared on a larger scale now demanding more resources and were subject to comprehensive planning. Authorities had always been confronted with demands of agriculture, industry, health, education, transport and trade, and had always to decide about the means to finance the measures taken in these fields. But in the course of the 19th century, the sheer size of the problems to be solved had become much larger, and the aspiration of states to provide comprehensive solutions had become manifest.

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Now measures in education, health or welfare were to include everyone due to rising demands for social mobility and changes in technology. New transport systems which required enormous amounts of capital were run or financed essentially by the state to facilitate political and economic unification and military mobilisation. States gradually became large unified trade areas by abolishing domestic trade barriers and started dealing with other large customs areas. Despite the differences in openness to trade across time and countries, international trade increased its weight in the region as a whole. In line with this development, monetary regimes were modernised and new independent central banks of issue emerged. The pursuit of commodity money standards with fixed interest rates contributed to financial integration and relative monetary stability; and the convertibility of currencies made the region follow common international monetary standards. State agencies routinely acted not only on the national or regional level but also on the local level, and they administered matters that had been outsourced and previously run privately. Consequently, state budgets and the public service sector grew disproportionately fast, resulting in larger shares of state revenues and expenses in rising GDPs. The distribution of tax burden and government spending were determined by a combination of domestic and international political economy factors. The general trend in the region was a move from direct to indirect taxation. The speed and scale of this shift was determined by relative political power of merchants, peasants, landowners, bureaucrats and other urban and rural groups. Military expenditures rose with the domestic and international conflicts. At the same time, states displayed comparatively little activity concerning the production of goods, not intervening in private competition, but neither in privately organised restrictions on competition. Most of these processes were in no way specific to East, Central, and SouthEast Europe. A  typical, albeit by no means unique, feature of the region lay in its belated development, which resulted in a greater reliance on the capabilities of states to solve problems which could be left to private enterprise in the most advanced economies. Differences to fast-growing neighbouring regions such as Germany were gradual rather than principal: weaker, more slowly developing economies relied more heavily on the state. Considering a counterfactual process of states refraining from economic political activity, the outcome would hardly have been more successful: the strong role of the state in the Central, Eastern, and South-Eastern European economies was the result of, not the reason for, economic underperformance.

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Lampe, J. R. (1986): The Bulgarian Economy in the Twentieth Century. London: Croom Helm. Lampe, J. R. and Jackson, M. R. (1982): Balkan Economic History, 1550–1950: From Imperial Borderlands to Developing Nations. Bloomington, IN: Indiana University Press. Lazaretou, S. (2005): “The Drachma, Foreign Creditors, and the International Monetary System: Tales of a Currency During the 19th and the Early 20th Centuries”, Explorations in Economic History, Vol. 42, No. 2, pp. 202–236. Lieven, D. (2006): “The Elites”, in The Cambridge History of Russia, Volume II: Imperial Russia, 1689-1917, edited by D. Lieven. Cambridge: Cambridge University Press, pp. 227–244. Love, J. (2001): “Resisting Liberalism: Theorizing Backwardness and Development in Rumania before 1914”, in Economic Thought and Policy in Less Developed Europe: The Nineteenth Century. London and New York: Routledge. Metzer, J. (1974): “Railroad Development and Market Integration: The Case of Tsarist Russia”, Journal of Economic History, Vol. 34, No. 3, pp. 529–550. Milić, D. (1993): “Die Pläne zum Ausbau der Eisenbahn in Serbien in der Mitte des 19. Jahrhunderts”, in Eisenbahnbau und Kapitalinteressen in den Beziehungen der österreichischen mit den südslawischen Ländern, edited by Richard G. Plaschka, Anna M. Drabek, and Birgitta Zaar. Wien: Österreichische Akademie der Wissenschaften. Mishkova, D. and Daskalov, R. (2014): “Forms without Substance”: Debates on the Transfer of Western Models to the Balkans”, in Entangled Histories of the Balkans, Vol. 2, edited by R. Daskalov and D. Mishkova. Leiden: Brill. Moon, D. (2006): “Peasants and Agriculture”, in The Cambridge History of Russia, Volume II: Imperial Russia, 1689–1917, edited by D. Lieven. Cambridge: Cambridge University Press, pp. 369–393. Özbek, N. (2010): “Osmanlı İmparatorluğu’nda Gelir Vergisi: 1903–1907 Tarihli Vergi-i Şahsi Uygulaması”, Tarih ve Toplum Yeni Yaklaşımlar, No. 10, pp. 43–80. Palairet, M. (1979): “Fiscal Pressure and Peasant Impoverishment in Serbia before World War I”, Journal of Economic History, Vol. 39, No. 3, pp. 719–740. Palairet, M. (1997): The Balkan Economies c. 1800–1914. Evolution Without Development. Cambridge: Cambridge University Press. Palamas, L. K. (1930): History of Monetary Enactments in Greece, 1828–1885. Athens: Hestia. Pammer, M. (2010): “Public Finance in Austria-Hungary, 1820–1913”, in Paying for the Liberal State. The Rise of Public Finance in Nineteenth Century Europe, edited by José Luis Cardoso and Pedro Lains. Cambridge: Cambridge University Press, pp. 132–161. Pamuk, Ş. (1987): The Ottoman Empire and European Capitalism, 1820–1913. Cambridge: Cambridge University Press. Pamuk, Ş. (2000): A Monetary History of the Ottoman Empire. Cambridge: Cambridge University Press. Pamuk, Ş. and Williamson, J. G. (2011): “Ottoman De-Industrialization 1800–1913: Assessing the Magnitude, Impact and Response”, Economic History Review, Vol. 64, No. S1, pp. 159–184. Péter, L. (2000): “Die Verfassungsentwicklung in Ungarn”, in Die Habsburgermonarchie 1848–1918. Vol. VIII: Verfassung und Parlamentarismus, edited by Helmut Rumpler and Peter Urbanitsch. Wien: Österreichische Akademie der Wissenschaften, pp. 239–540. Petmezas, S. (2000): “Export-dependent Agriculture, Revenue Crisis and Agrarian Productivity Involution  – The Greek Case 1860s to 1930s”, Histoire  & Mesure, Vol. 15, pp. 321–337. Petrovich, M. B. (1976): A History of Modern Serbia 1804–1918, Vol. 2. New York and London: Harcourt Brace Jovanovich. Portal, R. (1966): “The Industrialization of Russia”, in The Cambridge Economic History of Europe, Vol. VI. Cambridge: Cambridge University Press, pp. 801–872.

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Pressburger, S. (1966): Das Österreichische Noteninstitut 1816–1966. Wien: Österreichische Nationalbank. Quataert, D. (1993): Ottoman Manufacturing in the Age of Industrial Revolution. Cambridge: Cambridge University Press. Quataert, D. (1994): “The Age of Reforms”, Part 4 of An Economic and Social History of the Ottoman Empire 1600–1914, Vol. 2, edited by H. Inalcik et al. Cambridge: Cambridge University Press. Reclus, É. ([ca] 1886): The Earth and its Inhabitants. Europe. Vol. I. Greece, Turkey in Europe, Rumania, Servia, Montenegro, Italy Spain, and Portugal. New York: Appleton. Resch, A. (2002): Industriekartelle in Österreich vor dem Ersten Weltkrieg. Marktstrukturen, Organisationstendenzen und Wirtschaftsentwicklung von 1900 bis 1913. Berlin: Duncker & Humblot. Röll, V. v. (1912–1923): Enzyklopädie des Eisenbahnwesens. Vols. 1–10. Berlin, Wien: Urban & Schwarzenberg. SEEMHN (2014): South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II. Athens, Sofia, Bucharest, Vienna: Bank of Greece, Bulgarian National Bank, National Bank of Romania, Oesterreichische Nationalbank. Shakibi, Z. P. (2006): “Central Government”, in The Cambridge History of Russia, Volume II: Imperial Russia, 1689-1917, edited by D. Lieven. Cambridge: Cambridge University Press, pp. 429–448. Shaw, S. J. (1975): “The Nineteenth-Century Ottoman Tax Reforms and Revenue System 1517–1798”, International Journal of Middle East Studies, Vol. 6, No. 4, pp. 421–459. Singer, J. D. (1987): “Reconstructing the Correlates of War Dataset on Material Capabilities of States, 1816-1985”, International Interactions, Vol. 14, pp. 115–132. Spyropoulos, P. K. and Fortsakis, T. (2009): Constitutional Law in Greece. The Netherlands: Kluwer Law International. Stead, A. (1909): Servia by the Servians. London: W. Heinemann. Stepanov, V. L. (2004): “Finance Ministry Policy in the 1880s and the Unrealized Potential for Economic Modernization in Russia”, Russian Studies in History, Vol. 42, No. 2, pp. 14–21. Stoenescu, G. V. et al. (2014): “Romania: From 1880 to 1947”, in South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II. Athens, Sofia, Bucharest, Vienna: Bank of Greece, Bulgarian National Bank, National Bank of Romania, Oesterreichische Nationalbank, pp. 243–289. Stöckl, F. (1975): Eisenbahnen in Südosteuropa. Jugoslawien, Griechenland, Rumänien, Bulgarien, Türkei. Wien: Bohmann. Sundhaussen, H. (1977): Geschichte Serbiens. 19.–21. Jahrhundert. Wien, Köln, Weimar: Böhlau. Thomadakis, S. (1985): “Monetary Arrangements and Economic Power in Nineteenthcentury Greece: The National Bank in the Period of Convertibility (1841–77)”, Journal of Hellenic Diaspora, Vol. 12, No. 4, pp. 61–90. Tooze, A. and Ivanov, M. (2011): “Disciplining the ‘black sheep of the Balkans’: Financial Supervision and Sovereignty in Bulgaria, 1902–38”, Economic History Review, Vol. 64, pp. 30–51. Tunçer, A. C. (2015): Sovereign Debt and International Financial Control – The Middle East and the Balkans. London: Palgrave Macmillan. Tunçer, A. C. and Pamuk, Ş. (2014): “Ottoman Empire: From 1830 to 1914”, in SouthEastern European Monetary and Economic Statistics from the Nineteenth Century to World War II. Athens, Sofia, Bucharest, Vienna: Bank of Greece, Bulgarian National Bank, National Bank of Romania, Oesterreichische Nationalbank, pp. 171–197.

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5 ECONOMIC INTEGRATION WITH WESTERN EUROPE AND THE GLOBAL ECONOMY, 1800–1914 Steven Nafziger and Matthias Morys

Introduction From the dissolution of the Holy Roman Empire in 1806 until the onset of World War I in 1914, the regions of Central, Eastern, and Southeastern Europe (CESEE) experienced slow but rising integration with the economies of Western Europe and the rest of the global economy. This process occurred fitfully, both over time and across the three Empires – Austro-Hungarian, Ottoman (and the subsequent Balkan states of Greece, Romania, Serbia, and Bulgaria), and Russian – that dominated the region. Despite an incomplete quantitative record, it appears that trade, capital, and population flows between CESEE and the rest of the world saw largely positive growth over the period. Telegraph and railroad lines slowly spread across the region, educational and cultural connections deepened, and technological transfers occurred. Overall, these parts of Europe became less peripheral to the rest of the global economy, as the region participated in the wave of economic globalization over the long 19th century. The economies of CESEE grew slowly more connected to the rest of the world, but the effects of these developments are less clear, as convergence with Western European economies remained partial at best (cf. Chapter 3). With the exception of parts of the Habsburg lands, exports from the region were largely primary and semi-processed commodities, while imports were overwhelmingly manufactured goods produced in Western European factories. As Williamson (2011) points out, the European periphery (including Russia) saw rising terms of trade (export prices over import prices) over the first half of the “long 19th century” (1800–1914) before stagnation and even slow decline up to the first World War. The initial rise in the terms of trade for CESEE reinforced de-industrialization in some parts of the region. The eventual leveling off of the terms of trade was associated with declining trade costs, the rapid increase in agricultural competition from the Americas since

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the 1870s, and falling primary commodity prices, leading to adverse consequences for agriculture throughout CESEE. The long-run secular decline in industrial import prices caused initial movements towards trade liberalization to give way to higher levels of protectionism, although political pressures from Western Europe partially limited such barriers. Overall, these trade developments slowed the onset of modern industrial development in the region, and CESEE remained essentially agricultural through the onset of World War I. Capital flows acted as another channel of integration with the global economy. The 19th century saw the CESEE economies attract immense capital inflows, as Western companies and investors (largely European but a few American) sought out high returns, encouraged in part by policies and implicit political guarantees of CESEE states. Imperial Russia became the largest net borrower in the world over the period, while the rest of the region also saw significant levels of foreign investment. These capital flows came in all forms, from sovereign debt purchases, to direct investments, to the acquisition of equity shares floated domestically or on exchanges abroad. Foreign capital was particularly critical in the construction of railroads and other infrastructure projects, as well as in the initial stages of modern industrial activity. Underpinning these capital inflows were the growing presence of Western European banks in the region, the integration and cross-listing of securities in CESEE and Western exchanges, and, towards the end of the period, the adoption of the gold standard by all countries in the region. Although capital inflows generated additional investment and enabled the transfer of modern transportation and industrial technologies, dependence on such flows generated large payment outflows while possibly fueling macroeconomic instability. Finally, CESEE labor markets were increasingly integrated with those of Western Europe and the rest of the global economy, especially after 1870. Although low incomes, high transportation costs, and various institutional restrictions limited labor mobility over much of the century, the slow easing of these constraints allowed for rising temporary and permanent domestic, regional, and international flows of workers and households. Rural migrants fueled urban growth in CESEE cities and came to constitute a large share of the seasonal agricultural labor force in Western Europe. Intercontinental emigration from Austria-Hungary, Russia (approximately half of whom were Jews from the Pale of Settlement), and Greece grew after 1870, making them some of the largest migrant-sending countries to the Americas by the onset of World War I. By contrast, Bulgaria, Romania, and Serbia generated insignificant numbers of emigrants during the same period (for reasons that are not entirely understood). While those who moved to exploit opportunities elsewhere likely experienced substantial welfare gains (often including greater political and religious rights), this conjecture is based on imperfect information regarding migrant selection, relative living standards in sending and receiving locations, remittance patterns, and net flows. Moreover, the available wage evidence implies a relative stagnation of income levels in the region, suggesting that CESEE labor flows in the “Age of Mass Migrations” were not sufficient to generate significant

Economic integration with Western Europe  99

convergence processes with global economic leaders in the face of persistent and substantial internal and external impediments. This chapter explores the growing connections between the CESEE region and the economies of Western Europe (and the rest of the world) over the long 19th century. We cover Austria(-Hungary), Imperial Russia, and the emerging Balkan countries which obtained autonomy and, eventually, political independence in a drawn-out process (Serbia: 1817/1878; Greece: 1821/1832; Romania: 1859/1878; and Bulgaria: 1878/1908). We also include the Ottoman Empire, if and when the relevant data and sources allow us to distinguish the European part from the rest of the empire. Where appropriate, we borrow language from an open-economy, general equilibrium framework based on fixed (geographic endowments) and mobile (labor and capital) productive factors (e.g. O’Rourke and Williamson, 1999). Such a structure informs our discussion of whether trade, capital flows, and labor mobility, in the context of specific institutional, technological, and policy-related changes in CESEE, generated forces for economic convergence within the region and with the global economic leaders. In doing this, we link national processes of factor and goods market integration with regional and international ones. We begin by describing the underlying technological, institutional, and policy context within CESEE over the long 19th century. We then analyze commonalities and points of variation across the region in how internal and external trade, capital, and labor market integration took place. The focus is on the region as a whole, but our evidence is often pulled from national statistical sources and country-specific research, which necessarily weighs our discussion towards parts of CESEE with better empirical information on particular topics in different time periods. The concluding section considers some general issues of the welfare consequences of the growing economic ties between CESEE and the rest of the world.

The institutional, infrastructure, and policy context Between the Congress of Vienna (1815) and World War I, CESEE was politically divided among three Empires – the Russian, the Ottoman, and the Austrian (since 1867 the Austro-Hungarian Empire, conferring equal status to Hungary within the monarchy) – and four comparatively small Balkan countries which managed to first gain de facto and then de jure independence. The three empires maintained spheres of economic and political influence that grew, contracted, and overlapped over the century. A long series of military conflicts and subsequent peace treaties marked the steady detachment of the Ottoman Empire from Southeastern Europe; a vacuum filled in the 17th and 18th centuries by Austria but in the 19th century by the emergence of the Balkan states. The Russian Empire frequently interfered in the region, both formally and informally, often under a Pan-Slavic banner. At the same time, Russian colonial efforts in Central Asia and the Caucasus advanced, while political and economic engagement in East Asia grew. These developments generated increasingly complicated relationships and growing tensions among the

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empires and between CESEE and external powers, culminating in the Crimean War (1853–1856), the Balkan Crisis (1875–1878)/Russo-Turkish war of 1877– 1878, the Russo-Japanese War (1905) and, eventually, World War I. Underlying the growing interactions of CESEE with Western Europe and the rest of the global economy were technological improvements in communications and transportation. Telegraph lines were built from Western Europe to Istanbul via Bucharest and Black Sea cables during the Crimean War, and the subsequent decades saw the density of lines increase throughout the region before the conversion to telephone began in the 1880s (Ehrlich, 1985; Russia, Ministerstvo, 1875). The building of communication lines tended to parallel the construction of the railways, which began slowly but then grew across the region. Beginning in the 1870s, rail lines connected the industrialized regions of Western Europe to St. Petersburg, Moscow, Warsaw, Bucharest, and Istanbul. The construction of trunk lines was followed by the slow filling in of the networks, with significant implications for internal market integration and the creation of linkages between CESEE’s agricultural hinterlands and global markets (Good, 1984, pp. 99–104; Lampe and Jackson, 1982, Ch. 6; Goodwin, 1998; Metzger, 1974; Turnock, 2006, Ch. 3). Advances in technology also enabled a significant expansion of steamship lines, which played an essential role in reducing riverine (Volga, Dnieper, Danube, and other basins) and oceanic (Baltic, Black, Mediterranean, and the Atlantic) transportation costs (Williamson, 2011, p. 15). Table 5.1 reports the growth of the region’s rail networks and the number of telegrams sent over the period. Austria-Hungary experienced steady rail and communication growth (with levels approaching those of Germany), while Russia saw a delayed but rapid acceleration of its network building beginning in the 1870s. Overall, the Balkans experienced a slower expansion of rail and telegraph lines. Canal building was important in parts of European Russia, as evidenced by successfully connecting the Baltic and the Caspian Seas by means of the Volga-Baltic Waterway, while the advent of steam and rail made even longer trade routes cost-effective to transverse. Finally, the 19th century saw regional and international shipping, shipbuilding, and merchant trading expand, especially in Greece and among Greek-expatriate populations in the region (Harlaftis and Kostelenos, 2012). Such ethnic networks (including Jewish ones) functioned as a means to lower transaction costs in the absence of fully secure governmental arrangements (or low-cost maritime insurance) for international trade across the region. In writing about Eastern Europe, Alexander Gerschenkron (1962) emphasized the role that state policies could play in overcoming economic backwardness by substituting for other prerequisites of economic growth. As discussed by Pammer and Tuncer in Chapter 4 of this volume, the long 19th century saw slow but evident improvements in state capacity within much of CESEE, with rising tax collections and public service provision, especially after 1900. The very creation of new nation-states – Greece, Bulgaria, Serbia, and Romania – may have generated some momentum in this direction, although they often found it difficult to

Economic integration with Western Europe  101 TABLE 5.1 The spread of transportation and communications in Central, East and South-

East Europe, 1840–1913 Country

Years:

1840

1860

1880

1900

1913

Germany

Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands) Railroad (kms) Telegrams (thousands)

469 n/a 144 n/a 0 n/a 0 n/a 0 n/a 27 n/a 0 n/a

11,089 730 2,927 700 0 n/a 0 20 0 n/a 1,626 900 0 n/a

33,838 13,500 11,429 11,300 224 n/a 12 370 921 950 22,865 7,300 0 396

51,678 39,700 19,229 29,500 1,566 n/a 1,033 1,205 3,100 2,063 53,234 20,000 571 1,172

63,378 52,300 22,981 51,700 2,109 n/a 1,584 1,702 3,549 3,826 70,156 98,000 1,598 1,463

AustriaHungary Bulgaria Greece Romania Russian Empire Serbia

Note: The source of these data is Mitchell (1998). The Russian Empire includes non-European areas along with the Polish provinces but not Finland. On Austria-Hungary: Hungary did not report telegrams in 1860 (so the number here is Austria only), and part of the telegram data for 1913 is from 1914. On Greece: the telegram data for 1900 is from 1901. On Russia: the telegram data for 1860 is from 1864. On Serbia: telegram data for 1880 is from 1887, and telegram data from 1913 is from 1911.

knit together effective government services in their formative years (Becker et al., 2016). The Russian Empire and other polities in the region began to slowly engage in proactive economic development policies, from building, running, and subsidizing transportation and communication networks, to providing credit towards specific sectors, to undertaking health and educational initiatives in urban and rural areas. However, it is important not to overstate these achievements, for by the 20th century the CESEE regimes were still far from the emerging social welfare states of Western Europe (Lindert, 2004). Domestic policies created the groundwork for agricultural exports and the first steps towards industrial development in the region. Although protectionism and political tensions eventually emerged (from the late 1870s onwards) in response to cheap foreign manufactures, the states of CESEE largely evolved open policies with respect to capital and labor flows (see below and Chapter 4 in this volume) – a set of policies helped by the movement towards currency policies to maintain gold convertibility. Although external influences also played a role, CESEE domestic policies were critical for moving the region away from peripheral status and towards integration with the Western European and global economies (Gregory, 1994; Lains, 2002; Williamson, 2011). The CESEE’s experience of economic integration with Western Europe and the rest of the global economy took place amidst this backdrop of institutional development, infrastructure building, and policymaking. Moreover, the rising

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economic weight of the region in European and global affairs led to growing external involvement – expressed in military and diplomatic terms – in CESEE. This was true despite the relatively low level and slow pace of income growth throughout the period (cf. Chapter 3). The generally poor record of CESEE growth during the long 19th century suggests that despite growing integration with the global economy, the region saw limited convergence with the advanced industrial nations. Thus despite some localized industrial growth in Austria, Russia, and elsewhere in the region, particularly right before World War I, the overall story is arguably one of CESEE falling behind during the 19th century (cf. Chapter 3 by Kopsidis and Schulze). Marx, Lenin, Gerschenkron, and other writers have blamed exploitative military and economic policies of Western powers, backward institutions, and other factors for the lagging performance of CESEE. In the following, we argue that the various processes of integration with the rest of the global economy were not always smooth even though on balance they were helpful. In exploring three channels  – trade flows, capital market integration, and labor migration  – that increasingly connected CESEE to the rest of the global economy, the rest of the chapter interprets the region’s experience as part of the broader globalization debate.

Trade Amidst prevailing mercantilist policies, Imperial Russia, the Ottoman lands, and the Habsburg Empire were all engaged in trade with each other and with Western Europe well before 1800 (Attman, 1981; Good, 1984; Kahan, 1985; Lampe and Jackson, 1982). Furs, lumber, agricultural products, handicraft textiles, and a variety of other commodities were traded through Baltic, Mediterranean, and Black Sea ports, as well as over land and riverine routes. Ottoman traders interfaced between East and West. Russian merchants traveled east into Central Asia and Siberia, while thick Greek, Jewish, and Serbian trading networks developed (Stoianovich, 1960). Trade expansion was sometimes helped by imperial conquest. By the end of the 18th century, Russia’s control of the Black Sea coast was firmly established, leading to the further development of Odessa and other ports, providing easier access to the agricultural riches of Ukraine and the Volga basin (Herlihy, 1986). Yet it required substantial improvements in transportation and policy interventions to enable the growth in trade in the 19th century, and after 1870 in particular. The rise in international trade flows emerged out of the growing domestic integration of the CESEE economies. Domestic and international trade expansion were largely due to the same transportation and communication improvements, but domestic political factors and policy choices also played a significant role. Railroad network expansion since the 1840s and the formation of a customs union between Austria and Hungary in 1848 increased internal trade in the Hapsburg Empire (Good, 1984; Komlos, 1983). Mid-century reforms ended most internal trade taxes in Imperial Russia, while state funding and bond guarantees for railways supported the deepening of the transportation network after 1870. These factors not only

Economic integration with Western Europe  103

helped knit internal Russian markets together, but they also enabled the transportation of grain and other primary commodities for export via the Baltic and emerging Black Sea ports (Falkus, 1966; Goodwin and Grennes, 1998; Metzger, 1974; Mironov, 1985). Yet trade integration was not without obstacles. Trade along ethnic lines imposed persistent friction in market integration in the late Habsburg Empire (Schulze and Wolf, 2012), and the political disintegration of the Ottoman Empire on the Balkan Peninsula counteracted infrastructure-driven trade improvements, with overall effects mired in controversy (Palairet, 1997; Morys and Ivanov, 2015). Trade growth and pro-trade policies often reinforced each other. Starting in the 1890s, all countries in the region began stabilizing their currencies vis-à-vis gold and were able to maintain relatively stable exchange rates to their main trading partners, notably Britain, France, and Germany (Drummond, 1976; Morys, 2017). This probably boosted trade further (Lopez-Cordova and Meissner, 2003), but it is also true that earlier trade improvements had been a vital component of joining the gold standard in the first place. How much and with whom did the CESEE economies trade? Tables 5.2 and 5.3 provide information on trade openness and trade shares over the 1870–1913 period for which we have relatively good data both for gross domestic product (GDP) and trade. Table 5.2 also provides data for the European core countries as well as other economies on the European periphery. Our measure of trade openness  – exports plus imports as share of GDP  – provides a straightforward indicator for how strongly a country interacts with the rest of the world in terms of trade. In periods of strong trade integration, trade is expected to grow faster than GDP. Table 5.2 documents this association for the core economies, Southern Europe, and the Nordic countries, in line with our general understanding of the so-called First Age of Globalisation (Daudin et al., 2010): all countries were more open in 1913 than in 1870, often by a considerable margin (cf. Belgium and Spain). The CESEE experience was more mixed. While some countries became more open over time (notably Russia and Romania, which had established themselves as the largest and fourth-largest wheat exporter globally by 1913), others moved in the opposite direction (Greece, Serbia). Austria-Hungary and Bulgaria, for their part, hardly changed at all. The CESEE countries exhibited the lowest openness ratios of all European countries at the beginning of our period in 1870. In the case of Russia, the sheer size of the domestic market accounts for the low openness ratio in 1870; and the almost fivefold increases until 1913 (from 3.1% to 14.3%) are testimony to successfully developing the country’s export potential. Yet in other cases, a stagnating openness ratio suggests that not all CESEE economies fully took part in the First Age of Globalisation. Some were potentially held back by insufficient improvements in infrastructure, as documented for some Balkan countries such as Bulgaria (Morys and Ivanov, 2015, pp. 399–400). Table 5.3 provides trade shares for all CESEE economies except for the Ottoman Empire, where the data do not allow for a decomposition for the European part of the empire. Austria-Hungary and Russia conducted more than 60% of their

104  Steven Nafziger and Matthias Morys TABLE 5.2 Trade openness (exports plus imports as share of GDP) in European countries,

1870–1913 1870

1880

1890

1900

1913

Avg.

Avg. (1880–1913)

Central, East, and South-East Europe Austria-Hungary Bulgaria Greece Romania Russia Serbia Ottoman Empire

29.0% n.a. 45.6%

25.5% 16.6% 42.3% 29.5% 4.7% 40.6% 20.6%

25.2% 20.0% 39.4% 37.5% 13.0% 32.2%

26.8% 11.7% 42.3% 23.4% 10.1% 35.1%

24.1% 16.7% 29.4% 35.9% 14.3% 32.5%1 28.7%

26.1% 16.3% 39.8% 31.6% 9.0% 35.1% 24.7%

25.4% 16.3% 38.4% 31.6% 10.5% 35.1% 24.7%

18.3% 33.7% 12.1%

18.3% 43.8% 14.8%

15.9% 45.3% 18.8%

19.0% 48.9% 22.6%

23.9% 57.4% 22.3%

19.1% 45.8% 18.1%

19.3% 48.9% 19.6%

35.7% 31.7% 33.9% 29.4%

45.8% 50.8% 36.1% 37.3%

48.0% 39.3% 43.6% 44.9%

52.8% 47.6% 43.4% 39.4%

61.5% 56.2% 50.9% 34.7%

48.8% 45.1% 41.6% 37.1%

52.0% 48.5% 43.5% 39.1%

3.1%

Southern Europe Italy Portugal Spain Nordic countries Denmark Finland Norway Sweden

European core countries Belgium France Germany Netherlands UK

35.6% 53.2% 55.6% 65.4% 101.4% 62.2% 68.9% 23.6% 33.5% 28.2% 26.8% 30.8% 28.6% 29.8% 36.8% 32.1% 30.1% 30.5% 37.2% 33.3% 32.5% 115.4% 100.5% 112.3% 124.1% 179.6% 126.4% 129.1% 43.6% 46.0% 46.6% 42.4% 51.2% 46.0% 46.6%

Source: 1870–1913: Bulgaria, Romania, Russia, Serbia, Ottoman Empire: own calculations based on Ivanov (2012) for Bulgaria, Axenciuc (2012) for Romania, Gregory (1982) and Valetov (2010) for Russia, Tuncer and Pamuk (2014) for the Ottoman Empire, and data kindly provided by Michael Palairet for Serbia. All other entries: Daudin et al. (2010). Note: 1 Data refer to 1910.

trade with Britain, France, and Germany alone. There was some trade between the two empires, but numbers pale in comparison to their relationship with the Western European core economies. Russia, for its part, traded very little with the Ottoman Empire and the Balkan countries. These numbers document trade along the lines of comparative advantage. Western Europe  – Britain and Germany in particular – dominated as suppliers of largely manufactured imports and as destinations for mostly primary commodity and semi-processed exports from the region (Bairoch, 1974; Khromov, 1950; Lampe and Jackson, 1982; Pamuk, 1987). This

Economic integration with Western Europe  105 TABLE 5.3 Trade shares of Central, East and South-East European countries, 1872–1913,

percent Austria-Hungary 1880

2

South-East Europe Austria-Hungary Bulgaria Greece Romania 7.2 Serbia 1.7 Total Total excluding Austria-Hungary Core countries France Germany 61.0 United Kingdom Total Russia Ottoman Empire Italy 5.4

Bulgaria

1890 1900 1913 avg.

0.01 0.01 2.5 3.4 5.9 5.9

0.4 0.9 2.1 1.9 5.1 5.1

0.8 0.9 3.5 1.3 6.5 6.5

3

21.9 17.0 16.0 18.1 18.3 0.4 0.6 0.6 0.9 2.3 2.2 1.5 2.7 11.3 2.6 2.0 2.4 4.6 2.2 2.3 0.9 0.9 0.9 1.3 5.8 36.3 21.4 21.2 23.6 25.6 5.8 14.4 4.4 5.2 5.5 7.4

5.2 3.4 3.1 3.9 8.8 14.2 5.7 8.0 9.2 56.2 45.0 39.1 46.7 0.9 3.4 12.2 15.8 8.1 11.2 9.6 7.9 9.6 17.2 22.0 19.5 12.4 17.8 72.6 58.0 50.1 60.2 26.9 39.6 37.4 36.1 35.0 2.6 2.3 2.5 0.0 2.9 3.6 2.2 18.3 26.3 22.6 21.3 22.1 7.7 7.2 6.3 7.0 2.5 1.8 5.0 2.8 3.0

Greece

South-East Europe Austria-Hungary Bulgaria Greece Romania Serbia Total Total excluding Austria-Hungary Core countries France Germany United Kingdom Total Russia Ottoman Empire Italy

1882 1889 1901 1910 avg.

Romania

1872

1887 1897 1912 avg.

13.9 n.a.

10.1 0.01

1880 1890 1900 1911 avg.

9.7 14.9 0.01 2.8

4.0 0.01 17.9 4.0

12.2 44.1 9.6 22.9 15.8 23.1 0.9 3.4 0.6 1.2 0.6 1.5 1.6 0.2 0.3 0.2 0.6 2.8 0.7 1.3 2.2 0.01 0.01 0.01 0.0 0.5 0.2 0.3 0.1 0.3 12.9 10.4 19.0 15.1 49.6 10.7 24.7 16.7 25.4 2.8 0.7 4.1 11.6 5.5 1.1 1.8 0.9 2.3

11.7 0.01 36.9 48.6

13.4 11.2 9.3 11.4 9.7 8.9 4.8 6.7 7.5 2.9 6.4 9.5 4.7 5.2 19.1 15.1 17.2 14.1 31.0 28.0 21.0 29.2 24.0 40.5 9.7 11.2 21.4 47.4 45.6 39.9 45.3 38.9 68.5 29.5 36.1 43.0

14.1 5.5

11.2 6.0

7.7 5.2

4.7 5.9

9.4 5.7

Russia 1880 South-East Europe Austria-Hungary 5.0 Bulgaria 0.01

6.6 0.9

3.0 2.6

4.7 5.2

2.7 6.2

4.3 3.7

Serbia 1890 1900 1913 avg.

1884 1890 1900 1910 avg.

4.3 0.0

72.9 0.3

4.0 0.1

3.5 0.1

4.2 0.0

74.2 1.4

68.3 2.8

18.7 2.5

58.5 1.8

(Continued)

106  Steven Nafziger and Matthias Morys TABLE 5.3 Continued

Russia 1880 Greece Romania Serbia Total Total excluding Austria-Hungary Core countries France Germany United Kingdom Total Russia Ottoman Empire Italy

0.4 1.1 0.01 6.5 1.5

7.3 37.4 27.1 71.8 3.2 1.1

Serbia 1890 1900 1913 avg. 0.8 0.8 0.0 5.9 1.6

0.7 0.5 0.0 5.3 1.3

0.3 0.8 0.0 4.7 1.2

1884 1890 1900 1910 avg.

0.6 0.3 0.1 0.4 0.2 0.2 0.8 1.4 1.5 3.3 4.2 2.6 0.0 5.6 74.9 77.1 74.8 25.7 63.1 1.4 2.1 3.0 6.5 7.0 4.6

6.0 6.6 5.5 6.4 0.6 0.7 3.3 2.6 1.8 26.3 30.1 38.2 33.0 8.5 4.4 15.7 31.1 14.9 26.7 20.3 15.2 22.3 4.5 6.1 3.1 7.2 5.2 59.0 57.0 58.9 61.7 13.6 11.2 22.1 40.8 21.9 2.2 3.6

2.0 3.4

1.9 3.1

2.3 2.8

3.8 1.4

5.2 0.5

2.2 0.6

16.1 2.6

6.8 1.3

Source: Valetov (2010) for Russia and Morys and Ivanov (2015) for all other countries. Notes: Not separately reported in national trade statistics. Data refer to the border to which goods were transported (and not final destination). 3 The average only relates to 1890, 1900 and 1913 for the reasons explained in fn. 2. 1 2

rationale also explains the almost complete absence of regional trade: the economic structures of the CESEE economies were too similar to generate a meaningful level of intra-CESEE trade. The same pattern can be observed for the much smaller economies of Bulgaria, Greece, Romania, and Serbia. Trade orientation vis-à-vis Western Europe appears marginally smaller, but such perspective neglects the importance – and the structure – of trade with Austria-Hungary. The dual monarchy remained an important trading partner to the four countries, largely exporting manufactured goods from its advanced regions of Lower Austria and Bohemia (Paskalleva, 1981; Preshlenova, 1994). Combining the data for Britain, France, Germany, and AustriaHungary shows again trade shares between 55% and 65% for the Balkan countries. Trade with the Ottoman Empire and Russia was negligible. What does the evidence on trade openness, trade shares, and price integration suggest about the broader economic experience of CESEE in the first wave of globalization? As Britain, Germany, and other industrial economies saw their growth accelerate from early in the 19th century onward, the CESEE economies experienced rising demand for primary commodities and semi-processed goods. At the same time, the slow increase in incomes across the region generated demand for rapidly cheapening Western manufactures. Together, these resulted in rising terms of trade for CESEE over the first two-thirds of the period, followed by

Economic integration with Western Europe  107

stabilization, and then a slow decline from roughly 1870 to World War I. This early rise in the terms of trade generated some momentum towards de-industrialization through the middle of the century, with traditional handicraft industries in particular coming under pressure from cheap imported manufactures. The later downward trajectory in the terms of trade was primarily driven by the so-called European Grain Invasion, namely the arrival of cheap agricultural produce from the Western hemisphere (and the United States in particular) in the markets of industrial Western Europe (O’Rourke, 1997). With New World and Eastern European agricultural producers increasingly competing with each other, terms of trade fell for the CESEE economies (and correspondingly rose for the industrialized core countries) (Pamuk and Williamson, 2011; Williamson, 2011). From the mid-1880s, the movements in relative prices supported the onset of industrialization in parts of the region, with a particular emphasis on light manufactures and processed agricultural and natural resources for domestic consumption and export. Yet this process, which has been shown econometrically for Austria, Hungary, and Russia (Benetrix et al., 2015), should not be overstated. As Chapter 3 documents, the primary sector remained more important until 1913 and drove overall GDP growth more strongly in the 1870–1913 period, in all CESEE economies bar Austria. Were the open economy forces behind the late development of industrialization helped or hindered by regional trade policies that turned increasingly protectionist in the 1880s and 1890s? In the absence of statistical evidence similar to that provided by Lehmann and O’Rourke (2011) for more advanced economies of the time, we are left with little more than conjectures regarding the effects of tariffs on growth and industrialization in CESEE. Following a window of relatively liberalized bilateral trade relations in the middle of the century, protectionism rose across much of Europe from the 1870s to the early years of the 20th century. This was particularly true for much of the CESEE, where tariffs rose to levels well above the European core (Table 5.4; Williamson, 2011). Such was the case for Russia, where average nominal tariffs rose from 13% to 35% between 1870 and 1890, remaining at a relatively high level until World War I. Similar developments took place in the Balkan countries, albeit slightly later and mildly less protectionist. Only Austria-Hungary resisted the trend (Good, 1984). Yet there appears to be important differences across countries. In the Russian case, there were elements of infant industry protection, with high tariffs applied selectively to some higher valued final manufacturing goods (i.e. railway equipment), although, simultaneously, many imported industrial inputs and agricultural commodities also faced substantial duties, often for fiscal and strategic reasons (Barnett, 2004; Crisp, 1976). In the Balkans, by contrast, tariffs on agricultural produce were typically higher than on industrial items, and the associated trade conflicts were typically with the neighbouring countries (Lampe and Jackson, 1982, pp.  264–269; Preshlenova, 1994). From the available statistical evidence it is probably only safe to conclude that the exceptionally high tariffs by the 1890s were an additional factor why the CESEE openness ratios remained low in international comparison (cf. above).

108  Steven Nafziger and Matthias Morys TABLE 5.4 Tariffs in Central, East and South-East Europe, 1870–1913, percent

Average (Nominal) Tariff Rates

Austria Hungary Bulgaria Greece Ottoman Empire Romania Russian Empire Serbia Finland Portugal Spain France Germany UK

1870

1880

1890

4.3* – 12 7.4* 7.8 12.8 2.8* – 27 12.9 2.9 3.7* 8.9

4.6 8 16 – 5.7 15.4 8 7.4** 29.5 20.1 5.2 5.8 6.1

6.6 8 – 7.4 6.5 34.9 8 10.3 33.3 16.5 8.0 8.8 6.1

1900 6.6 15 25** 7.3 7.7 32.6 15 11.1 27.2 14.9 8.8 8.1 5.3

1910 7.1 20 27 11.1 13.4 25.7 20 12.8 23.6 15.4 9.0 7.4 5.9

Note: We take the nominal tariff rates – defined simply as tariff revenue/value of imports – from Lains (2002; three-year averages for Bulgaria, Greece, Romania, Serbia, Finland, Portugal, and Spain); Barnett (2004; Russia); Eddie (1977; Austria-Hungary in three- to five-year averages around these dates); Nye (1991; France and the UK; five-year averages included the denoted years); Tena-Junguito (2009; 12-year averages around 1870 for several countries; marked with *); Shaw (1975; the remaining Ottoman Empire rates); and Mitchell (1998; Germany and the remaining values for Finland (1883) and Greece (1903); both marked with **). Blank entries indicate missing values in these sources.

Capital flows Foreign capital flows into the region, particularly over the three and a half decades prior to World War I, were an important factor in the early stages of economic modernization and industrialization in CESEE. This was particularly the case in Imperial Russia, which became, on some accounts (Falkus, 1979, p. 5), the largest net recipient of foreign investment in the world by the early 20th century. But foreign capital also played a key role in the economic development of AustriaHungary, the Ottoman Empire, and the emerging Balkan states. The main benefit of the vast capital flows was to supplement limited domestic savings, thereby allowing capital stock increases commensurate with the economic needs of the backward CESEE economies. Yet capital inflows to the region often embodied technological, managerial, and financial knowledge from more advanced economies, thus lending some support towards economic catch-up. As opposed to trade, capital overwhelmingly flowed one way: from the Western European economies (and from Britain, France, and Germany in particular) to the region. There were hardly any capital outflows1 and only very limited cross-border investments within the region (mainly Habsburg and Russian investments in the Balkans). On an economic level, capital flows were a force for good. In line with economic logic, they flowed from the capital intensive Western European economies

Economic integration with Western Europe  109

to the capital-scarce Eastern European economies, helping CESEE to catch up and providing investors with returns higher than they could have expected at home. Yet they also created vulnerabilities of both an economic and a political nature. The CESEE economies became dependent, to some degree, on the capital flow cycle set by the core economies: push factors (i.e. why core countries wanted to export capital) sometimes dominated pull factors (i.e. what made a particular CESEE country attractive for foreign investment). The debt defaults of Greece and Serbia in the 1890s, for instance, were mostly the result of poor macroeconomic management, yet these episodes also reflected a much reduced willingness of the core countries to lend overseas in the wake of the 1890 Baring financial crisis, an event totally unrelated to the region. In both cases, default eventually resulted in financial supervision, by which foreign creditor governments effectively took control of the countries’ fiscal policies. These were extreme cases of “foreign intrusion”, partly helped by the small size of the countries. But even in the Russian case, capital imports were seen as a mixed blessing at the time – spurring growth and cementing the emerging political alliance with France (where most of the capital came from), but also creating economic and political dependencies in the process. The severe banking crisis of 1899–1902 is a case in point, when money market turbulence in Western Europe generated profound consequences for Russian banks and industrial production (Lychakov, 2018). Foreign investments took different forms, namely sovereign lending, portfolio investments into corporate securities (bonds and stocks), and foreign direct investment (acquiring direct control over foreign-based companies as opposed to holding merely a financial stake). Only with the first item are we in a position to establish numbers with sufficient accuracy and make meaningful comparisons across countries, and even here only for the period after 1880. Table 5.5 summarizes in columns 2 to 7 the amount of public debt – in total and the share held abroad – and compares it to nominal GDP (debt-to-GDP and foreign debt-to-GDP). For the SEE countries, the statistical material does not allow to distinguish between total government debt and government debt held abroad. The sources we rely on suggest2 that essentially all government debt was held abroad or, at a minimum, at least placed abroad initially (there is some evidence of later debt repatriations closer to 1914). With this caveat in mind, we treat all SEE government debt as foreign-held. Four key findings emerge from Table 5.5. First, almost 80% of foreign investment into CESEE government debt went to two countries alone, with more than half to Russia and approximately a quarter to Austria-Hungary (column 5). This is roughly in line with the size of their economies and populations (161.7 million and 50.7 million in 1913, respectively, versus fewer than 5 million on average for the four Balkan countries). Probably more surprising is the large share of Romania, accounting for 8.4% of foreign investment by 1913. Romania was the only Balkan country which had achieved some industrialization by then (cf. Chapter 3 of this volume), and was perceived as a more promising and safer investment destination (including for government debt). Second, foreign lending began at different points in time for the six countries. In the cases of the Balkan countries, achieving

110  Steven Nafziger and Matthias Morys TABLE 5.5  Foreign investment into Central, East and South-East Europe, 1880–1913

Public debt

Foreign portfolio investment1

Debt levels and percentage Nominal % public debt held abroad (million French francs) Russia 1885 14,245 1890 14,425 1900 16,199 1910 24,084 1913 23,474

60% 58% 43% 43% 44%

Austria-Hungary 1880 8,672 1890 11,773 64% 1900 13,573 1910 17,911 1913 19,309 24% Romania 1880 1890 1900 1910 1913

Nominal public debt held abroad (million French francs) 8,547 8,366 6,966 10,356 10,328

In relation to GDP Share of Debt to Foreign foreign GDP debt to investment GDP into CESEE government debt2

54.3%

87.5% 75.0% 56.4% 52.6% 43.7%

24.6%

63.9% 75.0% 74.2% 63.7% 61.3%

7,5354

4,670 45 985 1,430 1,570 1,603

Greece 1880 1890 1900 1910 1913

16 599 734 793 959

Bulgaria 1880 1890 1900 1910 1913

0 111 224 521 816

Serbia 1880 1890

7 327

Nominal (million French francs)

% of total foreign investment into country3

52.5% 43.5% 24.3% 22.6% 19.2% 5,944

36.5%

48.0% 1,140

13.1%

14.8% 2,127

31.3%

8.4%

2.5% 57.3% 77.1% 48.3% 46.5%

5.0%

5.4% 159.1% 206.3% 119.8% 111.9%

4.3%

0.0% 14.2% 23.4% 35.3% 49.9% 3.0% 125.8%

74

4.4%

32

3.8%

Economic integration with Western Europe  111

Public debt

Foreign portfolio investment1

Debt levels and percentage Nominal % public debt held abroad (million French francs) 1900 1910 1913

Nominal public debt held abroad (million French francs) 421 690 680

In relation to GDP Share of Debt to Foreign foreign GDP debt to investment GDP into CESEE government debt2

3.4%

Nominal (million French francs)

% of total foreign investment into country3

122.5% 122.7% 109.3%

Sources: Own calculations based on Moulton and Pasvolsky (1924) and Gregory (1982) for Russia; Jobst and Scheiber (2014) and Morys (2006) for Austria-Hungary; Stoenescu et al. (2014) and Lampe and Jackson (1982) for Romania; Lazaretou (2014) and Flandreau and Zumer (2004) for Greece; Dimitrova and Ivanov (2014) and Lampe and Jackson (1982) for Bulgaria; and Hinic et al. (2014) and Morys and Ivanov (2015) for Serbia. Notes: 1 Foreign portfolio investment into stocks and bonds excluding public debt. 2 Adds up to 100% for all six countries. 3 Compares relative size of entries in columns 8 and 4, respectively. 4 Value relates to 1892.

political independence (Romania and Serbia in 1878 at the Congress of Berlin), or at least obtaining wide-ranging autonomy (Bulgaria in 1878), and reaching a debt compromise with foreign creditors (Greece in 1878) became important political pre-conditions for the 1880s lending boom; with the exception of Greece in the 1820s and 1830s, there had been hardly any foreign lending to SEE before. Only Austria-Hungary and Russia had a history of foreign lending stretching further back in time. Engaged in imperial expansion and consolidation, the Russian government first took out foreign loans in the 18th century and became a serial borrower – both domestic and externally – by the 1820s, with debt issues floated in various Western European markets (Russia, Ministersvo, 1902). The dual monarchy had received substantial amounts of foreign capital in the 1850s and 1860s, often connected to railway construction (railways at the time were privately built but later taken over by the government, hence falling under government debt). Third, capital repatriations over time occurred in some cases. Almost 40% of Austro-Hungarian debt held abroad in 1892 was repatriated by 1913 (Morys, 2006, p.  176). This is probably best understood as a process in which a rapidly growing economy generated sufficient private savings to buy back debt initially placed abroad. The statistical evidence for Austria-Hungary is very robust, but the same phenomenon probably occurred in other parts of CESEE as well. It has even been argued that such debt repatriations created the need for local trading platforms, giving rise to stock exchanges in Belgrade and Sofia in the early 20th century (Battilossi and Morys, 2011).

112  Steven Nafziger and Matthias Morys

Fourth, debt levels, including levels of foreign debt, were high across the region, but with pronounced differences between countries. Russia, AustriaHungary, and Romania fell in one camp: they never experienced debt repayment issues, even though debt-to-GDP on occasions rose above 70%. Such levels were deemed high at the time, as the government’s ability to tax was much lower than today (tax revenue to GDP was between 10% and 15%, roughly a third of today). Bulgaria, Greece, Serbia, and the Ottoman Empire (which we include here for illustrative purposes) fell in the other camp. Greece and Serbia accumulated vast amounts of debt in the 1880s, partly to finance ambitious infrastructure projects, partly for military build-up in an increasingly fragile Balkan environment, and partly to cover chronic budget shortfalls. Losing control over their debts in the process, they defaulted in 1893 and 1895, respectively, and subsequently agreed to financial supervision in an attempt to regain access to international capital markets. In so doing, they followed the example set by the Ottoman Empire in 1881, and foreshadowed the “pre-emptive” financial supervision of Bulgaria in 1902, when the country agreed to financial oversight over its finances in exchange for an international loan. All four cases together are at the origin of the region’s reputation for recurring cycles of overborrowing, debt default, and financial supervision (Tuncer, 2015). Foreign purchases of CESEE sovereign debt were part of broader portfolios that included corporate bonds and stocks traded on exchanges across Europe. Such purchases began shortly after large-scale sovereign debt issuance had taken off in the middle of the century. Railroad securities were of particular importance early on. While they typically constituted investments into private companies, they often enjoyed certain state guarantees such as minimum returns or protection in case of bankruptcy. This made them particularly attractive to foreign investors, and railroad securities came to form a considerable share of all securities purchased by foreign investors (cf. Solov’eva, 1989 for Russia and Lampe and Jackson, 1982 for the Balkan countries).3 Foreign portfolios diversified later on, taking important stakes in particular in mining, metallurgy, commercial banks, and textile and chemical production (cf. Moulton and Pasvolsky, 1924, p. 183 for the case of Russia). How important was portfolio investment compared to foreign holdings of government debt? Based on relatively robust data for Russia and Austria-Hungary, it appears that portfolio investment constituted approximately one-third of capital inflows at the end of our period. Less reliable data for Romania and Bulgaria suggest a lower number for these two economies, probably not even reaching 5% of total foreign investment (no comparable data are available for Greece and Serbia). Comparing the 1892 and 1913 spot estimates for Austria-Hungary suggests that portfolio investment increased over time both in absolute numbers and as a percentage of total foreign investment (13.1% in 1890 vs. 31.3% in 1913). Despite their inevitable flaws, these data deliver a consistent story across the region and point to informational asymmetries as a key determinant. In the early stages, foreign investors preferred government debt, where monitoring was easier; as they began to understand the CESEE economies better over time, they increasingly

Economic integration with Western Europe  113

shifted into more profitable portfolio investment, reaching up to one-third of total investment in the two large economies of Russia and Austria-Hungary on the eve of World War I. Last but not least, foreigners also invested directly in affiliates and set up standalone enterprises in CESEE from early in the period. These included corporations active in a variety of sectors, from finance to machinery to mining and oil extraction. The “free-standing” company founded by foreigners (particularly the British and French) emerged as a central feature of numerous Russian sectors, including the more advanced ones. A famous example was the Nobel Company, founded by the Swedish Nobel brothers and other investors in the late 1870s in Baku, which specialized in oil production and refinement. Such foreign direct investment (FDI) often entailed direct technological transfers from foreign firms to local actors, creating the possibility for knowledge spillovers within or across industries. The scale of such direct investment was probably quite large by the early 20th century, as Geyikdagi (2011) and Pamuk (1987) have documented for the Ottoman Empire, Falkus (1979) and McKay (1970) for Imperial Russia, Komlos (1983) for AustriaHungary, and Lampe and Jackson (1982) for the Balkans, even though exact numbers are difficult to establish by the very nature of this particular investment type. A considerable amount of sovereign lending, portfolio flows, and foreign direct investment occurred through banks. To the extent that bank financing was particularly important in the context of relatively thin securities markets (Gerschenkron, 1962), connections between foreign and CESEE banking systems were critical for the region’s experience of capital market integration. Many of the early commercial banks in the region were established as majority-owned affiliates of British, French, and German firms, with foreign owners providing much of the initial capitalization.4 Such banks aided foreign firms operating directly in the CESEE and engaged in the underwriting of corporate and sovereign securities for Western exchanges. By addressing information asymmetries, these banking networks played a fundamental role in linking CESEE securities markets and investment opportunities to Western European investors. Another perspective on capital market integration between the CESEE and the rest of the world is provided by considering the role of the region in the aggregate foreign investment portfolios of important external economies. For example, in examining the distribution of foreign investment across regions by Britain, France, and Germany in 1913–1914, Clemens and Williamson (2004) note that Eastern Europe (including Austria-Hungary but excluding the Ottoman areas) was of relatively limited importance to Britain (3.6%) in comparison to France (35.5%) and Germany (27.7%). Falkus (1979, pp. 20–32) notes that Russia was the largest recipient of French capital exports, with its share rising from about 17% in 1890 to 25% in 1900 before falling slightly, as France’s aggregate share of total foreign investment in Russia slowly declined from a height of over 50% in the 1890s to approximately 40% in 1914.5 Parent and Rault (2004) consider slightly different sources on the distribution of French assets abroad and estimate that the CESEE countries constituted roughly 40% of the aggregate portfolio by 1900 (with Russian

114  Steven Nafziger and Matthias Morys

assets approximately two-thirds of that amount).6 Relying on yet a different set of underlying sources, Tilly (1994) finds that roughly 80% of German foreign portfolio investment went to the CESEE, and to Austria-Hungary in particular (over 50% on its own). Although these numbers are isolated observations from the end of the period, it is clear that CESEE was the primary destination for much of Western European capital investment abroad, with only Britain turning more to opportunities in the Western hemisphere and its empire. It is worth noting that Austria-Hungary was an important investor in the Balkan countries (Lampe and Jackson, 1982). What accounts best for the very large capital inflows obtained by the CESEE countries over the course of the long 19th century? On some level, it could be argued, they merely took part in the First Age of Globalization, in which the Western core countries made substantial amounts of domestic savings available for foreign investment. Britain committed on average a third of its savings, or 4% of GDP, for a full four decades to foreign investment, resulting in a 42% share of global foreign investment by 1913 (Daudin et al., 2010, p. 10). From the perspective of an investor in a core country, the relative scarcity of capital in parts of the world such as CESEE meant higher returns. Yet there were also specific steps that the CESEE countries took to attract foreign investment. In particular, towards the end of the 19th century, they all tried to establish gold convertibility  – that is, exchanging bank notes into physical gold – thereby ensuring fixed exchange rates to the core economies (all of which were on gold by that time). Maintaining convertibility implied restrictive monetary and fiscal policies, and served as a “Good Housekeeping Seal of Approval” for foreign investors (Bordo and Kydland, 1995; Bordo and Rockoff, 1996). This was a policy pursued throughout the region and often pushed by reform-minded politicians such as Finance Minister Sergei Witte in Russia (von Laue, 1963) and Prime Minister Trikoupis in Greece (Morys, 2016). But getting there was not easy. Austria-Hungary, for instance, required a full 37 years between 1859 and 1896 to stabilize its exchange rate. Romania and Russia adopted the gold standard in the 1890s (1891 and 1896, respectively), with Bulgaria, Serbia, and Greece following in the next decade (1906, 1909 and 1910, respectively). By the early 1910s, all CESEE countries had adopted the gold standard (Morys, 2017). Adopting the gold standard was only one element of a larger reform process in the region (cf. Chapter 4). On some level, the gold standard can even be seen as the final building block, which explains why the actual adoption came so late in CESEE but was then condensed into a 20-year window for all six countries. As with trade and labor flows, attracting foreign capital built upon domestic market development – financial in this case – and improved institutions and state capacity (Crisp, 1976; Good, 1984; South-Eastern, 2014). Governments developed modern finance ministries and central banks, which in turn fostered connections with Western banks and governments. At the same time, countries in the region established and reformed their banking systems by expanding state-owned institutions, chartering commercial banks, and permitting foreign banks to provide capital and guidance to domestic intermediaries.7 Stock exchanges emerged or expanded in

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Imperial Russia (St. Petersburg, Moscow, Kiev, Kharkov, Odessa, Riga, and Warsaw), Austria-Hungary (Vienna and Budapest), the Ottoman Empire (Istanbul, Salonica), and, eventually, the Balkans (Athens, Belgrade, Bucharest, Sofia and Zagreb).8 By the last decades of the period, the developing CESEE and established Western financial systems were increasingly interconnected in ways that facilitated the flow of capital eastward. The increasing degree of integration has also been assessed quantitatively. Borodkin and Konovalova (2010) find Russian stocks traded at essentially identical prices on domestic and Western European exchanges (Brussels, Berlin, and Paris) in the last two decades of our period, suggesting that equity markets were highly integrated. The evidence compiled by Tilly (1994) on the co-movement of CESEE stock prices traded on German exchanges has similar implications. In this line of research, prices for one and the same security are compared across space, as previously existing arbitrage opportunities between stock exchanges were eliminated by telegraph and telephone (just like in other parts of the world). A different – and more pessimistic – perspective on capital market integration is provided by econometric research comparing key interest rates across countries (or other country-specific indicators such as returns on corporate securities). While such research typically finds convergence over time for the late 19th century (Flandreau and Zumer, 2004; Morys, 2013; South-Eastern, 2014, there were persistent rate differences between CESEE and the rest of Europe. For instance, both shortterm and long-term interest rates came down substantially in CESEE between 1870 and 1914, in line with global and pan-European trends. Yet even at the end of the period, both indicators remain substantially elevated compared not only to the core countries but also to Mediterranean and Nordic countries. The high interest rates charged to the CESEE governments point to deeper institutional problems of the CESEE economies. Even if Russia, Hungary, and Romania retained an uncheckered record of debt payments, they were seen as less trustworthy borrowers by international financial markets; only Austria (which issued its debt separate from Hungary) escaped the “regional surcharge”. Capital market integration helped reduce this problem but could not overcome it. On some level, the high interest rate environment even demonstrated to the outside world that the CESEE economies operated very differently from the rest of Europe. Moreover, in documenting the various ways that the CESEE accessed foreign capital markets over the long 19th century, it is clear that some national sovereignty was transferred to outside powers. The establishment of foreign financial supervision in four out of the seven countries studied here represents particularly tangible cases; yet the detailed analysis of foreign lending into CESEE by Feis (1930) is full of examples where lenders attempted to gain economic, political, or even military advantage from the receiving country. Some have even argued that the CESEE’s experience fit into the continuum of “colonialism” imposed by European powers on much of the rest of the world, with demands made upon governments and populations in return for access to credit. These may have been reasonable calls for capacity building, policy clarity, and modernizing reforms, but the degree of

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foreign involvement in several of the CESEE economies by the early 20th century – particularly Imperial Russia (Malik, 2018) and the Balkan states (Tooze and Ivanov, 2011) – arguably led to heated domestic debates and contributed to the build-up of tensions prior to World War I.

Labor flows Labor migration was another important linkage between CESEE, Western Europe, and the rest of the global economy. The international mobility of labor emerged relatively late, growing out of the slow integration of domestic markets. In conjunction with trade and capital flows, these population movements further connected the low-income economies of CESEE with more advanced ones. At the same time, several smaller, reverse migratory flows over the long 19th century entailed the transfer of human capital and productive knowledge eastward. However, in the aggregate, international labor migration took place alongside limited convergence in wages or incomes to Western levels. Prior to the 19th century, political conflict, religious strife, and a long history of porous and shifting borders, combined with active settlement policies by various Russian and Austrian rulers, generated a greater degree of ethnic, linguistic, and religious diversity in CESEE relative to anywhere in Western Europe. The early modern period saw the slow movement of Jews eastward into what became the Pale of Settlement; the intermingling of Polish, Ukrainian, Belarusian and Russian populations over much of what is now modern Poland, Ukraine and Belarus; the spread of the Ottoman military and administrators into the Balkans; and the rise of Greek merchant communities throughout the Eastern Mediterranean and Black Sea. Russian settlement also spread eastward into Siberia and Central Asia, while German-speaking colonists moved into the Balkans and southern Russian territories. Many of these movements took place under imperial expansionist or semi-colonial policies (Bartlett, 1979). This heterogeneity did not in itself constitute “labour mobility”, yet it became an important factor in how labour mobility unfolded during the long 19th century. In fact, labor markets were poorly integrated before the 19th century by all accounts. The late spread of steam and rail lines in the context of poor road networks kept travel costs relatively high. The long life of the second serfdom, coupled with the persistence of other, quasi-feudal or ethnic restrictions on occupational and residential choice, generated considerable constraints on the mobility of workers and households. Labor market interactions were local, and long-distance migration out of CESEE was confined to the last three or four decades before World War I. An important step was the eventual end to serfdom which, for the entirety of their territories, was achieved only in 1848 for Austria-Hungary, 1861 in the Russian Empire, and 1864 in Romania (the other Balkan countries experienced less formalized forms of labor coercion). Yet constraints on peasant and worker mobility often persisted into the 20th century (Blum, 1978; Niederhauser, [1962]

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2004), and ethnic, religious, and linguistic divisions continued to generate impediments to mobility. Restrictions in land markets – such as peasant communal property rights – were prevalent and impeded mobility out of agriculture (for Russian examples, see Chernina et  al., 2014). Travel passports, urban residency permits, occupational restrictions, and explicit legal prohibitions on where certain groups were allowed to live (most obviously for Russian Jews in the Pale of Settlement and the Roma throughout the region) were common in Eastern Europe. Yet despite these significant labor market impediments, intra-regional mobility in CESEE became more evident over the 19th century, especially as transportation improved. Studies such as Borodkin et  al. (2008), Crisp (1978), and Nafziger (2010) have argued that there was substantial rural-urban and inter-regional labor mobility within European Russia in the latter half of the 19th century (although this did not necessarily lead to much within-country wage convergence). Permanent migration within the empire also entailed growing urbanization, which was particularly prominent among Jews within and outside the Pale of Settlement, setting the stage for emigration (Boustan, 2007). Russian settlers and labourers continued to move east, southeast, and south into Central Asia, the Caucasus, and southern parts of what is now the Ukraine. This process was fueled by the expansion of the railway network, particularly with the construction of various components of the TransSiberian railroad, connections to the Caucasus, and the growing density of the network in European Russia (Kessler, 2014).9 The latter decades of the long 19th century saw growing numbers of seasonal migrants from the Balkans, Austria-Hungary, and the Polish and Ukrainian provinces of the Russian Empire move further north and westward. This was largely seasonal agricultural migration, particularly to parts of Germany, Denmark, and Southern Sweden. By the early 20th century, hundreds of thousands of Austrians, Galicians, Czechs, Poles, Hungarians, Ukrainians, Russians, and other groups were moving every year (Olsson, 1996; Willcox, ed., 1929–1931). Olsson (1996) argues that this short-term migration was part of a very competitive cross-border market for agricultural labor that stretched from Russia west into Germany and beyond. Eventually, migrants increasingly turned to more permanent moves (and into industrial occupations), as economic growth in the West raised the demand for labor across sectors. Western European censuses of the 1900s and 1910s show perhaps a million people born in parts of CESEE, although such an impressionistic number should be interpreted with caution.10 Overall, these flows not only acted to slowly knit the labor markets of CESEE with the rest of Europe, but they served as an initial step towards longer distance, intercontinental moves. CESEE was eventually a major participant in the large-scale international flows of the “Age of Mass Migration” (Hatton and Williamson, 1998).11 Such migration from Austria-Hungary and Russia (and the Polish parts of both empires in particular) annually numbered in the low thousands into the 1870s, but then took off over the following four decades, especially after 1890. According to these totals, gross emigration was over 4 and 3 million from the Austro-Hungarian and Russian Empires, respectively, between 1870 and 1914. From the SEE countries, only

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Mediterranean Greece took part in the Age of Mass Migration. Starting late in the 1890s, approximately 400,000 had emigrated overseas by World War I. As a percent of the resident population, this made Greece (with a population of 4.8 million in 1913) one of the largest participants in overseas migration in Europe, alongside Ireland, Norway, and Italy (Hatton and Williamson, 1998). By contrast, landlocked Serbia as well as Bulgaria and Romania – both facing the Black Sea but with inadequate ports – hardly took part in intercontinental migration (Brunnbauer, 2016; Ivanov and Tooze, 2007; Kabuzan, 1998). The eventual scale of outflows was likely linked to relatively high rates of population growth in the region, coupled with slowly rising incomes, a fall in the costs of migration as chain migration took hold, and persistently high labor demand in recipient countries (Boustan, 2007; Hatton and Williamson, 1998). Precise numbers are controversial, but the broad pattern is well documented and beyond doubt. Last but not least, a considerable proportion of emigrants  – perhaps up to one-third (Bandiera et  al., 2013; Morys, 2006) – returned to CESEE, typically after staying overseas for periods ranging from one season to five years. This suggests a fairly high degree of labor market integration between CESEE and the rest of the world by the onset of the 20th century. A considerable number of the wave of CESEE emigrants after 1870 were Jews – up to 1.5 million from the Russian Empire alone (i.e. 50% of total Russian overseas emigration, cf. above).12 While sparked, in part, by discriminatory policies and pogroms, these migrants were also seeking out better economic opportunities abroad, with the magnitude of emigrant flows linked to the business cycle in the United States (Boustan, 2007; Spitzer, 2015). As with streams of emigrants from Western Europe and other parts of CESEE, Jewish migrants moved within chained networks, with communities abroad aiding and informing those that came later. This lowered the costs of migration, which helped integrate Jews from CESEE into global labor markets. What were the economic consequences of migration between CESEE and the rest of the world? Unfortunately, there is little econometric work comparable to the studies of Hatton and Williamson (1998) on Western Europe and intercontinental migration. If emigrants were relatively more positively selected than the streams from Western and Northern Europe, this may have generated some amount of brain drain, reducing the effective level of human capital in CESEE and impeding productivity growth. Hard evidence on this point is, unfortunately, lacking, although country-specific accounts in the Willcox compilation emphasize that most migrants had agricultural roots, despite ongoing urbanization in the region. On the other hand, some of the likely gains received by migrants were returned back to the region in the form of remittances (or as the savings of returned migrants). Based, among others, on the experience of Austria-Hungary between 1880 and 1913, Esteves and Khoudour-Casteras (2009) show that such migrant remittances were key in enabling current account adjustments under the gold standard, which limited the occurrence and costs of sudden stops in capital flows. Such streams were typically less volatile than capital inflows, which could have ameliorated some of the instability inherent in the large-scale foreign investments

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in the region. A complete assessment of how CESEE was affected by the first wave of globalization should consider the likely intertwining of labor and capital flows. Perhaps the most telling indicator of the net effect of the migration of labor out of the CESEE is the pace and scale of real wage convergence. In the case of better researched emigration countries such as Ireland and Sweden (Hatton and Williamson, 1998), studies have found strong wage convergence (i.e. that wages declined in the receiving country but rose in the sending country). Yet Chapter 3 of this volume shows that convergence was limited even in the late 19th century and remained confined to a small set of CESEE countries. Taking all the evidence together, the (highly limited) state of research suggests that CESEE benefited less from the Age of Mass Migration than the better researched cases of Western Europe and Italy.

Conclusion The evidence on factor and trade flows during the long 19th century suggests a slow but persistent process of economic integration between CESEE, Western Europe, and the rest of the global economy. While this characterization applies to the entire region, there was a gradient of experiences, from the western parts of the Hapsburg Empire, which were closely connected to the German economy, to the relatively more autarkic areas of the Balkans and eastern parts of European Russia. Transportation improvements, political developments, and macroeconomic policies leveled this gradient over time to some degree, as even peripheral parts of the region came to be connected to the rest of the world economy. In this chapter, we have drawn on trade patterns, capital flows, and labor mobility to substantiate our main point of growing integration over time. Other research points to the same conclusion; for instance, recent work on business cycles in South-East Europe suggests that the constituent economies were increasingly synchronized with those of Western Europe (Morys and Ivanov, 2015). Yet it is far from clear whether these new levels of economic integration generated extra income gains for the average resident of the region. While the forces of integration might not have resulted in measurable economic improvements for many, the experience of globalization did lead to gains for some sub-regions, sectors, and capital owners in CESEE. Emigration and internal labor mobility led to better economic outcomes for those able to move, with some positive consequences for stayers in terms of remittances and the reduction of subsequent migration costs. Underpinned by improving macroeconomic policymaking in the gold standard era, trade in capital goods, FDI, and portfolio investment generated flows of technological knowledge that improved agricultural productivity, enabled transportation development, and supported some industrial growth in the region to take advantage of overall low labor costs. As summarized in the chapters of O’Rourke and Williamson (2017), the last decades of this period did see the early stages of modern industrial development in the region, a process that was firmly linked to the influx of foreign capital and technology.

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At the same time, the region remained, with the possible exception of Austria, comprised of “emerging markets,” in which trade, capital flows, and labor migration generated both positive and negative effects. Trade openness fostered de-industrialization in some areas, while capital flows were volatile and led to factor payments going abroad. The loss of substantial human capital (even if negatively selected) over the period limited the overall welfare benefits of CESEE’s integration with the global economy. And while this chapter has compartmentalized three different aspects of globalization as applied to CESEE, the flows of trade, capital, and labor were intertwined in complicated ways, with various political economy implications. Thus, the net effects of 19th-century globalization for the region remain hard to identify, particularly if consequences that are more difficult to quantify are included – such as cultural and intellectual linkages, knowledge flows, health and demographic effects, and potential risk for military and political conflict. While the processes remained incomplete by 1914, growing tensions among the CESEE countries, and between the CESEE countries and the Western European powers, were to some degree an outcome of the long-run factor and trade relations between them. France’s vast capital investments into Russia, for instance, underpinned the emerging political and military alliance between the two countries. Simmering conflicts culminated in World War I, which brought CESEE into the heart of European and global politics. The war led to a fundamental reordering of the connections that had developed between Russia and the rest of the world, the end of any meaningful Ottoman influence in southeastern Europe, and the emergence and consolidation of new nation-states in the Baltics, the former Hapsburg lands, and the Balkans. Restructured trade, capital, and labor flows slowly re-linked much of the region to the outside world in the interwar period, even as the Soviet Union shifted towards relative autarky. The subsequent consolidation of Communist control of the Eastern Bloc, the formation of COMECON, and the development of Soviet economic relations with friendly regimes reconfigured but never entirely eliminated the connections between the CESEE and the wider world created over the long 19th century.

Notes 1 There were minor Russian investments in Finland, East Asia, and the Middle East, along with some limited involvement of Austrian firms in Western Europe. 2 Cf. the data descriptions of the four contributions we rely on for Bulgaria, Greece, Romania, and Serbia as well as Feis (1930, Ch. 12). Reinhart and Trebesch (2015), based on different sources, come to the same result for the case of Greece. 3 See Lampe and Jackson (1982) and Geyikdagi (2011) for a discussion of the role of foreign capital in the construction of railroads in the Balkans and Ottoman Empire, respectively. 4 The early Balkan banks were especially dominated by Western European capital, particularly French, German, and Austro-Hungarian (Kostis, ed., 1999; Tilly, 1994). For foreign  – particularly French and German  – involvement in Russian banking, see Anan’ich and Bovykin (1991), Crisp (1976), and Hertner (1997). On the role played by banks in linking foreign savings to domestic investments in the Ottoman Empire, see Geyikdagi (2011) and Thobie (2008).

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5 French investments in Russia can be disaggregated easily into investments into governments bonds and investments into private securities. For all other countries, we have data only for the latter. These data suggest that by World War I, French investment in Russian private capital was roughly two times the German and over 20% more than the British (Ol’, 1922, p. 301). 6 In other studies, the importance of Russia for French foreign investment portfolios looms even larger – see Crisp (1976). 7 The relevant literatures on banking history in CESEE are quite large. Useful summaries may be found in Crisp (1976), Lampe and Jackson (1982), Kostis, ed. (1999), and the chapters on Serbia and Austria in Cameron, ed. (1972). On the international connections of CESEE banking in the pre-1914 period, see the chapters in Cameron and Bovykin, eds. (1991) and Kostis, ed. (1999). 8 On the establishment and expansion of domestic financial markets in CESEE, see Borodkin and Konovalova (2010), Lampe and Jackson (1982); South-Eastern (2014), and Toprak (2008). 9 There is comparatively little scholarship on internal migration within the Balkans or within the Austro-Hungarian Empire, likely due to the relative lack of quantitative sources. Some limited evidence of fairly small-scale cross-border flows within (e.g. Serbia to Bulgaria) and between these regions is provided in Jackson (1985) and Palairet (1997). 10 Our estimate of “1 million” CESEE-born residents in Western Europe was generated from the relevant chapters of Willcox, ed. (1929–1931). 11 The primary quantitative resource on international migration in this period is Willcox, ed. (1929–1931), which drew on a wealth of national-level statistical materials, departure records from German and other port cities, and immigration reports of the United States and elsewhere. In providing the following quantitative information on aggregate emigration flows from CESEE, we draw on Willcox, ed., cross-checked against a number of the country-specific studies cited here, and validated against the revised numbers published in Carter (2006). In general, these data do not cover the large return population flows back to the region, and they likely miss  considerable migration occurring through less visible channels (on these, see Bandiera et al., 2013). 12 According to Tudorianu (1986), 41% of the 2.4  million migrants from the Russian Empire between 1899 and 1913 were Jews, while 29% were officially Polish (these may also have included Jews to some degree).

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6 POPULATION AND LIVING STANDARDS, 1800–1914 Tomáš Cvrček

Introduction The 19th century was a time of profound change in Central and Eastern Europe. In the West, the foundations of modern industrial economy and society had been laid already in the 18th century or even before (North and Weingast, 1989). The lands of Eastern Europe had the mixed fortune of being next-door neighbour to this outpouring of technological and economic growth. As a result, they were exposed to its modernizing influences quite early. At the same time, since they were not the original home of the Industrial Revolution, their institutions had not been developing in the long-term gradual and mutual adjustment that the Western institutions underwent over time. When the East entered the industrial age – mostly in the 19th century – the process entailed a bigger clash with existing structures, was much less gradual and also less enthusiastically embraced. This fact of Eastern Europe’s close proximity – both geographical and cultural – to the main source of economic upheaval, yet its clear distinction from it is what makes the study of this region’s response to the challenges of special interest. The ‘close-but-different’ optics also informed much of the writing on Central and Eastern Europe throughout the last two centuries. Malthus (1798) considered Russia’s poverty closely tied to its practice of high fertility, in contrast to her Scandinavian neighbours. Haxthausen (1846) constructed what became the defining image of the Russian commune as a family-based and harmoniously operating agricultural unit, which supposedly contrasted with the nuclear family, predominant in the industrialized West (Le Play, 1872: 40–44). A  similar concept of an extended family holding all its property in common, the Balkan zadruga, came to be viewed even by the budding East-European scholarly community as the quintessential expression of an ancestral form of Slavic family organization, distinct from the West (Bogišić, 1884; Kadlec, 1898; Szoltysek, 2012: 342). By the early

Population and living standards, 1800–1914  129

20th century, much of the study of East-European social history fell under the influence of Ostforschung, a research program espousing Pan-German (and later Nazi) ideologies, seeking to find and overemphasize cultural differences between purportedly advanced Germandom and “backward” Slavs (Conze, 1940). After the Second World War, the research into East-European economic and demographic development resumed with new nuance. Modern demographic data revealed Haxthausen’s ideas to be mostly a romantic invention (Dennison and Carus, 2003), while Szoltysek and Zuber-Goldstein (2009) dealt with some of the misrepresentations and misinterpretations of the biased pre-war German research. Still, the works of Hajnal (1965, 1982), Bérend and Ránki (1974) and Mironov and Eklof (2000) continued to find important differences in population development between East and West. The issue of the region’s relative backwardness – its extent, its sources and its consequences  – has also shaped economic history research (Gerschenkron, 1962; Good, 1984, 1976; Fellner, 1916; Pribram, 1938; Komlos, 1984, 1989; Schulze, 2000; Cvrcek, 2013). Population change and living standards are deeply inter-related. Narrowly defined, living standards refer to the purchasing power of the general population, that is, the daily consumer goods the people could afford, such as the quantity and quality of food, clothing and shelter. But basic consumption in turn affected things like health and life expectancy. Consequently, aspects of general health, such as morbidity and mortality, are legitimate indicators of the standard of living. At the same time, they are crucial demographic variables. Rising living standards affected many facets of demographic behaviour, such as marriage and fertility. Parents faced new choices, such as how much education to afford for their children, how much child labour to supply to the market, how long children would stay with their parents before moving on to start their own households (if at all), how much influence the parents would have over their children’s marital decisions and many others. By 1914, Central and Eastern Europe encompassed both regions that have undergone an intensive transformation into modern industrial economies, with broad availability of consumer goods, substantial improvements in health care and near-full literacy (such as Bohemia and Silesia), as well as such areas where economic development had barely begun (e.g. Serbia, Bulgaria and parts of Russia).

Population The foremost demographic fact of 19th-century Central and Eastern Europe was long-term population growth. Table 6.1 reports the decadal population totals. Several of the territories experienced a veritable population explosion. In the Czech provinces, Croatia-Slavonia, Dalmatia, and the territory of Poland and Hungary, the population doubled or more over the century. In European Russia, it quadrupled in 1810–1910. In contrast, the populations of Transylvania and Carniola were rather slow growing, occasionally even recording an inter-decade population decrease. Still, they too experienced a long-term increase, as the population growth sped up in the last third of the century.

9,000 40,700 56,100 28,045 24,139

24,905 21,239

753

4,097 5,876 850 4,427 339

1830

939 10,426 48,600

3,878 322

298

e

5,145

4,835

1820

31,126 26,745

62,400

813

33,746 27,181

1,006 13,000 68,500

43,500 34,623

1,458c 16,865 84,500 39,231 31,400

1,090

36,049 28,888

74,100

1,283 4,270

957

830

35,730 5,184 7,616 1,045 5,930 443 13,643 2,166 1,869

1880

1,086 3,940

32,814 4,866 7,150 989 5,244 413 12,541 2,171 1,610

30,647 4,565 6,647 1,009 4,943 401 11,621 2,074 1,460

28,614 4,314 6,239 918 4,719 385 10,846 2,079 1,194

1870 37,533 5,622 8,173 1,107 6,443 469 13,796 2,104 1,922 11,266 1,189 1,831a 4,540 2,008 1,697 19,632 97,700

1860

1850

1840

47,607 37,485

40,811 6,086 8,628 1,173 7,124 517 15,083 2,250 2,200 14,349 1,460 2,162 5,290i 3,216b 2,221d 22,854 117,800

1890 44,758 6,674 9,302 1,243 7,890 580 16,636 2,455 2,432 16,413 1,671 2,494 6,000 3,744 2,504 24,750 132,900 94,215j 54,388 41,155

1900

26,644 160,700 116,500 62,884 44,916

1,898 2,912 6,920 4,338

48,791 7,374 10,016 1,377 8,676 632 18,068 2,658 2,649

1910

Notes: a The 1880 population of Serbia reflects the 1878 acquisition of Vranje, Nis, Pirot and Toplica with 303.000 inhabitants. b The 1890 Bulgar ian population includes newly acquired Easter n Rumelia. c The 1870 Greek population total reflects the acquisition of the Ionian islands in 1864. d The 1890 population of Greece is inclusive of Thessaly and Arta, acquired from Turkey in 1881 with 294,000 inhabitants. e An estimate of an 1800 population of Poland in pre-transition borders. Subsequent populations of Poland refer to the ter r itor y as created after the First World War, so as to allow for continuity of compar ison with post-WWI data. f Without Bosnia-Herzegovina. g Does not include ter r itor ies that remained under Ottoman rule throughout the per iod. h Includes 50 European provinces without Finland and Poland. i Includes Dobrudja from 1879 onwards. j Data from the 1897 census.

Source: Mitchell (2003), Bérend and Ránki (1974), Maddison (2010).

Habsburg Empiref Austr ian provinces Czech provinces Car niola & Austr ian Littoral Galicia & Bukowina Dalmatia Hungar y–Ancient Kingdom of which: Transylvania Croatia-Slavonia For mer Ottoman Europeg Bosnia-Herzegovina Serbia Romania Bulgar ia Greece Poland (1921 borders) Russian Empire European Russiah Ger many United Kingdom

1810

TABLE 6.1  Total population in Central, East and South-East Europe, 1810–1910, thousands

130  Tomáš Cvrček

Population and living standards, 1800–1914  131 TABLE 6.2  European population developments, 1820–1913

Population shares (%)

1820

1850

1870

1890

1913

Western Europea Central Europeb Southern Europec Russian Empire

59.9 10.2 7.6 22.3 100.0

58.5 9.8 7.2 24.5 100.0

56.5 10.1 7.5 26.0 100.0

53.0 10.2 7.2 29.6 100.0

51.0 9.5 7.4 32.1 100.0

Average annual growth 1820–1850 1850–1870 1870–1890 1890–1913 1820–1913 rates (%) Western Europea Central Europeb Southern Europec Russian Empire

0.74 0.70 0.64 1.15

0.60 0.92 0.96 1.06

0.69 1.07 0.84 1.68

0.83 0.70 1.13 1.36

0.72 0.83 0.87 1.29

Source: Maddison (2010). Note: a includes Maddison’s (2010) 30 West-European countries except Greece, which is included in South European data; b covers the territories of post-WWI Czechoslovakia, Hungary and Poland; c includes Albania, Bulgaria, Greece, Romania and Yugoslavia.

Table 6.2 shows the region’s record in the context of Europe. The steep decline in the share of West-European population from 1870 onward was mirrored in a corresponding increase in the share of Russia. The long-term population growth of the Russian Empire (1.29% per annum in 1820–1913) significantly outstripped the 0.72% average annual growth of the West. The regions geographically in between were also in the middle statistically. Their population growth rates were closer to the West but above it, and so their population shares mostly fluctuated within a narrow range. From the point of view of demographic accounting, these different historical experiences resulted from the interplay of three factors: fertility, mortality and migration. The 19th century was a time when all three components underwent substantial change. Its starting point was a pre-modern demographic regime where high fertility was matched by high mortality, while migration (especially the longdistance, international kind) was relatively limited. Both fertility and mortality responded to economic conditions, with bumper crops and cheaper foodstuffs resulting in higher fertility and harvest failures in increased mortality (Galloway, 1988; Hammel and Galloway, 2000). A close balance between births and deaths kept overall population growth relatively low. Kárníková (1965) notes, for example, that in 1760s Bohemia, an average married woman gave birth to about 8–10 children, of which only 2.3 (i.e. not much above the replacement ratio of 2.1) survived to adulthood. At the same time, the living standards stayed close to subsistence level because, in the long run, any surpluses were eaten up by increased population. This mechanism, which roughly kept population in line with available resources, is known as the Malthusian Trap (Alter and Clark, 2010: 45). It operated throughout Europe, with some regional variation. One influential approach to understanding

132  Tomáš Cvrček

and explaining this variation was the concept of the Hajnal line. Named after its originator, John Hajnal, this line, running “roughly from Leningrad (as it is now called) to Trieste”, separated two distinct demographic regimes (Hajnal, 1965: 101). To the West of it, women historically married later, with mean age at marriage exceeding 25 years, and they were more likely to remain single for life. In the East, on the other hand, women’s age at marriage was below 25 – even close to 20 – and marriage was nearly universal, with fewer than 5% of women remaining celibate (Hajnal, 1965: Table 6.3). Hajnal drew his evidence from census data from around the year 1900 but argued, referring to numerous smaller demographic studies of earlier times, that this East-West distinction had been in place for more than two centuries. The demographic regimes corresponded to two distinct household formation systems (Hajnal, 1982: 452). In the European Marriage Pattern (EMP) in the West, marriage was tied to the establishment of a separate household by the newlyweds (neolocalism), who then started their own nuclear family, while in the East, brides were brought into their husband’s paternal households, which may have included not only the husband’s parents but also other related married couples and their children (a.k.a. joint or complex household/family). Table  6.3 shows

TABLE 6.3 Singulate mean age at marriage (SMAM) of women in various Central and East

European provinces around 1900 West of the Hajnal line Province

East of the Hajnal line SMAM

Province

SMAM

Austro-Hungarian Empire Alpine provinces Bohemia Moravia Silesia Carniola and Gradisca  

27.2 25.4 25.4 25.2 25.5

Hungary Croatia and Slavonia Transylvania Dalmatia and Istria Galicia and Bukovina Bosnia and Herzegovina Russian Empire

22.1 21.5 21.6 23.8 23.3 20.5

Estland Livland Kurland Kovno governorate Finland Sweden  

26.3 Grodno governorate 26.6 Vilno governorate 25.6 Vistula Land 25.4 Volhynia governorate 25.6 Romania 27.5 Bulgaria   Serbia German Empire 

22.8 24.2 23.0 21.5 20.3 20.8 20.1

Posen West Prussia

25.3 25.2

   

Source: Sklar (1974) for all entries except those for Austria-Hungary, which are based on data from the 1900 census in Österreichische Statistik Vol. 63(3) – Tabelle II (K.K. Statistische Zentral-Kommission, 1903) and Magyar Statisztikai Közlemények Vol. 5 (Magyar Király Központi Statisztikai Hivátal, 1907).

Population and living standards, 1800–1914  133

women’s mean age at marriage in several provinces of Central and Eastern Europe around 1900. It largely bears out Hajnal’s demarcation, if one adopts marriage age at 25 years as the cutoff.1 With the emergence of new and more detailed demographic studies, especially from Central and Eastern Europe, this neat, simple dichotomy developed cracks. Laslett (1977) recognized another distinct familial regime in the Mediterranean region, which also included the Balkans, previously considered typically EastEuropean by Hajnal. This was in turn questioned by Mitterauer (1996: 404), who doubted whether the Balkans even constituted a single unit, let alone belonged to a larger family-type region. Mitterauer (2003: 47–48) also criticized the notion of a clear dividing line by arguing that large swathes of Central Europe represented a zone of transition between East and West. Societies in this intermediate region had been historically exposed in varying degrees to Western modes of landholding and inheritance, brought by German settlers in the Middle Ages (Kaser, 2003). These land ownership institutions determined the prevailing pattern of family formation: the less a society was exposed to the Western (German) agrarian institutions, the less its family system resembled the EMP.2 Rather than a line, then, one should expect a broad West-East gradient with considerable variation, depending on local history of internal colonization and agricultural development. Using a large dataset with greater geographical coverage and historical time span, Dennison and Ogilvie (2014: Tables 6.2–6.5) document such gradient (but not, importantly, a sharp dividing line) for several relevant demographic characteristics, such as lifetime celibacy, women’s age at marriage and household complexity. We can illustrate the diversity of demographic patterns in this region by zeroing in on smaller geographical units than are large provinces. Using census data from 1880 and 1900 for Austria-Hungary, an empire that happened to straddle the Hajnal line (see map in Figure 6.1), one can calculate relevant measures for each civil district (an administrative unit of 50,000–100,000 inhabitants). As a measure of lifetime celibacy, use the proportion of women who were still never married at age 45–49. To proxy for the age at marriage, let us use the proportion of brides younger than 25. Such an exercise uncovers demographic features that are indeed consistent with Hajnal’s argument (e.g. no western district reported a percentage of lifetime celibate women below 5%). But it also reveals such high variation on either side of the Hajnal line that it casts doubt on the whole notion of two distinct demographic regimes. The city of Prague, for example, was a “well-behaved”, west-of-Hajnal-line kind of place: 24.3% women were lifetime celibate and almost 60% of all brides were older than 25. But travel a mere 40 miles south to the district of Příbram and one would find only 7% women who never married and 60% of brides younger than 25 – a rather “eastern” demographic behaviour. Similarly, some 500 km east of the line, the Dalmatian district of Dubrovnik showed a more “western” demographic pattern: lifetime celibacy characterizing 18.5% of women, with 72% of brides over 25. Yet Knin, another Dalmatian district, reported only 2.6% celibate women and 58% of brides under 25. These are obviously cherrypicked counterexamples to Hajnal’s thesis, but they illustrate the substantial variation

134  Tomáš Cvrček

Silesia Galicia

Bohemia Moravia Lower Austria

Upper Austria

Vorarlberg

Salzburg Tyrol

Bukoina Hungary

Styria

Carinthia

Gradisca

Carniola

Transylvania

Croatia

Slavonia

Istria

Banat

Bosnia Hercegovina

Dalmatia

FIGURE 6.1 

Austria-Hungary and the Hajnal line

hiding behind the nicely lined-up mean age differences observed in Table 6.3. The range of values observable on either side of the Hajnal line just within the Habsburg Empire alone undermines the notion of a clear east-west dichotomy: across all eastern districts, the proportion of young, under-25 brides ranged from 10% to 75%; in the west, from 10% to 65%. The east and the west were more distinct in terms of lifetime celibacy (eastern districts ranged from 1.3% to 20.8%, western from 5.4% to 60%), but the extremely large celibacy rates in some western districts did not, in fact, mean that those single women abstained from childbearing or family life.3 Much of the persuasive power of Hajnal’s argument derived from data aggregation at the level of large provinces or whole nations. Once the large areas are split into smaller units, the divide becomes less obvious (Szoltysek, 2012: 337). Yet, the notion of a clear East-West distinction played a prominent role in the research into when and how societies moved away from the pre-modern demographic regime to start out on the path of lower fertility, greater investment in human capital, faster economic growth and ultimately higher living standards. Authors such as Clark (2007), De Moor and Van Zanden (2010), Galor (2011) and Voth and Voigtlander (2013) argue that the EMP operating in the West was crucial in jump-starting economic growth there. By way of postponing or entirely forgoing marriage, West-European societies avoided “25–40 percent of all possible births”, and perhaps more (Voth and Voigtlander, 2013: 2227; Clark, 2007: 74). This line of argument posits, quite intuitively on the face of it, that the escape from the Malthusian Trap was easiest in those societies that were not too deeply entrapped in it to begin with. By logical implication, the relative backwardness

Population and living standards, 1800–1914  135

of Central and Eastern Europe could be explained as a result of its own distinct demographic regime of early and universal marriage, which generated too many mouths to feed and thus condemned the region to long-term stagnation in poverty. Yet, to view the East European family organization as the cause of the region’s economic underdevelopment would be to underestimate the family’s flexibility and variability (Kaser, 2003: 63). This is not just true for the Habsburg lands. Plakans (1983) documents a diversity of family forms and marriage patterns for various Baltic peasant communities, as do Guzowski (2013) for Poland and Todorova (1996) for Bulgaria.4 Similarly, Gruber and Szoltysek (2012: Tables 6.1 and 6.2) report some (though smaller) variation in marital and family behaviours across the different regions of early 20th-century Albania. Even in Russia, Dennison (2003: Tables 6.9 and 6.10) shows that the rural commune of Voshchazhnikovo near Yaroslavl, north of Moscow, had women’s marriage ages at times up to four years higher (but at other times also lower) and celibacy rates considerably higher than were reported, for example, by Czap (1983: Table  6.4) for the village of Mishino in Ryazan province, long considered a typical example of the East-European marriage pattern. Dennison and Ogilvie (2016: 206–207) also warn against overestimating the growth-enhancing features of the EMP when they show that many western areas, such as central and southern France, saw women marry at ages and rates comparable to Poland and Russia. Moreover, the causal link between demography and economy is likely to run strongly in the other direction, from economy to demography.5 These are important considerations in the study of the substantial changes in demographic behaviour, particularly fertility, which took place throughout Europe in the late 19th century. Before that, fertility varied markedly across time and space. Those East-European communities, which did practice early and near-universal marriage, exhibited high fertility because more women were “at risk” of pregnancy, and for longer. For example, in the 18th century, Hungary reported a crude birth rate (CBR) of about 55.1 per 1,000 inhabitants (1777), Russia about 50.0 (Helczmanowski, 1979: 377; Mironov and Eklof, 2000: 80). These values are close to what is considered the maximum biologically feasible fertility. Figures 6.2 and 6.3 report the data on crude birth rate from 1830 onward. The fertility rates in Figure 6.2 were mostly trend-less, subject only to fluctuations caused by exogenous events – wars, harvest failures and epidemics.6 In contrast to that, the countries and provinces in Figure 6.3 experienced fertility decline towards the end of the 19th century. This was most pronounced in the Czech provinces, where CBR declined by 32% from its last peak in 1873 to the beginning of the First World War. In the Austrian provinces, it fell by 26% between 1876 and 1912, in Galicia and Bukovina by 19% from 1884 on and in Hungary by 22% over the same period. Several explanations have been proposed for the onset of fertility decline. They generally fall under two headings: culture and economics. The cultural explanation sees the demographic transition as a diffusion of a new set of family norms. It found its most definitive statement in Coale and Watkins (1986). According to the cultural hypothesis, pre-modern fertility was regulated not by conscious decisions of married couples but through deeply internalized, community-wide cultural norms

136  Tomáš Cvrček

Births per one thousand inhabitants

60.0

50.0

40.0

30.0

20.0

10.0

0.0 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910

Adriatic provinces FIGURE 6.2 

Bulgaria

Greece

Romania

Crude birth rate in several South-East European countries, 1830–1913

Source: Mitchell (2003), K.K.Statistische Zentral-Commission (1881–1914).

about proper age at marriage and appropriate spacing of births, which couples merely enacted.7 The fertility transition, such as we see in Figure 6.3, then results from the gradual erosion of these cultural norms and their replacement, in modern times, with conscious fertility decisions informed by greater knowledge and societal acceptance of deliberate contraceptive practices. Birth rate falls as these new ideas diffuse through society and more and more couples are “converted”, as it were, to the new two-child norm (David and Sanderson, 1987). This diffusion can happen quite quickly and in a manner that is entirely uncorrelated with industrialization and economic development. To a degree, then, the cultural explanation stands in opposition to the economic, as in Cleland and Wilson (1987: 18), who argue that “the simultaneity and speed of the European transition makes it highly doubtful that any economic force could be found which was powerful enough to offer a reasonable explanation.” New research and new data have undermined many fundamental tenets of the cultural hypothesis. Guinnane et al. (1994: 1) showed that existing aggregate measures of fertility “may fail to detect the initial stages of fertility transition”. The province-level or country-level data, used by Coale and Watkins, inevitably missed all the local sub-provincial correlation between economic development and fertility behaviour, while disproportionately emphasizing cultural divides, which

Population and living standards, 1800–1914  137

Births per one thousand inhabitants

60.0

50.0

40.0

30.0

20.0

10.0

0.0 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910

FIGURE 6.3 

Austrian provinces

Hungary - Ancient Kingdom

Czech provinces

Russia (50 European provinces)

Galicia and Bukowina

Serbia

Crude birth rate in several Central and East European countries, 1830–1913

Source: Mitchell (2003), K.K.Statistische Zentral-Commission (1881–1914).

historically often ran along provincial and national borders (Brown and Guinnane, 2007). Fialová et al. (1990: Figure 2) found, for example, that even within the fairly small territory of 19th-century Bohemia, the onset of fertility transition could be dated anytime from 1870s (or earlier) to 1910s, depending on the region.8 In a similar vein, Hammel (1995) showed for the case of culturally diverse Slavonia that ethnic and religious markers were good predictors of fertility only when they lined up with indicators of social and economic status but not otherwise, implying that culture has explanatory power only when it proxies for the underlying economic factors. Galloway et al. (1994) also concluded from their analysis of fertility decline in Prussia in 1875–1910 that while religious affiliation was a powerful predictor of different levels of fertility, it was not very useful in explaining the changes in fertility across time. Wetherell and Plakans (1997) reached a similar conclusion in their study of fertility in Riga in 1867–1881. The notions about the diffusion of contraceptive practice also need qualification. Active birth control inside marriage has been documented in several premodern Central and East European populations. Andorka (1979) and Vasary (1989)

138  Tomáš Cvrček

describe the “one-child-family system” prevalent in southern Hungary already before 1840s, while Hammel and Galloway (2000: 83–84) see contraception and abortion firmly entrenched in the behaviour of Slavonian peasants by the late 18th century. Mironov and Eklof (2000: 89–93) detect the practice of birth control among Russian peasants in the first half of the 19th century, when Russian fertility transition was still almost a century away, even going so far as to call Russian serfs “pioneers of birth control”. In Central Europe, Brown (2009: Table 6.4) reports that up to a half of German married couples practiced some form or other of marital fertility control already around the start of the fertility transition. Such practice may have already been more than a century old by then (Dribe and Scalone, 2010). In short, it is difficult to sustain the notion of fertility decline as a qualitative change in behaviour, whereby married couples freed themselves from the religious diktat to “be fruitful and multiply” and instead decided, rather suddenly, to adopt various methods of birth control. In contrast, the economic explanation does not view the demographic transition through the lens of innovation and diffusion or as a fundamentally new behaviour of conscious child-stopping, but as an adaptation to changing economic conditions. Parents have always consciously responded to existing incentives, and the observed change in fertility is one such response. All things considered, economists see the underlying cause of fertility decline in a change in relative prices: children became more costly. This line of argument is mostly credited to Becker (1993) and all demand theories of fertility take his research as a point of departure. Various authors differ, however, in terms of which particular costs are most responsible for the fertility decline, and their approaches can be divided for our purposes into four broad groups. Let us consider each in turn. First, there is an economic variant of the contraceptive argument: the decline in fertility was a consequence of greater availability and lower price of contraceptives, rather than a change in moral attitude towards them. With mass production of the condom, better information about the efficacy of various methods and better women’s health care, the argument goes, more couples could afford effective birth control. Brown (2009) reviews the relative costs and benefits of various contraceptive tools in late 19th-century Europe and shows that they did indeed spread through the population. But given that even before their arrival, both urban and rural population knew of and used the more intuitive (and cheaper) contraceptive methods, such as abstinence and coitus interruptus, the impact of these new technologies must have been limited (Guinnane, 2011: 601). After all, they were just more effective substitutes for earlier practices. At least some part of the demand for the new contraceptives was likely just a switch on the part of consumers from those older, more rudimentary methods. The second approach to fertility decline is to consider the direct costs of childbearing and childrearing, resulting, for example, from the rise of mass schooling. It presented would-be parents with what Becker (1993) dubbed the quality-quantity trade-off: if they put ever-greater stress on their children’s education, which was

Population and living standards, 1800–1914  139

costly, they needed to apportion their finite resources among fewer of them. The advantage of this approach is that it has great intuitive appeal and fits the stylized facts well: the late 19th-century industrializing economies were indeed generating a growing number of skill-intensive jobs, and returns to education were rising. Improving one’s children’s labour market prospects increasingly meant sending them to school, and we do observe an increase in school enrolment going hand in hand with a fertility decline: the fertility transition in the Czech and Austrian provinces commenced around the time of a renewed push by central authorities to extend primary education. Other Central European countries witnessed much slower rise in schooling and their fertility transitions also came later, with Russia’s only starting in the 1920s and 1930s – at about the same time when school enrolment truly took off (Easterlin, 1981: Figure 1). The disadvantage is that the quality-quantity trade-off is difficult to test empirically, beyond the basic plausibility of stylized facts (Guinnane, 2011: 607). The third approach is to consider the opportunity costs of having children, specifically, the growing wages that women could command in the labour market as an alternative to motherhood. Galor and Weil (1996) argue that economic growth was historically accompanied by an increase in capital per worker. Since women’s labour was more complementary to capital than men’s, this capital intensification led to an increase in relative wages of women and therefore also in the opportunity cost of children. The growth of industry encompassed sectors, such as textiles, food processing or printing, where existing technologies were well suited for women’s labour and women therefore constituted an important if not majority share of those sectors’ labour force. Women, of course, have always worked in some capacity or other, but the rise of modern industry and factory work brought about a separation of home and workplace (Mokyr, 2001), further increasing the opportunity cost of childbearing. Most Central and East European countries did not have large, developed industrial sectors in the 19th century, so it is unlikely that growth in women’s relative wages had much impact on fertility. But in those that did, such as Bohemia and Moravia, the textile regions were leaders in fertility decline (Fialová et al., 1990). The fourth and final approach sees the decline in mortality as the cost change that led to fertility transition: since more babies started surviving to adulthood, parents needed fewer births to achieve the desired number of offspring (Notestein, 1945). One empirical prediction that follows from this approach is that mortality decline should precede and accompany fertility decline. Figures 6.4 and 6.5 display the record of infant mortality, splitting countries where it declined and where it stayed constant into separate graphs.9 A comparison with Figures 6.2 and 6.3 indicates that the support for causal link is at best mixed. In favour: Austrian infant mortality could be said to start declining from late 1860s, or about a decade before fertility begins to fall. In contradiction: Czech provinces, where fertility decline commenced at about the same time, did not register a decisive fall in infant mortality until 1890s (Fialová et  al., 1990: Table  6.5). Galicia and Bukovina show similar misalignment. The Balkan countries mostly

140  Tomáš Cvrček

recorded trendless infant mortality rates before the First World War but their fertility transitions also did not start until the 20th century, so their record has little bearing on the issue (Botev, 1990; Caldwell and Caldwell, 2001; Coale and Watkins, 1986). The issue of fertility transition is far from definitively settled. For some time, the cultural hypothesis seemed to fit at least the aggregate data well, but recent emergence of bigger, more detailed datasets, such as the Mosaic project (Szoltysek and Gruber, 2016), has undermined many of its tenets. The economic hypotheses, some of which make very specific claims about families’ fertility decisions, remain mostly untested because they often require evidence in such detail as even the existing datasets are unable to satisfy. In short, the jury is still out. Having dealt with births, the next major factor in population dynamics is deaths. Here the earlier discussion of infant mortality offers a convenient starting point, considering that infant deaths were such a large part of the overall death record. Compared to our modern situation, with infant mortality rates below 10 deaths per 1,000 live births across all developed countries, the historical record makes for very bleak reading. A quarter to a third of all newborns did not live to their first birthday (e.g. Austrian and Czech provinces, in Figure 6.4). There is little doubt that urbanization and high population density, brought about by industrialization, were responsible: the highest infant mortality rates were reported in cities with subpar sanitary conditions and next to no public health investments in place. The densely populated urban slums were also a breeding ground for epidemics. For example, in the Czech provinces, cholera outbreaks occurred in 1832–1836, in 1855 and again in 1866, and a typhoid fever epidemic occurred in 1847 (Kárníková, 1965). Meanwhile, babies were perennially at risk of dying of smallpox. As transportation improved, diseases travelled easily. This is nicely illustrated in the record of Galicia and Bukovina, neither of which was particularly industrial or densely settled but was closely connected to their industrializing neighbours: the 1866 cholera epidemic jumped from Moravia to Galicia. However, by the 1880s, the vagaries of disease and ill health were slowly being subdued. The high volatility of previous decades disappeared and, from 1890 onwards, infant mortality set on a downward trend which continues to this day. The fate of the Balkan countries and Russia in Figure 6.5 was different. First of all, with the exception of Russia, the recorded infant mortalities were significantly lower than we have seen in the industrial provinces of the Habsburg Empire. Serbia and Bulgaria in particular reported rather low values.10 The Adriatic infant mortality rates, just like the Balkan ones, were relatively stable throughout the century, which again fits with the pattern of agricultural and somewhat isolated areas offering a less disease-ridden, healthier environment. And so, while the Balkans were at this time mostly spared the negative externalities associated with industrialization, they also had to go without the benefits of the large public health projects that were paid for by the accumulated wealth. The Balkans had to wait well into the 20th century before their infant mortality decline materialized. Russia, it seems, had the worst of both worlds: a stagnant agricultural economy with industrial-level

Population and living standards, 1800–1914  141 340

Deaths per one thousand infants

320 300 280 260 240 220 200 180 160 140 120 100 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910

FIGURE 6.4 

Hungary

Czech provinces

Galicia and Bukowina

Austrian provinces

Infant mortality in parts of the Habsburg Empire, 1820–1913

340

Deaths per one thousand infants

320 300 280 260 240 220 200 180 160 140 120 100 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910

Bulgaria

Romania

Russia

Serbia

Adriatic provinces

FIGURE 6.5 

Infant mortality in the Balkans and Russia, 1820–1913

142  Tomáš Cvrček

infant mortality rates. There is a slight hint of a decline in the opening decade of the 20th century but, for the most part, throughout the period under study, Russia remained a country with high number of births as well as infant deaths. The last of the three components of population change was migration. During the period under study, the regions most affected by emigration were Poland and Hungary and the Adriatic coast. Galicia, Bukovina and Dalmatia lost among them 1.8 million migrants during the 19th century, while the Russian portion of Poland saw an emigration of 3.5 million, the main migration stream out of Russia. Hungary’s net loss to migration amounted to 1.4 million before the First World War (Bérend and Ránki, 1974: 20). A large proportion of this emigration was destined for the United States, where migrants from Central and Eastern Europe constituted the bulk of immigration in the first decade of the 20th century. The Balkan nations did not experience much of an emigration. As for the other regions, such as the Czech and Austrian lands, their migration was mainly internal. Vienna worked a powerful attraction on workers from Bohemia and Moravia and coupled with migration from other parts of the empire, the immigration contributed to Vienna’s increase in population from 232,000 in 1800 to 2 million in 1910.

Living standards Living standards can encompass a range of aspects of a population’s life, from consumption of basic necessities through health status to measures of opportunities for self-realization (education, career prospects) and even self-reported happiness. As data collection and processing capabilities of modern societies improved, our measures have grown more sophisticated and nuanced. One example of such measures is the Human Development Index (HDI), which combines income per capita, life expectancy and mean educational attainment (years of schooling) in an equally weighted average. The sophistication of these modern measures places stringent demands on the quality of the component data, which the 19th-century statistics cannot quite meet.11 This chapter will therefore not employ the HDI methodology. But to ensure at least some basic comparability across chapters, we will keep the threefold focus, implicit in HDI, on income, health and education and discuss measures that could be considered proxies for the component statistics in HDI. At its core, living standard usually refers to what the average person can buy with his or her income. The modern practice is to compare GDP per capita of various countries. The statistic is comprehensive, easily comparable and readily understood. However, historical reconstructions of GDP, which cannot rely on comprehensive statistics from individual sectors, are fraught with error and guesswork. An alternative measure of living standards is the real wage, which has the advantage of being much easier to reconstruct historically. The most useful wage rate, in terms of its comparability across time and space, is that of an unskilled labourer precisely because he is unskilled, selling nothing but the same brute force, which usually finds some use in all sectors in all historical periods. Critics of real wage indicators point out that such series capture only a small segment of the

Population and living standards, 1800–1914  143

population and therefore can be quite unrepresentative. The unskilled labourer, after all, is far from the typical worker in most economies and his wages generally represent the low end of the income distribution. Therefore, one potential way to turn this flaw into an advantage is to interpret unskilled real wage as an indicator of living standards of the poorer strata of society. In the Central and Eastern Europe of the 19th century, one-half to two-thirds of a working family’s budget was spent on food and beverages. Costs of housing varied significantly depending on location. Not surprisingly, large cities, such as Vienna and St. Petersburg, called for greater outlays to secure housing in comparison to smaller places. The difference was likely compounded by difference in quality of housing offered, with large cities, where demand was high, offering much lower value for money than the countryside. Next in importance was clothing, heating and light (about 12%, 4% and 2%, respectively). One way through which living standards usually improve is the gradual move away from necessities and into luxuries. On that score, workers’ situation did not improve significantly over the century, given that the share devoted to necessities remained consistently high throughout the period. If improvements occurred, they took the form of better quality and higher quantity of the necessities already consumed. Figure 6.6 corroborates the relatively pessimistic assessment. It compares real day wages of unskilled workers (mostly construction workers and day labourers)

16 14

Grams of silver

12 10 8 6 4 2

FIGURE 6.6 

Vienna

Istanbul

St Petersburg

3 91

0 –1 10 19

–1

91

0 01 19

–1

90

0 18

81 18 Krakow

91

89

0

London

–1

88

0 –1

18

71

87

0 –1 61 18

–1

86

0 18

51

85

0 –1 41 18

18

31

–1

84

0 83

0 –1

82

21 18

–1 11

18

18

01

–1

81

0

0

Warsaw

Real day wages of unskilled workers in various European cities, 1800–1913

Sources: Allen (2001), Özmucur and Pamuk (2002), Mironov (2010), Cvrcek (2013), Hoszowski (1934).

144  Tomáš Cvrček

in several Central and East European cities with those in London. The wages are expressed in grams of silver to allow for comparability across countries. The superiority of London was formidable – in fact, Central and Eastern Europe could be said to have been a century or more behind London. This highlights two facts: first, the visible, sizeable gap between Britain, the leading industrial power, and the East existed already before the 19th century. Second, in spite of all the negative social consequences that British workers suffered especially during the first phase of the Industrial Revolution (say, up to 1840), their lot was nonetheless appreciably better than the situation of their counterparts in Eastern Europe. The gap in living standards not only persisted but even widened from the 1860s on, which period corresponds to the arrival of the Second Industrial Revolution. London and Vienna enjoyed continuous, relatively fast growth that came with it, which cannot be said for Istanbul or St. Petersburg. Mironov (2010: 59–62) points out that the growth of urban wages in Russia in the first half of the 19th century coincided with the crisis of serfdom. Then, once the reform effort got under way in the wake of the Crimean War, St. Petersburg workers experienced almost three decades of continuous decline in real wages. Apparently, the abolition of serfdom cleared the way for worker mobility and so the supply of (unskilled) workers in cities must have picked up after the 1860s and perhaps outstripped the urban demand for labour, thereby depressing wages. The population of St. Petersburg increased from 495,000 in 1857 to 1.25 million in 1900, of which 50.6% were industrial workers and their families. A  similar story of rural-urban migration can be told for Vienna and Krakow, although there the demand for labour more than kept pace with the influx from the countryside, and so workers did register consistent gains in wages throughout the second half of the century. In the case of Istanbul, Özmecur and Pamuk (2002: 296) point out that the period from 1770 to 1850 was a time of considerable internal turmoil, frequent policy reversals and political infighting as well as increasing military pressure from the outside. In contrast, the second half of the century witnessed “stable money under bimetallism, rapidly expanding international trade, stable prices and rising real wages” (Özmecur and Pamuk, 2002: 318). In Figure 6.7, we move to the countryside. Continuous agricultural wage series are harder to come by in a region where some form of serf labour existed well into the 19th century, so we limit ourselves to the provinces of the Habsburg Empire. As in Figure 6.6, English data are shown for comparison. Figure 6.7 reports welfare ratios, where estimated annual earnings of a common labourer were divided by the expected annual expenses for a family of two parents and two children.12 The expenses represent overall outlays on what we may call a “respectable” basket of goods. This terminology was adopted by Allen (2001) to describe a bundle of goods that was somewhat broader and richer than what was absolutely necessary for bare survival (a “subsistence” basket). The basket of goods on which Figure 6.7 is based includes wheat bread, beef, wine, beer, butter, milk, rice, potatoes, beans, sugar, wood for fuel, tobacco, clothing and rent. A welfare ratio of 1 implies that an unskilled labourer could support his whole family on his own annual earnings alone.

Population and living standards, 1800–1914  145 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3

Czech provinces

Galicia and Bukowina

Adriatic provinces

England-Farm workers (Clark)

1910

1905

1900

1895

1890

1885

1880

1875

1870

1865

1860

1855

1850

1845

1840

1835

1830

1825

0.2

Hungary FIGURE 6.7 Welfare

ratios among agricultural labourers in Central Europe and England, 1825–1910

Sources: Cvrcek (2013), Clark (2001).

The first thing to notice Figure 6.7 is that none of the series ever reaches 1. Unskilled agricultural labourers in the 19th century were not able to support a four-member family on their wages alone. In fact, welfare ratios between 0.2 and 0.3, as reported by Galicia, Bukovina and the Czech provinces, imply that these labourers would not have been able to afford a respectable basket even on their own and so their living standards were probably quite close to the margin of subsistence. A family could only be supported if it received income not only from the father but also from the mother and children. The economic situation was better in Hungary and around the Adriatic. These provinces were cheap to live in and the nominal wages were actually somewhat higher than in, say, Bohemia. As a result, unskilled agricultural labour in these regions apparently fared as well or even better than their English counterparts in the early decades of the 19th century. This was not to last, however. In spite of considerable increases in prices between 1845 and 1875, the welfare ratios in Bohemia, Moravia and Silesia moved to 0.4 and higher and by the beginning of the First World War reached somewhere between 0.5 and 0.6. Economically, these were among the most dynamic provinces of Central Europe. The Balkan provinces of the empire, such as Croatia-Slavonia or Transylvania, saw either a long-term stagnation or even a mild decline. These provinces mostly missed out on the ongoing technological changes in industry, agriculture,

146  Tomáš Cvrček

food processing and transportation, and by the beginning of the 20th century they still reported welfare ratios of 0.5 or lower, as they had some 80 or 90 years earlier. While real wage data are not available at such detail for other Balkan countries, there is evidence that similar stagnation or even reversal in living standards from mid-19th century on occurred there also. Palairet (1997: 339) and Lampe (1975) note that agricultural output per capita in Bulgaria and Serbia actually fell between the 1870s and 1912, while the industrial sector remained too weak and small to balance the decline out. There was relatively little penetration of market economy into the Balkan agriculture, which means that outside impetus for increased production and more intensive farming fell flat. It is likely that unskilled labourers, who usually stood at the bottom rung of the village social ladder and were therefore most vulnerable to economic decline, experienced the downward trend firsthand. Their fate was therefore likely similar to that of their counterparts in the Habsburgruled Transylvania. To what extent does the record of reconstructed GDP corroborate the evidence from real wages? Let us start, somewhat atypically, from the end of the period under review when the statistical information is least unreliable. Table 6.4 reports estimated real GDP per capita from Maddison (2010) and Schulze (2007). Britain and Germany, as the leading industrial powers in Europe, can serve as a useful backdrop. As in the wage record, the GDP figures suggest that most of Central and Eastern Europe was far behind the British living standards in 1910. None of the listed countries reached the level of GDP per capita that Britain had enjoyed already 40 years earlier. The Balkan countries came close to about a third of the UK level, with Hungary and Poland not far above that. Only the Czech provinces of Bohemia, Moravia and Silesia and the lands roughly corresponding to the modern-day Austrian republic were able to enjoy between one-half and three-fifths of the British standard. Not surprisingly, the areas that were closest to Britain in living standards were also most similar to her in terms of economic structure. Both the Austrian and the Czech lands were the industrial heartlands of the Habsburg monarchy, containing such prominent manufacturing centres as Vienna, Graz, Brno, Prague and Ostrava. Further, the industrializing provinces could also boast relatively productive market-oriented agricultural sectors, unlike the poorer East-European countries such as Serbia and Bulgaria where specialized segments of agricultural production for the market coexisted with lingering low-productivity subsistence agriculture. Yet poor though they were, the East-European countries were also growing, as reported in Panel B. Over the 40 years from 1870 to 1910, several of the countries (e.g. Bulgaria, Greece and Poland) saw their GDP per capita increase by more than three-quarters while Austria reported an increase of 43%. At least from 1880 onwards, most of the countries in the table grew faster than Britain, allowing them to narrow the gap slightly. But living standards are not all consumption of tangibles. What can we say about the changing quality of life in terms of health and intellectual development? In the absence of reliable data on such qualitative aspects of life as, say, incidence of particular diseases, the extent of air pollution or the number of sick days per person per

Population and living standards, 1800–1914  147 TABLE 6.4  Living standards in Central and East Europe, 1870–1910

Panel A: GDP per capita in 1990 dollars

Austrian provinces a Czech provinces b Upper Hungary c Poland (1921 borders) Hungary d Yugoslavia e Adriatic provinces f Romania Bulgaria Greece Germany United Kingdom

Panel B: Average annual growth rates

1870

1880 1890 1900 1910 1870– 1880– 1890– 1900– 1880 1890 1900 1910

1,953 1,638 1,018 946

1,938 2,118 2,526 2,802 −0.1% 0.9% 1,640 1,883 2,154 2,545 0.0% 1.4% 1,047 1,293 1,444 1,650 0.3% 2.1% 1,284 1,536 1,690 1.5%

1.8% 1.4% 1.1% 1.8%

1.0% 1.7% 1.3% 1.0%

987 599 911 931 840 880 1,839 3,190

1,070 1,271 843 997 1,091 1,246 1,131 1,178 1,991 2,428 3,477 4,009

1.3% 0.7% 0.9% 1.3% 0.8% 1.4% 2.1% 1.1%

1.6% 1.6% 2.0% 1.6% 1.8%

1,442 902 1,195 1,415 1,223 1,351 2,985 4,492

1,683 1,057 1,454 1,660 1,456 3,348 4,611

0.8% 1.7% 0.9% 1.5% 1.5% 1.5% 0.8% 0.9%

1.7% 0.9%

2.0% 1.4%

1.2% 0.3%

Source: Maddison (2010) for Poland, Yugoslavia, Romania, Bulgaria, Greece, Germany and United Kingdom. Schulze (2007) for Austrian provinces, Czech lands, Upper Hungary, Hungary and Adriatic Provinces. Notes: a) Includes Lower Austria, Upper Austria, Salzburg, Styria, Carinthia, Tyrol and Vorarlberg. This area overlaps to a considerable extent with the territory of the post-1918 Austrian Republic, except for Burgenland (gained from Hungary), Lower Styria, parts of Carinthia (ceded to Yugoslavia) and Alto-Adige (ceded to Italy). b) Includes Bohemia, Moravia and Silesia. The territory of these three provinces mostly overlaps with the modern-day Czech Republic. c) Includes the Danube Left Bank and Tisza Right Bank, a territory that largely overlaps with interwar Slovakia, except for Borsod County and a few other territories. d) Includes the area of the historic Kingdom of Hungary, comprising both modern-day Slovakia and Transylvania but not Croatia-Slavonia. e) In 1921 borders. f ) Includes the Austrian Littoral, Carniola, Croatia-Slavonia and Dalmatia.

year, historians have searched for proxy measures that would at least broadly correlate with these. One such proxy that has been quite abundant in historical sources is human height. Individual height is certainly affected by a genetic component, but in a large enough population, individual disposition for shortness or tallness is distributed in a predictable, symmetric way, which means that in calculating mean height of a population from a representative sample, such genetic factors are likely to cancel out.13 A trend in average adult height of consecutive birth cohorts can then convey valuable information about trends in general welfare. An important point raised by Komlos (1998) was that rapid economic growth need not necessarily translate into an improving living standard, if it is accompanied by intensifying environmental insults such as work strain, pollution and other negative externalities. These are factors that the usual economic indicators may not pick up; in fact, they may even completely mismeasure them as gains!14 Of course, the misalignment can also go the other way.

148  Tomáš Cvrček

Most abundant records of historical human height come from military archives. Adult recruits were usually measured in order to assess their fitness. Komlos (1989, 2007) has collected such statistics going back to the 18th century. He reports that after a secular decline in average male height in the 18th century, Austrian men recorded an increase in average height from a trough of 161 cm in 1790 to 170 cm in 1910 (Komlos, 2007: Figure 3). Hungarians grew by about 7 cm over the same period to reach 169 cm. Table 6.5 shows broadly comparable height data for several different regions in Central and Eastern Europe. The height record provides some interesting context for the real wage and GDP data discussed earlier. All of the regions cited in Table 6.5 reported an increase in mean height between early 1860s and late 1880s. This was true both for the provinces whose real wages were growing during this time (such as Galicia and the Czech provinces) and for those where wages stagnated (Hungary and the Adriatic provinces). Note that Russian heights recorded an increase precisely during the decades when the real wages in St. Petersburg were falling. While for the urban labour market of St. Petersburg the abolition of serfdom signalled a reinforced inflow of migrants from the countryside searching for work, in the rural areas these institutional changes heralded a transformation of Russian agriculture into a more productive sector of the economy that was increasingly and successfully asserting itself on international markets. The cross-sectional pattern in Table 6.5 further reinforces the point that economic modernization and the level of industrialization have a complicated relationship with higher standard of living. The most advanced provinces in the Habsburg Empire had relatively tall men, yet the tallest men came from arguably the least developed province, Dalmatia. Like Dalmatia, Galicia and Transylvania were also relatively underdeveloped, but unlike in Dalmatia, their men were TABLE 6.5  Average height of male army recruits in Austria-Hungary and Russia, 1861–1889

Austria-Hungary Galicia Transylvania Slovakia Hungary Czech provinces Austria Dalmatia

1863 birth cohort

1889 birth cohort

161.0a 162.4a 162.6a 163.9a 164.6a 164.8a 165.5a

165.0b 165.7b 165.6b 166.6b 167.5b 167.4b 168.8b

162.0a 162.9b

165.1a 167.9b

1861 birth cohort

1887 birth cohort

163.4 163.7b

165.9b 165.5b

Russia All provinces Saratov province Congress Poland Peasants Small town residents

b

Sources: Komlos (2007: Table 2), Mironov and A’Hearn (2008: Table 4), Kopczynski (2011: Table 1). Note: a measured at age 20; b measured at age 21.

Population and living standards, 1800–1914  149

relatively short. While the Dalmatian population apparently enjoyed relatively high real wages (see Figure  6.7), by 1910 the Czech wages almost caught up with them. Yet in terms of mean height, there was no convergence and the gap, if anything, further opened up. Komlos (2007: 215) considers Dalmatia a strange outlier and puts the high average down to a high-protein local diet steeped in seafood. But in light of the epidemics mentioned in previous section, many of which did affect both the industrialized Czech provinces as well as the relatively agricultural Bukovina, it is worth noting that Dalmatia was in fact quite isolated from the rest of the empire – by sea to the south and by mountains to the north. This, together with its relatively low population density, affected the overall morbidity in the province. Most 19th-century governments were not quite capable of collecting reliable statistics on the incidence of disease and so our best measure is overall mortality, which is obviously affected by disease, especially since many infectious diseases that are easily treated today were then still lethal. Figures  6.4 and 6.5 provide a good sense of the broad underlying trends in overall mortality, given that infant and overall mortalities were correlated. Those countries that saw their early life mortalities decline usually saw some improvement in old-age mortality also. This was an unambiguous improvement in quality of life and it was caused partly by pure economic growth, which made foodstuffs of better quality cheaper and more available, partly by investments in specific public health projects such as more sanitary sewerage systems and broader access to vaccination. As a result, life expectancy in these regions improved. In Austria, male life expectancy at birth went from 31 in 1875 to 39 in 1905. For women, the values were 34 years in 1875 and 41 in 1905. Hungary reached similar figures by 1910: 39 years and 40 years. Russian life expectancy stood at 31 and 33 years for men and women in 1895 (Bérend and Ránki, 1974: 23; Findl, 1979). One final aspect of living standards to consider is human capital. The best available measure is enrolment in primary schools, which strongly correlates with economic development and also with general living standards. The rise in enrolment went hand in hand with gradual disappearance of child labour, which itself was made possible by the rising wages of the parents and by the lure of higher wages in the growing number of jobs reserved for the literate. Table 6.6 shows that even as late as early 20th century, primary schooling was far from a majority pursuit in many Central and East-European countries. Russia was the most backward in this respect, although the overall figure (which applies to the 50 European provinces of Russia, excluding Poland and Finland) hides considerable variation. In the Baltic region, for example, as much as a third of the school-age children were enrolled by 1910, while the Urals and parts of modern Ukraine were still stuck at around 16% (Chaudhary et al., 2012). As one ventures west from Russia, the situation improves. The industrialized provinces of the Habsburg Empire were the clear leaders in terms of education. They were already enrolling more than a half of school-age children (here defined as between 5 and 14 years of age) in 1830. Countries such as Romania and Bulgaria were thus almost a century behind the leaders. One reason behind the lower enrolment rates is that compulsory schooling legislation varied from country

150  Tomáš Cvrček TABLE 6.6  Percentage of children aged 5 to 14 years enrolled in primary schools, 1820–1910

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 Austrian (Alpine) provinces Czech provinces Adriatic provinces Galicia and Bukovina Hungary (ancient Kingdom) Bulgaria Romania Greece Russia England and Wales Prussia France

52.7 46.9 7.5 3.9 – – – – – – – –

55.5 54.1 7.5 4.9 – – – – – 27.4 69.5 38.8

54.2 56.6 7.8 6.2 – – – – – 35.1 71.4 51.3

55.9 56.9 13.9 6.8 – – – – – 49.8 73.0 51.5

57.9 60.3 22.7 11.8 – – – – – 58.8 71.9 66.5

58.8 62.7 27.0 11.9 33.4 – – 25.3 – 60.9 73.2 73.7

68.5 72.3 29.3 21.3 45.7 – – 29.3 – 55.5 74.9 81.6

76.0 78.3 43.9 38.4 51.3 23.8 – 31.2 9.9 65.7 75.5 83.2

75.7 81.9 52.9 47.8 54.2 33.2 25.6 32.4 14.9 74.2 76.8 85.9

77.6 79.7 60.2 62.9 52.6 41.2 35.4 40.8 – 74.8 76.4 85.7

Sources: Lindert (2004: Table 5.1), Cvrcek and Zajicek (2015). Note: For territorial definitions, see the note under Table 6.1.

to country. In the Austrian case, for example, the school age was increased from 6–12 years to 6–14 years in 1869 (Cvrcek and Zajicek, 2018). The enforcement of this new regulation pushed enrolment rates among 5- to 14-year-olds upwards. But note that government compulsion and government provision of schooling were by no means a sure way to higher enrolment: Adriatic provinces lived under the same law, yet their enrolment barely crossed 60% before the First World War. In spite of these problems, the spread of mass schooling bore fruit in the gradual increase in literacy. Here, the most industrialized areas, such as the Czech and Austrian provinces of the Habsburg Empire, achieved effectively full literacy by the first decade of the 20th century. In Hungary, following a new schooling law, illiteracy fell from 68% in 1869 to 33% in 1910 (Bérend and Ránki, 1974: 25). Galician illiteracy plummeted between 1880 and 1910 from 81.1% to 40.6%, although the overall decline hid considerable variation across the various nationalities living there. There were only 11.7% illiterate Germans in Galicia in 1910 but 60.1% illiterate Ukrainian speakers. Still, the Galician Poles, with their 28.4% illiteracy, did significantly better than their counterparts in the Russian-controlled Congress Poland, of whom 61.4% were illiterate, according to the 1897 census (Corrsin, 1998). Russia also witnessed a spread of literacy from 15% to 40% between 1850 and 1913 (Mironov, 2000: 94). The situation was most dire in the Balkans, where 79% of Serbs were illiterate in 1910 and 61% Romanians in 1912 (Bérend and Ránki, 1974: 26). In Bulgaria, 66% were illiterate in 1910, down from 97% in the 1880s (Mishkova, 1994).

Conclusions In terms of living standards, Central and East Europe was poorer and less developed than the West but not uniformly so. The rather undiversified Balkan

Population and living standards, 1800–1914  151

economies, steeped in subsistence agriculture and pastoralism, contrasted with the rising industry of Bohemia, Moravia and Lower Austria. The industrializers paid for their development in terms of lower quality of life in terms of health, but this was a temporary burden for which the economic growth eventually proved to be a solution: the resources generated through development were invested in improvements that mitigated the negative externalities associated with industrial growth. A similar division emerges when one looks at population trends. Here, too, Eastern Europe was a mixture of, on the one hand, regions with a modernizing outlook, a falling fertility and mortality and an increasing investment in child quality through education, and on the other hand, areas where school enrolment was low and fertility high. Both in the case of living standards and the population change, the factor that contributed in a major way to the difference between the modernizers and the laggards was the existence and extent of industrial wage labour. In contrast to, say, Great Britain, where the last vestiges of serfdom disappeared before the dawn of the modern era, in Central and Eastern Europe the allocation of labour in an open market instead of within some hierarchical, coercive structure is a very recent phenomenon that emerged fully only in the second half of the 19th century. It made a world of a difference because it enabled or reinforced many other aspects that we (rightfully) associate with the operation of a modern economy: increased marketization of production, deeper specialization, more efficient use of human skill and talent and greater social and geographic mobility. The Central European record, in its great diversity of local conditions, is a testimony to how powerful this process was.

Notes 1 Interestingly, Sklar (1974: 231–233), whose research supplied the Baltic and North-East European entries for Table  6.3, believed that the high marriage ages of Lithuanian, Latvian and Estonian women represented powerful counterexamples to Hajnal’s geographical division. But when the Hajnal line is traced out on a map, all three of these Baltic countries lie mostly west of it, which is also why they appear in the West column in Table 6.2. In that context, the fact that they exhibit features of the (West) European Marriage Pattern is not a refutation of Hajnal (1965) but rather evidence in support of it. Sklar was right to object to the conspicuous omission of any East-European countries north of Hungary in Hajnal’s (1965) original article, but when she filled in the blanks with her own data analysis, she somewhat misconstrued Hajnal’s East. Yet, presumably, there was a reason why Hajnal drew the line from St Petersburg to Trieste and not from, say, Helsinki or Kaliningrad to Trieste. Still, her counterargument does not lose all of its force, for no matter how one draws the Hajnal line, some relatively high-marriage age provinces, such as Grodno and Vilno governorates or the Congress Poland/Vistula Land, will remain east of it. (But see Granditzs and Heady (2003: Map 2) for an alternative drawing of the line.) 2 Specifically, Mitterauer (2003) mentions the Hufenverfassung (the system of hides), originating from the Frankish (later Carolingian) Empire, where a Hufe (mansus, hide) was an area large enough to support a nuclear family. Kaser (2003: 58) and Szoltysek and Zuber Goldstein (2009: 21–25) describe how implementation of this system in the

152  Tomáš Cvrček

Polish-Lithuanian Commonwealth in the 16th century met with unequal success across the country, thereby generating a diverse patchwork of closely coexisting different patterns of landholding and, by extension, family systems. 3 Out-of-wedlock childbearing was very common (upwards of 40% of all births) in many Alpine provinces, such as Carinthia, Styria and Salzburg (Kytir und Münz, 1986). In that sense, the local women’s high celibacy rates capture their legal status more than their demographic behavior. 4 Todorova (1996) also criticizes earlier researchers’ disproportionate stress on the zadruga as a typical or even predominant form of extended family in the Balkans. 5 After all, Mitterauer (2003) and Kaser (2003) argue that the family system reflect local agricultural organization and manners of ownership and inheritance (i.e. economic or economic-institutional variables). 6 This is clearly visible, for example, in the Bulgarian record with the steep drop in births during the Balkan wars of 1912–1913, or even in the Czech record in Figure 6.3, where the cholera epidemics of 1848 and 1855 featured prominently. 7 This view dovetails with Hajnal’s geographical categorization of family systems, seeing marriage (or more specifically: entry into marriage) as the pre-eminent regulator of fertility. 8 It should be noted that even Cleland and Wilson’s (1987) definition of simultaneity was rather loose to begin with: their evidence in favour of simultaneity is that for 71% of all European provinces, the first fertility decline can be dated sometime between 1880 and 1930. Even in the context of a century-long fertility transition, it is hard to see what is simultaneous about events that can occur 50 years apart. 9 Admittedly, infant mortality is not the perfect measure to use, if one intends to link fertility to the likelihood of survival to adulthood. A mortality rate for ages, say, 0 to 15 would be preferable (Galloway et al., 1998: 186). But infant mortality is more closely correlated with this ideal measure (which is usually unavailable) than overall mortality, measured by Crude Death Rate. 10 Partly this may be due to an incomplete count of infant deaths, but unless the omission reached some unrealistic proportions, such as 50%, the Serbian and Bulgarian infant mortality rates are evidence of a more healthy and less lethal environment overall. As mentioned earlier, these countries were still predominantly agricultural – large parts of the Serbian economy could, in fact, even be described as pastoral – and the recorded population densities were relatively low. 11 For example, the calculation of life expectancy requires reliable and complete mortality data by age and gender for the whole population – something that many countries were not in a position to reliably collect until the very end of the 19th century. Educational attainment, similarly, can be estimated only when good data are available on the population’s years of schooling, or of the highest educational degree attained. While such information was collected as part of many 20th century censuses, this was not the case in the 19th century when even measures of school enrollment and attendance were problematic. 12 Since children are usually counted as half an adult, the expenses are equal to three adult annual expenses. 13 The representativeness of the sample is a crucial assumption and one with which many historical height samples struggle. Who ends up in the army may vary across time and across population groups, leading to self-selection (Bodenhorn et al., 2015). 14 Such may be the case when, for example, a particular line of work becomes unpleasant, unhealthy or dangerous and employers need to increase worker remuneration to compensate them for these added job disamenities. Unless the disamenity is measureable (which it rarely is) and properly accounted for, an unaware observer may erroneously conclude, simply by looking at the wage record, that workers’ welfare has increased.

Population and living standards, 1800–1914  153

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The interwar period 1918–1939

7 ECONOMIC GROWTH AND STRUCTURAL CHANGE IN CENTRAL, EAST AND SOUTH-EAST EUROPE, 1918–1939 Matthias Morys

Introduction The interwar period has typically received a negative assessment in economic history (Kindleberger 1987, Eichengreen 1992, Feinstein et al. 2008). The 1920s are portrayed as an earnest and well-intentioned attempt by policy-makers to return to the benign economic environment of the pre-war era (free trade, gold standard, fiscal orthodoxy, etc.), and complement it with supportive international structures such as the League of Nations. Yet the legacy of World War I loomed large over the world economy, and political cooperation remained elusive after the divisions brought by the war and the subsequent Paris peace treaties. By the mid-1920s, an economic recovery had been achieved that was fragile in some places and buoyant in others (the “Roaring Twenties”), but the onset of the Great Depression in 1929 reversed the achievements of this quinquennium quickly. Output declined massively, often up to a third of gross domestic product (GDP), and the subsequent recovery remained weak. Some countries were even unable to regain the late 1920s output level before the outbreak of World War II. The gold standard and the international trading system unravelled, and many governments defaulted on their debts. This perspective might be convincing, yet it largely reflects the experiences of the industrialised economies of North America and Western Europe, and arguably of two countries in particular. For the United States, the Great Depression constituted the single most traumatic event of the 20th century; it acted as a watershed, much more so than the two world wars from which the United States emerged victorious with its mainland unharmed (Bordo et al. 1998). In the case of Europe, the Great Depression was particularly severe in Germany, contributing to the end of the Weimar Republic and the rise of Hitler. The Great Depression was, at least to a considerable degree, an industrial crisis, but this was not the world of Central,

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East and South-East Europe (CESEE). Even by the 1930s, Czechoslovakia was the only country in the region that was properly industrialised (and hence suffered from the Great Depression more than any other country in Eastern Europe). Despite these fundamental structural differences between Western and Eastern Europe, most of the historiography (Berend  & Ránki 1982, Berend 1998) has supported a negative assessment of the interwar period also for the countries of Central Europe (Czechoslovakia, Hungary and Poland) and South-East Europe (Albania, Bulgaria, Greece, Romania and Yugoslavia). This is the case in particular for the influential works of Berend and Ránki (1974) and Kaser and Radice (1985–1989). Both works, which remain towering scholarly achievements and important reference points to this day, are carefully argued and are based on a wealth of quantitative and qualitative evidence. Yet there also is a sense that the critical assessment of the interwar achievements carries a subtext, namely to justify, very subtly, the heavy state intervention, collectivisation of agriculture and forced industrialisation which materialised after World War II under communist regimes. The logic is that if neither the (relatively) liberal order of the 1920s nor the “light” state intervention of the 1930s had generated enough growth and structural change, then forms of government that were more intrusive seemed appropriate after the war. Such views were often held with great conviction by authors based in Eastern Europe (Berend, Ránki) or hailing from the region (7 of the 14 contributors to Kaser & Radice [1985–1989] were émigrés). Yet many academics in Western Europe and North America shared them in the 1970s and 1980s, even though they typically articulated them with greater nuance (e.g., Lampe & Jackson 1982). The literature referred to above typically did not draw on GDP and business cycle indicators, as is the standard case for interwar studies on the United States and Western Europe. It relied instead on a variety of easily available but less pertinent data such as trade, capital flows, infrastructure spending and so forth. There was no conceptual hesitation to use GDP data; they were simply not available. At the time when Berend and Ránki (1974) and Kaser and Radice (1985–1989) wrote their monumental contributions, annual national accounts were available only for three countries (Czechoslovakia, Hungary and Yugoslavia). Due to intensive quantitative research efforts of the past two decades, we are today in a far better position to analyse economic growth and structural change for the CESEE countries in the interwar period. Thanks to Markevich and Harrison (2011), we possess annual GDP data for the early Soviet Union, by far the largest economy in the region. Ivanov’s (2012) national accounts for Bulgaria allow us to better understand the economic development of a country that is widely seen as particularly backward (in the European context) and has fascinated economic historians since the seminal works of Alexander Gerschenkron (1962). Finally, our improved knowledge of interwar Greece (Mazower 1991, Christodoulaki 2001, Kostelenos et al. 2007) puts the CESEE interwar experience into perspective, as Greece was the only country in the region not to undergo the state socialist experience after World War II. The country can serve as counterfactual experiment:

Economic growth and structural change  163

how would neighbouring countries have developed after 1945 with a capitalist economy? The result of such a reassessment is surprisingly positive. Economic growth rates of the CESEE countries were high, both vis-à-vis other European countries and compared to their own past performance. As opposed to the 1870–1913 period, the CESEE economies began to converge on the Western European core economies led by Britain, France and Germany, and they did so more quickly than the Southern European economies (Italy, Portugal and Spain). All economies in the region moved away from the Gerschenkronian stereotype of backward peasant economies. In most cases, this implied far-reaching structural change. Hungary and Greece, for instance, had a meaningful industrial sector by the late 1930s. But even where structural change did not happen, as in Bulgaria for instance, improvements in agriculture were of such magnitude that per capita incomes and living standards rose substantially. The positive reassessment of the Central and South-East European experience puts in perspective the economic achievements and shortcomings of the early Soviet Union. On one level, the Soviet Union became part of the European convergence club very similar to the other countries described in this chapter. The country grew neither quickly nor slowly in a regional or European comparative framework but in line with what convergence forces would suggest. Yet on many other levels, the Soviet Union stood apart. After the devastations of World War I and the Russian Civil War (1918–1921) and (some form of) economic recovery under the relatively market-friendly New Economic Policy (1921–1928), the Soviet Union became the first country worldwide to move to a strategy of forced industrialisation. The collectivisation of agriculture and the complete nationalisation of industry (nationalisation had been limited to the “commanding heights” of the economy such as large-scale industry and commercial banks until 1928) brought the entire economy under the control of the Soviet government which henceforth directed the economy with the help of Five-Year Plans. Government fiat (and force) replaced the market, and the new economic policies became dependent on a totalitarian political system for their implementation. This strategy was controversial at the time and has remained so ever since. Was there long-run gain at the expense of short-term pain? The bulk of the evidence presented in this chapter suggests that fundamental structural change took place elsewhere in the region under market-based economic systems, and it calls into question the idea that the Soviet approach was the only option available to transform the Russian economy (Allen 2003). The remainder of this chapter is structured as follows. Section 2 will describe the national accounts available for the 12 CESEE countries. Section 3 will analyse GDP, population and GDP per capita developments in the interwar period, partly based on summary statistics and partly on the concept of convergence. We will argue that convergence with Western Europe happened, albeit at different speeds in the various countries. Section 4 is devoted to explaining what section 3 documents: Did the high growth rates emanate in the primary sector (agriculture,

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fishing, forestry) or the secondary sector (large-scale and small-scale industry, construction)? What explains agricultural productivity increases and the emergence of small-scale industries in most countries? The evidence presented will allow to distinguish three distinct development paths which match, albeit imperfectly, the sub-regions of Central Europe (structural change based on light industries), SouthEastern Europe (little structural change but vast improvements in agriculture) and Eastern Europe/Soviet Union (forced structural change focused on heavy industries). Section 5 summarises and concludes.

The interwar national accounts of the CESEE countries For our data on GDP, population and GDP per capita we rely mostly on the data set provided by Maddison (2009) and partly revised by Maddison (2013; see Bolt & van Zanden 2014 for the changes introduced). The most recent update of this database (Maddison 2018; see Bolt et al. 2018 for the latest revisions) has not resulted in any changes for the CESEE countries. Maddison (2009, 2013, 2018) go back to Maddison (2006), which contains detailed descriptions of the underlying sources. While offering a unified data set standardised at 1990 Geary-Khamis US dollars (in line with the other three growth chapters in this volume), it is worth elaborating on the input series. In broad terms, the data for the Soviet Union, Bulgaria and Greece reflect recent research efforts, while the time series for Czechoslovakia, Hungary, Yugoslavia and Poland go back to the 1950s and 1960s. The data for Romania, the Baltic countries and Albania are either problematic or completely absent, and we exclude them from further analysis after a brief description below. For Russia and the Soviet Union, the 2013 update of the Maddison database offers, for the first time, a continuous annual time series for the period 1885–1940. Building on earlier work by Gregory (1982) for the late Tsarist economy and Moorsteen and Powell (1966) for Soviet industrialisation 1928–1940 (Maddison 2006: 471), the more recent GDP reconstruction by Markevich and Harrison (2011) covering World War I, the Russian Civil War (1918–1921) and the period of the New Economic Policy (1921–1928) is employed to connect the two time series. Assessing the region’s largest economy is therefore much easier today than it was only a decade ago. The GDP data for Bulgaria has seen similar improvements in recent years. The older data by Chakalov (1946) has been replaced by Ivanov and Tooze (2007) for the interwar period, but it remains confined to benchmark years and contains annual data only for 1924–1945. Ivanov (2012) subsequently provided annual data stretching back to 1870. These data, while widely used (cf. Chapter 3 by Kopsidis & Schulze), have not yet made it into the Maddison data set (including its 2018 update). The situation of the GDP data for Greece is more complicated. The GDP reconstructions for 1830–1939 by Kostelenos (1995) and Kostelenos et al. (2007) have struggled to find widespread acceptance. Maddison initially did not use them at all (see Maddison 2006: 407 for a detailed discussion of Kostelenos 1995), but has used them since the 2013 update for the pre-WWI period for the lack of comparable annual data. Other authors, such as Kopsidis and Schulze (Chapter 3), draw

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on key components of Kostelenos’s work but then manipulate the data in different ways. The resulting GDP series are significantly different, with Kostelenos offering a more pessimistic assessment of the pre-WWI economic development than Kopsidis and Schulze. Maddison (2013) does not use Kostelenos for the interwar period but links instead three different estimates, carried out between 1954 and 1960, to obtain a unified series for the interwar period (Maddison 2006: 407). Different from the other five countries studied in detail in this chapter, the sources underlying Maddison (2006, 2009, 2013, 2018) for the case of Greece do not contain data on sectoral shares (Clark 1957, Ekonomikos Tachydromos 1954). We established the shares for 1921, 1929 and 1938 in Table 7.5 as follows. We use the 1913 shares provided by Kopsidis and Schulze in Chapter 3 for 1921 (59.1%, 19.4% and 21.5%, respectively), as we know that the occupational structure in Greece hardly changed between 1910 and 1920 (Lampe  & Jackson 1982: 336, Clark 1951: 399). We then estimate the increasing secondary sector share of total output by comparing the industrial production index of Christodoulaki (2001) with overall GDP growth. Such comparison suggests a secondary sector share of 24.9% in 1929 and 25.8% in 1938. Christodoulaki’s (2001) industrial production index constitutes the most recent research effort and implies lower industrial growth than the contemporary estimate of Greece’s Supreme Economic Council and the later estimate by Mazower (1991) (for details cf. Christodoulaki 1991: 64). Christodoulaki’s (2001) industrial production series shows growth of industry to be lower than growth of the secondary sector as a whole (the latter data are confined to 1925–1938 and hence cannot be used for our purposes). Consequently, our estimate produces by design a lower-bound estimate of advances of the secondary sector in the interwar period. The interwar GDP data for Czechoslovakia, Hungary and Yugoslavia are annual (only Hungary misses the entries for 1921–1923) and have seen no major revisions since the key contributions by Pryor et  al. (1971) for Czechoslovakia, Eckstein (1955) for Hungary and Vinski (1961) for Yugoslavia. These GDP reconstructions emerged at the time in the broader context of Thad P. Alton’s Research Project on National Income in East Central Europe. Alton aimed at calculating GDP for the Soviet bloc economies during the Cold War period (cf. Chapter 11 by Vonyó & Markevich), yet his work inspired research on where the CESEE economies stood in the decades before the introduction of the command economy. Interwar data for the other six CESEE countries are either problematic (Poland, Romania and Estonia) or completely absent (Albania, Latvia and Lithuania). Annual GDP data for Poland are available only for 1929–1938 based on the work by Laski (1956). Little insight can be gained from such a short time series and we do not include Poland as a result. The case of Romania is more complicated. Axenciuc (2012) provides annual GDP data since 1862 in domestic currency; a series deemed of good quality for the pre-WWI period and used, among others, by Kopsidis and Schulze in Chapter 3. Maddison (2018) incorporates the Axenciuc data, but his conversion into 1990 USD differs widely from the values calculated by Kopsidis and Schulze. The value for 1913, for instance, is only a quarter of the value

166  Matthias Morys

reported by Kopsidis and Schulze (481 vs. 1705). Likewise, the 1937 value is only a third of the value reported by Broadberry and Klein (2012: 88; 450 vs. 1206). Common to all series available for Romania is a fall in GDP per capita comparing 1913 with 1937/38, a finding we consider implausible even when taking into account the sizeable border changes after World War I. Furthermore, such a fall in GDP per capita is also difficult to reconcile with other, more positive accounts of the Romanian interwar economy (Lampe & Jackson 1982, Turnock 1986, Kopsidis & Ivanov 2017a). Erring on the side of caution, we exclude Romania from our analysis. There are some GDP data available for Estonia (Klesment 2010: 179), but the underlying source from Valge (2003) is in Estonian and, to the best of our knowledge, has received little international scrutiny. We exclude Estonia from our analysis, even though the available data suggest high levels of GDP per capita. The country constitutes an interesting case for future research. GDP data for interwar Albania are confined to a single benchmark estimate for 1929 based on GDP proxy estimates by Good and Ma (1999). This one observation can only reveal that Albania was the poorest CESEE economy during the interwar period. There are no GDP data available for Latvia and Lithuania. Excluding Albania, the Baltic countries, Poland and Romania from our analysis is most unfortunate. Available economic and social indicators suggest that Albania and the Baltic countries constituted the lower and the upper end of CESEE interwar economic development, respectively (see Chapter 10 of this book). Likewise, it must remain open for the time being whether the positive assessment of the preWWI Romanian economy by Kopsidis and Schulze in Chapter 3 would find its counterpart in the interwar years. Finally, we can answer the interesting question to what extent Poland benefitted economically from the Westward shift after World War II only once we have more robust data available for the interwar period.

Quantitative dimensions of economic growth Tables  7.1, 7.2 and 7.3 provide data on GDP, population and GDP per capita for the Soviet Union, Czechoslovakia, Hungary, Bulgaria, Greece and Yugoslavia. GDP levels and population numbers suggest that the Soviet Union was larger than Central Europe and South-East Europe combined. This is true, even if including the missing six countries (of which only Poland and Romania had sizeable populations, approximately 34.8 million and 19.8 million, respectively, by the end of the period). A major problem for any study of the interwar period is its brevity. We are analysing a maximum of four business cycles (Morys & Ivanov 2015) as opposed to four decades for the state socialist period (Chapter 11) and an even longer period for the long 19th century (Chapter 3). What, then, are the natural boundaries of the interwar period? We choose 1921 as the first year for which GDP data are available for all six countries. That year coincides with the end of the Russian Civil War (1918–1921) and precedes the end of the Greco-Turkish War (1918–1922) by one year (fighting

Economic growth and structural change  167 TABLE 7.1  GDP: levels and growth rates in six CESEE countries, 1913–1938

Eastern Europe

Central Europe

South-East Europe

Czechoslovakia

Hungary

Bulgaria3

Greece

Yugoslavia3

27,755 27,117 42,240 41,5782

14,7003 13,5854 21,250 24,342

5,2185 5,150 7,8516 9,833

7,9003 11,196 14,696 18,901

13,223 12,093 17,822 20,083

2.5 10.0

1.7 2.7

2.0 3.3

2.4 3.9

3.6 3.1

1.7 3.0

16.3

5.7

5.1

4.3

3.5

5.0

5.7

−0.2

1.5

3.3

2.8

1.3

1928

1923

1924

1924

1920

1924

Soviet Union Levels (in millions 1990 USD) 1913 220,8523 1921 80,3943 1929 231,8861 1938 405,220 Growth rates p.a. (in percent) Long-run analysis7 1913–1938 1921–1938 1920s 1921–1929 1930s 1929–1938 Business cycle analysis When was 1913 level recovered? Late 1920s peak Early 1930s trough Late 1930s peak Growth rate p.a.: Early 1930s trough to late 1930s peak

n.a. n.a. 1939 n.a.

1929 1929 1931 1929 1929 1935 1932 1932 1931 1932 19378 1939 1940 1938 1939 9.7% 4.5% 5.1% 4.7% 4.7% (1935–37) (1932–39) (1932–40) (1931–38) (1932–39)

Source: Own calculations based on sources described in section 2 (unless indicated otherwise below; see note 3). Notes: 1 Value of 1928 instead of 1929 (consistency with Table 7.3). 2 Value for 1937 (consistency with Table 7.3). 3 Values obtained by multiplying values of Tables 7.2 and 7.3. 4 Value for 1920 (consistency with Table  7.3). 5 Value for 1911 (consistency with Table  7.3). 6 Value for 1931 (consistency with Table  7.3). 7 Precise years may differ in case the levels data for individual countries presented above deviate from 1913, 1921, 1929 and 1938. 8 Last data point.

168  Matthias Morys TABLE 7.2  Population: levels and growth rates in six CESEE countries, 1913–1938

Eastern Europe

Levels (in million) 1913 1921 1929 1938

Central Europe

South-East Europe

Soviet Union1

Czechoslovakia

Hungary

Bulgaria

Greece

Yugoslavia

156.193 152.84 169.27 188.50

13.253 13.00 13.88 14.432

7.843 7.954 8.58 9.17

4.595 5.15 6.116 6.56

5.433 5.84 6.28 7.06

13.593 12.61 14.19 16.08

0.8 1.2

0.4 0.7

0.6 0.8

1.3 1.4

1.1 1.1

0.7 1.4

1.5

0.8

0.9

1.7

0.9

1.5

1.1

0.5

0.7

1.0

1.3

1.4

Growth rates p.a. (in percent) Long-run analysis7 1913–1938 1921–1938 1920s 1921–1929 1930s 1929–1938

Source: Own calculations based on sources described in section 2. Notes: 1 Population data for the Soviet Union in Maddison (2009) are consistently higher than Markevich and Harrison (2011) and Rothenbacher (2002, 2013); see Chapter 10 and Table 10.1 of this book for details. We rely here on the Maddison data in order to ensure consistency with Tables 7.1 and 7.3. Value of 1928 instead of 1929 (consistency with Table 7.3). 2 Value for 1937 (consistency with Table 7.3). 3 Population on the country’s territory in its interwar boundaries. 4 Value for 1920 (consistency with Table 7.3). 5 Interpolated value for 1911 (consistency with Table 7.3). 6 Value for 1931 (consistency with Table 7.3). 7 Precise years may differ for individual countries in case the levels data presented above deviate from 1913, 1921, 1929 and 1938.

stopped in 1918 for the other four countries). This year is also close to, or even coincides with, the year in which countries regained their 1913 income levels (Tables 7.1 and 7.3, lower panel). The only exception was the Soviet Union, where the devastations of World War I  and the subsequent Civil War were such that income levels had fallen by 1921 to approximately a third of their 1913 values (i.e., levels which were recovered only at the end of the decade). Consequently, 1921 would lead to inflated growth rates in the case of the Soviet Union, and selecting 1913 as reference point provides a more realistic perspective. Choosing more than one starting point for an analysis of interwar economic growth is not unusual, in which case authors typically select 1913 and 1921 (Feinstein et al. 2008: 10). We choose 1938 as the last year unaffected by World War II, again in line with widespread practice for the interwar period (Feinstein et al. 2008: 10). Yet we note that with the exception of Czechoslovakia (last data point for 1937) and Greece,

Economic growth and structural change  169 TABLE 7.3  GDP per capita: levels and growth rates in six CESEE countries, 1913–1938

Levels (in 1990 USD) 1913 1921 1929 1938

Eastern Central Europe Europe

South-East Europe

Soviet Union

Czechoslovakia

Hungary

Bulgaria

Greece

Yugoslavia

1414 526 13701 2150

2096 2085 3042 28822

18753 17094 2476 2655

11375 1000 12856 1499

14553 1918 2342 2677

973 959 1256 1249

1.7 8.6

1.3 2.0

1.4 2.5

1.0 2.4

2.5 2.0

1.0 1.6

14.7

4.8

4.2

2.5

2.5

3.4

4.6

−0.7

0.8

2.2

1.5

−0.1

1930

1923

1924

1925

1921

1922

Growth rates p.a. (in percent) Long-run analysis7 1913–1938 1921–1938 1920s 1921–1929 1930s 1929–1938 Business cycle analysis When was 1913 level recovered? Late 1920s peak Early 1930s trough Late 1930s peak Growth rate p.a.: Early 1930s trough to late 1930s peak

n.a. n.a. 1939 n.a.

1929 1929 1931 1929 1929 1935 1932 1932 1931 1932 19378 1939 1940 1938 1939 9.4% 3.8% 4.1% 3.3% 3.3% (1935–37) (1932–39) (1932–40) (1931–38) (1932–39)

Source: Own calculations based on sources described in section 2 (unless indicated otherwise below; see note 3). Notes: 1 Value for 1928. The onset of the Great Depression was of little relevance to the Soviet Union due to its autarky policies. The year 1928 is chosen instead as the change from the New Economic Policy to Stalin’s forced industrialisation. 2 Value for 1937. 3 Values taken from Chapter 3 (Table 3.3) of this book. 4Value for 1920. 5Value for 1911. 6The onset of the Great Depression to Bulgaria was delayed by two years (peak in 1931). We choose 1931 in order to measure growth from peak to peak (all other Central and South-East European countries peak in 1929). 7Precise years may differ for individual countries in case the levels data presented above deviate from 1913, 1921, 1929 and 1938. 8Last data point.

170  Matthias Morys

the other four countries continued to grow for one or two more years after 1938. Bulgaria, for instance, grew for eight consecutive years between 1932 (trough) and 1940 (peak). We found the following compromise: we maintain 1938 for the calculation of growth rates (Tables 7.1 and 7.3, middle panel), but show separately the (annualised) growth rate from the Great Depression trough to the late 1930s peak (Tables 7.1 and 7.3, lower panel). We will return to this point when discussing the strength (and length) of recovery growth after the Great Depression.

Long-run growth analysis The CESEE economies grew between 2.7% p.a. (Czechoslovakia) and 3.9% p.a. (Bulgaria) between 1921 and 1938 (Table  7.1). Even when extending the time frame to the quarter century of 1913–1938, growth rates fall in an elevated range between 1.7% (Czechoslovakia) and 3.6% (Greece). In this perspective, which we adopt to capture more adequately the experience of the Soviet Union (cf. above), the Soviet Union occupies an intermediate position (2.5%). GDP growth translates into GDP per capita growth of the same magnitude only if the population remains unchanged. Yet population grew in all cases, with CESEE essentially falling into two different groups (Table 7.2; cf. Chapter 10 for details): countries experiencing a late demographic transition with high population growth throughout the interwar period (Soviet Union, Bulgaria and Yugoslavia in our sample) and the more advanced economies of the region, which had already transitioned to a new demographic equilibrium characterised by low population growth (Czechoslovakia and Hungary in our sample). Consequently, growth rates of GDP per capita are lower than of GDP in all cases, yet by a wider margin for countries experiencing a late demographic transition. Based on the 1921–1938 time frame, all countries bar Yugoslavia experienced per capita increases of 2% p.a. and more (Table 7.3). This makes CESEE the fastest growing world region of the interwar period, as a comparison with Western Europe, the United States, Latin America, Japan, China and India for precisely the same period presented in Feinstein et al. (2008: 10) shows. Yet it could be argued that any positive re-assessment of the interwar period is valid only if based on GDP per capita growth for the 1913–1938 period, as results are biased downwards by including the years of zero (or even negative) growth associated with World War I. In this perspective, the countries growing slowest still achieved growth of 1.0% per capita (Bulgaria, Yugoslavia), and the other four countries achieved values between 1.3% (Czechoslovakia) and 2.5% (Greece), with Hungary (1.4%) and the Soviet Union (1.7%) falling in between. Are such values high or low? There are two points of comparison: a country’s own past performance and the contemporaneous performance of other economies. The second perspective will lead to a convergence framework, drawing on the interwar growth experience of 18 European countries (see below). In the following, we compare our findings with the 1870–1913 period studied by Kopsidis and Schulze in Chapter 3. From the six economies they study (Austria, Bulgaria,

Economic growth and structural change  171

Greece, Hungary, Romania and Russia), they show that only Hungary (1.3%) and Romania (1.5%) saw GDP per capita growth of more than 1.0% (Table 3.3). Russia’s and Bulgaria’s per head income levels hardly grew at all (0.6% and 0.1%, respectively). Before World War I, limited advances of per capita income reflected strong population growth, yet even switching to GDP does not alter the main finding that growth rates increased after the war. GDP growth rates 1913–1938 consistently exceed GDP growth rates 1870–1913 (Table 3.1), in some cases by as much as one percentage point and more (Bulgaria: 2.4% vs. 1.4%; Greece: 3.6% vs. 2.2%). In sum, CESEE grew more quickly in the interwar period than the 1870–1913 period, running against a widespread perception that equates the first age of globalisation with strong economic growth while identifying the interwar period with economic failure.

Short-run growth analysis: the 1920s Most accounts of the interwar period distinguish two periods separated by the onset of the Great Depression in 1929 (Kindleberger 1987, Eichengreen 1992, Feinstein et al. 2008): “the 1920s,” that is the recovery period after World War I, followed by a business cycle upswing and stronger economic growth in 1924–1929 (the latter half often referred to as the “Roaring Twenties”); and “the 1930s,” that is from the onset of the Great Depression to the outbreak of World War II. Such a chronology fits well Central Europe and South-East Europe, where four out of five countries reached their late 1920s business cycle peak in 1929 (cf. Tables 7.1 and 7.3, lower panel; Bulgaria reached its peak in 1931). Can we integrate the Soviet Union into such a chronological framework? Due to its autarky policies, the Soviet Union was one of the few economies worldwide that was not negatively affected by the Great Depression. Yet 1928 acted as a turning point for the Soviet Union no less fundamental than 1929 for the capitalist economies. In this year, Stalin terminated the New Economic Policy which had served the country well in terms of economic recovery (the 1913 GDP level was recovered in 1928; cf. Table 7.1), but was increasingly seen as incompatible with the political and economic agenda of the Soviet leadership (see Chapters 8 and 12 of this book). Born out of sheer necessity in 1921, the New Economic Policy had reintroduced a considerable amount of “capitalism” after the so-called War Communism between 1918 and 1921. Farmers owned their lands and were no longer subject to draconian wartime requisitioning targets, private trade was legalised, and small enterprises were exempted from nationalisation, among many other measures aimed at reviving private initiative. In particular, the New Economic Policy had empowered the peasants to an extent that they became viewed as a threat to the political leadership or, at least, as an obstacle to rapid industrialisation. Recognising this inherent tension, Stalin terminated the New Economic Policy in 1928 and embarked on a policy of “forced industrialisation,” which today is associated with the early phases of the state socialist experience (see Chapter 11).

172  Matthias Morys

All Central and South-East European economies grew more quickly in the 1920s than in the 1930s. Czechoslovakia and Hungary grew particularly strongly (GDP per capita growth above 4%), with Yugoslavia slightly behind at 3.4%. Bulgaria’s and Greece’s per head income levels also grew quickly, at 2.5% p.a. By any measure, the 1920s were a period of high economic growth in which countries quickly recovered from World War I (1913 income levels were recovered on average by 1923) and then grew substantially in the business cycle upswing of the second half of the 1920s (Morys & Ivanov 2015). The Soviet Union needed a full decade to recover from World War I, the Civil War and the 1921–1922 famine (approx. 6 million deaths). Crucially, and distinct from the other CESEE economies, the Soviet Union did not “develop” in the 1920s. The New Economic Policy provided the country with the opportunity to return to where it had stood in 1913; most of the growth came from the exploitation of unused capacity in industry rather than the build-up of new industries (Markevich & Harrison 2011: 688). This perspective is supported by the sectoral composition of the Soviet economy, which was almost identical comparing 1913 and 1928 (Table 7.5). It has remained the subject of scholarly debate if the continuation of the New Economic Policy beyond 1928 could have delivered genuine industrialisation (Allen 2003) or not (Markevich & Harrison 2011), but there is agreement that by the time it was abandoned it had not proceeded beyond the achievements of the late Tsarist economy. At the time, Soviet policy-makers certainly perceived such a limitation of the New Economic Policy, tipping the balance in favour of a strategy of forced industrialisation after 1928 (cf. chapter 8).

Short-run growth analysis: the 1930s The 1930s saw a reversal of fortunes between the Soviet Union and the other five countries. The Soviet Union exhibited high growth rates under the first two Five-Year Plans, growing at 5.7% p.a. Yet these policies came at enormous human cost. The collectivisation of agriculture (and the associated grain delivery targets) was a vital pillar, as it ensured the necessary resource transfer from the countryside to the cities (and the industries located in them). But resistance of the farming population (about 80% of total population) to the expropriation of their homesteads resulted in a vicious circle of peasants hoarding food (which was then sold on the black market) and violent countermeasures by the state, contributing – or even leading to – the 1932–1933 famine with an estimated 6 million deaths. For those who survived the 1930s (Stalin’s Great Terror of 1937–1938 resulted in another 1 million deaths), living standard increases were far more modest than an annual per capita growth rate of 4.6% suggests. The latest research suggests that living standards in the 1930s did not rise at all and arguably even fell (Allen 1998, Allen & Khaustova 2019; cf. Chapter 10 for details). In Central Europe and South-East Europe, growth slowed after the onset of the Great Depression. Countries growing rapidly in the 1920s (Czechoslovakia, Hungary and Yugoslavia) experienced a strong slowdown. By contrast, Greece and Bulgaria continued to grow at some pace in the 1930s, with less than a 1% growth difference between the 1920s and the 1930s. As the next section will explore in detail,

Economic growth and structural change  173

the different fortunes between Czechoslovakia and Hungary, on the one hand, and Bulgaria and Greece, on the other, relate to the sectoral structure of the economies. Industrialised Czechoslovakia and industrialising Hungary benefitted more strongly from the global recovery of the 1920s but suffered more from the Great Depression as industrial crisis (Klein et al. 2017). By contrast, growth in Bulgaria and Greece relied mostly on productivity increases in the agricultural sector. As such changes were of a domestic nature, the Great Depression had a smaller impact on South-East Europe. Greece and Bulgaria are also noteworthy for a short Great Depression: they reached their cyclical troughs in 1931 and 1932, respectively, and recovered the level of the previous business cycle peak (Greece: 1929; Bulgaria: 1931) by 1933. From a business cycle perspective, the Great Depression in Greece and Bulgaria only lasted four and two years, respectively. Hungary and Yugoslavia reached their troughs also as early as 1932, but their recoveries took longer. Czechoslovakia – incidentally the most industrialised CESEE economy  – stands out as the only country that did not recover its 1929 GDP per capita level in the interwar period. An intriguing feature in all cases is the strength and the length of the recovery. Bulgaria, Greece, Hungary and Yugoslavia experienced seven to eight year-long uninterrupted growth periods, in which the economies grew at annualised rates between 4.7% and 5.1%.

CESEE in a pan-European convergence framework The summary statistics in Tables  7.1 and 7.3 suggest that the CESEE countries grew rapidly in the interwar period compared to their own past performance. Did they also grow faster than the more advanced economies at the time, allowing them to catch up in the process? In the following, we will establish whether the CESEE countries converged on the European core economies, namely the three populous countries of Britain, France and Germany and the smaller yet no less developed economies of Belgium, the Netherlands and Switzerland. The convergence hypothesis states that poor economies will tend to catch up with and grow faster than rich ones, with all economies converging eventually in terms of per capita income.1 Low-income countries have the potential to grow faster than more developed, richer countries because they are not faced with as rapidly diminishing returns to capital accumulation as high-income and capital-intensive economies. In addition, poor economies can adopt and adapt the technologies, production methods and institutions that are characteristic of the leading, rich economies. Crucially, initial differences in income levels and/or capital stock only create a catch-up potential; exploiting this potential is another matter, and the exact conditions for doing so have remained controversial (Abramovitz 1986). A vast body of empirical research suggests that some periods exhibit stronger convergence forces than others, a finding replicated in Chapters 3 and 11 of this book on the long 19th century (weak convergence) and the state socialist period (strong convergence), respectively. Was the interwar period characterised by convergence or by divergence forces? Table 7.4 offers a preliminary answer by providing income levels and growth rates for four distinct European regions: (1) the six CESEE economies; (2) the Western

174  Matthias Morys

European core (as mentioned above, Belgium, Britain, France, Germany, the Netherlands and Switzerland); (3) the four Nordic countries (Denmark, Finland, Norway and Sweden); and (4) Southern Europe (Italy and Portugal). We exclude Spain from our analysis, as the GDP collapse due to the Spanish Civil War (1936– 1939) might otherwise bias our results against Southern Europe. This sample of 18 countries includes all European economies with reliable annual data except for Austria and Ireland, two small economies which escape our regional classification. Table  7.4 constructs per head income levels for each of the four European regions (first panel) by aggregating country-specific data on GDP (third panel) and on population (not shown) and dividing them. It also gives regional growth rates of GDP per capita (second panel) and of GDP (fourth panel) for 1913–1938, 1921–1938, 1921–1929 and 1929–1938. The columns of Table  7.4 list regions in descending order of regional per head income level, namely Western Europe, Northern Europe, Southern Europe and CESEE. In the case of the six CESEE economies, the unique experience of the Soviet Union suggests to provide data for Central Europe and South-East Europe on its own (column 5: five countries) and for the CESEE region as a whole (column 6: six countries). In parentheses we provide regional per head income levels relative to Western Europe. On balance, convergence forces dominated the interwar period. Northern Europe and CESEE reduced their income gap to the core between 1913 and 1938, while Southern Europe’s gap widened only marginally. GDP per capita growth in CESEE compared to Western Europe was higher by 0.6% p.a., shrinking the per head income gap from 35.5% in 1913 to 41.8% in 1938. In terms of GDP, CESEE grew twice as rapidly: 1.2% for the core vs. 2.4% for the CESEE-6. Given the late demographic transition in large parts of CESEE (cf. Chapter 10 for details), GDP growth is arguably the more relevant point of comparison. On this benchmark, the region grew more quickly not only over the full 1913–1938 period but also over each of the three sub-periods 1921–1938, 1921–1929 and 1929–1938. Results are not driven by the Soviet Union: the five Central and South-East European economies grew annually by a full percentage point more (1.2% vs. 2.2%), and they grew faster (or at the same speed) for any of the sub-periods. Were convergence forces of different magnitude in the various regions? The most basic variant of testing the (unconditional) convergence hypothesis involves regressing the GDP growth rate of a given period (1913–1938 in our case) on the initial income level at the start of the period (1913). Figure 7.1 shows the 18 observations of our sample and the implied regression line based on the following (statistically significant) regression result:

− 0.011 × Growth rate1913–1938 = 99.3 (in percent) (t-value: 6.48)  (t-value: −2.17) 

GDP per capita1913 (in 1990 USD)

Economic growth and structural change  175 TABLE 7.4 GDP per capita (levels and growth rates) and GDP (growth rates), 1913–1938,

Central, East and South-East Europe versus Western, Northern and Southern Europe Western Europe1

Northern Europe1

Southern Europe1

Central and South-East Europe1

Central, East and South-East Europe1

Belgium Britain France Germany Netherlands Switzerland

Denmark Finland Norway Sweden

Italy Portugal

Czechoslovakia Hungary

Czechoslovakia Hungary Soviet Union

Bulgaria Greece Yugoslavia

GDP per capita levels (in 1990 USD) In parentheses: levels relative to Western 1913 4,067 2,912 (71.6%) 1921 3,526 2,824 (80.1%) 1929 4,771 3,898 (81.7%) 1938 5,245 4,696 (89.5%)

Europe 2,366 (58.2%) 2,156 (61.2%) 2,860 (59.9%) 2,922 (55.7%)

Bulgaria Greece Yugoslavia

1,548 (38.1%) 1,567 (44.4%) 2,114 (44.3%) 2,221 (42.3%)

1,444 (35.5%) 761 (21.6%) 1,547 (32.4%) 2,165 (41.8%)

0.8 1.8 3.6 0.2

1.5 2.1 3.8 0.6

1.6 6.3 9.3 3.8

102,263 94,370 134,907 148,768

69,417 69,801 103,309 118,770

290,269 150,195 341,701 523,990

1.5 2.7 4.6 1.1

2.2 3.2 5.0 1.6

2.4 7.6 10.8 4.9

GDP per capita growth rates p.a. (in percent) 1913–1938 1921–1938 1921–1929 1929–1938

1.0 2.4 3.9 1.1

1.9 3.0 4.1 2.1

GDP levels (in millions 1990 USD) 1913 1921 1929 1938

690,790 575,370 818,141 940,194

40,992 42,508 61,779 78,263

GDP growth rates p.a. (in percent) 1913–1938 1921–1938 1921–1929 1929–1938

1.2 2.9 4.5 1.6

2.6 3.7 4.8 2.7

Source: Own calculations based on sources described in section 2 and Maddison (2009, 2013, 2018). Note: 1 Regional averages are weighted by population.

176  Matthias Morys

The inverse relationship between initial income and subsequent growth rate vindicates the convergence hypothesis: low-income economies were growing faster and catching up. The size of the slope means that for every USD (1990) 1,000 income difference in 1913, the richer economy is expected to grow by 11% less until 1938. With the exception of Italy, all peripheral countries converged on the core economies. Yet the size of this effect differed between countries and regions. The Nordic countries grew strongly, and in particular they grew more strongly than convergence forced would suggest (as indicated by their position above the regression line). By contrast, the Southern European economies grew less strongly than expected. Bulgaria, the Soviet Union, Hungary and Czechoslovakia all lie very close to the regression line. Please note that the Soviet Union appears hardly any different from the other three countries. Even though the country departed radically from conventional economic policy in the interwar period, the outcome in 1938 fits the standard pattern of European economic development and convergence. The overperformance of the 1928–1938 period compensated for the underperformance of the 15  years preceding it. The forced industrialisation policies of Stalin, then, returned the country to its long-run growth trajectory but failed to raise it above this threshold (in the same vein is Cheremukhin et al. 2017, albeit based on a very different methodology).

160.0% Gr

140.0%

GDP growth rates 1913–1938

120.0%

Fi

100.0%

Sw No

Bu SU

80.0% Po 60.0%

De Ne

Hu Cz

CH

Yu

Ge

It 40.0%

Fr

Be

UK

20.0% 0.0%

0

1000

2000

3000

4000

5000

6000

GDP per capita in 1913 FIGURE 7.1 

Beta-convergence of European economies, 1913–1938

Source: Own calculations based on data described in the main text. Note: Be: Belgium. Bu: Bulgaria. CH: Switzerland. Cz: Czechoslovakia. De: Denmark. Fi: Finland. Fr: France. Ge: Germany. Gr: Greece. Hu: Hungary. It: Italy. Ne: Netherlands. No: Norway. Po: Portugal. SU: Soviet Union. Sw: Sweden. UK: United Kingdom. Yu: Yugoslavia.

Economic growth and structural change  177

The interwar outliers were not the Soviet Union, but Yugoslavia (negative) and Greece (positive). We lack sufficient data on Yugoslav sectoral composition and industrial structure, and what is available often points in different directions. Some of this probably reflects the extreme heterogeneity of a country with strong regional differences (Nikolić 2018). The Greek exception is easier to explain, and understanding the sectoral transformation during the interwar period will be key in doing so. This is what we turn to now.

Sectoral transformation during the interwar period The previous section documented that the CESEE countries began to catch up with Western Europe during the interwar period. It also showed that economic growth in the early Soviet Union was not extraordinarily high, as some have claimed. Instead the country grew in line with what convergence forces would suggest given its 1913 income position. Yet the Soviet Union’s claim to fame does not necessarily rest on high growth rates. Apologists of Stalin’s forced industrialisation policies, such as Allen (2003), argue that such policies constituted the best or even the only means to achieve structural change and catapult the Soviet economy into the industrial age. In this perspective, backward countries can get trapped in a vicious cycle, in which they export agricultural goods and return industrial goods in turn but fail to develop an industrial sector of their own as a consequence. Their comparative advantage in agriculture allows them to grow and prosper in the short and medium term but prevents structural change and hence long-run growth. Government intervention can help escape such a sub-optimal equilibrium. Collectivisation of agriculture enables the necessary resource transfer from the countryside to the cities or, in the words of Allen (2003), from “farm to factory”; and the government can decide exactly what kind of industries they want to invest in. Some of this view is supported by the findings of Chapter  3 of this book, where Kopsidis and Schulze document “growth without structural change” for the CESEE economies for the 1870–1913 period, that is, a development path in which countries grow for extended periods of time without changing their economic structure. Did this pattern continue or change in the interwar period? Tables  7.5, 7.6 and 7.7 offer different yet related perspectives on structural change. Table  7.5 provides data on sectoral shares from 1900 to World War II. Table 7.6 shows annualised growth rates of the primary, secondary and tertiary sector (columns 2–4) and their relative contribution to overall GDP growth (columns 6–8). Comparing sector growth to average annual GDP growth (column 5) shows if a particular sector grew faster or slower than the aggregate economy. The relative contribution to growth is measured as each sector’s growth rate (the full growth rate and not its annualised fraction as reported in columns 2–4), weighted by its share in GDP at the beginning of the period. The three values obtained are then scaled up so that they add up to 100. The difference between columns 2–4 and 6–8 may be illustrated with reference to Bulgaria. For the 1911–1939 period, the secondary sector grew more strongly (3.23% p.a.) than the primary sector (2.42%), yet its impact on overall growth remained limited (16.7%) as a result of its small

178  Matthias Morys

share in 1911 (Table  7.5: 13.1%). Finally, Table  7.7 provides sectoral shares of the labour force. As labour productivity in agriculture was typically lower than in industry, labour shares put the continued importance of agriculture into sharper relief than sectoral shares. Hungary is a good case in point, where the primary sector declined to 31.9% of GDP by 1939 but it continued to employ 50.0% of the country’s workforce. Table 7.6 demonstrates the structural shift achieved by the Soviet economy. Before 1914, more than 40% of growth had come from agriculture (Chapter 3, Table 3.5). In the interwar period, more than 40% came from industry, and the contribution of agriculture fell to 13%. At the end of the second Five-Year Plan in 1937, the secondary sector overtook the primary sector by a small margin (32.3% vs. 31.0%). Yet the data presented in Tables 7.5 and 7.6 do not necessarily support the notion that structural change in the Soviet Union was contingent upon forced industrialisation policies. Drawing on similar data for the 1870–1913 period (Chapter 3, Tables  3.5 and 3.6) suggests that longer-term forces of structural change were operating independent of the prevailing political and economic system. Every two decades, the Russian/Soviet economy added approximately 6% in the secondary sector: 13.6% (1870), 20.1% (1890), 26.0% (1913) and 32.2% (1937). This steady increase reflected a secondary sector, which grew about 2% p.a. more quickly than the primary sector, with little difference between the pre-war and the post-war periods: 2.13% for 1870–1913 versus 2.43% for 1913–1940. The Soviet Union might have provided as efficient (or as inefficient, for that matter) an environment for economic growth as the late Tsarist economy. While Allen has emphasised the Soviet contributions to growth and structural change, the more recent literature has reverted to more conventional views highlighting allocative inefficiencies typically associated with command economies. Castañeda Dower and Markevich (2018) and Cheremukhin et al. (2017), for instance, find that the labour reallocation from agriculture to industry under Stalin did not lead to an efficient outcome and was inferior to what a market-based economic system would have generated. Cheremukhin et  al. (2017) make an even broader point. While acknowledging the structural transformation under Stalin, they find, based on a neoclassical growth model, that productivity advances of both the agricultural and the industrial sectors would have been higher in the absence of the frictions associated with a command economy. A sceptical perspective on Stalin’s supposed economic success story finds support in a comparison with Hungary. The country experienced even stronger structural change in the interwar period, yet remained within a conventional economic policy framework, that is, (relatively) liberal policies in the 1920s and a drift towards more interventionist but market-based policies in the 1930s. Hungary had a smaller secondary sector than Russia in the 1870–1913 period but then overtook the Soviet Union in the 1920s. By the outbreak of World War II, the secondary sector in both countries accounted for about 32% of GDP, higher than anywhere else in CESEE except for Czechoslovakia (35%). Hungarian secondary sector growth was similar to the Soviet Union (3.22% vs. 3.30%), and the relative contribution of the secondary sector to overall growth was even larger than in the Soviet case (47.1% vs. 40.4%).

Economic growth and structural change  179 TABLE 7.5  Sectoral shares in six CESEE countries, ca. 1900–1945 (in percent)

Russia / Soviet Union

1897–1901

1913

1921

1928

1937

1940

Primary sector

51.4

44.4

52.3

44.9

31.0

29.5

Secondary sector

21.0

26.0

14.7

26.2

32.2

32.8

Tertiary sector

27.6

29.7

33.0

29.0

36.8

37.7

Czechoslovakia

1913

1921

1928

1937

Primary sector

27.3

25.7

23.8

24.1

Secondary sector

31.4

29.9

37.4

35.2

Tertiary sector

41.3

44.4

38.8

40.7

Hungary

1900

1912

1928

1937

1939

Primary sector

47.2

51.0

40.1

33.9

31.9

Secondary sector

19.1

22.0

28.6

29.5

31.7

Tertiary sector

33.6

27.0

31.4

36.6

36.4

Bulgaria

1900

1911

1921

1928

1939

1945

Primary sector

56.5

56.7

51.8

52.9

52.1

42.9

Secondary sector

14.6

13.1

15.8

15.9

15.0

18.2

Tertiary sector

28.9

30.2

32.4

31.2

32.9

38.9

Greece

1913

1921

1929

1938

Primary sector

59.1

59.1

55.1

54.4

Secondary sector

19.4

19.4

24.9

25.8

Tertiary sector

21.5

21.5

20.0

19.8

Yugoslavia

1910

1931

1953

Primary sector

44

41

28

Secondary sector

21

27

46

Tertiary sector

35

32

26

Sources: Russia/Soviet Union: Gregory (1982) for 1883–1887; Markevich and Harrison (2011) for 1913, 1921 and 1928; Davies et al. (1994) for 1937 and 1940. Czechoslovakia: Pryor et al. (1971). Hungary: Eckstein (1955). Bulgaria: Ivanov (2012). Greece: Own calculations based on sources described in section 2. Yugoslavia: Vinski (1961).

Hungary and the Soviet Union both industrialised in the interwar period, but there was a fundamental difference: the Soviet Union invested in heavy industries whereas Hungary developed light industries. In the Soviet case, 56% of investment between 1929 and 1934 (the first Five-Year Plan) went to metals, machinery, construction materials, chemicals and fuels, compared to only 8% for light industries

180  Matthias Morys TABLE 7.6 Sector growth and relative contributions to GDP growth in six CESEE countries,

ca. 1913–1938 Sector growth (percent p.a.)

GDP (percent p.a.)

Contribution to growth (in percent; Σ = 100)

Primary

Secondary

Tertiary

0.87 0.40 1.90

3.30 0.38 8.65

3.32 0.17 9.03

2.41 0.20 5.08

13.0 54.9 11.6

40.4 30.2 40.6

46.6 15.0 47.8

1.17 2.30 4.96 0.27

2.18 3.76 9.57 -0.55

1.64 2.15 4.10 0.66

1.70 2.71 6.12 0.13

17.7 21.1 20.1 50.2

42.8 45.1 51.9 −156.5

39.5 33.8 27.9 206.2

0.07 0.05 0.11

3.22 3.24 3.18

2.96 2.53 3.60

1.83 1.56 2.22

1.6 1.4 1.8

47.1 51.8 43.2

51.3 46.8 54.9

2.42 4.38 5.06 3.96

3.23 4.05 4.84 3.55

3.04 4.44 4.18 4.60

2.73 4.35 4.74 4.10

48.0 52.4 55.8 50.7

16.7 14.3 16.2 13.4

35.3 33.3 28.1 36.0

3.21 2.63 2.56 2.69

4.74 4.87 6.74 3.24

3.21 2.63 5.84 −0.14

3.55 3.13 3.46 2.84

51.0 47.6 34.0 65.2

30.4 35.1 34.2 36.3

18.6 17.3 31.8 −1.5

0.46 1.12 −0.16

3.39 2.68 4.08

0.82 1.02 0.63

1.52 1.46 1.59

10.5 32.5 -3.4

73.3 43.9 91.9

16.2 23.5 11.5

Soviet Union 1913–1940 1913–1928 1928–1940 Czechoslovakia 1913–1937 1921–1937 1921–1928 1928–1937 Hungary 1912–1939 1912–1928 1928–1939 Bulgaria 1911–1939 1921–1939 1921–1928 1928–1939 Greece 1913–1938 1921–1938 1921–1929 1929–1938 Yugoslavia 1910–1953 1910–1931 1931–1953

Source: Own calculations based on GDP data of Table  7.1 (and described in section  2) and sectoral shares of Table 7.5.

Economic growth and structural change  181 TABLE 7.7 Sectoral shares in the labour force in six CESEE countries, ca. 1890–1950 (in

percent) Russia/Soviet Union Primary sector Secondary sector Tertiary sector

1890

1900

1913

19261

1939

77.4 8.9 13.7

73.8 11.4 14.8

70.0

73.0 8.9 10.1

57.8 21.8 20.4

Czechoslovakia

1913

1930

1950

Primary sector Secondary sector Tertiary sector

40.9 37.4 21.7

37.5 37.7 24.8

37.8 37.5 24.7

Hungary

1900

1910

1920

1930

1941

Primary sector Secondary sector Tertiary sector

59.4 16.8 23.8

55.8 19.4 24.8

58.2 18.1 23.7

54.2 21.7 24.1

50.0 23.2 26.8

Bulgaria

1890

1900

1910

1920

1930

Primary sector Secondary sector Tertiary sector

85.5 6.9 7.6

82.7 7.5 9.8

71.7 13.1 15.2

71.8 13.2 15.0

71.8 13.3 14.7

Greece

1910

1920

1930

1950

Primary sector Secondary sector Tertiary sector

49.3 16.1 34.6

58.7 17.4 23.9

56.6 18.8 24.6

51.3 20.7 28.0

Yugoslavia

1913

1930

1950

Primary sector Secondary sector Tertiary sector

82.2 11.0 6.7

79.7 11.2 9.0

66.9 18.2 14.9

Sources: Russia/Soviet Union: Chapter 3 of this book for 1890 and 1900 and Clark (1951: 420) for 1913, 1926 and 1939. Czechoslovakia: Buyst and Franaszek (2010: 210). Hungary: Eckstein (1955). Bulgaria: Chapter 3 of this book for 1890 and 1900 and Kopsidis and Ivanov (2017a) for 1910, 1920 and 1930. Greece: Kopsidis and Ivanov (2017a) for 1910, 1920 and 1930 and Buyst and Franaszek (2010: 210) for 1950. Yugoslavia: Buyst and Franaszek (2010: 210). Note: 1 Numbers do not add up to 100 due to the peculiarity of the underlying source material.

(Allen 2003: 95). By contrast, Hungary thrived on the light industries shunned by the Soviet Union. Agricultural processing (flour milling, distilling of alcohol, sugar refining, etc.) had been important since the late 19th century but expanded substantially after World War I (Klein et al. 2017: 70). The boom of the 1920s was largely propelled by the rapid development of the textile industry. The 1930s witnessed increased industrial activity in metal processing and engineering (partly related to

182  Matthias Morys

rearmament), two business activities typically taking place in large-scale company structures. Yet even by 1941, the majority of the secondary sector workforce worked in small-scale companies of fewer than 20 workers (Eckstein 1955: 176–185). These differences can be explained by the respective economic environments. Hungary continued its market-based growth model, responding to shifts inside and outside of the country. The country had not industrialised before World War I but instead developed a highly productive, capital-intensive agriculture (Schulze 2000, 2007). The emergence of a food-processing industry in the interwar period was a natural next step. Similarly, the production of textiles as a labour-intensive, low-skill and small-scale industry suited well the country’s economic conditions. The rise of this particular industry followed a general trend by which low value-added industries moved from the core to the periphery in the interwar period (Kopsidis 2012: 7). An underlying assumption of the Hungarian growth model was trade and capital market integration with the rest of the world. There was no perceived need to produce capitalintensive goods, as they would continue to be imported from Western Europe. The Soviet Union had a much greater incentive to move into large-scale industry. As a large country with a vast domestic market, Russia had always been one of the least open economies of Europe (cf. Table 5.2 in Chapter 5). The autarky policies pursued since the early 1920s followed less a coherent economic agenda than political needs. The Soviet leadership had considered some form of military confrontation as inevitable since the Allied Intervention in the Russian Civil War (Bushkovitch 2012: 371). Consequently, the Soviet Union needed to develop the full range of industries, including iron and steel, machine building and petroleum. Such considerations were not the only ones in the Soviet industrialisation debate between 1924 and 1928, but they were an important ingredient (Elrich 1960). The Soviet Union simply could not content itself with food processing and textile industries, which constituted the most important manufacturing activities in Hungary and all South-East European countries (Kopsidis & Ivanov 2017a). The Hungarian experience demonstrates that CESEE countries could industrialise within a conventional economic policy framework. In concession to the important arguments in favour of forced industrialisation advanced by Allen (2003), it is important to note that a conventional policy framework did not necessarily lead to industrialisation. Growth without structural change remained a distinct possibility. This experience is best exemplified by Bulgaria. The country underwent hardly any structural change between 1870 and 1939. The secondary sector accounted for 14.9% in 1870, 14.6% in 1900 and 15.0% in 1939. Consequently, the relative contribution of the secondary sector to overall growth was small and accounted consistently for less than 20%. Bulgaria grew in the interwar period by developing a more productive agricultural sector. The country moved away from extensification of agriculture (the pre-1914 pattern by which new land was put to agricultural use) to intensification (improving the productivity of a given plot of land). Given the relative poverty of the peasants and the delicate budget situation of the government, only very limited private and public funds were available to increase investment into agriculture (e.g., for the purpose of installing irrigation systems or building dams). Farming remained labour intensive, but an important process of “low-cost modernisation”

Economic growth and structural change  183

(Ivanov  & Tooze 2007, Kopsidis  & Ivanov 2017b) took place in which farmers increased agricultural productivity by, among others, improving seed varieties or using chemical fertilisers more widely. The result was impressive, as shown by primary sector growth of 4.4% p.a. for two decades. Agricultural modernisation was not limited to Bulgaria. The agricultural sector continued to grow in all CESEE economies and make a sizeable contribution to total GDP growth (Table 7.6, with the notable exception of Hungary). Even Stalin’s rapid industrialisation of 1928–1940 was accompanied – and made possible – by primary sector growth of 1.9% p.a. This finding is very different from earlier literature which had identified many of the region’s interwar economic problems in a stagnant agricultural sector (Berend 1985). Hungary and Bulgaria stand for two different growth models. Hungary saw hardly any growth of agriculture, but it moved decisively into small-scale industries. Bulgaria, incidentally, moved into the same small-scale industries. Food processing accounted for 47% and textiles and clothing for 29% of Bulgarian manufacturing output in 1938 (Kopsidis & Ivanov 2017). Yet Bulgaria’s secondary sector growth started from a small basis in the early 1920s and did not leave much impact on the aggregate level. The country grew instead by an intensification of its agricultural sector. We leave explaining the precise reasons for the two different trajectories for future research, but the broad pattern seems clear. In the interwar period, each country moved one step ahead on its development path. Bulgaria moved from an extensification of agriculture to an intensification. Hungary, which was richer and more developed in 1913 (cf. Chapter 3), moved from agriculture into industry. In both cases, the result was substantial GDP per capita increases. The dichotomy between Bulgaria and Hungary helps understand the case of Greece, the CESEE country with the best interwar growth performance (Figure 7.1). Before World War I, the country stood between Hungary and Bulgaria on many economic indicators (cf. Chapter 3). Its agriculture was less developed than Hungary’s, but it had a larger manufacturing sector than Bulgaria. In the interwar period, Greece combined the strengths of both models. It experienced “Bulgarian” agricultural growth and “Hungarian” industrial growth. Nowhere else in CESEE was the contribution of the primary and the secondary to overall growth as evenly balanced as in the case of Greece (Table 7.6).

Conclusions This chapter has reviewed economic growth and structural change of Central, East and South-East Europe in the interwar period. We began by sketching out the dominant view in the literature, a mostly skeptical assessment of economic growth in the region. This well-rehearsed narrative draws on similar accounts for Western Europe and the United States but fails to ask to what extent they can be applied to the Eastern European experience. The negative account emerged in the 1970s and 1980s and was strongly pushed by economic historians based in Eastern Europe and émigrés hailing from the region. It often served a specific purpose, that is to draw on the supposed failure of markets in the 1930s as a justification for the heavily interventionist policies of state socialism after World War II.

184  Matthias Morys

We then provided a more positive assessment of the interwar period, largely based on data for six CESEE economies for GDP, population, GDP per capita and indicators of structural change. Many of these data had not been available when the influential accounts of the 1970s and 1980s were written. The new data show the growth performance was considerably better than once thought. The CESEE economies not only grew more quickly in the interwar period than during the 1870–1913 globalisation period, but they also performed better than the Western European core economies. They grew twice as strongly (2.4% vs. 1.2%) between 1913 and 1938, allowing them to catch up (on a per capita basis) from 35.5% of Western European levels to 41.8% by the outbreak of World War II. CESEE remained the poorest region of Europe, but it had joined the European convergence club. The 1920s in particular showed strong growth, mainly concentrated in the second half of the decade. The earlier reconstruction efforts bore fruit and the region experienced its own version of the “Roaring Twenties.” We also reassessed the impact of the Great Depression. The GDP declines in the (still largely agricultural) CESEE economies were much smaller than for their Western European counterparts, and the recessions were typically short. The only exception was Czechoslovakia which, as the region’s most industralised economy, was heavily affected by the Great Depression. A common feature of all CESEE economies was strong recovery growth after the Great Depression, above 4% p.a. in all cases and typically lasting seven to eight years. The length and the strength of this post–Great Depression growth became a defining feature of the CESEE experience and explains why they converged on Western European income levels. Special attention was paid to the Sonderweg taken by the Soviet Union, the first country worldwide to develop the characteristic features of state socialism: central planning, collectivisation of agriculture and forced industrialisation focused on heavy industries. From a pure national accounting point of view, the new strategy worked well: no country in the region grew as rapidly as the Soviet Union after 1928, when Stalin terminated the market-friendly New Economic Policy and launched a first Five-Year Plan. In a longer-term perspective, however, a great deal of the overperformance between 1928 and 1938 was owed to the underperformance of the 1913–1928 period when the economy had hardly grown at all. A pan-European convergence framework showed that the Soviet Union in 1938 stood, in terms of per head income, almost exactly where convergence forces would suggest. We then tested the second line of defense of the apologists of Stalin’s forced industrialisation policies: was the Soviet approach better at achieving structural change and catapulting the economy into the industrial age? Structural change progressed unevenly in Central Europe and South-East Europe in the interwar period. Bulgaria, for instance, grew rapidly by increasing agricultural productivity. The country also industrialised to a certain extent, specialising in food production and textiles as so many other countries in the region. Yet as a share of GDP, the secondary sector hardly grew and remained below 20%. Further to the west and with better access to Western Europe, the experience was different. Hungary, for instance, saw a structural shift out of agriculture and into industry larger than the Soviet Union. The main difference between the two countries was not the degree of structural change

Economic growth and structural change  185

but which particular industries they developed. Hungary developed light industries in the 1920s and only the 1930s saw a larger move into metal processing and machinery built around large-scale industries. The Soviet Union, under government fiat (and force) and partly driven by a perceived need for national defense, was able to largely bypass the light-industries stage and move immediately into heavy industries such as iron and steel production, chemicals and petroleum. The data available for the six countries covered in this chapter suggest that there were essentially three distinct growth models: (1) a “South-East European” growth model epitomised by Bulgaria, where rapid growth stemmed from improving agriculture; (2) a growth model typical of the more advanced Central European economies and exemplified by Hungary, a country which experienced substantial structural change, initially focused on low-skill, labour-intensive light industries and only later venturing into heavy industry; and (3) the Soviet Union, with forced structural change geared towards heavy industries. Only future research can show if this typology is also helpful in explaining the Polish and the Romanian experiences and the smaller (yet no less interesting) cases of Albania and the Baltic countries.

Note 1 In its “unconditional” or “absolute” form, the convergence hypothesis implies that income per capita differentials between economies will disappear in the long run. The “conditional” convergence hypothesis, on the other hand, also takes account of economies’ different structural characteristics (and not just initial income differentials). Here the implication is that an economy’s income per capita (or per worker) converges to a longrun level that is specific to this economy and determined by its structural features.

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eds., The Spread of Modern Industry to the Periphery since 1871. Oxford: Oxford University Press, pp. 63–90. Klesment, M. (2010). Fertility Development in Estonia during the Second Half of the 20th Century. The Economic Context and Its Implications. PhD dissertation, Tallinn University. Kopsidis, M. (2012). Missed opportunity or inevitable failure? The search for industrialization in Southeast Europe 1870–1940. European Historical Economics Society Working Papers in Economic History 19. http://ehes.org/working_papers.html Kopsidis, M. and Ivanov, M. (2017a). Industrialization and de-industrialization in Southeast Europe, 1870–2010. In K. H. O’Rourke and J. G. Williamson, eds., The Spread of Modern Industry to the Periphery since 1871. Oxford: Oxford University Press, pp. 91–114. ———. (2017b). Was Gerschenkron right? Bulgarian agricultural growth during the interwar period in light of modern development economics. Südost-Forschungen 74: 44–72. Kostelenos, G. (1995). Money and Output in Modern Greece: 1858–1938. Athens: Centre of Planning and Economic Research. Kostelenos, G., Vsiliou, D., Kounaris, E., Petmezas, S. and Sfakianakis, M. (2007). Gross Domestic Product, 1830–1939. Athens: Centre of Planning and Economic Research. Lampe, J. R. and Jackson, M. R. (1982). Balkan Economic History, 1550–1950. Bloomington: Indiana University Press. Maddison, A. (2009). Historical Statistics of the World Economy. 1–2008 AD. ———. The World Economy. Vol. 1: A Millennial Perspective. Vol. 2: Historical Statistics. Paris: OECD Development Centre Studies, 2006. Maddison Project Database (2018). https://www.ggdc.net/maddison ———. (2013). https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/ maddison-project-database-2013 Markevich, A. and Harrison, M. (2011). Great war, civil war, and recovery: Russia’s national income, 1913 to 1928. Journal of Economic History 71: 672–703. Mazower, M. (1991). Greece and the Interwar Economic Crisis. Oxford: Clarendon. Mitchell, B.  R. (2007). International Historical Statistics. 6th ed. Basingstoke: Palgrave Macmillan. Moorsteen, R. and Powell, R. P. (1966). The Soviet Capital Stock, 1928–1962. Homewood, IL: Richard D. Irwin. Morys, M. and Ivanov, M. (2015). The emergence of a European region: Business cycles in South-East Europe from political independence to World War II. European Review of Economic History 19: 382–411. Nikolić, S. (2018). Determinants of industrial location: Kingdom of Yugoslavia in the interwar period. European Review of Economic History 22(1): 101–133. Pryor, F. L., Pryor, Z. P. and Stadnik, M. (1971). Czechoslovak aggregate production in the interwar period. Review of Income and Wealth 21, 35–59. Rothenbacher, F. (2013). The Central and East European Population since 1850. Basingstoke: Elgar. ———. (2002). The European Population 1850–1945. Basingstoke: Elgar. Schulze, M. S. (2007). Origins of catch-up failure: Comparative productivity growth in the Habsburg Empire, 1870–1910. European Review of Economic History 11(2): 189–218. ———. (2000). Patterns of growth and stagnation in the late nineteenth century Habsburg economy. European Review of Economic History 4(3): 311–340. Turnock, D. (1986). The Romanian Economy in the Twentieth Century. London: Croom Helm. Valge, J. (2003). On the Threshold of a New Economy: Estonia’s GDP 1923–1938 (in Estonian). Vinski, I. (1961). National product and fixed assets in the territory of Yugoslavia 1909–1959. Review of Income and Wealth 9: 206–233.

8 ECONOMIC POLICY, 1918–1939 Nathan Marcus, Stefan Nikolić and Tobias Straumann

Introduction Due to a number of extreme common shocks, the interwar years were challenging for all European countries. But the economic policies varied greatly, depending on economic factors as well as political and cultural traditions. To understand the specific experiences of Eastern European countries, one has to take three characteristics into account. First, with the exception of Austria and Czechoslovakia, the CESEE countries were much poorer and more agrarian than Western Europe. Thus the question of how to modernise the economy was much more salient for the East than for the West and, with the exception of the Soviet Union, involved the import of capital denominated in gold and foreign currencies, which created additional constraints. Second, nearly all CESEE countries were newly formed, enlarged, or curtailed after the First World War, while most Western European countries had been consolidated within their national borders for a longer period of time. CESEE countries were thus forced to direct great efforts towards forming a stable national economy and society and coping with population exchanges and minority issues. Third, nearly all CESEE countries shifted from liberal democracies to authoritarian regimes. In one country, Russia, the period even witnessed the emergence of a totalitarian state, with terror and mass murder being an integral part of the industrialisation strategy. Given the specific conditions, the economic policies of the CESEE countries were geared towards building institutions, modernising the economy, and mitigating economic and political vulnerabilities. With the exception of the Soviet Union, they went through four phases between 1918 and 1939. In the immediate aftermath of the First World War, governments focused on relief and reconstruction, that is on reorganising trade relations, setting up a taxation system and a central bank, reducing inflation and stabilising the currency, bringing fiscal deficits

Economic policy, 1918–1939  189

under control, integrating former alien goods, and in some cases, implementing agrarian reforms. In the second half of the 1920s CESEE countries focussed on fostering growth by importing foreign capital and imposing protectionist measures. During the height of the Great Depression, lasting from 1929 to 1932, nearly all of them introduced capital controls and turned their current account deficit into a surplus by raising import tariffs, subsidizing exports, and reducing their burden of foreign debt service; Greece also devalued its currency. Only one country, Poland, maintained the gold standard until 1936. In the second half of the 1930s, the last phase, the CESEE countries intensified their protectionist policies, pursued a more expansionary fiscal policy, and experimented with state-led industrialization. As mentioned, the trend towards more interventionist policies between 1918 and 1939 was accompanied by a regime shift. One country after another installed some sort of authoritarian government, not least due to the difficult economic circumstances during the interwar years: Bulgaria, Hungary, Lithuania, Poland, and Yugoslavia in the 1920s; Austria, Estonia, Latvia, Greece, and Romania in the 1930s. Only Czechoslovakia remained a democracy throughout the whole period.1 There was also an intellectual shift. In the beginning of the interwar years, most CESEE countries followed the intellectual tradition linked to the writings of the German economist Friedrich List (1789–1846). His main argument was that backwardness required protection, especially in foreign trade. In the 1930s, they went beyond the Listian approach by opting for the nationalisation of monetary policy, capital controls, clearing and trade agreements, and programs of stateled industrialisation.2 They also established a form of corporatism that echoed the model of fascist Italy. Employers and workers were forced to become members of associations and unions that were controlled by the state. Yet, though moving towards comprehensive state intervention, the economic policies of the CESEE countries were still of a fundamentally different character than the experiment of the Russian Bolsheviks. After gaining power in the October Revolution of 1917, they embarked on a program of nearly total control of the economy. At the end of the 1920s, they nationalised all sectors of the economy, directed growth according to five-year plans, and decoupled the economy from the world, whereas all other Eastern European countries continued to allow for market forces, though strongly regulating them.3 The remainder of the chapter will spell out the common challenges and the different policies in more detail. In the first two sections, we describe and explain the economic policies adopted by the Eastern European countries in the 1920s and the 1930s. Thereafter, we deal with the Soviet experience. The chapter ends with a short conclusion.

Reconstruction and stabilisation (1918–1929) The end of the First World War profoundly reshaped the political and economic map of Central and South-Eastern Europe. First, the Peace Treaties dismembered the Austro-Hungarian Empire and created five new states in its stead: Poland,

190  Nathan Marcus et al.

Austria, Czechoslovakia, Hungary, and the Kingdom of Serbs, Croats and Slovenes (later Yugoslavia). Second, the three Baltic republics (Latvia, Estonia, and Lithuania) were brought into existence. These new countries joined those already present in the region: Romania (which doubled in size), Bulgaria (which lost territory on all its borders), Albania (which was almost redone from scratch) and Greece (which traded territory and populations with Bulgaria and Turkey). Seeking to obtain a lasting peace, the victors not only forged new nation-states, but also brought to life the League of Nations, a multilateral body charged “to promote international cooperation and to achieve international peace and security.”4 Despite US isolationism, the League successfully mediated several territorial disputes during the 1920s but remained helpless as armed conflicts increased and member states deserted the organisation in the 1930s. The League considered economic prosperity a condition for peace and became engaged in the economic stabilisation of Eastern Europe right after the War.5 The First World War had left all the world’s economies in disarray and exceptional destruction and loss of life across Central and South-Eastern Europe. Food shortages and the Allied blockade had caused starvation and, after the armistice, dying from malnutrition or epidemics continued. Bridges and railway lines lay broken or destroyed, factories had been run without attention to wear or renewal of machinery, and the countryside had been depleted of livestock. Pre-war patterns of trade were disrupted, and industrial and agricultural production kept falling, necessitating the import of food and capital stock. The new nation-states in Central and South-Eastern Europe, aiming for economic independence, had to grapple with transitioning production from wartime to a peace economy and with changes stemming from the reordering of populations and the new national borders that cut across trading and transportation routes. Industrialization and modernization were key, but lacking a solid tax base and the political will and administrative tools for direct taxation, the new governments would seek to borrow abroad to finance such large expenditures. In dire need of foreign capital to pay for repairs, new machinery, and foreign goods, their first aim was to stabilize their economies and new currencies.6 An early policy commonly adopted across the region, ostensibly to deal with economic challenges, were agricultural reforms. Many rural areas were dominated by large estates, often owned by members of national minorities, which were now confiscated, fragmented, and sold to small farmers. Motivated by fears of a Bolshevik revolution, they were primarily aimed at creating national cohesion and loyalty among peasant citizens of the new states (and thus rarely allocated land to national minorities).7 Estonia and Latvia, where almost half the land was owned by a small number of Baltic German aristocrats, implemented the most wide-reaching reforms. Greece used them to settle about half a million refugee farmers in its new provinces. Czech and Yugoslav dispossessions also followed ethnic lines but affected only about one-tenth of landed property, and the restructuring of agricultural ownership in Hungary, Poland, Bulgaria and Albania remained relatively minor as well.8 A more efficient agricultural sector might have helped provide the

Economic policy, 1918–1939  191

economic surplus to pay for vital imports and investments, but overwhelmingly, agricultural reforms, even when they extended the amount of cultivated area, contributed little to the mechanization and modernization of farming.9 Generally, the populist reforms tended to diminish agricultural productivity, partly because they questioned future property rights. An international conference, held under League auspices in Brussels in the fall of 1920, charged financial experts, officials, and bankers to develop other ideas to bring about economic recovery. Across Europe, many governments still relied on inflation to finance expenditures. Subsequent currency depreciation made importing necessary raw materials, food, and new machinery difficult. Further, while inflation reduced much domestic debt, it also destroyed savings and made internal borrowing impossible. The conference pronounced three interlinked policy principles to stabilise currencies, end inflation, and benefit international trade and lending: national budgets had to be balanced and ordinary expenditures covered through taxation; inflation had to cease so that countries could return to the gold standard; and central banks had to be independent from national governments to uphold fixed exchange rates. The conference also evoked a declaration by the Allied Supreme Council from March that year, calling for the unhindered free flow of goods but with all its expertise devoted to monetary matters, it made no specific pronouncement on trade.10 More than anywhere else in the world, it was in the capital-poor countries of Central and South-Eastern Europe that the League of Nations put Brussels’ three principles into practice, helping countries issue loans on foreign capital markets in return. In need of foreign capital, Central and South-Eastern European states adopted the three Brussels principles at the Genoa Conference of April 1922, but achieving currency stability proved easier than balancing state budgets (Table 8.1).11 The League of Nations helped stabilise the currencies of many economies in the region, providing technical advice and facilitating the issue of foreign loans.12 Albania welcomed a League of Nations financial advisor in 1923, but ended cooperation after a central bank was founded and public finances were reformed.13 Loftier and more enduring economic interventions took place in Austria and Hungary that same year, where large budget deficits had translated into hyperinflation. The League insisted on balancing the budget and stabilising currencies, helping to float foreign loans for both countries in return. At the same time it became active in Greece, too, where following the 1923 Treaty of Lausanne 1.3 million refugees (about 25% of the existing population) needed to be resettled. The League helped Greece obtain a loan in 1924 and issue another in 1928, after the country pledged to balance a reduced budget and charged its reformed central bank to oversee currency stability. Estonia turned to the League in 1924, issuing a foreign loan in 1927 after it, too, had founded a national bank conforming to the Brussels recommendations. The League of Nations further helped issue a loan for Bulgaria in 1927 to assist in resettling its quarter million refugees, and a second in 1928, to strengthen Bulgarian currency stability, help it lower expenditures and balance the national budget.14

192  Nathan Marcus et al. TABLE 8.1  Post-war currency stabilisations (year) and their value in percent of 1914 in

Central, East and South-East Europe Country

Year

%

Latvia Lithuania Austria Czechoslovakia Bulgaria Estonia Hungary Yugoslavia Poland Romania Greece

1921 1922 1922 1923 1924 1924 1924 1925 1926 1927 1928

0.8 – 0.00007 15.6 3.8 1.1 0.00007 9.1 0.000026 3.0 6.7

Sources: Rudolf Nötel, “International Credit and Finance” in M.C. Kaser and E.A. Radice, The Economic History of Eastern Europe 1919–1975, vol. II (Oxford: Clarendon Press, 1986), pp. 287–95. Derek H. Aldcroft, Europe’s Third World: The European Periphery in the Interwar Years (Aldershot: Ashgate, 2006), Table, 3.1, p. 45. The Course and Control of Inflation (Geneva: League of Nations, 1946), pp. 92–3. C. H. Feinstein, P. Temin and G. Toniolo: “International Economic Organization: Banking, Finance, and Trade in Europe between the Wars” in Charles H. Feinstein (ed.), Banking, Finance, and Trade in Europe between the Wars (Oxford: Clarendon, 1995), Table 1.2, p. 24.

Other countries, some wary of the League’s stringent conditions, managed to issue foreign loans and stabilise their currencies without its help. But they too ascribed primary importance to balanced budgets, independent central banks, and stable exchange rates. In 1922, the Czech government and Prague Municipality both issued a foreign loan with tranches in US dollars and pound sterling, giving Czechoslovakia a stable currency by 1923. Bulgaria successfully used foreignexchange restrictions to introduce a stable paper currency in 1924, but in both countries budgetary deficits continued throughout the 1920s.15 Yugoslavia achieved currency stability by mid-1925 through foreign exchange interventions, after floating a US dollar loan in New York in 1922 and French franc loan in Paris in 1924, maintaining budget equilibrium thereafter. Poland founded an independent central bank in 1924, issued an Italian lire loan that year and a US dollar loan the year after, but only achieved currency stabilisation and a balanced budget by autumn 1926. Latvia and Lithuania both established central banks in 1922, introducing new stable currencies after putting their budgets in order and accumulating foreign reserves, though they ran budget deficits towards the end of the decade. Political instability in Romania and Greece postponed stabilization of their currencies to 1927 and 1928, respectively.16 The Greek government, ostensibly keeping a sound budget, engaged in opaque accounting practices that concealed expenditures, but in Romania, Austria, and Hungary, budgets were balanced by the mid-1920s and remained so thereafter. Stable exchange rates encouraged foreign borrowing and cross-border trade and helped economic production, but Czechoslovakia was the only country that managed to attain a net-creditor position through its exports.

Economic policy, 1918–1939  193

The adoption of the Brussels principles in Central, Eastern and South-Eastern Europe, balanced budgets and independent central banks, largely ensured currency exchange-rate stability across the entire region during the second half of the 1920s.17 Generally, foreign lenders and investors looked for balanced budgets and stable currencies when assessing a country’s creditworthiness.18 Reassured by successful currency stabilisations, large sums of foreign capital flowed to the region, largely from the United States and the United Kingdom, but also from France and other European countries. Roughly USD 1.3 billion poured into Eastern European states and enterprises during the 1920s, mainly as fixed-interest loans or short-term credits, but also in the form of investments and acquisitions. The sums necessary to service these foreign debts, both public and private, rose starkly from 1924 to 1929 and negatively impacted countries’ balance of payments, posing difficult challenges for central banks aiming at upholding a currency peg (Table 8.2).19 Austria and Hungary acquired the heaviest foreign debt burden per capita. The Balkan states borrowed less in absolute terms, but still considerably in relation to the size of their economies, and so their foreign debt service requirements were substantial in light of their limited capacity to earn foreign exchange.20 Especially Hungary, Poland, and Romania borrowed quite large sums in relation to their economies, too. Thus in 1928, the year foreign borrowing peaked, debt servicing as a percentage of export earnings stood at 17.9% in Hungary, 11.3% in Poland, 14.6% in Romania, and above 30% in Greece.21 For these agricultural exporters, the general decline of crop prices during the second half of the 1920s would prove especially damaging, and Greece in particular faced constant balance-of-payment problems, despite its large remittances from nationals living overseas.22 The Baltic states, redirecting their trade towards Germany and Britain, achieved manageable TABLE 8.2  Annual foreign debt service requirements in 1924 and 1930

1924

1930

1924–1930

Million per capita in percent of Million per capita in percent of per capita rise USD exports USD exports Austria Hungary Czechoslovakia Poland Bulgaria Romania Yugoslavia*

5.5 3.9 14.8 12.4 3.6 18.9 15.9

0.70 0.45 1.00 0.38 0.60 1.02 1.15

1.97% 3.33% 2.94% 5.1% 10.06% 13.62% 13.02%

39.9 35.2 19.6 53.9 8.3 32.8 23.3

5.07 4.05 1.33 1.67 1.39 1.77 1.76

15.05% 22.11% 3.79% 19.78% 18.62% 13.59% 19.53

625.45% 802.56% 32.43% 334.68% 130.56% 73.54% 65.34%

Source: Royall Tyler, The League of Nations Reconstruction Schemes in the Inter-War Period (League of Nations: Geneva, 1945), p. 157. Includes interest, and yield on securities and other investments, and in some cases also amortisation. Per capita figures for 1930 based on 1924 population sizes, too. * Figures for Yugoslavia refer to 1926 instead of 1924 and are taken from Iancu Spigler, “Public Finance” in M.C. Kaser and E.A. Radice, The Economic History of Eastern Europe 1919–1975, vol. II (Oxford: Clarendon Press, 1986), pp. 287–95.

194  Nathan Marcus et al. TABLE 8.3 Balance of payments of Central, East and South-East European countries, 1922–1930:

net inward (-) or outward (+) capital movement, measured by estimated deficits or surpluses on account of goods, services and gold in millions of USD CZ 1922 1923 1924 1925 1926 1927 1928 1929 1930

HU

PL

−14 −26 −13 −26 −89 −91 −38

+20 −43 −126 +91 −82 −124 −68 −3

BU

RO

YU

GR

EST

LAT

+2 −2 −2 −2

+8 +3 −6 −6 −5 +4 +1 −5 +1

−8

+15 +57 +58 +56 +22 +42

−2 −7 −7 −4 −7 −21 −1

−22 −49 −46 −113

+19 −8 −23 −27 +13 −35

−45 −34

LIT

+9 +1 +3 +1 −1 +5

Source: International capital movements during the inter-war period (United Nations, Dept. of Economic Affairs: Lake Success, NY, 1949), pp. 11–2.

current accounts. The situation turned worse after the US Federal Reserve raised interest rates and the 1929 crash on Wall Street dried up foreign liquidity. Apart from the Baltic states and Czechoslovakia, all the other countries faced a negative balance of payments and sudden transfer problem as the 1920s came to an end (Table 8.3).23 Balance-of-payment deficits and expanding money supply at a time when international capital markets were less prone to lend created a toxic concoction. The inevitable outflow of foreign currency had to eventually show up in central bank balance sheets, undermining public confidence in currency stability. Earning foreign currency from exports offered an alternative to foreign borrowing, and foreign trade had expanded across the region in the 1920s, but less than in some Western European countries.24 The potential for growing trade between Bulgaria, Romania, and Yugoslavia seemed favourable in the 1920s as old trade relations persisted and bilateral trade flows between Austria, Czechoslovakia, and Hungary remained high.25 However, in per capita terms, they never reached pre-war levels and the share of agricultural exports declined everywhere.26 Generally, there occurred a redirection of Eastern European trade during the late 1920s towards Western Europe and the rest of the world, but regional trade still remained important.27 Table 8.4 provides insights into these changing relations but gives no information about absolute importance.28 Among Wilson’s Fourteen Points had been the call for a “removal . . . of all economic barriers and the establishment of equality of trade conditions” all around the world, but instead most new states followed national policies of autarky, aimed at becoming industrially independent. In general, they heavily taxed the import of industrial products to help the development of their own producers.29 Despite the potential growth of cross-border trade, trade deficits remained quite large, with the exception of Czechoslovakia and perhaps Estonia. The situation was particularly precarious in Hungary and Greece, where in 1928 imports by far outweighed

Economic policy, 1918–1939  195 TABLE 8.4  Change of reported imports from 1926 to 1929, in percent

IMPORTING FROM

IMPORTING COUNTRY

AU AL BU CZ GR HU PL RO YU EST LAT LIT GER AU AL BU CZ GR HU PL RO YU EST LAT LIT GER IT

  315 −40 −14 100   −34 −11   30 53   −14   −27 −29 38     36 7 −29   1017 58 −3   0 67 −6 0 −55 −12         34     30       41 69   42   −4 −11 −14 −24

    −66   −22 12 4850 −14 112 633   −48 78 44 133 −22             59 7    

17   42 5   20 −38 137   224   −21 185

20 −1     181   38 80   28 −29   18 98   38 86   −27 −5   −13   −41                   322 −27 3 −46 7  

−64   49           28 100 248       25       83   6     62     46     29 −11 29 −19 7 79 62   −99  

IT −25 9 −14 100   103 −24 −51 −1601     191  

Source: Katherine Barbieri and Omar Keshk. 2012. Correlates of War Project Trade Data Set Codebook, Version 3.0. Online: http://correlatesofwar.org. See: Katherine Barbieri and Omar M. G. Keshk, and Brian Pollins. 2009. “TRADING DATA: Evaluating our Assumptions and Coding Rules” in Conflict Management and Peace Science, vol. 26/5, pp. 471–91. Note: The pairs AU/GR, GR/AU, IT/HU and GR/IT produced conflicting data and were left empty. Other pairs left empty had no available data.

exports (in Austria a similar position was partially remedied through invisible exports from tourism and services).30 But although protectionist tariff policies were cited as the culprit for a disappointing return of regional trade, the extent of protectionist measures differed considerably between states.31 In 1927, potential tariffs of Hungary (29.9%), Austria (17.5%), Czechoslovakia (31.3%), and Yugoslavia (32.1%), were considered somewhat reasonable, while in Poland (53.5%), Romania (42.4%), and Bulgaria (67.5%) they were highly protective given that the average for Western and Northern Europe was 25.1%.32 Bulgaria, which exported tobacco, for instance considerably raised custom duties in 1924 to protect home industries, while in 1928 it extended the duty-free import for raw materials and equipment needed by domestic producers. Romania, a wheat exporter, similarly increased import duties most considerably in 1924 and 1927 to benefit its agricultural sector and nascent industries. Poland, which subsidised its coal and agrarian exporters, increased customs tariffs in 1924 and 1928, and Yugoslavia, which predominately exported cereals, fostered domestic production through waiving import duties on coal and certain industrial equipment. Greece protected its wheat growers and nascent industries like soap manufacturing

196  Nathan Marcus et al.

with tariffs, too. On the other hand, Czechoslovakia, an exporter of manufactured goods, exempted the import of machinery from customs duties in 1925 and though new customs moderately protected agrarians, its tariffs were not generally raised after 1922. Hungary, which had built up a manufacturing industry and launched new import substituting enterprises in chemicals, paper, and textiles, mainly exported wheat, flower, sugar, and meat. Due to the League’s intervention program, both Hungary and Austria, the latter an exporter of manufactured goods, had abandoned all trade restrictions and their tariffs did not provide any preferential support for industries.33 Apart from protectionist customs, states relied on tax policy to support economic development, and because direct taxation in most states was politically not practical, balanced budgets relied heavily on tariffs and other indirect taxation. Levels of taxation were relatively high for the time and in many states designed to create and support industrial production, which hurt foreign trade.34 More specifically, Bulgaria granted tax benefits to domestic firms and industries, further offering them reduced transport charges and preferential treatment in public contracts. Hungary similarly granted tax exemptions to facilitate domestic construction and the establishment of new factories, while offering cheaper railway rates to local producers. Czechoslovakia applied tax breaks for enterprises deemed nationally important or purchasing new industrial equipment, while Romania granted low rail charges and certain tax exemptions to non-Jewish Romanians and enterprises using domestic produce. In the Baltic states, all three governments adopted policies to promote agricultural production. In Yugoslavia, the state itself founded several industrial enterprises, providing help to others in form of subsidies, grants, tax exemptions, or freight reductions.35 Geared towards autarky and fostering home production, high tariffs and protectionist taxation harmed national economies by reducing the profitability of cross-country trade. An obvious remedy to the countries’ balance-of-payment deficits would have been the expansion of exports, but League assistance addressed only budgets and currencies and its talks to facilitate economic collaboration were unsuccessful. After discussing their economic situation at a conference in PortoRosa (today Portorož) in 1921, Central European states failed to ratify a trade agreement.36 The League’s Council repeatedly called for normalizing international trade and commissioned several studies stressing the danger of autarkic policies in the Danubian region, but without effect.37 The League’s ultimate push for an international agreement to abolish trade restrictions and non-tariff barriers during the Geneva Economic Conference of 1927 faltered because not enough states ratified the agreement. In the words of Otto Niemeyer, the influential British member of the League’s Financial Committee, failure to enforce free cross-border trade was the “Achilles’ heel” of League interventions in the region and the League representative to Hungary would later term it as “perhaps the most powerful, of the reasons that caused the breakdown of the 1919–1920 Settlement in Central and South-Eastern Europe.”38

Economic policy, 1918–1939  197 TABLE 8.5  Trade deficit in percent of exports, 1919–1929

AL

AU

BU

CZ

1919 −650 −93 −75 −6 1920 −1066 29 −35 15 1921 −813 −88 −6 20 1922 −305 −52 31 31 1923 −188 −71 −19 22 1924 −67 −83 3 7 1925 −27 −55 −17 6 1926 −109 −62 −11 14 1927 −113 −51 8 11 1928 −160 −47 −13 9 1929 −170 −49 −30 2

GR

HU

PL

RO

YU

EST LAT

LIT

−99 6   −33       25 −221 −154 −25 −102 −162 −14 −92 −31 −82 −105 −28 −93 −68 −98 −139 −65 −24 −63 −29 12 −75 −16 −7 1 −137 −23 7 21 −1 −63 −16 −1439 −146 −22 −17 7 14 −4 −51 23 −128 −5 −26 −4 2 0 −56 −4 −84 −9 31 3 2 1 −53 5 −109 −43 −15 11 −14 9 −13 −8 −98 −45 −34 −17 −22 −3 −18 −13 −90 3 −11 −2 4 −5 −40 7

Source: Katherine Barbieri and Omar Keshk. 2012. Correlates of War Project Trade Data Set Codebook, Version 3.0. Online: http://correlatesofwar.org. See: Katherine Barbieri and Omar M. G. Keshk, and Brian Pollins. 2009. “TRADING DATA: Evaluating our Assumptions and Coding Rules” in Conflict Management and Peace Science, vol. 26/5, pp. 471–91.

The hurdles economic nationalism posed through protectionist taxation and high tariffs were serious and prevented cross-border trade from reaching pre-war levels in the 1920s.39 But trade did not stop and economic performance throughout the region improved during the second half of the decade.40 The largely agricultural economies were geared towards exporting primary products to pay for the import of machinery and capital goods, but tax subsidies and tariff protection exacerbated their lack of competitiveness. The more industrialised nations fought to find new foreign markets for their semi-finished and finished products in order to buy raw materials and pay for the importation of food and consumer goods. All countries needed to stimulate exports to earn the foreign exchange necessary for servicing foreign debt, but most state-driven infrastructure projects to modernize national railways, ports or invest in hydro-electricity showed little effect. Infrastructural development was costly and piecemeal, and while the share of industrial employment rose consistently across the region, it did so only slowly, and mainly in the cities.41 While the Baltic states had a largely stable balance of payments, the other countries of Central Europe, with the exception of Czechoslovakia, steered towards a potential transfer problem. Widespread trade deficits certainly spelled the potential for crisis and pointed to its possible remedy (Table 8.5). But despite the guiding hand of the League of Nations, the already sluggish pace of trade liberalisation was bogged down by national jealousies. As one historian put it, national “politicians’ inability to take a broad view of the economic situation . . . their failure to understand the crucial importance of multinational initiatives” doomed the interwar settlement in Eastern Europe.42 Thus on the eve of the Great Depression the outlook was not entirely bleak, but Europe’s periphery remained economically weak, and

198  Nathan Marcus et al.

financially dependent on the West. As long as its countries ascribed to the goldstandard orthodoxies prescribed by the Brussels conference and preached by the League of Nations, they could not prosper without a continued recourse to foreign loans or a better access to (regional) export markets.

Depression and recovery (1929–1939) The Great Depression profoundly altered the conditions under which CESEE countries had to conduct economic policies. Some have argued that 1931 marks “the definite turn to state intervention” (Ránki and Tomaszewski 1986, p. 22). Yet economic policies in CESEE were driven by necessity rather than choice. Foreign indebtedness limited monetary policy options and the loss of foreign reserves left the introduction of exchange controls as the only viable option for most CESEE countries if they were to keep honouring their foreign debt. Continuous scarcity of foreign exchange restricted international trade to operate mainly on a clearing basis. Fiscal policy space was limited and further diminished by the weak state of agriculture and industry that required government subsidies. Increased government intervention in CESEE – taking control of foreign exchange, strong regulation of international trade including import substitution policies, price controls, and cartelization – leads to a conclusion that economic policy of CESEE mainly differed from that of Western Europe during the 1930s. Still governments across CESEE influenced economic activity within a market economy and remained relatively open to the international economy. This contrasted with the policies of nationalization and autarky pursued by the Soviet Union. Table 8.6 charts the depression and recovery in CESEE and rest of Europe during the interwar based on GDP per capita estimates. Column 1 reports the predepression peak year and column 2 the trough year. The Great Depression arrived in most Central, East and South-East European (CESEE) countries in 1929. The duration of economic downturn varied. The downturn lasted from two years in Greece to six years in Czechoslovakia. Column 3 reports the amplitude (i.e. the peak to trough decline) of GDP per capita. From 1929 to 1933, Poland lost a quarter of its income per capita. Greece was on the other extreme, experiencing a fall of almost 9 per cent. Peak to trough GDP per capita fell on average by almost 17 per cent in CESEE (almost 16 per cent if we count the first instead of the second dip of the depression in Bulgaria). The amplitude in the rest of Europe (ROE) – Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Sweden, Switzerland, and the UK – was on average around 10 per cent. In this respect, CESEE was particularly hard hit by the Great Depression in comparison to the rest of Europe. As we discuss further later, one reason for this was high foreign indebtedness that constrained policy options in CESEE and in so doing prolonged the downturn. The last two columns depict the heterogeneous recovery process in CESEE. Greece recovered the fastest, surpassing its pre-depression peak already in 1933. On the contrary, several countries did not reach full recovery by the end

Economic policy, 1918–1939  199 TABLE 8.6 Depression and recovery according to GDP per capita developments, CESEE

and rest of Europe during the interwar period Peak year1

Trough year

Amplitude (%)2

Recovery year3

GDP pc 1938/ peak year4

Germany France UK

1929 1929 1929

1932 1932 1932

−24.62 −16.12 −6.19

1936 n.a. 1934

1.20 0.94 1.13

Poland Austria Czechoslovakia Yugoslavia Bulgaria

1929 1929 1929 1929 1927 1931 1927 1929 1929

1933 1933 1935 1932 1929 1935 1930 1932 1931

−24.87 −23.53 −21.12 −17.08 −6.01 −14.93 −13.38 −11.43 −8.92

1938 n.a. n.a. n.a. 1930 1936 1934 1936 1933

1.03 0.85 0.94 0.99 1.27 1.10 0.98 1.08 1.14

Romania Hungary Greece CESEE avg. ROE5 avg.

−16.91 −10.39

Source: Broadberry and Klein (2012) Notes: 1 Interwar data on Greece and Poland starts from 1929. 2 Peak to trough decline of GDP per capita in per cent. 3 Interwar year in which previous peak was reached again; n.a. – if outside interwar. 4 Interwar data on Austria and Czechoslovakia end in 1937. 5 ROE – rest of Europe comprising 12 Western European countries given in Maddison (2003) excluding Austria.

of the interwar. Austria recovered the least. By 1937 Austria was still 15 per cent below its pre-depression peak. Economic policy played a central role in the process of depression and recovery in Europe in the 1930s. The standard account stresses the abandoning of the gold standard as the crucial step in economic policy that contributed to the end of the Great Depression (Feinstein et al. 2008, p. 93). Countries that left the gold standard had their monetary and fiscal policies freed from “golden fetters” (Eichengreen 1992). Countries with depreciated currencies (e.g. the UK) enjoyed faster economic recovery than countries that remained on gold (e.g. France) (Eichengreen and Sachs 1985). Leaving the gold standard was an economic policy forced by economic forces  – reserve losses, banking crises, main trading partner currency devaluation, unemployment, and deflationary pressure (Wolf 2008, pp. 398–399; Straumann 2009, p.  616), as well as political instability (Wandschneider 2008, pp.  175–176). The effects of fiscal policy on recovery were minor due to the limited use of deficit spending (Almunia et al. 2010, pp. 234–235; Feinstein et al. 2008, p. 131). Protectionism led to “beggar-thy-neighbour” policies that impeded foreign trade and harmed economic recovery (Eichengreen and Sachs 1985; Irwin 2011). How do economic policies pursued by CESEE countries fit into this

200  Nathan Marcus et al. TABLE 8.7 Dates of policy measures affecting exchange rate regimes, CESEE during the

1930s Country

Introduction of exchange control

Depreciation or devaluation in relation to gold parity

Official suspension of gold standard

Hungary Greece Czechoslovakia

July 17, 1931 September 28, 1931 October 2, 1931

n.a. April 26, 1932 n.a.

Yugoslavia Latvia Austria Bulgaria Estonia Romania Lithuania Poland

October 7, 1931 October 8, 1931 October 9, 1931 October 15, 1931 November 18, 1931 December 18, 1931 October 1, 1935 April 26, 1936

n.a. April 1932 February 1934; October 1936 July 1932 September 1936 September 1931 n.a. June 1933 November 1936 n.a. n.a.

n.a. September 28, 1936 April 5, 1933 n.a. June 28, 1933 n.a. n.a. n.a.

Sources: Bulgaria: (Dimitrova and Ivanov 2014, pp. 202–203); Greece: (Lazaretou 2014, p. 127); Romania: (Stoenescu et al. 2007, pp. 247, 254); Yugoslavia: (Hinić et al. 2014, pp. 297–298); Austria (League of Nations 1934, p. 206, Table 101); other countries: (League of Nations 1940, pp. 194–195, Table 101)

conventional view on depression and recovery in the 1930? How and why did economic policy of CESEE countries differ from Western Europe? Table  8.7 documents the dates of policy measures affecting exchange rate regimes in 11 CESEE countries during the 1930s. It reports when countries imposed exchange control, depreciated or devalued their currency in relation to gold parity, and officially left the gold standard. Over the course of the 1930s, 11 CESEE countries resorted to exchange control. Nine countries  – Hungary, Greece, Czechoslovakia, Yugoslavia, Latvia, Austria, Bulgaria, Estonia, and Romania (in that order) – did so by the end of 1931. Greece followed the sterling bloc and devalued its currency early. Poland followed the gold bloc and stayed on gold until 1936. What explains these different policy choices? Foreign indebtedness forced many CESEE countries to impose exchange controls without formally abandoning gold. For all CESEE countries except Czechoslovakia, currency devaluation was not readily available given the high levels of foreign denominated sovereign debt. While devaluation may have improved international competitiveness, it would have necessitated a larger amount of domestic currency to acquire foreign exchange in order to service foreign debt. Having a large share of debt denominated in French francs and/or debt with gold clauses only worsened the debtor’s position. Unlike the pound or the dollar, the franc did not devalue in the first half of the 1930s. And having the gold clause meant debt was to be repaid in gold or its equivalent even if the currency in which the debt was denominated was devalued.

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Staying on gold required that the stipulated cover ratio (central bank gold and foreign exchange reserves relative to monetary base) be maintained. This proved increasingly hard in the second half of 1931 due to losses of central bank reserves (Nikolić 2017). Exchange controls were an effort to defend fixed exchange rates and stop the drain on reserves (Ellis 1941, pp. 878–879). Exchange controls were, however, insufficient to stop capital outflows from Greece. Only seven months after introducing exchange controls, Greece devalued its currency and officially left the gold standard. Despite suffering severe losses of central bank reserves and a banking crisis, Poland was able to stay on the gold standard given its large cover ratio (Nikolić 2017). Poland’s “strategic partnership” with France also played a role (Wolf 2007, 2008). How did the different monetary policy choices affect the recovery from the depression of CESEE countries? All else equal, for two countries at the extreme the relation seems clear – Greece devalued early and recovered faster than Poland, which remained on gold until 1936. For other countries that imposed exchange controls the picture looks more complicated. As Table 8.7 shows, some of these countries indeed officially devalued their currencies at certain points of the 1930s. Moreover, all of them relied on a so-called premium system to make their exports more competitive internationally.43 Indeed, currency depreciation in the 1930s took many forms (Eichengreen and Sachs 1985, p. 931). Nevertheless, judging by the belated or incomplete recovery of the exchange control group, this practice seems to have been sub-optimal to official devaluation. The imposition of exchange controls across CESEE during the 1930s had serious implications on the way these countries conducted international trade. The introduction of exchange controls involved concentrating all foreign exchange transactions at the central bank (Ellis 1941). With each transaction involving foreign currencies being supervised by the state, governments were effectively put in charge of international trade. Faced with the problem of foreign exchange scarcity, CESEE countries increasingly relied on trade through clearing – a system of international trade that reduced the need for foreign currency. Clearing arrangements allowed for a more or less reciprocal exchange of goods between countries with foreign exchange being required only at the end of the year when outstanding balances were being cleared (Ránki and Tomaszewski 1986, pp. 27–29). In Bulgaria, Hungary, and Yugoslavia, as much as 70 per cent of entire trade was conducted on a clearing basis already by 1932–1933, while Poland and Czechoslovakia resorted less to this practice during the 1930s (Drabek 1985, pp. 451–452). Regulation of trade opened the way for protectionist trade policy that went far beyond the measures of the 1920s (Ránki and Tomaszewski 1986, p. 29). CESEE countries made use of their control over international trade by reducing the share of consumer goods and final manufactures in imports (Drabek 1985, pp. 460–465). Reduced imports of finished goods opened a larger share of the home market to domestic producers. Thus import substitution policies were directed at limiting the outflow of foreign exchange and improving the balance of trade but at the same

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time also to protecting domestic industries. In this way, exchange rate, trade, and industrial policy were closely related. While using protectionist economic policy during the 1930s, the CESEE countries did not turn to autarky. Table 8.8 shows the developments of the openness ratio  – exports plus imports as share of GDP  – for eight CESEE countries for 1929, 1933, and 1937. During the depression trade fell more vigorously than production (Kindleberger 1986; Feinstein et  al. 2008, 93–97) and accordingly the openness ratio of CESEE countries declined. From 1933 to 1937, the openness ratio increased. This shows that trade played an increasing role towards the end of the interwar. In South-East Europe, vast improvements in transport infrastructure promoted trade and outweighed the negative effects of protectionism (Morys and Ivanov 2015, p. 497). Still, with the exception of Romania, CESEE openness ratios did not recover to their 1929 levels. How large was fiscal policy space in CESEE during the 1930s? Production and trade were greatly reduced during the Great Depression (Feinstein et al. 2008, pp. 93–97). This led to a drop in government revenues across Europe. Faced with budget deficits, CESEE governments were reluctant to cut spending (Spigler 1986, p. 128). Insofar as continued spending could not be met by increased taxation, closing budget deficits entailed borrowing domestically or abroad. The collapse of international long-term lending came in 1931 (Accominotti and Eichengreen 2015). With the financial crisis of 1931 depleting already low domestic savings, instead of issuing bonds on the domestic capital markets, for the most part CESEE governments turned to the treasury for funds to finance pressing needs. For South-East European countries faced with continuous budget deficits, debt monetisation became the norm (Morys 2015, p. 24). Most CESEE countries defaulted on their foreign debt in the course of the 1930s. Decrease of exports and foreign exchange earnings, increased government subsidies, and a wanting reduction in the sizeable share of government expenditures TABLE 8.8 Exports plus imports as share of GDP (openness ratio), CESEE 1929–1937,

percent

Austria Bulgaria Czechoslovakia Greece Hungary Poland Romania Yugoslavia

1929

1933

19371

45.1 26.2 43.3 62.5 32.7 22.8 21.8 25.9

21.3 14.2 16.3 35.4 15.6 13.0 15.0 17.3

27.2 21.5 27.1 43.8 20.0 15.5 22.0 25.6

Sources: GDP data for Czechoslovakia, Hungary, and Poland from (Lethbridge 1985, p. 550), Eckstein (1955 p. 165), and (Lethbridge 1985, p. 571) respectively. Trade data are from Mitchell (2013). Openness ratio of other countries from (Morys and Ivanov 2015, p. 397). Note: 1 Openness ratio for Poland refers to 1936.

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committed to foreign debt service made it increasingly difficult for CESEE countries to service their foreign debt. The concentration of foreign exchange transactions at the central bank as part of exchange control policy meant that countries that introduced exchange controls effectively prohibited foreign payments and made the government the mediator between domestic debtors and foreign creditors. In many cases, however, even taking control over foreign exchange proved insufficient in gathering enough foreign currency to keep servicing foreign debt. According to the League of Nations (League of Nations 1936, pp. 298–303) and subsequent research (Ellis 1939, pp.  53, 91; Gnjatović 1991, p.  172; Dimitrova and Ivanov 2014, p. 221; Hinić et al. 2014, p. 298; Lazaretou 2014, pp. 102, 123, 131; Stoenescu et al. 2014, pp. 247, 273), the following CESEE countries partially or fully defaulted on their foreign debt: Hungary in December  1931, Bulgaria in April  1932, Greece in May  1932, Austria in July  1932, Yugoslavia in October 1932, and Romania in August 1933. The reduction in the foreign debt burden and increased budget revenues opened more fiscal policy space. The reduction in foreign debt was a result of defaults, debt conversions, and the devaluation of the dollar (Spigler 1986, p. 146; Nötel 1986, pp.  261–264). Increasing budget revenues came along with economic recovery. Increased fiscal policy space was used for public works and defence programmes (Ránki and Tomaszewski 1986, pp. 40–48). CESEE governments were able to fund productive infrastructure projects such as building new roads and railways but also to engage in “frantic rearmament” (Hauner 1986, p. 49) needed to defend their newly established independence. By the end of the interwar CESEE countries had developed a much improved infrastructure that was nevertheless still far behind that of Western Europe (Ehrlich 1985, p. 369). No doubt both light (e.g. food and textiles) and heavy industries (e.g. metals and machinery) benefited from the demand produced by government spending. But it is unclear to what extent this translated into economic growth. Poor economic conditions, aggravated by the Great Depression, contributed to the rise of economic nationalism. While starting the interwar period as democracies, most European countries and all CESEE countries succumbed to some form of authoritarian rule by the end of the interwar (Aldcroft 2006, pp. 15–16). Authoritarian rule made it easier to conduct nationalist economic policies. Economic nationalism in CESEE included exchange controls, protectionism, import substitution, and state promotion of agriculture and industry (Batou and David 1998, pp. xviii–xix). These policies aimed to open up space for political manoeuvre and reduce relative economic backwardness, and were a consequence of the Great Depression and overall external conditions rather than based on a preconceived and clearly defined ideology (Kofman 1990, pp. 49–54). Economic nationalism gained increasing momentum in the 1930s (Aldcroft 1998, p. 131), but was not exclusive to this period. Nostrification policies – transfer of real and financial assets from foreign to domestic owners under the legislative process (Teichova 1985, p. 6) – were pursued already in the aftermath of the First World War and the 1920s. Agricultural reforms, discussed in the previous section,

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are one example. The purchase of shares in enterprises and banks from their foreign owners is another. Nostrification was also conducted without necessarily changing the ownership structure, by substituting the “domestic” (ethnic majority) workforce for “alien” nationals (ethnic minorities) on all levels  – from the board of directors to unskilled workers (Boyer 2000, p. 272; Koll 2000, p. 367). The increasing role of the state in CESEE during the interwar did not, however, lead to the emergence of Western-type welfare states. During the 1930s the share of CESEE budget expenditure captured by government spending on public health and social welfare as well as education remained more or less constant (Spigler 1986, pp. 167–169). It is therefore hard to argue that CESEE participated in the acceleration of social spending recorded in developed economies during the interwar (Lindert 2004). Nevertheless, CESEE governments did implement a set of welfare policies intended to alleviate the negative effects that the fall in prices of agricultural produce had on these predominantly agrarian economies. For example, governments set up institutions that would purchase goods from agricultural producers above market prices. Further, laws were introduced that allowed peasant debt to be rescheduled, partially or completely written off, or even taken on by the state. Finally, governments supported the creation of cartels across several industries (especially in food processing) with the aim of stabilising prices at a higher level (Ránki and Tomaszewski 1986, pp. 22–25, 30–31).

Russia and the Soviet Union (1917–39) Though most CESEE countries moved towards authoritarianism and state-interventionism, it would be wrong to liken them to the Bolshevik experiment launched in the aftermath of the October Revolution of 1917.44 Convinced that backward Russia needed to overcome the capitalist system in order to become a rich and powerful nation, the revolutionaries brought the economy under nearly total control of the government. As Ellman (2014) points out, socialist planning “originated in a backward country, and its major purpose was to propel the countries which adopted it into the ranks of the advanced countries.”45 The most influential thinker who used Marxism to develop a new theory was Vladimir Lenin (1870–1924), the leader of the Bolsheviks. He was convinced that Russia needed full nationalisation and a dictatorship in order to catch up.46 The Bolshevik leadership did not have a blueprint when they started their experiment, however. As Lenin explained in April 1918: “We know about socialism, but knowledge of organisation on a scale of millions, knowledge of the organisation and distribution of goods, etc., – this we do not have.”47 First steps towards government control of the economy were taken shortly after the October Revolution. According to Harrison (2016), three crucial elements of the command system were established: the principle of unconditional confiscation of private property, the control of industrial supply, and the control of food produce that was judged to be surplus to the farmers’ own basic consumption. As became the rule, economic policies were always closely linked to political goals.

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The confiscation of private property weakened the enemies of the revolution and helped secure the support of important segments of the population, especially in the countryside. Further measures in the early stage of the Soviet experiment were the nationalisation of industry and banking, the establishment of state monopolies over domestic trade in foodstuffs and foreign trade, and the takeover of management of large manufacturers and transport. Finally, in order to avoid a revolt by workers and soldiers, the Bolshevists took over the distribution of food by using violence against farmers and traders.48 The command economy was further strengthened by measures taken during the civil war that escalated in early 1919 and lasted until late 1922. The government nationalised the whole industrial sector down to the smallest units and monopolised all domestic trade. Government control of industry was enlarged to producers of intermediate goods, and farmers were forced to cede food that was not needed for subsistence. The command economy was not fully realised yet, but at this point Bolshevik economic policies had gone far beyond any historical experience. Even Germany’s economic policies during the war were much less intrusive. The nationalisation and control of a large part of the economy and the use of violence were unprecedented and formed an important basis for the shift to a command system that, beginning with the launch of the first Five-Year Plan in October 1928, consisted of the five elements: nearly complete nationalisation of all economic sectors, collectivisation of agriculture, central planning, rapid industrialisation by the means of five-year plans, and decoupling from the world economy. The road to the first Five-Year Plan was not predetermined, however. The first attempt to form a command economy and the civil war of 1919–1920 precipitated famine and a monetary and economic collapse, leading the Bolshevik leadership to change course and to opt for the New Economic Policy (NEP) in 1921. The NEP allowed for market mechanisms under the umbrella of socialism and consisted of a peculiar mixture of private and public elements. The land remained nationalised (since November 1917), but agriculture was controlled by the peasants. Fuel, heavy industry, railways, foreign trade, and the financial system – the “commanding heights” of the Russian economy – were still in the hands of the Bolshevik government; the rest, in particular agriculture, crafts and domestic trade, were left to private firms. Most importantly, state control was replaced by market transactions across and between the economic sectors. In addition, the NEP encouraged foreign trade and stabilised the currency.49 The new regime achieved its ultimate goal, namely to reinvigorate the economy. By 1928 real national income had climbed back to the level of 1913 – corresponding to an increase by more than 150 percent relative to 1921.50 Nevertheless, Stalin ended the experiment in 1928. Gregory and Stuart (2001) cite four reasons.51 First, the NEP had always been considered a temporary regime, as the private and market elements contradicted the core of Marxist-Leninist theory. Second, the NEP strengthened private traders (nepmen) and prosperous farmers (kulaks) who were seen as threats to economic and political stability. Third, the Bolshevik leadership feared that the NEP had reached its potential and was based on an outmoded

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capital stock. New capital accumulation was needed. And finally, the NEP was seen as a straitjacket for a coordinated industrialisation effort. In sum, ideological motives as well as political and security considerations were at the forefront of the decision.52 Originally, the Bolshevist leadership was divided on the question of whether or not to end the NEP. Roughly speaking, there were two sides in the debate that started after Lenin’s death in 1924. The left side, led by Leon Trotsky, advocated an ambitious industrialisation strategy and the expropriation of prosperous peasants (kulaks). The other side favoured a continuation of the NEP and a rapprochement with the capitalist world. Its most important proponent was Nikolai Bukharin, the editor of the party paper Pravda. Joseph Stalin, general secretary of the Communist Party since 1922, first sided with the moderate view and expelled leftist proponents, most notably Trotsky, but then shifted his position and removed the group of Bukharin and his followers. By manoeuvring from one side to the other, Stalin succeeded in consolidating his power, while changing his ideological outlook. Politics and policy were closely intertwined. Stalin did not simply adopt a well-formulated plan, but went beyond the ideas developed in the mid-1920s.53 The first Five-Year Plan launched in October 1928 defined output targets for each year, both for economic sectors and individual firms. Profits, prices, and interest rates were secondary, and firms were not constrained by bank credit. The bulk of investment went into heavy industry and machinery production, thus creating a supply that was not dictated by consumption, but by the goal to accumulate capital in order to meet future needs, including for military use. And once the plan started, the Soviet authorities always increased the targets in order to accelerate production. In the course of the first Five-Year Plan, Stalin proceeded to the collectivisation of the agricultural sector. Sanctioned by the decision of the Central Committee of the KPSU in November of 1929, the government forced all peasants to cede their land to collective farms (kolkhoz). By the end of the 1930s more than 90 per cent of the peasant households were collectivised.54 The immediate reason for this decision was a shortage of grain that Stalin falsely blamed on the kulaks. The collectivisation together with forced savings allowed the government to use the agricultural surplus to sell it to foreign markets, thereby obtaining the means to finance industrialisation. The tight control of the peasantry also made it easier to bring part of the inefficient employee population in the countryside move to the industrial cities. The second and third Five-Year Plans, launched in 1933 and 1938, respectively, continued the path opened by nationalisation and collectivisation. How successful was Stalin’s industrialisation strategy? First and foremost, there is no doubt that the human toll was enormous. According to Livi-Bacci (1993), the collectivisation famine in 1932–33 cost between 6 and 13 million lives, predominantly in the Ukraine. The purges of the 1930s led to nearly a million killed citizens. Millions were deported to the gulag. The industrialisation strategy required a political system that was totalitarian and in many ways inhumane.

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Economic and political control were two sides of the same coin.55 As for the success in economic terms, there are two different camps. According to Allen (2003), “big push industrialisation” was the only realistic option that was available to Russia at the time.56 A more gradual approach would not have removed the traditional bottlenecks – the low productivity of handicraft production and small-scale agriculture – that had hampered industrialisation. Allen also claims that between 1928 and 1940 Soviet GDP increased by 85 percent, the urban standard of living improved, and income per head of peasant household were not lower at the end of the 1930s than in 1928 (i.e. before collectivisation started). And thanks to mass schooling, human capital was upgraded. For these reasons, Allen considers Stalin’s forced industrialisation successful. This view has been challenged by a number of scholars. Ellman (2004) questions the idea that politics and economics can be separated when it comes to measuring living standards in the 1930s. Some urban dwellers may have had a higher living standard in 1937 than in 1928, but 1937–1938 were also the years of mass state terror. About a million people died, more than a million people were sent to the gulag, bringing misery to their families, and about 200,000 people were deported. Ellman is also sceptical about Allen’s estimates demonstrating that rural per capita consumption in 1938–1939 was not lower than in 1928, although the collectivisation had brought famine and hardship. Applying a two-sector neoclassical growth model to Russian economic history, Cheremukhin et al. (2017) reject Allen’s claim that Tsarist agricultural institutions were a significant barrier to labour reallocation to manufacturing, or that “big push” mechanisms were a major driver of Soviet growth. Thus, the jury on the potential economic merits of socialist industrialization strategies is still out.

Conclusion The interwar years saw important economic policy changes in Eastern Europe. The most radical shift occurred in Russia after the October Revolution of 1917. Following a brutal civil war and the interlude of the NEP, the Bolshevists under the leadership of Joseph Stalin almost entirely nationalised the economy, pushed industrialisation on the basis of five-year plans, and decoupled the country from the world market, resulting in a human toll unheard of. The changes in the other Eastern European countries were less radical than in the Soviet Union but also profound. Whereas the pre-war era was dominated by liberal economic policies, the interwar years witnessed growing state interventionism and economic nationalism. In the 1920s, governments experimented with tariffs and tax subsidies in order to protect domestic sectors and foster exports. In the 1930s they introduced capital and exchange controls, devalued their currencies, reneged on their foreign debt, regulated foreign trade, and initiated industrial policies. Measured against the difficult starting point after the First World War, the economic policies of the CESEE countries were successful. At the end of the 1930s, GDP per capita levels were everywhere higher than in

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1918. On the other hand, circumstances proved too challenging to allow these countries to escape from their peripheral status. The divide between East and West persisted throughout the period.

Notes 1 See e.g. Møller and Skaaning (2014, p. 6) for an overview of political regime change. 2 See David (2009, pp. 199–200), following Szlaifer (1990), Kofman (1997), and Stemplowski (1990). 3 Gerschenkron (1962, p. 28). 4 Preamble to the League of Nations Covenant, see Northedge (1986). 5 Patricia Clavin showed that the severe hunger catastrophe that haunted Central Europe during the first post-war winters convinced League officials that to safeguard peace they had to occupy themselves with economic reconstruction. Clavin (2013). 6 Many of the new political borders seem to have followed older economic fractures, ethnic or linguistic, so that their adverse effect on trade might have been no larger than that of the previously existing barriers. Wolf et al. (2011). Heinemeyer (2007). Ranki and Tomaszewski (1986, p. 6). 7 Berend (1985, pp. 152–162). Müller (2015, p. 190). 8 Müller (2015, pp. 184–185. 9 Walters (1988, p. 153). 10 Tyler (1945, pp. 11–12). 11 Aldcroft (2001, p. 30). Fink (1993, pp. 232–252). 12 Most of the League’s financial and economic work was directed towards Central, Eastern and South-Eastern Europe. On this see foremost Clavin (2013). Flores and Decorzant (2016). 13 Spigler (1986, pp. 117–169, 118, 287–295). 14 Tyler (1945, pp. 74–75, 109–110, 132–137). We leave out Danzig, which had become a Free City under the protection of the League of Nations, from this analysis. 15 Spigler (1986). For the data see League of Nations, International Statistical Yearbook (Geneva: League of Nations), 1926–1929 and Statistical Yearbook of the League of Nations 1930/31 (Geneva: League of Nations, 1931). 16 Meyer (1970), Nötel (1986, pp. 287–295), and Aldcroft (2006, pp. 94–105). 17 Not all of them were formally independent, but all aimed at holding exchange rates stable. The Yugoslav central bank, established in 1920 was under government control and British demands to grant it independence in 1928 were refused. The prewar Romanian National Bank remained under heavy government influence, but the Polish central bank established in 1924 remained independent until the Great Depression, as did the Czech National Bank founded in 1925. The Austrian and Hungarian central banks, established as parts of the League intervention, were independent from government, and the Bulgarian National Bank gained full autonomy in 1927 in preparation of its League Stabilisation loan of 1928. Also in 1928, Estonia established a new central bank and currency and the Bank of Greece began its function. Spigler (1986, pp. 146–148). Tyler (1945, pp. 80, 109, 135). 18 Radice (1985, pp. 23–65, 40–41). 19 Feinstein et al. (2008, pp. 77–92). 20 Lampe (2014, pp. 7–28). 21 Bulgaria 12.3% and Yugoslavia 18.1%. Aldcroft (2006, p. 55). 22 Greek net foreign liabilities had by 1930 grown to $20 million per annum, amounting to more than $3 per capita. The Greek state debt service was well matched by capital inflows, but left the large trade deficit uncovered. Aldcroft (2006, p. 55). Lampe and Jackson (1982, pp. 386, 428, 512). Radice (1985, pp. 23–65, 39–40). 23 US capital issues for foreign accounts fell from $841 to $409 million between the first and second halves of 1928. Between 1928 and 1929 new issues for account of the six

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largest borrowers (Germany, Japan, Australia, Argentina, Brazil, and Colombia) fell from $570 to just $52 million. Aldcroft (1977, pp. 261–267). 24 In 1929, global trade as a share of GDP was 68% of what it had been in 1913. Estevadeordal, Frantz and Taylor (2003, p. 395). Drabek (1985, pp. 379–531, 402). As pointed out by Radice (1985, p. 35), it would be wrong to view the Austro-Hungarian customs area before 1914 as a unified, economic space, but besides the Baltics, Bulgaria, and Albania, all countries were grappling with trade problems arising from its breakup. 25 In 1925, the Danubian states (Austria, Czechoslovakia, Hungary, Romania, and Yugoslavia) were importing less from outside the confines of the former Austro-Hungarian Empire than before 1914. The Baltic States had directed their exports to Germany and Great Britain, and by 1927 over 60 per cent of Estonian and Latvian exports went to these two countries. For Lithuania this figure was above 75 per cent. Aldcroft (2006, p.  105). Tyler (1945, pp.  94, 140–141, 150–155). Ménil and Maurel (1994, p.  564). Paslovsky (1928, p. 565). 26 Drabek (1985, pp. 379–531, 406). 27 Nautz (1992). de Ménil and Maurel (1994). 28 On the Balkans, compared to 1906–1910, export figures for 1926–1930 had risen by 47 per cent in the case of Bulgaria, 45 per cent for Greece, and 61 per cent for Yugoslavia, even though in Romania they were 26 per cent lower. The corresponding import figures were +27 per cent for Bulgaria, +124 per cent for Greece, +104 per cent for Yugoslavia and −13 per cent for Romania. However, these figures do not take account of important territorial adjustments. Yugoslav figures are matched with those of pre-war Serbia, Greater Romania’s with those of the Old Kingdom. In the case of Bulgaria, which lost territory, these figures are more informative. Lampe and Jackson (1982, p. 343). Trade relations beyond the region improved, too: e.g. Austrian exports to Germany rose by 62 per cent, to France 187 per cent, to Britain 35 per cent, to Russia 594 per cent and to the United States by more than 300 per cent. Nautz (1992, pp. 539–359). 29 Walters (1988, p. 154). 30 Only Albania was in a worse position than Greece. The Greek trade deficit could not be covered by remittances from émigrés or invisible exports. After its new central bank began operation in late 1928, Greek foreign reserves diminished by 25 per cent in 1929, a trend made worse by capital flight the following year. Hungary, a typical agrarian producer, faced difficulties servicing its $700 million foreign obligations when the fall in prices of primary products reduced exports. Poland, Yugoslavia and Bulgaria feared similarly. Tyler (1945, p. 94). Feinstein et al. (2008, p. 36). 31 The pre-war overall average, excluding the Austro-Hungarian Empire, had been 28 per cent. Tyler (1945, p. 32). 32 See de Ménil and Maurel (1994, pp. 555–575). 33 Diamond (1941, pp. 250–269). Mazower (1991, pp. 44, 87, 97). Pryor and Pryor (1975, pp. 500–533). Ránki and Tomaszewski (1986). Spigler (1986, pp. 123–124, 163–165). 34 Spigler (1986, p. 165). 35 Ránki and Tomaszewski (1986, pp. 3–48). Bandera (1964, p. 65). Spigler (1986). 36 “Protocols and Agreements Concluded at the Portorose Conference, November, 1921,” International Conciliation 176 (1922, pp.  252–312). Fink (1993, pp.  247–248), Hertz (1947) and Berend and Ránki (1969). Drabek (1985, p. 410). 37 Thus in 1925, the so-called Layton-Rist Report noted that Austria could not fully recover until “the tariff barriers of Central Europe are appreciably reduced.” Austria, prevented from joining Germany by international treaties in fact looked favorably upon the establishment of a Danubian economic union, but its sentiments were not shared. Hungary was governed by irredentism, which led it to embark on a policy of autarky. The Little Entente – Czechoslovakia, Romania, and Yugoslavia – while threatened by Hungarian revisionism, were equally opposed to a return of Austrian hegemony. Layton and Rist (1925). 38 Bank of England Archives OV 9/394: Niemeyer to Salter, 2 Mar. 1925. Tyler (1945, p. 21). Abdelal (2002, p. 905).

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3 9 Findlay and O’Rourke (2007, pp. 429–472). 40 Radice (1985, pp. 23–65, 45–47). 41 Ehrlich (1985, pp. 323–378, 329–336). In 1920, about 75 per cent of the Polish population was engaged in agriculture (i.e. peasants), but 20 years later that figure had dropped to 60 per cent. See Walters (1988, p. 181). 42 Walters (1988, p. 152). 43 A premium was paid above the official exchange rate when converting hard foreign currency into domestic currency. In this way CESEE exports were made cheaper to importers paying in foreign currency without officially changing the exchange rate. On the other hand, imports were made more expensive as more domestic currency was needed to acquire foreign exchange required for imports (Ránki and Tomaszewski 1986, p. 28). 44 For an overview of the period, see Nove (1982), Hunter and Szyrmer (1992), Davies, Harrison and Wheatcroft (1994), Gregory and Stuart (2001), Ellman (2014) and Harrison (2016). 45 Ellman (2014, p. 4). 46 On the ideas underlying the Bolshevist experiment, see e.g. Barnett (2004). 47 Session of the All-Russian Central Executive Committee of 29 April 1918, cited in Ellman (2014, p. 2). 48 Harrison (2016, pp. 9–11). 49 Johnson and Temin (1993). 50 Markevich and Harrison (2011, p. 680), table 5. 51 Gregory and Stuart (2001, pp. 47–48). 52 The close relationship between economic policies and power and security considerations is highlighted by several recent studies that are based on archival research. A summary of the new approach is given by Kontorovich and Wein (2009). 53 Allen (2003, p. 91). 54 Gregory and Stuart (2001, p. 74), table 5.4 (data drawn from L. Violin, A Century of Russian Agriculture, Cambridge University Press, 1970, p. 211). 55 Gregory (2004). 56 Allen (2003, 2011).

Bibliography Data sources Broadberry, S., & Klein, A. (2012), “Aggregate and per capita GDP in Europe, 1870–2000: continental, regional and national data with changing boundaries,” Scandinavian Economic History Review, 60(1), 79–107. League of Nations (1934), Statistical Year-book of the League of Nations 1933/1934, Geneva: League of Nations, Economic Intelligence Service. League of Nations (1936), Statistical Year-book of the League of Nations 1935/1936, Geneva: League of Nations, Economic Intelligence Service. League of Nations (1940), Statistical Year-book of the League of Nations 1939/1940, Geneva: League of Nations, Economic Intelligence Service. Mitchell, B. (2013),  International Historical Statistics, London: Palgrave Macmillan Ltd. (last accessed on 29 January  2016): www.palgraveconnect.com/pc/doifinder/ 10.1057/9781137305688. SEEMHN (2014), South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II, edited by Austrian National Bank, Bank of Greece, Bulgarian National Bank and National Bank of Romania, Vienna: Austrian National Bank.

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Hauner, M. (1986), “Military budgets and the armaments industry,” in M. C. Kaser  & E. A. Radice (eds.), The Economic History of Eastern Europe, 1919–1975, Volume 2, Oxford: Oxford University Press, 49–116. Heinemeyer, H.-C. (2007), “The treatment effect of borders on trade. The great war and the disintegration of Central Europe,” Cliometrica 1(3), 177–210. Hertz, F. (1947), The Economic Problem of the Danubian States: A Study in Economic Nationalism, London: Victor Gollancz. Hinić, B., Đurdević, L., & Šojić, M. (2014), “Serbia/Yugoslavia: from 1884 to 1940,” in South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II, BoG, BNB, NBR, ONB, pp. 291–354. Hunter, H.,  & Szyrmer, J. M. (1992), Faulty Foundations: Soviet Economic Policies, 1928– 1940, Princeton: Princeton University Press. Irwin, D. A. (2011), Trade Policy Disaster: Lessons from the 1930s, Cambridge, MA: The MIT Press. Johnson, S., & Temin, P. (1993), “The macroeconomics of NEP,” Economic History Review 46(4), 750–767. Kaser, M. C., & Radice, E. A. (eds.) (1985), The Economic History of Eastern Europe 1919– 1975, vol. 1: Economic Structure and performance between the two Wars, Oxford: Oxford University Press. Kindleberger, C. P. (1986), The World in Depression, 1929–1939, Berkeley, CA: University of California Press. Kofman, J. (1990), “How to define economic nationalism? A critical review of some old and new standpoints,” in H. Szlajfer (ed.), Economic Nationalism in East-Central Europe and South America, 1918–1939, Geneva: Librairie Droz, pp. 17–54. Kofman, J. (1997), Economic Nationalism and Development: Central and Eastern Europe Between the Two World Wars, Boulder, CO: Westview Press. Köll, A.-M. (2000), “Economy and ethnicity in the hands of the state: Economic change and the national question in twentieth-century Estonia,” in A. Teichova, H. Matis & J. Pátek (eds.), Economic Change and the National Question in Twentieth-century Europe, Cambridge: Cambridge University Press, pp. 357–381. Kontorovich, V., & Wein, A. (2009), “What did the Soviet rulers maximise?” Europe-Asia Studies 61(9), 1579–1601. Lampe, J. R. (2014), Balkans into Southeastern Europe, 1914–2014: A  Century of War and Transition, Basingstoke: Palgrave Macmillan. Lampe, J. R., & Jackson, M. R. (1982), Balkan Economic History, 1550–1950: From Imperial Borderlands to Developing Nations, Bloomington: Indiana University Press. Layton, W., & Rist, C. (1925), Report on the Economic Situation of Austria, Geneva: League of Nations. Lazaretou, S. (2014), “Greece: From 1833 to 1949,” in South-Eastern European Monetary and Economic Statistics from the Nineteenth Century to World War II, BoG, BNB, NBR, OeNB, pp. 101–170. Lethbridge, E. (1985), “National income and product,” in M. C. Kaser  & E. A. Radice (eds.), The Economic History of Eastern Europe, 1919–1975, Volume 1, Oxford: Oxford University Press, pp. 532–598. Lindert, P. H. (2004), Growing Public: Social Spending and Economic Growth Since the Eighteenth Century (Volume I, The Story), New York: Cambridge University Press. Livi-Bacci, M. (1993), “On the human costs of collectivization in the Soviet Union,” Population and Development Review 19(4), 743–766.

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9 BETWEEN DISINTEGRATION AND CONVERGENCE, 1918–1939 Flows of capital, goods, and labor Jari Eloranta, Stefan Nikolić and Flóra Macher

Introduction Overall, the interwar period was one of economic and political instability, following a devastating world war and an end to the first era of globalization. Efforts to ensure peace collectively, namely through the League of Nations, had failed by the early 1930s. The Central and Eastern European empires were broken up as a result of the postwar peace treaties. The war also represented an important, yet not linear, break in the process of deeper economic integration, which had been quite fast in the 19th century (see also Chapter 5 in this volume). Most Eastern and Southern European states experienced similar economic and political shocks after the war, for example Western Europe. However, these processes were neither uniform nor linear. Here in this chapter we will document the broad patterns of economic integration and disintegration (i.e. movement of capital and labor as well as trade of goods) – between Central Eastern and South-Eastern European (here defined as CESEE) states and the West, as well as within the region, from the First World War to the end of the interwar period – and how these patterns were shaped by economic and political forces related to the war and its aftermath as well as by the Great Depression. It seems that the immediate post-war period and the Great Depression represented periods of divergence, whereas especially in the 1920s the East European countries converged with the West. The economic and political nationalism of the 1930s made this less possible, especially the migration of labor. With the rise of authoritarianism, the world, along with all of Europe, began to drift towards war and calamity. The First World War became a big shock for global trade, politics, and movement of people, even though most of the fighting was focused on the European continent. Nationalism and political aspirations by European leaders plunged these states into a war of unprecedented scale despite the extensive globalization

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that preceded it. The European nations, and their colonial partners, experienced immense transformations involving extensive state regulation, substitution of market mechanisms by state officials, and introduction of new military technologies. When the war ended in 1918, the institutional design of the most European economies was considerably different, as compared to what had existed before the war. Moreover, it was the economic disorganization in Russia, Austria-Hungary, and Germany that ultimately brought these states down (Eloranta & Blum 2016). Furthermore, there were several main economic consequences that arose from the war, including immediate exogenous shocks, in terms of disruptions of supply and demand as well as excess mobilized production (and military) capacity after the conflict; a more rigid economic environment, since for example wage flexibility was diminished; a weaker financial structure, since the economies had to carry the new, increased levels of public spending as well as the acquired debts with mainly pre-war levels of taxation; and a fragile international monetary system (Feinstein et  al. 1997). Another casualty of the war was international trade. The existing trade agreements were nullified or ignored, non-European producers increased their share of the trade, the gold standard unravelled, and the industrial capacity aimed for war production made it harder for European nations to adjust to postwar economic conditions (Findlay & O’Rourke 2007). Conflicts typically have more negative economic consequences than positive ones. We can observe the negative long-term impacts via the connections between the Great Depression and the First World War. Without the war, the depression would have been much less severe. Moreover, the human costs and injuries resulting from the war damaged the European economies even more than the destruction of capital, limiting the growth potential of their societies. Overall, the interwar period was marked by uneven economic growth in the 1920s and divergent experiences of recovery from the depression in the 1930s (Foreman-Peck 1995). Some nations fared particularly poorly in their efforts to recover from the conflict. For example, Yugoslavia, Romania, and the Soviet Union had a very weak recovery by 1928, whereas Greece and the UK had a much more robust economic recovery (Markevich & Harrison 2011). The European financial situation itself began to change as early as before the war. The extension of suffrage, workers’ political parties becoming more powerful, and mass unemployment all changed the policy environments of European economies. The First World War intensified the process of change of the governments’ roles in economic development, whereas earlier governments had exercised a more laissez-faire approach. On the other hand, from the turn of the century onward, more and more tensions emerged in international politics, undermining European states’ willingness to cooperate with each other or non-European states. The interwar period also initiated a long-term decline of the European empires. In the early 20th century, the great powers (i.e. mostly European) all regarded colonial empire as a worthwhile pursuit. For example, in 1913 Europeans were the greatest imperialists in the history of the world, as 30 per cent of the world’s population lived in European colonies on more than two-fifths of the world’s land

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surface (Eloranta & Harrison 2010). These empires were in trouble after the First World War, since the colonial populations demanded to be repaid for their help in the war efforts. And some empires, like the German empire and the AustroHungarian empire, were casualties of the peace treaties that followed, and the Russian and Ottoman Empires shrunk due to the war, the revolution, and the civil war. As for the CESEE countries, many of them emerged as new independent states as these empires were splintered and no longer were able to exercise any control over their former territories. Establishing a more permanent peace was one of the unattainable dreams of the early interwar period. Such efforts were based on many types of ideological schemes and the Treaty of Versailles, which also included the foundations of the League of Nations (Eloranta 2011; Clavin & Wessel 2005). The League was formed on January 10, 1920. In total, 18 states became members of the League at first by formally approving the peace treaty. By late 1920, the number of members had already grown to over 40. In 1938, respectively, the total amounted to 55. The member states of the League of Nations in 1920 equalled about 74 per cent of the world’s population and, respectively, 63 per cent of the world states’ area. While the main function of the League was to prevent future conflicts, it also functioned as an intermediary on financial and fiscal matters. The realm of the League’s interests included aiding reconstruction efforts and mediating loans to more marginal states especially in Europe, along with a certain degree of monitoring of these efforts. In addition, the League gathered lots of information on the functioning of the member economies and societies. All of these efforts were meant to promote stability, thus reinforcing the League’s primary goal of preventing conflicts. While the League was able to provide access to capital for many war-ravaged states, it lacked the ability to ultimately enforce the conditions that came with the loans they facilitated, and they had no capital of their own to inject into the capital markets, for example after 1929. Similarly, it failed in the realm of disarmament, due to lacking military power of its own and failure of cooperation (Flores  & Decorzant 2016; Eloranta 2011). In some respects, though, the League’s failure has been overemphasized, especially given its positive role in providing capital to the CESEE nations as well as providing the foundation for future economic organizations like the International Monetary Fund (IMF). For many new states, the League – with its many flaws – was the last resort for financial and other types of help (Pauly 1996). Our goal in this chapter is to place Central, East, and South-East Europe in the context of the monumental changes that occurred in this period, and to examine how the tendency towards disintegration affected them. We will first analyze capital flows and the role played by the League of Nations. The period in fact featured both integration and disintegration, and the League was an important facilitator of capital flows to those nations. Then we will move on to investigate the trade flows both between the East and the West as well as within the region. We can observe that trade grew during the 1920s, and in the latter part of the 1930s to a lesser extent. After that, we will discuss the elements affecting labor mobility in

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the period, and we can again note the duality of the period (higher migration in the 1920s and less during the 1930s). We end this chapter with some concluding thoughts.

Movement of capital Capital market integration of Eastern Europe with the West during the interwar can be divided into periods of high (1924–1928, post-1932), medium (1929– 1932), and low (1919–1923) integration. In the aftermath of the First World War, Eastern European countries were in desperate need of physical and financial reconstruction. From the relative underdevelopment of domestic capital markets and the post-war poverty, it followed that domestic savings, which could be used to fund this reconstruction, were limited. Eastern European countries turned towards Western capital markets. Nonetheless, for economic as well as political reasons, only a handful of these countries were able to attract foreign capital before 1924. The role of League of Nations was critical in obtaining access to foreign capital. A number of Eastern European countries used the proceeds of the loans contracted with the help of the League of Nations or from other sources to adhere (de facto or de jure) to the gold standard during the period from 1924 to 1928. International capital inflows thus came hand in hand with exchange rate stabilization. The League of Nations’ support was instrumental to overcome post-war political obstacles to capital market integration and mediate capital flows. Nonetheless, the League was not powerful enough to remedy the consequences of the sudden stop and reversal in global capital flows from 1929 and the ensuing financial crises in 1931. Capital market re-integration did occur in the period after 1932 and, interestingly, these years saw renewed capital flows, which were more concentrated and, in some respects, higher than before. The First World War brought about a major shift in CESEE countries’ access to global capital markets. Whereas prior to the war the Austro-Hungarian monarchy was regarded as a “core” country in a two-tier world system due largely to the prominence of the Viennese capital market, this was no longer the case during the interwar years (Flandreau & Jobst 2005, 977–1007). Vienna had lost its allure and so did Berlin – two important pre-war natural financial centres for this region. Yugoslavia, for example, did not borrow from these financial centres during the interwar (Gnjatović 1991). The role of Paris varied across the CESEE region as political circumstances changed. For instance, close to 100 per cent of Hungary’s public debt raised abroad at the turn of the century was held by Austrian, German, and French financiers. For political reasons, the French financiers’ presence declined before the war and, subsequently, completely disappeared. German and Austrian financing strengthened in the war years but, for economic reasons, they ceased to be lenders during the interwar period (Fellner 1908). The new foreign loans received by Hungary during the 1920s before the sudden stop were raised 52 per cent in the UK and 46 per cent in the United States.1 As the section later shows, the overwhelming importance of British and American financiers until 1928 was

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representative of the whole CESEE region and funding from other financial centres was less significant and came only at a later stage. In the early years of the interwar, CESEE countries’ access to global capital markets thus led through New York and London – borrowing centres with which the region had limited familiarity. Building relationships in new financial markets was facing obstacles. American creditors, the primary financiers of the interwar period, had limited prior experience in lending to CESEE (Accominotti & Eichengreen 2015, 472). The creditors’ reluctant disposition was not helped by the fact that CESEE countries were struggling under the uncertainty arising either from postwar territorial changes, the loss of political legitimacy, a struggling economy, or undetermined reparations liabilities. The League of Nations had a critically important role in dispelling political obstacles and, through its commitment to the reconstruction loans, signalling reliability (Flores  & Decorzant 2016, 674–675). As a result, even pariah states like Austria and Hungary could return to global capital markets a few years after the war. At the same time, lending conditions remained tough vis-à-vis those of the pre-war years. A review of the spread at issue of the interwar League of Nations bonds issued for CESEE countries reveals that, by 19th-century standards, these bonds were pricey. Whereas in the 19th century the bonds issued by JP Morgan or, in general, interest rates for emerging market bonds had a spread at issue of approximately 200 to 300 basis points on average (Flandreau et al. 2009, 37, figure 3 and Flandreau & Zumer 2004, 16), the same metric for the League bonds was well over 300, often over 400 basis points (Flores & Decorzant 2016, 653–678). Despite all these obstacles, to what extent were Eastern European countries able to draw on Western capital markets during the interwar period? Table 9.1 shows TABLE 9.1  Borrowing through bond issues by Central and South-East Europe in

1919–1932, per sub-region, according to lending country, percent

Total Share of sub-region

CEE SEE Baltics CEE Borrowing by subregion 1919–1932 / SEE Baltics economic size of sub-region in 1932

Total US

UK France Netherlands Switzerland Sweden

100 55 43 2 14 22

28 48 51 1 4 7 NA

34 71 27 2 6 5 NA

16 35 65 0 1 5 NA

3 75 22 3 1 0 NA

3 44 56 0 0 1 NA

15 49 42 9 2 3 NA

Sources: League of Nations (1943) for data on borrowing. National accounts sources: Eckstein (1955, p. 165, table 1), Stádník (1946, pp. 180–181), SEEMHN (2014), Lethbridge (1986, p. 571, table 8.48). The Federico-Tena World Trade Historical Database for exchange rates. Notes: Bond issues of central and provincial governments, municipalities and corporations. CEE  – Czechoslovakia, Hungary, and Poland; SEE  – Bulgaria, Greece, Romania, and Yugoslavia; Baltics– Estonia, Latvia, and Lithuania. Economic size is measured by GDP (Bulgaria, Romania, and Greece), GNI (Yugoslavia), or GNP (Hungary, Czechoslovakia, and Poland).

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aggregate foreign capital flows from 1919 to 1932 by lender and by borrowing region. The United States and Britain were the primary lenders to the region. Between 1919 and 1932, these two countries accounted for almost two-thirds of total capital inflow during this period. France and Sweden captured a smaller share. The other two global financial centres, the Netherlands and Switzerland, were even less significant in comparison. In absolute terms, creditors had a preference for CEE over the countries of SEE – 55 per cent of the total foreign capital of this period entered CEE, whereas SEE obtained only 43 per cent, and the Baltic states (Estonia, Latvia, and Lithuania) accounted for the remaining 2 per cent. The United States and the Netherlands preferred CEE while France preferred SEE. Other creditors divided their lending equally between SEE and CEE. The Baltic states obtained only a minor share of the capital inflow from each of the creditors. Absolute figures, nonetheless, hide the fact that some countries received more capital than others relative to the size of their economy. Table 9.1 thus also shows the total capital inflow by sub-region between 1919 and 1932, weighted by economic size in 1932.2 After adjusting for the size of the economy, the United States’ preference for CEE largely disappears, the UK’s attraction to SEE emerges, and France’s choice to lend to SEE is reinforced. The calculations also reveal that SEE countries obtained significantly more foreign funding than CEE. Capital inflows to CEE countries between 1919 and 1932 amounted to 14 per cent of their GDP in 1932 period, while the same figure for SEE countries was 22 per cent. The relative importance of creditors also varied temporally. Figure 9.1 depicts the total volume of foreign capital inflows through bond issues to ten Central and South-East European countries between 1919 and 1932, according to lending country. Over 80 per cent of capital inflow during the period from 1924 to 1928 was supplied by the United States and Britain. France’s contribution was only around 1 per cent in these years. It was only when American and British capital markets dried up in 1929–1932 that the CESEE governments and firms turned to French and Swedish capital markets (Accominotti & Eichengreen 2015, 476). After the franc entered the gold exchange standard de jure in 1928, French interest rates started to decline, and thereby French capital became competitive in global financial markets. The share of French and Swedish capital increased to account for close to 50 and 30 per cent, respectively, of all capital received by the region in 1929–1932. France concentrated its lending on SEE countries, while Sweden lent broadly. Figure  9.2 provides an overview of capital inflows to ten Central and South East European countries between 1919 and 1937. The period from 1919 to 1932 includes borrowing through bond issues. From 1933 onward, the series include total borrowing based on balance-of-payments data. Thus the figures prior to 1933 undervalue total capital inflows to the extent that CESEE countries relied on foreign borrowing other than through bond issues (e.g. direct equity investments or direct lending). Four sub-periods emerge: the post-war years of 1919–1923, with minimal foreign capital inflow; the years of stabilization in 1924–1928, with

222  Jari Eloranta et al.

250

Millions of current USD

200

150

100

50

0

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 US

UK

France

Netherlands

Switzerland

Sweden

FIGURE 9.1  Borrowing

through bond issues by Central and South-East Europe, 1919–1932, according to lending country

Source: Own calculations based on League of Nations (1943). Notes: Bond issues of central and provincial governments, municipalities and corporations. Central and South-East Europe consists of ten countries shown in Figure 9.2.

increasing capital flows; the years of financial crises in 1929–1932; and the years before the Second World War, 1933–1937. During the first sub-period, CESEE obtained only 7 per cent of the total foreign capital volume of the whole 1919–1937 period, implying a capital deprivation of the years immediately following the war. Capital inflows were more pronounced in the following three sub-periods, which accounted for 31 per cent, 26 per cent, and 35 per cent of the total foreign lending, respectively. Why was Central and South-East Europe’s capital market integration low in the post-war years? After the First World War, Eastern European demand for capital was driven by the need for physical and financial reconstruction. The United States looked favourably upon newly independent countries and supplied the first major international loans to Poland, Czechoslovakia, and Yugoslavia, while Romania was able to contract a loan from allied France. Thus Eastern European countries which were affiliated with the Allied Powers could issue bonds abroad without external support even in the years immediately following the war (Nötel 1986, 180–181; Orde 1991, 27–40). These loans were planned to be used for either financial consolidation, domestic infrastructural and productive investment, or both. While Czechoslovakia (both reasons above) and Romania (external debt consolidation)

Between disintegration and convergence  223

250

Millions of current USD

200

150

100

50

37

36

19

35

19

34

19

33

19

32

19

31

19

30

19

29

19

28

19

27

19

26

19

25

19

24

19

23

19

22

19

21

19

20

19

19

19

19

0

Czechoslovakia

Hungary

Poland

Bulgaria

Greece

Romania

Yugoslavia

Estonia

Latvia

Lithuania

FIGURE 9.2 Borrowing

by Central and South-East Europe, 1919–1937, according to borrowing country

Source: Own calculations based on League of Nations (1935, 1936, 1937, 1943). Notes: Data from 1919 to 1932 include bond issues of central and provincial governments, municipalities and corporations. Data from 1933 to 1937 include total borrowing.

used the loans as planned, the Polish proceeds went to war finance while Yugoslav ones were used mainly for general government needs. Thus, Czechoslovakia was the only Eastern European country that managed to stabilize its exchange rate before 1924 (Nötel 1986, 179–181). The gold standard orthodoxy of the time posited that having stable exchange rates was crucial in order to attract foreign capital. Based on pre-war experience the gold standard was seen as a “good housekeeping seal of approval” (Bordo & Rockoff 1996). Moreover, fixed exchange rates were one of the main pillars of the Brussels principles – a commitment to fixed exchange rates, balanced budgets, and the independence of the central bank – that Eastern European countries adopted at the Genoa Conference of April  1922. While in writing agreeing to the Brussels principles, in practice most Eastern European countries were not able to keep budgets balanced and currencies stable during the first half of the 1920s (see Chapter 8 in this volume). An additional factor that could have contributed to low capital flows during the years immediately following the war was creditors’ bad experiences resulting from

224  Jari Eloranta et al.

the debt repudiation of the Soviet Union. Foreign capital flows to the USSR must have certainly been influenced by this event. However, it is unclear how other CESEE economies were affected. British and French creditors were the main victims of the repudiation, and whereas the former did lend between 1919 and 1923, the latter did not lend to CESEE until 1923 (Figure 9.2). Since it took years to settle the uncertainty around the responsibility of seceding states (Poland, Romania, and the Baltic states) for the debt of the former Russian Empire, these countries’ ability to borrow may have been affected by the repudiation. However, since Russian bond prices were not significantly impacted by the repudiation, it cannot be concluded that the French lending appetite was seriously impacted by the Soviet decision (Oosterlinck & Landon-Lane 2006). It is thus much more likely that the capital-dry post-war years can be explained by lenders’ political decision to favour their allied partners and borrowers’ inability to attain monetary stabilization. In terms of the CESEE region’s capital market integration, 1924 was a watershed year. The role played by the League of Nations – lending credibility to recipient countries – was essential for attracting capital in several Eastern European countries in the period from 1924 to 1928. It was with the help of the League of Nations that Hungary (1924), Greece (1924 and 1928), Bulgaria (1926 and 1928), and Estonia (1927) were able to receive major international loans. Those that refused the League’s support, such as Albania, were excluded from foreign financial markets (Flores & Decorzant 2016, 674–675). The international loans contracted by Hungary, Greece, Bulgaria, and Estonia with the help of the League of Nations (so-called League Loans) as well as other international loans in the case of Poland proved instrumental in helping these countries stabilize their exchange rates. External help in the form of capital inflows was welcomed by Eastern European governments since major parts of the proceeds from foreign government loans were used to replenish central bank reserves. Therefore, capital inflows and stable exchange rates were closely related, and it is thus not surprising that Eastern European capital inflows significantly increased in the period from 1924 to 1928, when most Eastern European countries stabilized their exchange rates. Inflows were further helped by the fact that Eastern European countries had depreciated their exchange rates relative to pre-war parity (see chapter on economic policy, table 1) – a development foreign creditors looked upon favourably (Obstfeld & Taylor 2003). Contraction in the supply of international long-term capital started in 1929 as European borrowers experienced a sudden stop and capital flow reversal from major international financial centres. Recipient country features had much less to do with the boom and sudden stop of foreign capital flows than did supplyside factors such as stock market volatility at the financial centres (Accominotti & Eichengreen 2015). Economic fundamentals, international transmission and global shocks played a role in financial crises experienced by almost all Eastern European countries in the latter half of 1931 (Nikolić 2017). Still, during the period from 1929 to 1932 Eastern Europe attracted around a quarter of its total interwar capital flows, two thirds of which took place in 1931 (Figure 9.2). What accounted for the significance of foreign capital flows even in a period troubled by financial crises? Late de jure currency stabilization in Romania and

Between disintegration and convergence  225

Yugoslavia is part of the explanation. The two countries took out major international loans from France – accounting for more than half of the total capital flows to Eastern Europe in the 1929–1932 period – in order to join the gold standard de jure in 1929 and 1931, respectively. Another part of the 1931 capital flow can be attributed to emergency bailout credits. Although it is impossible to tell from the data what percentage of the total should be assigned to such purposes, it is very likely that the figure is not negligible. For instance, it is known that only the Hungarian National Bank’s bailout can by itself account for 20 per cent of the Hungary’s capital inflow depicted in Figure 9.2 (Macher 2019). The majority of the residual capital flows to Eastern Europe in the period can be attributed to Ivan Krueger’s capital investments into the region through his Swedish Match Company (Wikander 1983, 209–226). It has been argued that capital flows practically ceased to exist in the 1930s (Nurkse 1944, 16; Nötel 1986, 231). Figure 9.2 shows that 1933 to 1937 is a period of concentration rather than contraction of capital flows into CESEE. Czechoslovakia and Poland alone accounted for three-quarters of total capital inflows in the period. Greece accounted for 15 per cent of CESEE and 70 per cent of SEE borrowing. The increased concentration can be explained by both economic and political factors. Most CESEE countries lost creditworthiness due to sovereign defaults. Hungary, Bulgaria, Greece, Yugoslavia, and Romania (in that order) all defaulted on their sovereign foreign debt from 1931 to 1933 (see Chapter 8). Following a default, it took years until the foreign borrowing of Bulgaria and Yugoslavia recommenced on a meaningful scale, while the capital imports of Hungary and Romania almost completely ceased. Greece was the exception. Leaving the gold standard early and being the most open CESEE economy (see Section 3) probably helped its position. The same economic rationale cannot be applied to Poland as it remained on the gold standard and was the least open CESEE economy. Close political relations with its major creditor France played a decisive role. Czechoslovakia’s traditional attractiveness towards foreign creditors prevailed despite slow economic recovery.

Interwar trade Trade of CESEE countries during the interwar period can be divided into periods of increasing trade (1920–1929), stagnation and decline (1930–1933), and recovery (1934–37). Total trade figures, shown in Figure 9.3, demonstrate these trends. Arguably, the League of Nations had an instrumental role in bringing about the positive improvement of the 1920s. The League required all recipients of reconstruction loans to settle their regional conflicts and increase trade towards their neighbouring countries. The rise in trade was also supported by favourable global capital market conditions during these years. From 1929 to 1933, total trade declined by more than a third. Increasing trade re-emerged from 1934, but complete recovery was not achieved. In the first sub-period of 1920–29, Greece was the weakest performer as its trade increased only by 46 per cent vis-à-vis the 1920 level. In comparison, the Baltic states

226  Jari Eloranta et al.

Millions of current USD

4000.0

Yugoslavia

3500.0

USSR

3000.0

Romania Poland

2500.0

Lithuania

2000.0

Latvia

1500.0

Hungary Greece

1000.0

Estonia

500.0

Czechoslovakia Bulgaria Albania

19

2 19 0 2 19 1 2 19 2 2 19 3 2 19 4 2 19 5 2 19 6 2 19 7 2 19 8 2 19 9 3 19 0 3 19 1 3 19 2 3 19 3 3 19 4 3 19 5 3 19 6 3 19 7 38

0.0

FIGURE 9.3 Total

trade of CESEE countries, 1920–1938

Source: Own calculations based on the Federico-Tena World Trade Historical Database. Notes: Total trade is exports plus imports. No trade data for Poland in 1920, 1921 and Czechoslovakia in 1938.

increased their total trade significantly: by 1929 Estonia reached almost 14 times, Latvia 6 times and Lithuania 8 times its 1920 trade level. The USSR achieved the biggest improvement with a tremendous 3,561 per cent increase in its trade from 1920 to 1929. Nonetheless, it must be noted that the USSR’s total trade was at a very low initial level in 1920, equivalent to that of tiny Lithuania. Among the three Central European countries, Hungary was the best performer with a rise of 299 per cent and Poland the weakest with a 131 per cent improvement in trade from 1920 to 1929. The two years of stagnation at the aggregate level were actually volatile at the individual country level. Bulgaria, Lithuania, and the USSR significantly improved their total trade in these two years. All the others, however, experienced a decline of 7–33 per cent compared to the 1929 level, with the lowest figure coming from Hungary, the highest from Romania. Only Albania’s trade was actually stagnating in these two years. In 1932 and 1933, all of the countries suffered a decline in their total trade. The USSR, Romania, and Lithuania experienced the smallest drop and they were able to largely maintain the advances of the 1920s. Czechoslovakia’s total trade, however, declined by 61 per cent from 1929 to 1933 and came close to the 1920 level. Greece’s trade dropped below the 1920 level in 1933. Then in the period of 1934–1937, all CESEE countries increased their trade compared to the 1933 level, with the exception of the USSR. Estonia was the best performer with a 97 per cent and Poland the weakest with a 21 per cent improvement from 1933 to 1937. Finally, 1938 was a controversial year in which some countries already saw a trade decline of 4 to 21 per cent (Latvia, Yugoslavia, Hungary, and Romania) while the rest of the region experienced a 6 to 17 per cent rise in total trade (Lithuania, Greece, Albania, and Bulgaria) or stagnation (Estonia, Poland, and the USSR).

Between disintegration and convergence  227

Figure 9.4 shows the openness to trade of eight CESEE countries. Greece and Czechoslovakia were the most open economies of the region. On the contrary, the USSR was the least open economy. Other countries’ trade openness was between the two extremes. The period until 1929 saw increasing openness for most CESEE economies for which data are available. The years from 1930 to 1933 brought a universal decline in trade openness. In all countries except the Soviet Union, this trend reversed in the remaining interwar years. Pre-depression openness levels, however, were not achieved. Figure  9.4 also allows some discussion of whether smaller countries tend to have higher trade openness ratios due to smaller domestic markets (Alesina,  & Wacziarg 1998). Most of the countries of the sample conform to this position. Greece was the smallest economy in the sample in terms of GDP and it was the most open with regards to trade. The opposite applies to the

0.70

0.60

0.50

0.40

0.30

0.20

0.10

FIGURE 9.4 

Bulgaria

Czechoslovakia

Hungary

Poland

USSR

Yugoslavia

1938

1937

1936

1935

1934

1933

1932

1931

1930

1929

1928

1927

1926

1925

1924

1923

1922

1921

1920

0.00

Greece Romania

Trade openness of eight East European countries, 1920–1938

Sources: The Federico-Tena World Trade Historical Database for trade data (current prices, current borders) and exchange rates. National accounts sources: Eckstein (1955, p. 165, table 1), Stádnik (1946, pp. 180–181), SEEMHN (2014), Lethbridge (1986, p. 571, table 8.48), Mitchell (1998, table J1). Notes: Trade openness is share of total trade (exports and imports) in GDP (Bulgaria, Romania, and Greece), GNI (Yugoslavia), or GNP (Hungary, Czechoslovakia, Poland, and USSR), both at current prices.

228  Jari Eloranta et al.

Soviet Union. Czechoslovakia appears to be an outlier as it was the second-largest economy and one of the most open to trade. The trends in the CESEE region’s trade integration depicted in Figures 9.3 and 9.4 closely follow global capital market trends illustrated earlier in this chapter and thus reveal how vulnerable these countries were to changing global capital market conditions. The main reason behind this dependency was these economies’ fragile current account. CESEE countries were heavily agricultural. Hungary was the second most industrialized economy in the region after Czechoslovakia but industry accounted for only 37–44 per cent of the country’s national income (Eckstein 1955) during the second half of the 1920s, and 58 per cent of the labour force was employed in agriculture in 1920 (League of Nations 1927). Primary agricultural products made up about 55–60 per cent of Hungary’s exports, and manufactured agricultural products accounted for an additional 20–25 per cent during the 1920s. That is, 80 per cent of the country’s exports were agricultural (Statisztikai Szemle 1926–1931). Other CESEE countries were even more reliant on agriculture (Berend 1985, 207). As they were heavily exposed to the primary sector of the economy, declining agricultural prices during the interwar years posed a great challenge to these economies. The price of wheat and corn dropped precipitously after the wartime peak and continuously declining price levels characterized the interwar years. New capacities from the United States, Canada, and Latin America flooded the world with cheap agricultural produce. Whereas prior to 1914 CESEE countries were protected against this competition by the tariff walls and the customs union of the Empire, after the post-war disintegration of this system they were left on their own in this competition. Since CESEE agriculture was much less productive than that of these new market entrants, it could hardly compete with low and declining prices (Berend 1985, 182–184; Radice 1985, 23–65). CESEE countries thus had to trade in global primary product markets, which offered increasingly unfavourable terms of trade (Berend 1998, 255–259). Declining global agricultural prices, however, meant that CESEE primary producers were earning less and less foreign exchange after the same volume of exported goods. They did try to increase their export volume but with that they gave a further downward push to prices. Their weak export potential thus meant uncertain foreign currency earnings and a vulnerable current account. Since these countries did not have a powerful export sector to ensure an increasing inflow of capital denominated in foreign currency, if they wanted to increase their imports they had to rely on foreign capital. As long as foreign capital was flowing, as it did between 1924 and 1928, CESEE countries could import goods for investment and consumption. During this period, all CESEE economies, with the exception of Czechoslovakia, were running current account deficits (Nötel 1986, 184–189). These deficits resulted from the fact that agricultural export earnings were mediocre and imports were always higher. Since foreign capital was flowing into these economies in the 1920s, foreign currency was available to pay for the import excess. However, when global capital flows experienced a sudden

Between disintegration and convergence  229

stop, as they did in 1928/1929, CESEE economies immediately had to reduce their imports. The adjustment was quick and complete, and during the sub-period of 1930–1933, most CESEE economies were operating with a current account in surplus (Nötel 1986, 242–249). They reduced their imports to such levels, which they could finance from only agricultural export earnings. When years of higher global capital flows returned in the second half of the 1930s, CESEE countries could again increase their imports and experience a rise in trade. Figure 9.5 shows the share of total trade of CESEE captured by certain countries or country groups, from 1924 to 1938. These shares measure the extent of trade integration between CESEE and its trading partners. Throughout the period, trade integration of CESEE was the strongest with Western Europe (excluding Germany), while integration with the Soviet Union or the Baltics was negligible. Trade within CESEE captured the second largest share until 1928 when it was overtaken by Germany. Much has been written on the reorientation of Germany’s trade in the 1930s (Feinstein et al. 2008, pp. 152–154). Recent research has noted that the increasing trade of Germany with South-East European countries was a drawn out process that started already before the First World War (Morys  &

7%

7%

6%

7%

27%

27%

26%

28%

22%

5%

23%

6%

21%

21%

15%

15%

1924

1925

Other FIGURE 9.5 

22%

7%

7%

22%

23%

25%

4%

5%

17%

17%

21%

21%

1928

1929

11% 1926

1927

Baltics

29%

31%

34%

25%

26%

23%

4%

5%

15%

13% 1930

CEE

5%

5%

7%

8%

8%

37%

38%

36%

34%

35%

20%

19%

21%

20%

4%

4%

5%

5%

6%

13%

13%

14%

14%

13%

12%

14%

15%

16%

17%

17%

17%

18%

1931

1932

1933

1934

1935

1936

1937

SEE

6%

27%

24%

5% 18%

22%

21%

5%

24%

6% 17%

7%

23%

25%

5%

8%

Germany

Western Europe

6%

USA

9%

27%

1938

USSR

Trade integration: total trade by trading partner, 1924–1938

Sources: SEEMHN (2014), LoN (1928) Memorandum on International Trade and Balance of Payments 1913–1927 Volume II; LoN (1931) Memorandum on International Trade and Balance of Payments 1927–1929 Volume III; LoN (1932–1939, multiple publications) International Trade Statistics. Notes: No data for the USSR for 1938. Western Europe covers Belgium, Denmark, France, Gibraltar, Ireland, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, United Kingdom.

230  Jari Eloranta et al.

Ivanov 2015, 404–407; Ritschl 2001, 337–338). Considering CESEE as a whole, Figure 9.5 shows that strong German trade presence extended beyond South-East Europe since Germany captured a large share of CESEE trade already from the 1920s. At the same time, the fact that most of CESEE trade was conducted with Western Europe warns against the idea of German trade dominance in CESEE. Only Bulgaria’s and Greece’s exposure was higher to Germany than to Western Europe in 1937. Hungary and Romania, German allies in the Second World War, traded more or at the same level with Western Europe than they did with Germany. Figure 9.5 also shows that CEE countries accounted for 12–22 per cent of the region’s total trade, gradually declining towards the end of the 1930s. The decline can be detected in absolute terms as well: the CEE region’s importance in terms of trade dropped by 41 per cent between 1924 and 1937. SEE accounted for 4–6 per cent of the trade, while the share of the Soviet Union and the Baltics was negligible. The contribution of the United States to the region’s total trade was in the range of 5–7 per cent. The data behind Figure  9.5 reveal interesting country-level distinctions. The Baltic states were the most reliant on trade with Western Europe and Germany, with about 80 per cent of their total trade arising from these countries. They were not integrated with the rest of the region. Albania’s and Greece’s same figures were lower as they extensively traded with SEE countries and the United States as well. Other SEE countries were more reliant on trade with CEE countries. Yugoslavia had the highest exposure to CEE with 25–45 per cent of its exports and imports generated with this region. CEE countries traded intensively amongst themselves with at least 15–20 per cent of their total trade coming from their sub-regional peers, or even higher; for example in the case of Hungary the figure was 50–60 per cent in the 1920s. The USSR is somewhat of an enigma in the CESEE sample as its trade appears to follow trends opposite to those of the rest of the countries. Its total trade expanded when others’ contracted and stagnated when that of the rest was growing. As openness figures have revealed, the Soviet Union was the least open economy in the sample with only a minor exposure to the outside world in terms of trade. As it was the largest economy in terms of population, the country had a large internal market and was thus less reliant on foreign trade. Further, the country was essentially cut off from most of world trade due to a state monopoly over foreign trade (Markevich & Harrison 2011). Isolation thus may explain why the patterns followed by the USSR were different from those of the rest of the sample. CESEE economies’ integration with Western trade markets was thus dependent on the availability of foreign capital. As long as they had access to foreign capital, their imports were high and hence their trade integration was high. When Western countries retrenched, a period of disintegration kicked in. This dependency has been noted by Accominotti and Eichengreen, who argue in connection with Hungary, Austria, and Germany that the sudden stop of 1928/1929 was due primarily to changing global capital conditions, in particular, increasing stock market

Between disintegration and convergence  231

volatility in the United States, rather than features or decisions of debtor nations (Accominotti & Eichengreen 2015). Being agricultural during the interwar period hence automatically implied that these peripheral countries could only converge to the more developed core if the latter supplied them with capital. They could then use this capital for investment into infrastructure and industries or for the improvement of agricultural productivity. Hence, they could slowly replace primary goods in their exports with higher value-added goods and thereby boost their foreign currency earning potential. The handful of years with sufficient global capital flows in the 1920s and 1930s were, however, an insufficiently short period to bring about such a change. CESEE countries’ chance for a catch up with the West was thus stifled by the sudden stop in 1928/1929 and the Second World War. It has been claimed by the literature that global capital market integration was not only short to bring about a significant economic turnaround in the European periphery, but also the countries of the region squandered the foreign capital they received. Rather than making use of the capital in productivity-improving investments, the money was spent on short-term purposes such as consumption and on the improvement of living standards (Berend 1998, 259–261). Unfortunately, no quantitative research has assessed these claims. What can be concluded from the available data is that trade market and capital market integration followed the same trends during the interwar period. It has also been suggested by the literature that CESEE countries were pursuing economic autarky during the interwar years by erecting tariff walls around themselves and they were disfavouring countries of the region in their trade. Drabek (1985) has documented tariffs across the region in various industries and has argued that tariffs significantly increased during the 1920s (Drabek 1985, 410–411, table  7.17) and the 1930s (Drabek 1985, 438–439). Nonetheless, the pursuit of autarky and countries’ lacking inclination to trade with other countries of the region are not confirmed by the available data. CESEE countries did trade amongst themselves, and while tariffs may have had some impact on the volume of this regional trade, capital flows seem to have been the paramount driver of trade volumes.

Movement of labour Migration within interwar Europe evolved in two distinct periods roughly corresponding to the two interwar decades. In chronological order, there was migration relating to post-war boundary settlements, economically motivated migration of the 1920s, migration due to the economic depression of the 1930s, and migration associated with the subsequent rise of authoritarian power in Europe (Kirk 1946, 104). Rates of migration were higher in the 1920s than in the 1930s. Migration was driven by both economic and political motivations. Migrants responded to economic incentives and moved in search of a higher living standard. War, changing borders, and political persecution provided perhaps more urgent reasons to

232  Jari Eloranta et al.

migrate. Economically motivated migration was directed from Eastern to Western Europe. Still, considerable movements of population occurred between Eastern European countries due to political turmoil after the end of the First World War. The lack of restriction on migration was a crucial element of 19th-century mass migration (Hatton & Williamson 1998). After the First World War, an increasing number of restrictions on immigration were put in place in the United States – the dominant overseas country of destination for European emigrants (Chiswick  & Hatton 2003, 73–74). As a result, the attention of emigrants turned to other parts of the Western Hemisphere (Brunnbauer 2016) and destinations on the continent. France and other countries of Western Europe increasingly took the role of the New World. By the late 1920s, France overtook the United States to become the main destination of European migration. During the 1920s over a million people immigrated to France from Poland and Italy alone (Kirk 1946, 105). Poland and Italy had one of the highest intercontinental emigration rates in Europe. Nevertheless, by 1923 Polish and Italian continental emigration rates had become higher than intercontinental ones (ILO 1926, 1929). In Soviet Russia, the First World War  and the civil war that followed were great humanitarian tragedies, yet the Russian population grew in the early 1920s, mainly due to high fertility and the collapse of the empire (Markevich & Harrison 2011). Who emigrated, where to, and at what rate? The number of Eastern Europeans living outside their country of birth (or nationality), their distribution across European regions, and share in neighbouring countries around 1930 is presented in Table 9.2.3 The countries of Central Eastern Europe supplied more emigrants than the rest of Eastern Europe taken together. Close to 1.5 million Poles were living outside Poland around 1930. More than 80 per cent of Central-Eastern European emigrants (Poles, Czechoslovaks, and Hungarians) settled in Western Europe. On the contrary, only a quarter of emigrants from South-East European countries (Albania, Bulgaria, Greece, Romania, and Yugoslavia) moved to Western Europe. Instead, the vast majority of them stayed within Eastern Europe. The same was true for Baltic countries on a whole, though most Latvian émigrés went to Western Europe. The total of Russian emigrants to Western and Northern Europe outweighed the number of those who stayed within the confines of Eastern Europe. Across the board, destinations in Eastern and Western Europe were preferred. A limited number of emigrants from South-Eastern Europe were attracted to Southern Europe, and from Russia and the Baltic countries to Northern Europe. The last column reports the per cent of emigrants settling in neighbouring countries. In most cases the majority of emigrants were concentrated in neighbouring countries indicating that geographical proximity is a relevant factor of migration. There are, however, notable exceptions. Emigrants from Russia, Latvia, and Poland did not move to neighbouring countries as much as their counterparts from other Eastern European countries. Period average continental emigration rates (as per 1,000 of population) for 12 European (of which seven Eastern European) countries are shown in Table 9.3. Emigration rates of Eastern as well as other European countries peaked during

Between disintegration and convergence  233 TABLE 9.2 Number of East Europeans living outside their country of birth (or nationality),

their distribution across European regions, and their share in neighbouring countries, ca. 1930 Country of origin

Total Europe (Number of People)

Eastern Europe (%)1

Western Europe (%)2

Central-Eastern Europe Poland Czechoslovakia Hungary South-East Europe Romania Yugoslavia Greece Bulgaria Albania Baltics Lithuania Estonia Latvia USSR

2,656,745

17.7

81.7

1,489,608 967,994 199,143 872,259

6.6 28.1 50.1 72.9

328,389 320,669 138,334 61,637 23,230 82,720 63,964 12,263 6,493 367,556

83.9 53.9 79.1 89.5 98.1 64.6 63.1 85.4 40.1 46.7

Northern Europe (%)3

Southern Europe (%)4

Neighbouring countries (%)5

0.3

0.3

68.2

92.8 71.4 48.3 25.1

0.4 0.1 0.1 0

0.1 0.4 1.4 2.0

53.3 89.4 77 72.4

15.8 42 19 10 0.2 32.8 36.2 8.9 44.6 41.7

0 0 0 0 0 2.6 0.7 5.7 15.3 11.1

0.2 4.2 1.8 0.4 1.7 0 0 0 0 0.4

82.7 78.3 80.8 85.7 98.1 65.8 63.2 88.7 48.6 25.5

Source: Own calculations based on Kirk (1946, pp. 282–283, Table 4). Notes: 1 Shares present a lower bound estimate as Albanian, Polish, Romanian, and Russian census data are not included. 2 Austria, Belgium, France, Germany, Ireland, Netherlands, Switzerland, United Kingdom. 3 Denmark, Finland, Norway, and Sweden. 4 Italy, Portugal, and Spain. 5 Neighbours – countries with shared borders over land and sea (for the latter: Italy in the case of Albania, Greece, and Yugoslavia; Sweden and Finland for the Baltic countries).

the 1920s. Still, peak interwar emigration rates of any Eastern European country were lower compared to average pre–war (1906–1910) emigration rates of Austria and Hungary, which came close to 5 per 1000 people.4 The 1930s brought a considerable decline and none of the countries (except Bulgaria) managed to regain the level of emigration rates of the preceding decade. In the first half of the 1920s emigration from Western Europe outpaced Eastern Europe. In the second half of the 1930s the situation reversed. While the volume of emigrants from Italy was unmatched by any Eastern European country, the record rate of Polish emigration in the second half of the 1920s outpaced even Italian standards. Central Europe (Poland and Czechoslovakia) was characterized by high emigration rates, while there was more variation in South-East Europe. Emigrants left Bulgaria and Greece at a higher rate than was recorded in Romania or Yugoslavia. Estonia, the single Baltic representative in Table 9.3, shows relatively low emigration rates throughout.

234  Jari Eloranta et al. TABLE 9.3 Five-year average continental emigration rates, 1920–1939, per one thousand

inhabitants

Bulgaria Estonia Greece Poland Romania Czechoslovakia Yugoslavia Average (Eastern Europe) Italy Belgium France Finland Sweden Average (5 Other European States)

1920–1924

1925–1929

1930–1934

1935–1939

n.a. n.a. n.a. 1.22 0.58 1.64 n.a. 1.15 4.83 4.28 1.18 0.10 0.47 2.17

2.08 0.97 n.a. 3.64 0.73 1.98 0.97 1.73 2.90 3.53 1.36 0.11 0.32 1.64

1.46 0.37 2.48 1.78 0.28 1.42 0.86 1.24 2.44 2.17 1.60 0.09 0.27 1.31

3.79 0.39 1.84 1.72 0.19 0.64 0.78 1.33 0.77 1.58 0.92 0.19 0.26 0.74

Sources: Own calculations based on migration data from ILO (1926, 1929, 1935, 1942), Wilcox (1929); and population data from SEEMHN (2014) for Greece, Bulgaria, Romania, and Yugoslavia, Broadberry and Klein (2012) for Czechoslovakia, Poland, Italy, Belgium, France, Finland, and Sweden, and Kirk (1946) for Estonia. Notes: Emigration of nationals and aliens for Bulgaria, Greece, Romania, Yugoslavia, Belgium, and Sweden; of nationals for Estonia, Poland, Czechoslovakia, Italy, Finland; of aliens for France. n.a. = no emigration data are available in the given sources. Data for 1939 are available only for Bulgaria, Belgium, Greece, Romania, and Sweden.

What explains the volume and direction of migration flows during the interwar period? In the aftermath of the First World War, all the defeated powers received a substantial amount of permanent refugees. Such migrants consisted of government officials, proprietors, and white-collar workers who had to leave ceded territories due to their allegiance to former regimes (Hauner 1985, 84–85). In Eastern Europe, Hungary received around half a million immigrants from lost territories (200,000 from Czechoslovakia and Romania each, and 100,000 from Yugoslavia). Bulgaria played host to 300,000 immigrants from neighbouring countries (200,000 from Greece and 50,000 from Romania and Yugoslavia respectively). Nevertheless, the largest movement of people in the interwar period came as a result of the 1922 Treaty of Lausanne, which ended the Greco-Turkish hostility and specified the terms for the ensuing forced migration between Greece and Turkey. By virtue of the treaty, over a million Greeks were transferred from Turkey back to their homeland, while 400,000 Turks went in the other direction (Kirk 1946, 102–103). Unlike the political “push” factors determining migration movements in the early 1920s, migration in most of the decade was driven by economic factors. Similar to the late 19th century (Hatton & Williamson 1998), migration decisions were based on economic considerations. Considerable differences in per capital income

Between disintegration and convergence  235

and presumably high wage differentials between Eastern and Western Europe provided strong incentives for migration to the more developed part of Europe. It is possible, however, that migrants discounted their future prospects both at home and abroad, so that domestic factors influenced migrant decisions in addition to the “pull” factors coming from the high wage countries. Also, as the 1920s progressed there may have been an increased significance of the “friends and relatives” effect by which previous emigrants help future emigrants by sending remittances or sharing their human capital on the country of immigration. During the 1930s migration across Europe continued, albeit at a lower rate than in the previous decade. Contrary to the economically motivated emigration of the 1920s, economic depression hindered migration flows from Eastern to Western Europe. Domestic economic hardship lowered the prospects of saving enough to cover relocation costs, while the decline of economic activity decreased job opportunities in countries of immigration. A peculiarity of the Great Depression period was the increase of return migration. The Eastern European country most affected by the return of its emigrants was Poland. In the period from 1931 to 1936 – which coincided with the economic downturn in France – Poland recorded positive net migration (more immigrants entered than left the country). As the French left the gold standard and economic recovery started, so did Polish net immigration rates turn negative (more immigrants left than entered the country). Migration played a large role in the convergence of wages across countries in the late 19th century (Taylor & Williamson 1997). As we have seen, there was considerable migration across the continent during the interwar period. Did migration lead to wage convergence between Eastern and Western Europe? According to the Heckscher-Ohlin factor endowment logic, migration from low to high wage countries would lead to wage convergence by changing the supply of workers relative to other factors of production. A different outcome is conceivable according to new economic geography as the effect of migrants in countries of immigration may be growth-enhancing. Recent evidence on Sweden – an important country of emigration in the late 19th and early 20th century – shows that external migration contributed to wage convergence before the First World War but not during the interwar years (Enflo et al. 2014). Unfortunately, no comparable study exists for Eastern Europe. The subsection paints a broad picture of interwar continental migration concentrating on Eastern Europe. A gap in the literature remains to be filled by studies reconstructing the flows and explaining the drivers of interwar cross-country continental emigration from Eastern Europe. Moreover, further research is needed on the vital yet underexplored question of the effects of migration on wage convergence between Eastern and other parts of interwar Europe.

Conclusion The First World War was a huge shock for Europe, both the East and the West. It disrupted trade, broke up states and created new ones, reoriented national

236  Jari Eloranta et al.

economies, and led to massive losses of human life. It also brought on severe consequences, including macroeconomic shocks, as well as political and economic instability. The first period of economic globalization came to an end in 1914, representing an end to the preceding liberal order. This disruption was also the first in many shocks that would destabilize Europe as a whole in the interwar period. Moreover, it appears that democratic form of government was among both the winners and losers of the First World War. The war signified the culmination of the first wave of democratization, which meant sweeping political changes for especially the CESEE nations. One of the most important reforms brought on by the war – stimulated by the need to maintain public support for massive wartime government spending during the war – was the extension of the voting franchise. Compared to the earlier period, most of the interwar European polities were slightly more democratic, yet they were more volatile as regimes too. The only notable exceptions were the states that became significantly more democratic in the period, although for example Russia and Romania bucked this trend. For countries that stayed out of the world war, the interwar period meant higher levels of democracy and slightly more fluctuations in these levels compared to the earlier period. Countries that won both the world wars, respectively, experienced political stability, albeit a bit lower democracy levels in the interwar period. Countries that lost the First World War  were pushed into democratic transitions, which tended to be quite volatile. The CESEE nations were also impacted by these trends. In Central Europe, the collapse of the Austro-Hungarian empire meant the creation of new states. Moreover, the shrinking of the Russian empire into a smaller Soviet empire meant the creation of new nation-states, some of which were more coherent politically and ethnically than others. For example, Finland and Poland had enjoyed a great deal of autonomy during the 19th century within the Russian empire, so their borders were more predictable and accepted by other states. Poland and other “new” East European states became more democratic after the First World War, but they also had contentious elections and leadership transitions for most of the period. For example, their latent democracy scores improved slightly during the interwar period, but they were still much lower than Finland’s scores, for example, which were similar to other Nordic countries. Democracy was fragile in Eastern Europe in the 1930s, and in most cases transitioned to some form of authoritarianism in the last years of the decade. Military dictatorships were also rather common in the 1930s among the CESEE nations. Thus, the early efforts at nation-building were fragile at best, and soon after halted brutally by the Second World War and its aftermath. One of the early efforts to support the fledgling nations in Europe centred on the League of Nations. In general, the CESEE nations were quite adversely impacted economically by the First World War, so they needed inflows of capital to finance the reconstruction and recovery from the conflict. However, they had somewhat limited access to capital in this period, although the League of Nations facilitated significant capital transfers in the 1920s. In general, the Eastern European capital market integration with the West was low immediately after the war (until 1923),

Between disintegration and convergence  237

high in the period 1924–1928 and post-1932, and at a medium level in 1929–1932. The primary lenders were the United States and the United Kingdom and later also France. Moreover, the Central European economies differed from the South European economies in many ways. In absolute terms, the former received significantly more capital, although this finding was reversed when adjusted to the size of their economies. Furthermore, capital flows into CESEE countries hardly declined in the 1930s; rather, they became more concentrated in the bigger economies like Czechoslovakia, Poland, and Greece. Many of the CESEE nations also defaulted on their debts, thus becoming less creditworthy. In terms of external trade, many of the Central and Eastern European nations were smaller economies dependent on foreign trade. Their aggregate trade flows were devastated by the war and the aftermath, and the region’s total trade in 1924 was still substantially below the 1913 level. Trade openness levels were fairly low throughout the period, and they declined further as a result of the depression. These countries’ trajectories in terms of exports were most similar with Germany, with a better performance in the 1920s, and a slump until the mid-1930s. Furthermore, the Eastern European economies typically exported agricultural products, for which the market conditions deteriorated even faster. Regardless, the region experienced increasing trade integration and trade openness after 1924, at least until the depression. The trend towards integration and revival of trade picked up speed again after 1933 and lasted until 1937. Yet within the CESEE group, countries hardly behaved in a uniform fashion, with high, mediocre, and low performers in terms of trade and integration. Similarly, labor mobility in various parts of Europe was substantially higher in the 1920s, due to both economic and political factors, and this also applied to the CESEE countries. Post-war boundary changes, economic opportunities, and recovery from the war all speeded up migration, especially from the East to the West. With the onset of the Great Depression, labor mobility dwindled, given the political conditions and limited economic opportunities across borders in the 1930s. The rise of authoritarian regimes and the depression reduced migration throughout the decade. CEE countries supplied most of the emigrants, especially Poland, Czechoslovakia, and Hungary, and the bulk of them moved to Western Europe. Emigrants from the SEE countries typically moved within Eastern Europe. On the whole, the migration flows were conditioned by economic incentives during the interwar period. Another challenge for Europe and the rest of the world after the First World War was how to resolve future conflicts. The League of Nations was created to solve many economic and political problems, although it turned out to be rather ineffective in mediating conflicts and decreasing military spending levels. Most nations spent less of their overall budgets after the war on the military, yet their military spending shares of GDP remained fairly similar to the pre-war period. This also applied to the East European states. However, many of them became less democratic in the 1930s, which also coincided with higher military spending levels. While many of the European states, both old and new, were more democratic in the 1920s

238  Jari Eloranta et al.

than before the conflict, several of them were quite volatile and prone for internal political competition. The Great Depression amplified these tendencies, and subsequently many East European countries fell under military regimes or outright authoritarian dictatorships. On the other hand, the League of Nations was able to mitigate the economic hardship of CESEE countries in the 1920s by facilitating capital flows and economic collaboration while it was unable to provide political stability. In sum, this was an uneven period of integration and disintegration in terms of economic development, trade, capital, labor, and European institutions. The fragile recovery and integration after the First World War collapsed with the beginning of the depression, which impacted the countries examined in this chapter differently. Trade and capital flows diminished initially after the First World War  but rebounded in the late 1920s. Then the depression hit the CESEE countries equally as hard as other parts of Europe, but they also were able to recover partially in the latter part of the 1930s. The League of Nations, which attempted to help keep peace in the period as well as aid developing European economies, was a failure in its broader goal of European peace and stability, yet it was able to alleviate some of the forces of divergence and instability on Eastern Europe. However, the fragile successes of the 1920s were quickly forgotten amidst the selfish economic and trade policies of the 1930s, and many of these states would be drawn into great power competition over the future of Europe. None of them fared well in the turmoil that came in the form of the Second World War. Are there lessons to be learned from the CESEE experience in the interwar period? First of all, despite the overall break in the trend of increasing globalization, due to the war this period was hardly uniform in nature. Divergence in trade flows was a prominent feature right after the war and during the toughest years of the depression, whereas convergence made a comeback during the mid-1920 and (to lesser degree) in the mid-1930s. It is misleading to assume that divergence was the overarching theme of the interwar period and that globalization could be constrained completely, or that there would not be significant regional differences. The CESEE countries as a group prove this notion, and that there were even substantial differences within this disparate group. Second, while the instability and uncertainty brought on by the First World War was extensive, some of the problems for Eastern Europe were alleviated by the actions of the League of Nations. While the League was only able to claim limited success in keeping the peace, it was able to facilitate capital flows and disseminate useful information to policymakers. During a relatively stable period, the 1920s, they were rather successful. But once the depression hit, it was no longer very effective and nationalism dominated the economic policies of the CESEE countries too. One of the lessons was, as for the rest of the world, that recovery from a major conflict requires economic assistance and aid, and thus the approach to the post–Second World War situation was different. And, of course, the Allies did not resort to punitive measures towards the losing side after that conflict, which helped the transition towards functional peacetime

Between disintegration and convergence  239

economies. Third, nation-building by the CESEE nations was both aided and hurt by the splintering of the Central and East European empires. On the one hand, the new (and sometimes old) nations were able to become independent states; yet, on the other, they left behind institutional, political, economic, and ethnic instability that in part led to the authoritarian trend of the 1930s. And the CESEE nations were hardly alone in this – the democratization wave that enabled their rise also crested elsewhere in the world, and the Cold War era did not help these nations keep their independence in the quest for power between the East and the West. Fourth, more research is needed to investigate the patterns of divergence and convergence between the East and West Europe. Also, the patterns of economic and political changes after the two major empires (Germany and Austria-Hungary) splintered need to examined further, to understand the multitude of consequences of the creation and destruction of polities. Our effort is simply a modest step in this direction.

Notes 1 The authors’ calculations are based on Bank of England Archive, file OV9/234, copy of a letter received by Sir William Goode from Dr Iklódi Szabó of the Hungarian Finance Ministry, 17 December  1927 and Rothschild Archive London, files XI/111/245, 000/401K/9, XI/111/294, XI/111/311, XI/111/317, XI/111/349. 2 Unfortunately, GDP figures are not available for the Baltic countries. 3 The lack of detailed data on interwar European cross-country migration flows compels the use of census data on the number of foreign-born persons in a country to approximate the volume and direction of migration. Thus Table 9.2 shows the outcome of previous migration flows and does not allow ascertaining the temporal aspect of migration. 4 Own calculation based on continental emigration figures from Wilcox (1929, 233, table 3) and population data from Broadberry and Klein (2012).

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10 POPULATION AND LIVING STANDARDS Central, East and South-East Europe, 1918–1939 Matthias Morys and Martin Ivanov

Introduction Improving the living standard is the ultimate objective of economic growth. This chapter will discuss to what extent the macroeconomic progress documented in Chapter  7 translated into rising living standards in Central, East and South-East Europe (CESEE) in the interwar period. Two questions will dominate. First, how did total population numbers develop between 1920 and 1939, and what were the driving factors? We will show that the economically advanced countries in the region such as Czechoslovakia, Hungary and Latvia exhibited a demographic experience similar to many West European countries at the time: the demographic transition came to an end and countries reached a new equilibrium of low population growth. By contrast, the poorer countries of the region experienced a late demographic transition with population growth rates of 1.5% per annum (and more) over a period of two decades. In a European perspective, countries such as the Soviet Union and Bulgaria were among the last ones to enter into and exit from this crucial transformational process. Second, how did living standards evolve over time? Living standards improved in all countries, but the catch-up with Western Europe remained limited when judged by income-based indicators such as gross domestic product (GDP) per capita. A more positive assessment emerges only when other factors such as longevity and education are taken into account (so-called non-income-based living standard indicators). Different types of living standard indicators point, in some cases, to different conclusions for the same country. The Soviet Union will turn out to be such a case, where the widely used Historical Index of Human Development (HIHD) suggests a considerable improvement in the interwar period. How much credence should we give this finding in light of the 13 million human losses produced by

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the 1918–1922 and 1932–1933 famines and the Great Terror of 1936–1938? (Cf. section 2.4 for details on these numbers.) Providing an answer will lead us to one of the most intriguing questions of 20th-century European economic history, which first posed itself in the Soviet Union. What did forced structural change (collectivisation of agriculture and stateled industrialisation based on Five-Year Plans) mean for living standards? Was there only long-run gain, but at the expense of heavy short-term pain? Or did industrialisation pay off relatively quickly, at least for the urban population? Structural change happened throughout CESEE in the interwar period, but it was particularly large than in the Soviet Union. We will try to find an answer by means of comparing the Soviet Union with Bulgaria – two countries which stood at approximately the same level in 1913. Based on a large number of indicators, including wages and nutritional intake, we will show that the Bulgarian approach delivered higher living standards in the 1930s, whereas the short-term pain, including for the urban population, was considerable in the case of the Soviet Union.

Countries included in this chapter and data availability The disintegration of the Habsburg and Romanov Empires during and at the end of World War I led to a doubling of CESEE countries compared to the 19th century – from 6 (Austria-Hungary, Russia, Bulgaria, Greece, Serbia and Romania) to 12 (in descending order of population for each group): Eastern Europe

Central Europe

South-East Europe

Soviet Union Lithuania Latvia Estonia

Poland Czechoslovakia Hungary

Romania Yugoslavia Greece Bulgaria Albania

Data availability is unproblematic except for the four small countries in our sample (Albania, Estonia, Latvia and Lithuania) and the Soviet Union. In the Albanian case, statistical material is generally in poor condition. The main reason for the paucity of the Baltic data is the systematic neglect of their economic and social history as independent countries in the interwar period after their incorporation into the Soviet Union in 1940. There has been increased (and promising) research activity since regaining political independence in 1991, but more time will be needed to write the interwar economic and demographic history of the three Baltic countries. Data availability for the Soviet Union constitutes a problem of a very different nature. Data are available but often not deemed trustworthy. For instance, scholars agree that deaths were under-reported during the two great famines of 1918–1922 and 1932–1933, but the exact size of the bias has remained controversial among scholars (cf. section 2.4). A great deal of this uncertainty stems from the censuses of 1937 and 1939. The Soviet authorities refused to publish the results of the

Population and living standards  245

first census, as it contained data the Soviet leadership was uncomfortable with (in particular the vast population losses in Ukraine in the 1932–1933 famine). They subsequently ordered a new census but manipulated many of its contents. Stalin confidently referred in public to the main conclusions of the census even before the statisticians had finalised their work (Applebaum 2019: 376–379). Yet for presentday researchers, the 1939 census remains an important source to this day. Fortunately, a group of scholars led by Yurii Polyakov, a Russian historian and member of the Russian Academy of Sciences, published in 1992 the full census material behind the 1939 census (Polyakov 1992). While not changing the 1939 census in itself, the wider range of material available since 1992 points to different conclusions. In the 1992 publication, for instance, the editors critically discuss in their introduction the total population figure of 170.1 million as recorded in the 1939 census and suggest as more plausible 167.6 million. In 2007, Polyakov also made the full census material of the (unpublished) 1937 census available (Polyakov 2007). Notwithstanding this important step towards historical accuracy, many problems persist with the Soviet data. More strongly than in any other country in our sample, the choice of the data itself is likely to determine the historical narrative in the case of the Soviet Union. With this important caveat in mind, we now proceed to describe and analyse population trends for the CESEE countries in the interwar period.

Population trends and late demographic transition Population trends Table  10.1 shows interwar population levels and growth rates for all 12 CESEE countries, differentiating between Central Europe, Eastern Europe and South-East Europe and comparing them to Western Europe. By Western Europe we mean the 30 West European countries listed in Maddison (2009) but excluding Greece (which we treat as a South-East European country, in line with the overall approach of this volume). As a more meaningful point of comparison, we divide Western Europe into core Western Europe (seven countries: Britain, France and Germany plus Austria, Belgium, the Netherlands and Switzerland), the Nordic countries (Denmark, Finland, Norway and Sweden) and Southern Europe (Italy, Portugal and Spain). The years 1920 and 1939 constitute natural boundaries of our analysis. The immediate post-war period exhibited considerable migration, typically related to the emergence of new nation states and border changes. By 1920 the majority of such movements had run their course, with the notable exceptions of Greece (at least 900,000 refugees following the 1922 Asia Minor catastrophe) and Latvia (approximately 180,000 refugees from other parts of the late Tsarist Empire into the new state between political independence in 1918 and 1925). The last possible choice of year still unaffected by World War II is 1939 (population numbers are typically mid-year data). For the 12 CESEE countries, we rely on Rothenbacher (2002, 2013), who reports population numbers as well as vital rates (crude birth rate and crude death rate) on an annual basis. These two different types of data allow us to calculate not only population growth rates (which includes migration patterns) but also natural

Latvia

Estonia

SovietUnion

1.1

2.0

Czechoslovakia

total

Lithuania

2.6 179.9 (31.3%) 14.7

n.a. n.a. 2.2 147.8 (30.4%) 13.0 9.2

18.7 8.0

Hungary 34.8

n.a. 27.1

total

n.a. 4.5 0.8 4.8

58.7 (10.2%) 1.0 6.3

48.1 (9.9%)

South-East Europe

7.2

4.8 5.0

Romania 19.8

7.3 15.5

Yugoslavia 15.7

3.04 12.0

CESEE total

1.4

1.1

50.0 (8.7%) 288.6 (50.2%)

38.1 (7.8%) 234.0 (48.1%)

total

Average annual population growth 1920–1939 (in percent) 0.6 1.1 1.0 0.7 0.8 1.4 1.6 1.4 1.9 1.3 1.0 1.1 1.4 1.3 1.2 Average annual natural population g rowth 1920–1939 (in percent) 1.65 n.a. 0.6 0.7 0.8 1.4 n.a. 1.5 1.2 1.3 1.1 1.4 1.3 1.1 1.6 Onset of the fertility decline according to the European Fertility Project (year) n.a. 1912 1913 1908 1911 1922 1899 1877 n.a. 1903 1910 1909

19392 174.2

Population (in million) 1913 133.23 n.a. n.a. 1.6 19201 142.9 1.1

Poland

Central Europe

Albania

Eastern Europe

Bulgaria

Panel A: Central, East and South-East Europe (CESEE)

Greece

TABLE 10.1 Population in Europe in 1913, 1920 and 1939 and onset of fertility decline

246  Matthias Morys and Martin Ivanov

Europe total

Core Western Europe7 (7 countries)

14.9 16.8

0.6% Denmark 1898 Sweden 1902 Norway 1903

77.0

0.9% Italy 1913 Portugal 1916 Spain 1920

Nordic countries9 (4 countries)

64.7

Southern Europe8 (3 countries)

Notes: 1 1920 was replaced for reasons of data consistency: Albania (1922), Lithuania (1923), Yugoslavia (1921). 2 1939 was replaced for reasons of data consistency: Albania (1938), Estonia (1928), Latvia (1938), Lithuania (1938), Poland (1938). 3 Population on the ter r itory of the later Soviet Union. 4 Serbia. 5 Based on data for 1925–1938 only. 6 30 Wester n European countr ies as in Maddison (2009) but without Greece. 7 Austr ia, Belgium, France, Ger many, Netherlands, Switzerland, United Kingdom. 8 Italy, Portugal, Spain. 9 Denmark, Finland, Sweden, Norway.

Sources: Population numbers: Rothenbacher (2002) and Rothenbacher (2013) for 12 CESEE countr ies, except for 1913 population on the ter r itory of the later Soviet Union (Markevich & Har r ison 2011) and 1913 population of Serbia (Austr ian National Bank 2014). All other countr ies based on Maddison (2009). Onset of fertility decline is based on Coale & Watkins (1986: 38) for the Soviet Union, Hungary, Greece and panel B. Entr ies for Estonia, Latvia (average of Kurland and Livonia), Czechoslovakia (average of Bohemia and Moravia), Poland, Bulgar ia, Romania and Yugoslavia are own calculations based on the data and methodology provided in Coale & Watkins.

Population (in million) 255.6 1913 252.4 171.4 1920 486.4 (51.9%) (100%) 285.4 187.2 1939 574.0 (49.8%) (100%) Average annual population growth 1920–1939 (in percent) 0.6% 0.9% 0.5% Onset of the fertility decline according to the European Fertility Project (year) France 1827 Belgium 1881 Switzerland 1887 Ger many 1888 England 1892

Western Europe (29 countries6)

Panel B: Western Europe

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248  Matthias Morys and Martin Ivanov

population growth rates (crude birth rate minus crude death rate). Subtracting the two from each other delivers the net migration rate: (1) net migration rate = population growth rate − natural population growth rate Multiplying the net migration rate with the population of the particular year gives net migration: (2) net migration = net migration rate × mid-year population In the cases of Greece and Latvia, for instance, average annual population growth between 1920 and 1939 was considerably higher than natural population growth rates for the reasons alluded to earlier (Table  10.1). Distinguishing between the two indicators is important, as typically the natural population growth rate is more relevant to understanding the demographic experience. It is precisely for this additional information that we have preferred the Rothenberger data over possible alternatives such as Bardet and Dupâquier (1999). Only in the cases of Albania and Estonia can this distinction not be made for the lack of data on vital rates. The European population grew from 486.4  million to 574.0  million in the interwar period (18%, or 0.9% p.a.). Yet population growth was highly uneven across the continent. It grew at roughly half the speed in the West compared to the East (0.6% vs. 1.1%). The divergent demographic dynamics allowed CESEE to overtake in absolute population numbers in the interwar period (48.1% of total European population in 1920, but 50.2% in 1939), almost certainly for the first time in European history. There also were pronounced differences within the two halves. The natural population growth rates for core Western Europe and the Nordic countries were as low as 0.5% and 0.6%, respectively, but it reached 0.9% for Southern Europe. A similar divergence is encountered in CESEE, where Central Europe grew the slowest and Eastern Europe the fastest, with South-East Europe falling in the middle. Yet stark regional differences can wither away in a countryby-country comparison. Latvia (0.6%), Czechoslovakia (0.7%) and Hungary (0.8%), for instance, grew at rates comparable to core Western Europe.

The concept of the demographic transition The unifying framework to understand cross-country differences and similarities in population dynamics is the theory of the demographic transition. In essence, while all European countries went through this transformational process, many CESEE countries experienced a late but rapid demographic transition whose crucial intermediate phase – fertility still high but mortality already low – took place during the interwar period. In the following, we will first explain the concept of the demographic transition. Then we will provide statistical evidence according to which some CESEE economies entered the transition at around the time that the core Western European countries did, whereas others came late in the process.

Population and living standards  249

Finally, we will explain the well-researched cases of Bulgaria and the Soviet Union, the two countries with the highest natural population growth rates in our sample, and ask how they were able to sustain such high rates. The theory of the demographic transition posits that countries will move through three distinct states in the course of their economic development (Livi-Bacci 2007: 101, figure 4.2; Chesnais 1992). Initially, population growth is low (or even absent), as high birth rates are offset by high death rates. High mortality is the result of epidemics, harvest failures, poor sanitation and insufficient medical care, and it affects infants (children of up to 12 months of age) in particular. The demographic equilibrium of this stage subsequently unravels as mortality declines but fertility remains high, resulting in substantial population growth. The exact reasons for the mortality decline have been a matter of debate, with some emphasising “collective” factors (and improvements in public health and overall hygienic conditions in particular) and others stressing “individual” contributions (and better nutrition in particular) (cf. Deaton 2006). Crucially, the long-term decline in mortality started in the second half of the 19th century throughout Europe, with only a limited connection to the level of economic development in a particular country. After a slow start in the late 19th century, the decline was step by step and pervasive between 1914 and 1945. Figure 10.1 shows this pattern for Bulgaria, where mortality halved over five decades (28.8 per thousand in 1893 vs. 13.5 per thousand in 1939).

45

Per one thousand inhabitants

40 35 30 25 20 15 10 5 1890

1895

1900 Fertility

FIGURE 10.1 

1905

1910

1915

Mortality

1920

1925

1930

1935

1940

Natural population growth rate

Vital rates of Bulgaria, 1890–1940.

Sources: Own calculations based on Bulgarian Statistical Yearbooks, various issues. Notes: Vital rates are 3-year moving averages of annual data spanning 1889–1941. Data are interpolated for 1913–1919.

250  Matthias Morys and Martin Ivanov

Finally, fertility rates decline to prevent excessive population growth; consequently, the country reaches a new equilibrium (that is, zero or low population growth) characterised by both low mortality and fertility rates. Not unlike the mortality decline, the exact reasons for the decline in fertility have remained more controversial. In the schematic version of the demographic transition, the mortality decline not only precedes the fertility decline but drives it: the reduction in fertility is interpreted as an endogenous response to the mortality decline in “nature’s attempt” to re-establish sustainable population growth rates. Yet two objections can be raised against such a simple mechanism. On a theoretical level, how and why would household decisions on offspring be driven by the macroeconomic rationale to lower population growth? Furthermore, the mortality decline in itself might be driven by the decline in fertility: fertility decline often involved longer spaces between births, thereby reducing infant mortality. On an empirical level, several well-studied cases (in particular on the French demographic experience) showed that the fertility decline often occurred before or coincided with the mortality decline. Consequently, a sizeable body of literature has developed to explain the fertility decline independent of the mortality decline (for an overview, cf. Guinnane 2011). Some of these theories emphasise costs, be they direct costs (e.g. raising children in cities might be more expensive than in the countryside) or opportunity costs (e.g. industrial work created new opportunities and trade-offs for women by offering better-paying work that could not be combined easily with child-minding); others focus on changes in social insurance and old-age support or innovations in contraceptive methods. All of these theories interpret the fertility decline as the result of modernisation (broadly defined), and many of them rely on the twin processes of urbanisation and industrialisation. Unfortunately, most of this literature reflects the historical experiences of Western Europe and North America. Future research will need to apply their analytical questions to the CESEE experience.

The timing of the demographic transition in CESEE Given the competing theories on the fertility decline but the lack of relevant studies on the CESEE experience, it seems prudent to establish first when this process commenced in the various CESEE countries. For this purpose, we draw on the results and the data of the European Fertility Project (EFP). This large-scale project, centred around Princeton University and conducted between 1963 and 1986, aimed at understanding the demographic transition in all European countries during the 19th and 20th centuries, with the main focus on understanding the pattern and the timing of the fertility decline. While not all aspects of the EFP have found universal support (Brown & Guinnane 2007), it remains unchallenged in terms of width and depth of coverage in analysing the fertility transition on the regional level. A key finding was that before the onset of the fertility decline, regions tended to have their own fertility plateau which often remained remarkably stable over

Population and living standards  251

decades if not centuries. Yet once the decline had begun (defined as a 10% decline from the initial fertility plateau; for details, cf. Coale & Watkins 1986: 37–41), the fertility transition became irreversible. Fertility rates would continue to fall for a prolonged period of time, after which they would stabilise on a new, much lower level. Table 10.1 also provides the date of the fertility decline (for the most part directly from the EFP calculations but partly complemented by own calculations based on the methodology and the data provided by the EFP). The decisive fertility decline for most core West European countries took place in the 1880s but started only two decades later in CESEE. It began in the 1900s in Central Europe, was followed approximately a decade later in South-East Europe and another ten years later in European Russia (EFP data are confined to the European part of the country). Consequently, the much higher interwar population growth in CESEE is largely explained by their late demographic transition. Crucially, there was considerable regional variation within CESEE (as there was in other parts of Europe). In the 73 provinces included for Hungary, for instance, the onset of the fertility decline stretched over a full eight decades from 1850 to 1930, yet on the aggregate level the 10% decline from the initial fertility plateau took place only in 1910 (Coale & Watkins 1986: 38). Large cities often played an important pioneering role in the fertility transition. For instance, while European Russia as a whole experienced the onset of the fertility transition only in 1922, its capital city St. Petersburg did so as early as the 1870s (Moscow: 1886). Other regional early comers include the Russian provinces of Kurland (1869) and Livonia (1886), which after World War I  came to form the nucleus of Latvia. The Latvian case – for which we report the average value of the two constituent provinces in Table 10.1 – demonstrates that the CESEE countries with a relatively early demographic transition hardly differed from the West European experience. Czechoslovakia and Hungary  – incidentally the most economically advanced CESEE countries at the time – fell into the same category. What really requires an explanation is the experience of the CESEE latecomers to the fertility transition: how can we explain that countries such as Bulgaria and the Soviet Union were able to accommodate a natural population growth rate of 1.5% and above for such an extended period of time?

The late demographic transition in the Soviet Union and in Bulgaria The Bulgarian case nicely demonstrates the interaction between overall economic development of the country and its demography. It appears to be one of the arguably rather rare (Guinnane 2011) standard cases where the dramatic mortality decline beginning in the 1890s eventually forced a change in reproductive behaviour and a fall in fertility. Yet this was a long-drawn-out process, and for a long period the essentially agrarian economy was able to absorb rising population numbers. To begin with, for more than three decades (mid-1890s to late 1920s) the population

252  Matthias Morys and Martin Ivanov

grew at more than 1.5% per year (Figure 10.1), almost doubling the population from 3.3 million to 5.7 million. Constant (and indeed increasing) fertility until the early 20th century can be interpreted as a demographic response to the agricultural demand created by industrialisation in Western Europe (cf. Chapter 3 by Kopsidis and Schulze in this volume). In the Bulgarian case, the international demand for agriculture was satisfied by an extensification of agriculture rather than an intensification. Given the relative poverty of the peasants and the high interest rates they faced, farmers were not able to introduce more capital per unit of land in order to meet the growing (foreign) demand for wheat, barley and maize. Instead, they adopted low-cost, labour-intensive methods of farming coupled with increasing fertility which allowed them to cultivate hitherto unused plots of land for export. Such extensification was possible only because of extremely low initial population densities of about 30 people per square kilometer during the 1870s. Common pastures and forests constituted an additional reservoir of “free” land which was also put under the plough. According to recent calculations (Lyberatos 2011: 146) the arable land almost doubled between roughly 1870 and 1910. Yet this process was bound to come to an end by its very nature. Land became even more scarce after World War I, when several hundred thousand ethnic Bulgarians from the neighbouring countries were forced to flee to Bulgaria. Coupled with the global agricultural crisis of the interwar period, the situation of the farming population became increasingly difficult and incomes stagnated. In this situation, where new lands could no longer be secured, the only solution was to increase agricultural productivity (on henceforth constant land) and to limit fertility (in order to prevent parcelisation in the next generation). Thus, in the Bulgarian case at least, the schematic version of the demographic transition (i.e. that the decline in mortality will eventually force a fertility decline) still seems to hold. By contrast, the case of Russia and the Soviet Union is extraordinarily complex. Three partially overlapping aspects preclude a straightforward interpretation. First, in addition to World War I and the 1918–1921 Russian Civil War, there were two major famines (1918–1922 and 1932–1933) and Stalin’s Great Terror (1936–1938). These three events resulted, by any account, in millions of premature deaths, but the exact numbers have remained the subject of scholarly debate. Frequently used numbers are 6 million, 6 million (roughly half in the Ukraine alone) and 1 million for these three demographic catastrophes, respectively, but estimates differ widely (O’Grada 2009: 233–241; Allen 2003: 114–115). Second, scholars disagree on the numbers, as much hinges on assumptions about the under-registration of deaths at the time. This in turn has brought much of the statistical evidence into disrepute (for an overview of the controversial discussion, cf. the first six articles in the Slavic Review, vol. 58 (1999), issue 1). We already mentioned in the introduction to this chapter the censuses of 1937 and 1939. The first was suppressed by Stalin and the second was published, but only in embellished form. Finally, some key developments are open to alternative interpretations, with important implications on where the Soviet Union stood in the 1930s with respect

Population and living standards  253

to the demographic transition. In particular, the substantial fertility decline in the mid-1930s, before returning to much higher levels in the late 1930s, has received different treatment. Allen (2003: 113, 115) brings the fertility decline in connection with the industrialisation and urbanisation stemming from Stalin’s first FiveYear Plan in 1928, while leaving open the reasons for the sizeable fertility rebound in the late 1930s (1927 peak: 45.8; 1934 trough: 30.0; 1937 peak: 40.0). O’Grada (2009: 237), by contrast, views the mid-1930s fertility trough as a consequence of the 1932–1933 famine (i.e. the famine not only increased mortality but also decreased fertility); in this view, the late 1930s fertility rebound was a “return to normal” for a country which found itself still in the early stages of the demographic transition. As the collectivisation and the associated high grain procurements contributed to the 1932–1933 famine, it is easy to see that the perspective on the early Soviet Union’s demographic experience is often closely tied to the view of a particular scholar on the broader economic transformation under Stalin’s first two Five-Year Plans (1928–1937). What then is a possible “minimalist” interpretation in the face of such uncertainty? Following sizeable human losses in World War I, the Russian Civil War (1918–1921) and the post-war famine (1918–1922), population growth in all likelihood resumed only after 1923. Yet it is not until the first Soviet census of 1926 that population numbers and vital rates can be established with greater accuracy (Markevich & Harrison 2011: 675–679). We therefore confine our discussion to 1926–1939, for which Rothenbacher (2013) calculates an average natural population growth rate of 1.6% – a very high number which (as opposed to the Bulgarian case) shows no tendency to fall towards the end of the period. Fertility rates (deemed more trustworthy than mortality numbers) remained close to 40 per one thousand immediately before World War II; while they had come down from the 50 per one thousand from four decades earlier, fertility remained much higher than in any other CESEE country at the time (Romania, the country with the secondhighest fertility, stood at 29.8 per one thousand in 1938). Likewise, while there was a clear downward movement in mortality (a trend which even the crude death rates of the two world wars, the two famines and the Great Terror cannot obfuscate; cf. Wheatcroft 1999: 38), mortality values in the interwar period remained higher compared to all other CESEE countries bar Romania. In sum, the Soviet Union experienced a retarded demographic transition even by the standards of the CESEE countries. Can this assessment be squared with the positive evaluation of the Soviet demographic experience proposed by Allen? (2003: 111–131). In his view, education, economic development and rising living standards were the main factors responsible for smaller families and slower population growth in the Soviet Union, thereby avoiding a population explosion on the scale of 20th-century India (the reference point chosen by Allen). While this interpretation has much to commend, it strongly relies on taking a larger period of time into account. Only in the 1950s did mortality in the Soviet Union fall below Central and South-East European levels (Millward & Baten 2010: 234) and fertility converge with the country’s Western

254  Matthias Morys and Martin Ivanov

neighbours. Seen in isolation, the interwar period only shows the early signs of the demographic transition in the Soviet Union, and connecting this process in an unequivocal way to industrialisation and urbanisation after 1928 is probably not possible. As we will see again in the section on living standards, the Allen perspective relies too strongly on the urban areas; they were growing and changing rapidly at the time, but the overall dynamics, including demography, were still driven predominantly by the countryside.

Living standards Living standard indicators can be classified into two broad categories: incomerelated measures and non-income-related measures. In assessing well-being across countries and over time, it is often instructive to draw on both, as they might well convey a different message. Only taken together will they give an adequate picture of living standards. In the following, we will sketch the theoretical concepts behind GDP per capita and the Human Development Index (HDI) as the two most widely used indicators (section 3.1) and then show potentials and pitfalls of both measures when applying them to the CESEE interwar experience (section 3.2). We will find neither indicator fully convincing in measuring the living standard of the rapidly developing CESEE economies. Not only are they highly aggregate, but they cannot capture, by design, what was arguably the most important feature of the CESEE economies at the time: the rural-urban divide and the structural transformation of essentially agrarian economies towards a larger share of industry. Sections 3.3 and 3.4 address both issues. Based on data for life expectancy, literacy and school enrolment, we will outline the fundamental changes undergone by all CESEE countries in the interwar period. We will then pay particular attention to the rural-urban divide, focusing on the Soviet Union and Bulgaria as two iconic examples of different developmental trajectories. Was “big push industrialisation” à la Stalin better for living standards than the more conventional approach pursued by Bulgaria?

 DP per capita and the Human Development Index (HDI) as G living standard indicators The basic idea of income-centred welfare measures is that command over commodities matters most in assessing well-being: income is an argument in any individual’s utility function, and a rise in real income means an increase in welfare. The most important such measure is real GDP per capita as taken from national accounts and population statistics. The ready availability of this type of data (for the post–World War II period anyway) partly explains the continued attraction of GDP per capita for comparative studies, and it remains the most popular measure to this day. Yet income-centred measures have been criticised for a long time, partly on practical and partly on more substantive grounds. On a practical level, GDP per

Population and living standards  255

capita has been seen as blind to income inequality and unduly concerned with income rather than consumption. Solutions to such objections have been found in a wide range of minor (and sometimes major) modifications to GDP per capita, such as multiplying the measure with one minus the country’s Gini coefficient (the Gini coefficient is a standard measure of income distribution, where an equal income distribution is attributed a value of zero; the more unequal the distribution, the higher the value, with an upper bound of unity). A more fundamental challenge to GDP per capita as a living standard indicator arose from the capability school of Nobel laureate Amartya Sen (born 1933). In this view, human development – that is, the human progression of an individual over time – is seen as the overriding purpose of (the macreconomic process of) economic development. This approach is often framed in terms of whether people are able to “be” and “do” desirable things in life (beings: well fed, sheltered, healthy; doings: work, education, voting, participating in community life). Consequently, underdevelopment is perceived as the lack of certain basic capabilities rather than lack of income per se. In this framework, “well-being” has to do with being well (as opposed to having the financial means to spend on something): Do people live long? Do they escape preventable morbidity? Are they literate, allowing them to lead more purposeful lives? Are they free from hunger and undernourishment? Put differently, while GDP per capita is essentially a macroeconomic indicator (except for the very last step, i.e., dividing by population), the capability school searches for measures that conceptually begin with the individual. The most important measure emanating from this alternative view of well-being is the Human Development Index (HDI), as inspired by the work of the development economist Mahbub ul Haq (1934–1998) and used in the (annual) Human Development Report of the United Nations Development Programme. While the HDI has undergone several important changes since the first Human Development Report in 1990, it has continued to give equal weight to indicators for (1) longevity, (2) knowledge and (3) income (the latter in clear concession to the incomecentred measures of well-being). Longevity has consistently been proxied by life expectancy at birth. Knowledge was initially measured by the weighted average of adult literacy (two-thirds weighting) and gross enrolment (one-third weighting). This particular specification of the knowledge indicator came to create problems over time, as adult literacy rates in most countries approached 100% and even gross enrolment rates converged remarkably among countries. Consequently, the 2010 Human Development Report dropped literacy altogether and replaced enrolment rates (a flow variable looking only at currently enrolled pupils and students) with “mean years of schooling” (expected years of schooling for those in school and mean years of schooling obtained for those out of it). Switching to mean years of schooling is more consequential than meets the eye initially. As a stock variable of educational attainment, it preserves for a long-time differences in schooling in periods past: it makes it more difficult for countries with previously poor educational systems to catch up. The 2010 changes to the “knowledge” variable helped reintroduce heterogeneity into the data. Finally, income has consistently

256  Matthias Morys and Martin Ivanov

been measured as GDP per capita adjusted for purchasing power parity (PPP) in different countries. Each of the three components is given equal weight and is measured in terms of percentage of the distance travelled between an assumed minimum (“natural zero”) and assumed maximum value (“aspirational target”). In the case of life expectancy, for instance, 20 years acts as a “natural zero” based on historical evidence that no country in the 20th century had a life expectancy of less than 20 years. Maximum life expectancy is set at 85, a realistic target for many countries today. Having defined minimum and maximum values, the dimension indices are calculated as: dimension index  =  (actual value − minimum value)/(maximum value − minimum value) or, applied to life expectancy: longevity index = (life expectancy of country X − 20)/(85 − 20) In addition to a new proxy for knowledge since 2010, two more changes have been introduced over time. First, the arithmetic average has been replaced by the geometric average of the three individual indicators as a means to ensure that equal development along all three dimensions is reflected in a higher HDI value. Second, it has been argued that each dimension should be treated as non-linear. Increasing income from $15,000 to $45,000 will be easier than increasing it from $45,000 to $75,000 ($75,000 in 2011 PPP is the assumed maximum value in the 2019 Human Development Report). Consequently, a logarithmic form has been introduced which “rewards” countries more strongly for achievements at the upper end than at the lower end. income index = (ln(GDP per capita in country X) − ln(100))/(ln(75,000) − ln (100)) The Human Development Report in its current form applies such discounting at the lower end only to the income indicator. Yet the same logic applies in principle to the other two indicators: for example increasing life expectancy from 25 to 55 years will be much easier than extending it from 55 to 85 years.

T he Historical Index of Human Development (HIHD) of Prados de la Escosura (2015) The most systematic attempt in recent years to import the methodology of the HDI into the field of economic history is by Prados de la Escosura (2015), who constructs a Historical Index of Human Development (HIHD) for 96 countries from 1870 to 2015 (with the number of countries rising to 164 for the latter periods). Adopting the HDI principles but adjusting them to the requirements of

Population and living standards  257

historical data, he forms three indicators similar to the pre-2010 HDI: LEB (longevity: life expectancy at birth), EDU (knowledge/education: literacy and enrolment, with equal weighting) and UNY (income: adjusted income per capita). Each of the three indicators (and not only income, as in the case of the current HDI) is subject to a logarithmic transformation, rewarding achievements at the upper end more strongly. The values obtained for the three components are then aggregated by forming the geometric average: HIHD = LEB1/3 EDU1/3 UNY1/3 Table 10.2 provides data for GDP per capita and the HIHD for nine CESEE countries for selected benchmark years. The Baltic countries are excluded for the lack of GDP estimates. In the case of the upper panel, we also exclude Albania and Romania for the reasons discussed in Chapter 7. By contrast, Prados de la Escosura (2015) deems the GDP data for both countries of sufficient quality and produces HIHD estimates. We add data for Britain, Germany, Italy and Sweden as points of comparison (Table 10.3). The two indicators exhibit important similarities. First, Czechoslovakia and Hungary offered the highest standard of living both in the beginning and at the end of the interwar period. Living standards rose more rapidly in some of the other countries, but their initial lead was sufficiently strong to maintain their overall position (with Czechoslovakia marginally better than Hungary). Second, certainly until the late 1920s and potentially well into the 1930s, living standards (and overall economic development) continued to follow a well-established, longer-term pattern documented in Chapters 3 and 6 of this volume for the 1800–1914 period: the standard of living in Central Europe was higher than in East and South-East Europe. Greece was the first country to break out from this pattern in the 1930s, at least in comparison to Poland. Third, living standards in CESEE continued to lag behind not only countries such as Britain and Germany but also Southern European and Nordic countries such as Italy and Sweden. Yet there also are crucial differences between the indicators, two of which are particularly important in our context and will propel us to go beyond aggregate measures (sections 3.3 and 3.4). First, an income-centred approach suggests hardly any relative improvement in CESEE living standards vis-à-vis Britain (the European country with the highest income level at the time). Czechoslovakia and Hungary, for instance, caught up only marginally but remained below 50% of British income levels throughout the interwar period. Convergence forces were stronger elsewhere (Soviet Union, Greece), but this partly reflected lower initial levels. By contrast, HIHD gains throughout the region were higher than for Britain, and often by a considerable margin. This suggests that economically backward countries typically find it easier to improve health conditions and educational achievements rather than to close the income gap with advanced economies. The relative position of Russia and the Soviet Union constitutes the other important discrepancy between the two indicators. Between 1860 and 1913,

1.8% 7.4%

Hungary

Poland

Albania

Bulgaria

South-East Europe

1.3% 2.4% 1.2% 2.7% 0.9% n.a.

0.089 0.098 0.109 0.135 0.168 0.181 0.197 0.228 0.256 0.302

Notes: 1 Data refer to 1937. 2 Data refer to 1938. 3 Data refer to 1911 and 1921, respectively.

Sources: Panel A: Own calculations based on Maddison (2013). Panel B: Data underlying Prados de la Escosura (2015).

0.073 0.080 0.082 0.089 0.119 0.225

(2015)

1.4% 2.9%

values (in 1990 USD) and relative to the United Kingdom 11373 1739 2096 2098 35.3% 42.6% 42.6% 24.1% 1933 1709 10003 n.a. 42.5% 37.6% 22.0% 28821 1676 21822 2838 26.8% 46.3% 45.3% 34.8%

Czechoslovakia

Central Europe

Panel B: Histor ical Index of Human Development of Prados de la Escosura 0.045 1860 0.055 0.137 1870 0.099 0.092 0.060 0.156 1880 0.122 0.109 0.074 0.180 0.122 1890 0.145 0.097 0.208 1900 0.166 0.145 0.111 0.241 1913 0.183 0.162 0.150 0.272 0.211 1925 0.224 0.170 0.298 1929 0.252 0.227 0.197 0.312 1933 0.269 0.232 0.267 0.340 1938 0.292 0.259 0.348 0.383 1950 0.339 0.331

growth p.a. 1913–1939 1920–1939

Panel A: GDP per capita. Absolute 1913 1414 28.7% 1920 575 12.6% 1939 2237 35.7%

Soviet Union

TABLE 10.2  Living standard indicators for Central, East and South-East Europe, interwar period

0.080 0.101 0.114 0.125 0.139 0.151 0.191 0.211 0.231 0.255 0.287

3.2% 3.3%

1177 23.9% 1433 31.5% 2638 42.1%

Greece

0.064 0.073 0.085 0.108 0.140 0.158 0.165 0.180 0.209 0.247

Romania

0.056 0.076 0.090 0.109 0.130 0.144 0.163 0.166 0.194 0.248

1.1% 1.7%

973 19.8% 949 20.9% 1300 20.8%

Yugoslavia

258  Matthias Morys and Martin Ivanov

Population and living standards  259 TABLE 10.3  Living standard indicators for the United Kingdom, Germany, Italy and

Sweden, interwar period  

Russia’s HIHD was consistently the lowest of all CESEE countries,1 yet by World War I  the country had achieved a mid-range per head income: lower than the (nascent) Central European countries but higher than some of the Balkan countries (cf. Chapter 3). Three decades of rapid industrialisation starting in the 1880s resulted in high growth rates but transformed mostly a small number of (rapidly growing) urban centres. Late Tsarist Russia made few inroads into the countryside, and life expectancy, literacy rates and school enrolment for the vast majority of the population remained far behind the Central European and even the South-East European economies. Yet, according to Table 10.2, a role reversal had occurred by the late 1930s. Rapid economic growth continued (though interrupted by World War I and the Russian Civil War; cf. Chapter 7), and increasingly translated into better living standards for the population at large. The HIHD suggests that by 1938, the Soviet Union offered the third-highest living standard after Czechoslovakia and Hungary. In recent years, Allen (1998, 2003) has interpreted similar

260  Matthias Morys and Martin Ivanov

data as evidence of successful economic development of the early Soviet Union, a process which in his view not only laid the foundation for large-scale industrialisation but also raised consumption and improved living standards within a relatively short time period. Should we concur with this revisionist assessment of Bob Allen? Or should we side with the conventional view which argues that any meaningful improvement of living standards in the Soviet Union materialised only in the 1950s? Finding an answer to the controversial question of living standards in the early Soviet Union is important but difficult. Collectivisation of agriculture, state-led industrialisation and Five-Year Plans were first implemented there (after 1928), but they became the template for the entire region after World War II. Consequently, the 1930s allow a comparison between two different development paths for a last time: “big push industrialisation” in the Soviet Union versus a process of slower, market-led structural transformation which we will refer to as “organic growth.” Developing our own position will require going beyond aggregate measures, which reveal as much as they conceal. Even Allen (2003: 132–152), the protagonist of a more positive assessment of living standards in the Soviet Union, does not claim that the standard of living improved throughout the country. His work is solely concerned with cities and urban areas, and his argument is more subtle: he concedes that living standards in the cities might not have improved a great deal, yet he argues that Stalin’s policies unleashed a large movement from the countryside to the cities, allowing a larger number of people to take advantage of a better urban life. Aggregate measures not only assume a homogeneity that was absent in the interwar period. They also make it more difficult to understand the CESEE experience, where heterogeneity was the defining feature we need to understand. We will first disaggregate the HIHD into its components (section 3.3). What do the individual indicators suggest about absolute and relative living standards? Second, we need to understand better the differences between cities and countryside in a region that was essentially rural and agricultural but became – in all parts, not only in the Soviet Union – increasingly urban and industrial (section 3.4).

Evaluating living standards beyond aggregate measures Decomposing the HIHD of Prados de la Escosura (2015) reveals that its component time series often do not rely on country-specific historical data. Instead, they constitute proxy measures based on assumed similarities to neighbouring countries (or even to countries in the same “region”). For example life expectancy data are reported for all 12 CESEE countries, but only for three of them are they based on historical data pertaining to the particular country (Srb 1962 for Czechoslovakia, Valaoras 1960 for Greece and Pressat 1985 for the Soviet Union). Such an approach might be legitimate for global comparisons in which regions are compared with each other, yet it is of little use in a study specifically devoted to Eastern Europe. Tables 10.4, 10.5 and 10.6 provide life expectancy at birth, literacy rates and school enrolment based on country-specific data only. All three tables come with

Population and living standards  261 TABLE 10.4  Life expectancy at birth in Central, East and South-East Europe, 1879–1941

Sweden

Italy

Germany

Britain

Other European countries

Yugoslavia

Romania

Greece

Bulgaria

Albania

Poland

Hungary

Czechoslovakia

Latvia

Estonia

Soviet Union

Eastern Europe Central Europe South-East Europe

1879 36.7 1896/1897 32.0 1899 40.2 1900 34.2 49.2 47.5 43.6 54.0 1900/1901 37.3 1903–1905 1910/1911 39.8 42.1 1913 54.5 50.0 46.1 59.2 1920 40.0 1921 47.8 42.1 1922 49.0 1923 1924 1925 60.5 58.6 52.6 64.0 1926 46.3 1927 44.3 1928 44.7 1929 1930 57.3 53.5 48.4 42.3 1931 50.2 1932 49.8 52.1 1933 56.4 1934 1935 58.1 1936 51.8 1937 56.8 1938 38.3 64.9 64.2 59.3 68.5 1939 46.8 1940 54.4 1941 56.6 Sources: Latvia, Poland and Romania: Bardet & Dupâquier (1999). Soviet Union, Estonia, Czechoslovakia, Hungary, Albania, Bulgaria, Greece and Yugoslavia: Rothenbacher (2013). Britain, Germany, Italy and Sweden are taken from the data underlying Prados de la Escosura (2015). Notes: Where our sources report male and female life expectancy separately, we form the average of the two values.

22.0 15–20 30.1 35.3 40–50

42.3 55–65 87 90–95 95–99

1912 1917 1930 1939 1950 1965

Estonia

90-95

Latvia

87

Lithuania

70-75

Czechoslovakia

90.4 95.3 97–98

97–98 98–99

68.7 67

92–97

95.9

50–55

32 36

20–30

Hungary

85–95

>70

>60

Poland 90–95 95–99

74.7

50–60

70–75 75–80

Albania

75–80 92–97

59–63

37.8 34

15–20

3

Greece 74.1 80–85

54.9

40.3

28–32

20–25

Romania 83 92–97

57.1

39

30–40

15–20