Question: How useful are the concepts of early and late development in explaining differences in

national institutions and business organizations?

Answer: The three sector economic theory divides economies into three parts, Primary, Secondary, and
Tertiary. The first refers to an economy that is most dependent on extraction of raw materials, the
second that economy that focuses on manufacturing and the third that focuses on services. When we
talk of industrialization we refer to countries moving from the first to second and third sectors, as has
been seen in the famous example of the UK’s industrial revolution which took place in the late 1700’s.
However, different countries may industrialize and achieve modern economic growth in different ways,
and the means and ways by which these countries achieve such advancements may have long term
impacts on their institutions and organizations, setting countries apart from others. Gerschenkron on his
theories of Late and Early Development attempts at explaining what these impacts may be, and how
countries which industrialized early such as the UK and US may be different from countries such as
China, Japan and Germany, because of when they industrialized. Although it is based on measuring
different growth rates of countries, it is also different from Kuznets theory which is concentrated on
simply detailed analysis of technologies, organizations, and institutions. Gerschenknron also picks up on
ideas of Porter and Rustow, by developing on their flaws. Porter and Rustows theories were linear and
assumed convergences, believing that all economies have the same starting points, leading to the
thought that all developed economies of today will be very similar. In reality however, this is not true as
economies of today are very different, and classifying these countries into late and early development
may help classify them according to their differences. “The basic premise of this theory is that the
degree of backwardness within an economy on the eve of industrialization fundamentally determines
the rate and pattern of subsequent economic growth.” (R.Fitzgerald 2008). Gerschenkron classified
economies as either advanced, moderately backward, or backward, and countries were classified into
these categories according to the analysis of factors such as GDP, GNI, technology and so on. He
detected a link between backwardness and growth rates and came to the paradoxical conclusion that
more backward countries will have a higher growth rate. This idea developed on the flaw of Rustows
theory of progressive stages of growth for countries. The countries which fall under late development
category have characteristics different from those of early development. Growth in early development
countries is slow and lengthy compared to late developed. This is due to early developed countries
having to develop new technologies on their own, without help, whereas late countries can simply
import such technologies initially or even imitate technologies, and build on these technologies later.
The British started their industrialization with the ‘Spinning Jenny’ and had to develop from scratch,
whereas other countries such as Japan simply copied technology by importing heavy machinery from
USA to develop their automobile industry. In early development countries, consumption rose gradually
as new technologies were slowly appreciated, in contrast late industries saw a rapid rise in consumption,
as seen with the Chinese companies which take benefit of their larger home market where there is high
consumption. Initially consumer goods are highly developed in late industries, but eventually using these
goods the shift to consumer goods is allowed, and this is usually directed by the state. In Early
developed countries development is also usually following a pattern of even distribution with all
industries increasing, as was the case with the US industries that picked up on technological synergies
between industries. In late Siraj Muneer Wattoo industrialized countries usually one or a few industries
see the most progress, and a lot of other industries are ignored. This can be seen through the example
of Germany concentrating on steel and automobile industries, which both fall under the category of
heavy machinery industries, but lacking behind in industries such as software development. A general
difference in living standards is also observed between the two types of economies. In early developers,
living standards are seen to be high, and this is because as the industries developed so did the skills of
people working in these industries due to better systems for development. This can be seen through
both the UK and US labor force which have better education systems as well as better training. In late
developers, since progress is in one way forced onto the country through their acquisitions of
technology and management, labor takes time to be skilled and living standards may remain lower in
comparison, as in seen in India which has the 7th largest economy in the world but still has majority of
unskilled labor. Besides these general differences there may be institutional differences as well. In early
developing countries the role of governments and banks is both lower. This causes businesses to be less
protected and also the stock market to be the main source of investment. The prime example of this is
the aggressive stock market of the United States which is so successful that businesses from all around
the world try to get listed on it to gain capital. In late developing countries Govt and Banks play a pivotal
role in supporting businesses and stock markets are less important with major investment coming from
long term mutual trust bank loans. This can be seen in China, in which the improving economy was
greatly backed by the government by allowing and dissuading international competition at the right
time. Furthermore, the role of banks as seen in Germany and Japan prove how advantageous long term
financing by banks can be. Organizational differences are also seen between the two types of countries
according to Gerschenkron. In early developers, there is generally short termism, in profits as well as in
the job market. This is due to the high demand from investors who demand profits through their shares,
which makes it harder for businesses to reinvest. Job security is also low and it is common for most
people two hold more than two or three jobs in their lifetime. In contrast, late development countries
have more long termism, as most investment comes from banks in the form of long term loans that have
late payback periods. Job security is also generally high and companies are seen to invest highly in
employee training and so forth since these employees stay mostly for life with the same country. In
Japan, most employees stay at one company their entire life, and sometimes if they are fired may refuse
to join other companies due to their loyalties and may feel dishonored. In early developed countries,
there is an atomistic market with firms working in high competition in an aggressive manner against
each other. This can be seen best in the United States Wall Street firms which are known for their
intense rivalries. In contrast, late developed nations usually have markets working through better
cooperation with each other and often business networks are formed as can be seen in German
automobile industries. All these factors in both types of countries are linked to each other and one
develops the other. Eventually, countries may lose some characteristics of late developing countries as
they start to develop own competencies, even if these are based on competencies they originally copied
from early developers. Many countries that have been late developing are eventually starting to develop
their own competencies as well such as China, Malaysia, Japan, and Germany, however these countries
still may lack something in the long run as the base of their competencies were not developed by
themselves. In conclusion, Gerschenkrons theories were in comparison better than the simplistic
theories of Porter and Rustow, however the theory is not without flaw. It ignores the political context of
different countries, and also ignores features that may be unique to come countries. Furthermore,
cultures of different countries may be different, and some of the credit that Gerschenkron gives to late
industrialization may in fact belong to cultural factors that promote Siraj Muneer Wattoo growth. In
comparison though, the theory still stands better in comparison to previous theories and thus may be
considered one of the best theories for explaining and analyzing modern economic growth and
competitive advantage.