Gerschenkron and Late Industrialization: Catch-Up as a Special Case
Alexander Gerschenkron argued that latecomers to industrialization can leapfrog by borrowing technology and substituting institutions — a thesis that shaped how we think about catch-up growth from Germany to China.
The Harvard Historian Who Changed Development Theory
Alexander Gerschenkron was not a typical economist. Born in Odessa in 1904, educated in Vienna, he fled the Nazis in 1938, arrived at Harvard in 1948, and spent the rest of his career in the economics department without ever producing a formal mathematical model. His tools were historical comparison, institutional analysis, and a prose style of unusual elegance and precision. His most influential work — a 1962 collection of essays titled Economic Backwardness in Historical Perspective — contained no equations, no regressions, and no theorems. It contained instead a thesis so powerful that it reshaped how economists and historians think about industrialization, catch-up growth, and the role of institutions in economic development.
The thesis, in its simplest form, is this: the process of industrialization differs systematically depending on when a country industrializes. Early industrializers — England, above all — followed one path. Late industrializers followed different paths, and the later they started, the more their paths diverged from the English original. The differences were not random; they were structured by the degree of backwardness at the point of departure. The more backward the country, the more dramatic the institutional innovations required to launch industrialization, and the more the state (or state-like institutions) played a central role.
This sounds intuitive now. In 1962, it was heterodox. The dominant view in both economic history and development economics was that industrialization followed a universal sequence — W.W. Rostow’s “stages of growth” being the most famous version — and that all countries would pass through the same phases on the way to modernity. Gerschenkron argued that this was wrong. Late industrialization was not a repetition of early industrialization with a time lag. It was a qualitatively different process, with different institutions, different financing mechanisms, different firm structures, and a different relationship between the state and the economy.
The Central Thesis: Advantages of Backwardness
Gerschenkron’s argument began with an observation about technology. By the time a backward country is ready to industrialize, the technology frontier has advanced far beyond what was available to the first industrializers. England industrialized with water power, wrought iron, and handloom-to-power-loom transitions. Germany, industrializing half a century later, could skip these intermediate steps and go directly to steel, chemicals, and electrical engineering — the most advanced technologies of the mid-nineteenth century. Russia, starting even later, could in principle adopt the most advanced technology available at the time of its industrialization.
This is the “advantage of backwardness”: the latecomer does not need to invent; it can borrow. And because the borrowed technology is more advanced than what the first industrializer used at the corresponding stage, the latecomer can, in theory, industrialize faster and achieve higher productivity levels per unit of investment.
But the advantage of backwardness is not automatic. It comes with a catch. The more advanced the technology, the larger the scale of investment required to deploy it. A cotton mill in 1780s England could be financed by a local merchant. A steel works in 1870s Germany required capital that no individual merchant could provide. A railroad network in 1890s Russia required capital that exceeded the capacity of the entire private banking system.
This is where institutions enter the story. The financing mechanisms that served early industrializers were inadequate for late industrializers, precisely because the scale of investment had grown with the technology. Late industrializers needed new institutional forms — what Gerschenkron called “substitute institutions” — to mobilize the capital, coordinate the investment, and manage the risk that the technology frontier demanded.
Three Cases: England, Germany, Russia
Gerschenkron developed his thesis through detailed comparison of three cases, chosen to represent three degrees of backwardness and three institutional responses.
England — the first industrializer, the benchmark. English industrialization in the late eighteenth and early nineteenth centuries was driven by private enterprise, financed by retained earnings and local banks, and required relatively modest capital per firm. The state played a limited role: it provided legal infrastructure (property rights, contract enforcement), maintained the navy that protected trade routes, and pursued mercantilist trade policies. But the state did not direct investment, own firms, or mobilize capital. It did not need to, because the scale of the technology was small enough to be financed privately.
Germany — the moderately backward case. German industrialization, which accelerated in the 1850s and 1860s, required much larger capital investments than English industrialization had. The technologies Germany adopted — steel, railroads, chemicals, electrical equipment — were capital-intensive. Individual entrepreneurs and local banks could not provide the necessary financing.
The institutional substitute was the universal bank — a banking institution that combined deposit-taking, commercial lending, and investment banking under one roof. German universal banks, particularly the “Big D” banks (Deutsche Bank, Dresdner Bank, Disconto-Gesellschaft, Darmstadter Bank), did not merely lend to industrial firms; they took equity stakes, sat on boards of directors, coordinated investment across firms, and provided the long-term, patient capital that industrial development required. The universal bank was, in Gerschenkron’s framework, the institutional substitute for the England’s diffuse system of self-financing and local credit — a substitute made necessary by the larger scale of the technology being adopted.
The result was a pattern of industrialization that differed markedly from England’s: larger firms, more concentrated industries, tighter connections between finance and industry, and faster growth in the heavy industries (steel, chemicals, engineering) relative to the light industries (textiles, food processing) that had led English industrialization.
Russia — the severely backward case. Russian industrialization, which began in earnest in the 1890s under Finance Minister Sergei Witte, faced an even larger gap. Russia’s private banking system was too small, too fragmented, and too risk-averse to finance the massive investments in railroads, steel, and heavy industry that the technology frontier demanded. Even universal banks would not have sufficed.
The institutional substitute, in Russia’s case, was the state itself. The tsarist government mobilized capital through taxation (including the deeply regressive grain exports that extracted surplus from the peasantry), foreign borrowing, and direct state ownership of key industries (especially railroads). The state did not merely coordinate investment; it was the primary investor. It set priorities, allocated resources, and directed the flow of capital in ways that no private institution could have managed.
Gerschenkron saw in Russia’s case the most extreme instance of a general pattern: the greater the degree of backwardness, the more the state must substitute for the institutions of private finance. England needed only the market. Germany needed banks. Russia needed the state. Each institutional form was a response to the same underlying problem — mobilizing capital at a scale that matched the technology frontier — but the severity of the problem dictated the severity of the institutional response.
Why Timing Matters
Gerschenkron’s thesis is fundamentally about the interaction between technology and institutions. The technology frontier determines the scale of investment required for industrialization. The scale of investment determines the institutional forms needed to mobilize it. And the timing of industrialization determines where the country stands relative to the technology frontier.
This means that there is no single “correct” institutional framework for industrialization. The right institutions depend on when you start. What worked for England in 1780 would not have worked for Germany in 1860. What worked for Germany in 1860 would not have worked for Russia in 1890. The institutions that support industrialization are historically contingent — shaped by the specific circumstances of the country and the specific technology available at the time.
This insight cuts against both market fundamentalism and state planning as universal prescriptions. Market fundamentalists argue that private enterprise and minimal state intervention are always the right approach. Gerschenkron’s cases show that this was true for England but not for Germany or Russia. State planners argue that government direction is always necessary for industrialization. Gerschenkron’s cases show that this was true for Russia but not for England. The right approach depends on the degree of backwardness and the scale of the challenge.
Gerschenkron also emphasized that the institutional substitutes were not permanent. As industrialization proceeded and the economy developed, the need for state intervention or bank-led coordination diminished. Germany’s universal banks became less important as firms generated their own retained earnings and accessed capital markets. Russia’s state-led industrialization (in its Soviet form) eventually became a drag on growth, as the centralized allocation of resources became increasingly mismatched with the economy’s complexity. The institutions that launched industrialization were not the institutions that sustained it.
The Ideological Dimension
Gerschenkron added a dimension to his analysis that is often overlooked: ideology. Each institutional form of industrialization required an ideological justification — a set of ideas that legitimized the sacrifices imposed on the population and motivated the actors who drove the process.
In England, the ideology was classical liberalism: individual freedom, property rights, free trade, limited government. These ideas justified an industrialization that was driven by private enterprise and required little overt coercion (though the enclosure of common lands and the Poor Laws imposed enormous costs on the rural poor).
In Germany, the ideology was nationalism: the unification of the German states, the pursuit of national power, the competition with England and France. Friedrich List’s National System of Political Economy (1841) provided the intellectual framework, arguing that free trade served the interests of advanced nations while protecting infant industries served the interests of developing ones. Nationalism justified the coordination between banks and industry and the tariff protection that sheltered German firms from English competition.
In Russia, the ideological justification was more strained. The tsarist government appealed to national greatness and military power, but the extraction of surplus from the peasantry for the benefit of heavy industry was difficult to justify in any terms other than raw state power. The ideological vacuum was eventually filled by Marxism-Leninism, which provided a comprehensive justification for state-led industrialization, forced collectivization, and the suppression of consumer goods production in favor of capital goods.
Gerschenkron did not endorse any of these ideologies. He analyzed them as functional elements of the industrialization process — as necessary complements to the institutional substitutes. Each degree of backwardness required not only a different institutional form but a different ideology to sustain it.
Critiques of the Thesis
Gerschenkron’s framework has been enormously influential, but it has also attracted serious criticism.
Selection bias. Gerschenkron chose his cases to illustrate a pattern: England, Germany, Russia form a neat gradient of increasing backwardness and increasing state involvement. But this is a pattern of three. Many countries that were as backward as Russia (or more so) never industrialized at all — or industrialized through very different mechanisms. The thesis explains the cases that fit but does not account for the cases that do not.
Ignoring failures. The “advantages of backwardness” are advantages only for countries that successfully industrialize. For every Germany or Russia, there are dozens of countries that were backward and stayed backward. The thesis does not explain why some backward countries seize the advantage and others do not. The missing variable is arguably state capacity itself — but state capacity is endogenous to the development process, creating a circularity that the thesis does not resolve.
Teleology. Gerschenkron’s analysis can read as if industrialization were inevitable — as if every country that was backward would eventually industrialize, differing only in the timing and institutional form. This is not what Gerschenkron claimed, but his framework provides no theory of failure. It is a theory of how countries that do industrialize manage to do so, not a theory of why many countries do not.
Oversimplification of England. Recent economic historiography has complicated the image of English industrialization as a purely market-driven process. The English state was far more active than Gerschenkron suggested: it maintained the world’s largest navy, fought wars to secure colonial markets, enforced patents that protected innovators, and pursued trade policies that were mercantilist in all but name. The contrast between “market-led England” and “state-led Russia” is overstated.
Modern Applications: South Korea, China, Ethiopia
Despite these critiques, Gerschenkron’s framework remains remarkably useful for understanding catch-up industrialization in the modern era.
South Korea. South Korea’s industrialization after 1961, under Park Chung-hee, is perhaps the closest modern parallel to Gerschenkron’s Germany case. The government directed credit through state-controlled banks, promoted specific industries (steel, shipbuilding, automobiles, electronics) through subsidies and trade protection, and coordinated investment through the chaebol — large, diversified conglomerates that played a role analogous to Germany’s universal banks. The technology gap with the frontier (the United States and Japan) determined the scale of investment required, and the institutional response — state-directed credit, industrial targeting, chaebol coordination — was Gerschenkronian in form if not in conscious intention.
China. China’s industrialization after 1978 combined elements of all three Gerschenkronian cases. Special economic zones were market-driven pockets within a state-directed economy. State-owned banks provided patient capital for heavy industry. The state itself remained the largest investor and the primary coordinator of industrial development. Township and village enterprises (TVEs) — neither fully private nor fully state-owned — were an institutional innovation with no exact historical precedent, a substitute institution created to fill a specific gap in China’s economic structure. China’s case illustrates both the power and the limits of Gerschenkron’s framework: the basic logic of substitute institutions applies, but the specific forms are new.
Ethiopia. Ethiopia’s recent (and troubled) experiment with industrial policy — including the construction of industrial parks modeled on Chinese SEZs, state investment in infrastructure, and the promotion of light manufacturing for export — represents an attempt to apply something like the big push within a Gerschenkronian framework. The degree of backwardness is severe, the technology gap is large, and the institutional response has been heavily state-led. The results so far have been mixed: some industrial parks have attracted investment and created jobs, while others remain underutilized, and the broader economy has been disrupted by civil conflict. Ethiopia’s experience illustrates the critique of Gerschenkron most clearly: the framework explains what is needed for catch-up industrialization but does not guarantee that the necessary institutions will function as intended.
Does Gerschenkron Still Apply?
The technology frontier today is different from the frontier that Germany, Russia, or even South Korea faced. The most advanced technologies — artificial intelligence, biotechnology, advanced semiconductors, green energy — have characteristics that do not fit neatly into Gerschenkron’s framework.
First, the capital requirements are enormous but unevenly distributed. Training a frontier AI model requires billions of dollars in computing infrastructure. Manufacturing advanced semiconductors requires fabrication plants costing $20 billion or more. But deploying AI-based services or installing solar panels requires much less capital. The “scale of investment” that determines institutional needs is not uniform across technologies.
Second, the knowledge requirements have changed. Gerschenkron’s latecomers could borrow technology through reverse engineering, licensing, or industrial espionage. Modern intellectual property regimes, trade restrictions (like U.S. semiconductor export controls), and the tacit knowledge embedded in complex production processes make technology transfer more difficult. The “advantage of backwardness” — the ability to borrow from the frontier — is constrained by barriers that did not exist in the nineteenth century.
Third, the global context has changed. Gerschenkron’s latecomers industrialized in a world where the leading industrial powers were often willing (or at least not actively opposed) to see others industrialize. The United States supported South Korea’s and Taiwan’s industrialization as part of Cold War strategy. Today, technology competition between the U.S. and China has created an environment in which catch-up industrialization is viewed as a strategic threat by incumbent powers.
These changes do not invalidate Gerschenkron’s core insight: that late industrialization requires institutional innovations that differ from those of the first industrializers, and that the specific form of those innovations depends on the technology being adopted and the degree of backwardness being overcome. But they do suggest that the institutional substitutes required today — sovereign wealth funds, state-backed venture capital, national AI strategies, green industrial policy — will look very different from the universal banks and state-owned railroads of the past.
Gerschenkron’s lasting contribution is not a specific set of prescriptions but a way of thinking. Development is path-dependent. Institutions are historically contingent. What worked for England will not work for everyone. And the most important question for any country trying to catch up is not “what did the leaders do?” but “what institutional forms do we need, given where we are and where the frontier is now?” That question, first posed clearly by a Harvard historian with no taste for equations, remains the central question of development economics.