TRANSFORMATION MECHANISMS: A CRITIQUE
OF THE POLITICAL ECONOMY
A dissertation submitted to the faculty of
The University of Utah
in partial fulfillment of the requirements for the degree of
Doctor of Philosophy
Department of Economics
The University of Utah
Copyright © Toudy F. Salem 1999
All Rights Reserved
This critique concerns the political economy of growth. It inquires into, analyzes and elaborates upon socioeconomic transformation theories. Using political economy monographs, it excavates, reconstructs, and intelligibly taxonomizes mechanisms with the potential to engender transformation. The critique’s thrust, however, is to critically evaluate the merits of these mechanisms, assess their repercussions, and discern their viability to conditions of underdevelopment. Ultimately, the critique conceptualizes generic themes germane to addressing the common problems of underdevelopment, especially poverty alleviation, and supplemental themes versatile to befitting Underdeveloped Countries' (UDCs’) heterogeneous conditions.
The thesis of this critique is that bridled capitalism (not revolution, not socialism, not delinking, not autarky, not mere efficiency and not structural adjustment) is the transformation mechanism most compatible with UDCs' current circumstances. By bridled capitalism is meant a trimmed market economy, based on government activism through the use of generic themes of limited planning, diverse industrialization and measured infant industry and infant economy protections, whereby rampant competition is restrained and capitalism’s merit is maintained. This is to be the core of a wide ranging program that also includes political, social, juridical, educational and other optional, supplemental themes. A specific set of the supplemental themes could thus be selected, depending on each country’s peculiar situation, to complement the generic themes towards a comprehensive socioeconomic transformation.
1. ORTHODOX MECHANISMS 64
1.1 The Classical Mechanism 66
1.2 The Marxian Mechanism 73
1.3 The Keynesian Mechanism 88
1.4 The Traditional Mechanism 98
1.5 The Bretton Woods Mechanism 117
1.6 Bretton Woods in Action 156
2. HETERODOX MECHANISMS 172
2.1 The Delinking Mechanism 172
2.1.1 The Neo-Marxist Perspective 176
2.1.2 The Dependency Perspective 192
2.1.3 Semiperiphery, Basic Needs, and New Economic Order 212
2.2 The Structuralist Mechanism 223
3. HETEROGENEOUS MECHANISMS 255
3.1 The Impediment Removal Thesis 255
3.2 The Weberian Perspective 268
3.3 The Industrial Revolution Thesis 277
3.4 Food Security 284
3.5 Balanced Growth 290
3.6 Critical Effort for Growth 296
3.7 Linkages by Unbalanced Growth 299
4. TRANSFORMATION VERSUS GROWTH MECHANISMS 305
4.1 Efficiency: the Neoclassical Growth Mechanism 306
4.2 Equity: the Transformation Intermechanism 338
5. TRANSFORMATION THEMES 358
5.1 The Manifestation of Underdevelopment 358
5.2 The Needed Transformation 380
5.3 Bridled Capitalism 395
5.4 Distributional Corrections 421
5.5 Fiscal Efficacy and Equity 429
5.6 Bretton Woods Reform 435
5.7 Muddling though the Bretton Woods Regime 443
5.8 Prospects for Transformation 455
SELECTED BIBLIOGRAPHY 490-531
This thesis was written in the Summer of 1992. Without Gail Blattenberger and Hans Ehrbar, it would have been nipped in the bud at that time, or killed at any of several junctures thereafter. Hans continuously defended my work, and Gail provided me with an uninterrupted flow of articles that enriched this work. Gail and Hans also made constructive remarks, and raised relevant questions, that improved the exposition and sharpened the focus of the thesis. And, uncharacteristically of their department, they both treated me with decency, but fairness was beyond their control.
Norman Waitzman and Dalmas Nelson accepted to join the embattled committee at two critical junctures, each literally saving the dissertation, and with it the degree, from oblivion. Further, Dalmas’ close reading of the work, and his several discussions with me, each extending for many hours, were most helpful: They qualified some of my wordings; saved me from many linguistic traps and errors; and impelled me to provide more clarifications, and stylistic modifications. And Norm’s open praise of the dissertation, during my defense, disarmed the lingering resistance.
Ultimately, thanks to Gail, Hans, Norm, and Dalmas, I was not silenced; they more listened to their voices of conscience than followed their profession’s bearing. To them all, I express my profound gratitude. However, bringing this unduly protracted episode to a close, in my judgment, could not have come from within the economics and political science departments only. I therefore gratefully thank any anonymous university member who might have intervened to bring about that end.
The Marriott librarians and staff were of great help, both in accommodating my reading and writing imperatives with my part-time work responsibility at the library, for the last four years, and in providing me with invaluable friendships. And they treated me fairly, and decently. I cannot mention them all. I like, however, to recognize Dan Lee, Sadaf Rahimi, Randy Silverman, Kristeen Arnold, Juli Hinz, and Sarah Michalak. To them all, I am most appreciative.
I gratefully thank Christine Pickett, the Thesis Editor, for her keen reading, and conscientious and timely editing of this work. I am also thankful of her generous appraisal of the dissertation, and of the gracious words, to that effect, of David Chapman, the Dean of the Graduate School, describing it as “outstanding.”
Needless to mention, most facts, and many singular concepts and forms of words, that constitute the building blocks of this inquiry, are adopted from the extant literature. In its collectivity, fundamental concepts, basic thesis, and main findings, however, this inquiry is mine alone, including all its potential mistakes. My intellectual debt, nonetheless, is to multitudes of scholars, whose written works constitute the foundations upon which I endeavored to build. Unavoidably, mentioning some of them does injustice to others, whose names permeates this work.
If I have to enumerate only a few, nonetheless, I like to acknowledge Janet Abu Lughod, Eric Jones, Gunnar Myrdal, John Hobson, Samir Amin, Warren Samuels, Hans Morgenthau, Roy Bhaskar, Maurice Dobb, Karl Polanyi, Diana Hunt, Raul Prebisch, Henry Kissinger, Immanuel Wallerstein, Hans Singer, Mark Blaug, John Maynard Keynes, Adam Smith, Rondo Cameron, Joan Robinson, André Gunder Frank, Karl Marx, and 'Abdul-Rahman Ibn Khaldun.
I finally thank Allen Sievers, for his seven-year perseverance on the committee, despite his reservations, and for his remarks. This work of course could not have come to fruition without his participation. It is only fair, however, that I make it clear that all along my basic thesis was neither changed nor hidden. Nor was any question of substance raised against it. Only ones aimed at procrastination, under the rubric of scope, modality, clarity, semantics, and nonconformity to neoclassical ways and means; at times taking more than five months to review the dissertation, delivering back no more than a general comment, for the process to be repeated, again and again.
A reading of Meditations on Quixote (1914), by Jose Ortega Y Gasset, that is reminiscent of the philosophy of Zeno (circa 300 BC) and his Stoic disciples, is that I am I and my circumstance, exist in a dynamic interplay. I cannot disregard my circumstance, but can influence it through creative action: create my life by exercising reason and exerting will, to go beyond the ordinary and the given.
The essence of dignity is the act of the will. The will to be oneself is dignity. One is to expend oneself, as does Don Quixote, in creative endeavors. One must have the dignity to be, to self-realize, self-actualize, in a life journey of authenticity, as the means to essentialization. Foresight, vitality and willpower, including discipline and order, are the ingredients.
One is also impelled to come to terms with the loneliness, inherent in the journey toward authenticity, by revulsion toward the mediocre, and aloofness from the mundane. By clinging to willpower, one is to shoulder the burden of lonely decisions. Like a tightrope walker, one has to cross, step by careful, anguish step, the solitary passage across the chasm between one’s goal, on the one hand, and one’s circumstance and associates’ reality, on the other, demonstrating to the latter that the far shore, yet and for many more years unseen, is in fact more dignified than the familiar promontory.
Holding my terrain, I eventually had this work approved, to start another of life’s unending battles. I dedicate it to my father's memory; my wife, Suma; and my children, Bassam, Tamy, and Maggie.
The research question of this critique concerns the transformation mechanisms that might enable the Underdeveloped Countries (UDCs) to metamorphose their current bleak and untenable state. The aim is to discern feasible courses of action that would help the UDCs better the conditions of their peoples. Such courses would provide alternatives to the flawed policy advocated by neoclassical economics and implemented by the Bretton Woods organizations. That policy, dubbed “structural adjustment,” is historically fallacious, theoretically deficient, and empirically ineffective. Yet the entire standpoint of mainstream economics towards the UDCs is epitomized by it, a standpoint that engenders the Fund-Bank conditionality. The latter entails currency devaluation; abandonment of import substitution, subsidies and social programs as well as government control; reduction of the money supply, budget deficit and size of government, while unleashing unfettered market dealings through privatization, deregulation and opening the country to international division of labor through free trade.
On the other hand, if there are to be theoretical changes in economic thinking, there must be a historical understanding of how the particular aspects of the neoclassical doctrine that are now taken for granted as composing mainstream economics came into being. The neoclassical strategy called “structural adjustment” is premised upon a rendition of the Ricardian specialization, the outcome, in part, of Paul Samuelson's (1939, 1962) attempt at restating a public policy formula, essentially a nouveau laissez faire argument, based merely on pecuniary gains from trade. Toward this end, Samuelson applied welfare economics to international trade theory, thereby modifying David Ricardo's (1817) comparative advantage, formulated for the limited purpose of repealing the Corn Laws, by both the 1870s' marginal theory of Leon Walras, Carl Menger, Vilfredo Pareto and William Stanley Jevons, on the one hand, and his own revealed preference theory on the other.
Marginalism, a utility theory of value, attempted to prove that labor, contrary to the account of the labor theory of value (LTV), gets its “proportionate” share of income distribution from the national product. It differed from naturalism, utilitarianism and historicism in that it compared units of want and feeling instead of things. It attempted to refine the objective view of the Utilitarians by a subjective one, the source of value taken to be found in people and not in materials. This reckoning of everything, of prices and incomes, of wealth and of capital, by differentials and margins pseudo-psychologically measured, is the quintessence of Marginalism.
Along its lines, Samuelson's “revealed preference” tried unsuccessfully to fix the incoherence of methodological individualism upon which the theory is based. Individual emancipation is of course an objective which one should never lose sight of. Society, however, is not simply a sum of single individuals. To the contrary, a single individual is merely a unique member of society. The relational whole is much more than and much different from the sum of its mere fungible parts. “A ‘science’ based on prognostications about individual behavior can only sink swiftly in the quicksand of individual variance; the individual is always ‘free;’ only aggregate behavior is more ‘predictable’ for being more ‘orderly’ --but never on the basis of individualist assumptions” (Kanth, 1977: 2).
Only organic-holistic thought, rather than atomism, can thus account for social phenomena. It is only commonsensical that taking the individual as the unit of analysis misses significant interactions that can be explained only by reference to society. Evidently neoclassical methodological individualism attempts to address macroeconomic problems through microeconomic tools (so-called foundations). It deals with the various component parts of the economy as if the latter is the sum of its parts, and as if dealing with all the parts is the same as dealing with the whole. The method followed by Smith and Marx, to the contrary, is the deduction of inferences from the entire social existence, a unit of analysis much larger than, and qualitatively different from, the individual. Neoclassical methodological individualism must therefore give way to a societal political economics, thereby complying with the Durkheimian maxim that collective facts require collective explanations.
Samuelson, like Hume who two centuries earlier tried to replicate the paradigm of Newtonian physics, attempted to reduce economics, a social phenomenon, to an exact science. His preference revelation is a sort of economic behaviorism, whose stimulus-response pattern can be drawn from behavioral psychology, by establishing correlations between input phenomena and outcome measures, both as perceived by the economic researcher. Meanwhile, whereas behaviorism waned after 1970, rational choice theory took over, reverting to axioms of universal human properties of rationality and self-interest, thereby giving Samuelson’s revealed preference an extra lease on life, still with the aim of embedding economics into the method of the physical sciences. Ignored of course is the uniqueness of natural science.
Samuelson wound up aligning himself with the factor proportion theory, a sought outcome of marginal utility, the end result of Bentham’s amateur psychology, whereby economics became the laws of wealth, deduced from the hypothesis that human beings were actuated exclusively by the desire to realize the most attainable pleasure with the least possible pain. Marginal utility changed the standard of measurement for exchange ratios, and the explanations given for the pricing and distributing processes under investigation. Feelings and marginal valuations took the place of outgo in things and in labor. Value became an act or a state of consciousness, an imputation of qualities to things and deeds, as exhibited in exchange. Concrete objects ceased to be the sole subject of measurement. Wealth became a fund of values, rather than a conglomeration of things physical. Production consisted of a creation of values. Like wealth, capital became a fund of values, employed productively. Costs became outlays of value, of labor, pain and Senior's abstinence (Alfred Marshall’s waiting; Irving Fisher’s time preference). Wants lay at the bottom of every price and income. The premises of that persuasion were the hallowed perfect competitive ones, which fitted-in so well with Benthamism. The static, individualistic view alone satisfied the requirements of an "exact" economics. Valuation could thus only be translated into prices, and costs would represent but the obverse side of the coin. In the pursuit of rationalizing laissez faire capitalism, therefore, atmospherics unlodged realism.
Samuelson thus accepted comparative advantage but conveniently rejected its LTV's comparative cost component, Ricardo's contribution of the determination of value by labor time. Classicism, in its Ricardian climax, the doctrine of labor cost value, was thus replaced, in international trade theory, by neoclassicism, the doctrine of exchange value. The subjective derailed the objective, the ideational supplanted the realistic, the amateur-psychological evicted the technical, intellect-psychic value overrode labor time value, internal categories displaced external things, personalism of Dühring and Nietzsche overruled collectivism of Rodbertus and Marx and of Comte and Durkheim, individual was substituted for estate and class, hedonism moved to the center stage. Neoclassical extreme abstraction and empiricism of Walras, Menger and Jevons eventually pushed aside evolutional historicism of Sismondi, Marx and Schmoller, as well as deist eternalism of Smith, Ricardo and Malthus. Contrary to the progressive trend through which humanity has moved from magic to reverse engineering, from godly power to experimentation, from temple to library, from astrology to astronomy, and from alchemy to chemistry, economics, under the auspices of neoclassical economics, has moved in the retrogressive direction according to which “endowment” topped labor, marginalism evicted LTV, pecuniary reductionism took over holistic thought, private economics dethroned political economy, miraculous rationalization overwhelmed enlightened reasoning, and esotericism replaced accessibility.
The end result provided a reductionist concoction of the world, ripping out political economy (in whose sphere analysis and policy are inextricably intertwined, and the impetus to social change is to be found) from its socio-historical matrix, replacing it by a hermetically sealed system of fictitious economics, whereby nonpecuniary ends of policy (e.g., security, social, cultural, and civilizational ends) were considered mere distortions. The IMF-World Bank's strategy of “structural adjustment,” the assortment of measures based on this theoretical construct, will allegedly eliminate these distortions, and protect the UDCs from Jadish Bhagwati's (1953) and Harry Johnson’s (1975) “immiserizing growth.” But the claim made by neoclassical economics that abstract theories of price, interest, rent, etc., can, by ostensibly following the analogy of physical science propositions, be validly applied to the derivation of quantitatively stated conclusions from given unreal premises, is fallacious.
Neoclassical economics has a tendency to treat presuppositions as self-evident, when they are nothing of the kind. Abstract logical constructs divorced from social activity have little value. The content of persons is mainly social, and the essence of society is mostly practical relations (praxis) --action, reaction and interaction. The problem with the Bretton Woods construct, therefore, lies in the very basis of neoclassical economics, upon which welfare economics and international trade and traditional development theories are superstructured. Its failure is located in the very ontological misconception of the nature of society, whose irreducible basis is abstracted from. Aside from the well-known serious theoretical shortcomings of neoclassical economics and its basis of methodological individualism, the Heckscher-Ohlin-Samuelson (H-O-S) theory, the fundamental pillar of international trade theory that sets the scene for the neoclassical/Bretton Woods approach towards the UDCs, assumes:
(1) Only two commodities, two countries, two factors of production.
(2) Similar tastes across countries, i.e., the indifference curves are homothetic --symmetric along the ray, have the same slope along the ray, well-behaved.
(3) Perfect competition, i.e., a large number of producers and consumers, immediate access to information by all market agents, a homogeneous good, and unrestricted access to the market.
(4) Constant returns to scale at the industry level, i.e., a homogeneous production function of degree one --firms are small, numerous, competitive, and price takers.
(5) Diminishing marginal returns to any input, holding the rest of the inputs constant, i.e., there exists a unique combination of prices of factors and commodities.
(6) Identical technologies, i.e., same production functions across countries.
(7) full employment.
(8) Immobility of factors of production across, and mobility within, countries.
(9) Relative factor "endowments" given, and different across countries.
(10) Ruling out factor intensity reversals.
(11) Unimpeded free trade: no transaction costs, no tariffs, no quotas, no subsidies (see Paul Samuelson, “International Trade and the Equalization of Factor Prices,” Economics Journal, 58, June 1948).
Whereas the processes of scientific understanding and theoretical progress can primarily come through delving into the world of facts, reestablishing contact with reality to bring the essential into relief and to make possible its analysis, not one of these arbitrary assumptions is realistic; in their collectivity they apply only to a bookish world. Of course if one is free to choose, pile up and postulate arbitrary and unrealistic assumptions, one can deduce rigorously any sought conclusions. However, such are irrelevant conclusions, which go nowhere in the real world, and can be reversed rigorously by different assumptions. Hence, under this assumption ridden theory, factor "endowments" become the source of trade, i.e., determine comparative advantages, and result in “factor price equalization.”
The latter Samulsonian “theorem” holds that in the free trade “equilibrium,” factor rewards are equalized in the trading countries, i.e., there would be a single, unique wage rate in a free trading world. That world, however, was determined for Samuelson by the mathematical imperatives of finding a “proof” to his sought theorem. The “assumptions” are but conditions imposed by the mathematical logic, or else no proof would be available. The mathematics took over, and controlled and subjugated, the thought process, rather than merely aiding it. Mathematical techniques became the master rather than the servant of economics.
Upon this prima facie unrealistic construct, via a multitude of graphs, equations and jargon, “structural adjustment” is founded. The UDCs are thus required to follow the free trade path (i.e., surrender to free trade imperialism), in order to overcome their "backwardness," to open their economies unhindered to transnational corporations, to specialize in the comparatively advantaged, labor intensive cotton, cocoa and banana, and to import the capital intensive manufactured goods from the DCs. That way, it is claimed, the UDCs can “capitalize on the gains from trade,” whereby their labor would be paid equal wages to those prevalent in the DCs. Given the unrealism of the assumptions, it is not surprising how fantastic are the inferences. It is those inferences, however, that set the scene for, and legitimize, the conditionality imposed by the IMF and World Bank on the UDCs, causing food riots and political destabilization, and further impoverishing the poorest strata in many of these countries.
Whereas theories, concepts, methods, paradigms are to be evaluated by the explanatory power of the conclusions they reach about real world activities and processes, neoclassical economics totally abstracted from realism, including the aspect of power projection and use, replacing it with fictitious harmony. And having absolved itself of assumption realism (by what became known in the literature, following none other than Paul Samuelson, as the F-twist) and gotten away with it, it decided that the exclusive end of UDCs' economies is to promote free trade, so that they can “capitalize on” its pecuniary gains. Any other objective is “political,” beyond the realm of the “exact science” of economics.
Protecting nascent industries and economies, learning by doing, diversifying the economic base for national security purposes, creating rather than relying on "endowment" comparative advantages, engendering forward-backward-demand linkages in the economy, expanding the extent of the domestic market and division of labor, achieving equity in income distribution, mobilizing national energies and resources, enhancing domestic entrepreneurship and administrative cadres, diminishing dependence and augmenting interdependence, developing native technologies, preserving societal and cultural fabric and maintaining social harmony and stability, and stimulating national dignity and freedom from foreign "aid," in sum transforming the means and relations of production, and all objectives other than simple pecuniary gains from trade, according to neoclassical economics, are externalities, distortions, or beyond the reach of its rigorous, exact science. And the best remedy for these alleged distortions, it is claimed, is to avoid any protective measures and instead subsidize the export industries.
That such construct is demarcated as (accorded the rank of) science is mind boggling; it reflects the outcome of the marginalists’ final deviation from the holistic thought of social science in the 1870s, mainly in reaction to, on the one hand, Marx’s penetrating critique of capitalism, showing that the latter, no less than antiquity, feudalism or mercantilism, is a contingent historical phenomenon, and, on the other, Roscher’s and (especially) Schmoller’s frontal attack on the very method of British “classical” economics. A century of economics’ isolation from the social sciences, apprenticeship to the neoclassical nomenklatura, and servility to technocratic empiricism, has evidently accumulated an economic malformation. The self-elected “queen of the social sciences” is in bad shape. The essential problem is the inability of neoclassical economics to coherently conceive of a collective good. All goods must be reducible to individual values, in order for the methodological individualist economic schema to be able to take cognizance of them. This is why social costs or benefits are regarded as “externalities,” or “distortions.” The problem is conceived in terms of the “external” effects of what should otherwise be regarded as an individual choice; there is no direct avenue for conceiving of a social good as such (Jon Mulberg, Social Limits to Economic Theory, 1995: 151).
In addition, this H-O-S theory, conveniently framed as it is in a barter fashion, abstracts from monetary aspects of transactions. Hence having the Coase cake and eating it too. Thus obliterating transaction cost differences, the neoclassical/Coase raison d'être of the firm and the market (on the basis that both emerge to cut down on transaction costs), while attempting to rationalize comparative advantages. So, transaction costs create and maintain the firm and the market, but transaction costs, simultaneously, do not exist, so that comparative advantages can be accounted for: two essentially contested, if not mutually exclusive, rationales in the same overarching theory. Incoherence? That would be an understatement, for it also includes inconsistency. Hence both the “internal criteria” for valid theorizing are absent (Freidrick Ferré, Knowing and Value: Toward a Constructive Postmodern Epistemology, 1998: 9).
The theory further ignores the fact that each transaction across a boundary is a function of, or results in, an exchange rate (the price ratio between the two currencies). Ignored also is the fact that a transaction determines the post trade price ratio for the two countries involved, or the change in international terms-of-trade, and hence real income change, ceteris paribus. Therefore, ignored is the fact that a transaction affects not only the equality or otherwise of the exchange, in terms of embodied labor time, thus the rates of employment and growth of the economy and the balance of payments, but also the stability and significance of national currencies. Absent from mentioning, furthermore, are other implicit assumptions of the theory: no history, no institutions, no exercise of unequal political power, and, indeed, no human society. The H-O-S theory abstracted from all this; yet that theory constitutes the centerpiece of international trade theory, and the basis for the “free trade” stratagem, for “structural adjustment,” and for Fund-Bank conditionality.
Because that body of thought is represented by differently specified models, each modified with its own set of assumptions, the result is either untestability or simultaneous corroborating and refuting evidence for the same theory. This can neither be science nor a way of doing it, nor can it command mere commonsensical persuasiveness. No wonder the home region of H and O (Eli Filip Heckscher and Bertil Gotthard Ohlin), is the one area of the industrial world which most defies this theory. Instead of employing unfettered free-market postulates, Scandinavia trims and restrains capitalism. Traditional French dirigisme and étatisme, implemented also by Japan, are other examples from the DCs of the repudiation of the H-O-S theory, after as well as before the latter's inception.
Empirically, furthermore, the DCs have not developed through Quesnay’s laissez faire, Smith’s free trade, Ricardo's monocropping, Senior's abstinence, Bastiat’s Harmonies Economiques, Friedman's economic liberalism, or Samuelson's preference revelation. They did develop, among other things, through mercantilism, cameralism and cut throat trade warfare (of the English-Navigation-Acts-type of 1651 and 1660), and through protectionist trade, sheltered industrialization, steered diversification and dirigiste government (of, e.g., Cromwell, Colbert, Bismarck, Meiji and Roosevelt, not to mention Stalin among this group because of his heavy-handed, totalitarian method). The US, the main promoter of unfettered capitalism, has been protectionist for most of its history (Joseph Schumpeter, “The Influence of Protective Tariffs on the Industrial Development of the United States,” in Essays of J. A. Schumpeter, 1951: 164-9). Indeed, relatively, it still is today, in practice though not in disseminated theory (Karl Polanyi, The Great Transformation, 1944). "Western capitalism," contends Allen Sievers (1974: 82), "depended to a certain extent, in its formative days, on an experienced and protective state apparatus and ability to manage a complex venture on a state like, bureaucratic basis...and financial instrumentalities available to facilitate large scale and long distance trade" (emphasis added). This is put very mildly indeed, in comparison, e.g., with Karl Polanyi, Alexander Girschenkron, Eric Hobsbaum, John Galbraith or Maurice Dobb, let alone Karl Marx. Today, however, when the sun sets in an underdeveloped country, neoclassical economics damn “government intervention in the economy!” In textbooks, journals, IMF statements, World Bank bulletins, media programs, neoclassical attack on the role of government is unsparing.
Unconcerned about relegating the UDCs to monocropping, and reducing them to providing the raw materials needed for the industries of the developed countries while remaining open markets for the latter's manufactured products, under the rubrics of “comparative advantage” and “structural adjustment,” neoclassical economics has forgotten that the degree of comparative advantage in the US ante-bellum South was strong enough to chill industrialization, in favor of cash cropping (an exchange value production), and ruinous enough for the region to be still relatively underdeveloped a century and a one third after the Reconstruction, a mid-1860s overall “structural adjustment.” Nor does neoclassical economics pay attention to the fact that a major reason for the economic eclipse of Britain, at the turn of this century, was its continuous reliance on comparative advantage: It relied rather heavily upon those industries on which its early lead had been based. That is, rather than moving into the new industries such as chemicals, in which technological advance was now most rapid, Britain continued to rely upon the cheapness of its coal, to obtain a comparative advantage in the steam-driven, cotton textile industry. This threatened the British ability to continue extracting primary products out of other countries. Those countries would be well-placed trading with Germany, or the United States. Further, Britain could no longer actually sell its own manufactures in these German and American markets, where they were often undersold by more efficient producers, whose development had been nurtured behind tariff walls (see Gerry Kearns, “Fin de Siècle Geopolitics: Mackinder, Hobson and Theories of Global Closure,” in Peter Taylor, Political Geography of the Twentieth Century: A Global Analysis, 1993: 10).
Indeed, contrary to past experiences of the DCs, neoclassical economics ominously intimidates the UDCs with “immiserization” (not externality, neighborhood effect, spill-over, diseconomy, market failure, or market imperfection), if they dare empower their economies to grow in the existence of such a "distortion" as infant industry protection. Further, the Hans Singer (1950, 1993)-Gunnar Myrdal (1957) infant economy protection is beyond the realm of neoclassical economics. Indeed, the entire structuralist school is damned out of hand as “Latin American.” Premising instead the invalidity of import substitution, protective tariffs (be they of the German nursery type, Mill's educative type, or any tariff type for that matter), and social safety nets, the IMF and World Bank use this construct to impose upon the UDCs a strategy of abrogating industrialization plans and dismantling welfare states. Then through validating so-called export led growth, it provides for the DCs' machinery and consumerism cheaply, in an unequal exchange with the UDCs, at the expense of their poor populations. For as a country merely forces the expansion of its exports, ceteris paribus, it only turns the terms-of-trade against itself.
The evidence thus supports Mulberg’s conclusion, that “the lack of realism in economics is a defensive strategy which has been invoked to avoid the political conclusions to which economic theory would otherwise lead. This has resulted in an orthodox economic theory which is at best useless and at worst vacuous” (Jon Mulberg, Social Limits to Economic Theory, 1995: 3). This critique, therefore, dissents from the positivist reductionism of neoclassical economics, and adopts, once again, the holistic thought of political economy, deducing inferences from the entire social existence, and paying special attention to all relevant factors of economic action, not only to its pecuniary logic. Its primary relevance is to communities, countries, peoples, regions, governments, powers, rather than to unrealistic models, ideological abstractions emphasizing asocial individual behavior, or harmonious theologies of invisible hand and laissez faire. This critique also calls into question the Eurocentric ideology of economic universalism (which is in fact reification, since the operation of the economy varies according to the geopolitical-institutional set), and searches for other roads for UDCs’ transformation than the construct that fallaciously justifies inequity and myopically aspires to Europeanize the geo-culturally diverse planet.
This critique, nonetheless, is conducted with the view that the question is not whether capitalism for the UDCs is or is not to be, since capitalism has many merits, as elaborated upon below in the body of this critique; merits that can be employed for the betterment of UDCs’ conditions. Pragmatically, moreover, capitalism for the UDCs is for now a fait accompli. The critique thus attempts to discern loopholes, in the workings of capitalism, which would enable the UDCs to function and transform themselves within that socioeconomic system domestically, and to navigate through it globally. The aim is not to change the endogenous workings of capitalism but to find exogenous, pragmatic ways for the UDCs to move ahead (transform), while accommodating themselves to the capitalist predicament. Capitalism did not evolve merely through purposeful action, nor can purposeful action alone (least of all that of the UDCs) eject that socioeconomic system. Capitalism, as much as any other epochal social occurrence and transforming economic institution, has resulted more from human action than from human design. The aim thus is to explore how the UDCs can live in the same den with that unmerciful companion, without continuing to be utterly pillaged by its workings, as they are experiencing now.
This aim, therefore, is not dogmatic: It is neither that the market be abandoned in favor of centralized planning nor that planning be discarded for the sake of freeing the market. Instead, the aim is to identify impediments in both market operations and planning strategies that might be hampering development, and to find ways of overcoming them. The question then is not whether a regime of free contract is or is not to exist, but whose choices does free contract give effect to, and how to prevent the powerful from manipulating the order to exploit the weak. Not freedom or no freedom, but whose freedom and for what. Not reform or no reform, but which (attainable) reform and for whose interest. Not private property of the means of production or not, but the extent these property rights reign, and the balancing (public sector/countervailing) rights for the dispossessed. Not democracy or no democracy, but whom does democracy empower, who rules and on whose behalf, and whether democracy is also substantive or merely procedural. Not government or no government, but whose government and for whom, and the economic jurisdiction as well as the scope and limits of this government. More specifically, this critique examines several substantive and pragmatic questions:
(1) In conditions in which the DCs are constantly pioneering technological advance in finance, manufacturing and agriculture, further augmenting the unequal exchange with UDCs’ primary products, is free trade necessarily in the best interest of the UDCs, as neoclassical economics asserts?
(2) Is foreign aid (always with strings attached), or, alternatively, a massive increase in savings (which denies the current generation any semblance of life), a precondition for economic advance? Or may the alleviation of other resource constraints (such as scarcity of entrepreneurial orientation, organizational and administrative regimes, and foreign exchange) be efficacious as well? How can foreign exchange be secured? Is the international finance body amenable to reform that would take the UDCs’ interests into consideration? What type of reform would that be? Is it likely to be implemented in the foreseeable future?
(3) If an increase in savings is needed, can this be achieved only by raising the share of capitalist profits in national income, as neoclassical economics claims?
(4) Does an increase in savings by capitalists, e.g., through supply side tax exemptions, lead automatically to an increase in productive investment and trickle down effect in underdeveloped conditions, as neoclassical economics alleges? Or does it lead to capital outflows, leaving the UDCs in ruins?
(5) Do UDCs have to follow a path of capitalist development similar to that of the extant DCs? Should industry focus more on a production des matières de premier besoin, as François Quesnay counseled in 1757 (in his Oeuvres Economiques et Philosophiques, 1969: 102-33), or on the neoclassical, exchange driven luxe de décoration, condemned by that physician of Madame Pompadour?
(6) Is the socioeconomic transformation operational? Does it lend itself to measurement and quantification? Can it be planned and monitored?
(7) How can economic growth be managed in the interest of the worse off people (the really poor people, not the anonymous factor of production)? What alternative courses of action need be pursued, still within a capitalist framework, if those people, not commodities or their interlocutors, are the principle focus of national policy?
These are the issues focused on, whenever appropriate, while analyzing various mechanisms and suggesting transformation themes. As to the benefits of trade for the UDCs, these are under no dispute. The metaphor "free trade" used by neoclassical economics, however, is misleading, and results in unequal exchange, which is elaborated upon below. The critique thus includes components that are designed as full fledged courses of action, e.g., the structuralist mechanism, as well as relevant scattered, heterogeneous material (in critiques, case studies and other intellectual works), which were not necessarily meant to be complete transformation perspectives, e.g., Sievers' dispersed policy recommendations derived from his work on Indonesia. Besides the conventional orthodox mechanisms, moreover, the critique also employs works that are tabooed, ridiculed or ignored by neoclassical economics, and endeavors to put them to good use. These are the Marxian, structuralist and delinking perspectives, respectively. The critique further includes the often despised equity intermechanism, as well as the much hailed neoclassical efficiency mechanism, and illustrates the possibility of attaining an accommodating equity-efficiency tradeoff. The basis and potentiality of the transformation themes are also elaborated upon.
Therefore, the inquiry is less "elegant" than current technocratic works in economics appear to be, for it encounters the classic problems of causality and explanations in the social sciences: Variables are so numerous that the differentiation of dependent from independent ones can at best be commonsensical; at worst, this unilinear causal construct has to be entirely discarded from the social sciences. This is the nature of social phenomena, and the price of holistic thought, from both of which neoclassical economics has abstracted. However, elegance should never be mistaken for mere simplification. This inquiry, nonetheless, is far from being a Feyerabendian “anything goes.” But nor is it a theoretical construct built upon unrealistic assumptions (à la Milton Friedman’s Positive Economics, 1953). It is neither nihilistic nor dogmatic, respectively. It is a pragmatic (realist) and functional endeavor, rather than strictly academic. It heuristically attempts to discern loopholes in the capitalist dynamics, through which the UDCs could exogenously bridle capitalism, tame it to suit their purposes, and figure out doable themes that might mitigate their dependency and underemployment, and alleviate their poverty.
This critique thus endeavors to discern intellectual foundations, which can enable a problem solving metamorphosis in the UDCs to take place, while attaining an adequate level of security and well-being for their increasingly eroding sovereignty and vulnerable populations, minimizing the degree and cost of dependence, while maximizing interdependence (symmetric rather than asymmetric dependence), as a necessary albeit insufficient step towards reordering their relations with the DCs. The aim is to provide versatile courses of action that would provide viable alternatives to the straitjacket of “structural adjustment,” prescribed through the fallacy of composition as a panacea for all. Because geo-economic reality is impervious to being thus encapsulated, in formal monolithic criteria, neoclassicism and reality are incommensurable. In the present state of knowledge one must resist the notion that any simple model will account for the whole transformation process. One cannot model it, say, as a production process which makes modernization, eighteenth-century industrialization, or the sustained rise of real incomes, the output of a handful of stylized inputs, while hoping to retain any sense of the historical complexity involved. Too many parameters shift and dissolve; long-term economic change in the DCs was much more than the usual conception of an "economic" process. Moreover, the circumstances --economic, security, political, and social-- of each underdeveloped economy vary, and thus the appropriate path to economic and political development cannot be determined a priori, but only in the historical context of these specific conditions. Different development strategies must therefore be improvised for different contexts. And any well-conceived development strategy must respect the perceptions of underdeveloped nations on equitable, enabling and environmental issues, and reflect the different tracks of their development.
The research method hereby adopted, therefore, is that of Smith and Marx, critical inquiry, i.e., critique, using an interdependent-intervalidating amalgam of abstract deductive and historical inductive reasoning. Smith and Marx did not, as is common in economics today, crunch some numbers in order to produce their scholarly works. Nor did they go to engage in some xenophobic chats at the coffee shops of the informal sector in rural Zaire or at the bazaars of provincial Tajikistan, another method currently in vogue in economics, in order to establish the originality of their credentials. Smith and Marx read; thought; analyzed (textually and contextually, comparatively as well as critically); elaborated; cohered; taxonomized; agonized; conceived; inductively investigated, corresponded, and corroborated their deductively theorized findings with reality; and only then slowly and laboriously made up their minds, and concluded. On the other hand, while empirical validation of a hypothesis is necessary for separating knowledge from belief and fiction, and every attempt is hereby made to that effect, through corroboration and comparative analysis, the challenge made by philosophers of science to both inductive and falsificationist approaches to empirical testing has produced no secure procedure, in which such validation may be grounded.
This critique is thus a thought process, which facilitates discerning some functional order in diverse and scattered material. It filters and classifies this material into related groups, with an eye on the intelligibility of the exposition, while seeking what this material has to offer for the improvement of the status of the UDCs. The taxonomy is a mere byproduct of this process. This critique is therefore involved in taxonomizing only to the extent that the latter classifies the relevant material in a functionally intelligible order. One has to make use of William of Ockham's razor: Entities are not to be multiplied beyond necessity, for it is not only arbitrary but also mistaken to postulate the existence of things, or kinds of things, unless one has to. Rather than from the taxonomy, the research thesis unfolds from the various elements of the critique. The taxonomy is thus not an end in itself, albeit it is a contribution of some significance. It coordinates courses of action and policy recommendations found by social scientists to have worked (or to be potentially workable) as prime movers in macro-societal transformation. It regroups some raw material in a more useful format. It organizes these into mechanisms that could potentially lead to the sought transformation. Such organization is built upon and hence discloses the relationships between concepts and the conceptual structures categorized as mechanisms.
Without further ado about semantics, a mechanism is but a course of action, a process, a device, a strategy by which socioeconomic transformation is brought about. By transformation is meant Sievers' reading of the Ethical System implemented in Indonesia in the early decades of this century, with the focus on raising both the material standard of living of the people and its social welfare, and, through a mixture of private enterprise and government mediation, modernize the population's psychological, economic and political life; create a middle class; integrate the traditional and the modern sectors; stimulate output; industrialize; and provide social overhead capital. Liberalism would exist only to the extent it reverts from laissez faire to its early humanistic roots, recognizing that when personal freedom and economic freedom come into conflict, the welfare of the people is paramount over that of the corporation's interest (Sievers, 1974: 132).
On the other hand, the senses in which this critique uses the terms economic growth and economic development, in contradistinction to transformation, are those of Furtado, elaborated upon below, in the Structuralist Mechanism. Growth is essentially the mere rise of per capita income; development basically includes also the rise of productivity and the expansion of economic activities. Both are limited to the economic domain, in contradistinction to transformation, which extends to the social, political and other aspects of society. A country is underdeveloped if the technical, economic, military, administrative equipment at its disposal is so markedly inferior to that which is in the hands of other countries, that the resulting inequality leads to domination, formal or informal, of that country by its better equipped rivals (see Ernest Gellner’s “The Civil and the Sacred,” in Nowak & Paprzycki’s Social System, Rationality and Revolution, 1993: 320). It also leads to problematic social, cultural, and other human factors.
This critique embodies a topic embracing introduction (which also includes a methodological prologue), complemental abstract and conclusion, and quasi discrete chapters. The latter group the mechanisms --orthodox, heterodox, heterogeneous, and transformation versus growth-- and the transformation themes (reference to the Contents could mitigate any seeming complexity in the discussion that follows, and further mitigation could result from skipping the footnotes). Those themes unfold from the various mechanisms, whose aim is to serve the main functional purpose. They unfold, that is, from the first four chapters, then they are regrouped in the last. This modality precluded the separation of the literature review, but, one hopes, saved redundancies and facilitated the unfolding of the themes. This is merely a matter of modality; there are no profound reasons as to why there are as many chapters, or as many sections in a chapter, or why some mechanisms are combined together in one chapter. The only purpose of the exposition’s modality, besides intelligibility, is the functional purpose of discerning what is there that might be of use.
The orthodox mechanisms, doctrinal and established, entail the classical, Marxian, Keynesian, traditional and Bretton Woods. The classical fosters division of labor, market extent and accumulation of stock. The Marxian credits primitive accumulation and institutional change. The Keynesian upholds demand management. The traditional suggests complementarity of industry and agriculture in a big push to achieve a takeoff within the context of a stages-of-growth theory. And the Bretton Woods advocates unfettered liberalization, dubbed “structural adjustment.” The Chilean experiment constitutes a case in point of Bretton Woods in action.
One can hardly inquire in social science today without taking the Marxian perspective into account, for much of contemporary social science is unthinkable absent the influence of Marx. It is only natural then that in the orthodox mechanisms the Marxian follows the classical, for this is their chronological order. Indeed, mainstream economics considers Marx --a theorist who albeit originated in the classical traditions has drastically changed the focus and direction of political economy and, virtually single-handedly, created a paradigmatic school of economic thought and worldwide disciples-- to be a classical economist, on the basis that he made use of the traditions of Smith and Ricardo. Paradoxically, it totally circumvents him in neoclassical economics. Hence while the new rendition of the classical school, neoclassical economics, depicts Marx as one of the founders of its parent school, it casts out his entire work as if he never existed. The study of the relationships between developed and underdeveloped countries is not of course the monopoly of Marxism, but cannot be authentically and fruitfully conducted in its absence, even as one ultimately disagrees with Marx's Voltairian revolutionary prescription for overcoming the problem of underdevelopment.
The Keynesian mechanism is the most serious endeavor in the last two centuries to reform capitalism from within, to infuse some realism into the unrealistic tenets of neoclassical economics, to replace the Great Depressions by a demand management growth (which is either ignored or attacked by supply side neoclassicism), and to institutionalize the international monetary system for the purpose of globalizing economic growth. Nonetheless, the resultant Bretton Woods organizations, geared essentially toward globalizing unfettered capitalism, dispensed with the entire Keynesian enterprise, and replaced it with neoclassical monetarism. In the process, these organizations have relegated the UDCs’ economies to a servitude status to advanced capitalism, and wrecked havoc in the lives of billions of people who constitute the poorest of the poor the world over.
Whereas the Chilean experiment is an illustrative case in point of Bretton Woods’ design in action, the Keynesian work is imperative for understanding both the ex post facto rationale of FDR’s New Deal --undertaken spontaneously and ad hocly in reaction to the second Great Depression (1929-38)-- and the “original intent” of establishing the Bretton Woods organizations. Both the rationale and the intent are of significance to the development of the central thesis of this inquiry, bridled capitalism. The traditional mechanism, on the other hand, attempted to extend some specific roots of classical economics, but it is strongly influenced by neoclassical economics, and it is still the best endeavor the latter school can contribute to the UDCs' transformation process.
The heterodox mechanisms, dissenting and nonconformist, include the delinking and the structuralist. The former emanates from the two inseparable yet distinctive perspectives of neo-Marxism and dependency, both grounded in the theory of imperialism. It is also affiliated with perspectives on the semiperiphery, basic needs, and new economic order. The structuralist mechanism is a stand alone school, especially because of its unique (inclusive, linking) policy recommendations, despite some affinity with the theory of imperialism and its offshoots. Hence it is exposited independently. It advocates planned industrialization and raising labor productivity, infant industry and infant economy protections and egalitarian reform, as well as structural change through import substitution complemented by export promotion, but not the neoclassical export led growth, all to be done within a context of regional and subregional cooperation while remaining within the global economic system.
The heterogeneous mechanisms, nondoctrinal and eclectic, encompass a diverse assortment of transformative, aspect-specific courses of action. They are nondogmatic, sociological and/or nonuniform. They entail such pragmatic, problem solving approaches as Eric Jones' impediment removal, Allen Sievers' (Weberian) production promotion, Arnold Toynbee’s industrial revolution (as elaborated upon by Robert Heilbroner's development engineering), Nurul Islam’s food security, Ragnar Nurkse's balanced growth, Harvey Leibenstein's critical minimum effort, and Albert Hirschman's fore-back linkages. Those heterogeneous mechanisms are ones that could not be accommodated with any of the other mechanisms. They could make more than one chapter, and they could be further internally taxonomized. Neither step would affect the research thesis however.
The transformation versus growth mechanisms are depicted respectively by communal equity and neoclassical efficiency. Efficiency, the neoclassical preoccupation, is juxtaposed to equity, an indispensable intermechanism in underdeveloped conditions, to contrast their attributes while avoiding redundancies. Both efficiency and equity are suggested as intermechanisms, i.e., common to whatever set of themes elected, with priority to efficiency, to uphold the economizing merit of capitalism. Basing law and economics, as well as economics per se, only on neoclassical efficiency, whether the latter is defined in terms of Benthamite pure utilitarianism, Kaldor-Hicks wealth maximization, or Kantian-Paretian individual autonomy, is rejected. Meanwhile, the importance of communal equity, the seal of political economic legitimacy in the UDCs (Khaliel, 1995: 65-93), is emphasized.
Finally the critique is regrouped in the final chapter on the transformation themes, which starts by the manifestation of underdevelopment. The transformation themes are the proposed generic and supplemental ones, which make not commodities but people (especially the worst off among them) the focus of the transformation process, to help UDCs alleviate poverty and override their dependency and underdevelopment. The themes, after the manifestation of underdevelopment, are semiclassified into the needed transformation, bridled capitalism, distributional corrections, fiscal efficacy end equity, Bretton Woods reform, muddling through the Bretton Woods regime, and prospects for transformation.
And in their collectivity, the abstract, introduction and conclusion, following the Scholastics, expose, inter alia, the general purpose, method and findings of the inquiry. Any excessive attempt at elaborate rationales for this format both contradicts the concept of economism and is moot, because the aim, as has been pointed out above, is not to furnish a taxonomy, for the latter is beside the point, which is to find out what is to be done, irrespective of taxonomies.
As to research tributaries, this critique, in disenchantment with the reductionist method prevalent in economics today, its static analysis, unrealistic assumptions, and technocratic bent, is conducted in the holistic footsteps of Smith and Marx, in the sense of deducing discernments from the entire social existence (but without applying an overarching paradigm as did Marx). Both Smith and Marx recognized that the social problem was indivisible into purely economic or whatever categories. They thus attacked the questions at hand on the basis of this conception. The principal sources of Smith’s Wealth of Nations thus dig deeper than mere reductionist pecuniary concerns, which preoccupy latter-day economics, into moral sentiments, ethical codes, logical reasoning, political philosophy, national security, literary essays, jurisprudence and administrative law, and rhetoric and belles lettres (see Andrew Skinner, A System of Social Science: Papers Relating to Adam Smith, 1979; and Jeffrey Young, Economics as a Moral Science: The Political Economy of Adam Smith, 1997). Nor did Marx confine himself to strict pecuniary analysis to found his thought. He drew upon the collective profundity of German gentile philosophy, world general history, British political economy, and French proto-socialism and sociology. Smith and Marx are thus the two source eclectic political economists par excellence, and this inquiry is conducted in their methodical footsteps.
An obvious disclaimer needs to be made explicit. This research is by no means unabridged, although, to the extent that one can evaluate, this is all there is of relevant value, negative as well as positive, in the literature. The monographs utilized in this critique are of course not exhaustive, but no literature of direct value and immediate relevance to its purpose is ignored or excluded. Of necessity there is a limitation on what to include, if only because of logical reasons. The political economic transformation literature is tremendous, and research comprehensiveness definitionally abridges encyclopedism. Prioritizing the tributaries of the inquiry, with the guidance of the research aim, is therefore inevitable. It is also important to stay within the general boundaries of political economy, especially its concern with prescription, as opposed, e.g., to the nonprescriptive domains within economic history, history of economic thought, international economics or international trade theory. Reference to such subfields is delimited to their overlap with political economy. There are also works that, for one reason or another, are incompatible with the first principles and aims of this inquiry, and thus can be either out of tune with its body and analysis or of no contribution to offer to its findings and thesis. Analogous cleavages and cross purposes bifurcate this inquiry from such tributaries in the literature as "feminist economics," “miracle economics” and “teleological (theocratic) economics.”
Another disclaimer is that bridled capitalism, entailing the generic transformation themes, is not a panacea for all UDCs' predicaments. It is hoped only to provide a badly needed escape hatch out of the ineffectiveness of neoclassical prescriptions to UDCs' development, a life jacket away from the failed policies of the IMF and World Bank; a new, discriminating, architecture capable of providing selective and flexible responses to economic troubles and contingencies, from among a variety of nondoctrinal, nondogmatic, multipurpose options. Therefore the aim of this critique is to neither theorize economics nor “discover” a theory thereof. Nor is the aim to construct an overarching paradigm of whatever kind. The aim is only to explore problem solving exits (or ways) out of the current dire situation of the UDCs. If two and half centuries of classical and neoclassical economics, spanning thousands of genuine and reputable scholars, have not produced a sound theoretical foundation for the transformation process, a single inquiry should not aim at (much less be expected to) solve this problem univocally --once and for all.
Anyone uncomfortable with generic underdevelopment should, therefore, justify the current undifferentiating stance of neoclassical economics encompassing all UDCs and DCs under the same economic “laws” and lumping together Brazil, Somalia, China and Singapore under the umbrella of “structural adjustment;” or, alternatively, come up with a better method, but still within a holistic framework. Ultimately, the persuasiveness of bridled capitalism, which is neither an overarching paradigm nor a law of motion, but merely an heuristic remedy, essentially resides in the absence of a better alternative. And absent a better alternative, bridled capitalism should be considered a step in the right direction, especially given that such variety of socioeconomic formations as economically liberal England, social democratic Sweden, and national socialist Germany were all intellectually based on generic capitalism, which encounters little, if any, objection.
There does not seem to exist a clean cut way out. Enlisting strictly in one or the other of the transformation mechanisms is bound to provide no solution. Therefore, the supplemental themes are necessarily rather eclectic to make full use of the entire gamut of transformation mechanisms, of which none captures the whole truth but each holds some. These supplemental themes are intended to address specific needs within the transformation process, in conjunction with the generic themes. They thus provide the needed versatility to bridled capitalism in order to address different problématiques in UDCs' economies. A particular set of supplemental themes, compatible with a given condition, may then be selected and used by an UDC according to its circumstances. Country studies could therefore determine, through situation specific contextualization, the most suitable supplemental themes to the case at hand.
A measured degree of eclecticism is also tolerated in the supplemental themes because mainstream economics provides neither effectual strategies for UDCs' transformation nor coherent theoretical foundations thereof. More important, applying neoclassical prescriptions in the last two decades has been empirically detrimental to both the standard of living of the poorest strata and the transformative aspiration of the general populations in many of those countries. On the other hand, the prescription of the only other overarching (paradigmatic) school of thought in economics, Marxian revolution, is unattainable.
For Marx the revolution is to come about in the advanced capitalist countries, not in the UDCs. However, he also realizes that even there "the trouble is that revolutions require a passive element, a material basis. Theory is going to be realized in a people only to the extent that it is the realization of its needs.... Will the theoretical needs be immediately practical needs? It is not sufficient that the idea strive for realization; reality itself must strive toward the idea" (quoted in Alfred Meyer's Leninism, 1986: 233). Empirically, moreover, the conception of a fruitful revolutionary society controlled by the workers proved so far to be not in the cards in the West, where the state of the proletariat has been improved, and proved to be impotent in Russia, where the proletariat was small and weak; it is therefore safe to conclude that effectual revolution is utterly unattainable in the UDCs, where proletariats do not even exist.
Revolutions, in the Marxist sense, arise out of insoluble conflict between productive forces and the system of productive relations in which they operate, which can only be overcome by a transition to another mode of production, and hence the hegemony of a different social class. This may or may not come to be true "in the long-run," when "we are all dead." In the short and medium-run, which is all that counts any way for a desperate UDC in today's neo-Leviathan, revolution is unattainable also because of capitalist élite interdependence the world over, backed by power structures of military alliances and technology and arms monopolies that preclude a weak and poor people from choosing even their economic orientation, much less revolting. If they unwisely do, then a counter revolution can be easily concocted by power hegemons, after the poor strata have incurred heavy human and economic costs, and the bourgeoisie has transferred its capital and hoarding abroad, leaving the country in ruin. External hegemons need not even show up; they can merely rely on regional surrogates, or even supply and/or coach the domestic comprador bourgeoisie to do the job. Divide et impera, from time immemorial, has usually worked. So, in UDCs' weak and divided conditions, a revolution cannot be carried out successfully as long as it is necessary, and will no longer be necessary, paradoxically, once it becomes feasible.
Even the century's most prominent revolutionary stressed the contingency of the century's most notable revolution. In a passage, quoted in Colburn (1994: 174), Lenin conceded that "if the Revolution has triumphed so rapidly it is exclusively because, as a result of a historical situation of extreme originality, a number of completely distinct currents, a number of totally heterogeneous class interests, and a number of completely opposite social and political tendencies have become fused with remarkable coherence." Quite an early testimony to the role of contingency, the underlying agent of change in the works of Stephen Jay Gould.
Moreover, violent revolutions tend to fail to change the underlying dynamics that cause them, and they feed a cycle of violence that is hard to break. Furthermore, the revolutionary momentum, historically, is short lived after the revolution’s empowerment. Sustaining radical fervor for long, when a revolution has already succeeded, is hardly possible. Revolution engenders divisions among different segments of society whose interests clash. And revolution becomes tiresome to the average citizen and, eventually, constitutes a drain on popular support for new power holders.
Alternatively, the UDCs are not privileged with a Germanic tribalism that would produce bourgeois society through serf feudalism via gentile militarism. Nor do they have the luxury of sitting and waiting for an external stimulus, either direct colonial conquest, full economic penetration or all out proletarian revolution in the West (the one in Russia has already proven impotent), for the Eurocentric processes of modernization, industrialization and economic development to take place on their own pace and take these countries out of misconceived feudalism to utopian communism via disarticulated capitalism. UDCs' desperate situation can neither afford them to be that passive nor sustain them as all out revolutionaries.
The crux of the current UDCs' theoretic choice dilemma therefore is that while neoclassical “structural adjustment” is a sufficiently established and well-documented failure, Marxist revolution is unattainable. And these are the only two overarching/paradigmatic schools of thought in economics. Both schools have come to exclude geo-economic categories, with neoclassicism portraying developmental economics as a harmonious psychiatry and neo-Marxism projecting it as a revolutionary theology. One has no alternative therefore but to venture beyond these two "rigorous" and "coherent" domains, respectively, if any solution at all is to be found for the dire situation of billions of people in the UDCs. For that purpose, some principled eclecticism may not be too much of an intellectual inconvenience to endure.
One more reason for the necessarily eclectic aspect of the supplemental themes is that efficiency is hereby rejected only insofar as it is the single criterion upon which “law and economics” as well as economics proper are based. However, efficiency, in the straightforward sense of continuously rationalizing production, distribution and exchange, maximizing the ratio of output to input in each case, means economizing, which (together with provisioning --that counts most in underdeveloped conditions) is the essence of things economic, and as such cannot be abstracted from. Therefore to the extent that neoclassical economics enhances efficiency, one has to adopt that contributive part of that school, a part which is not given enough attention in Marxian economics (notwithstanding the works of Oscar Lange, Abba Lerner, and Maurice Dobb, specifying the conditions required for an optimum allocation of resources).
Again one more reason for resorting to measured eclecticism is that the labor theory of value is appreciated, essentially for commonsensical reasons; not even one scholar dare deny the fact that labor is a source of value or a factor of production. Yet the significance of capital as another factor of production in modern economies is also appreciated, for pragmatic reasons. Smith's capital was basically a fund for the payment of laborers and the purchase of material, and not of machinery, the latter being considered merely an accessory to the labor force. However, in the same year in which Smith's Wealth of Nations appeared, 1776, James Watt succeeded in setting his first steam engine in motion. Only a quarter century later, therefore, fixed capital became a new fact of life that Lauderdale, in his Inquiry (1804: 254), pointed out that "not by supporting the laborer, but by replacing him, capital becomes a source of value." Viewed from a pragmatic standpoint, Lauderdale’s insight is certainly right, no offense to Marx's dead labor, or Ricardo's store up labor, for although either notion is a valid theoretical concept, it is beside the point: It defies functional operationalization, it is not of much practical help to an UDC in need of foreign exchange (capital) to procure machinery for its industrialization program at the threshold of the twenty-first century. After all, Marx himself gave his monumental critique of the dominantly industrial socio-economic system the title Capital, not labor, presumably because it is capital that distinguished that system from previous ones.
Hence the proposed themes of this critique are no fixed dogma, but a mere general guide to action. They are an orientation, a framework of attitudes and practices for the interplay of forces. They are heuristics (rules of thumb), probatory and dynamic; they are not laws, nor are they, nor can there ever be, the final word on the matter, for whereas nature may be immutable, society is constantly changing, whereby a static Being is merely a moment of the dynamic Becoming. Whereas mechanical motion is the product of certain physical forces, economic phenomena, especially in the power lacking intricacies of underdevelopment conditions, result, for the most part, from certain normative juridical postulates.
Every idea of economic policy has a definite perception of economic theory at its root. And whereas the object of perception to the natural sciences is not subject to the human will, and therefore eternal, the object of perception of the social sciences is molded by human beings and their wills, by concepts, sentences, utterances, by deeds done, acts taken, words spoken, and therefore changes with the history of humanity. All things social change. Change, thus, is the only social constant. Moreover, because in the difficult conditions of underdevelopment, in contradistinction to those of development, one encounters as much human postulates as economic tendencies, because options are so limited, the germane question concerns as much "what is to be done" as "what is," and both aspects have to be related. Therefore the sought transformation will not develop by spontaneity alone. It has to be consciously pursued. It is not a law of nature, but a task of woman and man.
To want to exclude sentiment from economics, by neoclassical (Friedmanite) disinterested researchers who believe the realism of premises is irrelevant, is to attempt to square the circle, and in the process either self-deceive, be deceptive to others, or both. Persons (let alone societies) are not just "phenomenal objects," like rocks, trees and even animals, about which "laws of regularity and predictability" can be established, but are thinking, feeling, calculating, purposive beings. The human observer is also an instrument of observation and, like other instruments, requires a theory for its proper use (Abraham Kaplan, The Conduct of Inquiry: Methodology for Behavioral Science, 1998: 58-9). “Facts,” thus, never speak for themselves: Both they and the observer arrive theory laden. The laws that govern astronomy may interest some people, but the tendencies that regulate the distribution of incomes interest everyone. Nobody thinks the order of the stars good or bad, but everyone has an opinion on whether the order of the human world is right or wrong. No will to objectivity (Weberian freedom from valuation) can change this fact, even the most objective person cannot escape judging socioeconomic precepts. And the judgment of people on reality no doubt shapes, but more importantly is well- shaped by, this very reality. Evidently, therefore, it is better to do without any overarching-schematic model than to use a mistaken one (the marginal productivity theory, especially with regard to distribution), or to use the right one (the labor theory of value, especially its explanatory power of the inner workings of capitalism) the wrong way, dogmatically. And measured eclecticism, as the repudiation of piety or fideism towards one theoretical tradition, is certainly a virtue, a means of liberation from mystification.
Still another reason for measured eclecticism is that old economic theories do not die, and they do not die not because one is built on the other but because one is independent from the other. Indeed, in the history of economic thought, most disputes over the fundamental aspects of economic analysis are due to factors outside the scope of economics per se. Such factors include conflicting currents of thought concerning methods of reasoning in the social sciences. Economics in an era is thus partially a creature of its episteme, the epistemological paradigm of the epoch. And more often than not an old episteme undergoes a revival through the process of cross cultural dialectics, thereby resulting in a renaissance of an old economic theory.
Moreover, tolerating a measured degree of eclecticism in social inquiry is not unprecedented. Indeed, Rajaa' (Roger ) Garaudy (1969: 169) considers this method inevitable for dealing with the complexity and heterogeneity of social phenomena, undemarcated by an infinite range of gradations and variations. Half a century prior to Garaudy, Lewis Henry Haney, an ardent composer of eclectic thought, hence a disciple of historicism in the wider sense of the word, upheld, in his History of Economic Thought (1911: 256-78) and Social Point of View in Economics (1914: 41-3), the conclusions that a social point of view was the only correct one for judging economic phenomena, and that the great questions of political economy cannot be mustered in isolation from their setting in real life; hence the imperatives of principled eclecticism. The medal of eclecticism, however, goes of course to Marcus Tullius Cicero, whose seminal eclectic political economic philosophy, written in the first century BC, draws on Platonic, Stoic, Epicurean and Aristotelian sources. And references to Augustine of Hippo and Thomas Aquinas, other masters of eclecticism, come later in this critique.
Economics, in contradistinction to political economy, is little more than an expression of the time that has created it; “economics,” contends Rajani Kanth, “is simply the crown jewel of the ideology of capitalism, nay modernism”; and “economics,” argues Donald McCloskey, “is nothing more than a species of persuasive rhetoric, not really different from literary criticism and aesthetics” (Quoted in Mark Blaug, in his Not Only an Economist, 1997: 23). Neoclassical economics, no less than scholasticism, and the sooner the better, will thus succumb to the fundamental fact of all history, by which in the course of time even sense turns to nonsense, truth to error, and the unimaginable to commonplace. The whole history of thought testifies to the relativity and historicity of human understanding. Nothing is quite certain. Nothing holds true for more than a time, whether the subject matter is creed or deed, thought or thing, economics or politics. The "doctrine of Menger, Jevons and Walras is today the dominant dogma," contends Stark (1994: 215), adding that "Edgeworth's and Pareto's disciples consider the theory of marginal utility and equilibrium as a piece of eternal truth.... But even this new doctrine is only the expression of a transient epoch in the change of history, yesterday not yet dreamed of, today in full splendor, tomorrow abandoned and forgotten."
This century alone, several tangible empires, not just theoretical constructs, have disappeared altogether: the Ottoman, Austro-Hungarian, Japanese, Third Reich, French, British and Soviet. The empire of neoclassical economics, mighty as it may feel today, can and should expect no better. This is the verdict of history. For "though economic analysis and general reasoning are of wide application," conceded none other than Alfred Marshall (1890: 66), "yet every age and country has its own problems; and every change in social conditions is likely to require a new development of economic doctrines." Neoclassical economics, no matter how hegemonic it is today, has no monopoly on the kernel of truth then, and it would do well-by adopting a tolerant attitude towards intellectual dissent from its method and inferences, even if such dissent appears as heresy (see Colin Wilson, The Outsider, 1956); where else if not in the United States’ land of pluralism?
At any rate, preference revelation is not much better than the order of seating among the angels in heaven, given that one full millennium has separated these two preoccupations. The hallmark of the Veblenian critique of orthodox economics, in The Theory of Leisure Class (1899: 155), is that individual wants are socially manipulated, and it is therefore futile to demonstrate how aggregate satisfaction can be maximized by markets: Both are created by vested interests. John Kenneth Galbraith, in The Affluent Society (1958: 149), argues that “it is the process of satisfying wants that creates the wants.” Paul Sweezy, in The Transition from Feudalism to Capitalism (1976: 89), argues that "even under such a dynamic system as capitalism, spontaneous changes in consumers' tastes are of negligible importance." Indeed, even Joseph Schumpeter, in Business Cycles (1939: 167), reasons that under capitalism "consumers' initiative in changing their tastes...is negligible and that all change in consumers' tastes is incident to, and brought about by, producers' action."
Beyond all that, moreover, eclecticism is the method of the social science as no other. It is, as shown above, the method of Cicero, Augustine, Aquinas, Smith, Marx, Haney, Garaudy and many other original pillars of social science. Political economy is ipso facto eclectic; indeed its strength is that it draws upon the work not only of philosophers but also of lawyers and various social scientists, particularly sociologists, economists, psychologists and political analysts. To elucidate the meaning and value content of ideas by which different actors are guided, to embrace the philosophical, psychological, sociological, legal and economic components of social phenomena, political economy has by necessity to be eclectic.
Furthermore, there is the critical evaluation of political economy’s findings, and hence a concern with the methodology of inquiry, which is informed by the philosophy of the social sciences, another determinant of eclecticism. Also, prescription may result from analysis of contemporary conditions; for example, arguments in favor of activist government could be based on a particular diagnosis of political, rather than economic, malaise. Finally, but not exhaustively, the analysis may reflect a concern with the examination of diverse political economic, not merely economic, generic theories, such as liberalism, Marxism, and so forth. Therefore, political economy’s unique contribution comes essentially from being an interdisciplinary endeavor, given at least its bidisciplinary appellation. In fact, had it not been for practicality the name of this interdiscipline would have extended to include law, history, philosophy, sociology, psychology and more, for the amalgamation of different disciplines --and hence research traditions-- “may produce a sum greater than the constituent parts” (Larry Laudan, Progress and its Problems: Towards a Theory of Scientific Growth, 1977: 103).
The generic themes constituting bridled capitalism, on the other hand, are essentially noneclectic. Anyone unaccustomed to eclectic thought can thus forego the supplemental themes and focus only on the generic ones. Concededly the latter are grounded neither in neoclassical nor in Marxian economics. Hence they reject “structural adjustment” as well as delinking revolution. They are nonetheless grounded in the pragmatism of James, Peirce and Dewey, and the realism of Thucydides, Clausewitz, Carr, Morgenthau and Bhaskar. They endeavor to balance the conceptual-theoretical with the empirical-historical, that is the transcendental aspect of German idealism, as embodied in Leibniz, Kant, Schelling and Hegel, with the materialist dimension of English empiricism, as upheld by Hobbes, Locke, Bentham and Mill. The generic themes emanate from the theory of imperialism, whose nexus to capitalism is analogous to that of circulation to production (as elaborated upon below), but nonetheless seek reformative moderation, following Burke, Owen, Keynes and Camus, rather than revolution. Instead of Fund-Bank economic liberalism, therefore, socioeconomic reform is the themes' dominant principle in prescribing economic policy.
The generic themes acknowledge both the spatial as well as the class relations of production and exchange as tributaries of socioeconomic formations in underdeveloped conditions. They combine, and balance the tradeoffs between, the a posteriori inductive recognition and interpretation of the Is, in the light of realism and pragmatism, with the a priori deductive identification and codification of the Ought. The themes thus are no neat positivist reducibles, because the concept of economic value as well as the phenomena of price and distribution form essentially social categories. And a study of these can produce satisfactory results only when it is attempted from the outset via a social perspective, the subject matter of which is human --including international-- relations. "Economics is today only a science insofar as it expands into a sociology," proclaimed Schmoller (in Stark, 1994: 71). "Its observation must be investigation into the social forms of economic life," added Schmoller. By thus exiting the neoclassical method, abandoning its ideational harmony and monolithic inference, and venturing instead into the realist turmoil of power relations and pluralistic thought, moreover, the combined generic and supplemental themes are intended here to provide needed versatility to bridled capitalism, in order to address diverse problématiques in UDCs' economies and their sought transformation.
There exists no conceptual problem then for broad development themes composed of a blend of the most suitable insights and formulations, and even postulates, from the right-conservative-orthodox economics (absenting Marx), the center-reformist-heterogeneous tradition, and the left-radical-heterodox school. Muddling through different aspects of transformation, within a variety of states of underdevelopment, that often lack the luxury of pure choice, needs more than one entrenched recipe. The important point is to set the objectives of transformation clearly, then pragmatically approach them from the most feasible themes. In light of more abundant data, and more thorough analysis (by going beyond the narrow and reductionist market formalism, and democratic rhetoric), more judicious appraisal and sober judgment are likely to evolve as to why underdevelopment compels lower levels of liberalism than does development and what can be done about it. A way out of the neoclassical stand with respect to the UDCs, which amounts to claiming that all their problems are the result of ignorance or unwillingness to make full use of the virtues of neoliberalism and the vision of the IMF, is badly needed. This study is thus designed as a vehicle for critically examining, rather than merely promoting, the fitness in kind and in degree of contemporary liberalism to conditions of underdevelopment, and pragmatically accommodating UDCs’ transformative purposes and remedies to its workings.
One final disclaimer is that this critique is not an attempt at a full fledged theoretical synthesis. It is rather an heuristic, heretical, probe of how the UDCs can change their state within their current holistic, not just pecuniary, stance. Intellectual humility, if not realism, is thus in order. Heuristic here means probatory, tentative, not "hard core" as Lakatos (1967) uses it. One is not to be carried away and cavalierly think of, much less promise or claim, innovative originality. Nor should one be expected to produce such a theoretical (in contradistinction to descriptive) synthesis. Genuinely original syntheses are rare, difficult to arrive at, and usually take lifelong mental labor before materializing. Hasty attempts at a full fledged synthesis (definitionally unattainable through the reductionist neoclassical method), amount merely to banality, incoherence and/or unwarranted eclecticism. Instant originality in the social sciences, as can be discerned from observation, and as the history of thought makes abundantly clear, from scholasticism to communism to neoclassicism and beyond, is whatever furthers, accommodates or even merely propagates whatsoever mainstream hegemony happens to prevail at the time. On the other hand, heresy, even if heuristic, may turn out, later, to be of some use (not exchange) value.
This said, and with all humility, the fundamental conceptual insights of this inquiry are original. The very outlook of the inquiry, the thesis that a principled eclectic approach liberated from overarching ideologies (namely bridled capitalism which essentially throws away the yoke of Marxian revolutionism as well as neoclassical laissez faire) is the most suitable way to muddle through the contemporary underdevelopment configuration, is original indeed. The concept that the underdevelopment problem is fundamentally as much one of security as of economics is original. The concept that an underdeveloped country’s economic orientation is determined neither upon mere materialist nor mere ideational underpinning is original. The concept that the security concern among other considerations, in conditions of underdevelopment, is primus inter pares in determining a country’s economic disposition as well as democratic tolerance, is original. The concept that when a UDC’s economy and security conflict, concerns about the latter prevail is original, and contradictory to Marx’s generic conclusion for that matter. Indeed, this inquiry’s very interdisciplinary breadth as well as its comprehensive treatment of the political economics of overcoming underdevelopment are original.
Such breadth and treatment amount to a transdisciplinarity of approach that breaks free from both the magic formula of universal applicability and the artificial divisions imposed by the compartmentalization of the social sciences into separate subject disciplines. Instead, this approach attempts to employ a contingent, heuristic, nonreductionist social science that is, one hopes, capable of grasping the complexity of social phenomena, the wide variety of actors and rationalities (substantive, procedural, complex --recursive-reflexive) and motivations (economic, sociological, cultural, ethical, ecological, psychological), and the multiple determinations of social systems, without recourse to a purely idealist and teleological logic (see Ash Amin and Jerzy Hausner, Beyond Market and Hierarchy: Interactive Governance and Social Complexity, 1997: 8, 27).
Contrary to the neoclassical reductionist characterization of the economy, this approach strives to be sensitive to nonteleological change, cognitive and cultural boundedness, social and institutional embeddedness, variant and diverse actor rationalities, autonomous and extroverted social networkings, cross cutting and conflicting goals, locational and temporal adaptations, oscillating and asymmetrical interdependencies, and contingent and contextual path specificities. This approach thus endeavors to analyze properly the dialectics between ontology and epistemology, between structure and agency, and between individual and collective, in handling the forces and relations of production within the UDCs, and among the latter and the DCs.
The significance of this critique, however, is not a matter of intellectual curiosity and pondering, but of real survival value for billions of people in the UDCs. On the other hand, the endeavor to discern heuristic transformation themes from diverse political economy monographs on growth is undoubtedly a worthwhile intellectual contribution. Without any need to disclaim comparison, this is what Smith's Inquiry and Marx's Critique are essentially about. Indeed, Hegel's dialectic (1996: 216-37) treats this gradual assemblage process as the characteristic form of theoretical progress, the concept of aufhebung, expressing how opposites are deliberately and piecemeally canceled and preserved in a new unity. And aside from the speculative elaboration upon untested hypotheses, such as the notion that celestial bodies move in perfect circles, the great works of Aristotle, which much Western European thought adopted as its basis, consisted essentially of the systematization of earlier thinking in the realm of science, logic, politics and ethics, with very few novelties. The Aristotelian picture of the universe was of course composed of a group of perfect crystal spheres centering on, and revolving about, the Earth. That did not preclude its great contribution to the thought of more than one civilization.
Nonetheless, a more detailed research agenda beyond this work is yet to be implemented as to what the essential elements of strategies for planning, managing, and financing human development are; what the requirements of a practical framework for participatory development are; what a conducive external environment for human development is. Further research to prioritize various aspects of human development and to identify social returns to different types of social expenditures over time is also needed. Not least, country studies are in order to determine which set of supplemental themes is germane to specific country conditions. A comparative study of the internal and external conditions in nonimperialist European economies, seeking to elaborate on how these economies avoided dependent peripheralization and underdevelopment, is further in order. And the recrimination of UDCs' population growth as the cause of poverty needs serious reconsideration. Finally, a question that is yet to be revisited intellectually is the reward for merit. On the one hand it seems fundamental for both motivating the bulk of the populace and enlisting the most talented to run the societal machine. On the other hand there is obvious injustice in rewarding talents and abilities for which a person has only limited responsibility --these being to a large extent governed by nurture, contingency and, perhaps, genes and brain chemistry. A lot of work is yet to be done, for this critique barely scratches the surface of how to overcome underdevelopment, how to help billions of desperately poor people in the world self-transform.
1. ORTHODOX MECHANISMS
This chapter focuses on the orthodox mechanisms of socioeconomic transformation. These are doctrinal, established and prevalent theories of economic growth. The aim is to point out, analyze and elucidate the contribution each of these theories can lend to the specific objective of improving the current situation in the UDCs. Needless to repeat, this will be the aim of each of the first four chapters with respect to the theories involved. The perspectives discussed in this chapter are either unsuitable for direct application in the UDCs, or speak for historic circumstances that are different from, or no longer characteristic of, the situation of the UDCs at the threshold of the twenty-first century. They nonetheless provide the foundations for the other perspectives discussed in the following chapters.
Any potential loose ends, therefore, are cumulatively tied in by the comparative process in the following chapters, especially by the regrouping of chapter five. For there are concepts in the following chapters that need to be introduced before some comparative analysis can take place. That pattern also much reduces redundancy. Moreover, any chapter is not a stand alone project; it is a part of a whole, and has thus to be considered in the entire context in which it exists. More important, in any nonreductionist research, which is the sine qua non of the social sciences, no matter how the topic is taxonomized, its different aspects cannot be neatly demarcated. Contrary to the claims of positivism, a water tight classification in the social sciences is a contradiction in terms. All chapters are thus semidiscrete.
The analysis is narrowly tailored to include only those mechanisms as projected in the works of primary representatives of pertinent schools. Smith, Ricardo and Mill are considered, inter alia, to best represent the general thought of the classical school. On the other hand, while Marx is the founder of his school, Evgennii Preobrazensky is generally credited with originating the conception of socialist metamorphosis. But it is Dobb who really best relates the Marxist theory to the early practical endeavors aimed at transforming the former Soviet Union and the countries of Eastern Europe under the socialist regimes. These three authors, therefore, are selected to represent the Marxian prescription for transformation. Keynes is doubtless the best spokesperson for his perspective. As to the traditional perspective, it is commonly accepted in the social science literature that among many contributors to that school, William Arthur Lewis and Walt Whitman Rostow stand out. And although the literature on Bretton Woods is ample, nothing is as credible in projecting the deficiency of that regime as its institutional publications, except for a concrete case of applying Bretton Woods’ “structural adjustment.” This is illustrated by the Chilean experiment.
1.1 The Classical Mechanism
"Natural progress of opulence," or long-term economic growth, according to Adam Smith, is achievable through accumulation of stock, division of labor and improved skills (hence economies of scale and specialization --not machinery), and market extent. The latter means extension of the scope for profitable international trade through improvements in law and order along trade routes, the expansion of low cost water borne transport, increasing savings --especially from manufacturing-- to create and make use of new markets, elimination of all obstructions to free trade and competition, and the abolition of laws of primogeniture and entails, which prevent the break up of large landed estates (Smith, 1776, I: 407-9, 441; II: 84). Smith's opulence also include peace, easy taxes, political competition, positive role of public authorities, and national security considerations, all within an accelerating growth policy. However, defense is more important than opulence, hence strategic and national interests justify a policy of trade restriction such as the Navigation Acts.
Smith builds his strategy for long-term economic growth on the premise that the desire of the individual to better his condition is the mainspring of progress. The growth of opulence is treated as the unintended consequence of short sighted behavior largely directed towards meeting private needs, and motivated by a persistent desire to improve both personal condition and social status (Smith, 1776, I: 477-8). His "system of natural liberty and perfect justice” serves simultaneously as an explanatory and normative means for the conduct of human affairs in economic matters (Smith, 1776, I: 157, 344; II: 37-8, 208). It seeks to show that the untrammeled pursuit of individual self-interest under competitive conditions can, and ought to be allowed to, create a harmonious public order in which the benefits of economic growth and efficiency, chiefly in the form of rising wages and lower prices and profits, will be most widely diffused throughout society.
Smith further argues for free trade and competitive markets while attacking mercantile restriction and monopoly privileges granted by the state (1776, I: 411, 456; II: 191). In contradistinction to later, more extreme versions of laissez faire individualism of the Senior (1971) and Friedman (1953) types, however, Smith paid as much attention to the institutional preconditions required to produce a socially beneficial result as he did to the internal connections forged by economic activity itself (a bent that is abstracted from now by neoclassical economics). Moreover, he did not employ rational-economic-person assumptions (as neoclassical economics now does), and was at least as concerned with the political and moral byproducts of economic activities in contemporary commercial societies as he was with material benefits for their own sake. Indeed with regard to the latter his position must be regarded as distinctly skeptical and ascetic.
Smith, whose thought was selectively dismembered and reduced to laissez faire by the neoclassical school to buttress its self-serving purposes, also believed that government had significant duties to perform with respect to education and the provision of public works that could not be left to private initiative. Thus state supported education was particularly important as an antidote to the effects of the division of labor in undermining the mental, moral, social and political capacities of the populace at large (1776, II: 232-53, 309-40, 444-56).
Smith therefore expected that the duties and even the size of government would grow with opulence, but he was anxious to devise means by which essential functions could be supplied without undue burden in the form of taxes and growth of unproductive activities. Hence his interest in proposing extra market institutions designed to achieve this result by methods that matched incentive to performance. The production of wealth, however, not the welfare of people, was Smith's first priority. In his own words, "the great object of the Political Economy of every country is to increase the riches and power of that country" (1776, I: 394).
The Smithian economic course of action for producing growth, therefore, reduces to the expansion of markets, the enhanced productivity resulting from the division of labor, and capital accumulation arising from private thrift under conditions ensuring political security. These are the most important aspects of Smith’s prescription for economic development relevant to the UDCs’ situation.
David Ricardo (1817) suggested a bifurcate strategy of escape from the stationary state. The latter results from the increasing scarcity value of good land, which raises rent, hence redistributes national income towards the land-owning class. Meanwhile, the share of profit is reduced until, as a result of steadily rising marginal food production and wage costs, profits in both farming and manufacturing are squeezed to zero. The stationary state then reigns. The two components of escape are the introduction of technical innovations in agriculture and the use of international trade to obtain lower cost food in exchange for manufactures (Ricardo, 1817: 79-82, 128-33, 266-72). The significance of expanded trade lay not so much in the enlargement of the market per se as in the fact that it could lead to increased profits through a decrease in the price of wage goods and greater efficiency in resource use by specialization according to comparative advantage.
Less pessimistic than Ricardo, not to mention Malthus (1798) and his “abysmal” science, John Stuart Mill (1848) emphasized the momentum of change, and boundless prospects for improvements in technology, opportunities for increasing imports of cheap wage goods, including food, and opportunities for capital export, and contended the power of commerce could keep the peace among nations. Hence law and order promoting stable commerce, new capital and techniques and the indirect (dynamic) and direct (static) benefits of commerce were components of Mill’s approach to economic growth. Mill also wanted to see increased voluntary restraints on population growth amongst working people, which, unlike Malthus, he was confident could be achieved, combined with a more equitable distribution of the gains from economic growth. Mill thus adopted the view of cumulative improvement in the underlying economic structure --of equity gains and of efficiency gains. Mill's view of cumulative improvement in the underlying economic structure, however, focuses more on efficiency gains than on equity gains.
In sum, classical scholars focused, in their work on growth theory, on capital accumulation, savings and investment out of profits, institutional change, trade, market expansion, technology, population growth and natural resources. The main concern of classical economics was the wealth of the nation, the way it grew over time, and how the distribution of income changed with growth. The chief interest was the long-run, the "normal" rather than "market" prices, and the aggregate incomes of strata such as laborers or landlords rather than the wage paid a given laborer. In matters of policy, classical economics was reformist, with proposals based on the newly developed social science of political economy. A fear existed, however, of a possible brake on growth due to diminishing returns in agriculture.
The essential contribution of the classicists therefore is:
(1) The provision of an account of the forces influencing growth (a wider, societal sense than mere economic growth as used today in neoclassical economics), and of the balances necessary to maintain the growth path.
(2) The recognition that it is the accumulation and productive investment of a portion of the social product that is the driving force behind the growth.
(3) The awareness of the interrelatedness of the activities of production, exchange of commodities, the distribution of the social product, and the accumulation of capital.
Amongst the most notable features of classical growth discourse that could be of value to UDCs transformation endeavors, therefore, are:
(1) The importance of market expansion as a stimulus both to the growth of total output and to raising labor productivity (in the UDCs’ case, this would mean their own market expansion, not that of the global or DCs’ market).
(2) The importance of profits as the source of finance for new investment, in contrast to the unproductive use of land rents and the zero or minimal savings capability of wage earners (hence some of the significance of the incentive system and the private sector of the economy).
(3) The potential of an agricultural sector dominated by rentier landowners to impose a brake on overall economic growth (Ricardo) --hence the importance of diversification as well as on the one hand regulation and on the other antitrust (pro-competition) laws.
(4) The need to liberalize trade as a means of enlarging the market (Smith) and of capitalizing on comparative advantage (Ricardo) --without turning the latter into a dogma that fetters economic dynamism and evolution.
(5) The importance of technological change in raising labor productivity and in helping to meet the food and raw material demands of a rising population --hence the necessity of throwing off the yoke of assigning the UDCs to primary production using primitive means thereof, which the H-O-S core of neoclassical international trade theory calls for.
1.2 The Marxian Mechanism
From the long line of classical growth theories, and his direct observation and analysis, emanated Marx's views on extant industrial capitalism. The transition form feudalism to capitalism is a necessary condition for industrialization and growth. Only under the capitalist mode of production, whereby the production is for exchange value, and surplus is the means for monetary assets accumulation (i.e., fixed capital, not wealth, accumulation), are growth and technological progress readily attainable. The economy is determinant, in the last instance, of sociopolitical change; social action and political outcomes are epiphenomena of the economic.
Evidently, Marx's early philosophical works led him to question the naturalistic basis of classical political economy. Marx’s historical materialism, i.e., dialectical materialism applied to the sphere of society, marks a fundamental break with the classical German philosophy of Hegel and Feuerbach. It replaces metaphysics by dialectics, and idealism by materialism. Hence his questioning of the “naturalistic” basis of classical political economy. The error of the classical writers was to naturalize (or present as universal) the historically specific social relations of capitalist society. Marx realized that capitalism was a type of economy just as English is a type of language, Christianity a type of religion, democracy a type of polity. None of these terms constitute a universal category.
Smith and Ricardo had figured out the notion of surplus value. Quesnay had previously explained the “surplus product,” the excess of agricultural output over “natural” subsistence wages. However, Smith and Ricardo had missed the wood for the trees when they took its specific phenomenal forms like rent, interest and profit as separate, independent entities. In other words, they failed to see surplus value as the essence of the particular distributive shares, as the generic concept underlying the historically determined manifestations thereof.
Marx emphasized surplus value in its general character. He realized that behind the formal abstractions of the classical works (land, labor and capital producing rent, wages and profit) lay an unexamined historically specific postulate: private property. As much as the last thing a fish would discover is water, only by taking for granted the existence of private property could Smith and the others assume that classes were derived technically from the division of labor.
Marx's works further indicate his understanding that the issue is not merely one of growth, but also of the economic, social, political, legal and conscious active metamorphosis of the social formation (i.e., transformation, not mere growth or development), provided it has reached a certain level of development of its forces and relations of production, and of the state apparatus necessary to sustain these.
Precapitalist modes of production are hardly prone to growth or technical change, for the surplus is meant for use value and partially for luxury consumption, support of the state apparatus and aggrandizing public works of an unproductive nature. In feudalism, since the immediate producers appear in combination with the means of production, and hence labor power cannot take the form of a commodity, the appropriation of surplus labor by the feudal lords takes place directly, by extra economic coercion (viz, political constraints such as feudal land property and guild regulations, as well as the pressures of manorial custom) without the mediation of the economic "laws" of commodity exchange. In capitalism, not only are the products of labor turned into commodities, but labor power itself becomes a commodity: The system of coercion disappears and the "law" of value holds true over the entire extent of the economy.
The fundamental components constituting the process of passage from feudalism to capitalism, therefore, are: The change in the social form of existence of labor power consisting in the separation of the means of production from the direct producers, i.e., the change from feudal land property to industrial capital; the change in the social mode of production of labor power from serfdom to wage labor (which comes to the same thing); and the polarization of the direct producers, or the dissociation of the peasantry.
For Marx, therefore, the conjunction of three phenomena accounts for the transformation of a feudal society into a capitalist formation:
(1) A rural social structure which allows the peasantry to be “set free” at a certain point.
(2) An urban craft development which produces specialized, independent, nonagricultural commodity production in the form of the crafts.
(3) Accumulation of fixed capital derived from trade, plunder and usury.
Among the basic analytical-descriptive rationales of capitalism that Marx emphasizes are:
(1) The capitalists use the economic power derived from their ownership of the means of production to extract and appropriate surplus value from laborers which is used to finance further accumulation.
(2) Technical innovation enables the capitalist to raise the rate of profit and/or undercut competitors. The consequent development of the productive forces is the positive aspect of capitalism.
(3) Meanwhile, capitalist competition also undercuts and destroys all precapitalist producers (artisans, peasants) as well as the less efficient capitalists (Marx, Capital, I, 1867: 480-93, 709, 927-35, 1037-8).
Marx's realist, materialist description of the metamorphosis thus entails:
(1) Primitive fixed capital (not wealth) accumulation.
(2) Institutional change.
(3) A reserve army of unemployed.
(4) Commodity production (for exchange not use value).
(5) Labor saving machinery (manufacture-machinofacture transition).
(6) New techniques and organizations.
(7) Cash nexus.
(8) Rising organic composition of capital (OCC).
(9) Expansion of trade (both capitalist and underdeveloped countries gain from exchange, albeit the former exploit the latter).
(10) Concentration of production and productive power of capitalism (Capital, I, 1867: 714, 775, 873-940).
Evgennii Preobrazensky (1965), with more of a practical and planning bent, worked on Marx's thought in the 1920s, originating the conception of both the nature and strategy of socialist metamorphosis. A key objective is to maximize the rate of growth of national output. Meanwhile the traditional, subsistence oriented sector and the wage labor based, profit oriented sector are replaced by the private sector and the public (state) sector, respectively (Preobrazensky, 1973: 35-79). The way to achieve socioeconomic metamorphosis is rapid industrialization, to be financed by what Preobrazensky (1965: 183) termed "primitive socialist accumulation": The unequal exchange of resources between industry and agriculture to the benefit of the former.
The state takes responsibility for a steadily increasing share of national production, not only to ensure the socialist metamorphosis of the economy, but also to maximize the rate of growth of output, for the state could fix the savings rate from its expanding, modern sector profits, up to one hundred percent, and it could also determine the pattern of investment to be financed by these savings. However, in the early years of the metamorphosis, concedes Preobrazensky (1973: 115-19), the economy would also need the support of private producers, whose relative and absolute importance should later steadily diminish. The public sector could be expected to generate a faster growth, and more efficient pattern, of investment.
Preobrazensky, like G. A. Feldman who later gave a formal statement of the same argument, favored assigning priority to investment in heavy industry --capital and intermediate goods. This not only would provide means for the production of armaments to protect the metamorphosis, but also in purely economic terms it would provide the basis for maximizing long-term output growth. While the populace might have to tighten its belts in the short-run, foregoing any immediate rise in per capita consumption while the basic industrial structure was created, in the long-run both annual levels, and the rate of growth, of output of all types would be higher under heavy industry investment than under any alternative growth path.
Preobrazensky (1973: 122-47) also explored the policy implications of seeking to maximize the rate of expansion of the public sector, proposing a number of measures to accelerate mobilization of both financial and real resources for state accumulation. These policy instruments include taxation, interest rate policy, the terms-of-trade between sectors and public utility pricing.
Thus Preobrazensky advocated the following policies:
(1) The state should tax the private sector.
(2) The banks should charge higher interest rates to private borrowers than to state industry.
(3) The state should replace private intermediaries in trade, and should set the terms-of-trade between the private and the public sectors so as to permit extraction from the former of part of its surplus products.
(4) The state should charge higher rates to private users of such services as the railways.
The Marxian metamorphosis reaches a sophisticated degree of realism in the work of Maurice Dobb. Dobb (1963: 27-34), with empirical eyes on the socialist, especially Soviet, industrialization experience, addresses the counterfactual question of whether social unity would be ruptured if too much political and economic pressure were exerted on the peasantry to provide, from their labor and their own narrowed consumption, the wherewithal for industrial expansion. His answer is that if encouragement were given to the richer farms to buy or rent more land and employ labor in order to produce a surplus for the market, this would lead to a rebirth in the country side of a capitalist class of improving farmers, accumulating capital and catering for trade and money lending, as have embryo capitalists from the ranks of peasant producers the world over (e.g., English yeomen, French laboureurs, Prussian junkers, Russian kulaks).
The pattern of development for capitalist countries in the past was to develop first all consumer goods industries, such as textiles, clothing or food processing, only switching over to a more rapid expansion of capital goods industries at a fairly advanced stage. This has come to be known as the policy of textiles first. If the peasantry can be wooed rather than coerced into providing a larger marketed surplus of raw materials and foodstuffs, this pattern would be the right one, since the only way of tempting a peasant to sell more grain or cotton is to offer him/her more industrial goods in return, and to make this possible an expansion of light consumer goods industry would be given priority. This would be enacted in a cautious and relatively slow development process, in the course of which a careful balance must be preserved between agriculture and industry production of more consumer goods, keeping in step with a quickened flow of agricultural products from village to town.
The actual Soviet way of metamorphosis, however, was to combine a high rate of industrialization with a drive for collectivization of agriculture --for the merging of individual peasant farms into large scale cooperative or collective farms. Thereby a solution was provided for two problems. The first, a historically specific one, namely the individualist peasant agriculture, with its primitive methods and low yields, and its constant threat of a “reborn capitalism” via the generation of an upper kulak stratum of farmers, was replaced by a collective form of agriculture. At the same time, but more importantly, the basis was laid for mechanization and an enlargement of the marketed surplus.
Industrial metamorphosis, therefore, rather than being slow and cautious, was planned to take place at an ambitiously high rate. The impetus of metamorphosis was not to be allowed to peter out; on the contrary it was to be generated and sustained by a campaign to which the leading personnel in industry at all levels and the full membership of the Party were mobilized. The cautious pattern of development was discarded, and instead of light industry taking the lead, priority was given to the construction of heavy industry --electrification, iron, steel and machinery. By enlarging the productive capacity of the metal, power and machine making industries the possibility of the future expansion in all branches of the economy was thereby being enlarged. Such a Marxian based Soviet experimentation, its political tyranny and human cost aside, provides economic precedents for the UDCs to consider in their quest for transformation. For example, in the absence of a heavy industry (fuel, metals, engineering) the UDCs will have to rely in the early stages of metamorphosis on importing machinery from abroad with which to equip their new industry. Meanwhile, they will have to export primary products, at whatever prices there are, to procure that machinery.
Another practical issue of relevance to underdeveloped countries from Marxian metamorphosis is whether to yield to Preobrazensky's counsel and leave some strategic segments of the metamorphosis to the initiative of private capitalists, aided perhaps by some foreign lending and technical aid under the umbrella of international bodies; or whether planning in some degree by the state and by government organs is necessary. The adoption of the latter of these two positions in the UDCs, even within a continuum or middle ground strategy, inevitably results in the state having to face internal as well as external reactions hostile to any encroachment on a free market economy, and to any considerable enlargement of the scope of state expenditure and investment, with the potential security problems thereof. This in turn discourages private initiative, results in capital outflows, scares away foreign capital and leads to uneconomic policies and to waste involved in economic planning. The tradeoff for such a course of action, elaborated on below, however, is so important that finding ways to mitigate, if not resolve, or absorb these shortcomings, is imperative.
In addition to this broader issue of planning versus free market, state versus private investment, especially in the strategic segments of the economy, there is of course, still lingering, the question of the general lines which metamorphosis, planned or unplanned, should pursue. It could pursue the policy adopted by some developed countries in the past, proceeding cautiously to invest first in agriculture and agricultural processing industries, then in light consumer goods industries for which there is an immediately available market, and only much later in highly mechanized modern techniques and in heavy industry. Or, alternatively, it could pursue the heavy-industry-first approach.
In this question of the pattern of metamorphosis a number of distinct though connected issues are involved: The relative importance to be assigned to foreign trade and to mobilizing internal resources, especially surplus labor; the order of priority to be assigned to different industries or sectors --their relative rates of growth at particular periods; and the choice of technique, or of methods of production, in the economy at large and in particular industries. These issues are difficult to size up clearly without entering into specific case reasoning, and in the process to focus upon essentials, something that is utterly difficult, especially in the muddled state of the data base and statistical nuances and lack of reliability in conditions of underdevelopment. But such complementary country studies will have to be made if the proper balance is to be achieved.
The wider issue of growth, however, is relatively straightforward. Assuming that population is increasing at 2 percent per annum, which is not an unusual rate for UDCs, and assuming a capital-output ratio of 3, a country will have to save and invest 6 percent of its national income merely to break even, i.e., to keep pace with population increase while preventing the standard of living from falling. To maintain an economic growth rate of 5 percent, and hence raise output per capita by as little as 3 percent per annum, will require the investment annually of 15 percent of its national income --a very high percentage, and hence too heavy a burden, for UDCs with such very low output per capita and already so near the starvation level.
Dobb (1963: 40-1) provides a rather obvious answer, or at least partial answer, to this: That in most UDCs there are large inequalities of income, and hence a substantial amount of parasitic consumption by feudal and other well-to-do elements (a lot of it of imported goods), which could be reduced if appropriate governmental measures were adopted. For a principal obstacle to rapid economic growth in the UDCs is the way in which their potential economic surplus is utilized. The UDCs’ surplus is absorbed by various forms of excess consumption of the limited number upper class, by increments to hoards at home and abroad, by the maintenance of vast unproductive bureaucracies and of even more expensive and no less redundant, mostly ceremonial, military establishments, whereby the state --also under constant security threats-- too often means the army, the only “national” institution. Moreover, there are often untapped resources and forms of waste, and these resources could be mobilized legally (i.e., with proper compensation) for investment by a government not too tender about existing vested interests. That does not mean dictatorship; it only means balancing conspicuous consumption with urgent needs, the privileged oligarchy with the destitute masses, and the utterly unjust with the fairly just.
The pessimistic view takes it for granted that, in order to have rapid metamorphosis, consumption must be depressed absolutely so that the investment ratio may be raised. This, in Dobb's account, is a purely static view, and derives from the snap shot habit of looking at things at a given point of time, with a given total income to be divided in certain proportions between consumption and investment (Dobb, 1963: 41-2). What this static view overlooks is that growth depends quite as much (and in the long-run much more) on what is done with the increment of national output, however small this may be to start with, as on whether the initial rate of investment (and hence rate of growth) is large or small.
In other words, it is the rate of increase of the increase --the capacity of the growth rate itself to grow-- that really matters. It is how one uses the investible surplus one has, and how one harnesses its results, that is crucial, rather than its initial size in year one (the neoclassical so-called “endowment”). True, using the increment for rapidly stepping up development involves not using it to increase consumption for the time being. But to partially forgo raising consumption here and now in order to be able to raise it more rapidly later, is a different thing from absolutely reducing consumption here and now which the pessimistic view sees as the only possibility.
From a planning standpoint, this issue appears essentially as the question of how to distribute investment between industries that make capital goods and industries that make consumer goods. Instead of the notion that savings, as a painful shrinkage of consumption, must always precede and condition growth, there is the notion that the increment that growth yields being used in various ways, with varying effects on growth in the future, result in a staggering force of compound growth at high rates. This is the practical crux of Dobb’s Marxian contribution, for his many profuse trees are all encompassed within this crowning forest.
1.3 The Keynesian Mechanism
Before Keynes, the prevailing orthodoxy was that the economy tended to a full employment equilibrium through the operation of the price device, with the distribution of income determined by the payment to factors of production according to their marginal productivity. Economic growth was assumed to be a smooth continuous process. The twin pillars of classical employment theory were that savings and investment were brought into equilibrium at full employment by the rate of interest, and that labor supply and demand were brought into equilibrium by variations in the real wage. Anyone wanting to work at the prevailing real wage could do so.
In the 1930s the problem that dominated the capitalist economies was that of intense, persistent, trade depression associated with widespread, unprecedentedly heavy unemployment which was aggravated rather than relieved by laissez faire economic policies. Britain, the last stronghold of free trade at that time, therefore, adopted a protectionist strategy in the 1930s. And in the United States, the proverbial home of methodological individualism, the New Deal licensed an unprecedented level of government activism.
The ideological bias associated with the neoclassical paradigm was becoming an anachronism (Keynes had consigned the laissez faire ideology to the lumber room of "vulgar economics" as early as November 1924), and Robbins' view that the cause of economic difficulties since the Great War was due to wages being held above the equilibrium level, though still shared by many economists, provided little practical guidance to policy makers.
This then was the context in which Keynes produced his General Theory of Employment, Interest and Money (1936), which he viewed as a complete break with current orthodoxy. Keynes took issue with what he chose to call "classical" theory but which embraced neoclassical theory.
A major objection to orthodox economic theory in the context of the 1930s was that it assumed an economy which was tending towards full employment --not of course that the economy was necessarily in a position of full employment, but that its eventual equilibrium was a full employment position. However, in the prolonged depression of the interwar period, with rampant unemployment, the assumption seemed blatantly to disregard the crucial problem of economic policy. It was thus the classical theory of employment with which Keynes took issue first --in his second chapter of the General Theory, which is a critique of what he chose to specify as the postulates of classical economics. These in his account were fourfold:
(1) That the real wage is equal to the marginal product of labor.
(2) That the real wage is equal to the marginal disutility of the existing employment.
(3) --Which is a logical corollary of (2)-- That there is no such thing as involuntary unemployment in the strict sense; i.e., that all the unemployed could get employment merely by accepting a fall in wages.
(4) That supply creates its own demand in the sense that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment (Keynes, 1971: 9).
With the first of the postulates he did not quarrel. With the second and its logical corollary, the third, he came into head on clash. The implication of the second classical assumption, that the real wage equals the marginal disutility of labor, is that an individual could increase his employment by revising his notion of the disutility of labor and accepting a lower wage. At a macroeconomic level it implies that if labor as a whole would agree to a reduction of money wages more employment would be forthcoming. Keynes' objections to these assumptions were based partly on an appeal to facts: It was not plausible to assert that unemployment in the United States was due either to labor obstinately refusing to accept a reduction of money wages, or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing.
In the General Theory Keynes strove therefore to demonstrate that contrary to the classical theory the capitalist system left to itself will not generally produce full employment. The key to this theoretical formulation was the development of two concepts, liquidity preference and effective demand. Liquidity preference meant that financial markets may systematically cause interest rates to be at such a high level that they depress private industry investment, and that the demand for the stock of money depends on the rate of interest. Effective demand is the notion that aggregate demand, and hence savings, depend on disposable income. Consequently, full employment may be unsustained because its level of output is not matched by aggregate demand. It stands in contrast to the classical or, more accurately, neoclassical view that the price device automatically adjusts to ensure equality between demand and supply, for instead of demand responding only to prices it responds to income.
Keynes was thus confronted not only with the theoretical challenge but mainly with the factual challenge of the large scale unemployment of the 1930s itself. He posited that the working class and the labor unions would show less resistance to a slow erosion of real wages, with a rising level of nominal wages and of inflation, than to a lowering of nominal wages under stable fiduciary (paper) money. His macroeconomic approach thus is less a grand construct than a pragmatic device for pursuing a given purpose: Namely to influence decisively the shaping of economic policies by the government. His ideas were experimented with during Roosevelt's New Deal and were put into practice in all OECD countries after World War II.
What was lacking was a model of economic reality which started from the facts of experience, i.e., a system with a persistent tendency towards something less than full employment. Keynes thus developed a theory in which the level of employment depended on:
(1) The propensity to consume.
(2) The marginal efficiency of capital.
(3) The quantity of money.
(4) The level of wages and prices.
The key factors in the system were:
(1) The principle of effective demand, which acted through the propensity to consume and the rate of new investment to set a ceiling to the level of economic activity.
(2) The role played by money as the link between the present and the future.
Keynes then tackled an empirical question about market economies, the causes of wide swings in economic activity, particularly of long slumps. His thesis in the General Theory is that the valuation of assets is sometimes disturbed by a massive shift of business or financial opinion and, in response, the labor market is not generally able to adjust rapidly and dependably so as to maintain the normal volume of employment, not because of any slow workingness in the wage setting machinery --wages may be quite flexible-- but because the participants in that market cannot assess every shift in business or financial opinion that occurs nor the scale of the wage adjustment that each such shift requires.
The theory chosen by Keynes thus was:
(1) Monetary, assigning a crucial role to the current level of nominal wages.
(2) Intertemporal and capitalistic, assigning a key place to fluctuations in the rate of interest, or marginal efficiency of capital, as determined in a two sector economy.
(3) Anti-equilibrium, in the expectational sense of the term, invoking uncertainty as an obstacle impeding expectations from successfully coordinating business activity.
(4) Interventionist, depicting monetary and fiscal instruments as having the power to improve the stability of the economy.
Spelling out the propagation agency to show how instability in the speculative valuation of capital assets would lead to episodes of below average and above average employment, Keynes made a three step argument:
(1) A decline of speculative confidence --a drop, calculated at the initial level of employment, in what Keynes dubbed "the marginal efficiency of capital"-- implies that there would have to be an equal decline in the nominal rate of interest, if the product market were to remain in equilibrium at the initial level of employment.
(2) If the condition for money market equilibrium is to be satisfied a decline of the interest rate, in increasing the amount of money demand, must be accompanied by a fall of real income, barring an increase of the money supply, unless the disturbance is accommodated by a decrease of the nominal wage level (hence of costs and prices).
(3) Nominal wages do not initially drop by enough, if at all, to forestall the fall of employment because workers in establishing their reservation money wage rates, do not forecast adequately the extent and generality of the weakening of the demand for labor; and they do not complete at all promptly the adjustment necessary to return to the former employment level for reasons that Keynes did not make explicit, but which may be presumed to involve workers' difficulties in gauging the extent and duration of the speculative disturbances. So there is a protracted spell of reduced employment as a result of the marginal efficiency disturbance (Keynes, 1971: 28-31, 135-41).
This Keynesian agenda had been attacked from its earliest days as socialist, although its avowed role was the preservation of capitalism; but ultimately it was undermined by changed circumstances more than by political attacks on it. The Keynesian dominance constructed after World War II lost its cohesion in the late 1970s, as the international order anchored by the US dollar (the Bretton Woods monetary system) gave way to a less regulated international finance, and the social consensus of domestic politics in industrial capitalist countries was fragmented by the phenomenon of high inflation coexisting with high unemployment (stagflation).
The monetarist criticisms voiced by Milton Friedman et al. for many years took a new line at the end of the 1960s by interpreting Keynesian theory as depending on the Philips Curve, which was proposed in 1958. Friedman gave the latter a neoclassical foundation by introducing expectations of inflation into a model of wage determination, and obtained the anti-Keynesian result that in the long-run unemployment, however high, is at its "natural rate" reflecting workers' choice instead of being involuntary and is not influenced by Keynesian demand management policies. Because the dominant form of the Keynesian model itself was based on neoclassical principles, its supporters were unable to argue effectively against this extension despite its anti-Keynesian conclusion. Keynesianism was eventually overturned as an official agenda in the 1980s, when Margaret Thatcher gained power in Britain and Ronald Reagan took the helm in the United States. The fundamental Keynesian objective of permanently eliminating mass unemployment was lost in that period.
But in pressing on economists the uncertainty of future conditions, the difficulty of gauging the analyses of others, and the consequent impossibility of a collective mind and collective rationality, Keynes was a bearer in economics of both the intellectual attributes of his time and of measured eclecticism. His outlook paralleled what was turning up in much of art and philosophy --in the cubism of Picasso and Braque, the atonalism of Schoenberg and Berg, the fragmented poetry of Eliot and Pound, and various writings from Nietzsche to Sartre. Keynes brought to economics the outlook generally called modernism: The consciousness of the distance between self and others, the multiplicity of perspectives, the end of objective truth, the vertiginous sense of disorder.
The class of Keynesian research problems thus have as their subject the traverse from the old equilibrium path to the new one. Recovery is as much the subject as the recession itself. However, when Europe and much of the rest of the world suffered a protracted depression in the 1980s this phenomenon was not a Keynesian story. The Keynesian theory was unable to explain the protracted 1980s slump. The portrait that Keynes' theory drew of the economy, one in which labor market participants faced daunting uncertainties about the extent of the general fall of wages that will prove necessary to restore employment, and about the extent to which other wage setters have reached the same calculation, hardly seems a propitious environment for government authorities to try their hand at stabilization. And indeed Keynes says in the General Theory that even optimal policy decisions by the stabilization authorities will inevitably leave a large amplitude of fluctuation in employment. Yet Keynes was no passivist in the battle over policy.
In its broadest sense Keynesianism is an approach to the political, social and economic affairs of industrial capitalism that validates the state taking a leading role in promoting material welfare and growth, and in regulating civil society. The fundamental idea of Keynesian thought is that capitalist economies systematically fail to generate stable growth or fully utilize human and physical resources. Markets, which are civil society's main economic agents of self-regulation and adjustment, cannot eliminate economic crises, unemployment or, in later versions, inflation. The iconoclastic conclusion of Keynes’ analysis was that there was no Smithian invisible hand translating private self-interest into social benefit. This was the nub of the Keynesian heresy.
But the principle reason why the General Theory had such a powerful impact on the community of professional economists inside and outside the universities, internationally as well as in Britain, was that the time was ripe. Its abstractions seemed more relevant to the conditions of the 1930s than the competing theories. Its analysis gave a theoretical basis for policy prescriptions that were more in tune with existing political trends in a world that was already in massive retreat from a laissez faire ideology. It thus attracted the interest of economists over a very wide spectrum of political affinity.
The Keynesian project gained political and social momentum, then, from intractable mass unemployment in the 1920s, culminating in the crises of the 1930s, which put the legitimacy of the capitalist order in doubt and appeared to threaten that it could collapse into anarchy or give way to socialism. Keynesianism seemed to offer a "third way" between laissez faire capitalism and socialism; by transforming capitalist society, Keynesianism would strengthen and preserve it. Keynes thus accepts the logic of the capitalist system and places his proposals squarely within that framework.
The General Theory was thus taken to justify deficit spending to stimulate employment. Keynes contended that poverty and "the economic struggle between classes and nations," which could produce war, could be overcome by social reorganization. Rejecting "state socialism," he held that capitalism safeguarded personal liberty and promoted efficiency through decentralizing decisions and appealing to self-interest. But the economic anarchy of laissez faire capitalism did not ensure full employment or sufficient equality of income and wealth. Keynes thus stressed the control of economic processes to achieve desirable objectives, and perhaps took for granted the political feasibility of his recommendation. He favored a world bank and international currency. He urged the government to stimulate consumption, encourage capital good production and invest in public works rather than waiting for automatic forces to revive employment. This required collective action. An enlargement of the functions of government, especially through semiautonomous agencies, and greater governmental control over savings and investment, through low interest rates and public work programs, were the techniques he proposed to promote "social justice and social stability." This would preserve a modified capitalism in which Keynes hoped pecuniary motives would diminish in importance, an orientation diametrically opposed to that of neoclassical economics.
1.4 The Traditional Mechanism
Official DCs' policy towards development after WW II was based on the premise that the West had gone through a process of modernization whilst the rest of the world was held back in the grip of traditional social forms. A sociological basis for this had already been formulated and become widespread in the ideational works of some of the modern realizers of the discipline. Emile Durkheim (1960) and Ferdinand Toennies (1974) both distinguished between the preindustrial and the industrial worlds in terms of different forms of social solidarity, whilst Max Weber (1954, 1958, 1971) drew up his ideal types of social action and legitimated authority to accommodate generalized features of all societies, which can then be seen as skewed towards tradition in the old world and rationality in the new. These are dichotomous versions of a general concept of social evolution, advocated by modernization theory, through which societies are seen as progressing along a pathway of development or modernization from a traditional to a modern stage. Indeed, the notion of aid to the UDCs is modernization theory operationalized. Official aid agreements always have conditions in them upon which the receiver is expected to conform to whatever version of capitalist economics that is considered orthodox in the West at the time. Development aid, however, has been more of a politico-military device than an economic one (Spybey, 1992: 33-7).
More important, the universalistic pretension of classifying all societies that do not follow the Western pattern as nonrational and traditional (à la Weber) is teleological. The binary categories of rational-irrational, modern-traditional are inadequate tools for dealing with the empirical plurality of rationalities and diversity of sociopolitical values and behaviors.
Besides the works of Durkheim, Toennies and Weber, however, there are a number of other clear examples of this evolutionary form, some of them from the nineteenth century, as exemplified by the work of Auguste Comte (1896) and Herbert Spencer (1972), and others from more recent times such as that enshrined in the overarching theoretical synthesis of Talcott Parsons (1977).
But perhaps the best example of evolutionary modernization theory, because of its direct association with policy formation, is Walt Whitman Rostow's Stages of Economic Growth (1960) which uses for a baseline the British industrialization episode as the archetypal case of economic development.
Rostow utilizes the sequential theory of history to provide a recipe of sharp stimulus, and propulsive, export leading sector which catapults an economy into "takeoff" (unbalanced growth but with no despair: It is possible for all latecomers; growth is to be measured not by GNP but by the absorption of extant technology). Rostow's ideational vision stipulates that growth can be achieved in five stages, of which the three fundamental
ones are: Preconditions for takeoff, takeoff, and self-sustained growth, in an aided global strategy of harmonious DCs-UDCs cooperation for the containment of nationalistic violence as well as Communism, to enable the "democratic way of life" to persist and develop.
For Rostow, like Lewis as is discussed below, a crucial factor which serves to lift an economy out of low income stagnation on to a sustained growth path is a significant increase in the share of savings and investment in national income. For this to occur a new class of entrepreneurs/businesspersons must emerge. Further, to desegregate the nature of the growth process, Rostow introduces the concept of the primary, or leading, sector, which plays a key role both during the takeoff and subsequently (Rostow, 1956: 73-125).
The sectors of an economy are grouped into three categories:
(1) Primary growth sectors, where possibilities for innovation or for the exploitation of newly profitable, or hitherto unexplored, resources yield a high growth rate and set in motion expansionary forces elsewhere in the economy.
(2) Supplementary growth sectors, where a rapid advance occurs in direct response to, or as a requirement of, an advance in the primary growth sectors; e.g., coal, iron and engineering in relation to railroads.
(3) Derived growth sectors, where advance occurs in some fairly steady relation to the growth of total real income, population, industrial production or some other overall, modestly increasing parameter. Food output in relation to population, and housing in relation to family formation, are exemplary derived relations of this order.
At any period of time, forward economic momentum is maintained as the result of rapid expansion in a limited number of primary sectors, whose expansion has significant external economy, and other secondary, effects. From this perspective the behavior of sectors during the takeoff is merely a special version of the growth process in general; i.e., growth proceeds by repeating endlessly, in different patterns, with different leading sectors, the experience of the takeoff. Like the takeoff, long-term growth requires that the society not only generate vast quantities of capital for depreciation and maintenance, for housing and for a balanced complement of utilities and other overheads, but also a sequence of highly productive primary sectors, growing rapidly, based on new production functions. Only thus can the aggregate marginal capital-output ratio be kept low.
Achieving satisfactory growth, in balance with rising demand, in the derived growth sectors, requires the diffusion of technical innovations in these sectors too. Thus changes in agricultural technology are also essential for successful takeoff, for modernization of a society increases radically its bill for agricultural products. Examples of leading sectors in the takeoff include the textile industry in Britain; railway development in the United States, Germany and France; the timber industry in Sweden; and armaments production in Russia.
The Eurocentric nature of Rostow’s underlying concepts is indisputable. His formula is a generalization of the case, i.e., the British. It is generally accepted by the modernization school. His analysis is rooted in the work of the German Historical School of Economics --including List, Hildebrand, Bücher, Roscher, Schmoller, and Sombart. It is, in one way or another, commensurate with François Perroux's (1983) Propulsive Industry and Growth Pole --pôle de croissance; Everett Hagen's (1975) Impetus for Growth (the order of economic advance is the reverse of the degree of contact with the West: Japan, China, India, Indonesia); Simon Kuznets' (1966) Entrance into Modern Economic Growth (with population growth, or at least stability); and Margaret Mead's (1953) Purposeful Change.
Not one concept in all of the above directly pertain to, much less originated from, the concrete socioeconomic problems of twentieth century UDCs, Hagen's endeavor notwithstanding. It is no wonder therefore that this Eurocentrism, an offshoot of the ideological construct of capitalism and a form of epistemological imperialism, claims that imitation of the Western model (supposedly laissez faire plus electoral democracy) by all peoples is the only solution to the challenges of underdevelopment.
Insofar as agriculture has been a focus of attention in traditional development economics, the reasons for this interest have been more diffuse than the pre-Marxian analysis of diminishing returns. The focus has shifted in respect to the role of agriculture in surplus generation, equity and employment creation, demand stimulation for the industrial sector and foreign exchange generation. William Arthur Lewis (1954, 1955, 1984) elaborated on his outlook of the Complementarity of Industry and Agriculture (which provide markets for each other's output), with highly elastic labor supply (furnished by the traditional, agrarian sector to the modern sector) in an unbalanced growth process within a democratic framework of social provision.
This complementarity can be augmented by the use of Ragnar Nurkse's (1952: 10-13) concept of surplus/seasonal labor with minimal equipment for rural capital formation: building roads, bridges, irrigation channels, terraces, antierosion barriers, etc. This use would result in no significant fall in other output and hence be costless in real terms (the inflationary pressure resulting from increasing the money supply being damped by the increased propensity to save, as an outcome of increased output of mass consumer goods which is in turn caused by the productive use of surplus labor).
Disguised unemployment, in Lewis' (1954: 24-5) account, is caused by a basic deficiency of the supply of complementarity inputs, such as arable land and physical capital, relative to the population and potential labor force, and not to a deficiency of Keynesian aggregate demand. Disguised unemployment results in too little labor being employed in the modern manufacturing sector because wages are above the social opportunity cost of labor in agriculture.
Lewis equates the steady expansion of the capitalist sector with economic development. However, he too contends that the working population cannot expect an immediate rise in living standards if capitalist growth is to be maximized. Meanwhile, capital export may slow down capitalist growth, although in principle at least there may be some scope for policy control of such outflows. Lewis' economic growth and development are thus equated: High growth now accelerates the transition to higher mass incomes in the future.
His starting point is an economy with unlimited supplies of labor at a subsistence wage. This labor is to be found in various branches of the economy, chiefly in traditional agriculture, but also in the urban sector. Such labor surplus economies can be analytically divided into two sectors: the capitalist sector and the subsistence sector. The former is very small, the latter large. The capitalist sector is that part of the economy which uses reproducible capital, and pays capitalists for the use thereof. Capitalist production occurs in mines, plantations and industry. The subsistence sector in contrast does not use reproducible capital, and output per capita is consequently much lower. It is also based upon family labor rather than hired labor (Lewis, 1955: 65-75).
Labor is available to the capitalist sector at a wage that is determined by earnings in the subsistence sector. Since individuals in this sector generally work in household enterprises, and/or pool their earnings with other household members, their effective income reflects the average, rather than the marginal, income of household members. It is thus average per capita income (which Lewis equates with average labor productivity) that is the material opportunity cost to a laborer of moving from the subsistence to the capitalist sector. The wage paid by the capitalist sector is set at the level of this opportunity cost plus a margin which is just sufficient to induce workers to move into wage employment.
The fact that the wage level in the capitalist sector depends upon earnings in the subsistence sector is sometimes of immense political importance, since its effect is that capitalists have a direct interest in holding down the productivity of the subsistence worker's income. For example, the imperialist record in Africa is one of impoverishing the subsistence economy, by taking away land, or demanding forced labor, or imposing taxes to force people to work in the capitalist sector at the prevalent wage (Kwame Nkrumah, Neocolonialism: The Last Stage of Capitalism, 1965: 35-62).
For Lewis, the fundamental constraint to growth in output is the lack of accumulation of productive capital, including knowledge and skills with capital, because of low rate of savings. Only when the share of profits in national income increases will the share of savings increase. Where a capitalist nucleus exists, however small, and where there is an unlimited supply of cheap labor, then the capitalists will reinvest at least part of their profits, thereby expanding the capital stock. More labor is then drawn into the capitalist sector. With each round, as the surplus is reinvested, total profit increases. With wages in the capitalist sector remaining at subsistence level, the share of profits in national income rises as the capitalist sector expands.
As the share of profits rises, the share of savings and investment in national income rises too, thereby increasing the rate of economic growth. Hence the limited savings problem which confronts underdeveloped countries is not because they are poor, but because their capitalist sector is too small. It is important to note that capitalist here does not mean private capitalist, but would apply equally to state capitalist. The latter can accumulate capital even faster than the private capitalist, since it can use for that purpose not only the profits of the capitalist sector, but also what it can force in taxes out of the subsistence sector.
Private or state capitalists are often imported. If they do emerge internally, this is probably bound up with the emergence of new opportunities --especially something that widens the market-- associated with some new technique which greatly increases the productivity of labor as labor and capital are used together. Once a capitalist sector has emerged it is only a matter of time before it becomes sizable. If very little technical progress is occurring, the surplus will grow only slowly. But if for one reason or another the opportunities for using capital productively increase rapidly, the surplus will also grow rapidly, and the capitalist class with it.
Expansion of the money supply and an associated price inflation, argues Lewis (1955: 78-91), can accelerate the rate of growth in a country with surplus labor when credit is created in favor of private capitalists, or when it is used to finance government capital formation, provided that the projects financed generate increased output fairly quickly. The inflation of monetary demand and prices will be liquidated as new goods begin to flow into the market. Furthermore, in labor surplus economies, output expansion financed by monetary expansion need not entail withdrawing land and capital from other uses (as assumed in the neoclassical theory), since there is significant scope for infrastructural capital creation using labor intensive methods --e.g., roads, viaducts, irrigation networks.
However, three factors may constrain the effectiveness of monetary expansion as a growth promoter:
(1) If prices rise too fast, or for too long, investors may lose confidence and turn to private forms of unproductive investment such as speculation in commodities and land purchase. (2) The smaller the capitalist class the greater the likelihood that much of the expanded money supply will find its way into the pockets of other groups (such as merchants who speculate in commodities; the general middle strata, who surrender to the demonstration effect; or peasants who buy more land).
(3) In an open economy, expansion of monetary demand would put pressure on the balance of payments (Hunt, 1989: 305-7).
Therefore, only if the balance of circumstances is favorable, and the authorities can contain the pressure on the foreign balance while ensuring that the monetary expansion leads to a significant increase in investment, should monetary expansion be used as a means of accelerating growth.
That government try to control price inflation by fixing industrial prices is not recommended by Lewis, since it is the industrial capitalist class that saves most. Industrial price controls reduce profits, and therefore savings and investment, while perpetuating inflationary pressures. However, the emphasis on an overriding savings constraint to development, as Hunt (1989: 108) points out, and as has Dobb above, ignores the possibility that investment is constrained not by lack of savings but by lack of demand (as the recent/current Japanese case may suggest).
Also, while Rostow, like Lewis, does give some attention to the inducement to invest, he does not treat this as an overriding constraint. Yet if the overriding constraint is lack of inducement to invest, pursuit of many of the policies advocated by Lewis can exacerbate the problem. For example, use of capital intensive techniques limits domestic market expansion in three ways:
(1) By constraining the growth of domestic demand.
(2) By concentrating income increases in the hands of upper income groups with a high marginal propensity to consume imported goods.
(3) By making it virtually inevitable in most countries that capital goods will have to be imported, thereby reducing backward linkages (Hunt, 1989: 108).
Moreover, sustained economic growth, according to Lewis, is possible so long as there is an initial capitalist nucleus and an abundant supply of labor at subsistence wages. The capitalist surplus will then be a rising proportion of the national income, but the process will slow down and finally come to a halt when the capitalist sector has absorbed all the surplus labor. Wages will then inevitably rise, eating into profits and reducing the incentive to invest. When the labor surplus disappears, the closed economy model no longer holds. The process may also be brought to a premature halt if wages rise prematurely.
This may happen for one of four reasons:
(1) If the rate of labor absorption in the capitalist sector exceeds the rate of population growth in the subsistence sector. In this case the number of people in the subsistence sector will begin to fall, and even though subsistence output at first remains constant, their average product will rise and so will the supply price of labor.
(2) If the capitalist sector buys goods (e.g., food) from the subsistence sector and if the supply of marketed output from this sector is price inelastic, then as the capitalist sector grows the terms-of-trade may turn against it. This will force the capitalists to devote a larger proportion of the value of their output to the payments of wages in order to sustain the real subsistence value of the wages.
(3) Subsistence producers may adopt certain of the improved production methods introduced by the capitalists (e.g., new seeds or crop varieties), thereby raising their average productivity and so also the supply price of labor.
(4) Industrial workers may seek to enjoy the living standards of their employers, and so bid for higher wages (Hunt, 1989: 92-3).
Furthermore, when productivity rises in capitalist plantations and mines producing for export in poor countries this is not followed by a wage increase. Wages remain determined by the supply price of labor, and all the benefits of the productivity increase are passed on to consumers in rich countries in the form of lower prices. However, as Lewis points out (1955: 92-5), in agreement with Marx’s contention referred to above, this is not to say that the underdeveloped countries gain nothing from having foreign capital invested in commercial production for export. They gain an additional source of employment and of taxation, but this is not the whole issue; it is only part of the picture that is more than offset by its collateral cost when the entire gamut of the transformation, not merely subsistence employment or even per capita GNP, is taken into account.
On the other hand, because labor in the subsistence sector is paid its average, and not its marginal, product, concedes Lewis (1955: 97-9), the application of the theory of comparative advantage is usually distorted in underdeveloped countries. Given diminishing returns to labor in the subsistence sector, the wage paid by the capitalists exceeds labor's true social opportunity cost. Capitalist accumulation may also be slowed down by the distorted operation of the theory of comparative advantage (due to the mode of determination of subsistence incomes), unless the government introduces compensatory measures. Lewis thus suggests that governments provide tariff protection to entrepreneurs in such economies as a means of compensating them for this cost distortion.
Industrialization occurs, according to the combined Lewis-Rostow Thesis, when countries increase investment from about five percent to approximately twelve percent of national income (because contrary to the comparative statics of neoclassical economics, which is essentially concerned with the allocation of the given resources, so-called “endowments,” economic development is dynamic and concerned with increasing the supply of investible resources through a greater rate of savings and investments).
But whereas Lewis presents a process of expanding capitalist accumulation which over time absorbs the labor force of the traditional sector, Rostow points out the political, social and institutional changes likely to be associated with the takeoff, as well as the likely leading sectors in this process. While Lewis focuses on the interaction of declining rural underemployment and increasing capitalist accumulation, Rostow takes increasing investment, the emergence of a leading high growth sector, and political, social, and institutional change as the three foci of his analysis of the takeoff. Whereas Lewis refers to the key role played by the emerging capitalist class, Rostow, like Schumpeter’s contention presented above, refers to an entrepreneurial class. But Rostow's capitalist entrepreneurs are those whom Schumpeter saw in Britain and elsewhere in the nineteenth century (Schumpeter, 1954), not the distinct category of entrepreneurs of a contemporary industrial society.
In sum, the traditional mechanism, as primarily projected by the Lewis-Rostow Thesis, entails the following concepts:
(1) Economic growth, measured by rising per capita income, is the focal defining characteristic of economic development.
(2) More broadly interpreted, economic development entails the conversion of a traditional, stagnant, subsistence oriented economy into a dynamic, capitalist economy (based on wage labor) capable of self-sustained growth and of providing, in the long-term, rising real wages.
(3) It is possible to specify the common and dominant characteristics of this conversion process for all countries, both those now relatively developed and those underdeveloped, provided that their starting point is a condition of abundant supplies of labor in the traditional sector.
(4) A key determinant of the rate of growth is the rate of capital formation, which is in turn governed by the share of savings in national income.
(5) The capitalist/entrepreneurial class plays a crucial role in capital accumulation, for its members have a higher propensity to save and invest out of their profit income than any other class.
(6) An essential element in the initiation of economic growth is the emergence of a class variously described as entrepreneurial (by Rostow) or capitalist (by Lewis), operating either in the private or the public sector.
(7) In order to maximize the subsequent rate of growth it is necessary to concentrate as large a share as possible of national income in the hands of those with a high propensity to save, i.e., the capitalist class. The aim should be to steadily increase this share over time.
The main policy conclusions that follow from the traditional mechanism are that, in order to maximize the pace of economic development, governments should take the following measures:
(1) Use tax policy to contain premature increases in subsistence incomes.
(2) Restrain the premature development of trade union, wage bargaining power.
(3) Judiciously expand the money supply to help finance capital formation.
(4) Refrain from attempting to control any ensuing price inflation by fixing industrial prices.
(5) Protect the domestic capitalist sector from foreign competition in order to compensate for the distorted operation of the concept of comparative advantage.
(6) Discourage capital exports.
What the traditional development doctrine amounts to, evidently, is a marriage of the theory of marginal productivity of the 1870s with that of comparative advantage, which Ricardo proposed in the early nineteenth century and neoclassical economics used to explain the pattern of international trade from the 1950s onward. According to the former, the price of factors of production that are relatively scarce will tend to be high and the price of those that are relatively plentiful will tend to be low. In this case it is labor that is the plentiful factor and capital the scarce.
Hence by concentrating on methods of production and on industries which are relatively labor intensive, a country will be concentrating on those methods of production and industries which are least costly. And this, the theory of comparative advantage claims, is the most economical way of using a country's resources, i.e., using them to the greatest efficiency. This is held to be better since an UDC would export part of the products of such industries, importing such things as machinery in exchange, then use labor and capital to produce the latter at home.
On this basis there was constructed what amounted to a theory of stages of development. First, a country concentrates on fairly primitive, labor intensive techniques and on industries which from their nature require relatively little capital and have low capital labor and capital-output ratios. In the course of time, as capital accumulates and surplus labor gets drawn into employment, it can graduate towards more capitalist techniques and develop the more capital intensive type of industry. Eventually, as it joins ranks of industrial capitalist countries, so the rationale of the traditional mechanism goes, the UDC can shift towards the production of capital goods, and import its foodstuffs and raw materials and even a lot of its industrial consumers' goods from countries at a lower stage of development.
Thus by design, not default, these lower-stage-of-development countries should never disappear, they are a corner stone of the paradigm, on the basis that this method was the traditional order of development for Western capitalist countries. The emphasis of this traditional mechanism for the underdeveloped countries, therefore, is on primitiveness and gradualism: On following the supposedly "traditional pattern" of nineteenth century European capitalism, and avoiding what is considered a grandiose design of engineers and planners.
Juxtaposing the mechanisms of Marxian metamorphosis and those of traditional development, the latter as a mixture of the classical and marginal theories, nonetheless, illuminates several aspects of the sought transformation. The traditional capitalist doctrine of development emphasizes caution and conservatism. It overemphasizes the fact that an UDC is apt to be characterized by acute scarcity of capital and by surplus labor while avoiding untraditional, innovative possibilities. In these circumstances, inevitably, new investment funds must be sparingly used, and used with maximum effect in harnessing surplus labor to employment and in increasing the national product.
This, accordingly, could best be achieved if investment were devoted, not to expensive machines and more productive technical processes, but to equipping labor with the cheapest possible implements, since with limited capital more of these implements could be used and with their aid more labor be employed.
Thus, instead of supplying a relatively small number of tractors and combines to agriculture, it would be more economical to supply a host of spades capable of employing a lot of labor at a relatively low level of productivity. It also follows that those industries must be chosen for development which require relatively little capital compared with labor, i.e., a low capital labor ratio.
Thus in the first stage of traditional development, at least, handicrafts, or cottage industries, are preferable to factory industry equipped with modern machinery, and light industries to heavy industry, especially as the former are quicker yielding, in the sense of augmenting sooner the supply of consumer goods available either for home consumption or for export.
The theoretical reasoning of traditional development thus depends essentially on taking a Ricardian static point of view, for launching the economy to "takeoff" through massive use of abundant labor, in a process of generic complementarity of industry and agriculture. However, the course of action which makes employment and output as large as possible here and now, in the conditions of the moment, is not necessarily the course of action that will maximize the growth potential of the economy, quite the contrary.
A policy of maximizing the latter, even if it is at the expense of making immediate output and employment smaller than they would be under an alternative policy, as Dobb (1963: 45-59) specifically points out, and as the crux of his argument is elaborated on above, could enable both output and employment, and hence consumption, to grow more quickly, and before long be larger than they would otherwise have been at such an early date. Dobb's well-taken insight is that a smaller share of a total that is growing fast can very soon become larger than a bigger share of a total that is growing more slowly.
This of course depends on determinants of the growth potential of an economy, not necessarily the financial limits in the amount that can be invested, but the real production limits --real resources available and production possibilities of the requisite kind. These limits may be of various kinds. Yet in a particular situation there is likely to be one (or a few) that is more important than the rest, because it is in these circumstances more restricting.
If the resources available can be directed towards widening this bottleneck, they will be contributing much more to promote growth than if they are used in the generic complementarity of the traditional perspective. It is in this sense that Dobb posits that achievement in promoting growth may depend more on the way one uses the investible surplus than on its initial size.
A bottleneck of constructional and building materials, in particular iron and steel, fuel and power, for example, is problematic. Obviously, new factories, steel mills, power plants and industrial towns cannot be built faster than cement, steel and bricks become available for their construction, and fuel and power are available to drive the new machinery when it is installed. These operate as effective limits upon the rate at which a country can develop out of its own resources. Whatever investment potential a country has should thus be concentrated upon methods and lines of production which will increase this investment potential still further.
Insofar as the limiting factor consists in the output capacity of the industries which produce capital goods (machines and constructional materials), the possible growth rate in the future will be higher the larger the proportion of current investment that is directed towards expanding this basic/heavy sector of industry: A country will have a larger output of steel and machines in future years with which to construct and equip new factories and power plants and steel mills. To this extent machine tools to make more machine tools will be more growth inducing in the critical start of the transformation than automatic looms or shoe-toe-lasers, not to mention soft drinks or chewing gums. The latter can always come later, once the economy is on a reasonably well-established growth path.
Insofar as the need is greater for foodstuffs and other consumer goods, it will not be the best policy from a growth standpoint to invest in very low productivity, labor intensive techniques (i.e., the Muhammad Yunis’ Bangladeshi recipe currently promoted in the US media and academia), even if at the moment these would be capable of affording a lager volume of employment. On the contrary, techniques should be chosen which, even if more costly, are more productive, and which by achieving a higher level of productivity per worker will make the surplus product larger; thereby enabling a larger labor force to be employed in other sectors of the economy: Surplus products will lead to accumulation and later to reproduction.
Labor intensive techniques, as a way of reducing unemployment and underemployment, cannot be a proper strategy for the UDCs because of their low productivity. The key is how high the rate of growth is, how large the surplus is, and then how the latter is handled to stir growth and employment while stabilizing the country and its population.
The way a given rate of investment is used will inevitably influence the size of this total investment in the future. A certain investment ratio and its most desirable allocation are intrinsically connected. A high growth rate policy will involve a conflict between the requirements of growth and a quick expansion of employment and consumption. In the earlier stages one will be under pressure because of high unemployment. But in the medium-range the conflict will peter out, since the high growth rate policy will soon make possible a more rapid expansion not only of investment but of employment and consumption as well. This will be done by causing a larger proportion of the employed labor force to be used in construction and other growth inducing activities. Powerful, self-expansionary forces in growth will be achieved as soon as the growth rate has been raised above a low level.
There are fairly obvious reasons, moreover, why an unfettered free market economy is most unlikely to maintain a high growth rate policy of this kind, whereas a planned one can achieve it: Individual businesspersons in their investment policy are ambivalent about looking very far ahead; and this not because of any innate shortsightedness but because of the situation in which each decision maker is set in an unplanned, free for all, individualist system. One cannot look far ahead because the horizon is limited both in time and space by the (Shackle-Keynes type) uncertainties involved.
In the first place, an entrepreneur can only afford, from a profit making standpoint, to take account of the consequences of her action which accrue to her own firm. Such effects as it may have for other firms and other industries and for society as a whole are none of one's business, except so far as she thinks, perhaps, that they may affect the price, or sales, policy of immediate rivals. One will be uncertain as to what other firms and industries are planning to do by way of expansion; at best one can make rather vague guesses, and the vaguer these are the more one will play for certainty and wait and see.
Yet metamorphosis essentially consists of a complex of interdependent actions, each influencing and being influenced by the rest. If an individual capitalist invests in expansion, it will be, if she is wise, for an immediately foreseeable market, and on the basis of productive possibilities (in the way of supplies of raw material, components, equipment and transport facilities) that are already visible. Hence market demand depends largely on investment decisions taken in other parts of the economy.
Furthermore, the development pattern for Western capitalism has been the way of textiles first. The last thing that an unfettered private enterprise, free market economy is likely to do is to invest in the development of additional productive capacity for making machine tools in advance of any immediate or easily foreseeable demand for them from other industries. To do so would be an act of faith that gambled on the maintenance of a particular rate of investment in the economy at large for decades. When this kind of development has occurred in the past it has either been under the stimulus of war demand or rearmament or a burst of railway building, or else in the heady optimism of boom years which has very soon collapsed into a slump.
It is true that at certain stages of their development the more industrial capitalist countries have expanded their capital goods industries more rapidly than industries making consumers' goods (Dobb, 1963: 45-59). However, this was at a relatively late stage, after the consumers’ goods industries, with their demand for machines for replacement and expansion, had shot ahead and an export market for capital goods had developed from the industrializing needs of other countries still at a lower level of growth.
The traditional mechanism then provides useful insights into the process of economic growth for the DCs, but is incompatible with an all out objective of socioeconomic transformation for extant conditions of underdevelopment.
1.5 The Bretton Woods Mechanism
The 1944 Bretton Woods conference was supposedly an attempt to institutionalize at an international level the economic vision of Keynes. Observing the realities of the capitalist system in the 1920s and 1930s, Keynes --as pointed out above-- had concluded and argued that the prosperity of nations --in particular, their levels of production and employment-- did not need to be the unplanned outcome of an uncoordinated and erratic construct, but could be controlled by government. At a national level, this in theory did not require new institutions but rather new approaches to existing ones: Adjustments had to be made in government spending and taxation and in central banks' money creation and interest rate determination. But no devices existed at the international level to perform these functions; there were no international counterparts to central banks or national budgets.
In 1941, then, Keynes developed the idea of an International Clearing Union --a sort of world level central bank. His plan provided the main basis for the Bretton Woods discussions. The forty-four nations represented there had set out to create international organizations throughout the world that would prevent the recurrence of a 1930s’ style depression with its massive unemployment, escalating tariffs and collapsing commodity prices.
After considerable negotiation, the International Monetary Fund (IMF) and the World Bank were established in 1944. Although in structure and functioning the IMF differs quite radically from Keynes' own plan, its fundamental objective was decidedly Keynesian. According to the first of its Articles of Agreement one of the IMF's basic purposes was "to facilitate the expansion of balanced growth in international trade to contribute thereby to the promotion and maintenance of high levels of employment and real income [,] and to the development of the productive resources of all members as primary objectives of economic policy." The IMF was thus jointly established by member nations pronouncedly to promote international monetary stability and to facilitate the expansion and balanced growth of world trade.
Article One of the Fund's charter also called on the IMF to make financial resources available to members on a temporary basis, and with adequate safeguards to permit them to correct payments imbalances. The Bretton Woods Agreement thus charged the IMF with prime responsibility for short-term macroeconomic developments --specifically, with maintaining stable exchange rates, except in situations of fundamental disequilibrium, and with providing finance to assist countries whose balance of payments were in short-term disequilibrium (Stewart, in King, 1990: 330-1).
The Bank was oriented more toward development. As indicated by its official name, the Bank for International Reconstruction and Development (IBRD), it initially had two main functions. The first was temporary: To help finance the reconstruction of the war devastated economies of Europe. The second primary duty, as described by Keynes, was "to develop the resources and productive capacity of the world with special attention to the underdeveloped countries, to raise the standard of life and the conditions of labor everywhere, and so to promote and maintain equilibrium in the international balance of payments of all member countries" (The Collected Writings of John Maynard Keynes, Vol. XXVI: Activities Shaping the Post War World: 1941-1946, 1980).
In 1952 the principle of “conditionality” was implicitly incorporated into the Fund's lending policies. Conditionality was conceived to encourage policies that would make it more likely for a member country to be able to cope with its balance of payments problem and to repay the fund within three to five years (Sidell, 1988: 240). The inception of the practice of conditionality accompanied the birth of the "stand by arrangement." The latter, in its infancy, was intended to be a precautionary device used to ensure access on the part of members who had no immediate need for such resources in the near future. This arrangement, however, matured quickly into a device for linking economic, and later political, policies to financial assistance. Technically, the stand by arrangement can be described as a line of credit outlining the circumstances under which a member can make drawings on the Fund. However, the question of what type of conditions the IMF should attach to loans is of course an essentially political question.
On 20 September 1968 the Fund decided to incorporate the practice of conditionality explicitly into its charter. Prior to this date, the concept of conditionality had generally been referred to in a vague manner. The amendments to the Fund's Articles of Agreement in 1968 ended this vagueness by introducing for the first time clear language which outlined the Fund's position with respect to conditionality (Sidell, 1988: 242).
Until the mid-1970s the typical conditions placed on the use of Fund resources involved policies that influenced the level and composition of aggregate demand. During this period, excess demand was perceived as the most important cause of inflation, currency overvaluation and ultimately payment difficulties. The expeditious elimination of excess demand was viewed as an essential condition for restoring payment equilibrium. This position is the product of the monetarist conception, whereby excess demand is deemed the root cause of inflation and exchange rate disequilibrium. Its goal is the rapid alleviation, typically in one year or less, of inflation and the restoration of exchange rate equilibrium vis-à-vis policies that alter the size and composition of aggregate demand.
Monetarist policies thus generally call for:
(1) Control of the money supply.
(2) Reduction of the government deficit.
(3) Exchange rate devaluation.
(4) Deregulation of prices.
(5) Reduction of consumer subsidies.
(6) Elimination of tariff and nontariff trade barriers.
More than any other factor, it is the IMF's neoclassical construct about economics and economic causality that most influences the specific content of Fund programs. This construct, shared also by the World Bank, is thus generally monetarist. For a long period, the Fund explicitly adopted this monetary approach to balance of payments problems and also to inflation (somewhat inconsistently, since one instrument cannot normally be used to achieve those two objectives). The Fund's approach is also laissez faire, with emphasis on price rather than controls, the private rather than the public sector and free trade rather than protectionism. Further, because of its strong and pervasive construct the IMF is not only concerned with policy objectives but also takes a firm view about which policy instruments are preferable. Thus even though the declarations of the Bretton Woods framers were Keynesian, the institutes they created have turned out to be anti-Keynesian (Stewart, in King, 1990: 332).
In the mid-1970s the monetarist strategy gave way to a more “structural,” longer run approach. The introduction of this new approach to payment adjustment was precipitated by the growing recognition both within and outside the Fund that payment imbalances could no longer be expected to be corrected within one year as the anticipations had been. In response to this recognition the Fund increased its support for programs that called for adjustment over a longer period.
In 1974, the Fund established the "Extended Fund Facility" which was designed to provide members with up to three years of financial support. In addition, the Fund decided in 1979 to allow the stand by arrangements to be extended for up to three years. This development was accompanied by growing support for more comprehensive programs designed to affect the balance of payments through changes in supply as well as in demand.
In practice the implementation of a Fund stand by arrangement is very likely to be preceded by a number of disruptive economic problems including inflation, overvalued currencies, current and capital account imbalances and economic stagnation. Although one can argue about the fundamental causes of these economic problems one cannot dismiss the fact that these problems are probably present at the time of Fund supported intervention (Sidell, 1988: 244).
These programs continued to rely on the typical monetarist instruments but in a more gradual manner. In addition, they called for more structural, supply oriented policies such as reducing the size of the public sector, channeling resources away from the public sector and into the private sector, creating financial intermediaries, promoting savings and discouraging wasteful investment by increasing real interest rates.
To facilitate the success of these enlarged programs the Fund increased by six times the amount of resources that member countries were allowed to borrow. The Enlarged Access Policy of 1981 authorized members to cumulate a maximum of up to 600 percent of their annual quota to the Fund.
Ostensibly the Fund and the Bank exhibit many common characteristics. Both are owned and rhetorically directed by the governments of their member nations. Both organizations supposedly concern themselves with economic issues and concentrate their efforts on broadening and strengthening the economies of their members. Despite these similarities, the Bank and the Fund remain distinct. The Bank is primarily a development organization; the Fund seeks to maintain an orderly system of receipts and payments between nations. Each has a different purpose and a distinct structure, receives its funding from different sources, assists different categories of members and strives to achieve distinct goals through methods peculiar to itself.
At Bretton Woods the international community assigned to the International Bank for Reconstruction and Development (IBRD) the primary responsibility for financing economic development. The Bank's first loans were extended during the late 1940s to finance the reconstruction of the war ravaged economies of Western Europe. When these nations recovered the Bank turned its attention to the underdeveloped countries.
The Fund was assigned a different purpose. The Fund was a reaction to the unresolved financial problems instrumental in initiating and protracting the Great Depression of the 1930s: Sudden, unpredictable variations in the exchange values of national currencies and a widespread disinclination among governments to allow their national currency to be exchanged for foreign currency.
The Fund's Articles of Agreement constitute its code of conduct. It requires members to allow their currency to be exchanged for foreign currencies freely and without restriction, to keep the Fund informed of changes they contemplate in financial and monetary policies that will affect fellow members' economies and, to the extent possible, to modify these policies on the advice of the Fund to accommodate the needs of the entire membership.
To help nations abide by the code of conduct the Fund administers a pool of money from which members can borrow when they are in financial trouble. The fund is not, however, primarily a lending organization as is the Bank. It is first and foremost an overseer of its members' monetary and exchange rate policies and a guardian of code of conduct.
The World Bank is an investment bank intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its member nations with equity shares in it. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issuing of bonds (which carry an AAA rating because repayment is guaranteed by member governments) to individuals and private organizations. Its concessional loan associate, IDA, is largely financed by grants from donor nations.
The Bank is also a major borrower in the world's capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It borrows money by selling bonds and notes directly to governments, their agencies and central banks. The proceeds of these bond sales are lent in turn to countries in need.
The Fund is not a bank and does not intermediate between investors and recipients. Nevertheless it has at its disposal significant resources. These resources come from quota subscriptions or membership fees paid in by the Fund's member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength.
While the Bank borrows and lends the Fund is more like a credit union whose members have access to a common pool of resources, the sum total of their individual contributions. Although under special and highly restrictive circumstances (such as the recent bailout of the Mexican and East Asian economies) the Fund borrows from official entities, but not from private markets, it relies principally on its quota subscriptions to finance its operations. The adequacy of these resources is reviewed every five years.
The Fund thus supposedly:
(1) Oversees the international monetary system.
(2) Promotes exchange stability and orderly exchange relations among its member countries.
(3) Assists all member countries, both industrial and underdeveloped, that find themselves in temporary balance of payments difficulties by providing short to medium-term credits;
(4) supplements the currency reserves of its members through the allocation of special drawing rights (SDRs).
(5) Draws its financial resources principally from the quota subscriptions of its member countries.
(6) Has at its disposal fully paid in quotas.
Thus, at the outset of Bretton Woods, the IMF unfolded with a principle which remains essentially the same: Creditworthiness at the donor level and easy credit terms at the recipient end. A fourfold increase in the number of IMF member nations has occurred --membership reached 151 nations in 1987, and two dozen states were added thereafter. But size has not changed structure. It was practice that changed (or uncovered) the de facto from the de jure IMF.
The Bank on the other hand presumably:
(1) Seeks to promote the economic development of the world's poorer countries.
(2) Assists underdeveloped countries through long-term financing of development projects and programs.
(3) Provides to the poorest underdeveloped countries special financial assistance through the International Development Association (IDA).
(4) Encourages private enterprises in underdeveloped countries through its affiliate, the International Finance Corporation (IFC).
(5) Acquires most of its financial resources by borrowing on the international bond market.
(6) Has an authorized capital, of which members pay in.
During the half century that has elapsed since the Bretton Woods Conference there have been many changes in the international economy. New centers of economic power, notably Japan and Germany, have developed, and the positions of old centers, such as Britain, have sharply eroded. International capital markets have grown enormously and have changed in nature. Of major significance, both politically and economically, has been the displacement of colonialism, to be replaced by neoimperialism, and the subsequent emergence of some hundred and forty independent underdeveloped states. Such shifts have contributed to changes in the Bretton Woods organizations.
The World Bank has become a source of finance and advice for projects, sectoral development and development policy. However, it contributes little to the making of world macroeconomic policy. This has been the responsibility of the IMF. At regular intervals the Fund makes assessments of the world economy. Although it has made some moves toward generalized interventions, it has for the most part --especially in recent years-- focused most closely and vigorously on influencing the policies and finances of deficit countries seeking access to its resources. Accordingly, any attempt to analyze the IMF's effects on underdeveloped countries and on the world economy as a whole must concentrate on IMF country programs (Stewart, in King, 1990: 331).
The IMF's influence on the policies of individual countries has grown over the decades. As pointed out above, the 1950s saw the development of the practice of "conditionality," which made access to IMF finance conditional on a country's adoption of certain macroeconomic policies. Initially, conditionality requirements were imposed only on a minority of countries receiving loans, about one out of four in the 1970s, for example. However, by the 1980s conditionality had become more pervasive and was applied to over three quarters of IMF loans. At the same time, as more countries have experienced economic difficulties, more have turned to the Fund for finance. In the 1970s, an average of ten countries initiated programs each year. In the 1980s, this number never fell below twenty, and throughout the first half of the decade over forty countries had IMF programs in effect for at least one month each year (Stewart, in King, 1990: 335-7).
As a result of its position as a lender of last resort and as the chief evaluator of a country's economic policies, nonetheless, the IMF has been heavily criticized, particularly in the UDCs. In order to meet IMF approval a country is required to follow very restrictive macroeconomic policies, e.g., reducing budget deficits dramatically, cutting the money supply, etc., which lead to high unemployment and to a restriction of social programs. Much of the burden of these policies falls on the poor. In response to IMF policies, therefore, it is not uncommon to see rioting in urban centers of the UDCs. IMF policies, moreover, can only be enforced by coercive, authoritarian governments and thus the IMF thwarts attempts at democracy in the underdeveloped countries.
Originally, however, it was not the UDCs but the Untied Kingdom that took a dim view of tight IMF money policies. England's main representative to the Bretton Woods Conference, John Maynard Keynes, argued a position that has now become familiar throughout the UDCs: He advocated the creation of a new international liquidity and a reserve instrument linked only nominally to the gold standard. He urged the granting of substantial automatic credit lines, now called Special Drawing Rights (SDRs). Keynes also argued the case that the United Kingdom should have a large degree of autonomy in its domestic economic policy, and that it should emphasize deflationary policies to safeguard an external equilibrium under a system of fixed exchange rates that no longer seemed acceptable. What emerged was a fluid exchange rate (Horowitz, in Myers, 1987).
Evidently the current policies of the IMF are in sharp contrast to the ideas that Keynes declared when he first proposed the IMF. The IMF has been taken over by the monetarists, whereby the contractionary policies that they recommend have not encouraged the type of self-sustaining growth necessary for economic development. The IMF should thus follow a more explicitly Keynesian, expansionary approach in its recommendations to underdeveloped countries (Frances Stewart, "Back to Keynesianism: Reforming the IMF," in King, 1990).
Moreover, the Fund itself generally provides only a small proportion of most countries' financial needs. Yet its influence extends well beyond its strictly financial significance, since other organizations have come to demand that countries have IMF agreements before they will agree to supply additional finance. The private banking sector rather universally makes such a requirement before rescheduling loans, as does the Paris Club, which deals with official loans from bilateral borrowers.
This type of "cross conditionality," whereby conditions imposed by one organization (the IMF) serve as requirements for other organizations as well, has also extended to the Structural Adjustment Loans (SALs) of the World Bank. Consequently, for countries in financial difficulty, obtaining finance from nearly any source --the private banking sector, bilateral donors, the World Bank-- has become contingent on the country's agreeing to IMF conditionality. The IMF governs the UDCs.
Indeed, the first half of the 1980s could be described as years of IMF conditionality in Africa and Latin America. Two thirds of the countries in those continents undertook IMF programs; the overall shift in economic climate caused many others to adopt policies similar to IMF programs in order to satisfy their creditors. Thus, in effect, the IMF became the major policy maker in most African and Latin American countries. These years therefore provide an opportunity to assess the impact of the Fund's advice on individual countries.
Further, because of the Fund's central role in the world financial system, and because its advice has been taken by so many countries, its impact has extended well beyond developments in individual countries to the world economy as a whole. There is, however, a paradox in the events of the first half of the 1980s. These were years when Keynesian policies were most needed, and when the IMF had more influence than at any time before that. Yet they were also years when the world economy, and particularly underdeveloped countries, veered away from the path declared by the IMF's Keynesian foundations --that of high income and employment and development of productive resources.
While the Fund's influence has grown over the decades, the condition of the world economy has declined. Unemployment in developed nations has risen in every decade since the 1940s. Output growth has slowed. The 1980s and 1990s have proved the worst decades for many countries, especially the poorer ones, since the last Great Depression. The terms-of-trade of primary producers have been worsening and commodity prices have fallen lower than they have been for sixty years. Making matters worse, voluntary private lending to underdeveloped countries through the banking system, which became a dominant source of finance in the 1970s, has more or less stopped (Stewart, in King, 1990: 334).
This widespread economic deterioration has caused acute problems for many underdeveloped countries. The stagnancy of world markets, the growth of protectionism and the fall in commodity prices have made it increasingly difficult for them to earn their way out of their economic troubles. Their export earnings are constantly declining. At the same time, trade deficits have become less and less easy to finance. The Bank lending that flowed freely in the 1970s has dried up since the 1980s, yet debt service obligations have continued to mount, pushed upward by high interest rates. Some countries have had to set aside more than half of their export earning for debt servicing, which leaves a small portion of a declining total available to pay for imports. From this situation emerged an acute foreign exchange crisis, which further obliged more and more underdeveloped countries to turn to the IMF (Stewart, in King, 1990).
At present, the Fund’s programs applied to different countries have a great many characteristics in common. First, they are usually negotiated in secret on a bilateral basis --in other words, independent parties, other countries and international organizations besides the IMF are not involved. Instead, the details of the conditionality agreement are typically worked out between the IMF representatives and officials from the country's finance ministry and central bank. It is partly because of these individuals' orientation that IMF programs rely heavily on macroeconomic policy instruments and tend to neglect the social and political aspects of a country's situation. Fund programs are usually introduced when a country's economy is in severe imbalance --externally, with large current account deficits in the balance of payments, and internally, with high rates of inflation and deficits in the domestic budget.
In order to offset these imbalances, IMF programs use three types of policy. One is to restrain demand, through cuts in government spending, limits on credit creation, increases in taxation and restraints on wages and public sector employment. Another is to encourage the channeling of resources into tradable goods through devaluations in the country's currency and through price reforms. The third is to implement such measures as financial reform and import liberalization intended to raise the medium and long-term efficiency of the economy.
In actuality, the second and third types of policy, which are supply oriented, tend to receive less emphasis than the first. This heavy reliance on demand restraint is due partly to the short time horizon of most programs --typically twelve to eighteen months. Such a period may be enough to make short-term improvements in the balance of trade by curtailing incomes, expenditure and demand and thereby rather immediately reducing imports. Measures to expand supply on the other hand nearly always take much longer.
Second, there is a general assumption that excessive expenditure by the state, particularly where this takes the form of encouraging higher levels of consumption rather than production, should be reduced. Thus the Fund will attempt to cut levels of government borrowing and this by implication will mean a corresponding cut in the services provided by the state. It will mean a reduction in welfare services for the poor. Subsidies to public sector industries will also be subject to pressure and it is not unusual for the IMF to recommend that such industries be sold off to private enterprise. Furthermore, there is likely to be pressure to reduce state subsidies on the price of either consumer goods or inputs for uncompetitive industries.
Third, associated with this attack on state spending will be an attempt either to reduce wages or to limit their growth to less than the growth in productivity in industry. Rising wages are believed to make it difficult for local producers to compete effectively abroad and therefore to export successfully. Rising wages are also said to generate an increase in consumption which can only be met through imports since local production cannot usually expand rapidly enough to meet the increased demand.
Fourth, while it is assumed that these cuts in wages and services will reduce imports it is also assumed that they will lead to an increase in the profits of the private sector since private capitalists will subsequently have to pay lower taxes and reduced labor costs. This will make it possible for both domestic and foreign capital to increase their investment in productive capacity and thereby either reduce the need for imports or increase the overall level of production in the long-run. In this respect an increase in the activities of foreign capital is thought to be especially useful because the capital which they import, as well as the goods which they produce, serve to reduce the level of the balance of payments deficit.
Last, the IMF will tend to discourage the use of direct controls over trade to reduce the deficit. It is very likely to demand a devaluation of the currency and will also try to do away with all attempts to use the rate of exchange to favor local as opposed to foreign producers. Although the Fund may not insist on the full elimination of tariffs it will resist any attempt to increase them and will indeed attempt to have them reduced. Thus, in theory, it will be forcing the country concerned to secure the improvement in its trade by increasing the competitiveness of its goods rather than by using direct controls to favor local over foreign producers.
Disequilibria in the UDCs, however, may be planned or accidental. The former occur when the chosen development strategy involves unbalanced growth paths; for example when planned imports of intermediate commodities and investment goods necessary for industrialization lead to a current account deficit in the initial stages of development. On the other hand accidental disequilibria can be provoked by unforeseen disturbances such as domestic political turmoil, changes in the world demand for the country's exports, in its terms-of-trade or in interest rates.
In the context of the latter set of disturbances, with a focus on the role of the exchange rate and tariffs when a negative shock in the terms-of-trade occurs, Enrico Colombatto adopts a short-run, macroeconomic perspective whereby intertemporal effects are overlooked. Using data drawn from the IMF's International Financial Statistics Yearbook, 1990, with reference to all UDCs considered in the terms-of-trade statistics, Colombatto looks at the annual terms-of-trade variation in thirty-eight UDCs during the 1960-89 period. He finds out that for the average UDC, in more than one third of the years there has been a fall in the terms-of-trade of at least four percent; and that for nine of these UDCs such fall has occurred in more than 45 percent of the years considered.
As for policies, in most cases a laissez faire attitude after a terms-of-trade shock is hard to enforce, for it would require the absence of significant externalities and low adjustment costs; among other things, all prices should be reasonably flexible and factors should be mobile, both geographically and across industries. Such conditions are hard to meet in the UDCs. Moreover, since such a policy would imply a new distribution of income among industries, and thus among factors, difficulties would arise also from a political point of view. Furthermore, fiscal and monetary responses to a terms-of-trade deterioration are not always feasible, either. On the fiscal side, tighter policies are hard to enforce. Public expenditure is usually difficult to cut, especially when the country experiences a fall in GDP --which is certainly the case if measured at international prices, likely at domestic ones.
Similar phenomena apply to ordinary revenues as opposed to trade tariff revenues; for unless the ordinary average tax rate is increased substantially after the shock the fall in GDP necessarily implies a fall in revenue. On the other hand, the scope of monetary policy tends to be very limited in many UDCs: Monetary policy in underdeveloped conditions largely follows fiscal policy. In many countries the absence of well-developed capital markets limits the instruments of monetary policy to credit controls, interest rate ceilings and changes in reserve requirements. Money creation is in many cases the residual source of financing.
In short, although adjustment is crucial for growth, in many UDCs fiscal and monetary tools are seldom available especially after a negative shock has occurred. On these grounds Colombatto’s analysis of the feasible trade policy options --exchange rate and import tariffs-- is justified (Colombatto, 1993).
Colombatto's framework within which to study a specific adjustment policy for a typical UDC after a fall in the terms-of-trade demonstrates that although the immediate consequences of such a shock tend to be similar in the various types of UDCs examined, the appropriate policies may differ according to the nature of the economy, as regards both its domestic features and its initial trade attitude.
As a consequence, whereas in some cases Colombatto's model tends to provide rather standard answers (calling for more free trade and less government intervention), there are cases where the best response to a shock might be protectionism, and where the best way to make subsequent adjustment easy is to keep the degree of commercial openness low.
Contrary to common belief, then, Colombatto's model suggests that opening up to trade is not the best policy under all circumstances after a shock. As a matter of fact if the UDC is not managed according to --by and large-- the rules of the market, a rational response to a terms-of-trade shock may well be protectionism and exchange rate revaluation; a policy that seems to be easier to carry through if trade volumes are relatively low.
Industrial countries, however, are competitive in their home market so that few foreign producers can increase their sales by exporting to them. Their ability to compete more effectively than everyone else leads to deflation in those countries which cannot find expanding markets elsewhere. This growth in the strong countries does expand the market for raw materials, but it inhibits the growth of manufacturing in weaker countries that is essential for the creation of a balanced growth process (Brett, in Latin America Bureau, 1983: 34-5).
Moreover, the intensification of the world economic crisis after 1974 coupled with concurrent oil price rises left the UDCs facing massive deficits that could be controlled only through drastic cuts in living standards and in the level of economic activity. IMF programs designed to reduce balance of payments deficits in the short-term, furthermore, result in substantial cost in terms of reduced consumption, damage to local industry and increased inequality.
Given the need to solve the problem quickly, and for other underlying reasons, most of the improvements have to be secured through a reduction in domestic consumption rather than an increase in production for export or in import substitution. The overall effect is therefore likely to be deflationary involving a decline in the overall level of economic activity, and a corresponding reduction in both local consumption and in long-term economic progress.
In trying to increase their exports, the UDCs immediately confront the strong developed countries which are attempting to do exactly the same. However, the latter have the advantage of producing on a very large scale, selling to a huge home market (a large middle class) as well as having established markets abroad, having direct use of highly trained work-force and sophisticated research and development facilities, and having a monopoly over many areas of technology and skills.
Given all of these factors the possibility of competing with them on equal terms is rather negligible. Alexander Hamilton, unconfused by neoclassical scientism, did intuitively recognize this fact very clearly, as is mentioned above. And the politicking with “comparative advantage,” by David Ricardo and his latter-day disciples, could not alter this fact.
The only "advantage" that most UDCs have over these established producers is the very low wages that their workers can be paid. Even this, however, is of relatively limited value. On the one hand the existence of low wages means that local markets are very small, thereby making it difficult to produce on a sufficiently large scale to reap the full advantage of modern production methods. On the other, low paid workers tend to be poorly trained and motivated, so their productivity is correspondingly low.
Furthermore, the industrial countries have been able to continuously adopt new technology, the automation secured through the micro-chip is an example, which has enabled them to pay much higher wages to their workers and still produce goods more cheaply than the average UDC producer.
In sectors such as cotton textiles where cheap labor does provide low wage countries with international competitive edge, the industrial countries have tended to ignore their professed belief in free trade and have adopted protective controls in order to defend jobs and capital investment in that sector.
Thus by reducing tariff protection in their home markets and attempting to grow by exporting manufactures UDCs render themselves very vulnerable. Several countries have found that established industries in their own countries have been destroyed as a result of tariff barriers having been lowered (Brett, in Latin America Bureau, 1983: 37-8).
Meanwhile, whereas the reduction of state spending might enable producers to pay lower taxes it will also reduce domestic demand for their products. Thus producers will lose some of their home market, usually the most profitable for them, and this loss of demand may mean a reduction in total production. Such a reduction will inevitably mean that the costs of producing each unit of output will rise as fixed costs will have to be offset by a smaller total production. This will lead to increased selling prices and therefore the firm will be less competitive internationally.
Nor will the lower taxes necessarily encourage producers to invest their increased wealth in local industry. When demand is being reduced through the reduction in wages and government spending they are more likely to spend it on consumer goods, which are very likely to be imported, or else to invest it abroad.
The latter is most likely to happen where a significant portion of local production is already in the hands of foreign capitalists who find it easy to remove their profits from UDCs either directly through legal channels or indirectly by various forms of transfer pricing (Brett, in Latin America Bureau, 1983: 38-9). Thus unless the reductions in wages and other costs are very large and the opportunity for increasing export markets very favorable, deflationary policies are quite likely to lead to a cut in society's consumption and productivity without leading to a subsequent improvement.
The effects of these policies on the overall world economy are likely to be very harmful. The UDCs are trying to overcome their deficits by cutting imports and increasing exports. But since most of their potential customers are attempting to do the same, the result can be intensified competition in which only the most powerful might succeed but at the expense of the weaker nations.
Even if the global trade outlook improves, it is illogical that all underdeveloped countries can expand exports all at once, for in the long-run exports and imports are a zero sum interaction. A country’s exports are another’s imports and vice versa. Exports and imports are two sides of the same coin.
It is therefore impossible for all countries to increase exports and reduce imports at the same time: How can all countries simultaneously export more than they import? Who will import the excess? This simple logic is not even admitted by the neoclassical export led growth model, much less the problem conceded. The neoclassical export led growth, therefore, has this obscurantist quality built into its conception.
An often-uttered rationale for the export led growth motto is that an outward looking economy does not mean trade surplus, thence every country can adopt export oriented growth: A rationale that siphons off the meaning of export led growth. It combines the unattainable neomercantilist best of both worlds: Production for export (mercantilism) and surplusness (free trade). It is a "vent for no surplus" rationale.
Andre´ Gunder Frank (1967: 118; 1978: 79) affirms the logical nongeneralizability of the Newly Industrialized Countries' (NICs') export led growth model: Who would import? If all countries are to increase their exports simultaneously, they will have to also increase their imports correspondingly (for in the aggregate current account surpluses and deficits must sum to zero), in which case the policy could as well be described as import led.
Furthermore, surplus countries, i.e., most industrial and oil producing ones, lend their surpluses to the international banks which invest them through lending to deficit countries. This process has the general long-term effect of increasing levels of indebtedness of the deficit countries, and means they will have higher interest and capital repayment commitments and will therefore have less resources available to develop their own industrial base. Thus their ability to generate exportable production and improve their balance of payments will be hindered. Hence, a short-term solution is being adopted that must worsen the problem in the long-run.
The IMF recommendations thus are the problem for which they purport to be the solution. They correspond to the policies favored by large scale international capital and its supporters in underdeveloped countries. It is the strong transnational corporations that have most to gain from policies which favor the free movement of goods and money, since they are able to move their investments to whichever country offers them the greatest concessions and, therefore, profit potential.
Many of the individuals involved in local political activities depend for their own political and economic privileges on their links with these corporations and with the governments of the major world powers that lie behind them. Many such transnational corporations use their economic power and political leverage to force countries to seek IMF assistance and submit to its conditionality. Moreover, the powerful industrial members of the IMF have used access to the Fund's resources as an instrument of their own foreign policy objectives.
The Bank too has become like the IMF --pushing simplistic, standardized formulae that slight the particular spatio-temporal circumstances, history, culture and politics of individual nations, and that are based more on preconceived construct than on objective analysis. Of course trade liberalization may be appropriate at times but one has to remember that the relatively closed economies of India and especially China have been doing very well of late, that the debt crisis shackles many economies to trade surplus maximizing strategies, and that successful export promotion policies may involve significant state activism, as the Asian industrialization processes demonstrate.
The financial liberalization process in Latin America is also informative in this regard. Theoretically, the main economic causes of capital flight are an overvalued exchange rate; positive differentials in interest rates on foreign and domestic assets; an increase in the domestic rate of inflation, which tends to be accompanied by a fall in the real rate of interest; and inflows of foreign aid, which result in an appreciation of the exchange rate and a fall in the real rate of interest. It is for these reasons that foreign aid and commercial borrowing often are associated with increased capital flight (Keith Griffin, Studies in Globalization and Economic Transitions, 1996: 52). The financial liberalization in Latin America has been undertaken under conditions that stimulate either massive capital flight from the economy, intended to avoid local inflationary taxes or domestic inflation risk, or otherwise huge capital inflows, attracted by exceptionally high real interest rates. The result under these conditions has been financial disaster. Hence, the experience of Latin American nations suggests that opening the economy to internationally mobile, short-term financial flows when such is not supported by a stable economy can generate substantial instability.
Nor has Asian financial liberalization been free of complications. The Korean liberalization of 1964 was plagued by problems similar to, although of a lower magnitude than, those encountered in the Latin American experiments. Korea's short-term financial inflows flooded the economy in 1966 leading to financial destabilization and inflation (Rivera-Batizs, 1994). Both experiences, together with the current instability in the East Asian financial markets, show the delicate nature of the UDCs' path toward deregulation and openness.
It is not surprising, then, that the original Keynesian finance objectives have not been achieved. The record of the 1980s shows just how far short of achieving those objectives IMF programs have fallen. The Bank was making its presence known, fervently pushing free market solutions "to all the world's ills." In 1980, the Bank made its first structural adjustment loan. Although the Bank later acknowledged that it had failed to assess their possible negative social impact, these loans grew to a quarter of the Bank's portfolio by mid-decade and have remained near that level ever since.
In practice, the policies associated with these “structural adjustment” programs --the promotion of exports, trade liberalization, privatization, deregulation, wage restraints and budget and credit cuts-- led to the deepening and spreading of poverty worldwide. Many countries with Fund programs experienced severe economic difficulties while on those programs (Rich 1994: 68).
Current levels of output and income have fallen and the combination of stagnant real investment, rising malnutrition and falling health and educational standards (as is elaborated upon below) has adversely affected physical and human capital. As a result the prospects for medium and long-term economic growth are being undermined.
Thus, after undergoing tough IMF programs many countries have found themselves with reduced real incomes, increased poverty, deteriorating social conditions, reduced growth potential and often no significant improvement in their external account balance. In this last respect the IMF programs failed even to meet their most narrowly defined goal --to improve the imbalance of the external account.
The inadequacy of Fund programs at a world level becomes clearer if one examines the impact they have had not only on individual countries but on the world economy as a whole. In general the IMF's approach to correcting payments imbalances has created a worldwide tendency toward deflation. Adjustment programs require deficit countries to attempt to eliminate their deficits by cutting expenditure and employment so that their imports fall.
Such a strategy might under the right conditions help reduce deficits in underdeveloped countries' current account balances. But when applied to many of these countries simultaneously it also causes a significant drop in UDCs' demand for both UDCs' and DCs' products (Stewart, in King, 1990: 333-7). Thus IMF mandated cutbacks in UDCs' spending and employment have caused worldwide decreases in demand and therefore output.
Deflation is not the only way to correct imbalances in external accounts. The alternative would be to correct surpluses through reflation: Surplus countries would try to eliminate their surpluses by increasing their spending so that their imports rise. The net effect on external accounts would be the same --because exports, output and incomes of deficit countries would be raised, their deficits would be lowered.
The IMF's original charter did include a "scarce currency" clause designed to encourage symmetry of adjustment by placing pressure on chronically surplus countries to bring their surpluses down. But the clause has never been invoked, and the Fund's approach has remained highly asymmetrical; the major burden of policy change and adjustment is imposed on deficit countries (Stewart, in King, 1990: 338).
Other aspects of IMF conditionality have had similarly negative effects when the same program is imposed on many countries at once. At the same time that the Fund's overall impact has been deflationary, so that basic demand for underdeveloped countries’ products has not been sustained, Fund programs have also tended to increase the supply of these products.
IMF country programs have been tailored to expand production of primary commodities --in some cases the same product in more than one country. For example both Ghana and the Ivory Coast have had programs to increase cocoa production. This upward shift in cocoa output, because it did not result from or cause an upward shift in demand, had the result that prices were driven down. In fact, for commodities with low demand elasticities --commodities for which a price cut does not induce a substantial rise in demand, since consumption is not much affected by price-- an increase in production may lower prices so much that a country's total earnings from those commodities actually fall. Past experience has shown that this is the case for many commodities, especially those in which some very poor countries specialize, such as cocoa, tea, and coffee (Stewart, in King, 1990: 338-9).
When the IMF encourages production increases from a number of major producers of particular commodities, without simultaneously taking action to increase demand for those commodities, the net result may be to decrease deficit countries' foreign exchange earnings from commodity production, while increasing the resources they devote to that production.
Fund programs have thereby contributed to primary producers' worsening terms-of-trade, which were in turn partly responsible for the limited improvements many underdeveloped countries were able to make in their current account balances. Therefore, IMF policy worked at cross purposes to its stated Keynesian goals.
Currency devaluations have often had a similarly damaging effect on the terms-of-trade of exporters of manufactured goods, since such devaluations lower the relative price that producers receive for their manufactured exports. But in this case, as opposed to that of primary commodities, there is more potential for the UDCs as a whole to increase their share of the world market. As a result, reduced prices may be more than offset by an increase in the quantity sold --provided of course that developed countries do not impose trade restrictions (Stewart, in King, 1990: 339). Or consider the appreciation of the Japanese yen, which essentially tripled in value between 1971 and 1991. Without a big jump in productivity, neoclassical economic logic would have predicted a dramatic drop in Japanese exports. Instead, productivity and exports continued to expand geometrically, and Japan’s trade balance with most of the world became even more favorable (see T. J. Pempel’s Regime Shifts: Comparative Dynamics of the Japanese Political Economy, 1998: 11).
According to its originally stated goals the IMF should be responsible for ensuring that the international environment be compatible with increasing world output, employment and development. Yet the IMF has not made its own programs, much less the world economy, consistent with these goals. The basic declarations of the Bretton Woods framers have not been realized, as the IMF has not evolved in such a way as to discharge its original responsibilities. The problem is not technical but political: The dominant governments which set the major limits on Fund functioning have imposed their own ostensibly technocratic (monetary) views on the IMF.
Most theorists did accept that UDCs would need long-term international credit in order to finance their industrialization programs. This, however, was defined as a "developmental" as opposed to a "monetary" need and it was to be provided by the World Bank, the private banks and the transnational corporations. Paradoxically the money that the IMF lends to a country makes that country able to continue to import for longer than would have been the case if IMF loans were not available. Without the IMF, abrupt cuts in spending and investment would have to be made to reduce the deficit. IMF assistance allows debtor countries to adopt policies that lead to a more gradual reduction in the deficit. Thus the intervention of the IMF makes possible a higher level of economic activity for deficit countries, especially given that the negotiation of an IMF agreement usually enables the country to also borrow extensively from the private banks (Brett, in Latin America Bureau 1983: 33-4).
Thus when an IMF team visits a country in order to negotiate a stand-by arrangement its primary concern is to reduce the balance of payments deficit within a relatively short period of time, usually within three to five years. The team assumes that direct state intervention is not necessary for the objective to be achieved, and that the balance of payments problem is caused by high local inflation that is itself caused by high government spending funded by a large supply of new money, which leads to high levels of local consumption in relation to the level of output of goods that can be sold abroad.
Given these assumptions such a team tends to require policies which emphasize reductions in consumption rather than an increase in production. It justifies its position by the fact that a country with a balance of payments deficit is consuming more than it is producing, by importing more goods than it is exporting. Unless such a country can obtain continuing supplies of international credit or aid for this process its economy must eventually come to a halt.
Although there is no unique profile for debtor countries, troubled debtors when compared to less strained ones are frequently characterized by a variety of the following traits:
(1) Large debts to private creditors relative to that owed to official lenders.
(2) High debt to exports ratios.
(3) Unprofitable investments and unsound financial strategies that do not provide buffers to economic slowdowns (and other general problems related to moral hazard, taking higher risks on the belief they will somehow be bailed out).
(4) High government deficits.
(5) Capital flight and overvalued exchange rates.
Yet the strength and length of the debt problem that depleted and debilitated the UDCs for over two decades are further related to a series of factors that slowed down their recovery endeavors:
(1) The adverse short-term effects of IMF sponsored austerity programs have been coupled with extended isolation from financial markets, to produce a delay in recovery in some countries.
(2) Negative resource transfers coupled with positive net flows of public and publicly guaranteed external debt have caused protracted financial strain.
(3) Substantially higher real interest rates on dollar denominated assets in the 1980s harmed debtors, while the dislocation of internal financial markets entailed unstable domestic rates that led to capital flight.
(4) Capital flight meant that new lending to underdeveloped countries went to finance capital outflows.
(5) Making matters worse, adverse terms-of-trade changes hit hard on a large number of UDCs, accentuating their difficulties (Rivera-Batizs, 1994: 264-7).
The 1980s and 1990s have thus seen the import substitution consensus of the previous decades, with its preference for high levels of tariff and nontariff trade barriers, all but evaporate in the underdeveloped countries which by and large pushed towards liberalization. The simplification of import procedures, reduction or elimination of quotas, and the rationalization of the tariff structure are the most commonly adopted liberalistic features.
Yet it is perplexing that the 1980s should have become the decade of trade liberalization in the underdeveloped countries. Because of the debt crisis that decade has also been one of intense macroeconomic instability. Common sense would suggest that the conventional benefits of liberalization become muted, if not completely offset, under conditions of macro-instability characterized by high and variable inflation on the one hand and fiscal and balance of payments crises on the other.
A period of macro-instability is the worst time to undertake a trade reform, yet paradoxically so many countries are doing it. The main reasons are to be drawn from the broader domain of geo-ecomics. First, a time of crisis makes possible the adoption of radical measures that would have been unthinkable in calmer times. The second and more important reason has to do with the role of foreign creditors and of the IMF and the World Bank.
The 1980s were a decade of great leverage for these organizations vis-à-vis debtor governments, especially where poorer African countries are concerned. The trade policy recommendations of the World Bank were adopted by cash starved governments frequently with little conviction of their ultimate benefits. This accounts for the high incidence of wobbling and reversal on the trade front. It also indicates that one ought not be very optimistic on the sustainability of liberalization in many of these countries.
When the debt crisis broke, with the announcement by Mexico in August 1982 that it could no longer meet its debt service payments, the IMF was to play a key role in the emergency rescue operation mounted to stave off default and avoid serious disruption to the financial system. Since the resources available to the Fund had fallen substantially in relative terms over the years, the role of the Fund would be less that of provider of liquidity, the function that it was pronouncedly established to perform, and more that of bailiff and policeman acting on behalf of the creditors. In this capacity the role of the Fund was to extract the maximum possible debt service payments from debtor countries with little regard to the effect that this would have on their economies.
This operation was carried out by a carefully calibrated process of organizing just enough liquidity to the debtors via new bank loans (so-called "involuntary" lending), rescheduling, World Bank lending, IMF loans, etc., to make it not worth their while to declare outright defaults (with all the costs to them that this would entail), and instead to continue cooperating with their creditors in servicing the loans. These policies were associated with the names of successive US Treasury Secretaries, first the Baker Initiative, then the Brady Plan (Adams, 1993: 153).
The key to these initiatives was the policy package of austerity measures which it was the role of the Fund to impose on the debtor countries. The main objective was to secure a rapid reduction in the current account deficit, and this was to be accomplished by the vigorous application of standard deflationary measures of which the main elements consisted of tight monetary policies, high interest rates, cut backs in government expenditures accompanied by increases in taxes and devaluation. These measures were duly applied and the current account deficit soon reduced or eliminated.
But as may be expected the effect of these policy measures was to put the economies of the debtor countries into reverse gear, sending them reeling in a downward spiral towards economic depression: The primary objective of the policy package was the collection of the debt and the protection of the interests of the creditors, and in this it largely achieved its aims. From the debtor, underdeveloped countries' point of view, however, the massive policy induced deflation to which they were subject meant a great deal of disruption to their social and economic life, and a major setback to their long-term economic development prospects. It was in Latin America and in Africa, the two continents where the debt problems were most acute, that the disruptions were the greatest.
In the short-term the impact was felt most acutely in high urban unemployment, reduced earnings, economic deprivation and shortages of essential goods, and while most sections of the community had to bear part of the sacrifice, the heaviest brunt of the adjustment was borne by the poorest groups. This was the inevitable consequence of the Fund's approach to policy conditionality, whereby the traditional recipe of tight fiscal and monetary policies and currency devaluation is invariably supplemented by “structural adjustment” policies giving free rein to market forces and requiring the lifting of all constraints on full market pricing, including the elimination of subsidies on essential food and other basic necessities, with effects that bear particularly heavily on the poor.
The latter were also those most affected by the reductions in public expenditure on health, education, and social welfare, key elements in the Fund's package of conditionality. But the effects went beyond the short-term since these are expenditures which finance the basic investment in human capital, without which there can be no development. In many cases the severe manner in which expenditure on education was cut, and the low income and status to which teachers were reduced in the ensuing market oriented adjustment process, have so weakened the educational infrastructure in these countries as to greatly damage the prospects for rebuilding it (Adams, 1993: 155). This has disastrous consequences for their development prospects in the medium-term to long-term.
The sharp cut backs in imports that became necessary owing to the external financial squeeze also seriously undermined long-term development prospects. Underdeveloped countries typically depend on imports for a wide range of essential products to keep the economy going, most importantly for machinery and equipment to maintain and expand the productive base of the economy. Such sharp cut backs in imports seriously reduced availability of essential supplies and equipment and led to import strangulation of the economy: Falls in output and capacity utilization due to unavailability of imported inputs.
Such import strangulation also means inadequate maintenance of existing capital stock in transport, industry, agriculture and basic infrastructure, with adverse effects on production and, particularly in the poorer countries, shortages of essential imported inputs such as drugs, medical equipment, textbooks and other items necessary to keep the basic medical and educational services functioning. In many cases the unavailability of fuel, inputs and spare parts has also adversely affected export potential, making it all the more difficult for such countries to escape from the balance of payments trap in which they have found themselves.
Hence, while the Fund's declared aim is the promotion and maintenance of high levels of employment and real income, and the development of the productive resources of all members as primary objectives of economic policy (Article I [ii] of the IMF's Articles of Agreement), it was the Fund itself, in responding to the balance of payments crisis faced by underdeveloped countries in the early 1980s, that took the lead in imposing the policy measures responsible for the sharp cut backs in incomes and imports, massive unemployment, social deprivation and widespread deterioration in capital stocks and in productive capacity, that were the hallmark of the adjustment process to which these countries were subjected (Adams, 1993: 155-7).
It was a long road that the Fund had taken from its declared Keynesian conception, which sought an organization that could provide temporary liquidity to ease the pains of adjustment to balance of payments disequilibrium and thereby to promote the stability and growth of the world economy, to its present role of debt collector on behalf of private banks and enforcer of harsh policy conditionalities, that leaves little room for independent maneuver in countries which fall prey to it. In the process its purposes have surely been transformed, in practice if not in its legal constitution.
A further telling aspect of the changing nature of the IMF over the years concerns the evolution of the size of quotas relative to trade or other relevant variables. The size of quota determines the extent to which a member can have access to the resources of the Fund. Since potential need for resources can be expected to grow in proportion to the size of trade, one might have expected the idea to be that the size of quotas would grow pari passu with trade. But this is not what happened. Instead, the growth of quotas lagged far behind that of trade.
IMF quotas averaged about 16 percent of total imports in 1948, but by 1980 the proportion had fallen to less than 3 percent (Adams, 1993: 158-9). For the industrial countries themselves, this fall in the relative size of quotas was without significance since they had long ceased to turn to the Fund as a source of liquidity, having evolved alternative arrangements for this purpose. It was therefore the underdeveloped countries, which still depended on the Fund as a source of liquidity, that the quota policy affected, and this of course explains the reluctance to increase quotas.
As an alternative to increasing quotas a whole series of new access facilities was introduced. Apart from the original Credit Tranches these facilities include, or have included, the Extended Fund Facility, Supplementary Financing Facility, Policy of Enlarged Access, Compensatory Financing Facility, Cereal Import Facility, Buffer Stock Facility, and the Oil Facility. All in all members can now draw up to a cumulative total of over 600 percent of quota, compared with a limit of 125 percent of quota in the early years of the Fund.
But the consequence of this approach to enlarging access to Fund resources has been devastating from borrowers' points of view, since it has meant that access to low conditionality resources is now minuscule in relation to needs, amounting to only 25 percent of quota, while increasingly stringent conditionalities are imposed for access to the remaining 575 percent of quota. The result is that low conditionality resources are now virtually an extinct species and any meaningful access to the Fund's resources involves high conditionality. In this way the influence that the Fund is able to exert over members seeking any meaningful access to its resources has greatly increased.
Not only was this niggardly policy towards quota increases pursued to the detriment of underdeveloped countries but equally niggardly has been the policy towards SDR allocations, with similar effect. Despite the Jamaica Agreement of 1976 under which the SDR was to become the principal reserve asset of the international monetary system, the developed countries have argued that there is no need for further SDR allocations since there is no shortage of liquidity. And for those countries of course there is certainly no shortage of liquidity.
Increases in the price of gold since the breakdown of the Bretton Woods monetary arrangement have meant large increases in the value of their reserves, since these were the countries that held the world's stock of monetary gold, and this, together with the vast expansion of international commercial bank lending to which they have ready access, meant that their liquidity needs are fully met.
Only underdeveloped countries without access to commercial bank lending would be unable to find low conditionality, short-term finance, and hence would remain dependent on the IMF for their liquidity. The bulk of the Fund's resources can be expected to be channeled to countries that by and large are excluded from ready access to private capital markets. Countries enjoying such access probably will remain reluctant to sign up for conditional Fund assistance. After the debt crisis broke virtually all underdeveloped countries fell into the excluded category and most of them reluctantly had to sign up for conditional Fund assistance.
When the Fund approached the balance of payments disequilibrium created by the first oil shock in 1973, it took the sensible position that conceded that "attempts to eliminate the additional current deficit caused by higher oil prices through deflationary demand policies, import restrictions, and general resort to exchange rate depreciation would serve only to shift the payments problem from one oil importing country to another and to damage world trade and economic activity" (Adams, 1993: 161). It therefore called on oil importing countries to accept the consequent short-term deterioration in their balance of payments, and made available the Oil Facility at low conditionality to assist countries in financing the resulting payments deficit.
In contrast, in 1979-80, when the impact of the oil price rise on the balance was compounded by the effects of the interest rate rise, no reference was made by the Fund to the dangers of deflationary demand policies, nor was there any suggestion of the need to prevent damage to "world trade and economic activity." Nor, for that matter, was any attempt made to provide additional low conditionality resources to meet the resulting balance of payments deficits, notwithstanding that the logic of the argument put forward in 1974 applied with even greater force in 1979, given the deep recession that was developing. In the former case a number of industrial countries were among those facing large unforeseen deficits in their balance of payments and requiring support from the IMF, hence the much more lenient and reasonable treatment, while in the latter case only underdeveloped countries needed to turn to the IMF for support, the industrial countries being by then awash with liquidity and having full access to the pool of resources by then available in the international commercial banking system.
In addition, the new thinking in Washington was reflected in a general hardening of the Fund's access policy. Apart from the refusal to supply additional low conditionality resources, thereby forcing borrowing countries straightaway into the high conditionality upper credit tranches, there was also a general tightening of policy conditions that became harsher and overbearing, extending beyond the traditional macroeconomic variables relating to fiscal, monetary and exchange rate policies to include “structural adjustment” policies at the sectoral- and micro-levels.
There was also a hardening of IMF interest rate policy, with interest now being charged at close to market rates (Adams, 1993: 161). It is also common to have a number of important policy dictates in the formulation of an adjustment program. These normally include public sector policies on prices, taxes and subsidies, interest rate policy, exchange rate policy and income policy.
Further, the IMF has not set its programs within a cost minimizing framework. It has treated the balance of payments objective as overriding, and has been reluctant to give weight to other government purposes when designing stabilization programs. From the point of view of an underdeveloped country therefore the Fund's approach is potentially a high cost one.
As noted above, the power of the IMF over underdeveloped country borrowers was further made all the more formidable since, in the aftermath of the debt crisis, all other potential sources of credit, bilateral or otherwise, required an IMF stamp of approval (in effect, that an IMF high conditionality agreement be in place) before any credit was extended. This was a continuation and development of policies started as far back as the 1950s but was to assume particular importance in view of the tight financial squeeze which large numbers of underdeveloped countries now faced.
Concerning the purpose and justification of IMF conditionality, originally the imposition of conditions on a potential borrower was considered to be justified largely in terms of the need to ensure prompt repayment of drawing so as to safeguard the revolving character of the Fund's resources. But the kind of conditionality imposed in recent years cannot be justified on these grounds.
While the rationale for extending the scope of conditionality was ostensibly a laudable one (to respond to a concern that Fund policies should promote not only macroeconomic stability but also economic growth), it meant in practice that the Fund would have free rein to impose on the debtor underdeveloped countries the extreme versions of the free market construct which dominate US academic thinking and official policy making. Thus supply side economics would now become standard fare in the policy matrix of debtor countries under IMF tutelage. All this served to make it much more painful to seek assistance from the Fund and to be on the receiving end of its policies.
For most underdeveloped countries that seek IMF assistance, IMF credits represent only a very small proportion of their total debt (Adams, 1993: 162-4). And given the high priority that all countries necessarily attach to meeting their repayment obligations to the IMF it is scarcely plausible to suppose that this formidable array of armor in the guise of conditionality can really be justified on these grounds. The real explanation must surely lie elsewhere.
Undoubtedly the proxy role the IMF plays as debt collector on behalf of the banks, not at all provided for among the Keynesian purposes of the Fund, better explains the severity of conditionality in recent years than the need to safeguard the revolving character of the Fund's resources. But the matter goes further than this. The rather religious zeal with which the IMF announces and insists on its standard package of austerity measures, almost without variation between countries except perhaps as regards the specific percentage targets to be achieved, disregards the complexity of getting into balance of payments difficulties in the first place.
Hence the merciless character of the measures that are insisted upon, the "IMF knows best" syndrome. This character and its implications are best illustrated by a concrete case of applied “structural adjustment.” The Chilean experiment, the next section, is a case in point.
Evidently, the IMF and IBRD have been designed with the underlying objective of promoting capitalism; but with the demise of UDCs' unity under extensive pressures in the late 1960s and 1970s, the 1980s and 1990s, these organizations were used in a blatant unapologetic manner to impose upon underdeveloped countries the severest of postulates thought of in neoclassical think tanks spread across the USA.
Britain, in particular, among other industrial countries, was always there to support and rationalize the acts of the US led international organizations no matter what. Having lost the Empire upon which the sun never set, Britain is playing the traditional role of a fading hegemonic power --joining its successor as a junior partner-- and thus acting as a Trojan horse for the United States.
And writings of such arch economic liberals/libertarian Austrian authors as Carl Menger, Friedrich Wieser, Eugen von Böhm-Bawerk, Ludwig von Mises, Joseph Schumpeter, and Friedrich von Hayek, who were always concerned to justify the market system and to reject any and all forms of government participation in the economic affairs, provided the intellectual rationalization for such schemes.
Meanwhile, under the Fund-Bank auspices, the UDCs had to run a lot faster to at most stay in the same place; some countries were negatively impacted upon (as is elaborated on below).
“Structural adjustment” might well imply a sought destination for a limited minority, but it offers little in the way of sustenance along the journey for the overwhelming majority. Its alternative must constitute an all encompassing transformation mechanism which relates means to ends, thus mitigating the horrible trip for strata not at all prepared for the arduous carnage. The mazes and jungles of neoclassical technocratic details therefore have no relevance to the situation of the billions of UDCs’ peoples, for the test of relevance is whether that theory informs policy makers about the predicament of those people at the wrong end of global capitalism, which neoclassical economics does not.
The socio-Darwinian evolution that subtly underlies “structural adjustment” has no basis whatever. And the theoretical basis upon which the Fund-Bank program is ostensibly built is nothing but a mythical concoction of neoclassical economics which made it up, reiterated it and eventually, perhaps, believed it.
Indeed manifold inconsistencies invalidate the entire theoretical edifice of that dominant school of economics. However, a myth dies hard, especially when it caters for the interests of the globally reigning strata: A myth never goes away as long as it continues to have an ideological utility, and powerful vested interests, in the long march of history, were immune to rational argument.
Empirically, however, even if neoclassical economics underwrites the achievements of contemporary postindustrial capitalism, which is certainly not the case, it is incompatible with the objective conditions prevalent in the UDCs today.
Nonetheless, an interesting phenomenon, an indication of the extent to which the DCs are now firmly in the driver's seat, is the high prestige currently enjoyed by the Bretton Woods' organizations, never mind also their role in putting the squeeze on debtor UDCs in the recent past. Such a prestige reflects, apart from anything else, the overriding power these organizations have come to wield, and the implanted perception by neoclassical economics of a lack of any practical alternatives to them.
This prestige also reflects the enthusiasm now being shown worldwide for membership and active participation in these organizations, notably by the Eastern European countries and those of the Commonwealth of Independent States. Indeed, there is now the prospect that in the not too distant future they will become truly universal in membership, while remaining under tight DCs' (particularly US) control.
Hence the international system created in the aftermath of WW II, heavily criticized and deeply distrusted in the UDCs as it is, and unreformed in any important way, now reigns supreme and its hegemony is virtually unchallenged.
1.6 Bretton Woods In Action
In his visit to Chile in March 1975 Milton Friedman diagnosed for Chile’s Pinochet the cause of his country’s economic malaise and prescribed the solution: ‘"The immediate cause of inflation is always a larger increase in the money supply than in output.... The first need is to eliminate inflation and the only way in which Chile can finish with inflation is by eliminating drastically the fiscal deficit, preferably by reducing public expenditure.... Gradualism seems to me to be impossible"‘ (quoted in Robert Carty, in Latin America Bureau, 1983: 57).
In mid-April 1975 the drastic austerity formula which became widely known as the "shock therapy" was put in place. Following the IMF diagnosis that the ailment in Chile's economy was excessive demand, the authorities applied the Fund's recessionary remedy, a painful bleeding of the economy by intentionally contracting output. Public sector employment was frozen. Government spending was slashed with a one third cut in subsidies to public enterprises and a two thirds cut in government spending on housing and public works. Wage cuts suggested by the IMF were also implemented, resulting in a further decline in real incomes. And, in their zeal, the new Chilean disciples of neoclassical economics in charge of managing the economy strictly applied the IMF package in its entirety. They reduced tariff protection for the country's industries and generally moved towards opening the economy to foreign competition.
This “shock therapy” delivered a body blow to the economy. The Gross Domestic Product decreased by 11 percent. Industrial production plummeted by more than 25 percent and capital investment fell below its already low levels. Small and medium sized enterprises protested against the treatment which was sending many of them into bankruptcy. However, it was the Chilean people who bore the brunt of the new measures. During 1975, real wages were almost 40 percent less than their 1969 level and the share of wages and salaries in the national income fell from a high of 63 percent in 1972 to 41 percent in 1976. The biggest sacrifice was made by those who lost their jobs. Unemployment, which averaged 5 percent in the 1960s and which had fallen to 3.1 percent in 1972, grew dramatically to 9.2 percent in 1974, 14.5 percent in 1975 and a peak of 20 percent in March 1976 (Carty, in Latin America Bureau, 1983: 60-1).
The recession caused by the “shock therapy” was the worst in 45 years and the 11.5 percent decline in output greatly surpassed the 3.6 percent fall in output registered in 1973. If the 1974 through the 1980s “structural adjustment” period as a whole is considered, Chile's economic growth became much less than the Latin American average. On a per capita basis, the output of goods and services only returned to its 1972 level by the end of 1979. This partial and slow recovery of production was also accompanied by a regressive redistribution of wealth and by a faulty restructuring of the economy. Both processes were reinforced by the inflow of large amounts of foreign capital.
By 1978 the top six economic clans controlled two thirds of the total assets of Chile's largest 200 enterprises. This concentration of wealth contributed to increasing economic inequality. By that year the richest fifth of the population enjoyed more than half of the total national consumption while the poorest 60 percent of the people shared only 28 percent. The fortunes of the rich were won directly at the expense of the bottom 60 percent of income earners. In addition, the government's decrees on wage controls, reduction in its employment and cuts in its spending reinforced the unequal income distribution and even deepened impoverishment.
By 1980 real wages and salaries were still inferior to their 1969 level and almost a third below their 1971 high. The poorest were especially hard hit. Since 1973 the real value of the minimum family income earned by a fifth of the population had been cut in half. The social wages of Chileans have also been squeezed. By 1979 both government expenditure as a whole and outlays for social programs in particular were 10 percent less in real terms than in 1969. Spending on education, housing and health services remained well beneath the historical highs recorded under the previous government and as a result serious social problems in these areas remained unsolved (Carty, in Latin America Bureau, 1983: 61-3).
The restructuring of the economy resulted in growth in the tertiary (or service) sector, up from 52.5 percent of the economy in 1970 to 58 percent in 1980, but at the expense of the mining, agricultural and industrial sectors of the economy. Goods production as a whole declined from 1973 to 1979 while finance and banking activity, sectors enjoying access to foreign credit, were the main contributors to economic expansion. The manufacturing sector suffered the most. Many manufacturers never recovered from the “shock therapy.” A large number cut output and simply became importers.
By 1980 industrial employment was 10 percent less than in 1970 and 20 percent below its 1973 level. Some diversification of exports was achieved: Dependence on mineral exports declined from 83 percent of the total exports by value in 1974 to 60 percent in 1980. But the nation's export earnings remained highly dependent on natural resources and semiprocessed materials, leaving Chile still very vulnerable to fluctuations in price and demand on international markets. Apart from the growth of the service sector Chile virtually became a hewer of wood and drawer of water. However, the Achilles heel of the Chilean experiment is its failure to generate a sufficient amount of capital investment. If a country does not invest enough each year to replace worn-out or obsolete production facilities the nation's productive capacity will rapidly deteriorate. If it fails to invest today in its production base it will not have the ability to create new wealth tomorrow.
Chile's capital investment levels, a traditional weakness in an underdeveloped economy, were about half of the Latin American average for the 1974-79 period and the recession dealt them a further setback. This low level of capital investment points to a failure of the Smithian notion of "invisible hand." Part of the problem is due to the government's deliberate shrinking of its role in public works investment. But it is also due to decisions by Chilean investors to put their savings into nonproductive investments, including speculation, and both banking and corporate concentration. The low rate of capital investment is further caused by the pattern of direct foreign investment: Although the government bent-over backwards to attract direct foreign investment, actual inflows did not live up to expectations and most of the investment that materialized involved use of existing enterprises or supported commercial activities instead of contributing to new capital investment (Carty, in Latin America Bureau, 1983: 64-5).
Above all, the capital investment contradiction in the IMF recipe is a reflection of how large inflows of borrowed capital have been squandered by Chile's neoliberalism. Rich Chileans, like their counterparts privileged by IMF tutelage in other UDCs, used foreign loans to go on an international buying spree. Imports of nonessential consumer goods, including furs, alcohol, carpets and home entertainment equipment more than doubled from 1970 to 1978 in real terms and increased their share of total imports from 14 to 21 percent. But during the same period capital good imports remained static in nominal terms. The recipe's propensity towards imported consumption at the expense of capital investment and capital good imports worsened in the 1979 to mid-1982 period when the authorities maintained a fixed exchange rate and in so doing caused further damage to an already battered manufacturing sector. With capital good imports less than half of the value of nonessential imports the purchasing binge did not translate into a powerful productive base. In 1981 an unprecedented 58.4 percent of foreign exchange earned by Chile's exports had to be allocated to service the foreign debt. But with a low level of capital investment the country was not generating the productive capacity to pay off its debt.
Chile's experience shows in part that dependence on external finance is a key factor influencing government policies. Part of this dependence derives from the underdeveloped status of the Chilean economy; in particular, its character as a producer of minerals vulnerable to the fluctuation in international markets. The ideology of Chile's rulers has also determined the country's degree of independence or the lack thereof. Adopting an incomes policy designed to increase the share of the pie going to labor, the previous Allende administration, upon coming to power in Chile, raised wages by 30 percent and froze most prices, thereby squeezing the profit rates. With more consumer demand, underutilized capacity was brought back into full production, consumer goods supplies were increased quickly, overhead costs were spread more efficiently and aggregate profits held up despite the lowering of the profit per unit. Thus, in its first year, the Allende administration increased real output by eight percent. Meanwhile, prices rose by a substantially smaller percentage than they did the previous year. “For the first time, an underdeveloped country...[had] been following a ‘structuralist’ policy rather than that of the ‘monetarists’ of the International Monetary Fund and the World Bank” (Lynn Turgeon’s Bastard Keynesianism: The Evolution of Economic Thinking and Policy-making since World War II, 1996: 103).
Despite external campaigns against it, the nationalist coalition formed by Allende resisted foreign financial pressures. In contrast, the Pinochet military government which ousted Allende (with CIA assistance) soon purged and repressed nationalist and progressive forces, and made Chile open and vulnerable to the influence of international financial institutions. The price paid by Allende for striving for independence was extremely high, but not uncommon in the UDCs (Carty, in Latin America Bureau 1983: 66-7). Governments dedicated to social justice have great difficulty in managing an economy in transition while trying to sustain both domestic political support, by providing subsidies for the poor, and access to international credit in a hostile international environment. Under the Pinochet government, therefore, the monetarist construct of the IMF became official doctrine, and throughout the 1974-1981 period the recipe's relationship to, and dependence on, the IMF and the private sources of capital was central to that government’s existence.
The IMF was able to exert direct and determinant influence on economic policy in 1975, the year “shock therapy” was fully applied and the model took on its complete shape. IMF seals of approval subsequently allowed the regime to wean the economy from official sources of external finance towards a heightened reliance on private banking sources. This change of sources allowed the government to ostensibly shift its external political dependency. After 1975 the continuing IMF approval of the recipe plus the blessing of international banks strengthened the position of the economic managers in the government. In this way continuing international financial support for the government sustained the regime's economic model. And because the model required repression the conclusion can be drawn that external finance has been instrumental in consolidating and perpetuating the repression in Chile (Carty, in Latin America Bureau, 1983: 67). Now Pinochet alone is deemed responsible for that repression.
In February 1983, Chile's showcase was in tatters: The government announced that it would stop repaying the principal on its US$17 billion foreign debt while it worked out a rescheduling agreement with its foreign bank creditors. This financial impasse followed a year in which the Chilean economy recorded a massive 13 percent fall in output, by far the worst result for any Latin American country. Unemployment reached 25.2 percent in Santiago in 1983, although that figure does not include the thousands of people employed on meager wages by the Government's emergency work program. A total of 431 bankruptcies was recorded during 1982 and by the end of the year Chile had accumulated a US$4.8 billion trade deficit. Although the world recession has compounded Chile's problems, low commodity prices and high interest rates are not solely to blame. The government's insistence on maintaining an overvalued currency, thereby rendering “structural adjustment” devoid of its theoretical “coherence,” made foreign borrowing relatively attractive, led to dramatic falls in reserves, and hindered the country's exports, for its products were overpriced on international markets.
By mid-1982 the ever worsening trade deficit forced the government to comply with the rest of the recipe and devalue the peso. Dollar debtors were hard hit as they now had to come up with more pesos in order to meet their dollar obligations. The devaluation forced many producers into bankruptcy because they were unable to service their large foreign loans. These bankruptcies created a severe liquidity crisis in the country's banking system. In January 1983 the government stepped in to take over five banks. This move, which included the country's two biggest banks, was made necessary by the magnitude of the anticipated loan portfolio losses. The banking sector, which had benefited from the overvalued peso during the previous two years, was badly hit by its customers' inability to repay their debts at the devalued exchange rate. To forestall a total collapse of the national banking system the government was forced to undertake a massive intervention, which ran against its IMF formula, further undermining its theoretical “coherence.” Furthermore, Chile's foreign creditors were anxious that the government should take over responsibility for the country's private sector foreign debt (about 64 percent of the total). This had long been resisted as the government argued that taking over such a debt would violate sacred, free market economic principles. However, those foreign creditors with loans outstanding to Chilean companies feared their loans would not be repaid if the government did not help.
Using Chile's need to renegotiate its debt as a lever these foreign creditors forced the government to take responsibility for more than half of the private sector debt in the wake of a series of twelve bankruptcies of companies belonging to the country's two largest conglomerates. This again represented a big break with the independence prone past. In March 1983 the government began to lend to other companies which had fallen behind on their debt service. A total of US$15 million was loaned to eight companies to enable them to avoid liquidation (Carty, in Latin America Bureau, 1983: 68-9). The government's decision to intervene in the economy was a dramatic departure from its monetarist policies. The failure of orthodox, free market policies to provide a stable basis for growth, much less a basis for equitable development, has discredited the doctrines of the Bretton Woods' organizations. Paradoxically, the recipe of “shock therapy” has been breached at the behest of international private sector creditors whose interests are intended to be served by it.
The record on IMF policies thus makes two conclusions clear. First, the “shock therapy” administered by the IMF to its underdeveloped country clients aims in the short-term to achieve a reduction in balance of payments deficits essentially through a contraction of the domestic economy, and it usually succeeds in achieving this limited objective, with all the social, political, and economic costs and human suffering that this entails. Second, there is no evidence that Fund programs have contributed to achieving positive longer term objectives such as bringing down inflation rates, increasing savings and investment or setting the economy on a path to successful long-term growth. Among the large number of underdeveloped countries that have over the years been the objects of IMF stabilization programs (repeatedly, for some countries) there is scarcely a single example of that kind of success. Indeed, the present sorry state of most underdeveloped countries that have been through the IMF wringer stands as a vivid testimony to the contrary. The particularly harsh conditions imposed during the 1980s seriously disrupted the development potential of the countries affected and substantially lowered their long-term growth path (Adams, 1993: 164-5).
All indications of the 1990s so far are that they are little different from the lost decade of the 1980s for those countries that faced the balance of payments squeeze and were the victims of the debt crisis. They are still reeling under the devastation and upheaval they were forced to undergo. For apart from permanently lowering the growth rates and the long-run growth path of those countries immediately affected, the IMF led strategy was also to have far reaching effects on the development climate in the UDCs and on the course of DCs-UDCs relations. The “shock therapy” of Jeffrey Sachs and the monetarists that underdeveloped countries were forced to undergo, a type of economics of overkill, with its extreme demand deflation, high unemployment, sharp reductions in wages and incomes, severe import compression, heavy cut backs in social services, etc., was a traumatic experience that left a deep impression on the consciousness of the underdeveloped world. ”What has been called shock therapy,” argues John Galbraith, “is politically acceptable only to those not experiencing it” (John Galbraith, “Economics in the Century Ahead,” in John Hey’s The Future of Economics, 1992: 45).
The noose that the international financial community held around the necks of these countries, and the measured way it was manipulated to keep victims alive but struggling for air, greatly intensified the impact of this experience, paradoxically causing the authoritative segments of the victims to embrace the ideological paraphernalia of the oppressor. After almost two decades of tight financial strangulation and heavy political pressure, there is scarcely an underdeveloped country today that does not ostensibly embrace the free market, private initiative, trade liberalization, foreign investment, deregulation, privatization and so on and so forth. The emphasis now is on the neoclassical “efficient allocation of resources.” Dodged are growth, development, equity and transformation. Under the rhetorical rubric of “structural adjustment” there is little real interest any more in deeds of institutional change as essential components of societal development. The market is to determine the distribution of the gains from growth, according to the Schultz doctrine, whereby the Department of State is one of the committees responsible for globalizing unfettered capitalism.
A telegram issued in February 1985 by US Secretary of State George Schultz to US
AID officials, setting out matters to be raised with "host" governments in connection
with “aid” projects, reads in part:
Policy dialogue should be used to encourage UDCs to follow free market principles for sustained economic growth and to move away from government intervention in the economy. This allows the market to determine how economic resources are most productively allocated and how benefits should be distributed. To the maximum extent practical governments should rely on the market mechanism --on private enterprise and market forces-- as the principal determinants of economic decisions.... In most cases, public sector firms should be privatized (quoted in Adams, 1993: 169-70).
The IMF is thus only rhetorically a permanent forum for collaboration on international monetary issues among its member countries. Its basic objectives (supposedly to encourage balanced trade and through its expansion, stimulate employment and real incomes, to help countries balance their external payments and to foster economic liberal trade and payments arrangements) (IMF, 1988) are administered with an eye on --and priority given to--the interest of the conglomerate of the industrial states and transnational corporations. In the words of Michel Camdessus, IMF Managing Director, “the transition to a market economy entails inescapable challenges for policy --prices have to be freed; the economy has to be opened to the rest of the world; macroeconomic stability has to be established; laws and institutions have to be reformed; enterprises have to be commercialized and privatized" (IMF Survey, February 21, 1994: 52). The neoliberal ideology used is based on the notion that the market does everything by itself and that it is unnecessary for a state to guide the development process, a dangerously blind faith.
The IMF therefore subscribes to a laissez faire economic and political view of the world. This view is predicated on the assertion that free trade and the unhindered operations of market forces are conducive to the welfare of the international economy. The IMF's belief in automatic adjustment by the market has also led it to assume that if all countries were to observe these basic rules there must ensue a "natural" tendency for all balance of payments to remain in equilibrium over time. No direct government intervention would thus be required to bring about this change. So the role of the international monetary agency would be merely to ensure that all the countries involved observed the rules in order to make it possible for this process to take its "sustainable" course. Such a view on how economic growth is achieved and how economic crises are avoided is not universally accepted. The concept of "sustainable development" from the point of view of underdeveloped countries has a sinister aspect lying just below the surface. The logic of all the talk about sustainable development is that there is hardly room for newcomers, and that the poor must remain poor in order to save the planet!
No wonder therefore that President Nyerere of Tanzania stated in 1980: "I doubt whether there are now people who honestly believe that the IMF is politically or ideologically neutral. It has an ideology of economic and social development that it is trying to impose on poor countries." The Brandt Commission in its first report, moreover, argued that the conditions imposed by the IMF on deficit countries had forced unnecessary and unacceptable political burdens on the poorest of the poor, on occasions leading to "IMF riots and even the downfall of governments." In addition, the Arusha Initiative, signed in Tanzania in 1980 by a number of UDC representatives, pronounced that far from being scientific and generating economic progress, "the performance tests which the Fund imposes lack scientific basis" and that "the Fund policies conceived to achieve stabilization, have in fact contributed to destabilization and to the limitation of democratic processes" (Brett, in Latin America Bureau, 1983: 30-1). Moreover, the IMF power to lend is a means to overcome short-term difficulties, rather than a means to solve a long-term problem resulting from the fact that certain economies are internationally less competitive than others, and therefore in need of long-term remedy in order to be able to survive and expand. Hence the inadequacy of the IMF even with the best of intentions to address the chronic incompetitiveness of UDCs' economies is indubitable.
Further, if debtor nations accept assistance from the IMF they must accept the conditions that accompany that assistance. However, the Latin America Bureau’s case studies illustrate the implications of these conditions for the majority of the population in the countries concerned and show how, even within their own terms IMF policies failed to solve the crises they were intended to confront. Governments effectively abandon their commitment to reform when they agree to implement IMF austerity measures whose analysis of the problem is incorrect. On the other hand, an ideological commitment to the IMF view of the world, to the acceptance of the IMF medicine, is an acid test of the potential effectiveness of its prescriptions and policies. The IMF has failed that test in repeated cases, in many countries.
Latin America Bureau’s case studies reveal important insights into the present crisis facing underdeveloped countries, as successive UDCs' governments are forced to turn to the IMF for assistance in the face of their enormous debt burdens and balance of payments difficulties. IMF programs are not benignly solving the structural balance of payments problems that debtor nations face. The high social costs of IMF restructuring are being paid by the poorest sections of the population, and draconian austerity measures are provoking political confrontation which in some cases may have far reaching consequences. Growing social unrest in the form of spontaneous riots or organized opposition by workers in key economic sectors has an explosive political potential in the underdeveloped world. By opposing reform oriented governments but failing to provide solutions through its free market recipe, the IMF may well be paving the way for more radical solutions with implications not only for internal power structures, but also for the international economy. The results of the experience of the last two decades show how the free market formula represents the antithesis of integral development. Instead of enhancing national sovereignty and self-reliance the experiment made the UDCs more and more dependent on and subject to outside forces and influences. Instead of promoting social justice it widened inequalities and the division between social strata. Instead of increasing economic, social and political participation in society the experiment reduced it, concentrating economic and political power in a wealthy minority, while the poor masses were excluded from economic as well as political decision-making.
Policies based on the monetarist response to economic problems fail repeatedly in the underdeveloped context. An example is Arnold Harberger's formula for successful IMF-UDCs' relationships, despite its useful aspects and qualified wording. Harberger asserts the need for the following set of economic rules:
(1) Avoid false mechanism in economic policy making.
(2) Keep budgets under adequate control.
(3) Keep inflationary and deflationary pressures under reasonable control.
(4) Take advantage of international trade since some types and patterns of trade restrictions become excessive and reducing them is politically impossible.
(5) Mount an indirect attack on the program for increasing incentives for export.
(6) Make the tax system simple and easy to administer.
(7) Avoid excessive income tax rates.
(8) Avoid excessive use of tax incentives to achieve particular objectives.
(9) Use price and wage controls sparingly if at all.
(10) Minimize quotas and licenses to arbitrarily regulate imports and exports.
(11) Make the borderline between public and private sector activity clear and well- defined (Horowitz, in Myers, 1987).
The fiscal regimen being suggested by the IMF, while ostensibly nonpolitical, has enormous political consequences. This free market type of approach, seemingly economical, results in a political nightmare. The use of coercion often parallels the implementation of the orthodox stabilization measures of the IMF formula. IMF imposed structures create the basis of repression by making repayment schedules a class burden. The free market system becomes the cause of rather than the cure for political instability. Generally, the substance of the debates over the status of the IMF, and between the IMF and debtor nations, as Horowitz points out, "is less the kind of policy guidelines the IMF establishes than it is the weak status of an economic science itself still painfully linked to ideological proclivities. In nearly every case...national interest rather than universal science prevails as the measure of IMF decision-making" (Horowitz, in Myers, 1987: 178, emphasis added).
In an odd way, the argument of the IMF represents a new kind of economic world, not the classical and Marxian economics of production but the neoclassical economics of allocation. When one discusses the economics of allocation, however, one is talking essentially of politics: Who is going to get what, how, and when. The policy issue is not as much a matter of what is produced as it is a matter of which is allocated, or of how the political-administrative network disburses what has already been produced, purchased or borrowed. The infrastructure of the new global economy is configured and made possible by this allocational emphasis. Albeit economic production systems are part of this IMF political allocation network, the IMF is merely "an instrument of capitalism." Kari Levitt further holds "that IMF programs are not designed to increase the welfare of the population. They are designed to bring the external payments account into balance.... The IMF is the ultimate guardian of the interests of capitalists and bankers doing international business" (quoted in Horowitz, in Myers, 1987: 182).
IMF conditionality is now further overlapped with that which the World Bank imposes in connection with its program of structural adjustment loans (SALs). The SAL program, as pointed out above, was introduced in 1980 as a form of Bank lending geared to the realization of specific policy and institutional liberalization. The policy areas on which the SAL program focuses include the relative roles of the public and private sectors in economic activity, the way markets are permitted to develop or are organized by governments, the process and criteria by which the level and structure of agricultural prices are determined, and the industrial policy framework within which industry operates as determined by tariffs, import licensing systems and investment promotion schemes. These issues go to the very heart of development policy, and World Bank policy requirements in these areas focus above all on changes needed to give free play to market forces with emphasis on such issues as deregulation, privatization, cut backs in the role of the state in the economy, import liberalization, removal of price controls (typically on basic necessities) and elimination of budget subsidies, and on interest rate policy.
The World Bank's SAL program thus provided a unique opportunity for promoting the neoliberal economic ideology in the underdeveloped world. With the two organizations coordinating their individual country policies and working in tandem countries coming under their sway soon found themselves overwhelmed and left with few policy choices. This was especially so for small or medium-size underdeveloped countries, sometimes stretched so thin in their dealings with the double prong organization that their economic officials find little time left for consideration of other policy issues not in the Bretton Woods programs. Further, a considerable cost of Fund credit is caused by the excessive amount of high level manpower tied up in the preparation of a credit application, the subsequent negotiations and the monitoring of results. In 1992, for example, the Bank's borrowing countries in the underdeveloped world paid out $6.5 billion to companies in the OECD for procurement of goods and services. The poorer borrowing nations thus wound up paying $198 million more to OECD economies for Bank associated procurement than the borrowing countries actually received from the Bank (Rich, 1994: 155).
It was the Bank's strategy thus, focusing more specifically on the microeconomic aspects of policy making, that provided the fullest scope for promoting the market oriented, supply side economics currently in vogue. Beyond doubt, then, the present international finance organizations, as far as the UDCs are concerned, have not achieved and are not fulfilling the Keynesian objectives laid down for them at Bretton Woods. Preoccupied with moves to coordinate policies on exchange rates among the major industrialized countries, with financial bailout of countries deemed important for the process of capitalist globalization, and with perpetual and frantic striving for the marketization of the underdeveloped countries, these organizations have more or less abandoned any attempts to exert a balancing influence on the international economic system in such a way as to maintain growth throughout the UDCs. The impact of these organizations has been mainly felt at the level of individual countries through IMF conditionality programs. The results of these programs have often been cutbacks in expenditure and employment, which have weakened growth prospects and threatened the living standards of many who are already just barely subsisting.
2. HETERODOX MECHANISMS
Heterodox mechanisms are dissenting and nonconformist courses of action. They include two perspectives which are ignored and ridiculed by neoclassical economics. These are, respectively, the delinking and the structuralist mechanisms. Heterodoxy has no chain of basic principles ensuring its internal consistency in a way comparable to orthodoxy, hence the presumed superiority of the latter. In the case of socioeconomic complexity, however, this is not true (see Robert Delmore, “The Foundational Bearing of Complexity,” in Ash Amin and Jerzy Hausner, eds., Beyond Market and Hierarchy: Interactive Governance and Social Complexity, 1997: 43-4).
2.1 The Delinking Mechanism
The delinking mechanism is the outcome of the neo-Marxist and dependency perspectives; both are grounded in the intellectual endeavors on imperialism of Hobson, Hilferding, Luxemburg, Bukharin, Lenin, Nkrumah, Galtung and others. A sample of the conceptions in this line of thought would include, e.g., Eric Hobsbawm's (1962) Demand Side Determination, limiting industrialization to Britain around 1800, and Samir Amin's (1974, 1976, 1986) concepts of Resource Supply Limitation, Aid's Perpetuation of Reactionary Regimes, Capital Accumulation on a World Scale and World Systems Analysis. The latter is à la Immanuel Wallerstein's The Modern World System (1974). It has emanated from René Descartes' (1927, 1970) seventeenth century World Machine, and is the successor of the Functionalism of Bronislaw Malinowski (1993), A. R. Radcliffe-Brown (1962), Hilary Putnam (1979, 1981, 1983), and David Mitrany (1975). Bringing history back in the social sciences, especially in economics, is an achievement of the delinking mechanism through the focus on the heritage of imperialism. The term “imperialism” denotes a classic political economy concept which cannot be properly defined in either political or economic categories alone (Michael Barrat Brown, Economics of Imperialism, 1974: 19). Indeed a fundamental problem with the whole “modernization” and “development” schools of modern social science, not to mention the ahistorical neoclassical economics, is that they conveniently circumvent, forget, or at least ignore the role that imperialism played in the evolution of the modern world division of labor, inequality, and underdevelopment.
The geographical extent of core political control in the periphery during the capitalist era has been all but total. Between 1500 and 1970, all areas that were at some time under core control comprise almost all today’s periphery. The major exception is China, but even here the leading core states established their “spheres of influence.” In geographical terms the result of this political control was areas organized as one huge functional region for the benefit of the core states. “Imperialism, both formal and informal, is the process that created and continues to recreate the periphery” (Peter Taylor, Political Geography: World Economy, Nation State and Locality, 1993: 104-5, 113). Therefore, today's "backward areas" of the world, as Dobb (1963: 5-64) refers to them (notwithstanding their precolonial mode of production which Marx gave the unfortunate Eurocentric, but painfully partially true, generic attributes "Asiatic" and “despotic,”) have been for the most part the traditional colonial or semicolonial regions --the agricultural, plantation and raw material hinterlands of the big capitalist powers that have exploited these areas as sources of cheap raw materials and foodstuffs and as spheres of investment. Historically speaking, this has been the main reason for their underdevelopment (Dobb, 1963: 17-18).
Imperialism used military, political, economic and cultural means of oppression to thwart development of national capitalism in the UDCs. The alliance between imperialism on the one hand and quasi feudal landlords and comprador bourgeoisie on the other made possible the use of such imperialist means as wars of aggression, unequal treaties, economic and diplomatic concessions (capitulation systems such as those ceded to European countries by the Ottomans and which led to deindustrialization, or the decline of handicrafts, among other economic effects, all over the Middle East), control of ports, monopoly of banking and finance, appropriation of raw material, exploitation of cheap labor, military assistance to warlords, cultural domination, and the like (Mao Tse Tung, “The Chinese Revolution,” in Selected Works, 1939: 310-12).
Different modalities of imperialist exploitation resulted in wide ranging effects in both the colonial and the metropolitan economies:
(1) Merchant capital destroyed colonial national economy and stimulated commodity production. In the metropolis, mercantile profit provided wherewithal for primitive accumulation.
(2) Capture of mines, plantations, etc., resulted in rising ground rent and the appearance of super-profit which flowed from the colonies to the metropolis.
(3) Use of cheap colonial labor power resulted in a high rate of profit which was pocketed by the metropolis.
(4) Import of cheap agricultural goods and minerals into the metropolis from its colonies resulted in the pauperization of peasantry through forced commercialization of colonial agriculture. In the metropolis, it resulted in a higher rate of profit as constant capital became cheaper and variable capital was reduced.
(5) Import of manufactured goods into colonies from metropolis resulted in colonial deindustrialization, displacement of artisans, falling wage rate, and hence rise in profit rate while resolving the realization problem in the metropolis.
(6) Capital exports from metropolis to colonies, while they promoted periphery capitalism and disarticulated industrialization in the colonies, prevented the profit rate from falling at the metropolis.
(7) The advent of the transnational corporation resulted in declining rent, super (monopoly) profit and limited (selective) industrialization in the colonies, and in inflow of profit, export of obsolete machinery, and faster technological progress in the metropolis.
It is this history of imperialism that engendered both the neo-Marxist and dependency perspectives, the constituent parts of the delinking mechanism, and focused the attention of UDCs’ scholars on extending Marx’s theory of exploitation from the national to the international domain. Examples thus encompass André Gunder Frank’s dependency theory, Arghiri Emmanuel’s theory of unequal exchange, and Samir Amin’s theory of accumulation on a world scale. It would be hair splitting, therefore, to try to sharply delineate the neo-Marxist from the dependency perspectives. Scholars of both orientations interchanged and intermingled their thought through the years as a unified front facing neoclassical economics. Separating them for mere taxonomic convenience may, however, prove to be intelligibility enhancing.
2.1.1 The Neo-Marxist Perspective
The neo-Marxist views on the nature and coming into being of the state of underdevelopment is central to understanding why this perspective finds no solution to the UDCs' dilemma other than revolutionary delinking from the global capitalist system. Marx attributes the stagnation (as opposed to progress: The unfolding of human dormant powers) of societies to their generic "Asiatic" mode of production (Capital, vol. I, 1867: 479). Private land ownership (the precondition of feudalism) is very limited. Class distinction exists on spurious lines, distorted further by a caste system which creates accepted inequalities. A form of exploitation that is less rigid, owing to the absence of private slavery or personal bondage, prevails, whereby the ruling bureaucracy's capacity for creating illusions is able to absorb the change of productive forces within the existing social structure. Town and village are hardly demarcated and self-sufficient by agriculture and craft manufacturing in unison, and the State is despotic.
Marx, in Capital, vol. 1 (1867: 479), citing a governor of Java during the British occupation, in the period 1811-16, contends that
under this [Asiatic] form...the inhabitants of the country have lived from time immemorial. The boundaries of villages have been but seldom altered, and though the villages themselves have been sometimes injured, and even desolated by war, famine, and disease, the same name, the same limits, the same interests, and even the same families, have continued for ages. The inhabitants give themselves no trouble about the breaking up and division of kingdoms; while the village remains entire, they care not to what power it is transferred, or to what sovereign it devolves; its internal economy remains unchanged.
But Marx also contends that with colonialism "European despotism, planted upon Asiatic despotism" formed "a more monstrous combination" (The British Rule in India, in Marx-Engels Reader, 1978: 212). The age of modern colonialism worldwide began with the global expansion of trade and conquest by European powers. Politically, imperialist control and influence have tended to support and preserve obsolete social and political forms. Economically, foreign investment ( i.e., the export of capital) has tended to go into mining and plantations and raw material processing, or into the development of export industries as a kind of enclave of the imperial metropolis, detached from the rest of the colonial economy, both seeking its markets abroad and sending its profits abroad.
A distinction exists, however, between types of precapitalist colonial rule, notably that of the Iberian powers in Central and Latin America, as well as that of the Ottoman sultanate, on the one hand, and, on the other, the new colonialism that was associated with the birth, development and global expansion of the West European capitalism, beginning with the commercial upsurge of the sixteenth century and itself entering into successive phases of development (Hamsa Alavi, 1982: 57-79). In its dominions, for example, the Ottoman sultanate used the traditional form of direct appropriation of agricultural surplus previously used by world empires, namely that of tribute, in contrast to the other direct appropriation of feudal rent that prevailed in European feudalism, and to the indirect appropriation of industrial surplus of wage labor that constituted the basis of nascent capitalism. Therefore, towns, under Ottoman rule, became parasitic communities, rather than centers of production. Out of its six centuries of existence, except for the successful prelude of counter offense in the fourteenth and fifteenth centuries, especially in 1453 and thereafter, and the gallant and nostalgic but foredoomed efforts of Abdul Hamied at the turn of this century, the four centuries of Ottoman exploitation of the Arab countries, reliant on irreciprocal (parasitic) and unaccountable exaction, engendered a coma which may be analogously called Middle East Dark Ages (1516-1924).
Parasitic strata in Istanbul and its surroundings as well as their agents elsewhere in the dominions, living off the despoiling of the sultanate, created such a degree of tributary exploitation that they undermined the conditions for continuing production in the dominions. No lesson was learnt from the decay of the Roman Empire under the weight of parasitism (taxation) as the prey became increasingly impoverished by the drain and showed strong signs of restiveness. The sultanate “did not enter the mainstream of progress in science and technology and it participated only marginally, and as a periphery, in Europe’s economic activity and not at all in the development of its economic thought” (Charles Issawi, “The Economic Legacy,” in Leon Carl Brown’s Imperial Legacy: The Ottoman Imprint on the Balkans and the Middle East, 1996: 240-1). The sultanate finally ceased by demise, succumbing to European industrial countries (not unlike Rome, succumbing to the militarized barbarians). The sultanate found itself then as much underdeveloped as its dominions, for it had furnished its economy in an exchange mode that catered for the nascent industries of European powers. Hence the significance of industrialization and production, as opposed to agriculture and exchange. The Ottoman sultanate, therefore, constituted precapitalist colonialism, not imperialism, till its very end. 
The object of precapitalist colonialism was direct extraction of tribute from subjugated peoples. Its essential tools were those of political control, a modus operandi that was used prior to the Iberian powers and the Ottomans by Pax Romana, the Byzantine Empire, and the Tartars invasions, in their spheres, until their days' ends (Marx, Grundrisse, 1972: 151-3). By contrast, in the case of the new colonialism, associated with the rise of capitalism, the objectives and tools were essentially economic --direct political control was not essential, though sometimes advantageous. The emphasis was on a search for raw materials and, especially after the industrialization in Britain, for markets. Realization of both these objectives entailed a restructuring of the economies of the colonized societies.
Associated with that primary thrust, sometimes, was territorial conquest, with or without the elimination of indigenous populations of conquered territories, and the establishment of European settlements or slave plantations and mining enterprises. Except in the latter cases, given the economic preeminence and naval power of Britain, the principal imperialist power of the day, direct rule was not essential to secure the purposes of the new colonialism, or imperialism as it soon came to be called. Many countries that remained formally independent soon came under the economic domination of world imperialism, in a semicolonial fashion. It was only in the late nineteenth century, with the German and American challenge to traditional European powers, that there was a new rivalry for colonial conquest, a scramble for Africa, and a fresh redivision of the world. The bid for direct colonial rule was now largely a preemptive strategy vis-à-vis rival imperialist powers rather than an indispensable condition of the colonial relationship itself. Too sharp a distinction between colonial and noncolonial societies of the underdeveloped world would therefore be misleading, though not without some significance.
To avoid confusion between precapitalist colonialism and capitalist world domination, with or without conquest and direct colonial rule, the term imperialism is often used for the latter. However, a further distinction must then be made between the old imperialism of early capitalism and the new imperialism of industrial capitalism in the late nineteenth century, the era of monopoly capitalism (Alavi, 1982: 79-81). The latter was associated with the preeminence of finance capital, a drive for export of capital and also fierce internationalist rivalry that culminated in two world wars. As for the parts of the world dominated by imperialism, both its phases entailed a forcible transformation of precapitalist societies and the establishment of a new international division of labor (not any different from the one advocated by international trade theory, on the basis of comparative advantage, today),whereby their economies were internally disarticualted and externally integrated with the metropolitan economies (Amin, 1974, 1976). They were no longer self-sufficient locally but were now to concentrate on production of raw materials and food demanded by the industrial countries, very often becoming precariously dependent on monocropping. On the other hand, those imperialism dominated countries provided markets for manufactured products supplied by the capitalistic economies. The colonized countries were also profitable fields for investment of metropolitan capital. This was originally mainly in plantations and extractive industries, but later also in labor intensive light manufacturing which takes advantage of cheap labor in the colonies.
Any emphasis on the quantum of capital exported is therefore misplaced, for the most significant aspect of the new imperialism is the hierarchical relationship in partnership that is established between metropolitan capital and indigenous capital originating in the colony on the basis of the former's control over sophisticated modern technology, so that the actual extent of metropolitan control over the colonized economy greatly exceeds the nominal value of metropolitan capital invested in it. The nature of these economic relationships provides a key for understanding the problems of postcolonial societies, and hence for the transformation courses of action that can be effective as well as efficient in dealing with their predicament. The market society, with all its economic dynamism, did not spread, however, into the underdeveloped areas, certainly not in all of them, despite the prevalence of periphery capitalism. The reason goes back to the fact that the active economies of the developed world did make contact with those regions, beginning with the exploratory missionary and commercial voyages of the fifteenth and sixteenth centuries. Until the nineteenth century, the end of that contact was little more than plunder (which contributed substantially to the capital accumulation of the DCs).
And then, starting in the first half of that century and gaining momentum until World War I, came that scramble for territory, the Age of Imperialism (Heilbroner, 1965: 178). That imperialism was a compound of many things: Militarism, jingoism and, essentially, a search for markets and for sources of cheap raw materials and labor to feed growing industrial enterprises. Insofar as the colonial areas were concerned, however, the impact of imperialism was not solely that of exploitation. The incursions of DCs' powers into the other regions injected the first heavy dose of industrial capital: rail lines, mines, plantation equipment. It brought epiphenomenal concepts of law and order, often into areas in which rule by traditions had previously been the order of the day. It also introduced the notion of freedom, a collateral attribute of commercial and industrial capitalism, which was eventually used against the invading powers themselves.
Yet if imperialism brought these modern influences, it also exerted a peculiarly deforming impulse to the economies of the colonial countries. In the eyes of the imperialists, the colonies were viewed not as areas to be brought along in balanced development, but essentially as immense supply dumps to be attached to the metropolitan industrial economies (Heilbroner, 1965: 181-3). Malaya became a vast tin mine; Indonesia a huge tea, coffee and rubber plantation; Egypt a wheat granary and cotton farm; Arabia an oil field. In other words, economic development was steadily pushed in the direction that most benefited the imperial exploiter, not the colonial peoples themselves. Under Machiavellian-Morgenthauian realism, this was only to be expected. The result today is that the typical underdeveloped country has a lopsided economy, unable to supply itself with a wide variety of goods, including food. It is thereby thrust into the international market with its one basic cash crop commodity.
On the surface, this looks like the supposedly healthy, Ricardian specialization of trade promoted by neoclassical international trade theory. It is not. It impoverishes the UDCs, if only through increasing their remuneratory and monolithic susceptibility, which interbreeds with, and goes to the very heart of, their security vulnerability. Economic lopsidedness, the fundamental attribute of underdevelopment, was thus a direct consequence of imperialism. Its continuation is the result of free trade imperialism, propagated as science by neoclassical international trade theory. This lopsidedness spills over into the chronic debt problem. Anwar Sheikh’s “The Law of International Exchange,” in Edward Nell’s Growth, Profits and Property (1980), finds the roots of the debt crisis in the uneven development caused by capitalist competition, especially free trade. Competition leads to unbalanced trade which, in turn, leads to interest rate changes which encourage investment in the surplus country and squelch it in the deficit country. This sequence of unequal rates of accumulation (and thus technological development) is matched by a similar sequence of trade imbalances. Countries that have chronic deficits must ultimately rely on capital inflows to balance international payments. International debt accumulation is the result.
No less important for the future course of underdevelopment in the colonial areas was a second decisive influence of the West: Its failure to achieve political and psychological relationships of mutual respect with its colonial peoples. In part, this was traceable to an exploitative economic attitude, in which peoples of the colonies were relegated to second class jobs with tenth class pay, while a handful of colonialists formed an insulated and highly paid managerial clique. However, it ran deeper than that. A racist color line, an indifference to colonial aspirations, and a contemptuous view of the natives run all through the history of capitalist imperialism, with diluted traces extant to this day. It has left as a bitter heritage not only an identification of capitalism with its worst attributes and practices, but a political and social wariness toward the West that deeply affects the general orientation of the underdeveloped nations. There is no room for, much less understanding of, let alone redress for such factors in today's "positivist" economics. Hence, the legacies of colonialism and imperialism cannot be understood by adherence to a perspective which does not account for their existence or consequences.
Imperialism today has certainly changed. The naked power grabs, when imperialism often meant the acquisition of territory that would look good on a map, have all but disappeared. In the past also are the seizures of raw materials on the utterly penniless terms characteristic of mineral empires built in the late nineteenth century. The nature of this imperialism has changed, and is now changing, partly under the pressures exerted by a restive underdeveloped world, changing the demographic composition of the globe, and partly as a result of a post-WW II power shift within the industrial capitalist countries themselves. Yet that is not the whole story. Obscured now are latent attitudes of racial superiority, remnants of times past, so infuriating to peoples whose anthropology was often of far greater roots and delicacy than that of the colonizers. And, more importantly, industrial powers continue to exercise collectively a mixed political and economic hegemony over de jure independent, sovereign nations: Britain, France, Belgium, Portugal, and Italy over portions of Africa; Russia over some contiguous Slavic states, and countries of the Caucuses and Central Asia; the United States over Latin America, Southeast Asia, the Middle East and South Africa; and now Australia (as a NATO proxy) over East Timor: Formal imperialism is dead; long live informal imperialism.
Until the middle of the twentieth century much of the underdeveloped world was subject to direct colonial rule. But with the rise of national liberation movements and, not least, a change in the balance of world forces with the emergence of the Soviet bloc and the dominance of American power, which was no longer prepared to accept the monopoly of political control exercised by fading European powers over a large part of the globe, a process of decolonization began with the independence of South Asian countries in 1947, followed successively by the rest of the UDCs. However, under the new structure, imperialism survives the process of decolonization and outlives the age of annexation. FDR’s advocacy of Wilsonian, worldwide self-determination was essentially a challenge to formal imperialism. He was determined to put an end to the “backward” imperialism of British and French colonial empires, replacing them with his own informal, “advanced” brand:
When we’ve won the war,” wrote FDR, “I will work with all my might and main to see to it that the United States is not wheeled into the position of accepting any plan that will further France’s imperialistic ambitions, or that will aid or abet the British Empire in its imperial ambitions.... I can’t believe that we can fight a war against fascist slavery and at the same time not work to free people all over the world from a backward colonial policy (Henry Kissinger, Diplomacy, 1994: 397, 399, 401; emphasis added).
Informal imperialism renders direct political control unnecessary in the presence of other ways of exercising domination, for example through technological superiority or the free trade stratagem of leading economic powers, let alone cultural imperialism. Economic, financial and social structures of dependence thus still remain, and are being continually reproduced, not least by the disseminated economic "science" and transnational corporation, not to mention international governmental organizations and nongovernmental organizations (NGOs.) The UDCs are thus subjected to indirect political control.
For a time, in the 1950s and 1960s, the fact that many of the newly independent countries opted for nonalignment in the context of the Cold War, reinforced by their quest for social justice, engendered an aura of the underdeveloped countries as exemplars of a new path to economic and social development, neither capitalist nor socialist. But the continuous dependent nature of their economies, organically linked and financially indebted to industrial countries, quickly dispelled that myth. The concept of dependence on metropolitan capital and designs soon came to be accepted as the alternative definition of their status, as an attribute of the neoimperialist relationship, with dependence implying political subjugation as well as economic domination. Yet a postcolonial society has a unique composition of the state and a complex alignment of class forces.
The development of the modern form of the state, as a public power separate from the monarch and the ruled, and constituting the supreme political authority within a defined territory, is associated with the slow institutional differentiation of the "political" and the "economic" related to the growth of the centralized absolutist state and the spread of commodity production. Absolutist states arose in the sixteenth and seventeenth centuries in Western Europe under the Tudors in England, the Habsburgs in Spain and the Bourbons in France. The introduction in Europe of a standing army, a centralized bureaucracy, a central taxation system, diplomatic relations with permanent embassies and the development of the economic doctrine of mercantilism informing state trade policy, all date from that period. It is at this point that the term "the state," used by Niccolò Machiavelli, in The Prince [completed 1513, à la the eighth century’s Islamic, Arabo-Persian Mirrors for Princes, and published 1532] is first introduced into the political discourse (Machiavelli, The Prince, Angelo Codevilla, tr., 1997: 5; Harvey Mansfield, tr., 1998: xxi; Todd Lowry, “Preclassical Perceptions of Economy and Security,” in Craufurd Goodwin, ed., Economics and National Security: A History of Their Interaction, 1991: 14-19).
In societies subjected to colonial domination, precapitalist structures were undermined and new structures necessary for capitalist development were established. This not only allowed metropolitan capital to develop but inevitably also created conditions for the development of indigenous capital in manufacture as well as in commerce and agriculture. In colonial societies the colonial state is the instrument of the metropolitan bourgeoisie and is deployed against indigenous strata where their respective rights clash. But that is no longer the case in postcolonial societies, where the state is no longer controlled directly by the metropolitan bourgeoisie.
In the postcolonial country, neither the Marx's-Engel's conception of the state as the instrument of a single ruling class (Marx-Engel, Manifesto, and Marx, Capital, III, 1896: 448, 569), nor the neointerpretation of the Marxist theory of the state as the relatively autonomous reproducer of the social formation in the interest of the whole of that class, can be applied in an unproblematic way to the new conditions. The metropolitan bourgeoisie is no longer in unquestioned command of the state apparatus, although it continues to wield considerable influence. Its relationship with the postcolonial state is complicated by the fact that it now stands in competition with the bourgeoisie of other industrial capitalist countries, as well as with the indigenous strata, for influence over the state. The indigenous strata now attempt to use the postcolonial state to advance their own particular class interests, but they too do not have unqualified command over it, for it is subject in some degree to the influence of powerful metropolitan capitalist strata. Indeed, no single one of these foreign and domestic strata qualifies as the ruling class, for that would exclude the powerful influence of the others on postcolonial societies.
Those societies incorporate a peripheral capitalist mode of production in which the various strata are all located, including the metropolitan bourgeoisie, who have a structural presence in them. There is an inherent structural symbiosis between these competing strata, for they have a common interest in the preservation of the capitalist social order that the postcolonial state upholds. Subject to their collective influence, the postcolonial state enjoys relative autonomy vis-à-vis each of these strata taken by itself, for only by virtue of such autonomy does it mediate their competing interests. Thus the postcolonial society, while being peripherally capitalist, possesses a class configuration and a state that are distinct from those found in industrial capitalist countries as well as in countries that have existed under colonial rule. Classes there are not the technical Smithian ones, the result of the division of labor. Nor are they the pure institutional Marxian ones, the outcome of the ownership and control of the means of production. They are heterogeneous strata of symbiotic domestic and metropolitan interests located in the peripheral capitalist composition. Nor is the state that of Hegel, standing over and above the economic and social forces at work in society, a universal and neutral instrument which could be used, once political power was attained, to secure societal advances (Hegel, Philosophy of Right, 1965: 137-52). Nor is it purely Marx's state, the instrument of class domination, whereby only revolutionary transformation can bring about its change. It is an intermediary body between the competing interests at home and abroad. It can be influenced by any of these interests, subject to the rest. Hence, it can be used for modifying the socioeconomic system, through evolution rather than revolution, and only within this capitalist structure.
This complex configuration of the postcolonial strata and state, and the fact that the latter is amenable to the application of reform, are, however, absent from the neo-Marxist analysis. Instead, the state is still essentially seen in its Marxian form, reproducing the social formation for the benefit of the dominant ruling class, albeit relatively autonomously. From a delinking perspective, therefore, the state has to be overthrown, it cannot reform the socioeconomic system of which it is both a product and a tool. Only revolution can thus bring about the delinking, and salvage the good proletariat from the evils of global capitalism. Delinkers, moreover, and for better reasons, are appreciative of the fact that the Chinese have succeeded, through delinking, in combining growth and structural change (Hunt, 1989: 73-5). The argument can be analogized to cover the cases of India and Brazil as well. That the Chinese brought about improvements in mass welfare made their development experience of particular interest to many neo-Marxist, dependency and basic needs scholars.
Mao Tse Tung's strategy consisted of small-unit production and agrarian commune while exploring and resolving contradictions (a focus on the Hegelian aspect of Marx's dialectic: Contradictions as the incentive to social creativity), dismantling class structure, and trusting the creative ability of the people. Hence the systematic destruction of the superstructure and its reconstruction on the basis of new rationality of ends, insisted Mao (1965: 123-7), must precede the construction of a material infrastructure (essentially overturning Marx's base and super structure). This is to be accomplished in conjunction with uprooting and destroying the underlying means of social reproduction, and by laying down the foundation for a genuine collectivist society. The fundamentals of the Maoist approach which could claim credit for bringing China, virtually sans an imperialist component, to the industrial threshold on which it stands today are:
(1) The ultimate aim of economic development is to achieve material abundance, with income differentials abolished and strategic productive property socially owned and operated.
(2) To achieve progress towards this goal it is necessary to simultaneously build up the economy's productive capacity, and to socialize the production process by moving towards communal ownership of the means of production and societal control of production decisions and product distribution.
(3) In the development of productive capacity, the build up of modern heavy industry plays a central role.
(4) However, expansion of different branches of production (heavy industry, light industry, agriculture) as well as the emphasis given to different scales of plant, using different technologies, and to the rural-urban distribution of these, are all perceived to be interlinked. It is necessary for the Maoist to search for that set of relative emphases (varying over time) in resource mobilization and allocation, which will maximize the overall rate of capital accumulation while providing for a sufficient increase in mass welfare to maintain political support for the transformation.
(5) The expansion of small scale heavy and light industry in rural areas can serve both to increase the rate of surplus mobilization for state investment in heavy industry and to increase mass welfare. It raises the surplus through mobilization of slack resources for productive use in addition to the short gestation and capital cost recovery periods for investment in small scale industry, after which a part of the value of the increased output can be mobilized by the state. Expansion of small and medium-scale rural industry can increase mass welfare through its direct and indirect contributions to expanding employment and labor productivity (indirect via the production of producer goods such as farm implements), and through expansion of the supply of basic consumption goods. Such industries also contribute to human capital formation through the development of technical skills.
(6) In the rural sector, seasonal slack labor can and should also be mobilized for labor intensive capital formation.
(7) Concerning economic equity and economic incentives:
(a) Economic and political equality between regions should be promoted by enforcing regional self-sufficiency in heavy and light industry and in basic foodstuffs, and by giving greater power in decision taking to the regions.
(b) Income differences between persons should be minimized as fast as possible, but not faster than the masses are prepared to accept. As a part of this process reliance on material incentives should be steadily reduced.
(c) Professionals should work among the masses, learn from them about
their needs and use their skills towards helping to overcome concrete difficulties.
In sum, the neo-Marxist discourse of the delinking mechanism argues that:
(1) The prospects for the development of the capitalist mode of production in any one country are largely determined by its position in the international economy.
(2) This position is in turn historically determined.
(3) Present day underdeveloped countries cannot expect to pass through the same phases of economic development as the now industrial capitalist economies because the international conditions are different.
(4) The DCs at various stages of their development have been able to use today's underdeveloped economies as sources of cheap raw material, markets for their goods and outlets for surplus capital.
(5) These opportunities are not open to contemporary underdeveloped economies. Instead, the very nature of foreign capitalist investment in the UDCs has locked these countries into the production of primary products for export, based on cheap labor drawn from the traditional sector. The manufactured goods supplied in exchange for these exports have destroyed indigenous industries and represent a strong disincentive to the local development of manufacturing production. In these countries production is characterized by export of primary products and by the existence of a small, protected, monopolistic, modern industrial sector dominated by foreign capital and using imported technology. Meanwhile the mass of the population remain impoverished. In some cases the appropriation of land for plantations and mines, the destruction of indigenous industry and the intervention of middle-persons and moneylenders between small scale primary producers and their markets have led to increasing impoverishment.
(6) Given their sources of income, the dominant strata --landlords, the commercial bourgeoisie, owners of monopoly capital and, above all, foreign capitalists-- have limited interest in the development of producer capitalism in the periphery. Instead, they channel most of the surplus abroad.
(7) Meanwhile, trade between industrial economies and underdeveloped ones is characterized by unequal exchange --the difference in returns to labor embodied in the products traded exceeds the difference in labor productivity. In this way too, surplus is extracted from the periphery.
(8) Only through delinking following a revolution can these economies embark on a path of full development, through productive and equitable use of the surplus.
2.1.2 The Dependency Perspective
A large number of writers contributed to dependency theory as it emerged from the notion of dependencia and the deliberations of United Nations Economic Commission for Latin America (UNECLA) in the late 1960s. Dependencia emanated from the realization at the time that extant traditional theories both inadequately explained underdevelopment and failed to provide strategies for breaking out of the circle of poverty. Dependency theorists thus began to advance a new framework to explain and overcome the continued impoverishment of the UDCs. Although Lenin’s theory of imperialism puts the emphasis on structural changes in capitalism, and the dependentistas upon the relation between metropolitan countries and their colonies, dependency theory is clearly based on Lenin’s classical works.
Paul Baran's Political Economy of Growth (1957) is generally accepted as a founding work, but other significant contributors include André Gunder Frank with The Development of Underdevelopment (1966), Arghiri Emmanuel with Unequal Exchange (1972), Immanuel Wallerstein with The Modern World System (1974), and Samir Amin with Accumulation on a World Scale (1974). However, it was mainly through the effort of Frank, paradoxically a Chicago trained economist, that the concept of dependency came to be popularized in DCs' academic circles. His work involves the concept of a series of metropolis satellite relationships, developed from Baran's work, which conflate global economic relationships with social class relationships, extended throughout the workings of capitalism. Thus the industrialized countries stand in a relationship of exploitation with the UDCs, but there equally exist metropolis-satellite relationships within individual countries. Therefore, Frank's perspective may be seen in the form of a chain which conceptually links the UDC’s peasant in the field with the metropolitan capitalist, wherever the latter exists.
In dependency theory, the absence of a properly formed working class in the UDCs is no barrier to revolution, for through colonialism these parts of the world have been rendered into a dependent position but within the capitalist world economy. The implication is that the UDCs are open to socialist revolution on Marxist principles without the prerequisite of capitalist industrialization. However, the distinguishing feature of dependency writers (Amin, Baran, Frank, et al.), is that they treat the social and economic development of underdeveloped countries as being conditional by external forces, namely the domination of these countries by other, more powerful ones. The most emphasized aspect of this dominance is surplus extraction.
Dependency theory thus entails the notion that surplus is extracted from underdeveloped countries by industrial capitalist countries. The underdeveloped country is impoverished and fails to grow because it loses access to its surplus. Correspondingly, this surplus is appropriated by and invested in the industrial developed countries where it is one of the primary causes of rapid economic growth. Dependency theory further posits that this extraction/appropriation both causes and perpetuates the inequalities among countries. Historically the looting and plundering of the colonies by the metropolitan countries was the initial cause of the latter's primitive accumulation and growth, and of the disarticulation and stagnation of the colonies; and this capitalist dynamic explains the persistence of underdevelopment today.
A dependent economy is generally characterized by the following features:
(1) Wide disparity between domestic production and consumption.
(2) Subordinated production to the accumulation needs of metropolitan capital (commodity production for the metropolitan market).
(3) Extreme specialization --production of only a few primary products (the predominance of agrarian capitalism in the national sector) and/or trade with only one or two partners.
(4) Overwhelming use of unadapted foreign technology through direct investment of transnational corporations and/or the licensing of local enterprise.
(5) Incomplete proletarianization (most small producers still own their means of production, especially in the traditional sector).
(6) Heavy reliance on aid and loans from metropolitan countries and international finance organizations.
(7) Domination of production by circulating (unproductive) capital (the comprador bourgeoisie utilize their capital for facilitating the circulation of foreign-produced merchandises, rather than for entrepreneurial production).
(8) Commercial capital possessing a monopoly that is not the outgrowth of a competitive economy but the result of the political action of the state.
(9) Surplus value generally appropriated by central capitalism.
(10) Internally-retained surplus predominantly in the form of merchant’s profit.
(11) Agricultural surplus siphoned off into commerce, rather than reinvested in agriculture.
(12) Pauperized agricultural producers, who strive, upon advancing, to defect to trade, joining the externally oriented propertied class running the export-import economy in commerce, in cash crop agriculture and within the state apparatus.
(13) A relatively large contribution to national income and employment by the public administrative sector (for the private sector is essentially circulating products produced by foreign labor, rather than hire labor for native production processes).
(14) A local, mainly merchant, bourgeoisie formed in the wake of foreign capital domination.
(15) An external model mentality --the domination of the consumption patterns of the ruling strata by metropolitan values and the reliance on foreign standards in socio-cultural, educational and professional institutions.
Baran (1952) and Frank (1978) emphasize, in their dependency (spatial) components, as opposed to their neo-Marxist (class) components, that surplus extraction was the cause of the initial division of the world into rich and poor areas, and that the extraction is essentially an aspect of the relationship among countries, not strata. The tools of the extraction/appropriation process, in the colonial period, took the form of direct, overt appropriation of products (looting and plundering), while in the modern period it takes the form of indirect, covert repatriation of profits. What in essence is suggested is that capitalism does not develop primarily on the basis of the exploitation of the proletariat, but upon the basis of the exploitation of countries.
This exposes dependency theorists to the Marxian criticism of adopting a circulationist approach on the basis that they posit that underdevelopment can be explained in terms of relations of domination in exchange, almost to the exclusion of an analysis of the forces and relations of production (Elizabeth Dore, in Bottomore, 1983: 115-16). Even on that score, however, dependency theory does fare better than neoclassical (Francis Ysidro Edgeworth’s) exchange; for although exchange is the sine qua non of both, the former provides historically supported explanation of underdevelopment rather than mere abstract hypothetico-deductions, based on unquestioned "endowments" and assumptions that lack any realism. As Wesley Mitchell explains, deductive systems which are based upon unsound and untested assumptions, and “pure” theories which are completely synthetic, are not useful. He is thus against the “conscious use of assumptions contrary to fact,” and the “use of these assumptions to facilitate comprehension of the complex conditions of reality” (Mitchell, “Rationality of Economic Activity,” Journal of Political Economy, vol. 18 (1910: 109).
The dependency perspective further draws attention to constraints on the degree of autonomy faced by the UDCs in the choice of development strategy. Such constraints stem essentially from the very emanation of capitalism as well as the DCs-UDCs relations, especially in the last two centuries, and the composite of the state and class structure (Spybey, 1992: 78-81). For dependency theory, therefore, the rise of transnational corporations (TNCs) puts the problem of the economic relationship of capitalist and underdeveloped countries, and hence neoimperialism as the basis of dependency, in a new light. The UDCs are extremely wary of the power inherent in a giant DCs' corporation, yet they do need the big companies.
There are specific areas in which transnational corporations enjoy significant advantages in their dealing with the UDCs. They have privileged access to industrial capital, expertise gained through long-term activity, state of the art technology for the efficient processing of commodities, and membership in established worldwide distribution networks. Further, TNCs pay higher wages, keep more systematic books, provide better working conditions and fancier career opportunities, and bring in more technological expertise and needed capital than do the domestic enterprises of the host countries. The result is that the problem of neoimperialism today has taken an unexpected turn. On the economic side of the question, the danger now is as much that the TNCs will bypass the underdeveloped countries as that they will dominate them. Meanwhile, the political element of imperialism that appeared to be diminishing in the post WW II era is resurgent.
The erstwhile capitalist empires of Britain, France, Belgium, Portugal, Netherlands, and Germany have formally disappeared. What is left is the strong effort of these nations, combined especially with that of the United States, using direct intervention and indirect manipulation through dominated international organizations and some fictitious Non-Governmental Organizations (NGOs) armed with the "human rights" ploy, to preserve and expand their ideological and political influence; this is the second wave of neoimperialism (otherwise known as neocolonialism), the first being the late nineteenth century's rush. Hence nothing has changed with respect to the disarticulation caused by older forms of imperialism. Three coexisting factors pushed precapitalist formations into the direction of disarticulated/peripheral capitalism, and continue to push them in the same direction under the new forms of imperialism: monetization, foreign trade, and foreign investment.
Monetization, essential for capitalist penetration, made possible the formation of indigenous capital in the UDCs. The simple money commodity structures which this created, however, were not transformed into capitalist structures. Foreign trade prevented this, imports replacing locally produced crafts and the competition from imports directing local investment into agrarian capitalism. Investment of foreign capital further reduced the possibility for local capital to be invested freely. The ruination of craftsmen, competition from imports, and lack of profitable opportunity for local capital investment rendered capitalist development chaotic, and were the source of the blocking of such development and of locking the local formations into their peripheral condition (see, especially, Samir Amin’s Imperialism and Unequal Development, 1977). Therefore, Amin's (1974, 1976, 1986) diagnosis of the UDCs' predicament is a disarticulated, extroverted economic system, and hence his only solution is delinking for independence --development could only be effected through revolutionary breaks with international capitalism, à la North Korean Model (an analogy that is probably difficult to understand, much less to accept, by many observers in the West).
Eric Hobsbawm argues, and Maurice Dobb concurs, both in Hilton's Transition from Feudalism to Capitalism (1976: 159-64 and 57-67, respectively), that the development of capitalism in the most advanced countries, such as Britain, served to retard development in other parts of the world, and this not only in the epoch of imperialism. Frank's (1967, 1978) fundamental concept, analogously, is that the rich underdevelop the poor (underdeveloped development, or development of underdevelopment), whereby repression, furthermore, is not accidental or merely ideologically motivated; it is a necessary concomitant of economic exploitation. Underdevelopment is always primarily the result of industrial capitalist penetration. Therefore, short of liberation from this capitalist structure or the dissolution of the world capitalist system as a whole, the capitalist satellite countries, regions, localities and sectors are condemned to underdevelopment.
Hence external delinking, internal participation, sociopolitical mobilization, and socialist restructuring are the solution's components of Frank. Short of that, the alleviation of underdevelopment can only occur during periods of retreat or withdrawal by the industrial capitalist economies (an ineluctable form of delinking). Contrary to the Reaganite-Thatcherite argument that less social development is necessary for more economic development, therefore, Frank (1978: 111-70) stipulates that the prior development of human capital through education, health and improved social relations would lead to social and economic development.
Frank's dependency perspective also counters the thesis, advocated, e.g., by W. Arthur Lewis as presented above, according to which the underdeveloped world's first priority need is foreign investment and capital aid on the premise that the principle obstacle to its development is its shortage of capital. He counters this supply side theory with the essentially Keynesian demand side concept that the real economic obstacle is insufficient market demand for productive national investment. Frank thus argues that policies of “structural adjustment” are insufficient to expand the internal market and generate development. Hence development would not result from minor changes in dual economies/societies, hoping that the modern sector would expand and eliminate the traditional one.
Frank thus eventually concludes that escape from underdevelopment, and subsequent development, are no longer possible for the UDCs as part of the capitalist system, and only liberation from that system offers that possibility; that continued participation in the same world capitalist system could only mean continued development of underdevelopment, that is, there would be neither equity, efficiency nor economic development. The course of action he recommends therefore is to deliberately and revolutionarily delink from the system externally, and to transit to self-reliance internally in order to make independent or nondependent economic development possible.
That may be the case economicwise, and Frank's analysis, as well as that of Amin, represents a major contribution to the understanding of the dynamics of underdevelopment, but his conclusion, not unlike that of Marx, i.e., proletarian revolution, is moot, unworthy of further investigation from a political economy vista, because of its impolitic security consequences, especially because in underdeveloped conditions it is more difficult to separate the security from the economic aspects of social existence. Underdevelopment and dependency cannot be broken simply by autarkic delinking; to break with them it is necessary to change their internal structure, a course that necessarily leads to asymmetrical confrontation with the existing international power structure. This is inaccessible if one is to enact rationality, not revolutionary fervor; delinking is thus doomed by reason.
Quasi feudal Japan, in the Tokugawa period of 1603-1867, prior to the Meiji Restoration of 1868, attempted to retreat from foreign aggression by isolating itself from the world economy. However, this response could not be sustained against the West’s penetration through superior military power. The Opium War seconds this conclusion with respect to China. Indeed delinking and retreatism from the thirteenth and early fourteenth century “world system” have been used with devastating, long lasting effects on China by the Ming, who upon coming to power in 1368 hoped to dissociate themselves from the commercialism of their Yuan-Mongol predecessors who had occupied and ruled the country for over a century (Janet Abu Lughod’s Before European Hegemony, 1989: 340-8). And the delinking argument has been around since the Paris uprising of 1848 and the simultaneous European turmoils. But neither that uprising, nor the turmoils, nor the very 1789 revolution, nor for that matter any other revolution (whether bourgeois/antifeudal, or socialist/anticapitalist) has delivered such a utopian autarkic outcome.
Delinking economically cannot engender delinking from security threats as well, threats that are foreign provoked, whether they are exhibited externally or internally. Indeed, economic delinking exacerbates security vulnerability. This is a great lesson of the twentieth century. Compelled to security over-stretching, the nuclearly-protected Soviet Union overburdened its economy, and eventually abrogated delinking, overturning its world view, by subjugating its economic "base" to the security "superstructure." The New Deal too relinquished the liberal economic dogma, in the face of internal upheaval. When the economy and security conflict, then, a country --minor or major, developed or underdeveloped-- has to ensure its continued existence, prior to thinking about its mode of production. FDR's New Deal as much as Gorbachev's Glasnost and Perestroika attest to that. Therefore, delinking is unattainable, and muddling through the contemporary world power structure, with hegemonic capitalism in its base, intellectually supported by vast interest-interdependent, international intelligentsia, is the only potentially attainable objective for the weak, divided, unprotected, poor and desperate UDCs. A revolution, on the other hand, is not exactly delinking, isolation, or change of the prevailing political system. It essentially involves the awakening of human intelligence, the increasing of inventive spirit. A revolution is rather in the minds of people, as deep and deeper still, than in their external relations.
Frank's difficulty in his dependency circle stems, however, from his theories of underdevelopment and dependency, which are meant to conflate the transfer of value through spatial relations with the Marxist emphasis on the appropriation of surplus value through the class relationship. The exploitative relationship between the capitalists of the core and the peasants of the satellites is seen to exist through a network of spatial relations. This exploitation brand has therefore never satisfied orthodox Marxists, and Frank's work has thus been considered neo-Marxist due to its emphasis on the metropolis-satellite relationship at the expense of the quintessential class relationship of Marxist theory. Neo-Marxist analysis of capitalist exploitation emphasizes the core-periphery division on an equal basis to the quintessential class division.
Even Emmanuel (1974), Amin (1976), and Marini (1972) reject the downplaying of the role of strata in the appropriation of the surplus product. For Emmanuel and Amin the extraction and subsequent appropriation of surplus value is accomplished through unequal exchange between the underdeveloped and the industrial capitalist countries. They argue that as a consequence of the equalization of the rate of profit in the international market, developed countries appropriate more labor time in exchange than they generate in production, resulting in the transfer of surplus value from the underdeveloped to the industrial capitalist countries, on the basis of labor (and hence class) exploitation.
An account of the unequal exchange emanates from the differences between countries in the organic composition of capital (OCC). When the OCC is not uniform, prices cease to be equiproportional to values and the rate of exchange between commodities, being determined by their relative values, is no longer of validity or relevance (Samir Amin, Unequal Development, 1976: 141-2; Ranjit Kumar Sau’s Unequal exchange, Imperialism and Underdevelopment, 1978: 48). Exchange is unequal because varying OCC results both in unequal productivity and, through the working of the equalization of the rate of profit, in determining prices of production that differ from values in isolation (Charles Bettelheim, “Theoretical Comments,” in Arghiri Emmanuel’s Unequal Exchange: A Study in the Imperialism of Trade, 1972).
Three decades before the works of Emmanuel and Amin on unequal exchange, however, the Japanese economist Nawa Töichi articulated the unequal exchange argument (in 1948) in terms of the logic of the labor theory of value (LTV). According to Ricardo’s theory of comparative advantage, differences in productivity provided the basis for international trade and ensured that all countries gained from participation in the international exchange of goods. Nawa has undermined this argument: From the perspective of the LTV, international differences in productivity implied that in the process of trade, an unequal exchange of values would occur between more industrially advanced and less advanced countries (his concern was Japan, not the UDCs). Because the average worker in the former is more productive than the average worker in the latter, exports from the former contain less labor than those of the latter, and a hidden transfer of value from the poorer to the richer nations takes place.
Nawa illustrated this process of unseen exploitation with the example of trade between an industrialized nation (A) and an agricultural nation (B). The former is assumed to be the more efficient producer both of manufactured goods and of agricultural goods, but whereas it is twelve times more efficient than its trading partner in producing manufactured goods, it is only twice as efficient in producing agricultural goods. According to the Ricardian theory, country A should specialize in industrial production and country B in agricultural production. However, if A and B trade along the lines of comparative advantage, A will be exchanging an item that required only a single day’s labor for an item that required six days of B’s labor, hence exchange is unequal (Tessa Morris-Suzuki, A History of Japanese Economic Thought, 1989: 114-15).
Marini (1972: 56-78), on the other hand, argues that underdevelopment persists because the development of capitalism is limited by the size of the capitalist market. In the underdeveloped countries, the role of the working class is that of producers and the product of its labor is exported. Since the product is exported there is no need for this working class to serve as consumers and its wages can be forced down without limit. Thus workers are super-exploited in the dependent country and there is no means for their wages to rise since they are not needed for realization; Fordism need not apply to them. Since wages do not rise, the internal market does not expand and accumulation in the dependent country is retarded or deformed (another version of Amin's disarticulation).
Whereas Lenin (1897: 56-73) argued that there is no realization problem inherent in the expansion of capital, since the mass of surplus value is realized through the productive consumption of capital and not by means of the consumption of workers, in Marini's conception the commodities exported from the underdeveloped countries are realized by the consumption of the working class in the industrial capitalist countries, which requires that their wages be high. In essence Marini is arguing that surplus value is produced in the periphery and appropriated at the center. Underconsumption merely provides the means by which this appropriation occurs.
Paul Sweezy's Transition from Feudalism to Capitalism (1976) presents an alternative interpretation, drawing upon the historical analysis of Fernand Braudel (1969) and Immanuel Wallerstein (1974), which regards production for extended market exchange as a sufficient definition of capitalist activity. Capitalism, involving economic interdependence in an extending division of labor and global economy, is contrasted with feudalism, involving a high degree of self-sufficiency within the manorial unit. Unequal exchange then comes in. The UDCs have to import at market prices the technology and expertise that they lack but are unable to produce themselves. This can only be financed by selling cash crops and raw material commodities for hard currency, but the price obtained is determined by international commodity markets which are located in industrial finance centers. These respond to economic pressures including patterns of mass consumption in the industrial countries, and in order to remain competitive the latter must obtain raw materials as cheaply as possible. Contrary to the disseminated postulates of international trade theory, selective tariffs then complete the picture by ensuring that only those UDCs' products that are of most advantage to the DCs can be imported at competitive prices, whilst other products attract heavier import duties. The result is a vicious circle whereby the UDCs have little option but to sell their raw material products relatively cheaply, but at the same time buy finished product imports relatively expensively. In this lies the unequal exchange, which makes mockery of comparative advantages, the heart of international trade theory.
One of the ways in which UDCs might break out of the unequal exchange predicament, obviously, is to trade amongst themselves, but in this they have been conspicuously unsuccessful. Part of the reason lies in the lack of capital, expertise and technology, but the fundamental factor is the external, politically imposed constraints and security threats which constitute a barrier to mutual cooperation within the UDCs. The DCs use their power leverage to divide and conquer the UDCs, both economically and in their security concerns. Even the group of 77, an economic spin off from the Non-Aligned Movement, and regional organizations such as the Organization for African Unity, have rarely enjoyed much success because of their members' widely varying dependencies, hence political ideologies, extending from Marxism to extreme right wing politics. Therefore, despite the Bandung rhetoric, the UDCs have cooperated neither politically nor economically, and statistics (Spybey, 1992: 113-17) continue to show that by far the greater part of the UDCs' trade is directly with the DCs, not among themselves. Because of this lack of cooperation, and of the pessimism concerning its likelihood, self-reliance must come to the rescue. For that purpose, Paul Baran (1952: 54-96) contrasts the supposedly typical way in which the surplus is now actually utilized with the way in which it could potentially be utilized if the domestic economies were self-reliant and thus not constrained by the distorting requirements of current surplus utilization. He thus suggests a radical reallocation of the surplus, based on present and future needs of the indigenous population:
(1) A mobilization of potential surplus through an expropriation of foreign and domestic capitalists and landowners, and an elimination of the drain on current income resulting from excess consumption and capital removals abroad.
(2) The reallocation of unproductive labor.
(3) The planned development of domestic agriculture related to home industry based on a new mobilization of the surplus. Baran tries to show how, by changing current patterns of surplus utilization towards a planned allocation of the surplus based on domestic economic requirements, the pattern of underdevelopment imposed by the reproductive requirements of the industrialized economies can be overcome, and domestic development generated.
For Baran, underdevelopment is a state characterized by low per capita incomes. For Frank, underdevelopment is a process of continuing extraction of surplus from the UDCs and transference to the centers of world capitalism --chiefly through monopolistic trade-- and leads to the perpetuation of mass impoverishment. For both Baran and Frank, however, the cause of the perpetuation of underdevelopment lies in the failure of the dominant strata in underdeveloped countries to use the surplus for productive accumulation within the domestic economy. Instead, the surplus that is extracted from peasants and wage labor is either exported or used to finance luxury consumption, land purchase and urban property speculation. Both concur that these propositions apply as much to merchant capitalist and to any capitalist with investments in production as to that traditionally prodigal class --the landlords. For capitalist activity in underdeveloped countries, whether foreign or domestically owned, is typically monopolistic and hence conservative and rigid (undynamic).
Frank (1978) subsequently espoused Arghiri Emmanuel's thesis of unequal exchange (1972), which provides a different account of surplus extraction through trade. An important element of Frank's rendition is his emphasis upon surplus appropriation through trade, implicitly equating capitalism with relations of exchange rather than a system of production. He argued that monopolistic merchant capitalism had penetrated the remotest reaches of all underdeveloped economies via a series of trading networks in which small scale merchants in rural areas were linked to larger monopolistic suppliers, and monopsonic buyers, and so on up the chain to large scale import-export activities dominated by foreign interests.
Frank used this thesis as the basis of his affirmation that all branches of underdeveloped economies have been incorporated into the world capitalist system. Underdeveloped economies have bypassed the phase of competitive capitalism due to the mode of their incorporation into the international economy. Their monopoly capitalists are content to appropriate existing rigging profits and have no interest in promoting a competitive, dynamic capitalist sector. Meanwhile the strata that control the use of the surplus also hold political power, and they use this power to maintain the status quo. In these circumstances the only possible way forward is delinking through a social and political revolution that will replace the existing alliance of the domestic comprador bourgeoisie and foreign capitalists with a socialist regime committed to social and economic development.
Therefore, dependency theory, as pronounced inter alia by Paul Baran, Immanuel Wallerstein, Samir Amin, Kwame Nkrumah, Ruy Marini, Paul Sweezy, Arghiri Emmanuel, André Gunder Frank and others, constitutes the denial of development, and consequently of modernization theory. Denial is on the grounds that DCs' development involved the creation of a capitalist world economy that became a means to exploit nonindustrial countries, prevent them from developing and instead maintain them in an underdeveloped, rather than undeveloped, condition. Immanuel Wallerstein (1974) emphasizes that this was a historical process, with its origins in the Renaissance and its culmination in the late nineteenth century, during which the European states colonized large areas of the world. In this perspective, since Europeans took possession of colonies mainly for economic gain, the global economic profile was changed and a dependent and unequal relationship established between colonizer and colonized. The core of the resulting capitalist world economy was, from the beginning, centered on northwestern Europe, but the periphery to the system has been wherever economic activities have taken place in forms subservient to the European core, hence the concept of core and periphery seeks to avoid the simplistic geographical division between Europe and its colonies. Instead it sets a distinction, in terms of economic activity, that is roughly equivalent to the traditional and modern societal dichotomy. The capitalist core is characterized by modern society, whilst the exploited periphery is handicapped by traditional institutions. Many colonized territories thus became dualistic, containing enclaves of modern activity set against a background of traditional activity, which remained detached socially, politically and economically.
The main point of dependency theory therefore is that the West, operating with a capitalist economic system, has modernized itself through the medium of enterprises and investments which, whether located in the West or in the colonies, fitted into a Western dominated, capitalist world economy. After WW II, pro forma constitutional independence left the former colonies in the position of attempting to modernize with forms of economic activity left over from colonialism, whereas the dependency relation continued in place. Core type activities in the UDCs tended to remain firmly under the control of DCs' companies, especially the transnational corporations, connected directly with the core of the capitalist world economy. Peripheral type activities were normally left under the UDCs' own control but were, in Amin's (1976) concept, disarticulated from the capitalist world economy, thereby preventing any significant change in their economic fortunes.
Thus, dependency, on the one hand, is a form of boundary interchange, an external relationship of consistently unequal and asymmetrical core-periphery interrelationships of dominance and dependence between component parts (invariably national economies) of a single world capitalist system. Dependency, on the other hand, is also a conditioning factor which distorts and alters the internal functioning and articulation of the elements of the dependent social formation, whereby the nature and characteristics of internal structural relationships both define and create dependency. Hence, the domestic infrastructure of dependency is a function of the transnationalization process of disarticulation, but it is also a generative cause of disarticulation by its own autonomous dynamics.
Therefore, modernization theory (adopted by Lewis and Rostow, as elaborated on above in the traditional mechanism) and dependency theory (of Baran, Frank, Amin et al.) are opposites, the one asserting a vision towards economic development and the other to exposing reasons why this development cannot take place within a Western dominated capitalist world economy, respectively. Each theory, however, is premised upon an economistic concept, and any explanation of institutions other than the economy is taken as reducible to the terms of economy itself. Modernization theory posits that the application of the capitalist economic dynamic to the UDCs will result in their modernization and advancement along an imaginary route towards DCs' standards of living. Dependency theory is associated with the Marxist critique of capitalism, with its singular emphasis on class conflict derived from the contradiction between socialized production and private appropriation. Added to this, however, are the concepts of core and periphery which contain the extra contradiction between globally organized production and consumption that is disproportionately Western. This additional proposition has bestowed on dependency theory the epithet neo-Marxist, but it does not detract from the fact that in heterodox dependency theory, as in Orthodox Marxism, the development of economic institutions determines the form of other institutions in society.
The weakness of both modernization and dependency theories is that they do imply preordained eventualities. Modernization theory, in all its variations, bases economic development upon the premise of a capitalist formula derived from the British industrialization. Dependency theory, in all its forms, including world systems theory, views all development as one sided in favor of the West, in a situation that can thus be reversed only by socialist revolution. In this prescriptional respect, dependency theory as well as neo-Marxism are not much different from Orthodox Marxism. The latter prescribes worldwide proletariat revolution, the former UDCs' delinking revolution. Neither prescription is attainable, as explained above.
2.1.3 Semiperiphery, Basic Needs, and New Economic Order
In “The West, Capitalism, and the Modern World System,” in Review XV-IV (Fall 1992: 561-619), Wallerstein elaborates on the characteristics of the capitalist world economy as:
(1) The ceaseless accumulation of capital as its driving force.
(2) An axial division of labor in which there is a core-periphery tension, such that there is some form of unequal exchange (not necessarily as defined originally by Arghiri Emmanuel) that is spatial.
(3) The structural existence of a semiperipheral zone.
(4) The large and continuing role of nonwage labor alongside of wage labor.
(5) The correspondence of the boundaries of the capitalist world economy to that of an interstate system comprised of sovereign states.
(6) The location of the origins of this capitalist world economy earlier than in the nineteenth century, probably in the sixteenth century.
(7) The view that this capitalist world economy began in one part of the globe (largely Europe) and later expanded to the entire globe via a process of successive incorporation.
(8) The existence in this world system of hegemonic states, each of whose periods of full or uncontested hegemony has, however, been relatively short.
(9) The nonprimordial character of states, ethnic groups, and households, all of which are constantly created and recreated.
(10) The fundamental importance of racism and sexism as organizing principles of the system.
(11) The emergence of antisystemic movements that simultaneously undermine and reinforce this system.
12) A pattern of both cyclical rhythms and secular trends that incarnates the inherent contradictions of the system and that accounts for the extant systemic crisis.
A. G. Frank agrees with all of the above characteristics, but argues that they are also equally and totally true both of the world economy/system(s) before 1500, whether capitalist or not, and of the medieval and ancient (not merely European) world system (see his Transitional Ideological Modes: Feudalism, Capitalism, Socialism,” in Frank’s and Gills’ The World System: Five Hundred Years or Five Thousand?, 1993: 203-4).
In the functionalist terminology of Wallerstein's (1974) world-systems theory, a "semiperiphery" provides a buffer zone between core and peripheral countries. That the core exploits and the periphery is exploited occurs through the different processes operating in different spatial zones. Core processes consist of relations that incorporate relatively high wages, advanced technology, and a diversified production mix whereas periphery processes involve low wages, more rudimentary technology and a simple production mix. There are no semiperipheral processes, only semiperiphery (zones, areas or states which exhibit a predominance neither of core nor of peripheral processes). While the semiperiphery exploits peripheral areas it suffers exploitation by the core.
For example, Nestlé is a transnational corporations for food products, headquartered in the small city of Vevey, Switzerland, with production and sales facilities on every continent and in virtually every country of the world. In recent years its sales turnover has exceeded the Swiss government budget! In the hierarchical spatial structure of the world economy, Switzerland (neutral and innocent but part of the core) exploits Brazil (a semiperiphery state) because the world economy is structured in such a way as to favor Switzerland at Brazil’s expense. Switzerland does not have to engage in any overt actions to impose its domination beyond “normal free trade” relations: Swiss bankers are part of an international banking system imposing on Brazil direct conditions to reschedule its debts and indirect conditionality (through IMF clean bill of health) to “liberalize” its economy; Swiss transnational corporations such as Nestlé are involved in profitable enterprises for the ultimate benefit of Swiss shareholders; the operation of the world market, and Swiss and Brazilian relations to that market, ensure Swiss predominance and a resulting flow of surplus to Switzerland. This is a far cry from the original Spanish plunder of the Americas based on a very overt use of power, but it is nonetheless real for all that.
The Swiss are involved in no manipulation of the system; quite the opposite. They are playing the rules of the capitalist game (free trade imperialism) as they are meant to be played. It is just that those rules, the operation of the world economy, are in their favor as a state whose economy is based upon core production relations. With more efficient production they can call the tune in countries that cannot directly compete economically with them, such as Brazil. No overt power coercion is needed, for the most important and effective form of power relation is structural. It drives directly from the operation of the world economy as a system. In that system, power is a direct reflection of the ability of a state to operate within the system to its own material advantage. This depends on the efficiency of its production processes which is measured by the categories of core, semiperiphery and periphery (Peter Taylor, Political Geography: World Economy, Nation State and Locality, 1993: 37-8).
As such, Switzerland --a little country of some five million people-- qualifies as a parahegemon. As defined by David Wilkinson, parahegemony is a position in an oikumene (an economic structure of larger scale than the political structures it contains) in which the parahegemon derives economic benefits similar to those which a true hegemon is able to extract by the use or threat of force. However, the parahegemon does so without the threat or the use of force, because it has the economic advantage of being a highly privileged fore-reacher (a center of invention, and/or saving and investment, and/or entrepreneurship), and/or a rentier (monopolizing a scarce resource, a trade route intersection or choke point, an enormous market, etc.); and because it has the politico-military advantage of being strong enough to defend its centers and monopolies, or of being outside the politico-military striking range of its rivals and/or victims. Parahegemony is thus able to compete though less able to coerce; it involves less relative power than the real hegemony; it may be more secure, less assailable, and/or cheaper to maintain than the politico-military hegemony (Wilkinson, “Civilizations, Cores, World Economies, and Oikumenes,” in Frank and Gills’ The World System: Five Hundred Years or Five Thousand?, 1993: 239-43).
The semiperiphery (in Wallerstein’s formulation) is thus in a transition, rising or sinking from one state to the other, based more upon political than economic dynamics in this triple tiered spatial structure. This semiperiphery embraces those DCs such as Spain and Portugal which historically slipped from the core of the capitalist world economy, together with the former European settler colonies of Australia and New Zealand. Of course Spain and Portugal are nowadays full members of the European Union whilst Australia and New Zealand are OECD countries and undeniably enjoy DCs' standards of living. Wallerstein's analysis nonetheless is informative to the extent it sheds light on how the post-WW II semiperiphery has not resulted in independent economic strides of any of these countries even several decades later, as was the case, e.g., with the East Asian NICs, not to mention Japan.
In Wallerstein's parlance, moreover, those UDCs which have exhibited significant capitalist economic development, the NICs, have been in effect "promoted" from UDCs to the now more general semiperiphery. One of the results has been the Brandt Commission's (1980) portrayal of a world consisting almost completely of DCs and UDCs, whereby a latitudinal line is notionally drawn around the globe and distorted to include Australasia within an industrialized Northern hemisphere that embraces the former Soviet Union and Eastern Europe. This leaves the UDCs all roughly located in the Southern hemisphere, and as the former Soviet Union and the Eastern European countries have become part of the capitalist world economy, this demarcation has evolved as the natural successor to the three worlds of previous popular terminology.
Although the focus essentially is on the UDCs, the semiperiphery nonetheless is an important concept for dependency theory because of its role as a buffer zone between core and periphery, serving to prevent the two from direct conflict over economic issues. It is conceptualized as a bridge between the haves (à la Galbraith) and the have-nots, projecting to the latter, however, an illusionary kind of potential escape route from deprivation that is, in fact, available only to a few countries which have enjoyed special geostrategic and geopolitical relationships with the West, thereby engendering geo-economic privileges. This special relationship is most clear in the case of the NICs of East Asia, for these have certainly enjoyed special attention from the West either as colonial entrepôts for trade, strategic and cultural outposts, or as capitalist ideological allies and recipients of military oriented aid during the Cold War. These states have also benefited from their recent association with Japan industrially, and from such common historical and cultural background as post-Confucianism of the China periphery type.
The concept of semiperiphery, together with the Maoist perspective, nonetheless, influenced the basic needs first strategy for development (Chien-fei Hsin, Mao Zedong’s World View: From Youth to Yanan, 1998). The latter, couched in an ideational layout and concerned more with self-reliance than with delinking, is a kind of bourgeois spin-off from the former. In 1976 the ILO's Employment, Growth, and Basic Needs considered the latter to include the minimal consumption requirements for a physically healthy population, certain minimal standards of access to public services and amenities, access by the poor to employment opportunities which would enable them to achieve a target minimum income, and the right to participate in decisions that affect the lives and livelihood of the people. Meanwhile, some analysts concentrated on arguing the case for, and assessing the resource costs of, improved public service provision, chiefly in education and health care, as investment in human capital (Hunt, 1989: 75-9). Others took a broader view of what was entailed in the basic needs first strategy, arguing that the latter incorporates, but goes beyond, improved public service provision. Emphasizing the need also to raise directly the incomes of the working poor, these analysts argued that not only was there no need for a growth-equity tradeoff, but that a basic needs first approach to development could provide the basis for faster and more self-sustained growth.
A central element of the theoretical core of this perspective is that the expansion of a homogeneous mass market is likely to promote faster long-term growth and structural change than is the concentration of expanding demand in the upper income bracket, for the latter has a much higher direct and indirect import content than the former. The basic needs approach for the UDCs' development thus aims at guaranteeing everyone a basic minimum livelihood of food, shelter, clothing, as well as health, education, etc.
Complementing the basic need strategy was the 1970s' call for a new international economic order (NIEO), which was decided by the nonaligned countries at their meeting in Algiers in 1973. Then the group of 77 pushed it through the United Nations as resolutions in 1974. The argument was that since the international economic order of dependence hinders development, a new one was needed. This NIEO should offer the underdeveloped world better prices for their commodity exports, greater access to northern markets for their manufacturing exports (which according to the Lima target should reach 25 percent of the world total by the year 2000), more finance such as the link between world reserve creation and its distribution to the UDCs (already demanded and negated at UNCTAD III in 1972), and greater group of seventy-seven participation in United Nations and world decision-making. However, the UDCs' bargaining power is still insufficient to make the DCs say yes, let alone to give anything away.
Basic Need (BN) and NIEO were necessary complements to one another. For the UDCs the new order of the 1980s, administered by the Bretton Woods organizations, became worse even than that of the 1970s; and that of the 1990s, promulgated by the Bush Administration early in the decade, fared no better. As for BN, the relative distribution of income and the number of absolute poor and depth of their poverty became far worse than before. Now the debt crisis has vastly increased the foreign dependence of national states. Their trade, monetary, fiscal and social development policies are even more constrained by foreign debt than they were before the foreign investment. The debt drains surplus from the UDCs.
This flow of capital from UDCs to DCs, for example, was over five hundred billion dollars from 1983 through 1986. Two hundred billion through debt service, over one hundred billion through capital flight, one hundred billion through the forty percent decline in the UDCs' terms-of-trade, and one hundred billion through normal remission of profits and royalty payments. Through much of the 1980s, the annual underdeveloped world debt service was about 6.5 percent of its GNP. This percentage may be compared to one percent of GNP spent by the US on the Marshall Plan or by the West on higher oil prices in the 1970s. Even German war reparations in the 1920s averaged two percent and rose to 3.5 percent in 1929-31, before they contributed to the rise of the National Socialists who abrogated them (UNCTAD, 1988: 76-9; UNDP, 1993: 15-21).
Historically, this drain is not new, but has always increased somewhere in the UDCs during each Kondratieff B-phase economic crisis (Frank, 1976: 39-40). The result is not development, as Frank’s case is presented above, but the development of underdevelopment, with disinvestment in productive infrastructure and human capital and loss of competitiveness. Another result is that the earlier Keynesian and structural development theories have been replaced by the irrelevance of neoliberalism, post-Keynesianism, and neostructuralism for development policy. In the real world, the order of the day has become only economic or debt crisis management, instead of socioeconomic transformation, and the related unattainment by the underdeveloped world of delinking and self-reliance. Meanwhile, economic crisis, stagnation, recession and depression, in the disarticulated, capitalistic economies of UDCs, are prevalent problems, in part inherent in the transition from extensive to intensive growth, in part a reflection of a conjuncture in the built-in political investment cycle, in part the result of the importation of economic crisis, inflation and debt from the industrial world through the import led growth. Hence gradual delinking and self-reliance is Frank's, like Amin's, only solution.
Frank (1992: 45-7) thus argues that the basic needs approach should concentrate on the bundle of goods and services that deprived population groups need: food, shelter, clothing, health care and water; that it should focus on the provision of these goods and services as well as on the issue of human choices. Along similar lines, Jacob Viner's (1991) Basic Needs is inferred from the premise that the first requirement for high labor productivity are that the masses shall be literate, healthy and sufficiently well-fed to be strong and energetic. Population growth will decline only after higher income levels have been reached. However, Viner's policy framework is supposed to be one of free trade, with neither central planning, protectionism nor Keynesianism. Rather than a perspective of capital concentration, the basic needs approach is generally one of capital dispersal. The emphasis, of Leibenstein (1954) and Myint (1954) for example, is on the importance of noneconomic factors --sociological, political, cultural, moral-- in the development process. Hence, the significance of institutional arrangements in meeting basic needs. Viner (1991) has rejected both duoeconomics and the notion that disguised unemployment existed in the UDCs' agricultural sector, as Theodore Schultz (1990) has argued for example.
On the other hand, Roy Harrod's (1968) "post-Keynesian" recommendations for achieving growth focus on the use of a low interest rate policy and an anticyclical program of public works. In contrast to the capital dispersal, characteristic of the basic needs approach, are Roy Harrod’s (1993) and Evsey Domar’s (1957) conditions for growth with full employment: The focus is on growth not development, whereby growth is financed out of savings. Harrod's warranted rate of growth is that which is sanctioned by the values of two other variables: The planned national rate of savings, and average value of the capital-output ratio as planned by producers. Planned savings represents the sum of the spending power which individuals and firms plan to withhold from consumption in a given period, and which, if the plans are fulfilled, can be made available to finance new capital formation.
The general elements of the basic needs first approach, nonetheless, are:
(1) Economic development includes not merely economic growth but steady, measurable progress towards absolute poverty elimination and a sustained expansion in the employment opportunities and incomes of the poor.
(2) A basic needs first development strategy can lay more effective foundations for sustained growth than any other course of action, primarily because of its impact on the structure of domestic demand and the associated inducement to invest.
(3) Among the range of consequences that flow from the restructuring of domestic demand that is entailed in a basic needs first perspective are an easing of the two dominant constraints encountered by traditional strategies of import substituting industrialization --the domestic demand constraint and the balance of payments constraint.
(4) A redistribution of resources towards the poor would also both increase the productive mobilization of extant untapped small scale savings potential, and provide opportunities to tap and develop the technical and innovative skills of the labor force.
(5) In addition to the foregoing, in agriculture an expansion of small scale, labor intensive farming could lead to greater efficiency of land use, reduced use of imported machinery, and reduced food imports (and/or increased agricultural exports).
(6) Compared with development strategies based on unequal income-distribution, this pattern of development is likely to promote more effectively the development of capital and intermediate goods production within underdeveloped countries. Some of this would be achieved by small to medium scale relatively labor intensive methods. However, where large scale, capital intensive investments remain essential, foreign exchange savings in other branches would increase the supply of this resource to finance essential imports.
(7) Such a strategy can be expected to help promote trade between underdeveloped countries as more goods appropriate to their needs are produced by them.
(8) Meanwhile, the rate of expansion of essential services can also be accelerated by greater and more imaginative use of low cost, often labor intensive methods of capital construction and service provision.
The main policy recommendations that follow from the basic needs concept thus concern:
(1) Removal of the legal, institutional and financial impediments which discriminate against the expansion of small scale and labor intensive production.
(2) Use of a package of policy instruments to promote small farm production --land reform; agriculture research, extension, credit, marketing.
(3) Commitment of more resources to research on the development of small scale, labor intensive production technologies in all sectors in which these are likely to be efficient.
(4) Expansion, and revision of the technologies and methods, of public service provision in order to reach the poor more effectively.
In sum, concerning the delinking mechanism, while the neo-Marxist discourse employs a class analysis, in contradistinction to the spatial focus of dependency theory, to determine the causes of continuing underdevelopment, both orientations derive the same mechanism out of their different analyses (notwithstanding the basic needs first and related concepts, which are an offshoot of the delinking perspective, but without delinking). In neo-Marxist theory, the concept of economic surplus also plays a central role, although the interpretation given to this concept is no longer that used by Marx. Marx's rate of surplus value is the ratio of surplus to necessary labor used in production (Marx, Capital, I, 1867: 320-39, 668-72, 956-65; III, 1896: 142, 167, 169). Baran's surplus, however, is the difference between the total domestic output of an economy and the actual consumption of its residents; or the difference between total output and essential consumption.
It was the dependency analysis, however, that effectively broke the hegemony of modernization theory in the field of development studies. Such neo-Marxists as Frank and Amin have further highlighted the concept of dependence --that while industrial growth had indeed occurred in some countries of the periphery, this growth had particular undesirable features that distinguished it from economic growth in the DCs. Specifically, such growth was not generated by autonomous, indigenous capitalist strata within these economies, and these strata remained incapable of generating their own internal growth dynamics. Rather, the underdeveloped economies remained dependent on the world metropolitan economies for access to markets, finance and, above all, technology. As a result, and as a result also of the continuing class alliance between the comprador bourgeoisie of the periphery and the metropolitan bourgeoisie, the latter continue to play the crucial role in determining the pattern of change in the periphery. The ultimate conclusion (of the delinkers) is still that the only mechanism to full autonomous development is via socialist revolution which delinks the UDCs from the world capitalist system.
2.2 The Structuralist Mechanism
In the period 1955-80, developments in underdeveloped, especially Latin American, societies and economies have eroded the position of those who put their faith in laissez faire and have strengthened that of the structuralists --those believing that progress requires deliberate radical change in economic policy, in the allocation and use of resources, in the distribution of income, in social policy and in the nature and the functioning of the political system. The structuralists laid great stress on the position of underdeveloped economies in the international economic system. They considered external factors to be at least as important as internal factors in determining the growth prospects of peripheral economies, and in influencing both their long-term development strategies and short-term economic policies. The structuralists identify the primary case of economic dependence as the cultural dependence of the élite (Furtado, 1973) and transnational corporations (Sunkel, 1972, 1973). However, Cardoso and Faleto (1979) and Warren (1980) contend that not only is dependent transformation possible, and in some countries occurring, but that this may also lead to the breaking of existing dependency relations.
On the other hand, Raúl Prebisch's (1962, 1964) indictment of the false universalism of economics has impelled him and others to a critical assessment of the capitalist conceptual framework. Prebisch, the main founder of the structuralist perspective, as well as other scholars, attacked the concept of comparative advantage, adducing a number of reasons why primary exporting countries could not expect to follow a path of export led growth. Some elaboration on these reasons as well as the incoherence of the concept of comparative advantage, especially in application, are essential for appreciating the structuralist perspective, its policy recommendations, and its relevance to the thesis of this inquiry. The idea, as culminated in the last two centuries, is that a source of comparative advantage is technology differences between nations. Britain, during the industrialization, exported its industrial products and with them, inadvertently, its new technology which was absorbed by European industries.
Technologies, however, spread slowly. One reason is that the technology adapted to one country's factor resources may not be appropriate to the relative resource costs of another country. The abundant timber of the US made it uneconomical to adopt coal fired steam engines on the British model, while the fast flowing waters of Switzerland allowed the Swiss textile industry to use water powered machinery as efficiently as the British textile mills used steam power. One more dichotomy is that once old methods of production have been adopted, it is not profitable to invest in new techniques until either the old equipment is so worn out it has to be scrapped, or the variable costs of generating a given sales revenue with the old technique exceed the total costs of earning the same money with the new methods of production. There is also the size of the market. The new techniques might require that there be a larger number of higher income customers within an economic distance of the manufacturer in order for profits to be made.
However, contrary to the predictions of comparative advantage, not only did industrial countries tend to retain the fruits of technological progress in the form of higher wages, rather than passing them on in reduced prices, but the world's dominant trading nation in the mid-twentieth century, the United States, had a much lower import coefficient than the previously dominant Britain had in the nineteenth century (Foreman-Peck, 1983: 37-41). Another type of discrepancy between the prediction of the Ricardian theory of comparative advantage and empirical data arises from the neglect by the theory of distance from potential markets and the costs of moving various products. The weight of bricks in relation to their value makes unprofitable imports of these products on a large scale despite the low productivity of the domestic brick industry. One more type of discrepancy results from the emphasis solely on supply, to the exclusion of demand considerations. A strong domestic demand relative to foreign demand can eliminate exports and draw in imports, even though the economy could export profitably according to supply conditions alone. Still another restriction on the empirical validity of the theory is tariffs in the domestic economy and abroad offsetting comparative advantages. Moreover, much of eighteenth century trade was based on products that needed climates different from those of the importing country, such as sugar, tobacco, tea and raw cotton, or as in Ricardo's example, wine.
Even the great nineteenth century export industry, cotton textiles, depended to a considerable extent upon climate for locational advantage. Lancashire's high humidity made cotton fibers more pliable, less brittle and easier to process. In part because of technology advance, that climatic differentiation is no longer a crucial factor in twentieth century’s international production and exchange. More importantly, the prototypical Ricardian theory does vaguely explain why technological differences underlying comparative advantages should exist in the first place, which brought about an attempt, a century later, by the assumption ridden H-O-S hypothesis to shift the theory from the fuzzy technology and cost to "endowment." It traces the sources of comparative advantage to the relative scarcities of the factors of production in different countries, a teleological, fatalistic rationalization.
This theory, due to Heckscher (1922) and Ohlin (1933) and disseminated in the interwar period and elaborated upon in the 1950s by Samuelson, was meant to explain much of intra-European trade which could not be ascribed to climatic factors. The Ricardian theory would explain such trade if there were differences in production technology between countries, but the persistence of the differences themselves would then require unprovided explanation. The H-O-S theory in contrast assumes the same technology is available to all countries. Trade takes place between nations because the factors of production do not move across national boundaries and so cannot be used in the most appropriate proportions to maximize productivity. The relative scarcity of productive inputs differs from region to region and from country to country. In the absence of trade these different relative scarcities lead to different relative prices within the countries even though countries are assumed to have access to the same production technologies.
The implication of the theory is that a nation will export products intensive in the relatively abundant factor of production. However, once there are more than two countries and two traded goods in the international economy, this implication crumbles; it is not necessarily true that a traded good will be exported if its relative price exceeds its pretrade relative price. Furthermore, the assumption of factor intensity, central to the theory, is ambiguous once it is recognized that there is a choice of techniques using different proportions of factors to make a product, and when large changes in relative factor prices occur. Then factor intensity reversals may occur, cases in which it is impossible to say which country has a comparative advantage in the production of a good. And an economy's comparative advantage can be changed not only by imported technology stimulating capital accumulation but also by the new technology inducing the discovery of natural resources by raising their value.
Similar logical difficulties occur with the factor price equalization theorem, another pillar of the neoclassical international trade theory which is predicated on this brand of comparative advantage, as with predicting the pattern of trade from factor abundance and factor intensity. In the simple case of two countries and two goods, equalization may not take place because each country stops producing the good in which it has a comparative cost disadvantage, importing it entirely. Moreover, factor intensity reversals allow the possibility that even without complete specialization, factor price equalization may not occur. Further, both transport costs and tariffs prevent the emergence of a single price for internationally traded commodities, and so also prevent the emergence of a single price for the factors used to produce these goods. This is why the theory conveniently abstracted from the transaction costs, the very raison d’être of the emanation and perpetuation of the firm and the market per se, according to the same (neoclassical) overarching theory. Further, if an empiricist rebuke to the factor price equalization theorem beyond the observation of wage and price differentials between the DCs and the UDCs is needed, Foreman-Peck (1983) documents the obvious persistence of those differentials. These must be explained partly by the importance in consumption of goods that are not much traded between regions, but mainly by a growth process that is not captured by the H-O-S theory on which factor price equalization is based. Because economies have different resources per capita of population, any hypothetical, nominal equalization of the prices of these resources and of labor through trade could widen the gap in real income per capita between countries, even if all trading economies are made better off.
Historically, where the regions of recent settlement were concerned, the complementarity of the factor flows from the Old World with the abundant natural resources resulted in persistently higher wages than in Europe, rather than factor price equalization. In other areas, such as Russia, the informational difficulties and institutional restrictions were too great to permit equilibrating tendencies of the international market to operate (Foreman-Peck, 1983: 41-51). Furthermore, the comparative advantage theory of trade suggests that income will be increased by opening an economy to trade, but this does not constitute economic growth in the sense of a sustained rise in income per capita, the intensive growth of Eric Jones (1981) and others elaborated upon below. Nor is this considered growth at all in the Marxian sense, whereby all growth takes place in the sphere of production, not that of circulation.
Generally speaking, theories of growth may be classified into those which are demand led and those in which growth is generated from the supply side. An eighteenth century idea of trade was that it increased the capacity and the income of the economy by providing "a vent for surplus" (Smith, 1776: I, 9-19, 179-207). This doctrine ostensibly overlaps with the latter-day, export led growth theory only in the latter’s argument that foreign demand, presumably, encourages investment in export industries, which in turn raises income and stimulates further investment and increased income. Supply side growth theories usually emphasize the efficiency of the price system in balancing supply and demand. This balancing, supposedly, prevents the emergence of unemployed labor or underutilized resources on any substantial scale unless certain institutions prevent price adjustment. However, on this assumption an increase in the demand for exports would tend to divert investment and employment away from those industries mainly supplying the home market, so that there would be no increase in growth. Increased investment can temporarily increase growth rates but can only take place at the expense of a reduction in consumption, in current living standards.
The sure way in a closed economy that growth in income per capita can occur is through increased technical progress (Foreman-Peck, 1983: 53-4). The introduction of foreign trade raises the growth rate of the economy temporarily as the gains from trade raise income and savings, and the savings are plowed back into industry as investment. But diminishing returns to the increased investment set in and the growth rate falls back to that determined by technical progress. Further, trade can permanently increase the growth rate when there is a natural input, such as ores, semiprocessed metals or agricultural products, for which it is difficult to substitute other factors. In this instance the long-term growth rate of the isolated country is set by the slowest growing natural input. The growth rate can be raised if opening the economy to trade increases the growth of available supplies of this input. This may be considered import constraint growth (Foreman-Peck, 1983: 53-62). Whereas export led growth shifts resources into the export sector, the removal of supply constraints in import constraint growth increases imports, which must be paid for by more exports or capital. On the other hand, for the UDCs, trade with the DCs was not the "engine of growth" (the equivalent of what Hilton calls "prime mover," which is thus used by Takahashi, Dobb and Sweezy, all in Paul Sweezy, ed., The Transition from Feudalism to Capitalism, 1976), nor was the foreign investment that went with the development of primary product exports. Instead, the "engine" of whatever growth that took place (if engine was indeed needed at all, rather than impediment removal as is discussed below), was the shift from primary products to manufactured goods, by way of import substitution.
But import substitution as a development strategy, if it is to be carried out efficiently, must be based upon:
(1) A lower level of protectionism, preferably through tariffs rather than quotas, whereby such near absence of protectionism is detrimental to long-term, nascent industrialization programs.
(2) A lower range or degree of dispersion in the rates of protection provided to specific industries, again lowering the efficacy of targeted measures necessary for a rapid development.
(3) A sustained implementation of supportive policy measures such as technological research, training and education, and development of infrastructure, all of which require finance that can essentially be procured through exports, which is unlikely to take place politically because of the adoption of the import substitution strategy (Nurul Islam, 1990, and in South Center, 1993: 257-71).
This is thus a strategic dilemma for the UDCs: Import substitution is constrained by security considerations, and export led growth is economically unsound and politically repressive. The so-called Four "Tigers/Dragons" in East Asia are projected in the neoclassical literature as the export led growth model. However, the geostrategic factors under the Cold War, and the economic and political importance of the state's role, and its political repression, bribes (from the successive presidents down the ladder) and other forms of corruption and disarticulation go largely unmentioned. Further, if export led growth has been attained in the Republic of Korea and in Taiwan, the above factors notwithstanding, it is in part because of the prior increase in the equity of the distribution of income and the domestic market. These were due in turn to the land reforms modeled after the Japanese case. But it is essentially the exceptional political and strategic factors which make the NICs experience immaterial to the UDCs' situation, a more unique than copyable model. Globally, moreover, the export led growth model ushered in and supported military coups, martial law, emergency rule, etc. The model's inequitable socioeconomic side requires the physical and political repression not only of workers and their unions, but also of industrialists and others working for the internal market. Events of the last few decades in South Korea, the Philippines, Thailand, Bangladesh, Indonesia, Pakistan, Chile, Uruguay, and Argentina are a testimony to that tendency. In many cases the political repression worked, while the export led growth resulted in the debt crisis.
The import led growth in the East European NICs was essentially the same as the export led growth in the East Asian NICs, as Frank (1978: 115-18) points out. The former export to import, the latter import to export. The difference has been that NIC growth in Eastern Europe has been less successful than in East Asia, essentially, again, for geostrategic reasons. Now the East Asian NICs, on behalf of the TNCs, outcompete the East Europeans in the world market and invade their domestic markets too. Export led growth has also been used in some countries in South America. However, all things considered, the East European model is still politically less repressive and less inequitable than in both capitalist NIC areas. However, the South American and East European NICs could not be competitive against the East Asian ones, the TNCs' connection notwithstanding, after their debt service made them fall behind in technological and other competitions on the world market. Hence, for the UDCs, either one of these two clear-cut, monolithic strategies is a zero sum game. Therefore, an amalgam of import substitution and export promotion has to be adopted, and tradeoffs in both strategies have to be made.
The need for learning by doing does of course require infant industry protection, but the sooner it is removed or reduced the better. In a highly discriminatory system of import restrictions the least cost industry often ends up getting the highest level of protection. But empirical data compiled by Nurul Islam indicate that with proper public education, including that of consumers and other interest groups such as importers, traders, export industries or industries using high cost protected products, it is possible to generate the necessary pressure to reduce protectionism over time (in South Center, 1993: 257-71). Other dynamic arguments for net benefits from a specific level of protection do exist. For example, in a growing economy free trade is not the optimal policy for a large country because the growth of exports would cause an excessive deterioration in the terms-of-trade. Again an optimum tariff could offset this deterioration (Foreman-Peck, 1983: 53-62).
Moreover, in the course of economic growth, comparative advantages will tend to change as different productivity increases occur between industries, and as the factors of production are accumulated at different rates. The changing pattern of comparative advantage in economic growth is also associated with the changing relative importance of different economic groups and this importance is usually reflected in policy. It is further possible that a country may not benefit from growth through the accumulation of its relatively abundant factor (contrary to the H-O-S postulates), for example labor in a densely populated poor country. The country can, however, produce export goods which use a large proportion of the abundant factor for an initial period, and import needed requirements for its industrialization program. The price of exports relative to imports (the terms-of-trade) will fall and this loss of income may exceed the gain from the increased supply of the factor. However, the tradeoff, on a temporary basis, is the initiation of new industries.
Although comparative advantage theory signifies that free trade is better than no trade (essentially a truism), specialization, historically, was largely determined by national resources, especially climatic factors, arable or pastoral land, coal or labor, rather than by trade through the Ricardian difference in, or gradual diffusion of, technical knowledge. The justification for believing in pecuniary welfare gains from trade, moreover, is the notion that being able to buy more of what one wants is an improvement in welfare. Yet free trade is not necessarily better than reduced trade. For a country large enough to affect world prices, an optimum tariff could result in more benefit by reducing the price at which foreigners can sell than is cost by the fall in that country's imports.
Such, and other, defects in the theory of comparative advantage in its varying forms were the sources of the Structuralists' disenchantment with neoclassical economics. Hence, Prebisch's (1962, 1964) development recommendations are based on his conclusion that only government promotion of a steady process of structural transformation, focusing above all on the development of a diversified domestic industrial sector, including capital goods production, can overcome UDCs' problems. This is to be achieved using a humane, market oriented economy based on planning, industrialization and protectionism, and limiting competition to counteract the secular tendency of primary products' terms-of-trade (TOT) to deteriorate. Prebisch, like Celso Furtado (1954: 33-57) and other ECLA economists, stresses the central role of rising labor productivity in economic development. Only this can provide the basis for a steady increase in mass living standards. His attack on the concept of comparative advantage, in addition to the reasons mentioned above, is especially linked to the empirical observation that, contrary to the concept's prediction, the benefits of technological advance in primary exporting and manufacturing economies are not equitably distributed between the two trading partners. This factor, as well as the many others pointed out in the Introduction, so-called distortions, is swept under the rug by the neoclassical preoccupation with pecuniary gains from trade and with nothing else.
The data upon which Prebisch's argument is founded indicate an adverse long-run trend in the terms-of-trade for primary commodities from the mid-1870s to the mid-1930s (Prebisch, 1962: 2-65). Major advances in productivity have occurred in the main manufacturing nations since the late nineteenth century. According to the concept of comparative advantage, this should have been reflected in a decline in the price of their exports, and a consequent improvement in the terms-of-trade of primary exporters. Yet this has not occurred. It has not done so, as Prebisch found out, due to the downward rigidity of wages and prices in the manufacturing nations. Instead, these productivity gains have been fully absorbed within the industrial capitalist economies in the form of higher real wages and profits. Consequently the terms-of-trade of primary exporting countries, which should have improved, have not. Indeed, using the international financial statistics of the IMF, Beat Bürgenmeier has found that while the terms-of-trade (the ratio of the unit price indexes of exports over imports) of the DCs improved by 13.2 percent between 1980 and 1987, those of the UDCs deteriorated 24.1 percent during the same period (Bürgenmeier, Socio-Economics, 1992: 14).
Furthermore, while the manufacturing nations have retained the benefits of their own productivity gains, the extent of the movement in the terms-of-trade suggests that they have also absorbed part of the productivity gains of primary exporters (which were passed on through a decline in relative prices). Thus the postulation by the theory of comparative advantage, that where two countries have different internal relative productivities in the production of two goods, both can gain if they enter into international trade (and even in the unlikely case that all the gains are absorbed by one country, the other will not lose) does not apply in the real world. The cause of the center's ability not only to retain its own productivity gains but also to appropriate part of those of the periphery, in Prebisch's account, derives largely from different responses to recession in the two regions. Specifically, it derives from labor success in the center in claiming wage increases in the upswing of the business cycle while ensuring wage rigidity in the downswing. The pressure then moves on to the periphery: The less that income can contract at the center, the more it has to do so at the periphery. The characteristic lack of organization among the workers employed in primary production prevents them from obtaining wage increases comparable to those of the industrial countries and from maintaining the increases to the same extent. The reduction of income, whether profits or wages, is therefore less difficult at the periphery. Although the prices of primary products rise somewhat in the upswing of a business cycle, this is more than offset in the downswing, hence the long-run downward trend in the terms-of-trade for primary producers. This is another explanation of a phenomenon that was also noted by Lewis, and referred to above: The failure of the periphery to retain the benefits of its own productivity increases in traded goods. However, while Lewis emphasizes the unlimited supply of low cost labor as the key causal factor leading to the loss of surplus, Prebisch emphasizes the lack of effective unionization of wage labor in primary production in the periphery. But the lack of effective unionization could itself be due to the excess supply of labor that Lewis emphasizes (Hunt, 1989: 136-9).
From his analysis of the causes of the long-run trend in the terms-of-trade of primary exporters, therefore, Prebisch concludes that the countries of the periphery have no option but to industrialize and produce their own manufactured goods. They will then be able to reap the benefits of their own productivity gains both in primary production and in manufacturing (Prebisch, 1962: 49-65). Prebisch also adduces a second reason, which is hinted at above, for promoting industrialization in the periphery. In the nineteenth century the leading industrial economy, Britain, pursued a policy of free trade in a context in which a substantial proportion of the gross domestic product of this expanding economy was traded for imports of raw materials. When the United States took over as the leading industrial economy a notable change occurred, for its import coefficient is much lower than that of Britain. Already only five percent in 1929, it fell further during the following depression and stood at three percent in 1948. This low import coefficient reflects the US' high degree of self-sufficiency in many raw materials and does not augur well for the primary export growth prospects of the underdeveloped economies. A third reason both for the downward long-term trend in the terms-of-trade for primary products, and for expecting only relatively low growth of future primary export volume (with slower real revenue growth), lay in the different income elasticities of demand for primary and industrial goods, these being generally low for the former and high for the latter (Singer, 1950: 63-5). A fourth reason is the development in the industrial capitalist countries of synthetic substitutes for primary products (Nurkse, 1952: 10-13). Fifth is the further depressing effects on demand for primary exports from the periphery of growing protectionism in European agriculture and increased efficiency in the industrial economies in the use of raw materials, leading to less input per unit of output (Prebisch, 1964: 127-8). Sixth, a static version of the Prebisch-Singer dynamic TOT argument, also called the optimum tariff thesis, was developed by ECLA and endorsed by Nicholas Kaldor (1996: 69-73). It holds that the underdeveloped countries are confronted by monopolistic markets in their purchases of manufactured goods, and that prices are kept above competitive levels by international private cartels or simply by the absence of price competition among producers operating in imperfect markets.
Singer's (1950, 1993) policy reactions to worsening TOT makes him a bridge between the delinking and the structuralist mechanisms, with his feet well-established in the latter. These include:
(1) Changing the underlying bargaining relations.
(2) Emphasizing collective self-reliance by more inter-UDCs trade and investment.
(3) National delinking (autarky/import substitution). Delinking (the extension of the infant industry argument into an infant economy argument) is the way of overcoming the institutional and power setup.
(4) Export promotion.
(5) Increasing the volume of trade in primary commodities (by individual nations, not compositionally, or else they would drive prices even lower, which is exactly what export led growth is essentially about) so as to obtain better income TOT (export revenue divided by import prices) and maintain import capacity.
(6) Compensate for declining TOT, and lagging import capacity, by financial transfers.
And Prebisch's (1962) conclusion that industrialization ought to be the most important means of expansion became a key element in the structuralist perspective. However, while poor prospects for expanding primary export earnings underlie the case of industrialization, the expansion of the modern sector is itself heavily import dependent. Increased self-sufficiency in the long-term requires, as a precondition, increased imports and, hence, increased access to foreign exchange. Thus, the low income elasticities of demand at the center for the periphery's primary exports combined with high income and low price elasticity of demand for imports in the periphery do render the latter increasingly susceptible to balance of payments crises as it attempts to industrialize. The structuralists’ main objections to neoclassical economics, therefore, are that they question the static analysis of the external growth process, the efficacy of market forces to provide needed external and internal adjustments, the use of conventional measures to correct deep seated secular problems, and the reduction of the standard of living, especially of the poorest strata, as a way of promoting growth.
A distinctive feature of the structuralist mechanism then is the rejection of neoclassical-monetarist solutions to the problem of imbalance, as well as to that of domestic inflation. Prebisch (1962: 118-20) and Furtado (1964: 78-81) have questioned whether balance of payments problems in the periphery could be solved simply by applying "sound rules" of monetary behavior. According to the monetarist view, both pressure on the balance of payments and domestic price inflation are symptoms of the same problem: Excess demand generated by an unduly rapid expansion of the money supply. Therefore, whereas Keynes (1936: 67-9, 115-19) argued that a high Public Sector Borrowing Requirement (PSBR) should be allowed when economic activity was depressed, enabling public spending when tax receipts are low, in order to encourage growth in the economy, monetarists (e.g., Friedman, 1962: 102-7) argue that government borrowing fuels inflation and crowds out private investment, and hence the PSBR should be tightly controlled at all stages of the economic cycle. The monetary solutions lie in domestic deflation, and in devaluation of the currency in order to both reduce the demand for foreign exchange and increase foreign currency earnings. The structuralists, however, contend that the recommendation of these monetarist solutions derives from an incorrect monolithic diagnosis of the problem, based on the assumption that all economies function in a similar manner; that adoption of monetarist solutions to these pressures in the periphery would amount to throwing out the baby (development) with the bath water (monetary disequilibria).
Moreover, devaluation, an important element of the monetary, “structural adjustment” strategy, may adversely affect development for three reasons. First, its impact on the balance of payments may be negative rather than positive due to low price elasticities of demand for imports and exports. If the sum of these two elasticities is less than unity then a country's balance of trade will be worse following a devaluation. Particularly in the late stages of underdevelopment, when most imports consist of essential capital and intermediate goods, the price elasticity of demand for imports is likely to be low. Hence only if export demand is price elastic will there be an overall gain from devaluation. If foreign exchange outlays are unlikely to fall significantly, then foreign exchange earnings must rise. Yet in practice the latter is unlikely to occur, partly because the exporting country's competitors may cut their prices rather than lose their market share, while aggregate demand in the developed countries for primary imports is also unlikely to be highly price sensitive. Second, devaluation may have a further negative impact on the foreign balance where primary export production is under foreign ownership. If, due to either external demand conditions, capacity limitations or other reasons it is impossible to expand exports, at least in the short-term, the sole immediate consequence of devaluation on the export side will be to raise the domestic price of the export. All the value of the price increase will accrue to the firm's owners as increased profit, and will most probably then be remitted abroad, thereby increasing foreign exchange outflows. Finally, devaluation will raise the domestic price of imports. The immediate effect will be felt most severely in those branches of the economy with the highest capital intensity. Since in semiindustrialized underdevelopment the import coefficient is higher in investment than consumption, it is here that the effects will be most severe. With an increase in the relative cost of investment there will be a decline in the real value of savings (Hunt, 1989: 135-6, 149, 322).
For these reasons the monetarist response to balance of payments disequilibrium was rejected by structuralist economists, and an alternative response which would not impede development was proposed, namely industrialization, while controlling public expenditure, with an eye on the foreign balance. In addition, Prebisch (1962: 66-75) discusses the impact of inflation on the balance of payments, income distribution, savings and the pace of development. He sees the causes of inflation as lying in the international operation of the Duesenberry (1949) effect in the sphere of public expenditure, and in the belief that inflation is an unavoidable means of forced capitalization where voluntary saving is evidently insufficient. Any inflation, however, redistributes income and wealth, of both individuals and social groups. Those whose incomes are price elastic (merchants, manufacturers, landowners who farm their own lands, peasants with secure tenures and produce for the market) benefit at the expense of wage earners and those whose income is either fixed or changes only slowly (bureaucrats, teachers, pensioners, rent receivers, rackrented peasants). With respect to the consequences of monetary expansion, a moderate credit expansion may contribute to expanded employment and output. But Prebisch concludes that monetary expansion is more likely to raise prices than employment in the first instance, resulting in a redistribution of income towards the recipients of profit: The rise in prices, by creating exceptional profits, places in the hands of a comparatively small group great opportunities for savings (Prebisch, 1962: 45-8).
When juxtaposed to Lewis, Prebisch first does not accept the view that profits are automatically converted into investment. Rather, he concludes on the basis of evidence from the Brazilian case that only some 50 percent of profits are so used. He contends, second, that those who consume out of profits have a high propensity to import, and while monetary expansion may increase savings it cannot increase the supply of foreign exchange needed to finance the import of capital and intermediate goods. Meanwhile it is likely to reduce voluntary savings among other income groups while increasing income inequality. Hence, although Prebisch focused only on the conventionally accepted cause of inflation, monetary expansion, his analysis emphasized a key characteristic of the structuralist school --preoccupation with the foreign balance. The distinctive structuralist analysis of inflation focuses on its structural causes, and their implications for policy. Just as international and domestic demand elasticities render underdeveloped economies inherently susceptible to balance of payments crises, so domestic supply inelasticities in key sectors --agriculture, due largely to tenurial conditions, infrastructure, certain branches of industry, and shortages of skilled labor and entrepreneurial skills-- render underdeveloped economies inherently susceptible to cost inflation during the development process. Such pressures on costs are exacerbated by diseconomies of small scale production in newly created industries.
Inflation, as Furtado (1964: 37-8) points out, is not an autonomous phenomenon, but an overt expression of structural maladjustments which follow in the wake of the growth process in some phases of development. With short-run supply elasticities typically quite low in the UDCs, rises in some prices are bound to be substantial. Inevitably, price rises which are due to supply shortages, while initially located in specific sectors, tend to be transmitted throughout the economy. For example, food shortages lead to money wage increases and so to price increases in the modern sector. Where new industries are protected monopolies, the likelihood of cost increases being fully passed on in price increases is high, and once price rises get underway, there will be familiar cumulative tendencies as each stratum attempts to protect itself from the rise in prices. Meanwhile any attempt to cope with balance of payments disequilibria, however caused, through devaluation will add to domestic inflationary pressures. While the structuralists’ analyses concur that inflationary pressures are inevitable during phases of growth combined with structural transformation, they also concur that if inflation gets out of hand its impact on development becomes negative; long-term productive investment becomes discouraged in favor of more speculative uses of capital, such as hoarding inventories, buying foreign exchange and building apartments and shops for the higher income groups. Hence, it is essential to seek ways of confining the upward pressure on prices within tolerable bounds, but without unduly lowering the rate of growth and structural change.
Foreign credit obviously has an important role to play in helping to contain inflationary pressures. Governments thus have a role to play in guiding investments into key areas and in the implementation of institutional reforms, particularly agrarian reform, in order to improve domestic supply elasticities. Therefore, the structuralists are convinced that the presumed Lewis-Rostow pattern of inevitable gradual evolution from a subsistence or closed economy through the stage of raw materials exports to full scale industrial or open economy along the lines of England, Germany, the United States and Japan is an illusion. For the structuralists the evolutionary formula is based upon a general theory of economic development which embodies concepts of universality. No underdeveloped, peripheral economy and society, they insist, can be expected to become fully independent and autonomous in its decisions on vital areas of domestic policy because enduring neocolonial structures since independence have profoundly permeated the process of change and impede full scale breakthrough to modernization (Stein and Stein, 1970: 75-9).
Differing development patterns (depending on the composite of natural resources, human resources, stock of capital, market size, flows from abroad and government strategy) are nonetheless proposed by Hollis Chenery (1975). They are postulated upon Chenery's structural conclusion of his two gap models: Computable planning models, which rationalize foreign aid until takeoff, and are built on elasticity pessimism. The two gaps refer to the ex ante savings- and the foreign-exchange- bottlenecks to increasing the value of the specified objective function (i.e., the savings-investment gap and the import-export gap). These development patterns are also postulated upon Chenery's link between level of development and capital intensity of industrial production. Gunnar Myrdal's (1957) structuralist thesis of cumulative causation, on the other hand, focuses on the link between low average incomes in the UDCs and the pattern of change elsewhere in the world economy. He argues that a small group of countries, having achieved major advances in science, technology and industrial production, have become locked into a path of cumulative development, while the majority of countries, which have not achieved these breakthroughs, are condemned to stagnation or, worse, declining per capita incomes.
Factors making for growing international inequality, according to Myrdal, include continuing scientific and technical progress in the developed countries, the presence of larger markets in these countries, the tendency of finance capital to flow into areas where cost structures and market prospects look most promising, and the relative income elasticities of demand in the industrial capitalist countries for manufactured and primary products. Meanwhile, in poor countries low levels of per capita output and savings, high rates of population growth, low levels of skills, the poor health of the work force, a production structure locked into the export of primary products facing poor world market prospects, and the import of cheap manufactures which undercut local artisan production, all contrive to perpetuate and exacerbate existing poverty.
Breaking out of this situation can be achieved, argues Myrdal, only by governmental planning and deliberate activism within market forces. The simple and static concept of comparative advantage, vehemently attacked by Myrdal, fails to provide an adequate guide to resource allocation. Hence, industrial development must be promoted, and this can only be achieved by protecting infant manufacturing industries within the entire economy from foreign competition. Myrdal further attacks Samuelson's factor price equalization, which is built upon Heckscher-Ohlin economic liberalism of factor proportions, and supplemented by Bhagwati-Johnson's "immiserization" and allocative efficiency (Myrdal, 1957: 79-118). Myrdal therefore suggests egalitarian reforms, protectionist industrial policies, economic planning and control, and higher consumption levels as a course of action for growth. In addition, he recommends changing such attitudes and institutions as population and population policy, land ownership and tenancy, conditions of illness and health, education for different strata and different localities and its quality, etc. Eventually, the goals would be the elimination of soft state (specific interest-group dominance, rent seeking activities, corruption, etc.), and the circular and cumulative causation of national and global inequalities of resources and power.
A less ambitious course of action than that of Myrdal comes from Hla Myint (1954), for whom underdevelopment is a state of being, characterized by an objective and a subjective complements. The former is reflected in low productivity and stagnation, the latter in a sense of economic discontent and maladjustment generated by awareness of the higher living standards attained in industrial capitalist economies. Myint's basic thesis, which is analogous to Amin's disarticulation thesis and Frank’s development of underdevelopment, is that as underdeveloped regions have been opened up to international markets the pattern of trade and development that has ensued has consolidated rather than transformed the condition of underdeveloped peoples --they have specialized in unskilled work as wage laborers or peasant producers (a trend that continues to be inculcated through the focus of neoclassical international trade theory on comparative advantage).
As producers the UDCs face monopsonistic buyers of their produce, e.g., the Group of Seven (G-7). A cartel is an agreement or contract among nominally independent firms or countries to fix prices, restrict output, limit wages, divide markets, use protective tariffs, employ dumping, or otherwise engage in monopolistic, anticompetitive practices, not only in industrial production but also in monetary and other economic activities and devices. In this sense the G-7 is more of a cartel than OPEC. The fact that Russia is now added to the G-7, thus the group is currently called G-8, to shore up Boris Yeltsin’s “liberalization” program, changes little in the nature of the G-7, for this addition is merely cosmetic. As consumers the UDCs face the monopolistic markets of the big export companies and of middle merchants and money lenders. A combination of unequal market forces, military alliances, social institutions and prejudice act to prevent underdeveloped peoples from improving their economic status, and these forces are compounded by their resultant lack of business experience.
In principle, Myint's solution is the development of countervailing powers to counteract the existing unequal distribution of market power. The development of labor unions, state marketing boards and peasant cooperatives are all potential sources of such countervailing power. But the problem of finding investment outlets remains. Meanwhile, the scope for use of such forms of countervailing power as economic protection or development of labor unions is also limited by the potentially adverse effects these may have in terms of reduced efficiency and increased costs of production. Therefore, while questioning the adequacy of the neoclassical discourse as a framework for studying economic development, Myint advocates free market and free trade policies for the UDCs on the basis of dualistic analysis and nonneoclassical rationales: The Smithian notion of vent for surplus, and the educative effects of foreign trade in introducing new wants, new technology and new forms of economic organization into an UDC.
For Myint, underdevelopment in the undensely populated countries was caused by the limited local demand for the additional agricultural output that the extant underemployed labor could have produced with the extant uncultivated land. Hence, the role of international vent for surplus, by bringing more land under cultivation. Another insight of Smith upon which Myint elaborates and depends is the productivity theory of international trade, emphasizing the role of international trade in widening the extent of the market and the scope for division of labor. These changes in turn raise the productivity of resources by improving the state and dexterity of labor, by overcoming technical indivisibilities in production, and by encouraging technological innovations.
However, in Smith’s implicit theory about the determination of the course of economic development or underdevelopment, referred to above, productivity is a function of the degree of the division of labor, i.e., specialization. Specialization is achieved through the separation of agriculture and manufacturing and their assignment to country and town; the degree of specialization depends on the degree of the development of trade. Hence the division of labor is limited by the extent of the market. While this Smithian theory may accurately describe certain aspects of the way productivity is increased, it rests on the premise of capitalist social relations of production. For example, it takes for granted the mobility of labor and the potential for developing, and continuing to develop, the productivity of labor. However, it is exactly the emergence of these relations of production which is the crucial focus of originating sources of capitalist economic development (Reuven Brenner, “Origins of Capitalist Development,” New Left Review, 1993, 104: 25-92).
Hence, structuralists Celso Furtado (1973) and Osvaldo Sunkel (1973), who adopt as historical an approach as that of Baran's neo-Marxism, conclude that the central features of economic underdevelopment have been caused by the impact of the developed countries on their underdeveloped counterparts. Underdevelopment is not a phase through which every growing economy passes, but a specific historical condition. Furtado further draws a seminal distinction between growth and development, the latter consisting not just in rising output, but in the steady incorporation of the labor force into lines of production in which the most capitalist technologies are applied, and potential labor productivity is maximized. These two Furtadoian definitions are the senses of economic growth and economic development adopted in this critique, whereas transformation is the wider Sieversian concept that encompasses not merely the economic but also the security, political, social and psychological aspects of the nation, as mentioned in the Introduction. Hence, transformation implies institutional --structural organization of society-- and distributional change in addition to rising incomes.
Central to Furtado's analysis also is the contrast he draws between the development path pursued in the past by the industrial capitalist countries and the paths possible for present day UDCs. The economic development of the DCs over the past two centuries has been based on a continuing technological progress in domestic production, first in consumer and later in capital goods. DCs development, in other words, was initiated and sustained by internal supply side dynamics. In contrast, in the underdeveloped countries what development has occurred has been generated externally, on the demand side (in concurrence with Amin's disarticulation thesis). This dichotomy is crucial in explaining differences in development performance and development potential.
Furtado (1954, 1964) thus takes the structuralist perspective to as high a latitude of realism as Dobb has done for the Marxian metamorphosis. Realism, judiciously used, strips away epistemological illusions nurtured of rationalizing ideology, by juxtaposing all fabrications to the acid test of ontology. Furtado thus aims at deliberate creation of comparative advantages, in sectors enjoying an elastic foreign demand, thereby short circuiting or circumventing the "endowment" basis of the H-O-S theory. For Furtado, protectionism is always necessary in the initial phase of industrialization, thereby throwing off the "immiserization" argument of Bhagwati and Johnson as well. Contending that the Physiocrats' social surplus, whether a stock or a flow, underlie the process of accumulation, Furtado calls for reforms of the structural rigidities that hinder authentic development, giving preference in accumulation to meeting the basic needs of the population. Accumulation is what makes it possible, through innovation, to introduce transformative changes in the production system and social structures, a process of reshaping social relations founded on accumulation.
Rather than the traditional forms of accumulation, in the building of defense walls, pyramids, temples, palaces, cathedrals, etc., developmental accumulation in productive forces aims at the appropriation of a surplus generated by the opening of new lines of trade, discovery and extraction of new natural resources, or increase in the physical productivity of labor by the introduction of more efficient methods, more effective division of labor and improved manufactured instruments. An intense developmental process of accumulation, moreover, can be achieved only through strict transformative social discipline: hard work, economic incentive, and moral motivation. Such a restructuring demands a guiding force that can only come from the state. The complexity of the government's task calls for a comprehensive approach, both temporal and spatial, which is possible only through planning. Industrialization should contribute to the diversification of exports, and at the same time operate as an instrument to expand the domestic market.
Furtado further contends that reduction of social inequality depends on the creation of new employment by industrial activities, on an increasing domestic supply of wage goods at decreasing relative prices, and on the opening of new outlets for export. However, a country with a low income level and large population cannot establish an industrial system that is internationally competitive in all sectors. Therefore, incorporation in the world must be selective, which, again, requires planning. Thus, even resource allocation has to be accomplished by comprehensive planning, rather than a price system. Getting the prices right, the neoclassical motto, will not do. Dependence, for Furtado, is essentially technological, albeit it is based on the lack of control of finance, markets, skilled and cheap labor, information, communication as well as technology. These power resources determine the bargaining position of different states to appropriate the generated global surplus. Hence, Furtado's key policy recommendations for countries wanting to develop are:
(1) Abandonment of the criteria of static comparative advantage as the basis for incorporation in the international division of labor.
(2) Introduction of planning as a guiding instrument for the government, whose functions in the economic area are likely to expand as the endeavor to overcome underdevelopment becomes more intense.
(3) Strengthening of the institutions of civil society (chiefly rural and urban labor unions), which may be expected to enlarge the underlying social basis of the state and to oppose the prevailing patterns of income distribution.
Other Furtadoian recommendations include accumulation, development of productive forces, increased efficiency, diversification of production, free trade areas, customs unions, common markets, joint financing and the use of instrumental rationality in all paths of the social network. Industrialization (technological takeover of all productive activities) is the key, including the introduction of production techniques already tried out in the DCs, to which access could be gained on the international markets or through bilateral agreements. Urbanization (the spatial structuring of the population to satisfy the needs of the labor market) is also important, together with secularization (prevalence of reason in the legitimating of power systems). The dismantling of craft guilds, the abolition of usury (i.e., excessive interest rates), the elimination of feudal privileges are also advocated. The liberation of traditional forms of social organization (paternalistic relations, over-extended family obligations, etc.), and the rejection of dogmatism and authoritarianism in the spheres of knowledge and value judgments are added (i.e., resorting more to reason, pluralism and diversity, and less to ideology, metaphysics and hierarchy). Linking legitimacy to the social representativity of power through the democratization of the Hegelian civil society --the social structures situated between kinship groups and the state, in contradistinction to the all-encompassing theocratic community ruled by divine rights-- is another Furtadoian recommendation.
In sum, the structuralists argue that structural aspects play an important role in processes of economic growth and development. These aspects include:
(1) The endogenous change of the economy’s institutional framework in the course of its growth and development.
(2) Distributional shifts in output and employment between different sectors of the economy.
(3) Different forms of technical and organizational change (Adolph Lowe, The Path of Economic Growth, 1976).
The main tenets of the structuralist perspective, therefore, are:
(1) An underdeveloped economy is characterized not only by a low per capita income but also by certain structures:
(a) The sectoral composition of output, employment and the capital stock.
(b) Economic institutions, including agrarian systems.
(c) The joint effect of elasticities of supply and demand.
(2) Key structural features of underdeveloped economies are:
(a) Those economies combine a traditional, largely agricultural sector using a technology with low levels of productivity and a modern sector using more capitalist technology.
(b) The modern sector is usually established by foreign capital engaged in primary production for export.
(c) The modern sector is characterized by a high degree of openness (i.e., a large proportion of its output is exported and a large proportion of its requirements both for capital equipment and for manufactured consumption goods is imported).
(d) These economies are not able to design and manufacture the capital goods required by the modern sector.
(e) The numbers employed in the modern sector are typically a small proportion of the total population.
(f) The indigenous agriculture sector is usually characterized by forms of land tenure which constrain the expansion of output.
(g) These economies are characterized by domestic supply rigidities in key branches of the economy, and by high income and low price elasticities of import demand in the modern sector. These elasticities of supply and demand mean that economies do not respond effectively to conventional monetary measures of control. All the above characteristics inhibit the generation of internal growth dynamics. Meanwhile, low elasticities of supply and demand also create inherent tendencies towards inflation and balance of payments crises.
(h) These economies, moreover, are usually characterized by high rates of population growth.
(3) Economic development consists not only of raising per capita incomes but also of structural change, so that economies acquire the internal capacity to initiate and sustain economic growth.
(4) The structural features outlined above are the main constraints to economic development. Policy recommendations center on finding ways in which governments can take an active role to help private producers change these structural characteristics, via the promotion of import substitution in individual UDCs and the establishment of common markets among them, as a means to develop their industrial sectors and to diversify the structure of domestic production into a pattern which is capable of sustaining economic growth. Land reform is also advocated, but does not receive priority attention.
(5) Main policy instruments are tariffs and quotas, foreign exchange rationing, low formal sector interest rates and tax concessions to industrial investors. Foreign investment is welcomed as a potential purveyor of finance and technology.
(6) Underdeveloped countries cannot be expected to replicate the development paths of the now industrial capitalist countries due to the nature of their position in the global economy.
(7) However, industrial capitalist countries can assist the development of the periphery by opening their markets to its exports and by providing financial aid to ease foreign exchange shortages. With respect to the latter, evidently, the configuration of international relations, and perhaps contemporary attributes of human beings, necessary for such idealism to take hold are not in place. The unwarranted optimism of the structuralists, concerning DCs' assistance to the UDCs, is thus unrealistic. On the other hand, a crucial difference between Furtado's structuralist approach and the traditional perspective of Rostow, Lewis et al., is that the latter assume that there will be reinvestment of profits within the host economy. The structuralists argue the contrary occurs --an outflow of profits from the host economy. This is central because the dynamism of a capitalist system depends greatly on how profits are appropriated. Besides, the scale of demand generated in the Rostow-Lewis, traditional, export oriented capitalist nucleus depends on:
(1) The amount of labor the modern nucleus employs.
(2) The average real wage.
(3) The amount of tax paid by enterprises in the modern sector (which determines the possible scale of public sector expenditure).
(4) The demand for locally manufactured producer goods which is generated by this sector.
(5) The extent to which profits and salaries are spent within the underdeveloped economy (Hunt, 1989: 125-6).
For Furtado the extent of the expansion of the modern capitalist enclave depends on the relative importance of the income to which it gives rise, and the extent to which this income remains within the underdeveloped national economy. The latter depends very much on the inducement to invest in that economy, so the question becomes what determines this inducement. Initially the inducement is production for export (external demand). However, external demand cannot be relied upon to sustain growth indefinitely. The central issue therefore is whether export production can in turn generate an internal impetus to further growth, i.e., whether it can generate sufficient internal demand to induce a process of sustained investment to supply an expanding domestic market. There is, moreover, a consensus amongst the leading structuralist economists that the rational sequence for industrial development runs from light industry (consumer nondurables and then consumer durables) through to intermediate goods, and, lastly, basic capital goods. This is the reverse of the sequence which the Marxist economists --Preobrazensky, Feldman, and Dobb-- argue will maximize the long-run rate of growth.
The main reason for this difference of views lies in the structuralists' preoccupation with the impact of market size upon the inducement to invest, a factor that does not have the same significance in a centrally planned economy. To Furtado and Prebisch, however, it seems self-evident that this is how industrialization will proceed, whereby they point to the experience of industrialization in the more capitalist regions of Latin America, such as Southern Brazil, in support of their contention. Comparatively, furthermore, the traditional perspective of the expanding capitalist nucleus of Lewis and Rostow assigns the central role in economic development to increased savings and capital accumulation. It gives little scope to the notion that slow growth rates may be due not to lack of savings but to a lack of inducement to invest. It ignores too the possibility of a growth constraint due to a lack of foreign exchange, meaning that necessary capital goods cannot be imported. In contrast, these constraints are central to the structuralist perspective. Many of the policy recommendations that stem from structuralist analysis of underdevelopment, therefore, relate in one way or another to the international context. The tenor of the policy debate, with its preoccupations with the balance of payments constraint, the small size of the domestic market and domestic supply inelasticities, is noticeably different from that to be found in other analyses, e.g., Lewis, which perceive inadequate domestic savings to be the dominant constraint to growth.
Concerning wages, while Lewis argues that if growth is to be maximized there must be no increase in wages until the labor surplus has been absorbed from the subsistence sector, the structuralists have no equivalent preoccupation. Indeed, many structuralists uphold a preference for a degree of wage increase. For Prebisch, if productivity in agriculture can be increased by technical progress, and real wages raised by industrialization and adequate social legislation, the disequilibrium between incomes at the center and the periphery can be gradually corrected. A general increase in wages resulting from greater productivity in industry step by step spreads to other activities, which are thereby obliged to use more capital, per capita, in order to achieve the increase in productivity without which they would be unable to pay higher wages. For the structuralists, therefore, economic development is fundamentally concerned with raising the productivity of labor and with reaping the benefits of increased productivity through increased incomes.
Apart from equity reasons, Prebisch (1962: 15-18) suggests a consistency between some real wage increase in the modern sector and economic development for the following reasons:
(1) This helps to expand the domestic market.
(2) Some general increase in wages may act as a stimulus to raising labor productivity in technologically underdeveloped branches of productive activity.
(3) Real wage increases are a crucial means of retaining the benefits of rising productivity within an open economy.
Felix (1964: 39) also argues that implementing a decline in real wages as part of a deflationary package (which is exactly what the neoclassical “structural adjustment” calls for) is developmentally counterproductive. Through its impact on the structure of domestic demand, the reduction of real wages tends to divert investment in the industrial sector excessively and indiscriminately to consumer and capital goods that are technologically sophisticated and import intensive. In contrast, the less sophisticated and more labor intensive consumer goods industries are generally ones whose demand depends more heavily on nominal wage income. These, according to Felix's structuralist account, are precisely the industries which in the early stages of industrialization offer the best prospects for export development.
Finally, juxtaposing the neo-Marxist paradigm to the structuralist perspective indicates that the existing pattern of class control over the disposition of the surplus in the former, rather than existing economic structures in the latter, is the immediate cause of underdevelopment. The structuralists aim to influence policy design and achieve policy reforms within individual countries and within the international economic system. They emphasize import substitution as the device to structural change and economic development. Neo-Marxists, however, conclude that the path to development within the international capitalist system is blocked for underdeveloped countries. If economic development is to occur, the masses must replace the existing ruling class alliances in the countries of the periphery, take control of the economic surplus and move immediately to a socialist development path, withdrawing from the international capitalist system (again in contrast to Marx's conclusion that a revolution would ripely originate in the most industrial capitalist countries, not in the UDCs with their condition as is).
3. HETEROGENEOUS MECHANISMS
Heterogeneous mechanisms are courses of action potentially useful for economic growth and development, and ultimately for socioeconomic transformation, which could not be accommodated within the mechanisms analyzed in the other chapters. They are nondoctrinal and eclectic; they are adogmatic, sociological and/or nonuniform. These heterogeneous mechanisms include the impediment removal thesis, Weberian perspective, industrial revolution thesis, imperatives of food security, balanced growth, critical effort for growth, and linkages by unbalanced growth. These courses of action are dealt with, successively, in the following sections.
3.1 The Impediment Removal Thesis
The politico-institutional impediment thesis (Jones, 1981: 234-8) posits that historically speaking growth in the UDCs was in the cards, until it was actually frustrated. This thesis is in contradistinction to the one called “causes of the industrial revolution,” to be analyzed in the third section of this chapter. Eric Jones (1981) conceives of a motion from extensive to intensive growth. The former takes place when the total output and total population are both increasing at approximately the same rate so that there is no secular rise in output --average real income-- per capita, no intensive growth --no rising per capita GNP. Gradualism is the key to the latter. Jones' long-term growth in the UDCs can be achieved through a conjunctive device of growth promoting forces that result from the removal of impediments, contrary to Smiths' conclusion that "little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and tolerable administration of justice; all the rest being brought about by the natural course of things" (Quoted in Jones, 1981: 235).
Growth for Jones did not begin with, nor was it, a disjunction driven by an "industrial revolution," or "takeoff," or "propulsive force." Industrialization was a symptom not a cause. Growth is not an aberration. It is the norm. The Jonesian primary catalyst in bringing about growth lay outside either objective resource constraints or ideational cultural rigidity. It lay in the removal of political disincentives. The focus should thus shift from hypothetical push forces to whatever forces blocked growth --the depressants on intensive growth, pushing energies back down into extensive growth. Intensive growth, for Jones, who bridges Petty with the structuralists in his heterogeneous perspective, involves structural change --part of the occupied population shifts from primary production into secondary or tertiary sectors, large fractions of the population use new methods and consume more than ever before, whereby change continues for a long time. Moreover, capitalism is not a sine qua non for growth. Modern socialist countries have (or had) economies that grow (or grew). The USSR of the 1930s-1960s and the PRC of the 1970s-1990s are epitomes of socialist intensive growth.
Hence, seeing development as the "rise" of capitalism, à la Tawney (1926), or a single, great "discontinuity" as a result of Weberian religion sociology of sudden Protestant ethic (1904-5), does not do, for either view is not only mere ideation but also implies that growth (or transformation for that matter) occurred spontaneously only in Christian Europe, which although it broadens the Lewis-Rostow approach beyond Britain, it contradicts historical evidence that growth was not limited to Europe. Neither Confucian-Shintoism, of the Tokugawa Shogunate and Meiji Restoration, was Calvinist nor were the earlier Renaissances of the Sumerians at the turn of the second millennium BC, the Abbasids in the ninth century or Sung China in the tenth to thirteenth centuries, Protestant. Hence, rather than conforming to the revolutionary thesis, Jones joins the diffusionist thesis of Francis Bacon (1611), William McNeill (1967), Joseph Needham (1986) and Marshall Hodgson (1993). Major civilizations were evolving pretty equally, until the acceleration of Europe at its Renaissance. Polanyi had already concurred earlier: "In its economics, medieval Europe was largely on a level with Ancient Persia, India, or China, and certainly could not rival in riches and culture the New Kingdom of Egypt, two thousand years before" (Polanyi, 1944: 45).
Further, in his “Civilizations, Cores, World Economies, and Oikumenes,” in Frank and Gills’ World System: Five Hundred Years or Five Thousand? (1993: 221-46), David Wilkinson stresses the emergence and development of a single “central civilization,” which was formed out of the relations between Egypt and Mesopotamia around 1500 BC, and then successively and incessantly spread through the world to incorporate all other “civilizations” within the “central” one, which has been dominant long since. McNeill (1967: 44-133), indeed, sees the entire modern European growth as an epiphenomenon of Sung commercialism, and Jones (1981: 7-16) agrees. What frustrated the earlier Renaissances, in their account, were external factors such as the Jurchen and later Mongol invasions and conquests, and partly the socially or politically structured institutions, e.g., guilds, undermarket, undergovernment, militarism, conquest, rent seeking conflict --the use of political means by different élites to capture the surplus produced by others, rather than direct economic activities in the pursuit of growth. In addition, there existed extravagance, corruption, superficiality, repetitiveness, antiquarianism, regionalism, sectorism, conservatism and lack of investment finance, and legalism and rudimentary administrative structures under the Ming and Ch'ing (Manchu).
Following the US naval intervention in Japan, which took place in 1853-4 under the command of Commodore Matthew C. Perry, who sailed into the Tokyo Bay threatening to bombard the city, the US forced the Tokogawa shogun to accept asymmetrical diplomatic and commercial relations. Soon other Western countries gained privileges equivalent to those ceded to the USA in “unequal treaties” which prevented the government of Japan from levying tariffs of more than five percent ad valorum. Westerners also imposed rights of extraterritoriality, and thereby became not subject to Japanese law.
Members of the former warrior class, the samurai, aided by the accession of a young emperor, Mutsuhito, forced the foreign dominated shogun to abdicate and brought the emperor to Tokyo, the de facto capital. This event, marking the beginning of Japan’s industrialization through the use of a mixed economy, is known as the Meiji Restoration (Meiji meaning “enlightened government,” which Mutsuhito chose to designate his reign). The Meiji era lasted from 1868 to the death of Mutsuhito in 1912 (Rondo Cameron, Economic History, 1997: 271-4). Japan of course managed to achieve transformation internally without the help of outside powers. The lack of a land owning aristocracy during the Tokugawa quasi-feudal Shogunate was a crucial factor. This allowed the Samurai, formerly a warrior and then an administrative group, to carry out the modernization process after the 1868 Restoration when the Shogun was replaced as head of state by Emperor Mutsuhito.
On the other hand, both the Republic of Korea and Taiwan, other examples of the practical implications of the impediment removal thesis, were colonies of Japan during the first half of the twentieth century and as in most cases of colonialism this can be held to account for some changes to their social structures. But, more recently, both enjoyed considerable military and economic support from the USA in the global military order as bastions of capitalism, outposts in an area seen as vulnerable to the spread of communism and simultaneously well-positioned to contain it. That type of support has become problematic diplomatically since Nixon's détente with China in the early 1970s, but by that time the development process in South Korea and Taiwan was well underway, and the misperception of potential communist domino effect was still in the Western air.
US economic and military aid to South Korea and Taiwan was of such magnitude and importance to their survival and long-term development that it was a veritable Marshall Plan exclusively for two. In the 1950s, US aid financed more than 80 percent of South Korea’s imports and 95 percent of Taiwan’s trade deficit. By 1987, the cumulative economic aid received by South Korea alone was almost as much as that received during the same period by all African countries combined, and 41 percent of the Latin American total; in three decades of sustained US military spending on the peninsula, South Korea’s total military aid was 3.5 times that of the whole of Latin America and nearly 9 times that of all Africa. And both South Korea and Taiwan benefited greatly from US spending in the region connected with the Vietnam War.
When US aid started to taper off, the dollar continued to flow in the form of direct foreign investments and loans. The United States was the main source of foreign investments that entered Taiwan between 1951 and 1985 (amounting to 43 percent of all nonoverseas Chinese sources), followed by Japan (28 percent) and European sources (13 percent). Along with Mexico on the other side of the Pacific, Taiwan benefited from the first wave of relocation of US assembly operations to low wage sites for products that would be re-exported to the US market; by the late 1960s, roughly half of such US “imports” came from US owned factories in Mexico and Taiwan. When the Japanese countered by themselves relocating operations in Taiwan, the island took on its specialized function as a receptacle for declining Japanese industries at every stage of that dynamic economy’s industrial restructuring process.
Ever the nationalist, South Korea’s preference (until the mid-1980s) was for foreign loans over direct foreign investments. Following a sharp rise in the early 1970s, the country’s total foreign loans soared in 1978 and remained at nearly $3 billion a year for almost a decade. The state’s total control of the banking system and its complete autonomy in the allocation of subsidized credit, enabled it to concentrate capital on a handful of favored conglomerations, the chaebol, the backbone of Korean industry. With heavy deficit spending, South Korea in the 1970s embarked on a public sector heavy industry and chemicals development program in defiance of World Bank protestations; Taiwan did likewise.
The trade policies pursued by Seoul and Taipei ran parallel to each other through the decades: Initially, stringent import substitution and other protectionist strategies, which Washington chose to benignly overlook; then a determined export promotion program while still behind protectionist walls; then, with an eye to full access to the US market, some sort of liberalization and a full speed drive for exports. The market was ready even before the exporters were: It was the United States itself. With an unprecedented worldwide export expansion that followed in the 1980s, “Newly Industrialized Countries” became a well-known word.
Analogously, Hong Kong and Singapore were formerly entrepôt ports of British imperialism in its trade with China and the Far East, occupying the niches held in European medieval times by such sites of the Champagne trade fairs as Troyes and Provins. Hong Kong especially has for a long time benefited from its position as an unofficial outlet onto the world market for goods manufactured in China, often indistinguishable from those mass produced within its own small territory. Both Hong Kong and Singapore have since converted successfully into manufacturing locations.
Undoubtedly, all four of these newly industrialized countries have benefited from their special connections with the industrial world and institutions generally, and the USA and Britain in particular, for the above mentioned geopolitical and geostrategic reasons. For Japan and the "four little tigers" have, in various ways, all served as allies of industrial capitalism in the face of the establishment of Marxist regimes in China and North Korea after WW II. Their industrial development is a testimony to the impediment thesis: Once the impediment to transformation has been removed, the latter took place as a norm.
It is the Confucian principles of collectivism rather than neoclassical methodological individualism, and merit rather than ascription, that are reproduced in post-Confucian form to achieve work group productivity and industrial success throughout contemporary East Asia. The Confucian principles include emphasis on education and familial ties; guidelines for proper and ethical behavior among individuals, placing them in hierarchical relationships; and stressing social harmony. In business/economic terms these principles are reflected in cooperative industrial relations; authoritarian corporate bureaucracies; close business/government coordination (quasi bureaucratic capitalism, or plan rationale economy); labor treatment as human capital rather than as business outlays (hence lifetime employment); small gap between the compensation and living standards of top executives and the average workers (Mark Borthwick et al., The Pacific Century, 1992: 85-96). There is, however, more to the subsequent social relations accompanying the capitalist industrialization process in East Asia than the post-Confucian thesis alone.
Confucian collectivism and merit may serve as part of the explanation for successful industrial relations and management in East Asia, but innovation and marketing would seem to lie elsewhere. The flexibility of manufacturing techniques in East Asia is the definitive example of post-Fordism, contrasted with the rather inflexible mass production of Fordism. Post-Fordist consumerism in the industrial countries, involving a wider choice of product, is propagated through the attractiveness of notions of individualism, even if those notions are mainly illusory given the nature of consumerism. East Asian manufacturers have been particularly successful at identifying market niches at which to aim their flexible production runs, hence the invasion and prevalence of their consumer durable products the world over, especially the UDCs.
The complexity of production range and the brevity of life of particular variations lend themselves to notions of individualism in consumption, and to planned obsolescence in manufacturing and marketing. In this way, flexibility of product has successfully provided a broadening of demand, and people in East Asia are just as enthusiastic in the consumption of these individualized products as people in the West. Thus, there may appear to exist some grounds for skepticism over the full appropriateness of the post-Confucian principle of collectivism, at least when it is applied to consumption patterns in contemporary East Asian societies. However, the discrepancy could be accounted for by the fact that individualism, properly understood in that part of the world, is individualism rooted in social responsibility and permeated by concern with a viable socioeconomic order: stable, free, dynamic, and equitable. In that order, the private and the public sectors are essential and balanced, and the latter is conceived as the guardian of the viability of the former.
Authoritarian democratic capitalism, on the other hand, characterizes not only the Japanese system but also and to a larger extent that of its East Asian neighbors: Hong Kong, Singapore, South Korea and Taiwan. This authoritarian nature of the employment relationship distinguishes East Asian capitalism from the industrial liberal democratic model. It may not be so much post-Confucianism as a broader authoritarianism in the social structure that is responsible for the former industrial relations success. This authoritarianism is, however, served by Confucianism and takes deliberate and instrumental forms when reproduced in the industrial institutions of these countries.
These cases are of highly centralized states exercising repressive political power directly in the economic sphere, in contradiction with the theoretical liberal democratic principle of separation between polity and economy as the only way to capitalist development. Therefore, attempts by neoclassical economics to hold up the East Asian NICs, and present them to the UDCs, as examples of the free play of market forces are spurious rationalization, as they are among the more corporate, planned and dirigiste economies in the world. Similarly, attempts at prescribing that only liberal democracy can produce economic growth, or that a country can be transformed only as a result of an industrial "revolution," are equally fallacious.
The rise of industry in East Asia has thus given rise to a burgeoning research industry on the phenomenon itself. Cultural explanations (Confucianism), political theories (authoritarian developmentalism), business strategies (lean and mean approach, shop floor focus), economic history (late industrialization), and macro-historical postulates (Spengler’s “decline of the West” updated) have been elaborated in best sellers and fashionable MBA courses to account for the ascendancy of the Pacific Rim (George Aseniero, “Asia in the World System,” in Sing Chew and Robert Denemark, The Underdevelopment of Development, 1996: 196). It was, however, the restructuring of the world economy under the strategic pressures of the Cold War, and the consequent world economic downturn, which resulted in a new international division of labor that removed the impediments and propelled the rise of the East Asian NICs. State activism in the NICs clearly mattered in responding to those global opportunities and dislocations, but as it did, it was thanks to transnational conditions (prewar Japanese colonialism, postwar US patronage, Cold War subsidies) uniquely affecting them.
As to the population factor in the socioeconomic transformation process, which is another concern of the impediment removal thesis, the latter dissents from the Malthusian argument about the effect of increasing population rate on economic growth. The Malthusian invention pull premise stipulates that inventions and innovations (the latter being the insertion of the former in the productive system), succeed in pulling up output and enable more people to be supportive, but are eventually overtaken and exhausted by the pressure of human numbers.
The Ester Boserup's and Julian Simon's thesis (in Jones, 1981: 116-21) points out the positive contribution which population growth can make. On the assumption of a normal distribution of intelligence, the supply of gifted individuals will grow to the point where, ceteris paribus, it may attain critical mass for solving a country's problems. Boserup-Simon's is a population push model, in which, while the invention rate is independent of population growth, the adoption of new techniques of production depends on a rising population. And population growth presses the available stock of inventions into use. The higher the density of population growth, furthermore, the more the economies of scale achieved in such matters as transport, trade, and government.
Julian Simon and Gunter Steinmann (in Jones, 1981: 123-5) further argue that the larger of two populations will have the higher output per worker, because of scale advantages in learning by doing. The recrimination of the UDCs' population growth as the cause of poverty and misery, therefore, needs serious reconsideration. Indeed, the history of European economic thought testifies to the fact that economic growth and prosperity followed high rates of human development and population growth, whereas low or negative rates of the latter, e.g., in the fourteenth century's “Black” Death, resulted in hampering and rolling back economic growth (Maurice Ashley, History of Europe, 1973).
Indeed, Harrod's work is predicated on the premise that population growth sets the upper limit for economic growth. Harrod's (1968, 1993) capital-output ratio represents the value of the capital needed to produce a given output divided by the value of that output. It is a stock flow ratio, whose value depends partly on the time period over which the output flow is measured. If planned savings are represented as a proportion of national income, then this proportion divided by the planned capital-output ratio gives the warranted rate of growth of output: Gw = S/Cp.
The actual capital-output ratio diverges from that which had been planned, and actual rate of growth of output therefore diverges from the warranted rate. The actual growth rate is given by the actual savings rate divided by the actual capital-output ratio. Where output growth is above the planned rate, C will be forced below its desired level, and vice versa. Harrod assumes not only a constant Cp, but also a constant capital labor ratio, and, given this assumption, the economy cannot, at full employment, grow faster than the rate of growth of the labor force.
However, as ideal types, the models of Boserup-Simon and Simon-Steinmann clarify some relationships, but by neglecting the institutional and political setting they leave the final outcome indeterminate, for example whether talent will be mobilized, i.e., whether rates of invention and innovation will keep ahead of population growth or whether foreign pressures and intervention will abort the entire enterprise. These factors, the direct interdependence of population and security notwithstanding, cannot be decided by population studies alone. The political strategic context, particularly in the case of the UDCs, is crucial. Hence the need for further research on the role of the population factor in the transformation process.
Recently, UNDP (1990) categorized the human development experience, still another aspect of the impediment removal thesis, in various countries during the last three decades into three broad categories of performance. First are countries that sustained their success in human development, sometimes achieved rapidly, sometimes more gradually. Second are countries that have their initial success slow down significantly or sometimes even reverse. Third are countries that had good economic growth but did not translate it into human development. From these country experiences emerges the typology of sustained human development, disrupted human development, and missed opportunities for human development.
Analysis of these UNDP country cases leads one to several important conclusions. First, growth accompanied by an equitable distribution of income appears to be the most effective means of sustained human development. Second, well-structured government social expenditures can generate substantial improvements in a relatively short period. This is true not only for countries starting from little human development, but also for those that already have moderate human development. Third, to maintain human development during recessions and natural disasters, targeted activism may be necessary. Fourth, growth is crucial for sustaining progress in human development in the long-run, otherwise human progress may be disrupted. Fifth, despite rapid periods of GNP growth, human development may not improve significantly if the distribution of income is bad and if social expenditures are low or appropriated to those who are better off. GNP growth in statistical tables is not always perceived as such by ordinary people trying to put bread on the table and keep a roof over their heads, for it, more often than not, does not entail any immediate benefits for the masses. Finally, while some countries show considerable progress in certain aspects of human development, particularly in education, health and nutrition, this should not be interpreted as broad human progress in all fields, especially when one focuses on the question of democratic freedoms. John Galbraith underlines the role of education by making the case that “no literate population is poor, no illiterate population is other than poor” (John Galbraith, “Economics in the Century Ahead,” in John Hey’s The Future of Economics, 1992: 46).
Nonetheless, mere literacy, as important as it is for the initiation and sustenance of economic development, is not sufficient for this high technology world on the threshold of the twenty-first century. The ability of individuals to participate fully and effectively in the current scientific technological matrix, whether as scientists and technicians or in its commercial and bureaucratic structures, increasingly requires advanced studies and sophisticated brain-power. The brain drain from the UDCs has to be viewed in this human capital demanding context, and solutions thereof must be sought accordingly. Simon Kuznets (1966) argued that it was the growth of knowledge which was the most decisive characteristic of modern economic growth. Kuznets was not merely writing about practical knowledge in the sense of knowledge directly applied in transforming inputs into outputs, but also of the basic sciences which are increasingly having profound impacts on transformations in the sphere of production, that are leading to changes in the international economy.
The main policy conclusion that can be discerned from the country study cases, however, is that economic growth, if it is to enrich human development, requires effective policy management. Conversely, if human development is to be durable it must be continuously nourished by economic growth. Excessive emphasis on either economic growth or human development will lead to developmental imbalances that, in due course, will hamper further progress. So, the impediment removal thesis is accepted, at least in terms of its ultimate inference, by UNDP.
3.2 The Weberian Perspective
For Max Weber beliefs are autonomous; they drive history by causing people to modify their actions. Reacting against the German Historical School and Second International Marxism, let alone his bitter opposition to Marx, Weber thus provided an ideational, heterogeneous perspective for development, namely The Protestant Ethic and the Spirit of Capitalism [1904-5] (1958). The influence of the Protestant ethic on the capitalist spirit was pinpointed by Marx, in the Grundrisse, seven years prior to the birth of Max Weber in 1864: “The cult of money has its asceticism, its self-denial, its self-sacrifice --economy and frugality, contempt for mundane, temporal and fleeting pleasures; the chase after the eternal treasure. Hence the connection between English Puritanism, or also Dutch Protestantism, and money making.” Indeed David Hume, two centuries before Weber, did raise the question of the distinctive role of Protestantism in the birth of the modern world (Hume, Natural History of Religion, 1992, and the essay “Of superstition and Enthusiasm” in Hume’s Dialogues Concerning Natural Religion, 1935). 
Weber’s view is commensurate with the puritan ethics of New England and the Confucian ethics of Japan and the Republic of Korea, as well as other ideational views. Indeed, Werner Sombart, not to be outdone by Weberian Protestantism, and anticipating Schumpeter’s “entrepreneurial spirit,” published The Jew and Modern Capitalism in 1911, arguing that the “spirit” of capitalism was introduced into Northern Europe by the dispersion of the Jews after the Inquisition, bringing with them a new morality, a new conception of legal relations, and a genius for commercial enterprise. Sombart followed that by The Quintessence of Capitalism  (1915), explicitly attacking Weber’s thesis that Calvinism had played a key role in creating the “spirit” of modern capitalism. He argued that Calvinism in particular and Puritanism in general were actually hostile to the bourgeois values of thrift, rational calculation and this-worldliness.
At any rate, Weber’s economic emphasis, as well as that of Oscar Lange (1945), is on the elements of exchange, the use of money and rationalization. His perspective is heterogeneous because he has combined with the Protestant ethic propertyless proletariat to produce the spirit of capitalism. This Marxist dimension, together with Schumpeter's concession, despite his invidious opposition to Marx, that the Marxist analysis prescribing that capitalism would fall through its own contradictions might come true, begged the adjective “bourgeois Marxism” prevalent in the literature of transformation (Stark, 1958: 127, 212, 272). However, the significance of the Weberian perspective is that it engendered other scholarships which expanded his approach with more realist, transformative and remedy propositions unfolding from the ideational vision. The way this Weberian school identifies the nature and causes of underdevelopment, even as one disagrees with such reasoning, is crucial to understanding its proposed remedies.
In his study of modern Indonesia, Sievers (1974: 95-6) argues that the twentieth century did not invent the problem of economic development; it confronted the European imperial powers when they were ruling where they had been trading in the ancient but crippled civilizations of Asia; that it was the Europeans who perceived the elementary point that increased production was necessary for prosperity, whereby the late eighteenth and early nineteenth centuries witnessed the popularity of liberalism. “Liberalism in this colonial context includes progress [both along humanitarian lines as well as along the lines of economic and social reorganization]; freedom from government sanctioned debasement of man by man (corvée and the like); freedom of trade, that is, toleration of competition of foreigners and free agents in place of mercantilist monopoly; freedom of capitalistic enterprise, both capital intensive and small peasant; development of habits of economic responsibility in the peasant class via freedom to produce for the market; substitution of private property for village communalism; and the preferability of a money economy to all manner of dealings in kind” (96). Hence, that heterogeneous liberalism “was a program based on a mixture of Rousseau, Quesnay, and Adam Smith” (ibid.). Ultimately, however, that rendition of liberalism means the free right of private individuals and firms to exploit the soil, and people, of a country (Sievers, 1974: 96, 104, 124).
Sievers' focus is on the ideational account of underdevelopment. He analyzes the anthropologically grounded literature, together with Weber, Schumpeter, Boeke, and others who argue that precapitalist societies are not primarily economic minded (Sievers, 1974: 284-7). However, while cultural aspects certainly influence social formations' abilities to progress, even Marx has not disagreed with that, qualifying the role of the economic base only to the last instance, it is going too far, along the road of ideas and their effects, to hang the entire phenomenon of underdevelopment on cultural traditions, à la Boeke. After all, the entrenched customs, while stable, are not immutable. Was South Korea much culturally different from, or more modernizationally congruent than, China when the former was introduced to industrialization by the imperatives of the Cold War? Were Hong Kong's traditions different from those of its mainland surroundings? Were Singapore's mores uniquely compatible with industrialization? Or was it the geostrategic-geopolitical circumstances that removed impediments to economic growth, and pushed those formations in different directions other than their very culturally similar neighbors? Why is it that Sievers' Indonesia, "mystical" only a few decades ago, has since achieved one of the highest economic growth rates in Asia, third only to China and Malaysia, and the latter currently having the tallest building in the world in its capital, Kuala Lumpur, rather than that being in Chicago or New York? The problem evidently is with the ideational conception of history, the Weberian as well as the generic, for Weber too had it backwards, standing Marx’s paradigmatic breakthrough (historical materialism) on its head.
Sievers (1974: 285-6) is on the mark nonetheless in pointing out the facts that in underdeveloped conditions social recognition and other social goals come before economic prosperity; that economic needs are static at some minimal level, enough to satisfy the demonstration effect; that in consequence, economic rationality may frequently be sacrificed for noneconomic goals. For he is cognizant of the facts that the precedence of social needs over economic needs is the source of social unity in the UDCs; that it induces cooperation and harmony; that large scale administration is unnecessary in the UDCs, and accordingly productive activity is family based and/or governed by tradition; and that such societies may be relatively stationary in economic terms but dynamic in social terms.
Sievers' (1974, ch. XIII: 279-97) reading of Julius Herman Boeke's rendition of dualism also identifies the latter as the result of the intrusion of capitalism, of the penetration by a colonial power. Dualism in the tradition of Boeke concerns the implications of a society divided into precapitalist and capitalist sector. It is the consequence of interaction between village society and the capitalist socio-politico-economic system. Some societies have been drawn into a modern economy but are yet held in traditional ways and values: Traditional customs and land tenure still have a strong grip. The pristine, precapitalist society's perturbed state reflects capitalistic traits. More importantly, Sievers points out that dualism is the consequence of the intrusion of a total socioeconomic system, not merely a particular power relationship (281, 293).
Whereas Sieversian dualism is not by definition either colonial or foreign because indigenous individuals can become part of the capitalist regime, and indigenous élites can preside over the capitalist sector and perpetuate dualism even after the colonial power has departed, Sievers (1974: 293) tolerates Clifford Geertz’s argument that it was colonial policy which caused dualism, for people do not become impoverished because they are static, they become static because they are impoverished. The intrusion of capitalistic traits into traditional societies through imperialism and neoimperialism resulted in dualism: The capitalistic was separated from the syncretistically and traditionally inclined. The mentality is the product of economic situation, and not the other way around.
Dualism for Sievers thus means the coexistence within one society of two heterogeneous subsystems, imported capitalism and indigenous peasant precapitalism, each of which is a mature system sui generis. The two systems are separated by a genuine chasm, the absence of the intermediate stage of early capitalism. If it were not for the missing stage, there would be a continuity in which the early stage would be but a lagging transit to the higher stage, as from feudalism to capitalism or from capitalism to socialism, and hence not dualism. However, this kind of heterogeneity, contends Sievers (as has the modernization school’s argument presented above, for both perspectives emanate from the same ideational origin), is transient and will disappear as the early stage disintegrates and is everywhere replaced by the new.
Sievers, nonetheless, points out that dualistic society is unique in that it is a stable heterogeneity; two distinct systems subsist simultaneously. The capitalist sector does not absorb the lagging sector, which in turn does not progress. The lagging sector is viable, hence it fights to maintain its own identity; and so the essence of dualism is conflict. The lagging sector is not converted, but neither does it win: In the process of interaction with the capitalist sector great damage is done to the fabric of village life and also to the value system and the sense of worth of the adherent to that lagging sector. He or she is left out of the decision-making process, having neither consultation nor participation, and finds a different sector governed and administered by aliens. One loses both control and the sense of responsibility for oneself: Dependence is forced on him/her.
Sievers thus contends that involution is a response to dualism (304); the peasantry, cut off from an expanding capitalist sector are forced back onto their own resources. They adapt but not progressively in a modernizing sense. The entire social structure runs madly to stay in the same place. When the villager finds himself the victim of a rising capitalistic system of which he cannot be a part, with no viable alternative, he turns inward for survival. So, while primitive manufacturing is characterized by rehabilitation, expansion and new industries, the formation of a proletariat, a desideratum of modernization, is hampered. The institutionalization of a dual system is thus solidified, by a policy of excluding a segment of the population and a sector of the economy from participation in the modernizing process, while one part is stimulated the other is stultified, and by making the alienation of the traditional segment of society permanent. Meanwhile, private enterprise dualism, in the name of liberalism, permits the continuation and crystallization of the unequal symbiosis between the modern sector and the traditional sector. In this system the old sector is disorganized by capitalism but is not permitted to become capitalistic. Moreover, the lack of integration of the market sector, insofar as the productive, marketing and financial units do not interact enough as to constitute a unified whole, in addition to the dualistic cleavage between the market and nonmarket sectors, become two problems that need continuous attention (254). The response to population explosion, moreover, is more labor intensiveness, a process of static or stationary (Eric Jones’ extensive) expansion.
Sievers thus discerns a crucial underlying foundation which guides Boeke's dualism: That conventional analytic economics can have only a limited relevance to a dualistic society, for it is a discipline with a limited scope. Hence, conservative as he may have been, Boeke rejected the universal pretensions of orthodox economic analysis (291). A dualistic economy requires dualistic economics, which is neither conventional capitalistic economics nor anthropological precapitalist economics, but a blend of both. Likewise it is necessary to have a differentiation in respect to policy. The policy usually called economic is not the most appropriate instrument to deal with the dualistic conflict or with the problems of the lagging sector.
Sievers' (1974: 217) implicit conglomerate of development can be epitomized in his term "production promotion." And inasmuch as political stability is a condition for success in the economic sphere (233-4), a perceptible improvement in the lot of the masses is a Sieversian condition for transformation. The latter can only be attained through increased participation in the structure of political life of all societal strata, and a real commitment to the attainable democratic processes, civil liberties, due process of law and freedom of the press: a thorough democratic ambiance, albeit not necessarily a replica of DCs' institutions, political or economic (236).
Any successful reform must involve the psychological and social transformation of the masses, but transformation does not take place quickly, and crash programs are doomed to failure (289). Policies could be meaningfully formulated only in terms of the actual conditions in, and the particular heritage of, a country; hence, no monolithic dogma could do for Sievers.
Technical progress at an acceptable and agreed upon social cost can be effective in laying the basis for an economically, politically and sociologically modern state. Stabilization policy aimed at controlling inflation via governing monetary supply, government finance, bank credit and foreign exchange is unavoidable (212). Decentralization, increased political autonomy especially in the fiscal and budgetary domains, is also essential.
While national income may increase, cautions Sievers, the mass of the working class may not improve their lot, because the increments in national income may not be distributed to them. This caution was formulated one full decade before the abysmal results of "structural adjustment" made it prophetic almost in every case the latter was applied, virtually all over the UDCs.
Education: primary, higher, vocational, and advanced, is a key to development; so, the economic endeavor is set into a context by Sievers, far from reductionism. Further, schools and universities are important; but more important are the attitudes and values which prevail (245). Education should not be viewed as a license out of the working stratum into the bureaucracy. The aristocratic ideal that militates against manual labor should be dismantled and abandoned.
Transmigration may be adopted as a better than nothing approach to relieving population pressure on overcrowded regions with adjustment to the industrialization program in mind (244). Building infrastructure and social services and then encouraging migration are also of the building blocks of Sievers' course of action for transformation. Government mediation can play a role in development via technical education, promotion of research, import controls, extension of credit and the like (146).
Yet that the Sieversian government is committed to the welfare of the masses does not mean it is hostile to private enterprise, especially indigenous private enterprise. And Sievers' acceptance of a governmental role in a country's transformation, including his understanding of the need for stability, is no license for totalitarianism. He nonetheless concedes that the word democracy, so quick to the Western tongue, becomes most illusive when it comes time for definition (166).
For his Indonesian case purposes, Sievers postulates that democracy is both the ideology underlying the political system in the West and institutional structure of Western polity, which is presumably designed to fulfill the goals of that ideology. He then relaxes that definition to describe the political ambiance of a society insofar as it is more or less successful in realizing the democratic ideal. Sievers thus concludes that "a degree of consensus is essential if a democratic nation is to function with sufficient harmony to be workable" (168), and that "the history of the fall of democracy...is essentially a story of instability, of an inability to govern" (172).
3.3 The Industrial Revolution Thesis
The concept of an industrial "revolution" did not appear spontaneously with factory development in the late eighteenth century. It was made popular only after (the elder, the uncle --1852-1883) Arnold Toynbee’s Lectures on the Industrial Revolution in England, published in 1884, whereby it enjoyed immediate acceptance at a moment of intense international economic competition, a faltering of British industrial supremacy and the feverish first wave of neoimperialism.
The word “revolution” implies a suddenness of change that is not, in fact, characteristic of economic processes. Nor was the change taking place in industry alone in that period of roughly 1760-1830. Nor did the change start at that time, nor has it ended yet. This inquiry, therefore, uses the word “industrialization” instead of “industrial revolution.” On the fact that the term “industrial revolution” is a “misnomer,” “both inaccurate and misleading,” as well as on the fact that industrialization is much less British than is commonly believed, see Thomas Ashton, The Industrial Revolution: 1760-1830 (1948: 2); and Rondo Cameron, Economic History of the World (1997: 164-7). See also Henri Pirenne's sketch dealing with "the evolution of capitalism through a thousand years of history," entitled "The Stages in the Social History of Capitalism," American Historical Review, vol. XIX (1914).
Further, J. U. Nef, in Industry and Government in France and England, 1540-1640 (1940), has shown that what he calls the first industrial revolution in England occurred between 1540 and 1640, and included investment in such industries as mining, metallurgy, brewing, sugar refining, soap, alum, glass and salt making. Some of these industries, e.g., glass, were of course already in existence in the Levant in the eleventh century, as the Crusaders found out. The reference here is to the use of glass in architecture: In windows, doors, etc., for the material "glass" itself, and glass artifacts, were first made in Mesopotamia before 2000 BC. The process was indeed cumulative and dialectical, whereby changes in quantity were at critical junctures transformed into changes in quality.
Heilbroner's Making of Economic Society (1972), nonetheless, is an engineering of development blueprint which focuses on how an underdeveloped country can emerge from its poverty. His fundamental thesis is that the prerequisite for economic growth for the underdeveloped countries today is not essentially different from what it was in Britain at the time of the industrial "revolution." To grow, an underdeveloped economy must build capital: Another version of Lewisism, but couched in a dose of idealism and anticipation of practical issues. The question for Heilbroner then becomes how a starving country is going to build capital. When the majority of the population is scrabbling on the land for a bare subsistence, how can the nation divert its energies to building dams and roads, ditches and houses, railroad embankments and factories, which, however indispensable for growth tomorrow, cannot be eaten today? If postage stamp farmers were to halt work on their tiny, unproductive plots and go to work on a great project in the urban areas, who would feed them? Whence would come the necessary food to sustain these capital workers?
At first sight, the problem seems insuperable. If an underdeveloped country is to amass capital, it will have to swing labor from agricultural tasks to capital building tasks. But when a country can barely feed itself, how can it make this switch? At a second look, however, Heilbroner (1972: 115) finds that the prospect may not be quite so bleak. These economies do have unemployed factors, and a large number of peasants who till the fields are not feeding themselves. They are, in a sense, taking food from one another's mouths. The crowding of peasants on the land in the underdeveloped areas has resulted in a diminution of agricultural productivity far below that of the developed countries. Hence the abundance of peasants working in the fields obscures the fact that a smaller number of peasants, with little more equipment, perhaps even with no more equipment, could raise a total output just as large.
In concurrence with this vision of Heilbroner, one can point out that one of the major structural changes in European economies in the nineteenth century was a decline in the relative size of the agricultural sector. That does not imply that agriculture ceased to be important; quite the contrary. The prerequisite for a decline in the relative size was a proportional increase in agricultural productivity. Agrarian reform, involving a change in the system of land tenure, was frequently a prerequisite for substantial improvement in productivity. The latter can contribute to overall economic development in several potential ways; for example:
(1) The agricultural sector can supply a surplus population (labor force) to engage in nonagricultural occupations.
(2) The agricultural sector can supply foodstuffs and raw materials for the support of the nonagricultural population.
(3) The agricultural population can serve as a market for the output of manufacturing industries and service trades.
(4) By means of either voluntary investment or taxation, the agricultural sector can provide capital for investment outside agriculture.
(5) By means of agricultural exports, the agricultural sector can furnish foreign exchange to enable the other sectors to obtain necessary inputs of either capital goods or raw materials that are not available domestically (Rodno Cameron, Economic History of the World, 1997: 275-7).
Now Heilbroner (1972: 54) begins to see an answer to the predicament of the underdeveloped societies. In nearly all of these societies, there exists a disguised and hidden surplus of labor which, if it were taken off the land, could be used to build capital. This does not mean that the rural population should be literally moved in toto or en masse to the cities where there is already a hideous lump of indigestible unemployment. It means rather that the inefficient agriculture conceals a reservoir of both labor and the food to feed that labor if it were elsewhere employed. By raising the productivity of the tillers of the soil, a work force can be made available for the building of roads and dams, while this transfer to capital building need not result in a diminution of agricultural output.
This rationalization of agriculture is not the only means for growth. When agricultural productivity is enhanced by the creation of larger farms, or by improved techniques on existing ones, part of the ensuing larger output per person must be saved (p. 96). In other words, the peasant who remains on the soil cannot enjoy his enhanced productivity by raising his standard of living and eating up all his larger crop. Instead, the gain in output per cultivator must be siphoned off the farm. It must be saved by the peasant cultivator and shared with his formerly unproductive cousins, nephews, sons and daughters who are now at work on capital building projects.
A hungry peasant is not expected to do this voluntarily. Rather, by taxation or exaction, the government must arrange for this indispensable transfer. Thus in the early stages of a successful Heilbronian development program there is apt to be no visible rise in the individual peasant's food consumption, although there must be a rise in his food production. What is apt to be visible is a more or less efficient, and sometimes harsh, method for ensuring that some portion of this newly added productivity is not consumed on the farm, but is made available to support the capital building worker (Heilbroner, 1972: 65-9).
This Stalinist style method, of course, is not a formula for immediate action. In many underdeveloped lands, the countryside already crawls with unemployment, and to create overnight a large and efficient farming operation would result in an intolerable social situation. This is a long-term process that covers the course of development over many years. One should also be cautious in the extraction of rural surplus to create new infrastructure and to develop local and centralized industries, remembering Mao's often quoted injunction from experience in the context of condemning Stalinism, namely that it is counterproductive to impoverish the peasants in order to build industry: This is draining the pond to catch the fish.
Capital building, moreover, is not just a matter of freeing hands and feet. Peasant labor may construct roads, but it cannot with its bare hands build the trucks to run over them. It may throw up dams, but it cannot fashion the generators and power lines through which a dam can produce energy. What is needed to engineer the ascent is not just a pool of labor, it is also a vast array of industrial equipment.
An allied problem of no less importance arises from the lack of technical training on which industrialization critically depends. At the primitive level, this is evidenced by UDCs' appalling rates of illiteracy, which make it futile, for instance, to print instructions on a machine or a product and expect them to be followed. At a less primitive level, the lack of expert training becomes an even more pinching bottleneck. To bring about such expertise will be a task of staggering difficulty without much remuneration. Yet without them it is often difficult to translate development plans into actuality.
How is equipment going to be obtained? By expanding the machine tool (that is, the capital equipment building) sector; hence the heterogeneous orientation of Heilbroner. But an underdeveloped economy does not have a capital equipment building sector. Consequently, in the first stages of industrialization, before the nucleus of a self-contained industrial sector has been laid down, an underdeveloped economy must obtain its equipment from abroad.
The country can do this in one of three ways, suggests Heilbroner (1972: 115-23): It can buy the equipment by the normal process of foreign trade; it can receive the equipment by foreign investment when a corporation chooses to invest in that economy; or it may receive the foreign exchange needed to buy industrial equipment through a grant or a loan from another country or an international organization, that is, it can buy industrial equipment with foreign aid.
Of these three avenues of capital procurement, the first and most important is foreign trade. A lion's share of export earnings of the underdeveloped countries must go to pay for such indispensable imports as procurements of equipment, or supplementary food, and replacements of old equipment, or to pay interests on loans contracted with the industrial world.
In addition, the Ricardian problem, i.e., comparative advantage, reckons Heilbroner (1972: 135-50), plagues the underdeveloped countries in foreign trade. International trade is the supposed means by which a great international division of labor can be achieved; that is, by which productivity can be enhanced in all trading countries, by enabling each to concentrate on those products in which it is most efficient. With the underdeveloped countries, however, this international division of labor has worked badly indeed.
Their structural underdevelopment has prevented them from developing their productivities even in their main occupational tasks. And most of them suffer from another problem: As sellers of raw commodities --usually only one raw commodity-- they face a highly inelastic demand for their goods. The terms-of-trade --the actual quid pro quo of goods received against goods offered-- are likely to move against the poorer nations, who must give more and more coffee or cotton for the same amount of machinery.
This is to the contrary of the argument of neoclassical economics that quality of machinery and industrial products is constantly improving, whereas the quality of raw commodity is not, so that the higher prices of industrial goods are offset by their greater productivity when put to use. Moreover, when commodity prices take a particularly bad tumble, the poor nations actually lose more in purchasing power than the total amount of all foreign aid they receive; in effect they subsidize the developed countries (Heilbroner, 1972: 212).
That is why the UDCs are seeking commodity stabilization agreements, not altogether dissimilar from the support programs that stabilize US farm incomes, but nonetheless is disapproved of by neoclassical economics and attacked by the Bretton Woods organizations. This commodity stabilization is essential if the underdeveloped countries are to be able to plan ahead with any assurance of stability.
Another possibility lies in the prospect of encouraging diversified exports from the underdeveloped countries --e.g., handicrafts, light manufacturers. But this is unlikely to happen as long as the industrial countries refuse to allow the underdeveloped ones equal access to their own markets.
A second main avenue of capital acquisition for the underdeveloped countries is foreign investment. Before World War II, this was a major source of their investment programs. Today, however, it is a much diminished avenue, as a corollary for the existence of transnational corporations. The former capital exporting nations are no longer eager to invest private funds in areas over which they have lost control and in which they fear to lose any new investments they might make.
On the other hand, many of the poorer nations view DCs' capitalism with ambivalence if not suspicion: They need capital, technology, expertise, but they see in the arrival of a branch of a powerful corporation run by faraway headquarters another form of the domination they have just escaped, at least de jure. As a result, foreign investment is often hampered by restrictive legislation in the underdeveloped countries, even though that investment is badly needed: Humans do not live by pecuniary incentives alone, as neoclassical economics would have it.
Another difficulty is that DCs' corporations partially offset the growth producing effects of their investments by draining profits out of the UDCs. Even when plant and equipment remain in the underdeveloped world, where it continues to enhance the productivity of labor, the pattern of economic flows sucks the surplus produced by the UDCs in such a way as to make foreign investment a negative influence: The earnings on this capital are not plowed back into still more capital goods, they do not trickle down; so their potential growth producing effect is far from realized, contrary to the neoclassical supply side hypothesis.
The third channel for securing capital is foreign aid from the industrial countries or international organizations. Foreign aid could make possible the accumulation of industrial capital much faster than could be accomplished solely by underdeveloped countries' resources. It could also provide a source of technical assistance that enables the underdeveloped countries to partially overcome their lack of skilled and trained personnel. Yet foreign aid may displace domestic savings and relax the effort of an underdeveloped country to generate capital. Such aid also carries political and cultural attached strings, which is the more dominant factor. In a great number of cases, furthermore, the aid provides a golden opportunity for much of it to be siphoned off by corrupt members of the governing stratum.
In sum, the revolution thesis, insightful in some aspects as it is, is based on the premise that for growth to occur it needs creation of some novel, unique, positive force or means such as what started in Lancashire at 0601 a.m. on January 1, 1760. But the "event," in concurrence with Jones, was really a process, smaller, far less British, infinitely less abrupt, part of a continuum, which took much more time to run. The proponents of this revolution rationale can have no range of comparative cases to help isolate the sources of the change, unlike what the impediment thesis can provide.
3.4 Food Security
No commodity can have graver consequences to a country's security and political economic orientation and stability than basic food items. Allocation of foreign food deals, as part of aid, or as a commercial transaction, is influenced by noneconomic, that is, other, more stringent, political and strategic considerations. UDCs that depend on foreign food sources, or on food aid, especially if heavily dependent on such foreign supply, not only face uncertainty, but also lose a certain independence of action, both internally and internationally. Heavy reliance on food aid is a specially sensitive issue because food is, by its Maslowian nature, a basic need. A shortfall in food supply resulting from a reduction in food aid has thus much graver social and political consequences than does a shortfall in other forms of aid. However, to reduce dependence on food aid to a level which is socially and politically tolerable is not to eschew commercial food imports financed by export earnings, for the former does not lead to self-sufficiency in food. Further, sharp year-to-year fluctuations in food prices, caused by variations either in domestic food production or in import prices, lead to deprivation and distress among the poor when prices rise; conversely, low prices discourage production and long-term investments. A policy of stabilization of food prices within a reasonable margin thus requires either domestic food stocks or a compensating variation in imports. The domestic prices of food imports can be regulated by means of taxes and subsidies on imports. If import prices rise above the domestic ceiling price, subsidies are needed; if they fall below that level, taxes could be changed on imports.
In addition, the optimal combination of domestic stocks and reliance on food imports, financed either by accumulation of foreign exchange reserves or by means of guaranteed access to international financing facilities, depends on the particular circumstances of the country concerned. Criteria that determine the appropriate size of domestic food stocks include the degree of fluctuations that are politically tolerable and economically efficient --this will determine the price band, that is, the gap between ceiling and floor prices-- within which stabilization of prices is to be sought; the cost of food stocks, including the required amount of investment in stocks and costs of storage (in the UDCs both spoilage in storage and storage costs tend to be higher, the latter because of higher interest rates); the time interval between the procurement of supplies from abroad and their distribution at home --which determines the amount of food supplies to be released from stocks at times of shortage (Nurul Islam, in South Center, 1993: 79-83).
Another important issue related to food security, especially during an attempt at industrialization, is the assurance of access for the poor. The South Commission (1990: 108-9), dealing with the question of food subsidy for the poor along lines no less harsh than those of Heilbroner, apparent good intentions in both cases notwithstanding, stresses the subsidy's high cost, in the sense that resources devoted to the subsidies could be used alternatively in raising employment and income opportunities for the poor. In addition, the Commission, but now rightly so, highlights the possibility of leakages of the benefits of the subsidy to the nonpoor, and gives qualified support to food subsidy plans which could be used for the improvement of the nutritional status of vulnerable groups.
Any reasonable person who is directly informed as to what poverty in the UDCs means will opt for a second best solution, trying to avoid as many inefficiencies and high costs as possible. Experience, compiled by Nurul Islam (in South Center, 1993: 95-6), indicates that one such measure which tends to ensure self-targeting is the introduction of public employment plans such as public works projects, including food for work programs. Wages may be paid in cash and partially in food, provided that employment is offered at less than the going wage rate, that is, less than what is available in alternative private employment opportunities or self-employment, without circumventing a reasonable minimum wage limit. Such plans are not likely to compete with existing employment opportunities and are most likely to attract those who are otherwise unable to find employment or feed themselves.
A second potential measure is some kind of specifically targeted, subsidized food distribution plan. Feeding programs for particular vulnerable groups among the poor, for example the landless poor or female headed households, are unlikely to involve any considerable risk of leakages to the nonpoor. Both the public employment plans and targeted food distribution programs can be integrated with development programs, that is, provision of physical infrastructure such as roads, irrigation and drainage plans or training and education of the poorest groups for income earning activities in both self-employment and wage employment. Admittedly the administration of such poverty oriented plans is costly. But a considerable body of experience has been accumulated (Nurul Islam, South Center, 1993: 103-5) which can provide guidance for successful and cost effective replication, and perhaps can be adjusted to the special circumstances of the country concerned.
Several requirements seem to be clear. First, such plans should be decentralized to the level of local government for their implementation if not also for the mobilization of resources. Second, transparency and accountability in the administration of such plans must be assured, in order that the beneficiaries and local populations at large are kept informed not only about the criteria for the selection of the beneficiaries, but also about the nature of projects undertaken and the way in which resources are spent on these projects. Third, explicit linking as far as possible of the poverty alleviating plans to development projects, that is, to investment in physical and social infrastructure, will ensure that they are less like welfare plans and more in the nature of development projects, contributing to the formation of either physical or human capital. Ideally, the UDCs should aim at self-reliance rather than self-sufficiency, such that a UDC should be able to procure the basic food it needs on its own, in order to achieve a minimum level of food security. This minimum could then be complemented either by further domestic production if it is a low cost, efficient producer, or through imports in exchange for exports, either nonfood or nonagricultural exports.
However, that does not mean surrendering to export led growth in order to procure the needed food complement. Comparative advantages cannot always be realized mutually; markets are neither perfect nor competitive, they are oligopolistic and oligopsonistic (whereby small numbers exchange relations dominate); trade is severely hindered by protectionism; and social and security considerations override Ricardo's static concept of comparative advantage. Further, unlike capital, labor is not mobile enough internationally, its flow is hindered by a great many obstacles and discriminatory practices; there is no integrated labor market on the world level; international trade cannot perfectly substitute for factor mobility; paradoxical trade structures are contrary to the H-O-S theory, and the perverse flow of capital also contradicts the assumed equalization.
Neither the unorganized workers nor the weaker UDCs can attain a just or even a reasonable remuneration for their work, furthermore; world production, while causing oversupply and wastage, is failing to satisfy basic human needs. And on the world level, despite all the loud talk about “human rights,” there is no state like institution regulating income redistribution, and neither safety nets nor systematic welfare measures are applied, yet economic dictates come in the form of conditionality and sanction from the global dictatorial organizations.
A one sided specialization in primary production, that this conditionality ultimately entails, has disintegrative effects on the economies of the UDCs, and dooms them to losing, instead of realizing, advantages in international trade, and to lagging further and further behind the DCs. By its very nature export oriented primary production fails to provide conditions conducive for the economy to develop its productive forces, to expand the domestic market, to promote technological progress, to realize internal and external economies, and particularly to improve the quality, and hence productivity, of labor. However, more important, it sacrifices the very base upon which national security can be attained, namely industrialization.
None of these fundamental objectives bothered Ricardo, for his immediate aim was to repeal the Corn Laws and the old Poor Law. Nor do they bother the characteristically neoclassical Bretton Woods organizations, for their underlying aim is to globalize unfettered capitalism, at whatever cost. Therefore, the vulnerability of many UDCs which are importers of food, concurrently with agrarian export orientation, makes imperative a shift in the pattern of production and exports from raw materials to manufactures, and, within the latter, to products with medium research and development intensity; that is, the creation of dynamic comparative advantages to develop economic structures, rather than surrender to “endowment” and “static” comparative advantages of the neoclassical creed.
Further, efforts of the UDCs have been hampered by such external shocks as declining commodity prices, high interest rates, protectionism, negative net financial flows and the unresolved debt crisis (EEC Commission, Lomé IV, 1990: 25-33). The dynamics of capitalist individualism, the underlying striving of capital to transform labor into a commodity capable of producing, and ever increasing, surplus value, furthermore, tends to have the sinister effect of the dissolution of societal coherence, especially within the family, for only then is the labor market rid of so-considered noneconomic variables, externalities or distortions. This phenomenon turns the collectivity into uprooted masses, so lonely and disoriented that they are mobilized further behind the very ideology that estranges them.
What unfettered capitalism pursues, compelled by its very inner workings, is rather constant: Access to raw materials and cheap production factors for processing under its control (not necessarily in the DCs) and universal marketing, including in the UDCs. Deploying the lofty ideal of freedom, neoclassical economics calls this desideratum "free trade," and has a rationalization for it dubbed "comparative advantage," and a strategy titled "structural adjustment and development assistance."
All the desiderata, rationalization and strategy are highly attractive to the élite comprador bourgeoisie in the UDCs, who learn neoclassical economics, engage in trade, benefit from development aid, accumulate wealth, deposit it in Western banks, send their children to the USA to learn neoclassical economics, and bribe the politicians (e.g., Mexico's former president, Salinas, and Republic of Korea's two former presidents) to further "liberalize" the economy. Never mind the price: Hunger, misery and death for the poorest of the poor. This condition of neoimperialist dependence has in many respects been far worse than that of direct colonial subjugation. For now the poor peasants, under disarticulated capitalism, have even lost their little plots of land that previously ensured their insular autarky and traditional way of life.
This deepening dependence shows no sign of abatement with continued “financial aid,” transfers of technology, and technical assistance for furthering economic "development" of the UDCs. However, neoimperialism may not be the only onus, nor is merely the legacy of colonialism, although both factors account for the bulk of the problem. Apathy, involution, dualism, lack of work ethics, absence of middle class industrial habits --reliability, punctuality, time awareness, progress cognizance, limited birth rate, competitiveness, etc.-- all are abundant in underdeveloped conditions. For, as Marx put it succinctly in the Preface to vol. I of Capital (1867: 91),
alongside of modern evils, a whole series of inherited evils oppress us, arising from the passive survival of antiquated modes of production, with their inevitable train of social and political anachronisms.
3.5 Balanced Growth
Paul Rosenstein-Rodan's (1958) development formula is balanced growth. Elaborating on "the vicious circle of poverty," he contends that low per capita incomes lead to low rates of savings and investments in the face of rapid population growth, and thus perpetuate the initial low incomes. For Rosenstein-Rodan, the hard core of the amount of stock of capital goods --whether infrastructure or superstructure, machinery or human resources-- together with its distribution and expansion is the post-Keynesian Harrod-Domar model. The central concept of the latter is the capital-output ratio, meaning that the portion of national product to be available for investment should be several times the annual rate of growth of national product desired (capital-output ratio being in the time period for which output equals capital invested, hence the construed use of the word "ratio"). The model, which attempts to give a dynamic perspective to the Keynesian discourse, postulates that the growth rate equals the savings income ratio divided by the capital-output ratio.
In the Roy Harrod’s (1968, 1993) and Evsey Domar’s (1957) general works on growth (despite the differences between their theories), the rate of growth of output which is warranted is given by the planned savings rate divided by the planned capital-output ratio. Since current investment plans are largely independent of current savings and consumption plans, there can be no certainty that output will actually grow at the warranted rate, for investors may be forced to adjust to unanticipated changes in demand. Such adjustments entail short-run variations in the capital-output ratio followed by adjustment of investment plans. Harrod and Domar were concerned that the planned savings rates "s" in Western Europe and North America were too high for the maintenance of stable growth, for actual "s" warranted a long-run growth rate in excess of that permitted by the rate of growth of the labor force. The physical impossibility of carrying out a rate of investment at full employment sufficient to match "s" would generate periodic deflationary pressures.
Paul Rosenstein-Rodan's Big Push (1958, ch. II) is inferred from the axiom that obstacles to growth are not solid (thus in concurrence with Eric Jones and the impediment thesis), and the premise that there is a minimum level of resources that must be devoted to a development program (an economic sort of the critical mass concept in physics), if it is to have any chance for success. Hence accelerated, coordinated investment is recommended, in a planned, balanced growth pattern enacted simultaneously in several complementary industries. The approach, predicated on elastic pessimism, suggests customs unions, massive capital flow from abroad and an international court of economic justice, still in an institutional framework of international division of labor.
The critical mass aspect of Rosenstein-Rodan's Big Push is commensurate with the Boserup-Simon critical mass of population necessary for innovation to take place, referred to above. More closely, it is analogous to the critical time of Alexander Gerschenkron's (1962, 1977) conception of Great Spurt: A big state assisted push of industrialization (for delay may mean the crucial moment will pass, opening the way for reaction) in the pattern of the German and Russian latecomers. The pattern entails joint stock enterprises, investment bank financing, heavy industry, state support, stage skipping (leap frogging), originality and creativity in deviating from the older industrialization path.
Jose Goldemberg too (in South Center, 1993: 240-5) advances the leap frogging argument that technology is the answer to development and not labor, inexpensive and abundant as it might be. What is required to make development a reality for Goldemberg is a dynamic entrepreneurial (Schumpeterian) class backed up by enough science and technology to allow it to make the correct technological choices and leap to the frontiers of productivity innovation to gain comparative advantages --"leap frogging," the path followed in the past by today's industrialized countries, as he interprets it. The UDCs have to incorporate in their process of development the new technologies tested and available in the DCs, that is to leap frog stages of development which do not necessarily have to be retraced.
Contrary to such a big push, Ernst Friedrich Schumacher, in his telling subtitle Economics as if People Mattered, made famous the notion that Small is Beautiful (1973), stressing the need to protect the process of organic growth from any attempt to speed up development through a large scale industrialization. His caution is analogous to Karl Polanyi's principle of Cultural Devastation, and in tune with Sievers’ warning against precipitousness, doomed crash programs and grand schemes. Schumacher also emphasized the need to use small organizational structures and intermediate technology, for UDCs' tools are too primitive and DCs' ones too complex.
Rosenstein-Rodan's course of action incorporates many other concepts that can be summarized as follows:
(1) The economic development of "backward" economic regions --his focus is on Eastern and Southeastern Europe-- is necessary for international political stability.
(2) The key economic characteristics of these regions are low income and hence purchasing power and substantial unemployed and underemployed labor in the agrarian sector.
(3) In order to raise income it is necessary to industrialize.
(4) Industrial development strategy may be pursued either under conditions of autarky --developing self-sufficiency in all branches of industrial production including capital and intermediate goods, i.e., establishing a closed national economy-- or through specialization and integration into the international economic system (still according to the principle of comparative advantage). The latter is preferable to the former for Rosenstein-Rodan because it supposedly permits a higher level of aggregate world output, prevents an increase of international excess capacity in certain sectors, and permits the mobilization of international capital to fund part of the development effort with loans to be repaid from export revenues (its detrimental effects on the UDCs are ignored on the unrealistic basis that autarky is always attainable as an alternative, or else delinking would have been feasible).
(5) Three key factors impede spontaneous industrial investment by private enterprise in underdeveloped regions: The small size of the domestic market, the inability of individual firms to internalize the value of the external economies that they generate --e.g., the training of labor which may leave to work for other enterprises-- and the inability of individual firms to anticipate the external economies which may be generated by the investment of other firms.
(6) These constraints can be overcome by state investment in the training of the work force as well as state planning and organization of a large scale investment program. The more or less simultaneous implementation of a range of investments in different branches of light industry and essential infrastructure will permit individual firms to find larger market outlets --due to the expansion of wage employment-- and to benefit from external economies.
(7) State activism would also be needed to help mobilize the financing for a large scale program of industrialization in underdeveloped regions. If consumption standards were not to be forced down to intolerably low levels, up to half the necessary funding would have to be borrowed abroad. State activism would be necessary to guarantee these loans. This must be combined with international collaboration in programming the expansion of exports in order to permit loan repayment from export revenues without major disruption to the light industries of creditor countries.
Another balanced growth device, relatively less regimented than that of Rosenstein-Rodan, is that of Ragnar Nurkse (1952). It entails an inward looking, synchronized (but not necessarily planned or protectionist) application of capital to a wide range of industries. Nurkse's economic development formula entails import substitute industrialization, with unlimited (City of London or Canada style) capital supply, since international trade cannot constitute an "engine of growth" for the UDCs, given only the absence of expanded world demand to induce growth (pp. 53-4); again export pessimism. Moreover, the linkages effects --the secondary multiplier-- of a primary product, export based economy are limited because of its enclave character. In conditions of underdevelopment, contrary, e.g., to the Canadian case, staple exports, instead of spear heading growth, tend to lead the economy into a trap, reinforcing the existing growth inhibiting patterns.
Nurkse's course of action is thus built on the diagnosis that underdevelopment has two key causalities that jointly lock underdeveloped economies into a vicious circle of self-replicating poverty and stagnation (pp. 60-5). These are low per capita incomes which limit the size of the market and hence the inducement to invest, and inability to generate significant savings from low per capita incomes, so that even if the inducement to invest existed, the domestic resources to finance such investment would not be available. This latter problem is exacerbated by the operation on an international scale of the Duesenberry effect --even if per capita incomes in underdeveloped regions rise due to buoyancy in primary export markets, any potentially favorable impact on savings will be annihilated by an increase in the propensity to consume as people in these regions try to keep up with the consumption standards prevalent in the industrial capitalist Joneses. A way out of this condition requires simultaneous action on both fronts: The inducement to invest and the mobilization of investible funds. With respect to the former, Nurkse considers and rejects the neoclassical growth strategy based upon the continued expansion of primary exports, i.e., upon an external market. He rejects this due to the low international income and price elasticities of demand for primary products (Nurkse, 1952: 43-7).
Nurkse, like Rosenstien-Rodan, confirms the case for balanced domestic growth in consumer goods industries in order to create a balanced market, and accepts the need for state planning to promote this. With respect to resource mobilization, Nurkse accepts Rosenstein-Rodan's notion of mobilizing both domestic and foreign resources to finance the investment program. However, his analysis of the prospects for achieving this takes a different road, which can be summarized as follows:
(1) Increased voluntary savings is improbable due to the Duesenberry effect.
(2) Some of the UDCs have large masses of disguised unemployment on the land, which could be mobilized for real capital formation, but not without strict curbs on any immediate rise in consumption (in concurrence with Heilbroner). Again the demonstration effect may hamper such restraint.
(3) Any increase in domestic incomes is also likely to put pressure on the balance of payments as people demand more imported consumer goods.
(4) Luxury and semiluxury import restriction, if implemented, is likely to be only partially successful as a means of raising capital formation, for the release of foreign exchange must be matched by a corresponding increase in domestic savings. However, the potential consumers of luxury imports will not necessarily replace their thwarted consumption outlays by savings; they will look for domestic consumption outlets. The likely result is that there will be increased inflationary pressure in the domestic economy. This may generate some forced savings as profits are built up while real consumption is curtailed by availability, so that, as long as inflation does not get out of control, there may be some increase in net investment, but not to the full extent theoretically made possible by import control; however,
(5) apart from the question of the quantity of investment, there is also that of quality. If import restrictions are not matched by restraints on consumption, and if there is sufficient effective demand, the increase in investment is likely to be channeled into relatively inessential uses, producing luxury and semiluxury items; and
(6) the automatic efficacy of foreign aid in raising investment is spurious.
Nurkse's (1952: 39-40) conclusion is that the onus for breaking the vicious circle of poverty in the UDCs rests firmly upon their governments, with respect not only to planning a program of balanced industrial investment but also to mobilizing domestic resources, and ensuring effective use of foreign aid, through curtailing the growth of domestic consumption. The key to growth lies in the ability of these governments to match expanded investment with an effective fiscal policy. No solution is possible without strenuous domestic efforts, particularly in the field of public finance.
3.6 Critical Effort for Growth
Along lines compatible with Marx's Feuerbachian dialectics and physics' concept of critical mass, Harvey Leibenstein (1954, 1957) develops his means of critical minimum effort, which suggests that to achieve or regain growth an economy needs an effort which transforms changes in quantity into changes in quality of innovations: technical, organizational and regional --i.e., concentration. Conceptualized within Leibenstein’s strategy of critical minimum effort are subconcepts of micro-micro theory, gap fillers, input completers and x-efficiency (slack is ubiquitous and effort sporadic and unreliable in the absence of special pressure situations --à la (the younger, the nephew --1889-1975) Arnold Joseph Toynbee's environmental challenge and human response-- and obstacles, in concurrence with Jones and Rosenstein-Rodan, are not solid).
According to Toynbee's Study of History (1934-61), civilizations (or transformations) arise because of a creative response by a minority of individuals to a situation of special difficulty. In general, the more severe the challenge posed by difficulties, the more creative and fruitful the response. Toynbee calls the process of response etherealization, using the term “mimesis” to name the process of imitation by which the uncreative majority follows the creative minority. Among the challenging situations that serve as stimuli to creative individuals are hard countries, that is, places where it is difficult, rather than easy, to survive; new grounds, where no effort to build a society has previously been made; blows, defeats of one sort or another; the pressures of frontier conditions; and penalizations, that is, coercive conditions and regulations imposed on one class or race by another.
Leibenstein's special pressure situations are therefore a restatement of Toynbee's thesis. His perspective is also analogous to Joseph Schumpeter's (1947, 1954) notions of industrial growth, commandeered fixed capital, innovative entrepreneurship and role of minorities (outlanders, marginal groups, nonconformist entrepreneurs, social deviants, transnational groups, captains of industry, robber barons, rugged individualists, etc.) in economic progress, and is commensurate with Schumpeter's lack of emphasis on capital accumulation. It is also analogous to Angus Maddison's (1989) amalgam of innovation, accumulation and risky change, and to Raymond Firth's (1929) sequence of transformation, which is deduced from The Primitive Economy of the New Zealand Maori: Material accession through the introduction of new or better tools and instruments, then technical processes, then forms of organization, then beliefs and institutions. Here the introduction of new tools and of new technical processes constitutes a cultural change, a break with established continuity, a Schumpeterian national deviant representing a new social control group, or his external deviant, adopted and adapted by the local élites (e.g., the reforming élite of Meiji Restoration of 1868 in Japan, the Maori case, or the role of foreigners in the Swiss transformation).
Leibenstein explains economic underdevelopment in terms of a low level equilibrium trap: At low levels of income, forces operate to restore increased per capita incomes to their original level. Of these forces the most important are population growth, and a high marginal propensity to consume stimulated by the Duesenberry effect. In contrast, capitalist economies are disequilibrium systems in which change is cumulative, while development itself is an explosive disequilibrium path (Leibenstein, 1957: 15-17, 60-61). The problem then is presented as one of breaking out of the trap (in concurrence with Eric Jones' impediment removal thesis) into cumulative growth (Jones’ intensive growth). Any relatively small scale effort designed to generate gradual change will be inadequate (contrary to Sievers' gradual, though comprehensive, production promotion); any potential increase in savings will be absorbed in increased consumption, and any initial increase in per capita incomes will soon be offset by an induced acceleration in population growth.
Leibenstein's only solution thus lies in a critical minimum effort in which the scale of increased investment enables a country to achieve and sustain a growth rate, which exceeds the maximum feasible rate of population growth by enough to permit the following to occur: Rising consumption per capita, maintenance of the growing capital stock, and generation of sufficient net savings to sustain further growth. An effort on this scale should make it possible to reap the benefits of external economies and industry interdependence, and to achieve balanced growth in interindustry demand. Attainment of the critical minimum effort will depend heavily on the development of entrepreneurship, knowledge and skills. Governments can help to foster the growth of these factors. Meanwhile the supply of savings per se, although important, is not the dominant constraint on growth. The problem lies at least as much in achieving more productive use of the existing savings potential, currently used up in luxury consumption and unproductive investments such as land purchase.
Unlike Nurkse's, Leibenstein's analysis leaves the international trade aspects of economic development out of the discussion. The central causes of underdevelopment and the main key to growth lie within the underdeveloped economy and not in the international sector. However, like Nurkse's, Leibenstien's main impetus for a substantial-growth program must be generated internally, through the interaction of government and domestic entrepreneurs, and scale of the effort to mobilize resources for productive investment must be massive, as would the investment program itself, for only in that case could the diseconomies of small scale be overcome, risks of market failure reduced and external economies fully exploited. Only then, too, could growth of output surpass that of population and generate sustained increases in per capita income (Hunt, 1989: 57).
3.7 Linkages by Unbalanced Growth
Albert O. Hirschman's (1958) Backward and Forward Linkages (à la Harold Innis, 1956) is another proposed means for achieving growth, in an import substitution, unbalanced growth model. The latter is to be achieved through the use of shortages, bottlenecks, capital intensive investment, inflation, balance of payments deficit, etc., in contradistinction to the ideas of balance, coordination, comprehensive overview, integrated plan, etc. That unbalanced growth is conducted as an antagonistic sectoral/targeted growth; hence: Voice and exit play an important role. To exit, is used by Hirschman in the sense of to leave, or to vote with one's feet. In his analysis of the relationship between group members and group leaders, members of organizations may express their dissatisfaction with leaders by leaving the organization. Members may also voice, use the threat of exit as a way of exerting pressures on leaders. Actors may thus threaten "exit" in order to increase influence (voice). The possibility, terms and control of the exit option are consequently viewed as important dimensions of intragroup politics (Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, 1970).
Cultural, institutional, socioeconomic obstacles to growth, as with Jones, Rosenstein-Rodan and Leibenstein, are not considered solid. Economies of scale encourage firms to reach backward to control their supplies of raw materials and forward towards further fabrication and marketing. Hence priority is to be given to industrial investment with strong linkage effects. Albert Hirschman (1958: 206-8) contends that attempts to identify dominant causes of underdevelopment in terms of the lack of a key factor, be it savings, entrepreneurship or skilled labor, have all been disproved; each being latent in underdeveloped economies. What is lacking is a binding agent --the organizational capability to call forth and combine these latent resources in order to generate growth (another repudiation of Smith’s invisible hand).
Hirschman has also argued that where organizational and managerial skills are in scarce supply, the pursuit of balanced growth would overstretch these resources. Consequently, he proposed a strategy of unbalanced growth, in which planners and policy makers would not attempt to anticipate supply and demand imbalances, but would be guided by major resource bottlenecks as demonstrated in the market. Such a strategy would emphasize induced investment in both the public and the private sectors. Therefore, Hirschman, too, identified an active role for government in guiding resource allocation. To maximize the rate of development, investment should be encouraged in branches of production with substantial backward and/or forward linkages. His analysis can thus be interpreted as providing a justification for backward linked import substitution --starting with consumer goods production. Hirschman (1958: 109-12) further advocated the use of large scale, capital intensive techniques of production which tends to minimize demands on organizational and managerial resources. He also favored foreign capital for its ability to pick successful priority sectors and regions, its innovatory capacity, and its foreign market contacts which can be used to ease temporary input bottlenecks.
Agriculture received little attention in Hirschman's analysis though. Primary production in general has, in his view, virtually no backward linkages --he even ignores its demand for means of production. Meanwhile, the foreword linkages from agriculture to other branches of production he also sees as minimal, since most agricultural output in underdeveloped countries is either consumed or exported. Again Hirschman played down the scope for forward linkages into the expansion of agricultural processing. On the contrary, John Kenneth Galbraith's (1973 and in South Center, 1993: 230-6) basic principles governing the economics and politics of his development strategy are:
(1) To recognize the primary role in early economic life of agriculture --the peasant.
(2) Land reform.
(3) The central role of universal education.
(4) The limits of the role of the state: To supply honest and effective administrative talent.
(5) A firm fiscal context.
(6) Minimal role of the military.
(7) The devastating effect of international or internal conflict between or within the countries of the UDCs: Tolerance and peace must be a prime goal in all of the UDCs.
(8) The writing down and writing off of debt by the DCs.
Hirschman nonetheless argued (à la Schumpeter) that a crucial scarce resource in the underdeveloped economies is a binding agent, which will call forth the resources that are available and promote their use in ways that will most effectively contribute to economic growth. In contexts in which experience and knowledge of efficient growth paths are lacking, and in which difficult decisions have to be taken, some of which conflict with traditional norms and/or with current ideas concerning the nature of development itself, there is a need for pressures and inducement devices that will elicit and mobilize the largest possible amounts of resources for development while minimizing the need for difficult development decisions. One must call forth as much decision-making ability as possible by maximizing induced and routinized decision-making.
Hirschman (1958: 203-6) further argued that the inducements to invest in the industrial sector could be maximized if economies followed an investment path in which each stage of investment generated, through backward and forward linkages to other branches of the economy, cumulative inducements to invest in these branches also. He emphasized the need to use the market as the main inducement device, an approach which indicated a strategy of backward linked industrialization, starting with import substitution in consumer goods production, i.e., goods for which a known market exists, given by the existing scale of imports. Hirschman foresaw that with time the development of these branches could generate sufficient demand for intermediate and capital goods to induce investment in local production of these also.
Meanwhile, the development of manufacturing production could also be expected to put increased pressure on existing supplies both of agricultural output (food and raw materials), and of infrastructure of transport facilities, power supplies, communications, etc. It would thus induce expansion in agricultural production, while bottlenecks and shortages in the use of infrastructure would provide the necessary information to guide public sector investment, into the areas where it too would be most effective in promoting growth. These, in sum, are the concepts that underlie Hirschman's advocacy of unbalanced growth and his rejection of the opposing balanced growth strategy advocated by Rosenstein-Rodan, Nurkse and others. For Hirschman it was quite unrealistic to assume that the latter strategy could be effectively organized and implemented. Of course an increase in foreign earnings or in private capital imports would have equally powerful effects on growth. But the difficulty is in the way of rapidly increasing receipts from these sources. For ultimately, “in the last instance,” growth depends on the interplay of three key variables.
First, is the rate of investment that an underdeveloped country can generate. This depends on the proportion of its current effort that it can devote to capital created activity. In turn, the rate of savings, the degree of success in attracting foreign capital, and the volume of foreign aid, all add to that critical fraction of effort on which growth hinges. Second, is the productivity of new capital. The savings that go into new capital eventually result in higher output. But not all capital boosts output by an equal amount. A specific money amount invested in a given industry will have an impact on GNP very different from that invested in education. In the short-run the industrial investment may yield a high return of output per unit of capital investment; in the long-run the education may. But in any event, the effect on output will depend not merely on the amount of investment, but also on the marginal capital-output ratio of the particular form of investment chosen. And third, is population growth. Here is the perplexing factor. Economicwise, if growth is to be achieved, output must rise faster than population, a simple enough dictum. Otherwise, per capita output will be falling or static, despite seemingly large rates of overall growth. However, securitywise, that is, in terms of political economy and not just economics, things are a little more complicated, for a declining rate of population growth involves changes in the demographic composition of the population, both internally and with respect to the outside world, that may be of great importance beyond the economic domain. In specific cases, if the nation is to survive at all, it has to achieve a rate of population growth that ensures the difficulty of erasing it off the map, even though that simultaneously risks erasing off a large portion of the product of output growth.
But even merely within the economic domain, economic growth is dependent upon population growth. Indeed, even the USA cannot maintain its status as the leading power in the world without continued above average population growth, both from natural and immigrational sources, with all the unintended accompanying demographic consequences of that dilemma. That fact is to be in part discerned from Alvin Hansen’s explanation of this century’s great depression in the USA by the interwar period’s declining rate of population growth (in addition to declining rate of resource discovery, because of the disappearance of the frontier, and declining rate of technological progress, for lack of great new industries). Hansen elaborates on the effect of the declining rate of population growth upon investment, showing that a rapidly growing population, ceteris paribus, will call forth more investment than a slowly growing one.
There are two main ways in which population growth affects investment:
(1) A growing population provides a growing labor force. So long as population growth keeps pace with capital accumulation, the marginal productivity of capital will, in the absence of other influences, remain constant. However, when population growth falls off, capital accumulation must also fall off, if, apart from other influences, the marginal productivity of capital is not to decline.
(2) A growing population provides an increasing demand for goods and services. The correlation between long-run increases of population and of consumption is so high that one can be more or less substituted for the other, and consequently the acceleration principle (which states that a mere drop in the rate of increase in consumption may cause an absolute decline in investment) can be applied to population (see Hansen, Business Cycles and National Income, 1957, and Benjamin Higgins, Employment without Inflation, 1998: 83-9).
4. TRANSFORMATION VERSUS GROWTH MECHANISMS
This chapter deals with neoclassical efficiency and UDCs' need for equity. For the purpose of this critique, efficiency means continuously rationalizing production, circulation and distribution. It entails the promotion of the greatest aggregate surplus of benefits over the costs of economic activity. Equity is to allocate these benefits and costs, following David Barnes and Lynn Stout (1993: 70), "in accordance with reasonable societal values," always keeping in mind the ultimate Rawlsian (1971) objective of improving the lot of the worse off, and that justice is fairness. While foundational equity is that of treating people as equal beings, distributional equity is that of justifying a more equal distribution of economic goods, social opportunities, and/or political powers among people (Amy Gutmann, in Miller, 1987: 136). The latter concerns this inquiry as much as the former.
There would be no reasonableness in an argument that extracts efficiency, which is common to all strands of transformation albeit to differing degrees, from the basis of economics and its relevant legal postulates, for that would amount to not only undermining economic growth, thereby distributing poverty, but also abstracting from the very concept of economizing. For extracting efficiency would contradict the economic principle: Optimizing the output input ratio, or, to use Wilhelm Roscher’s Historical School terminology, “satisfying society’s greatest needs with the smallest expenditure of means” (quoted in Jacob Jan Krabbe’s Historicism and Organicism in Economics: The Evolution of Thought, 1996: 24). Any argument that seems counter efficiency in this chapter is thus to be taken as confined to the rejection of the specific notion of basing economics, or for that matter “law and economics,” the juridical shrine of neoclassical economics, only on efficiency, --whether it is defined in terms of Benthamite pure utilitarianism, Kaldor-Hicks wealth maximization, or Kantian-Paretian optimality of individual autonomy. An administrative agency of constitution and law that is based on efficiency rather than justice cannot, without a tremendous degree of hypocrisy, be called the Justice Department, but should rather be called the Efficiency Department. Mr. Chief Justice and each of the Associate Justices would be called Mr. or Ms. Efficiency. Because such a change would make no human sense, it is not adopted. However, basing economics only on the basis of efficiency is the explicit and declared goal of “law and economics.” The latter is the school of law that promotes and advances the neoclassical doctrine. It is the outcome of the growing phenomenon of economic imperialism, whereby the neoclassical mode of rationalization is applied to legal thought (as well as to other branches of the social sciences), in order to produce economically based postulates, determined only by neoclassical economics.
4.1 Efficiency: the Neoclassical Growth Mechanism
In today's world there are not too many "lands of plenty," “frontiers,” "headrights," "freehold grants" and "homesteads," where the efficiency alone mechanism is inadequate to bring down the social order. Images of concentrated prosperity, in the land of plenty, nonetheless, mitigate and/or mask societal disorders caused by the insistence on making efficiency the only sought objective of law and economics. Such disorders in the UDCs' conditions, lacking "plenty," are disastrous. Rather than a mechanism for growth, then, confining the basis of law and economics to promoting efficiency is tantamount to negating the very essence of person and hence precluding substantive human rights in their entirety, not just the potential of economic advancement.
Although centrally planned countries have demonstrated that they can generate brisk growth of real GNP (the issue of freedom notwithstanding), whereby the People's Republic of China currently has by far the world's highest GDP growth rate, an explicit policy inference of neoclassical economics', and the neoclassically based school of law and economics', focus on efficiency, to the detriment of equity, calls for a least state "intervention" in the economy, and consequently a minimal judiciary "meddling" in private bargains. This inference is supposedly based on the rational-behavior premise, axiomatic to neoclassical economics, which implies the automatic efficiency of the left alone market, and is underlain by an ideological perspective that seeks to explain away and justify privileges and disadvantages, richness and poverty, work and unemployment as the mere consequences of individual choices. A “revealed preference” is considered rational because it supposedly maximizes individual and, through the invisible hand, societal utility. Conforming to this particular world view, benignly or malignly, helps create, preserve and legitimate socioeconomic inequalities inter- as well as intrasocieties.
The case for the efficiency of the free market rests on the mystique of the invisible hand, which Adam Smith first set forth in The Wealth of Nations (1776, I: 477) based upon Bernard Mandeville’s [1670-1733] Fable of the Bees: or, Private Vices, Public Benefits (1997). Through the market, greed is harnessed to serve social purposes in an impersonal and seemingly automatic way. Important among factors informing human action is the recognition that people tend to respond to incentives. Not always as mechanically as neoclassical economics projects them to be, but they do respond. However, Smith missed witnessing the two Great Depressions of the nineteenth and twentieth centuries, to see for himself that actions of individuals working for their self-interest do not necessarily result in a beneficial outcome for society: Private gain did not translate into public benefit. When "the butcher, the brewer or the baker" regarded only "their own interest," not also "benevolence," the economy broke down, on a world scale, and millions of people went without "dinner," quite contrary to Smith’s invisible hand’s hypothesis.
Suffice it to point out that when Adam Smith was appointed commissioner of customs in 1778, two years after the publication of the Wealth of Nations, the appointment gave rise to a sharp irony: "While Smith was an adamant proponent of free trade, he was to spend years in the Custom House upholding duties and regulations that promoted mercantilism rather than free trade" (Dugi, 1992: 147). Academic pondering is one thing, functional duty is quite another. Nor were the state measures taken by Franklin Delano Roosevelt, which mitigated this century’s Great Depression unprecedented. In the “Great Depression” of the second half of the fourteenth century, which hit the core economies of Venice and Genoa following the Bubonic Plague,
individualistic Genoa was poorly positioned to mobilize communal wealth to create a safety net for its merchants, whereas the state of Venice had always provided subsidy and insurance to its merchants through the provision of collective goods --whether ports, vessels, or defensive arms. Thus, state...[action] tided Venice over the shoals of depopulation and economic contraction on which Genoa foundered (Janet Abu Lughod’s Before European Hegemony: The World System AD 1250-1350, 1989: 128, emphasis added).
In both the cases of the fourteenth and the twentieth century, then, it was state activism, not laissez faire, perestroika, open door policy, or neoclassical shock therapy, that saved the day.
A competitive market, the neoversion of economics that replaced Smith's political economy, supposedly transmits signals to producers that reflect the values of consumers. If the manufacture and distribution of a new product is profitable, the benefits it provides to buyers necessarily exceed the cost of production. And these costs in turn measure the value of the other outputs that are sacrificed by using labor and capital to make the new product. Thus, profitability channels resources into more productive uses and pulls them away from less productive ones. The producer has the incentive to make what consumers want and to make it in the least costly way. Nobody is required to evaluate what is good for the economic system or for society; if one merely pursues her own economic self-interest, she will automatically serve the social welfare and maximize its function. Only the market is allowed to make allocative decisions. And allocation as a function of income distribution through the market is a different matter than allocation as a function of legal revision of legal rights. Hence the neoclassical economics' rejection of social change through constitutional and legal means.
The efficiency, however, is bought at the cost of inequalities in income and wealth and in the social status and power that go along with income and wealth. These inequalities stem from the limitless private ownership of property, including the basic means of production, and from market determined wages and salaries. For "the same concepts which leave the free market system basically intact also leave the highest and lowest incomes far apart" (Okun, 1975: 51). And the efficiency construct, in its Edgeworth boxes and H-O-S's "endowment," takes the existing distribution of income and wealth, and underlying institutions that generate such order, as given. Therefore the market economic system, in which the role of law, and of government generally, is just to control externalities and reduce transaction costs, generates substantial inequalities in the distribution of income and wealth both domestically and internationally.
Hence, contrary to Jean-Jaques Rousseau (in Miller, 1991: 455-58), the classic exponent of democratic equality, who was concerned with redistributing economic resources largely as a means of redistributing political power among citizens, neoclassical economics is uncritical of the changes in resource allocation that are brought about by efficient transactions between persons and nations unequally controlling the world's tangible and intangible goods and services. Unrestricted private ownership of industry permits a few people to exercise too much control over many other people's lives. Unfettered markets create inequalities not only in the distribution of wealth but also in the satisfaction of human creativity (Amy Gutmann, in Miller, 1987: 137). Institutional, especially law's, bias in favor of the status quo from which interactions take place in a market economic milieu of unequal bargaining power, cannot be reasonably denied. Trades that are made as a last resort could not be fair trades and would be distorted by vast differences in the bargaining power of the participants, and by the desperation that spawns them (Okun, 1975: 19-20). Of course modern societies cannot be as small as Rousseau's Geneva. But economic equity can go a long way towards providing citizens with opportunities to participate directly in governing their destiny. Just as a few public officials should not have the power to decide the political fate of all citizens, so a few property owners should not have the power to decide the economic fate of all workers, and of all society for that matter.
The major ethical, but also political, issue posed by the efficiency approach to national and/or international law and economics, is the discrepancy between efficiency maximization and socially just distribution of income and wealth. Obviously it is hardly possible to separate efficiency in resource allocation from equity in income distribution. Yet
whereas Scandinavian governments have wielded tremendous economic power without compromising democratic institutions, fascist governments that oppressed political opponents have maintained a private enterprise economy. The conflict between equality and economic efficiency therefore is inescapable, while the perception of a direct relationship between laissez faire and democracy is spurious. If capitalism and democracy need each other, it is to put some rationality into equality and some humanity into efficiency.
Therefore, Charles Louis Montesquieu (1689-1755) postulates in his theory of government, developed in Esprit des Lois (1746: 146-9), that governmental powers should be "separated" among legislative, executive, and judicial bodies to safeguard personal liberty. Montesquieu's “tripartite” separation of powers (whose simpler versions go back to Marsiglio of Padua --the greatest political thinker after Aristotle-- and then to Locke), was not meant to assign the judiciary mere executionary role for the constitutional and statutory wills of the legislative and the executive, or else there would be no need for the separation. On the other hand, the task of judging cannot be mere reading or interpretative process of legal texts; that much may be done by a well-programmed laptop. Nor is judging limited to deciding like cases alike, or else Dred Scott would still be the "law of the land." Judging cannot be based only on Benthamite pleasure and pain, Robbinsian tradeoffs in a world of scarcity, or Samuelsonian preference revelation. Judging is essentially related to a sophisticated, though instinctive, sense of human equality and to justice. Only then can democracy mean what it preaches. Only then can the Jeffersonian dictum of the Declaration of Independence "all men are created equal" somewhat pertain to reality.
Neoclassical economics resolve competing claims by allocating the benefits and burdens of a legal rule according to the single principle of economic efficiency (Barnes and Stout, 1993: 1). Scarcity and rationality provide the basis for efficiency. Scarcity means that item's supply is sufficiently limited that not enough exists to satisfy all desires. The item must be allocated among competing uses. Rationality means that people generally attempt to make themselves as well off as possible, and more is better. The neoclassical concept of efficiency involves minimizing opportunity costs and getting the maximum amount of physical output of the product mix of any enterprise or any economy from a given bundle of resources. An economy is efficient if its market functions in such a way that a Pareto optimum can be achieved. Allocating scarce resources efficiently means allocating them in a fashion that maximizes the happiness or utility people derive from them. Rational maximizers reallocate their resources through exchange. Voluntary exchange efficiently redistributes resources so as to maximize utility. The exchange would not increase the total amount of resources available, but it would increase the total amount of utility those resources provide by making both parties to the exchange better off (Barnes and Stout, 1993: 4). There is an element of circular reasoning in this construct: On the one hand, efficiency is defined in terms of the functioning of the market (Pareto optimum, marginal cost equals price, average cost minimized), and, on the other, an economy is considered efficient if its market functions in this way. Any departure from this pattern is inefficient, and any policy that causes such a departure is bad policy (Higgins, in Savoie and Brecher, 1992: 32-6).
Evidently it is a futile and costly task in the short-term to heretically dissent from this lieu commun, for the notion of efficiency is utterly hegemonic in economics today. However, efficiency is also deficient on various other grounds, which makes silence a collusion in the crime committed day in and day out by neoclassical economics against billions of the poorest strata the world over. These grounds include imperfect knowledge and foresight, incomplete information, misleading advertising, externalities, and inapplicability to public goods. Empirically, virtually all societies impose some limitations on the Samuelsonian freedom of choice in the market, to prevent people from harming themselves or other people through ignorance or perverseness: Controls on purchase and sale of drugs, firearms, alcohol, securities, and so on. As a society moves along this road it further and further contradicts the revealed preference postulates. As knowledge grows, more and more goods and services are recognized as being harmful to their users and/or to society as a whole: tobacco, various carcinogens, prostitutional AIDS, leaded gasoline, aerosol bombs, antipersonnel mines, sarin, anthrax, etc.
In underdeveloped countries, where malnutrition is a barrier to breaking out of the vicious circle of poverty, it is also a question of whether people should be free to produce, sell and buy foodstuffs that are less nutritious than others that could be produced with the same resources; whether, that is, the production of more Giffin goods such as pasta for the deprived strata is more important than allocating resources for more production of soda pop and chewing gum for the well to do. This is why the so-called “welfare economics” is predicated on the relativism of preference ordering. For it is this abstraction from interpersonal utility comparisons and the refusal to distinguish basic needs from superfluous consumption, that play the role of precluding the examination of whether social welfare would be enhanced by policies of income redistribution, as well as those which shift production away from frivolous products toward goods which meet people’s needs.
The money pump argument concerning the rationality of transitivity (upon which the Samuelsonian preferences are founded) is based on the spurious notion that since intransitivity is irrational, then rational choice is a transitive one. First, the notion of rational choice presumes private property, exchange, and money. This is not a universal condition. Second, these institutions cannot be justified by the rationality argument without circularity (the classical problem of tautological reasoning), since they are presupposed by the very argument. Third, private property, exchange, money, transitivity and rationality say nothing about social relations which must not only be accepted as given but also cannot be derived or explained by any theory of economic behavior within this inadequate framework (Higgins, in Savoie and Brecher, 1992: 32-44).
Neoclassical economics, moreover, defines welfare in terms of choice: One is better off when she gets what she chooses, for she chooses what makes her better off. The circularity notwithstanding, before one accepts this logic, one must be convinced that choice is, at the very least, pleasure yielding, value maximizing. This can only be attained if one abstracts from her knowledge of the complexities of human sociality: A chooser is a human being, and a human being does not live alone on earth, she socially interacts, affects and is affected by the social group. She has a personal history, self-consciousness of past and future, and a specific, binding, social framework beyond which she has limited choice. A human being also has habits and addictions, can be adapted, induced, swayed, coopted, threatened, coerced, duressed, starved to death, and may make a choice that she later regrets, and can have constrained income, imperfect information and inadequate market power.
Motives, beliefs and preference thus are neither identical across individuals nor stable over time. They are shaped and continuously modified by social forces, not least of which is deliberate manipulation. Hence, “revealed preference” or “rational choice” explanations offer a shallow and transitory understanding of behavior and must be superseded by an account of how preferences, beliefs and motives emerge from within the social structure and what to do about that. Human sociality then renders unattainable the mechanistic assumptions of completeness, transitivity and reflexivity of preferences and their pleasure yielding, value maximizing implications upon which the Samuelsonian theory of revealed preference, that underlies neoclassical economics' notion of efficiency, is based.
Neoclassical economics, further, postulates that all commodities are comparable, on the basis that the chooser's income is limited, commodities are priced and the aim is to maximize utility. But given the functions utility is supposed to fulfill in consumer behavior, this argument puts the cart before the horse. The theory assumes that commodities are circulated via exchange in a market that has a definite price quantity structure at any given moment. But the marketplace is supposed to be an outcome of the theory, built on the preference revelation, and therefore cannot be presupposed by the very theory, if the latter is to be noncircular. In the formulation of utility theory, moreover, the consumer's preference ranking is not supposed to depend on prices or income. The single purposed, utility maximizer model therefore is fallacious.
Furthermore, such neoclassical parables, where, e.g., an initial distribution of wealth (so-called endowment) has to be assumed, for the translation of consumers' preferences in terms of market demand, then income distribution is derived, as part of the general pricing process (as a constituent set of equations in the total equational system of market equilibrium), is utter circularity: Income distribution is a constituent assumption for the determination of income distribution. In addition, income and wealth are indicators of people's economic positions. Income is the more important of the two, because it provides the basic purchasing power for maintaining a standard of living. Moreover, when property incomes are included, the income distribution reflects holdings of wealth. Nonetheless, wealth is important in its own right. At the upper end, people accumulate wealth by saving the extra margin of income above their consumption expenditures. At the bottom of the income pyramid, people accumulate debts to the extent they can borrow (Okun, 1975: 65-6).
Besides, the relative ranking of a fixed pair of alternative social states will vary, as Kenneth Arrow (1963) has realized, with changes in the values of individuals. Therefore an assumption that the ranking is immutable with changes in individual values, and hence social choices are completely independent of individual tastes, would be analogous to Platonic social philosophy, whereby there exists an objective social good defined independently of individual desires. Such a philosophy is "meaningless and was basically meant to justify government by élite, secular or religious" (Arrow, 1963: 463). On the other hand, the utilitarian philosophy of Jeremy Bentham which sought instead to ground the social good on the good of individuals is also misplaced. The hedonist amateur psychology associated with that philosophy was essentially used to imply that each individual's good was identical with her desires; hence the social good was a composite of the desires of individuals. This view "served as a justification of both political and economic liberalism" (Arrow, 1963: 463-5).
William Stanley Jevons and Léon Walras, nonetheless, reduced social phenomena to mathematical equations (Blaug, 1986: 216), although there is nothing in the physical sciences that corresponds to theories which deduce the nature of a social optimum from certain fundamental value judgments. Mathematical statistical (econometric) models, moreover, ignore many important factors which need to be studied, since they focus on the quantifiable elements in the economy and society at the expense of the qualitative ones. While Smith dealt primarily with the issue of production, and Ricardo focused on distribution, Jevons was thus preoccupied only with exchange (Rajani Kanth’s Against Economics: Rethinking Political Economy, 1997: 25). "Economists," wrote Mark Blaug (1986: 25),
have talked a great deal of nonsense about 'value free' welfare economics on the curious argument that the standard value judgments that underlie the concept of a Pareto optimum --every individual is the best judge of his own welfare; social welfare is defined only in terms of the welfare of individuals; and the welfare of individuals may not be compared-- command...consensus [which] somehow renders them objective.
Economists, concedes Blaug (1986: 255-6) along lines analogous to Schumpeter's dictum of Ricardo's Vice,
have also swallowed whole the untenable thesis that 'normative' as distinct from 'methodological' value judgments are not subject to rational discourse and have thus denied themselves a fruitful area of analysis. But these issues apart, the intimate relationship between normative and positive economics has been a potent source of 'ad hoccery' in economics, the effort to retain theories at all costs by the addition of assumptions that lack testable implications (emphasis added).
This leaves out the justice of the associated distribution of personal income; optimal allocation is strictly defined with reference to the above mentioned three basic value judgments of Paretian welfare economics. Yet relative incomes have cultural and sociological importance. Hence, the large relative disparities in the income distribution mar the social scene. To "promote equality up to the point where the added benefits of more equality are just matched by added costs of greater inefficiency," as Okun (1975: 90), still influenced by utilitarianism, stipulates, just would not do, albeit it is a step in the right direction.
In his Critique of Welfare Economics, 2nd. ed. (1957), Ian Little rejected the “new” welfare economics, casting doubt on the sense in which perfect competition is characterized by welfare theorists as an “optimal” solution. He thus effectively denied that questions of “efficiency” can be divorced in practical terms from questions of “equity”: Every step towards efficiency involves changes in the distribution of income, which alters the efficiency state itself and, moreover, these income changes are liable to be far more significant for social welfare than the changes in efficiency.
In the sixth century AD, Isidore argued that "law should be framed, not for any private benefit, but for the common good of all the citizens" (in Aquinas, 1981: 66). If this principle is adopted it makes wealth maximization an insufficient basis for law making, since it does not necessarily secure the common good. To limit the ruling basis to wealth maximization is to limit the distribution dispute within the boundaries of who gets the market share from among the capitalist stratum, thereby excluding the majority of the population from consideration in the underlying basis of the law. This is why neoclassical economics is concerned only with efficiency, not fairness, not justice.
Directing resources to their most valuable uses, and measuring value according to "willingness and ability to pay,” bias allocations towards those with the greatest ability to pay. And because efficiency analysis proceeds from a preexisting set of distributions of wealth it does not question whether the initial distribution of abilities to pay is proper. However, "because the distribution of wealth among people influences the allocations that result from bargaining, changes in the distribution of wealth may change the allocation of resources." Hence, "focusing on efficiency rather than fairness does not make economics a neutral and unbiased exercise" (Barnes and Stout, 1993: 17-20).
The structure of property rights governs the structure of coercion and thereby the flow of payment. Property rights convey the right to benefit or harm oneself or others (Demsetz, 1967: 347). It is precisely here that the distributional limitation self-imposed by welfare economics breaks down: Resource allocation is a function of wealth allocation and income distribution, and both in turn are functions of the distribution of legal rights. Problematic then is the incompleteness as well as the circularity of the basis of efficiency. The moral which neoclassical economics overtly draws from this discourse is that agents' choices and "endowments" determine relative prices; but the moral which it is really drawing is that the concept of unlimited property rights is beyond discussion. Property rights, nonetheless, are decisional power; to create new property rights is to create new decisional power, thereby altering existing structure of decisional power. Since Pareto optimal adjustments are possible within any number of power or rights structures, to argue for particular changes in property rights so as to produce conditions propitious to achieving some Pareto optimal adjustments, is to beg the broader question of who will have what power to create which externalities and thereby engender which adjustments (Samuels, 1981: 60-1).
The creation of a property right in quest of conditions propitious to Pareto optimal solutions functions to vest in certain individuals wealth- and/or income-acquiring power whose justification is beyond the capacity of the Pareto criterion to provide. The Pareto criterion cannot justify particular changes in property rights without an additional judgment or ethical assumption as to income and wealth distribution. Change of the law of property is an exercise of power that goes far beyond the self-imposed limits of welfare economics. It is inconsistent to support legal change in the interest of a certain outcome that ignores distributional consequences, while opposing other reforms under the rubric of avoiding interpersonal utility comparisons and distributional-ethical questions; welfare economics, evidently, is incoherent. It is one thing to avoid making interpersonal utility comparisons and to avoid ethical judgments; it is quite another to fail to develop a comprehensive model of welfare attainment with income distribution consequences --to treat income distribution as if it were absent from the social decision-making process. It is not a matter of making economics relevant to practical problems, though that is not unjustifiable; it is a matter of generating a complete theory of welfare, one that does not exclude certain phenomena and thus yield only partial, biased and capricious conclusions (Samuels, 1981: 58). Thus welfare economics is but a rationalizing ideology for the status quo.
Economic behavior, in addition to preferences, depends on the extent of legal responsibility, upon the structure of legal rights and obligations, upon the relative existence and scope of rights to behave in one way or the other, and ultimately of legal standing in tort law, criminal law, or under the police power of the state as well as the law of property. Rights vary from generation to generation in accordance with the variations in the moral consciousness in the community. In times past, a “man” had a right to graze his sheep on the common lands, to drive a carriage on any side of the road, to build houses without reference to sanitary conditions, to keep the children at home without giving them education, to own slaves, because the community believed that one ought to have these “rights.” With the change in the forces and relations of production, and with it the growth of moral consciousness, man ceased to have these “natural” rights, because the reconstituted community has come to realize that one ought not to have them if it is to function properly. Rights are thus space and time contingent.
Central to the social choice involved, then, is the determination of what is of public importance. Here is where the power structure enters: The judgmental process is one in which decisions are a function of the structure of power, in which decisions are power- structure-specific, and decisions based on the status quo power-structure are skewed toward the perceived interests of those with more of the say, whether power be based on wealth, property, votes, position, rank or brute force. Optimal levels of the policy variables, moreover, depend on how various losses are perceived. The political process will determine how the interests of various groups will be reconciled or which groups will be able to impose their will on the rest of society. It is clear that these losses will be perceived differently among social and economic groups within any society (Harris, 1993: 171). Any social welfare function will thus depend upon the power structure or institutional framework within which society decides upon such matters. Hence there are no unique Pareto optimal solutions; there are only solutions specific to the underlying power structure. "The functioning, indeed the very life, of the market depends on the coercive powers of political institutions. The state uses these powers to establish and ensure rights in the marketplace, directly supply some essential services, and indirectly generate the environment of trust, understanding and security that is vital to the daily conduct of business" (Okun, 1975: 71).
Inequality of wealth, income, position, legal status and so on leads to inequality or asymmetry in the patterns of capacity to function in the market. In any historically given situation there is a social state that has a preferred status in social choice in that it will be adopted in the absence of a specific decision to the contrary. Politically, the status quo has this property, as is frequently all too obvious (Arrow, 1963: 119). This is a matter of social valuation, in some sense the result of the aggregation of (rather than mere) individual preferences, however learned. Part of the social process is the perception of which --whose-- injuries are to count, which are to be considered important and thereby suitable for inhibitory policy. Whoever is poor or weak by the criterion of the selection system used will be sacrificed so long as their interests do not coincide with the interests of the corresponding rich or strong (Samuels, 1981: 68). Thus the central economic problem, economic growth included, is conflict. In every society conflicts of interest among society members must be resolved. The process by which that resolution (not elimination) occurs is the sine qua non of the category of that society, with respect to the control over distribution of costs and benefits and therefore over the structure of power. Welfare economics must come to grips with this; it treats this issue any way, by design or by default, in the interest of the few.
Politico economic analysis, therefore, cannot be conclusively justified in terms of the optimality solutions they yield, nor can the optimality solutions be conclusively justified in terms of the decisional structures, without smacking of circularity. There is potential conflict between the quality of the decision-making structure and the quality of the resulting decisions: A criterion of one may be satisfied but not a criterion of the other, and tradeoffs will have to be made. There is in addition the intractable problem of evaluating the status quo and potential changes of the status quo --in terms of the cost price structure generated by the status quo. Costs are a partial function of the state of the law, and one cannot conclusively rationalize costs by reference to the law, nor the law by reference to the costs, nor changes in either costs or law by reference to the other (Samuels, 1981: 68-71).
The preoccupation of neoclassical economics with how to improve efficiency and reduce transaction cost while extracting the economy from the social matrix, is thus a classic example of not being able to find the right answer because of having asked the wrong question, of looking for the lost keys under the street light only because this is where keys can be seen by night. The peculiarity of the wrongness in the case of the neoclassical question, however, is that it deals with people's lives. The Coase Theorem --leaving aside its more problematic Invariance Hypothesis, the strong version of the theorem-- states that as long as there are no obstacles to bargaining between the parties involved resources will be allocated efficiently regardless of how property rights are initially assigned. One "may speak of a person owning land and using it as a factor of production, but what the landowner in fact possesses," argues Coase (1960: 1-44), "is the right to carry out a circumscribed list of actions. The rights of a landowner are not unlimited.... This does not come about simply because of governmental regulation. It would be equally true under the common law. In fact, it would be true under any system of law. A system in which the rights of individuals were unlimited would be one in which there were no rights to acquire." That is to say, it is always possible to modify by transactions in the market the initial legal delimitation of rights; hence voluntary exchange not only allocates goods efficiently, but costs as well (Barnes and Stout, 1993: 41-51).
The Theorem is obviously designed to undercut the notion that liability rules determine who is legally accountable for harm in cases of externality, on the basis that liability rule will not affect substantive results, therefore to deny the inevitability of political decisions on the contours of the polity. If the Coase Theorem is thus applied in the area of civil rights it would lead to abrogating the freedom of some people so long as that renders more total freedom, which is back again to the classic problem with pure utilitarianism: tyranny of the majority. Welfare theorists at least since Debreu (1969: 40-5) have recognized that a situation might exist in which competitive equilibrium was reached with a segment of the population living below a subsistence level, in which case it would be Pareto optimal for society to have them work for nothing, inasmuch as they will soon perish any way. They have thus hypothetically and unrealistically assumed that each individual has the resources with which to both survive and participate in the market (Koopmans, 1957: 59-62). As Warren Samuels (1981: 21) has noted, the latter assumption has the interesting implication that the consent and no loss requirements of Pareto optimality, operate within a paradigm precluding death such that the laissez faire implications often attending the Pareto rule are inappropriate and gratuitous.
Whereas welfare state support is generally seen as a departure from Pareto optimal conditions (except where it represents Pareto optimal redistribution, which relaxes the assumption against interdependent utility functions), i.e., constituting an involuntary loss for the support of others, Pareto optimality seems to require by this consumption set assumption the very existence of a welfare state (Hochman and Rodgers, 1969: 542-56). Therefore, aside from limiting it to a description of the case of a society of self-sufficient farmers who do a little trading on the side, and aside also from assuming instantaneous elimination by starvation of those whose resources prove insufficient for survival, and conditions ensuring existence of an equilibrium involving survival of some consumers, a more realistic alternative to the Pareto criterion would be to recognize the existence of income transfers through taxation and social insurance, and to look for conditions, including tax and benefit schedules, ensuring general survival (Samuels, 1981: 21).
Not only is there no unique Pareto optimum (the contract curve represents a set of Pareto optima with respect to which some additional value judgment, e.g., a Bergsonian (1982) social welfare function, is necessary as a basis on which to choose between the optima); not only are there a multiple number of Pareto optima represented on the contract curve which reflect alternative initial (unquestioned, status quo) "endowments," but the Pareto optimum varies, e.g., with income and wealth distribution, with wealth as a function of ability and willingness to pay, with the power structure, and, most significantly for policy issues, with the law. Pareto optimal redistribution also constitutes a secondary redistribution which depends on the initial distribution of earnings. This distribution is determined by such factors as inheritance, earning capacities, education and market structure. It may itself be changed through the political process (Musgrave, 1970: 17).
Optimizing in terms of existing cost price ratios generated as a partial function of status quo income distribution, power structure and working rules, serves to reinforce the existing distributional institutions. Hence not only is income distribution a partial function of resource allocation, but resource allocation is a partial function of income distribution: A bias in favor of the status quo enters whenever one aims to bring the economy closer to an optimum using the existing set of prices, since this set of prices itself emerges from the existing distribution (Mishan, Dobb, Schmid, and Samuels; in Samuels, 1981: 34-8). The fact is that Pareto optimum solutions take place within the status quo moral and legal rules. Pareto optimal solutions are specific to the state of the law. Pareto optimality exudes the spirit of laissez faire but if one changes the law one changes Pareto optimality; if one changes the law the substance of the formal solution will change.
Laissez faire markets thus constitute a power structure within the law. Market positions relevant to Pareto optimizing behavior are partially a function of the working rules which govern the acquisition, structure and use of power, e.g., property rights (including any right to monopolize). The relative capacity of an economic actor to enter and participate in the market, to acquire gains and to thrust costs upon others, to reach optimal adjustments, etc., all are a function of the structure of legal rights and of the legal and moral rules governing those rights (Samuels, 1981: 22-3). The legal and moral rules are an object of power play: Government is a vehicle available to whomever can control or use it, so that individuals and groups, international as well as domestic, seek to buy and/or control government in order to formulate legal rules of benefit to them. The working rules govern the distribution of power, and the distribution of power governs the development of the working rules. Efficiency depends on the relevant input-output categories and it is property rights which determine relevancy.
Prices and costs, then, reflect not only existential scarcity, revealed preferences and production technologies, but also the institutional distribution of that scarcity through the power structure, e.g., through the legal distribution of things that are or become cost items to other people. And if costs and prices are partially a function of power structure and wealth distribution, then productivity too is similarly governed, which means that factor pricing according to productivity is partially factor pricing according to institutional arrangements, and that to justify income as a proxy for productivity by reference to institutions, and to justify institutions by reference to how they reward productivity, is to reason in a circle, as when rights are justified by results and results are justified by rights. Institutional arrangements figure very much then in economic efficiency, while the latter conceals inequity (Samuels, 1981: 38).
But the focus on efficiency while eliminating sociality, for one to be fair, has not emanated from neoclassical economics but from social Darwinism. On the basis of efficiency some devotees of laissez faire capitalism in the nineteenth century opposed in principle any right to survival, beyond the right to beg for private philanthropy. However, any help of philanthropic organizations, "available only through some demeaning proof of dire need --thus imposing a toll of shame in lieu of cash, or a sacrifice of pride for a dinner" (Okun, 1975: 18) is too inhuman and, any way, is unacceptable in some cultures. Charity, soup kitchens and other means of volunteerism may appear to reduce the demand for costly public welfare programs, but they do not solve the vast inequality problem in society. Worse even, they degrade people at the receiving end and breach their dignity. Those who never quit resorting to the human rights ploy, therefore, need to answer: What about the human right of survival? Of social justice? And of dignity?
Writing in 1884, Herbert Spencer argued that the command "if anyone would not work neither should he eat[,] is simply an enunciation of the universal law of nature under which life has reached its present height --the law that a creature not energetic enough to maintain itself must die” (quoted in Okun, 1975: 17-18). For the Spencers of yesteryear as well as of latter-day Spencers, therefore, economic efficiency requires the forceful implementation of the rule that those who do not work shall not eat; never mind the fact that a society that turns itself into a giant vending machine which delivers anything and everything only in return for the proper number of coins is, in the long-run, self-destructive. This is the result of pushing sociality down the drain, replacing political economy by economics, and of measuring social welfare merely by GNP.
But society is not a mere aggregate of individuals, and the gross national product cannot measure social welfare. The latter is a vector and cannot be adequately accounted for by a scalar (Okun, 1975: 13). Dudley Seers (1962: 145-60) thus suggests that rather than by per capita GNP, development is to be measured by what happens to poverty, to unemployment and to inequality. Market forces, argues Seers, reflect a country’s income distribution. Per capita income is therefore a defective measure. It is also misused; the early explorers of quantification in economics --William Petty, Gregory King, François Quesnay, Antoine Lavoisier and Joseph Lagrange-- were the initiators of GNP and GDP. This statistical tool came to prominence when it was used for the quite specific purposes of Keynesian demand management. It was then popularized by the work of Simon Kuznets, who compiled official estimates of US GNP and compared them with those of other countries which he also compiled. GNP was eventually elevated by neoclassical economics to become the central icon of its ideology as the measure of all things (Tessa Morris-Suzuki’s A History of Japanese Economic Thought, 1989: 137).
Employing costs as an objective measure of value, which is what is done by the GNP aggregate, leads to paradoxes. Spending more on petrol because of congestion raises GNP, even though the same amount of travel is undertaken. Money spent on expensive technologies to counteract the effect of pollution (clean up technology) adds to GNP, even though all they achieve is to return the world to its previous state. If technology is employed that cost the same but did not pollute in the first place (clean technology) GNP would be lower, not higher. Even though the same amount of benefit is yielded, less “growth” occurs. Increased economic activity, or economic growth, may therefore not correspond to an increase in economic “welfare,” in the sense of well-being. Nor does the GNP as a standard economic aggregate reflect the well-being of individual members of society (Jon Mulberg’s Social Limits to Economic Theory, 1995: 148-9).
GNP growth is thus necessary but not sufficient for human development. Human progress may be lacking in some societies despite rapid GNP growth or high per capita income levels unless some additional steps are taken. National income figures, useful though they are for many purposes, do not therefore reveal the composition of income or the real beneficiaries. Also, people often value achievements that do not show up at all, or not immediately, in growth figures: better nutrition and health services, greater access to knowledge, more secure livelihoods, better working conditions, security against crime and physical violence, satisfying leisure time and a sense of participating in the economic, cultural and political activities of their communities.
Of course, people may want higher incomes and more material things, but these are not the sum total of human life. And excessive preoccupation with GNP growth and national income accounts has obscured the fact that human beings are the real end of all activities; this powerful Kantian perspective was ignored, whereby neoclassical economics supplanted a focus on ends by an obsession with merely the means. Indeed, theories of capital formation and resource development are anti-Kantian: They view human beings primarily as means rather than as ends. They are concerned only with the supply side --with human beings as instruments for furthering commodity production. True, there is a connection, for human beings are the active agents of all production. Human beings are both the means and the end of development. However, human beings are more than capital goods for commodity production. They are also the ultimate ends and beneficiaries of this process.
The presence of nontradeable goods and services and the distortions from exchange rate anomalies, tariffs and taxes make per capita income data in nominal price not very useful for international comparisons either. More importantly, averages conceal wide disparities in the overall population. The GNP figures typically used for international comparisons do not adequately account for national differences in purchasing power or the distorting effect of official exchange rates. The purchasing power adjusted GDP estimates developed in the International Price Comparison Project, a collaborative effort of the UN Statistical Office, the IBRD, EUROSTAT, OECD, ECE, ESCAP and USAID, is still in its experimental stage (Lance Taylor, 1988).
Conceptually, in the UDCs and some sympathetic circles in the DCs, there was a generalized revolt against the straitjacket of economic definitions of development, constraining its goals to more or less irrelevant quantitative indicators. However, the dethronement of GNP, as this endeavor was then called, did not go very far (Lance Taylor, 1988): No international or academic consensus around any other definition was possible, given the hegemonic power of neoclassical economics. On the other hand, efficiency as wealth maximization means a preference for the technical, quantitative, mechanical, material, individualist, over the human, just, fair, right, moral, and communal. It is on the side of the calculating engineers against the innocent poets, the loaded factory owner against the wretched worker, the railroad against the farmer, the rich against the poor, the powerful against the weak. Efficiency is a tool of class, gender, and race invidiousness. Efficiency as the only criterion of law and economics is a rationalizing ideology, pure and simple.
The distribution of wealth...is a matter of human institutions only.... The rules by which it is determined are what the opinions and feelings of the ruling portion of the community make them, and are very different in different ages and countries; and might be still more different, if mankind so chose.
These are the words of John Stuart Mill (1926: 200), by no means an institutionalist, much less a Marxist.
Neoclassical economics, with its focus on efficiency and the Coase theorem, has served domestically in the US under the Reaganomics of the 1980s, to undermine the ad hoc socioeconomic programs that were generated by the New Deal and the social counterculture of the 1960s. The advent of the New Deal essentially meant to address what was perceived to be a temporary gap between socioeconomic expectations and reality. This gap, however, is endemic in the capitalist system (e.g., as projected in homelessness in the US and wide regional and class economic differentiation in capitalist countries, and among the latter and their suppliers and consumers in the UDCs), while no exogenous economic measures are thought imperative, for the market will take care of everything through the invisible hand: pure fiction. Only the acute nature of the second Great Depression, which threatened the political stability of the US, and indeed capitalism per se, prompted the ad hoc measures that FDR thought urgently needed, even before any theoretical basis for taking such action was available, i.e., before Keynes’ publication of his General Theory, containing his thoughts on demand management, and thus giving a fatal blow to Say’s law.
Reaganomics focused on monetary policy (with Milton Friedman’s views as a spearhead) and supply side economics (with Jack Kemp as a prime spokesperson). A component of the supply side bent was the Laffer curve argument --that reducing tax rates would increase tax revenues-- but both aspects of Reaganomics were not conceptually novel: They had been advanced seven decades earlier by Joseph Schumpeter, in a monograph on the Crisis of the Tax State (1918). Supply side economics held that if tax rates were lowered people would save more and work harder. A surge of economic activities would follow, resulting in more tax revenues and hence keep fiscal policy in a budgetary balance. Combined with the improved efficiency expected from deregulation, the end result would be avoiding recession and implementing an antiinflation program. However, this “populist type of supply side economics has been fully discredited” (Lawrence Klein’s “Macroeconomic Policy,” in Werner Sichel’s The State of Economic Science: Views of Six Nobel Laureates, 1989: 53). Neoclassical economics has also been used globally by the IMF and the World Bank, in conjunction with resolutions taken by the UN security Council, to abstract the UDCs from the little postindependence social justice they had achieved. It provided rationalizations for ignoring, and hence concealing, economic and political inequalities.
Underlying all that is the intellectual absurdity of the claim that defining the good --efficient-- society as one that maximizes opportunities for people to buy what they want is "value free." One can of course make such a skewed value judgment, and even defend it on