chapter  1
18 Pages

Globalization and the South at the crossroads of change


The point is that given the fixity of land, the marginal product of labour, fL, will be declining with greater labour input. Countries with greater agricultural productivity, either because the land is more fertile or because of intermediate inputs (irrigation), will be able to sustain larger populations (as in China and India). Otherwise, the economy will be caught in a Malthusian trap, unless there is a nascent manufacturing sector, perhaps subject to increasing returns to scale. Expanded international trade can release the economy from this Malthusian trap. If there is a phase of mercantilist trade and surplus extraction, where it is the North (England, France, Holland, Portugal) that accumulates surpluses from monopolistic colonial trade and surplus extraction there may be industrialization in some countries of the North (England) following technical progress and institutional change that permit these surpluses to be channelled into industrial capital. Free trade can intensify industrialization where it has occurred in the North and cause de-industrialization in parts of the South (China and India) that had nascent manufacturing.4 What is less referred to is the use of military power to enforce monopolistic mercantile trade (as with the British and Dutch East India companies) and later on, ironically, even the principle of free trade and the freedom of the high seas. Thus, as Findlay and O’Rourke (2007) put it, prosperity and plenty often emanate from war and even naked aggression. After the de-industrialization of parts of the South, the economies of these countries will once again be characterized by a Malthusian trap in its subsistence sector, but may have an enclave sector producing commodities demanded by the industrialized North. Many will have surplus labour in the sense of Lewis (1954). Within the sphere of international trade there is an endogenous change in endowments which dictates that the South will export commodities (based on the relative abundance of land and labour), and the North manufactures (based upon historically greater capital stocks accumulated via mercantilist trade). Following Findlay (1980), we can think of the following steady state NorthSouth global equilibrium. Here growth in the South (gs) is given by:

gs = sPfk (1.3)

Here fk is the marginal productivity of capital or land given an exogenously fixed real wage rate, P is the price of the good the South produces and exports and s is the propensity to save out of profit (Pfk). In the North growth is as in a neoclassical Solow type model; it means equilibrium growth is equal to the growth of the effective labour force, n. In the world steady state n is equal to the growth rate of the South, hence:

P = n/sfk (1.4)

The South’s terms of trade (P) adjust to bring about global growth equilibrium. Technical progress in the South (a rise in fk) will be immiserizing, as the equilibrium terms of trade for the South (P) declines. Technical progress in the North (a rise in n) benefits the South via higher prices. This is exactly how Raul Prebisch (1950) would have put it. The North is not only the engine of growth for the South but sets its pace based on the North’s growth. There is a distinct international division of labour, cemented during the first age of globalization (1870-1914) with the South exporting commodities and the North producing and exporting manufactures. Moreover, this unfavourable system does not change with the simple advent of labour-intensive manufactured goods exports from the South during the 1970s, as long as the South is dependent on the North to determine its rate of growth and the equilibrium terms of trade. An increase in savings rates in the South from (equation 1.3) can raise its growth rate, via capital accumulation. Is this how China and East Asia succeeded by simply accumulating capital and augmenting total factor productivity? That could be partially true, if one considers the writings of Young (1995) and Chang (2007), who argue that the East Asian growth miracle is based on this type of accumulation. Capital mobility between the North and the South driven by the prospect of higher profits in the South will not fully benefit the South except through increased employment at a constant wage rate (in the presence of surplus labour). Its terms of trade will decline with expanded output and a part of profit income has to be repatriated to the North (see Burgstaller and Saavedra-Rivano 1984 for an analytical model of this process). This bleak picture regarding asymmetric trade and economic interaction can be supplemented by three other strands of thought. The first is to do with economic imperialism, as exemplified in the work of Hobson and Lenin, and elaborated on in a contemporary economic model by Krugman (1981). The developed North may invest in the underdeveloped South, but that does not lead to an increase in living standards (real wage rates) of workers in the South; Northern workers are better off compared to their counterparts in the South. Second, there is the notion of unequal exchange and dependency; see Bacha (1978) for an analytical model encapsulating some of these ideas. Unequal exchange emanates from the fact that North-South trade does not equalize both wages and profits (but only profits), as would be predicted by the Heckscher-Ohlin theory. Factor price equalization would only be applicable to intra-North trade. Finally, we have the experience of the Great Depression of the 1930s, when commodity prices collapsed. This

prompted Prebisch (1950) to suggest that because of a low-income elasticity of demand for commodities, specializing in them did not provide dynamic gains in terms of growth. Singer (1950) pointed to a secular tendency for the commodity terms of trade vis-à-vis manufactures to decline. Ergo, industrialize. Somehow, North-South trade was unfair and asymmetric, as it did not provide any more than static gains from trade for developing countries, and was perceived to be inimical to the South’s more dynamic growth interests. Trade dependence should be minimized, and whenever possible developing countries should rely on their own domestic markets in order to industrialize and grow.5 But the problem is that a strategy of industrialization is not simple to implement. It requires coordination between sectors, and expectations that the big push towards industrialization will last and not just fizzle out (Murphy et al. 1989). Indeed, the economic history of the world does seem to suggest that there is historical divergence in growth rates (and therefore average living standards) between regions since the Industrial Revolution. Most nations were comparable in per capita income levels at the beginning of the second millennium but after the Industrial Revolution North and South diverged (see Table 1.2). The gap between the average for rich and poor nations as a whole has widened by 350 per cent in 178 years. Until 1950, the Western offshoots (USA, Canada, Australia and New Zealand) grew to take the premier position within the North.6 The second half of the twentieth century would see Western Europe and Japan catching up and solidifying the world gap. Globalization, which proceeded rapidly between 1870 and 1914, and once again after 1945 (with the biggest surge after 1980), may serve to cement the polarization between rich and poor nations. This polarization has been described by Quah (1996) as the ‘persistence and stratification’ of the differences between rich and poor. Over time, a bi-modal distribution of world incomes emerges; one for affluent nations, the other for low-income countries. Nations are forced to join one or the other.