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This
is a short history of the global economy since 1800.
It is about the system of global capitalism that took
shape once the British economy went ‘underground’
and began to draw its energy and, increasingly, its
raw materials from mineral resources.
The
progressive substitution of minerals for plants, as
the economy’s source of energy and raw materials,
transformed the dynamics of capitalism. It opened
up vast new sources of energy and raw materials, freeing
the economy from the narrow resource constraints of
an organic, plant-based economy. The new cheaper,
more abundant energy produced dramatic reductions
in the costs of transportation; a growing volume and
range of goods could now enter into long-distance
and international trade; and this rapidly created
the basis for an international division of labor.
But the resource substitution also deepened the logic
of uneven development. On the one hand, the mineral-based
economy created several positive feedbacks that strengthened
the already existing tendency towards the division
of trading areas into Core and Periphery, or concentrations
of high and low value-added activities. In addition,
it augmented the military power of the states that
pioneered these new technolgies. Together, these tendencies—markets,
energy substitution, and force—created the modern
global economy, increasingly integrated but also deeply
divided into a Core and Periphery.[1]
The
history of the new mineral-based global economy falls
into three phases, defined with reference to the degree
of global centralization of power. The first phase,
lasting from 1800 to 1913, concentrated power—and,
with it, capital, technology, science and manufactures—in
a small number of Core areas, notably Britain, France,
United States, and Germany. Conversely, the greater
part of the Periphery—nearly all of Asia and
Africa—lost its sovereignty to a few Core countries,
was forced to open their economies to Core capital,
specialized in primary goods, and scarcely experienced
any improvements in the living standards of the indigenous
population. The global economy slowly entered into
a second phase in the late 1940s, although this process
was initiated earlier with the Russian Revolution
of 1917, when power was decentralized from the Core
to the Periphery. On the level of the economy, this
decentralization reversed the earlier concentration
of manufactures in the Core countries, and produced
dramatic acceleration of growth in the dependent Periphery.
Starting in the 1980s, however, power was again re-centralized
in the Core countries. Already, by the mid-1990s,
this re-centralization had exceeded the previous peak
in the global centralization of power attained during
the late nineteenth century. This paper will examine
these three movements of the global economy, though
the emphasis will be on analyzing the dynamics of
the third movement.
Two
Economic Logics
It
is important to begin by laying out, if only briefly,
the different logics underlying the organic, land-based
economy that held center stage before 1800 and the
inorganic, mineral-based economy that has been developing
since that date.
In
the old agrarian system, two factors perennially constrained
its capacity for economic growth. This system drew
nearly all its energy from plants, the source of our
food, fuel, fiber and other raw materials; this constrained
the supply of energy since the land necessary for
growing plants was available only in finite quantities.
In addition, this system only used organic instruments,
men and animals, for converting the energy captured
by plants into mechanical energy. These organic instruments
did not favor growth since their upkeep required large
amounts of land, and their efficiency at converting
energy could scarcely be improved upon. As a result,
once all accessible land had been brought into use,
the agrarian system grew by improving the organization
of work, primarily through division of labor; inventing
machines that enhanced the efficiency of work; or
improving the quality of existing lands. The division
of labor offered the best prospects for growth, though
this was limited—as Adam Smith so famously noted—by
the extent of the market, or transportation and institutions
of exchange. Most importantly, once all the land was
in use, the limits on growth pressed harder. It was
land, or its ability to fix solar energy through plants,
that appeared to impose the final constraint on growth
in this organic economy.
The
new inorganic economy that developed after 1800 transcended
the dual limits that constrained growth in the organic
economy. It drew its energy and raw materials increasingly
from stocks of minerals, and since these stocks were
quite large relative to the rate at which they could
be drawn down, this virtually lifted the cap on energy
flows available to the economy. More importantly,
the energy from fossil fuels was converted to mechanical
energy by machines: the steam engine and, later, internal
combustion engine. Once these machines outstripped
the organic instruments for converting energy to work,
they found growing applications in transportation,
manufacturing, and, eventually, agriculture. In time,
the cheaper energy, when combined with advances in
science and technology, produced cheaper inorganic
substitutes for organic raw materials. This was in
addition to the uses of fossil fuels, which began
at an earlier date, in heating homes, lighting and
smelting.
This
energy revolution created a variety of positive feedbacks.
First, the fossil fuels freed land from producing
fuels and fodder; the development of inorganic substitutes
for organic raw materials had the same effect. In
other words, even as the new economy expanded, it
released land that could be used for producing more
food and organic raw materials, and we can expect
this to reduce the industrial economy’s propensity
to imports of food and raw materials, at least during
the early stages of this development. Second, the
cheaper energy reduced the costs of manufacturing
and transportation; in turn, the cheaper transportation
produced cumulative cost reductions in manufacturing
through wider markets, greater division of labor,
technology spillovers, and other linkages. These cumulative
cost-reductions and, in part, their localized effects,
created a tendency to concentrate the world’s
manufactures in countries—the Core countries—that
took an early lead in harnessing the new energy. Conversely,
the rest of the world, the Periphery, specialized
in producing food and raw materials, still using the
old source of energy. Finally, the new energy per
se stimulated endless innovations in production technology.
Since large and increasing amounts of energy could
now be concentrated at one point in space, this led
to the development of larger, faster, and more powerful
machines for use in transportation, manufacturing,
mining, construction and, eventually, agriculture.
This constituted a third source of cumulative growth
in the industrial economy.
The
energy revolution had created a new economic dynamics.
Unlike the muscle-driven, plant-based, land-constrained
agrarian economy, the industrial economy increasingly
drew upon minerals for its energy and raw materials,
employed engines to convert fossil fuels to mechanical
energy, and used this energy to mechanize work in
manufacturing, transportation, construction, and agriculture.
The productive capacity of the industrial economy
was not constrained by energy, as in the old agrarian
economy, but by its ability to deploy machines that
converted energy to work. The engine of growth in
this economy was capital accumulation, since this
determined how fast it could expand the stock of energy-converting
and energy-using machines available to the economy.
As a result, capitalists replaced landlords as the
central actors in the new industrial economy.
These
profound changes created new classes and class conflicts.
The new energy-converting and energy-using machines
downgraded the workers in the manufacturing even as
they pushed this sector to the center of the economy.
Of course, the workers were still needed, but the
new machines diminished their importance. Now the
workers could not own their machines, which were too
expensive compared to what they were able to save
individually. The craftsmen, artisans, and even peasants,
became labor, hired by capitalists to tend to the
machines, fix them when they broke down, or perform
tasks that had not yet been mechanized. The machines—and
their capitalist proprietors—now employed the
workers. In addition, since the new energy created
concentrations of factories, it also assembled great
masses of workers in one workplace. These conditions
favored the growth of class consciousness on both
sides of the production process.
The
industrial economy deepened the polarizing tendencies
in the agrarian system. Formerly, due to the greater
economies of scale in manufactures compared to primary
goods, there was a tendency for manufactures to be
concentrated in countries which acquired the biggest
markets, whether by chance or force. By reducing the
costs of manufactures and transportation and creating
mineral-based substitutes for raw materials, the energy
revolution strengthened this tendency. In addition,
both directly and indirectly, the energy revolution
added to a country’s military power by stimulating
prosperity, reducing the cost of arms and armaments,
and improving military technology as inventors drew
upon the general advances in the economy’s technical
capabilities. In time, the development of steamboats,
better prophylactics against tropical diseases, and
the development of rapid-firing weapons sealed the
fate of Africa and Asia; they were colonized or converted
into open-door countries. [2] The white-dominated
Periphery in Europe and Latin America had the protection
of membership in the European family of civilized
nations. [3]
The
first countries to adopt the new energy system would
have a near-lock on the global economy. It created
a set of cumulative forces that concentrated manufactures,
capital, technology and power in the countries that
took a lead in the energy revolution—the Core
countries. Simultaneously, the new energy system created
a Periphery, economic regions that were restructured
by Core capital to supply food, agricultural raw materials
and minerals to the Core. In varying combinations,
military force, markets and racist ideologies brought
about this restructuring. It is the story of this
global economy that we narrate in these pages.
Karl
Marx and Class Contradictions
In
his Wealth of Nations, Adam Smith (1776) does
not once refer to any of the early signs of an industrial
revolution—the harnessing of waterpower, the
use of steam engine in mines, or the rise of factory
production. Although he was greatly impressed by the
power of division of labor in manufacturing, he believed
that diminishing returns to capital and labor, in
the presence of fixed amounts of land, would eventually
lead the economy into a stationary state. This remained
the vision of classical economists even as late as
the middle of the nineteenth century.
Amongst
classical economists, Karl Marx (1848) alone took
serious notice of the industrial revolution. In graphic
passages, he describes the quickening pace of history,
the tremendous expansive power of capital, its constant
search for new markets and new technologies, and how
this was pushing small-scale producers into the ranks
of workers, and unleashing profound changes in the
economic and social landscape of pre-capitalist societies
everywhere. These transformations had produced two
great classes, capitalist and workers, constantly
at odds with each other. At the global level, this
expansive dynamic was destroying pre-capitalist societies
and binding them into a single system of global markets.
Although Marx did not worry too much about the origins
of capitalism—he saw its precursors in the burghers
of medieval towns, the growing commerce stimulated
by the discoveries, and the system of Atlantic trade—he
was reasonably certain that the system he was describing
was fully developed or nearly so. Indeed, it was ready
for another epochal transformation, and he might even
live to see that happen in his own lifetime. As it
was, Marx underestimated the durability of the system
he was analyzing.
Class
contradictions are central to Marx’s analysis
of capitalism. The two great classes spawned by industrial
capitalism, capitalists and workers, had opposite
interests. The capitalists were driven by competition
to accumulate, innovate, and expand their market shares;
this produced concentrations of capital and deepening
business cycles. By the same logic, they sought to
drive down wages and lengthen the workweek; this pauperized
the workers. At some point, Marx predicted, even in
his own lifetime, these two tendencies would produce
a proletarian revolution. Led by the communist party,
the workers would overthrow the capitalists, abolish
markets, socialize ownership and production, and lay
the foundations of a new social formation.
History
did not oblige Karl Marx. There would be no proletarian
revolutions in the advanced industrial countries,
where capitalist contradictions were most ripe for
the overthrow of capitalism. The workers stirred in
less likely places, but were easily suppressed. On
the whole, the class contradictions were contained,
as capitalist growth created a middle class, and rising
labor productivity began to translate into higher
wages for production workers. In time, when the workers
organized, it was not to overthrow the system but
to demand higher wages and better working conditions.
Slowly, capitalists acceded to these demands, as unionized
power expanded, workers gained voting rights, and
labor parties gained ground at the ballot. The emergence
of the Soviet Union, the first worker’s state,
pushed Core capital towards greater accommodation
with their working classes. In addition, since there
was little industrialization in the Periphery yet,
their concessions to labor did not dampen the international
competitiveness of Core capital. Finally, with help
from compulsory schooling and the media, the system
succeeded in socializing the workers as citizens,
endowed with rights and the illusion that they were
free to move up the social ladder through education,
thriftiness and hard work.
Imperialist
Rivalry
The
challenges to Core capital came from two sources not
anticipated by Karl Marx: the rivalry of countries
seeking entry into the Core, and attempts by the Periphery
to overthrow the Core’s hegemony.
The
outward expansion of Core capital was a central result
of Karl Marx’s analysis of capitalism. He never
worried that anything short of a proletarian revolution
could reverse this expansion; it would penetrate all
parts of the world, and transform and launch them
on development trajectories similar to those traveled
by the Core countries. Karl Marx had not foreseen
that the global expansion of Core capital, in and
of itself, might generate contradictions that would
reverse for several decades the capitalist penetration
of the Periphery. We are indebted to Vladimir Lenin
and the neo-Marxists for drawing out attention to
these contradictions.
Contrary
to the mythical accounts of orthodox economists, we
observe an intimate connection between the capital
and the state at least in the rise of capitalism in
Western Europe. In the new age heralded by the energy
revolution, capital in the Core countries would use
the expanded powers of the state to try to acquire
exclusive control over markets and resources in the
Periphery. Starting in the nineteenth century, this
produced a new wave of direct colonization of societies
– in Asia, Africa and Caribbean – that did
not have the protection of membership in the Western
“family of nations.” At least for a while,
the parceling of the world into colonies proceeded
quite smoothly. There was plenty of real estate for
everyone.
The
first challenge emerged when powerful new entrants
into the Core – Germany, Italy and Japan –
were seized with empire envy. The old timers, Britain,
France and Netherlands, had appropriated all the real
prizes in Africa and Asia. Miffed, the newcomers decided
that their best chance of gaining an empire was to
take it from those who had one. In time, as Britain’s
hegemonic control weakened, this produced two fratricidal
World Wars, fought mostly amongst Western countries
at the Core. According to an African proverb, when
elephants fight, the grass gets trampled on. In this
case, whether by good or ill luck, the grass would
have a chance to grow.
Core-Periphery
Contradictions
Industrial
capitalism spawned powerful cumulative processes—operating
through markets, military power and racist ideologies
of domination—which concentrated capital, manufactures,
technology and power in the Core countries. The dependent
Periphery in Asia, Africa and the Caribbean, regions
that lost their sovereignty, specialized in the production
of primary goods for export.
The
centralizing tendencies of Core capital acted strongly
and quickly. By 1913, according to Bairoch (1982:
296, 304), two-thirds of the world’s manufactures
were concentrated in four Core countries: Britain,
United States, Germany and France. In 1750, their
combined share had stood at less than a tenth. At
the same time, the Core countries reduced vast areas
of the world—nearly all of Asia, Africa, Central
America and the Caribbean—to colonies, open-door
countries or dependencies, which were converted to
the production of primary exports. Those parts of
the Periphery that enjoyed various degrees of political
autonomy were luckier. By 1950, many of them had developed
indigenous capital, skills and manufactures.
The
contradiction between the Core and dependent Periphery
was on display, most transparently, in the widening
gap between the living standards of the two economic
areas. According to Bairoch (1981), Britain had roughly
the same per capita income as Asia in 1800; but, in
1950, it had gained a lead of close to six to one.
Africa suffered a similar decline in its relative
position. On an average, the sovereign parts of the
Periphery did not face a decline in their relative
position during this period.
Once
again, history had dashed the great hopes of Karl
Marx. Core capital had penetrated the Periphery—in
fact, its political penetration of the dependent Periphery
was nearly complete—but failed to transform its
productive potential. Instead, the global expansion
of Core capital had polarized the world, dividing
it into two unequal moieties, the Core and the Periphery,
connected by the disequalizing impact of trade, imperialism
and racist ideologies. In the words of Andre Gunder
Frank, capitalist development at the Core produced
underdevelopment in the Periphery. It is important
to note that this inverse dynamic was strongest in
the relations between the Core countries and the dependent
parts of the Periphery.
The
prospects for growth in the dependent parts of the
Periphery were dim as long as they could not structure
their economic relations with Core capital. Yet, the
system itself offered a break. Help came when the
elephants got into fights—big fights, better
known as World Wars. These wars battered the strength
of the elephants, creating opportunities for indigenous
capital in the Periphery. When these wars directly
involved major countries in the Periphery—Russia
in the First World War, and China in the Second World
War—they created openings for the emergence of
radical political movements. Thus was born the October
Revolution of 1917, amidst the chaos of Russian defeat
during the First World War, producing the first systemic
challenge to Core capital. Ironically, the challenge
had come from the Periphery.
The
October Revolution of 1917 began a temporary reversal
in the global concentration of capital, power and
manufactures. It gave an impetus to liberation movements—in
the colonies and open-door countries—that were
already challenging this concentration, even pushing
some towards radical solutions. The Soviet Union stood
as the vanguard, the one great ally, of liberation
movements seeking to roll back the colonial empires
and weaken the polarizing dynamic of global capital.
When the elephants fought again twenty years later,
these decentralizing movements were poised for major
victories.
Most
importantly, the Second World War battered the major
colonial powers, those who won no less than those
who lost. Of course, the defeated powers, Italy and
Japan, instantly lost all their colonies. The victorious
colonial powers, Britain, France, Belgium and Netherlands,
found that they had lost too much of their former
strength to successfully defend their empires, especially
as the liberation movements gathered steam. In most
cases, they decided to pull out of their colonies
before the anti-colonial movements turned violent;
this also offered the best opportunity of preserving
their economic interests and influence in the former
colonies. A massive decentralization of power followed,
larger, more dramatic and deeper than the one that
marked the dismantling of Spain’s American empire
in the 1820s.
This
was a window of opportunity for the Periphery, especially
the former colonies and open-door countries who were
now free to restructure their relations with Core
capital. Several tried collective ownership and planning,
and insisted on a radical break from global markets.
By the 1970s, nearly a third of the world’s population
lived in communist countries. Many more did not reject
markets as such, but adopted a variety of interventionist
measures to develop indigenous capital, manufactures
and skills. Starting in the 1950s, the former colonies
jettisoned the colonial doctrines of laissez faire,
free trade, balanced budgets, and private ownership.
In their place, they introduced interventionist policies
to accelerate the pace of development.
This
decentralization produced some dramatic results. The
share of the Periphery – Africa, Latin America,
and Asia minus Japan – in world manufacturing
output had shrunk to 6.5 percent in 1953 from a dominant
share of 73 percent in 1750. After two centuries of
decline, this share began to increase in the 1950s,
and rose to 12 percent in 1980. In addition, the growth
rates in the Periphery accelerated dramatically. The
per capita income in the largest colonies and quasi-colonies,
containing some 50 percent of the world’s population,
grew at an average annual growth of 0.5 and -0.27
percent over 1900-1913 and 1913-1950; the same growth
rates for the sovereign countries in the Periphery
were 1.61 percent and 1.34 percent. Over 1950-1992,
the growth rates in the former colonies and quasi-colonies
had jumped to 2.96 percent, ahead of the 2.58 percent
recorded for the always-sovereign countries in the
Periphery. [4]
Re-Centralizing
Power
The
retrenchment of Core capital would not last. Starting
in the 1980s, the IMF and World Bank began to dismantle
the developmental states as their mounting international
debts pushed them closer to bankruptcy. A decade later,
the communist regimes began their transition to markets.
In 1994, the creation of WTO institutionalized the
interests of Core capital.
It
is tempting to take the position that this recentralization
was inevitable. An underdeveloped Periphery could
not long resist the expansive power of the Core countries
once the latter had recouped their war losses and
regained their growth momentum. Yet, the communist
revolutions and the liberation movements in the Periphery
came quite close to dislodging global capitalism.
On closer examination, the argument that revolutions
in the Periphery were incapable of overthrowing Core
capital is not as watertight as it appears. In this
case, Core capital had geopolitical luck on its side.
The
challenge from the Periphery was quite massive. The
Soviet Union, which mounted the systemic challenge
to global capitalism, was a great power itself. Its
industrial and military strength expanded rapidly
in the decades following the Revolution, and, at the
end of the Second World War, it had emerged as one
of the two superpowers dominating the world. In 1950,
the communist regimes in Soviet Union, Eastern Europe
and China stretched continuously from the Danube and
the Balkans to the Pacific, together controlling the
upper half of the Eurasian landmass; they also contained
nearly a third of the world’s population. In
addition, communist parties were active in many Third
World countries. At this point, many fully expected
the tide of communism to roll westward into a Europe
devastated by war, and southward into impoverished
Asia and Africa. If, instead, Core capital successfully
blocked the communist advance and the Soviet Union
itself collapsed in 1990, there was nothing inevitable
about these outcomes.
If
Core capital overcame the communist challenge, this
was, at least in part, a fortuitous outcome of the
system of nation states. The fact that United States
was the hegemonic power during this crucial period
was a geopolitical accident; there was nothing in
the logic of capitalist system per se that produced
this result. Yet, this accident was of vital importance
to the outcome of the contest between Core capital
and the communist regimes and nationalist liberation
movements in the post-war years. Imagine this contest
with Britain still as the leading Core country.
United
States brought several vital advantages to this contest.
The most important was size. It had vastly greater
resources than its predecessor, Britain, had at its
height. United States produced 44.7 percent of the
world’s manufacturing output in 1953 and 27 percent
of the world’s output in 1950; compare this to
Britain’s peak share of world manufacturing output
of 20 percent in 1860, and a share of 8.5 percent
in world output in 1870. [5] American capitalism too
was in some ways unique; it had a huge industrial
working class but they possessed little class-consciousness.
As a result, organized American labor joined enthusiastically
in the fight to undermine workers’ movements
overseas. Capitalism—‘free enterprise,’
in the American lingo—occupied a place in this
country’s emotional life that normally belongs
to religion, inseparable from its national existence
and history. The communist challenge evoked very strong
emotional defenses. Finally, the great distance of
United States from the theatres of war in Europe ensured
that it would emerge from the two World Wars with
all its industrial assets in one piece.
The
American strategy for containing communism required
the commitment of massive resources. The first component
of this strategy was to put the war-devastated economies
of Western Europe and Japan back on their feet; some
of these economies had lost more than half of their
pre-war production capacities. The Marshall Plan was
the centerpiece of these efforts. The United States
injected $11.8 billion into Western Europe between
1948 and 1952, equal to $120 billion in 1997 prices.
[6] In the words of Duignan and Gran (1997), this
amounted to the “greatest voluntary transfer
of resources from one country to another.” This
injection of capital financed technology transfers
and the import of vital machinery, spare parts, and
raw materials, all of which put Western Europe’s
industries back on their feet by 1952. In addition,
the Marshall Plan pushed Western Europe towards economic
and political cooperation, helping to lay the foundations
of a united Europe. United States played a similar
role in the recovery of Japan.
The
second focus of America’s containment strategy
was a massive military buildup. During the Cold War,
the military spending of United States remained roughly
proportional to its share in the global economy. In
1986, this share was 28 percent of the world total
and 65 percent of the NATO total. It is even more
remarkable that the Soviet Union, according to CIA
estimates, outspent the United States. In 1986, the
military expenditures of United States and Soviet
Union were $365 billion and $374 billion respectively.
[7] Since the Soviet GDP was only 38 percent of the
US GD in 1986, this must have placed their civilian
economy under considerable strain. [8] Many experts
maintain that this was an important factor in the
eventual collapse of the Soviet Union.
The
containment strategy had a third focus. On the one
hand, it consisted of massive efforts to install anti-communist
governments in the Periphery, prop them with military
and economic assistance, and use them to eradicate
radical movements in their own countries. The White
House led these efforts with support from several
agencies including the United States Agency for International
Development (USAID). The Central Intelligence Agency
(CIA) carried out the opposite task of overthrowing
or destabilizing governments that were ‘unfriendly’
to United States. A single statistic bespeaks better
than many tomes the power of this Agency: it spent
$26.6 billions in 1997. [9]
The
vast economic and military resources of United States
allowed it to maintain a firm hegemonic grip over
the global capitalist system. On the one hand, it
created the NATO (North Atlantic Treaty Organization)
to institutionalize its military dominance over the
Core countries in Western Europe. In a similar move,
Japan was converted into a military protectorate.
In the economic arena, United States sought to stimulate
economic growth in Western Europe and Japan by providing
them relatively free access to its own vast markets.
In other words, the United States employed its dominant
hegemonic position to eliminate military conflicts
among Core countries and, in addition, replaced their
economic rivalries with various cooperative arrangements,
including the European Common Market (ECM) and the
Organization for Economic Cooperation and Development
(OECD). Freed from their old conflicts, with declining
trade barriers, and better management of business
cycles, the Core countries went on to experience a
golden period of growth between 1950 and 1973.
Core
capital slowly regained its intellectual confidence
and political muscle as it grew and expanded, at home
and abroad. On the economic front, this was visible
in the assault by neoclassical economists on Keynesian
macroeconomic policies, the regulation of industries,
the welfare state and social security programs. Politically,
Core capital gained control over the levers of power
with the election of Prime Minister Thatcher in 1979
and President Ronald Reagan in 1980, two right-wing
warriors. The conditions were now ripe for Core capital
to stage a comeback.
We
can agree on the factors that contributed to the collapse
of communism but still disagree on their relative
importance. First, and I think foremost, there was
the geopolitical luck that placed the vast resources
of the United States in the fight to contain communism.
This not only stopped the spread of communism: it
pushed the Soviets into a debilitating military rivalry
even as they failed to match the growing affluence
offered by the Core countries. In addition, the communist
states were disadvantaged in their ideological battle
against Core capital. The Core countries captured
the high ground on democracy and freedoms, even while
they sterilized the impact of these rights with money-driven
elections, media manipulation, and schooling. On the
other hand, the communists practiced inflexible planning,
rejected political competition, and stamped out dissent
with police methods. They denied workers a sense of
ownership in their workplace, and when they also failed
to deliver prosperity, they had no chance of surviving.
It was too late when the Soviets undertook reforms
in the late 1980s; this only deepened the feeling
that the system was indeed rotten, and hastened its
collapse. China avoided this catastrophic end by starting
early on their economic reforms and delivering rapid
economic growth. However, their reforms too led to
the same destination: the dismantling of communism.
The
end of developmental states came about differently.
They had created hothouses for the growth of indigenous
capital in the Periphery, a prospect that could not
have pleased the Core countries. Since Core capital
could not block the progress of developmental states,
they sought to penetrate them with official loans,
military agreements, private investments, technical
assistance, and access to the best graduate schools
in the Core countries. In time, this would produce
results. Core capital penetrated the key sectors of
the developmental states, integrated their elites
into the lower rungs of the Core hierarchy, and oriented
their most talented graduates into Core labor markets.
Once started, this process worked by undermining the
developmental states.
Several
forces inside the developmental states produced similar
results. In their anxiety to deliver growth on the
cheap—without painful reforms—the nationalists
would seek loans from the Core countries, regardless
of the hidden costs, until their debt servicing placed
them at the mercy of the lenders. In their search
for easy profits, the indigenous bourgeoisie forged
links with Core capital—as subsidiaries, suppliers,
and distributors—and, once these ties multiplied,
they would lobby for the removal of barriers against
the penetration of Core capital. Finally, as some
developmental states created the infrastructure and
skills that would make them increasingly competitive
in manufactures—threatening the Core countries
with competition in their own markets—this would
invite predatory investment from Core capital, eager
to ensure that they owned the new industries developing
in the Periphery. The strikes against developmental
states were mounting.
The
dismantling of developmental states began in the early
1980s, well before the end of the Cold War. It was
triggered by the cumulative impact of the two oil
crises of 1974 and 1979. Unable to pay their higher
import bills, the oil-importing developmental states
took out variable-interest loans from foreign banks
secured by sovereign guarantees. When interest rates
rose in 1981, and some of these countries faced bankruptcy,
the IMF and World Bank—the watchdogs of Core
capital—stepped into the breach, offering new
loans to stop them from defaulting on their old ones.
At first, the borrowers were required to stabilize
their economies, which translated into cuts in their
social spending. This was the thin end of the wedge.
In time, the conditionalities were expanded into “structural
adjustment programs”—a code word for eviscerating
the developmental states—which required eliminating
trade barriers, freeing exchange markets, privatization,
and national treatment of foreign investments.
The
age of neoliberal economics had arrived. This was
the new consensus forged in the 1980s by a cohort
of orthodox economists, many connected to the World
Bank and IMF. For several years, they had been developing
a doctrinaire neoclassical critique of developmental
states—supported by several generously funded,
country-by-country assessments of the inefficiency
of interventionist policies in the developmental states.
Their vision, appropriately dubbed the “Washington
Consensus” by John Williamson (1994), would tilt
the playing field in the Periphery to favor Core capital.
In this new regime, the reformed states would guarantee
national treatment to Core capital, enforce property
rights—effectively, those of Core capital—balance
their budgets, and help in the provision of human
capital. Core capital would step in to capture the
commanding heights—the financial sector, utilities,
communications—and any industry that offered
handsome profits.
The
end of the Cold War produced a push to institutionalize
the interests of Core capital in a new global framework.
In 1994, this led to the creation of the World Trade
Organization (WTO), which bound all its members to
a single set of rules—neoliberal rules—on
trade, exchange markets, foreign investments, government
procurements, property rights and investments. The
WTO forced all countries to accord “national
treatment” to imports and foreign capital in
every sector of the economy, including services, thereby
preparing the ground for rolling back the gains of
developmental policies. All this was a signal departure
from the General Agreements on Trade and Tariffs (GATT)—the
trade regime displaced by WTO—which granted developing
countries the right to impose protectionist trade
and payments regimes.
By
the late 1990s, Core capital had reversed much of
the decentralization of power that had occurred since
1917. At no period during the past two centuries did
Core capital—not even during its previous peak
in the late nineteenth century—operate with so
much freedom in nearly every country of the world,
or make deeper inroads into the Periphery. In effect,
the WTO bound the Periphery to the old open-door treaties
minus extraterritoriality; though in other respects
the WTO was more invasive than the open-door treaties,
especially in the enforcement of property rights,
the penetration of services, and opening up government
contracts to foreign bids. In addition, the private
agglomerations of Core capital in the 1990s were now
incomparably greater—compared to most countries
in the Periphery—than they were a hundred years
back. This increased the capacity of Core capital
to crowd out, co-opt and absorb indigenous capital
in the Periphery. Was this the Valhalla of Core capital,
the dream of the prophets of laissez faire?
Recentralization:
Economic Consequences
Contrary
to the grandiose claims made by the ideologues, the
neoliberal, open-door economic regimes imposed on
the Periphery by Core capital – starting in the
1980s – have produced no economic miracles. Instead,
these economic regimes have brought economic ruin
or, at best, lack-luster performance to the countries
they have touched most deeply.
In
order to identify the failure of neoliberal economics,
we will compare the growth record of the Periphery
in the two decades before and after 1980. First, consider
the two decades preceding 1980 when nearly all countries
in the Periphery protected their manufactures, regulated
their currency markets, engaged in deficit spending,
and their governments took on entrepreneurial roles.
By the norms of neoliberal economics, they violated
all the rules of good economic housekeeping. Yet,
they recorded quite impressive growth rates under
these interventionist regimes. The GDP of low-income
countries grew at average annual rates of 4.6 and
4.5 percent during the 1960s and 1970s; the corresponding
figures for the middle-income countries were 6.0 and
5.6 percent. There were no strong regional variations
in the growth record for this period. Although growth
in Sub-Saharan Africa faltered during the 1970s, there
were nine countries in this region whose average annual
growth rates exceeded 5.0 percent during this decade.
[10]
Over
the next two decades, as the World Bank and IMF forced
neoliberal policies upon them, the growth rates in
the Periphery declined in proportion to their embrace
of these policies. The neoliberal policies took their
first toll in Latin America and Sub-Saharan Africa.
Both regions suffered a precipitous decline in their
GDP growth rates to 1.7 percent during the 1980s,
producing declining per capita incomes. The growth
rates in Latin America recovered during the 1990s
to 3.4 percent per annum, though this was significantly
below their pre-1980 levels. The growth rate for Sub-Saharan
Africa improved only marginally during the 1990s,
and it was unable to stem the decline in its per capita
income. [11]
The
collapse of Eastern Europe and Central Asia came next,
with their rapid integration into global capitalism
starting in the 1990s. Their economic decline was
striking. Although the growth performance of these
economies had been weakening for some time, they still
managed to log an annual growth rate of 2.4 percent
in their GDP during the 1980s. However, their precipitate
transition to markets produced catastrophic results.
During the 1990s, their GDP declined at an annual
rate of 2.7 percent, more than wiping out the gains
of the previous decade. It is doubtful if any economic
region of comparable size has experienced a similar
decline in its output. Soon, their fertility rates
fell significantly below replacement levels, producing
a declining population. [12]
The
economic decline of the Middle East and North Africa
since the 1980s has been nearly as steep as in Sub-Saharan
Africa. Their GDP growth rates in the two decades
after 1980 were significantly below those for the
two preceding decades. As a result, the region’s
per capita income declined between 1980 and 2000.
This was not due to declining oil prices alone. The
non-oil economies in this region shared in this decline;
their GDP had grown at 2.9 percent annually between
1950 and 1980, but this declined to 1.5 percent in
the two decades after 1980. This decline occurred
at a time when the non-oil economies, barring Syria,
were liberalizing their trade and payments regimes.
[13]
Most
countries in East and South Asia, which had made striking
progress in the transition to neoliberal economic
regimes, followed the same pattern. Their growth rates
in the two decades after 1980 were visibly lower than
in the two preceding decades. Notably, this group
includes the most advanced countries in the region—Taiwan,
South Korea, Singapore, Hong Kong, Thailand and Malaysia—as
well as the poorer countries: Sri Lanka, Indonesia,
Philippines and Pakistan.
There
were few countries in the Periphery that escaped the
declining trend in growth rates in the post-1980 period.
India and China, the two largest countries in the
Periphery with more than one-third of the world’s
population, nearly doubled their GDP growth rates
in this period compared to their record in the three
previous decades. Although both countries enacted
market reforms since 1980, they were still amongst
the most illiberal economic regimes in the world,
whether one examines the extent of state ownership
in their industries or their trade and payments regime.
[14] A second group of countries—Myanmar, Laos
and Vietnam—experienced dramatic upturns in their
growth rates during the 1990s, without the benefit
of a liberal regime.
These
results should surprise no one but the historically
myopic. In the hundred years before 1950, the colonies
and open-door countries performed poorly compared
to the sovereign countries in the Periphery—those
that were generally free to choose interventionist
policies. [15] During the post-war interlude lasting
into the 1970s, when most of the former colonies and
open-door countries practiced strongly interventionist
policies, they experienced a dramatic acceleration
in their growth rates. It is scarcely surprising that
the forced return to open-door policies in the Periphery,
since the 1980s, has repeated the results from the
past. It is not clear how long India and China, the
two major countries that have not yet surrendered
their economic sovereignty, can resist conversion
to neoliberal economic regimes.
The
re-centralization of power by Core capital that began
in the 1980s was quite swift and mostly non-violent,
unlike the centralization that reached its peak in
the last decades of the nineteenth century. Perhaps,
this is not surprising. The first centralization was
a pioneering movement: it involved the creation, extension
and deepening of core-controlled systems of transport,
trade, finance, investment, cultural instruments,
and subordinate classes in the Periphery. It took
centuries to establish this system, often involving
wars. However, when the colonial powers departed from
their colonies, in most cases, they did not fully
liquidate these long-established systems of control.
While they terminated direct political controls, and
ended their military presence, many of the economic
and social linkages, though weakened, persisted in
most former colonies; only the communist countries
severed nearly all their linkages with Core countries.
This is what made the second re-centralization easier.
The
Core countries began to reinforce their informal systems
of control as soon as they lowered their flags over
their former colonies. The reinforcements took many
forms, including foreign aid, military assistance,
joint military exercises, training programs, and foreign
investments. When Core countries, now working in unison,
articulated their new determination—through IMF,
World Bank and the OECD—to impose neoliberal
regimes on the former colonies in the 1980s, there
was little resistance. For the most part, the elites
in the Periphery had already been integrated into
the hierarchy of power emanating from the Core; they
also understood that resistance carried unacceptable
costs. There was no popular resistance because re-centralization
did not affect the visible symbols of sovereignty.
The communist countries too were re-integrated without
firing a shot. They were overthrown from within, since
they failed to deliver prosperity, freedom or a sense
of ownership.
Concluding
Remarks
The
swift and easy recentralization of the global economy
created a paradoxical situation. United States still
commanded a massive military force while the combined
military strength of its main adversaries was less
than a third its former size.[16] This led to calls
to downsize the military, an intolerable prospect
for the industries whose profits depend on military
contracts. This had to be remedied.
The
refurbished power of Core capital was creating some
domestic problems too. On the one hand, Core capital
was eroding the social gains made by workers, consumers,
and environmentalists since the 1930s. More importantly,
the labor force in the Core countries was beginning
to face competition from the growth of industrial
production and advanced skills in some countries at
the Periphery. They were also losing jobs as Core
capital relocated to the Periphery, a process being
accelerated by the internet revolution. In addition,
Core capital was using its muscle to import cheaper
skilled workers into the markets of Core countries.
Faced with a sustained decline in their living standards—the
first in the history of industrial capitalism—a
growing number of people in the Core countries were
gravitating towards anti-Corporatist, anti-globalization
movements. This too had to be remedied.
These
problems would be solved by inventing new enemies.
It was in this context that Bernard Lewis (1990) first
invented the “clash of civilizations” between
the West and Islam. He argued that the Islamist opposition
in the Middle East represented “a mood and a
movement far transcending the level of issues and
policies and the governments that pursue them. This
is no less than a clash of civilizations – the
perhaps irrational but surely historic reaction of
an ancient rival against our Judeo-Christian heritage,
our secular present, and the worldwide expansion of
both in 1990, that the West was engaged in a veritable
clash of civilization with Islam.” Three years
later, Samuel Huntington (1993) generalized this thesis
into a historical principle. At the end of the Cold
War, he prophesied, the world is entering a new age,
whose conflicts will occur along the fault lines of
civilizations, mostly between the West and Islam,
and the West and China.
The
Clash thesis set up the military machine for capture
by powerful special interests and voting blocks within
United States. Quickly, the Israeli lobby, Christian
fundamentalists, the oil interests, and military contractors
joined forces. Each would pursue its specific goal—eliminating
threats to Israel’s hegemony, Christianizing
Islamic societies, capturing oil profits, resisting
military cuts—by mobilizing America’s redundant
military to re-colonize the Middle East. It was not
hard selling this imperialist project to Americans.
The Arab regimes were easily painted into a corner.
They were tyrannies, they possessed weapons of mass
destruction, they were an imminent threat to American
lives, they opposed Western values, and they threatened
Israel. A great nation, the greatest there has ever
been, would have little difficulty manufacturing a
clash of civilizations when it needed one.
Footnotes:
[1]
The terms, organic and mineral-based economy, are
borrowed from Wrigley (1988: 12).
[2]
Headrick (1981).
[3]
Strang (1996)).
[4]
The data in this paragraph are from Alam (2000):
151, 169.
[5]
The data on shares of manufacturing output are from
Bairoch (1982: 296, 304), and the data on shares
in world output are from Maddison (1994): 182-3,
227.
[6]
The data are from Duignan and Gran (1997).
[7]
The data on military expenditures are from Conetta
and Knight (1997).
[8]
Maddison (1995): 183, 187.
[9]
Levin (1997).
[10]
World Bank (1983): 150-51.
[11]
World Bank (2001): 295.
[12]
World Bank (2001): 295, 297.
[13]
Sevket Pamuk, The Middle East and North Africa
in the age of globalization, 1980-2000 (Paper
presented at the 13th IEHA Congress at Buenos Aires,
August 2002): http://www.eh.net/XIIICongress/cd/papers/7Pamuk
421. pdf
[14]
Wacziarg and Welch (2002) maintain that India and
China remained closed economies as of 2000—India
more than China—when judged in terms of their
average tariffs, non-tariff-barriers, and exchange-rate
premiums. In addition, state-ownership remained
dominant in heavy industries in India; in China,
this included the financial sector as well.
[15]
The average annual growth rates of PCI in the sovereign
countries were 1.00 percent for 1870-1900, 1.61
percent for 1900-1913, and 1.34 percent for 1913-1950.
The corresponding figures for the colonies and open-door
countries were 0.59, 0.50 and -0.27. Alam (2000):
151.
[16]
In 1994, according to Conetta and Knight (1997)
US military expenditure was $288 billion, while
that of Potential Threat States was $167 billion;
in 1986 the corresponding figures were $365 billion
and $550 billion.
References:
Alam,
M. Shahid, Poverty from the Wealth of Nations
(Houndsmill, UK: Macmillan, 2000).
Bairoch,
Paul “The main trends in economic disparities
since the Industrial Revolution,” in: Paul
Bairoch and Maurice Lévy-Leboyer, eds., Disparities
in economic development since the Industrial Revolution
(New York: St. Martin’s Press, 1981).
Bairoch,
Paul, “International industrialization levels
from 1750 to 1980,” Journal of European
Economic History 11, 2 (Spring 1982): 269-333.
Conetta,
Carl and Charles Knight, Post-Cold War US military
expenditure in the context of world spending trends
(Project on Defense Alternatives: January 1997): http://www.comw.org/pda/bmemo10.htm#2.
Duignan,
Peter and Lewis H. Gran, “The Marshall Plan,”
Hoover Digest 4 (1997): http://www-hoover.
stanford.edu/publications digest 974 duignan.html
Headrick,
Daniel R., The tools of empire: Technology and
European imperialism in the nineteenth century
(New York: Oxford University Press, 1981).
Huntington,
Samuel, “The clash of civilizations?”
Foreign Affairs (Summer 1993).
John
Williamson, eds., The political economy of policy
reform (Washington, D. C.: Institute for International
Economics, 1994).
Levin,
Duncan, “The CIA and the price we pay: Law-suit
response puts the figure at $26.6 billion,”
Baltimore Sun (October 19, 1997): http://www.gwu.edu/~cnss/secrecy/dloped.html.
Lewis,
Bernard, “The roots of Muslim rage,”
Atlantic Monthly (September 1990).
Smith,
Adam, The wealth of nations: An inquiry into the
nature and causes (Modern Library: 1776/1994).
Strang,
David, “The social construction of sovereignty,”
in: Thomas J. Biersteker and Cynthia Weber, eds.,
State sovereignty as social construct (Cambridge:
Cambridge University Press, 1996).
Wacziarg,
Romain and Karen Horn Welch, “Trade liberalization
and growth: New evidence” (Palo Alto: Stanford
University, November 2002): http://www.stanford.
edu/~wacziarg/ down loads/ integration. pdf.
World
Bank, World Development Report, 1983 (New York: Oxford
University Press, 1983): 150-51.
World
Bank, World Development Report, 2000-2001 (New York:
Oxford University Press, 2001).
Wrigley,
E. A., Continuity, chance and change: The character
of the industrial revolution in England (Cambridge:
Cambridge University Press, 1988).
M.
Shahid Alam is Professor of Economics at Northeastern
University. His last book, Poverty from the Wealth
of Nations, was published by Palgrave in 2000. He
may be reached at m.alam@neu.edu.
Visit
his webpage at http://msalam.net.
©
M. Shahid Alam
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