REAL WORLD GLOBALIZATION
AND INEQUALITY YESTERDAY AND TODAY
A Review Essay
by
Andre Gunder Frank
of
GLOBALIZATION AND HISTORY.
THE EVOLUTION OF A NINETEENTH CENTURY ATLANTIC
ECONOMY
by Kevin H. O’Rourke and Jeffrey G. Williamson,
Cambridge MA & London: MIT Press 1999
This book shows that the current
“globalization” buzz-word refers to a process that in fact already characterized
the nineteenth century until the beginning of the First World War. From then and until the
end of the Second World War, the process of globalization was severely reversed - in
exemplification of one of the authors’ sub-theses that this process can and does have
its own ups and downs and is not a one way ever onward and upward road, as latter day
parlance would have it. During the half century past, the globalization process was
re-initiated laboriously but haltingly until the last two and especially the last decade
of the twentieth century, when globalism more than globalization recovered the reach it
had already nearly a century earlier. Although this book focuses on the nineteenth century
period prior even to that, the authors nonetheless express important concerns for present
and future praxis and policy. Not the least of them is the warning that
“globalization” should not be
regarded as an automatic and irreversible ever onward and upward going process; but that
it must also be cultivated and protected, in particular from protectionism itself.
This wide-sweeping and far-reaching book
represents a major piece, or set of pieces, in a still on-going assembly of a yet larger
jigsaw puzzle the outlines of which one of the authors has kindly provided me in the course of e-mail correspondence between
us. As reviewer, I will here of course concentrate on the book. Nonetheless, I will try
also to situate this book among the authors still growing and ever wider concerns. These
include debates of long standing among economists and historians to which the authors
bring their own innovative sophisticated analysis of a rich data base that in they have
had in large part they have had to assemble
themselves.
Their related other works both tap into
and further expand this data base, which they thereby generously also make available to
others as well, including those who may wish to use it also to contest the authors
conclusions. I include myself among these, if only because in some of their work our
authors take specific issue with my still wider concern and conclusions, which they
dispute on the basis of their data and their analysis in this book and elsewhere. I
therefore also permit myself to engage in what in a simple book review would normally be a
no-no: to use the review of another author’s book to push the reviewer’s own
agenda. I will do so below on pretext at
least of writing a review ESSAY, which not only engages a problematique that is wider than
that of the book itself, but also one within which the authors themselves have already
challenged my position by quotation and me by name.
The central question that the authors
address is whether the Atlantic economy experienced convergence of income among its
constituent parts. Their short answer is YES
in the Atlantic economies, in which some however receive more equal attention than others.
Moreover, the rest of the world remains beyond their scope in this book, although not in
their later work. The authors rely less on
the usual per capita GNP or GDP and prefer to use the real PPP [purchasing power parity]
wage rate of the majority of workers as an index of income, because it takes better
account of the otherwise all too much and often disregarded important domestic
distribution of income. So the second main question posed is to what extent and how
openness and especially trade impact on domestic distributions of income. This factor price wage rate of labor and its
relation to the factor prices of land and capital are the empirical pieces and the
analytical red thread that guides the authors innovative and coherent assembly of this
part of their larger jig-saw puzzle still under construction.
Another part of the jigsaw puzzle the
authors are assembling turns on their insistent and repeated question whether factor
movements and trade substituted or complemented each other. The [neo]classical
Hecksher-Ohlin Theorem had it that trade can be and is generated by equalizing factor
prices and benefits from trade between two regions: A labor rich region exports labor
intensive goods and imports capital and/or land intensive products from regions that are
relatively rich in capital and land, thereby also tending to equalize factor prices
between both regions. An additional question
is whether such equalization also occurs WITHIN these regions, as per below. The
authors’ time series and other analysis suggests that for most factors, products and
times the trade of products instead complements the movement of the labor and capital
factors that produce these products. That is, trade and capital flows, as well as trade
and migration mostly rose and fell in tandem and re-enforced rather than replacing each
other: increased capital flows and migration among regions also generated more trade among
them.
Nonetheless, not only is trade found to
be largely derivative from factor flows, but its contribution to wage/income convergence
is much smaller than that of factor flows themselves. On the other hand, trade does have
important consequences for the DISTRIBUTION if income. However, these effects are not the
everywhere the same. They can result in both less and more equality of domestic economies,
depending on differences in their pre-existing political economic structure. Usually, the
efects are to accentuate both their already more equal and more unequal domestic
distributions of income. Notably for instance, in the two Atlantic economies with the
already previously most UN-equal income distributions, that is Brazil and the United
States, three decades of late twentieth century ‘openness’ MULTIPLIED this
inequality. In a subsequent paper, the authors pose the question whether the
Hecksher-Ohlin suppostion that trade also affects the distribution of income is confirmed
by the experience of England before the nineteenth century. They suggest that not, firstly
because the nature of the goods traded could not have sufficient such effects, and
secondly because trade did not, or was not sufficient to, equalize commodity factor prices
among the trading regions.
This last observation becomes the index
and key to a still later work that asks “When Did Globalization Begin?” And they
say that contrary to Frank and also to Bentley the answer is only since 1820-28, because
only then did commodity factor price equalization or even convergence begin on a global
scale. In an e-mail exchange, I objected and one of the authors O’Rourke agreed that
equal factor prices across regions cannot serve as an adequate index of trade
globalization; since even in the today’s globalized economy world - and even national
- factor prices and of course especially the wage price of labor - are still unequal. But
if we agree that the presence or lack of price equalization can NOT be used as an, let
alone the, index of globalization, then what remains of our authors’ argument that
the absence even of convergence proves that there was no world economy?
Perhaps this is a
glass-half-full/half-empty difference of appreciation.
For if factor prices really WERE EQUAL, there would be no incentive or reason to
trade at all! In yet another and so far last paper in this series, the authors wonder why
international trade grew rapidly from 1500 to 1800, even though they find no factor price
convergence, which according to them only begins in the 1820s. In this regard, it may be
observed that in fact tradeable commodities like grains, sugar, coffee, tea, silk etc. and
goods , especially textiles, were already competitive substitutes from one end of the
world to another during this earlier period [Frank 1998, Barendse 2002]. That also tended
to generate factor price convergence among them. Importantly furthermore, the world wide
trade of silver both responded to and its different prices in different parts of the
world. Thereby the trade of silver generated even more price convergence, not only for
silver itself, but also for all the commodities and goods that were exchanged for and
through silver. That is and contrary to our authors claims to the contrary, the already
then globalized the division of labor [that is of production], trade and investment and
led to some convergence but NOT equality of factor prices, which had they become equal
would have stopped rather than increased international - really global - trade.
In this book however, the authors are
not yet so interested in WHEN factor prices converged and with what effect, than they are
with WHY these prices - and in particular why real wage rates and income - converged in
the Atlantic economies. Limiting the question to the circum-Atlantic is of course their
privilege. However as I will argue at the end of this review essay, it is NOT adequate or
satisfactory to answer questions of why what happened IN the Atlantic Basin by drawing on
evidence and its analysis, which is also limited only TO the Atlantic. That is among other
reasons because in any one region factor prices are also formed through its participation
in an already pre-existing and still continuing globalized world economy. Of course and
perhaps in part for that reason as the authors aver in their above cited works, part of
our dispute is precisely whether a world economy did or did not exist before the
nineteenth century.
For that period, the authors proceed
with a sophisticated factor analysis of what did and did not have how much influence on
factor price equalization and on wage/income convergence among various countries for which
there are statistics within the Atlantic region. They consider and reject education,
demonstrate the importance of cost reducing innovations in transportation, and discuss
tariff and other policies. They conclude that far and away the most important factor was
mass migration, which in their estimation accounted for 70 percent of the convergence:
Migrants reduced the labor/land & capital ratio and exerted upward pressure on wages
in the labor exporting regions and increased the labor/ land & capital ratio and
exerted downward pressure on wages in the labor importing regions. Capital flows, although
large and increasing especially in the last decade of the nineteenth and first decade of
the twentieth century, contributed much less than migration of labor.
Accordingly also therefore, the authors
allot three of their twelve
chapters to migration and migration
policies. Apart from the also
important intra-European migration,
especially into Eastern Europe - and
also eastward within Russia - the authors
re-examine the familiar overseas
migration of 60 million Europeans and very
much less Asian. They also
re-examine the familiar penury push
and riches pull explanations for the
sources, destinations, and timing of the
migrant flows. More than elsewhere however, this book analyzes the underlying and
resulting - that is changing - combinations of the availabilities and absolute and
relative factor prices of labor, land, and capital.
Of course however, the flows of these
factors were related; since new capital investment, especially in infrastructure, was
required to make labor and land productive in the regions of recent [European] settlement. [Although land and other natural resources of
course remained in place, they may also be regarded functionally as flows inasmuch as they
were incorporated into the economy through expansion of the frontier of - European! -
settlement and resource use]. To render all of these profitable, they had to be bound
together by international as well as also internal trade and finance of e.g. railroads and
canals.
The book also has several chapters on
other aspects of political economic policy, both as an effect of/response to and as a
cause of changing economic circumstances and events. Thus, there is a chapter on the
movement to free[er!] trade at mid-century and the return to renewed protectionism during
the last quarter of the century. The latter was a response to the “Great
Depression” following 1873 and especially during the 1880s, although as it would
again during the Depression of the 1930s, protectionism also re-enforced the very tendency
that gave rise to it. In the earlier period however, such restrictions were imposed
primarily on trade but not on factor mobility, while both trade and factor movements,
again both of capital and of migration, were restricted during the second period. This
difference can be attributed to or at least is correlated with more peace in the former
and more war in the latter period, though it may be disputable which was more cause and
which was more effect.
Another chapter examines the causes and
consequences of capital flows, and the following one pursues the aforementioned issue of
their substitution for or complementarity with commodity trade and migration. As per the
book’s title, the authors limit their empirical work and its analysis to only the
circum - Atlantic regions; and they find that among these convergence did exist. However,
some of these regions and convergence among them were more equal and receive more equal
attention and convergence among them is found to be more equal than among others. Europe
as a whole and the regions of recent European settlement are the beneficiaries both of
more attention by the authors and of more convergence among them. Perhaps that correlation
also has causative significance, although it is less clear in which direction the causes
run.
The most important finding of the book
and argument of the authors is that convergence among economies is a function and result
of their degree of openness, also of trade but primarily to factor flows in response to
underlying inter- regional differences in factor availability and relative prices. Among
these in turn, most important was the globalization of labor markets through migration and
the expansion of the frontier. Indeed, the two should be regarded as largely functionally
equivalent: Pushing the North America and Australasian as well as Argentinian and South
African frontiers outward further globalized the labor market. The related migration
obviously also served to extended the frontiers within these regions. Less often noted
however, is that opening these regions and expanding their domestic frontiers through
overseas out-migration from Europe also served functionally to extend the frontier of
Europe itself.
Contrary to the Hecksher-Ohlin study,
theorem and predictions however and as already observed in general but also in a chapter
especially devoted to thereto, the authors find that not commodity and manufacturing trade
but rather factor mobility is the major contributor to wage rate and income convergence.
The authors note on several occasions that received theory is rather ambiguous on a number
of important policy related questions. But so is their work. To their credit, they want to
speak to today’s debates”[p.3]. But how? They
clearly demonstrate and stress that openness is correlated with, indeed causes
[desireable?!] convergence, where the latter was observed: In much of the North Atlantic
in the nineteenth century; and with the cessation of openness during the twentieth century
war and inter-war period, so was convergence replaced by divergence. Ah, but not
altogether, since parts of Latin America - also part of the Atlantic region - and certainly East and South Asia and
significantly so the Soviet Union experienced important measures of convergence. So how is it then that as the authors can state
on p. 284 that “we believe that catching up of poor countries with rich may have as
much to do with economic linkages as with any
other force identified by growth theory....Where there has been openness, there has been
convergence: where there has been autarky, there has been either divergence or cessation
of convergence.” Ergo, the authors
suggest that even still today it is important to resist temptations or forces to revert to
controls and restrictions on movements of capital and migration that have sometimes been
invoked during some periods in the past.
If that is the authors conclusion and
policy recommendation for the present and future, it is open to serious reservation on at
least three counts, including some that they even raise themselves: 1] One is on their
argument as it stands so far, 2] another is on how widely in the Atlantic Economy convergence was NOT operative, and in the
remainder of the world still less so, and 3] to what extent the authors’ good cause
and effect factor analysis is or is not adequate to account for observed, let alone
unobserved, effects or consequences. We may inquire into the first two reservations here and
then more extensively into the third one below.
1] We must have very serious
reservations about the authors argument and policy conclusions already even on the
analytic battlefield the authors selected themselves and engaging them only with the
analytic arms they use themselves. Their insistence on openness for the future must be
suspect insofar as it is based on their own factor analysis of factor movements and their
consequences in the past. For the authors found that it was factor mobility of labor,
primarily through inter-continental migration, that accounted for 70 percent of observed
convergence. That also means that insofar as
factor mobility was the crucial factor at all, the mobility of all other factors combined
accounted for no more than 30 percent of observed convergence. Indeed, that percentage may
also have been lower inasmuch as it is possible that some other factor mobility was
DI-vergent but compensated by labor mobility. Moreover, the authors find that merchandize
trade did NOT generate convergence. That
leaves capital mobility as the other most important factor. But regarding that, the
authors find that capital moved as a complement of and not as a substitute for the
movement of labor and the development of land and other resources. Without capital to make labor and land productive
in the regions of recent settlement, their development and convergence would have been
much less than it was or even nil. Moreover, it was precisely to these resource rich and
labor attracting potentially productive regions that capital went, and hardly at all
elsewhere. So in the conclusion to their chapter 12 on “International Capital
Flows,” the authors themselves observe that “late-nineteenth century world
capital flows were a force for divergence, not convergence” [p245].
How much morso then must serious analysis of the evidence demonstrate, or
even raw evidence or pure theory each taken separately suggest, that the enormous flows of
speculative financial capital in the late-twentieth century had to be and have been highly
DE-stabilizing and DI-vergent. Also still today, capital flows to the already or potentially productive
regions, and not especially those with the lowest labor costs. So what does this REAL
WORLD historical experience even within the confines of the North Atlantic Region REALLY
teach us about factor mobility and especially capital mobility? Once openness to the
global mobility of labor is closed off or even curtailed as it is today [except for the
brain drain, which of course is DI-vergent], openness to trade and to capital mobility no
longer offer much of any source or generation of convergence! As the authors themselves note also still on
the same above cited page 284, “Thus, one must be cautious in applying lessons of
history to the present, where mass migrations are so much more modest.”
Why then would anyone wish to insist on
openness [for everything except labor mobility!], unless it is for ideological reasons
that mask REAL world interests, which are served by openness to capital mobility, and
especially for speculative financial capital mobility, that far from accounting for
convergence generates ever greater DI-vergence.
2] Contrary to the authors rather
wide-sweeping claims, convergence did not operate everywhere and at all times of openness,
and was even negative within Europe between its regions the North and the South of Europe,
as the authors also observe. Moreover, as I observed above - and already in my 1966
article on “The Development of Underdevelopment” - relative autarchy has also
been associated with - and permitted? - national catch up and thereby convergence in parts
of the ‘Third” and “Second” worlds.
However, the authors devote much less, indeed almost no, attention to what has come
to be and be known as the “North” and the “South” in what also was and
still is the Atlantic economy - and among them there was NO convergence, but rather
de-convergence and ever greater dispersion. Convergence certainly did not include the also
ATLANTIC economies of West and Southwest Africa or the Caribbean, nor even of west Atlantic South America - with one notable
exception: Argentina and Uruguay during the period of the authors’ study, where at
the end of which wages and income EXCEEDED even the highest ones in Europe.
The sad decline - anything BUT
convergence - of Argentina to the terrible crisis it now suffers as I write has of course
been the object of unending studies. Whatever the reasons for this debacle, failure to
follow our authors ‘opennes’ policies can NOT be said to be one of them. Even the short periods of partial
economic isolation of Argentina were not
due to endogenous policies but to loss of its export markets to agricultural protectionism
elsewhere, by the Ottawa Commonwealth
Agreement in the 1930s, the US Marshall Plan commodities exports to Europe, and then the
US, Canadian, and West European Common Agricultural Policy throughout the past several
decades. Ironically under these circumstances beyond Argentinian control, world and
Argentinian economic policy since the 1976 military coup was to turn Argentinian “The Master Wheel” back to the pre-1930s
wheat and meat export economy and to DE-industrialize the intervening import substituting
manufacturing sector, thus for the first time generating massive unemployment and
declining income. Even so, the little Argentina that in 1930 had accounted for 3 percent
of all world exports; by 1990 already accounted for no more than 0.3 percent of them. The coup de grace to once proud Argentina was
complete financial liberalization and the dollarization of its economy, which de jure
incorporated and de facto marginalized Argentina and its by now miserably poor population.
In a word, for the also ATLANTIC regions in Latin America and Africa, openness was
then in the nineteenth and has been since in the twentieth century the road NOT to
con-vergence , but to DI-vergence. THAT must be taken as a second very significant limitation to the alleged
benefits of openness and its recommendation by the authors even for the “Atlantic
Economy,”not to mention in the world economy. The same must be said also for Harold
Innis’ and Mel Watkins’ related “staple’ theory of growth. It holds
that industrialization and convergence can be achieved through production, early
specialization and opennes to the export of commodities derived from natural resources,
including cattle and sheep ranching and grain farming. That was the experience in the
Canada that served as their model, as well as in other land and resource abundant but
labor scarce regions of recent European settlement. But it has equally assurededly NOT
been the case in the labor abundant regions elsewhere in Latin America, the Caribbean and
Africa, not to mention of Asia, which except
in a few marginal references remain marginal
and beyond the purview of this book as well. There is nothing wrong in not including this
populous large part of the world in this book per se, all the more so as the authors
increasingly do so in their above-mentioned related later work.
The sad decline - anything BUT
convergence - of Argentina to the terrible crisis it now suffers as I write has of course
been the object of unending studies. Whatever the reasons for this debacle, failure to
follow our authors ‘opennes’ policies can NOT be said to be one of them. Even the short periods of partial
economic isolation of Argentina were not
due to endogenous policies but to loss of its export markets to agricultural protectionism
elsewhere, by the Ottawa Commonwealth
Agreement in the 1930s, the US Marshall Plan commodities exports to Europe, and then the
US, Canadian, and West European Common Agricultural Policy throughout the past several
decades. Ironically under these circumstances beyond Argentinian control, world and
Argentinian economic policy since the 1976 military coup was to turn Argentinian “The Master Wheel” back to the pre-1930s
wheat and meat export economy and to DE-industrialize the intervening import substituting
manufacturing sector, thus for the first time generating massive unemployment and
declining income. Even so, the little Argentina that in 1930 had accounted for 3 percent
of all world exports; by 1990 already accounted for no more than 0.3 percent of them. The
coup de grace to once proud Argentina was complete financial liberalization and the
dollarization of its economy, which de jure incorporated and de facto marginalized
Argentina and its by now miserably poor population.
In a word, for the also ATLANTIC regions in Latin America and Africa, openness was
then in the nineteenth and has been since in the twentieth century the road NOT to
con-vergence , but to DI-vergence. THAT must be taken as a second very significant limitation to the alleged
benefits of openness and its recommendation by the authors even for the “Atlantic
Economy,”not to mention in the world economy. The same must be said also for Harold
Innis’ and Mel Watkins’ related “staple’ theory of growth. It holds
that industrialization and convergence can be achieved through production, early
specialization and opennes to the export of commodities derived from natural resources,
including cattle and sheep ranching and grain farming. That was the experience in the
Canada that served as their model, as well as in other land and resource abundant but
labor scarce regions of recent European settlement. But it has equally assuredly NOT been
the case in the labor abundant regions elsewhere in Latin America, the Caribbean and
Africa, not to mention of Asia, which except
in a few marginal references remain marginal
and beyond the purview of this book as well. There is nothing wrong in not including this
populous large part of the world in this book per se, all the more so as the authors
increasingly do so in their above-mentioned related later work.
3] Not so acceptable however, is the
authors’ failure even to consider, much less to account for, the effects that this
wider world political economy has on the Atlantic region and convergence among the
northern [and non-convergence of the southern] parts thereof. For each and all of these regions is [only] part
and parcel of this world economy as a whole. Nor
do our authors seem to find much reason to study the complex [sub] system of trade,
capital flow, and migration RELATIONS among the Atlantic regions and how these relations
contribute to different degrees of convergence. Instead
this book focuses on and is largely limited to only inter-regional relative factor prices.
However valuable their innovative study in this book unquestionably is, what this reviewer
nonetheless finds missing is the examination of how WORLD trade, capital movements and
payments, and migration impact on the Atlantic Economy that is under study here.
All of these economic relations are and
MUST be examined also as the structure and operation of the complex system of world trade
and payments itself. For as the saying goes, the whole is more than the sum of its parts;
and it and helps shape the parts and their relations among each other. Therefore, an
adequate - or even any - analysis of HOW the causes and consequences of inter-regional
[and inter-sectoral] flows of capital, trade and migrations and their consequences for
convergence or not must also take due account of how any, e.g. Atlantic, regions were also
importantly shaped by and dependent on what Ragnar Nurske called THE NETWORK OF WORLD
TRADE [League of Nations 1943]. Moreover as he, Saul, Condliffe and Frank [1978,2001]
analyzed and Kenwood & Lougheed apparently unsuccessfully sought to
“popularize,” this network was and is characterized by a WORLD-WIDE MULTILATERAL
system of balances and imbalances of trade and payments. And arguably it is the POSITION
WITHIN this system, more than relative factor prices and productivity of each economic
region and sector that determines their absolute and relative benefits and any convergence
or not among them. Of course, if all
positions were equivalent, occupying one or another would not afford any particular
dis/advantage to whoever manages or is obliged to locate there. But some positions are much more and others less
beneficial than others, and even among apparently equal ones, some can in Goerge
Orwell’s terminology be more equal than others.
The importance of locational position in the world economy is by no means derived
from or limited to only geographical location, as we will note below. But it is perhaps
the easiest to visualize, e.g. in the locations over two milennia of
Constantinople/Istanbul near one and Malacca/Singapore near the other end of Eurasia. The
former boasted a population already of 750,000 while Paris and London were edging from
50,000 to 100,000. Both were located at natural turn-around places in Afro-Eurasian
East-West and North-South trade. And what is
the benefit they derived from their locations? MONOPOLY
RENT! That is why I use the term LOCATION,
LOCATION, LOCATION in the Nineteenth Century World Economy [Frank 2001] to dramatize this
all too neglected problematique, also by our present authors.
Far from only [let alone perfect]
competition making the system tick -
that WOULD equalize factor prices and
converge incomes -, it is competition to establish and hold on to MONOPOLY positions from
which to extract RENT that is the real name of the game. That was an all too neglected
observation already of Karl Marx, Joseph Schumpeter, Joseph Chamberlain and Joanne
Robinson - the latter under their titles of IMPERFECT and MONOPOLY competition - among
economists and Fernand Braudel among economic historians. All of them alas claimed to be
identifying and analyzing a structure and operation that is characteristic only or
especially of ‘capitalism,” when the same has equally characterized political
economy and the world throughout the ages. The
patent illustration is the ever present race to get patents and then by whatever ruse to
hold on to them and the monopoly rent that they afford or to capture, construct, or be
granted any other privileged position, not only geographical but also technological, productive, commercial,
legal or just plain force/powerful in the local, national, regional and global political
economy. Why else fund kings and conquerors throughout the ages, or lobby legislatures and
contribute to political parties and candidates in ‘democracies”? Ask ENRON!
This is not the place to elaborate
thereon, other than briefly to note some of its possible consequences for our
authors’ analysis, conclusions, and policy recommendations. Hilgerdt and Saul
analyzed and Frank [1978,2001] further elaborated on this complex system of multilateral
trade and payments imbalances in the late nineteenth and early twentieth centuries.
These may be simplified and
schematically illustrated in two alternate or complementary ways. One is a set of
triangles, beginning with that - or rather those - of the triangular Atlantic trade
already before the nineteenth century. The second is the in/famous opium imbalanced trade
and payments triangle among India, China, and Britain. Another is the complementary US,
China and Britain triangle of trade and payments imbalances. More and more triangles were
added and interwoven as the nineteenth century progressed until these triangles merged
into an ever more complex multilateral system of trade, its underlying division of labor,
that is also of the expenditure of labor power here and there - and their consequences for
the convergence or not of factor prices and incomes, which is the focal point of our
authors’ inquiry.
All these triangles had in common that
their apex was in Britain, which thereby occupied the most privileged position in the world. Visually most obvious again
is the geographic location and nexus that
joined all the triangles in Britain. But this nexus of triangles also operationalizes and
represents its position in the global productive and commercial system of multilateral
trade and payments that Britain derived its maximum benefit IN MONOPOLY RENT, arguably
more than from its alleged workshop of the world productive prowess. For that was not
sufficient even to avoid or remedy a structural Britain with merchandize trade DEFICIT in
EVERY year of the century, which grew from 10 million to 160 million pound sterling from
1816 to 1913. How then, was Britain able to increase its consumption and income - and be
the world’s largest investor besides? Not by its own efforts nor by taking advantage
of factor price differences alone.
And how would convergence come about
around the North Atlantic [and with Argentina and Australasia as well], while the rest of
the world DE-converged? Further to the factor prices so well analyzed in this book, this
process can also be schematically illustrated in another way. Picture a world economic
circle around the perimeter of which we locate the various world regions [however roughly
or finely one wishes to cut them up] in locational correspondence to how each region is
advantaged or disadvantaged by its triangular and then ever more multilateral relations
with all the others. Then Britain was the top dog, which benefitted firstly from its
relations with Continental Europe, and both from their relations with the Regions of
Recent settlement [and among these the United States with the British Dominions], and ALL
of these from their economic and in some cases also political/ military relations with the
rest of the later so-called Third World, which instead of converging, DE-converged and
suffered “development of underdevelopment.”
Conversely, the location on the
perimeter of the world economic circle permitted each of these regions also to benefit
from its relations with those behind and below it, AND to use part of the benefits it
derived from others to export commodities and payments to the other regions to whose
benefit it in turn contributed and who benefitted from their location and relations with
the regions behind and below it. As in the schematic illustration by triangles, in this
circular world system of trade and payments im/balances, it was Britain who was top dog.
Bye and bye it had to cede its place of privilege on the charmed circle to the United
States. At the bottom of the pile, stack or deck were and largely still remain the now
underdeveloped Third World that made up the pedestal on top of and from which all the
others literally made their fortune.
Within the now mis-called Third World
however, there was one region - outside the Atlantic Economy! - that carried the brunt of
these relations that were beneficial to others and disasterously DIS-beneficial to itself:
INDIA. In effect, it was India and its
direct relation to Britain that was the pedestal on which rested the structure and
operation of the entire global system of multilateral Imbalances of trade and payments AND
of direct and portfolio investment and repayment. Each of B[ritain], E[urope], U[SA], and
D[ominions] was able to settle all or part of its unfavorable balances with some by
drawing on its favorable balance with others. That is, each of these regions was able
“ to settle its accounts” with the others by drawing on the productive inputs
into the system as a whole of labor, land and other resource and capital in regions other
than its own. Only the T[hird World] and within it particularly I[ndia] -except for the
latter partly also with China - had no one else to benefit from and instead had to allow
all other B,E,U,D regions to benefit from it [conversely, each of these regions was - and
still is - able multilaterally to dissipate its own entropy to the others and lastly to T.
That is, not only were - and still are!
- some able to profit and consume at home from
the production of others abroad. The beneficiaries were - and ever more are - able to pass
much of the other costs of their ‘American way of living” lifestyle at home off
onto the backs of those who already produced the products for that life-style in the first
place. No wonder that US Presidents Bush
father and son have explicitly rejected sacrificing even a tiny bit of the American way of
Life just to keep from destroying the global environment elsewhere. Analogously, when
President George W. Bush says that we can and will not let terrorists change our style of
life, because if we did they would have achieved what they wanted to, the President means
it - and backs his words up with military power and blackmail to preserve and extend the
work that after the end of the Cold War his father began and called “The New World
Order.” The question comes, what else is
new?
I firmly believe that a responsible
reviewer [responsible both to the author and to the readers] should review the book that
WAS written and NOT a book that the reviewer may have liked to be, but was NOT written,
and hence also NOT up for review. So why do I insist on even summarizing all this about
the rest of the world, in a review of a book that is not about that? I do so for the
simple reason that the economic processes of convergence and some factor price
equalization within the Atlantic Economy that the authors analyze so well, could NOT have
taken place as it did and as they examine it in the absence of the relations between the
Atlantic Economy and its regional members and sectors with this remainder of the world.
The North Atlantic - but not most South
Atlantic - regions benefitted from their relations with other and especially Asian ones,
but not only in some general way. The circum-Atlantic factor prices were directly related
to those elsewhere in the world economy, as the same authors themselves show in their
subsequent work thereon. So were therefore also the very factor movements and in
particular the migration of labor within the Atlantic economy to which the authors
attribute 70 percent of the convergence that they find - there but not elsewhere! But to
make that labor and the new land it occupied productive and capable of generating
commodities for export also required a complementary transfer of working and investment
capital to provide the required infrastructure. But Britain was the principal exporter of
capital all the while that its own exports were insufficient to pay even for its home
consumption and investment, as also the United States today. Moreover, Britain then - and
again also the US now - was unable to raise enough capital from its own savings at home to
finance its investments. Its own productivity and savings were probably wanting even for
its investment at home, and certainly altogether insufficient to cover its investment on
the other side of the Atlantic and the world. What
Britain then and the US now have been able to do however is in the name of
‘free” enterprise and trade of goods and services - to set up, run and
manipulate a world embracing - more accurately choking! - financial system to their own
monopoly advantage.
So where and how then did Britain raise
this investable capital? True, some was derived from invisibles like interest and profits
from previous investments and shipping and insurance fees. But that was all but sufficient
for Britain to cover its structural merchandize import surplus. Moreover, to generate
invisible earnings from its investments, Britain, Continental Europe and then also the
United States had to place some foreign investment capital abroad in the first place. And
the real source of most of that capital for British was its colony in INDIA. Not only was
India the linch-pin or center piece of the arch of Britain’s - and through it the
world’s and the Atlantic Economy’s - entire economic prowess in general. India
was also the principal source in particular of the investment capital that Britain used to
help construct and make tick the Atlantic Economy and the convergence among its northern
regions.
All these regions to some extent and
Britain very substantially therefore owed their growing prosperity and the convergence
among them probably more to their position in the international division of labor and
their ability to manipulate the world financial system in their favor than from their own
labor or combination and use of productive factors in response to relative factor prices.
The same is again, or rather still, true today. The
1990s boom time in the United States, contrary to all the Clintonesque self-congratulatory
back-slapping, was in no wise derived from any exceptional American productiveness or
productivity, which the latter rose in electronics only, soon to bust there as in the
economy as a whole. American consumption -
despite the huge and ever growing trade deficit - and what little investment was largely
derived from its PRIVILEGED POSITION in the world, which in turn rests on two main
pillars: the dollar as the world reserve currency and the Pentagon as the keep of the new
world order. Each pillar also supports the other, and both have served Americans to
prosper at the devastating cost of the vastest majority of the population elsewhere in the
world. During the 1990s, that was most spectacularly so in the former Soviet Union and
Eastern Europe since 1990 and in parts of East Asia since the financial crisis of 1997,
both of which were first generated and then deliberately deepened by US policy.
In conclusion we must observe again that
our authors very laudable but sole or main object of inquiry have been factor price
equalization and income convergence among otherwise separate productive, sectoral and
geographic units. We already observed earlier on that [1] even their own evidence does not
support their argument for openness even on their own turf and that [2] the evidence they
do not examine beyond their own turf disconfirms their argument altogether. [3] Thirdly
and most importantly however, their factor analysis of what factors and factor prices
intervene in the process of con- or di- vergence are not the only factors of major
significance for the economic and social outcomes that the authors are keen to observe and
explain. The structure, organization, functioning, and transformation of the global world
economy itself and the location within it of any particular unit also accounts for as much
or very probably more, as per the titles of Adam Smith and David Landes, of “the
wealth and poverty of nations,” their
inhabitants and of con- or di-vergence of income among them. By confining their analysis
almost entirely to the former in neglect of the latter, our authors therefore also able to
convey at best only half or even less of the truth. I leave it to the reader to judge
whether a half truth or less is better or worse than none.
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