By MICHAEL ROBERTS*
When considering the Global South as a whole, it is seen that it is not catching up with the Global North. With the exception of China, there is increasing divergence rather than convergence
In a recent article, I reviewed a new — and very important — book by Brazilian Marxist economists Adalmir Antônio Marquetti, Alessandro Miebach and Henrique Morrone. They worked with a model of economic development based, on the one hand, on technical change, the rate of profit and capital accumulation and, on the other, institutional change (i.e. policies and governments). Together, these two factors are combined by them to explain the dynamics of raising or slowing down the development process.
The reality is that, in the 21st century, “recovery” is not happening for almost all countries and thus for the populations of the so-called “Global South”, that is, for the poor periphery outside the advanced capitalist economies of the Global North . This reality is often denied by conventional economists and, in particular, by economists at international agencies such as the IMF and the World Bank.
It was therefore surprising to discover that in its latest World Development Report, the World Bank admitted that most economies in the Global South are not closing the gap in per capita income or labor productivity that they maintain with advanced capitalist economies. It also recognized that there are many extremely poor countries, such as those in sub-Saharan Africa, that were and still are trapped in desperate poverty. But economists at that bank are generally more optimistic about what they call “middle-income economies,” that is, those with annual per capita incomes ranging from $1.136 to $13.845.
In its latest report, the World Bank presents a more pessimistic view of the future of the 108 countries it classifies as “middle income”. Now, as the table below shows, this group accounts for almost 40% of global economic activity, for more than 60% of people living in extreme poverty and for more than 60% of global carbon dioxide (CO2) emissions.
This is how the World Bank presents this type of information: “middle-income countries are in a race against time. Since the 1990s, many of them have done well enough to escape low-income levels and eradicate extreme poverty, leading to the general perception that the last three decades have been great for development. But this is due to abysmally low expectations — reminiscent of a period when more than two-thirds of the world lived on less than a dollar a day. The ambition of the 108 middle-income countries is to reach high-income status in the next two to three decades. When measured against this objective, however, the record is grim: the total population of the 34 middle-income economies that have transitioned to high-income status since 1990 is less than 250 million—equivalent to the population of Pakistan.”
Average annual income growth in these middle-income countries fell by nearly a third in the first two decades of this century—from 5% in the 2000s to 3,5% in the 2010s. And the World Bank concludes that “a turnaround is not likely soon because middle-income countries are facing increasingly strong headwinds. They are facing increasing geopolitical tensions and protectionism, which may slow the spread of knowledge in their economies; Furthermore, they face difficulties in servicing their debts, as well as the additional economic and financial costs they must bear due to climate change and climate action.”
In fact, that's right. However, who is to blame for this situation? Clearly, the imperialist countries of the North, who have extracted billions in profits, interest, income and resources from the South over the last century. Who were the countries that contributed most to global warming, as can be seen in the table already shown? Which of them have led wars for control of the South or against any country that opposes their interests.
Recent work by Marxist and socialist economists has revealed the extent of this imperialist extraction. And there are at least four of them: that of Guglielmo Carchedi and Michael Roberts; that of Andrea Ricci ; that of Jason Hickel; and, finally, that of Lefteris Tsoulfidis.
But all this is ignored by the World Bank. For him, the explanation for the failure to catch up is due to the fact that these countries are reluctant to adopt a correct “development strategy”. Now, for a long time, these countries relied solely on trying to increase their capital stock, but now this increase is beginning to “generate diminishing returns”. In the language of neoclassical economics, World Bank economists consider that “by itself, factor accumulation is likely to worsen the outcomes that can be obtained — this is a natural occurrence as the marginal productivity of capital declines.”
This type of consideration would be clearer in Marxist terms. Here is how Adalmir Marquetti presents the problem: “Yes, World Bank economists recognize that the marginal productivity of capital, the rate of profit in the neoclassical tradition, decreases due to capital accumulation during the 'recovery.' But it is the falling rate of profit that is the main determinant of the decline in capital accumulation and investment. The problem is that the profit rate approaches the US level much faster than labor productivity. Essentially, the average income trap is a “rate of profit trap.”
Gulglielmo Carchedi and Michael Roberts came to the same conclusion in their book, Capitalism in the XNUMXst century; on pages between 211 and 213 it is written: “in a capitalist economy, lower profitability is in conflict with productivity growth”. Put in Marxist terms, as these countries try to industrialize, the capital-labor ratio will increase and, thus, also labor productivity. If labor productivity grows faster than what happens in the “leading countries”, there will be a recovery.
However, the profitability of capital will tend to decline more quickly and this will ultimately slow down the increase in labor productivity. In another joint work by Guglielmo Carchedi and Michael Roberts, using Marxist categories, it was discovered that the profitability of “dominated countries” starts out above that of imperialist countries because of their smaller organic capital composition, but “the profitability of dominated countries, although persistently higher than in the imperialist countries, it falls more than in the imperialist bloc”. The following graph illustrates this statement:
Having recognized the “profitability trap”, but thinking in terms of neoclassical theory, the World Bank proposes a solution to solve the problem of the development of “middle income” economies; Through it, these countries first absorb, through infusions, technology from the Global North so that they can then take advantage of the innovations that will be generated by private companies endogenously.
Here's what it says: “Initially, the investment is complemented with an infusion of technology from the North; At this time, countries (mainly lower-middle income countries) focus on imitating and disseminating modern technologies. In the second stage, innovation is added to the investment mix while still infused, so that countries (mainly upper-middle income countries) focus on building domestic capabilities to add value to global technologies, becoming innovative. In general, middle-income countries need to recalibrate the mix of the three engines of economic growth — investment, infusion and innovation — as they move towards middle-income status.”
For World Bank economists, Karl Marx was wrong, because these middle-income countries are not condemned to permanent poverty and to be under the control of imperialist economies. Furthermore, it does not seem correct to think “that market-based economies will always be affected by a growing concentration of wealth and that they will be destroyed by successive crises, until capitalism is replaced by communism”.
In 1942, in his treatise Capitalism, Socialism and Democracy, Austrian economist Joseph Schumpeter showed that capitalism had a way out: “creative destruction”. In this way, restoration can emerge from crises and, with it, growth. Yes, the crises of capitalism are painful, but they also — he judged — create conditions for prosperity.
World Bank economists, in their wisdom, conclude that “nearly a century later, many of Schumpeter’s insights appear to have been confirmed.” What are they based on to reach this conclusion since they had already concluded that the vast majority of relatively poor countries (sorry, middle-income countries) are stuck in relative poverty? Well, they turn to some case studies where certain countries seem to show a way.
In Latin America, there is the case of Chile. The World Bank tells us that in 2012, Chile became the first Latin American country to achieve high-income status. Here is what those who prepared the report say: “Chile has grown and diversified its exports since the 1960s, when mining represented around four-fifths of its exports. That share is now at half. Knowledge transfers from advanced economies have been supported by public and private institutions.”
Actually, that's not quite it. In Chile, public investment has been the main driver of more advanced technology that supports diversified exports. The Chilean export promotion agency (ProChile) and the Chile Foundation, both non-profit, promote the transfer of technology to domestic enterprises. And they have been successful.
The World Bank makes no mention of the horrendous military coup in Chile in 1973 under the command of General Pinochet, which violently removed the socialist Allende government and killed tens of thousands, laying the groundwork for increased exploitation of the workforce. Ironically, Chile's average real GDP growth rate from 1951 to 1973 was 4,3% per year; but after Pinochet and successive pro-capitalist governments, it was 4,1% per year.
Despite the compression of labor incomes, the profit rate fell in the Chilean economy to a low level in the early 1980s; it rose later (as in many other countries) during the neoliberal recovery period; however, it is now in decline since the global financial collapse and the Great Recession (as elsewhere). Therefore, in fact, there is no capitalist success story in the case of Chile.
In Asia, the World Bank turns to Korea to showcase a successful development model. This is how the Bank's economists present this case further: “While Brazil stumbled domestically, Korea raced around the world, making the infusion of foreign technology the cornerstone of domestic innovation. In 1980, the average productivity of a worker in Korea was only 20% of the average productivity of an American worker. In 2019, it tripled, reaching just over 60%. In contrast, Brazilian workers, who were 40% as productive as their American counterparts in 1980, were only 25% as productive in 2018.”
Korea's success was apparently due to an “infusion of foreign technology.” The World Bank does not refer to the huge state-led push given to industrialization in the 1980s; or to foreign investment made by the US to support a capitalist containment economy, which acted as a bulwark against the Soviets and China after the Korean War.
And then there was the massive exploitation of Korean workers by a decades-long military regime. This greatly explains the difference between the development of Korea and Brazil; the latter's industrial strategy was strangled by neoliberalism that killed a large part of national industry to favor the most backward sectors, foreign capital and, in particular, American capital.
There is also the case of Poland, told by the World Bank as another success story, now in Europe. Joining the European Union with massive subsidies for the agricultural sector; huge capital investment from German manufacturing; and the extensive emigration of unemployed labor were fundamental to Poland's relative increase. The World Bank shows this coyly: “Educated Poles put their skills (skills obtained in the Soviet era — MR) into practice across the European Union, opening another channel for infusing global knowledge into the Polish economy.”
This is the total set of success stories that the World Bank presents as an example of the “Schumpeter model” of development. And Bank economists are forced to admit that these countries' shift to “high-income status has been interspersed with economic crises… The shifts in strategies across the three stages are neither smooth nor linear.
There is no mention of the “elephant in the room” for the World Bank’s development model: China. Why did China, one of the poorest countries in the world in the 1950s, quickly jump to “middle-income” status in the 1990s and continue to close the gap with advanced capitalist economies in the XNUMXst century? Why have countries like Vietnam and even Laos also successfully followed the Chinese model of development? World Bank economists say nothing about this. As Marquetti points out: “Our book includes figures that show that China, Vietnam and Laos have maintained high levels of investment despite falling profitability. And this was done by an autonomous decision that came from the State. This is, therefore, the fundamental condition for catching up.”
The World Bank ignores the Chinese development model of state-led investment, state financing of infrastructure and technology based on national plans with targets, where the “profitability trap” of middle-income economies does not apply. In the aforementioned book by Carchedi and Roberts it is shown that there was a good correlation between changes in profitability and real GDP growth in China compared to other economies, particularly “middle income” ones. China did not suffer crises in production and investment due to falling profitability, like the World Bank's favorites.
World Bank economists ignore the role of investment and state planning. Instead, the Bank wants to create “globally contestable markets, reduce factor and product market regulations, lay off unproductive companies, strengthen competition, deepen capital markets.”
But which development model is likely to be most successful? The Schumpeter one that is based on profitability crises or the Marxist one that is based on public ownership and planning? We can rework the World Bank Figure at the beginning of this article to include China and thus compare the progress of the two models, that is, China, with the success stories of the World Bank (those three already mentioned).
We thus discovered that Chile’s “recovery” has actually stopped since 2012; behold, the ratio of its per capita income to the US per capita income has fallen from 29,9% in 2000 to 28,6% now. Korea has been stabilizing (albeit at a high level) over the last decade. Poland started at a higher and slightly lower level than the Soviet era; but later, it recovered significantly due to joining the European Union (EU). Poland's per capita income ratio relative to the US has increased by more than 74% compared to 2000. But this performance becomes less impressive when compared with China's truly fantastic increase; behold, China's per capita income rate in relation to that of the USA has grown 314% in the last forty years.
Now, when considering the Global South as a whole, it is seen that it is not catching up to the Global North. With the exception of China, there is increasing divergence rather than convergence. The graph presented above shows this dramatically. Furthermore, in the aforementioned study there is no mention of wealth and income inequalities in middle-income countries and they have been increasing since the 1980s, as shown by the Bank of World Inequality Data.
The World Bank report ends with the observation of neoclassical economist Robert Lucas, who compared the development strategy that led to spectacular economic growth in Korea to the achievement of a “miracle.” The report concluded: “Given the changes in the global economy since the time when Korea was a middle-income economy, it would be fair to conclude that it would be a miracle if today's middle-income economies were able to do in 50 years what Korea did in just 25. It could even be miraculous if they replicate the impressive achievements of other successful countries such as Chile and Poland.”
Yes, indeed, we must conclude that it would indeed be a miracle, all the more extraordinary because it would have occurred under the growing threat of global warming.
*Michael Roberts is an economist. Author, among other books, of The great recession: a marxist view (Lulu Press) [https://amzn.to/3ZUjFFj]
Translation: Eleutério FS Prado.
Originally published in The next recession blog.
the earth is round there is thanks to our readers and supporters.
Help us keep this idea going.
CONTRIBUTE
