Catching up or falling behind

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By MICHAEL ROBERTS*

Considerations about the book Unequal Development and Capitalism

Brazilian Marxist economists Adalmir A. Marquetti, Alessandro Miebach and Henrique Morrone have produced an important and insightful book on global capitalist development, which contains an innovative way of measuring the progress of the population inhabiting the so-called Global South in the struggle to try to “ achieve” living standards with the “Global North”.

In this book, Marquetti et al argue that uneven development has been a defining characteristic of capitalism. “Throughout history, countries and regions have exhibited differences in labor productivity growth – a key determinant of poverty reduction and development – ​​and while some nations may reach the levels of productivity or well-being of developed economies, others tend to to be left behind.”

They propose a model for thinking about economic development that is based, on the one hand, on the evolution of technical change, the rate of profit and capital accumulation and, on the other, on institutional change. Together, these two factors combine to explain the dynamics of the delay reduction or falling behind process.

They base their development model on what Duncan Foley called the 'Marxian bias', but what Paul Krugman called the 'capital bias'. In other words, they assume that, in the process of capitalist accumulation, there will be an increase in the organic composition of capital (resulting from the increase in the use of machines compared to the increase in labor employment), which leads to an increase in the productivity of labor. work, but which also produces a tendency for the profitability of accumulated capital to fall.

However, surprisingly, the authors do not use Marx's typical categories to analyze this global development of capitalism. They adopt what they call the “classical-Marxist tradition” model (therefore, which is not really Marxist), which is composed of two key variables: 1) increased labor productivity (defined as production per worker; and 2) fall in capital productivity (which is defined as production per unit of capital or fixed asset). 

The problem with this model is that the Marxist categories of surplus value (s/v) and the organic composition of capital (C/v) are obscured. Instead, it operates with the productivity of labor (v + s) / v) and the “productivity of capital” (v + s / C). Canceling v + s in the ratio between these two variables, we obtain C / v, that is, the organic composition of capital as defined by Marx.

In Marx's theory of development, the key variable is the rate of profit. In more general terms, if total assets grow, due to the reduction in labor employment with the use of new technologies, employment grows less (or even falls) than the growth of total assets (C / v increases). As only work produces value and surplus value, less surplus value (s/v) is generated in relation to total investments. The rate of profit falls and thus less capital is invested. As a result, the accumulation rate falls, causing the GDP growth rate to also fall.

For my part, I think it is unnecessary to use such particular measures to the detriment of Marx's own categories, as the latter provide a clearer picture of capitalist development than is provided by the "classical-Marxist" theory employed by Marquetti, Mierbach and Morrone. At one point, the authors say that “decreased capital productivity in the follower country reduces the rate of profit and capital accumulation.” But if Marx's own categories were used, only the opposite could be said: a decreasing rate of profit will reduce capital accumulation and decrease the “productivity of capital”.

However, these are the two measures used by the authors; To carry out the empirical work they used an extraordinary source, the “Extended Penn World Tables” in version 7.0, which was updated and improved by Adalmir Marquetti based on the original “Penn World Tables”. (…) EPWT 7.0 – they say – allowed us to investigate the relationships between economic growth, capital accumulation, income distribution and technical change in cases of proximity and distance” in relation to developed countries.

Using these two measures, the authors confirm that the pattern pointed out by Marx (Marx's biased) of technical change that takes into account the use of capital with labor savings occurred in 80 countries. The authors then compare the two measures of “productivity” and argue that economies can “catch up” with major capitalist economies, with the US leading the way, “if accumulation rates are higher in the follower country. This leads to a reduction in disparities in the productivity of labor and capital, as well as in the capital-labor ratio, the average real wage, the profit rate, capital accumulation and social consumption between countries”.

The model used by the three authors points out that capital productivity will tend to fall as labor productivity increases, something that applies to all countries. Countries with lower labor productivity tend to exhibit higher capital productivity, while countries with high labor productivity tend to have lower capital productivity. The following figure shows this pattern:

“Follower” countries (which are in the Global South) will generally have higher profit rates than “leader” countries (which are in the imperialist Global North) because their capital-labor relationship (in Marxist terminology, the organic composition of the capital) is smaller. Marx also considered that a less developed country has lower “labor productivity” and greater “capital productivity” than a developed country. Here’s what he said: “the profitability of capital invested in the colonies… is generally greater because of the lesser degree of development.”

Not surprisingly, the authors found that the capital-labor ratio and labor productivity have a positive correlation. “For countries with low capital-labor relations, there is a relationship between these variables that shows a certain concavity. Furthermore, the adjusted lines for the years 1970 and 2019 show that a movement has occurred through which countries have managed to increase capital-labor relations, as well as labor productivity, along the path of economic growth.

(NT: the 2019 linear adjustment is less tilted relative to the horizontal axis than the 1970 linear adjustment). As countries try to industrialize, the capital-labor ratio increases, such that labor productivity also increases. If labor productivity grows faster than in leading countries, then there will be a recovery. However, the productivity of capital (for me, the profitability of capital accumulation is more important) will tend to decrease and this will ultimately slow down the increase in labor productivity.

 In a joint work with Guglielmo Carchedi, Marx's categories were used. In it, we also show that the profitability of dominated countries starts above that obtained by imperialist countries because of their lower organic composition of capital. However, we also observe that “profitability in dominated countries, although persistently higher than in imperialist countries, tends to fall more than in the imperialist bloc”.

The authors also identify the trajectory of the relative profitability of capital between leaders and followers in the development process and the importance of this for 'catching up'. Here's what they say:  

“The advantages of less mechanization in follower countries, implying lower labor productivity and higher capital productivity and therefore a higher rate of profit, begin to diminish when capital productivity falls more quickly than labor productivity increases. This indicates that the follower country is gradually losing its backwardness advantage as disparities in profit rates and incentives for capital accumulation diminish relative to the leader country, potentially compromising the rapprochement process.”

What this says is that many countries in the Global South will never “close the gap” observed in labor productivity and therefore the living standards of their populations, because the profitability of capital in the Global South will dissipate more quickly compared to the Global North. This is what we also found in our own study: “Since 1974, the profit rate of the imperialist bloc (G7) has fallen by 20%, but the highest rate of the dominated bloc has fallen by 32%. This behavior leads to a convergence of the profit rates of the two blocks over time.”

Through their model, the authors were able to analyze the dynamics of the process of approximation in labor productivity. They found that “there is no consistent pattern of approximation, as about half of the sample of countries fell further behind over time. The data shows that as the labor productivity gap with the leading country expanded, some countries were able to benefit from their lag, while others in a similar situation did not take advantage of it.”

Asia was the continent with the highest number of countries successful in catching up, in contrast to Latin America. Countries in the latter region have generally failed to make much progress. Many Eastern European economies have also tended to “be left behind”, while African countries in general “still suffer the consequences of decolonization”. To be more precise, I would add that the previous colonization in these countries was long and cruel – which thus compromised their futures.

What this shows is the importance of institutional factors in the development process – something the authors rightly emphasize. “The interaction between, on the one hand, institutional organization and, on the other, the way in which technical change and income distribution affect profit rates (a key determinant of capital accumulation and growth) is crucial to addressing the question fundamental understanding of how developing countries can initiate and sustain rapid growth in labor productivity over time.”

And here we reach an important conclusion that concerns the theory of imperialism applied to the 21st century. Marx once said that “the most industrially developed country only shows the least developed country the image of its own future”. The economic model used in the construction of the book is aligned with Marx's vision according to which underdeveloped countries should follow the path of technical change established by developed capitalist nations. However, as the authors recognize, this does not necessarily produce rapprochement. This process often leads to a decline in the rate of profit and, therefore, a decrease in incentives for investment and capital accumulation. How to overcome this problem is an important question that a national development plan must address.”

Without strong state intervention, the contradiction between a decreasing rate of profit and increasing labor productivity cannot be overcome. Here is how the authors explain this problem: “it is observed in many countries that fall into the middle-income trap. In these cases, state intervention becomes essential to expand investment even when the profit rate decreases, as occurs in China.” Exactly. China's success in catching up, which so frightens US imperialism now, is due to state-led investment. With it, China has overcome the impact of falling profitability in capital investment. 

In recognizing this, the authors, strangely to me, refer to “the Keynesian thesis on the socialization of investment and the stark contrast found with the policies followed by most Latin American countries during the neoliberal period, when there was a decline in investments by the State and public companies”. Apparently, the authors seem to suggest that, if Latin American governments had adopted Keynesian policies, they would not be trapped in the so-called “middle income trap”, that is, they would be catching up just like China.  

But China is not a model of “socialized investment” that follows the Keynesian recommendation (by the way, Keynes never promoted this in his economic policy lessons); rather, it is a development model based on public ownership dominant in finance and strategic sectors. China has a national investment and growth plan (something that Keynes vehemently opposed), which capitalists, as supporting actors, have to follow – without being able to control it. In fact, this is what the authors of the book reviewed here end up saying:

“The aspects discussed above point to the fundamental relevance of state capacity as the primary locus in which strategies and conditions for industrialization are conceived and implemented. Unlike the market, which allocates resources mainly to maximize profits without guaranteeing national development, the State remains, in the 21st century, the political and economic entity capable of intentionally boosting industrialization.”

That said, they point out that “China has increased its investment rate, even in the face of falling profitability… China has thus demonstrated the ability to adapt to development challenges, which suggests that the labor productivity gap between China and the USA, even if at a slower speed, will continue to decline.

The reality is that, in the 40st century, the approximation in terms of labor productivity is not happening for almost all “Global South” countries. Take the case of the so-called BRICS. Only China is reducing the gap in GDP per capita in relation to the imperialist bloc. Over the past XNUMX years, South Africa and Brazil have fallen further behind, while India has made little progress. In general, as the following graph clearly shows, the approximation, in general, has not happened.

The authors provide us with a shocking statistic and it is presented here to conclude. In 2019, the average worker in the Central African Republic, one of the poorest countries in the world, produced 6,8 dollars per day when output is measured in 2017 purchasing power parity. In India, the average worker produces 50,4. 355,9 dollars a day, while in the United States, the average worker produces XNUMX dollars. “Rapidly expanding labor productivity is a fundamental step towards reducing poverty and improving the well-being of the poor. However, it has been a huge challenge for backward nations to achieve high growth rates in labor productivity and catch up with developed countries.

*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.

Reference

Unequal Development and Capitalism: Catching Up and Falling Behind in the Global Economy -
Adalmir Antonio Marquetti, Alessandro Miebach and Henrique Morrone. [https://amzn.to/3Sgmmyg]


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