Capitalism and Third World Development

Prabhat Patnaik

WHAT we call the third world today did not always exist in its present form. It underwent a specific structural transformation owing to the intrusion of metropolitan capitalism, because of which some economists, starting with Andre Gunder Frank, use the phrase “the development of underdevelopment”. In India for instance the processes of “de-industrialization” (imports from the metropolis displacing domestic craft producers) and “drain of surplus” (the siphoning away without any quid pro quo of a part of the country’s surplus through the colonial taxation system), brought about an immense increase in the pressure of population on land, and engendered modern mass poverty.

Since “underdevelopment” of the third world had been the outcome of the manner in which it had been integrated into the capitalist world economy, it was widely believed at the time of decolonization that the people of this region could advance only under an alternative economic regime which shook off such integration. And since metropolitan capital was not going to tolerate it, and the bourgeoisie, afraid of the threat to its own position owing to its late arrival on the historical scene (because of which it also made common cause with the domestic landed interests), was incapable of taking on metropolitan capital, such shaking off could be effected only through a state based on a worker-peasant alliance. This argument of the Left commanded considerable intellectual influence at the time; and these countries were visualized as proceeding in stages from such shaking off towards socialism in the course of time. The third world’s development therefore was not visualized as occurring through the pursuit of a capitalist path of development; it could occur only through the pursuit of an alternative trajectory that led on to socialism.

Such an understanding however began to get challenged in the neo-liberal era with the argument that the factors which had produced the segmentation of the world economy in the past were no longer operative. Underlying this segmentation, which was expressed in the dichotomy between developed and underdeveloped countries, was the fact that labour from the latter was not free to move to the former and capital from the former, though juridically free to move to the latter, was for a variety of reasons unwilling to do so, except to capture the latter’s market or to grab the latter’s raw materials; in other words, despite the latter’s wages being much lower, capital from the former did not locate plants there for meeting the global, including the metropolitan, market.

This situation, according to this new argument, had changed under neo-liberal globalization; metropolitan capital was now willing to locate plants in the third world to exploit its lower wages for meeting global demand. In fact the relocation of several manufacturing and service sector activities from the metropolis to third world countries, especially in East, South-East and South Asia, now suggested that even within the framework of world capitalism, these countries could nonetheless experience rapid economic development.

This argument of course was a flawed one even when it was being advanced. The same neo-liberal order under which such a diffusion of activities was occurring from the metropolis to the third world, was also launching a fierce attack on petty production and inflicting a process of primitive accumulation of capital within the third world; and, at the same time, it was generating such meagre employment within the third world, even when the GDP growth rates of these economies were quite impressive and unprecedented, that mass poverty there actually got aggravated, instead of getting alleviated, despite such high growth.

But now world capitalism has entered a new phase where even such diffusion as was occurring in the neo-liberal era is being restricted. Hence the very premise of the argument that saw the third world as developing within the framework of world capitalism, i.e. even without delinking itself from the framework of world capitalism through appropriate trade and capital controls, has lost its relevance. Trump’s protectionism is meant precisely to restrict such diffusion of activity from the metropolis to the third world, and it is only a marker of the fact that the neo-liberal regime is now at a dead-end.

Trump, it must be noted, is by no means jettisoning neo-liberalism. On the contrary he is retaining the core of the neo-liberal arrangement, which is global mobility of capital-as-finance; but he is putting restrictions on American capital (and other metropolitan capital, as well as third world capital) locating production facilities within the third world for meeting American demand. And he is compensating American capital that would be hurt by such restrictions through large-scale tax concessions on corporate profits. Trump’s measures in other words are so calculated as not to cause any hurt to American capital; but they certainly would prevent the diffusion of activities from the metropolis to the third world that is supposed to be the instrument for ushering in third world development even within the framework of world capitalism.

Trump’s measures have to be understood in the context of the crisis that has engulfed world capitalism in the period of neo-liberal globalization. At the root of this crisis is the fact that the very relocation of activities from the metropolis to the third world has kept down real wages in the metropolis; at the same time it has not raised third world real wages since the large labour reserves in the latter created in the colonial period, far from getting exhausted, are growing even larger. While the vector of real wages in the world economy thus remains more or less constant, the vector of labour productivity has increased vastly, resulting in an enormous rise in the share of surplus in world output. This creates a tendency towards over-production in the world economy, since the share of consumption out of surplus is lower than out of wages. This tendency however was kept in check because of two “bubble”-based booms in the U.S., first the “dot-com bubble” in the nineties and then the “housing bubble” at the beginning of this century.

With the collapse of the housing “bubble” and with no new “bubble” taking its place, the U.S. economy, and with it the world capitalist economy, entered a period of crisis, causing widespread mass disaffection and a threat to the social stability of the system. The working class, already afflicted for long with stagnant wages, now had to cope with the added burden of increased unemployment.

Trump’s solution to the crisis is to pursue what economists call a “beggar-my-neighbour” policy, which amounts to snatching jobs from other countries, especially countries of the third world, in order to increase employment in the U.S. The stagnation in the world economy in other words is not being overcome; but within this stagnant world economy the U.S. is trying to improve its position at the expense of others. While this may improve the position of the U.S. for a while, until others begin to retaliate, it does not overcome the crisis of world capitalism; on the contrary when others do retaliate, this crisis will get further aggravated, which only underscores the fact that neo-liberal capitalism has reached a dead-end.

In this situation, any hopes that the third world would continue to be the beneficiary of diffusion of activities from the metropolis, and thereby continue to grow rapidly within the framework of world capitalism, clearly disappear. This growth, as we have seen, was accompanied by an aggravation of mass poverty, and not its alleviation. But now even this trajectory of development has come to an end.

The third world countries will now have to adopt measures to develop their home market, for any growth henceforth will have to rely on the home market rather than the export market, which is hit by world economic stagnation and U.S. protectionism. This would require the growth of peasant agriculture, greater domestic income equality, an increase in real wages across the board, a jacking up of the minimum wage, and an activation of state spending. Since these measures will be opposed by globalized finance which would precipitate a capital flight and hence a financial crisis, capital controls will have to be put in place. And since this is likely to make the financing of current account deficits on the balance of payments that much more difficult, import controls too will have to be instituted.

All these measures however would require a change in the nature of the State, in the class alliance that underlies it. It is only a worker-peasant alliance that can sustain a state which will see an overcoming of the crisis and stagnation to which the third world is being inexorably pushed in the new situation which marks the dead-end of neo-liberal capitalism. And since the trajectory of development ushered in by a state sustained by such an alliance will be characterized by a movement towards socialism through stages, the old argument that third world development can occur only through the pursuit of a path that leads to socialism re-acquires an emphatic relevance in the new situation.

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