In this article I argue that there is a fundamental tension characterizing the process of global development and structural change. Industrial policy is necessary for triggering structural change in the developing world. Yet such efforts put pressure on economic leaders to adjust structurally as well. Drawing from international relations theory, a hegemon is necessary to provide international public goods such as peace, which are critical for development to be possible in the first place. But this necessity gives the hegemon expansive powers over international institutions of economic governance; and this enables the hegemon to externalize the costs of adjustment associated with structural change in the developing world.
Tensions in Trade Theory for Development
The Ricardian tradition of international trade, argues that each country should specialize in the goods and services in which they are least bad at producing. However, one of Ricardo’s errors was his failure to recognize the heterogeneity of labour. The theory of comparative advantage neglects the fact that different economic activities have varying propensities for and intensities of productivity growth and technological diffusion. And as endogenous growth theory argues, catch-up can be elusive when systematic productivity differentials exist. There are other problems with conventional comparative advantage (Lin and Chang, 2009).
The evolutionary approach maintains that comparative advantage is, to a significant extent, dynamic (Sha and Hughes, 2009); therefore new comparative advantages can be created through state intervention. In fact, Chang (2002) argues that no country has ever industrialized without using such interventionist measures. Nonetheless, the industrialization effort is not easy, and there are both internal/domestic and external constraints that play a role. Although much of the constraints to structural transformation are internal, there are also external constraints. Three key external elements are: development policy space/tools, foreign capital (FDI, development aid, etc.), and access to foreign markets.
These three dimensions are strongly mediated by economic leaders. Development aid and assistance are at the disposal of the leading economic powers to give; development policy space is substantially regulated in international institutions of economic governance whose construction, structure and operations are substantially influenced by the leading powers; and access to leaders’ markets are further regulated by the leaders themselves, both directly thought national policy and indirectly through the influence over international policy.
The North-South Conflictual Implications of Structural Transformation
Protectionist development policies for the laggard can limit or even reverse export growth for the leaders. Development aid to the laggard detracts from domestic usage for the leaders. And unrestricted access given to the laggards by the leaders (while the laggard maintains protectionist measures) can raise import growth for the leaders. In addition to these costs to the leaders, there are also pressures of industrial adjustments experienced by the leaders associated with the rise of new international competitors.
In essence, by trying to emulate the cost-competitive structure of the industries and products of a leading economy (Reinert, 2009), the laggard is coming into direct competition with the leader in certain industries and sectors (Gomory and Baumol, 2001). Lastly, and even ab inito, leaders tend to benefit the most, at least in the short-term, from asymmetrical global production relations and reciprocal trade agreements based on static comparative advantage. Hence they already have a fundamental incentive to not provide comprehensive and positive developmental environment which enables structural adjustment amongst laggards. Although they may do so for specific countries or regions for non-economic reasons, such as East Asia for geostrategic/security reasons (Stubbs, 1999; Ikenberry, 2004).
The structuralist school argues that import-substitution carries with it “automatic/implicit reciprocity”. This means that “each additional unit of foreign exchange the periphery obtains from international trade will be transformed into additional imports of capital and high-tech goods from the centre” (Cimoli and Porcile, 2011, 387). Therefore, the assistance made to developing countries to develop through structural transformation will be reciprocated automatically through this higher demand for capital goods. However, while this may provide some succour to the leaders, it does not completely compensate for the transitional trade deficits which the leader may experience as a result of several countries increasingly competing with several of its industries at the same time. This is because the value of capital goods imports from the leaders is not necessarily equal to the value of other goods which have been protected against by the laggards. In addition, capital goods’ production is typically more capital-intensive. Hence increases in demand for those goods may not lead to as much increase in employment as is needed to absorb labour from the leaders’ industries facing increased international competition.
For “normal countries”, this would not have been much of a problem, because it incentivizes the leaders to innovate further and engage in industrial and skills upgrading as their competitive advantage in lower value added manufacturing declines (Samaniego and Sun, 2016). Hence, the leaders are supposed to shift their specialization into higher value added manufacturing and further into the service sector. In other words, as long as the leader internalizes the costs and turbulence of adjustment, there is no need for panic.
The Role of Power in International Trade
Within the field of international relations, the Hegemonic Stability Theory (Gilpin, 1972; Kindleberger, 1986) has gained wide acceptance among many realists. In simple terms, it says that in an international system characterized by anarchy (which means that, unlike nations, the world lacks a single sovereign to mediate international politics), a hegemon is necessary to instil stability and order in the global system. The hegemon provides the “international public goods” necessary for global stability. Within modern capitalism, Great Britain in the 19th century very imperfectly served as one such hegemon; and the United States currently serves as the hegemon, underwriting the historically unprecedented post-war international liberal order (Kagan, 2018). Two major conditions for hegemony are industrial and/or economic (and technological) dominance, and military dominance to be able to balance other powers and maintain global stability. The hegemon also works with other major economic powers in the delivery of international public goods and the oversight of the global community.
Its ability to maintain international peace is necessary for prosperity to ensue. However, the international responsibilities of hegemony (e.g. underwriting security alliances) also include responsibilities for global economic governance (i.e. underwriting economic alliances). It was the U.S., along with Britain to a subordinate degree that led the creation of the post-war new institutions of global economic governance – the Bretton Woods system. And it was England in the 19th century that first adopted the gold standard; and was a primary actor in the late 19th century Berlin Conference. The hegemon maintains unilateral power to influence the affairs of weaker nations around the world, as well as to do so through multilateral institutions. In other words, the hegemon and its cohorts can shape the global rules of the game in ways that “subordinate” nations cannot.
This means that the hegemon and its cohorts are very capable of externalizing the (transitional) costs of their domestic economic tensions, unilaterally, bilaterally and/or multilaterally. When faced with the transitional turbulence associated with global structural change, the hegemon and its cohorts, being the economic leaders and hence those actually experiencing the turbulence and pressures, are able to use their channels of power to change the international rules of the game in order to limit the pace of global structural change and thereby stabilize their polities. The hegemon is particularly important as the prime market to absorb exports from the industrializing countries because it typically possesses the largest economy, and yet it has the most power to externalize the costs of adjustment to such absorption.
Robert Brenner (2006) has written copiously about how the post-war (re)development of Germany and Japan, and later on the industrialization of the Asian Tigers, intensified international competition and instigated a crisis of overproduction and a crisis of profitability in the reigning hegemon, the U.S. Other factors were certainly at play (such as the oil shocks and the inflationary wage, fiscal and monetary pressures); but within the background of a crisis of profitability, the attempts made by the U.S. to deal with its crisis affected the rest of the world. For instance, the Volcker shock of the 1980s precipitated the debt crisis in the developing world. Silver and Arrighi (2003) extend this argument to the case of the Long Depression of 1873-1896 which saw England face domestic economic turbulence due to the intensified international competition resulting from the industrial rise of Germany and the U.S. Bhagwati and Irwin (1987) further show the protectionist rhetorics employed by 19th century England and 1980s U.S. when faced with the new competitors who employed protectionist policies as part of their industrialization measures. As a result of these pressures, and with the contribution of others, both hegemons in their different periods of reign engaged in significant externalization of the adjustment costs. In 19th century England there was the engagement of “protectionism, mercantilism, and territorial expansion overseas” (Silver and Arrighi, 2003:334). Colonial economic policy sought to coercively enforce the Ricardian comparative advantage logic by preventing colonies from developing manufacturing capabilities, explicitly limiting their production to raw materials as well as making the colonial power the primary export destination; and actively avoiding developmental capital transfers to the colonies. In post-war U.S. there was the neoliberalization of the economic rules of the game to coercively and consensually enforce the same logic, but with different tools (such as structural adjustment lending imposing the elements of the Washington Consensus, and eventually the creation of the WTO to further shrink development policy space).
Confronting the Political and Economic Implications for Development
What this all means is that with the structure of international relations and politics, and its intersection with international economic governance and development economics, it seems that there can, actually be no smooth trend of broad-based global development (Gaiya, 2018). With an accommodating global development space (more so if the developing country or region has geostrategic value to the leading power), some economies will successfully structurally transform (strongly aided by export growth and external development finance flows), but this would trigger a narrowing of the global development space under which many other economies will struggle to develop. This is not an indictment of the West; as it implies that no matter who the leader is (whether from East or West), these tendencies will be present. Perhaps it may also be a systematic feature of global capitalism for the opening up of the global development space to come at the heels of another series of crises – just as the post-war broadened development space came at the close of two world wars and a great depression which enabled leaders to fashion international institutions that allowed countries significant policy space.
The implication is that, in creating a new global economic order, economics cannot be separated from politics and international relations. And the domestic affairs of the hegemon can no longer be treated as inconsequential to the global order. For instance, to improve the ease of the leader’s structural change process (and thereby reducing the frictions involved in global structural change), it may be necessary for the leader to maintain institutions that foster social protection, labour mobility (occupational and geographical) and social investment (for high-quality post-industrial servicification to occur) within its borders. These should no longer be seen as social-democratic luxuries, but as burdens of hegemony necessary for quicker global development.
The Global South must also work to better understand these interrelations with global development. The implications are not trivial. For instance, emerging economies may need to be mandated to make plans for internal integration so as to avoid the global imbalances which put persistent pressure on the leaders. What this all reminds us is that Southern structural transformation is inextricably tied to Northern structural change; and therefore global structural change is more interactive than we commonly think, and requires much more international cooperation, checks and balances.
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