The commodity supercycle of the 2000s and 2010s gave rise to a rich debate in the academic literature about the possibility for resource-rich countries to muster the primary commodity price bonanza for development. As in past debates on the rise of Asia as the ‘world’s factory’, industrial policy was once again at the forefront of discussion.
On the one hand, orthodox scholars insisted that the use of market distortions to channel resources towards industrialisation would be a risky gamble with little guarantee of success. Instead, as the Asian ‘tigers’ and China before them, developing countries would do well to make good use of the market to identify their comparative advantages. In this view, industrial policy continues to be inefficient and wasteful, especially as it creates plenty of opportunities for corruption rather than development. On the other hand, heterodox researchers argued that state intervention was crucial to divert resource rents to specific nascent industries that would never be able to withstand international competition without sustained support. As both the Asian ‘tigers’ and China more recently used robust industrial policy to develop globally competitive industries, developing countries should also use targeted policy intervention to ‘upgrade’ to higher value-added manufacturing for export.
Still, one question that eludes both orthodox and heterodox literature concerns why, for decades, multinational corporations would consistently invest in manufacturing in resource-rich countries such as, for instance, Argentina, Brazil, and Egypt. This has been the case despite the small scale and high costs of production in these markets (making them inefficient, per orthodox scholars), whose output is mostly sold domestically rather than exported (pace heterodox scholars).
In a recently published open access article in Competition & Change, I applied Argentinian scholar Juan Iñigo Carrera’s original elaboration on Marx to the under-researched case study of the car industry in Uzbekistan to answer precisely this question. I found this same orthodox-heterodox binary to dominate the literature on ‘transition’ from the command to the market economy in Uzbekistan, too. Orthodox researchers averred that state-owned auto company UzAvtoSanoat failed to develop due to inefficiency and corruption, in particular due to the distortions of the government’s industrial policy. Heterodox scholars instead found industrial policy to be the very reason behind the creation of a successful export-oriented car industry, in particular during the commodity supercycle when part of total output was exported mostly to Russia. Neither, however, could explain why Korean Daewoo Motor Company (DMC) and American General Motors (GM) entered into a joint-venture with UzAvtoSanoat, despite the small domestic scale (hence high costs) of automobile production in the country, which is mostly purchased domestically.
One of Iñigo Carrera’s crucial discoveries is the fact that resource-rich countries – that is, countries such as his native Argentina that mainly partake in the global economy as exporters of raw materials – are sources of appropriation of ground-rent. Although the latter concept may sound arcane to the contemporary ear, it used to be a basic staple of classical political economy. While extremely complex, Marx’s elegant solution to ‘the shitty rent business’ consisted in understanding that, instead of being regulated by ‘normal’ competitive conditions, whereby the most productive capitalist firms establish the prices of commodities, the prices of raw materials are regulated by marginal conditions, as prices must rise to encapsulate a ground – i.e. land – rent for the worst (‘marginal’) land whose production is justified by solvent demand. After all, not even the landlords of the worst land in production would allow their land to be used to extract raw materials without being paid a rent for it.
Consequently, the sale of primary commodities on the world market results in a flow of social wealth – ground-rent – into the resource-rich countries exporting them. Crucially, Iñigo Carrera identified a number of specific policies put in place by the national state of resource-rich countries in order to appropriate and allocate this flow of ground-rent. For example, the state often purchases raw materials at below-market prices domestically in order to sell them at international prices on the world market. In turn, the difference – i.e., ground-rent – is used to in/directly subsidise manufacturing firms operating in the domestic market, including via the provision of cheap credit by state-owned and commercial banks. Simultaneously, state enterprises in these economies can provide cheap inputs including energy to industrial firms and the general population, lowering the cost of living/increasing the purchasing power of the labour force, which, as a result, could buy relatively expensive goods manufactured domestically. Finally, the overvaluation of the national currency allows industrial firms to import parts, components, and machinery at subsidised rates.
This means that manufacturing firms in resource-rich countries can stay in business thanks to these multiple forms of (ground-rent) subsidisation as mediated by the national state. As a result, they tend to operate and sell most of their output within the limited scale of the protected domestic market. These firms include MNCs and MNC-subsidiaries, which can take advantage of this barrage of benefits and subsidies to valorise small-scale investments by world-market norms in these countries. Specifically, the overvalued currency enables MNCs to subsidise the import of machinery by-then obsolete for world market production to manufacture relatively old and expensive goods in these national spaces instead of exporting them. This explains their sustained involvement in resource-rich countries that has eluded orthodox and heterodox scholars alike. As such, industrial manufacturing firms, regardless of ‘nationality’, tend to be small in size and technologically obsolete by world-market standards. Following Iñigo Carrera, I call this ‘backward’ industrialisation.
The car industry in Uzbekistan is the epitome of this ‘backward’ form of industrialisation. As a cotton and, increasingly, gold and natural gas exporter, the Uzbek state mediates the inflow of ground-rent in its territory with many of the same policies found in other resource-rich countries. As a result, manufacturing firms in Uzbekistan have also been small and technologically obsolete, as the car industry in joint-venture (JV) with leading MNCs clearly demonstrates. The authorised capital for UzDaewooAvto – the JV between UzAvtoSanoat and Korean DMC – was only 200 million USD, a small amount compared to the industry’s multi-billion-USD world-market norms. The same can be said of the 266.7 million USD that established GM Uzbekistan, the JV between UzAvtoSanoat and American GM, which took over after DMC’s bankruptcy in 2000. Despite their small size and scale, these firms could generate an average rate of profit because they were subsidised by a range of policies, including the provision of cheap credit via e.g. Asaka commercial bank, as well as cheap inputs such as gas-fired electricity and gas-derived chemical intermediates used in the production of plastic parts like bumper sets and dashboards. In parallel, subsidised energy lowered the cost of living of the labour force, whose purchasing power was thus enhanced, enabling them to buy relatively expensive Uzbek-made cars.
Moreover, the overvaluation of the national currency, the soum, allowed the industry to import parts, components, and machinery at subsidised rates. Crucially, DMC and GM could subsidise the import of technological platforms to manufacture old car models for the domestic Uzbek market, which had been used in the previous decade for world market production and had by then been superseded by new technology. As a result, while the JVs could profitably stay in business, as the government of Uzbekistan recently admitted, ‘[t]he current range of car models are outdated [by an] average of 10-11 years.’ In particular, the marked uptick in production and Russia-bound exports during the commodity supercycle was not the result of the successful creation of an export-oriented car industry, as heterodox scholars posited, but the result of a sharp increase in the ground-rent available on the Uzbek market to subsidise ‘backward’ industries, because of rising cotton, natural gas, and gold prices. Actually, even during this period more than half of total output was still consumed domestically. Likewise, once the rouble’s overvaluation against the soum was cancelled out by recession in Russia in the mid-2010s, Uzbek car exports to the country ground to a halt.
In short, ‘backward’ industrialisation is not the result of inefficient or developmental policies, but the concrete form that manufacturing takes in resource-rich countries integrated into the global economy as exporters of raw materials. As such, MNCs and their affiliates invest in these countries to appropriate ground-rent, just like all other manufacturing firms operating in these national spaces. With this article, I aimed to bring into dialogue the literature on ‘transition’ in the former Soviet Union with broader debates on development, showing how Iñigo Carrera’s original take on the Marxian critique of political economy offers valuable insights for both sets of scholarly work. My hope is that more scholars will apply this approach conceived in the Global South to other resource-rich countries of the Global South, including the former Soviet Union.