by Jakob Drews
The global capitalist system is characterized by inequality through exploitation and dependency. These attributes were fostered by European colonization. Different parameters of dependency were institutionalized since the “independence” of the formally colonized. They characterize the structure of the international system.
Some economies are profiting from the global capitalist system, some are doomed to depend on those who profit. This structure is binary and consists of the profiting centre and the exploited periphery. Both substructures were not “born” into their respective position. They were constructed.
In this work, I am stressing the relationship between centre and periphery from a historical perspective. What constituted the centre in the centre and why is the periphery dependent on the centre?
One explanatory factor is industrial policy which is actively responsible for constructing comparative advantages in capitalism. It increases economic output, induces growth and is responsible for development. Development is considered sustainable economic growth.
Through analysing by which policy centre economies enforced rapid economic growth it becomes clear that peripheral economies are facing higher constraints to implement domestic development. This is due to postcolonial structures of dependency between periphery and centre within global capitalism.
Chapter two explains the employed methodology. Afterwards, chapter three emphasizes the concept of centre and periphery and their interdependent relationship. Chapter four points out trade policy and its relationship to economic development. Chapter five tests the hypothesis (1) that centre economies have not achieved their hegemonic position within global capitalism in the absence of active policy intervention. Chapter six tests the hypothesis (2) that peripheral economies lack full autonomy to implement growth-inducing policies. The final chapter concludes.
2. Method: Historical Institutional Analysis
Other than most social sciences historical and economic science is driven by objectivism rather than conceptualized parameters measuring subjective individual perception. Seeking factual understanding within a larger context and variance in time constitutes the centre of historical approaches to institutional analysis.
History is characterized by paths of political and economic development and critical junctures constructed through policy intervention or violent capture making certain developments irreversible. In the context of postcolonial hierarchies in international capitalism this, unfortunately, is true, until today. Colonial hierarchies haven’t dissolved but are shaping institutional contexts until today.
Because this is the centre of my interest it is inevitable to shed light on the historical development of economic growth and the institutions conditioning it.
3. The Relationship between Periphery and Centre
The global capitalist economy, which is a system “within which there is a division of labour and hence significant internal exchange of basic or essential goods as well as flows of capital and labour” (Wallerstein 2004: 23), provides distinctive structural characteristics. These characteristics, which are stable patterns deriving from social relations, are manifested in the basic dichotomy of centre and periphery. The former constitutes a higher structural power than the latter. Here, structural power is defined as the capability to “shape and determine the structure of the global political economy” through a superior position within the hierarchy of international labour division (Strange 1988: 24-25). This power derives from the tendency of accumulation, concentration and centralization of capital and determines the asymmetric relationship between periphery and centre as the “most prevailing and relevant” characteristic of the global capitalist economy (Prebisch 1950).
There are three core differences between the economic areas of periphery and centre:
1) The capitalist centres show diversified capitalist production dominated by the output and export of high-value-adding goods and services. The periphery is dominated by low-value-adding production mainly operating in the export of primary goods (Prebisch 1950).
2) Capital accumulation in peripheral economies is technologically dependent on the import of capital goods produced in the central states. These imports are financed by the export of primary goods (Cardoso, Faletoo 1979).
3) Peripheral economies are characterized by capital flight. Center economies are characterized by capital inflow. (Boyce, Ndikumana 2012).
Now let’s have a look at more distinct economic relationships between the periphery and centre.
3.1 Negative Peripheral Income Elasticity of Demand
In the capitalist centre, growth can be produced by increasing demand, whereas the relationship between income and demand is vice-versa in the periphery. The centre is a self-sufficient economic system as domestic production meets domestic demand. Exports generate a general surplus. This strategy does not work in the periphery, as mass consumption products are neither produced nor massively consumed. Economic development is considered an increase in economic output covered by the same amount of demand. This produces self-sufficient growth and is measured by the income elasticity of demand.
If income increases in the centre, this liquidity is released within the central national economies. If the income increases in the periphery, this is not accompanied by an increase in general demand. Capital is exported which has a crucial implementation on the relationship of peripheral terms of trade.
The deterioration of peripheral terms of trade is inevitable (Prebisch, Singer 1950). The increase in peripheral incomes is positively correlated with capital exports. Peripheral balance of payment is harmed resulting in high debt rates as a fundamental characteristic of peripheral economies with relative underdevelopment compared to the centre.
3.2 Compensating the Fall of the Profit Rate
The capitalist production mode is characterized by the tendency of the profit rate to fall (Amin 1976). Consolidated profit rates are fundamentally necessary to survive within competitive capitalist markets, as well as to enable the capitalist production mode itself. History forced centre capitalists into a coalition with the peripheral bourgeoisie to counteract the falling profit rate of the centre. This led to the colonized mode of production. The periphery suffers from exploitation through the extraction of labour value through the centre (Amin 1974). “This asymmetry in structural power causes that the periphery cannot autonomously develop its accumulation of capital and its’ cycles, but it is constrained by the cycles of the centre” (Guijarro, Perez-Oviedo 2019: 4).
Instead of the liberal ideal of peace-preserving symmetrical interdependence, what is observable in the international economy, is an asymmetrical dependence of the periphery on the centre. This is the liberal reality of globalized production and is realized by policy intervention enabling the endless accumulation of capital within the centre.
4. Policy Intervention
Policy interventionism is a governmental intervention into the market process aiming at correcting market failures. State interventionism is a general political practice. Theoretically, every state government is entitled to autonomously interfere in domestic production processes. Every developed capitalist economy went through a phase of heavy interventionism to nurture domestic industries and generate growth. (Chang 2003). The implementation of growth-inducing policies shields the domestic industry from foreign competition. This infant industry protection is responsible for the successful integration of domestic industry into transnational value chains within globalized production. Climbing up transnational value chains of labour division is equivalent to sustainable capitalist growth and hence economic development. Successful integration into the global division of labour necessarily presupposes infant industry protection. Without nourishing the infant domestic industry, respective sectors will never be able to integrate into global value chains. Comparative advantages are not given by nature – they are constructed through policy.
4.1 Protection of Domestic Industry
Domestic Industries can be protected from foreign competition by certain tools.Tariffs are a legitimate instrument to protect domestic industry by reducing local demand for imported products by increasing their domestic price. In the periphery, a certain standard of tariffs shields domestic producers from more competitive producers in the centre. Tariffs implemented in the centre can increase the world price of goods due to the fall of central mass demand. In general, centre tariffs have a negative impact on the world economy. Tariffs implemented in underdeveloped economies shield their industry from overcompetitive goods imported from highly industrialized countries. Peripheral tariffs decrease the economic divergence between the centre and periphery as they promote upgrading in the respective region. Tariffs fluctuate over time.
Import quotas are trade-related prohibitions of imports. The restrictions on the number of imports can be implemented on the goods produced by certain individuals or firms. They constitute a more radical policy tool as it bans the import of certain goods, completely. Here, government revenues are not generated. Restrictions are more costly for governments as there is no tariff rent to collect. Radical restrictions on imports inhabit certain dangers, as they may provoke illicit trading activity and the emergence of national monopolies. Certain institutional capacities are needed to implement successful quantitative restrictions.
Local content requirements urge domestic producers to fuel their production process with domestic goods. It is an indirect restriction on imports and nurtures domestic industry, indirectly.
4.2 Promotion of Domestic Industry
Subsidies are governmental value transfers into the private sector to stimulate production and increase export and alter economic activity. Also, it is a tool to reallocate resources. Subsidies can be used to decrease material inequality. Domestic inequality can be reduced through the implementation of horizontal or selective subsidies. This presupposes consistent law to hold firms responsible if an increase in productivity promoted through subsidies is not passed on to the workforce. Subsidies actively break the price logic of the market. Subsidized firms produce cheaper. They are more competitive than not subsidized counterparts.
Highly subsidizing economies can be predisposed to informal competition or intensive lobbying for governmental payments, but in general, subsidies are more transparent than tariffs as their implementation is centralized.
“Where a foreign firm has a cost advantage because of its larger size, the government support can enable a domestic firm to expand and strategically win market share at the expense of a foreign competitor” (Shadikhodjaev 2018: 81). Generally, the literature does not discuss the general effectiveness and legitimacy of subsidies but the conditions that presuppose certain subsidy structures. Some argue that import tariffs, as indirect subsidies, do not raise consumer prices (Bhagwati, Ramaswani 1963). Export subsidies are useful in imperfect markets. Export subsidies can effectively lead to an increase in market share for dependent and underdeveloped actors as they actively decrease the output of competitors by creating a domestic price advantage. This can boost the national welfare of subsidizing countries if the generated profit surpasses the volume of subsidies (Brander, Spencer 1985). Rodrik (1995) argues that successful subsidies depend on state autonomy from private interest groups and policy coherence over a certain amount of time.
Industrial policies are a crucial part of every developmental strategy but there is no general scheme that can be applied. The following chapter will discuss what industrial policies led to the crucial economic growth within the French and British private sectors. Every policy implementation that successfully supported the accumulation of capital within these centre economies is a critical juncture in explaining the colonized mode of production and today’s postcolonial dependencies between the centre and periphery.
5. Growth-Inducing Policies in the Centre
Today developed capitalist economies have not ever been in their hegemonic position. The centre has not always been constituted by the same actors. The implementation of certain policies promoted development throughout history. So, how did today’s actors of the dominant centre achieve their hegemonic position within the global economy? Chang (2003) provides extensive information on how the implementation of growth-inducing policies consolidated centre economies in their respective position.
Post-feudal Britain was attributed with typical peripheral characteristics. It relied heavily on the import of technology and the export of primary goods like raw wool or manufactured but low-value-adding wool cloth. Edward II (1327-1377) was the first British monarch to promote domestic wool cloth production through an import ban on wool cloth. Henry VII (1458-1509) introduced radical infant industry protection from 1489 onwards. He actively intervened in the British private production sector by installing wool manufacturing locations through state missions, recruiting skilled workers from foreign countries, increasing duties on wool, temporarily banning the export of raw wool, banning the export of unfinished cloths, or banning raw wool exportation. In 1587 Elizabeth I (1558-1603) banned raw wool exports, completely. Britain’s wool manufacturing sector was profiting massively from this state support and dominated the international market with their products. Foreign wool processors could not compete with the efficiency the British sector provided and were ruined. Additionally, the crown invested heavily in the imperial naval sector. The Navigation Act in 1660 colonised all trading activity with Britain and led to the capture of a significant part of world trade and its working population. The Wool Act in 1699 banned the import of all superior wool products from the colonies into the British market. The British economy “had to be protected at home from the competition with foreign finished products; free exportation of finished articles had to be secured, and where possible encouragement had to be given by bounty and allowance” (Brisco 1907: 132). British interventionism enabled the industrial revolution and consolidated the country at the heart of the centre of global capitalism. “Britain had very high tariffs on manufacturing products as late as 1820” (Chang 2003: 22). Crucial state intervention lasted until the 19th century when the British private sector pressured for “free” trade, as it was perceived as constraining economic freedom, more than enabling it. Goods that were connected to tariffs were reduced from 1146 in 1848 to forty-eight in 1860. British economic development happened “behind high and long-lasting tariff barriers” (Bairoch 1993: 46) and can be understood as an act of imperialisation by enlarging the market especially for primary goods to fuel domestic output and induce growth. The liberalization of the British economy was achieved through active state involvement and state supervision. It was a process of liberalization through interventionism and the build-up of state capacities like extensive public beaurocracy to realize it (Polanyi 1957). This is the opposite of laissez-faire and modern neoliberal approaches to development.
It is interesting to compare the British level of protectionism with the french level of protectionism. France has, in most of history, been less protectionist than Britain.
When the political system of absolutism was abolished through the French Revolution, French governance was dominated by a laissez-faire economy. The absence of an extensive tariff regime is considered a reason for the relative economic stagnation compared to Britain (Trebilcock 1981).
Table 1 compares the trade regimes of Britain and France from 1821 to 1913. It proves that state interventionism supported growth.
Protectionism in Britain and France, 1821-1913
(net customs revenue as a percentage of net import value)
Source: Nye 1991, p. 26, Table 1
Britain and France used interventionist policies to induce economic growth as economic output in both economies increased steadily from 1821 to 1913. Also, per capita production increased more dynamically in Britain (Crafts 1984). This concludes that higher protection of domestic industry led to higher growth rates and more rapid economic development.
6. Growth-Extracting Policies in the Periphery
A crucial number of peripheral economies inhabit the bloody heritage of colonization. It comes too short to descriptively interpret the era of European colonization with an economic lens, only. Colonization cannot be discussed by rational economic concepts, exclusively. Being colonized means a lot more than suffering from low growth rates or capital flight. These are symptoms of dependency originating from hundreds of years of European suppression, killing, enslavement, ignorance, and arrogance. Even though, there is a consciousness of memory evolving in European scholars throughout the last decades, which had been present in social discourses within globally marginalized groups since ever, a complete, inclusive, social, and political processing of how European powers imposed their racist ideology on the peoples has not come to an end, yet. This development of collective memory is normatively good.
This work concentrates on postcolonial economic dependency mechanisms that are present. This will be the subject of the following chapter. Two Anglo-American institutions that have a crucial implementation on world trade and international dependency relations are discussed. It is argued that these institutions constrain policy autonomy for peripheral governments in exchange for potential market shares in the centre. This has an impact on the autonomous developmental trajectories of peripheral economies.
6.1 The International Monetary Fund
The IMF was founded in Bretton Woods in 1944 and sought to stabilize the post-war economies with short-term credits to induce long-term economic growth and stability. The number of IMF loans and the conditions imposed on receiving governments steadily increased – with it, its structural power (Dreher 2009).
If a country struggles with high debts, it can consolidate its balance of payments with loans from the IMF. The IMF is binding its financial aid to certain conditions.
“When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF. This system of conditionality is designed to promote national ownership of strong and effective policies” (IMF 2021)
In exchange for monetary aid countries in economic trouble agree to implement a set of policies defined by the IMF, over a certain time.
According to IMF, these conditions are inevitable. They secure the successful implementation of given payments and promote their evolving character – their growth-inducing effect. (IMF 2001a). The IMF Poverty Reduction and Growth Facility is giving loans to the least developed economies and gives a good insight into the IMF’s policy strategy for development.
1) Monetary and Financial Policy
- Limit on Credit Expansion
- Privatization of Financial System
- Target on Foreign Reserves
2) Public Sector Policies
- Restraint on Central Government Expenditure
- Tax Policy
- Privatization of the Public Sector
- Reduction of Deficit (Austerity Policies)
3) External Debt Policies
- Decreasing External Debt
4) Exchange and Trade Policies
- Trade liberalization
Source: Dreher 2009, Appendix
Since the IMF was founded, conditionality became more comprehensive and is emphasizing a wide range of implications on domestic policy space for receiving countries. In general, the IMF seeks at reducing trade barriers, decrease public spending, and increase government revenue to pay back given loans. The fund’s development strategy relies on constructing relative advantages for private international actors through trade and labour liberalization. Also, decreasing public and social spending is seen as a tool to promote economic development. The IMF can be understood as an agent for implementing a neo-liberal structure in the international system of labour division as it is actively interfering in domestic policy decisions. It is criticised that the fund is focusing too much on internal adjustment, is too intrusive and neglects development (Payer 1974, Williamson 1983). Normatively, it is questionable why countries that are already in deficit should take responsibility for a negative balance in payments if this is due to the structure of the international capitalist system. The fund has no mechanism to compel surplus economies for payments (Dreher 2009). The IMF cannot be seen as an independent actor in the international system, promoting development. It is representing the interest of centre economies for a liberal global trading system without barriers while diminishing the space for autonomous policy articulation for indebted economies.
6.2 The World Trade Organization
The internationalization of global trade, also known as the process of globalization, must be understood as a project of economic institutionalization of political hegemony. On April 15th, 1994, 128 states ratified a final agreement on the international negotiation of trade. Three different contracts were ratified. All members met under the same set of rules.
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) seeks the protection of trademarks, copyright, data secrets and patents. It limits the autonomous use of technologies or patents. The number of patent holders in the centre surpasses patents hold in the periphery. This secures rent-flows from peripheral economies into the centre and institutionalizes the technological dependence between the periphery and centre.
The Agreement on Trade-Related Investment Measures (TRIMS) aims at illegalizing requirements for domestic sourcing of inputs or restrictions on imports or exports of domestic goods. It actively reduces policy autonomy for the member states in favour of the idea of neoliberal global capitalism. The promotion and, especially, protection of domestic industry which is a basic requirement for self-sufficient growth is not possible within TRIMS.
The General Agreement on Trade and Service (GATS) aims at implementing the dogma of market neo-liberalization from production affairs to service affairs. It limits governmental possibilities of interfering in the process of service allocation. Governmental control of the inflow of service and capital through domestic institutions is not possible within the agreement.
The three agreements – GATS, TRIMS and TRIPS – define a comprehensive strategy for development that is characterized by secure property rights, freedom of capital and trade. This excludes state interventionism to protect or promote the infant domestic industry and initiate development.
International institutions diminish policy space and autonomous decision-making abilities (Wade 2003). Institutional arrangements affect domestic policy outcomes: “Institutional arrangements of political bodies shape the character and the final outcome of political struggles by affecting the relative influence of competing actors” (Chorev 2005: 322). Additionally, they identify globalization and global capitalism as a political project. Global “free trade” requires a comprehensive set of rules – rules that are created in a specific interest that, in most cases, are congruent to the hegemonic one. Hence, describing it as free is a considerable lie. Within this system, global institutions are not just a product of international trade, but a conductor of its requirements and seek to increase the political impact of hegemonic interests (Panitch 1994). Institutions matter! They advance the interest of some at the expense of others and systematically impact the ability of various political forces to pursue their interest and strategy (Jessop 1990). Institutional arrangements of international organizations reproduce inequality among states as they institutionally organize the inequality in power resources. Global trade as it is constituted in the WTO was always in the interest of certain powerful actors. Centre economies manage to institutionalize their interest and make it impossible for peripheral economies to bypass the hegemonic idea of neo-liberalism. This inequality in power is reflected in global economic outcomes and dependencies and the institutional arrangements of organizations enforcing the underlying idea. The WTO was established to strengthen the systemic bias needed for the competitiveness of international business, investors, and property rights holders by shrinking the policy space of peripheral economies. Rothstein (1992) concludes: “Its more beneficial to fight over institutions than over its policies, to not fight the same battle over and over again.”
The international system is not equal, and capitalism is not a system of freedom. While some were able to implement growth-inducing policies others are not able to do so.
Britain and France implemented protectionist policies during times of their economic take-off which enabled the colonized mode of production inherited in capitalism itself. Capitalism is a story of contradiction. The interests of the periphery and centre are opposed to each other. Peripheral economies are not able to introduce growth-inducing policies but are structurally urged to implement policies that extract growth from the periphery and transfer it to the centre. This structure is institutionalized through international organizations such as the WTO and IMF. They are not a product of international capitalism. They enforce the necessary laws to keep the system running.
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 In the context of analyzing global capitalism with its dependency structure between centre and periphery, we must admit, that the perfect market is a myth. Domestic economies can approach relatively stable and equal conditions for market participants through inhabiting certain state capacities introducing consistent policies aiming at reducing inequality and hindering monopolies to emerge. The international system does not provide institutions willing to realize such a market condition.
 Neither are actors in international capitalism free from state intervention, nor free to do whatever they desire. Neither dimension of freedom is applicable to global capitalism in an institutional context.