Immiserating Growth: The Third World
By Edward S. Herman
In the early Cold War years the dominant aims of establishment intellectuals analyzing Third World issues were, first, to counter leftist ideas of exploitation, dependency, immiseration, and the necessity of radical change; and, second, to rationalize the planned and ongoing reshaping of the globe for U.S. imperial advantage. The best publicized analysis along these lines was Walt Rostow's The Stages of Economic Growth (1960), subtitled "A Non-Communist Manifesto," which described a sequence of development whereby Third World countries, with judicious foreign aid and investment, would gradually modernize their institutions and value systems, increase their rates of investment and per capita incomes, and take off into sustained growth. In the end they would become like us, the obvious final product of human development (and history). The possibility that the great powers might obstruct or skew the Third World development process in accord with their own interests was recognized by Rostow, but dismissed. As a model Cold Warrior, Rostow naturally found the Soviet leadership to be "expansionist" and convinced that the rest of the world "must ultimately be conquered," whereas the West only sought "partnership" and encouraged Third World change that would "keep open the possibility of progressive, democratic development."
Another influential and less blatantly ideological strand of establishment thought arose out of the empirical work of the distinguished economist Simon Kuznets, who found a tendency for income distribution to become less equal during five to seven decades of rapid growth, but then to become more equal. Such a pattern, which could be graphed as an inverted U curve, seemed to fit a number of cases of western economic development. Although Kuznets offered the relationship tentatively and with qualifications, it soon became "Kuznets law." The law was simple and politically convenient: it could explain, and implicitly justify, deteriorating income distributions in Third World development under First World tutelage. The masses might be miserable now, but in place of the old exhortation that they wait for their reward in heaven, they could take solace in the prospect that their grandchildren might benefit from a delayed trickle-down.
At the very same time as establishment thought was giving these benign views of presumably freely-chosen development processes in the Third World, the U.S. -- following closely World War II and early postwar plans for "Grand Areas" under U.S. control, with the Third World serving the needs of the Western great powers -- was actively intervening to make sure that oligarchic structures of control were preserved and social democratic reforms would pose no threat to foreign investment. Kuznets classic article appeared in 1956; Rostow's Stages of Economic Growth was published in 1960. Meanwhile, the U.S. had put the Shah on the throne in Iran by covert subversion in 1953, and had organized the overthrow of an elected government in Guatemala in 1954, installing in its place a regime of permanent state terror. The important and pace-setting Brazilian coup in 1964, which also displaced a democratic government with a military dictatorship, was enthusiastically supported by the liberal Democrats in power in Washington (the coup was "the single most decisive victory for freedom in the mid-twentieth century" according to U.S. Ambassador Lincoln Gordon, later president of Johns Hopkins University). Trujillo in the Dominican Republic, Duvalier in Haiti, and the Somoza family in Nicaragua had taken power following extended U.S. occupation and tutelage. The World Bank and IMF were already in place, serving to guide Third World countries in proper directions. In the mainstream, however, these were all defensive, stabilizing, and apolitical efforts, in accord with accepted ideological premises.
Kuznets Law: An Aberration
Kuznets law was built on sketchy data drawn from western experience. It doesn't apply to Third World development, as was apparent even before the final victories of the National Security State and the full global triumph of the transnational corporation (TNC) and neoliberal ideology. Furthermore, the curve of inequality has been moving upward again in the West itself, suggesting that the earlier decline may have been transitory, eventually to be reversed with the full maturation of a global capitalism.
Irma Adelman and Cynthia Taft Morris carried out a major test of Kuznets law in application to the Third World in their Economic Growth and Social Equity in Developing Countries (1973). They examined the relationship between 31 different economic, political, and cultural variables, and income concentration, for 44 Third World countries. Their results were "consistent with the view of economic backwardness under colonialism held by such political economists as Paul A. Baran, according to which very uneven income distribution is a typical outcome of a narrowly based growth process where natural resources are exploited for the primary benefit of a small class of wealthy, usually expatriate, businessmen....An even more disturbing implication of our findings is that development is accompanied by an absolute as well as a relative decline in the average income of the very poor. Indeed, an initial spurt of dualistic growth [where technological improvement and income growth are confined to one sector, while another frequently traditional sector remains small-scale, poor, and politically powerless] may cause such a decline for as much as 60 percent of the population. The absolute position of the poorest 40 percent apparently continues to worsen as countries move toward less dualistic growth patterns unless major efforts are made to improve and expand human resources. Thus our findings strongly suggest that there is no automatic, or even likely, trickling down of the benefits of economic growth to the poorest segments of the population in low-income countries."
Economist David Felix also studied Kuznets law with particular application to Mexico for the period 1885-1975 ("Income Distribution Trends in Mexico and the Kuznets Curves," in S. Hewlett and R. Weinert, Brazil and Mexico: Patterns in Late Development, 1982). Felix found that Mexico's high level of income concentration failed to decline, as had those of Great Britain, the U.S., and Germany, despite a higher growth rate over a longer period than it took the others to produce a turnabout. (His finding for the years 1885-1975 was reinforced by the substantial further increase in Mexican income inequality after 1975.) Felix argued that Mexico is hardly a special case; that its leveling revolution and reformist institutional changes of the post World War I era provided conditions more favorable to "extensive trickling down" than in a majority of Third World states.
Durable Immiseration Factors
Why did inequality not fall in Mexico or Brazil after many decades of growth? One reason is that the ruling oligarchies rarely projected a national vision of independent development; they were satisfied to prosper via export bonanzas in indigenous raw materials and produce, and they were fearful of depleting the supply of cheap agricultural and mining labor. Their lack of national-cultural vision and identity was also manifested in their long aping of the styles and other cultural innovations of Europe and the U.S. This made them object lessons in the workings of the "international demonstration effect," whereby national surpluses of relative poor countries were frittered away in elite purchases of fashionable foreign consumer goods rather than being used to stimulate domestic industry or provide investment funds for indigenous development.
In Britain, the U.S., and Japan, industrialization was closely tied in with the development of artisan industry, which filled niches not adequately supplied by factories and provided a technological base important to future industrial development. Its growth, along with that of factory industry, helped absorb labor surpluses coming out of a shrinking or industrializing agriculture. In Brazil and Mexico, by contrast, artisan industry declined with economic growth, as the elites, who captured virtually all the national surplus, preferred foreign made and modern goods; artisan industry was left to supply the poor. Its decline, and the heavy reliance on foreign produced goods, made for technological backwardness and technological dependency.
This form of development also helped consolidate dualism and economic-social polarization. In Brazil, some 30-35 million of the 150 million population, or between a fifth and a quarter of the total, live in circumstances comparable to those of the middle classes and rich in the United States or France. They consume the great bulk of fashionable new goods supplied by the modern sector and TNCs. Studies of Mexican consumption patterns show that "the demand of the lowest 60 percent was concentrated on products whose national sales were stagnating [i.e., traditional and artisan supplied goods], while the top 20-40 percent made up the market for successive new goods in the dynamic growth phases of their product cycles" (Felix). When puffers of Latin American "reform" refer to surging new markets and sales in Mexico (or Chile, or Brazil) they are speaking of only 20-25 percent of the population -- the people who count for the puffers.
The remaining 75-80 percent -- the other pole of Brazil's dual society -- live in wretched conditions in huge shantytowns around Rio de Janiero and Sao Paulo, or in numerous poor agricultural communities, and consume a minute fraction of the hot new consumer goods. Many work small land holdings or as part-time agricultural laborers in the countryside; those in the shantytowns provide a reserve army available to the affluent for household service or to the "modern" sector in factories or as employees of subcontractors in the "informal market." A large fraction of this Brazilian majority are without potable water or sewage facilities, have grossly inadequate medical care, and their educational resources are reflected in a 35 percent illiteracy rate -- the percentage of children finishing grade school in this fairly wealthy country approximates that in Haiti and Guinea-Bissau. It is estimated that some 8 million Brazilian children under 14 are homeless and live as beggars, thieves, and prostitutes. Several thousand of them are murdered each year by police death squads, some hired by local businesses to improve the climate for tourism.
The benefits of growth in Brazil and Mexico, both in the past and today, have flowed almost entirely to the affluent 20-25 percent of the population, plus, importantly, foreign TNCs and banks. The residual majority is seen by the leadership (and by IMF and World Bank officials) largely as a means to elite ends, and concern for its well-being almost invariably reflects worry that it might cease to be apathetic and upset "stability." The condition of the majority therefore constitutes a "management problem," and considerable thought is given to token allocations of resources, strategically placed, that will placate, divide and immobilize them.
There have been brief interludes in which the welfare of the majority received attention in Mexico. Felix notes that the two Mexican presidents who tried to tilt toward equity, Adolfo Lopez Mateos (1958-64) and Luis Echeverria (1970-76), suffered in consequence from strongly adverse reactions by Mexican and foreign business interests, including reductions in private investment, and they were unable to fulfill their promises. Echeverria "left office in a major foreign exchange crisis and amidst rumors of a military coup, a novel and portentous phenomenon in postwar Mexico." Peter Evans and Gary Gereffi point out, in reference to Echeverria's experience, that "Mexico, one of the richest and best-behaved nations in the Third World, had only to stray slightly from the path of sound business practice to end up...[suffering a shift] of TNC capital and profit flows from a positive $179 million in the 1960 to 1969 period to a negative $349 million in the period from 1970 to 1976. Since one can hardly accuse Echeverria of being a radical, it would appear that the band of acceptable policy is exceedingly narrow and that the penalties for straying outside it are strict and swift" (Hewlett and Weinert, p. 151).
The experiences of Allende (Chile, 1973), Goulart (Brazil, 1964), Bosch (Dominican Republic, 1963 and 1965), Arbenz (Guatemala, 1954), and the Sandinistas (Nicaragua, 1979-90) show that military intervention, sponsored or supported by the U.S., is a very real possibility where there is too much "straying" beyond the boundaries of service to local and expatriate elites. "Security" expenditures remain enormous in Latin America; in Argentina, the military budget is three times that for education, and more than the aggregate for education, health, culture and justice combined. In Chile, also, "the military budget in 1989 outstripped by $432 million the housing, health and education budgets combined" (Joseph Collins and John Lear, Chile's Free-Market Miracle: A Second Look, p. 9). The Chilean military budget is exempt from neoliberal "shrinking" of government, and is the only governmental activity where salaries are linked to the cost of living. This priority system is understandable: the armed forces preserve the right to immiserate the majority.
The spendthrift habits of Latin elites has also been a long-standing factor in periodic balance of payment crises: spurts of income growth and inflows of foreign capital have led to large increases in consumer imports, leaving little margin for adverse changes (declines in export prices, sudden fears on the part of foreign investors!), which have produced balance of payments deficits, panic outflows of capital, and consequent deflationary policies and further increases in external debt. These developments have enhanced the power of foreign lenders and the international financial institutions like the IMF, which have forced upon the debtor countries policies that worsen all the indigenous trends toward inequality. That is, they enforce a primary focus on paying the foreign debt, privatization (benefiting foreign and local elites), export orientation (further concentrating land ownership and accelerating the expropriation and marginalization of peasants), cutbacks in public expenditures (except export subsidies and those for "security"), and deflationary macro policies (increasing unemployment, but helping creditors).
Law of Increasing Immiseration
Immiseration rests on the implementation of class power in the economy and political arena. A surge of immiseration is usually associated with changes in technology and markets that create opportunities for the dominant class and interest groups. Taking advantage of these requires the dispossession of peasants, the mobilization of a pliable and cheap labor force, intensified exploitation, and the aggressive application of state power to further serve business profitability.
Over extended periods of capitalist development in the technologically advanced countries of the West, real wages rose markedly and welfare states were put in place, although large pools of misery persisted even in good times. This came about as a consequence of periods of relative labor scarcity, the gradual emergence of labor unions, and painfully slow but real gains wrested from a capitalist-dominated but not entirely closed political system. To this important degree democracy in the West has worked; the propertied classes, often not completely unified, were induced to allow concessions rather than suffer more severe class conflict or take a chance on authoritarian rule at home.
In the 1970s and thereafter, however, international competition intensified, and the burdens of high wages and a welfare state began to seem intolerable to the U.S. business community. New communications technology helped make restructuring and foreign outsourcing more practicable. The labor movement was in retreat, and the power of business was further enhanced by the fluidity of money capital, the further centralization of the media, and the increased importance of money in politics. Any populist tendencies in politics could be snuffed out by sustained media assaults, money market discipline, and the funding (and defunding) of political campaigns. So business could hog-tie and discredit Carter and put in place their own servant (Reagan, formerly a hired propaganda gun of General Electric Company) to help it implement an accelerated program of "reform" cum "immiseration."
The key factor in this renewed phase of immiserating growth, which is taking place on a global basis, is the enhanced mobility of capital, which has allowed an increasingly active global process of wage-tax-regulation arbitrage (i.e., shifting between markets to take advantage of price and other differences) and bargaining down. The TNCs have been able to tap the vast pools of impoverished and underemployed labor in the Third World, which provide what economists call an "elastic" supply of cheap labor -- i.e., wages do not go up as the supply is tapped, helped along by regressive political regimes, as in Mexico, Indonesia, or China, where strikes must be approved by the state and the dominant unions are government-controlled. In Indonesia an estimated 30 percent of the 83 million workforce is underemployed, and another 2 million-plus enter the work force each year, "eagerly competing for the $1.75-a-day jobs being created in the cities" (Merrill Goozner, "Asian labor: Wages of shame," Chicago Tribune, Nov. 6, 1994).
Since 1979, China's "market socialism" leaders have allowed some 177,000 foreign-organized joint ventures or independent firms to set up shop in special economic zones, tapping some 60-100 million peasants, millions of them young women, lured by the promise of factory jobs. These workers have been subjected to "working conditions that have not been seen since the dawn of industrial capitalism in the early 19th century," a "killing field" of workers (206 factory fires resulting in 10 or more deaths, 19,000 work fatalities in the first 8 months of 1994 by official estimate), with the enforcement of law and worker protection non-existent Attempts to create independent labor organizations to correct the severe abuses have been met with "fierce repression" in both China and Indonesia, and Tribune reporters put the two countries in the same class: "The one-party regimes of nominally communist China and right-wing authoritarian Indonesia have reacted to the labor unrest in a similar fashion for similar reasons" -- they worry about challenges to authoritarian rule and the demands of foreign investors (Uli Schmetzer and Merrill Goozner, "Growing workplace fatalities dim glow of Chinese economy," Chicago Tribune, Nov. 8, 1994).
These supply conditions disconnect wages and productivity, so that economic growth "is not lifting all boats" in China and Indonesia, the world's first and fourth most populous nations, and "a wave of labor unrest has swept over both countries in the last year as the promise of a better life from working in industry proved false for millions of uprooted agricultural workers." The delinkage can go far, with real wages sometimes declining while productivity soars; thus, real wages in Mexico in the years 1980-1992 fell 32 percent while manufacturing productivity increased by 41 percent.
Arbitrage, along with Third World labor supply conditions, necessarily affects wages and working conditions in the high income countries, by putting steady downward pressure on the higher wage levels. This has weakened the relationship between productivity and wage rates in the high wage countries as well, where real wage growth is now consistently below the rate of productivity increase. In the U.S., between 1973 and 1992 average hourly real wages fell 1 percent, while productivity rose by more than 15 percent. The other side of the coin, of course, was the sharp increase in executive pay (19 percent, 1979-89) and, more important, the enormous increase in capital income (up 65 percent, realized capital gains up 205 percent, 1979-89), all reflected in the substantial increase in income inequality.
These numbers show that at this juncture a very large fraction of any global productivity advances are being captured by a small elite of local compradors and political and military leaders, and foreign banks and TNCs. This elite is even able, brazenly, to impose further absolute reductions in the living standards of the already impoverished majority to sustain elite incomes in times of difficulty -- thus Zedillo's adjustment package to meet Mexico's current crisis centers on forcing real wages down, and IMF imposed austerity plans consistently involve budget cuts, deflationary macro policies, and wage restraints that put the burden of adjustment on the impoverished. The poor majority, who do not share in the gains of productivity growth, still must provide the fallback resources to assure payment to those who do benefit from growth.
In sum, the technological, economic, political, and ideological environment of the New World Order has strengthened the traditional forces making for inequality and immiseration. TNC mobility and power in economic life, the media, and politics, has entrenched the belief that there is no other policy option than creating a favorable climate for investment; it has put opposition groups into disarray and in weakened positions, and with no obvious strategies for defense or means of regaining initiatives; it has unleashed the forces of irrationality (immigrant threat, racism) to help smooth the way to dismantling the welfare state; and it has led us into a new era of renewed aggressive class warfare and unconstrained search for global advantage. A revised "law" of the trend in inequality seems plausible: that, given the increasing imbalance in the global power of capital and labor, we may expect inequality and immiseration to increase until either a new and potent resistance force emerges from the oppressed or the now unconstrained forces of capital produce a Big Bang (with unknown fallout effects thereafter).
Louis Proyect
(http://www.panix.com/~lnp3/marxism.html)