reading response w 5
write one paragraph reading response for Dicken 2015 and Frank 1966, one paragraph for Bernstein 1983, each paragraph 7-10 sentences.
Six
THE STATE REALLY
DOES MATTE
R
CHAPTER OUTLINE
‘The state is dead’ – oh no it isn’t! 174
That was then; this is now 174
States, nations, nation-states 175
States as containers 17
8
States as cultural containers 178
Variegated capitalisms 181
States as regulators 18
3
The competition state 183
Managing national economies 184
Regulating and stimulating the economy 188
Trade 188
FDI 19
0
Industry and technology 191
Labour markets 193
Economic strategies in the older industrialized economies 194
Jump-starting economic development 197
From import substitution to export orientation 198
Variations on a theme 201
States as collaborators 207
The proliferation of regional trade agreements 207
Types of regional economic integration 2
10
Regional integration within Europe, the Americas, East Asia
and the Pacific 211
The EU 212
The Americas 2
16
East Asia and the Pacific 2
19
Potential Transatlantic and Trans-Pacific initiatives 222
06_Dicken-7E_Ch-06.indd 173 18/11/2014 11:01:52 AM
PART TWO PROCESSES OF GLOBAL SHIFT174
‘THE STATE IS DEAD’ – OH NO IT ISN’T!
That was then; this is now
‘State denial’1 has formed a central claim of the ‘hyper-globalizers’ (and many
social scientists) over the past 40 years: that we live in a borderless world where
states no longer matter. A combination of the revolutionary technologies of trans-
portation and communications (see Chapter 4) and the increasing power of TNCs
(see Chapter 5) has, it was argued, shifted economic power out of the control of
nation-states to ‘the market’. ‘Market fundamentalism’ – a neo-liberal agenda urg-
ing the reduction of state involvement in the economy, the privatization of state
economic and social assets, lower direct taxation, unfettered trade and financial
movements, a reduction in the state’s social welfare role – became the mantra, espe-
cially in the USA and the UK. ‘Government’, argued the US President, Ronald
Reagan, in the early 1980s, ‘was not a solution to our problem, government is the
problem.’ A similar sentiment was echoed by the UK government of Margaret
Thatcher (and revived by the Conservative-dominated UK coalition government
of 2010–15). Such a free market ideology formed the basis of what came to be
called the ‘Washington Consensus’, the set of views that exerted immense influ-
ence on both developed and, especially, developing countries.
That was then.
This is now – and how the world has changed! The cataclysmic events that
stunned the global economy in 2008 saw a dramatic reversal in the apparently
unchallenged dominance of the free market and a revival of the view that ‘states
really do matter’. The change was most apparent in the financial sector (see
Chapter 16), where the ‘Masters of the Universe’2 had to go on bended knee to
the state to be rescued, but also in such industries as automobiles (see Chapter 15).
Governments poured billions of dollars, pounds and euros into propping up the
financial sector. In some cases, notably in the USA and the UK, this amounted to
little short of nationalization, a bête noire of the market fundamentalists. Quite how
this will play out over the next few years is not yet clear. However, there is a gen-
erally held view that things will never be quite the same. The state is back.
In fact, the state never really went away. The notion that the power of the state
had been totally emasculated by globalizing forces was always highly misleading.
While some of the state’s capabilities were reduced, and there may well have been
a process of ‘hollowing out’,3 the process was not a simple one of uniform decline
on all fronts:4
Much of the ‘end of the state’ … literature focuses on western notions of
statehood and experiences … Implicit is a common experience of the
emergence of the state in the nineteenth century and its zenith in the
postwar Fordist regime of accumulation … In many parts of the world,
however, experiences of statehood have followed a quite different trajectory and
06_Dicken-7E_Ch-06.indd 174 18/11/2014 11:01:52 AM
THE STATE REALLY DOES MATTER 175
are, in a postcolonial context, still being actively constructed, strengthened and
extended rather than weakened.5
The state unquestionably remains a most significant force in shaping the world
economy, despite the hyper-globalist rhetoric. It has always played a fundamental
role in the economic development of all countries6 and, indeed, in the process of
globalization itself. After all, an increased facility to transcend geographical distance
made possible by transportation and communication technologies is of little use
if there are political barriers to such movement. An important enabling factor
underlying globalization, therefore, has been the progressive reduction in political
barriers to flows of commodities, goods, finance and other services.
In fact, the more powerful states have used globalization as a means of increasing
their power:
States actively construct globalization and use it as soft geo-politics and
to acquire greater power over, and autonomy from, their national econ-
omies and societies respectively … [for example] … The US and the
G-7’s other dominant members design and establish the international
trade agreements, organizations, and legislation that support and govern
the trans-border investments, production networks, and market-pene-
tration constitutive of contemporary economic globalization. Advanced
capitalist states, particularly, use these political instruments to shape
international economic decision-making and policy in their interests.7
Governments have also used the rhetoric of the supposedly unstoppable forces of
globalization to justify particular kinds of domestic policy (including not taking
certain kinds of action) on the argument that ‘there is no alternative’.
States, nations, nation-state
s
We need to be clear about what we mean by the terms ‘state’, ‘nation’ and
‘nation-state’:8
•• A state is a portion of geographical space within which the resident population
is organized (i.e. governed) by an authority structure. States have externally
recognized sovereignty over their territory.
•• A nation is a ‘reasonably large group of people with a common culture, sharing
one or more cultural traits, such as religion, language, political institutions,
values, and historical experience. They tend to identify with one another, feel
closer to one another than to outsiders, and to believe that they belong
together. They are clearly distinguishable from others who do not share their
culture.’ A nation is an imagined community. Note that whereas a state has a
recognized and defined territory, a nation may not.
06_Dicken-7E_Ch-06.indd 175 18/11/2014 11:01:52 AM
PART TWO PROCESSES OF GLOBAL SHIFT176
•• A nation-state is the situation where ‘state’ and ‘nation’ are coterminous. ‘A nation-
state is a nation with a state wrapped around it. That is, it is a nation with its own
state, a state in which there is no significant group that is not part of the nation.’
Although it is often regarded as a natural institution (for all of us it has always been there),
the nation-state is actually a relatively recent phenomenon. It emerged from the particu-
lar configuration of power relationships in Europe following the Treaty of Westphalia
that ended the Thirty Years War in 1648. Since then, the map of nation-states has been
redrawn continuously, sometimes peacefully and incrementally, often violently through
revolution. During the second half of the twentieth century, two particular events had
a profound effect on the map of nation-states. First, the waves of decolonization that
swept through Africa and Asia in the 1960s created a whole new set of nation-states.
Second, the collapse of the former Soviet Union, after 1989, resulted in the creation not
only of a new Russian Federation, but also of a number of newly independent states
throughout Eastern Europe. As a result, the number of nation-states, as measured by UN
membership, has grown dramatically (Figures 6.1 and 6.2).
But that is not all. An important feature of today’s world is the tension between
the triad of nation, state and nationalism. Increasingly, it seems, there are more and
more ‘nations without states’, manifested in separatist movements engaged in con-
flict with the state in which they are (wrongly in their view) embedded (obvious
0
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Source: United Nations
06_Dicken-7E_Ch-06.indd 176 18/11/2014 11:01:53 AM
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06_Dicken-7E_Ch-06.indd 177 18/11/2014 11:01:53 AM
PART TWO PROCESSES OF GLOBAL SHIFT178
examples include the Basques in Spain and France, the indigenous groups in
Chiapas, Mexico, the East Timoreans in Indonesia, the Palestinians in Israel).
STATES AS CONTAINERS
The ‘black box’ of the state acts as a kind of ‘container’ of distinctive practices
and institutions. Of course, the term ‘container’ should not be taken literally. It is
used here as a loose metaphor to capture the idea that nation-states are one of the
major ways in which distinctive cultures, practices and institutions are ‘bundled
together’.9 Of course, such containers are not (except very rarely) hermetically
sealed off from the outside world. A major impact of modern communications
systems, especially the Internet, is to make national containers even more perme-
able. But that does not mean that the container no longer exists. Indeed, there is a
good deal of compelling evidence to show the persistence of national distinctive-
ness – although not necessarily uniqueness – in structures and practices which help
to shape local, national and global patterns of economic activity.
States as cultural containers
All economic activity is enmeshed in broader cultural structures and practices,10
although ‘culture’ is an extremely slippery concept to define. Here it is taken to be
a learned, shared, compelling, interrelated set of symbols whose mean-
ings provide a set of orientations for members of a society. These
orientations, taken together, provide solutions to problems that all
societies must solve if they are to remain viable.11
From an economic perspective, there are relatively few comprehensive and robust
analyses of how cultures vary between countries. The most widely known is Geert
Hofstede’s classic study of more than 100,000 workers employed by the US company
IBM in 50 different countries.12 Hofstede claimed that, by focusing on a controlled
population within a common organizational environment, he was able to isolate
nationality as a variable. On this basis he identified four distinct cultural dimensions:
•• Individualism versus collectivism: societies vary between those in which people, in
general, are motivated to look after their own individual interests – where ties
between individuals are very loose – and those in which ties are very close and
the collectivity (family, community, etc.) is the important consideration.
•• Large or small power distance: societies vary in how they deal with inequalities (e.g.
in power and wealth) between people. This is reflected in the extent to which
authority is centralized and in the degree of autocratic leadership within society.
06_Dicken-7E_Ch-06.indd 178 18/11/2014 11:01:53 AM
THE STATE REALLY DOES MATTER 179
•• Strong or weak uncertainty avoidance: in some societies, the inherent uncertainty
of the future is accepted; each day is taken as it comes, that is the level of
uncertainty avoidance is weak. In other societies, there is a strong drive to try
to ‘beat the future’. Efforts (and institutions) are made to try to create security
and to avoid risk. These are strong uncertainty avoidance societies.
•• Masculinity versus femininity: societies can be classified according to how sharply
the social division between male and females is drawn. Societies with a strong
emphasis on traditional masculinity allocate the more assertive and dominant
roles to men. They differ substantially from societies where the social gender
role division is small and where such values are less evident.
Hofstede went on to show how different countries could be characterized in terms
of their positions on varying combinations of these four dimensions (Figure 6.3).
Peru
Portugal
Venezuela
Chile
Colombia
Mexico
High power distance
High uncertainty avoidance
Low individualism
Whole range on masculinity
8. Less developed
Latin
France
Spain
Argentina
Belgium
Brazil
High power distance
High uncertainty avoidance
High individualism
Medium masculinity
7. More developed
Latin
Greece
Iran
Turkey
High power distance
High uncertainty avoidance
Low individualism
Medium masculinity
6. Near Eastern
Singapore
Taiwan
Thailand
India
Pakistan
Philippines
High power distance
Low uncertainty avoidance
Low individualism
Medium masculinity
5. Less developed
Asian
Japan
Medium power distance
High uncertainty avoidance
Medium individualism
High masculinity
4. More developed
Asian
Norway
Sweden
Denmark
Finland
Netherlands
Low power distance
Low to medium
uncertainty avoidance
Medium individualism
Low masculinity
3. Nordic
Italy
South Africa
Switzerland
Austria
Germany
Israel
Low power distance
High uncertainty avoidance
Medium individualism
High masculinity
2. Germanic
Ireland
New Zealand
U.S.A.
Australia
Britain
Canada
Low power distance
Low to medium
uncertainty avoidance
High individualism
High masculinity
1. Anglo
Countries
Characteristics
Group
Countries
Characteristics
Group
Figure 6.3 National variations in cultural characteristics
Source: based on Hofstede, 1980: p. 336
Although Hofstede’s work has stood the test of time remarkably well,13 it has its
critics. For example, Shalom Schwartz14 argued that not enough countries were
included fully to capture national cultural variation and that the respondents were too
narrowly drawn to be truly representative of the entire population. Using rather dif-
ferent methods, he identified the following seven distinctive cultural dimensions:
•• Conservatism: places an emphasis on preserving the status quo and in restricting
behaviour likely to disrupt the traditional order.
•• Intellectual autonomy: the extent to which people are free to pursue their own
intellectual ideas.
•• Affective autonomy: the extent to which people are free to pursue their own
personal and emotional desires.
06_Dicken-7E_Ch-06.indd 179 18/11/2014 11:01:54 AM
PART TWO PROCESSES OF GLOBAL SHIFT180
•• Hierarchy: the extent to which an uneven allocation of power and resources is
legitimized.
•• Egalitarian commitment: the extent to which individuals are prepared to subju-
gate self-interest for the greater communal good.
•• Mastery: the extent to which individual self-assertiveness is legitimized as a
means to achieve specific goals.
•• Harmony: the importance placed on fitting harmoniously into the environment.
Although there is obviously some overlap between these two schemes, what mat-
ters here is not so much the detail as the fact that there are identifiable cultural
attributes that appear to vary across countries and that this, in turn, affects both
how the major actors we identified in Chapter 3 are likely to behave and the kinds
of institutions within which such behaviour is organized and regulated. Although
it is always rather dangerous to classify phenomena into statistical boxes, the cat-
egories shown in Figure 6.3 seem intuitively reasonable. Most of us would be able
to recognize our own national contexts, while also realizing the danger of using
simple stereotypes without due care.
For example, East Asia’s emergence as the most dynamic growth region in recent
decades has often been attributed to its having a very distinctive set of value systems:
specifically an emphasis on collective responsibility rather than individualism and on
the roles and responsibilities of the state, which is seen as essentially paternalistic. Figure
6.4 sets out the major components of this concept of ‘Asian values’ which, in effect,
East Asians believe in
the virtues of
saving and frugality.
They believe that individuals,
families and governments
should lead frugal lives.
East Asians do not
believe in extreme
forms of individualism.
Every individual is a member
of a nuclear and extended
family, clan, neighbourhood,
community, nation and state.
East Asians want their
governments to maintain
a morally wholesome
environment in which to
bring up their children.
Good governments in Asia
want a free press.
They do not believe that such a
freedom is an absolute right …
the press must act responsibly.
East Asians believe
in strong families.
They believe that the family is
the building block of society.
In some Asian countries,
governments have
sought to make every
citizen a stakeholder
in the country.
East Asians
revere education.
This is a value held by
all strata of society.
There is an Asian version of
a social contract between
the people and the state.
Governments have an obligation to treat
their people with fairness and humanity.
Citizens are expected to be law-abiding,
respect those in authority, work hard,
save and motivate their children
to learn and be self-reliant.
East Asians practise
national teamwork.
Government, business
and employees work
cooperatively for
the good of the nation.
East Asians consider
hard work a virtue.
The chief reason
that this region is
outcompeting Europe.
‘Taken together, these 10 values
form a framework that has enabled
societies in East Asia to achieve
economic prosperity, progress,
harmonious relations between
citizens, and law and order.’
Figure 6.4 ‘Asian values’?
Source: based on material in Koh, 1993
06_Dicken-7E_Ch-06.indd 180 18/11/2014 11:01:54 AM
THE STATE REALLY DOES MATTER 181
‘recast “Asia” as a moral opposite of the West. Thus … the Asian penchant for hard
work, frugality and love of the family are unproblematically figured as things the West
lacks or has lost.’15 It is extremely doubtful that this reflects the situation across the
whole of East Asia (let alone of Asia as a whole). This is, after all, a region of immense
social, cultural and religious diversity. But insofar as these attributes reflect at least some
of the social and political characteristics of some successful East Asian economies, they
form a considerable contrast with the situation in other parts of the world.16
Variegated capitalisms
The specific cultural and institutional forms that have evolved over time in differ-
ent national contexts have resulted in distinctive modes of economic organization,
even within the apparently universal ideology of capitalism. Capitalism, in other
words, is variegated, not uniform.17 The traditional ‘varieties of capital’ literature
focuses on just two broad categories of ‘national’ capitalism:
•• the liberal market economy (LME), generally associated with the USA and, to a
large extent, the UK;
•• the coordinated market economy (CME), most commonly associated with such
countries as Germany, Sweden and Japan.
This is not a very satisfactory classification.18 In particular, the CME category
encompasses enormous diversity and needs to be further unpacked. Here we iden-
tify four variants of capitalist organization, based on differing conceptions of the
‘proper’ role of government in regulating the economy:
•• Neo-liberal market capitalism. Market mechanisms are used to regulate all, or
most, aspects of the economy. Individualism is a dominant characteristic; short-
term business goals tend to predominate. The state does not overtly attempt to
plan the economy strategically. Capital markets are decentralized, open and
fluid. The dominant philosophy is ‘shareholder value’ – facilitating maximum
returns to the owners of capital. Exemplified by the USA and, to a large extent,
the UK.
•• Social market capitalism. In contrast to neo-liberal market capitalism, a higher
premium is placed upon collaboration between different actors in the econ-
omy with a broader identification of ‘stakeholders’ beyond that of solely the
owners of capital. The concept of ‘social partnership’ is more prominent.
Capital markets tend to be bank centred. Exemplified by Germany, Scandinavia
and many other European countries.
•• Developmental capitalism. The state plays a much more central role (although not
necessarily through public ownership of productive assets). The state sets sub-
stantive social and economic goals within an explicit industrial strategy. Capital
06_Dicken-7E_Ch-06.indd 181 18/11/2014 11:01:54 AM
PART TWO PROCESSES OF GLOBAL SHIFT182
markets tend to be bank centred. There is a strong emphasis on tight business
networks. Exemplified by Japan, South Korea, Taiwan, Singapore and most
other East Asian countries (excluding China). Variants on this model include
‘the “democratic development capitalism” of India and Brazil, with their strong
social agendas to go with their growth aspirations’.19
•• Authoritarian capitalism. Here, a highly centralized political system is combined
with an increasingly open capitalist-market system. The prime example is
China, where the process of liberalizing the economy (in a highly controlled
way) began in 1979. Nevertheless, the Chinese Communist Party retains tight
political control. In the case of Russia, the system is rather messier. Both
political and economic structures were liberalized after 1991 but the Russian
state still exerts strong control (though less effectively than in China).
Of course, this four-fold typology is also highly simplistic and, like all such schemes,
should be seen in dynamic rather than static terms. However, there is little doubt
that a variegated, rather than a single, system of capitalism (of whatever kind) is
likely to persist in the future:
There are inherent obstacles to convergence among social systems of
production of different societies, for where a system is at any one point
in time is influenced by its initial state … Existing institutional
arrangements block certain institutional innovations and facilitate oth-
ers … There are critical turning points in the history of highly indus-
trialized societies, but the choices are limited by the existing
institutional terrain. Being path dependent, a social system of produc-
tion continues along a particular logic until or unless a fundamental
societal crisis intervenes.20
An alternative view is that the pressures exerted by globalizing forces will inevita-
bly produce a convergence of economic governance systems towards a ‘best-prac-
tice’ form. Until recently, many argued that the neo-liberal model, based on the
success of its leading advocate, the USA, would come to replace national systems.
In other words,
even though the unique kinds of state capacities found in Japan and
Germany have deep-rooted political preconditions, these face the pros-
pect of ‘permanent dismantling’ by way of gradual ‘liberal erosion’.21
But, as we have seen, the ‘pure gold’ of the neo-liberal model is now looking dis-
tinctly tarnished and it is difficult to imagine that it will retain its attractiveness.
If this is so, then variegated capitalisms will continue to be the norm although in
a dynamic, not static, form in which the state is likely to have a larger (though
varied) role:
06_Dicken-7E_Ch-06.indd 182 18/11/2014 11:01:54 AM
THE STATE REALLY DOES MATTER 183
The wide divergences among high-income countries over the size of
the state, the generosity of welfare systems, the structure of corporate
governance and the pervasiveness of financial markets all demonstrate
the possible divergences.22
We can safely predict … that the Anglo-American view will become
less influential … [while] … virtually all Asian models of capitalism
involve a more active role for government. And the rise of these mod-
els is taking place as the US approach is discredited by abuse, shrivel-
ling opportunities and a shrinking middle class. Among the alternatives,
the US model is now the outlier.23
STATES AS REGULATORS
Recognizing that countries continue to differ as ‘containers’ of distinctive struc-
tures and practices is important in emphasizing that we do not live in a homog-
enizing world. In this section, we focus specifically on some of the ways states
regulate how their economies operate as they attempt to control what happens
within, and across, their boundaries.
The competition state
The transformation of the nation-state into a ‘competition state’ lies at
the heart of political globalization.24
Books, government reports, newspaper articles, TV programmes in virtually all
countries resonate with the language and imagery of the competitive race between
states for a bigger slice of the global economic pie. Indeed, the Swiss business
school IMD publishes an annual World Competitiveness Yearbook with a ‘competi-
tiveness scoreboard’ (or ‘league table’) of 49 countries based on no fewer than 286
individual criteria!
States compete to enhance their international trading position in order to cap-
ture as large a share as possible of the gains from trade. They compete to attract
productive investment to build up their national production base that, in turn,
enhances their international competitive position. One of the most graphic
expressions of competition between states is their intense involvement in what
have been called ‘locational tournaments’: the attempts to entice investment pro-
jects into their own national territories. There has been an enormous escalation
in the extent of competitive bidding between states (and between local communities
within the same state) to attract the relatively limited amount of geographically
mobile investment (see Chapter 7).
06_Dicken-7E_Ch-06.indd 183 18/11/2014 11:01:54 AM
PART TWO PROCESSES OF GLOBAL SHIFT184
Most states continually search for a magic key to enhance their economic com-
petitiveness. One of the most widely adopted has been Michael Porter’s ‘competitive
diamond’ framework, in which he argues that national competitive advantages are
created through highly localized processes internal to the country. Figure 6.5 shows
these as an interconnected, mutually reinforcing, system of four major determinants.
Porter’s ‘competitive recipe’ has been adopted by many governments in their
attempts to improve their competitive position, although he sees government itself
as merely an ‘influence’; a contingent, rather than a central, factor. In fact, all states
perform a key role in the operation of their economies, although they differ sub-
stantially in the specific measures they employ and in the precise ways in which
such measures are combined.
Figure 6.5 National competitive advantage: the Porter ‘diamond’
Source: based on material in Porter, 1990: chapter 3
Government
As an influence
on the four major
determinants
Related and
supporting industries
Competitive advantage
in supplier industries
Competitive advantage
in related industries
Demand conditions
Host demand
composition
Demand size and
pattern of growth
Internationalization
of domestic demand
Interplay of demand
conditions
Factor conditions
Factor endowment
Hierarchies among
factors
Factor creation
Selective factor
disadvantages
Firm strategy,
structure and rivalry
Strategy and structure
of domestic firms
Goals
Domestic rivalry
Chance
Invention and
entrepreneurship
Managing national economies
The institutions of the state … are not simply involved in regulating
economy and society, for state activity is necessarily involved in constituting
economy and society and the ways in which they are structured and ter-
ritorially organized.25
In other words, states do not merely ‘intervene’ in markets; they underpin and help
to constitute their very existence.
06_Dicken-7E_Ch-06.indd 184 18/11/2014 11:01:54 AM
THE STATE REALLY DOES MATTER 185
Although a high level of contingency may well be involved in how states strive
to manage their economy, certain common themes are evident. These reflect the
kinds of cultural, social and political structures, institutions and practices in which
the state is embedded. Specifically, the degree of direct and indirect state participa-
tion in economic management varies with the type of capitalism involved (Figure
6.6). The precise policy mix adopted by a state will also be influenced by:
•• the size of its national economy;
•• its resource endowment, both physical and human;
•• its relative position in the world economy, including its level of economic devel-
opment and degree of industrialization.
Two basic types of macroeconomic policy are used by the state to manage its
national economy:
•• Fiscal policies to raise or lower taxes on companies and/or individual citizens
and to determine appropriate levels and recipients of government expenditure.
Raising taxes (either direct or indirect) dampens down domestic demand,
lowering taxes stimulates demand. However, such automatic responses to
changes in fiscal policy do not always occur. For example, consumers may
choose to save rather than spend any tax gain they receive. Similarly, raising or
lowering public expenditure or targeting specific types of expenditure can
influence the level of economic activity in the economy.
•• Monetary policies aimed at influencing the size of the money supply within the
country and at either speeding up, or slowing down, its rate of circulation. The
main mechanism employed is manipulation of the interest rate on borrowing.
Lowering interest rates should stimulate economic activity through increased
investment or private expenditure while, conversely, raising interest rates
should dampen down activity. Again, however, rapid and automatic adjustment
Neo-liberal
market capitalism
Type of
capitalism
Degree of state involvement in the economy
IndirectDirect
Social
market capitalism
Developmental
capitalism
Authoritarian
capitalism
RELATIVELY
LOW
HIGH
VERY
HIGH
VERY
HIGH
Figure 6.6 State economic involvement in different types of capitalism
06_Dicken-7E_Ch-06.indd 185 18/11/2014 11:01:54 AM
PART TWO PROCESSES OF GLOBAL SHIFT186
does not always occur. The 2008 financial crisis has led most countries to keep
their interest rates at exceptionally low levels (close to zero in some cases) for
a very long period of time. At the same time, injecting money into the econ-
omy (sometimes called ‘Quantitative Easing’ – QE) has become common.
Most spectacularly, in 2013 the Japanese government decided to double the
volume of money in circulation in an attempt to reverse the long-standing
problem of deflation in the economy. Inevitably, monetary policies impact
upon a country’s international currency exchange rate, whose level and volatil-
ity affect the costs of exports and imports.
Such policies are also underpinned by the state’s regulation of financial services
(see Chapter 16).
At a more tangible and material level, governments generally provide – or at
least secure the provision of – those ‘conditions of production that are not and
cannot be obtained through the laws of the market’.26 One example is the physical
infrastructure of national economies – roads, railways, airports, seaports, telecom-
munications systems – without which private sector enterprises, whether domes-
tic or transnational, could not operate. They are the providers, too, of the human
infrastructure, in particular of an educated labour force as well as of sets of laws and
regulations within which enterprises must operate.
For several decades after the end of the Second World War in 1945, the role of
the state in the developed economies progressively expanded, notably through the
provision of welfare benefits for particular segments of the population and the
development of a considerable (though varied) degree of public ownership of
productive assets. The majority of economies, outside the command economies of
the state-socialist world, became mixed economies. In many countries certain eco-
nomic sectors, such as telecommunications, railways, energy, steel and the like,
became state owned or controlled. As a result, government spending as a percent-
age of GDP rose very substantially. In the OECD countries, such spending
increased from less than 20 per cent of GDP in the early 1960s to 35 per cent in
the early 1990s. In the developing countries, the average growth was from around
15 per cent to 27 per cent. Of course, the pattern varied a lot between countries.
Starting in the mid-1980s, many states reduced their direct involvement in their
economies, most notably through a systematic process of marketization: extending
the principles of market transactions into more and more aspects of public life.
This was apparent not only in the older industrialized countries, but also in many
developing countries and, most dramatically of course, in the former state-social-
ist countries of Eastern Europe, the former Soviet Union and in China. Such
market liberalization consisted of two related processes:
•• Deregulation. Virtually all industrialized countries jumped aboard the deregula-
tion bandwagon to varying degrees. However, the issues are far less simple than
the ‘deregulationists’ claim. Because no activity can exist without some form of
regulation (otherwise anarchy ensues), ‘deregulation cannot take place without
06_Dicken-7E_Ch-06.indd 186 18/11/2014 11:01:54 AM
THE STATE REALLY DOES MATTER 187
the creation of new regulations to replace the old’.27 In effect, what is often
termed deregulation is really reregulation. Processes of deregulation spread to
most economic sectors, most notably in financial services (see Chapter 16),
telecommunications and utilities (such as energy and water). The labour market
also became a particularly significant focus of deregulation (see below).
•• Privatization. The state pulled out of a variety of activities in which it was for-
merly centrally involved and transferred them to the private sector. The selling
of state-owned assets, and the greater participation of the private sector in the
provision of both ‘private’ goods (the ‘de-nationalization’ of state-owned eco-
nomic activities) and ‘public’ goods (such as health care or education), has been
a pervasive, continuing, though uneven, movement. However, this has not
reduced government expenditure as much as might have been expected; the
rhetoric has often been stronger than the reality, as Figure 6.7 shows. The aver-
age GDP share of government spending in the 26 countries shown was 46.6
per cent in 2011 compared with 43.1 per cent in 2000.
Denmark
France
Finland
Belgium
Sweden
Austria
Slovenia
Greece
Italy
Netherlands
Portugal
Hungary
United Kingdom
Ireland
Iceland
Germany
Norway
Spain
Poland
United
States
Luxembourg
Slovakia
Estonia
Switzerland
South Korea
0 10 20 30
Expenditure as a percentage of GDP
40 50 60
2000
2011
Figure 6.7 Central government spending as a share of GDP
Source: OECD data
06_Dicken-7E_Ch-06.indd 187 18/11/2014 11:01:55 AM
PART TWO PROCESSES OF GLOBAL SHIFT188
In response to the post-2008 crisis, all governments intervened massively to re-
stimulate their economies. The figures involved are astronomical.28 The com-
bined stimulus expenditure of the G20 countries for 2009 was $692 billion,
the equivalent of 1.4 per cent of their GDP. The USA accounted for almost 40
per cent of this. The other countries with very large stimulus packages were
China ($204 billion), Germany ($130 billion) and Japan ($104 billion). Since
then, the debate has focused around either continuing or increasing stimulus
expenditure to kick-start economic growth or cutting expenditure in key areas
as part of austerity programmes. This debate has been especially acute within
the EU but is by no means confined to Europe and continues within the G20
countries.
Such large-scale intervention during a period of economic recession reflects
the influence of John Maynard Keynes, whose analysis of the ‘Great Depression’
of the 1930s demonstrated that markets do not necessarily correct themselves.29
Under certain circumstances, they have to be stimulated by government actions –
possibly in a very large-scale way – through, for example, reducing interest rates,
providing financial assistance to specific firms and sectors, and investing heavily in
infrastructure.
Regulating and stimulating the economy
National governments possess an extensive kit of regulatory tools with which to
try to control and to stimulate economic activity and investment within their own
boundaries and to shape the composition and flow of trade and investment across
them. These tools may be employed as part of a deliberate, cohesive, all-embracing
national economic strategy or, alternatively, individual policy measures may be
implemented ad hoc with little attempt at strategic coordination.
Trade
Of all the measures used by nation-states to regulate their international economic
position, policies towards trade have the longest history. The shape of the emerging
world economy of the seventeenth and eighteenth centuries was hugely influ-
enced by the mercantilist policies of the leading European nations. Figure 6.8
summarizes the major types of trade policy pursued by national governments. In
general, policies towards imports are restrictive whereas policies towards exports,
with one or two exceptions, are stimulatory.
Policies on imports fall into two distinct categories:
•• Tariffs. These are taxes levied on the value of imports that increase the price to
domestic consumers and make imported goods less competitive (in price
terms) than otherwise they would be. In general, the tariff level tends to rise
with the stage of processing, being lowest on basic raw materials and highest
06_Dicken-7E_Ch-06.indd 188 18/11/2014 11:01:55 AM
THE STATE REALLY DOES MATTER 189
on finished goods. The purpose of such ‘tariff escalation’ is to protect domestic
manufacturing industry while allowing for the import of industrial raw mate-
rials. Thus, although tariffs may be regarded simply as one means of raising
revenue, their major use has been to protect domestic industries: either ‘infant’
industries in their early delicate stages of development or ‘geriatric’ industries
struggling to survive in the face of external competition.
•• Non-tariff barriers (NTBs). While tariffs are based on the value of imported
products, NTBs are more varied: some are quantitative, some are technical.
Although, in general, tariffs have continued to decline, the period since the
mid-1970s witnessed a marked increase in the use of NTBs. Indeed, today
NTBs are more important than tariffs in influencing the level and composition
of trade between nation-states. It has been estimated that NTBs affect more
than a quarter of all industrialized country imports and are even more exten-
sively used by developing countries. Certainly much of what has been termed
the ‘new protectionism’ consists of the increased use of NTBs.
National trade policy is unique in that since the late 1940s it has been set within an
international institutional framework: the GATT/WTO. We will have much more
to say about this in Chapter 11. Here we merely need to note the basic features of
this regulatory system. The purpose of the GATT was to create a set of multilateral
rules to facilitate free trade through the reduction of tariff barriers and other types
of trade discrimination. The GATT was eventually replaced by the WTO in 1995,
an institutional change which greatly broadened the remit of the trade regulator.
Today, around 97 per cent of world trade is covered by the WTO framework.
Financial and fiscal incentives to export
producers
Export credits and guarantees
Setting of export targets
Operation of overseas export promotion
agencies
Establishment of Export Processing Zones
and/or Free Trade Zones
‘Voluntary export restraint’
Embargo on strategic exports
Exchange rate manipulation
2. Non-tariff barriers
Import quotas (e.g. ‘voluntary export restraint’, ‘orderly
marketing agreements’)
Import licences
Import deposit schemes
Import surcharges
Rules of origin
Anti-dumping measures
Special labelling and packaging regulations
Health and safety regulations
Customs procedures and documentation requirements
Subsidies to domestic producers of import-competing goods
Countervailing duties on subsidised imports
Local content requirements
Government contracts awarded only to domestic producers
Exchange rate manipulation
1. Tariffs
Policies towards exportsPolicies towards imports
Figure 6.8 Major types of trade policy
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PART TWO PROCESSES OF GLOBAL SHIFT190
FDI
In a world of transnational corporations and of complex flows of investment at
the international scale, national governments have a clear vested interest in the
effects of FDI, whether positive or negative. Few national governments oper-
ate a totally closed policy towards FDI, although the degree of openness varies
considerably.
Figure 6.9 summarizes the major types of national FDI policy. Most are con-
cerned with inward investment, although governments may well place restrictions
on the export of capital for investment (e.g. through the operation of exchange
control regulations) or insist that proposed overseas investments be approved
before they can take place. Historically, there have been large differences in
national policy positions towards inward FDI. In general, developed countries
have tended to adopt a more liberal attitude towards inward investment than
developing countries,30 although there were exceptions. For example, among
developed countries France had a much more restrictive stance than most other
European countries. Among developing countries, Singapore had a particularly
open policy, far more so than most other Asian countries. In the past two decades,
however, national FDI policies have tended to converge in the direction of liber-
alization. Attempts to regulate at the international scale have not been successful
(see Chapter 11).
Government screening of investment proposals.
Exclusion of foreign firms from certain sectors or restriction on the extent of foreign
involvement permitted.
Restriction on the degree of foreign ownership of domestic enterprises.
Operations
Insistence on involvement of local personnel in managerial positions.
Compliance with national codes of business conduct (including information disclosure).
Insistence on a certain level of local content in the firm’s activities.
Insistence on a minimum level of exports.
Requirements relating to the transfer of technology.
Locational restrictions on foreign investment.
Finance
Restrictions on the remittance of profits and/or capital abroad.
Level and methods of taxing profits of foreign firms.
Incentives
Direct encouragement of foreign investment: competitive bidding via overseas
promotional agencies and investment incentives.
Necessity for government approval of overseas investment projects.
Restrictions on the export of capital (e.g. exchange control regulations).
Policies relating to inward investment by foreign firms
Entry
Policies relating to outward investment by domestic firms
Figure 6.9 Major types of FDI policy
06_Dicken-7E_Ch-06.indd 190 18/11/2014 11:01:55 AM
THE STATE REALLY DOES MATTER 191
Although national differences still exist, therefore, they are now rather less stark
than in the past. Figure 6.10 summarizes the major regulatory changes towards
FDI between 2000 and 2011. The proportion of regulatory changes that are more
favourable to FDI continues to far outweigh those that are unfavourable, although
‘in the last three years, 30 or 40 per cent of the laws have gone in the direction of
being less welcome to investment’.31
Industry and technology
There is much debate about whether or not governments can, or should, attempt
to pursue a focused industry strategy, especially in the more neo-liberal, free mar-
ket economies. In fact, ever since Britain emerged as the world’s first fully indus-
trialized nation in the late eighteenth and early nineteenth centuries,
every successful industrial power at some point in its history has carried
out an activist industrial policy.32
Most influential historically were the ideas of the nineteenth-century German
economist Friedrich List.33 List heavily criticized Britain for advocating free
trade policies only after it had attained a position of global industrial leader-
ship. In fact, all the ‘newly industrializing economies’ of the nineteenth cen-
tury – in particular the USA, Germany, France, other European nations, as
well as Japan – adopted a set of policies that were strongly protectionist and
developmental in order to nurture their infant industries, before relaxing some
Number of countries
introducing changes in
their regulatory regimes
Number of changes
more favourable to FDI
Number of changes
less favourable to FDI
0 0
20
40
60
80
50
100
N
u
m
b
e
r
o
f
re
g
u
la
to
ry
c
h
a
n
g
e
s
N
u
m
b
e
r
o
f
c
o
u
n
tr
ie
s
in
tr
o
d
u
c
in
g
c
h
a
n
g
e
s
150
200
2000 2002 2004 2006 2008 2010
Figure 6.10 Changes in national regulation of FDI
Source: based on UNCTAD, 2009: Table I.14; 2012: Table III.1
06_Dicken-7E_Ch-06.indd 191 18/11/2014 11:01:55 AM
PART TWO PROCESSES OF GLOBAL SHIFT192
of the trade barriers when these industries were seen to be strong enough to
face external competition.
Today, some governments – notably the neo-liberalist US and UK – still tend to
be in denial that they should pursue an active industry policy involving the public
sector. But this is a smokescreen. Governments across the board continue to be
heavily engaged, either directly or indirectly, in trying to stimulate their industrial
sectors. Indeed, there are whole areas of the economy – notably those dependent
on big, long-term investments in science and technology – where government is
absolutely central. The real distinction, then, is between an overt and a covert stance,
for example over whether government can or should attempt to ‘pick winners’.34
Investment incentives
Taxation policies
Technology policies
Labour market policies
State procurement policies
Small firm policies
Policies to encourage industrial restructuring
Policies to promote investment
Merger and competition policies
Company legislation
National technical and product standards
State ownership of production assets
Environmental regulations
Health and safety regulations
The range of potential industry and technology policies
Some or all of these policies may be applied either generally or, more
commonly, selectively. Selectivity may be based on several criteria:
1. Particular geogaphical areas, e.g. 3. Particular types of firm, e.g.
2. Particular sectors of industry, e.g.
(a)
(b)
(a)
(b)
(c)
(d)
(a)
(b)
(c)
economically depressed areas,
areas of ‘growth potential’ (‘cluster policies’).
to encourage entrepreneurship and
new firm formation,
to attract foreign firms,
to help domestic firms against
foreign competition,
to encourage firms in import-
substituting or export activities.
to bolster declining industries,
to stimulate new industries,
to preserve key strategic industries.
Figure 6.11 Major types of industry and technology policy
Figure 6.11 outlines the major types of industry and technology policies that
may be used by national governments. Such policies may be applied generally
across the whole of a nation’s industries or they may be applied selectively. Such
selectivity may take a number of forms: particular sectors of industry, particular
types of firms (including, for example, the efforts to attract foreign firms), particu-
lar geographical locations. Especially, there has been a deluge of interest, in most
countries, in trying to encourage the development of growth clusters: an attempt to
capture the virtual circle of growth that has come to be associated with the kinds
of technology clusters described in Chapter 4.
Related to this is the almost universal adoption of various kinds of technology
(R&D) policy by national governments in an attempt to develop and exploit tech-
nological innovations. At one level, such policies tend to focus on stimulating invest-
ment and entrepreneurship through, for example, various kinds of tax incentive. But
06_Dicken-7E_Ch-06.indd 192 18/11/2014 11:01:55 AM
THE STATE REALLY DOES MATTER 193
at the macro level, the major role of governments is in providing the basic, high-risk,
exceedingly costly scientific and technological infrastructures and innovations upon
which companies depend. Mariana Mazzacuto develops a very powerful case to
show that in most of the ‘high-tech’ sectors, such as ICT, pharmaceuticals and nano-
technology, most of the spectacularly successful private companies have depended
on being able to ‘piggyback’ on the huge, long-term investments by government:
Most of the radical, revolutionary innovations that have fuelled the dynam-
ics of capitalism – from railroads to the Internet, to modern-day nanotech-
nology and pharmaceuticals – trace the most courageous, early and
capital-intensive ‘entrepreneurial’ investments back to the State … [for
example] all of the technologies that make [Apple’s] iPhone so ‘smart’ were
government funded (Internet, GPS, touch-screen display and the recent
SIRI voice activated personal assistant). Such radical investments – which
embedded extreme uncertainty – did not come about due to the presence
of venture capitalists, nor of ‘garage tinkerers’. It was the visible hand of the
State which made these innovations happen. Innovation that would
not have come about had we waited for the ‘market’ and business to do it
alone – or government simply to stand aside and provide the basics.35
Labour markets
States, especially in the older industrialized economies, have become increasingly
involved in labour market policies, particularly in attempting to make labour mar-
kets more flexible. A new conventional wisdom has emerged: the need to remove
rigidities in the labour market to make it more in tune with what are seen to be
the dominant characteristics of a globalizing world economy. The ‘flexibilization’
of labour markets through deregulation involves greatly increased pressures and
restrictions on labour organizations, the drastic cutting back of welfare provisions,
and the move away from welfare towards workfare.36
The process has gone furthest in the USA. Its apparent success in continuing to
create large numbers of jobs (albeit with the widening of income gaps) has ‘been
the most persuasive argument for neo-liberal policies’.37 It certainly stimulated the
UK government to move along the same path. As yet, the countries of continental
Europe have not moved as far, or as fast, down the labour market flexibility path.
Most European governments are concerned that the social costs of reducing unem-
ployment using the US model may be politically unacceptable in a system in which
the social dimension of the labour market is very strongly entrenched. But there
are clear signs of change as governments become increasingly concerned about the
financial costs of sustaining existing practices and the continuing loss of competi-
tive edge. As a result, a variety of labour market measures, employed in various
combinations in different European countries, has emerged (Figure 6.12).
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PART TWO PROCESSES OF GLOBAL SHIFT194
Economic strategies in the older industrialized
economies
As we saw earlier, the continental European countries, on the one hand, and
the USA and the UK on the other, represent distinctively different types of
capitalism. Historically, a major difference has been the centrality of industrial
policy, together with a greater degree of social accountability of business in
Europe, and the absence of such policy and accountability in the USA.38 The UK
occupies an intermediate position between the virtually pure market capitalism
of the USA and the kinds of social market capitalism practised in continental
Europe, but with a tendency in some areas (notably labour market policy) to be
closer to the USA.
The policy stance of the USA reflects both the sheer scale and wealth of its
domestic economy and also a basic philosophy of non-intervention by the federal
government in the private economic sector. But, as we have seen, US governments
have been immensely important in funding fundamental science and technology
research, which has underpinned the growth of high-tech private sector firms. As
far as industry in general is concerned, the role of the federal government has
generally been regulatory: to ensure the continuation of competition. Action at the
federal level has been based primarily on fiscal and monetary macroeconomic
policies. The aim has been to create an investment climate in which private sector
institutions could flourish. This has not, however, prevented the federal govern-
ment from rescuing specific firms – especially very large ones – from disaster. At
the other end of the size spectrum, the Small Business Administration has pro-
vided aid to stimulate new and small firms. Federal procurement policies are
generally non-discriminatory but the sheer size of federal government purchases,
particularly in the defence and aerospace industries, has exerted an enormous
influence on US industry. Entire economic sectors, regions and communities are
heavily dependent on the work created by federal defence and other procurement
The use of more temporary and fixed term contracts
The introduction of different forms of flexible working time
Moves to encourage greater wage flexibility by getting the long-term unemployed
and the young to take low-paid jobs
Increased vocational training to provide more transferable skills
Reforms in state employment services
Incentives to employers to take on workers
Measures to encourage workers to leave the labour market
Reductions in the non-wage labour cost burdens on employers
Specific schemes to target the long-term unemployed
The range of potential labour market policies
Figure 6.12 Elements of labour market policies
06_Dicken-7E_Ch-06.indd 194 18/11/2014 11:01:55 AM
THE STATE REALLY DOES MATTER 195
contracts and on subsidies in such sectors as agriculture (Chapter 13) and auto-
mobiles (Chapter 15).
US policy towards international trade during most of the post-war period has
been one of urging liberalization through multilateral negotiations through the
GATT/WTO. However, there has been an increasing willingness to develop bilat-
eral trading arrangements with other countries. US trade policy is complicated by
the structure and composition of the US Congress and the ways that new trade
policies have to be negotiated with domestic interest groups.39 As the strongest
economy, the USA, like Britain in the nineteenth century, has been the leading
advocate of free trade. Even so, the federal government has intervened with the
use of tariff and non-tariff barriers to protect particular interests. A ‘Buy American’
initiative was part of the Obama administration’s stimulus measures introduced in
2009.
In the eyes of many parts of the world, the USA is seen as having a strong uni-
lateralist tendency, very much at odds with its traditional multilateral trading stance.
The USA has become increasingly embroiled in a whole series of trade disputes,
particularly with East Asian countries (primarily this means China) and with the
EU. There is also concern that the USA has a tendency to introduce extra-territorial
trade legislation to achieve its broader political objectives.
Within Europe, despite the existence of the EU, an ideological divide continues
to exist between the so-called ‘market’ and ‘social’ models of how the economy
should be organized, that is between the UK’s more ‘neo-liberal’ position and that
of France and Germany, where the principle of the ‘social market’ remains strongly
entrenched. However, the lines are not always quite as clear as is often claimed.
Although the UK’s policy position does contrast in a number of ways with that
of continental European countries, and is closer to that of the USA, the UK has
been more interventionist than the USA, at least until recently.40 Nevertheless, the
UK has strongly adopted economic policies of privatization and deregulation. Its
labour market policies, in particular, are far closer to the US model than to the
EU model.
There are considerable differences in policy emphasis between continental
European member states. Of the leading EU states, France maintains the most
‘nationalistic’ economic position, having long had the most explicit state indus-
trial policy, a reflection of a tradition of strong state involvement dating back to
the seventeenth century. A major component of French industrial policy has
been the promotion of ‘national champions’ in key industrial sectors, often
through state ownership of large-scale enterprises. France’s current policy posi-
tion retains many of these traditional qualities (and an especially strong antago-
nism to the Anglo-American neo-liberal economic model). Despite considerable
privatization the French state retains a very considerable direct involvement in
the economy.
Germany is the major exception among the continental European nations to a
more centralized approach to industrial policy. In part, at least, this reflects its
06_Dicken-7E_Ch-06.indd 195 18/11/2014 11:01:56 AM
PART TWO PROCESSES OF GLOBAL SHIFT196
federalist political structure, with power divided between the federal government
and the provinces (Länder). But although often described as ‘light’, the federal
government’s role has been far from insubstantial. It has pursued policies of active
intervention in industrial matters, including a substantial programme of financial
subsidy. Such involvement has to be seen within the German model of a social
market economy.41 The German economy is characterized both by a considerable
degree of competition between domestic firms and by a high level of consensus
between various interest groups, including labour unions, the major banks and
industry. The major challenge facing Germany after 1990, of course, was to cope
with the fundamental transformation of the economy brought about by reunifi-
cation. Putting together the strongest economy in Europe (the former West
Germany) with one that, for half a century, had existed in a completely different
ideological system, was an immense undertaking. It placed enormous strains on
the federal budget because of the huge problems of rebuilding infrastructure and
dealing with problems of unemployment brought about by restructuring.42
Among the older industrialized economies, Japan stands apart in its policy
stance. Japan can be regarded as the archetypal developmental capitalist state.43 There
has long been a high level of consensus between the major interest groups in Japan
on the need to create a dynamic national economy. This consensus is often
regarded as a cultural characteristic of Japanese society, with its deep roots in
familism. But it also reflected the poor physical endowment of Japan and the lim-
ited number of options facing the country when, in the 1860s, it suddenly
emerged from its feudal isolation. In other words, consensus was also a pragmatic
stance built up over more than a hundred years. Given virtually no natural
resources and a poor agricultural base, Japan’s only hope of economic growth lay
in building a strong manufacturing base, both domestically and internationally,
through trade. In this process, the state played a central role not through direct
state ownership, but rather by guiding the operation of a highly competitive
domestic market economy.
For more than 50 years after the end of the Second World War, the key govern-
ment institution concerned with both industry policy and trade policy was
MITI – the Ministry of International Trade and Industry (renamed METI, the Ministry
for Economy, Trade and Industry, in 2001). After its establishment in 1949, MITI
became the real ‘guiding hand’ in Japan’s economic resurgence. Until the 1960s
Japan operated a strongly protected economy and it was not until 1980 that full
internationalization of the Japanese economy was reached. During the 1950s and
early 1960s MITI, together with the Ministry of Finance, exerted very stringent
controls on all foreign exchange, on foreign investment and over the import of
technology.
Initially, MITI focused on the basic industries of steel, electric power, ship-
building and chemical fertilizers, but then progressively encouraged the develop-
ment of petrochemicals, synthetic textiles, plastics, automobiles and electronics.
Japan was transformed from a low-value, low-skill economy to a high-value,
06_Dicken-7E_Ch-06.indd 196 18/11/2014 11:01:56 AM
THE STATE REALLY DOES MATTER 197
capital-intensive economy. The foundation of this transformation was the clearly
targeted, selective nature of Japanese industry policy together with a strongly
protected domestic economy.
A key element in Japanese economic policy was the specific treatment of
inward FDI which, for much of the post-war period, was extremely tightly regu-
lated. The technological rebuilding of the Japanese economy was based on the
purchase and licensing of foreign technology and not on the entry of foreign
branches or subsidiaries. Since the early 1990s, Japanese policy has been especially
exercised by the problem of a high-value currency, with contentious trading rela-
tionships with the USA and Europe, and especially with the deep domestic reces-
sion which accompanied the collapse of the so-called ‘bubble economy’ at the end
of the 1980s.
These diverse characteristics of industry policy in the older industrialized
economies persist. However, the post-2008 financial crisis dramatically changed
their context and called into question at least some of their elements. Faced with
the enormous problems of huge financial deficits and sluggish economic
growth, all of the older industrialized economies are struggling to redefine their
strategies. Here, the ideological position of individual governments is extremely
important. For example, a ‘new’ UK industrial strategy was in process of con-
struction in 2013 but the coalition government’s persistence with a deep auster-
ity programme – and the overhang of the banking crisis – inevitably limited the
scope for industrial policy initiatives. In late 2013, France set out a new 10-year
industrial policy based around 34 sectors.44 In Germany and France, where
explicit industry policy is the norm, the problem is less ideological than practi-
cal, given the problems of the eurozone (see later in this chapter). In the USA,
the position is rather different, given the long-standing reluctance to accept
even the notion of an industry policy. In fact, of course, the USA always had an
industry policy – it was the label that was avoided. In Japan, a developmental
strategy never went away; the problems there have been the two-decade stagna-
tion since the 1990s.
Jump-starting economic development
As we saw earlier, activist trade and industry policies were fundamental to the
early economic development of all of today’s older industrialized economies. A
similar strategy has been followed by the new wave of NIEs of East Asia and Latin
America – the ‘latecomers’ – in the second half of the twentieth century:
Countries arriving late on the industrial scene suffer from enormous
disadvantages … The latecomers have to meet the powerful incum-
bents with only their temporary advantages of lower costs. They have
to devise strategies that capitalize on these lower costs … In this, they
do have two potential advantages, in (1) not being burdened with past
06_Dicken-7E_Ch-06.indd 197 18/11/2014 11:01:56 AM
PART TWO PROCESSES OF GLOBAL SHIFT198
technological and organizational commitments … and (2) being able
to devise institutions that make up for the deficits found in under-
developed countries. These potential advantages are not handed on a
plate to latecomers, or achieved automatically through operation of
some ‘economic law’ … They are only achieved through strategizing,
which is through the formulation of firm- and national-level policies
and programmes designed to mesh with the current situation and
capture the potential advantages that can be identified.45
From import substitution to export orientation
The essence of most policies aimed at ‘jump-starting’ the process has been one of
an initial emphasis on import-substituting industrialization (ISI): the manufacture
of products that would otherwise be imported, based upon protection against
such imports. The aim is to protect a nation’s infant industries so that the overall
industrial structure can be developed and diversified and dependence on foreign
technology and capital reduced. To this end, many of the policies listed in Figures
6.8, 6.9 and 6.11 have been employed.
The ISI strategy, in theory, is a long-term sequential process involving the pro-
gressive domestic development of industrial sectors through a combination of
protection and incentives. The realization that an import-substituting strategy
cannot, on its own, lead to the desired level of industrialization began to dawn in
a growing number of countries, some during the 1950s, rather more during the
1960s. Generally it was the smaller industrializing countries that first began to shift
towards a greater emphasis on export orientation because of the constraints imposed
upon such a policy by their small domestic market. Increasingly, an export-ori-
ented industrialization (EOI) strategy became the conventional wisdom among
such international agencies as the Asian Development Bank and the World Bank.
Such a shift was facilitated by a number of factors:
•• the rapid liberalization and growth of world trade during the 1960s;
•• the ‘shrinkage’ of geographical distance through the enabling technologies of
transportation and communications;
•• the global spread of TNCs and their increasing interest in seeking out low-cost
production locations for their export platform activities.
Export orientation was invariably based upon a high level of government involve-
ment. The usual starting point was a major devaluation of the country’s currency to
make its exports more competitive in world markets, together with the whole bat-
tery of export trade policy measures shown in Figure 6.8. In effect, these amounted
to a subsidy on exports that greatly increased their price competitiveness. Of course,
the major domestic resource on which this EOI rests was the labour supply – not
only its abundance and relative cheapness, but also its adaptability and, very often,
06_Dicken-7E_Ch-06.indd 198 18/11/2014 11:01:56 AM
THE STATE REALLY DOES MATTER 199
its relative docility. Indeed, in many cases, the activities of labour unions have been
very closely regulated and often suppressed.
In fact, the ‘paths of industrialization’ followed by individual NIEs have been
rather more complex than is often suggested.46 Figure 6.13 sets out a five-phase
sequence of industrialization based upon the experiences of the Latin American
and East Asian NIEs into the 1990s. A number of important points can be made:47
•• The distinction commonly drawn between inward-oriented Latin American
industrialization strategies and outward-oriented East Asian industrialization
strategies is misleading.
•• The initial stages of industrialization were common to NIEs in both regions;
‘the subsequent divergence in the regional sequences stems from the ways in
which each country responded to the basic problems associated with the con-
tinuation of primary ISI’.48
•• ‘The duration and timing of these development patterns varied by region.
Primary ISI began earlier, lasted longer, and was more populist in Latin
America than in East Asia … The East Asian NICs began their accelerated
export of manufactured products during a period of extraordinary dynamism
(Higher value-added
and skill-intensive
products which require
a more fully-developed
local industrial base)
Secondary EOI
(Heavy and chemical
industrialization) and
Secondary ISI
Diversified
export promotion
and continued
secondary ISI
Emphasis on exports of
manufactures, especially
labour-intensive products
Primary
export-oriented
industrialization (EOI)
Substitution of domestic
production for imports of
capital- and technology-
intensive manufactures
such as consumer
durables (e.g. autos),
intermediate goods
(e.g. petrochemicals, steel)
and capital goods
(e.g. heavy machinery)
Secondary ISI
Shift from imports to local manufacture
of (textiles,basic consumer goods
clothing, footwear, food processing)
Primary import-substituting
industrialization (ISI)
Unrefined/semiprocessed raw materials
(agricultural goods, minerals, oil, etc.)
Commodity exports
Taiwan: 1973–
S. Korea: 1973–
Taiwan: 1960–1972
S. Korea: 1961–1972
Taiwan: 1950–1959
S. Korea: 1953–
1960
Taiwan: 1895–1945
Korea: 1910–1945
East Asia
1970–
1968–
Mexico:
Brazil:
1955–1970
1955–1968
Mexico:
Brazil:
1930–1955
1930–1955
Mexico:
Brazil:
1880–1930
1880–1930
Mexico:
Brazil:
Latin America
Figure 6.13 Paths of industrialization in Latin America and East Asia:
common and divergent features
Source: based on material in Gereffi, 1990: Figure 1.1; p. 17
06_Dicken-7E_Ch-06.indd 199 18/11/2014 11:01:56 AM
PART TWO PROCESSES OF GLOBAL SHIFT200
in the world economy … [after 1973] … the developing countries began to
encounter stiffer protectionist measures in the industrialized markets. These
new trends were among the factors that led the East Asian NIEs to modify
their EOI approach in the 1970s.’49
•• Some degree of convergence in the strategies of the Latin American and East
Asian NIEs began to occur in the 1970s and 1980s. Each ‘coupled their previ-
ous strategies from the 1960s (secondary ISI and primary EOI respectively)
with elements of the alternate strategy in order to enhance the synergistic
benefits of simultaneously pursuing inward- and outward-oriented approaches’.50
The attraction of FDI has been an integral part of both ISI and EOI in many
developing countries, although to varying degrees. Among all the measures used
by many developing countries to stimulate their export industries and to attract
foreign investment one device in particular – the export processing zone (EPZ) – has
received particular attention.51 The ILO defines EPZs as:
Industrial zones with special incentives set up to attract foreign inves-
tors, in which imported materials undergo some degree of processing
before being (re-)exported again.52
Figure 6.14 shows the rapid growth in EPZs, especially during the past 30 years.
Some 90 per cent of all EPZs in the developing countries are located in Latin
America, the Caribbean, Mexico and Asia. However, in terms of employment,
Asia is by far the most important region for EPZs, with 85 per cent of the total.
Of these, the biggest concentration is in China, which has 40 million of the world
total of 66 million EPZ workers.53
EPZs come in a number of different forms: ‘free trade zones, special economic
zones, bonded warehouses, free ports, and maquiladoras’.54 Within developing
countries, EPZs have been located in a variety of environments. Some have been
incorporated into airports, seaports or commercial free zones or located next to
large cities. Others have been set up in relatively undeveloped areas as part of a
regional development strategy. EPZs themselves vary enormously in size, ranging
from geographically extensive developments to a few small factories; from
employment of more than 30,000 to little more than 100 workers.
EPZs in developing countries share many common features. The overall pattern
of incentives to investors is broadly similar, as is the type of industry most com-
monly found within the zones. Historically, the production of textiles and cloth-
ing and the assembly of electronics – both employing predominantly young
female labour – dominated. However, the position is not static:
Zones have evolved from initial assembly and simple processing activi-
ties to include high tech and science zones, logistics centres and even
tourist resorts. Their physical form now includes not only enclave-type
zones but also single-industry zones (such as the jewellery zone in
06_Dicken-7E_Ch-06.indd 200 18/11/2014 11:01:56 AM
THE STATE REALLY DOES MATTER 201
Thailand or the leather zone in Turkey); single-commodity zones (like
coffee in Zimbabwe); and single-factory (such as the export-oriented
units in India) or single-company zones (such as in the Dominican
Republic).55
0
20
40
60
1975
1986
1995
1997
2003
2007
n.a.
Employment
(millions)
0
1000
2000
3000
1975
1986
1995
1997
2003
2007
Number of EPZs
0
40
80
120
1975
1986
1995
1997
2003
2007
Number of countries
with EPZs
Figure 6.14 Growth in EPZs
Source: ILO, 2003: Table 1; 2007a: pp. 1–2
Variations on a theme
The recurring theme running through the development of all NIEs is the central
involvement of the state. But its precise nature varies, a reflection of each country’s
particular historical, cultural, social, political and economic complexion.56 In some
cases, state ownership of production has been very substantial; in others it has been
insignificant. In some cases, the major policy emphasis has been upon attracting
FDI; in others FDI has been tightly regulated and the emphasis placed on nurtur-
ing domestic firms.
As we noted earlier (Figure 6.13), NIEs in East Asia and Latin America initially
followed similar, though distinctive, ‘paths to industrialization’. Of the two geo-
graphical areas, the East Asian NIEs have been significantly more successful in
creating dynamic economies.57 Three examples from East Asia can be used to
illustrate how the state has been involved in each case.
South Korea (the Republic of Korea) came into being in 1948, following parti-
tion. From 1910 to 1945, Korea was a Japanese colony, very tightly integrated into
the imperial system. Between 1948 and 1988, when political liberalization
occurred, South Korea was governed by a succession of authoritarian, military-
backed and strongly nationalistic governments that operated a strong state-directed
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PART TWO PROCESSES OF GLOBAL SHIFT202
economic policy articulated through a series of five-year plans.58 Indeed, ‘South
Korea [represented] perhaps the strongest form of the developmental state among
the three [East Asian NIEs].’59 Two important developments during the 1950s
helped to provide the basis for industrialization: the land reform of 1948–50,
which removed the old landlord class and created a more equitable class structure;
and the redistribution of Japanese-owned and state properties to well-connected
individuals which helped to create a new Korean capitalist class.60
A powerful economic bureaucracy was created, with a key role played by a new
Economic Planning Board (EPB). At the same time, the financial system was
placed firmly in the hands of the state. This highly centralized ‘state-corporatist’
bureaucracy, in effect, ‘aggressively orchestrated the activities of “private” firms’.61
In particular, the state made possible – and actively encouraged – the development
of a small number of extremely large and highly diversified firms – the chaebol –
that continue to dominate the Korean economy (see page 134).
By controlling the financial system, particularly the availability of credit, the
Korean government was able to operate a strongly interventionist economic
policy. The chaebol were consistently favoured through their access to finance and
very strong, long-term relationships were developed between them and the state.
From the 1960s Korean policy had a strong sectoral emphasis as the state decided
which particular industries should be supported through a battery of measures,
including financial subsidy and protection against external competition.
Like Japan at a similar stage in its development, Korea generally eschewed the use
of inward FDI to acquire technology. Indeed, Korea adopted the most restrictive
policy towards inward foreign investment of all the four leading Asian NIEs. Korean
government policy has been to build a very strong domestic sector. As a conse-
quence, the share of FDI in the Korean economy remains very low (Table 2.2).
In the early 1980s the policy emphasis shifted towards a greater degree of
(restricted) liberalization. Indeed, much of Korea’s traditional industry policy was
gradually diluted.62 Major changes were made in policies of financial regulation,
exchange rate management and investment coordination. The formerly tightly
controlled financial sector was significantly liberalized and the policy of exchange
rate management virtually abandoned. The central pillar of South Korean industrial
policy for 40 years – the coordination of investment – began to be dismantled.
When the East Asian financial crisis of 1997 hit Korea, the country’s problems – as
for the other affected East Asian economies – were attributed by the IMF, and by
the Western financial community in general, to an over-regulated, state-dominated
economy with excessively close (even corrupt) relationships between government
and business. Yet, in the case of Korea, that was no longer entirely the case. It could
be argued, in fact, that the Korean government had already gone too far in abandon-
ing the principles on which its spectacular economic growth had been based.
Clearly, certain reforms were needed as both the Korean economy itself and the
broader global environment were changing. Not least was the need to reform the
chaebol, which distort the economy by, in effect, ‘choking the development of small
06_Dicken-7E_Ch-06.indd 202 18/11/2014 11:01:56 AM
THE STATE REALLY DOES MATTER 203
and medium-sized companies’63 and which were, themselves, in great financial dif-
ficulty. That battle is still being fought. The chaebol argue that the proposed reforms
will leave them vulnerable to foreign takeover; the government argues that reform
of cross-shareholdings will make them more competitive. The issue of ‘foreign
takeover’ remains, however, a very sensitive issue in Korea as a whole.
Singapore demonstrates a very different model of industrialization, albeit one in
which the state has also played a dominant role.64 Singapore is by far the smallest
of all the East Asian NIEs: a city-state with a population of only around 5 million.
Like both Korea and Taiwan, it had a very long history as a colony (in Singapore’s
case as a British colony). But it was less tightly integrated into its imperial system,
although its strategic geographical position gave it a highly significant role as a
commercial entrepôt. Singapore became fully independent in 1965 when it sepa-
rated from Malaysia. Since then, although Singapore is a parliamentary democracy,
it has been governed by one political party (the People’s Action Party).
From the outset, the Singapore government pursued an aggressive policy of
export-oriented, labour-intensive manufacturing development. Concentration on
manufacturing – especially labour-intensive manufacturing – was adopted because
of the need to reduce a very high unemployment rate in a society that, at the time,
had one of the fastest population growth rates in the world. The twin pillars of the
policy were those of complementary economic and social planning, the latter
being much more overt than in other East Asian NIEs.
In contrast to both Korea and Taiwan, the central pillar of Singapore’s export-
oriented strategy was attracting FDI.65 As a result, the economy has become over-
whelmingly dominated by foreign firms (Table 2.2). The most explicit
industrialization measures, therefore, were those of incentives to inward investors,
using a sectorally selective process. The government agency responsible was the
Economic Development Board (EDB), which still plays an extremely influential
role in the Singapore economy. With a few exceptions, Singapore operated a free
port policy with little use of trade protectionist measures. The second set of direct
measures used to promote industrial development was the establishment of a
high-quality physical infrastructure.
At the same time, a series of social policy measures was introduced aimed at creating
an amenable environment for foreign investment. Most notably, the labour unions
were effectively incorporated into the governance system: ‘Strikes and other indus-
trial action were declared illegal unless approved through secret ballot by a majority
of a union’s members. In essential services, strikes were banned altogether … These
labour market regulations resulted in the creation of a highly disciplined and depo-
liticised labour force in Singapore.’66 Thus, through a whole battery of interlocking
policies, the Singapore government created a very high-growth, increasingly affluent,
industrialized society in which foreign firms played the dominant economic role in
production but within a highly regulated political and social system.
Today, Singapore promotes itself as a global business centre on the basis of the
very high quality of its physical and human infrastructure, its strategic geographical
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PART TWO PROCESSES OF GLOBAL SHIFT204
location and its business-friendly policies. Government policy incorporates an
explicit strategy to ‘regionalize’ the Singaporean economy by encouraging domes-
tic firms to set up operations in Asia, while Singapore develops as the ‘control
centre’ of a regional division of labour. The government introduced a series of
initiatives using government-linked corporations to develop major infrastructural
projects in Asia and, more broadly, to develop international networks.67 At the same
time, the emphasis on high-technology research and development and techno-
logical upgrading68 has intensified with, for example, specific emphasis on biotech-
nology to enhance its already significant role as a pharmaceuticals centre and on
IT. Two recent policy initiatives have been the greater liberalization of the financial
system and a push for greater ‘Asian regionalism’. The key question, however, is the
extent to which this highly paternalistic state is able to loosen its grip on the coun-
try’s political and social life without damaging its economic influence.
The dominant role of the state is, of course, most obvious in the case of
China.69 The People’s Republic of China (PRC) came into existence in 1949
with the replacement of the nationalist government by a communist govern-
ment led by Mao Zedong. For the next 30 years, China followed a policy of
economic self-reliance. This policy was pursued through a series of major, often
extreme, measures. Initially, the new government followed the example of the
Soviet Union in establishing a Five-Year Plan (1953–57). This relatively success-
ful policy was jettisoned in 1958 when Mao announced the ‘Great Leap
Forward’: a total transformation of economic planning, with the emphasis on
small-scale and rural development. Although this initiated rural industrialization,
the Great Leap Forward had disastrous consequences, including mass famine. In
1966, policy changed again with the introduction of the ‘Cultural Revolution’,
a phase that lasted for some 10 years with, once more, disastrous human and
social implications.
The period after Mao’s death in 1976 was one of political hiatus that was even-
tually resolved by the emergence of Deng Xiaoping as leader. It was under Deng’s
leadership that China began to jettison the self-reliance policy of the previous 30
years and to make links with the world market economies. This has been done,
however, without substantial political change. In the words of the new Party
Constitution of 1997, it is ‘Socialism with Chinese characteristics’; in our termi-
nology, it is an authoritarian capitalist state.
The pivotal year was 1979, when China began its ‘open policy’ based upon a
carefully controlled trade and inward investment strategy. This was set within the
so-called ‘Four Modernizations’ (concerned with agriculture, industry, education,
and science and defence). A central element was the opening up of the Chinese
economy to foreign direct investors. As we saw in Chapter 2, FDI has grown very
rapidly indeed in China since the early 1980s and now accounts for 10 per cent
of GDP (Table 2.2). The organizational form of these investments varies from
wholly owned foreign subsidiaries to equity joint ventures with Chinese partners
and other partnership arrangements.
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THE STATE REALLY DOES MATTER 205
A distinctive feature of the open policy has been the explicit use of geography.
Partly in order to control the spread of capitalist market ideas and methods within
Chinese society, and partly to make the policy more effective through external
visibility and agglomeration economies, FDI was originally steered to specific
locations. Initially, these were the four Special Economic Zones (SEZs) established
in 1979 at Shenzhen, Zhuhai, Shantou and Xiamen (Figure 6.15). Significantly,
each of these was located to maximize their attraction to investors from overseas
Chinese, notably in Hong Kong, Macau and Taiwan. The Chinese SEZs offered a
package of incentives, including tax concessions, duty-free import arrangements
and serviced infrastructure. The original SEZs were located in areas well away
from the major urban and industrial areas in order to control the extent of their
influence. However, since the mid-1980s, there has been considerable develop-
ment and geographical spread of Economic and Technological Developments
Zones (ETDZs), as Figure 6.15 shows.
Despite massive inflows of foreign capital and technologies, China remains a cen-
trally controlled economy in which state-owned enterprises (SOEs) predominate,
Yantai
Dalian
Tianjin
Qinhuangdao
Qingdao
Fuzhou
Lianyungang
Nantong
Shanghai Minhang
Shanghai Hongqiao
Shanghai Caohejing
Ningbo Daxie
Guangzhou
Zhanjiang
Urumqi
Wuhan
Shenyang
Yingkou
Weihai
Changchun
Harbin
Wenzhou
Hangzhou
Xiaoshan
Kunshan
Wuhu
Guangzhou Nansha
Huizhou
Dayawan
Dongshan
Fuqing Rongqiao
Beijing
Chongqing
Xiamen Haicang
Hainan
Yangpu
Shanghai Jinqiao
Ningbo
Lanzhou
Zhengzhou
Suzhou
Shihezi
Lhasa
Xining
Yinchuan
Xi’an
Chengdu
Guiyang
Huhhot
Taiyuan
Hefei
Nanjing
Nanchang
Changsha
Nanning
Kunming
Zhuhai
Shantou
Xiamen
Shenzhen
Established 2000–02
Established 1992–93
Established 1984–88
Established 1979
Economic and Technological
Development Zones
Special Economic Zones
Figure 6.15 The geography of China’s ‘open policy’
06_Dicken-7E_Ch-06.indd 205 18/11/2014 11:01:56 AM
PART TWO PROCESSES OF GLOBAL SHIFT206
despite more than halving in numbers. Reform of the SOEs is an immense task and
one surrounded by massive controversy. A major problem for a country trying to
‘modernize’ its economy is the sheer inefficiency (by Western standards) and high
levels of corruption in many of the SOEs. SOEs are embedded within the
Communist Party system and this fact pervades their operations.70
The problems posed by the SOEs were intensified with China’s accession to
the WTO in 2001. Although this greatly enhanced China’s economic potential
it also imposed severe stresses on the domestic economy and institutions. Not
only have tariff levels fallen from their previously high levels, thus exposing
Chinese enterprises to intense competition, but also NTBs, matters relating to
intellectual property rights, safety regulations, financial and telecommunications
regulations were all affected. It is notable that the Chinese government now
actively encourages Chinese businesses to invest overseas and there have been a
number of significant Chinese acquisitions of foreign businesses, notably the
IBM PC business by Lenovo in 2004. Financially, China continues to be under
pressure to revalue the renminbi, not least because it has the largest trade surplus
in the world.
Overall, the institutional structure of the Chinese economy is in a state of flux,
with a greater variety of forms. As in the past, however, the key lies in the inter-
nal political power struggles between the ‘modernizers’, who wish to sustain and
develop the open policies of the recent past, and those who wish to retain a
degree of isolation. So far, China’s reform policies have proved remarkably suc-
cessful. But the key test of the survival of such policy is its continued success in
delivering economic growth and raising incomes for the majority of Chinese,
and not just those in the more developed parts of the country. For a country so
large geographically, so populous and still heavily rural, this is a very tall order
indeed:
China has an unsustainable growth pattern and it will have to pay a
cost in the form of slower growth … To make its growth sustainable
China must shift to a new growth pattern that relies more on domes-
tic rather than external demand and consumption instead of invest-
ment, especially real estate investment.71
In this context, the arrival of a new president, Xi Jinping, in 2013 is highly sig-
nificant for the next decade of Chinese economic development. In a speech to a
Business Forum in Hainan in 2013, Mr Xi asserted that
‘China will sustain relatively high economic growth, but not super-
high economic growth … would protect the lawful rights and inter-
ests of foreign-invested companies and ensure their rights to equal
participation in government procurement and independent innova-
tion … China will never close its doors to the outside world.’ Mr Xi
said a slowing of the pace of growth would help China rebalance its
06_Dicken-7E_Ch-06.indd 206 18/11/2014 11:01:57 AM
THE STATE REALLY DOES MATTER 207
economy towards a domestic-consumption-led model rather than an
export-driven model, something it has been trying to achieve for
years. ‘It does not mean that we cannot maintain economic growth at
a very fast pace, but because we don’t want it any more.’72
STATES AS COLLABORATORS
As we saw in an earlier section of this chapter, states – like firms – are competi-
tors in the global economy. But they are also – again like firms – often collabora-
tors: involved in trade agreements with other states. Indeed, what the WTO terms
regional trade agreements (RTAs) have become a pervasive feature of the global econ-
omy. At least one-third of total world trade occurs within RTAs.
The basis of RTAs is the preferential trading arrangement (PTA). Technically,
PTAs are not necessarily ‘regional’, that is involving states that are geographically
proximate. They simply involve states agreeing to provide preferential access to
their markets to other specified states wherever they are located – primarily
through tariff reductions, at least initially. However, the WTO uses the term
regional trade agreement for all such arrangements. RTAs have a two-sided quality:
they liberalize trade between members while, at the same time, discriminating
against third parties.73
The proliferation of regional trade agreements
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Figure 6.16 The acceleration in RTAs
Source: WTO data
06_Dicken-7E_Ch-06.indd 207 18/11/2014 11:01:57 AM
PART TWO PROCESSES OF GLOBAL SHIFT208
There has been an especially marked acceleration in RTA formation since the
early 1990s (Figure 6.16) and the development of a complex tangled web of
interstate connections (Figure 6.17). Most have a strongly defensive character;
they represent an attempt to gain advantages of size in trade by creating large
markets for their producers and protecting them, at least in part, from outside
competition. There is also an undoubted ‘bandwagon’ effect: a ‘fear of being left
out while the rest of the world swept into regionalism, either because this would
be actually harmful to excluded countries or just because “if everyone else is
doing it, shouldn’t we?”’.74
Despite a widespread view that RTAs are a relatively new phenomenon they
have been an important feature of the global economic landscape since the middle
of the nineteenth century. But their basis and their nature have changed over time.
Historically, four ‘waves of regionalism’ can be identified:75
•• During the second half of the nineteenth century there were a number of trade
agreements in place, especially in Europe: for example, the German Zollverein,
the customs unions between the Austrian states, and between several of the
Nordic countries. ‘As of the first decade of the twentieth century, Great Britain
had concluded bilateral arrangements with forty-six states, Germany had done
so with thirty countries, and France had done so with more than twenty states’
(p. 596).
•• After the disruption of the First World War (1914–18) a new wave of regional
arrangements occurred but, this time, in a more discriminatory form. ‘Some were
created to consolidate the empires of major powers, including the customs union
France formed with members of its empire in 1928 and the Commonwealth
system of preferences established by Great Britain in 1932. Most, however, were
formed among sovereign states … The Rome Agreement of 1934 led to the
establishment of a PTA involving Italy, Austria and Hungary. Belgium, Denmark,
Finland, Luxembourg, the Netherlands, Norway, and Sweden concluded a series
of economic agreements throughout the 1930s … Outside of Europe, the US
forged almost two dozen bilateral commercial agreements during the mid-1930s,
many of which involved Latin American countries’ (p. 597).
•• Since the end of the Second World War (1939–45) there have been two dis-
tinct waves of regionalism. ‘The first took place from the late 1950s through
the 1970s and was marked by the establishment of the EEC, EFTA, the
CMEA, and a plethora of regional trade blocs formed by developing countries.
These arrangements were initiated against the backdrop of the Cold War, the
rash of decolonisation following World War II, and a multilateral commercial
framework, all of which coloured their economic and political effects’ (p. 600).
•• A further wave of economic regionalism – from the late 1980s onwards –
occurred in the drastically changed geopolitical circumstances of the collapse
of the Soviet-led system and the increased uncertainties of a more fragmented
political and economic situation. ‘Furthermore, the leading actor in the
06_Dicken-7E_Ch-06.indd 208 18/11/2014 11:01:57 AM
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06_Dicken-7E_Ch-06.indd 209 18/11/2014 11:01:57 AM
PART TWO PROCESSES OF GLOBAL SHIFT210
international system (the US) is actively promoting and participating in the
process. PTAs also have been used with increasing regularity to help prompt
and consolidate economic and political reforms in prospective members, a rar-
ity during prior eras. And unlike the interwar period, the most recent wave of
regionalism has been accompanied by high levels of economic interdepend-
ence, a willingness by the major economic actors to mediate trade disputes, and
a multilateral (that is, the GATT/WTO) framework’ (p. 601).
Types of regional economic integration
RTAs come in a variety of shapes, sizes and degrees of integration. As Figure 6.18
shows, the progression is cumulative: each successive stage of integration incor-
porates elements of the previous stage, together with the additional element that
defines each particular stage.
Harmonization of economic policies
under supra-national control
Free movement of factors of
production between member states
Common external trade
policy towards non-members
Removal of trade restrictions
between member states
Economic
Union
Common
Market
Customs
Union
Free Trade
Area
Levels of economic integration
Figure 6.18 Types of regional economic integration
Most RTAs fall into the first two categories shown in Figure 6.18: the free trade
area and the customs union. Indeed, around 90 per cent of all RTAs are free trade
areas. There are a small number of common market arrangements, but only one
group – the EU – comes close to being a true economic union. In fact, not only is
there enormous variation in the scale, nature and effectiveness of these RTAs, but
also there is, in some cases, a considerable overlap of membership of different groups.
Figure 6.19 shows the major regional integration agreements currently in force.
What effects do such RTAs have? The classic economic analysis of their trade
effects identifies two opposing outcomes:
•• trade diversion which occurs where, as the result of regional bloc formation,
trade with a former trading partner (now outside the bloc) is replaced by trade
with a partner inside the bloc;
•• trade creation which occurs where, as the result of regional bloc formation, trade
replaces home production or where there is increased trade associated with
economic growth in the bloc.
06_Dicken-7E_Ch-06.indd 210 18/11/2014 11:01:58 AM
THE STATE REALLY DOES MATTER 211
In addition, regional trading blocs have a major influence on flows of investment by
TNCs. The effects of regional integration on direct investment, like that on trade,
can also be conceptualized in terms of ‘creation’ and ‘diversion’. In the latter case,
the removal of internal trade (and other) barriers may lead firms to realign their
organizational structures and value-adding activities to reflect a regional rather
than a strictly national market (see Figure 5.17). This, by definition, ‘diverts’ invest-
ment from some locations in favour of others.
Austria, Belgium, Bulgaria, Croatia, Cyprus,
Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta,
Netherlands, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden,
UK
Canada, Mexico, US
Iceland, Lichtenstein, Norway, Switzerland
Argentina, Brazil, Paraguay, Uruguay,
Venezuela (2006)
Bolivia, Colombia, Ecuador, Peru, Venezuela
Brunei Darussalam, Cambodia, Indonesia,
Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand,
Vietnam
Brunei Darussalam, Cambodia, China,
Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand, Vietnam
Antigua and Barbuda, Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Haiti,
Jamaica, Montserrat, St Kitts and Nevis,
St Lucia, St Vincent and the Grenadines,
Suriname,
Trinidad and Tobago
1957 (European
Common Market)
1992
(European
Union)
1994
1960
1991
1969
(revived 1990)
1967 (ASEAN)
1992 (AFTA)
2010
1973
Economic
union
Free trade
area
Free trade
area
Common
market
Customs
union
Free trade
area
Free trade
area
Common
market
TypeDate(s)MembershipRegional group
EU (European
Union)
NAFTA (North
American Free
Trade Agreement)
EFTA (European
Free Trade
Association)
Mercosur
(Southern Cone
Common Market)
ANCOM (Andean
Common Market)
AFTA
(ASEAN Free
Trade Agreement)
China–
ASEAN
Free Trade
Agreement
CARICOM
(Caribbean
Community)
Figure 6.19 Major RTAs
Regional integration within Europe, the Americas, East
Asia and the Pacific
In Chapters 2 and 5 we identified a strong tendency for a disproportionate share
of global production, trade and FDI to be ‘regionalized’. Such geographical con-
centrations reflect, first and foremost, the basic economic–geographical processes
of preference for proximity to markets and suppliers and a general tendency to
‘followership’ in location decision making. But there are also rather different kinds
of regional integration agreement in each of the three major regions.
06_Dicken-7E_Ch-06.indd 211 18/11/2014 11:01:58 AM
PART TWO PROCESSES OF GLOBAL SHIFT212
The EU
The European Union is the duck-billed platypus of the political
world: a curious-looking animal that defies simple categorization.
Some people think it resembles a bird, others a reptile or a mammal.
Similarly, everyone interprets the EU according to their own precon-
ceptions rather than seeing it for the singular institution it is.76
The EU is by far the most highly developed and structurally complex of all the
world’s regional economic blocs. Although initially established as a six-member
European Economic Community (EEC) in 1957, it was always – and remains today –
more than simply an economic institution. The EU is a political, as well as an eco-
nomic, project. Indeed, the initial stimulus was the desire to bring together France
and Germany in such a way that their traditional enmities could no longer find
their outlet in another round of European wars and also to strengthen Western
Europe in the face of the perceived Soviet threat. Figure 6.20 shows how the EU
UK
Ireland
Iceland
Sweden
Finland
Portugal
Spain
Netherlands
Denmark
France
Italy
Belgium
Luxembourg
Germany
Poland
Estonia
Latvia
Lithuania
Czech
Republic
Austria
Slovakia
Hungary
Romania
Bulgaria
Turkey
Slovenia
Croatia
Serbia
Greece
Cyprus
FYR
Macedonia
Montenegro
Malta
2013 enlargement
Candidates
Original European
Community, 1957
1973 enlargement
1981/86 enlargement
1995 enlargement
2004 enlargement
2007 enlargement
The European Union
Figure 6.20 The EU: from 6 to 28 members (and beyond?)
06_Dicken-7E_Ch-06.indd 212 18/11/2014 11:01:58 AM
THE STATE REALLY DOES MATTER 213
has grown from its original 6 member states in 1957, to 12 in the 1970s and 1980s,
15 in the 1990s, 25 in 2004, to its current 28 member states.
Since the early 1990s, four developments have been especially important for
the EU.
The first significant development was the completion of the Single European
Market in 1992. Almost 40 years after the Treaty of Rome, individual countries
were still resorting to tactics which prevented, or delayed, the import of certain
products from other member nations through the use of various kinds of NTB.
The Single European Act aimed at the removal of the remaining physical, techni-
cal and fiscal barriers; the liberalization of financial services; the opening of public
procurement; and other measures. Such internal liberalization and deregulation, it
was argued, would create a virtuous circle of growth for the European Community
as a whole, its member states and for those business firms successfully taking
advantage of the changes.
The second major development in the EU since the early 1990s was the Treaty
on European Union (TEU), signed at Maastricht in 1991. This introduced a far
more ambitious political agenda, aimed at creating a fully fledged economic union.
In particular it:
•• strengthened social provisions by (a) the incorporation of the Social Charter,
(b) the enlargement of the EC Structural Funds, (c) the creation of a new
Cohesion Fund to assist poorer areas of the Union;
•• set out the mechanisms for the creation of a single European currency and
monetary union (EMU).
European Monetary Union (the eurozone) came into effect in 1999, when 11 (later
12) of the 15 member states joined the system. Today, 18 of the 28 member states
are in the eurozone. The issue of monetary union, and the adoption of a single
European currency (the euro), crystallized some of the most difficult political prob-
lems within the EU, notably the sensitive issue of national sovereignty. Within the
eurozone national control over monetary policy – notably the setting of interest
rates – has been passed upwards to the European Central Bank (ECB) based in
Frankfurt. The ECB, therefore, has an immense influence over the economies of
individual member states. Each member state in the eurozone has to comply with
the Stability and Growth Pact, which sets limits on permissible budget deficits and
debts. We will return to the problems within the eurozone towards the end of this
section.
The third major development was the dramatic enlargement of membership from the
mid-2000s to 28 states, with the potential of further enlargement. In this regard,
the most contentious outstanding applicant is Turkey. The majority of the new
members were previously embedded within the Soviet-dominated system, with
very different recent histories and socio-political structures from the existing EU
members. Others are smaller countries like Cyprus and Malta. Significantly, the
income gap between existing and new members was much wider than in previous
rounds of enlargement. The average GDP per head of the 10 new members in 2004
06_Dicken-7E_Ch-06.indd 213 18/11/2014 11:01:58 AM
PART TWO PROCESSES OF GLOBAL SHIFT214
was only 46.5 per cent of the existing EU average. This compares with the average
of 95.5 per cent for Denmark, Ireland and the UK, when they joined in 1973, and
the 103.6 per cent for Austria, Finland and Sweden on their accession in 1995.
Such huge income differences pose massive problems for the already stressed EU
budget.
The greatly increased size and diversity of EU enlargement make the process
of consensus in decision making even more difficult, hence the fourth major
development was the implementation of the Lisbon Treaty on 1 December
2009. This was an immensely tortuous and contested process over several years,
with a number of states refusing to ratify the original ‘EU Constitution’. The
result was a considerably less ambitious structure but one that, nevertheless,
involved some important changes. In particular, the position of the European
Parliament was strengthened with greater powers regarding EU legislation, the
EU budget and international agreements. National parliaments were to have
greater involvement, especially in ensuring that the EU only acts where it will
result in better results than would occur at the national level (the principle of
‘subsidiarity’). The aim was to create ‘a more efficient Europe, with simplified
working methods and voting rules, streamlined and modern institutions for a
EU of 27 [now 28] members and an improved ability to act in areas of major
priority for today’s Union’.77 Significantly, it made it possible for a member state
to leave the EU.
Political–economic integration in the EU is unique in its extent and depth.
Many – though not all – of the economic policies of individual member states
have been ‘relocated’ to the supra-national EU level. For example, there is just one
EU trade commissioner representing the EU in the WTO and in all other inter-
national trade negotiations. There are EU-wide policies on competition, on sub-
sidies (both industrial and agricultural) and on investment incentives. On the
other hand, there are significant areas where policy is set at the national level: for
example, in labour markets and taxation.
However, even in areas of ‘common’ EU policy, the differing ideological posi-
tions of individual member states clearly affect the process of reaching consensus.
Trade negotiations, for example (including issues relating to the Common
Agricultural Policy – CAP), have become increasingly contested within the EU,
with a sharp divide opening up between states with a more protectionist stance
(notably France, but also Poland) and those espousing more open trade policies
(notably the UK and some of the Northern European states). In the sphere of
competition policy, as well, there is much heated argument over the acquisition of
domestic firms even by firms from other EU member states.
In the post-2008 world, not surprisingly, major cleavages have developed within
the EU, both between members of the eurozone and between the eurozone and
the other EU member states. The pros and cons of a single European currency
were always finely balanced. The major benefits are the reduced costs and uncer-
tainties associated with having to deal with many separate currencies within a
06_Dicken-7E_Ch-06.indd 214 18/11/2014 11:01:58 AM
THE STATE REALLY DOES MATTER 215
single market and the overall stability this is intended to produce. Set against this
is the fact that an individual state’s ability to use monetary mechanisms to deal
with periodic economic crises is hugely reduced. Such constraints on national
freedom of manoeuvre become especially apparent during major financial crises,
as has happened since 2008. Massive crises developed, initially in Ireland and
Greece, necessitating large-scale bailouts of both economies. Bigger EU econo-
mies, notably Spain and Italy, as well as Portugal, have been drawn into the finan-
cial morass and others may well follow. The ECB undertook to take ‘whatever
measures were necessary’ to sustain the eurozone but the cost has been draconian
austerity measures imposed on struggling economies as the price of financial help.
The tension between the EU’s strongest economy, Germany, and these states has
become acute.
The result is the intensification of social tensions within and between EU states:
The big challenge is unemployment and growth. About 26m people
are out of work across the EU and the unemployment rate for the
17-nation eurozone has hit a record 11.8 per cent … Worse, the
eurozone-wide rate conceals stark country-by-country differences.
Joblessness is still near two-decade lows in Germany but in Spain
and Greece one-in-four people are out of work with the rate near-
ing 60 per cent among those under 25 … These social strains have
started to be expressed in a rekindling of smouldering separatist
and regionalist tensions … Many countries are experiencing the
most severe economic crises in living memory … The social con-
tract around which a country coalesces may become increasingly
strained.78
Inevitably, therefore, there is intense speculation about the future of the euro itself
and, more broadly, over the future shape of the EU as a whole. In the case of the
euro, some argue that it will inevitably fail; others that it will survive, primarily
because ‘they underestimate Europe’s deep political commitment to the euro’s sur-
vival, in some form or other … The euro will neither fail nor succeed. Defective
but defended, it will simply endure.’79 One distinct possibility is that the ‘geometry’
of the EU will change, perhaps into a three-tier structure:
The first tier will probably – as France and Germany are proposing –
have its own budget separate from the EU budget, to help countries
that suffer economic shocks or are introducing painful structural
reforms … A second tier, consisting of countries that aspire to join the
euro, is already known as ‘eurozone plus’. This group, which includes
Poland, will accept much of the same supervision of budgetary and
economic policy as the first tier … The third tier will consist of the
UK and a few others that do not wish to give up any more economic
06_Dicken-7E_Ch-06.indd 215 18/11/2014 11:01:58 AM
PART TWO PROCESSES OF GLOBAL SHIFT216
sovereignty. They will, however, wish to remain involved in the single
market, trade policy, farm policy, foreign policy cooperation and other
things that the EU does.80
Of course, this is all speculation. Only time will tell how the EU will turn out.
The Americas
Whereas the history of political–economic integration in Europe has been one of
progressive deepening and widening – albeit with many interruptions and uncer-
tainties – the history of attempts to create regional integration agreements in the
Americas has been far more fragmented and shallow. To a great extent, this reflects
the overwhelming dominance of the USA in the region and the fact that, until very
recently, the USA had chosen not to enter into bilateral or regional trading arrange-
ments. It reflects, too, the limited success of Latin American countries in creating
robust and lasting regional agreements. The picture in the Americas, therefore, is
of a mosaic of regional trade agreements of different type and scope (Figure 6.21).
The North American Free Trade Agreement (NAFTA) is by far the most important
RTA in the Americas. By integrating two highly developed countries (the USA
and Canada) and one large developing country (Mexico) into a single free trade
area it radically changed the economic map of North America. The NAFTA came
into force in 1994, but its origins can be traced back into the 1980s. One impor-
tant building block, although this was not its intent, was the Canada–US Free
Trade Agreement (CUSFTA) signed in 1988 and implemented in 1989. As the
CUSFTA was being signed, two other developments were also occurring.
President George Bush (Senior) had made freer trade with Mexico a campaign
issue in 1988. At the same time, President Carlos Salinas of Mexico made clear his
determination to negotiate a free trade area with the USA. Within a short time of
bilateral talks starting, Canada had joined in an obvious defensive response.
The arguments in favour of creating the NAFTA varied among the three par-
ties. For the USA, it formed part of its long-term objective of ensuring stable
economic and political development in the western hemisphere and also gave
access to Mexican raw materials (especially oil), markets and low-cost labour. The
Canadian government was anxious to consolidate the recent CUSFTA. The
motives of the Mexican government were primarily to help to lock in the eco-
nomic reforms of the previous few years, to create a magnet for inward invest-
ment, not only from the USA but also from Europe and Asia, and to secure access
to the US and Canadian markets.
The aims of the NAFTA were gradually to eliminate most trade and investment
restrictions between the three countries over a 10- to 15-year period. The possi-
bility of other countries joining the NAFTA was left open to negotiation. The
NAFTA is not a customs union; it does not incorporate a common external trade
policy. Each member is free to make trade agreements with other states outside
the NAFTA. In contrast to the EU, political–economic integration is minimal so
that, unlike the EU, there are no social provisions within the NAFTA.
06_Dicken-7E_Ch-06.indd 216 18/11/2014 11:01:58 AM
THE STATE REALLY DOES MATTER 217
The NAFTA remains a highly controversial issue in all three countries. Against
the claimed benefits of an enlarged economic space (from both a production and
marketing point of view) is set a number of concerns. In the USA, there were
NAFTA
North American
Free Trade Agreement
MERCOSUR
Southern Cone
Common Market
ANCOM
Andean Common Market
CARICOM
Caribbean Community
LAIA
Latin American
Integration Association
Canada
United States
Mexico
Bahamas
Belize
Cuba
Jamaica
Panama
Haiti St. Kitts and Nevis
Antigua and Barbuda
Dominica
St. Lucia
St. Vincent and
the Grenadines
Grenada
Barbados
Trinidad and Tobago
Chile
Uruguay
Guyana
Suriname
Venezuela
Colombia
Ecuador
Peru
Bolivia
Argentina
Paraguay
Brazil
Figure 6.21 The mosaic of RTAs in the Americas
06_Dicken-7E_Ch-06.indd 217 18/11/2014 11:01:58 AM
PART TWO PROCESSES OF GLOBAL SHIFT218
particular worries about environmental and labour impacts. In the latter case, a
former presidential candidate, Ross Perot, offered the spectre of a ‘giant sucking
sound’ as jobs left the USA for Mexico.81 A similar fear was expressed in Canada.
One politician saw the NAFTA as a ‘nightmare of US continentalists come true:
Canada’s resources, Mexico’s labour, and US capital’.82 In Mexico, the fear was
expressed that the country would become even more dominated by the USA. The
jury remains divided.
Not surprisingly, attempts to create a Central American Free Trade Agreement
(CAFTA) between the USA and four Central American countries (Costa Rica, El
Salvador, Honduras, Nicaragua), plus the Dominican Republic, have been far from
smooth. Although the legislation was passed in the USA in July 2005, the agree-
ment has not been fully implemented. The major opposition has come from US
labour organizations and sugar farmers fearing job relocations to the cheap-labour
economies (and poorer working conditions) of Central America. On the other
hand, CAFTA is seen as being a way for Central American producers of sugar and
of garments to gain better access to their biggest markets. In fact, unlike the
NAFTA, which removed most US barriers to imports from Mexico and Canada,
‘CAFTA largely makes permanent the access Central America already has to the
US market … under the Caribbean Basin Initiative … in exchange for signifi-
cantly greater access to the Central American market.’83
In contrast to the USA, Latin America has a long history of attempts to create
free trade areas and customs unions, dating back to 1960 with the establishment
of the Latin American Free Trade Area (LAFTA).84 As Figure 6.21 shows, there has
been a complex overlapping of bilateral and multilateral agreements between
Latin American countries. Some of these agreements have failed to develop, nota-
bly the LAFTA, despite its reinvention as LAIA (Latin American Integration
Association) in 1980.
Two Latin American regional integration agreements have had rather more
staying power: the Andean Community and Mercosur. Of the two, Mercosur is the
more significant.85 It was established in 1991 with the intention of liberalizing
trade between the four founding member states, establishing a common external
tariff, coordinating macroeconomic policy and adopting sectoral agreements.
Economically, Mercosur has certainly increased the degree of internal trade.
In some respects Mercosur has some features in common with the EU. Like the
EU, one of its primary motivations was to deal with security relationships between
Argentina and Brazil (a parallel with the Franco-German relationship in Europe).
It certainly goes some way beyond a simple free trade area (such as the NAFTA).
On the other hand, Mercosur does not have any of the supra-national institutions
that are at the heart of the EU:
Conflict continues to plague the organization because of a lack of
coordinated economic policies and supranational institutions.
Deepening of the integration process has slowed because member
06_Dicken-7E_Ch-06.indd 218 18/11/2014 11:01:58 AM
THE STATE REALLY DOES MATTER 219
states have not established common mechanisms for coordinated
macro-economic policy nor have they truly committed themselves,
despite the rhetoric, to establishing a regional institutional framework
… rather, loose regulations and shallow institutionalism have been
maintained at a relatively low political cost … Put simply, the member
states of Mercosur want the maximum economic and political benefits
from integration while foregoing as little sovereignty as possible.86
Looming over all attempts to create a more vigorous regional economy in Latin
America is the USA, which aspires to create a pan-hemispheric Free Trade Area of the
Americas (FTAA), encompassing North, Central and South America. So far, progress
in the negotiations involving 34 countries have stalled. Partly to subvert an FTAA,
there are counter-moves to create a South America Community of Nations, whose
core would be a merger, over 15 years, between Mercosur and the Andean Community.
East Asia and the Pacific
Regional trading arrangements in the Asia-Pacific are much looser, less formal-
ized and more open than the EU and NAFTA.87 Until 2010 there were two
main regional economic collaborations (AFTA and APEC) and a host of bilat-
eral agreements. The ASEAN Free Trade Agreement (AFTA) was initiated in 1992
between the ASEAN countries. ASEAN itself had been established in 1967 as a
group of four, then six, South East Asian countries (Singapore, Malaysia, Thailand,
Indonesia, the Philippines, Brunei). ASEAN’s membership grew to 10 countries
in the 1990s, with the addition of Cambodia, Laos, Myanmar and Vietnam (see
Figure 6.22):
ASEAN as an intergovernmental institution established to promote
regional cooperation, offers a striking contrast to the Western institu-
tions such as EU and NAFTA … it is … based on a different concept
of institutionalisation …
Paying full respect for the sovereignty and independence of each
member state is one of the fundamental principles of the Association
… most of the decisions have been made by consensus through the
‘consultation based on the ASEAN tradition’, which means to negoti-
ate and consult thoroughly till achieving an agreement …
[The] mechanism for dispute settlement also reflects ASEAN’s preference
for an informal approach. This is a striking contrast with the Western
approach to dispute settlement in which preference is clearly on the side
of judicial settlement based on clear rules and binding decisions.88
Such a system has both strengths and weaknesses.89 A strength is that it has helped
what is a very diverse group of countries to maintain positive relationships. A
06_Dicken-7E_Ch-06.indd 219 18/11/2014 11:01:59 AM
PART TWO PROCESSES OF GLOBAL SHIFT220
weakness is that a firm and rapid response to problems is often difficult, especially
in light of the principle of non-interference in domestic matters of member states.
ASEAN has had only limited success in stimulating economic activity. As a conse-
quence, in 1992, the original six member states agreed to initiate an ASEAN Free
Trade Agreement (AFTA).
Increasing competitive pressures on the ASEAN region from other East Asian
countries (notably China) has forced the organization to look towards making
agreements with other countries in East Asia. Some ASEAN members, notably
Singapore, have negotiated bilateral trade agreements with China, South Korea,
Thailand
Myanmar
(1997)
China
Cambodia
(1999)
Singapore
Laos
(1997)
Vietnam
(1995)
Brunei
Darussalam
Philippines
M a l a y s i a
I n d o n e s i a
Original
members, 1967
Subsequent
members (with
date of entry)
China–ASEAN
FTA, 2010
ASEAN
Figure 6.22 The China–ASEAN Free Trade Agreement
06_Dicken-7E_Ch-06.indd 220 18/11/2014 11:01:59 AM
THE STATE REALLY DOES MATTER 221
Japan, and with the EU, the USA, Canada, Mexico and Chile. However, the
China–ASEAN agreement (Figure 6.22), which came into being in January 2010,
is at a different scale:
The deal creates the third largest regional trading agreement by value
after the European Union and the North American Free Trade
Agreement, covering countries with mutual trade flows of $231bn
(€161bn) in 2008 and combined gross domestic product of about
$6,000bn … However, the deal remains short of genuine free trade.
The trade in goods agreement provides for each country to register
hundreds of sensitive goods on which tariffs will continue to apply, in
many cases until at least 2020.90
At the same time, a free trade agreement has been reach between ASEAN, Australia
and New Zealand. An agreement has also been negotiated with India to establish
an Indo-ASEAN free trade area by 2012.
The other major regional economic organization in East Asia is the Asia-Pacific
Economic Cooperation Forum (APEC), established in 1989 on the initiative of the
Australian government. Figure 6.23 shows the extremely diverse composition of
Canada
South Korea
Japan
Taiwan
China
Philippines
New Zealand
Australia
Papua New Guinea
Indonesia
Singapore
Brunei
Thailand
United
States
Mexico
Chile
Vietnam
Malaysia
Russia
Peru
Figure 6.23 The Asia-Pacific Economic Cooperation Forum (APEC)
06_Dicken-7E_Ch-06.indd 221 18/11/2014 11:01:59 AM
PART TWO PROCESSES OF GLOBAL SHIFT222
APEC. It includes not only the obvious East and South East Asian states themselves
(including China and Taiwan), but also Australia and New Zealand on the one hand
and the USA, Canada, Mexico, Peru and Chile on the other. However, APEC is, so
far, little more than a broadly based ‘forum’ and little real progress has been made in
fulfilling its stated goal of ‘open regionalism’. Particularly following the Asian finan-
cial crisis of 1997, APEC became increasingly criticised by Asian participants:
APEC’s failure to provide any meaningful response to the biggest eco-
nomic crisis in the Asia-Pacific region since 1945 made it, if not irrele-
vant, then less important for many Asian members … Increasingly, Asian
observers evaluated APEC as a tool of American foreign economic pol-
icy. And the resistance of Asian policy makers to a strengthened APEC
was caused by their fear of US dominance … APEC has not been suc-
cessful in creating a joint identity as the basis for further pan-Pacific
cooperation and the lack of tangible benefits has been progressively
criticized … APEC has failed to provide much needed political legiti-
macy for the wider regional liberal economic project.91
At its summit meeting in 2012, APEC’s 21 members promised to find ways of
stimulating economic growth but in rather vague ways.
This failure of APEC has led to various initiatives within East Asia to create a more
robust regional economic (and financial) framework. None, so far, has come to fruition.
Potential Transatlantic and Trans-Pacific Initiatives
The development of new regional trade agreements continues. For example, the
EU is discussing one such agreement with Japan (it already has a recent agree-
ment with Korea). The USA, likewise, continues to explore various bilateral trade
agreements. But the most ambitious proposals are those involving a possible US–
EU agreement and a US–Asia-Pacific agreement. Formal negotiations between
the EU and the USA began in early 2013 over a potential Transatlantic Trade and
Investment Partnership (TTIP):
A deal to abolish tariffs, remove regulatory barriers and create an inte-
grated marketplace could add about 0.5 per cent annually to national
income on either side of the Atlantic. It would also establish the US and
EU as the pre-eminent standard-setter for the rest of the world …
[However] getting rid of tariffs will be the easy bit … Delve deeper
into the worlds of competing standards and cultural preferences, intra-
company trade, competitive tax regimes or intellectual property rights
and defining a free trade area becomes almost a metaphysical exercise.92
Negotiations over a Trans-Pacific Partnership (TPP) agreement involve Australia,
Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
06_Dicken-7E_Ch-06.indd 222 18/11/2014 11:01:59 AM
THE STATE REALLY DOES MATTER 223
USA and Vietnam. Although less ambitious than the TTIP, it is likely to take some
considerable time to negotiate and implement. Of course, neither project may
actually happen, given the complexity of the politics (both domestic and interna-
tional) involved. The current atmosphere of distrust between the USA and others
over the revelations of the wholesale monitoring of communications by US intel-
ligence agencies (helped, to a degree, by the UK) certainly does not augur well.
This should remind us that, even though such projects are ostensibly economic in
focus, they are, like all such projects, fundamentally political.
NOTES
1 Weiss (1998: chapter 1).
2 This was the term coined by the novelist Tom Wolfe in The Bonfire of the Vanities
(1988).
3 Jessop (1994).
4 See Gilpin (2001), Gritsch (2005), Hirst et al. (2009), Hudson (2001), Jessop (2002),
Wade (1996), Weiss (1998, 2003).
5 Kelly (1999: 389–90; emphasis added).
6 Rodrik (2011).
7 Gritsch (2005: 2–3). Nye (2002) also addresses the question of ‘soft power’ in the
context of the geopolitical position of the USA.
8 Glassner (1993: 35–40).
9 Agnew and Corbridge (1995) and Taylor (1994) discuss the general notion of states
as ‘containers’ and the nature and significance of territoriality and space in geopolitics.
10 See Granovetter and Swedberg (1992), Lee (2009), Smelser and Swedberg (2005).
11 Terpstra and David (1991: 6).
12 Hofstede (1980).
13 A study of 700 managers across a large number of countries confirmed the persistence
of significant cultural differences (Financial Times, 15 October 2004). See also
Drogendijk and Slangen (2006).
14 Schwartz (1994), Drogendijk and Slangen (2006).
15 Yao (1997: 238).
16 Jacques (2012: chapter 5) provides an extensive discussion of these issues.
17 See Berger and Dore (1996), Brenner et al. (2010), Hall and Soskice (2001),
Hollingsworth and Boyer (1997), Peck and Theodore (2007), Whitley (1999, 2004).
18 Peck and Theodore (2007: 750–8).
19 Rothkopf (2012).
20 Hollingsworth and Boyer (1997: 266, 267–8).
21 Peck and Theodore (2007: 756).
22 Wolf (2008: 1).
23 Rothkopf (2012).
24 Cerny (1997: 251).
25 Hudson (2001: 48–9; emphasis added).
26 Hudson (2001: 76).
06_Dicken-7E_Ch-06.indd 223 18/11/2014 11:01:59 AM
PART TWO PROCESSES OF GLOBAL SHIFT224
27 Cerny (1991: 174).
28 Brookings Institution (2009), www.brookings.edu/articles/2009/03_g20_stimulus_
prasad.aspx.
29 Keynes (2007). See Skidelsky (2010).
30 Mortimore and Vergara (2004) and Mytelka and Barclay (2004) discuss FDI policies
with particular reference to developing countries.
31 Financial Times (25 April 2008).
32 Gilpin (2001: 201).
33 List (1928).
34 Mazzucato (2013) provides an excellent analysis. See also Chang (2011: chapter 12).
35 Mazzucato (2013: 3).
36 Peck (2001: 10).
37 Faux and Mishel (2000: 101).
38 See Gilpin (2001: chapter 7).
39 See Chorev (2007).
40 See, for example, Beath (2002).
41 Contributors to Vitols (2004) explore the extent to which the ‘German model’ is sustainable.
42 Gretschmann (1994: 471).
43 Accounts of Japanese economic policy are provided by Dore (1986), Johnson (1985),
Porter et al. (2000).
44 Financial Times (13 September 2013).
45 Mathews (2009: 9–10). See also Yeung (2014).
46 See, for example, Rodrik (2011).
47 Gereffi (1990: 18).
48 Gereffi (1990: 21).
49 Gereffi (1990: 21).
50 Gereffi (1990: 22).
51 ILO (2003, 2007a), Farole and Akinci (2011).
52 ILO (2003: 1).
53 ILO (2007a).
54 ILO (2003: 1).
55 ILO (2003: 2).
56 Douglass (1994: 543).
57 Yeung (2014) explores the relationship between East Asian developmental state poli-
cies and global production networks. Henderson (2011) and Studland (2013) discuss
variations in economic policy within East Asia.
58 Especially useful accounts of Korean industrialization policy are by Amsden (1989),
Chang (2007), Koo and Kim (1992), Pirie (2012), Wade (1990, 2004).
59 Yeung (2014: 85).
60 Koo and Kim (1992).
61 Wade (2004: 320). See also Amsden (1989).
62 See the detailed analyses provided by Chang (1998a), Pirie (2012).
63 Financial Times (17 July 2013).
64 Singapore’s developmental policies are discussed by Lall (1994), Ramesh (1995),
Rodan (1991), Yeung (1998, 2006a,b,c, 2014).
65 Yeung (2014: 86).
06_Dicken-7E_Ch-06.indd 224 18/11/2014 11:01:59 AM
THE STATE REALLY DOES MATTER 225
66 Yeung (1998: 392).
67 See Yeung (1998, 1999, 2006b,c).
68 Coe (2003b), Yeung (2006a).
69 Spence (2013) provides a comprehensive account of the development of modern
China. See also Benewick and Wingrove (1995), Crane (1990), Jacques (2012), Nolan
(2001), Zheng (2004).
70 Nolan (2001).
71 Yu Yongding, quoted in the Financial Times (23 January 2013).
72 BBC News Business (8 April 2013).
73 Mansfield and Milner (1999: 592).
74 Schiff and Winters (2003: 9).
75 Mansfield and Milner (1999: 595–602). Numbers in parentheses refer to pages in this
work.
76 Thornhill (2008).
77 www.europa.eu/lisbon_treaty/glance/index_en.html.
78 Financial Times (23 January 2013).
79 Cohen (2012: 689).
80 Grant (2012).
81 Lawrence (1996: 72–3).
82 Quoted in McConnell and MacPherson (1994: 179).
83 Financial Times (23 February 2005).
84 See Grugel (1996), Gwynne (1994), Kaltenthaler and Mora (2002).
85 This discussion of Mercosur is based upon Kaltenthaler and Mora (2002).
86 Kaltenthaler and Mora (2002: 92, 93).
87 Bowles (2002), Dieter and Higgott (2003), Haggard (1995), Hamilton-Hart (2003),
Higgott (1999).
88 Liao (1997: 150–1).
89 Narine (2008).
90 Financial Times (2 January 2010).
91 Dieter and Higgott (2003: 433).
92 Stephens (2013).
Want to know more about this chapter? Visit the companion website at
www.guilford.com/dickenGS7 for free access to author videos, suggested
reading and practice questions to further enhance your study.
06_Dicken-7E_Ch-06.indd 225 18/11/2014 11:01:59 AM
THE DEVELOPMENT OF
UNDERDEVELOPMENT
BY ANDRE GUNDER FRANK
We cannot hope to formulate adequate development theory
and policy for the majority of the world’s population who suf-
fer from underdevelopment without first learning how their
past economic and social history gave rise to their present
underdevelopment. Yet most historians study only the developed
metropolitan countries and pay scant attention to the colonial
and underdeveloped lands. For this reason most of our theo-
retical categories and guides to development policy have been
distilled exclusively from the historical experience of the Euro-
pean and North American advanced capitalist nations.
Since the historical experience of the colonial and under-
developed countries has demonstrably been quite different, avail-
able theory therefore fails to reflect the past of the under-
developed part of the world entirely, and reflects the past of
the world as a whole only in part. More important, our igno-
rance of the underdeveloped countries’ history leads us to as-
sume that their past and indeed their present resembles earlier
stages of the history of the now developed countries. This igno-
rance and this assumption lead us into serious misconcep-
tions about contemporary underdevelopment and development.
Further, most studies of development and underdevelopment fail
to take account of the economic and other relations between
the metropolis and its economic colonies throughout the history
of the world-wide expansion and development of the mercantilist
and capitalist system. Consequently, most of our theory fails to
explain the structure and development of the capitalist system as
a whole and to account for its simultaneous generation of under-
development in some of its parts and of economic development
in others.
Andre Gunder Frank, a frequent contributor to MR, is Visiting
Professor in Economics and History at Sir George Williams University in
Montreal.
17
MONTHLY REVIEW SEPTEMBER
19
66
It is generally held that economic development occurs in a
succession of capitalist stages and that today’s underdeveloped
countries are still in a stage, sometimes depicted as an original
stage of history, through which the now developed countries
passed long ago. Yet even a modest acquaintance with history
shows that underdevelopment is not original or traditional and
that neither the past nor the present of the underdeveloped coun-
tries resembles in any important respect the past of the now
developed countries. The now developed countries were never
v’ underdeveloped, though they may have been undeveloped. It is
also widely believed that the contemporary underdevelopment of
a country can be understood as the product or reflection solely
of its own economic, political, social, and cultural characteristics
or structure. Yet historical research demonstrates that contempo-
rary underdevelopment is in large part the historical product of
past and continuing economic and other relations between the
satellite underdeveloped and the now developed metropolitan
countries. Furthermore, these relations are an essential part of
the structure and development of the capitalist system on a
world scale as a whole. A related and also largely erroneous
view is that the development of these underdeveloped countries
and, within them of their most underdeveloped domestic areas,
must and will be generated or stimulated by diffusing capital,
institutions, values, etc., to them from the international and na-
tional capitalist metropoles. Historical perspective based on the
underdeveloped countries’ past experience suggests that on the
contrary in the underdeveloped countries economic development
can now occur only independently of most of these relations of
diffusion.
Evident inequalities of income and differences in culture
have led many observers to see “dual” societies and economies
in the underdeveloped countries. Each of the two parts is
supposed to have a history of its own, a structure, and a con-
temporary dynamic largely independent of the other. Supposed-
ly, only one part of the economy and society has been im-
portantly affected by intimate economic relations with the “out-
side” capitalist world; and that part, it is held, became modern,
capitalist, and relatively developed precisely because of this
contact. The other part is widely regarded as variously isolated,
18
DEVELOPMENT OF UNDERDEVELOPMENT
subsistence-based, feudal, or precapitalist, and therefore more
underdeveloped.
I believe on the contrary that the entire “dual society”
thesis is false and that the policy recommendations to which it
leads will, if acted upon, serve only to intensify and perpetuate
the very conditions of underdevelopment they are supposedly
designed to remedy.
A mounting body of evidence suggests, and I am confident
that future historical research will confirm, that the expansion
of the capitalist system over the past centuries effectively and
entirely penetrated even the apparently most isolated sectors
of the underdeveloped world. Therefore, the economic, political,
social, and cultural institutions and relations we now observe
there are the products of the historical development of the
capitalist system no less than are the seemingly more modern
or capitalist features of the national metropoles of these under-
developed countries. Analogously to the relations between de-
velopment and underdevelopment on the international level, the
contemporary underdeveloped institutions of the so-called back-
ward or feudal domestic areas of an underdeveloped country
are no less the product of the single historical process of capitalist
development than are the so-called capitalist institutions of the
supposedly more progressive areas. In this paper I should like to
sketch the kinds of evidence which support this thesis and at the
same time indicate lines along which further study and research
could fruitfully proceed.
II
The Secretary General of the Latin American Center for
Research in the Social Sciences writes in that Center’s journal:
“The privileged position of the city has its origin in the colonial
period. It was founded by the Conqueror to serve the same
ends that it still serves today; to incorporate the indigenous
population into the economy brought and developed by that
Conqueror and his descendants. The regional city was an instru-
ment of conquest and is still today an instrument of domina-
tion.”‘* The Instituto Nacional Indigenista (National Indian In-
* Footnotes are at the end of the article.
19
MONTHLY REVIEW SEPTEMBER 1966
stitute) of Mexico confirms this observation when it notes that
“the mestizo population, in fact, always lives in a city, a center
of an intercultural region, which acts as the metropolis of a
zone of indigenous population and which maintains with the
underdeveloped communities an intimate relation which links
the center with the satellite communities.”? The Institute goes
on to point out that “between the mestizos who live in the
nuclear city of the region and the Indians who live in the
peasant hinterland there is in reality a closer economic and
social interdependence than might at first glance appear” and
that the provincial metropoles “by being centers of intercourse
are also centers of exploitation.l”
Thus these metropolis-satellite relations are not limited to
the imperial or international level but penetrate and structure
the very economic, political, and social life of the Latin Ameri-
can colonies and countries. Just as the colonial and national
capital and its export sector become the satellite of the Iberian
(and later of other) metropoles of the world economic system,
this satellite immediately becomes a colonial and then a national
metropolis with respect to the productive sectors and population
of the interior. Furthermore, the provincial capitals, which thus
are themselvessatellites of the national metropolis-and through
the latter of the world metropolis-are in turn provincial centers
around which their own local satellites orbit. Thus, a whole
chain of constellations of metropoles and satellites relates all
parts of the whole system from its metropolitan center in Europe
or the United States to the farthest outpost in the Latin Ameri-
can countryside.
When we examine this metropolis-satellite structure, we
find that each of the satellites, including now-underdeveloped
Spain and Portugal, serves as an instrument to suck capital or
economic surplus out of its own satellites and to channel part
of this surplus to the world metropolis of which all are satellites.
Moreover, each national and local metropolis serves to impose
and maintain the monopolistic structure and exploitative rela-
tionship of this system (as the Instituto Nacional Indigenista of
Mexico calls it) as long as it servesthe interests of the metropoles
which take advantage of this global, national, and local structure
20
DEVElOPMENT OF UNDERDEVElOPMENT
to promote their own development and the enrichment of their
ruling classes.
These are the principal and still surviving structural char-
acteristics which were implanted in Latin America by the
Conquest. Beyond examining the establishment of this colonial
structure in its historical context, the proposed approach calls
for study of the development-and underdevelopment-of these
metropoles and satellites of Latin America throughout the fol-
lowing and still continuing historical process. In this way we
can understand why there were and still are tendencies in the
Latin American and world capitalist structure which seem to
lead to the development of the metropolis and the under-
development of the satellite and why, particularly, the satellized
national, regional, and local metropoles in Latin America find
that their economic development is at best a limited or under-
developed development.
III
That present underdevelopment of Latin America is the
result of its centuries-long participation in the process of world
capitalist development, I believe I have shown in my case
studies of the economic and social histories of Chile and
Brazil.’ My study of Chilean history suggests that the Conquest
not only incorporated this country fully into the expansion
and development of the world mercantile and later industrial
capitalist system but that it also introduced the monopolistic
metropolis-satellite structure and development of capitalism into
the Chilean domestic economy and society itself. This structure
then penetrated and permeated all of Chile very quickly. Since
that time and in the course of world and Chilean history during
the epochs of colonialism, free trade, imperialism, and the
present, Chile has become increasingly marked by the economic,
social, and political structure of satellite underdevelopment. This
development of underdevelopment continues today, both in
Chile’s still increasing satellization by the world metropolis and
through the ever more acute polarization of Chile’s domestic
economy.
The history of Brazil is perhaps the clearest case of both
21
MONTHLY REVIEW SEPTEMBER 1966
national and regional development of underdevelopment. The
expansion of the world economy since the beginning of the
sixteenth century successivelyconverted the Northeast, the Minas
Gerais interior, the North, and the Center-South (Rio de
Janeiro, Sao Paulo, and Parana) into export economies and
incorporated them into the structure and development of the
world capitalist system. Each of these regions experienced what
may have appeared as economic development during the period
of its respective golden age. But it was a satellite development
which was neither self-generating nor self-perpetuating. As the
market or the productivity of the first three regions declined,
foreign and domestic economic interest in them waned; and
they were left to develop the underdevelopment they live today.
In the fourth region, the coffee economy experienced a similar
though not yet quite as serious fate (though the development
of a synthetic coffee substitute promises to deal it a mortal
blow in the not too distant future). All of this historical evidence
contradicts the generally accepted theses that Latin America
suffers from a dual society or from the survival of feudal in-
stitutions and that these are important obstacles to its economic
development.
IV
During the First World War, however, and even more dur-
ing the Great Depression and the Second World War, Sao
Paulo began to build up an industrial establishment which is
the largest in Latin America today. The question arises whether
this industrial development did or can break Brazil out of the
cycle of satellite development and underdevelopment which has
characterized its other regions and national history within the
capitalist system so far. I believe that the answer is no.
Domestically the evidence so far is fairly clear. The development
of industry in Sao Paulo has not brought greater riches to the
other regions of Brazil. Instead, it converted them into internal
colonial satellites, de-capitalized them further, and consolidated
or even deepened their underdevelopment. There is little evi-
dence to suggest that this process is likely to be reversed in the
foreseeable future except insofar as the provincial poor migrate
22
DEVELOPMENT OF UNDERDEVELOPMENT
and become the poor of the metropolitan cities. Externally, the
evidence is that although the initial development of Sao Paulo’s
industry was relatively autonomous it is being increasingly
satellized by the world capitalist metropolis and its future de-
velopment possibilities are increasingly restricted.” This develop-
ment, my studies lead me to believe, also appears destined to
limited or underdeveloped development as long as it takes place
in the present economic, political, and social framework.
We must conclude, in short, that underdevelopment is not
due to the survival of archaic institutions and the existence of
capital shortage in regions that have remained isolated from the
stream of world history. On the contrary, underdevelopment was
and still is generated by the very same historical process which
also generated economic development: the development of
capitalism itself. This view, I am glad to say, is gaining adherents
among students of Latin America and is proving its worth in
shedding new light on the problems of the area and in affording
a better perspective for the formulation of theory and policy.”
The same historical and structural approach can also lead
to better development theory and policy by generating a series
of hypotheses about development and underdevelopment such as
those I am testing in my current research. The hypotheses are
derived from the empirical observation and theoretical assump-
tion that within this world-embracing metropolis-satellite struc-
ture the metropoles tend to develop and the satellites to under-
develop. The first hypothesis has already been mentioned above:
that in contrast to the development of the world metropolis
which is no one’s satellite, the development of the national and
other subordinate metropoles is limited by their satellite status.
It is perhaps more difficult to test this hypothesis than the fol-
lowing ones because part of its confirmation depends on the test
of the other hypotheses. Nonetheless, this hypothesis appears to
be generally confirmed by the non-autonomous and unsatis-
factory economic and especially industrial development of Latin
America’s national metropoles, as documented in the studies al-
ready cited. The most important and at the same time most
23
MONTHLY REVIEW SEPTEMBER 1966
confirmatory examples are the metropolitan regions of Buenos
Aires and Sao Paulo whose growth only began in the nineteenth
century, was therefore largely untrammelled by any colonial
heritage, but was and remains a satellite development largely
dependent on the outside metropolis, first of Britain and then of
the United States.
A second hypothesis is that the satellites experience their
greatest economic development and especially their most classic-
ally capitalist industrial development if and when their ties to
their metropolis are weakest. This hypothesis is almost dia-
metrically opposed to the generally accepted thesis that develop-
ment in the underdeveloped countries follows from the greatest
degree of contact with and diffusion from the metropolitan
developed countries. This hypothesis seems to be confirmed by
two kinds of relative isolation that Latin America has experienced
in the course of its history. One is the temporary isolation caused,
by the crises of war or depression in the world metropolis. Apart
from minor ones, five periods of such major crises stand out and
seen to confirm the hypothesis. These are: the European (and
especially Spanish) Depression of the seventeenth century, the
Napoleonic Wars, the First World War, the Depression of the
19
30
‘s, and the Second World War. It is clearly established and
generally recognized that the most important recent industrial
development-especially of Argentina, Brazil, and Mexico, but
also of other countries such as Chile-has taken place precisely
during the periods of the two World Wars and the intervening
Depression. Thanks to the consequent loosening of trade and
investment ties during these periods, the satellites initiated mark-
ed autonomous industrialization and growth. Historical research
demonstrates that the same thing happened in Latin America
during Europe’s seventeenth-century depression. Manufacturing
grew in the Latin American countries, and several of them such
as Chile became exporters of manufactured goods. The Na-
poleonic Wars gave rise to independence movements in Latin
America, and these should perhaps also be interpreted as con-
firming the development hypothesis in part.
The other kind of isolation which tends to confirm the
second hypothesis is the geographic and economic isolation of
24
DEVELOPMENT OF UNDERDEVELOPMENT
regions which at one time were relatively weakly tied to and
poorly integrated into the mercantilist and capitalist system. My
preliminary research suggests that in Latin America it was these
regions which initiated and experienced the most promising
self-generating economic development of the classical industrial
capitalist type. The most important regional cases probably are
Tucuman and Asuncion, as well as other cities such as Mendoza
and Rosario, in the interior of Argentina and Paraguay during
the end of the eighteenth and the beginning of the nineteenth
centuries. Seventeenth and eighteenth century Sao Paulo, long
before coffee was grown there, is another example. Perhaps
Antioquia in Colombia and Puebla and Queretaro in Mexico
are other examples. In its own way, Chile was also an example
since, before the sea route around the Hom was opened, this
country was relatively isolated at the end of the long voyage
from Europe via Panama. All of these regions became manu-
facturing centers and even exporters, usually of textiles, during
the periods preceding their effective incorporation as satellites
into the colonial, national, and world capitalist system.
Internationally, of course, the classic case of industrializa-
tion through non-participation as a satellite in the capitalist
world system is obviously that of Japan after the Meiji Restora-
tion. Why, one may ask, was resource-poor but unsatellized
Japan able to industrialize so quickly at the end of the century
while resource-rich Latin American countries and Russia were
not able to do so and the latter was easily beaten by Japan in
the War of 1904 after the same forty years of development
efforts? The second hypothesis suggests that the fundamental
reason is that Japan was not satellized either during the
Tokugawa or the Meiji period and therefore did not have its
development structurally limited as did the countries which were
so satellized.
VI
A corollary of the second hypothesis is that when the
metropolis recovers from its crisis and re-establishes the trade
and investment ties which fully re-incorporate the satellites into
the system, or when the metropolis expands to incorporate pre-
25
MONTHLY REVIEW SEPTEMBER 1966
viously isolated regions into the world-wide system, the previous
development and industrialization of these regions is choked off
or channelled into directions which are not self-perpetuating and
promising. This happened after each of the five crises cited
above. The renewed expansion of trade and the spread of eco-
nomic liberalism in the eighteenth and nineteenth centuries
choked off and reversed the manufacturing development which
Latin America had experienced during the seventeenth century,
and in some places at the beginning of the nineteenth.
After the First World War, the new national industry of Brazil
suffered serious consequences from American economic invasion.
The increase in the growth rate of Gross National Product and
particularly of industrialization throughout Latin America was
again reversed and industry became increasingly satellized after
the Second World War and especially after the post-Korean
War recovery and expansion of the metropolis. Far from having
become more developed since then, industrial sectors of Brazil
and most conspicuously of Argentina have become structurally
more and more underdeveloped and less and less able to
generate continued industrialization and/or sustain development
of the economy. This process, from which India also suffers,
is reflected in a whole gamut of balance-of-payments, inflation-
ary, and other economic and political difficulties, and promises
to yield to no solution short of far-reaching structural change.
Our hypothesis suggests that fundamentally the same pro-
cess occurred even more dramatically with the incorporation into
the system of previously unsatellized regions. The expansion of
Buenos Aires as a satellite of Great Britain and the introduction
of free trade in the interest of the ruling groups of both
metro poles destroyed the manufacturing and much of the re-
mainder of the economic base of the previously relatively
prosperous interior almost entirely. Manufacturing was destroyed
by foreign competition, lands were taken and concentrated into
latifundia by the rapaciously growing export economy, intra-
regional distribution of income became much more unequal, and
the previously developing regions became simple satellites of
Buenos Aires and through it of London. The provincial centers
did not yield to satellization without a struggle. This metropolis-
26
DEVELOPMENT OF UNDERDEVELOPMENT
satellite conflict was much of the cause of the long political and
armed struggle between the Unitarists in Buenos Aires and the
Federalists in the provinces, and it may be said to have been the
sole important cause of the War of the Triple Alliance in which
Buenos Aires, Montevideo, and Rio de Janeiro, encouraged and
helped by London, destroyed not only the autonomously de-
veloping economy of Paraguay but killed off nearly all of its
population which was unwilling to give in. Though this is no
doubt the most spectacular example which tends to confirm the
hypothesis, I believe that historical research on the satellization
of previously relatively independent yeoman-farming and in-
cipient manufacturing regions such as the Caribbean islands will
confirm it further.’ These regions did not have a chance against
the forces of expanding and developing capitalism, and their
own development had to be sacrificed to that of others. The
economy and industry of Argentina, Brazil, and other countries
which have experienced the effects of metropolitan recovery
since the Second World War are today suffering much the same
fate, if fortunately still in lesser degree.
VII
A third major hypothesis derived from the metropolis-
satellite structure is that the regions which are the most under-
developed and feudal-seeming today are the ones which had
the closest ties to the metropolis in the past. They are the regions
which were the greatest exporters of primary products to and
the biggest sources of capital for the world metropolis and which
were abandoned by the metropolis when for one reason or an-
other business fell off. This hypothesis also contradicts the
generally held thesis that the source of a region’s underdevelop-
ment is its isolation and its pre-capitalist institutions.
This hypothesis seems to be amply confirmed by the former
super-satellite development and present ultra-underdevelopment
of the once sugar-exporting West Indies, Northeastern Brazil,
the ex-mining districts of Minas Gerais in Brazil, high-
land Peru, and Bolivia, and the central Mexican states of
Guanajuato, Zacatecas, and others whose names were made
world famous centuries ago by their silver. There surely are no
27
MONTHLY REVIEW SEPTEMBER 1966
major regions in Latin America which are today more cursed
by underdevelopment and poverty; yet all of these regions, like
Bengal in India, once provided the life blood of mercantile and
industrial capitalist development-in the metropolis. These re-
gions’ participation in the development of the world capitalist
system gave them, already in their golden age, the typical struc-
ture of underdevelopment of a capitalist export economy. When
the market for their sugar or the wealth of their mines dis-
appeared and the metropolis abandoned them to their own
devices, the already existing economic, political, and social
structure of these regions prohibited autonomous generation of
economic development and left them no alternative but to turn
in upon themselves and to degenerate into the ultra-underde-
velopment we find there today.
VIII
These considerations suggest two further and related hypo-
theses. One is that the latifundium, irrespective of whether it
appears as a plantation or a hacienda today, was typically born
as a commercial enterprise which created for itself the institu-
tions which permitted it to respond to increased demand in the
world or national market by expanding the amount of its land,
capital, and labor and to increase the supply of its products.
The fifth hypothesis is that the latifundia which appear isolated,
subsistence-based, and semi-feudal today saw the demand for
their products or their productive capacity decline and that they
are to be found principally in the above-named former agri-
cultural and mining export regions whose economic activity
declined in general. These two hypotheses run counter to the
notions of most people, and even to the opinions of some
historians and other students of the subject, according to whom
the historical roots and socio-economiccauses of Latin American
latifundia and agrarian institutions are to be found in the
transfer of feudal institutions from Europe and/or in economic
depression.
The evidence to test these hypotheses is not open to easy
general inspection and requires detailed analyses of many cases.
Nonetheless, some important confirmatory evidence is available.
28
DEVELOPMENT OF UNDERDEVELOPMENT
The growth of the latifundium in nineteenth-century Argentina
and Cuba is a clear case in support of the fourth hypothesis and
can in no way be attributed to the transfer of feudal institutions
during colonial times. The same is evidently the case of the post-
revolutionary and contemporary resurgence of latifundia par-
ticularly in the North of Mexico, which produce for the Ameri-
can market, and of similar ones on the coast of Peru and the
new coffee regions of Brazil. The conversion of previously yeo-
man-farming Caribbean islands, such as Barbados, into sugar-
exporting economies at various times between the seventeenth
and twentieth centuries and the resulting rise of the latifundia in
these islands would seem to confirm the fourth hypothesis as
well. In Chile, the rise of the latifundium and the creation of the
institutions of servitude which later came to be called feudal
occurred in the eighteenth century and have been conclusively
shown to be the result of and response to the opening of a
market for Chilean wheat in Lima.” Even the growth and
consolidation of the latifundium in seventeenth-century Mexico
-which most expert students have attributed to a depression
of the economy caused by the decline of mining and a shortage
of Indian labor and to a consequent turning in upon itself and
ruralization of the economy-occurred at a time when urban
population and demand were growing, food shortages became-
acute, food prices skyrocketed, and the profitability of other
economic activities such as mining and foreign trade declined.”
All of these and other factors rendered hacienda agriculture
more profitable. Thus, even this case would seem to confirm
the hypothesis that the growth of the latifundium and its feudal-
seeming conditions of servitude in Latin America has always
been and still is the commercial response to increased demand
and that it does not represent the transfer or survival of alien
institutions that have remained beyond the reach of capitalist
development. The emergence of latifundia, which today real-
ly are more or less (though not entirely) isolated, might
then be attributed to the causes advanced in the fifth hypo-
thesis-i-i.e., the decline of previously profitable agricultural
enterprises whose capital was, and whose currently produced
economic surplus still is, transferred elsewhere by owners and
29
MONTHLY REVIEW SEPTEMBER 1966
merchants who frequently are the same persons or families.
Testing this hypothesis requires still more detailed analysis, some
of which I have undertaken in a study on Brazilian agriculture.’?
IX
All of these hypotheses and studies suggest that the global
extension and unity of the capitalist system, its monopoly struc-
ture and uneven development throughout its history, and the
resulting persistence of commercial rather than industrial capital-
ism in the underdeveloped world (including its most industrially
advanced countries) deserve much more attention in the study
of economic development and cultural change than they have
hitherto received. Though science and truth know no national
boundaries, it is probably new generations of scientists from
the underdeveloped countries themselves who most need to, and
best can, devote the necessary attention to these problems and
clarify the process of underdevelopment and development. It is
their people who in the last analysis face the task of changing
this no longer acceptable process and eliminating this miserable
reality.
They will not be able to accomplish these goals by im-
porting sterile stereotypes from the metropolis which do not cor-
respond to their satellite economic reality and do not respond
to their liberating political needs. To change their reality they
must understand it. For this reason, I hope that better confirma-
tion of these hypotheses and further pursuit of the proposed
historical, holistic, and structural approach may help the peoples
of the underdeveloped countries to understand the causes and
eliminate the reality of their development of underdevelopment
and their underdevelopment of development.
30
DEVELOPMENT OF UNDERDEVELOPMENT
FOOTNOTE5
1. America Latina, Afio 6, No.4, October-December 1963, p. 8.
2. Instituto Nacional Indigenista, Los centros coordinadores indigenistas,
Mexico, 1962, p. 34.
3. Ibid., pp. 33-34, 88.
4. “Capitalist Development and Underdevelopment in Chile” and “Capi-
talist Development and Underdevelopment in Brazil” in Capitalism and
Underdevelopment in Latin America, to be published soon by Monthly
Review Press.
5. Also see, “The Growth and Decline of Import Substitution,” Economic
Bulletin for Latin America, New York, IX, No.1, March 1964; and
Celso Furtado, Dialectica do Desenvolvimiento, Rio de Janeiro, Fundo
de Cultura, 1964.
6. Others who use a similar approach, though their ideologies do not
permit them to derive the logically following conclusions, are Anibal
Pinto S.C., Chile: Un caso de desarrollo frustrado, Santiago, Editorial
Universitaria, 1957; Celso Furtado, A [ormaqao econ6mica do Brasil,
Rio de Janeiro, Fundo de Cultura, 1959 (recently translated into
English and published under the title The Economic Growth of Brazil
by the University of California Press); and Caio Prado Junior, Historia
Econ6mica do Brasil, Sao Paulo, Editora Brasiliense, 7th ed., 1962.
7. See for instance Ramon Guerra y Sanchez, Azucar y Poblaci6n en las
Antillas, Havana 1942, 2nd ed., also published as Sugar and Society
in the Caribbean, New Haven, Yale University Press, 1964.
8. Mario Gongora, Origen de los “inquilinos” de Chile central, Santiago,
Editorial Universitaria, 1960; Jean Borde and Mario Gongora, Euolu-
ci6n de la propiedad rur.al en el Valle del Puango, Santiago, Instituto
de Sociologia de la Universidad de Chile; Sergio Sepulveda, El trigo
chileno en el mercado mundial; Santiago, Editorial Universitario, 1959.
9. Woodrow Borah makes depression the centerpiece of his explanation
in “New Spain’s Century of Depression,” Ibero-Americana, Berkeley,
No. 35, 1951. Francois Chevalier speaks of turning in upon itself in
the most authoritative study of the subject, “La formacion de los
grandes latifundios en Mexico,” Mexico, Problemas Agrlcolas e In-
dustriales de Mexico, VIII, No.1, 1956 (translated from the French
and recently published by the University of California Press). The
data which provide the basis for my contrary interpretation are sup-
plied by these authors themselves. This problem is discussed in my
“Con que modo de produccion convierte la gallina maiz en huevos
de oro?” El Gallo Ilustrado, Suplemento de El Dla, Mexico, Nos. 175
and 179, October
31
and November 28, 1965; and it is further
analyzed in a study of Mexican agriculture under preparation by the
author.
10. “Capitalism and the Myth of Feudalism in Brazilian Agriculture,” in
Capitalism and Underdevelopment in Latin America, cited in footnote
4 above.
31
Pessimism of the Intellect, Pessimism of the
Will? A Response to Gunder Frank*
Henry Bernstein and Howard Nicholas
The contribution of the work of Andre Cunder Frank to debates
about the nature of Third World ‘underdevelopment’ over the past
twenty years is well known, and its significance widely acknow-
ledged. The arguments that he has consistently put forward have
been assimilated into the broad mainstream of contemporary anti-
imperialist ideology. Also well known are a number of criticisms of
the approach of Frank and other writers of the ‘dependency’
school. The extension of Frank’s influential version of dependency
theory to the current recession in the world economy and its effects
for the Third World, provides an opportunity to reconsider his
position, with particular reference to its political and ideological
implications. This is the principal focus of our response, which we
begin with a brief resume of Frank’s main theses and of criticisms
of their theoretical and methodological bases.
FRANK’S THESIS A N D ITS CRITIQUE
The following points summarize the main themes and conclusions
of Frank’s argument.
1 . Frank’s theory is concerned, above all, with the distribution of
the surplus product (or ‘economic surplus’, Frank 1975) between
*A. Gunder Frank: ‘Global Crisis and Transformation’, Developmen1 ond Change.
Vol. 14. 3 , 3 2 3 – 4 6 .
Developmenr and Change (SAGE. London. Beverly Hills and New Delhi).
Vol. 14 I 1 983). 609-624
610 Henry Bernsrein and Howard Nicholas
countries or groups of countries. National economies compete to
maximize surplus appropriation, and the extent to which they are
able t o d o so rests on their possession (or lack of possession) of
certain types of monopoly power in international economic
relations. Successful surplus appropriation is the key condition
of accumulation and hence development, although other factors
also have a role, for example, adequate levels of effective
demand and technical change.
2. While all countries were originally ‘undeveloped’. the advanced
capitalist countries (DCs) were able t o achieve a path of
(‘normal’) capitalist development denied to the countries of the
Third World (UDCs). The two categories can be grouped in
terms of ‘metropole’ and ‘satellite’ or ‘centre’ and ‘periphery’.
3. The UDCs were actively underdeveloped as a consequence of
their forced integration with the capitalist world economy,
through which they became exporters of primary products (and
also sources of effective demand for exports from the DCs). The
economies of UDCs are locked into a structural relation of
dependence on those of the DCs, whose reproduction needs they
are compelled to satisfy. This occurs through a variety of
mechanisms – international trade (unequal exchange), invest-
ment, aid, technology transfer, transfer pricing etc. – the result
of which is a ‘drain’ of surplus from UDCs t o DCs, thereby
restricting the accumulation and development of the former.
4. It follows that ‘de-linking’ f r o m the capitalist world economy is
an indispensable condition of the development of UDCs,
allowing them to retain their surplus for accumulation and to
provide a market to encourage growth and technical change, free
from international competition dominated by the monopoly
power of DCs.
The following points summarize some of the main criticisms of
Frank’s thesis.
1. In Frank’s work capitalism is understood primarily as a system
of exchange relations, above all those of international exchange.
This has important implications because the obverse of defining
(capitalist) underdevelopment by integration with the world
market, is to define (socialist) development by de-linking and
autarky.
2. Closely linked to this preoccupation with exchange relations (as
the means of distribution of the ‘surplus’) is the use of countries,
or groups of countries, as the units of analysis of international
economy – and indeed, one could say, as its subjects or ‘actors’.
A Response lo Gunder Frank 61 I
3. Within this framework, accumulation is seen as a quantitative
process: the amassing of goods and money. The historical
‘drama’ of accumulation is played o u t between countries on the
‘stage’ of the international economy.
4. Together w i t h a strongly mechanistic methodology (on which
more later), Frank’s mode of argument encourages what one
could call a ‘puppet master’ view of imperialism. Not only does
this deny the dynamics of class and popular struggle w i t h i n
UDCs, and the specific contradictions they express, but it also
and necessarily produces a generalized pessimism about the
prospects for socialism. Indeed, as we shall argue, it is the lack of
any adequate conception of class contradictions and of political
struggle in Frank’s work that has the most dangerous effects.
I n o u r view, these lines o f criticism have been most effectively
formulated and elaborated w i t h i n an avowedly Marxist framework
(Brenner 1977, Leys 1977, Bernstein 1979, among ot hers).
However, i t is clear that Frank is not a Marxist nor has he ever
claimed to be one. To criticize his work for this reason, then. may
seem beside the point. On the other hand, there are several counter-
arguments to this. First, to propose a theory of the history of
(global) capitalist development, and to argue for socialism as the
only way ahead for the development of UDCs. is to enter a terrain
already occupied by several generations of Marxist thinkers and
parties, and is implicitly to contest their contributions.’ Second, as
Frank’s w o r k is committed to the needs of contemporary anti-
imperialist struggle (similarly a preoccupation of Marxists) i t can be
assessed from the viewpoint of these needs, to see how effectively i t
contributes theoretical and ideological resources to the struggle. I t
may be found wanting in this respect, independently of the claims
of the Marxist tradition. The latter, however, does have its own
claims. and this leads to the third point. Marxism has long been
concerned with the issucs which Frank addresses, and i t can claim
that the method of historical materialism is better equipped to
inform struggles for the same goals that Frank believes in.
The perspective and method of historical materialism can be con-
trasted with that of Frank i n relation to the kinds of criticism noted
above.
I . Capitalism is a particular mode of production. constituted
through distinctive relations of production which give rise to
distinctive forms of class and popular struggle. The distinctive
contradictions of the history of capitalism include the
mechanisms of uneven and combined development, determined
612 Henry Bermrein and Howard Nicholas
by the fundamental contradiction of the relationship between
capital and labour (which does not have to take in all cases the
immediate form of fully proletarianized ‘free’ wage labour; see
Banaji 1977, Gibbon & Neocosmos 1983).
2. Accordingly, the focus of Marxist analysis is on class and other
social categories constituted through antagonistic relationships
of exploitation and oppression. These include relations of
domination and subordination in the sphere of gender, and in the
sphere of the ‘national question’. For Marxists the national
question is generated by the contradictions of capitalism, and has
to be assessed from the viewpoint of the struggle for socialism.
National economies and states are not the primary units of
analysis and historical subjects that they are for Frank, but
arenas of class struggle with their own specific articulations and
mediations. The latter, of course, are subject to determination by
the dynamics and contradictions of world capitalist economy,
but this is neither an exclusive nor a one-directional
determination.
3. Accumulation is a social process, marked by struggles between
capital and non-capitalist producers (‘primitive accumulation’),
and between capital and the working class. Accumulation within
the transitional period of socialist construction is also necessarily
a process with its own contradictions and struggles (a point we
shall come back to).
4. Class and popular struggles affect accumulation processes within
national economies and internationally, as well as being affected
by them. To grasp the significance of these struggles (which is
systematically if unwittingly devalued by Frank’s ‘puppet
master’ view of imperialism, in which the ‘external’ deter-
mination explains everything) requires a dialectical method
lacking in Frank’s work.’ Even more important than its implica-
tions for the analysis of capitalist development/underdevelop-
ment, is its effects for understanding struggles for national
liberation and for socialism, and the criteria used to assess them.
The ‘all or nothing’ quality of the binary oppositions of Frank’s
‘structuralist’ economics (de-linking and autarky vs world
market integration and dependence) provides no means, and
leaves no space, for getting to grips with the complexities and
contradictions o f socialist construction in particular conditions.
Major experiences of mass struggle, and the lessons to be gained
from them, are ‘written off‘ by a view of socialism which renders
i t synonymous with withdrawal from the capitalist world
A Response 10 Gunder Frank 613
economy. This can only lead to an ever-growing list of countries
which failed to ‘pass the test’, thus reinforcing defeatism and
pessimism.
This will be pursued further as we consider more closely Frank’s
analysis of ‘global crisis and transformation’.
FRANK O N GLOBAL CRISIS A N D TRANSFORMATION
It is striking that Frank provides no systematic explanation of the
cuuses of the present crisis, also a notable omission in his book on
the crisis of world economy (Frank 1980). The latter contains a few
vague references to ‘the rising organic composition of capital’ (a
curious appropriation of Marxist vocabulary by a non-Marxist)
and to ‘long waves’ in its first chapter, and thereafter there is
virtually no reference to the causes of crisis. It can be inferred from
his general argument, however, that capitalist crises are caused
primarily by increased costs of production – what may be
characterized as a neo-Ricardian position (Fine & Harris 1979: ch.
5). Certainly, rising costs of production and their effects for rates
of profit and accumulation are the predominant manifestation of
the crisis for Frank. Accordingly, responses by capital to the crisis
are characterized as various ways of reducing the costs of pro-
duction, including both labour costs and the costs of raw materials.
In the advanced capitalist countries, the response is seen in
distributional terms: shifting distribution in favour of capital
through cuts in public spending (at least on social consumption, if
not on military and police forces) and reduction in levels of real
wages, facilitated by a general political shift to the right. Marxist
criticisms of the limitations of neo-Ricardian analysis of crisis are
well established (Fine & Harris 1976, 1979), and we need only note
their relevance to Frank’s argument briefly. He is unable to analyze
crisis as an inherent outcome of the dynamics of capitalist accumu-
lation, and its contradictions rooted in the capital relation itself.
Because he sees accumulation as a quantitative phenomenon, with
the relevance of classes limited to their role in distribution (and
demand), Frank views crisis as resulting from a lack of technical
change in production in the face of conflict over distribution. Mass
unemployment is also seen primarily in terms of distribution: it is
manipulated by capital t o weaken the bargaining power of workers
over wages. For Marxists the massive expansion of the reserve army
of labour is, i f anything, even more important as a weapon in class
614 Henry Bernsrein und Howurd Nicholus
struggle over the restructuring of production. The introduction of
new technologies and work practices requires an offensive against
the capacity of workers to resist forms of control imposed on them
by the capitalist labour process itself.
In Frank’s account, crisis appears in principle as both resolvable
and avoidable. I t is resolvable through the introduction of new
technologies and the reduction of costs of production, and avoid-
able through the imposition of some kind of ( d e f u c f o ) domestic
and international incomes policy, together with state sponsorship
of technological change and diffusion (within and between
countries).
The role of UDCs in the response of metropolitan capital to the
crisis is primarily as a supplier of cheap labour, whether directly to
(export oriented) industries relocated in the Third World or to the
production of primary commodities for the world market (export
production vs import-substitution for the internal market). This
argument, in fact, does not distinguish the role of UDCs in a period
of crisis from their role in the capitalist world economy during
periods of ‘boom’: what is demanded of them now is essentially the
same as before only, perhaps, more so. The ‘before’, i t should be
remembered, comprises five centuries of world capitalist economy
marked by an essential structural continuity as far as ‘world
system’ theorists are concerned. Frank himself expresses this:
The new dependent export-led growth of manufacturing and agribusiness
production for the world market are i n no wu.v signiJicunrly di’j-erenr from the old
raw materials export-led growth which underdeveloped the Third World in /hejirsr
pluce (Frank 1983: 3 3 5 ; our italics).
I t follows that the two responses identified by Frank as available
to UDCs and socialist countries – ‘acceptance’ or ‘rejection’ –
can not be specified as responses to the demands of the metropole
at any time. Bearing this in mind, we shall briefly consider Frank’s
description of the ‘acceptance’ response and its effects, and then
his description of ‘rejection’ and de-linking.
The acceptance response (further integration in the world
capitalist economy) is discussed mostly in relation to the Newly
Industrializing Countries (NICs) of South Korea, Taiwan, Hong
Kong, Singapore, Brazil and Mexico. Frank’s aim is to show that
despite their impressive rates o f industrialization and economic
growth more generally, they d o not constitute a generalizable,
viable or desirable ‘model’ of development for other UDCs to
emulate. I n criticizing Frank it is-not necessary to endorse the
A Response lo Gunder Frank 612
recent experience of the NlCs as providing a positive ‘model’
(which is more the position of Warren 1980). Our position is rather
that the significance of those experiences cannot be adequately
assessed by Frank’s methodology and the criteria i t employs. Our
disagreement entails very basic issues of theory and historical
method which can only be briefly summarized here (for fuller
discussion see Bernstein 1979, 1982).
Frank’s conception of ‘underdevelopment’ is derived from an
underlying notion of ‘normal’ capitalist development historically
realized in the metropole. At the same time, the capitalist develop-
ment of the metropole required the formation of a ‘world system’
that denies the possibility of development to the UDCs. Whatever
changes (even ‘transformations’ in Frank’s term) occur in the
latter, they can never replicate the pattern of development of the
DCs. This is essentially a tautology with a negative (and not very
illuminating) punch-line: history does not repeat itself. That the
industrialization of certain countries at certain times influences the
conditions of industrialization in other countries subsequently is a
perception neither unique to the ‘world system’ approach, n o r a
demonstration of its ‘scientific’ character. That the Marxist
historian Eric Hobsbawm was able to analyze the specificity of
Britain’s industrial revolution ‘without the benefit of “world
system analysis”’ (as Frank puts i t . 1983: 332) is hardly surprising.
Nor is it surprising that a non-Marxist historian Alexander Ger-
schenkron (1952, 1962) produced a still rewarding discussion of the
ways in which one ‘generation’ of capitalist industrialization
changes the conditions for the next.
All that Frank is saying is that capitalist development of the
NICs neither (i) leads to ‘relatively autonomous and self-propelling
technological development based on national resources and
capacities’ (1983: 335) (an accolade bestowed uniquely on North
Korea among the dozens of countries he refers to), nor ( i i ) delivers
the goods of full employment, satisfaction of basic needs, equaliza-
tion of income, and so on. But neither of these is what capitalist
development means. I t means the accumulation of capital and the
development of the productive forces through a distinctive mode of
exploitation, and the class struggles it generates. The types of
questions that socialists need to investigate are: what are the ‘trans-
formations’ that have occurred in the NICs? How have they
changed the conditions of class and popular struggle? What are
their implications for political organization and programmes,
strategy and tactics?
616 Henry Bernsrein and Howard Nicholas
These are not questions that can be answered according to pre-
packaged o r deductive formulas – and that is precisely the point.
Frank’s theory provides no means of investigating the specificity of
particular social formations and sites of struggle within the
capitalist world economy, characterized as it is by a basic structural
dualism (metropole/satellite, centrelperiphery) and a fundamental
continuity over five centuries. The dead weight of Frank’s ‘world
system determinism’ either negates specificity (all UDCs are
ultimately trapped in the same blind alley), or can only construct
specificity in an ad hoc and empiricist fashion. This is clearly
illustrated in his assertion of the ‘exceptionalism’ of the Asian
‘Gang of Four’ NICs, as Frank feels it necessary to distinguish
them from the rest of the (theoretically) undifferentiated periphery
(pp. 3 3 1 f f ) .
His discussion of the ‘acceptance’ response (Ibidem) of UDCs
can only provide negative conclusions: ‘acceptance’ may provide a
limited avenue of growth for a limited number of UDCs, and it
cannot provide ‘real’ development for any UDC. The experience of
the NICs fails the test of development according to both
nationalism and socialism. ‘Dependence’ is the key term in the
nationalist lexicon because industrialization and accumulation
cannot connote ‘real’ development, if they are considered to be
determined by metropolitan capital as a means of maximizing
‘surplus drain’. As Anne Phillips pointed out, the ‘national
capitalist’ response was rejected by dependency theorists nor
because it is capitalist but because it is insufficiently ‘nafional’
(1977: 19). The nationalist reaction to imperialism, therefore,
cannot provide a revolutionary critique of capitalism of the kind
required by the struggle for socialism.
Furthermore, it is only confusing to dismiss capitalist develop-
ment, as Frank does, because it fails to d o what we believe
socialism should d o for human emancipation. The result is a
moralistic and utopian critique of poverty, misery, injustice and
oppression. I t completely misses the point that these widespread
phenomena may manifest the ‘success’ of capitalist development
rather than its ‘failure’, expressing the contradictions through
which capitalism develops.
The ‘transformations’ experienced by the NlCs encompass
simultaneously (i) new forms of ‘marginalization’ and oppression
(emphasized by Frank), (ii) major developments of internal
productive linkages, of the internal market, and of indigenous
capital accumulation (Frank’s empirical generalizations to the
A Response 10 Gunder Frunk 617
contrary are inaccurate),’ and (iii), most importantly, massive pro-
letarianization and urbanization. The significance of the last for
generating new forms of class and popular struggle – in short, new
political possibilities – is altogether lost in the story as Frank tells
i t . This is the political point that we shall carry forward to our
discussion o f Frank’s account of the ‘rejection’ response of UDCs
and socialist countries (p. 331).
The extension of Frank’s theory to the current period of crisis
contains no surprises, as far as the ‘acceptance’ response is
concerned. What he says about the effects of world economy
integration for UDCs in the context of 1983 is familiar from what
he said in the 1960s. The extension of his discussion to take in
‘rejectionist’ responses (including socialism) is more novel (pp. 338 ff).
I t is also, in our view, even more confused and politically dangerous.
In the last part of his paper, socialism appears more or less
synonymous with ( i ) de-linking from the world economy, plus ( i i )
the redistribution of political power together with popular
participation (p. 342). The inadequacies of these (vague) notions
for assessing the record of socialism (and of UDCs that have
followed a ‘rejectionist’ line at certain times) is borne out in
Frank’s ad hoc and impressionistic judgements. First, i t is not clear
to what extent countries termed socialist satisfy these criteria; for
example, Frank states that ‘the Soviet Revolution certainly did not
bring the Russian proletariat to power’ (p. 345). One may also
inquire (and genuinely, because we d o not know) about the role of
popular participation in North Korea development.
Second, while the achievements of socialism are registered in
terms of (an initial) de-linking, increasing production, and satisfy-
ing basic needs, socialist economies are seen as trapped in low levels
of productivity (he does not explain why). This impels them to turn
to the West for technology (1983: 345). and thus draws them into
re-linking with the capitalist world economy. This both threatens
the social gains they have made, and entails the danger of a
transition to capitalism (which Frank thinks is occurring in Eastern
Europe) (p. 345). The practical difference between socialist
countries and non-socialist but ‘progressive’ UDCs appears only as
one of degree. Attempts by the latter to de-link are nipped in the
bud sooner, and re-integration with the world economy imposed on
them more easily.
The general conclusion is necessarily a gloomy one. Frank refers
t o the ‘real economic limitations. social costs and political short-
comings of both the integrationist and rejectionist options – and
618 Henry Bernslein and Howard Nicholas
the failure of Marxist theory and socialist models in the Soviet
Union, China and elsewhere to offer sufficiently persuasive
alternatives’ (p. 341; our e m p h a ~ i s ) . ~ He also points out that the
‘very fact that de-linking is not only a policy that is attempted by
progressive governments but is also an arm that is used against the
progressive governments, gives cause for reflection about the
rational utility of de-linking in the world today’ (p. 343).
We argue that Frank’s ability to assess the nature and signifi-
cance of capitalist development is limited by the lack of adequate
conceptions of class contradiction and struggle. The same applies
to his assessment of socialism. The meaning of the latter for Frank
is effectively exhausted by the existence of progressive regimes and
the pursuit of de-linking as a policy. The remarks about mobiliza-
tion and participation are too abstract and vague to inform his sub-
stantive judgements. The history of mobilization and participation
in Vietnam and China, for example, has not saved their socialisms
from the clutches of re-linking in Frank’s view (p. 344).
In short, Frank shows no awareness of the politics of state
forms, practices and policies in relation to class struggles and their
contradictions. I t appears that ‘the people’ is simply a residual and
homogenous mass, which regimes more or less succeed (or fail) to
rally behind their policies. That the construction of socialism is a
complex process of transition, constituted by its own specific
contradictions, both ‘external’ and ‘internal’, antagonistic (class
contradictions) and non-antagonistic (contradictions amongst the
people), is not indicated in even the most general way. Nor is there
any recognition that relations of production in factories and farms,
social divisions between mental and manual labour and between
town and countryside, gender and cultural divisions, party and
state organization, strategy and policy, are all actual or potential
sites of contestation and struggle, in the transition to socialism.
The reason for this is Frank’s dual obsession with de-linking and
with policy (‘responses’, ‘options’, ‘alternatives’, etc.). While de-
linking stems directly from his ‘world system determinism’, the
obsession with ‘policy’ paradoxically reflects an astonishing
volunfarism: ‘de-linking is in essence voluntary’ (p. 343). This, as
much as anything, expresses the core of the problem: the whole
apparatus of the world system approach is put at the disposal of
finding a ‘policy’ of development alternative to (capitalist) under-
development or dependence. ‘Socialism’ is thereby reduced to an
impoverished conception of finding the right policy and making i t
work (a spuriously technico-rationalist view that mirrors the
A Response 10 Gunder Frank 619
‘applied’ ideology of conventional development studies).
With de-linking as the key litmus test, the examples given by
Frank appear as failures on either voluntarist or determinist
grounds. The former include Zimbabwe where Mugabe ‘has
completely failed to pursue the policies that he had promised’, and
Guinea-Bissau, Angola and Mozambique ‘none of [which] have
sought to de-link significantly from the world capitalist economy’
(p. 3 3 9 ) . In Mozambique ‘the FRELIMO regime has recently back-
(racked on its earlier policies’ (p. 339). The emphases we have
added to these revealing phrases highlight the subjective attribution
of ‘failure’ consistent with a voluntarist approach. All that these
statements tell us. in fact, is that their author is disappointed with
the individuals and regimes concerned, not about the severe contra-
dictions that socialists in these countries have to confront and try to
act on.
The determinist version of failure is expressed by the over-
whelming power of imperialism to impose its demands on, under-
mine or threaten progressive regimes (Tanzania, the Manley
government in Jamaica, Nicaragua). The point here is not to under-
estimate the power of international reaction, but to suggest that
Frank’s erratic leaps between the poles of voluntarism (failure
through subjective weakness or betrayal) and determinism (failure
in the face of hopeless odds) is an effect of his lack of grasp of class
contradiction and struggle. I t is precisely the absence of class
struggle that enables Frank to provide ‘a review of some recent
experiences’ (p. 3 3 8 ) constituted, on one hand, by a voluntaristic
conception of the way forward, and, on the other hand, by a
determinism that denies its possibility.
The theoretical incoherence of this framework reflects itself in a
number of throwaway remarks displaying a lack of political
responsibility that we can only regret coming from Gunder Frank.
For example, the intensity of class contradiction and struggle in the
Chile of the Popular Unity government, and the painful lessons to
be learned from its defeat, are betrayed by reducing the counter-
revolutionary class forces in the country to the status of a ‘Quisling
fifth column’ (p. 3 4 3 ) . No less irresponsible is the casual reference
to Deng Ziaoping (and the millions of Chinese he speaks for?)
being in ‘alliance with American imperialism’ (p. 344).
The only thing that Frank has to counter the mechanical deter-
minism of his own theoretical framework, is a voluntaristic
aspiration to the right ‘policy’ as a means of moving forward. It is
perhaps not surprising, then, that he has discovered that everything
620 Henry Bernstein and Howard Nicholus
is for the worst in the worst of all possible world systems, that the
will has succumbed to the pessimism of the intellect.
CONCLUSION
Communism is not for us a stute o/uJ/uirs which is to be established, a n ideal to
which reality (will) have to adjust itself. We call communism the r e d movement
which abolishes the present state of things. (Marx and Engels 1970: 56-57)’
T h e immediate effect of ‘marxifying’ radical structuralism was to shift the implied
solution t o the problem of underdevelopment from economic nationalism to
sociulism. and to shift the means from utopian recommendations of structural
reforms to revolutionary struggle. But this was an illusion. It is n o less utopian to
appeal to ‘revolution’ and ‘socialism’ to solve the problem a s rudirol structurulism
formulures it, than to the existing third world governments o r the USAID, since a
structuralist analysis doesn’t disclose the potential class forces o n which a
revolutionary struggle can be based, o r the contradictions which condition and are
developed by the struggle. o r a strategy o r organisational forms of struggle. o r – u
fortiori – a ‘socialist’ solution since a socialist solution must itself be disclosed by
t h e interests and capacities of the revolutionary forces and their strategy which has
not been identified a t all (Leys 1977: 98).
I t has not been easy for us to engage with Frank’s arguments and
the style in which they are presented, for the following reasons.
First, his problematic combines a deductive and a prior;
determinism drawing on a few global propositions about the world
system (and its history), and a verificationist empiricism in which
any set of facts illustrates and ‘proves’ these global propositions. I f
the latter are assimilated uncritically (and even unwittingly as part
of the mainstream of contemporary anti-imperialist ideology) then
everything that follows is plausible. The ‘conjuring trick’ of
empiricism is that it provides descriptions of the world that we
‘recognize’ as valid. When Frank talks about the chronic indebted-
ness of Brazil and Mexico, or state repression in the Philippines, we
are confident that he is describing important facets of the current
world conjecture. In this sense, he continues to contribute to what
could be called the ‘symptomology’ of contemporary imperialism.
However, the ‘recognition’ factor in our reading of his description
of the manifesfations of crisis and transformation, should not be
the same thing as accepting its (often submerged) explanations and
prognoses.
A second difficulty in getting to grips with Frank is his
A Response lo Gunder Frank 62 I
undoubted commitment to anti-imperialist struggle and to the goals
of socialism, which a number of us share. At the same time we have
argued that his commitment is expressed through a utopian and
voluntarist, hence politically impoverished, notion of development.
It is rooted in the search for an ‘ideal’ state of affairs (progressive
regimes with the correct ‘models’ and policies and the ability to
make them work), detached from the centrality of class struggle
and uninformed by any understanding of contradiction – ‘the real
movement which abolishes the present state of things’ (Marx and
Engels). Such a utopian and voluntarist conception contains the
seeds of its own ‘disillusionment’, leading only too easily to
pessimism of the will as well as of the intellect.
In trying to uncover what is at stake in Frank’s paper, we have
not been able to confront all the particular points it raises. I t is,
after all, a kind of whirlwind ‘Cook’s tour’ of the present world
conjecture, containing many statements that are unsubstantiated,
unelaborated, o r only partially valid empirically. In our criticism,
however, we have indicated some of the elements of a different
approach based in (our understanding of) historical materialism.
Criticism has clustered around three kinds of points and the links
between them: theoretical, methodological. and political.
Theorefically, we have criticized the form and content of Frank’s
version of ‘world system’ analysis. Its content lacks concepts of
relations of production, contradiction and class struggle; its form is
that of a mechanical and deductive determinism.
Merhodologically, this expresses itself in a form of empiricism
more committed to ‘verification’ than t o invesfigofion. i.e. the
production of new knowledges adequate to changing conditions
and processes of struggle. Frank’s methodology lacks any differ-
entiation of levels of abstraction necessary to construct specificity
within the general. I t essentially packages facts in a few global
categorical boxes.
Politically, the formulation of a voluntarist conception of
‘development’/‘socialism’ which neither starts from the concrete
struggles of the exploited and oppressed nor puts them at the centre
of analysis, leads to a gratuitous and dangerous pessimism. There is
a painful irony in this for those of us who respect Frank’s commit-
ment but have to recognize that the ways in which it is expressed
can undermine the struggle for the very goals that he believes in.
622 Henry Bernstein and Howard Nicholas
NOTES
I . It is relevant that Frank announces ‘the failure of Marxist theory’ (see note 4
below), and that one of his followers assimilates his work t o a body of current ‘neo-
Marxism’ presented a s establishing a salutary break with the older traditions of
Marxism (Foster-Carter 1974). Tensions a n d debates within the Marxist tradition are
illustrated. for example, by Bill Warren’s criticism of Lenin’s /mperialism and of
Comintern policy on the national question, a s historical precursors of contemporary
‘Third Worldist’ political economy (Warren 1980: chs. 3 and 4).
2. Valuable recent discussions of the dialectical method can be found in Nicolaus
1973, Echeverria 1978, Banaji 1979, Mepham & Ruben (eds.) 1979.
3. We are unable t o go into the details of this disagreement here. Some idea of the
theoretical and methodological issues involved in interpreting the relevant evidence,
and the political sources and implications of diverging interpretations, are conveyed
in the recent ‘Kenya debate’: see. for example, Leys 1978. the exchanges between
Kaplinsky 1980. Leys 1980, and Henley 1980, the commentary by Beckman 1980.
the special issue of the Review of African Political Economy 1981. and the
penetrating discussion by Kitching (forthcoming). For an incisive analysis of
comparable issues in the Nigerian context see Beckman (forthcoming).
4. This statement reveals once again Frank’s ‘all o r nothingism’ tied to his utopian
and voluntarist conception of development (discussed below). The definitive
pronouncements of ‘failure’ it produces can only be disturbing to socialists. To
whom is Frank’s assertion of ‘the failure of Marxist theory and socialist models’ (p.
341) addressed? What is a ‘persuasive alternative’ (p. 341) and to whom is it
‘persuasive’? T h e experiences of the Soviet Union, China and a number of other
countries constitute the most profound and critical ‘school’ for learning about the
contradictions and struggles intrinsic to the transition to socialism. Frank, however,
more o r less writes them off a s having ‘failed’ to conform to the (utopian)
expectations of his conception of ‘development’. His pronouncements show no
awareness of the intense debates these experiences have generated among socialists;
see. for example, the original and provocative work of Corrigan, Ramsay and Sayer
1978.
5 . We are grateful 10 Peter Waterman for reminding us of this apposite statement
by Marx and Engels.
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!
A Response to Gunder Frank 623
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Agrarian Question.
624 Henry Bernstein and Howard Nicholas
Henry Bernstein is a Lecturer in Third World studies at the
Open University, and Visiting Research Fellow at the
Institute of Social Studies during 1982-3. He has published
many articles on theories of development and
underdevelopment, peasant economy, African
historiography, and state and peasantry in Tanzania. He is
the editor of Underdevelopment and Development. The
Third World Today (Penguin, fourth printing 198 1); co-
editor with Hazel Johnson of Third World Lives of Struggle
(Heinemann, 19821, and with Bonnie Campbell of
Contradictions of Accumulation in Africa. Studies in
Economy and State (Sage Publications, forthcoming).
Howard Nicholas is Assistant Lecturer in Economics at the
Institute of Social Studies. He has recently been awarded a
doctorate for a dissertation on the role of money in world
market crises. His interests include value theory, modes of
production and uneven development, and national liberation
movements.