Rise of political economy

Critically discuss the statement “Development and underdevelopment are two sides of the same coin”
Here are all the notes for it.
Rise of the Global Economy
Session 3. Accumulation on a World Scale
Recall from session 1, the global economy is marked by great geographical unevenness in terms of wealth, income and levels of material wellbeing of the population.
Geographical inequality as an enduring feature of the global economy. The rise and spread of capitalism has seen worsening between country inequality (more recently, within country inequality has also worsened).
In this session we explore some debates on the question of whether geographical unevenness of economic development is systemic. The theories that we cover all understand the origins and persistence of this unevenness in different ways. They are in stark contrast to mainstream economics approaches to economic development (classical school of economics, neoclassical economics, neoliberalism). We will leave aside a thorough exploration of how neoclassical economics understands global inequalities to week 4.
We will discuss three approaches to the origins of a stratified and uneven global economy:
Dependency (Theory)
Combined an Uneven Development: Marxist critique of the dependency school
Key authors: Raul Prebish, Celso Furtado, Oswaldo Sunkel
Emerged and developed between the 1940s and 1960s initially as a critique of orthodox development approaches of the time, namely modernisation theories that drew from classical political economy. Structuralist thinkers argued that orthodox development theorists were over optimistic about the impact of trade and capital flows in levelling out the global economy and the view that underdeveloped economies were simply at earlier stages of capitalist development compared with advanced industrial economies.
(It may be of interest to note that Marx has a similarly optimistic view of progressiveness of capitalist forces of production in rupturing the existing mode of production)
By contrast, Structuralists argued that the underdevelopment of economies of the present day needed to be understood in relation to the world system as a whole. Late industrialisation/development poses different challenges and opportunities compared with industrialisation processes that took place earlier.
(Capitalist/Economic) Development of a country can only be understood through their linkages/interdependence with other countries and the system as a whole.
Structuralists reject the assumption that countries constitute independent units
Key organising concepts: The World Economy (core-periphery structure) and Unequal Exchange
Central proposition: development and underdevelopment constitute a single process
Centre and periphery form one world economy
Disparities between core and periphery are reproduced through international trade
Underdevelopment is not a phase through which every growing economy passes, but a specific historical condition
Centre-Periphery Thesis
Centre periphery thesis was first formulated in the 1940s by Raul Prebish. The C-P thesis implied a hegemonic relationship between two discrete elements in a single system. The unequal relations between the core and the periphery through unequal exchange the centre derived part of its profits from the periphery. The unequal relationship between the centre and the periphery is an enduring one. The formation of new centres by peripheral areas was possibly the only way of breaking away from the old centre.
Differences between centre and periphery structures
Production Structures
Income Distribution
Peripheral Dependence
Features of peripheral capitalist economies
Highly skewed and worsening income distribution
Consumption patterns of the elite in the periphery are strongly influenced by tastes created at the centre
The technology utilized in the process of industrialisation is taken in a more or less unadapted form from the centre (via MNCs or licensing)
Strong foreign economic presence in the shape of MNCs, foreign aid, foreign loans, and trade with the centre. Industrialisation in the periphery does not reduce the reliance on foreign technology or foreign capital, but tends to increase it.
Foreign influence is not confined to economic spheres but extends to cultural, educational, legal and political spheres
Macroeconomic instability (internal and external = inflation and BoP problems; pro-cyclical adjustment)
The centre-periphery thesis has formed the basis of a number of parallel theoretical developments in radical political economy traditions. (e.g. Dependency theory, Theory of Unequal Exchange, World Systems theory)
Core-Periphery Model of the World Economy
The world economy is structured into a core/centre and a periphery
These features emerged with the industrial revolution.
Industrial revolution meant dramatic increases in productivity in the core
Core countries internalised new technology (developed a capital goods sector and employed more advanced technology across economic sectors)
Hi-tech integrated economies in the core
Uneven diffusion of technology throughout the world
New technologies were largely imported in periphery countries and confined to primary commodity producing export sectors
Economies of the periphery characterised by:
large productivity gap between export and subsistence sectors
sizeable low-productivity pre-capitalist sector which continuously produces a large surplus of labour. This keeps wages down
Result was a trade relationship between core and periphery that is detrimental to the development in the periphery:
core exported capital goods and high value manufactured consumer goods (which experience gains in the terms of trade) to the periphery in return for primary commodities. (which exhibit declining terms of trade)
Unequal and declining terms of trade: The Prebish-Singer Hypothesis
The Prebish-Singer Hypothesis was central to the empirical justification for the types of development policies advocated by the Structuralist School.
It was based on the empirical observation of a long-run decline in the terms of trade for agricultural/primary commodities. Prebish and Singer argued that this decline was systematic owing to a systematic decline in the demand for primary commodities and a rise in demand for manufactured goods from advanced industrial economies.
A systematic decline in the demand and hence price for primary commodities from developing countries.
Engels Law Low income elasticity for food stuffs
Technological advance and the development of substitutes for industrial inputs
Productivity increases in the export sectors of the periphery would thus translate to lower prices
Reserve army of labour keeps wages down and close to subsistence level and hence, prices are unlikely to rise as a result of wage increases
There is a systematic increase in the price of goods exported from the developed countries.
Products that embody greater technological advances will tend to be more income elastic compared with the demand for lower technologies and more basic products.
Technological advances in the export sectors of the core translates to higher incomes in the form of wages and profits
Tight labour markets and strong trade unions in industrialised countries mean that prices are determined as a mark-up on wage costs.
Industrialised countries gain both as producers of manufactures and consumers of primary commodities while developing countries lose as consumers of manufactures and consumers of primary commodities.
The hypthesis was put forward independently by Prebish and Singer at the same time in 1950. Each coming from different schools of thought. Prebish from ECLA and associated with structuralism and then dependency theory. Singer was trained by Schumpeter in Bonn and later Keynes while he was in Cambridge. There are some differences in emphasis in the two papers on the causes of the declining terms of trade. Singers explanation for the declining terms of trade focussed on the demand side. For Singer, the systematic decline in in the demand for primary exports from developing countries in comparison to industrial products from advanced countries comes from the relatively low income elasticity for food stuffs (Engels Law), and lower demand for industrial raw materials coming from technological progress and the development of synthetic substitutes.
Prebish, R. (1950), The economic development of Latin America and its principle problem, UNECLA. Santiago.
Singer, H. W. (1950), Gains and Losses from Trade and Investment in Under- Developed Countries American Economic Review

Theory of Unequal Exchange
Marx: There can be a discrepancy between (labour) value and exchange value (price) and this discrepancy is socially determined.
A commodity has a use and an exchange value. The exchange value is the value at which the commodity would be exchanged on the markets (related to price but not identical to it). The use value derives from the intrinsic characteristics of a commodity in its ability to satisfy human need. This property of a commodity is independent of the amount of labour required to appropriate its useful qualities. (A commodity also embodies the socially necessary abstract labour used to produce it) Value in exchange is proportional to the labour value of a commodity
The discrepancy between use and exchange values can arise at the international level in 2 ways when the rate of profit is equalised between countries:
1. When wage rates are equal between countries and the organic composition of capital differs, the country with a higher organic composition will exchange at a price above (labour) value the reverse is true for the country with a lower organic composition of capital. Free trade would result in the transfer of value from low to high capital countries.
2. Given the international mobility of capital and differing wage rates, free trade forces low-wage countries into unequal trading relationships with high-wage countries. Trade results in a transfer of surplus from low-wage to high-wage countries.
Unequal exchange and the reproduction of under-development in low-wage countries
Higher wages cause development in 2 ways:
o Stimulates development and adoption of labour-saving, productivity enhancing production methods
o Higher wages -> increasing effective demand -> expands size of domestic market -> encourages new domestic investment
The positive reinforcement of higher wages and development in high-wage countries increases the inequality between high-wage and low wage countries thus reinforcing and deepening the unequal trade relationships with an ever increasing level of surplus being transferred from the latter to the former. This is a cumulative process.
For a clear exposition of the theory of unequal exchange and a critique see Brown, R. (1978) The Theory of Unequal Exchange: The End of the Debate?, ISS Occasional Papers, no. 65

Dependency Theory
The centre-periphery thesis has formed the basis of a number of parallel theoretical developments in radical political economy traditions. (e.g. Dependency theory, Theory of Unequal Exchange, World Systems theory)
Dependency theory emerges as an explanation of underdevelopment in the 1960s in the work of the dependencia economists working in or on Latin America. It has its roots in both the Structuralist tradition of Prebish, Furtado, and ECLA and Marxist and neo Marxist thinkers on imperialism. The dependency school was influential within the field of development economics in the 1960s.
This dual parentage has resulted in a diversity of concepts and prognoses. Here I will only be able to sketch out some key features of the Dependency School to highlight some of the common thinking around the issue of trade and development.
Developed out of a radical critique of othodox economics of development
Focus on the range of unequal relationships seen to exist between the countries of the periphery and the advanced capitalist economies
These dependent relations constrain development in the periphery
Dos Santos (1969) defines dependence as:
A conditioning situation in which economies of one group of countries are conditioned by the development and expansion of others. A relationship of interdependence between two or more countries or between such countries and the world trading system becomes a dependent relationship when some countries can expand through self-impulsion while others, being in a dependent position, can only expand as a reflection of the expansion of the dominant countries, which may have positive or negative effects on their immediate development.
Other developments of dependency theory see the dynamics of centre and periphery as part of single world capitalist system that derives its momentum from the development of the capitalist mode of production at the centre. (Amin, Frank, Wallerstein)
The development of dependency theory has occurred simultaneously with a number of closely related theories coming from Marxist and other radical traditions that seek to understand underdevelopment and the reproduction of the capitalist system as one which is sustained by and reproduces material, social and political inequalities between the global north and south. These include World Systems Theory (Immanuel Wallerstein) and the theory of Unequal exchange (Arghiri Emmanuel).
The dynamics of dependency, while not completely preventing the occurrence of industrialisation and development here and there, will tend to maintain the system of dependence and a global division of labour that has periphery countries producing raw materials or integrated into low value added parts of global production networks.
See Lall (1975) and Palmer (1978), as well as Hunt (1989), for surveys of the dependency literature and its critique.
Dynamics of dependency and underdevelopment
Lall (1975) identifies 3 strands of thought around the possibility of growth in the periphery:
Dependence as development of underdevelopment (Gunder Frank)
Dependence and Market Constriction (problems with import-subsitution-industrialisation)
Subservience (e.g. unequal exchange and technical dependence)
Critiques of (developments in) dependency theory
Tendency within dependency literature of the 1960s and 1970s to employ vague and imprecise concepts and to apply these universally.
Asocial (no class analysis) and ahistorical (failure to deal with historical specificities)
Palma: Strength in dependency in its analytical approach (to the study of concrete phenomena) rather than as a theory of underdevelopment
Analysis needs to be based upon an understanding of the specificity of the historical process of the penetration of capital and should not be rejected just because the stylised characteristics derived from the theory dont fit the facts.
Capitalist development needs to be understood in its own terms, and in relation to the global economy
Uneven and Combined Development: Leon Trotsky
Unevenness in capitalist development at various levels, between:
units of capital in a sector,
within regions and between regions of a country
Within and between nations and regions within the world economy as a whole
Unevenness across different dimensions of capitalist production, e.g. profitability, productivity, growth rates
This unevenness is systematic and has its origins in primitive accumulation and the creation of two poles of the capital relation:
Separation of the direct producers from the means of production
Concentration of the means of production into fewer hands
This has entailed colonial extraction of wealth and surplus which acts as capital.
Impoverishment of the parts of the world in which wealth is extracted meant that they were less likely to develop own autonomous accumulation process
The role played by the state and by finance central to these procesess.
Intellectual Roots in Marxs Analysis
Recall from Weeks (1985), first stage in the development of capitalism was based on absolute surplus value
In the immediate period after the development of the wage relation (formal subsumption of labour to capital), capitalists were able to extract absolute suplus value from labour without having to raise productivity significantly (e.g. through extension of the working day)
The second stage of capitalist development was based upon relative surplus value
Factory Acts of 19th Century in UK: placed a limit on absolute surplus value: competition set the imperative for capitalists to accumulate relative surplus value.
Through the introduction of new technologies to augment labour (machinofacture)
Increase in the capital composition of production and the real subsumption of labour to capital.
Industrialised sectors/regions/nations pulled further ahead due to systematic increases in productivity
Lock in of many societies in the periphery in the global division of labour as producers of commodities for export to the colonial world
Great challenges in the periphery in relation to the development of capitalism in relation to
Technology gaps
Shortage of surplus for accumulation
Limited to production of absolute surplus value
Competitive introduction of new technology in industrialised capitalism meant the tendency towards concentration and centralisation of capital
The competitive success of some comes at the expense of others, be they capitals, states or regions

Based on the analysis of Russia at the start of the twentieth century as simultaneously backward and advanced, combining low productivity peasant production with the most advanced forms of capitalist enterprise (Ashman 2012)
Economic development from the time forging of and Absolute state and establishment of a Russian Empire by Peter the Great.
Military modernisation on the basis of high taxation and the squeezing of serfs
Developed an unevenness between city and countryside and the reliance on the latter on agriculture and handicraft production and the former being centres of milatary and administrative life; of consumption and not production (contrast to the urban centres of England during the Industrial Revolution)
Abolition on serfdom in 1860 and massive state intervention in modernization financed through debt and European capital.
Development of capitalism thus followed a very different route compared with England and the earlier industrialisers.
Import of technologies
Transplanting of the factory system of production on to Russian Soil (Trotsky, cited in Ashman 2012, p. 62)
Industry develops in a highly concentrated way and is dominated by investment by foreign capital.
The peasantry is a reserve army of labour, a tributary of the Stock Exchange of the world (Trotsky, PR, ch. 2), pauperized and proletarianized through heavy taxation as a result of the borrowing by the Absolutist state, the greater part of it was not used for productive investment but sent abroad in the form of interest payments which enriched and strengthened the financial aristocracy of Europe (Trotsky, PR, ch. 2). (Ashman 2012, p.63)
In both Trotsky and Lenins analysis of industrial development, there is a clear application of Marxs method of historical materialism. Both the prexisting class structures, their relations to the structure and function of the global economy are carefully considered in relation to the articulation of the modes of production and the concrete manifestations of capitalist development within Russia. Dependency theorists took Marxist ideas and sought to apply them deterministically in new contexts that rendered their analysis to deep detailed descriptions of concrete processes at best, and subject to circular reasoning at worst.

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