THE SOUTH AND THE EMERGING NIEO

6:47 AM Aug 28, 1995

THE SOUTH AND THE EMERGING NIEO
by Prof Ajit Singh

Geneva 28 Aug (TWN) -- Two long-run tendencies have dominated the world economy in the postwar period -- industrialization of developing countries (the South) and deindustrialization in the sense of declining number or proportion of people employed in manufacturing) of the older industrial countries (the North). The evolution of the relationship between these two phenomenon and how this relationship is managed by the international community is today, and even more so in the future a central issue on the world economic agenda into the new millennium.

After the end of the second world war, a large number of Third World countries embarked on a veritable industrial revolution - a revolution they had been prevented from implementing fifty or hundred years earlier by the rather different world economic and political conditions. In this post-war period most poor countries initiated a serious process of industrialization. Several of them, particularly during the 1960s and 1970s, made rapid industrial progress. Even sub-Saharan African countries, which started with extremely unfavourable initial conditions when colonial rule ended, managed to increase their share of world manufacturing production during these two decades. More significantly, the socalled newly industrialising countries (NICs) in Asia and Latin America, were especially successful in establishing a technical, scientific and industrial infrastructure, in training their labour forces and in developing a relatively broad-based industrial structure. By the 1970s, these countries were providing a formidable competition to the North in a range of consumer and producer goods industries.

As a consequence of this industrialization, and parallel transformations in agriculture and in other sectors of the economy,the overall economic progress in the developing countries after World War II was very impressive by previous historical standards.

From 1960 to 1980, though their population was increasing at a very high rate of nearly 2.5% per annum, the per capita rate of growth of GDP in developing countries was 3% per annum -- a doubling of productive capacity every 22 years or so. This compared very favourably with the long term rate of annual per capita growth of about 1.3% which West European industrial countries achieved between 1850 and 1950.

Between 1950 to 1980 the South surpassed the 80-year record of the North (1820-1900) and, arguably, achieved greater material advance in these three decades than it did in the previous three thousand years.

This was by no means a foregone conclusion: at the end World War II, there was enormous scepticism among professional economists on industrial development in the South. This pessimism, though for different reasons, was also shared by Marxist economists.

Also, there was enormous heterogeneity in the initial levels of economic and industrial development among the South countries, and the spread of industry to these countries was far from uniform. Starting from a higher base, Asian and Latin American countries achieved much greater industrial success than African countries. But even many of these latter were able to take the fist systematic steps towards industrialization.

While in 1980 only ten countries within the South (China, Brazil, Argentina, India, Republic of Korea, Turkey, Iran, Venezuela and Philippines, in descending order of size of manufacturing production) accounted for nearly 80% of the manufacturing value added, these ten also accounted for 60% of the Third World population.

Countries with widely different economic and political systems - socialist, capitalist and mixed economies -- and with equally divergent industrial strategies - outward orientation or inward looking and import substitution programmes -- were all able to achieve fast industrial development. But the achievement was barely equal to the minimal requirements of the people of the South. It is a social necessity for developing countries to grow rapidly -- both to provide jobs for their fast growing labour forces and to reduce poverty.

Despite slowdown in population growth in recent past, labour force in Latin America and Africa has been expanding at an average 3% a year. Just to provide jobs for these new entrants, these economies have to grow at atleast 6% a year, and a higher growth rate would be needed to wipe out current high levels of unemployed and underemployed.

The eradication of poverty and meeting basic minimum needs of the people also require higher rates of growth. ILO studies suggest an annual average growth rate of 7-8 percent is needed just to meet basic needs of poorest 20% of the Third World population by year 2000. Other studies show that for developing countries to grow at an annual 6%, their industry would have to grow at an annual 10%. Thus, the industrial revolution in the South must continue.

For a large number of developing countries, the actual experience of the 1980s was greatly at variance with this ambition. Instead of a rise, they witnessed a steep fall in trend rate of growth of production - to about half the rate of 7% envisaged in UN targets for the decade.

For Latin American and African countries it was a disastrous decade - with these countries suffering sizeable falls in per capita GDP. Adjusted appropriately for changes in terms of trade and net factor payments, in 1989 Latin American countries average per capita was 15% below that in 1980, while in Africa it was as much as 30% below. In this overall collapse, industry suffered particularly badly.

In the 1990s, as a consequence of large-scale private capital flows to Latin America, there has been a revival of economic and industrial growth in a number of these countries, though only one or two of them show signs of reverting back to their previous long-term trend rates.

The economic situation in Africa in the 1990s is even less promising.

But in Asia, particularly East Asian economies including China, it has been an outstanding success story.

Why were Asian countries able to continue with their industrial revolution while it came to a virtual standstill in Latin America and subs-Saharan Africa? How can industrial revolution be revived in these countries. And, will the successful Asian countries be able to continue their industrial revolution in the new post-cold war economic order?

Contrary to the view of international financial institutions, a number of studies show that the main reason for the intercontinental difference in economic performance were not internal economic factors but the external shocks arising from fundamental changes in world economic conditions that occurred at the end of the 1970s. These changes (heralded by the 'Volcker' shock), emanated from adoption of highly contractionary monetarist economic policies in the US and the other leading OECD economies. These led to a prolonged world economic recession and highly unprecedented high interest rates.

In the non-neoclassical real world of imperfect wage-price flexibility, unemployment and balance of payments disequilibria, these events affected the developing countries through four main channels: a demand shock to their exports, a consequently fall in commodity prices and terms of trade shock, the interest rates shock and capital supply shock.

If all these external shocks are considered together, their combined size and adverse impact on the BOP of the Latin American economies was much greater than that for Asian countries. The external shocks suffered by Latin American countries in the 1980s were gigantic, and required considerable period of time to recover from disruptions of such shocks. Instead, the shocks were compounded for Latin America and Africa: external factors continued to operate throughout the 1980s.

Latin American terms of trade fell by nearly 20%, that for sub-Saharan Africa by 30%; in contrast South Asia and East Asian NICs showed a small improvement. The external shocks of Latin America had not only a big impact on the real economy and future growth prospects, but, equally important, the redistributive struggle over reduced economic growth greatly disturbed the normal balance of political forces in these societies, leading in turn to extreme financial and monetary instability and episodes of hyper-inflation. If the rich countries like UK and USA had been afflicted with same kind of shocks, they would probably have suffered a much longer period of depression.

These raise the basic questions facing the world economy now. How can the industrial revolution be revived in the Latin American and African countries; and will the successful Asian countries be able to sustain their industrial revolution and bring it to a successful conclusion in the new post-cold war economic order?

The outstanding economic success of the Third World countries during 1950-1980 (the Golden Age of post-war Capitalism) took place in extraordinarily favourable international conditions. Between 1950 and 1973, there was an historically unprecedented expansion of production and consumption, at a rate of nearly 5% per annum in the advanced industrial nations. There was a long sustained period of virtual full employment in most of them and, in a number of them, in fact over-full employment - with countries like France and Germany having 10% of labour force coming from abroad.

The developing countries gained from faster growth of the OECD economies through the same channels by which they have been disadvantaged by the slow growth of OECD economies in the post-1980 period. The post-World War II GATT multilateral trading system worked in their favour by permitting them to have more or less free access to advanced country markets without "reciprocity". The poor countries were allowed to use import controls against advanced nations to protect their infant industries. The IMF Articles of Agreement allowed them to use exchange controls to protect their financial systems.

The western international trading and financing system worked smoothly and predictably under the guidance of a single hegemonic power - the USA. The cold war and the contention between the two systems worked to the advantage of the developing world, just as it had done in the early post-war period for West European countries and Japan. The outstanding economic achievement of Japan and other East Asian NICs was made possible not only by the free access of these countries to the US market, but also by their ability to pursue an active and vigorous export-oriented industrial policy. These nations controlled the competitive process and used a whole panoply of export and industrial policy instruments without much hindrance from GATT or other international agencies. During this period of contention between the US and Soviet systems, many developing countries benefited from technical and economic aid from both sides.

Compared to this period, now developing countries are faced with a radically different situation in most respects. Since 1973, the rate of growth of OECD and world GDP has nearly halved. Many industrial countries, particularly in Western Europe are witnessing mass unemployment, with double digit unemployment recorded in many of them.

Workers, trade unionists and general public in industrial countries increasingly blame cheap labour products from developing countries for these job losses or stagnating real wages. Unlike the 1950s and 1960s, when free trade with advanced countries was feared by developing countries, today it is the advanced countries that are more concerned about the ill effects of a liberal trading regime -- as epitomised by Ross Perot and Pat Choate in their condemnation of NAFTA.

In many advanced countries there are populist demands for protection from Third World imports -- often taking the form of demands for imposition of labour or environmental standards on Third World products. The US is now demanding reciprocity from its trading partners, even the poor countries.

Notwithstanding the concessions on the MFA, the Uruguay Round, from a Southern perspective, represents a significant retrogression even in relation to trade in manufacturing. Moreover, many of the export promotion and industrial policy measures used by Japan and the East Asian NICs in the past may no longer be permissible under the new WTO rules.

It is thus evident that the prospects for the resumption of industrial revolution in Latin America and sub-Saharan Africa and its continuation in Asia will be greatly enhanced if there was full employment in industrial countries and their economies grow fast.

In addition to the advantages it will bring to the South, there are also other important considerations pointing in the same direction.

The competitive game, between the North and the South, and among nation states in general is played in a cooperative, non-zero-sum game only when the world economy is growing fast and there is more or less full employment in leading countries. But if there is widespread unemployment and the world economy is expanding slowly as now, the outcome will be conflict and retreat into non-zero-sum game ad hoc protectionism. Faster economic growth and healthier public finances may make rich countries more generous. Faster OECD growth may lead to sufficient improvement in terms of trade of the South to compensate for the reduced aid flows.

But what are the prospects for restoring full employment in industrial countries and enhancing their economic growth in this post-cold-war international economic order?

In broad terms, this economic order is a continuation of the Reagan/Thatcher model of market supremacy which industrial countries have progressively instituted, both internally within their own economies, and externally in the international economy - encompassing free movement of goods, services and capital flows, but significantly not labour.

But this market supremacy model is unlikely to restore anywhere near full employment in the OECD economy. The world economy now is far more integrated than in the 1950-1980 period. Contrary to the view of the Bretton Woods Institutions that greater economic integration leads to more efficient resource utilization and faster economic growth, the trend rate of growth since 1980 has been half that in the earlier period. The OECD economy under the market supremacy model has not only been characterized by much lower trend growth rates, but it has also been far more unstable.

The central issue for the world community is whether the dynamic period associated with fuller employment can be recreated?

That period of full employment and dynamic economy was the outcome of an unique economic regime, a new development model, very different from what prevailed in the inter-war years and the one instituted in the last decade and half. In that regime, there was rapid growth of productivity and capital stock per worker and a fast growth of both real wages and productivity. These two elements guaranteed both a roughly constant profit rate and equal growth of consumption and production.

But such a macro-economic growth path could only be perpetuated if it were compatible with the behaviour of individual economic agents - firms, workers and consumers. This was ensured by a social consensus around generally cooperative institutional arrangements for setting wages and prices. Similarly, at the international level, under the leadership of the US (as the hegemonic power), the global economic systems functioned under stable monetary and trading arrangements.

The process of breakdown in this consensus began before the 1973 oil price shock. The Bretton Woods monetary system broke down in the late 1960s - partly as a consequence of the success of the Golden Age and party as a result of productivity slowdown by the late 1960s in several leading industrial countries which was not matched by a deceleration in rate of growth of real wages, thus creating a profit squeeze. The demise of the Golden Age was due to events overtaking the existing institutional framework.

In the current situation, reduction of mass unemployment in the North requires a trend increase in rate of growth of demand and output in OECD countries. But this cannot be achieved simply by changes in fiscal and monetary policies of leading industrial countries.

Without an appropriate national and international institutional framework. reliance on such policies would simply result in a sharp rise in commodity prices, an increase in trade union militancy and higher inflation. Instead of the market supremacy model, restoration of full employment with only moderate inflation requires more cooperative institutional arrangements involving workers, employers and governments in individual countries and more cooperative relationships between nation states, within the North and between North and the South.

The task of such institution building, national and international, is no doubt challenging, but not impossible. While the UN and its agencies like the ILO are equipped to assist in this endeavour, the BWIs, to the extent that they are wedded to the market-supremacy model, regrettably are a part of the problem rather than its solution.

(The above is based on a longer paper, "Supporting the South's Industrial Revolution after the Cold War: Developing countries and the Emerging New International Economic Order", presented by Prof. Ajit Singh, of the Cambridge University Faculty of Economics, at an International Conference in Athens in May to mark the occasion of the 50th Anniversary of the United Nations. It is published with the permission of the author)