Part Five: Global Inequality and Theories of Development. In part five of my Lectures in Political Economy: Understanding Global Hegemony and its Implications, we take a look at global inequality. The theory of hegemonic stability and regime change makes it very clear that most states in the world have little political and economic influence concerning the nature of norms, procedures, and rules of the international political economy (IPE). What does IPE look like in terms of wealthy states versus poor states? What is development or modernization? How do states become developed? We will look at three grand theories to explain how states become developed: modernization theory, institutional economics theory, and structuralism/dependency theory.
There are three different groups of states in the IPE today. One group, let’s call it the North, is made up of the US as the hegemon and the other wealthy, capital exporting, industrialized/post industrialized (high tech, information based economies), stable democratic states such as western Europe, Japan, and Australia. States within the North are politically and economically interdependent. Another group, let’s call them the middle group, are those states that are industrialized, some of them capital exporters, but are either authoritarian or have unstable and/or partially democratic political systems. This middle group consists of the so-called BRICS (Brazil, Russia, India, China, and South Africa), the so-called Asian Tigers of Singapore, Taiwan, Hong Kong, and South Korea, and several Latin American states such as Mexico, Chile, and Argentina. The middle group is politically and economically interdependent with the North as well. The third group, let’s call it the South, consists of the vast majority states in the world. They are not developed (we will define development later). This includes states that depend almost entirely on the export of agricultural products or natural resources such as oil, tin, copper, iron ore, bauxite, etc. This group also includes the so-called poorest of the poor that depend almost entirely upon international aid, such as Haiti. Remember that the rules of the IPE are set by the North, the hegemon with the support of the wealthy, industrialized/post industrialized democracies. States in the middle group and the South had no say in the establishment of these rules or regimes. They have no choice in terms of interacting in these regimes. The south is dependent upon the North and the middle group rather than in an interdependent relationship. They are dependent upon the North and the middle group for capital/investment, markets for their products/commodities and natural resources, and access to technology. Dependence implies vulnerability. They are vulnerable to decisions made in the North and the middle group and have little to no influence over those decisions.
From a western point of view, development or modernization consists of the transition from a state that has the characteristics of the south to a state that has the characteristics of the north. There are other definitions of development but for this lecture we will use a western point of view. So, what are the typical characteristic of a developing or southern state compared to a state in the north?
Southern states typically have a small middle class, whereas northern states have a larger middle class. There is less class mobility in the south compared to the north. Class mobility refers to the ability of families to move up the socio-economic ladder, say from working class to middle class. Typically there is a larger gap between the rich and the poor in the south compared to the north. Another dramatic difference has to do with the type of inequality that one finds in the north and the south. In the south we see cumulative inequality. In the north we see dispersed inequality. Cumulative inequality means that if an individual has little economic power, that individual will have little access to and education or knowledge power, that individual will have little political power, and that individual will have little social power. The point here is that scoring low in any indicator of power means that individual will score low in all indicators of power. Thus, inequality is cumulative. Dispersed inequality means that an individual could score high on education or knowledge power, and low or high on all the other indicators of power (political, economic, and social). In other words one could be a professor with knowledge power, yet score low on economic and social power, and maybe high or low on political power. In other words, inequality is dispersed. Scoring high on any indicator of power is not necessarily a predictor of where that individual will score on the other indicators of power. Another difference between the north and the south is the type of economy that one finds. This south is primarily natural resource extractive (oil, coal, etc.) and agricultural based economies. The north consists of industrial economies with some that have moved to a post-industrial (high tech, information based economy). In the south, states have little economic capital (capital scarce), whereas in the north, there is enough capital to satisfy domestic needs and to be exported (capital abundant).
In the south, participation in the political processes is limited or restricted. In the north, participation is open to the overwhelming majority of individuals and groups of individuals (it is a healthy pluralism to use a political science term) or simply put it is more democratic. In the north, governments have the capability of enforcing the law throughout the entire state, whereas in the south, governments find it more difficult to enforce the law without resorting to force. In the north, one finds greater protections of civil liberties and rights, whereas in the south there are less protections of civil liberties and rights. In the south governments are less stable or prone to corruption, violence, civil wars, coups, and revolutions. In the north, governments are more stable. Another difference refers to the type of political culture. According to sociologist Max Weber, the north has a modern political culture and the south has a traditional political culture. In the south, authority is based on tradition. In a traditional culture authority and status are a function of family, tribe, clan, ethnic group, bloodline, or nationality. In the north, authority is based on the rule of law and status is based on merit. In the south, people do not identify with the state, they identify with their tribe, ethnic group, clan, bloodline, or nationality. To put it another way, if you ask someone who they are, they will say, for example, I am a Zulu first and then, maybe, a South African second. In the north, people identify with the state. So if you as someone from the US who they are, they will say I am an American. Another difference between traditional and modern cultures is the relationship between people. Personal relationships are most important in a traditional society. Your word is your bond, thus breaking your word to another person is unacceptable and brings dishonor to your family. In a modern society, relationships are not personal, rather they are contractual. A business agreement is written and has the force of law behind it. Note that business relationships in traditional societies are simply a handshake.
In a traditional culture, people are risk averse whereas in a modern culture, people are risk takers. Risk averse means even if you tell a farmer in Nicaragua that if you plant your crops in another way you will increase the yield, the farmer is not likely to take a life-threatening risk of changing the way that has been reliable for many years. In a modern culture, farmers are more likely to take the risk when confronted with evidence of a “better way.” Traditional culture is more religious (less secular) and less acceptance of science/technology whereas in the modern culture, people are more secular (less religious) and more accepting of science and technology. Thus, the south has a set of characteristics that differ from the north. I should point out that the set of characteristics of the north and the south are not completely exclusive. Some characteristics of the north can be found in the south and vice-versa. Think of this as a continuum rather than discrete categories of north and south characteristics.
Note that development or modernization from a western perspective is the movement away from the characteristics of the south to the characteristics of the north. Development is not guaranteed for any state and the process is not linear, meaning a state could move toward the characteristics of the north and then suffer a setback. The question we want to look at is how do states move from the southern characteristics to the northern characteristics? There are three grand theories that we will discuss. The first is modernization theory or “it’s the economy stupid.” This is associated with Max Weber, Seymour Martin Lipset, and Walt Rostow. The second is institutional economic theory or “it’s politics stupid.” This is associated with Daren Acemoglu and James Robinson. I would urge you to read their book Why Nations Fail. The final grand theory is dependency theory which is associated with Andre Gunder Frank, Fernando Cardoso, and Enzo Faletto to name a few. Dependency theory grew out of what is known as the structuralism school or the Praebisch thesis.
Modernization theory grew out of the liberal perspective of IPE. In essence, the primary engine that drives a state from its southern characteristics to the northern characteristics is capitalism or a liberal economic system. To put it simply, the adoption of a liberal economic system with its focus on private property, individual rights, and a limited role of government (rules of the game, public/social goods, externalities) will move a state from southern characteristics to northern characteristics. In other words, capitalism fuels development or modernization as we have defined it. This is based on the traditional studies and writings on the development of the US and Great Britain. Thus, ask a liberal/capitalist scholar or those in the International Monetary Fund who believe in modernization theory why a particular state in Latin America has failed to develop. The answer typically is that the state has failed to fully develop a capitalist or liberal economic system. As one may imagine, there are some criticisms of this theory. It seems to be saying that capitalism or a liberal economy will lead to a democratic political system, a large middle class, social mobility, wealth, less economic inequality, and political stability. In other words, all good things tend to go together. But the evidence doesn’t fully support this. Let’s take a look at the work of Samuel Huntington, Simon Kuznets, and others.
Political scientist Samuel Huntington finds that modernization or development initially creates political instability and only becomes stable when development reaches a tipping point in which change can take place without or with less resort to actions that lead to political instability. In other words, the relationship between development/modernization and political instability is curvilinear. The most stable societies are the least and most developed. Those in transition or in the middle (the majority of states) have the most political instability. Another way to look at this is that development/modernization initially leads to political instability, not stability as modernization theory predicts. An example of this was the massive amounts of foreign aid (Alliance for Progress) and economic growth in Central America in the 60s that ultimately led to tremendous political instability – revolutions, coups, and military and revolutionary governments. Let me give you a specific example to illustrate this. Let’s say a group of small, subsistence level farmers in Nicaragua have an excellent year and have a surplus (more than they can eat) in agricultural products for the first time. They decide to go to the city and sell the surplus. They have to interact with the government for the first time. They purchase a permit, probably having to bribe the local official, to use a stall in the city market. They begin to sell their products but find out that all those selling their products also had to bribe the local official by paying more than they should. They complain and the government worker doesn’t pay any attention. They organize all those selling their goods in the market to advocate for lower prices for the stalls. The point is that for the first time in their lives these farmers are participating in the political process. Let’s say the government says no and tells them to leave or takes their stalls from them. The farmers then try to join a political party (if there is one) to advocate for them. The party says that they cannot join. They may have to march in the streets or even advocate violence against the government. The point is that development or modernization mobilizes groups of people who have never had or needed to participate politically. Those in power often don’t want these new people to participate politically. Remember that political participation is limited in less developed states. This can and does lead to political instability.
Simon Kuznets, an economist, provides another criticism of modernization theory. Modernization theory states that increased development is associated with social mobility, less economic inequality, or less of a gap between the rich and the poor. Kuznets finds that the relationship between development/modernization and economic inequality is curvilinear. The most equal societies are those that are least and most developed. Those in the middle (most states) or in transition initially experience increased economic inequality. That inequality begins to decline as the state reaches a tipping point that may be associated with a variety of factors such as the growth of labor unions, land reforms, public education, social safety nets, etc. To put it another way, development or modernization initially creates even greater economic inequality. Kuznets argues that initially only a handful of people are risk takers in the less developed states, so they are the ones that will initially benefit from adopting modern farming techniques or other changes that creates wealth for them. Thus, economic inequality will increase initially. If we take this one step further, economic inequality is often a cause of political instability in many states.
Another criticism looks at the global evidence. Remember that the states in the south have little to no say in the rules of the liberal, global economic regime. They must play by the rules. Most developing states have adopted liberal/capitalistic economic systems to a greater or lesser extent. One might expect that the development gap between the north states and the southern states would begin to narrow. Yet, this has not occurred over time for the vast majority of southern states. Poverty has been reduced in many of the developing states or the south but the gap between the north and the south continues to widen except for a handful of states who are now in the middle between the north and the south, such as the BRICS and the East Asian Tigers. Another important criticism that is related to what we just talked about is that modernization theory focuses on the state level of analysis for an explanation. It ignores the global or international systems level of analysis. In other words, the cause of the lack of development in the south is found within these states, rather than at the system or global level of analysis. As we will see later, dependency theory explains the lack of development by focusing on the global or international system structures. A final criticism is that modernization theory often conflates economic growth and development. It often assumes they are the same and, in fact, in the north they are typically the same. But, in the south economic growth (an increase in a state’s economic output) may only enrich the few at the top, thus it does not contribute to economic development. Economic growth may raise the standard of living of the minority but not the majority. This is not economic development.
A second grand theory which explains the lack of development in the south is institutional economic theory. Institutional economic theory is somewhat of a misnomer because it argues that it is the nature of the political system that leads to or does not lead to development. This theory makes a distinction between inclusive political institutions and extractive political institutions. An inclusive political institution is characterized by pluralism (all groups in society are able to participate politically) and centralism (the ability of the state to enforce the rule of law throughout its territory). Simply put this is a stable democracy. The development of pluralism is often called nation-building while the development of centralism is often called state-building. Extractive political institutions are those that (1) lack pluralism and centralism, or (2) those that have centralism but lack pluralism. These are non-democracies. This theory also makes a distinction between inclusive economic institutions and extractive economic institutions. Inclusive economic institutions protect private property for all citizens, apply the law equally to all citizens, provide a level playing field for all business enterprises, allow economic enterprises to compete with each other and allow some of them to go out of business due to economic competitors that have developed new technologies and greater efficiencies. Allowing economic enterprises to go out of business because they can no longer compete with others is called creative destruction (see the work of Joseph Schumpeter). Creative destruction is crucial to economic growth and modernization. Extractive economic institutions lack the characteristics of inclusive economic institutions. They actively prevent the process of creative destruction. Those in power fear creative destruction because it creates winners and losers and they fear being a loser in the economy. Having the political power they simply eliminate any economic competition. Again it is important to note that these categories (inclusive and extractive political institutions and inclusive and extractive economic institutions) are not discrete. Think of them along the lines of a continuum.
The first thesis the theory makes is that inclusive political institutions create inclusive economic institutions. Inclusive political institutions and inclusive economic institutions reinforce each other creating what the authors (Acemoglu and Robinson) call a virtuous cycle. The virtuous cycle promotes economic growth and development for all. The second thesis of the theory is that extractive political institutions create extractive economic institutions. These also reinforce each other creating what the authors call a vicious cycle. The vicious cycle inhibits economic growth and development because it is limited to only those that are allowed to participate politically. The authors argue that the extractive political institutions that are centralized but NOT pluralistic such as China can exhibit tremendous economic growth but will never be able to match the overall development that inclusive political institutions can achieve. To put this in simple terms, the authors argue that China, which has extractive political institutions, will never fully match the economic development of the US because the US has inclusive political institutions
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The second thesis is how states change from extractive political institutions to inclusive institutions. This requires a critical juncture (a major political event) such as the Glorious Revolution in Great Britain in the 1680s that moved political power from the monarchy to Parliament. This move to inclusive political institutions led to inclusive economic institutions which reinforced each other over time via a virtuous cycle and created the modern Great Britain of today. Another example would be the civil war in the United States. This event moved the US greatly toward inclusive political institutions which led to inclusive economic institutions which reinforced each other over time via a virtuous cycle and created the modern United States of today. Note that it is also possible for a critical juncture to move a state from inclusive political institutions to extractive political institutions. Thus, Acemoglu and Robinson argue the development or modernization as we have defined it is caused by the development of inclusive political institutions.
While many political scientists have responded very favorably to this theory, the problem is the identification of a critical juncture. It is easy to look back in history to see the significance of the Glorious Revolution in Great Britain and the civil war in the United States, but what about current events? Let’s take a look at the Cuban Revolution of 1959. Perhaps the most important event in the history of the island state but it did not create inclusive political institutions as many had thought it would in 1959. What about the Sandinista Revolution of 1979? In my book published in 2010, I argue that it did create more inclusive political institutions which created more inclusive economic institutions, but there have been recent, significant reversals in the inclusiveness of the Nicaraguan political institutions. The primary criticism is that it requires a long time frame to recognize what event qualifies as a critical juncture.
The third grand theory, called dependency theory, explains the lack of development in the south because of the structure of the liberal, global economic regime. It grew out of a theory that was called structuralism. Structuralism is associated with Argentinian scholar Raul Praebisch and has since come to be known as the Praebisch thesis. Praeblisch, writing in the 1950s, wanted to explain why northern states were getting wealthier while the southern states were remaining poor. He argued that if you look at the trade relationship between the north and the south, the north provides manufactured goods and the south provides raw materials (agricultural goods and natural resources such as bauxite). He noted that even though colonialism was coming to an end, the global trade system of manufactured goods for raw materials reflected a colonial relationship. The problem he noted was that the price of manufactured goods was rising while the price of raw materials, with a few exceptions, was declining. To put it in economic terms, the terms of trade did not favor the southern states. Southern nations were paying more for imported manufactured goods, yet receiving less for their exported raw materials. He argued this explained why the south could not catch up with the north, despite the fact that states in the south were adopting the liberal, economic system. His solution was that the south must industrialize to catch up with the north. He observed that real wealth and the development of a large middle class was dependent upon the growth of an industrial sector in the economy.
Structuralism also focuses on the discussion of the existence of the dual economies in southern states. There is a backward, subsistence agriculture sector largely in the country side. There is also a modern, export oriented enclave normally located in the major cities and/or along the coasts. It is tied into export agriculture (large plantations/farms or mines) via strategic roads to the interior of the state. The modern sector may have some minor manufacturing capability as well. This modern, export oriented enclave is extensively tied into trade with the north. In fact, when the north invests in the south, it invests in the modern enclave only. The problem is that the modern sector of the economy is virtually separate from the backward sector. There are no links between them. This makes economic and political inequality greater in the state. The fact that foreign investment goes only to the modern sector exacerbates this inequality. Structuralism argues that development of the southern states can only occur when the modern and backward sectors of the economy are linked or tied together.
Dependency theory grew out of the Praebisch thesis and its focus on the dual economy. Dependency theory represents a Marxist or class perspective to international political economy. If you read an article or book about development and the author uses the terms center and periphery, this is an indicator that the author is using dependency theory. The term center refers to the wealthy class (typically land owners in agricultural based societies in the south, mine owners in states that are dependent on natural resources in the south, CEO’s of modern industry, finance, and high tech firms in the north). The term periphery refers to all other classes such as the peasant or nascent working class in the south or the working/labor or middle classes in the north. Dependency theory looks at the global, liberal economic regime and notes that it is controlled by the center of the northern states and the center of the southern states. They make all the decisions. The periphery of the northern states and the periphery of the southern states have little to no say about this. They are dependent upon decisions made by the center of the northern states and the center of the southern states. The periphery in the south is not tied into this global political economy because of the dual economy. In the global trading system of manufactured goods in return for agricultural products or natural resources the center of the north and the center of the south, located in the modern enclave of the dual economy, benefit from the current liberal, global economic regime. There is no incentive to change the nature of global trade or the global economic regime. Thus, the structure of the liberal, global political economy with the center in the north and south benefitting from the current global economic regime predicts there will be very little change. This means that in the south, the dual economy will remain, economic and political inequality will remain, and the south will not become fully developed even if they adopt liberal economic systems. One criticism of dependency theory is its class basis and the fact that members of each class are considered to be a single unit. This does not reflect reality. I note that some industries support free trade and other support mercantilism or economic nationalism. A more important criticism is that the theory says that the states in the south can never develop, but we see that some southern states are making substantial progress in development. These states are that middle group we spoke of – the BRICS, the Asian Tigers, and a handful of Latin American states. Dependency theory does not explain why these states are rapidly developing within the liberal, global economic regime.
In Part 6 of Lectures in Political Economy – Understanding Global Hegemony and its Implications, we will look at strategies for development including import substitution industrialization, export led development, the agro-export model of development, and the East Asian development model including the rise of South Korea and China. We will then turn our attention to the relationship between the wealthy states and the poorer states by studying foreign aid and the issue of the poverty trap.
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