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Day five - a third dimension

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The rich people have to eat money, but luckily the poor provide food.


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MOST of what we have said so far has applied largely to the economies of rich countries. Now we want to look at the kind of economy you will find in Third World countries, whether they are capitalist or socialist.

Isn’t it time we heard a bit more abut socialist economics in any case?

Maybe it is. You might even be a bit surprised that the New Internationalist is giving capitalism the spotlight. We have been sympathetic enough to the socialist alternative in the past.

Soft on communism, I would have said

Just prepared to give credit where it is due. But in this issue we’re not going to talk much about socialism not in the Eastern European sense at least.

Thank God for that - but why not?

Well this is meant to be a very basic explanation of economics. Socialism on the whole is much less difficult to understand than capitalism. And you probably know most of it already. The socialist idea that the State should centrally plan the production and distribution of goods is pretty straightforward - even if it is difficult to carry out in practice.

Capitalism on the other hand is relatively easy to practice but much more difficult to describe. All the capitalist has to do is follow his basic instincts and let everyone else follow theirs. But following the financial trail they’ leave behind can be very difficult.

In fact as companies get larger the operating differences between socialism and capitalism have become very blurred. Most of the big corporations spend a lot of time planning the future. Despite all their talk about the free play of market forces they can probably’ tell you how many hamburgers or jars of coffee the are going to be selling in five years time.

But the planning we are looking at today is that of governments. This is because the focus is on developing countries and for them central planning is much more important than it ever was for us.

I don’t like the sound of that. Why don’t they just follow our lead?

Because even if they want to they can’t. Third World countries can’t follow the same path because they are starting from a completely’ different place.

Remember how the early capitalist countries started out? Over a long period of time a series of simple inventions were introduced into agriculture and industry. These enabled production per person to be stepped up and wages could rise as a result. Earnings were then used to buy goods or invest in future production. The capitalist machine today is the product of centuries of steady growth: it can cough and splutter and sometimes look like breaking down completely. but with regular servicing and occasional replacement of parts it has managed to keep going.

In poor countries the economic machine is in a very different condition. Some parts of it are whirring round very rapidly, others don’t work at all - and many are completely missing. Take literacy - which is of economic as well as educational importance. In most developing countries you will find copies of Time magazine, instruction manuals for IBM. Computers and advertisements for Gold Leaf cigarettes. Yet many people will not be able to read them. They may be illiterate or perhaps they do not even speak that particular language. Or, even if they can read, it could be that most of the reading matter is in the capital city and they live in the countryside. Things are often like this in poor countries: their economies are very unevenly developed, many of the parts simply do not connect up.

Time they got themselves organised.

Time things were changed, I’d agree with you there. But you can hardly blame the people in poor countries for their disjointed economies. Many of the things which do not match up came from overseas: it is the rich countries which cause much of the dislocation in the poor world.

Here we go. You’re going to tell me that all the problems in the world are caused by international capitalism.

No - though some of them certainly are. All I’m saying here is that capitalism has certainly shaped the economies of poor countries. Of that there can be no doubt.

I should say again, however, that there are some communities that remain relatively untouched by any outside influences of any kind. You will find subsistence communities in most of the poorest countries from Chad to Peru to Papua New Guinea. Even in India which is one of the world’s biggest industrial powers the majority of the population live in poor villages working the way they have done for generations.

But in every country you will find particular 7-areas and groups of people which are closely linked with the outside world. Even as we speak there are Ecuadorian campesinos cutting bananas to send to Europe. Dumper truck drivers in Jamaica are scooping up bauxite to ship to Canada and tea pickers in Sri Lanka are choosing the leaves that will appear in Australian supermarkets.

According to my watch some of them must be working in the dark - still, it’s very helpful of them, whenever they do it.

True. They are doing precisely what we want them to do - following the pattern of work that was established from the earliest days of colonial contact. Poor countries in general were designated as suppliers of raw materials while we would sell our manufactured goods to them.

Seems like a fair exchange to me.

It might be if the proceeds of the trade were equally shared out. But it is the makers of the manufactured goods who have the whip hand. Take the confectionary industry - importing cocoa from Ghana. They decide what products they are going to make, what ingredients they need and in what quantities. Most of all they decide what they are prepared to pay’ and can change the mix of raw materials if one of them rises in price.

The chocolate and candy end of the business is also the part that is the most susceptible to technical innovation. There’s not much you can do to improve cocoa yields but no end of computer-aided gadgets that you can use with moulding or packing machines. Most of the investment therefore has been made in the rich countries and this is where most of the profit has been made.

But Ghana isn’t a colony anymore. Why don’t they make chocolate too?

They do. But they don’t have the accumulated capital that we have to invest in sophisticated machinery. Nor do they have the education and training at the marketing end. They find for example that there are subtle hut vital differences in national taste: chocolate is milky in Britain, or bitter in France or tastes of peanuts in North America.

And even if they really start being successful at selling such manufactured goods they find that the rich countries raise tariff barriers to keep them out. Developing countries as a result find themselves tied to the economic patterns laid down by the more powerful nations.

But just as important as the economic legacies of colonialism are the social and political ones. Colonial dependencies were usually run through a small elite of settlers or of carefully chosen local people. They were to be the channels through which the trade and the money were to pass to the home government.

Nowadays you will find their successors just as firmly entrenched. They may be the privileged government officials, the owners of large plantations or the local managers of multinational corporations. Their interests and values are linked as much with the rich nations as with their own countries.

I think we’re getting off the point here - is this economics?

I’m just trying to say that the poor countries have ‘dualistic’ economies. There is a small rich elite surrounded by a mass of very poor people.

The rich will control most of the country’s land and industry. Certainly they will earn a great deal, but much of what they get will be spent on expensive imported goods - the swish Mercedes or the Hitachi music centre, they will buy relatively little that is locally produced.

The millions of poor people may be subsistence farmers and so largely outside the cash economy. Or they may work for very low’ wages mining tin or cutting sugar cane for exports. Neither group can afford to purchase very much.

The economic point of all this is that the lack of demand from both the rich and the poor and the lack of investment in manufacturing industry mean that most poor countries have very small economies: their Gross National Product (GNP) will be low. The GNP includes all the goods and services that people work at producing - whether food or clothes or bus rides or police forces.

International comparisons are usually’ made in terms of GNP per head of population. So that of New Zealand is S7.000 while that of Chile is S2,560. This does not mean that everyone in New’ Zealand is richer than everyone in Chile. There are wide discrepancies of income in both countries.

But the inequality is much greater in Chile than in New’ Zealand and is indeed generally’ greater in poor countries than rich ones. This is another indication of the more solid economic base of the rich countries people buying and selling from each other on a more equal basis enables the money’ to move round the economy.

This relative equality’ in the advanced capitalist countries has confounded the predictions of Karl Marx. He correctly foresaw that corporations would grow larger and larger, but he also thought that they’ would use their greater size to exploit their work forces and lower their wages. The workers in the end, he said, would rise up in revolution and overthrow capitalism. This has not happened where he thought it would - in countries like Germany and Britain largely due to the efforts of the trade unions.

You mean they have kept capitalism going?

Very probably. But modern Marxists argue that this has only been possible because the real exploitation and misery has been felt in the Third World.

Why haven’t they risen up then?

Well, cotton pickers in Central America can hardly rush off and seize cotton mills in Manchester or Philadelphia. Geographical separation has a great stabilising effect. And even if they were to try to take over their own plantations they would find opposition, not just from the local owners but also from the police and government who are likely to be receiving aid and equipment from Western governments. International military aid also has a great stabilising effect.

So let’s see what we’ve established so far. Poor countries have small dislocated economies which are orientated towards the needs of Western nations. To make progress they have to connect all their activities up so that local people can buy and sell more from each other.

Fair enough - but how do they do it?

This is where government planning comes in. And generally’ pretty drastic action is needed. Western countries can get away with tinkering with their economies but the poor countries are in such a desperate state that something like complete rebuilding is needed.

The most direct way to do this is through a socialist revolution. The cotton pickers in Nicaragua at least now’ have much more control over this own lives. And socialist governments in general do stand a good chance when it comes to connecting all the bits of the economy. They can distribute assets and income over the whole country so that demand is evenly spread out. There are doubts however about whether socialists promote production as efficiently as they manage distribution. But economic planning is by no means limited to socialist countries. The governments of South Korea and Singapore, for example have strongly directed local business activity, both through incentive and legislation. We may consider their social or political approaches to he restrictive or repressive but economically they have been very successful.

Changing political, economic and social structures simultaneously - in whatever direction - is a process that goes under the heading of development.

I’ve always wondered what that was.

Now you know. It involves both unlocking the existing potential of countries whose development has been held back by’ archaic social structures - and then building on this to produce some kind of economic growth.

How are they supposed to promote growth?

In the case of the poorest countries there is often little point in stimulating demand in the Keynesian style. They don’t have the factories to produce the goods so increasing demand will only push up prices and lead to inflation.

What they have to do is to try’ and promote demand and supply together. Given that so few people in poor countries have wage-earning jobs the best way of creating an even spread of supply and demand is by investing in labour-intensive industries. This would mean starting a number of small cobblers workshops to make shoes, for example. rather than a highly automated shoe factory.

But this might not be what investors would want done with their capital naturally. They might consider that a highly automated Bata shoe factory would give a better return on investment.

A good place to instal the small workshops would be in the countryside rather than the capital - so as to stem the tide of migration to the glamorous city. But a private investor would want his factory to be sited near his biggest market - which is likely to be the capital.

So a government with development as an objective will be in conflict with the ‘natural’ behaviour of the market. It has to promote supply’ in a way that will create general demand.

That smacks to me of ‘supply-side’ economics. I thought we were against that.

There’s nothing wrong with trying to promote the supply of goods. But there are very different ways of doing it, so you will find supply-siders both on the right and the left.

In rich countries the supply-siders of the right want to promote production by reducing taxes on entrepreneurs. People on the left put more emphasis on creating demand but they are also worried about the supply. The fear that, even if demand goes up, manufacturers will not be sufficiently well-organised or imaginative to take advantage of it. So they advocate planning agreements with the major companies to ensure they produce and invest in the national interest - and they might in some cases want to nationalise the companies.

In poor countries the supply-siders take a similar line. They want industry to produce the goods in a way that will best benefit the country.

But where is all this investment going to come from?

A good question to end on - and one that we’ll have to try and answer tomorrow and the day after.

We have used Third World countries as sources of raw materials and markets for manufactured goods.

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An elite group of politicians and businessmen have served as our point of contact.

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Meanwhile the mass of poor people have stayed outside the cash economy or earned very low wages.

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Third World economies have thus been relatively small and dislocated.

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Development will mean connecting up the different parts of the economy.

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And changing both political and economic structures simultaneously.