FAMILY OF THE HEART  
present a seminar  

 

Why is the world polarized into rich and poor countries?
What can be done to minimize the disparity?

on Saturday, August 18, 2007; 1:30 PM at North York Public Library

 

Shaukat Ansari

I would like to begin by examining how capitalism generates both development and underdevelopment-focusing specifically on the American and Latin American region as an example. Iíll begin with the colonial period and then move on to discuss the current phase of imperialism and how the American brand of imperialism is unique in many respects from the prior forms.

In discussing the mechanisms of colonialism in generating capitalist underdevelopment in the Third World, I want to first make a distinction between two different categories of colonies. In explaining why certain parts of the new world were able to develop economically and why other parts stagnated and de-developed, the late economist Andre Gunder Frank differentiated between settler colonies and exploitative colonies. The former, white settler colonies were the North American colonies of the United States, or at least certain regions of what became the United States, Canada, Australia and New Zealand. The latter, exploitative colonies were the colonies in Latin America, the West Indies, and parts of Asia and Africa.

The difference between the two had to do with the mode of production that was established by the colonialists and the organization of the economy and society around this mode of production. And in fact whether the economy of a colony was organized along exploitative lines or settler lines had much to do with its geography and its resources and the importance of these resources to the process of world primitive capitalist accumulation. These resources include, most importantly gold and silver, numerous raw materials, and staple luxury crops which were grown for European populations.

So for example, looking at Latin America, the discovery of gold and silver and other raw materials and precious metals, which helped fund the industrial revolution in Britain and other parts of Europe, the economies of the different countries were organized in a fashion that was specifically designed to excavate these metals or raw materials and ship them out to the European metropolis in Spain, England or Portugal, and all the infrastructure and support systems that were built in these colonies were designed solely to facilitate in the transfer of these resources out of the region and the import of those materials necessary for that transfer. In the West Indies and parts of Brazil colonial plantation economies were established around mono-crops such as sugar, and when demand for such crops declined or other sources were found, the entire basis of the economy crumbled, no diversification took place, and the workers and slaves simply went back to subsistence farming.

And so it was the incorporation of these colonies into the world mercantile capitalist market in a very specific manner that very early on implanted the seeds of structural underdevelopment that continue to this day. Now I want to examine briefly just how the mechanisms of capitalist underdevelopment created the conditions to perpetuate and deepen the patterns of de-development long after these countries gained official independence.

The first is resource expropriation and appropriation:  To understand how this process works to deepen the structure of underdevelopment, itís necessary to go back to Marx. In Volume I of Capital, Marx sought to unlock the secret of capital accumulation by examining the relationship between producers and the owners of the means of production. He pointed out that by increasing the work time beyond the level necessary for the workers to live, the capitalists were able to create a surplus value through production which they then expropriated from the workers as profit. By extending this analysis to the relationship between developed and underdeveloped countries, the economist Paul Baran demonstrated how the latter came to be de-developed. Through external monopoly ownership a large part of the economic surplus produced by the Third World is simply expropriated by the core industrialized nations.

Take the example of Chile. The most important source of the generation of economic surplus in Chile has always been the nitrate mines. And for most of the countryís history these mines have been owned by foreign capital and interests, either Spain, Britain, or the United States, which have always expropriated a large portion of the economic surplus out of the country instead of investing it appropriately. When the socialist government of Salvador Allende nationalized the mines in 1971 a US military coup was organized to overthrow him.

This process also explains a significant difference between the settler colonies and the exploitative colonies. In the former, the development of agricultural practices led to forward and backward linkages-development of infrastructure and investment of profits into other sectors for economic diversification-Could not take place in exploitative colonies. Where not only industries but the public utilities and trade routes and merchandising were largely controlled by foreign capital.

 However, the second and more important legacy of colonialism in Latin America, and which has served to reproduce the patterns of underdevelopment in the region even after formal political independence, has been the establishment and development of internal classes whose interests are aligned with the interests of foreign capital. We have seen how the colonial countries used the colonies as a source of raw materials. After achieving their independence from Spain or Portugal the structure of underdevelopment didnít change, and in fact these countries were just further integrated into the capitalist system.

So just taking the example of Brazil, after its formal independence from Portugal in the nineteenth century Brazil signed a number of treaties with Britain giving the English full access to Brazilian markets. Britain would import raw materials and primary products from Brazil to spur British industry and feed English workers at a cheap price and then export manufactures and luxury goods to Brazil. But this wasnít done through brute force. These trade relations created a national oligarchic exporting and importing class within Brazil that was able to enrich itself from the trade in raw materials, and whose financial and economic interests depended on maintaining these relations with the metropolis and importing luxury items for their own consumption. And this was how the colonial relations were reproduced in Latin America even after formal colonialism ended.

And here is one more difference between a settler colony like the United States and an exploitative colony such as Brazil. As I mentioned, the Northeastern portion of the United States was able to engage in substantial economic development within the context of world capital accumulation because it was a resource poor area. The settlers would sell fish and meat to South America, harvest agricultural products, produce rum with molasses which was then traded for slaves in Africa, and so the economy was able to diversify into manufactures because it wasnít organized around a single mono crop or raw material, and a strong, industrial capitalist class emerged.  

In the Southern United States, however, there was a class of plantation owners whose interests were tied to the export of a primary product, cotton, produced by African slaves. When the Northern industrial class erected trade tarriffs on British manufactures and steel in order to boost domestic industry so they could compete on a world scale, the British retaliated by ceasing to purchase US cotton from the south and instead turned to India for their raw materials. And it was this conflict that in fact led to the American civil war. The war had nothing to do with slavery-slavery would have died out on its own as capitalism advanced. With the North's victory over the south the United States was able to consolidate its position in the world as an advanced capitalist country capable of competing with the other industrial powers, and the Northern bourgeois industrial class began expanding westward and accelerating the process of industrialization.

In Latin America, on the other hand, the reverse would take place again and again. In resource poor areas there did emerge autonomous capitalist classes that sought to develop the domestic economies, and were constantly pitted against the oligarchic exporting and importing classes that had no interest in erecting tariffs or repealing the British doctrine of free trade. And, unlike in the United States, it was this latter class that repeatedly emerged victorious with the decisive backing of the English, and which consolidated Latin Americaís position as a structurally underdeveloped region

Now the nineteenth century saw two other developments that were significant. The first was the MonroeDoctrine that was issued by American president James Monroe declared that Latin America fell under the US sphere of influence and that they would not tolerate any European power intervening in the area. US could not enforce it at the time, it was mainly for show, and the British didnít need to intervene militarily at the time because they were ruling through the doctrine of free trade and economic liberalism. Yet it was significant because it foreshadowed US intervention in the region over the next century and a half. The second more important development in the nineteenth and early twentieth was the rise of monopoly capitalism. Monopoly Capitalism refers to the increasing concentration of wealth and economic power in the hands of a few corporations dominating trade and business in the important heavy industries. It is accompanied by the export of capital to the underdeveloped regions and by a relentless drive by the large corporations to control markets all over the globe and to control and regulate the supply and prices of raw materials. This is what Lenin was referring to when he wrote his piece Imperialism, the highest stage of capitalism.

Monopoly capitalism does not mean the end of all competition, but it does mean that competition changes form. Firms can now anticipate the moves of their competitors, and prices are maintained at a certain level since only a few firms dominate in the industries. With the end of World War 1 the United States emerged as creditor nation over Britain American corporations began to dominate the markets in Latin America. By dominating markets I mean that trade was very often now simply between different corporations, there was increasing foreign investment in the extractive and mining industries in the region, prices were set and regulated by the monopolistic corporations and in the twentieth century numerous practices were employed to drain as much capital as possible out of the region. For example, since trade was often conducted between corporations, a standard practice of US firms was transfer pricing; basically, if a corporation was based in the United States it would trade with its subsidiaries in Latin America, if the subsidiaries needed to import capital equipment or technology to transform raw materials into the finished product, often the home office would overcharge their branches in Latin America for the item in question, and in this way the corporation would simply transfer the countryís foreign exchange out of the region and into their own coffers without even having to sell a single product.

And in fact, this is exactly what was taking place in Cuba before the revolution. A US corporation called Jersey Oil had subsidiaries in Cuba and Venezuela, the office in Venezuela was overcharging  the subsidiary in Cuba for equipment needed to turn crude into oil, and in this way foreign exchange was being transferred out of Cuba and into the coffers of US corporations. Now, for this process to take place whatís needed in the Third World are governments that are willing to deregulate their economies, to not implement the kind of labor or environmental regulations that exist in the First World, that donít impose any import barriers, tariffs, or foreign exchange controls so that the corporations can have access to the countryís hard currency without question asked to transfer funds back to their home offices. Upon taking power through the revolution, Castro immediately nationalized Jersey Oil and ended the process of price transferring, which incurred the wrath of the United States. 

After the Second World War     

Even though the US became a creditor nation after WW1, did not takeover as the regulator of World Economy, led to the depression which led to fascism and the competing imperialisms led to WW2. The US emerged from the Second World War as the only unscathed power, with tremendous resources and a permanent war economy. This time they did organize a new economic order around their interests. The Conference in Bretton Woods New Hampshire established the World Bank and the IMF, both lending and credit institutions. The most significant development emerging in the aftermath of the war was the establishment and acceptance of the US dollar as the key reserve currency. It was written into the IMF constitution that the US dollar was equivalent to a certain portion of gold, and all other currencies were then pegged to the dollar at a fixed exchange rate depended on that countryís gold reserves. At the warís end most of the gold was held in the United States.

Now, in structuring the world economy around US interests the US rebuilt Europe and injected their economies with large amounts of US dollars so that they could purchase US exports. Britain had emerged from the war as a debtor nation once again, owing a massive amount of money to the United States. Since it was understood that repaying the entire debt would ruin Britain's economy, the US entered an agreement with England, and this was called the Lend-Lease Act. Under this agreement, Britain was obligated to forfeit its sterling bloc areas, its former colonies and spheres of influence, and allow their markets to be opened up to the United States and its exports. During the war Britainís colonies had supplied Britain with raw materials for no cost and had thus accumulated a large number of sterling pound certificates, and were owed money by England.

What Britain could have done, and what they had often done in the past, was to tell the colonies that they had to accept British exports and only by accepting these exports would they be repaid the debt. However, under the Lend-lease Act the sterling certificates held by these colonies made convertible into the US dollar and could be used to purchase US exports instead of British exports, and in exchange Britain would only have to pay back 10 cents on every American dollar owed. This destroyed the British empire overnight and subordinated Britain to US interests. This historical event goes a long way in explaining why Britain always goes along with US foreign policy wishes. 

Now, since the US dollar was the reserve currency, many important commodities were soley traded in dollars, including the most important commodity, oil. In the 1960s and 70s OPEC countries in the Middle East became flush with petrol-dollars from their oil exports, and all oil importing countries had to export in dollars in order to pay for their oil. The OPEC countries invested these dollars into US banks in New York, and these banks then lent these dollars out to developing countries in Latin America at high interest rates to help them finance oil imports or to continue buying US exports. This is what became known as Petro-dollar recycling.

When the Third World was pushed into the debt crisis in the 1980s, Mexico was among the first countries to declare that it could no longer go on servicing the debt. The commercial banks brought in the World Bank and IMF to impose structural adjustment on these countries to enforce debt repayments. Stand by loans and credit was arranged and a number of policies were imposed by external forces. Public spending on health, education, and social services was drastically reduced, most state subsidies were eliminated and the funds were diverted to debt repayment. The economies of these countries were also geared towards exports, which had serious effects on the populations.

Many essential products were now produced to be sold on the world market, such as food, and this led to a drastic increase in domestic prices, as did the elimination of subsidies. Furthermore, valuable land was turned over for the raising of luxury commodities such as flowers instead of being used to cultivate food, and repeated devaluations of the domestic currencies led to increases in prices which raised the cost of doing business for local companies and facilitated their take over by foreign firms.

Furthermore, under structural adjustment the economies of these Latin American countries were completely opened up and foreign exports began flowing in, luxury exports, which simply served to exacerbate the debt problem, which was then alleviated with more foreign aid. And so you can see how foreign aid, instead of helping the countries, serves to reproduce the patterns of exploitation and underdevelopment that was implanted during colonial times. During this period, there was another change in global economic relations that changed the form of the US empire. As I mentioned, the United Stated had emerged from World War 2 as a major power and creditor nation to the world, but as a result of the Vietnam War and the activities of US corporations, this began to change. The war led to increasing arms spending and weapons contracts, and US corporations were buying out firms in Europe and Asia, and these foreign firms would deposit the US dollars into their countries central banks and the central banks would cash them in to the Federal Reserve for gold, and as a result gold started flowing out of the United States at an increasing rate and the US started to become a debtor country.

 

However, rather than cease its economic and war activities or cut back on its expenditures, the United States, under Richard Nixon, simply declined the dollar from the gold standard, which led to the collapse of the Bretton Woods system and the establishment of floating exchange rates  based on the market and the proportion of exports and imports. By doing this, the massive amounts of dollars that had been injected into the world economy and European and Asian countries had acquired through corporate transactions and exports, were no longer exchanged for US gold, but were now exchanged for US treasury securities and bonds which finances the US deficit. And when the time comes for the US to pay the interest on these securities, they do so by selling and trading more bonds and securities. And itís because of this that the United States is now able to run a huge trade deficit while continuing to pay for its wars with foreign dollars while also importing luxury goods, without the rest of the world imposing on their economy what the US imposes on the developing countries in Latin America and elsewhere, namely, structural adjustment and austerity. But its position is completely dependent on maintaining the American dollarís role as a key reserve currency over any competing currencies, especially the Euro.  

What is to be done? 

            It needs to be stressed that a country that has been significantly underdeveloped cannot break out of its shackles and lift its population out of poverty within the confines of capitalism. Not even ISI (import substitution industrialization) can move an underdeveloped country towards development unless it is undertaken in the context of radically different investment priorities.  For example, like the Soviet Union, an underdeveloped country must begin producing heavy consumer goods industry and equipment manufacturing instead of light consumer goods. Only by turning to socialist principles is it possible for the developing world to escape the devastating consequences of economic globalization. 

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