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Growth and fluctuations 1870–1913
World Development Vol. 7 pp. 349-354 Pergamon Press Ltd. 1979. Printed in Great Britain
Book Reviews Growth and Fluctuations 1978; p. 333; 212.50.).
1870-1913.
By W. Arthur
Arthur Lewis has written an important new book about growth and fluctuations in the world economy during the period 1870- 19 13. This was the heyday of what could be called the old international economic order, for it was a period of relatively free trade and rapid industrialization in the West which coincided with the formation of a unified world market and the maximum extension of the colonial system. After 1913 the old order went into 35 years of decline. First came the First World War; this was followed by falling terms of trade for primary commodities in the 1920s then by the great depression of the 1930s and finally by the Second World War. This was ‘a period of disaster’ for the tropics. In the late 19th century, however, the old order seemed to perform rather well. Lewis divides the world into four ‘core’ countries (the UK, France, Germany and the USA) and the ‘periphery’. Industrialization in the ‘core’ provides the stimulus to growth of the world economy as a whole. This model of the world economy thus is similar in structure to his earlier model of an underdeveloped country with its ‘modern’ and ‘traditional’ sectors. Indeed, in a sense this book represents an exceptionally interesting universalization of ‘economic development with unlimited supplies of labour’. Let us begin with a few facts about rates of growth. The trend of industrial output in the ‘core’, from the peak of 1883 to that of 1913, was about 3.65% per annum. In principle this should have created possibilities for growth in the ‘periphery’ by exporting primary commodities. In practice, however, ‘the core was not really importing all that much’ as it was largely self-sufficient. The relatively low volume of world trade increased, in current prices, about 3.4% a year during 1883- 1913 while trade in primary products grew 3.1% a year. Industrialization was, thus, an engine of foreign trade, although the long-run elasticity of trade with respect to core industrial production was significantly less than unity. More important, Lewis shows that, in general, trade was not an engine of growth for the under-
Lewis (London:
George
Allen and Unwin,
developed countries of the periphery. The important exception is the temperate climate countries such as Australia and Argentina. They were able both to export temperate zone products at favourable terms of trade and later to switch to import substituting industrialization, all the while paying wages comparable to those in Europe. In fact wages in Buenos Aires in 1911-14 were higher than those in France. Conditions in the tropics, however, were very different. The productivity of labour in food cultivation in the tropics was low and consequently the wage rate was low. This in turn implied that the price of tropical export crops using low-wage labour and competing with food crops for land would be low. That is, regardless of the productivity of labour in the export crops, the prices of tropical commodities would move to the level determined by the low productivity of labour in food crops. As a result the tropical countries in the ‘periphery’ were condemned to low factoral terms of trade and hence low gains from trade. One possible escape from this would be through massive foreign investment which ultimately would raise the productivity of labour in the tropics. Foreign investment did increase quite rapidly during the period 1886/ 90 to 1909/13, namely at 4.25% a year, but most of this investment was located in the temperate rather than in the tropical countries of the ‘periphery’. Another possible escape would be through emigration. Between 1871 and 1915 there were about 36 million emigrants from Europe, the great majority going to the United States. The number of emigrants from India and China was even larger, but these migrants were channelled to other tropical countries, not to the high wage economies in the temperate zone of the ‘periphery’. Given the virtually unlimited supply of Indian and Chinese labour, tropical wages and the incomes of peasant cultivators in the tropics were kept down to levels approximating those in India and China. In this way emigration tended to keep the factoral terms of trade of tropical producers permanently depressed. The 349
350
WORLD DEVELOPMENT
international labour market clearly was segmented, European labour going to the high wage, sparsely settled temperate climate countries and Asian labour forced to circulate in the low wage, densely settled tropical countries. How the labour market became segmented in this manner and how this segmentation was maintained obviously are important issues of the political economy of the period. The author, unfortunately, fails to explore these questions. Instead he examines other alternatives available to the ‘periphery’. One was to reduce the rate of population growth. A second was to use such gains from trade as there were to industralize. A third, and most important, was to introduce continuous technological improvements in agriculture. Only in this way could
Economic (London:
labour productivity, the factoral terms of trade and standards of living be improved. The author recognizes that ‘the key to reducing mass poverty is an agrarian revolution’ and that the heart of the revolution is land reform. International trade offers only modest once-for-all improvements whereas secular improvements are most likely to originate from within the domestic economy. The old colonial order did not encourage these changes in the tropics and in consequence the poverty of the poorest people in the poorest countries was perpetuated even in this period of rapid world industrial expansion. Keith Griffin Queen Elizabeth House, Oxford
Relations between Socialist Countries and the Third World. Edited The Macmillan Press, 1977; pp. 265, including index; El 5.00).
by Deepak
Die Wirtschaftsbeziehungen des Comecon mit den Entwicklungslandern, Unter besonderer sichtigung Stidasiens. By Jifi Eli&5 (Berne: Peter Land; Europaische Hochschulschriften, (Volks-und Betriebswirtschaft), Vol. 159; pp. 204; including Bibliography).
The role of trade in the growth of less developed countries (LDCs) has occupied such an important place in the development literature that it may seem redundant to bring in yet another aspect of economic relations of LDCs for academic discussion. For some economists, the problem now is to ‘discover’ a new alternative which would provide the basis for devising a suitable trade strategy for LDCs. Intensification of economic relations with the centrallyplanned economies (CPEs), which is the subject of the two reviewed books, may be tempting for LDCs since both trade and aid still represent a relatively small proportion of the total. Unanalysis of economic relations fortunately, between LDCs and CPEs has been neglected by economists in the past’ and it is for this reason that the recent publication of Eli& book and the book edited by Nayyar are very welcome. In general, there are at least four areas which make the relations between both groups of countries of special interest. First, their trade takes place to a large extent in the framework of bilateral agreements. Although the effects of bilateral agreements on the growth, structure and stability of trade of other countries have already been discussed in the literature, the bilateral trade between LDCs and CPEs provides a new source of experience. Second, it
Nayyar
BeriickReigh V
is often claimed in the CPEs and even by economists in the West (including some in Nayyar’s edition) that trade with and aid from CPEs brings special gains for LDCs. Hence, it would be useful to substantiate such claims by empirical evidence. Third, since the literature on the subject is relatively limited, it is equally desirable to provide a comprehensive description of the magnitude and organization of trade and aid between both groups of countries. Such descriptions could offer an invaluable source of information for those LDCs which may wish to enter into economic relations with the CPEs. Finally, an analysis of the past trends may facilitate projections for the future. Of the four areas, both books are concentrated on two issues: description of the dimensions and organization of the economic relations and analysis of implications of the relations for LDCs. The book edited by Deepak Nayyar includes essays by eight contributors and an introductory chapter by the editor which outlines the dimensions of the economic relations between LDCs and CPEs. Six essays represent country studies: a case study of Tanzania by M. Bienefeld, Egypt by R. Mabro, West Africa by C. Stevens, India by D. Nayyar, Pakistan by A. Noman and China by S. Paine. The remaining two essays deal with
Book Reviews Growth and Fluctuations 1978; p. 333; 212.50.).
1870-1913.
By W. Arthur
Arthur Lewis has written an important new book about growth and fluctuations in the world economy during the period 1870- 19 13. This was the heyday of what could be called the old international economic order, for it was a period of relatively free trade and rapid industrialization in the West which coincided with the formation of a unified world market and the maximum extension of the colonial system. After 1913 the old order went into 35 years of decline. First came the First World War; this was followed by falling terms of trade for primary commodities in the 1920s then by the great depression of the 1930s and finally by the Second World War. This was ‘a period of disaster’ for the tropics. In the late 19th century, however, the old order seemed to perform rather well. Lewis divides the world into four ‘core’ countries (the UK, France, Germany and the USA) and the ‘periphery’. Industrialization in the ‘core’ provides the stimulus to growth of the world economy as a whole. This model of the world economy thus is similar in structure to his earlier model of an underdeveloped country with its ‘modern’ and ‘traditional’ sectors. Indeed, in a sense this book represents an exceptionally interesting universalization of ‘economic development with unlimited supplies of labour’. Let us begin with a few facts about rates of growth. The trend of industrial output in the ‘core’, from the peak of 1883 to that of 1913, was about 3.65% per annum. In principle this should have created possibilities for growth in the ‘periphery’ by exporting primary commodities. In practice, however, ‘the core was not really importing all that much’ as it was largely self-sufficient. The relatively low volume of world trade increased, in current prices, about 3.4% a year during 1883- 1913 while trade in primary products grew 3.1% a year. Industrialization was, thus, an engine of foreign trade, although the long-run elasticity of trade with respect to core industrial production was significantly less than unity. More important, Lewis shows that, in general, trade was not an engine of growth for the under-
Lewis (London:
George
Allen and Unwin,
developed countries of the periphery. The important exception is the temperate climate countries such as Australia and Argentina. They were able both to export temperate zone products at favourable terms of trade and later to switch to import substituting industrialization, all the while paying wages comparable to those in Europe. In fact wages in Buenos Aires in 1911-14 were higher than those in France. Conditions in the tropics, however, were very different. The productivity of labour in food cultivation in the tropics was low and consequently the wage rate was low. This in turn implied that the price of tropical export crops using low-wage labour and competing with food crops for land would be low. That is, regardless of the productivity of labour in the export crops, the prices of tropical commodities would move to the level determined by the low productivity of labour in food crops. As a result the tropical countries in the ‘periphery’ were condemned to low factoral terms of trade and hence low gains from trade. One possible escape from this would be through massive foreign investment which ultimately would raise the productivity of labour in the tropics. Foreign investment did increase quite rapidly during the period 1886/ 90 to 1909/13, namely at 4.25% a year, but most of this investment was located in the temperate rather than in the tropical countries of the ‘periphery’. Another possible escape would be through emigration. Between 1871 and 1915 there were about 36 million emigrants from Europe, the great majority going to the United States. The number of emigrants from India and China was even larger, but these migrants were channelled to other tropical countries, not to the high wage economies in the temperate zone of the ‘periphery’. Given the virtually unlimited supply of Indian and Chinese labour, tropical wages and the incomes of peasant cultivators in the tropics were kept down to levels approximating those in India and China. In this way emigration tended to keep the factoral terms of trade of tropical producers permanently depressed. The 349
350
WORLD DEVELOPMENT
international labour market clearly was segmented, European labour going to the high wage, sparsely settled temperate climate countries and Asian labour forced to circulate in the low wage, densely settled tropical countries. How the labour market became segmented in this manner and how this segmentation was maintained obviously are important issues of the political economy of the period. The author, unfortunately, fails to explore these questions. Instead he examines other alternatives available to the ‘periphery’. One was to reduce the rate of population growth. A second was to use such gains from trade as there were to industralize. A third, and most important, was to introduce continuous technological improvements in agriculture. Only in this way could
Economic (London:
labour productivity, the factoral terms of trade and standards of living be improved. The author recognizes that ‘the key to reducing mass poverty is an agrarian revolution’ and that the heart of the revolution is land reform. International trade offers only modest once-for-all improvements whereas secular improvements are most likely to originate from within the domestic economy. The old colonial order did not encourage these changes in the tropics and in consequence the poverty of the poorest people in the poorest countries was perpetuated even in this period of rapid world industrial expansion. Keith Griffin Queen Elizabeth House, Oxford
Relations between Socialist Countries and the Third World. Edited The Macmillan Press, 1977; pp. 265, including index; El 5.00).
by Deepak
Die Wirtschaftsbeziehungen des Comecon mit den Entwicklungslandern, Unter besonderer sichtigung Stidasiens. By Jifi Eli&5 (Berne: Peter Land; Europaische Hochschulschriften, (Volks-und Betriebswirtschaft), Vol. 159; pp. 204; including Bibliography).
The role of trade in the growth of less developed countries (LDCs) has occupied such an important place in the development literature that it may seem redundant to bring in yet another aspect of economic relations of LDCs for academic discussion. For some economists, the problem now is to ‘discover’ a new alternative which would provide the basis for devising a suitable trade strategy for LDCs. Intensification of economic relations with the centrallyplanned economies (CPEs), which is the subject of the two reviewed books, may be tempting for LDCs since both trade and aid still represent a relatively small proportion of the total. Unanalysis of economic relations fortunately, between LDCs and CPEs has been neglected by economists in the past’ and it is for this reason that the recent publication of Eli& book and the book edited by Nayyar are very welcome. In general, there are at least four areas which make the relations between both groups of countries of special interest. First, their trade takes place to a large extent in the framework of bilateral agreements. Although the effects of bilateral agreements on the growth, structure and stability of trade of other countries have already been discussed in the literature, the bilateral trade between LDCs and CPEs provides a new source of experience. Second, it
Nayyar
BeriickReigh V
is often claimed in the CPEs and even by economists in the West (including some in Nayyar’s edition) that trade with and aid from CPEs brings special gains for LDCs. Hence, it would be useful to substantiate such claims by empirical evidence. Third, since the literature on the subject is relatively limited, it is equally desirable to provide a comprehensive description of the magnitude and organization of trade and aid between both groups of countries. Such descriptions could offer an invaluable source of information for those LDCs which may wish to enter into economic relations with the CPEs. Finally, an analysis of the past trends may facilitate projections for the future. Of the four areas, both books are concentrated on two issues: description of the dimensions and organization of the economic relations and analysis of implications of the relations for LDCs. The book edited by Deepak Nayyar includes essays by eight contributors and an introductory chapter by the editor which outlines the dimensions of the economic relations between LDCs and CPEs. Six essays represent country studies: a case study of Tanzania by M. Bienefeld, Egypt by R. Mabro, West Africa by C. Stevens, India by D. Nayyar, Pakistan by A. Noman and China by S. Paine. The remaining two essays deal with