Third World (idea)

"Outline and judge the arguments of the ‘pessimists’ and the ‘optimists’ with regard to the consequences of closer economic relations between the ‘West’ and the ‘Third world’ following from colonialism."

The purpose of this essay is to outline the arguments of the 'pessimists' and 'optimists' regarding the consequences of closer economic ties between the West and the Third World as presented by D.K. Fieldhouse and assess their validity. I first discuss the basic theoretical arguments for free trade as formulated by the classical economists, and then assess how well that theory has worked in practice. Secondly, I consider the optimist position based on protectionist notions. I then discuss the theoretical arguments of the pessimists, focusing on the classical Marxist theory of Luxemburg and the 'Unequal exchange' argument put forward by Emmanuel and Sau, and assess the validity of their claims. I conclude by arguing that the optimist position based on free trade principles is the strongest of the ones I consider.

The optimist position regarding closer economic ties between the West and the Third World is divided by Fieldhouse into the free trade position and the protectionist position (Fieldhouse, 1999; 1). There are three basic points in the free trade arguments for the optimist position that increased economic ties between the West and the Third World have been - or at least should be - beneficial. These are: specialization, comparative advantage and 'vent-for-surplus' (Fieldhouse, 1999; see also, Sachs et al., 1995 and Ingham, 1995). The argument for specialization was put forward powerfully by Adam Smith: "The greatest improvement in the productive powers of labour ... seem to have been the effects of the division of labour" (Smith, 1993: 11). The division of labour means that different sections of the labour force specialize in different parts of the production process. Thus, each can concentrate on improving the techniques used in their niche, resulting in greater efficiency overall. This principle can be expanded to the international economy. Specialization in certain products means a country can concentrate its resources - labour, capital, education and so forth - on those products. This in turn means that it can make those products cheaper and better that would otherwise be possible, thus increasing overall productivity in the world economy (Fieldhouse, 1999; for the classic discussion of this, see Smith, 1993).

Comparative advantage, a notion first put forward by David Ricardo, is based on the idea that certain countries are better suited to produce certain goods than others (Fielhouse, 1999). Thus, Finland and Sweden produce timber products, but Cuba produces coffee and tobacco. It would be absurd for it to be the other way round, since the climates of the respective countries are well suited for one type of product but totally unfit for the other.

The third theoretical advantage of increased economic ties between countries is the ability to sell products they cannot consume themselves to others. This is called 'vent-for-surplus', a notion put forward by Adam Smith. 'Vent-for-surplus' allows countries to get a higher income from the products they produce, since the surplus does not go to waste (Kurtz, 1992; Fieldhouse, 1999).

All of these advantages require free trade to operate fully. Free trade should thus result in economic growth, and the effects of closer economic ties between the West and the Third World should be positive. This argument seems theoretically sound, but does it work in the real world? Sachs et al. have presented a powerful argument for the benefits of free trade to developing countries. In the period 1966-1990, for instance, economies which were always open to foreign trade constantly outperformed permanently closed economies (Sachs et al., 1995: 37). Another example of the benefits of free trade is that the economies of developing countries which were open to foreign trade grew at an average annual rate of 4.49 percent in the period 1970-1989, while closed economies grew at the rate of 0.69 per cent per annum. Sachs et al. note that open developing economies tend to converge with open developed economies, since their growth rate was over two percentage points higher than that of open developed economies. There is no convergence between closed developing economies and closed developed economies, however, since the latter grew at slightly higher a rate than the former (Sachs et al., 1995: 36; 2).

Similar results have been presented by David Dollar and Aart Kraay. According to their data, the group of countries which they call 'globalizers' has cut tariffs 22 per cent on average in the last twenty years, whereas 'non-globalizing' countries only cut tariffs 11 per cent. The first group had an average growth rate of 2.9 per cent in the 1970s, 3.5 per cent in the 1980s and 5.0 per cent in the 1990s. The economic growth of those adopting more protectionist polices actually declined - from 3.3 per cent in the 1970s to 1.4 per cent in the 1990s, with a drop to 0.8 per cent in the 1980s (Dollar & Kraay, 2002: 2). Free trade not only seems to promote economic growth in Third World countries, but also decreases global inequality (3).

The theoretical optimist position based on protectionism argues that there are several benefits for colonies and Third World countries to be gained from the type of economic system that France imposed on its colonies. This meant preferential treatment of colonial products in France and French products in the colonies (Fieldhouse, 1999). How might this benefit Third World countries?

Fieldhouse lists several reasons. First, weak economies are vulnerable to international competition, and therefore need to protect themselves. Second, the colonies or later, Third World countries, were largely dependent on exporting a small number of primary goods. The world market for these is unpredictable. Therefore a closed economic system with the metropolis gives the developing country a much more secure income. It was also in the interests of the metropolis to promote economic growth in the colonies, since they could thus become markets for the imperial power's own products. The metropolis might therefore buy colonial products at uncompetitive prices. The closed imperial economic system might encourage investment since there was a guaranteed market for goods (Fieldhouse, 1999).

The greatest theoretical difficulty with the protectionist argument is that by artificially biasing the economy towards producing certain products, it might promote inefficiency. Protection of certain colonial products meant that the colony was less likely to change the products it produced, or diversify its economy. Thus, colonies and later Third World countries became largely dependent on a few exports, and price fluctuations might cause considerable economic hardship. In some cases, preferential treatment for ex-colonies has been continued, and many have adopted protectionist policies. It seems that the theoretical objections to such policies apply in reality as well. As I have already pointed out, many studies show that open economies grow faster than their protectionist counterparts (4).

The 'pessimist' position regarding closer economic ties between the West and the Third World is, greatly simplified, that the effects of this closer relationship have been, on the whole, detrimental to the economic developed of the Third World. It is clear that many Third World countries are exceedingly poor despite centuries of contact with the West. I will concentrate on Luxemburg's classical Marxist critique of free trade and the 'Unequal exchange' position argued for by Emmanuel and Sau, since both of these reject the theoretical assumptions of the classical economists.

Rosa Luxemburg's analysis of closer economic ties between the West and the Third World is based on the theoretical observation that in a capitalist society, there will necessarily be a surplus of produced goods since the proletariat is unable to buy all the goods available and the capitalist class is unwilling to do so. The conclusion, resembling the 'vent-for-surplus' notion, is therefore to export this surplus. However, this surplus must be sold to non-capitalist, in practice Third World countries, since the capitalist countries are unable to absorb the surplus themselves. Western countries also gain the primary materials they need from this exchange. However, this exchange is not done in a mutually beneficial manner. Capitalism transforms the peasantry in the Third World country into a proletariat working in mines, factories, or on plantations, thus extracting the maximum amount of wealth for the benefit of the West and leading to poverty in the Third World (Fieldhouse, 1999).

I think Luxemburg's historical analysis does have some merit. For instance in Latin America, her description of the effects of closer relations between the West and the Third World corresponds closely to the historical reality. However, the problem is her Marxist determinism. Surely the fact that there has been exploitation of Third World countries by the West does not mean the Third World will stay in perpetual poverty. The rise of many Asian economies give weight to my point (see Maddison, 2001: 142-149).

The argument about 'unequal exchange' is even more untenable than Luxemburg's. It is premised on the Ricardian and Marxist notion that the value of a product is determined by the cost of the labour needed to produce it. Emmanuel and Sau point out that wages are considerably lower in Third World countries than in the affluent West (Fieldhouse, 1999; Sau, 1978). Products made in the West are more expensive than those produced in the Third World, since the latter mostly specializes in primary products. The exchange of goods between the West and the Third World is unequal since a Third World country must export much more in terms of hours of labour to buy Western imports than a Western country has to export in order to buy goods of equal value. Resources which might be used for economic development in the Third World are therefore used to make up for the gap (Fieldhouse, 1999). According to Sau "The Third World's ... most important endowments ... are given out in unequal exchange with imperialism." (Sau, 1978: 165)

This argument is highly dubious. Perhaps a Third World country has to spend more hours of labour on paying for imports, but why would this matter? It's the same as saying that Mr. A is condemned to poverty since he earns half the amount Mr. B does. Obviously Mr. A is going to stay poorer than Mr. B, but this tells us nothing of Mr. A's absolute level of wealth. Also, this is all assuming that Mr. A cannot change his job or get a better education or get better at his job. Similarly, the 'unequal exchange' theory assumes that Third World countries are unable to change the products they manufacture to ones that give them a greater comparative advantage and that they cannot make their economies more efficient by adapting new technologies or educating their workforces.

The argument put forward by Emmanuel and Sau also fails to explain why some countries such as the white settler colonies of North America or Australia and some Asian countries have been able to develop highly sophisticated economies. Perhaps the world economy favours Western interests, but this should simply lead to slower growth in Third World countries than in the West rather than keep less developed countries in perpetual poverty. The statistics of growth rates in developing and developed countries presented above refute even this point. It is quite obvious that some other explanation of Third World poverty than 'unequal exchange' needs to be found.

Of the positions I have considered, free trade seems the strongest. It is theoretically sound, and free trade policies in Third World countries tend to foster higher economic growth and bridge the gap between the underdeveloped and the developed world. Protectionist economic policies have failed to create sufficient growth, and there are theoretical problems with them. The pessimist arguments I have considered fail in theory, so it is hardly to be expected that they would work in reality. Indeed, I have shown that they fail in practice as well.

Still, the fact remains that after centuries of contact and trade with the West, large parts of the Third World remain impoverished. Latin America has been trading with the West for over five hundred years; surely this is ample time to reap the benefits of comparative advantage. However, the evidence I have used suggests that the pessimists are missing the point. The enduring poverty of the Third World has been caused not by free trade, but by the lack thereof. Many developing countries were under protectionist economic regimes during colonialism, or have adopted such policies after independence. Many have seen dramatic economic growth after they have opened up their economies. There may be many factors which contribute to the economic success of Third World countries; free trade is one of the most important.

Where does this leave the debate between the optimists and the pessimists? The pessimists I have discussed are in the wrong, but I think there is considerable justification for pessimism about the effects of closer economic ties between the West and the Third World. This is not because of any theoretical problems of closer economic integration, but because of actual policies adopted by both Western imperial powers and the Third World countries themselves. In itself, closer economic ties between the West and the Third World are a good thing.

1. My concern here is merely with the economic aspect of this relationship; my criterion for judging the arguments on both sides of the debate is therefore whether this closer relationship has fostered economic development - i.e. economic growth - in the Third World. See Easterly, 2001 for a discussion of the importance of economic growth in reducing poverty in Third World countries.

2. The obvious problem with this thesis is the definition of an 'open' economy. The definition used by Sachs and his colleagues has been challenged by Francisco Rodriguez and Dani Rodik. However, there are counterarguments to this criticism, and Rodriguez and Rodik do not dispute the basic findings of Sachs et al. (for a discussion of Rodriguez and Rodik's argument, see The Economist, 1999). Thus, I think the statistics used by Sachs et al. are sufficiently reliable for the purposes of this essay.

3. Even though free trade seems to promote economic equality between countries, this does not necessarily mean inequality within countries is decreased by free trade policies leading to economic growth. See Meier & Rauch, 2000: p. 36, p. 38.

4. This hardly refutes the 'infant industry' argument put forward by John Stuart Mill. Historically, a lot of the industrialization and economic growth attained by Western Europe and the United States happened under protectionism. A more recent example which could be used to defend this argument is the case of the East Asian 'tiger' economies. I think this argument is strong, but I do not think it refutes - or is intended to refute (at least as argued for by Mill) the basic argument for free trade. Defending or criticising it is beyond the scope of this essay.

5. Emmanuel's solution to Third World poverty is that less developed countries restrain from international trade. This would probably be economic suicide, since exports form a large proportion of the GDP of these countries. If one accepts Emmanuel's basic argument about the inequality of trade, a better solution to it would be to adapt more efficient technology in Third World manufacturing and thus narrow the gap in labour hours paid.

Dollar, David & Kraay, Aart (2002) 'Trade, Growth, and Poverty', The World Bank Group (from worldbank.org, http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2002/08/23/000094946_02082304142939/Rendered/PDF/multi0page.pdf)

Easterly, William (2001) The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics (Cambridge, The MIT Press)

'The never-ending question', The Economist, July 1st, 1999 (from economist.com, http://www.economist.com/displaystory.cfm?story_id=323173)

Fieldhouse, D. K. (1999) The West and the Third World (Madison, Blackwell Publishers)

Maddison, Angus (2001) The World Economy: A Millenial Perspective (Development Centre of the Organisation of Economic Co-Operation and Development)

Mill, John Stuart (1994) Principles of Political Economy (Oxford, Oxford University Press)

Ricardo, David (1971) On the Principles of Political Economy and Taxation (Harmondsworth, Penguin Books)

Sachs, Jeffrey D., Warner, Andrew, Aslund, Anders & Fischer, Stanley (1995) 'Economic Reform and the Process of Global Integration', Brookings Papers on Economic Activity, vol. 1995, No.1, pp. 1-118.

Sau, Ranjit (1978) Unequal Exchange, Imperialism and Underdevelopment: An Essay on the Political Economy of World Capitalism (Calcutta, Oxford University Press)

Smith, Adam (1993) An Inquiry into the Nature and Causes of the Wealth of Nations (Oxford, Oxford University Press)