Synopsis

Andre Gunder Frank's concept of "development of underdevelopment" is increasingly relevant in the context of globalised trade and finance. Numerous historic and contemporary economists propose that unchecked, globalised trade and finance can have negative outcomes on developing economies. These negative outcomes include unbalanced growth in favour of advanced countries, worsening terms of trade for economies dependent on exporting primary products and lagging of incomes within poorer developing countries.

Empirical analysis is showing that the globalisation of many developing economies in Latin America, Eastern Europe, Asia and Africa – through the liberalisation and deregulation of markets and finance in the 1980s and 1990s – was detrimental. The economic data of numerous developing economies, over the past 20 and 30 years, proves that the current neo-classical trade theory caused the development of underdevelopment. It is clear that the economic development concepts that developing economies are encouraged to follow must be reconsidered in a world of globalised trade and finance.

The Development of Underdevelopment

In a 1966 paper, Andre Gunder Frank coined the concept of “the development of underdevelopment” after moving to Latin America in the early 1960s to teach at the University of Chile. It was this concept that made Frank famous for his criticisms of the economic development concepts that were beginning to be popularised at the time. (Frank, 1966)

Frank’s critique of the existing capitalist process pushed back against the idea that economic development could be spread to underdeveloped countries simply through the diffusion of capital, institutions and values. It was thought that the reason for the underdevelopment of any country was a result of their economic, political, social and cultural characteristics. Frank pointed out that the ideals of the capitalist economic growth process had already spread across the globe, and yet, the underdevelopment of countries continued to occur. (Frank, 1966)

Frank argued that the underdevelopment of some countries, in contrast to the more advanced countries, was inherent to the development of global capitalism. The development, growth and spread of global capitalism, by its very nature, created and continues to create “satellite underdevelopment”. Satellite underdevelopment, similar to colonial development, represented the growing disparity between the economic success within the metropoles – in other words the developed, advanced nations – and the economic stagnation or deterioration in the underdeveloped regions around the world. (Frank, 1966)

Frank was confident that “future historical research” would confirm his belief that the development of capitalism around the world would create underdeveloped regions or countries compared to the advanced economies. It would be the capitalist process and the development of global capitalism itself that deepens underdevelopment in the “satellite underdeveloped”, not a lack of capital, institutions or values within these countries. (Frank, 1966)

Hirschman and Myrdal on Globalisation and Economic Development

In his 1957 book titled “Rich Lands and Poor, The Road to World Prosperity”, Gunnar Myrdal pointed out that the historical and contemporary results of international trade and the spread of globalised capitalism had not reduced international inequalities between developed and underdeveloped countries. (Myrdal, 1957) In fact, the theoretical framework on which the economic development benefits of international trade are based do not describe or deal with the problems of underdevelopment. (Myrdal, 1957; Frank, 1966) The proponents of international trade and their theories appeared to be completely isolated from reality, which experienced increased disparity between the developed and underdeveloped countries. (Myrdal, 1957)

Albert Hirschman described, in “The Strategy of Economic Development”, that the current economic development process creates inherent inequalities of growth between interregional and international economies; Hirschman stated that inequality “is a condition of growth itself”. (Hirschman, 1958) In a geographical sense, growth is necessarily unbalanced because in order to create higher levels of income, an economy must first develop regional centers of economic strength. (Hirschman, 1957; Hirschman, 1958)

Economic growth concentrates in areas called “growing points”, which can be thought of as metropoles or well-endowed geographical areas. The economic growth within these “growing points” often causes the economies within the non-growth areas to stagnate. (Hirschman, 1957) Historically, these growth areas were distinguished between the North, the prosperous, and the South, the backwards. (Hirschman, 1958)

The globalisation of trade and finance has made the distinction between developed and underdeveloped countries increasingly relatable to Hirschman’s North-South polarisation. (Hirschman, 1958) To a large extent, economic growth inequality between countries became similar to the problem of interregional inequalities within countries. Both Myrdal and Hirschman believed that international trade and capital movements would have strong inequality effects on underdeveloped countries. (Myrdal, 1957; Hirschman, 1957)

In the long-run, the widening of markets brought about by globalised trade would strengthen the positions of developed countries which already had well established manufacturing sectors. (Myrdal, 1957) This is because international trade encourages underdeveloped countries to specialise in the production of primary goods, basic resources and other unskilled forms of production. If left unprotected, a developing country’s small-scale industry and handcraft sectors are easily “priced-out” of the market by cheaper imports from the developed economies. (Myrdal, 1957)

Myrdal also described how the movement of capital between developed and underdeveloped countries cannot be relied upon to reduce inequalities. Myrdal stated that “it is almost against nature” for large amounts of capital to move voluntarily towards underdeveloped countries. This is due to the fact that advanced economies can provide investors greater profits and security for their capital than the developing economies. (Myrdal, 1957)

Historically, capital flows to the underdeveloped countries from the advanced countries were, for the most part, directed towards primary production sectors. These primary production sectors were often already controlled by the advanced economies, such as through colonialism, and these investments often paid for themselves quickly. However, the profits were returned to the owners of the primary resource investments whom were from the advanced countries. (Myrdal, 1957; Reinert, 2008) Myrdal further argued that if there are no controls that limit the outflow of capital and no national policies that ensure a high rate of return for capital in the developing countries, then the owners of capital in developing countries would export their capital to advanced countries. (Myrdal, 1957) We can see here, that financial capital flows have an uneven balance and flow between the developed and underdeveloped countries.

According to Myrdal and Hirschman, if left unregulated, international trade and capital movements are the methods in which the economic progress of the advanced countries have detrimental effects on the economic progress in the underdeveloped countries. (Myrdal, 1957; Hirschman, 1958) Globalisation and liberalisation of trade encourages underdeveloped countries to remove trade and industry protections. This works against the economic growth and catching up of the underdeveloped countries. (Myrdal, 1957)

Myrdal’s and Hirschman’s analyses on the effects of globalisation on developing economies are completely in-line with the concept of “development of underdevelopment”. These two prominent economists at the time of Frank’s 1966 paper also expected that the globalisation being sold to developing countries would cause these economies to become what Frank described as “satellite underdeveloped”. Contemporary analyses of the results of globalisation and liberalisation of developing economies would confirm these expectations.

Contemporary Considerations on Globalisation and Economic Development

The experience with globalisation – in other words, the liberalisation of trade and finance – over the last two to three decades does not corroborate the positive predictions made by the neo-classical trade theory. (Cornia, 2004) Since the 1980s and 1990s, globalisation has led to increasing inequality between rich and poor countries, which can be seen in the formerly soviet countries of Eastern Europe, Latin America and some countries in Asia and Africa. (Reinert, 2004; Singh & Dhumale, 2004) The social costs of globalisation has simply outweighed the benefits in many – if not most – developing countries. (Taylor, 2004)

Trade liberalisation has had the opposite effect of what the trade-theory of the Washington Institutions – such as the International Monetary Fund, the World Bank or the World Trade Organisation – and what the standard neo-classical economic textbooks anticipated for low-income and commodity dependent countries. (Cornia, 2004; Reinert, 2004; Reinert, 2008) The neo-classical trade theory suggested that income inequality would be reduced, but historical and data analysis of the outcomes prove that this is not the case. (Cornia, 2004; Reinert, 2004; Reinert, 2008)

Available data suggests that globalisation is likely to be a significant factor for increased inequality within developing countries compared to the advanced countries. (Singh & Dhumale, 2004) For example, trade openness was correlated to increased inequality in low- and middle-income countries. (Cornia, 2004; Singh & Dhumale, 2004)

The outcome of globalisation on developing economies is what the Prebisch-Singer Theory of Underdevelopment anticipated. This theory indicates that innovation and technological change favours the advanced countries to the detriment of the underdeveloped countries. (Reinert, 2004) The technological change and innovation in the globalised market would benefit advanced countries through higher wages and punish the developing countries through lower prices of basic exports. (Myrdal, 1957; Reinert, 2004; Cornia, 2004)

Empirical analysis of four centuries worth of economic data for basic exports shows that the Prebisch-Singer Theory is correct. (Harvey, et al., 2010) Developing countries that are primarily dependent on the production and export of primary goods have experienced a worsening in the terms of trade compared to advanced countries which specialise in manufactured goods and advanced industries. (Johnson, 1955; Harvey, et al., 2010)

Similar arguments can be made for the effects of globalised financial systems on a developing economy. (Kregel, 2006) Data over the past two decades shows that financial and capital account liberalisation of developing economies had detrimental effects; furthermore, it appears that capital account liberalisation had the strongest dis-equalisation effect on developing countries during this time period. (Cornia, 2004) In most cases, capital account liberalisation in the developing countries was also accompanied by a financial crisis and economic instability. (Singh & Dhumale, 2004)

Deregulation is a central feature of the “globalisation package” presented by the Washington Institutions during the 1980s and 1990s; this deregulation was aimed at liberalising the balance of payments for both the current and capital accounts of the developing countries. (Taylor, 2004) There would be an increase in capital flows to the developing countries following deregulation which would cause credit booms leading to higher interest rates and a stronger currency. The rise in exchange rates would reduce the amount of exports from the developing countries, because of a decrease in cost competitiveness. (Cornia, 2004)

The export sectors in the developing economies would become weakened following liberalisation, causing job loss and a reduction in wages. The developing country labour markets would then shift from export sectors to non-export sectors which further weakened wages. Liberalisation and financial deregulation – in other words globalisation – made employment conditions worse, leading to greater inequality of incomes between skilled and unskilled workers. (Cornia, 2004)

The Washington Institution’s development advice generally encourages developing economies to consider liberalisation and the “openness of the economy” to be the main criteria for economic success. However, this term of “openness” is meaningless if the country’s exports do not lead to greater levels of economic development. It is the poorest economies that suffer the most from concepts such as “openness” and “deregulation”. (Reinert, 1999)

The globalisation of finance also has significant and detrimental national policy implications for developing countries. Quite simply, the accumulation of foreign claims, through liberalisation, generally reduces a developing country’s capacity to pursue domestic and external policy goals. Unfortunately, the more successful a developing country is at attracting foreign investment and generating returns for those investments, the greater the risks for that country. (Kregel, 1996) A reduction in policy autonomy for a developing country further reinforces the “satellite underdeveloped” concept rather than reducing it.

The following summary of outcomes from an econometric analysis of globalisation and liberalisation of trade and finance, shows us that most developing countries experienced poor results from increased globalisation. (Taylor, 2004) We can clearly see in the following table that globalisation and liberalisation did not reduce income inequality or increase economic growth in the developing economies.

Overall, globalisation has not had favourable or positive results for developing countries. After globalisation, most developing countries experienced a neutral or negative effect on economic growth and the vast majority of developing countries experienced an unfavourable impact on income distribution. (Reinert, 2004; Reinert, 2008; Cornia, 2004; Taylor, 2004; Singh & Dhumale, 2004)

Contemporary considerations and economic analyses over the past 20 to 30 years shows us that Frank’s concept of “development of underdevelopment” is further entrenched after globalisation and liberalisation of developing economies. It is clear that, in order to avoid the creation of the “satellite underdeveloped”, economic development must be reconsidered.

Reconsidering Development in a World of Globalised Trade and Finance

Almost two centuries ago, Friedrich List stated that supporting manufacturing sectors and the industrialisation of an economy are the only approaches in which a country can develop itself in a paradigm of international trade. (List, 1841) Today’s economists, whom present economic development concepts that are counter to the Washington Institution’s consensus, are continuing this line of reasoning. (Reinert, 2004; Reinert, 2008)

In order for a developing economy to catch up to the more advanced countries, in a globalised world of trade and finance, the developing economy must create a comparative advantage in skills-based productive industries and not focus on primary products. (List, 1841; Johnson, 1955; Reinert, 1999; Reinert, 2004; Reinert, 2008; Harvey, et al., 2010) Underdeveloped countries must transition from purely agricultural or primary product industries to manufacturing in order to develop themselves. Otherwise, if a developing economy focuses on developing only unskilled productive industries, that economy will be permanently locked into specialising in unskilled labour; in other words, the developing country will specialise in remaining underdeveloped. (Reinert, 1999; Reinert, 2008)

The countries that monopolise manufacturing and are able to keep underdeveloped countries economically focused on primary products will maintain political and economic power. Furthermore, the result of underdeveloped countries focusing on primary production is that they will become dependent on the advanced countries. (List, 1841)

The advice for developing economies should be the protection of their nascent industries and skilled-based sectors through the regulation of foreign trade and a focus on industrial training of the country. (List, 1841; Johnson, 1955; Reinert, 1999; Reinert, 2004; Reinert, 2008) This is because the long-term development of economies can only occur through the creation of skills-intensive economic activities and the division of labour. To achieve this, state intervention by the developing country’s government is required in order to protect and encourage the development of skills. (List, 1841; Reinert, 1999; Reinert, 2008; Kregel, 2004)

Furthermore, increased capital movements between economies or reinventions of financial institutions should not be relied upon to reduce the inequalities between the developed and underdeveloped countries. Even though capital may be scarce in an underdeveloped country, it does not mean that there is effective demand for it. (Myrdal, 1957) Capital movements are not the obstacles that limit a country’s development, but rather it is due to imperfections in the country’s decision-making processes. (Kregel, 2004) These decision-making processes are further hindered through the globalisation and liberalisation of financial markets. (Kregel, 1996)

The example of South Korea’s success in development proves that foreign borrowing or the spurring of high domestic savings rates through the reinvention of institutions is not required. South Korea’s success was due to its ability to re-organise production processes to match its local conditions and to increase skills through industrialisation. (Kregel, 2004)

The development of a country’s financial system should be focused on systems that best support the growth of knowledge-based activities within economic sectors that have the greatest income growth. (Reinert, 1999; Reinert, 2008; Harvey, et al., 2010) This defence of financial systems in developing countries should be done similarly to that of the industrial and manufacturing sectors in order to build-up a comparative advantage. (Harvey, et al., 2010)

Conclusion

Historical and contemporary analyses show us that supporting manufacturing, industrialisation and advanced sectors – even if they are less efficient than those in the developed countries – is the core mechanism behind strong, long-lasting economic development. (Reinert, 2004; Reinert, 2008) Free trade, liberalisation of markets and deregulation should become the long-term goal and not the short-term goal of developing economies. (Reinert, 2004) This remains true in today’s world of globalised trade and finance.

Developing economies must reconsider their strategies towards advancement, in order to avoid the trap of what Frank terms the “development of underdevelopment” and becoming the “satellite underdeveloped”. The proliferation of globalised trade and finance has made this task even more important.

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