By John Lee
Under the World Bank classification, a developed country in 2008 was one with an annual GNP of $11,116 per capita. By definition then, economic underdevelopment can be seen as the inability of a state to grow to the point where it reaches that level. This essay will look beyond that stark statistic and confront the complexities of explaining the problem. It will proceed by establishing the conditions – from Bretton Woods onwards – under which the world economy arrived at its current state before going on to examine why some countries are underdeveloped in comparison to others. It will do this by contrasting the accounts of those – such as Rostow – who explain underdevelopment as being a result of countries’ internal failings, with the accounts of those – such as Prebisch and the Dependendistas – who point to the exploitative nature of the Global North and the inequalities inherent in the international system. It will take into account the core-periphery relationship propounded by Wallerstein and the world system theorists and, finally, it will seek further explanation of underdevelopment by focusing on those countries which have escaped the condition, particularly in the Global East.
BRETTON WOODS
In order to establish how the world economy came to be as it is today, it is necessary to go back to July 1944 and the summit of 44 countries at Bretton Woods, New Hampshire, which was intended to plan for a post-war international economy. The gathering was predominantly of Western states with the US and Britain taking the lead. As with the establishment of the UN, the first priority of Bretton Woods was to avoid the problems of the past, in BW’s case primarily the breakdown of the pre-war international economy. It was clear that Washington would have to take on the bulk of the burden in achieving this, because, as Paul Kennedy points out in the Rise and Fall of the Great Powers, ‘among the Great Powers, the US was the only country which became richer – in fact much richer – rather than poorer because of the war . . . economically, the world was its oyster.’
A major pitfall to be avoided was the imposing of punitive damages on defeated powers. Thus the consensus at Bretton Woods was that reparations levied on Germany and the other vanquished belligerents would be far smaller than in the 1920s after the First World War. At the top of the Bretton Woods agenda was the need to remedy global monetary imbalances and this was achieved by planning for fixed exchange rates among the major currencies and the use of gold as a reserve asset, which the US (as holder of 70pc of the world’s stocks) promised to sell at a fixed price of $35 an ounce. To manage the Bretton Woods system, two new institutions were created – the IMF to provide countries with short-term credit and the World Bank to give longer-term loans.
MARSHALL PLAN
However, there were obstacles, notably the polarisation between East and West, which made a single global economy based on currency conversion and multilateral trade unfeasible. Another problem was the huge ‘dollar gap’ – the fact that European imports from the US were seven times its exports back across the Atlantic. Washington soon realised it had to remedy the situation, not least because it feared Moscow would take advantage of Western European states’ economic fragility and attempt to induct them into the Soviet Bloc. Its solution was to offer massive financial support, first through the Truman Doctrine – which saw $400million go to Turkey and Greece – and then, more significantly with the Marshall Plan which, as its architect the Secretary of State George Marshall said, would ‘permit the emergence of political and social conditions in which free institutions can exist’. In theory, aid was available to East and West, but in practice Moscow put a stop on the likes of Poland and Czechoslovakia getting any money, which resulted in a widening of the economic schism between Eastern and Western Europe.
NIXON'S PANIC
By 1951 and the culmination of the Marshall Plan, Western European had benefited to the tune of $17billion dollars. With economic progress came the idea of closer integration, firstly through the European Coal and Steel Community leading to the European Community and the European Free Trade Association made up of seven non-EC states including Britain. However, while Europe and Japan prospered, the US was soon in trouble. A run on the dollar in 1960, the growing vulnerability of world currencies including the dollar to globalisation and the rise of MNCs and the ruinously expensive Vietnam war (combined with President Johnson’s unwillingness to raise taxes), meant that by 1971, the US suffered its first trade deficit of the 20th Century. As a consequence, in that year President Nixon took drastic action – the imposition of wage and price controls, the suspension of the convertibility of dollars into gold and a 10pc surcharge on imports. By December, a system of free-floating currencies emerged and the Bretton Woods system was in tatters.
OIL, FOOD AND DEBT CRISES
The following decade was to see further blows to the global economy, firstly through food crises – grain shortages and overfishing – which, with grim inevitability, hit the Global South the hardest. Then came a 400pc hike in the price of oil by OPEC countries following the renewal of Arab-Israeli hostilities in 1973. With the economies of oil-producing countries unable to absorb their vast incomes, the banks became awash with petro-dollars, which they in turn were keen to lend. And keenest to borrow were the LDCs of the Global South. However, these countries got into difficulty with the onset of rising interest rates, declining demand for their exports and an ability to service their debts. This problem was typified by the case of Mexico and when it, and other countries became unable to pay when their loans were called in at short notice, the ‘debt crisis’ was triggered. And for the purposes of this essay, the scene is now set for an examination of the explanations of underdevelopment.
WHY UNDERDEVELOPMENT OCCURS
In order to examine the causes and results of underdevelopment and therefore to account for its occurrence, it is first necessary to define the process. Broadly speaking, development can be seen as economic growth within the international economy. In other words, a country is said to be developing if its Gross National Product (GNP) is increasing: if the gap between its GNP and that of developed countries is decreasing then the country is moving from being a Less Developed Country (LDC) to being a developed country. So it can be said that underdevelopment is what results when the above factors are absent.
INTERNAL PROBLEMS OF GLOBAL SOUTH
For classical theorists, the major barriers to development are to be found in the internal characteristics of Global South countries. According to them, the barriers can be overcome by wealthy countries injecting ‘missing components’ such as investment capital through foreign aid or private direct investment. Once economic growth is underway, the benefits would trickle down to the broader population. Walt Rostow formalised this model in The Stages of Economic Growth, which predicted that states would pass through various stages of free market development until they ‘took off’ to become similar to the mass-consumption societies of the Global North. Critics of this viewpoint oppose a set of assumptions characteristic of this classical stance: these are, that the Global North prospered because of a concentration on hard work, innovation, invention of new products and modes of production and investment in schooling and other infrastructures. Instead, they attribute underdevelopment in the Global South to exploitation by the Global North.
DEPENDENDISTAS
Prominent among these critics are the Dependendistas, one of whom, the Argentinian Raoul Prebisch, asserted that the world was divided into industrialised, fully developed ‘core’ countries and non-industrialized ‘periphery’ countries. He suggested that the only way to break out of this structural vicious circle was for the elites of ‘periphery’ countries to embark on a programme of industrialisation to reduce dependence on import and decrease the accumulation of debt. This would be achieved domestically by ‘healthy protectionism’ – ie controlling imports to speed the development of the industrial base - and internationally by encouraging ‘core’ countries to show greater regard for the interests of the ‘periphery’ – ie preferential treatment for LDC manufactures in the world market and long-term contracts to provide stability plus long-term development and debt relief programmes.
According to more revolutionary theorists such as Samir Amin, Prebisch’s ideas were somewhat idealistic in that the elites of ‘periphery’ countries were not concerned with the welfare of their own people but of the core states and that nothing short of armed action to overthrow the old order was required. Such revolutionary theorists are further divided into the neo-Marxists, such as Gunder Frank, who posit that only by national revolution and delinking from the world economy can a people be truly liberated, and orthodox Marxists, such as Immanuel Wallerstein, who believe nothing short of world revolution will suffice. But not all reformists are Marxist.
NIEO AND BRANDT
Prebisch’s model for a New International Economic Order was seized on by Western statesmen such as the late West German Chancellor Willy Brandt who emphasized the ‘interdependent’ nature of international relations, with the ideology of, ‘we must help them, or we all go down together’. The Brandt Report of 1980 identified a huge North-South Divide and called for the transferral of resources from developed to developing countries. Indeed the Brandt Line circles the earth at approximately 30deg North, passing between North and South America, above Africa and India but dipping south to include Australia and New Zealand in the richer North. However, an examination of the 21st Century’s developing countries, particularly of the Global East, suggests that this line may have to be redrawn.
ASIAN TIGERS
The states moving from underdeveloped to ‘newly industrialized country’ status are typified by the Asian Tigers of the 1980s – Hong Kong, Singapore, Taiwan and South Korea – who as Kegley notes, have engineered export-led growth through neomercantilist policies aimed at protecting infant industries and subsidizing their manufacturers. While the Asian Tigers are now considered by the IMF to be advanced economies and the BRICs – Brazil, Russia, India and China, and the CIVETS – Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – are growing at accelerated rates, approximately 150 countries were still classified as emerging or developing countries in 2010.
CONCLUSION
In conclusion, this essay argues that there are useful explanations of underdevelopment. These can be located by examining the global economic system itself, which evolved towards its current status after the Bretton Woods summit of 1944 and underwent numerous crisis-forced changes, and defining how that system leads to the problematic condition in question. Classical theorists believe underdevelopment can be explained by the conditions within the LDCs themselves. The Dependendistas and Marxist theorists on the other hand, insist the structure of the international economy which sees the Global North exploiting the Global South, is to blame. The liberal non-Marxist view as propounded by Brandt is that such exploitation must be rebalanced by the shifting of ‘core’ resources from the developed countries to the ‘periphery’ or underdeveloped countries. This essay concludes that such explanations are ‘useful’, not only for the IR theorist, but for politicians and policy-makers seeking to address the inequalities which result from underdevelopment.