Critical reflection upon the extent to which global capitalism produces uneven development rather than economic convergence

INTRODUCTION

“Just 8 men own same wealth as half the world” - With this title Oxfam published its annual study on global inequality in January this year.¹ Even if the exact calculation of their numbers is controversial, the report itself is shocking.²

In answer to this news the scientific debate about global inequalities as well as economic convergences, which emerge within the structures and processes of our global capitalism, break out again. The Nobel laureate Joseph Stiglitz, for example, blames global capitalism for this development and sends an appeal for strengthened corporate social responsibility.³

In this essay I therefore want to examine to which extent global capitalism can be seen as the producer of uneven development rather than of economic convergence.

HISTORY OF GLOBAL ECONOMIC POLICIES SINCE THE EARLY 1980s

Since the early 1980s the winds of global capitalism became stronger. It was a period where developing countries with their mostly inward-looking and nationalistic policies suffered deep crisis like the Latin American depth crisis as of the early 1980s or the collapse of the Soviet Bloc in 1991. During this era neoliberal economies of the more developed world built the hegemonic power.⁴

This power caused the capitalistic principles of the Washington Consensus, a framework of the International Monetary Fund and the World Bank. It was compiled for developing countries worldwide to strengthen its economies. By adaptation of economic policy instruments that were already established within the developed countries, especially within the United States, developing countries received loans to overcome their depths.⁵ Main measures of the Consensus were instruments of privatisation of public corporations and institutions, deregulation of markets and prices and economic opening through liberalizing trade policies.⁶

Smaller countries in the South, especially in Latin America and in Africa, adopted neoliberal policies comprehensively, but under pressure of the IMF and the World Bank. China, but also India and Brazil for example, since they were not dependent upon loans from the IMF or the World Bank, adopted voluntarily but selectively to the instruments of the Washington Consensus. China embraced free trade, but did not accept the liberalization of its financial sector neither the privatisation of public corporations. It built a socialist market economy.⁷

But the wind of global capitalism also blew through developed countries. With the increasing industrialisation of developing countries, mostly in East Asia, global competition was gradually intensifying. In response developed economies were constantly transforming from manufacturing in financialised economies searching for new market niches. Abolishing regulations on capital movements had the advantage for financialising economies of a widened reach of their global money market. This let their financialisation increase its effectiveness.⁸

Therefore both, developing and developed countries experienced a stronger rivalry from outside their former sphere of economic activities.

THE IDEA OF CAPITALISM AND ITS THEORETICAL CONTRIBUTION TO OVERCOME GLOBAL INEQUALITY

In a broader sense the Washington Consensus aimed for a catching up of wealth of the developing countries with the developed countries. A free and open market design and private ownership were central neoliberal instruments of its strategy, since those capitalistic structures by definition are said to bring development “through the accumulation and reinvestment of profits”.⁹

These new structures indeed excited Transnational Corporations (TNCs) from more developed countries to invest intensively in territories where higher rates of return were expected. Those territories often where less developed countries since costs, especially for labour, where lower. On the TNCs profitability this had a positive effect. Developing countries saw this trend as a chance to push on its industrialisation process.¹⁰ This increase in the level of industrialisation, which is caused by neoliberal instruments, in the following forms the starting point of our theories.

According to the Kuznets curve on inequality (1955), industrialisation has a positive effect on income per capita. The first stage of industrialisation is linked to increasing inequality since workers are dependent on their employers and firms reap. In the long run however, when industrialisation reaches a stage, where employees skills and therefore also incomes rise, inequality decreases. Firms are not able anymore to reap high profits, since the power of employers rises. This relation Kuznets visualises through a curve of an inverted-U.¹¹

Whereas the Kuznets curve describes a long-term decline of inequality within an industrialising society, the strategy of the neoliberal instruments were also expected to diminish inequalities between societies, meaning especially between the developing and the developed world.

It was supposed that the productivity of service activities was lower than of manufacturing activities.¹² Therefore it was expected that in the industrialising, developing countries the growth rate of income per capita would increase, in deindustrialising, more developed countries the growth rate of income per capita would shrink. This then leads to a decline of inequality between countries.¹³

EMPIRICAL ANALYSIS: HOW DID ECONOMIES REACT TO THESE POLICY CHANGES IN TERMS OF INEQUALITY?

It is in line with the theory that, after most countries adopted the Washington Consensus, the industrialisation process of the less developed countries accelerated since the early 1980s. Also de-industrialisation of the more developed countries continued even more intensively.¹⁴

Quite contrary to the convergence in the degree of industrialisation, global inequality even increased since the early 1980s.¹⁵ Total global income-inequality can be interpreted as a sum of income-inequality between and within countries functions.¹⁶ I therefore again want to differentiate between those.

To begin with the level of income-inequality between countries initially it seems that it might have declined within the last four decades. According to the World Bank, the Theil index declined from .65 to .53 from 1980 to 1995.¹⁷ Also Dunford (2005) marks some trends which made a “significant contribution to global convergence”.¹⁸ But these trends which cause the decline are also recognised in further studies and make it necessary to handle the assumption of a decline with care.¹⁹ Since we talk of population-weighted differences in average national incomes, it must be considered that outliers in terms of development of average income, can influence the numbers enormously, if their population is huge. This is the case for China. China has one fifth of world population and experienced considerable growth.²⁰ Its GDP as a share of the world total rose from 2.8 percent in 1980 to 11.0 percent in 2005 and GDP per capita increased with an outstanding annual growth rate since 1978.²¹ It furthermore increased from an outstanding small level of income per capita towards the global average income per capita, which led to a decrease of the Gini coefficient of between-countries inequality.²² It is noticeable that China was the country, which rejected most of the neoliberal agenda of the Washington Consensus.

On the other side Latin American and African countries, which subjected most extensively to the rules of the Washington Consensus, could not profit from increasing income growth. The greater adherence even led to the median rate of growth of their per capita income of Latin American countries of zero percent in 1980-98, even it was 2.5 percent in 1960-79.²³

If we thus consider the trend of between-countries inequality without one single country, namely China, the declining trend “flattens out”.²⁴ According to Arrighi, Silver and Brewer (2003), under this consideration the “North-South-Divide”, even increased from 1980-2000.²⁵

In a second step I want to consider the development of income-inequality within countries. In this point researches agree: From the early 1980s within-countries income inequality increased severely. According to Hudson (2016), the industrialisation process of the developing countries was “associated with increasingly uneven intra-national development”.²⁶

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¹ Kramers, M., 2017.

² For the whole discussion regarding the calculation of their numbers, see: Oxfam, 2017.

³ cf. Knop, C., 2017.

⁴ cf. Dunford, M. & Yeung, G., 2011, p.23.

⁵ cf. Hudson, R., 2016, p.6.

⁶ cf. John W., 2004.

⁷ cf. Hudson, R., 2016, p.6 f..

⁸ cf. ibid.

⁹ American Heritage, 2016.

¹⁰ cf. Hudson, R., 2016, p.8.

¹¹ cf. Kuznets, S., 1955, p.6 ff.

¹² cf. Baumol, W. J., 1967.

¹³ cf. Arrighi, G., Silver, B. J. & Brewer, B. D., 2003, p.6.

¹⁴ cf. Dunford, M. & Yeung, G., 2011, Figure 6.

¹⁵ cf. Arrighi, G., Silver, B. J. & Brewer, B. D., 2003, p.8 ff.; see also Wade, R. H., 2014, p.575 ff., who points out that due to different calculation methods inequality increased. Berry, A. & Serieux, J., 2006, Table 6 show the decile distribution of world income among persons. If China, as a country, which refused most neoliberal policies, is excluded, the indices increased from 1980 to 2000.

¹⁶ cf. Goesling, B., 2001, p.746. In this essay I weight the inequality differences in average national incomes by population to then draw conclusions about global inequality about individuals. Otherwise the two components of between- and within-countries inequality would not be additive.

¹⁷ World Bank, 1998, 1999, 2000 and Unu/Wider, 1999 qtd. in Goesling, B., 2001, p.752.

¹⁸ Dunford, M. & Yeung, G., 2011, p.42.

¹⁹ cf. Arrighi, G., Silver, B. J. & Brewer, B. D., 2003, p.5; Hudson, R., 2016, p.13 or Berry, A. & Serieux, J., 2006, Table 6.

²⁰ cf. Worldometers, 2017.

²¹ For GDP wold share see: International Monetary Fund, 2008 qtd. in Dunford, M. & Yeung, G., 2011, Table 1. GDP at PPP is considered here. For GDP growth per capita see also Maddison, 2008 qtd. in Dunford, M. & Yeung, G., 2011, Figure 8.

²² World Bank, 2017, GDP per capita at PPP (current international $) in 1990 was 986 for China and 5431 for world average. In 2015 it was 14450 for China and 15672 for world average. Latter years do not exactly fit to reference period, but since China experienced relatively stringent growth (and therefore also influences the trend line of global growth) I do here assume a feasible inference.

²³ cf. Easterly, W., 2001, p.135.

²⁴ cf. Goesling, B., 2001, p.756. It should be considered that Chinas case could, to a smaller degree, be transferred also to India. But since China´s development already changes the whole analysis I want to focus on this even more extreme example.

²⁵ cf. Arrighi, G., Silver, B. J. & Brewer, B. D., 2003, p.15 f. Here “North-South-Divide” means “Global North” and “Global South”, which is put on a level with developed and developing countries.

²⁶ Hudson, R., 2016, p.8.