Notes on W.

Arthur Lewis, The Evolution of the International Economic Order (Princeton, 1978) [I decided to prepare these notes after an unsuccessful foray into the arcana of unequal exchange theory. While the basic argument of that theory is rather simple, evaluating the argument has led to rather Byzantine discussions on the nature of Marxian value theory, the relative rates of exploitation of First- and Third-World proletariats, etc. Discretion being the better part of survival this summer, I beat a hasty retreat, and thus offer you this more modest project.] This is an interesting little book, based on lectures given by Lewis in 1977. He examines four aspects of importance to the IEO: a. The division of the world into exporters of primary and manufactured goods; b. Terms of trade; c. Developing country dependence on external finance; d. Dependence upon the developed countries for an "engine of growth." I. On the first point, Lewis begins with the question "How did the world come to be divided into industrial countries and agricultural countries?" He argues that, in the 19th C, "the example of industrialization would have been easy to follow": The new ideas were ingenious but simple and easy to apply. The capital requirement was remarkably small, except for the cost of building railways, which could be had on loan. There were no great economies of scale... (7-8) Lewis rejects at the outset a "political" answer to this question: the division of the world, he insists, was not the product of imperialist hostility to industrialization in the colonies. Such hostility may have been a factor, but it fails to explain why even independent countries in Latin America, Eastern and Southern Europe failed to industrialize at this time. Lewis thus focuses on "economic" factors: agricultural productivity was low, which will play a decisive role throughout this book. Lewis argues that it was essential for the outcome of Britain's industrial revolution that it occurred in a country which already had high-productivity agriculture, which in turn provided a support for an industrial sector. High productivity in agriculture frees up workers for the industrial sector, provides an internal market for industrial output, and generates surplus food and raw materials. Lewis also presents as an "economic" factor "the absence of an investment climate" (10). This factor, however, appears more "cultural" and "political" than economic. Culturally, Western Europe had "a whole new set of people, ideas, and institutions... that did not exist in Asia or Africa..." Politically, Power in these countries-- as also in Central and Southern Europe-- was still

concentrated in the hands of landed classes, who benefited from cheap imports and saw no reason to support the emergence of a new industrial class (11). These landed classes turned to trade, and failed to use the opportunities given by trade to industrialize (as they might have, as the example of Australia shows). II. Although trade did represent a potential basis for industrialization, Lewis argues, it did so less for some countries than for others, because of terms of trade relations. Here Lewis enters into his own variant of an unequal exchange analysis, one that is more easily understood by those trained in marginal analysis. Under market conditions, the cost of a factor of production is its opportunity cost, that is, the value of what it would produce in its best alternative use 1. By this analysis, the roots of modern terms of trade lie in the fact that agricultural labour productivity in Europe was "six or seven times [higher] than in tropical regions (15). Thus, the production of temperate commodities depended on labour that could only be attracted "by offering income levels higher than prevailed in Northwest Europe"2, while the production of tropical commodities could rely on "an unlimited supply of Indians and Chinese willing to travel anywhere to work on plantations for a shilling a day." Lewis notes that he is working with a three-product model in which productivity levels for the good produced by "both" countries 3, food, determines the factoral terms of trade 4 for the traded goods, "temperate" and "tropical" commodities. Though he proceeds in a different fashion, Lewis thus arrives at conclusions similar in some respects to those of the unequal exchange theorists. First, the analysis stresses that no products are poor products in themselves: If tea had been a temperate instead of a tropical crop, its price would have been perhaps four times as high as it was. 1 Thus the capitalist farmer outside of Toronto will attribute a "cost" even to the land that he owns, on the basis of the income he foregoes by not selling or renting the land. 2 Lewis will note that racism helped sustain this situation: generalized opposition to Indian and Chinese immigration in the "white" colonies played a key role in maintaining wage disparities (20). 3 Note that his model divides the world into two countries.

4 That is, the terms of trade expressed, not in terms of quantity of this product versus quantity of that one, but amounts of labour that will trade for one another. Lal, as we saw, rejects the use of factoral terms of trade, arguing that they are irrelevant for the welfare of the LDCs. If welfare depends on relative as well as absolute incomes, however, (as Lewis's argument will assume throughout) the evolution of factoral terms of trade is important.

This analysis thus rejects the simple notion that primary commodities are "bad" exports while manufactured products are "good" ones. If a given manufactured product (eg textiles) were to become a "tropical" product, its terms of trade evolution would reflect the same forces that have cheapened tropical commodities. A second conclusion is that there is no long-term solution to terms of trade problems until the LDCs can address the underlying problem of poor productivity in non-export sectors. The solutions to trade problems essentially lie outside the sphere of trade itself. Lewis also explains LDC over-specialization in terms of market forces: "The tropics could compete in any commodity where the difference in wages exceeded the difference in productivity." But this criterion ruled out an increasing number of primary products: cotton, tobacco, maize, beef, timber, sugar. Overspecialization was to a large degree the result of a process of elimination. Thus, while Lewis argues that trade might have formed a basis for national development, he also argues that trade meant different things for different countries. "Trade offered the temperate settlements high income per head...", but it offered the tropics only "the opportunity to stay poor" (19). Despite poor factoral terms of trade, the LDCs did enjoy "some sixty to seventy years" of increasing exports and national income, prior to WW I. This dynamism did not translate into industrialization, however, partly because "to a large extent the import and export sectors of these countries were controlled by foreign hands," which thus siphoned off much of the surplus generated by trade. Landed interests, as mentioned above, also presented an obstacle. The 1929 depression, however, "broke the back of the political resistance to industrialization" (31). The post-war golden age of capitalism proved very propitious for LDC industry, partly because In the industrial countries, the combination of full employment and zero population growth produced structural changes in their labor markets, which have altered their attitudes to importing manufactures from low-wage countries (34). Nevertheless, Lewis stresses, the problems of poor factoral terms of trade grounded in lowproductivity agriculture were not overcome by LDC industrialization (36). III. Lewis's examination of LDC financial dependence is somewhat less detailed than the first two points of his agenda. Lewis argues that, historically, the distinction between borrowing and lending countries did not parallel that between poor and rich ones5, but reflected rather the tremendous financial needs of countries undergoing urbanization. Similarly, the LDCs in the 1960s had domestic savings rates similar to those of Britain and France a century earlier, but they 5 In the early 20th C the US borrowed from Britain and France, though it was wealthier than the two.

nevertheless needed to borrow because of the tremendous investment requirements brought on by urbanization and rapid population growth. He also cautions against simplistic evaluations of debt problems on the basis of debtexport ratios. He notes that in 1972, LDC debt was 1.8 times annual exports, while in 1913 Canada's ratio was 8.6! The actual ratios, however, are less important than the question of whether the borrowed funds are laying a basis for long-term growth. He also notes that a key element of LDC debt problems is the increasing proportion of short-term loans in their overall debt portfolio. IV. Lewis's final point is drawn out at greater length in his 1980 "The Slowing Down of the Engine of Growth" (American Economic Review, 70 [4], pp. 555-64.) He argues that the pattern of LDC trade has made export-led growth there dependent on DC growth. This dependence implies that the LDC/DC gap can never be narrowed. In addition, while LDC manufactured exports could grow rapidly in a world environment in which world trade in such goods was growing 10% per year, such a situation could not be sustained. For the future, the LDCs must look for their engine of growth to trade amongst themselves, but above all to changing the conditions that underlay their location in the IEO: The most important item on the agenda of development is to transform the food sector, create agricultural surpluses to feed the urban population, and thereby create the domestic basis for industry and modern services. If we can make this domestic change, we shall automatically have a new international economic order (75). * * *

Comments 1. Lewis's writings on development provide an interesting example of the evolution of ideas. In his 1954 "Economic Development with Unlimited Supplies of Labour," he argued that "capitalists have a direct interest in holding down the productivity of the subsistence workers," since the basic wage in the capitalist sector had to equal subsistence earnings plus a premium or around 30%. Since, following the simple Harrod-Domar model, accumulation was held to depend on the profit level, and since the profit level would fall as rural earnings rose, it was easy to conclude that rural development was dysfunctional for capitalist development. The same opportunity cost analysis generates a different conclusion twenty-five years later! So, a question we might discuss: what are the conceptions of the process of economic development that lie behind Lewis's transformation? 2. Though I tend to avoid this expression, Lewis, in both 1954 and 1979, is assuming something like "articulated modes of production." The persistence of peasant production has a decisive impact on the capitalist sector. To wit: there has been no "primitive accumulation" in his model. That is, the worker has not been decisively separated from the means of production.

This means that the "return to the farm" remains a live option for the worker. The worker's base wage then, appears to depend less on the cost of "maintaining him in his normal state as a labouring individual" [Marx], than on rural earnings6. It is the incompleteness of primitive accumulation that makes opportunity cost analysis relevant7. 3. The nature of the argument Lewis is making about the roots of the modern IEO is not clear. Is he saying that imperialism/colonialism did not historically play a part, or that it was not logically necessary, given the problems of low agricultural productivity and internal cultural/political factors? In any case, the Cardoso-Faletto answer would be that internal class relations were themselves externally influenced. Perhaps the most grotesque "lesson" learned by Latin America in the 19th C occurred when Britain financed and helped coordinate the "War of the Triple Alliance" against Paraguay in the 1860's, which destroyed the most successful protectionist experiment in Latin American history8. The experience helped show to what extent autonomous development both was and was not possible. * * *

6 One presumes that this would not hold were rural earnings to fall so much that the equivalent urban wage would fall below Marx's value of labour. In such a case, the cost of the "normal" upkeep rather than rural earnings would be expected to determine wages. 7 This incompleteness also explains the ambiguous role that changing agricultural productivity plays for Lewis in 1954 and 1979. In a fully capitalist situation, such increasing productivity would lead simply to a fall in the value of labour, and hence to increased relative surplus value. With agriculture capitalized, there would be no reason for increased productivity there to translate into better earnings for rural workers. Thus the effect on urban wages that the Lewis of 1954 discussed would not exist. 8 Reducing Paraguay's population by over 80% in the bargain.