Can capitalism make the whole world rich?

Mike Haynes explains why industrial development in the Global South will not close the gap between rich and poor countries under capitalism.

Author’s note: This article draws on ideas from a bigger project I am working on but its immediate origin may be of interest. Early in February, I, with many other people, got a positive e-mail from Colin Barker, whose work has always been an inspiration.  Fuller accounts can be found elsewhere of the range of things to which he made contributions. Colin was then very seriously ill but said he was still carrying on and writing. Heartened I quickly drafted out this article. Later that day we had another e-mail from his family to say that he had died hours earlier. I therefore put this away in sadness. But I have now rewritten it and would like to think that Colin would have appreciated it as a small tribute inspired by his desire always to move forward by engaging with people, with their ideas and with the evidence.

Capitalism seems to be an incredibly successful system. We have seen a massive growth in incomes in many countries. People live longer and better than in the past. But within countries some people are rich and many are poor. Some countries too are rich but many are poor.  If we look at the global distribution of wealth (what you have) and income (what you earn) in terms of individual people then the gaps are obscene.  Each year Oxfam publishes figures contrasting the wealth at the top with the poverty at the bottom. At the start of this year it estimated that the richest 26 people on the planet owned as much as the bottom 3.8 billion. [1]

A full explanation of these huge contrasts would have to link the gaps within countries and the gaps between countries. These are the subject of the most authoritative study on the subject: the World Inequality Report 2018, which came out at the end of 2018 and which I hope will become an annual publication. [2]

However, in this article I will look at the gaps between countries, and ask: can capitalism make all the countries of the world as rich as the top OECD states? One way to answer this question would be to analyse capitalism as a global system. This is a huge task.  Instead, I want to take a different route and think through some of the problems that exist for those who want to answer yes.

Conventional economists tend to think that what has been done before can be done again.  After WWII, the world economy appeared to be frozen into a small industrial north and a huge ‘underdeveloped’ south. In the ‘south’ people provided the foodstuffs and raw materials and in the ‘north’ people made stuff.  But this division fell apart as the richer economies moved more towards service production and some poorer economies (most importantly, if belatedly, China) began to surge forward in manufacturing. They did so by export led growth. So why not others?

There is an obvious difficulty. Can the world keep producing a mass of stuff? We are encouraged to think about this problem in terms of the numbers of people. But the growth of the world’s population is slowing and at some point in the next decades it will begin to fall.  The real problem is not numbers of people but the value we place on having the money to buy ever-increasing amounts of stuff.

Take cars.  In 1976, the number of cars and trucks in the world was 342 million. In 1996 it was 670 million and by 2016 some 1.32 billion. Now imagine that all the world’s countries were rich enough to have the same number of cars per head  as in the UK. That would be nearly 5 billion cars – an increase of 3-4 times. Do the calculation on the US figure and you get 7 billion. But car ownership is growing even in rich countries. Factor in that growth and global figures get even higher.

Poorer countries are chasing a moving target. Catching up by growing faster needs impossible levels of income and wealth. We cannot have infinite expansion on a finite planet. There is a resource problem. There is a degradation problem: there is already extreme pressure on the biosphere, with critical loss of forest, soil, water and bio-diversity in many places. And there is the problem of what we are pumping into the atmosphere, in particular the greenhouse gases that cause global warming. For the poor countries to catch up in the current system, we have to imagine these issues away and assume we have access to several planets worth of resources and atmospheres.[3]

There is another problem. How is it possible for every country to have an export-led growth model? This is what is called ‘the fallacy of composition’. If somebody has an export surplus, someone else has to have an import deficit. Some economists argue that this will be resolved by comparative advantage but that model seemed to work best when one part of the world produced industrial goods and the other foodstuffs and raw materials. If there could be a rebalancing towards domestic markets this would reduce the scale of the problem but it certainly would not eliminate it.

So long as we are trapped in the anarchy of global competition, this problem is likely to get worse. For countries to continue to climb the international division of labour those at the bottom will have to start producing more and more sophisticated  products, but who will these be sold to if they are not produced in relation to need?

Demand is not unlimited.  In the rich world, we are already drowning in stuff.  Today the UK has some 1500 big box storage units with 45 million square feet of storage space.   Car ownership per household has grown from under 0.6 in 1971 to 1.2 in 2011 (households have become smaller too). Although the exact figures vary with the economic cycle, we also seem to keep cars less long. The average UK household is said to throw away a ton of ‘waste’ a year and at the recent rate of increase will double the weight of household waste every 20-25 years. Without consumerism, capitalism would die, but current consumption levels also make no sense.

We have another problem. What if the levels of productivity that have been achieved in global capitalism are already so great as to swamp the possibilities of competitive growth in the rest of the world?   In the past, the first stages of growth involved  labour-intensive industrialisation. You combine lots of labour with a little capital. But over time capital has become more sophisticated and so you need fewer workers.   When the modern Indian textile industry was starting up in the late 19th century (after India’s earlier textile industry had been destroyed by the British), some second-hand machinery was imported from the UK. A century later the same thing happened   but obviously even the second-hand machines imported now make workers more productive than those of a century ago.

If poor countries try to leap forward using new machinery then this too may not generate much employment at all. Some fear that with cheap robotics even factories in the poor world will require very little industrial labour. Logically, if robots were to do more of the work there might not be any advantage at all in putting them in poor countries at all especially given their poor infrastructures.

Currently, there are important constraints. Despite the hype, the number of robots is still modest and they are used more in some industries and places than others.[4] Robots, for example, are better at helping make cars than clothes. Hard materials seem to be easier for robots to deal with than soft, flimsy ones that easily pull out of shape.  That is good for textiles but bad for most other things and it is these other things that are important if incomes are to rise. In 2015, one third of industrial robot exports went to middle income countries for car and electronic production with China the largest importer.

The inability to use robots in clothing is only a partial compensation. The textile and clothing industries have been the classic sectors of early growth for countries starting to develop. Yet today, the world is literally awash with their output. Some higher-end production remains in the rich countries but 50% of clothing exports come from just four countries – China, Bangladesh, Vietnam and India.[5]

A quick trip round Primark soon shows how cheap clothing is today in the rich world.  But what of quality? Much of the stuff we buy – irrespective of the prices we pay – is actually produced by the same people in the same factories. A succession of consumer tests have shown that higher prices and branding is no guarantee of higher quality even if wearing stuff with the right  ‘label’ makes us feel good.

In the rich world, we simply have too many clothes. This creates another big problem for poor countries trying to establish their own industries. They also have to compete with our second-hand clothes.  Over 4 million tons of used clothing are passed on each year. Most go to be sold in poor countries. 70% of the world’s population is said to wear second-hand clothes.  These clothes have barely been worn, if at all, by those who have given them away in the rich world. Their availability explains why even malnourished people are better clothed than a generation ago.  For producers in Africa, it is a double whammy: competition from both the big new clothing exporters and from the second-hand importers. Governments have tried to ban the import of second-hand goods but they are far from successful. Why should they be if the goods are perfectly serviceable?  It is an illusion of the most recent decades that everything must be new and nothing needs to be repaired.

The consequence of this is dramatic. In the 19th century countries grew by shifting labour from the countryside into factories and then into the service sector. The share of labour in manufacturing peaked in the western European countries after WWII at around 50% of the labour force. Since then the peak of the share of labour in manufacturing seems to have declined over time. It appears to have peaked already in China already at around one third of the labour force. In Africa, there was hope in the 2000s that the share of labour in ‘industry’ might rise but it may already be peaking.

The data tends to be slow to come out and is patchy. But, using the most recent data it seems that the share of workers in manufacturing (traditional and modern) rose in the early 1970s to some 8-9% of and then experienced a fall and stagnation. It rose again just before 2000 and had painfully crept up to around 8-9% again by 2010 but seems to have been more or less stuck since.[6] This means that at the bottom, people are left to scrabble for employment in the service sector and booming informal economies, which are inherently limited in their potential to improve incomes.

These are just some of the problems for those who think that the system can cure itself. They also create a problem for the left. It appears that none of these issues can be addressed within a competitive national framework. However, we have been very bad at building international links to address them. In rich countries, the left has been too reticent in raising the issue of global redistribution not only in terms of what it means to ‘them’ but also what it demands of ‘us’. We need to build a creative politics of re-organisation and redistribution not only within countries but also between them. We have to confront the illusion that capitalism can make all of the countries rich. It cannot and that is not the way the world is developing.

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[1] https://www.oxfam.org/en/even-it/5-shocking-facts-about-extreme-global-inequality-and-how-even-it-davos

[2]  https://wir2018.wid.world/.  Among the many writing about these problems Thomas Piketty and Branko Milanović stand out for the way in which they have moulded evidence and argument. Piketty is one of the contributors to the World Inequality Report; see: Banko Milanović, Global Inequality. A New Approach for the Age of Globalization (Cambridge, MA: HUP, 2016).

[3] There have been a number of attempts to show that this cannot work. See: Michael Haynes and Rumy Husan, ‘National Inequality and the Catch-up Period: Some “Growth Alone” Scenarios’, Journal of Economic Issues, 34:3 (2000), 693-705 and  Michael Haynes, and Rumy Husan, ‘A Note on the Implications of Global Convergence under a Non-redistributive Solution’,  Journal of Economic Issues, 37:3 (2003), 805-12.

[4] For a sceptical take, see: Martin Upchurch, ‘Robots and AI Work: The Prospects for Singularity’, New Technology, Work and Employment, 33:3 (2018), 205-18.

[5] WTO 2018, World Trade Statistical Review 2018.

[6] These figures are my own calculations from the Groningen Growth and Development Centre 10 sector database, which covers only 11 countries in Africa but includes the biggest economies: https://www.rug.nl/ggdc/productivity/10-sector/.