The last time the world experienced an economic catastrophe on the present scale, governments in Latin America and elsewhere drew the conclusion that reliance on fickle overseas markets was a dangerous thing. World War II only served to reinforce this conclusion.
Similar lessons are being drawn today, with one crucial difference. Back then, the decision was made to artificially decouple national economies from the international economy by developing protected industries that would service the home market. Now, the focus is on lessening export dependence by boosting local demand, which will involve temporary stimulus measures in the short run, but more structural measures in the longer term, for example promoting “social safety nets to give Asian consumers, especially the poor, the confidence to spend”. Moving towards higher wages, a more equal income distribution, and lower savings rates in countries like China, so that more of what is produced there is consumed there, would seem to be among the more benign adjustment scenarios available to the world economy today.
10 replies on “Dependency theory for the 21st century”
Interesting observation. That reminds me of the old piece of Brad DeLong with Barry Eichengreen on Argentina (recently re-posted on DeLongs somewhat difficult-to-navigate blog). If I remind the arguments correctly, they compared Western Europe with Argentina after 1945. A more equal income distribution sounds a bit like the “continental European model”, am I right. This is interesting, since e.g. the Germans have been doing their very best to “widen” the income distribution in the last decade.
@Kevin
The notion that China is going to move towards a new form of isolationism due to the collapse of Western demand is based on opinion not analysis. As Phil Mullen has argued, the decoupling discussion of China makes a fatal error of conflating economic self-sufficiency and economic development. The reality is very different. China’s (and Asia’s) economic dependency on global markets is evidence of its development. Much as the the most developed economy of the 20th century (the US) developed deep economic relations across the world, China’s rise has fostered deeper interdependence – dependency and growth are symbiotic not antagonistic processes. China is today more embedded in global relations of production not less.
Saying this, the myth that China’s rapid growth of the last decade is the outcome of an export-driven model of economic development is based on poor economic research. Koopman et al has shown that export grrowth may explain only 3% of the 10-12% of China’s GDP growth if export revenue is stripped down to estimate domestic value added of exports. See Why the Export Slump Won’t Doom China’s Economy
In addition, the assumption that Chinese exports are dependent on consumers in the West is also not useful. In reality China’s exports are mostly intra-regional trade with other Asian nations.
Therefore, whilst China is most definitely experiencing major shocks in the short to medium term. The suggestion that China is on the verge of turning its back on globalisation seriously misreads the shift in economic power that is occurring. China’s GDP growth is less dependent on the West, but relatively more dependent on the rest of the world and Asia in particular. But most importantly, China’s GDP growth will prove more resilient than Western commentators assume.
In the short term China’s massive subsidies and social reforms will be necessary to limit the damage of the global slump (originating in the structural weaknesses in the West). In the long term, China is possibly the most well-placed to benefit from Schumpeterian “creative destruction” as technological and business innovations shift it up the value chain. This suggest that China’s economic growth may well become a future dynamo of globalisation.
Anemeconomy
Historical analyses are best left to qualified historians – they tend to be very nitpickey indeed about their sources and the reliability of these sources.
There are no historical comparisons with the current economic mess – similarities certainly. This is the first global crisis where there was a systemic, close-coupled electronic financial network established between local, national and international centers. A Normal Accident waiting to happen – and it did. Now Normal Accidents are anything but normal – they generally result in catastrophic failure and devastation. We got this. Conclusion: The Economic Model we use (Permagrowth) is the culprit. We need a new model. A Permagrowth model require an essential element – Credit (lots of credit). Trouble is credit has a very ugly cousin – Debt! Now debt has an even uglier Siamese Twin – Compound Interest!! And compound interest has a very nasty attribute – it grows exponentially!!! Conclusion: Economic Model must ensure annual incremental surplus in excess of annual increase in debt!!!! Reason: Exponential values ‘grow’ faster than arithmetic values. We need a new Economic Model!!!!!
Brian P
@Brian Woods, there are few more qualified than Kevin O’Rourke to give the current economic crisis an historical perspective. http://www.tcd.ie/Economics/staff/orourkek/homepage.htm
[…] this blog last night via Crooked Timber, and I’m going to follow suit and totally steal this post wholesale. Kevin O’Rourke points out a possible benefit of the worldwide economic crisis […]
What is really interesting about this shift Kevin is that, where the ‘old’ dependency theory saw the health of developing economies as tied to the vitality of its domestic firms and emerging capitalist class, this view sees it as tied to the health of the people of the country. The potential for a progressive investment in education, health and social security is opened up as a source of economic growth, where the older view privileged the needs of domestic firms over workers’ rights (as was seen in union suppression in Korea etc). Given that a ‘modified dependency theory’ was part of the success of the East Asian Tigers I see a lot of potential here, with these investments in enhancing capabilities (a la Amartya Sen) being part of a broader development strategy.
There is an interesting article by Monica Prasad on the role of suppressed demand/ worker prosperity in the crisis. It’s in the Spring edition of Accounts , the newsletter of the Economic Sociology section of the American Sociological Association.
http://sitemaker.umich.edu/mesoc/files/accounts_spring_09_final.pdf
@Sean
I think you are exhibiting that most abundant quality of Western commentators on China – namely wishful thinking. China’s subsidies are not conforming to the silly nonsense of Western academics that GDP growth is based on social capital (possibly the most naive instrumental approach to education and culture). I think you will find that China’s subsidies are mostly aimed at developing a balance of short-run damage limitation and and long-term capital investment in energy, transport and construction. The social safety nets are designed to ease the immediate damage from the slowdown of developed economies as complementary not substitute policies for the “old-fashioned” path of industrialisation. China is embarking on massive projects of civil engineering, housebuilding and high value manufacturing.
What is radically interesting about China in the global recession, is that the “old dependency” theory of financial dependency has been reversed. The emerging economies of Asia are not contracting because of their peripheral links to developed economies in the West. That has been turned upside down as China transfers its surplus value to Western financial centres. New York, London and Dublin have become dependent on capital transfers from China (and Japan, Middle East). This greater interdependence also marks a historical shift in the axis of economic power towards Asia.
I see the recession as a positive for China as many small manufacturers, selling through trading companies but with limited if any control systems, have closed down. The surviving ones will be stronger.
Cheap labour is the driving force of the Chinese economy and will remain so for many years to come.
The consumer electronics sector is dominated by foreign companies and as with the iPod, the trade stats can flatter but value added is often limited.
China is in a strong position to invest in capital and as for Asia in general, there will be an impact from a fall in US demand in coming years but it will not change very much.
Business is slowing in Malaysia, where I live but not much.
The experience of 1997, has meant that while there was robust growth in recent years, it wasn’t like the madness in Ireland.
I have covered some issues on China, in the panel at the lower end of this article:
http://www.finfacts.ie/irishfinancenews/article_1016593.shtml
@Micheal
I read with interest the comprehensive article on China, however I think that you underestimate a key advantage of Chinese capitalism – its ambition to transform the structure of its economy through real investment of its domestic surpluses. As you correctly indicate, China’s high tech exports have contributed relatively little to GDP. However, the global slump is likely to accelerate the industrial strategy of moving up the value chain. There are 3 factors that give China some competitive advantage here.
Firstly, China’s absolute GDP and GDP growth is primarily based on indigenous profits realised by domestic Chinese operations. (Liquidity)
Secondly, foreign high tech MNCs have transformed the technical and business skills of China’s managers, engineers and workers. (Technology)
Finally, China’s banks are retreating from building up foreign currency reserves and are moving towards allocating the massive domestic savings and surpluses as capital to be invested based on long term economic planning and ROI. (Long-termism)
@LorcanRK: Thanks for the reply. My comments are in the context of attempting to analyze the current economic mess. Historical precedents may be useful, but are treacherous. My main concern is that there seems to be very little comment or discussion about the current economic Model-in-Use. Each of us has one. This model frames and guides our thinking and opinion formation. Unless you make your Model-in-Use explicit it is difficult for others to construct a meaningful understanding of your views, opinions and beliefs – not impossible, just difficult, and it leaves open the prospect of misunderstandings.
I have formed the opinion that the majoritarian (I hope this is correct) economic Model-in-Use is, Permagrowth. I no longer hold this – I regard it as defective. I would like to see a much greater engagement with the possibility that we are in the process of an economic paradigm shift. We may be, we may not be. I hold that we are.
We have slowly, insidiously, wound the spring (debt) of our ‘clockwork’ globalized economy about as far as it will go: now it snaps. Paradigm shift! There is customarily a ‘trigger event’. My money is on an irreversible problem with access to adequate supplies of liquid fossil fuel. The inflection will probably occur over a number of years, and unfortunately will not be apparent until we conduct an historical ‘look-back’.
Brian P