IMMEDIATE POST-WAR THEORIES, PREDICTIONS, AND EVIDENCE
Although economic historians have been interested in the links between globalization and inequality in the nineteenth and early twentieth centuries,5 we begin this discussion by considering the first three decades after World WarII.
Atthe start of this period, much of the development literature was focused away from global opportunities. It was either concerned primarily with domestic processes to the neglect of the global context, or it was suspicious ofinternational trade, investment, and capital flows.An example of a theory of development that was isolated from global forces is the classic Lewis (1954) surplus labor perspective. In the first part of this paper, Lewis analyzes a pure closed economy in terms of drawing labor away from the traditional surplus labor sector toward modern capitalist forms of production, a process that continues until labor becomes scarce and wages start rising.
What is interesting and not very well appreciated, however, is that the Lewis (1954) paper was in two parts. Part II of the paper deals with the open economy in the phase when surplus labor is exhausted:
When capital accumulation catches up with the labour supply, wages begin to rise above the subsistence level, and the capitalist surplus is adversely affected. However, if there is still surplus labour in other countries, the capitalists can avoid this in one of two ways, by encouraging
immigration or by exporting their capital to countries where there is still abundant labour at a subsistence wage.
Lewis (1954, p. 176)
Lewis carries out a detailed analysis of a number of archetypical cases of trade and investment. Among his conclusions are the following:
The export of capital reduces capital formation at home, and so keeps wages down. This is offset if the capital export cheapens the things which workers import, or raises wage costs in competing countries.
But it is aggravated if the capital export raises the cost of imports or reduces costs in competing countries.... The importation of foreign capital does not raise real wages in countries which have surplus labour, unless the capital results in increased productivity in the commodities which they produce for their own consumption.... The Law of Comparative Costs is just as valid in countries with surplus labour as it is in others. But whereas in the latter it is a valid foundation of arguments for free trade, in the former it is an equally valid foundation of arguments for protection.Lewis (1954, p. 189)
This perspective on openness dovetailed with other perspectives such as export pessimism on the demand for products produced by developing countries. Many models of development at this time were built on this foundation. Overall, it would be fair to say that Lewis was indeed suspicious of openness in trade and investment raising wages relative to the return to capital in a country with surplus labor. In addition, in his other writings, he was quite “Kuznetsian” in seeing the initial stages of development as leading to rising inequality because, as he said (Lewis, 1976),
Development must be inegalitarian because it does not start in every part of the economy at the same time.... There may be one such enclave in an economy, or several; but at the start development enclaves include only a small minority of the population. (p. 26).
Thus, as opportunities opened up for trade they would be taken by some and not others and this would create inequality. At the same time, surplus labor would prevent the narrowing of the inequality on average between labor and capital. Overall, then, a pessimistic view exists on globalization and inequality.
Counter to this perspective is a view of the world without surplus labor, with trade between economies with different degrees of labor scarcity. This neoclassical H-O model famously leads to the “Stolper-Samuelson” conclusion that opening up of trade will raise the relative return of the relatively abundant factor.
Because in developing countries this factor is labor relative to capital, it must follow that opening up will narrow the differential in rates of return to labor and capital. Making the reasonable assumption that owners of capital are richer than those who earn their living through their labor power, it follows that globalization will reduce inequality in developing countries.These theoretical perspectives corresponded, of course, to policy stances. Most developing countries in the immediate post-war period adopted import substitution strategies—convinced that opening up would be bad for growth and for inequality.
Elaborate multisector planning models, such as those for the first Indian 5-year plans, had these key elements of a focus on domestic markets and domestic industrialization. Latin American countries adopted import substitution strategies, as did the newly independent African countries in the 1960s and 1970s. However, a group of countries in East Asia went against this trend and, from the 1960s onward, pursued policies of integration with the global economy. There is of course a huge debate on the details of these strategies. In particular, there is debate on the extent to which their policies can be classified as “free market” policies. However, there is no question that for three decades after the war, these economies, in contrast to other economies discussed above, did indeed integrate into the world economy in a purposive manner.
The East Asia experience was crucial to the policy debates of the 1970s and 1980s and to the turn in policies that one began to see in the rest of the developing word from the 1980s and 1990s onward. The 1960s and 1970s saw what has been dubbed the “East Asia miracle” of growth with equity. Not only did this group of countries have historically high growth rates, and higher growth rates than their contemporaries, they also managed growth with falling levels of inequality. The combination of high growth and falling inequality meant a sterling record in poverty reduction as well.
Of course the details of the inequality performance are varied and are not quite so uniform across countries and over time. There were periods of increasing inequality in some of the countries, and there were differences between Northeast Asia and Southeast Asia.6 But there is a general acceptance that the East Asia story is one of growth with inequality kept in check. However, the interpretation of the facts is a different story. Already alluded to is the use of experience to support both the “free market” and the “judicial intervention” strands of the policy debate. The distributional outcomes have similarly been interpreted in different ways. One straightforward interpretation is in terms of support for the neoclassical H-O model with its prediction that opening up would narrow the returns to labor and capital and, with it, bring about a reduction in inequality. Indeed, this was the interpretation that was most used by those urging other countries, like India, to adopt outward-oriented policies. Thus, the classic exposition by Bhagwati and Desai (1970) represents a turning away from the nostrums of the immediate post-war, post-independence consensus in India that equitable development could only be achieved through import substitution and industrial planning. This strand of literature found its apogee in a series of studies by the World Bank in the 1980s, including for example, in Papageorgiou et al. (1990), the capstone to publications entitled the “Liberalizing Foreign Trade Series.” The contrast of East Asia with stagnation in India and growth with inequality in Brazil was very much highlighted in this literature. At the same time, the integration of Europe through the European Union, and the success it
delivered over a long period of high growth with falling inequality in the immediate postwar decades, was also relevant in the policy discourse.
However, the East Asian experience has also been used to support the thesis that the equity dimensions of outcomes owe a significant amount to other structural and policy features.
Among these are the land reforms instituted by the occupying American forces in South Korea in the 1940s and 1950s, which meant that they entered the next phase of development, in the 1960s and 1970s, with supportive initial conditions for equitable development. Further, in these countries and in other East Asian countries, proactive policy had ensured a very wide spread of basic education. Here is how Adelman (n.d.), the leading scholar of South Korean development strategy at that time, sets out these structural factors in the country from the end of World War II until the beginning of the 1960s:There were two waves of land reform, in 1947 and 1949. In 1947, the U.S. military government decreed that the land confiscated from Japanese farmers and Japanese corporations should be redistributed to tenants.... The second wave of land reform redistributed the holdings of Korean landlords owning more than 3 chongbo (7.5 acres or about 3 hectares) to tenant farmers and landless farm laborers.... The distribution of land holdings became very even.... The bulk of government investment during this period was on social development...Over this period, the literacy rate increased from 30 to over 80 percent.
These structural factors have to be seen in conjunction with the perspective of Lewis (1976) that initial differences in advantage can be magnified by the appearance of economic opportunity. Thus, perhaps the best interpretation of the East Asia experience is being supportive of both a structuralist view and a neoclassical perspective based on the H-O model. The land reforms and the wide spread of education simultaneously reduced surplus labor while at the same time making the distribution of assets (land and human capital) much more equal. The stage was thus set for an opening up and integration into the global economy to deliver growth with equity. However, the outcome was dependent on the initial conditions at the time of the opening up, conditions that need not necessarily hold in other countries, or at other time periods.
20.3.