Global Issues. Kristen A. Hite
for the past several decades, that the distribution of income within growing economies became more unequal during the period when the countries were experiencing high rates of growth. The same thing happened in China in the 1990s. The rich got a larger proportion of the total income produced in these countries than they had before the growth began. And even worse than this is the evidence that the poor in these countries, such as Brazil, probably became absolutely poorer during the period of high growth, in part because of the high inflation which often accompanied the growth.38 (High inflation usually hurts the poor more than the rich because the poor are least able to increase their income to cope with the rising prices of goods.) The economic growth that came to some nations following the market approach failed to trickle down to the poor and, in fact, may have made their lives worse. High inflation was halted in Brazil in the 1990s, as was the trend for income inequality to worsen. At the end of the century the distribution of incomes in Brazil continued to be highly unequal. The poorest 20 percent of the population received about 3 percent of the income in the country, and the richest 20 percent received about 62 percent.
Critics of the market approach have also pointed out that prices for goods and services set by a free market often do not reflect the true costs of producing those goods and services. Damage to the environment or to people’s health that occurs in the production and disposal of a product is often a hidden cost, which is not covered by the price of the product. The market treats the atmosphere, oceans, rivers, and lakes as “free goods,” or as a global commons, and, unless prohibited from doing so by the state, it transfers the costs that arise because of their pollution to the broader community. In the language of economics this is called a “negative externality,” a term rarely discussed in public. Some critics believe this flaw in the market system is what is really responsible for our changing the climate on Earth, to be discussed in detail in Chapter 6.
And finally, critics point to the cycles of positive and low or negative growth that are a normal part of the market approach. An extreme case of this was seen as recently as 2008/2009 when a near collapse of market economies started in the United States and spread to Europe and other parts of the world. A major recession occurred in the United States, which was only prevented from turning into a depression by major intervention by the state. Many economic analysts attributed this failure of the market system in the United States to a lack of regulation by the government or state.
The State as Economic Actor
Approaches to economic development that envision a role for the state beyond that described in the previous section vary widely. Advocates of Marxist‐Leninist thought in early twentieth‐century Russia built a communist state, the Soviet Union, which functioned as the only economic actor, overseeing a centrally planned economy and directing the production and distribution of all goods, services, and labor. In a socialist country most of the means of production – land, resources, and capital – are publicly controlled to ensure that the value obtained from the production of goods and services is used to benefit the nation as a whole. The prohibition on the private control or ownership of these so‐called factors of production leads, according to this approach, to a relatively equal distribution of income, as everyone, not just a few individuals, benefits from the economic activity. Central planners set prices and invest capital in areas that are needed to benefit the society.
Some state‐focused approaches to economic development envision a strong role for the state beyond direct central planning. With respect to the global distribution of wealth, one explanation popular among those who take a state‐based approach to economic development attributes the causes of poverty in the world to international trade. According to the state approach, the root of the present international economic system, where a few nations are rich and the majority of nations remain poor, lies in the trade patterns developed in the sixteenth century by Western Europe. (“Dependency theory” is the name given to this part of the state approach, popularized by Immanuel Wallerstein.39) First Spain and Portugal and then Great Britain, Holland, and France gained colonies – many of them in the southern hemisphere – to trade with. The imperialistic European nations in the northern hemisphere developed a trade pattern that one can still see clear signs of today. The mother countries in “the core” became the manufacturing and commercial centers, and their colonies in “the periphery” became the suppliers of food and minerals. Railroads were built in the colonies to connect the plantations and mines to the ports. This transportation system, along with the discouragement of local manufacturing competing with manufacturing in the mother countries, prevented the economic development of the colonies. The terms of trade – what one can obtain from one’s export – favored the European nations, since the prices of the primary products from the colonies remained low while the prices of the manufactured products sent back to the colonies continually increased. It was the political power of the “core” that determined the global economic structure, rather than the economic “laws” of the market.
When most of the colonies gained their independence after World War II, this trade pattern continued. Many resource rich yet economically poor countries still produce food and minerals for the world market and primarily trade with their former colonial powers. The world demand for the products from the poorer nations fluctuates greatly, and the prices of these products remain depressed. The political and social systems that developed in the former colonies also serve to keep the majority within these nations poor. A local elite, which grew up when these countries were under colonial domination, learned to benefit from the domination by the Western countries. In a sense, two societies were created in these countries: one, relatively modern and prosperous, revolved around the export sector; while the other consisted of the rest of the people, who remained in the traditional system and were poor. The local elite, which became the governing elite upon independence, acquired a taste for Western products, which the industrial nations were happy to sell them at a good price.
The present vehicle of this economic domination by the North of the South is the multinational corporation. Tens of thousands of these exist today. In 2009, 140 of the 500 richest corporations in the world had headquarters in the United States, while many others were headquartered in Europe and Japan.40 In 2018, the figure reduced to about 130.41 These corporations squeeze out smaller local firms in the developing nations, evade local taxes through numerous devices, send large profits back to their headquarters, and create relatively fewer jobs than their local counterpart when the manufacturing firms they set up utilize the same capital‐intensive technology that is common in the industrialized countries. Also, they advertise their products extensively, thus increasing demands for things such as Coca‐Cola and mobile technology while many people in the countries in which they operate still do not have enough to eat.42
Advocates for a state approach point to the adverse terms of trade that many poorer countries face today. There is general agreement that there has been a long‐term decline in the terms of trade for many of the agricultural and mineral products that these resource rich nations export. There has also been great volatility in the prices of some of these products, with a change of 25 percent or more from one year to the next not uncommon for some products. Such fluctuations make economic planning very difficult. There is also clear evidence that the industrialized countries, while primarily trading among themselves, are highly dependent on other countries for many crucial raw materials, including chromium, manganese, cobalt, bauxite, tin, and, of course, oil.
Although international trade is still far from being the most important component of the US economy, it is a very important factor for many of the wealthiest corporations. In the early 1980s about one‐half of the 500 wealthiest corporations listed in Fortune magazine obtained over 40 percent of their profits from their foreign operations.43