the brics, us â€declineâ€™ and global transformations

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The BRICs, US ‘Decline’ andGlobal TransformationsRay KielyProfessor of Politics, Queen Mary University of London, UK

© Ray Kiely 2015

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Softcover reprint of the hardcover 1st edition 2015 978-1-137-49996-7

Contents

List of Tables vii

Acknowledgements ix

1 Introduction 1

2 The Rise of the South: Rising BRICs, Declining US? 9Developmental change and transformation through 10convergenceGeopolitical change and transformation 15Rising South, declining West?: Competing perspectives 16Conclusions: Issues for further consideration 30

3 The BRICs, State Capitalism and Globalization: Challenge 33to or Triumph of the West?Triumph of the West?: The South and the opportunities 34of globalizationChallenge to the West? State capitalism, the China model 39and the Beijing ConsensusStates and markets in the development of the BRICs 44States, markets and the question of neoliberalism 57Conclusion 63

4 The BRICs, the South and the International Economy, 651992 to 2007Globalization and the emerging markets boom of the 1990s 65Convergence at last?: The boom from 2002 to 2007 71The limits of convergence, 1992 to 2007 75Conclusion 90

5 The South and the Causes and Consequences of the 91Financial Crisis, 2007–14The immediate causes of the global financial crisis 2008 92From boom to bust: The international origins of the crisis 105The consequences of the crisis: The transformation of the 109international order?Conclusion: Inequality and the crisis in the US as a global 126crisis

v

6 Global Inequality and the Rise of the South 129The question of international inequality 129Inequality and poverty within countries 132Global inequality manifested: The food crisis and the 139international division of labourConclusion 150

7 The South and Geopolitics: From Bandung to the BRICS? 152The Third World and the South after 1945 152The new South 156Transforming international order? 167Conclusion 173

8 Conclusion: Development, Innovation and the Limits of 174International TransformationThe rise of the South and development theory 175The rise of the South and technological innovation 181The limits of international transformation 187

Notes 195

References 200

Index 223

vi Contents

List of Tables

Table 2.1 Annual average real GDP growth rates 14Table 4.1 Manufacturing shares of exports by country, 67excluding oilTable 4.2 Annual average growth rates (percentages) of GDP 69and exports in China, US and Europe since the late 1970s, up to the financial crisis in 2008Table 4.3 World output growth (annual percentage change) 72Table 4.4 Average annual percentage GDP growth, 1960–2010 73Table 4.5 Percentage change (increase/decrease) in primary 74commodity prices over previous year (excluding crude petroleum)Table 4.6 Share of economies in world GDP 80Table 4.7 Growth of GDP and other components in China 85Table 4.8 China’s trade with the other BRICs (in US $billion) 86Table 4.9 India’s trade with the other BRICs 86Table 4.10 Commodities imports of China 87Table 4.11 Manufactured imports of China 88Table 5.1 Official holdings of China and Japan of long-term 108agency debtTable 5.2 China’s contribution to global consumption growth 113of particular commodities, 2002–12Table 5.3 Primary commodity prices, measured by percentage 114change over previous yearTable 5.4 Capital flows to the South pre- and post-financial 117crisisTable 5.5 Private and official net purchases of US long-term 123securities by foreignersTable 6.1 Global Gini Co-efficient, percentage measurement, 137various yearsTable 6.2 Theil Co-efficient, percentage measurement, various 137yearsTable 6.3 Global population by consumption groups 140Table 6.4 Shares of global consumption growth 141Table 6.5 Merchandise imports from low wage economies 147(as percentage share of total merchandise imports)

vii

viii List of Tables

Table 7.1 Composition of Latin America and Caribbean 161exports to China, and to the rest of the worldTable 7.2 Percentage increase in consumption growth, 2002 161to 2007

Acknowledgements

I would like to acknowledge the following for permission to draw on andadapt tables in this book: Mark Weisbrot, Rebecca Ray and www.cepr.net,Andrew Sumner, Yilmaz Akyuz, Richard Kozul Wright and UNCTAD,Rhys Jenkins, Helen Thompson, Francesca Beausang, the United Nations,Palgrave and Taylor and Francis (www.tandfonline.com).

Much of this project was conceived (and delayed) while Head ofSchool at SPIR, QMUL. Thanks to the Faculty of Humanities and SocialSciences and the School of Politics and International Relations atQueen Mary University of London, a very collegial place to work.Particular thanks within the School to James Dunkerley and MichaelKenny for reading and commenting on original proposals related tothis project, and to Bryan Mabee and Rick Saull for comments on andsupport related to parts of this work. Adam Fagan, Jean Francois Drolet,David Williams and Sophie Harman were also important sources of col-legial support and friendship, especially as this project moved to thenext one without this one being completed. Thanks also to ShaunBreslin, Andrew Gamble, Leo Panitch, Alfredo Saad-Filho, Andy Storey,Andy Sumner, for their support for and/or comments on this project atvarious stages of development, and to Shirley Tan for copy-editingwith great efficiency. As always, the music of Low, Will Oldham, MBVand PJ Harvey (among many others), and for much of this project, thelate Gene Clark, and indeed Gabriel-era Genesis, helped keep me sane,as did work by Vince Gilligan, David Simon and Ed Burns, and PaulFeig. Bill Haverchuck rocks! Thanks as always and love to Emma, Willand Ella.

ix

1

1Introduction

There is a growing perception that the international order is undergo-ing a process of transformation. There are two closely related (but farfrom identical) contentions used to back up this assertion: first, recentyears have seen the growth of emerging powers, which is part of amore generalized rise of the South (OECD 2010a; World Bank 2011a;UNDP 2013); second, and not unrelated to the first point, the UnitedStates has entered a period of decline (Moran 2012). The force of thesearguments has actually intensified since the onset of the globalfinancial crisis of 2008, based on a contrast of two worlds, “a resurgentSouth…where there is much human development progress, growthappears to remain robust and the prospects for poverty reduction areencouraging, and a North in crisis where austerity policies and theabsence of economic growth are imposing hardship on millions ofunemployed people and people deprived of benefits as social compactscome under intense pressure.” (UNDP 2013: 1) The rise of the so-calledemerging powers, and the BRICs in particular is in many respects unde-niable (O’Neill 2001, 2007; Young 2010). Brazil, Russia, India, andabove all China have enjoyed high rates of growth both prior to andafter the financial crisis, and their share of global output has increasedwhile the US’ has declined. Jim O’Neill (2013: 3), formerly of GoldmanSachs, and the person responsible for the term ‘the BRICs’ in 2001, hasargued that in fact it is really after the 2008 crisis that “the BRIC thesisreally came of age.” Though O’Neill himself suggests that the rise ofthe BRICs is good news for all countries, as their growth represents newmarket opportunities for established companies, others link their riseto the decline of the West. More specifically, this is the main reasonwhy some argue that the US is in decline, and convergence (in thesense of ‘catching up’ with the developed world) is taking place

2 The BRICs, US ‘Decline’ and Global Transformations

between parts of the global South and the developed world (Pape2009).

In the words of Parag Khanna (2009: x), the new second world ofemerging powers is “where the action is. Wall Street flies to Abu Dhabifor bailouts from its delinquent loans. OPEC is once again a confidentcartel shaping the energy market. Turkey brokers Arab-Israeli negotia-tions…The second world shapes global order as much as the superpow-ers do.” However, the rise of the BRICs/BRICS1 is not simply a story ofthe rise of a handful of emerging powers. It is good news for the globalSouth as a whole, for “the second world’s rise might be the best thingto happen to the third world….Booming second world demand forthird world commodities, investment by second world giants in Africaand other chronically underdeveloped regions, and rapidly growing‘south-south’ trade have all contributed to unprecedented world-wideeconomic expansion.” (Khanna 2009: x) There is thus much talk forexample of an ‘emerging Africa’, of ‘Africa rising’ and even of ‘Africa’smoment.’ (Radelet 2010; Rotberg 2013; Mahajan 2008; Severino andRay 2013) This point about the emergence of the South as a whole isall the more significant since the outbreak of the global economic crisisin 2007–08. The 2007–08 crisis did not have such an adverse impact ondeveloping countries as previous major financial crises, such as in1873, 1929 and 1981–2 (UNCTAD 2011). Indeed, rapid recovery andhigh rates of growth since 2007–08 in many countries in the globalSouth, and not just emerging powers such as the BRICs, has led to theargument that these have become ‘de-coupled’ from dependence onthe West, and indeed China is becoming a new hegemonic power, par-ticularly for the countries of the South. Moreover, as the quotes fromKhanna above make clear, it is not only the BRICs that have experi-enced high rates of growth, but other countries in the (former) GlobalSouth, beneficiaries of a new order of trade taking place betweenSouthern nations. This is reinforced by China’s growing internationalinfluence, and the rise of what has various been described as theBeijing Consensus (Ramo 2004; Halper 2010), the China model (Zhao2010), or just state capitalism (Bremmer 2009), all of which challengethe US-centred, neoliberal Washington Consensus. Even some pro-ponents of market liberalism see this as a possible state capitalist chal-lenge to western hegemony (The Economist 2012).

On the other hand, it could be argued that the rise of these countriesrepresents not so much a challenge to, but rather a triumph for, theWest. The rise of these countries owes less to state capitalist deviationsfrom neoliberal prescriptions which originated in the West, and more

to the embrace of globalization friendly policies. Seen in this way,whatever the geopolitical implications might be, the rise of ‘the Rest’ isa developmental triumph for the West, demonstrating the superiorityof market friendly policies which embrace the opportunities presentedby globalization. The South is rising through the growth of manufac-turing in some locations, commodity market booms caused in part bythe rise of those same new manufacturing powerhouses, and with thata massive reduction in the numbers of people living in absolutepoverty. At the same time, this leads to new opportunities for theWest, and not its imminent decline (O’Neill 2013: 6). In the words ofthe centre-right British magazine The Spectator, the year 2012 was ‘thebest year ever’ as “people are being lifted out of poverty at the fastestrate ever recorded”, and globalization “means the world’s not justgetting richer, but fairer too.” (The Spectator 2012; O’Neill 2013: 232)In stark contrast to the pessimism emanating from some versions ofthe US decline thesis, this is a far more upbeat story; indeed it is a taleof global convergence, one caused by the adoption of policies pro-moted above all in western countries, and the US in particular. Theseare essentially market friendly, or neoliberal, policies.

In these two accounts of the rise of the South then, we can see somedifferences in interpretation and in terms of normative implications.Some argue that the rise of state capitalism in the BRICs representsboth a geopolitical and developmental challenge to western dom-inance, as China in particular becomes a new pole of attraction fordeveloping countries. For some this is a cause for regret, as state capi-talism is associated with authoritarian politics, neglect of human rightsand ultimately the undermining of individual freedom (Halper 2010;The Economist 2012). Others welcome this development, suggestingthat state capitalism represents a challenge to the market friendly,neoliberal policies that have undermined the development of theformer Third World (Ramo 2004; Arrighi 2007). On the other handsome argue that the real reason for the rise of emerging powers is theiradoption of market friendly policies, and while any geopolitical chal-lenge to the West might be cause for concern, more significant is thedevelopmental triumph of new emerging powers, and this triumph hasits roots in pro-western, market friendly policies (World Bank 2002).

Whatever the differences between these interpretations, there aresome shared analytical assumptions. Most notably, all agree that therehas been a significant rise of emerging powers. This may or may notlead to the decline of the US (compare Mearsheimer 2005; Nye 2011),but the rise does represent some kind of tendency towards convergence

Introduction 3

in the international order. This book takes a more sceptical position. Itdoes not deny that there have been significant recent changes in theinternational order, and that we can refer to something called the riseof emerging powers. However, it also suggests that the rise of thesepowers has been exaggerated, and has real limits.2 This point applieseven more to the South more generally, and is particularly scepticalabout its supposed rise, both developmental and geopolitical.Moreover, it is not only the rise of the South which has been exagger-ated, but also the decline of the United States. The argument is madeabove all through an approach which draws on international politicaleconomy and especially an examination of the reasons for the rise ofthe South, which are traced back to the global economic boom from1992 onwards, and which ended with the global financial crisis of2007–08. This crisis is also examined in great depth, in terms of bothits causes and consequences, above all for the rise of the South and thedecline of the US. This focus on the international political economy ofthe period from 1992 to 2014 is not however at the expense of a con-sideration of geopolitics and the question of the geopolitical rise of a‘new South’ (Alden et al 2012), which is also investigated in somedepth, though how this relates to political economy questions will alsobe central to the argument.

The rest of the book considers these issues in seven chapters. Chapter 2outlines the arguments briefly considered here in more detail. In par-ticular it identifies five positions which will be considered throughoutthe book. The first position is that there is some kind of (state capital-ist, Chinese model, or Beijing Consensus) challenge to US hegemony,and that this is a cause for concern. The second position is that emer-ging powers are rising and this is transforming the international order,which carries with it a set of dangers, based on competition betweenrising and falling hegemonic powers. The third position is that there isa Beijing consensus, or China or BRICS model, but this is something tobe celebrated. The fourth position is that insofar as there is a rise ofemerging powers in the developing world, this should be seen as atriumph for the West, and convergence is occurring because of theincreased promotion of market friendly policies. The fifth and finalposition is that the rise of emerging powers is limited, and US hege-mony persists. This final position is the closest to the one taken in therest of the book. However, this does not mean that all of the otherpositions are rejected wholesale, and it will become clear in the empir-ically grounded analysis that follows that some specific points made bythe other perspectives are useful. In particular, and on the face of it


somewhat paradoxically, the first and third positions do have somevaluable – though also limited – insight to offer, particularly where thefifth position tends to overstate its case.

Chapters 3 through to 6 then present the empirical arguments inconsiderable depth. At points in the chapters, these are related back tothe five positions outlined in Chapter 2, but much of the analysisfocuses in considerable depth on empirical material and analysisderived from this material. Chapter 3 does this through a discussion ofthe rise of the BRICs in particular, relating the debate over their rise toearlier debates over the rise of the first tier newly industrializing coun-tries in East Asia (South Korea, Taiwan, Singapore and Hong Kong),and questions of the developmental state as against market friendlyintervention. This debate is then used to inform the current debateover state capitalism in the South, and the reason for the rise of theBRICs. The argument made in the chapter is that the rise of theseemerging powers cannot be explained by the fourth position outlinedin Chapter 2 (a ‘market friendly intervention’ triumph of the West),and so in this regard – and whatever their differences over the implica-tions – positions 1 and 3 are more convincing.

However, the chapter also concludes by suggesting that a fully con-vincing analysis of the rise of these new powers needs to examine theinternational political and economic reasons for their emergence, andthis is considered in Chapter 4. This chapter examines the inter-national factors that facilitated the emergence of these countries, locat-ing these within the ‘long 1990s’ (Schwartz 2009) from 1992 to 2007.This chapter clearly shows not only evidence of the growth of thesepowers, but also how this led to new configurations in the inter-national order, such as growing interdependence between the US andChina, which was reflected in US deficits, Chinese purchase of US debt,and highly lucrative US direct foreign investment overseas (includingin China). At the same time, by the late 1990s/early 2000s, Chinesedevelopment led to increased demand for primary products from theSouth, which facilitated growth elsewhere based on high demand andhigh commodity prices.

Chapter 5 takes up the story by focusing on the causes and conse-quences of the financial crisis. While the chapter starts by providing arelatively straightforward narrative account of the reasons for the crisis,it then focuses on its international causes, rooting them in the break-down of the boom years of the 1990s. However, while moving to focuson the consequences of the crisis, a seeming paradox emerges, which is that if international factors were so important in facilitating the

Introduction 5

emergence of new powers in the South, then why did these same coun-tries recover so quickly from the crisis? Indeed, their recovery seem-ingly strengthens the case for the argument that the South is rising andthe US declining. Through a more detailed examination of the conse-quences, this argument draws – implicitly at least – on the idea that theSouth has decoupled from dependence on the West, and that thisdecoupling will increase in years to come. This argument is howeverquestioned and with it the idea that the continuing rise of the South issustainable. An alternative account of Southern recovery is proposed,which focuses on the success – and limits – of stimulus programmes inthe South, and above all in China, and the impact of this on commod-ity prices, but also continued dependence of receiving capital from theWest, in part as a consequence of quantitative easing policies.

Chapter 5 concludes by suggesting that (national, international andglobal) inequality were significant factors in causing the crisis, andthese issues are addressed in their own right in Chapter 6. Once again,the argument that we are witnessing a rise of the South is considered insome detail, though this chapter also notes that the ‘small-print’ insome of these accounts, such as the OECD (2010a, b) report, ShiftingWealth, is far more nuanced than is usually suggested. The chapterthen moves on to examine inequality within countries and finallyglobal inequality. The argument made in this chapter is that for all theoverblown talk of global convergence, those at the bottom end of thescale are still overwhelmingly concentrated in the South. Moreover, infocusing on two concrete issues – that of the changing internationaldivision of labour, and that of food – the contradictions and social ten-sions associated with the rise of the South are examined.

Chapter 7 shifts the focus to a more explicit examination of geopolit-ical issues. In addressing the history of ‘Third Worldism’, it examineswhether the ‘new South’ is emerging as a major actor in the interna-tional order. Relating the discussion back to calls for a new interna-tional economic order (the NIEO) and non-alignment, it is argued thatwe are witnessing a return to these debates, albeit in a radically differ-ent context. In particular the NIEO called, among other things, forguarantees on commodity prices, which in effect, China’s rise has facil-itated (for now at least). Non-alignment called for foreign policy inde-pendent of the superpowers, and the BRICS, among others, have calledinto question the promotion of liberal interventionist foreign policiesby western powers, and above all the US. The chapter relates theseissues back to the five positions briefly outlined above and discussed inmore depth in Chapter 2. In doing so it argues again for a perspective


most influenced by position 5, but one which recognizes the utility ofparts of positions 1 and 3.

Finally, Chapter 8 provides an extended conclusion which puts theargument in a wider framework. It emphasizes both the reality of therise of emerging powers but also their strict limits, and questions USdecline. However it does so not only by summarizing the argument ofthe book, but also by putting these arguments in a wider framework. Itdoes this by first examining and updating theories of development,and then making these more concrete by examining theories of inno-vation, and emphasizing their limits in the most ‘advanced’ of theemerging powers. It then moves back to a consideration of the interna-tional by engaging with the question of international transformation,and questioning whether this has taken place.

The book is very much in the tradition of ‘big picture’ academicwork (Tilly 1989), drawing on a number of resources to make the argu-ment. Given its macro nature, it does not rely on resources such asinterviews, but instead relies heavily on official sources such as trade,GDP, and investment data, combined with country specific and sec-ondary material to formulate the argument. Such is the nature of thedata that the book has to rely on existing official material, using this ina critical and productive way to make an original argument, based on a‘critical synthesis’ of existing primary and secondary material. Countryspecialists are unlikely to find much in the discussion which will aidtheir understanding of say, Brazilian national development. What theymight find useful is the way that this development has been locatedwithin an international political economy framework, and how thiscan be utilized to explain recent international and national events. Ofcourse, simply pointing to an IPE framework is not sufficient, as a(sub)discipline is not the same as a theoretical framework, a conflationthat is sometimes made by some IPE literature (see for instance Payne2005; Phillips 2005). It should also be stressed that the five positionsoutlined above and in the next chapter actually cut across theoreticaltraditions – for example, Marxists might identify with positions 2 and5, and liberal internationalists with 4 and 5, and possibly also 1. Whatfollows draws on various radical traditions in political economy,including a non-dogmatic Marxism (Kiely 1995; 2010), alongside workinspired by (among others) List, Keynes and Polanyi, as well as somework that draws inspirations from the idea of dependency (Kay 1989).It also draws on non-orthodox Marxist traditions of geopolitics, whichowes some debt to the work of Kautsky (Panitch and Gindin 2012;Kiely 2010). At the same time however, the empirical work that follows

Introduction 7

is developed in a constructive dialogue with these theoretical approaches,and is not intended to fit into pre-conceived theoretical boxes. Indeed,while there is a good deal of analysis throughout the book, the widertheoretical approaches are only implicit throughout. Finally, and mostimportantly, is the significance of the argument. What is argued in thisbook is that the idea that there is a new rising South should be treatedwith some scepticism, as should the alleged decline of the West andthe US in particular. This argument is made by considering in depththe reasons why some have argued that there is a new rising South,and suggesting why these arguments are flawed, and by presenting analternative, and more sceptical account of the limited rise of a newSouth. It should be stressed that this argument is analytical, and thecontention that the decline of the US and the West has been exagger-ated does not imply a simple normative commitment to US or westernhegemony, still less to those neoliberal policies promoted by the Westin recent years.


9

2The Rise of the South: RisingBRICs, Declining US?

This chapter develops further one of the themes of the introductionand provides a more in depth account of the rise of the South andrelated arguments. The first section provides a basic narrative accountabout the rise of the South, and of the BRICs, firstly focusing on theOECD report Shifting Wealth (2010a), and then the work of Jim O’Neilland other researchers at Goldman Sachs, the investment bank that firstused the term. Other works produced by Goldman Sachs’ rivals willalso be briefly examined. Following on from the discussion in theintroductory chapter, this section mainly focuses on the developmentalrise of the South and the question of transformation through convergence.The second section then looks at the development of the BRICS (Brazil,Russia, India, China and South Africa) as a geopolitical actor in theinternational system, outlining the development of various themes at anumber of summits since 2008. This section thus focuses on the ques-tion of transformation through geopolitical change. In both sections, thetreatment of the rise of the South and of the BRICs (or BRICS) will bequite sketchy, as much of this is developed in a more systematic andcritical fashion in later chapters. The third section outlines variouspossible ways of understanding the rise of the BRICs by trying tosituate these arguments within broader perspectives on the inter-national order, and whether we are witnessing a transformation in thatorder. This will involve some consideration of academic work that willalso be addressed in more depth in later chapters, but some initial con-sideration will be useful for two reasons. First, it will help to situatemore specific debates within wider analytical frameworks. Second, andperhaps as a starting point for more critical analysis later in the book, itwill be shown that much of the discussion about the rise of the BRICs


is actually really a discussion about one BRIC country, that of China, atheme that will be revisited in later chapters.

Developmental change and transformation through convergence

The basic contention concerning convergence is well summarized bythe 2010 Organisation for Economic Cooperation Development(OECD) report Shifting Wealth:

The new millennium saw the resumption…of a trend towardsstrong convergence in per capita income with the high incomecountries. The number of…countries doubling the average percapita growth of the high income OECD countries…more thanquintupled during this period (from 12 to 65), and the number ofpoor countries more than halved (from 55 to 25)…Latin America’sper capita growth rates were the highest since 1965–70…InAfrica…GDP growth for the region averaged 4.4% between 2000and 2007. (OECD 2010a: 5, 16)

This is indicative of a transformation in the international order, inwhich “the world’s economic centre of gravity has moved towards theeast and south, from OECD members to emerging economies…Thisrealignment of the world economy…represents a structural change ofhistorical significance.” (OECD 2010a: 15) In other words, we are wit-nessing a transformation of the international order based on ‘the riseof the East’, above all India and especially China (OECD 2010a: 37,44), and this in turn is facilitating the rise of the South as a whole.The South’s dependence on western markets has eroded and “businesscycles in emerging markets have gradually decoupled from those inadvanced economies, as trade diversification, commodity strengthand, particularly, the emergence of China took over the G7 as themain global factor behind fluctuations in the emerging world.”(Yeyati and Williams 2012: 17) This is reflected in the decline inNorth-North trade as a proportion of total international trade, theincrease in the proportion of exports originating from the developingworld (from 23% in 1990 to 37% by 2008), and the increase in theproportion accounted for by South-South trade, which rose from 7.8%in 1990 to 19% by 2008 (OECD 2010a: 71). For the OECD, and in con-trast to some perspectives outlined later in the chapter, this rise of theSouth is less a threat to the West and more one in which net gains in

the developing world “can benefit both rich and poor countries alike.”(OECD 2010b: 7)

Central to this story of convergence is the leading role played by asmall number of large developing countries. The financial servicescompany Goldman Sachs, and more specifically its chief economist JimO’Neill (2001), coined the term the BRICs in 2001. His basic argumentis that Brazil, Russia, India and China, and to some extent a number ofother countries, have become more important players in the globaleconomy. Based on a number of different projections for growth after2001, it is argued that the BRICs will account for an increasing propor-tion of global GDP, rising from 8% in 2001 to 14% by 2011, measuredin US dollar terms. When measured in terms of purchasing powerparity, which factors in local purchasing power, the rise is from 23 to27% over the same ten year period (O’Neill 2001: 6–7). Over the yearsthat followed, Goldman Sachs’ projections actually became more opti-mistic, concluding in a 2003 report that “If things go right, in less than40 years, the BRICs economies together could be larger than the G6 inUS dollar terms.” (Wilson and Purushotaman 2003: 2, 4)

It should be emphasized that these projections are not based on pro-jecting current growth rates into the future, but rather factor in the factthat growth is likely to slow down. Thus, “the projections assume thateconomies remain on a steady development track, (but) they do notassume ‘miracle economy’ growth.” (Wilson and Purushotaman 2003:12) What is assumed is that there are certain conditions for growthwhich broadly coincide with the World Bank’s post-Washington con-sensus, and which thus regard free markets supported by appropriateinstitutions as the way in which the BRICs have grown. Conditions forgrowth therefore include macro-economic stability (low inflation, pricestability and a low fiscal deficit), appropriate institutions which allowmarkets to work, openness to trade and to direct foreign investment,and good education which promotes the development of a skilledworkforce (Wilson and Purushotaman 2003: 13; O’Neill et al 2005: 10,14–15).

By 2005, projections were again revised upwards, as countries grewfaster than initial projections had suggested. Between 2000 and 2005the BRICs contributed 28% of global growth (measured in US dollarterms) and 55% measured in PPP terms. Over the same period, theBRICs more or less doubled their share of world trade to 15% of theglobal total (O’Neill et al 2005: 4). This final point is a crucial part ofthe BRICs story because “what distinguishes the BRICs theme from an‘emerging markets’ story is that they appear to be a crucial driver of

The Rise of the South: Rising BRICs, Declining US? 11

markets and investment opportunities outside those countries also.”(O’Neill et al 2005: 12) This is not just the story of the rise of a smallnumber of large developing countries, but also of the opportunitiesthat their rise presents to the developing world as a whole, and indeedfor the developed world as well (O’Neill 2013: 232; World Bank 2011a).While some way behind, Goldman Sachs identify a ‘next eleven’ (or N-11) list of countries that are also experiencing significant develop-ment. These are Bangladesh, Egypt, Indonesia, Iran, South Korea,Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam (O’Neill et al2005: 7; O’Neill 2013: 6, 223–5). Most recently, O’Neill added anotheracronym, the MINTs to the list of emerging powers, which referred toMexico, Indonesia, Nigeria and Turkey (O’Neill 2014; Elliot 2014a and b).

While the global economic crisis of 2007–08 did lead to a sharp slow-down across the world, what was striking was how quickly and rapidlyrecovery took place in the BRICs. Indeed, for Goldman Sachs, theoutcome of the crisis actually reinforced and enhanced the case beingmade for the significance of the rise of the BRICs (Goldman Sachs2009: 1; O’Neill and Stupnytska 2009). Growing domestic demandwithin the BRICs could actually lead the global recovery, including forthe advanced economies desperate for export markets in the face ofsluggish demand in their home economies. A new global middle class –defined as the number of people with incomes greater than $6,000 andless than $30,000 has grown by hundreds of millions, and these willlead the world out of the global slowdown (Goldman Sachs 2009;Goldman Sachs 2010: 1).

Post-crisis projections thus concluded that the BRICs catch-upwith the advanced economies would happen sooner than expected.By 2009, it was being predicted that China would overtake the US by2027, rather than the previously thought 2041; Brazil would over-take Germany by 2029 rather than 2036; Russia would overtakeJapan by 2037 (previously this was not even projected) and Indiawould overtake Japan by 2027 rather than 2032 (O’Neill andStupnytska 2009: 23). In the three years that followed the crisis in2008, the BRICs contributed over 50% of global growth (GoldmanSachs 2011: 2).

Not to be outdone by its competitors, Price Waterhouse Coopers iden-tify an E7 list of emerging economies, which are the BRICs plus Mexico,Indonesia and Turkey. Projections vary in each report, but the essentialargument is that by 2050, the E7 emerging economies will be around50% larger than the current G7 (Hawksworth and Cookson 2008: 2).They also argue that other emerging economies are likely to grow


rapidly, and a PWC 30 is identified, not least for those looking for lucra-tive investment opportunities (Hawksworth and Cookson 2008: 3).

These projections clearly have some basis in reality. Above all, thereis the emergence of China, which has experienced rapid growth andemerged as a major international actor in recent years. At market pricesits contribution to global GDP was 1.6% in 1990, but by 2008 it stoodat 7.1% (Nolan 2012: 1). It has the largest amount of foreign exchangereserves in the world – $3,197 billion in June 2011, more than doublethe amount of Japan, the second country (Nolan 2012: 4). Its exportsgrew by 14% per annum in the 1990s and by 25% in the 2000s (Nolan2012: 4), and by 2009 it was the world’s largest exporter (Nolan 2012:55). It is a major foreign holder of US public debt and in June 2011 itheld $1,170 billion of US Treasury securities, 26% of the total foreignholdings of US government debt (Nolan 2012: 4).

But as we have seen, it is not simply a story about the rise of China,and developing countries as a whole have experienced growth inrecent years, on the face of it reversing the disasters of the lost decadeof development of the 1980s (see Table 2.1). In the period from 1986to 2007, the developing world’s share of debt fell from 80% to below40% (Beausang 2012: 59). In the period after 1992, there was a massiveboom in foreign investment. The total global amount of direct foreigninvestment increased from $59 billion in 1982 to $202 billion in 1990,$1.2 trillion in 2000, down to $946 billion in 2005, and back up to$1.3 trillion in 2006 (UNCTAD 2002: 3–5; 2007: 9). For much of thisperiod foreign investment shares tended to show some degree of con-centration with the developed world receiving about two-thirds andthe developing world one-third of total foreign investment. Thus, from1993 to 1998, ‘developed countries’ received 61.2% of world DFI,developing countries 35.3%, and the former communist Europeancountries 3.5% (UNCTAD 2002: 3–5). For 1999–2000, foreign invest-ment inflows to the developed world constituted 80% of total DFI, andthe proportion going to developing countries constituted only 17.9%of the total (UNCTAD 2002: 5). By 2006, out of a total of $1.3 trillion,developed countries received $857 billion and developing countries$379 billion, with transition (former socialist) economies receiving $69 billion (UNCTAD 2007: 2–3). However, by 2009 developing andtransition (former socialist) economies accounted for almost 50% ofthe total global share of foreign investment inflows. By 2012, develop-ing and transition economies accounted for 52% of global FDI inflows(UNCTAD 2013a: 2). To some extent this development reflects less aconvergence between developed and developing countries, and more a


significant decline in the amount of foreign investment in recent years.The 16% global decline in 2008 was followed by a 37% fall in 2009,which meant that the amount going to developing countries fell, butfell less sharply than the amount received by developed countries(UNCTAD 2010a: 2–3). Similarly the increased proportion of FDIflowing to the developing world in 2012 reflected a total 18% fall inthe amount of FDI compared to 2011 (UNCTAD 2013a: 3). Nonethelessthis still represents a significant change if the proportion and (over alonger period of time) the amount of FDI going to developingeconomies. The BRICS were central to this change in foreign invest-ment shares, with (in 2009) China the second largest recipient, Russiasixth, India eighth and Brazil 13th (Beausang 2012: 60). Moreover, theBRICS (including South Africa) have also emerged as major foreigninvestors themselves with outward flows increasing from $7 billion in2000 (amounting to 1% of total global outflows) to $145 billion in2012 (10% of total outflows) (UNCTAD 2013a: 5).

Even more significant, on the eve of the 2008 crash, emergingmarkets accounted for 75% of foreign exchange reserves. The US had acurrent account deficit of 7% of GDP, and so surplus countries becameholders of dollar reserves. China’s investment into the US not onlytook the form of the purchase of US Treasury bonds, but also real estateand equities. Much of this investment was through Chinese state-ledSovereign Wealth Funds, which are essentially state owned andmanaged pools of capital, and are discussed in later chapters.

Clearly then, the story here is an upbeat one in which four develop-ing countries have emerged as major players in the international eco-nomic order. Moreover, their rise has presented opportunities for otherdeveloping countries which can benefit from trade and other linkswith the BRICs. Goldman Sachs reports do however note some caution,as “living standards in the BRICs continue to lag far behind the devel-


Table 2.1 Annual average real GDP growth rates (sources – UNCTADHandbook of Statistics for 1980–2005, IMF World Economic outlook, Jan2012

1980– 1990– 2000– 2006 2007 2008 2009 2010 201190 2000 05

Brazil 2.8 2.9 2.8 3.7 5.7 5.1 –0.2 7.5China 10.3 10.4 9.6 11.6 13 9 8.7 10.3India 5.8 6 6.9 9.8 9.3 7.3 7.4 10.4Russia N.A. –4.7 6.2 7.4 8.1 5.6 –7.9 4.8

oped world” and that none of the BRICs “have yet to break into eventhe top 50 richest economies in terms of PPP-based GDP per capita.”(Goldman Sachs 2011: 3) This qualification is important as the percapita point relates in part to facts that there is a large population inthe BRIC countries (though obviously there is more to say than this, aswe will see). This might point to a disjuncture between the geo-economic rise of the BRICs, which in part is a story of high populationcountries growing significantly, in contrast to the developmental limitsof their rise, and the fact that there remain many people living inextreme poverty. We return to this issue later in the book.

Geopolitical change and transformation

The story of an alleged transformation of the international order is nothowever just one about development. Also central to the story is theidea that we are witnessing a geopolitical transformation in whichleading developing countries give the south a greater voice in the inter-national order, and thereby challenge western, and specifically US,hegemony. While the concept of the BRICs was developed by JimO’Neill at Goldman Sachs in 2001, the idea became a reality in theperiod from 2006–08. Foreign ministers from Brazil, Russia, India andChina first met at a fringe meeting at the United Nations GeneralAssembly in the autumn of 2006, which was followed by the firstleaders’ meeting at Sapporo on the eve of the G8 Toyako-HokkaidoSummit in 2008. This was followed by the first full BRICs summit inYekaterinburg, Russia, in 2009, and then summits in Brasilia in 2010,Sanya in China in 2011, and New Delhi in 2012. At the Sanya summit,South Africa became the newest member so that the BRICs became theBRICS (Sanya Declaration 2011).

The BRICS act as a kind of international interest group, and possiblya counter to the G8, a group composed of some of the leadingeconomies from the ‘advanced’ capitalist world, both through mem-bership of the G20 major economies and of the G20 developingeconomies.1 At each BRICS summit, common themes have emergedsuch as the need for “a more democratic and just multi-polar worldorder” (Joint Statement 2010) in the context of rapid change in theinternational order, which highlights the need for “correspondingtransformations in global governance” (Second BRICS Summit 2010).Much emphasis has been placed on the need for voting reform withininternational institutions such as the World Bank and InternationalMonetary Fund (Second BRICS Summit 2010; Sanya Declaration 2011;


Fourth BRICS Summit 2012). Attention is also paid to issues like terror-ism, the environment and the development gap, and the fact that“emerging market economies and developing countries have thepotential to play an even larger and active role as engines of economicgrowth and prosperity.” (Second BRIC Summit 2010) This is sometimessituated in the specific context of the global financial crisis of 2007–08,and the need for changes in the international financial architecture, anargument that implies some criticism of ‘deregulated’ finance (JointStatement 2009). But at the same time, there is strong support for theWorld Trade Organization and the call is for “all states to resist allforms of trade protectionism and fight disguised restrictions on trade.”(Second BRICS Summit 2010)

The rise of the BRICS as an informal international body is only partof the story, and there are a number of informal gatherings, summits,and so on, that could be said to reflect the rise of a ‘new South’ (Aldenet al 2012), asserting itself within the international order. Theseinclude the alliance of G20 developing nations and IBSA, an informalalliance between India, Brazil and South Africa. These are briefly dis-cussed in Chapter 7, but what should be clear from this brief outline isthat a more assertive geopolitical voice has emerged alongside substan-tial economic growth in recent years.

Rising South, declining West?: Competing perspectives

So far this chapter has established that China, other BRICs, and theSouth more generally, have grown substantially in recent years. This inturn has gone hand in hand with the rise of the BRICS as an interna-tional actor, albeit tentatively. This section provides an introduction tosome different perspectives on the rise of the BRICs, and the not unre-lated question of US decline. What these perspectives are addressingare essentially the following questions: (i) is the rise of the BRICS andthe South so significant that we are witnessing a transformation in theinternational order?; (ii) is the West, and specifically the US in decline,and if so is this part of the transformation of the international order?and (iii) are these changes desirable or a cause for regret?

Five positions will be outlined in what follows. In each case anumber of perspectives will be presented. These are far from uniformand in some cases the differences between writers will be highlighted.However, what is more important is the broad arguments made asthese will at least help to inform the more detailed empirical and theo-retical discussions in the chapters that follow. Thus, if there is a danger


of over-simplification in the presentation in this chapter, this shouldbe overcome in the more in-depth discussions that will follow. Asalready highlighted above, some of the positions outlined largely focuson the rise of China, and so in some respects are not necessarilyarguing that either the South as a whole, nor all of the BRICs, are risingand transforming the international order. In particular, some of thepositions outlined focus on what is called the Beijing Consensus,which may or may not be compatible with arguments which focusmore on the rise of the South. This will be considered further belowand in later chapters.

The five positions outlined are: (i) the Beijing consensus as a causefor concern; (ii) the rise of emerging powers and the dangers of trans-formation; (iii) the Beijing consensus as a cause for celebration; (iv) therise of the developing world as a triumph for the West and (v) the per-sistence of US hegemony and the limits of hegemonic challengers.

The Beijing Consensus as a cause for concern

Stefan Halper is not the first person to use the phrase the BeijingConsensus, as we will see below. But the way he uses the term isindicative of some concerns in the West concerning the rise of China,and its appeal to other developing countries, and so we start with aconsideration of this approach. Halper highlights some concerns thatare often seen as causes for concerns such as the issue of the status ofTaiwan, the economic rise of China and its use of an undervalued cur-rency to promote competitiveness and on-going territorial disputes inAsia. He also points to both the limits of, and problems with, theChinese economic miracle. These include mutual dependence betweenChina and the US concerning the latter’s deficits, as the former isdependent on the latter as an export market (Halper 2010: 22), andChina’s difficulties after the financial crisis, including a propertybubble, local government debt, rising social unrest and inflation(Halper 2010: xv). While all these issues may give cause for concern,what is far more serious is “a most troublesome export: the example ofthe China model”, which is one based on “state capitalism.” (Halper2010: 32, 10). For Halper (2010: 11):

China’s true challenge arises in…Beijing’s transformative, leadingrole in the rise of a Chinese brand of capitalism and a Chinese con-ception of the international community, both opposed to and sub-stantially different from their Western version.


China’s state capitalism is not only different within China, it acts as apole of attraction for other developing countries. For Halper (2010: xx),“China is exporting something simpler, and indeed more corrosive, toWestern pre-eminence. This is the basic idea of market authoritarian-ism.” This is a capitalism based on a (controlled) liberal economicpolicy, combined with the persistence of authoritarian rule (Halper2010: 30). This represents a new Southern challenge to western hege-mony, with China at the helm, and the other BRIC countries alsoplaying a leading role (Halper 2010: 28). This is a cause for regretbecause it undermines Western conceptions of the rule of law, marketfreedom and respect for human rights, and gives support for author-itarian leaders in the developing world such as Robert Mugabe inZimbabwe (Halper 2010: 31).

These arguments will be considered in greater depth in later chap-ters, and while they should not be dismissed out of hand, we shouldtreat with suspicion someone who makes the statement that “HenryKissinger makes the point that we must revitalize the democratic story,demonstrating to ordinary people in the world beyond the West thepromise of democratic government, transparency, and good manage-ment.” (Halper 2010: xxi) One need not reject a commitment to liberaldemocracy to point out that this would be news to (among others) thepeople of Chile, Cambodia and Vietnam (see Hitchens 2002).

The rise of emerging powers and the dangers of transformation

This approach can draw on a number of perspectives, such as Marxismon the left and realism on the right – the latter case of which overlapswith the views of Halper outlined above. Marxist approaches owesomething to the classical theories of imperialism that were developedin the period leading up to the First World War, and especially those ofBukharin and Lenin. They both argued that imperialism represented anew stage of capitalism based on the concentration and centralizationof capital, and the merger of banking and industry in the form offinance capital. Competition between capitals now took place on ahigher level in the form of internationalized state capitalist trusts, sothat states compete aggressively with each other in a new era of inter-imperialist rivalries (Bukharin 2003: 155–6; Lenin 1977).

The utility of classical Marxist theories of imperialism is a matter ofsome considerable debate (Barratt-Brown 1970; Brewer 1990; Kiely2010), and while many reject a good deal of the details of the classics,the argument that the international capitalist economy promotes notonly economic competition between capitals, but geopolitical competi-


tion between states, retains some influence. For example, Callinicosaccepts that global interdependence since 1945 partly undermines therelevance of classical theories of imperialism today, but he retains theargument that geopolitical competition between states is still a centralfeature of the international order. For him, “(t)he combined impact ofcontinuing slow growth in the core of the system and of a shiftingglobal distribution of economic power is likely to create significantcentrifugal pressures on the major blocs of capital that, it should neverbe forgotten, are in competition with one another.” (Callinicos 2007:218) As well as specific issues of conflict such as that of the status ofTaiwan, “China’s rise is already destabilizing the existing pattern ofglobal relationships.” (Callinicos 2007: 219) Although he is careful toqualify the degree to which China is challenging the US (Callinicos2007: 219; 2010: 125–6), he still argues that “what classical Marxistscalled inter-imperialist rivalries remain a feature of the contemporaryinternational system, even if the form they take is…not the same as itwas in the first half of the twentieth century.” (Callinicos 2007: 226)

Also writing from a Marxist perspective, the late Peter Gowan (2001:81) noted “the central fact of contemporary international relations:one single member…has acquired absolute military dominance overevery other state or combination of states on the entire planet.” Healso suggested that these “US policies are tending to conflict with thecollective interests of major capitalist centres” (Gowan 2002: 22), thusproviding the possibility for competition and conflict between thesesame powers.

Writing from a realist perspective, John Mearsheimer (2006: 60)argues that:

If China continues its impressive economic growth over the nextfew decades, the United States and China are likely to engage in anintense security competition with considerable potential for war.”As a structural realist, Mearsheimer argues that in the context ofinternational anarchy, states are principally concerned with theirsecurity and so compete with each other to maximize their share ofworld power. Specifically, “China is likely to try to dominate Asiathe way the United States dominates the Western Hemisphere…Anincreasingly powerful China is also likely to try to push the UnitedStates out of Asia, much the way the United States pushed theEuropean great powers out of the Western Hemisphere.”(Mearsheimer 2006: 162) Mearsheimer argues that this pessimisticscenario simply reflects the reality of the anarchical international


system, though interestingly, this is combined with the normativesuggestion that the US should “do what it can to slow the rise ofChina. In fact, the structural imperatives of the internationalsystem, which are powerful, will probably force the United States toabandon its policy of constructive engagement in the near future.(Mearsheimer 2001: 402)

The neoconservative Arthur Waldron (1997: 48) similarly concluded asearly as 1997 that “sooner or later, if present trends continue, war isprobable in Asia…China today is actively seeking to scare the UnitedStates away from East Asia, rather as Germany sought to frightenBritain before world War I.” Interestingly, the US National SecurityStrategy of 2002 argued along similar lines. It argued that “Our forceswill be strong enough to dissuade potential adversaries from pursuing amilitary build-up in hopes of surpassing, or equalling, the power of theUnited States”. These potential adversaries were not only China: “Weare attentive to the possible renewal of old patterns of great powercompetition. Several great powers are in the midst of internal transi-tion – most importantly, Russia, India and China.” (National SecurityStrategy 2002: 28, 26) Robert Kagan (2012: 98) has also argued that theautocracies of Russia and China are threats to the international orderand so US primacy must be maintained, based on “a wise and practicalinternationalism” combined with “a sound and intense nationalism.”The former National Security Adviser to President Carter, ZbigniewBrzezinski has recently argued that US decline is potentially disastrousfor the international order, but that alongside new weaknesses the USstill had sufficient strength to maintain primacy. In particular it shouldseek to enhance and extend the Western alliance by bringing Russiaand Turkey into its orbit, while it should be “the balancer and concilia-tor between the major powers in the East.” (Brzezinski 2012: 185) Thiswould involve an alliance of sorts with China but also recognition ofthe diversity of interests in the East Asian and wider region, whichcould be used to limit Chinese power (Brzezinski 2012: 85–6; see alsoLuttwak 2012).

These positions cut across different theoretical perspectives, and inparticular realism, neo-conservatism and Marxism. In essence howeverthe argument is made that the rise of emerging powers and the declineof the US have gone hand in hand, leading to new dangers in an inter-national order characterized by anarchy (realism) or competitionbetween capitalist states in the context of uneven development(Marxism). In some cases – neo-conservatism and some versions of


realism (and indeed liberal internationalism) – this is linked to a nor-mative commitment to US primacy, though obviously not in the caseof Marxism.

The Beijing Consensus as a cause for celebration

We have seen that some writers on the political right see the BeijingConsensus as something of a cause for regret as it undermines thehegemony of the West. However, the term was originally associatedwith the work of Joshua Cooper Ramo (2004), who was far less con-cerned about China’s rise (Halper 2010: 214). Though the term wasdeveloped separately from the idea of the BRICs, it is interesting tonote that Ramo was, among other things, a senior advisor to GoldmanSachs when his pamphlet was published in 2004. It should also benoted that the idea of the Beijing Consensus has been treated withsome scepticism within China itself (Kennedy 2010), and at more orless the same time that Ramo’s views were published, the CommunistParty Central Committee were actually questioning the developmentmodel in China (Breslin 2011b: 1326). Moreover, there is intensedebate within China between liberals critical of the continued dom-inant role of the Chinese Communist Party and the Chinese new leftcritical of the degree of pro-market reform (Ferchen 2013). It is cer-tainly the case that too often, western commentators exaggerate thedegree of consensus that exists in China and often conflate the viewsof certain leaders with those of all of the Communist Party leadership.

Nonetheless, for Ramo (2004: 11), the Beijing Consensus is based on“three theorems about how to organise the place of a developingcountry in the world”. The first of these is the value of innovation andthe capacity of developing countries to develop and utilize advancedtechnology (Ramo 2004: 12). The second of these is the emphasis ofdevelopment models on issues of sustainability and equity as well asthat of growth. Third is a “theory of self-determination, one thatstresses using leverage to move big, hegemonic powers that may betempted to tread on your toes.” (Ramo 2004: 12) Ramo is essentiallyarguing that China represents both an alternative model of develop-ment for the poorer world, challenging the dominant, US-led andmarket friendly Washington Consensus, and that, partly for thisreason, it is a pole of attraction for developing countries, so that“China’s very emergence is remaking the international order.” (Ramo2004: 12) Seen in this way, China might be seen as the “biggest ideo-logical competitor to liberal democratic capitalism since the end ofcommunism.” (Garton Ash 2008)


Arif Dirlik (2006) has criticized but also further developed Ramo’scontentions concerning the Beijing Consensus. He is particularly crit-ical of Ramo’s contentions concerning innovation, both generally andspecifically applied to China. The question of innovation will be dis-cussed in depth in Chapter 8, but for now it should suffice to point outthat Dirlik is critical of Ramo’s technocratic approach to innovationand his not unrelated underestimation of “the cheap supply of mostlyobedient labour” in China (Dirlik 2006: 3). This point also has implica-tions for Ramo’s second feature of the Beijing Consensus, and espe-cially the emphasis supposedly placed on equity, when in factinequality has risen sharply in China, as even Ramo (2004: 24) recog-nizes. Dirlik (2006: 5) is however more sympathetic to Ramo’s focus onself-determination, which “has taken the form not only of maintainingcontrols over the economy internally, but also taking a multilateralistapproach to global relationships which contrasts sharply with theincreasingly unilateralist direction US policy has taken over the lasttwo decades.” This means in effect a focus on both localization –making development more appropriately diverse on locally specific sit-uations in contrast to the one size fits all marketization of theWashington Consensus – and multilateralism – promoting cooperationbetween states in the context of social and cultural diversity. Dirlik(2006: 5) specifically argues that China “has emerged as a counter toUS economic and political hegemony without directly challenging theUnited States.” Seen in this way, China is less a global hegemonic chal-lenger to the US and more a centre of gravity for Southern states in anunequal international order. For Dirlik (2006: 6):

Beijing may be on the rise as a new center of gravity in the Thirdworld, or the Global South, as is preferred these days. It might beseen as a Bandung for the age of global capitalism when the issue isno longer overcoming colonialism or finding a ‘third way of devel-opment’, but the inclusion of the voices of the former colonizedand marginalized in a world that has already been shaped by a colo-nial modernity to which there is no alternative in sight.

Dirlik then is careful not to suggest that the Beijing consensus or theChina model represents an alternative to US-led neoliberal hegemony.Rather it is a ‘paradigm for inspiration rather than a model of emula-tion’ (Dirlik 2011: 135–6). This is partly because China has used theinternational economy for its own benefits on the one hand, butwithout fully embracing neoliberal policies on the other. This means


that China represents more a countervailing power and less a hege-monic challenger to the US. The late Giovanni Arrighi more openlywelcomes the rise of China, and is more prepared to regard it as a hege-monic challenger to the US. Writing from a perspective informed byworld systems theory, Arrighi welcomes the resurgence of China as itundermines western hegemony and more specifically the US-led hege-mony which has served to reinforce the subordinate position of mostof the developing world in the international order. The one regionalexception to this subordination has been East Asia, where a labourintensive and energy saving industrious revolution challenged UShegemony in the post-war period (Arrighi 2007: 366–8). By the 1970s,the US faced a ‘signal crisis’ of hegemony, as competitors emerged andthe world economy entered recession. It responded to this crisis bycompeting for capital in liberalized financial markets, but this onlydelayed the inevitable, for “(a)lthough the response succeeded in reviv-ing the political and economic fortunes of the United States beyondthe rosiest of expectations of its promoters, it also had the unintendedconsequences of aggravating the turbulence of the global politicaleconomy and of making the national wealth and power of the UnitedStates ever more dependent on the savings, capital, and credit offoreign investors and governments.” (Arrighi 2007: 9) The war onterror, on-going deficits and (we could add) the financial crisis of2007–08 has exacerbated the crisis of US hegemony, which is now in‘terminal crisis’ (Arrighi 2007: 9–10), threatened above all by the rise ofChina. China’s rise is thus contrasted to US imperial overstretch anddecline, reflected above all in the twin deficits of the US, and the disas-trous wars in the 2000s in Afghanistan and Iraq.

This perspective, then, mainly focuses on geopolitics, though it com-bines this with some analysis of development in that it sees a Chinamodel or Beijing Consensus as a pole of attraction for other developingcountries. In this respect, there is some agreement with Halper’sversion of the Beijing Consensus, but diametrically opposed positionsare taken in terms of the normative implications. These debates areconsidered in depth in later chapters, but we should briefly note herethat following Ramo’s initial presentation of the Beijing Consensus, hesuggested that in fact China did suffer from a considerable imageproblem and that ‘brand China’ may not have been so successful(Ramo 2007). These two views, the former reflecting harder economicpower and the latter softer cultural power, may not be incompatible,but given the centrality of China as a pole of attraction to his initialformulation, it does at least complicate Ramo’s initial argument. We


should add however, that while the idea of a Beijing Consensus carriedlimited weight within the Chinese leadership, the idea of a Chinesemodel did enjoy some influence, particularly in light of the Westerneconomic crisis and the Chinese recovery after 2008–09 (Paus et al2009: 17; Breslin 2011b). As should become clear, the usage of termslike the China model and the Beijing Consensus are used as short-hands for a (supposed or perceived) state capitalist alternative toneoliberal capitalism, in what follows, rather than as an endorsementof the position of Ramo, or indeed Halper.

The rise of the developing world as a triumph for the West

The positions outlined above are mainly concerned with geopolitics:they focus principally on the question of what are the implications forthe international order of the rise of the BRICs (or more likely, China),and the decline of the United States? The first and some versions of thesecond position are concerned by what they see as a threat fromemerging powers, while the third position welcomes this supposedthreat as it regards US hegemony as undesirable. What all broadly agreeon is that the West, and more specifically the US, is in some respects indecline, while the South, and more specifically China, is on the rise.

In other words, if we move from geopolitics to international politicaleconomy, then we are witnessing a tale of convergence between theglobal North and global South. Seen in this way, this is a cause for cele-bration even if uncertain geopolitical problems emerge from this phe-nomenon. The question of what caused this convergence is subject todebate and some argue, in common with the third position above, thatthis is due to policies that break with Western-led market friendly poli-cies (Arrighi 2007). Others may argue that to some extent this is indeedtrue but given the authoritarian nature of China, this is not desirableand in any case in the long term economic efficiency is best guaran-teed through free market policies (The Economist 2012).

However, it could be argued that the recent convergence betweenthe rich and poor world is less a challenge to and more a triumph forthe West, and the market friendly policies advocated by Washingtonsince the 1980s. The rapid growth and poverty reduction in the devel-oping world in recent years has happened because poorer countrieshave adopted market friendly policies, and liberalized their economiesin terms of investment and trade policies. In other words, “all success-ful countries have used market signals and international competitionas the fundamental mechanism for resource allocation.” (Harrison andSepluveda 2011: 10) Wilson and Purushothaman (2003: 6) argue that


developing countries have two advantages which make convergencemore likely: “Returns on capital are higher and a given investment rateresults in higher growth in the capital stock” and “developing coun-tries may be able to use technologies available in more developedcountries to ‘catch up’ with developed country techniques.” Theseadvantages are best secured via the promotion of orthodox, marketfriendly reforms, which usually amount to some combination of liber-alization of trade and investment, secure property rights, privatization,state reforms and good governance (Wilson and Purushothaman 2003:13–14; also World Bank 1992; 1993; 1994; 1997).

The World Bank earlier argued that globalization presented manyopportunities for developing countries and that the more globalizedcountries – those more open to international trade and the broaderopportunities presented by incorporation into the world economy –had grown more successfully than less globalized ones (World Bank 2002: 35–41; Sachs and Warner 1995). The conclusion drawn isthat:

a strong correlation links increased participation in internationaltrade and investment on the one hand and faster growth on theother. The developing world can be divided into a ‘globalizing’group of countries that have seen rapid increases in trade andforeign investment over the last two decades – well above the ratesfor rich countries – and a ‘nonglobalizing’ group that trades evenless of its income today than it did 20 years ago. The aggregateannual per capita growth rate of the globalizing group acceleratedsteadily from one percent in the 1960s to five percent in the 1990s.During that latter decade, in contrast, rich countries grew at twopercent and nonglobalizers at only one percent. Economists are cau-tious about drawing conclusions concerning causality, but theylargely agree that openness to foreign trade and investment (alongwith complementary reforms) explains the faster growth of theglobalizers. (Dollar and Kraay 2002: 1)

This perspective then suggests less a downbeat story of western decline,and more one of optimism (The Spectator 2012; O’Neill 2013). This isbecause the rise of the South is good news in terms of poverty reduc-tion, it is the result of policies recommended by western governmentand western dominated international institutions, and because thegrowth of new economic powerhouses is an opportunity, and not athreat to the West. Indeed, the BRICS’ self-image of a challenge to


western hegemony stands in stark contrast to O’Neill’s initial formula-tion of the term, which was developed in part as a recommendation towestern investors, looking for new, lucrative investment opportunities.

This perspective also informs some geopolitical analyses, such as thatof Thomas Barnett (2009: 1, 4) who suggests that as modern globaliza-tion can be sourced back to the US, “(t)his is still America’s world”because the US “isn’t coming to a bad end but a good beginning – ourAmerican system successfully projected upon the world.” The exten-sion of capitalism throughout the world ultimately owes more to theUS than any other state, and the rise of the likes of Russia and China isnot a threat because “(n)either represents a systemic threat, becauseeach supports globalization’s advance, and so regards the world’sdangers much as we do.” (Barnett 2009: 231) This view crosses overinto the final one, which argues that US hegemony persists in theinternational order.

The persistence of US hegemony and the limits of hegemonic challengers

Not all realists believe that US primacy is under threat. Indeed, Brooksand Wohlforth (2008: 217) believe that the US is so powerful that itcan promote ‘systemic activism.’ By this they mean that, “the UnitedStates can push hard and even unilaterally for revisions to the interna-tional system without sparking counterbalancing, risking the erosionof its ability to cooperate within international systems, jeopardizingthe gains of globalization, or undermining the overall legitimacy of itsrole.” What this essentially means is that the US is so powerful that itmakes no sense for any rising power to challenge it, and instead statessuch as China are more likely to adopt a policy of cooperating with it,albeit selectively. What this means is that they consciously choose toembrace, the US-led international order, in order to share in the gainsof that order, and thus avoid a confrontation with a stronger power.This ‘defensive realist’ approach suggests that China’s rise might beexaggerated, or at least it is not so significant that it can present a realthreat to US hegemony on the foreseeable future (see also Chan 2008;Art 2010).

The argument of Brooks and Wohlforth goes very much against thegrain of the rising South thesis. It also usefully reminds us of the con-tinued centrality of US power in the international order. Where it isless convincing is in its tendency towards a one dimensional view ofhegemonic power, drawing on classical realist themes of state security,international anarchy and the balance of power. What is particularly


missing from their account, convincing though it may be in otherrespects, is its lack of attention to the specifics of US power in the inter-national order, which is a major theme in the argument that follows.

Like Brooks and Wohlforth, some liberals suggest that China’s risewill not inevitably provoke conflict in a changing international orderand that US hegemonic decline – and by implication, China’s rise – hasbeen exaggerated (Ikenberry 2008). But unlike them, these liberals alsosuggest that the reason for this is in part because of the specific natureof American power and of the international order that it leads (see alsoMabee 2013). In the words of Ikenberry (2008: 24):

The rise of China does not have to trigger a wrenching hegemonictransition. The US-Chinese power transition can be very differentfrom those of the past because China faces an international orderthat is fundamentally different from those that past rising statesconfronted. China does not just face the United States; it faces aWestern-centred system that is open, integrated and rule-based,with wide and deep political foundations.

What is crucial for Ikenberry is the nature of the liberal internationalorder. This is a rules based order, based on multilateral governance andinterdependence. This open, transparent order, allows rising powers towork within that order, rather than against it (Ikenberry 2008: 32) andthis is precisely what China is doing. We can see evidence of this inter-dependence which in turn has facilitated cooperation between theUnited States and China. For example, China is a permanent memberof the United Nations Security Council, and in 2001 it joined theWorld Trade Organization. China has liberalized in terms of its tradeand investment policies, and as a result increasingly trades with theUS, and indeed is a major recipient of US direct foreign investment.Furthermore, while there may be tensions over currency values and theUS’ trade deficit with China, it is the latter which plays a significantrole in financing both the US trade and budget deficits, through forinstance buying up US debt through the purchase of US Treasurybonds.

This does mean a more economically multipolar world, but not onein which the rise of one power automatically means the decline ofanother. Liberals argue that a liberal international order can facilitatepositive sum games in which new powers emerge but not necessarily atthe expense of existing hegemonic ones. While recognizing thesignificance of China’s rise, Nye (2011: 202) argues that “among the


range of possible futures, the more likely are ones in which China givesthe United States a run for its money but does not surpass it in overallpower in the first half of this century.”

Writing from a Marxist perspective, Panitch and Gindin (2012) sharethis view that US hegemony is not in decline. Unlike other Marxists,they make this argument by focusing on the specificities of US imperialpower, in contrast to older European imperialisms (see also Mabee2013). They argue that the US state plays a leading role in regulatingthe international capitalist order, and other states have increasinglyinternationalized through liberalization, investment rules, WTO mem-bership and so on. In their words, “it was the immense strength of UScapitalism which made globalization possible, and what continued tomake the American state distinctive was its vital role in managing andsuperintending capitalism on a worldwide plane.” (Panitch and Gindin2012: 1) They accept that in some regards the world is economicallymultipolar but also emphasize the continued lead role played by theUS in the most dynamic sectors of the international economy, as wellas the privileged role of its national currency as it is simultaneously themain international reserve currency. US deficits do not alone necessar-ily equate to decline as other countries are willing to finance thesedeficits, and US capital still plays a leading role in the internationaliza-tion of capital, not least in terms of investment in China. The militarypower of the US is neither necessary nor sufficient to discipline othercapitalist powers, all of whom have a collective interest in promotingthe internationalization of capital, and all of whom benefit (albeitunequally) from the US state leading the regulation of this process(Bromley 2008: 71–81). Above all, while there may be areas of disagree-ment between capitalist states, the leading states still look to the US tolead the regulation of the international capitalist order. This point is astrue after the financial crisis of 2007–08 as it was before, as the role ofthe dollar strengthened and international agreements in 2008 and2009 demonstrated the leading role of the US state in coordinatingother capitalist states to manage a way out of the immediate crisis(Panitch and Gindin 2012: 318–30). Of course whether or not the USstate, alongside other states, has the capacity to find a longer term wayout of the economic impasse is open to question, but a crisis of globalcapitalism should not be conflated with a crisis of US hegemony.

While noting important differences between them, what these three(realist, liberal internationalist and Marxist) positions share analyticallyis the view that the West and specifically the US is not in decline. Theywould not necessarily agree on the reasons why new powers have


emerged in the international order, with liberal internationalists closerto the arguments of position 4 and suggesting liberal policies werecentral to their emergence, while Marxists might question the efficacyof these policies. There is also sharp disagreement over the normativeimplications of continued US hegemony, and of the expansion of capi-talism within the international order, though even the Marxist argu-ment would accept that as capitalism is more historically progressivethan other modes of production, its expansion is not necessarily anunwelcome development (Warren 1980). The most obvious disagree-ment between the positions is that in terms of political economy,Marxists would focus on capitalism as a system of class relations,whereas liberal internationalists welcome the expansion of capitalismas it provides a useful ‘breeding ground’ for the extension of liberaldemocracy (compare Hardt and Negri 2000; Bromley 2008; Held et al1999 and Ikenberry 2012). However, some approaches influenced byMarx suggest that the uneven and unequal expansion of capitalismbrings with it new structured hierarchies which cannot be reduced tothe capital-labour relation, an argument to which we return through-out the book (Kiely 2012, 2014). For now though we should stress thatwhatever their wider disagreements, the three approaches outlined inthis sub-section all agree that these new powers are less challengers to,rather than states within, a liberal international order.

These then are the five positions that will be considered in the chap-ters that follow. At times that consideration will be implicit, and therewill be a lot of attention paid to the empirical arguments about the riseof the South. It also needs to be stressed that these positions are notnecessarily mutually exclusive, and there are some positions that donot fit easily into the categories outlined above. For instance FareedZakaria’s (2008) argument concerning a ‘post-American’ world con-tains elements of a number of positions outlined above. This includesthe argument that ‘the Rest’ is on the rise and that in some respects theUS is in decline, but also recognition that this rise is in part due tomarket friendly policies but also that these policies were not simplybased on a full-scale adoption of the Washington consensus. The rise isalso regarded as presenting both opportunities and dangers for theWestern world. Perhaps most crucially, he argues that the question ofthe future of US hegemony will ultimately be decided by how the USaccommodates itself to the rise of ‘the Rest’. This is an argument madeby a number of writers outlined above, and by the NationalIntelligence Council (NIC) (2008) in its assessment of the future of USpower. As should be clear from some of the analyses briefly outlined


above, some of it is committed to US primacy and much of the differ-ence is about how the US should respond to rising powers in order tomaintain its hegemony. The work of Charles Kupchan is interesting inthis regard, for he suggests that the rise of emerging powers isinevitable and so the West needs to adjust to an interdependent world.In doing so the West needs to recognize that there are various paths tomodernization and that the US could not dictate a liberal democraticpath as the only one that could be supported. This does not necessarilymean giving up on US hegemony so much as transforming it, andliving with difference in the international order. But this can alsomean continued US primacy provided it is used more judiciously(Kupchan 2012: 203).

These analyses are briefly discussed here to highlight the danger ofassuming that the five positions outlined above are mutually exclusive.As was stated in the opening chapter, the five positions outlined in thebook actually cut across theoretical frameworks, but they are deployedto aid understanding and explanation. In particular they are employedto understand the extent to which the South has emerged as a majorplayer in international politics, and the degree to which the US hasdeclined. This is a slightly different focus from international relationswhich focuses on questions of strategy. Though such questions are notignored, and are a particular focus of Chapter 7, the main approach ofthis book is not to focus on how the US should (strategically) respondto the rise of emerging powers of the South, but more one of consider-ing the extent to which these have risen in the first place. Thus inquestioning for example the view that China is a hegemonic chal-lenger to the US in the same way that, say, Germany was a hegemonicchallenger before 1914, the book’s principal focus is on the differencesin terms of political economy rather than security, though some refer-ence will be made to the latter.2

Conclusions: Issues for further consideration

This chapter has provided a broad overview of the debate about therise of the South in recent years, examining in particular the develop-ment of the BRICs, both as a subject of interest to a major investmentbank and as a new international actor. What was shown in consideringthe views put forward by various researchers at Goldman Sachs is thatit is not just the BRICs per se which are important, but also how theseare indicative of a wider shift in the international order. The emer-gence of the BRICS as an international actor may be indicative of this


wider shift, as they may act as a wider pool of attraction for othercountries in the Global South. In other words, and as has been stressedin this and the last chapter, the story of transformation of the interna-tional order is also a story of growing convergence in that order.Having said that, as the discussion that followed implied, when dis-cussing the rise of the Global South and even of the BRICs, it is clearthat often what is being discussed is the significance of the rise ofChina, and whether this is leading to a transformation of the interna-tional order. This in turn is also a question about the extent to whichChina is catching up with richer countries, and what geopoliticalimplications follow from the answer to this question. We should atthis point note some caution about China’s rise, which is not necessar-ily the same thing as the rise of the BRICs or indeed the rise of theSouth. This is discussed in depth in the chapters that follow, but wecan highlight one example here. As we saw above, Mearsheimer seesChina’s rise a threat to US hegemony as much as any writers discussedabove. But he does not see this as indicative of a wider rise of the BRICsor the South, and even suggests that “(m)ost of China’s neighbors –including India, Japan, Singapore, South Korea, Russia and Vietnam –will join the United States to contain China’s power.” (Mearsheimer2006: 160) Though sharing in many respects Mearsheimer’s concernsabout the rise of China, Halper (2010: 28–9), on the other, does see itsrise as possibly part of a wider, BRIC-led transformation. This is butone example which does not conflate China’s rise with the rise of theSouth, and sees the interests of the BRICs – in this case Russia andIndia – as conflicting with that of China. We return to these issues inlater chapters, but we can note here that much of the talk of a risingSouth is in reality a discussion about the rise of China.

The chapter then examined five positions on these transformations,showing how these at times cut across different perspectives on inter-national order and international development. The rest of the bookwill consider these positions in more depth, through more detailedempirical analysis and theoretical reflection. Chapters 3 and 4 startfrom a discussion of the fourth position (above); that is, the questionof how emerging powers have successfully developed. Have they doneso through market friendly policies compatible with the Western dom-inated international order, or have they done so through state capital-ist policies that challenge that order, whether for good (position 3) orill (position 1)? Or even if the policies adopted were not as marketfriendly as is commonly supposed, does this in itself constitute a chal-lenge to the liberal international order? This is explored in Chapter 4


which further examines the rise of emerging powers, but morespecifically in the context of conditions in the international economybefore the onset of the financial crisis. Are these conditions easily repli-cated and if they are not then how serious is the challenge from emer-ging powers (position 5)? Chapter 5 further develops the arguments ofprevious chapters by focusing more specifically on the global economiccrisis, relating this to the question of US decline and of the role of theemerging powers in both the causes and consequences of the crisis.This will again involve analysis of all five positions outlined above.One of the arguments made in Chapter 5 will be that inequality was acentral component of the crisis, and this demands wider consideration.Chapter 6 will therefore discuss inequality as a central problem for theBRICs and the South more generally and how this may underminetheir rise in the future. Again relating this back to the boom period dis-cussed in Chapter 4, some brief comparison will be made with the US,and the question of US absolute decline (as opposed to decline relativeto other powers) will also be considered. While some parallels can bemade between inequality and poverty in the US and in the South, itwill be argued that it is still far more acute in the latter, where percapita income is so much lower. Inequality also manifests itself in theglobal food crisis, where prices have meant that many basic foodstuffsare out of the reach of consumers in the developing world and this toowill be considered in the Chapter. Chapter 7 then shifts the focus moreto geopolitics and asks whether the BRICs represent a new pole ofattraction for the rest of the south, and what normative implicationsmight follow (positions 1 and 3). It does so by examining in moredetail the argument that the BRICs might represent a ‘new Bandung’,for post-colonial, global times. This will involve some consideration ofthe history of ‘third worldism’, of recent changes in global governanceand debates over liberal intervention, and of the possibilities of aninternationalized Beijing Consensus (positions 3 and 5). Equallyhowever, it will show how even if the BRICS do represent a newBandung (a questionable argument), like the Non-aligned Movementbefore it this should be seen less as evidence of a global transformation,and simply one of the development of a new or revived actor in theinternational order. Finally, Chapter 8 will bring together the argu-ments of the previous chapters, and add some further detailed consid-eration of the questions of innovation and development, to conclude.


33

3The BRICs, State Capitalism andGlobalization: Challenge to orTriumph of the West?

This chapter examines the rise of the South, and more specifically thelarger BRIC countries, by focusing on the development policies whichfacilitated their rise. It particularly focuses on the question of statesand markets and their respective roles in the rise of the BRICs, andwhat lessons this might have for the South as a whole. The chapterstarts by examining the argument that the rise of various parts of theSouth is less a challenge to, and more a triumph of, the West, andspecifically the market friendly policies recommended by internationalinstitutions like the World Bank, International Monetary Fund (IMF)and the World Trade Organization (WTO). This is done through anassessment of the case made for ‘neo-liberal’, ‘globalization friendly’policies in the last thirty years. This section suggests some reasons whythis case is problematic, which leads on to the second section, whichexamines the argument that the rise of the BRICs represents both adevelopmental and geopolitical challenge to the West. This is becauseof the rise of a state capitalist, Beijing-led alternative to theWashington Consensus. The third section examines this case in moredepth, through an investigation of development in Brazil, Russia, Indiaand China, particularly focusing on the role of the state and themarket in these countries in recent years. It also asks whether we cantalk of a BRIC ‘variety of capitalism’ that challenges the market friendlypolicies advocated by the dominant international institutions. Thefourth and final section provides a critical assessment of the discussionby focusing on the state versus market debate, and of the related ques-tion of neoliberalism. The argument made here is that the issue is lessone of state versus market, and more one of different forms of inter-vention. However, as a prelude to the next chapter, it is also argued


that we also need to look at how different ‘national capitalisms’ inter-act with the international economy.

Triumph of the West? The South and the opportunities ofglobalization

While much of the literature on the BRICs/BRICS tends to see them asgeopolitical challengers to the West, another interpretation suggeststhat, in terms of development at least, they actually represent atriumph for the West. This is because their rise has been the product ofmarket friendly policies like those advocated by the World Bank andIMF since the 1980s. In 1982, Latin America experienced a debt crisisin that, faced with higher interest rates, a number of states (and privatesectors within those countries – see Diaz-Alejandro 1985) found thatthey could not meet their debt obligations. International banks hadloaned money to southern countries in the 1970s at low rates of inter-est, but the US under Carter and then Reagan had increased interestrates. Mexico defaulted on its foreign debt in 1982, and Brazil lookedlikely to follow, thus causing a panic on the part of internationallenders and the drying up of new sources of credit (see Brett 1985). Itmade sense for each individual bank to stop lending as each wasunsure that it would receive the interest, let alone the principal, on itsloans. Moreover, if one individual bank loaned any more money to anindebted country, this might help that country to continue to meet itsdebt obligations, but there was no guarantee that any other bankwould do the same thing. From a wider perspective however, if noindividual bank would lend money, then this threatened to undermineall of the banks. This collective action problem thus needed to beresolved in such a way that loans continued to flow to indebted coun-tries, but in such a way that there was some kind of guarantee thatthese countries could meet their debt obligations.

The IMF played this role by lending to indebted countries, or bygiving approval to policy packages so that other institutions mightlend, though this latter policy met with limited success in the case ofprivate financial institutions and new commercial bank lending toheavily indebted countries fell from $19 billion in 1983 to $6.7 billionin 1986 (Corbridge 1993: 53). What was particularly important wasthat this period saw a significant change in the development policiesthat occurred in the South. The argument was made that, with theexception of some countries in East Asia, the South faced severe eco-nomic difficulties by the early 1980s because of poor economic policies

(World Bank 1981). In particular, there had been too much govern-ment intervention in these economies, which had led to a number ofnegative effects. The policy of import substitution industrialization(ISI) was particularly targeted. ISI advocated the development of indus-try (initially) serving the home market in order to replace, or to substi-tute for, dependence on the import of manufactured goods. Thisinvolved the utilization of protectionist policies such as the use oftariffs, import quotas and subsidies. For critics, this was an ineffectivepolicy as it led to neglect of traditional export earners, such as agricul-ture and other primary goods, the development of high cost,inefficient industries insulated from competition, and the developmentof state regulations which encouraged corruption, hindered initiative,and crowded out the private sector (Lal 1983). It was therefore unsur-prising that by 1982, many developing countries – and not just thosein Latin America – faced severe balance of payments problems andwere unable to meet their interest payment obligations.

What was needed then was some form of ‘conditionality’ whichensured that in the short-term, indebted countries could generatecurrent account surpluses and therefore meet interest payment obliga-tions, and in the long term, these countries could promote more sus-tainable growth and development. In practice, conditions varied andwere subject to intense negotiations, but the IMF stabilization policiesand World Bank structural adjustment loans did have a certain familyresemblance (Toye 1994). Some countries, like Brazil and Mexico, didmove from deficits to surpluses very quickly, though this was largelyachieved by cuts to imports and (to some extent) cuts on governmentexpenditure. For critics of both left (Bienefeld 2000) and right (Buiterand Srinivasan 1987; Bauer 1991), this was less a market friendly solu-tion to the crisis, and more one in which the IMF played a regulatoryrole that ensured creditors as well as debtors were bailed out ratherthan be subject to market discipline (and therefore be left to go bankrupt).

However, this was also the period which saw a gradual turn to moremarket friendly policies, albeit through the interventionism ofSouthern states alongside the conditionality of the World Bank andIMF. For what was increasingly taking place were policies that disman-tled the ISI policies that had dominated what was then known as theThird World from the 1950s onwards. The new policy mantra was – intheory at least – one in which states should be ‘rolled back’ and protec-tionism replaced by privatization, liberalization and deregulation. Thisin effect meant privatizing state owned enterprises, making economic

The BRICs, State Capitalism and Globalization 35

sectors subject to competition through trade liberalization (the reduc-tion of tariffs, import controls and subsidies), and reforming the publicsector to make sure that this operated in ways that were more marketfriendly (through league tables, internal competition, contracting out,and so on).

The short-term results of these policies were disappointing as eventhe IMF admitted (IMF 1989). Indeed, the 1980s was a lost decade ofdevelopment for much of the South (UNDP 1999). However,significant changes did occur in the early 1990s, as the World Bank(1989, 1992) encouraged institutional reforms and ‘good governance’,which meant transparent, open and accountable government, and acommitment to the rule of law (World Bank 1994). But moresignificant, optimism in the 1990s replaced the pessimism of the 1980sas a new foreign investment boom occurred, which incorporated atleast parts of the developing world. From 1990–94, $524 billion incapital flowed into the South, an annual average of $105 billion, whichwas three times the annual average in the years preceding the debtcrisis (1977–82), and twelve times the 1983–89 average (Henwood1997: 14).

This optimism led to the World Bank replicating earlier argumentsthat what was needed was market friendly policies in which prices wereset by the laws of supply and demand rather than by distorting govern-ment activity, and countries adopted outward oriented policies ratherthan the inward orientation of ISI (World Bank 1983). It was on thesegrounds that some concluded that the East Asian miracle associatedwith the first tier newly industrializing countries, or NICS (SouthKorea, Taiwan, Hong Kong and Singapore) “was achieved not by eco-nomic tricks, but by sensible policies based on sound neo-classical eco-nomic principles.” (Tsiang and Wu 1985: 329) This view was latermodified and it was accepted there was some significant degree ofintervention in the market in these NICs, especially South Korea andTaiwan, though it was also argued that this intervention was eitherineffective or that it in effect simulated a free market (Berger 1979: 64;World Bank 1991, 1993: 325). In other words, intervention was marketfriendly. We return to a consideration of this idea in the second andfourth sections of this chapter, but we should note immediately thatthe market friendly discourse was also abandoned when South Koreasuffered a major recession following the Asian financial crisis of1997–98 (IMF 1998).

The wider optimism concerning the growth of the South wasperhaps most clear in the World Bank’s 2002 report, Globalization,


Growth and Poverty. Drawing on earlier work by David Dollar and AartKraay (2001a and b), this work pointed out that:

The more globalized developing countries have increased their percapita growth rate from 1% in the 1960s, to 3% in the 1970s, 4% inthe 1980s, and 5% in the 1990s. Their growth rates now substan-tially exceed those of the rich countries: they are catching up just asduring earlier waves of globalization there was convergence amongOECD countries… (World Bank 2002: 5)

While careful not to assign causality to what was identified as a strongcorrelation between participation in world trade and investment andgrowth (World Bank 2002: 12, 36; Dollar and Kraay 2002: 4), the reportdistinguishes between 24 ‘more globalised’ and 49 ‘less globalised’countries and concludes that the former countries saw significantadvances in economic growth and poverty reduction in comparisonwith the latter (World Bank 2002: 35–6). Dollar and Kraay thus con-cluded that “The accelerated growth rates of globalizing countries suchas China, India and Vietnam are consistent with cross-country compar-isons that find openness going hand in hand with faster growth.”(Dollar and Kraay 2002: 4)

The IMF (1997: 72) similarly argued that:

Countries that align themselves with the forces of globalization andembrace the reforms needed to do so, liberalizing markets and pur-suing disciplined macroeconomic policies, are likely to put them-selves on a path of convergence with advanced economies,following the successful Asian newly industrializing economies(NIEs). These countries may be expected to benefit from trade, gainglobal market share and be increasingly rewarded with larger privatecapital flows. Countries that do not adopt such policies are likely toface declining shares of world trade and private capital flows, and tofind themselves falling behind in relative terms.

For advocates of open policies, industrialization can occur throughopen investment policies which allow foreign (or national) companiesto take advantage of low labour costs, and this promotes properly com-petitive industrialization rather than the high cost, white elephantapproach associated with ISI. In the long run, competitive industrializa-tion will lead to full employment, which in turn will lead to upgrading


to a more developed kind of manufacturing, as occurred in the case ofthe earlier developers (World Bank 2000: 1).

Given that Globalization, Growth and Poverty was published in early2002, and that China and India was so central to its story, it can beseen in some respects as complementing the arguments developed atGoldman Sachs about the BRICs in 2001. Wilson and Purushothaman(2003: 13) similarly argue that openness, alongside macroeconomicstability, institutional capacity and education, were central to thegrowth of the BRICs. Buiter and Rahbari (2011: 4) argue that beyondjust the BRICs, there are a number of other countries1 which “haveopened up to international trade and foreign direct investment, haveadopted some kind of market economy and have reached theminimum threshold level of institutional quality and political stabilitythat enables them to launch themselves on a path of rapid conver-gence and catch up growth.” While the Commission on Growth andDevelopment is careful not to dismiss the role of government, it stilltalks of a renaissance in the world economy in which “(g)lobalizationhas...proceeded apace, aided by legislation (the lowering of tariffs andquotas and the relaxation of capital controls) and innovation.”(Commission on Growth and Development 2008: 18)

What we see then is an on-going narrative stretching back to theearly 1980s at least (World Bank 1983) in which the more marketfriendly countries grow fastest, and begin to converge with the alreadyrich countries. This narrative has been modified in the face of certainchallenges, such as the reality of state intervention in the first tier EastAsian NICs, the Asian financial crisis, and a policy shift towardsemphasizing institutional change as well as market friendly policies.But the story is one of limited or market friendly intervention andoutward orientation leading to the growth of the South, to emergingmarkets, and indeed, in the context of the BRICs, the rise of emergingpowers.

We should however note some problems with this narrative. Wehave already suggested that the East Asian NICs were far more inter-ventionist than this narrative implies, and indeed we will see that thisintervention was far from market friendly. But for the moment, let usreturn to the 2002 report and the work of Dollar and Kraay. Central tothis work is a comparison of changes in trade/GDP ratios between 1977and 1997. The problem with this argument is that trade/GDP ratios tellus less about trade policy than they do about trade outcomes. It is per-fectly possible to have a high trade/GDP ratio and have protectionistpolicies, as a high proportion of goods produced may be exported.Moreover, even if trade/GDP ratios did tell us something about


changes in trade policy, using the changes in trade/GDP ratios is useless,as it is perfectly feasible for a country to have low but increasing ratiosbetween 1977 and 1997, while another has high but constant ratiosbetween these years. For the Bank report, the former is the more glob-alized and the latter less globalized. Indeed, if we look at the amountrather than the change, the trade/GDP ratio for the least developedcountries in 1997–98 was not appreciably lower than the world’saverage, but the share of these LDCs in world trade fell by 47% from1980 to 1999 (UNCTAD 2002: 103). If we look at average tariff rates (aflawed but better measure of openness than trade/GDP ratios), then theBank’s own data suggests that the supposedly high globalizers hadhigher average tariffs (35% in 1997) than low globalizers (20%)(Sumner 2004: 1174). In an analysis of 46 of the least developed coun-tries, UNCTAD (2004: 16–17) found that in 2002, average tariff rateswere less than 25% for 42 of these countries, and less than 20% for 36of them. This is hardly a story of closed economies failing to integrateand embrace the opportunities afforded by globalization.

In terms of the BRICs, and especially India and China, they are acentral part of the World Bank’s story, for the distinction between highand low globalizers is weighted according to population, and these twoaccount for a significant proportion of those assessed in the 2002report. This weighting is highly controversial as there is no goodreason why a single government should count for more in such anexercise (Milanovic 2003: 674). Moreover, there are serious questionsabout whether they can really be counted as more globalized thanother countries. It is true that tariff reductions and investment liberal-ization have taken place, and average tariff rates in India fell from 91%in the 1980s to 50.5% in the 1990s, and China’s rates fell from 42.4%to 31.2% in the same period (Rodrik 2000: table 1). However, whilethis represented a significant change, they were still higher than theaverage for the South (Rodrik 2000), subsidies and high tariffs inselected industries persisted, and capital controls were maintained.This suggests that the state may have been, and continues to be, moresignificant than the market friendly perspective suggests. We now turnto look at the argument that in fact the story is one of state capitalismrather than market friendly intervention.

Challenge to the West?: State capitalism, the China modeland the Beijing Consensus

This section examines a very different understanding of the BRICs, andto some extent of development policy in the last thirty years. It starts


by outlining some popular accounts of what is sometimes seen, forgood or ill, as a state capitalist to the market friendly policies of theneoliberal, so-called Washington Consensus (Williamson 1990). It thenrelates these issues to the argument that we have a variety of capi-talisms in the international order (Hall and Soskice 2001), which inturn is related to earlier debates around the developmental state and itsrole in the East Asian miracle (White 1988).

The state capitalism thesis is a fairly simple one. While there are dif-ferent normative views as to the desirability or not of the state capital-ist alternative,2 analytically there is common agreement that thegrowth of the South and the emerging powers in particular, has less todo with the market friendly policies discussed above, and more to dowith a state capitalism which actually challenges those policies. IanBremmer (2010: 55) has argued that an “era of state capitalism hasdawned, the natural by-product of a global economy which willincreasingly depend for most of its growth on China, the Persian Gulfstates, and other emerging market economies…” The Economist (2012:3; also Bremmer 2010) similarly argues that state capitalism “tries tomeld the powers of the state with the powers of capitalism. It dependson the government to pick winners and promote economic growth.But it also uses capitalist tools such as listing state-owned companieson the stock market and embracing globalisation.”

This story of state capitalism is sometimes associated with the BeijingConsensus. As we saw in the last chapter, Ramo (2004: 4) broadly wel-comes this development as he sees it as an alternative to the failedWashington Consensus. Halper (2010: 122) is far more hostile to therise of the Beijing Consensus, and in some respects his work is more acall to arms for a more aggressive US policy towards China than a rig-orous analysis of China’s rise. Both Ramo and Halper are also guilty ofexaggerating the degree of consensus among Chinese policy makerswithin the Chinese Communist Party (Ferchen 2013). Nevertheless, theanalysis of state capitalism is to some extent useful and deservesserious consideration. Halper is less critical of the WashingtonConsensus than Ramo, but he agrees that in some respects the BeijingConsensus has emerged as an alternative to the WashingtonConsensus and the latter’s “one size fits all” policy (Halper 2010: 61).He does not regard the Washington Consensus as anything like a com-plete failure, but does argue that the implementation of policies associ-ated with it was too insensitive to local contexts. Quite whatconstitutes the Washington Consensus is an open question, and theperson that first used the term believes that it has been caricatured by


critics of, and apologists for, neoliberalism (Williamson 2008). In its ori-ginal formulation, Williamson (1990) used it to refer to fiscal discipline,a reduction in public subsidies, tax reform, market determined interestrates, competitive exchange rates, trade liberalization, the free flow offoreign direct investment, privatization, deregulation and the legal pro-tection of property rights. Some of these are open to interpretation, bothin how they are to be achieved and the mechanics of their implementa-tion. Even a relatively straightforward policy such as trade liberalizationcould find broad support among say, neoliberals (Dollar and Kraay 2001)and neo-Keynesians (Krugman 1986), but there might be substantial dis-agreement about the timetable for such a policy. Moreover, China’sdevelopment model has broadly conformed to at least some of the tenpolicy requirements identified by Williamson, even if there are alsosignificant (and decisive) differences (Kennedy 2010).

Essentially however, and regardless of Williamson’s original formula-tion, what the debate is about is that of the market friendly policiesassociated with neoliberalism, against the state capitalist policies asso-ciated with the (so-called) Beijing Consensus. Halper (2010: 121) arguesthat “(t)he marriage of free politics and free economies is beingreplaced by governments determined to reassert control over theireconomies, enhancing both their autocratic base and their globalinfluence.” State capitalism is not confined to the BRIC countries andis attractive to a number of countries. Halper’s ‘list of shame’ includesIndonesia, Vietnam, Nigeria, Turkey, Saudi Arabia, Pakistan, Venezuela,Brazil, South Africa, Ukraine and Egypt. Moreover, state capitalism iscommon in countries with significant oil supplies, and the thirteenlargest oil companies are state owned. But other sectors “are no longercontent with merely regulating the market. Instead they use state-owned or national champion industries to bolster their political posi-tion domestically.” (Halper 2010: 122) Such sectors includepetrochemicals, mining, iron and steel, weapons, heavy machinery andtelecommunications (Bremmer 2010: 55–6). Moreover, governmentshave built up large reserves of currency, and channelled these intostate-owned investment funds, known as Sovereign Wealth Funds.These funds are “being channelled into global markets in ways thatreaffirm the role of governments over markets.” (Halper 2010: 125–6)As Halper (2010: 126) points out, some of these funds were used tobail-out troubled financial institutions such as Citigroup and MerrillLynch in the financial crisis in 2007–08.

While China has in many respects liberalized and privatized, and inthe process become a major recipient of foreign investment, it also has


a great deal of state-owned and directed large, strategic sectors, such assteel, aluminium, energy, transport, communications and banking(Halper 2010: 124). As Bremmer (2008: 59) states:

Beijing has substantially liberalised the Chinese economy over thepast two decades, with private firms now accounting for more than60% of ‘Communist’ China’s gross domestic product. But while thestate sector has grown considerably smaller, Beijing’s strategic deci-sion to build and subsidise large, technologically advanced andinternationally competitive state-owned enterprises in key eco-nomic sectors and to send them abroad in search of long-term sup-plies of precious commodities has had a profound effect oninternational politics and global markets.

China is a global leader in the promotion of ‘illiberal capitalism’,which in some respects replicates earlier East Asian models (Halper2010: 69) based on cheap labour, undervalued currencies, state subsi-dies to ensure export competitiveness, high levels of personal and busi-ness savings, high levels of foreign direct investment and stateinvestment in education (Halper 2010: 70).

Halper’s reference to earlier East Asian models can be traced back toearlier debates about the developmental state (Johnson 1982; White1988). This far more sophisticated literature was designed to show thatthe state was central to the rise of East Asia, and that in many respectsthe interventions carried out were not necessarily market friendly(Amsden 1989; Wade 1990). These developmental states were ones thatpromoted and led industrialization and wider social transformation.This was done in part through markets, but these markets were subjectto the discipline of the state as much as the discipline of market com-petition. The developmental state ensured selective protection forspecifically chosen national industries regarded as necessary to thestrategic needs of the national economy, selective investment in thesesame sectors (through state allocation or direction of finance), specificmeasures designed to control capital (such as restrictions on capitalexport) and labour (such as restrictions on trade unions).

In other words, for the developmental state perspective, capitalistdevelopment is less a product of spontaneous market forces (Hayek1949), or indeed immanent capitalist development (Cowen andShenton 1995), and more a product of states directing capitalistmarkets in specifically designed ways. This is the product of states“whose politics have concentrated sufficient power, autonomy and


capacity at the centre to shape, pursue and encourage the achievementof explicit developmental objectives, whether by establishing and pro-moting the conditions and directions of economic growth, or byorganising it directly, or a varying combination of both” (Leftwich1995: 401).

The merits of this perspective suggests that we might be able to iden-tify a specifically BRIC variety of capitalism. The varieties of capitalismapproach was developed to understand institutional differencesbetween capitalisms in the developed world, and specifically that ofAnglo-American liberal, market-led capitalism, and North Europeancorporatism associated with the Rhineland and Scandinavian models(Hall and Soskice 2001). The argument of the varieties of capitalismschool is that specific institutional complementarities are able toexplain divergent patterns of innovation, at least in the advanced cap-italist world (Hall and Soskice 2001: 17–33). This account has been crit-ically expanded to take in dependent market economies in East andCentral Europe (Nolke and Vliegenthart 2009) and the hierarchicalmarket economies of Latin America (Schneider 2009). This approach issometimes used to explain the deficiencies of capitalism in particularregions, compared to the success of more advanced capitalisms in thedeveloped world (Schneider 2009; Schneider and Soskice 2009). On theother hand, used in a more critical way, one can identify varieties ofcapitalism and locate these within an unequal and uneven interna-tional context (Ebenau 2012: 220). In this way, ‘variegated capitalisms’may be identified, but these are analysed not simply in terms of allegedinternal institutional deficits which hinder progress to advanced cap-italism, but as a product of a particular configuration of national, polit-ical and social forces promoting capitalism, and which exist in anunequal international context.

Nolke (2012: 125; compare with Bremmer 2010) identifies a B(R)IC3

variety of capitalism characterized by state permeated marketeconomies which “are dominated by a particularly close cooperationbetween public and business actors that is at least indirectly based oninformal personal relations – particularly even family ties – supportedby common values and a shared social background.” This description isunsatisfactorily specific in that the characterization identified could beapplied to other countries, but equally it over-generalizes by failing toidentify specific differences between China, India and Brazil.4 However,of potentially more use is the recognition that there may be a resur-gence of state capitalist alternatives to neoliberalism, and this is being led by the BRIC countries. Beeson (2013: 288) argues that the


significance of state capitalism is that it shows that there is an alterna-tive to the neoliberal Washington Consensus, which means that “wemight expect to see the persistence, rather than the end, of differencesbetween capitalist systems.”

This argument in effect combines a critical use of varieties of capital-ism approaches alongside – to some extent – the developmental stateperspective. The next section examines further the development of theBRIC countries, Brazil, Russia, India and China.

States and markets in the development of the BRICs

This section fills out some of the empirical gaps left out in the previoustwo sections and provides a broad economic history of the four BRICcountries. These have been chosen as proxies for the South as a whole,partly because we can only examine a limited number of countries,and mainly because these are seen as the leaders in the supposed rise ofthe South, with the possible exception of Russia. The treatment of eachwill be quite brief, and will focus on the role of states and markets ineach of them. As the leading country of the four, China will be giventhe most detailed treatment, and we start with this case. Once we haveprovided a brief economic history of each one we will draw togetherthe arguments of this chapter into a fuller analysis in the fourthsection.

China

China’s reform process can be traced back to the late 1970s, and theperiod which followed Mao’s death in 1976. Under Deng Xiaoping, anumber of reforms were introduced which allowed for the limited pri-vatization of formerly state owned assets, and some liberalization poli-cies such as the opening up of some regions and sectors to foreigninvestment. Though there were undoubtedly some disastrous periods,such as the Great Leap Forward years of 1958 to 1964, average growthrates in the Maoist era were actually quite high. Though accuratefigures are difficult to obtain, estimates of annual growth rates from1963 to 1978 vary from Maddison’s low figure of 5.1% (based on 1990constant prices) to the official figure of 6.4% (based on 1970 prices)(Bramall 2009: 292). There were also important social developmentadvances in health care and education, although these were accom-panied by some awful human rights abuses which could ultimately betraced back to the leadership of, and conflicts within, the CommunistParty (Walder and Yang 2003). Nonetheless, life expectancy increased


markedly. Figures before the revolution are distorted by war with Japanfrom 1931, but by the end of the Mao era, life expectancy hadincreased to somewhere between 63 and 66 years of age (Bramall 2009:295), an increase from around 25 years on the eve of war with Japan.Though a shift to population control policies from the late 1960s maydistort the figure (as less children being born also meant that therewere less infant deaths), the decline in infant mortality pre-dated thispolicy, due in large part to improvements in public health. Thisincluded large vaccination programmes and improvements in sanita-tion, as well as likely indirect benefits derived from the expansion ofrural education (Bramall 2009: 295–6; Dreze and Sen 2002).

In the reform period however, growth rates were unprecedented,averaging 8.1% per year from 1978 to 2001. During the same periodexports grew by an annual average of 12%, and by the latter year, man-ufacturing accounted for 90% of total exports (Nolan 2004: 3, 9–10).New Special Economic Zones were created, which replicated the ExportProcessing Zones that could be found in a number of developing coun-tries, in that incentives were granted to investors, including foreigncapital, such as tax breaks, controls on trade unions and broadly equiv-alent treatment for multinational companies and local enterprises(Bramall 2009: ch.11). While the 1980s witnessed high rates of growth,it was in the 1990s, during the ‘long boom’ from 1992 to 2007, wheregrowth really soared, fuelled in part by a substantial increase in directforeign investment. In 1991, FDI inflows stood at $436 million, but by1992 had risen to $1.1 billion; by 1998 annual inflows totalled $4.03billion and, after falling back slightly in the period after the Asiancrisis, they reached $5.27 billion by 2002 (Harvey 2005: 124).

China’s reform process saw an initial phase of liberalization, and thegrowth of small and medium enterprises which, alongside the multina-tional companies that began to invest in the country, played a role inthe export drive that followed (Bramall 2009: 366–72). However, liber-alization has not meant simply conforming to neoliberal policies, andthe decision to selectively liberalize investment and trade has existedalongside a strategy designed to target selected industries, keep strictcontrols over the capital account, and persist with large state-owned,national champion industries (Breslin 2011a: 1331, 1338–9). Whileaverage tariffs fell substantially in the 1990s, by the end of the decade,they still stood at 25% and were much higher in some sectors, such asvehicle imports (80–100%) and farm products (31%). Moreover, non-tariff barriers (such as technology transfer or joint venture require-ments in some sectors) were still in place (Nolan 2001: 18). In the


1990s, 120 large enterprise groups were selected by the State council assectors regarded as being of strategic importance. These included elec-tricity generation, coal mining, automobiles, electronics, pharmaceut-icals, transport and aerospace; the most cutting-edge sectors withinthese industries, such as IT hardware, were also included.

China’s industrial policy, therefore, has been similar to those of bothJapan and South Korea, in that the state has deliberately attempted tofoster large companies, or national champions (Anderson 2007).However, this strategy has occurred in a different context from that ofits East Asian predecessors, which ‘took off’ in the Bretton Woods eraand into the 1970s, when there was far more room for state-directeddevelopment and the protection of new industries. In China, someprogress has been made, but unlike Japan and South Korea, hardly anycompanies have emerged as globally competitive players. Indeed, asNolan (2001: 91) pointed out, “in export markets, China’s aspiringglobal giant corporations must content themselves mainly with sellinglower end sophisticated products (for example, power stations, steelmills, fighter planes), mainly to other developing countries.”Otherwise, these firms concentrate on the domestic market or exportin low value sectors, such as bicycles and motorbikes. In 2000, Chinahad just three firms in the Financial Times 500 (based on market cap-italization). These were the China National Offshore Oil Company(CNOOC), China Mobile and China Unicom, each of which operatesin a protected domestic market. In one category in the Fortune 500,China had six of the top ten firms, but this was in terms of number ofemployees, and each one of these was mainly state owned and pro-tected. As Chapter 8 will show, there remain high levels of concentra-tion of firms in the developed world, particularly in terms of the mostdynamic economic sectors in the world today.

For advocates of market friendly approaches to development, thesefailings reflect the inefficiencies of Chinese industrial policy. Growthhas occurred but this is despite, rather than because of, such a policy,and it has occurred in sectors largely outside of the influence of indus-trial policy. By implication, growth would be even greater if theChinese state was liberalized further and market-friendly interventionwas extended by an enabling state. China’s growth is thus attributableto its market-conforming policies, while future potential problems areattributable to ‘market-supplanting’ policies (Fan and Woo 1996;World Bank 2002). While China certainly has experienced an eco-nomic miracle alongside older ‘developmentalist’ state policies, neolib-erals argue that these policies are largely irrelevant.


However this view underestimates the ease with which dynamicfirms can break into world markets, ignores the strong tendenciestowards capital concentration, and supports the reversal of policies(such as industrial policy) designed to alleviate these tendencies. It is inthis context that China’s industrial policy should be located. Like theEast Asian miracles before it, China has some of the characteristics of a‘high household saving, high corporate debt’ development strategy (Lo2005), which involves a commitment to long-term, industrial upgrad-ing which in turn relies on high intensity investment, rather thansimply competing in the world economy based on ‘static’ comparativeadvantage. Instead, investment is characterized by high start-up costsand slow returns – conditions not conducive to development led solelyby the market. This strategy relies heavily on bank-led finance medi-ated by states who direct credit into certain potentially dynamic andhigh value sectors.

As we have seen, it was successfully employed in South Korea andTaiwan from the 1960s through to the 1980s, but this was in a very dif-ferent context to that now faced by China. WTO membership wasagreed in 1999 and came into effect in 2001, but this has occurred “atthe point at which the degree of unevenness of business capability hasnever been greater” (Nolan 2001: 187). China was given a five-yearadjustment period before fuller implementation of WTO rules, whichwould include reduction in average tariff levels from 24.6% to 9.4%,the observation of WTO rules on trade related investment measures(TRIMS), the elimination of local content requirements for foreigninvestment, increases in guarantees for intellectual property, and openaccess for foreign firms to sell to State Owned Enterprises (SOEs). In theautomobiles sector, tariffs were to be reduced from 80–100% to 25% by2006, and quotas were to be phased out, chemicals from 15% to 7% by2005, and steel from 10.3% to 6.1% by the end of 2002 (Nolan 2001:198–205).While these policies were largely (though not completely)implemented, China stalled on liberalization in some areas. Optimistsargued that liberalization would allow China to specialize in its mostcompetitive sectors and shed those high-cost industries that constitutea drain on the economy. In this scenario, upgrading will occur as it didfor earlier East Asian miracle economies. Certainly, quota reductionshave allowed China to increase its market share in lower value activ-ities – though this was likely to happen whether or not China joinedthe WTO. This does not, however, mean that a transition to highervalue production will necessarily occur. The first-tier newly industrial-ized countries upgraded and developed in a very different international


environment, which gave far more room for the interventions associ-ated with the developmental state. We return to these issues in thechapters that follow.

Historically, the incidence of rural poverty has had an adverse effecton wages for unskilled and semi-skilled workers, including in thetowns. This is because declining or stagnant rural incomes make migra-tion to the towns more likely, which has put downward pressure onwages in those sectors. About 60% of the population still lives in thecountryside. However, employment in agriculture has been relativelystagnant, despite substantial population increases. While total popula-tion increases at around 16 million a year, and the working age popula-tion grew from 679 million in 1990 to 829 million by 1999,employment in agriculture fell slightly, from 333 million in 1995, to329 million in 1999. It has been estimated that there could be as muchas 150 million surplus farm workers. Moreover, employment in town-ship and village enterprises has also stagnated. While the proportion ofpeople living in the countryside has remained more or less constant,the share of the rural population in total consumption has fallen from60% in the early 1980s to 42% by 2001. This has also occurred in thecontext of increasing inequality: income distribution in the country-side has also increased, with the rural Gini co-efficient moving from0.21 in 1978 to 0.4 in 1998. Indeed, some estimates suggest that ruralpoverty is actually increasing (Nolan 2004: 11–13). Thus, Woo et al(2004) argued that the proportion of rural residents with income of lessthan 50 cents a day rose from 1.8% to 2.9% between 1996 and 2002,while the proportion of rural residents with daily income below $1 aday (PPP adjusted) has stagnated at 11% over the same period. Theseproblems have been exacerbated by growing urban unemployment –employment in state-owned enterprises fell from 76 million in 1995 to35 million by 2002 (Harvey 2005: 128). Regular employment in theurban, non-state-owned formal sector grew from 21 million in 1995 to35 million in 2002, but this is nowhere near enough to cope withrural-urban migration and lay-offs in other sectors (Khan and Riskin2001; Liu and Wu 2006; Nolan 2004: 14–15).

It is the case that China has been successful in exporting low value,labour-intensive goods. Thus, in 2003, the US retail company Wal-Martimported $15 billion worth of products from China, which accountedfor as much as 11% of all US imports from China (Kaplinksy 2005:176). China has also successfully expanded its market share in labour-intensive sectors, such as clothing, and this is likely to expand furtheras the effect of the phasing out of quotas takes hold. Thus, in clothing


sectors where there have been quota removals, China’s share hasincreased enormously. For instance, in 2002, the USA removed quotasin 29 categories of clothing, and China’s share in these sectors rosefrom 9% to 65%, as prices fell by an average of 48% (Kaplinsky 2005:176). Breslin (2005: 742–4) suggested that China’s rise itself may beexaggerated, as its economic miracle cannot be divorced from its rolein East Asian production networks. In particular, China specializes incompleting the production of low value, labour-intensive goods, andrelies on technologies produced in other East Asian countries, withwhich it has a substantial trade deficit. Moreover, the East Asian regionprovided over 50% of total foreign investment into China for much ofthe 1990s. There is now some debate as to whether there are significantchanges in China’s labour market. In essence, the argument is that thelabour market is tightening due to the country’s ageing population.The number of those between the ages of 15 and 24 years entering thelabour force peaked in 2005 at 227 million, and this could fall to 150 million by 2024 (Beausang 2012: 48). One effect is to put upwardpressure on wages, which will undermine the country’s low wageadvantage compared to other countries. China’s competitiveness willthen depend on its capacity to upgrade into more technologicallysophisticated areas of production. Although there is some evidence ofwage increases in recent years, this has not led to consumption ledgrowth keeping pace with investment led growth, and this is an impor-tant part of the story, as we will see. Neither, it should be said, is afigure of 150 million new arrivals into the labour force a small orinsignificant number. Whatever the merits of the debate over thefuture of China’s labour force, this discussion suggests that China’s risemust, in part, be located in the context of the wider restructuring ofinternational capitalism, an issue taken up in the following twochapters.

India

From independence in 1947 until the early 1980s, and perhaps eventhe 1990s, India deployed an ISI strategy for development. Thisinvolved the use of state planning, and 5 year plans were adopted from1951. The second and third of these plans were ones where the stateguided economic development, and attempted to promote heavy andcapital goods industries such as iron and steel, chemicals and heavyengineering, as part of a nation-building project designed to leavebehind the legacy of colonialism. As part of this project, resources weretransferred from agriculture to industry (Byres 1991). The expectation


was that any shortfall in food output would be met by the takeover ofunproductive land, and by the food aid programme developed by theUnited States from 1954 onwards (Sahn et al 1981).

The plans did not meet expectations as the population grew fasterthan food output and by the 1960s, there was growing criticism ofurban bias in the country’s development strategy. Challenges emergedfrom within the ruling Congress party, and in the 1970s there wasincreasing criticism of the so-called ‘Hindu rate of growth’. Havingbeen out of office in the late 1970s, Indira Gandhi returned to office in1980 and pursued policies that business interests supported (Kohli2006), such as the removal of price controls and the reduction of cor-porate taxation. The 1980s saw substantial growth though criticsargued that this was unsustainable as it had led to increasing debt andstill involved the promotion of inefficient domestic industry (Bhagwati1993; Lal 1999). By 1991 the government faced a massive deficit andthe economy a large external debt, which paved the way for more sub-stantial liberal reforms following the loan of $1.8 billion from the IMF(Ghosh 1998). The most immediate reform was the devaluation of therupee, and then the government began to reduce tariffs, so thataverage weighted tariffs declined from 72.5% in 1991–92, to 25% bythe mid-1990s, and the import licensing system was abolished(Corbridge et al 2013: 37). Though liberalization continued to be quitegradual (Manor 1995; 2011), there was some cumulative impact, notleast as each local state effectively competed with each other to “adoptthe same or even more robust pro-business policies to catch up withtheir stronger (or richer) rivals.” (Corbridge et al 2013: 135; see alsoJenkins 2011). Investment liberalization was a crucial part of thisprocess, and by 2010 almost 600 Special Economic Zones had beenapproved, aiming to attract foreign investment through the usualpackage of tax incentives, decent infrastructure and state policies gen-erally favouring capital over labour (Jenkins 2011).

The period after 1980 did see a substantial improvement in annualaverage rates of growth. From 1950–51 to 1979–80, the annual averagewas 3.7% while from 1980–81 to 2000–01, it was 6% (Corbridge et al2013: 23). As Chapter 2 showed, the annual average for the periodfrom 2001–05 was 6.2%, and this rose to 7.4% and 8.1% in the twoyears that preceded the financial crisis. While growth slowed to 5.6%in 2008, and the economy contracted by as much as 7.9% in 2009, by2010 growth was back up to 4.8% (IMF 2012). Notwithstanding thenegative growth of 2009 and what appears to be some slowing down ofgrowth after the global financial crisis, the general trend is certainly


one of higher rates of growth after 1980. For some these differencesreflect the success of liberalization as against the disasters of the ISIperiod (Pangariya 2008).

However we do need to be cautious in presenting such a starkdichotomy. First, the annual average rates of growth from the 1950sthrough to the late 1970s were hardly disastrous (De Long 2003), andsome have argued that the higher growth from the 1980s onwardsreflects less efficiency gains associated with liberalization, and more“slow growing towards faster growing areas of the economy” (Wallach2003: 4312). In the 1950s and 1960s, agriculture still dominated theeconomy, but this was not the case by the 1980s and 1990s, whenhigher growth areas such as industry became more important. Thisargument is useful but limited because the fact is that there were pro-ductivity improvements within sectors, particularly manufacturing(Madsen et al 2010). On the other hand, these productivity increaseswere greater (2.49% per year) in the 1980s – before liberalization – thanthey were in the decade of liberalization in the 1990s, when itincreased by 1.57% (Rodrik and Subramanian 2005). India has also insome respects been a reluctant liberalizer, deploying anti-dumpingmeasures on a major scale. From 1995–2006, it initiated 457 suchmeasures (15% of the world’s total) and since then its share of theworld’s total has actually increased to 16.5% (Beausang 2012: 43).

Moreover, the high growth of the 1980s onwards was partly facil-itated by the ISI policies that preceded it; as Corbridge et al (2013: 32)argue, we should not neglect the fact that “Nehruvian investments inheavy engineering and infrastructure, or indeed in Indian institutes ofmanagement or technology, can be shown over a long period of fiftyor so years to have delivered significant benefits to long-run economicgrowth.” This is especially the case in skilled labour, which has beencentral to the IT boom (Saraswati 2008). Software and IT account forover 20% of merchandise exports (Beausang 2012: 46), but this is alsopart of the legacy of ISI, when an infrastructure base for science andtechnology was developed.

India has then experienced significant growth in recent years butthis is not simply because of a straight-forward correlation, let alonecausal relationship between liberalization and growth. Furthermore,Chapter 6 shows that India’s record on poverty reduction is unimpres-sive when compared to other countries in the South (see Corbridge et al 2013: 58–69). Finally, and we return to this issue later chapters,India has run trade and current account deficits, covered by capitalinflows from overseas. By mid-2013, the current account deficit stood


at 4.8% of GDP (Rahman 2013), the value of the rupee was decliningand in the period from June to late August as much as $12 billion leftthe country. We pick up these problems in later chapters.

Brazil

Brazil’s development policies in recent years have been influenced bythe perceived failure of ISI policies in the period up to 1982. The periodafter 1930 was the first period of experimentation with ISI, and thistook place in response to state centralization, urbanization and thedevelopment of an urban middle and working class, the influence of amilitary committed to modernization, and to international influencesand in particular falling demand for primary commodities in thecontext of the Great Depression (Skidmore and Smith 1992: 162–3;Furtado 1970). Although limited in its initial formulation, not least bythe continued power of an agrarian elite disinterested in nationalindustrialization (Cardoso and Faletto 1974), the influence of the ‘rev-olution’ under President Vargas in the 1930s persisted after his deathin 1954. The high point came under the presidency of Kubitschek(1956–60) when the state set about building on the domestic industrialbase initiated by Vargas, through protectionist policies such as tariffsand import controls. The state also played a leading role in investmentin steel, oil refining and infrastructure. The state also provided foreigncapital with incentives to invest in, rather than export to, Brazil, andthis increased substantially in the automobile, chemicals and machin-ery sectors, as well as in some consumer goods. Multinational com-panies were happy to invest to take advantage of tax holidays, but alsoto avoid tariffs on goods that might otherwise have been produced intheir home country. Between 1957 and 1961, manufacturing outputincreased by 62% and rose very sharply in sectors like automobiles andelectrical machinery (Hewitt 1992: 74).

However, ISI faced a number of problems such as on-going balanceof payments and government deficits (Saad-Filho 2010a: 6–10).Alongside the breakdown of the national populist alliance between theurban middle class and urban workers, Brazil entered a period of crisiswhich culminated in the military coup of 1964. This allowed for thecontinuation of a version of ISI (albeit one which also focused moredeliberately on breaking into export markets) which was facilitated lessby populist agreement and more by repression of labour by the mili-tary government (Skidmore and Smith 1992: 181). Insofar as alliancespersisted, this was strictly between elites, and a triple alliance betweenstate elites, local capital and foreign capital, though with continued


influence from agrarian interests (Evans 1979: 236–49; Saad-Filho2010a: 11). Growth rates were very high in the period from 1968–74,and while some claimed that this was because Brazil moved in a moreneoliberal direction (Balassa 1981), in fact the role of the stateincreased in this period (Munck 1984: 223).

However, this boom was short-lived and faced with an increase inthe price of oil imports after 1974, and negative spin-offs as a result ofits reliance on the automobile industry, Brazil began to borrow heavily.When interest rates increased, Brazil faced a potentially unsustainabledebt crisis. While in the short-term there were severe costs in ensuringthat Brazil could meet its interest payment obligations, as imports andgovernment spending was cut drastically, the longer-term was sup-posed to promise a better future. This led to a series of policies whichbegan Brazil’s transition in a neoliberal direction, albeit one in whichthe legacy of ISI was never completely eradicated (Ban 2013;Musacchio and Lazzarini 2012). Under President Sarney, the domesticfinancial system was reformed in 1988 and the following year flows ofinternational capital were liberalized. In 1990, under President Collor,import restrictions were gradually lifted. But it was through the RealPlan, a response to high inflation from 1992–94, that neoliberal poli-cies were more rapidly implemented (Saad-Filho 2010a: 16). Thisincluded a deeper liberalization of imports, a re-valued exchange rate,further domestic liberalization, fiscal reforms designed to cut publicsector deficits (privatizations, spending cuts and some tax increases)and the liberalization of the capital account, which was designed toattract foreign savings and investment.

These policies were implemented under Cardoso (who was FinanceMinister from 1992–94, and President from 1995 to 1998 and thenagain from 1999 to 2002. They also persisted into the first term ofLula’s presidency. In some respects this was a boom period but it wasone that hid underlying weaknesses in the Brazilian economy. Theupward revaluation of the exchange rate led to a surge in imports,which fuelled a consumer boom. However at the same time domesticmanufacturing suffered and the proportion of manufacturing valueadded in GDP declined from 41% in 1980 to 27% by 2001.Manufacturing employment and average real wages in the sector bothfell substantially as well (Saad-Filho 2010a: 17; Palma 2012: 48–54).Similarly financial liberalization was designed to increase domesticsavings and so fund investment but instead savings rates fell from 28%of GDP in 1985 to 15% in 2001, and investment rates fell from 22.2%of GDP on average in the 1980s to 16.1% in the period from 2001–06.


The annual average growth rate for the period from 1994–99 was 2.6%,compared to an annual 6.4% in the ‘inefficient’ ISI period from1933–80 (Saad-Filho 2010a: 17).

The basic problem with the new, neoliberal strategy was that“(c)heap imports were allowed in, while high interest rates, foreignloans, mass privatisations and TNC takeovers of domestic firmsbrought the capital that paid for them…Neoliberalism discardedimport substitution and promoted ‘production substitution’ financedby foreign capital instead.” (Saad-Filho 2010a: 17, 18; see also Palma2012) In the period from 1980 onwards, Brazil’s productivity growthwas actually negative. The recovery after 2002 has not reversed longerterm trends. While in 1980 its productivity was similar to that of SouthKorea, by 2011 its productivity level was on average three times lowerthan that of South Korea. One effect of this was that as South Korea’sproductivity gap with the US narrowed, from 25% of the US’ in 1980to 60% by 2011, Brazil’s fall behind from 28% in 1980 to 19% in 2011(Palma 2012: 7–8).

The second Lula administration saw a significant response to theseproblems, partly in response to a serious corruption scandal that engulfedthe ruling Workers Party, and also partly reflecting shifting socialsupport for Lula away from the middle class towards poorer sections ofsociety (Saad-Filho and Morais 2012). In particular there was a shift in amore developmentalist direction, more compatible with the state capital-ism outlined above (Bresser-Pereira 2010). Alongside monetary stabilitypromoted by the central bank, there was a growth acceleration pro-gramme (the Programa de Aceleração do Crescimento) which includedinvestment in energy, transport and infrastructure, and the expansion ofsocial provision to deal with the problem of inequality. The Bolsa Famíliaprogramme of direct but conditional cash transfers to the poor reached11.4 million households, the minimum wage was increased by 67%(between 2003–10) and social security was expanded (Saad-Filho andMorais 2012: 5). The old policy of the state promoting national cham-pions was revived, such as in construction (Odebrecht), beverages(Ambev), steel (Gerdau) and processed foods (Friboi), much to the con-sternation of neoliberal critics (The Economist 2012). The period sawfaster growth which meant greater tax revenues, which in turn helped tofinance increased public sector activity. There was also expansion inemployment and a significant fall in both inequality (the Gini co-efficient fell from 0.57 in 1995 to 0.52 in 2008) and the number ofhouseholds living in absolute poverty declined from 35.8% of house-holds in 2003 to 21.4% in 2009 (Saad-Filho and Morais 2012: 6).


These policies continued both after the immediate negative fall-outfrom the financial crisis of 2007–08, when growth fell sharply butquickly recovered, and under the Rouseff administration elected in2010. What we see here is some evidence of a shift in a market friendlydirection from the 1980s onwards, but with disappointing results.Since then, we have also seen a tentative shift back towards a develop-mentalist state capitalism since 2006, with, on the face of it, quite con-siderable success. However, we should draw a note of caution, which isthat successes in recent years must also be linked to favourable interna-tional circumstances, especially high global liquidity before thefinancial crisis, and indeed to some extent after foreign capital flowsquickly returned, one of the unintended effects of quantitative easingin the advanced countries. Also central to the success story, and onethat might confirm some version of the Beijing Consensus, has beenhigh primary commodity prices. This point relates to a wider issue con-cerning the methodological nationalism of the varieties of capitalismapproach, and I return to this in the next section.

Russia

The fourth of the BRICs is Russia. Nolke (2012) excludes Russia fromhis discussion, and suggests that one motivation for including Russiain the original formulation of Goldman Sachs was simply so that theletter ‘R’ could be used to make up the acronym, BRIC. This is an exag-geration but not completely without foundation, as Russia’s recenthistory is dominated by the two inter-linked issues of the collapse ofCommunism and the collapse of a territorial entity much larger thanRussia, namely the Soviet Union. This is a history in which per capitaincome and indeed life expectancy fell sharply in the aftermath of thecollapse of Communism and the introduction of rapid market reform,known as shock therapy. In the period from 1991 to 1992 Russiaunderwent a series of policies which rapidly liberalized prices, priva-tized state enterprises and attempted to promote macro-economic sta-bility, above all through large cuts in government spending. Prices roseby as much as 250% in one fell swoop, while government cutsincluded the ending of subsidies to basic food (Gaidar 1999). Whilethese cuts led to the government deficit turning into a surplus, rapidliberalization and privatization was a failure and GDP fell by around50% in the period from 1990 to 1995 (Beausang 2012: 32).Privatization also largely failed as high interest rates discouraged thepurchase of newly privatized assets (Stiglitz 2003), and a great deal ofmoney was invested overseas rather than domestically. According to


official statistics, Russian capital flight amounted to $182 billion in theperiod from 1992 to 1999 (Tsygankov 2010: 49).

The year 1998 also saw a serious financial crisis but in the 2000s,there was a substantial recovery, led above all by the boom in primarycommodities, and especially oil. Russia has an estimated 13% of theworld’s known oil reserves and as much as 34% of its gas reserves(Tsygankov 2010: 46). By 2007, Russia’s economy had recovered to its1990 level (Young 2010: 6–7), and at current prices, GDP rose from$200 billion in 1999 to $1680 billion in 2008 (Rutland 2013: 351). Itsshare of world exports grew from 1.64% in 2000 to 2.63% in 2008, andthe importance of trade was reflected in a trade/GDP ratio of as muchas 55% in 2008, almost as high as China (Beausang 2012: 34). By 2012,Russia had joined the WTO. These developments all reflected Russia’sre-emergence as a regional power. But it was also in this period thatRussia developed a form of state capitalism that differed sharply fromboth ‘state socialism’ and ‘liberal capitalism’. Following the failures ofmarket led reform in the 1990s, the government has promoted anational champion policy of developing large companies, often understate ownership. In the period from 2000 to 2008 the state’s share ofthe economy, measured in terms of state ownership, rose from 30% to40% (Rutland 2013: 357). As The Economist (2012: 10) noted in 2012:

the Russian state once again controls the commanding heights ofthe economy – only this time through share ownership rather thandirectly. The state holds huge chunks of the shares of the country’sbiggest and most strategic companies, including Transneft, apipeline company; Sukhoi, an aircraft maker; Rosneft; Sberbank;United Energy Systems, an electricity giant; Aeroflot; and Gazprom.

Two of these companies, Sberbank and Gazprom account for morethan half of the turnover on the Russian stock exchange and arecentral to the oil and gas sectors (The Economist 2012: 6, 10). Oil andgas companies accounted for 20% of Russia’s GDP and 60% of itsexports in 2011 (The Economist 2012: 10). By 2005, manufacturesaccounted for only 8% of Russia’s exports (Rutland 2013: 355).

Given its history of liberalization, falls in living standards, financialcrisis, recovery and embrace of a particular form of state capitalism inthe 2000s, Russia is not necessarily as different from the other BRICs asNolke implies. Conversely, the similarities between the so-called BICcountries are often over-stated in any case (though much the same point can be made about the older idea of a ‘Third World’, as


Chapter 7 shows). On the other hand, it is true that Russia is not seenas a leader of the new South in the same way as the other BRICcountries, particularly if South Africa is included. Nonetheless, given itsrecent history of liberalization followed by a partial return to state cap-italism, Russia is very much part of the BRIC story.

States, markets and the question of neoliberalism

So far then, this chapter has examined the argument that the South isrising because of market friendly policies, or whether state capitalistpolicies are an alternative. What best explains the rise of the BRICs wasconsidered in the third section through some consideration of theempirical record in those countries. This final section provides a discus-sion of how we can make sense of these debates, by examining morethoroughly the question of neoliberalism and state intervention. Thisdiscussion will then be related explicitly to the question of whether theBRICs represent a triumph for the West or a challenge to it. The casesbriefly outlined above show that there has been significant degrees ofliberalization, but also continuing forms of state intervention. Howthen are we to make sense of these developments, and in particulardoes continued intervention mean that neoliberal policies have notbeen implemented? Does it mean that they have been implementedand state intervention has been irrelevant? Or does it mean somethingelse, namely that we must reject the state-market dichotomy proposedby neoliberal theory and instead examine different forms of interven-tion, some of which can be described as neoliberal, some of whichcannot?

Harvey (2005: 2) defines neoliberalism as:

a theory of political economic practices that proposes that humanwell-being can best be advanced by liberating individual entrepre-neurial freedoms and skills within an institutional framework char-acterized by strong private property rights, free markets and freetrade. The role of the state is to create and preserve an institutionalframework appropriate to such practices.

The question then is what constitutes an ‘appropriate institutionalframework’. Harvey, a critic of neoliberalism, argues that for neoliber-als, the state should guarantee the supply and value of money, andshould provide military, defence and legal structures, and where appro-priate, create markets. But this list is far from straightforward. Some


libertarian neoliberals reject the view that states should be responsiblefor the supply of money and indeed argue that central banks should beabolished (Dowd 2001; Hayek 1976). Much the same point could bemade about nationalized defence forces, or education, which couldboth be provided via private insurance schemes (Rothbard 1973;Hoppe 2003; Friedman 2002). But perhaps even more fundamentally,which laws are compatible with, and which laws challenge, the freemarket? Immigration controls, universal restrictions on the workingday, safety standards in food, or the outlawing of child labour can allin some respects be seen as paternalist government interventions inchoices made between freely contracting individuals. The fact thatthey are not necessarily considered in this way in some places reflectsless the fact that these are interventions and more that some peopleassume that the boundaries of states and markets can easily be drawn(Chang 2003). We have also seen (in the first section) an example ofthese tensions in the context of the IMF’s regulation of the 1982 debtcrisis. For many critics, this was the start of the shift away from neo-developmentalism towards neoliberalism in the developing world. Forsome neoliberals, IMF regulation did not conform to neoliberal prin-ciples, which instead should have meant that both creditors anddebtors be left to market discipline and face bankruptcy (Buiter andSrinivasan 1987; Bauer 1991). A similar position was taken by someneoliberals in their opposition to the state bail-outs following the 2008financial crisis (Nothstine 2009). On the other hand, conditionsattached to loans, either directly from the IMF or indirectly throughIMF approval for policy changes implemented by states after 1982,were central to the shift towards market friendly policies; in otherwords, neoliberalism, and the market order to which it is committed,was in some respects, designed or planned. This paradox reflects thegreat tension in neoliberal thought and practice, namely that “theirrevolution in government requires that a group of individuals be foundwho are not governed by self-interest, but are motivated purely by thepublic good of upholding the rules of the market order. Yet if such a group existed it would contradict a basic premise of neo-liberalanalysis.” (Gamble 2006: 28; see also Evans 1995: 25)

Harvey (2005: 19), as a Marxist, argues that “when neoliberal prin-ciples clash with the need to restore or sustain elite power, then theprinciples are either abandoned or become so twisted as to be unrecog-nizable.” This is not necessarily completely wrong, but if they becomeunrecognizable then how can we continue to call them neoliberal?Again Harvey (2005: 19) attempts to provide an answer, when he


argues that this reflects “a creative tension between the power ofneoliberal ideas and the actual practices of neoliberalization that havetransformed how global capitalism has been working over the lastthree decades….We have to pay careful attention, therefore, to thetension between the theory of neoliberalism and the actual pragmaticsof neoliberalization.”

In other words, we need to bring out the tensions between neoliber-alism as theory and neoliberalization as neoliberal practice (see alsoPeck 2010). This task is not quite as straightforward as Harvey implies(see Kiely forthcoming), but for our purposes we need to focus on thistension in the case of the role of the state. We saw above that theWorld Bank in 1993 accepted that the state had not been insignificantin the rise of the first tier NICs, but this could be incorporated into aneoliberal explanation through the idea of market friendly interven-tion. This idea was first put forward in an earlier report, which arguedthat intervention can be market friendly if:

(i) States intervene reluctantly, preferring to ‘let markets work’.(ii) States apply checks and balances, subjecting interventions ‘to the

discipline of international and domestic markets’.(iii) States intervene openly, and are ‘subject to rules rather than to

official discretion’. (World Bank 1991: 5)

In this framework, “the appropriate role for government is to ensureadequate investments in people, provide a competitive climate forprivate enterprise, keep the economy open to international trade, andmaintain a stable macroeconomic economy.” (World Bank 1993: 10)The first tier East Asian NICs conformed to these market friendly prin-ciples in contrast to much of the indebted developing world in the1980s (World Bank 1993: 325, 351).

The traditional way of measuring state intervention is to examinethe ratio of government spending to GDP. For OECD countries as awhole, state expenditure as a share of GDP has increased from just lessthan an average of 10% in 1870 to around 45% by the 1990s, and thesignificant expansion since the 1930s and 1940s did not slow down inthe 1980s. At most, the rate of increase of state spending as a share ofGDP slowed down in the 1990s, but this hardly constitutes rolling backthe state (Hay and Lister 2006: 3). Even in the case of MargaretThatcher’s governments in Britain in the 1980s, her commitment to“roll back the frontiers of the state” (Thatcher 1993: 745) was mixed atbest. State spending increased in real terms for every year but two


(1985–6, 1989–90) of her premiership, and on average it increased inreal terms by 1.1% a year. It is true that state spending as a share ofGDP did fall, from 44.6% of GDP in 1979–80, to 39.2% in 1989–90, butthis is hardly the straightforward roll-back envisaged by neoliberals(Rogers 2013; Eaton 2013). Such data has been used, both by someneoliberals to argue that the state has not been rolled back in recentyears (Pennington 2011), and by some ‘globalisation sceptics’ to arguethat globalization has not eroded the importance of the nation state(Hay 2005a). In a broadly similar way, the World Bank used such datato claim that East Asian states were examples of market friendly inter-vention in the early 1990s. Thus, in 1989 South Korea’s ratio was16.9% compared to Brazil’s 30.9% and South Africa’s 33% (World Bank1991: 224–5).

In the case of the developed world, this lack of roll back is explainedin part by a growing welfare bill caused by increases in unemployment,low wages and an ageing population since the 1980s (Hay 2005a). Inone respect this does reflect the failure of neoliberalism to cut thewelfare state in the developed world as much as many neoliberalswould like, even though individual welfare benefits have declined inreal terms, and there has been an increase in spending at the aggregatelevel5 (see Korpi and Palme 2007; Scruggs 2008). But more relevant forour purposes, simply focusing on state spending alone tells us littleabout the changing priorities of neoliberal states, and the shift awayfrom spending on housing and industry, and towards law and orderand defence, increasing reliance on indirect taxation, and reform of thepublic sector (Gamble 2006: 31–2). Similarly, for developmental statesin East Asia, state expenditure/GDP ratios tell us little about the extentof state intervention, which “has been conducted less through stateownership and budgetary outlays, but more through measures whichneed little state ownership or budgetary outlay.” (Chang 2003: 85) Inother words, while the extent of state intervention is not unimportant,more significant is its form. This is not an argument which rejects thereality of neoliberalism, rather it is one that rejects the neoliberal ideo-logy that the debate is one between cases for and against intervention;instead it is one about different kinds of intervention, and whether wecan talk about intervention which is market friendly or which governsand challenges the market.

For it is the case that, from the 1960s to the 1980s the state in SouthKorea and Taiwan guided the market in ways that were far from marketfriendly, and hardly conformed to the neoliberal ideal of a state thatset the general framework for private individual behaviour to flourish


but did not set common purposes or goals. The state allocated credit totargeted industries, controlled the movement of capital (includingoverseas), heavily subsidized selected industries, and restricted foreigninvestment (Amsden 1989: Wade 1990). Even in Singapore and HongKong, the state played a central role in regulating labour costs throughproviding access to cheap public housing, health care and food. Toargue, as the World Bank (1993: 325, 351; also Lin 2012) did, that suc-cessful interventions were irrelevant because they created marketfriendly outcomes becomes a tautology, for as “this test is formulated,industrial policy cannot win: if it fulfils neo-classical expectations, it is‘ineffective’; if it violates them, it is inefficient.” (Amsden 1994: 629;see also Kwon 1994)

Some of these ‘distortions’ were belatedly highlighted by the IMF in1998, as it attempted to explain the Asian financial crisis through theidea of a statist ‘crony capitalism’. The World Bank also suggested thatamong East Asian countries, the most market friendly (based onoutward orientation and low rates of price distortion) were Hong Kong,Malaysia, Singapore, Indonesia and Thailand, in contrast to Japan,South Korea, Taiwan and China (World Bank 1993: 301). This did notstop the attempt made less than 10 years later to describe China as ahigh globalizer (World Bank 2002). Moreover, in the 1993 report SouthKorea and Taiwan actually rank below Brazil and India in terms ofmeeting the market friendly criteria of low levels of price distortionand high levels of outward orientation, even though the report wasdesigned to show precisely the opposite (Kiely 1998: 122).

State intervention in East Asia was actually deliberately marketunfriendly in that interventions were designed to challenge static com-parative advantage and to build a domestic industrial base throughstrategic and protectionist policies. This included high tariffs, subsidies,and the state directing credit at selected industries (Amsden 1989;Wade 1990; Payne and Phillips 2010). This makes perfect sense because“there are formidable barriers to entry for developing countriesattempting to move up the ladder of the international division oflabour – because of cumulative causations in technical progress…imperfect domestic and international financial markets…and a lack ofmarketing skills and infrastructure, and so on.” (Chang 1995: 215; seealso 2002) This is an argument that in effect derives from “nationalistcatch up theory” approaches to development (Payne and Phillips 2010:42), which is not necessarily against free trade as a long term goal, butargues that this can only take place once the productive power ofnations is relatively equalized (List 1966: 79; Tribe 1988). In the


absence of this equalization of productive powers, free trade will exac-erbate and not reduce uneven development between countries (Shaikh2005). The problem with the liberal case for free trade is that itassumed “a state of things which has not yet come into existence.”(List 1966: 102) While some contemporary writers accept a role for thestate in dealing with market imperfections and in developing the skillsand education necessary for upgrading, they still suggest that the stateplays an enabling or facilitating role (World Bank 1997; Lin in Lin andChang 2009), which essentially complements rather than challengescomparative advantage and free trade. This is an updated version ofmarket friendly intervention, which assumes precisely what needs tobe explained, which is differential and unequal technological capacitywhich leads to competitive advantage. For, in the end, “the rich coun-tries are rich, and the poor countries are poor because the former canuse, and develop, technologies that the latter cannot use, let alonedevelop.” (Chang in Lin and Chang 2009: 490).

This point applies not only to the first tier East Asian NICs or thecurrent state capitalist countries. For in contrast to neoliberal claims,state capitalism has characterized more or less all processes of capitalistdevelopment in history (Polanyi 1957; Chang 2002; Reinert 2007).This contrasts not only with the Hayekian argument that market soci-eties are the outcome of spontaneous market processes, but also thoseradical approaches to development that set up a dichotomy betweenimmanent capitalist development through the market order and inten-tional development designed to ameliorate the unintended conse-quences of this immanent development (Hayek 1949; Cowen andShenton 1995).

This does not mean however that contemporary state capitalism issimply identical to previous processes of capitalist development. Themost significant difference is the degree of public ownership in thecurrent state capitalist countries. In 2011, state companies made up80% of the value of the stock market in China, 62% in Russia, and 38%in Brazil, and accounted for one third of the developing world’s foreigndirect investment and a higher proportion of its foreign takeovers (TheEconomist 2012: 4). However, this again should be regarded less as ageopolitical challenge to the West and more a specific version of devel-opmentalism for as we have seen, attempts to promote large state com-panies is a central component of a longer running strategy ofpromoting national champions, such as the zaibatsu in Japan (Johnson1982). The chaebol in South Korea obtained capital from surplus fundsfollowing state directed land reform and from US aid in the 1950s, and


then the most successful exporters received government subsidies, andcheap credit from state owned banks in the 1960s and 1970s, all underthe direction of the state. In 1974, sales by the top 10 chaebol repre-sented 15% of GDP but by 1984 this figure had increased to as much as67% of GDP (Amsden 1989: 116). This concentration and centraliza-tion was a product of close connections between government, financeand industry, in which cheap loans were granted to favoured sectorson condition that these broke into export markets.

Seen in this way, we need to be cautious about the idea of a suppos-edly unique Chinese model, still less a perceived Beijing Consensus(Kennedy 2010). Certainly China’s development is not one that con-forms to neoliberal approaches, no matter how flexibly defined, but“the Chinese experience broadly conforms with a state-led growthproject that places national development at the centre of policy, pointsto the importance of promoting and protecting key economic sectorsand actors, and involves using a central financial institution and aform of (at least) soft planning as the means of national constructionand economic development.” (Breslin 2011a: 1342) State capitalismcan be regarded as in some sense incompatible with, and even a chal-lenge to, neoliberalism, but it is hardly something new in the historyof capitalist development, still less something unique to China (Chang2002; Peerenborm 2007: ch.2). It is not an exception to the history ofcapitalist development precisely because states have played a leadingrole in structural transformation, and have done so even more in thecase of late development, where potential capitalist enterprises face thereality of competition from already established producers from over-seas (Gerschenkron 1962; Amsden 2001; Polanyi 1957; Chang 2002;Reinert 2007). Thus, in contrast to Halper, we should not concludethat just because state capitalism has re-emerged in recent years, thisautomatically means that it constitutes a geopolitical and/or hege-monic challenge to the West. Drawing on concepts of ‘market author-itarianism’ (Halper 2010: xx) and ‘ illiberal capitalism’ (Halper 2010:69) may describe something of the process taking place in China, andto some extent Russia, Brazil and even India, but it downplays theauthoritarianism that characterized early capitalist development in thenow advanced capitalist countries.

Conclusion

This chapter has argued that if we must choose between state capital-ism and neoliberalism as explanations for the rise of the BRICs, than


the former is more convincing. However, this conclusion is somewhatreluctantly drawn because much of the material associated with thestate capitalism approach is purely descriptive and often couched interms of regret that this alternative has emerged. However as my dis-cussion in the final section made clear, the state has been central to thedevelopment of all capitalisms, and perhaps even more acutely thoselater capitalisms that emerged after the rise of the West (Amsden2001). This leads on to the point that just because state capitalism isdifferent from market capitalism, it does not necessarily mean that it isa threat to the West. Nor does it mean that state capitalism is intrins-ically related to a supposed Beijing Consensus that overlaps with auniquely state capitalism – my argument in this chapter is that this isnot the case. These geopolitical questions are considered further inChapter 7.

Those more sophisticated theories of the developmental state andvarieties of capitalism are certainly more useful than the more populistinterpretations of state capitalism. But there is still a further problem,hinted at in places in this chapter, which is that the varieties approachat least tends towards a methodological nationalism which downplaysand underestimates the influences of the international politicaleconomy. This should be clear in the context of the fallout from globaleconomic crisis, and for instance the crisis of the Eurozone. But for ourpurposes we need to consider the extent to which international factorsmay have helped to facilitate the rise of the South, both in the boomyears of the early 2000s (and before), and after the financial crisis. Thelatter is considered further in Chapter 5, while the former is the subjectof the next chapter.


65

4The BRICs, the South and theInternational Economy, 1992 to2007

The last chapter argued that the rise of the South has less to do withthe adoption of neoliberal policies than it does with ‘state capitalist’policies based on guiding the market. However it was also argued thatwe cannot fully analyse the rise of the South without examining theinternational economy. This chapter’s focus is therefore on the Southin the international economy from the early 1990s through to the eveof the Great Recession in 2007–08. It does so in three sections. First,the emerging markets boom and the globalization of the 1990s is out-lined. This section examines the foreign investment boom in thisperiod, alongside the rise of manufacturing, in the developing world.But it also investigates the darker side of the era, suggesting that theboom was exaggerated and that, albeit with some exceptions, it wasalso an era of relatively slow growth, and regular financial crisis. Thislatter point was most clear when the dot-com boom in the US came toan end in 2001, and the policy response to this in the US was central tothe changes in the 2000s which gave rise to talk of convergence andthe resurgence of the South. This is discussed in the second section,which examines the specific international conditions which facilitatedthe boom in the 2000s. The third, more analytical section, focuses onthe reality of the boom, but also its limits, suggesting that the condi-tions that facilitated it are unlikely to be repeated, and also that theseconditions were factors that led to the Great Recession in 2008–09, thesubject of the next chapter.

Globalization and the emerging markets boom of the 1990s

As we saw in the last chapter, the 1990s was a period of optimism thatreplaced the disappointments of the lost decade of development in the


1980s. There were essentially two reasons for this optimism: first, theforeign investment boom and the rise of manufacturing in the devel-oping world; second, the rise of China. These interconnected reasonsalso meant that growth rates improved, at least when compared to the1980s, for much of the South, and not just East Asia, and the numbersand proportions of people living in absolute poverty declined. All thesefactors could be seen as giving rise to optimism regarding the 1990s,but there were also good reasons for some scepticism as well. Thissection thus focuses on the reasons for optimism in the 1990s, andspecifically the foreign direct investment boom and rise of manufactur-ing in the South, including China. It also briefly addresses the down-side of the 1990s, highlighting the limits of economic growth and ofpoverty reduction, and the global concentration of foreign directinvestment flows. But perhaps above all, it also points to the commonoccurrence of financial crises in the 1990s, which will of course be con-sidered in some depth in the next chapter.

The foreign investment boom and the rise of manufacturing in thedeveloping world

One of the legacies of colonialism was an international division oflabour in which the developing world predominantly produced andexported primary products. While the developed world itself producedlarge amounts of primary goods, it also produced almost all of themanufactured goods that were traded in the international economy.On the eve of World War Two, 71% of manufacturing production wasconcentrated in just four core countries, and 90% in 11 countries fromthe core of the world economy (Dicken 2011: 14–15). This was tochange to some extent in the post-war period, as developing countriesfollowed the ISI strategies that were outlined in the last chapter. But itwas also to change in the neoliberal period, and especially from the1990s onwards.

The rise of manufacturing was considered to be very important fordeveloping countries, as industrial production had certain advantagesover primary goods production. Many developing countries had beendependent on the export of a small number of primary goods, and ifthe world prices of these goods fell, then there was a real danger thatthese countries would go into recession, as there was limited capacityfor diversification. Industrial production could provide the capacity todiversify into a number of sectors, and provide greater forward andbackward linkages for the economy as a whole. It also tends to be asso-ciated with the generation of economies of scale, more sophisticated

technology, and higher productivity than primary goods production.Moreover, it was often argued that the prices of primary goods tend tobe low when compared to manufactured goods, and that there is ten-dency for the terms of trade to decline for the former as against thelatter (Prebisch 1959; Singer 1950; Spraos 1983). This is partly becauseprimary goods suffer from a low income elasticity of demand, whichmeans that as average incomes rise, consumers spend a declining pro-portion of their income on primary goods. But also, as there is particu-larly intense competition between the many primary goods producersas against the relatively few manufacturers, prices are less ‘sticky’upwards than they are downwards. When combined with the depen-dence for foreign exchange on a small amount of products, this carriedenormous dangers, and so the development orthodoxy after WorldWar Two was that in order to develop countries must industrialize(Kitching 1982). This was an orthodoxy that crossed the ideologicaldivide (Rostow 1960; Myrdal 1968).

However, as we have seen, ISI was subject to a number of criticismswhich on the face of it, suggested that countries should return to exer-cising their comparative advantage and specialize in the production ofprimary goods. But the period after the 1980s saw the rise of manufac-turing in the developing world on a substantial scale (see Table 4.1),though we will see later that there have been some changes for indi-vidual countries since 2000.

The reason for the rise of manufacturing in the South was less to dowith trade liberalization and specialization, and more to do with afactor that the original theory of comparative advantage assumedwould not, or could not, take place, namely the international mobilityof capital. In other words, with investment liberalization, multinational

The BRICs, the South and the International Economy, 1992 to 2007 67

Table 4.1 Manufacturing shares of exports by country, excluding oil

1980 2000

South Korea 87% 94%Mexico 55% 90%Malaysia 25% 87%Turkey 29% 81%India 56% 78%Brazil 39% 60%

Source: Adapted from Kozul-Wright and Rayment 2004: 10, with author permission

companies increasingly invested in manufacturing in the developingworld. At constant prices, total direct foreign investment increasedfrom $59 billion in 1982 to $1.2 trillion by 2000 (UNCTAD 2002: 3).Developing countries increased their share of world production, tradeand FDI, particularly from the 1990s onwards: from 18.4% (1990) to26% for GDP (2007), from 19% to 30.3% for exports and from 20.6%to 28.7% for inward FDI stocks (Dicken 2011: 25). In the period from1980 to 2010, developing countries increased their share of world mer-chandise trade from 25 to 47% (UNDP 2013: 3). At the same time,developing countries consistently liberalized their investment policies;in 2001 for example, 71 developing countries made 208 changes totheir investment policies, 194 of which were more favourable to FDI(UNCTAD 2002: 7). Even in recent years, where state capitalism insome countries has led to some restrictive policies regarding foreigninvestment, the general trend is still towards the extension of invest-ment liberalization (UNCTAD 2013a).

Over a broadly similar period (1990 to 2008), inward FDI’s share ofGDP increased in many developing countries: China from 5.8% to8.7%; South Korea from 2.1% to 9.8%; India from 0.5% to 9.9%; Brazilfrom 8% to 18.3%; Mexico from 8.5% to 33%; Chile from 33.2% to59.6%; and Thailand from 9.7% to 38.4% (Dicken 2011: 22).

As part of their increasingly global strategies, MNCs have drawn ondifferent locations for different stages of the production process, andthus there was a substantial increase in global commodity chains, orglobal production networks. These networks or chains of productionreflect the fact that production processes are linked through a chain, “atransnationally linked sequence of functions in which each stage addsvalue to the process of production of goods or services.” (Dicken 2003:14) Within these networks, multinationals might invest directly inoverseas production, or enter into subcontracting arrangements withlocal producers and suppliers. Accurate aggregate data on subcontract-ing is difficult to find, but what can be said with some certainty is thatthe rise of manufacturing in the developing world is not simply due todirect foreign investment, but equally a significant proportion ofdomestic production is closely linked to local capital’s integration intothese global networks. Moreover, the emergence of these global com-modity chains is not new, but what is relatively novel was the use ofthem within different stages of the production process within manu-facturing. This was an important factor in China’s growth and develop-ment from the 1990s onwards.


The rise of China

We have already considered the rise of China in Chapter 3, so we canbe brief. What we should emphasize here is the link between China’smanufacturing export growth and its wider economic growth. For nowwe will simply provide some figures, without subjecting them to crit-ical scrutiny but we should highlight the fact that the precise linkbetween China’s exports and its growth is far from being a trivial ques-tion, and goes to the heart of the question about whether or not Chinaremains dependent on the West. This in turn relates to the centralissues of whether or not the South has ‘decoupled’ from the West, andthus whether or not there has been a transformation of the interna-tional order, an issue discussed later in the chapter.

What is not in doubt is China’s extraordinary growth in recent years.Using PPP measures, its share of global GDP rose from less than 5% in1973 to 17% by 2006 (Maddison 2003). This rise is reflected in rapidannual average growth rates since the late 1970s, which comparefavourably with annual rates of growth in the US and Europe. Table 4.2provides a breakdown of growth since the late 1970s, comparinggrowth of annual output and of annual export growth.

The rates of growth of China’s exports saw a significant shift from1990 onwards. Real exports grew by about 500% from 1993 to 2008, bywhich time China had emerged as the world’s third fastest exporter(Steinfeld 2010: 71). China’s share of global exports was just 1.9% in1990, compared to 8.5% for Japan, 11.6% for the US and 12.1% forGermany. By 2005, the comparable figures were 7.3% China, 9.4%Germany, 5.7% Japan and 8.7% the US. By 2010, post-crisis, the figureswere 10.6% China, 8.1% Germany, 5.2% Japan and 8.6% the US


Table 4.2 Annual average growth rates (percentages) of GDP and exportsin China, US and Europe since the late 1970s, up to the financial crisis in2008

China US Europe

1979–88 (GDP) 10.1 3 2.31989–2000 (GDP) 9.8 3.2 2.32001–08 (GDP) 10.2 2.1 1.71979–88 (exports) 8.1 5.7 4.11989–2000 (exports) 13.6 7.3 6.92001–08 (exports) 16.5 3.1 4.4

Source: Adapted from UNCTAD 2011

(Farooki and Kaplinsky 2012: 40). By 2010 then, China had emerged asthe world’s biggest exporter (Steinfeld 2010: 71). Much of the source ofthese exports was foreign direct investment, which similarly boomedover this period. China’s share of global foreign direct investment sawa similar increase, accounting for 1.6% of global flows in 1990 but upto 8% by 2008, the second highest figure for the latter year, behind theUS’ 17.7% for that year (Farooki and Kaplinsky 2012: 41). In 1983,direct foreign investment amounted to $1.73 billion spread over 470projects; by 2006, $193 billion of FDI found its way to 27, 514 projects(Steinfeld 2010: 72). In the 1980s and early 1990s, exports were mainlyin labour intensive sectors such as apparel, textiles, footwear and toys,and while these remain important, from the late 1990s and 2000s,Chinese exports diversified into seemingly more sophisticated prod-ucts. These included sectors like electronics, telecommunicationsequipment, office machines and appliances (Steinfeld 2010: 72).

Globalization and the 1990s: Optimism or scepticism?

For the reasons outlined above, we could argue that the decade of the1990s was one of optimism when it came to the question of develop-ment. This in many respects was the dominant popular interpretationof the globalization decade (Giddens 1999; World Bank 2002): Theargument was quite clear: globalization, or at least economic globaliza-tion, was an opportunity for developing countries and countriesshould adopt market friendly policies which embraced these oppor-tunities. This meant that in contrast to ISI policies, trade and invest-ment liberalization would mean countries specializing in theirrespective comparative advantages, and drawing on world savings andthus receiving high rates of foreign investment. This in turn wouldlead to economic growth and subsequently pave the way for povertyreduction. Claims made for absolute poverty reduction include figuressuch as a fall from 1.8 billion (1990) to 1.37 billion (2005), 1.4 billion(1980) down to 1.2 billion or 1 billion (2000), or even lower (Chen andRavallion 2010; World Bank 2002: 30). We thus arrive back at the casefor globalization friendly policies discussed in the last chapter, andindeed in some respect the optimism surrounding the rise of the BRICcountries at the start of 2001.

However, in other respects the optimism of the 1990s was misplaced.This will be discussed in depth later in the chapter but essentially,growth rates for most of the South were not especially high, invest-ment by multinational companies in the developing world was not asgreat as it was in the developed world and the evidence for poverty


reduction was problematic (Reddy and Pogge 2004; Wade 2004a, b;and see Chapter 6). Thus for example, while annual average growthrates in Latin America were, at 1.4%, an improvement on the 1980sfigure of a negative 0.3 rate, this was far less than the decades of the1950s, 1960s and 1970s (Weisbrot and Ray 2011). The 1990s also sawperiodic financial crises, such as Mexico in 1994–95, East Asia (1997–98), Russia (1998) and Argentina (2000–01). Each of these had specificcauses but in each case the liberalization of financial flows led to aninflow of foreign capital designed to make money from non-productivesources. This led to consumer booms in which imports flooded intothese markets, but which were unsustainable and led to increasedcurrent account deficits. With falling confidence, flows rapidly leftthese countries as quickly as they entered them, plunging each of theminto recession (Grabel 1996; Wade and Venereso 1998; Bello et al2000). The US itself entered a brief recession in the second quarter of2000, as stock prices fell by 33% (Brenner 2002: 252). This followed theso-called ‘dot.com boom’ in IT industries, in which share prices mas-sively outpaced real earnings following a speculative boom (Henwood2003). As we will see in the next chapter, though these financial criseswere effectively managed by states, they were dwarfed by events in2007–08.

Convergence at last?: The boom from 2002 to 2007

The response to the financial crisis in 2001 was central to the boom inthe 2000s as we will see. What is also important though is that whilethe claims made for the boom of the 1990s were exaggerated, there wassomething more substantial in terms of development in the periodbefore (and possibly even after) the financial crash of 2008. While aswe have seen, average annual growth rates in the South exceeded thosein the North in the 1990s by 1% a year, a figure that was cancelled outby population growth, in the period from 2002 to 2007–08, the differ-ence was as much as 5% a year. Even after this fell back in 2008–09, itquickly recovered so that the difference for the period from 2002–12remained as high as 5% a year (Akyuz 2012: 10; and see Table 4.3).

Growth rates did of course vary across countries. For instance annualaverage growth rates in the period from 1990 to 2002 were 1.9% forArgentina, 1.9% for Brazil, –0.9% for Russia, and 1.9% for South Africa.In the period from 2003 to 2007, annual average growth rates were8.8% for Argentina, 4% for Brazil, 7.5% for Russia, and 4.8% for SouthAfrica (IMF 2012). Even for the poorest countries, there was substantial


growth, which certainly compared favourably to the period from the1980s onwards, and indeed the period from 1960 to 1980. Table 4.4breaks down growth rates according to levels of per capita income(based on 2005 dollars) and provides a useful historical comparison.

Taken together, Tables 4.4 and 4.5 show that growth rates were dis-appointing in the period from 1980–2000, but were relatively high inthe period before the implementation of neoliberal policies in the1980s. But they also tell us a story of impressive growth rates in the2000s, with each quintile recording comparable or better growth ratesin the third period than in the first, with the exception of the highestincome group, which is essentially the developed world. Anotherreflection of this trend is the fact that from 2006–12, 74% of worldGDP growth was generated in the South and only 22% in the devel-oped countries (UNCTAD 2012: 3). From 2000–06, the developedworld accounted for just over 50% of global growth. In contrast, in the1980s and 1990s, the developed countries accounted for 75% of globalgrowth (UNCTAD 2012: 3).

This was also a period which saw substantial changes in imbalancesin world trade, which are central to those claims made that we are wit-nessing a transformation in the international order. In a nutshell, thedeveloped world faced current account deficits which were overwhelm-ingly accounted for by the US’ external deficit, which exceeded 6% ofGDP by 2007 (Akyuz 2012: 12; Thompson 2010: 31). US private savingsfell in the 1990s and again after 2001, after the Federal Reserve broughtdown interest rates in response to the bursting of the dotcom bubble.By 2008, household savings had all but disappeared – the US house-hold net savings rate fell from just over 10% in 1980 to 0.5% in 2006(Thompson 2010: 41). Meanwhile the surpluses on the developingworld exceeded $600 billion in 2007 and international reserves hadreached as much as $5 trillion (Akyuz 2012: 11). These figures of coursetended to over-generalize from the specifics, as China and some otherEast Asian countries accounted for around two-thirds of the 2007 sur-


Table 4.3 World output growth (annual percentage change)

2004 2005 2006 2007 2008 2009 2010 2011

World 4.1 3.5 4.1 4 1.5 –2.3 4.1 2.7Developed world 3 2.4 2.8 2.6 0 –3.9 2.8 1.4Developing world 7.4 6.8 7.6 7.9 5.3 2.4 7.5 5.9

Source: Adapted from UNCTAD 2012: 2

pluses, with the other third accounted for by oil exporters (Akyuz2012: 11). This is discussed further below in the context of China’sboom and Chinese-US interdependence. In the developed world,serious deficits had built up within the Eurozone periphery, particu-larly in Spain, Portugal and Greece. Much, though not all, of thisdeficit was with core Eurozone countries and especially Germany, andthese deficits were financed by banks from the core of the Eurozone, atleast until the outbreak of the financial crisis (Lapavitsas 2012: ch.4).Germany had surpluses, not only with the rest of the Eurozone butalso with the US. Japan also relied on exports to the US market. Sothere were important differences within the North and the South, butit remained the case that the most significant power in the latter hadbuilt up surpluses as the most significant power in the former facedmounting deficits.

We will look at the post-crisis period in the next chapter, but here weneed to understand the international factors that help to account forthis boom. The first of these was the renewal of the boom in capitalflows to the South after 2001. This was due to the lowering of interestrates (from 6.5% to 3.5% in the first eight months of 2001) and theexpansion of liquidity in the developed world, which was a response tothe end of the dotcom boom and to some extent, the uncertainty thatfollowed the terrorist attacks on the US in September 2001 (Mason2009: 84). Private capital inflows to the South reached close to $200 billion in 2000, and then fell in 2001, increased to $280 billionby 2003, and then increased sharply from 2004 onwards, reaching apeak of around $1,285 billion in 2007 (Akyuz 2013: 99), before fallingback in 2008 and 2009 and then partially recovering in 2010 (seeChapter 5). In the peak year of 2007, around $500 billion was in theform of direct foreign investment, $97 billion in portfolio investment,


Table 4.4 Average annual percentage GDP growth, 1960–2010

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5($303 to ($1429 to ($3133 to ($5890 to ($12289 $1429 per $3103 per $5885 per $12723 per per capita capita GDP) capita GDP) capita) capita) and above)

1960–80 2 2.4 3.1 3.2 2.41980–2000 1.1 0.7 1.5 1.1 1.12000–2010 2.5 3.1 3.1 3.4 1.3

Source: Adapted from Weisbrot and Ray 2011: 10, 31, with author and website permission

$451 billion in commercial bank loans and $237 billion in non-bankprivate loans (Akyuz 2013: 99).

Thus, “while growing US external deficits were being financed‘officially’, there was plenty of highly leveraged private money search-ing for yield in DEEs (developing and emerging economies – R.K.). Amutually reinforcing process emerged between private flows to DEEsand official flows to the US – the former were translated into reserves ofDEEs and constituted an important part of official flows to the US, andsupported lower rates there and private flows to DEEs.” (Akyuz 2012:14) With the rapid expansion of liquidity and growth in the worldeconomy after 2003, commodity prices started to rise substantially.The commodity price boom was a product of rising demand fromChina, low initial stocks, a weak dollar and increasingly financializedmarkets. After 2002, developing countries with a high share of oil andmineral and mining products in their total merchandise exports saw asubstantial improvement in their terms of trade (see Table 4.5), andthose with high fuel exports saw their terms of trade double from2002–11 (UNCTAD 2012: 8).

The positive impact of these price rises on economies in the Southwas substantial. At the start of 2000, average central governmentdeficits in the South stood at around 3.5% of GDP but by 2006–07, thisfigure had declined to 0.5% (Akyuz 2012: 20). Total public debt as aproportion of GDP also fell, for instance in Latin America from 50% to35% of GDP over the same period (Akyuz 2012: 20). While currentaccounts saw deficits of around 3 to 4% of GDP in 2000, by 2007, LatinAmerican current accounts had an average surplus of 1% of GDP in2007, and Africa had surpluses averaging 3% of GDP (Akyuz 2012: 22).However, rising commodity prices and revenues from commoditytaxes, profits and royalties account for as much as half of the increasein the fiscal revenue ratio in Latin America (Cornia et al 2011), andindeed budgets went into deficit in 2008–09 following the financialcrisis and the fall in commodity prices (ECLAC 2011). It has been esti-mated that without the 2002–06 average improvement of 50% in the


Table 4.5 Percentage change (increase/decrease) in primary commodityprices over previous year (excluding crude petroleum)

2006 2007 2008 2009 2010 2011

30.2 13 24 –16.9 18.2 17.40


terms of trade for primary commodity prices, current accounts wouldhave shown a deficit of 4% of GDP (Calvo and Talvi 2007). The realprices of energy and metals more than doubled from 2003–08, andfood increased by 75% (UNCTAD 2012: 9). In the first half of 2008,crude petroleum and food prices rose by more than 50% (UNCTAD2012: 8–10). While energy and metal reached some of their highestprices in history, in agriculture price levels only reversed the trends sincethe 1980s (Erten and Ocampo 2012). In the second half of 2008,investors withdrew money from commodity futures. This coincided withcapital flows falling and the rise of the dollar. These factors combinedand the price of commodities fell rapidly (see Table 4.8): oil from $140 abarrel in July 2008 to $50 a barrel by December; grain prices fell from$440 a ton in February 2008 to $220 in November, and wheat from$1000 a ton to $550 a ton over the same period (UNCTAD 2012: 9).

The decade from 2000 did see a substantial boom in the developingworld, which was of far greater significance than the growth of theSouth in the 1990s. Indeed, as we saw in Chapter 2, as this boom con-tinued, the optimistic predictions concerning the BRICs, made byinvestment banks such as Goldman Sachs, were regularly upgraded.What this section has essentially described is the international factorsthat facilitated this growth, and particularly capital flows to the Southand high commodity prices. The next section provisionally questionswhether these conditions can continue in the longer term, and sug-gests other reasons why convergence might be limited. This will bedone before a more detailed consideration of the financial crisis in thenext chapter.

The limits of convergence, 1992 to 2007

This final section of the chapter examines in more depth the explana-tions cited for the booms of the 1990s and the 2000s. We have alreadysuggested that the 1990s boom was not of great significance, or at leastit was not as significant as the boom in the 2000s. Nonetheless, we willexamine both periods together in this section as at least some of thereasons for the emergence of the South are similar in both decades.Equally however, these reasons might give rise to some caution in dis-cussing the rise of the South as we shall see. This section further breaksdown and revisits five reasons for the rise: first, capital inflows into thedeveloping world; second, the rise of manufacturing in the South;third, the character of the Chinese boom; fourth, the commoditiesboom of the 2000s, and the question of South-South trade. In addition


there will be a fifth factor, already noted in terms of the limits of glob-alization in the 1990s, that of financial crisis. This will be considered indepth in the next chapter but some initial observations related to thelimits of the boom of the 2000s will be highlighted.

Capital inflows and the developing world

As we have seen, there was a direct foreign investment boom from theearly 1990s right through to 2008, with only a brief interruption in2001. Thus, the total global amount of direct foreign investmentincreased from $59 billion in 1982 to $202 billion in 1990, $1.2 trillionin 2000, down to $946 billion in 2005, and back up to $1.3 trillion in2006 (UNCTAD 2002: 3–5; 2007: 9). However, we need to treat thedata with some caution. Between 1993 and 1998, the global Northreceived 61.2% of world DFI, developing countries 35.3%, and theformer communist European countries 3.5% (UNCTAD 2002: 3–5). For1999–2000, foreign direct investment inflows to the developed worldconstituted 80% of total DFI, and the proportion going to developingcountries constituted only 17.9% of the total (UNCTAD 2002: 5). Thiswas however an unusual year as a great deal of mergers and acquisi-tions within different countries in the North distorted the figures. Aswe saw in Chapter 2, by 2006, out of a total of $1.3 trillion of directforeign investment, developed countries received $857 billion anddeveloping countries $379 billion, with transition economies receiving$69 billion (UNCTAD 2007: 2–3), and by 2010 developing and transi-tion (former socialist) economies accounted for around 50% of thetotal global share of foreign investment inflows, and by 2012 this hadgone beyond 50% to 52% (UNCTAD 2013b: 2). To some extent thisreflects falls in direct foreign investment figures, and sharper falls inthe developed world. We investigate FDI patterns further in the nextchapter but it is still relevant to stress that for much of the boomperiod, from 1993 to 2007, the direction of FDI was very concentrated,with developing countries receiving around one-third of the globaltotal, and of this third, only a few developing countries received mostof this.

Moreover, though foreign investment levels had increased, this oftenreflected a shift in ownership from the state to private sector, ratherthan genuinely new, greenfield investment. Indeed, investment/GDPratios were lower across the board since the reform process started inthe early 1980s. Thus, investment/GDP ratios for sub-Saharan Africafell from a peak of around 23% in the early 1980s, down to around15% in 1985. By 2000, the figure stood at around 17%. For the big


Latin American five (Argentina, Brazil, Chile, Colombia, and Mexico),the investment/GDP ratio of a peak of close to 25% in 1981 fell to 16%by 1984. By 1989, just before the FDI boom, it stood at 19%, and by2000, it had only increased to 20% (Kozul-Wright and Rayment 2004:30).

In the 2000s, the average savings rate in middle income countrieswas actually lower than the rate in the 1990s, and investment rates andproductivity increases showed at best a mixed record (Akyuz 2012: 23).Only China and India saw large increases in domestic savings andinvestment. India’s ratio of investment to GDP increased substantiallyfrom 24.3% in 2000 to 37.4% in 2007, but Brazil’s increased onlyslowly, staying at 18.3% in 2000 and in 2007, but increasing post-crisisto a still low 19.3% in 2010 (Akyuz 2012: 23–4). South Africa’s savingsand investment rates stood at 15.6% and 15.7% of GDP in 2000; by2007, these had increased to only 16.7% and 15.9%. Russia’s savingsrate fell from 36.7% to 28.5% from 2000 to 2007, and its investmentrate showed only a minor increase, from 18.7% to 20% over the sameperiod. By 2007, the current accounts of various countries were also,given the boom that preceded this, unimpressive, with Brazil actuallyshowing a deficit. By 2010, Brazil (–2.3%), India (–2.6%) and SouthAfrica (–2.8%) all recorded deficits, while Russia’s surplus fell from amassive 18% of GDP in 2000 to 4.8% by 2010. In short, in many caseseconomic growth was fuelled by primary goods exports and consumergoods imports booms, the latter of which was only made possiblebecause of the inflow of speculative rather than productive foreigncapital. This brings us back to the question of whether, in much of theSouth, the import substitution industrialization period has beenreplaced, not by new economic miracles but rather production substi-tution (Saad-Filho 2005).

The rise of manufacturing in the South

At the same time, there was of course some significant manufacturingdevelopment in the South, but this too needs to be put into context.Foreign investment flows and the increased use of sub-contractingagreements by multinational companies were major reasons for thegrowth of this manufacturing. The concept of a global commoditychain was introduced earlier in the chapter, and it “describes the fullrange of activities that are required to bring a product or service fromconception, through the different phases of production (involving acombination of physical transformation and the input of various pro-ducer services), delivery to final consumers, and disposal after use.”


(Kaplinsky 2005: 101) The question then is the extent to which devel-oping countries have managed to capture value within these commod-ity chains. Since the start of the 1980s, while the developed countries’share of manufacturing exports fell (from 82.3% in 1980 to 70.9% by1997), their share of manufacturing value added increased from 64.5%to 73.3%. Over the same period, Latin America’s share of world manu-facturing exports increased from 1.5% to 3.5%, but its share of manu-facturing value added fell from 7.1% to 6.7% (Kozul Wright andRayment 2004: 14). Though there are only limited data updating thiscontrast between manufacturing exports and manufacturing valueadded,1 there is still strong evidence that even after the boom in the2000s, upgrading by industries in the South is limited. It is the casethat the period since 1990 has seen a significant increase in the South’sshare of manufacturing value added (MVA), from approximately 16%in 1990 to 27% by 2007, and 32% by 2010 (Nayyar 2009: 20–1; 2013:107–8; see also Saad-Filho 2014; UNCTAD 2013b). However, the diver-gence between manufacturing exports on the one hand, and MVA onthe other, has (until recently) sharpened. While in 1980, as far as wehave reliable figures, these shares were broadly similar at around 10%each, by 2000 the export share was 28.1% and the MVA share 20.9%,and by 2006 export share stood at 34.2% and MVA at 25.9% (Nayyar2009: 20, 21, 24). This still of course constitutes an increase in theSouth’s share of MVA, but this is growing less rapidly than export sharewhich once again shows the importance of understanding changingglobal strategies by MNCs and the use of networks of production. Inthe immediate aftermath of the financial crisis, as the developed worldmade only a slow economic recovery, the developing world’s share ofmanufacturing exports and manufacturing value added convergedonce again. Nevertheless, this increase in share is concentrated in onlya few developing countries, of which the older East Asian newly indus-trializing countries and China are most significant (Nayyar 2009: 20;Nayyar 2013: 109–11; Saad-Filho 2014). More generally, and not un-related to these points about capturing value within commoditychains, while the number of companies from the South in the FT 500increased from 8 in 2000 to 79 in 2010, these are widely concentratedin a narrow range of sectors – banking, oil and gas, metals andtelecommunications services – and not in sectors which generate themost advanced technology (such as aerospace, chemicals, electronicand electrical equipment, pharmaceuticals, retail, IT hardware) (Nolan2012: 49). Most of these operate within protected domestic marketsand are often state owned.


What we have seen then is the rise of manufacturing in the South,but we can question the extent to which this constitutes a trans-formation of the international order. Rather, while manufacturingexports have increased for developing countries, most of theseexports remain in low value sectors. Core countries still tend to dom-inate in high value sectors, with high barriers to entry, high start upand running costs, and significant skill levels. In the periphery, thereare large amounts of surplus labour, and barriers to entry, skills andwages are low. While this gives such countries considerable compet-itive advantages, at the same time the fact that those barriers are lowmeans that competition is particularly intense and largely deter-mined by cost price, which also means low wages (Kaplinsky 2005).Thus, while the old North-South divide could be characterized by aninternational division of labour in which the developed world pro-duced most manufactured goods (and a lot of primary goods) and thedeveloping world overwhelmingly produced primary goods, the newinternational division of labour is more complex. Both North andSouth produce manufactured goods but there remains a divisionbased on the type of goods manufactured, and specifically the valueadded nature of the manufacturing activity (Kaplinsky 2005;Steinfeld 2010; Nolan 2012; UNCTAD 2013b). This of course is notstatic and there are examples of successful upgrade (as well as benefitsderived from high commodity prices), but it is hardly a story of con-vergence between North and South.2

Some sense of continued divergence can be seen when we look atshares of world income. While the share of the South in worldincome has increased substantially, accounting for as much as 47.9%of the global total by 2010 (IMF 2011), figures like this exaggerate asthey measure by using local purchasing power parity and not marketrates of exchange.3 This is misleading as it is “the market (exchange)value of goods and services, not the PPP values that determine theeconomies’ contributions to global supply and demand and theexpansionary and deflationary impulses they transmit to others.”(Akyuz 2012: 28) If we instead use constant market rates, then thepicture is somewhat different, as Table 4.6 demonstrates. What thisshows is a quite substantial increase in the share of the developingworld, and of China’s within that share, but even then the shareremains less than the share of the US, which had been hit by a majorrecession just before 2010. This demonstrates a small tendencytowards convergence at most. This issue is discussed further inChapter 6.


The character of the boom in China and US-Chinese interdependence

We saw above that China’s high rates of GDP growth were accom-panied by high rates of growth in manufacturing, and in the export ofmanufactured goods. Export-oriented industrialization was asignificant feature of the success of the original Asian tigers (seeChapter 3), but in fact China’s export dependence was far greater. Inthe period from 1965 to 2004, the combined export/GDP ratio forJapan, Taiwan and South Korea combined varied from around 10 to20%, but usually around 15%, with the higher 20% figure almost beingreached in the mid-1980s and 2004 (Hung 2009: 8). China’s by con-trast was consistently between 20 and 30% from the early 1990s, andfrom 2000 to 2004, it increased to over 30% a year (Hung 2009: 8).

In China from 2002–08, exports grew on average by as much as 25%a year, while domestic consumption lagged behind growth. About one-third of GDP growth in China was directly due to exports, and whenthe multiplier effect of exports is taken into account, thus factoring inthe effect of exports on domestic consumption and investment, thefigure rises to almost 50% (Akyuz 2012: 27). The destination of theseexports was overwhelmingly to the North. In 2005, 82.9% of exportswent to the North (including Eastern Europe), and 79.8% in 2007. Postcrisis, this figure had fallen, but it was still as high as 76.4% in 2010(Akyuz 2012: 27–8).

At the same time, while growth rates were high, the growth in con-sumption grew less rapidly (see Table 4.7). For Japan, South Korea andTaiwan combined, consumption as a share of GDP averaged some-where between 50 and 60% from 1965 to 2004, for China the figuredropped from just below 50% to below 40% in the period from 2000 to2004 (Hung 2009: 8). The lower growth in domestic consumptionreflected in part the fact that “the intensity of the PRC’s (People’s


Table 4.6 Share of economies in world GDP, using constant (2005) dollarsas benchmark

2000 2010

US 28.6 26.1EU 31.9 28.5Developing world 18.5 25.8China 3.6 7.6

Source: Adapted from Akyuz 2012: 29, with author permission

Republic of China – R.K.) export-led and private consumption growthmodel has made its market and financial dependence on the US evengreater than that of its predecessors.” (Hung 2009: 9) Not unrelated tothis is the decline on the share of wage income in China’s GDP from53% in 1998 to 41.4% in 2005 (Hung 2011: 21). This can be seenfurther when we compare GDP growth rates and consumption growthrates in China in the 2000s, discussed further below and in Table 4.7.

China’s exports to the US were a significant reason for the US’ on-going trade deficits which, we have already seen, is an important partof the argument that the international order is undergoing a period oftransformation. Giovanni Arrighi (2005: 64) makes the case that thereis a close parallel between British decline from the late nineteenthcentury, and US decline today:

As in Britain’s case at a comparable stage of relative decline, escalat-ing US current account deficits reflect a deterioration in the compet-itive position of American business at home and abroad.

Indeed, Arrighi argued that for the US, the situation was worse than itwas for Britain as the latter had an empire, and particularly colonialIndia, from which it could finance deficits. The US on the other hand,has to compete in international capital markets, and imperial adven-tures such as Iraq in 2003 make things worse as the cost of the warsleads to fiscal deficits and the threat of higher interest rates.

Dooley et al (2009) however did not share this pessimism. Theyargue that in effect, the relationship represented a new Bretton WoodsII, under which Asian countries under-valued their currencies, tiedthem to the dollar, and exported to the US, thus generating currentaccount surpluses. The overvalued US dollar meant that imports werecheaper in the US, albeit at the cost of increasing debt and the declineof US manufacturing. For Asia, they faced the risk of a devaluation ofthe dollar as so many foreign assets were held in dollars, but Dooley etal argued that this was a worthwhile risk as Asia, or more specificallyChina, still needed to absorb labour leaving the countryside andmigrating to urban areas. This can continue, at least as long as Chinaneeds to absorb rural labour. This argument suggests that on the oneside, the US benefits from cheap imports and the financing of deficitsthat arise in part through these cheap imports, while China (andothers) benefit from access to the lucrative US market as part of theirdominant export-orientated development strategy. In the period from


1997–2006, nominal GDP nearly tripled, while the stock of foreignreserves rose from 15 to 41% of GDP (Schwartz 2009a: 166).

The debate here is quite straightforward. On the one side is the argu-ment that China’s exports led to cheap imports for the US, and Chinathen recycled its export earnings in the form of purchasing US debt,which in turn helped to keep interest rates low in the US. On the otherside, the US provided a lucrative export market for Chinese goods, andthe purchase of US debt helped to keep the value of the yuan low, thusfacilitating further exports. This represented a ‘Chimerican’ interde-pendence (Ferguson and Schularik 2007), in which both sidesbenefited. Critics argued that due to a number of fault lines, this inter-dependence was unsustainable. Though there was disagreement aboutsome of the specifics, critics generally identified an undervalued yuan,capital mobility, and the hollowing out of US manufacturing as themain problems, and most suggested that at some point, surplus coun-tries would want more for the purchase of US debt, but the resultanthigher interest rates would undermine both the US economy andChinese exports to the US (Eichengreen 2004).

It is undoubtedly the case that “the East Asian states were by themiddle of the decade accumulating ever more dollar reserves at a lowrate of return at ever greater currency risk.” (Thompson 2010: 45) From2002 to 2007, the weighted dollar index against a basket of currencies(the euro, yen, sterling, Swiss franc, krona and Canadian dollar) fell by36% and by 40% against the euro (Thompson 2010: 45). On the otherhand, efforts to diversify foreign exchange reserves by the SouthKorean central bank in 2005 led to retreat in the face of the fall of thedollar and the consequent threat of a wholesale devaluation of Korea’sdollar denominated assets (Thompson 2010: 43–4). Covering much ofthe period of the falling value of the dollar, from June 2003 to June2005 China’s official holdings of dollar bonds rose from $255 billion to$527 billion (Thompson 2010: 39). In the period from 2003–07,Middle Eastern and developing Asian countries (mainly China)increased their holdings of US Treasury bonds by $771 billion, anincrease of 23% (Panitch and Gindin 2012: 309; Bernanke et al 2011).We should also note in passing for now (see the next chapter) thatthese same states increased their purchase of mortgage backed secur-ities by 231% (to $656 billion) over the same period, a trend replicatedby private European banks as well (Panitch and Gindin 2012: 309).

As well as the housing boom, a further reason for the increase in thepurchase of housing debt was the weakening of the dollar. From 2005to 2007, some energy exporters adopted policies which further under-


mined the dollar’s value, with Russia and Nigeria diversifying intoother sources of foreign exchange, and Kuwait abandoning its dollarpeg. Even Saudi Arabia failed to match the US Fed’s interest rate cut,despite a pegged exchange rate policy (Thompson 2010: 49). States andprivate investors responded by purchasing fewer Treasury bonds andmore housing bonds, which were guaranteed by the US’ two leadingmortgage corporations, Fannie Mae and Freddie Mac. In the twelvemonths up to January 2005, foreign central banks made net purchasesof $182 billion of long-term Treasury bonds and $60.3 billion ofagency bonds (mainly issued by Fannie Mae and Freddie Mac). In theyear up to January 2008, these same central banks made net purchasesof $44 billion of treasury bonds and $103.4 billion of agency bonds(Thompson 2010: 50).

We thus see a mixed picture in the boom years, with some evidencesupporting the optimistic scenario regarding Chinese-US interdepen-dence, and some suggesting a darker picture. Whatever the merits ofthe two sides on this debate, we can identify a number of importantconsiderations. First, the boom from the early 2000s up until 2007 wasone that reflected interdependence between the US and China, andother countries that purchased US debt. As we will see in the nextchapter, this is important when thinking about the causes and conse-quences of the financial crisis of 2008. Second, we need to understandthe specifics of that crisis, which emerged in the housing market andnot in the equities or currency markets. Third, and following on fromthis point, while some pessimists identified certain dangers in thisinterdependence, the crisis that did emerge and the responses to it didnot necessarily confirm the views of at least some of the pessimists, notleast when investors, in the short-term at least, flocked to the dollarand the dollar value increased. Fourth, we need to understand how theconditions that led to a boom from 2002–07 (and indeed from 1992 to2000) gave rise to a crisis in 2007 and 2008. These questions are impor-tant for understanding the post-crisis world, both in terms of tran-scending that crisis and in terms of whether or not China, the BRICs,and the ‘new South’ represent a new powerhouse in the worldeconomy which has effectively decoupled from the West. These ques-tions are considered in depth in the next chapter, but the discussionhere immediately suggests some scepticism concerning the decouplingthesis.

However there is one further argument that we should consider,which is that China’s export dependence is exaggerated (Anderson2007). This is an important argument because if it is true, then this


would strengthen the case made for a decoupling thesis and the argu-ment that in the post-crisis world, China can lead the South andperhaps the rest of the world out of recession and stagnation. Theessential claim made is that China’s export dependence is a statisticalillusion based on misleading figures such as export/GDP ratios. This isbecause of China’s role within the East Asian global production chainwhich means that its role as a final assembler of parts and componentsmade elsewhere distorts the figures. Thus, “the gross value of finishedproducts includes a big chunk of the value of imported parts and com-ponents, inflating the overall number.” (Hongbin and Wang 2013)What this means is that the figures are distorted because of doublecounting in terms of value added. For example if China exports $100of goods to the US, $10 of which is originally produced in Vietnam,then only $90 of goods should ‘count’ for China but officialexport/GDP ratios count $100. This double counting also distorts thefigures on South-South trade (see below) and China’s trade surpluswith the US. For example in the case of the latter China’s official tradesurplus with the US was $172 billion in 2005 but in value added termsthe figure was only $40 billion (Akyuz 2011b: 11). The appropriatefigure to measure then is not export/GDP ratios but export valuedadded/GDP ratios, and the latter figure is far lower than the former.Anderson (2007) suggests it was only around 7.7% for much of theboom years.

While it is certainly true that China’s exports have a high importand high foreign value added content, this does not necessarily meanthat China did not have a high degree of export dependence in theboom years. This is because this approach ignores the impact ofexports on domestic demand. Anderson for example deducts fromexports both the import content directly linked to sectors producingexportables, but also inputs from other sectors, and thus “excludes theindirect domestic value-added content of exports, which…exceeddirect domestic value-added by a large margin.” (Akyuz 2011b: 14) Ifwe take into account the effect of import content on exports anddomestic demand then the figure is much higher, perhaps as much asover 30% according to Akyuz (2011b: 14). High growth rates are there-fore accompanied by comparatively low rates of increase in domesticconsumption and very high rates of increase in exports, as demon-strated in the case of the latter by an increase in the trade surplus/GDPratio from 3% in 2002 to 8.2% in 2006 and 9.3% in 2007 (Akyuz2011b: 13). Table 4.7 shows the differences in rate of growth of GDPcompared to consumption, investment and exports.


It should be noted however that while growth rates were lower in2008 and 2009, they remained high even though export growth fellsubstantially (2008) or even fell in real terms (2009). This would appearto challenge the view that China has a high degree of export depen-dence. But as the next chapter will show, much of this growth must belinked to the fiscal stimulus put into place in response to the collapseof export demand.

South-South trade and the commodities boom of the 2000s

One of the main arguments made for a transformation of the interna-tional order has been the rise of South-South trade, which increasedsubstantially in the 2000s. The share of this trade in total world tradeincreased from 9.9% in 2000–01, to 14.5% in 2006–07, to as much as16.9% in 2009 (ADB 2011). This is not so high that it can really becalled a global transformation, but there is also much more to sayabout its rise. First, it is heavily concentrated, with East Asia account-ing for 75% of all South-South trade, and China 40% (Akyuz 2012: 30).Second, in terms of the BRICs, and the trade that takes place betweenthese countries, China is significant but the others are not. This can beseen if we look at Table 4.8 and 4.9 below, which compares China’strade with other BRICs with India’s trade with other BRICs.

The East Asian share is however of particular interest because itdemonstrates an enormous problem with the figures which showgrowing South-South trade. The increase in South-South trade can beseen less as evidence of growing solidarity between these countries,and more one that reflects the unequal and subordinate integration ofparts of the South into global production networks. The South’s share


Table 4.7 Growth of GDP and other components in China, annualaverage percentage growth

Year GDP Consumption Gross Fixed Capital Exportsformation

2002 9.1 7.4 13.2 29.42003 10 6.6 17.2 26.82004 10.1 7.1 13.4 28.42005 10.4 7.3 9 24.32006 11.6 8.4 11.1 23.82007 14.2 10.8 14.2 202008 9.6 8.5 11 8.62009 9.1 8.5 19.8 –10.4

Source: Adapted from Akyuz 2011b: 12, with author permission

of world trade has increased in part because of the greater importintensity of its exports, as the OECD (2010a: 72) recognizes:

About 60% of trade within South and South-East Asia is related tovertically integrated activities – that is, the provision of inputs forgoods consumed outside the region. If China is now the world’sworkshop, then large parts of South-East Asia have become China’ssupplier of parts and components.

In other words, much of the increase in the share of South-South tradereflects the double counting associated with the high import intensitythat comes with integration into the global commodity chains dis-cussed above. The import component of consumption in China is farlower than that of the developed world, and between 2003 and 2007,possibly as much as 60% of total Chinese imports were used forexports, while only around 15% of imports are for domestic consump-tion, which is about a quarter of the US’ import-consumption ratio(Akyuz 2012: 31). Chinese merchandise imports from East Asia is dom-inated by manufactures (see Tables 4.10 and 4.11). These parts andcomponents are then used for China’s export industries. Breslin (2005:742–4) suggest that China’s rise itself may be exaggerated, as its eco-nomic miracle cannot be divorced from its role in East Asian produc-tion networks. In particular, China specializes in completing the


Table 4.8 China’s trade with the other BRICs (in US $billion)

China exports China exports China imports China imports2001 2009 2001 2009

India 2 29 2 14Russia 3 17 8 21Brazil 1.5 14 2.5 28

Source: Adapted from Beausang 2012: 57, with author and publisher permission

Table 4.9 India’s trade with the other BRICs

India exports India exports India imports India imports2001 2009 2001 2009

China 1 12 2 31Russia 1 1 1 4Brazil 0.25 3 0.5 3.8

Source: Adapted from Beausang 2012: 57, with author and publisher permission

production of low value, labour intensive goods, and relies on tech-nologies produced in other East Asian countries, with which it has asubstantial trade deficit. Thus for example, South Korea, Japan andTaiwan combined had a $30 billion trade surplus with China in 2000;by 2010 that figure had increased to over $200 billion (Huang 2012).Moreover, the East Asian region provided over 50% of total foreigninvestment into China for much of the 1990s China has increased itsexports to the European Union and the United States, while the rest ofEast Asia (excluding Japan) has seen its share of exports to the EU andthe US fall, while its export share to China has increased. Thus, China’spercentage of manufacturing exports to the US increased from 9.1% in1992 to 22.9% in 2000, and to the EU it increased from 9.5% to 16.7%for the same years. Over the same period, Thai export shares to the USfell from 26.4% to 22.9% and the EU from 21.3% to 17.7%, and SouthKorea’s fell from 25.9% to 23.9% (US), although they showed a smallincrease in shares to the EU, far bigger was the share of exports to therest of East Asia. With some small variations, there has been asignificant increase in shares by East Asian exporters to the rest of theregion, while EU and US shares (either taken together or individually)have generally fallen or stagnated (Athukorala 2003: 40–1). Even moresignificant has been the increase in shares in parts and componentsrather than finished goods. Indeed, between 1992 and 2000, theseaccounted for 55% of the export growth of Indonesia, Thailand,Malaysia, Singapore, the Philippines and Vietnam (Athukorala 2003:33). There was no clearly identifiable pattern in the share of com-ponents and parts in trade to the US or EU from East Asian countries,with some showing increases and some decreases, but generally the farbigger increases in shares of parts and components was in East Asiancountries trade with China. By 2000, the shares were 50.6% forMalaysia, 54% for Thailand, 50.3% for Singapore, 81.8% for the


Table 4.10 Commodities imports of China in $ billions

Trading partner 2003 2003 2007 2007 2010 2010(region) Non-fuel Fuel Non-fuel Fuel Non-fuel Fuel

Africa 2.3 4.9 7.9 26.1 19.5 41.5Latin America 10 0.4 37.5 5.3 66.7 13Asia 15.5 19.5 48.3 56.1 66.6 100Developing world 27.8 24.9 93.7 87.6 152.8 154.5(total)Rest of world 27.3 4.3 80.3 17.6 146 34.5


Philippines, 26.7% for South Korea, and 29.8% for Taiwan. At the sametime, parts and components in China’s share of exports to the US(4.3% to 9.1%) and EU (2.9% to 10.9%) increased from 1992 to 2000,but from far lower bases and the total shares remained low (Athukorala2003: 48–9). In the period from 1992–2003, parts and componentsaccounted for 52% (Taiwan), 44% (Malaysia), 70% (Philippines), 59%(Singapore) and 31% (Thailand) of the total manufacturing exportgrowth for particular countries (Athukorala and Yamashita 2005: 33).For China, the figure was 17% (Athukorala and Yamashita 2005: 33)Taken together, these figures suggest that China has increased its roleas a manufacturer of final goods produced within the East Asianregion, which are exported to the EU and US (and Japanese) market.

Lim and Lim (2012) suggest that around 22% of exports of the mainEast Asian countries to each other are for final demand, while 60% isdestined for final demand in the US, Europe and Japan. Seen in thisway, the rise of South-South trade reflects less the rise of the South andmore its continued dependence on the markets of the North. The shareof East Asian countries’ exports to China increased significantly in theperiod from 1995 to 2005: from 5% to 13.5% for Japan; from 7% to21.8% for South Korea and from 0.3% to 23.3% for Taiwan (Hung2009: 17). This reflects a growing pattern in which China has increas-ingly played the role of final producer and/or assembler of manufac-tured goods produced in East Asia and exported to the West. BellamyFoster and McChesney (2012: 13–14) thus argue that:

In the complex global supply lines of multinational corporations,China primarily occupies the role of final assembler of manufac-tured goods to be sold in the rich economies. Export manufacturing


Table 4.11 Manufactured imports of China (totals and percentages)

Trading partner 2003 2003 2007 2007 2010 2010(region) $ % of $ % of $ % of

billions total billions total billions total

Africa 0.8 0.3 1.8 0.3 2.6 0.3Latin America 4.4 1.4 8.1 1.2 11.1 1.3Asia 161.1 49.2 373.3 55.3 473.1 53.2Developing world 166.3 50.8 383.2 56.8 487.1 54.7(total)Rest of the world 160.9 49.2 291.2 43.2 402.6 45.3


is directed not at the actual production of goods, but at commodityassembly using parts and components produced elsewhere and thenimported into China. The final commodity is then shipped fromChina to the developed economies.

The centrality of the East Asian production network does not of coursemean that Africa and Latin America are irrelevant, though of course itmight mean that the latter two regions need China (or at least Chinesegrowth) more than China needs them. We will revisit this argument inlater chapters, but for now, the fact remains that both Africa and LatinAmerica have benefited from a primary commodity boom in the 2000s.In some respects, this boom represents a substantial shift away fromthe idea that there is a tendency for the terms of trade to decline forprimary goods. It also therefore challenges the old development ortho-doxy that in order to develop one must industrialize, discussed aboveand in the previous chapter. Moreover, some manufacturing goodshave seen a decline in their terms of trade in recent years, largely as aresult of rising demand from China pushing up the prices of someprimary commodities, alongside financial speculation in these markets(Farooki and Kaplinsky 2012: 180–6). This might suggest that special-ization in primary commodities is a useful strategy for at least somedeveloping countries.

However, we might interpret the boom very differently. We saw thatthere was a substantial decline in commodity prices in the immediateaftermath of the financial crisis, and while there has since been somerecovery (discussed in the next chapter), the commodities boom couldbe “viewed as a new super-cycle (i.e. a trend rise in real prices of abroad range of commodities that lasts for one to two decades and isdriven by urbanization and industrialization in at least one majoreconomy)” (UNCTAD 2012: 12) If this is the case, then the questionbecomes one of locating the point at which this super-cycle comes toan end. This is not an easy task but asking this question forces us tolocate the source of the commodities boom in factors external to thosecountries benefiting from it, namely continued high rates of growth inChina (alongside financial speculation, which is discussed in Chapters5 and 6). We have suggested the reasons above why the high rates maynot be sustainable, though of course post-crisis they were maintainedfor a period and commodity prices rose accordingly. This is discussedin the next chapter (and in Chapter 8), but what we can immediatelysay is that if there is a slowdown in industrialization and urbanizationin China, then this will have negative knock-on effects elsewhere, and


then all the old vulnerabilities associated with specialization inprimary goods production will re-appear.

Conclusion

The booms of the 1990s and especially the 2000s occurred in thecontext of a particularly favourable international context for theSouth. Latin America and Africa benefited from increasing commodityprices and lower costs of financing payments deficits, which facilitatedgrowth and the expansion of demand. Oil exporters benefited fromhigh oil prices and for oil importers, any external shocks were coveredby capital inflows. But at the centre of this process was the relationshipbetween China and East Asia on the one hand and the US and thedeveloped world on the other, whereby the former grew rapidlythrough exports to the latter, which in turn benefited from cheapimports. While this gave rise to on-going trade deficits for the US, thesesame exporting countries were willing to finance these deficits throughcapital flows to the US, initially mainly in the form of US Treasury debtbut also in the form of agency debt linked to the US mortgage market.This process further reinforced the boom as capital inflows into the USallowed interest rates to remain low, thus further fuelling an increasein debt, including in the US mortgage market. This debt in turnallowed for the continued expansion of exports from East Asia andespecially China. This relationship also facilitated a wider boom in theSouth, based on both the US and Chinese ‘ends’ of this relationship.The South benefited from increased demand from China for its goods,which led to rising commodity prices in the period from 2002–07, andfrom capital flows, both from China and from the US and elsewhere.

There were thus very specific international economic relations,which facilitated the booms of the 1990s and the 2000s. But thisperiod also saw regular financial crises, culminating in the global crisisof 2007–08, which was intimately connected to the internationalfactors that had facilitated the boom. This is the subject of the nextchapter.


91

5The South and the Causes andConsequences of the FinancialCrisis, 2007–14

This chapter examines the causes and consequences of the financialcrisis that hit world markets in 2008. It examines both the immediateand longer term causes, and relates these back to the discussion in theprevious chapter. It then uses this discussion to reflect on the conse-quences of the crisis, for one of the outcomes of the crisis has been astrengthening of the argument that we are witnessing a global redistri-bution of power, away from the West and the US, and towards China,the other BRICs and the South. But to examine this question properlywe first have to understand the causes of the crisis which, the lastchapter suggested, are inextricably linked to the booms and financialcrises after 1992 and especially after 2001. The chapter examines theseissues in three sections. First, the immediate causes of the crisis areexamined through a broad narrative account. Second, the causes areexamined more deeply through an analysis which, instead of focusingso narrowly on interest rates and the US housing market, puts interna-tional factors at the centre of the analysis. The third section then usesthis analysis to critically examine – and question – the claims that theoutcome of the crisis is a further shift away from US power towards the South. This will involve some further discussion of the reasons forthe boom that preceded the crisis, the limits of the rise of the South,and the question of US decline. This discussion will also point to someof the questions that will be discussed in Chapter 7, which focuses onthe geopolitical question of the rise of a new South. Finally, the con-clusion will tentatively suggest that we also need to examine the ques-tion of inequality when locating the shift from boom to crisis, aquestion that will be taken up further in the next chapter.


The immediate causes of the global financial crisis 2008

The autumn of 2008 saw a period of almost unprecedented tumult inthe international economic order, perhaps best summarized by GeorgeW. Bush’s statement that “(i)f we don’t loosen up some money intothe system, this sucker could go down.” (quoted in Mason 2009: 28)Whilst it had been clear for at least a year that there were difficulties inthe global economy, September and October 2008 saw some dramaticdevelopments. On September 15th, after failing to be bought out by theKorean Development Bank and the Bank of America, the leadinginvestment bank Lehman Brothers collapsed (FCIC 2011: 324–42). Thefollowing day, the US government agreed a major bail-out and 80% inthe main insurance group in the US, American Insurance Group (AIG).AIG was increasingly exposed to the drying up of short-term lendingby money markets, and the declining value of its collateral, much ofwhich was in mortgage backed securities, discussed further below.Finally, AIG increasingly had to pay out to counterparties that hadinsured against falling securities, leaving it exposed to massive pay outsbut with little access to short-term credit (FCIC 2011: 344). Panicensued and lending between banks, crucial to the circulation of credit,effectively dried up, as the interest rate at which banks were preparedto lend to one another increased substantially. This rate is usually quiteclose to the rate at which it costs governments – and the US govern-ment in particular – to borrow, with an average discrepancy of around0.3 points, but on September 18th, it reached 3.02 percentage points. Atthe same time, the cost of borrowing for non-financial firms increasedfrom around 2 to 8% (Mason 2009: 17).

The collapse of Lehmans led to stock market volatility, withsignificant losses on Wall Street, London and elsewhere, which werethen counter-acted at rumours of impending government bail-outs.The Troubled Assets Relief Programme (TARP) planned a US govern-ment bail-out of $700 billion to buy up Wall Street’s toxic debts. Thisled to considerable opposition from both anti-corporate left and liber-tarian right, and an initial defeat of the bail-out plan in Congress onSeptember 29th. This again led to substantial stock market falls.Meanwhile in Europe, banks were desperate to purchase dollars in amarket where there was limited availability, and simultaneously somewere exposed to the bad debts of Lehmans and AIG. In the UK,Bradford and Bingley was nationalized and sold on to Santander, andthere was pressure on HBOS, Lloyds TSB and RBS. Hypo Real Estate wasbailed out by the German government and the joint Dutch-Belgianoperation Fortis was semi-nationalized, while Iceland and Ireland saw

the removal of money from their banks, which in the case of the latterwas only reversed when the government stepped in to guarantee alldeposits in its 6 major banks. This decision in turn threatened a run onBritish banks as investors moved money into Ireland, thus threateningthe start of a process of competitive bail-outs. Meanwhile, the rate atwhich banks leant to each other increased, with a 3.83% discrepancybetween what is known as the TED spread, namely the aforementionedinter-bank lending and bank-government lending (Mason 2009: 41).

While nationalizations and bail-outs spread across Iceland, Russiaand Spain, Britain and the US dithered until it became clear once againthat there was a need for bail-outs and nationalizations. Eventually,after considerable opposition from Congress, the $700 billion TroubledAsset Relief Programme (TARP) was passed in early October 2008(Doran 2008). This in essence meant that the US state bought up thebad debts of banks at prices that were advantageous to the banks (that is, above the market rate at that point in time). In Britain, a £500 billion bail-out was implemented on October 8, 2008 (Wearden2008). But these were only the first stage of a number of bail-outs andnationalizations of loss making financial companies. The total value ofthe renationalization of banks and insurance companies in the US, UKand Europe was approximately equivalent to reversing about half ofthe total global privatizations of the last thirty years; the nationaliza-tion of the insurance agency AIG was the equivalent in value terms ofreversing all the privatizations in post-Communist Europe; in 2008, theUK government’s liability for Northern Rock debts was greater than thecombined total value of all private finance provided by EU-wide privatefinance initiatives since 1991; and the total cost of constructing sewersand drainage and water systems throughout the world’s cities for 75%of the world’s urban population would be about 280 billion euros,about 5% of the guarantees awarded to banks (Hall 2008). However,this is not a straightforward ‘return of the state’, for as Fine (2012: 54)points out, “we now have the paradox of what would be generallycharacterized as the adoption of neoliberal austerity measures to cutthe fiscal deficits that have been incurred by state support to private(financial) markets.”

How then do we make sense of this crisis? In terms of immediatemanifestation, as good a place to start is one of the most popularaccounts of the crisis:

If the global economic crisis can be reduced to one single phenom-enon, it is this one: the fact that nobody knows which banks aresolvent. Because banks are crucial to the creation and operation of

The South and the Causes and Consequences of the Financial Crisis, 2007–14 93

credit, a bank crisis leads directly to a credit crunch. It’s also whythe huge amounts of money being pumped into the banking sectorby governments are tending not to do the thing they are supposedto do, that is restart lending to businesses and consumers. That’sbecause...the banks are being given two totally incompatible goals.One is to rebuild their balance sheet and recapitalize themselves sothey’re no longer at risk of going broke. The second is to keeplending money. They’re being told to save and to keep spending atthe same time. (Lanchester 2010: 30)

Many questions follow from the crash of 2008. How did we get tothis position? What changes had occurred in international finance thatbrought us to such a precarious situation? Was the crisis caused byfinancial markets or by inadequate regulation of these markets (or acombination of both)? What does the crisis mean for economicfutures, and how in turn does this relate to public policy? (Gamble2011) Does the economic crisis mean a political crisis, and specificallydoes it mean the end of neoliberalism? (Mason 2009; McNally 2011)Or are we in a situation where there is a crisis in neoliberalism but notof neoliberalism (Saad-Filho 2010b), one in which the old order willcontinue in the absence of a convincing alternative? (Hay 2011)Related to these broad issues, and of more direct relevance to our con-cerns, what does the future hold for the international order, and theleading role of the US in that order? Are we witnessing the transcen-dence of US hegemony and the rise of China as a (peaceful or other)hegemonic challenger? (Arrighi 2007) And what does this mean for thesupposed rise of a new South, the BRICs and so on?

Full justice cannot be given to answering all of these questions, andour main focus is inevitably on the last two questions. However, toadequately answer these questions we will at least touch on answers tothose other questions. For as the conclusion of the previous chaptermade clear, the boom years of the 1990s and especially the 2000s werealso the years that paved the way for the crash of 2008. We thereforeneed to understand how boom gave way to crisis, and this involvesaddressing questions around regulation and the growing centrality offinance in the world economy. These in turn have implications forunderstanding the relationship between US hegemony, neoliberalismand the international order.

The rest of this section, then, will focus on the lead-up to, and out-break of, the crisis, with a particular (though not exclusive) focus onthe country where the crisis originated, the USA. It will examine in


more depth four crucial issues: (i) changes in regulation in the US inparticular up to 2007–08; (ii) the rise of derivatives, securitization, andoff-sheet banking; (iii) securitization and the sub-prime mortgagemarket, and; (iv) the housing crisis that culminated in the financialcrisis. In addition, a fifth sub-section will also briefly show how theretook place an international shift from a private to a sovereign debtcrisis.

Regulation and the financial crisis

Much of the debate that has followed the crisis is over whether it wascaused by either poor, or insufficient, government regulation. Thedebate here is the long-standing one about whether markets can beself-correcting, and if so, what is the appropriate role for government,or whether markets and particularly financial markets, are prone tofailure and so in need of more active and visible regulation which ismore effective than market forces (Hayek 1949; Keynes 1973). On theother hand, rather than set up a state-market dichotomy, we couldargue that regulation was poor precisely because it was market friendly;in other words, regulation was specifically designed to expand andextend the reach of finance, rather than to contract it. Two pieces oflegislation were important in expanding some of the key practices ofthe 2007–08 crisis. In 1999, the Gramm-Leach-Biley Act was passed(FCIC 2011: 55), which repealed the 1933 Glass-Steagall Act that waspassed at the height of the New Deal. Glass-Steagall had placed a majorrestriction on the activities of US banks, and had specifically enforcedthe separation of commercial and investment banking. The former isessentially mainstream high-street banking activity in which bankslend out deposits from customers at a higher rate of return than theypay to those customers who deposit their incomes. This is a relativelysafe and secure practice, at least when compared to the speculativeactivity of investment banking. In the Great Depression, many peoplehad their savings wiped out by speculative activity, and Glass-Steagallwas designed to ensure that this could not happen again. New Dealmeasures also ensured that banks had limited access to capital acrossdifferent states, thus ensuring that they could not become too big –and indeed, too big to fail. Investment banks existed but these limitson their activities meant that they largely acted as intermediaries forthe savings of very wealthy individuals, while the commercial banksdealt mainly with the savings of ordinary Americans.

While the 1999 Act, led by Republican Senator Phil Gramm, repealedGlass-Steagall, in many respects it simply formalized, though also


enhanced, a process of reversal that had already taken place. UnderReagan, Bush I and Clinton, measures were put in place which allowedcommercial banks to invest some of their capital in investmentbanking. The proportion increased from 5% in 1987 to 25% in 1996(Mason 2009: 62). Legislation concerning mergers and acquisitions wasalso liberalized, including of financial institutions across nationalboundaries, and banks were allowed to expand into insurance activ-ities. Similar liberalization processes took place in Britain and HongKong, and even to some extent in Germany and Japan. These develop-ments led to a wave of mergers, culminating in the merger of Travelersand Citicorp into Citigroup in 1998, even though this was contrary tothe Glass-Steagall rules still in place. This merger was approved byPresident Clinton’s then Treasury Secretary, Robert Rubin, just a yearbefore he became joint Chief Executive Officer of Citigroup (FCIC2011: 92–3; Mason 2009: 62–3).

In 2000, the Commodity Futures Modernisation act was passed,without any meaningful debate, through Congress. The effect of thisAct was to exempt futures and derivatives from any meaningful regula-tion. This applied particularly to energy futures, reflecting theinfluence of Enron on the passage of the Act, just one year before itcollapsed in the wake of massive corporate fraud. As Mason (2009: 58)contends, the effect of these two acts was to enhance the developmentof four things that were central to the financial crisis. First, they dereg-ulated investment banking. Second, they expanded sub-prime mort-gage lending. Third, they expanded the derivatives market, and fourth,they facilitated the growing merger between banking and insurance.We now turn our attention to these, first looking at investmentbanking and derivatives.

Investment banking and derivatives

Liberalization of financial services pre-dates the actions outlined above,and can be traced back to a number of developments after 1945.Briefly, in the post-war period the US ran balance of payments deficitsto stimulate the international economy with dollars. This period sawthe expansion of trade and production, and a growing international-ization of capital as multinational companies invested in a variety ofcountries. The very success of this so-called golden age (Marglin andSchor 1992) facilitated not only the internationalization of production,but the internationalization of finance, including offshore banking andthe Eurodollar market. This in turn stimulated financial accumulation,


which increasingly by-passed the regulations that were essential to thefinancial repression of the neo-Keynesian era. At the same time, theUS-led system led to the recovery and rise of competitors, whichundermined US hegemony. Financial expansion soared in the contextof the breakdown of Bretton Woods and the shift from a fixedexchange rate system, with for instance all manner of hedge fundsdeveloping in response to the uncertainties caused by trading in fluctu-ating currency values. But these very same funds became a source ofinstability as they were also used to speculate against the price ofcertain commodities and currencies. The 1970s also saw the furtherstimulation of the market in international dollars, as oil producersplaced their increased wealth in various financial institutions whichthen lent this money to Latin America in particular. From 1979, the USresponded to the inflationary crisis by massively increasing interestrates, which led to recession and unemployment in the developedworld, and unsustainable debt in the developing world (Kiely 2005:ch.3). In this context of floating exchange rates, financial marketsexpanded enormously, a process reinforced and extended further by the growing liberalization of financial services across different countries.

Thus, the market for foreign exchange expanded enormously, from$70 billion a day in 1980 to $500 billion a day in 1988 and up to asmuch as $3.2 trillion a day in 2007 (Mason 2009: 65). While the devel-opment of derivatives made sense in the context of floating exchangerates, this unprecedented expansion was clearly not simply designedfor traders or producers to hedge against unexpected fluctuations incurrency prices. Instead, the expansion reflected the fact that the deriv-atives market had itself become a source of speculation, as traders sold,swapped or gambled on a future price of a commodity (or a derivativelinked to a commodity). This wider derivatives market involved the useof futures and options. Futures were where a party agreed to buy some-thing in the future at a price fixed in the present, and these were takenon by traders hoping to sell something on at a higher price somewheredown the line. An option is similar but in this case, a party agrees onan option to buy. Finally, a swap is where a party agrees to swap acommodity, bond, stock or currency at a set price for a set time.Though some of these transactions take place through exchanges, mostnotably oil, most are over the counter, between buyer and seller. Theglobal derivatives market has thus clearly moved way beyond foreignexchange markets, and it reached $596 trillion by 2007, compared toworld GDP of $65 trillion (Mason 2009: 65–6).


These developments alone only go so far in explaining the crash of2007–08, and to move to the specifics of that we need to understandwhat happened in the period after 2000–01. The 1990s saw a boom inhi-tech investments, and NASDAQ, the main stock exchange for hi-tech industries reached a peak of 5048 in March 2000. By October2002, it had lost 78% of its value, the dot.com bubble had come to anabrupt end, and many internet firms went bankrupt without everbecoming profitable (see Chapter 4). At the same time, corporate fraudwas exposed through the collapse of Enron, and a whole series of scan-dals were uncovered. Particularly significant was the common invest-ment bank practice of giving conflicting information to parties in sharetransactions, telling clients one thing and divisions of their owninvestment bank quite another. This was made possible by the fact thatinvestment banks could act as intermediaries for both buyers andsellers of shares, and in 2003, the Securities and Exchange Commissionissued $1.4 billion of fines and compensation orders to ten Wall Streetbanks for misleading investors (Mason 2009: 73). This crisis spreadacross the economy as a whole and both Standard and Poor’s and theDow Jones Index saw sharp falls in the early 2000s.

However, two factors shifted attention away from corporate scandalsfor a while. First, monetary policy was eased and interest rates cut,which helped to fuel a new investment bubble. This is addressed inmore detail below. Second, and more relevant to our immediatepurpose, the banking system developed new methods that effectivelyevaded any regulations that might restrict them. In particular, bankshave capital reserve requirements, as agreed at Basel II, a treaty signedin 2004 and designed to set international standards for banks; in effectbanks were supposed to hold 4% of their capital in case of economicdownturns. While this might be a useful safety tool for the system as awhole, for each individual bank it is a cause for regret because it is idlecapital, or capital that is not being used to make a profit. What banksdid was find a way to evade this system of capital requirements, so thatthey could borrow short (at low interest rates) and lend long (at higherinterest rates), but under this shadow banking system “they were doingit with no depositors, no shareholders and no capital cushion to fallback on. They were pure intermediaries.” (Mason 2009: 78) In order todo this, banks created two kinds of front companies that were off theofficial balance sheet: conduits and structured investment vehicles.

Conduits were set up by banks in tax havens, and they did not have to declare these on annual accounts unless they were deemed tobe significant by regulators and most were not (Palan et al 2009;


Shaxson 2012). Banks insured themselves for part of their exposure toconduits, with AIG taking much of this on, and Credit RatingsAgencies declared these safe investments. Structured investment vehi-cles (SIVs) had no back up at all, and were shrouded in secrecy.Citigroup held 25% of the market for all SIVs, and Centauri, its biggestSIV, lent out $21 billion by the time of the outbreak of the crisis, butthere was no mention at all of this SIV in Citigroup’s 2006 annualreport (Mason 2009: 80). With few exceptions (see Tett 2010), theshadow banking system was ignored in annual reports and by mostjournalists, but it was “as central to the official banking system asEnron’s secret companies had been.” (Mason 2009: 80) Structuredinvestment vehicles thus in effect “allowed banks to increase theirborrowing without breaching minimum capital requirements.”(Thompson 2010: 76) In effect the shadow banking system took on theform of an elaborate global Ponzi scheme whereby money was effec-tively being transferred from one source on to another to give the illu-sion of continually expanding wealth and indeed the supposed end ofboom-bust cycles1 (see Minsky 1982: 36; Kindleberger 2000: ch.5). AsMason (2009: 80) suggests, “It could only work as long as every pieceof paper on sale could find a buyer. It collapsed because certain piecesof paper that had become central to the profitability of the systemsuddenly became unsellable.”

To understand why certain pieces of paper became unsellable wenow turn our attention to securitization and the US sub-prime mort-gage market.

Securitization and the sub-prime mortgage market

On the face of it, one of the puzzling issues about the financial crisiswas how defaults by some low income mortgage holders in the US ledto a credit crunch which brought the financial system to its knees. To do this, we need to link the low income mortgage market to thephenomenon of securitization.

In response to the economic downturn of 2000–01, exacerbated bythe uncertainty around the terrorist attacks in September 2001, the USFederal Reserve successfully boosted a recovery by cutting interest rates.In the first 8 months of 2001 they were cut from 6.5% to 3.5%, andafter September 2001, they eventually fell to just 1%, lower than therate of inflation (Mason 2009: 84). At the same time, money poured infrom surpluses generated in East Asia and so there was a great deal ofcheap money looking for profitable investment (see the next section fora detailed discussion). This outlet was to be housing, and in particular


the market for mortgages for low income families, which in turn helpedto keep the whole housing market booming, at least for a time.

But before we examine the sub-prime mortgage market, we also needto examine some further practices of financial institutions around thistime. A few years before, in 1997, JP Morgan launched BISTRO, whichstood for broad index secured trust offering (see Tett 2010: 59–60). Ineffect, this was what was later called a collateralized debt obligation, inwhich JP Morgan took a bundle of loans worth $10 billion, set up afront or arm’s length company, and swapped the risk/insurance onthese loans (which were valued at $700 million) with that company. Inother words, they swapped the risk of default with that front company– this was a Credit Default Swap (CDS). The debt of $10 billion was notan actual debt, but rather a debt that might be incurred in the future –it was a derivative. JP Morgan then sold off the front company, inchunks to investors, and this in effect was a collateralized debt obliga-tion or CDO. What this meant was that JP Morgan got $10 billion ofrisk off their books at a cost of only $700 million, and so it was not sur-prising that other investment banks followed. This bundling of riskinto chunks which were then sold off to investors was securitization(see Tett 2010: 51–4).

However, for this to work there needed to be a new supply of high riskloans, and it was at this point that the sub-prime mortgage marketentered the picture. Sub-prime lending had taken place on a relativelysmall scale in the 1980s and 1990s, but it was in the 2000s that the sub-prime boom really took off. From 2001 to 2005, sub-prime mortgagesgrew from 7 to 20% of the total US mortgage market, and Alt-A loansfrom 2.5% to 12% (Thompson 2010: 74). Sub-prime mortgages in placeslike Detroit and Baltimore were high interest as the loans were riskier(though initial rates might have been lower), they were generally vari-able rates, and had lots of small-print such as obligatory renewal withthe same mortgage firm, often with an additional fee. Detroit’s citycouncil attempted to restrict sub-prime lending in 2002 but withoutsuccess, and though already by 2004, 8% of sub-prime homes had beenseized after default, the sub-prime boom persisted from 2004–06.

What happened in the boom years, then, was quite simple.Mortgages were packaged together with other debts, or securitized, intoa CDO. In the United States, approximately $6 trillion of the $10 tril-lion owed in outstanding mortgages had been packaged into MortgageBacked Securities, and the issuing of CDOs rose by almost 10% in 2006to $1.2 trillion (Elliot and Atkinson 2009: 204). In 2001, sub-prime andAlt-A mortgages made up 9% of the new mortgages that were secur-


itized; by 2006, this figure had risen to 40% (Thompson 2010: 74).Banks then bought insurance on the CDOs, thus (in theory) averagingout the securitized risks, and moving them off the company’s balancesheet. With the averaging out, and backed by some complicated (andultimately spurious or at least inappropriately used) mathematical for-mulae for spreading risk (Black and Scholes 1973; Merton 1973; Li 2000), Credit Rating Agencies generally gave their approval. TheCDOs were then broken into chunks and sold on, and CDO buyers hada ‘guaranteed’ return. The value of Asset Backed Securities (of whichMortgage Backed Securities were one type) soared from a few billion inthe late 1990s to $2 trillion in 2007, and CDS’ grew from zero to $58 trillion in 2008, while the profits of investment banks increasedfrom $9.5 billion in 2002 to $30 billion in 2006 (Mason 2009: 94).Mortgage lenders had little interest in repayment as they sold the debton the mortgages to willing purchasers. This practice could continue solong as house prices continued to rise, and credit ratings agenciesjoined the herd in giving AAA ratings to all kinds of financial products.One anonymous manager at the Credit Rating Agency Standard andPoor’s bluntly stated that a securitized package “could be structured bycows and we would rate it.” (cited in Thompson 2010: 75)

However, there was an enormous problem. The value of the originaldebts fell as house prices began to fall. This not only affected mortgageholders, but all those financial institutions holding CDOs, who did notknow the value of those that they held (or of those held by other insti-tutions), and indeed those insurance agencies – above all AIG – whohad insured against the risk of default, and were therefore “done in byCDSs on CDOs.” (Lanchester 2010: 60) CDOs usually combined riskierloans (such as sub-prime mortgages) with low risk loans. This divisiongenerally took the form of high risk (but high reward) equity, lowerrisk but still risky mezzanine, and low risk senior tranches. The ideawas that the high risk would be cancelled out by the low risk. Butsecuritization took this process further, as CDOs were combined withother CDOs (CDOs squared) and even CDOs of CDOs of CDOs (CDOscubed) and even synthetic CDOs, which packaged CDSs into a CDO.The idea that risk could be spread in this way was exposed however, aswhen mortgages started to default, it became clear that the valuationsbore no resemblance to reality, thus exposing “an utterly opaque,impenetrable financial system rip for a panic.” (Roubini and Mihm2010: 67) The upside of CDOs (namely that they spread risk) nowbecame the downside, as risk became contagious and no one knewwhich of the CDOs were toxic and which were not.


From housing crash to financial crisis

House prices began to fall as substantial numbers of mortgage holdersdefaulted on their mortgage payments. Before 2007, the foreclosurerate in the US was less than 1% a year. In 2009, 2.2% of all residentialproperties received at least one foreclosure filing, and in the autumn of2010, 1 in every 11 outstanding residential mortgage loans in the USwas at least one payment overdue. Estimates vary, but between 8 and13 million people may have lost their homes in the aftermath of themortgage crisis in the US (FCIC 2011: 402). These defaults were aproduct of re-mortgaging after initial favourable conditions ended and,related to this, an increase in interest rates to stem inflationary pres-sures. Interest rates increased from the second half of 2004, reaching ahigh of 6.25% in June 2006 (Thompson 2010: 99). Inflation had begunto increase for a number of reasons, including growing demand forprimary commodities in China, and speculation on some of these com-modities by financial institutions looking for the next source of lucra-tive investments. Above all, oil prices increased. There were clear signsof stress in the mortgage market, and in Detroit, 8 out of the top 10mortgage brokers had gone out of business by early 2007. Nevertheless,Ben Bernanke argued in May 2007 that “we believe the effect of thetroubles in the subprime sector on the broader housing market willlikely be limited.” (cited in Mason 2009: 97) Throughout 2007, prob-lems began to show up in the shadow banking system and various SIVsand conduits called on their parent companies to meet their losses,hedge funds ran by investment banks announced losses, and the CreditRating Agencies began to downgrade loans. The problem now faced bybanks was that they had held many short-term debts while issuinglonger-term loans, and they had financed these loans by short-termborrowing. However, short-term borrowing was becoming increasinglyscarce, and so “(t)he result of thousands of bankers all making indi-vidual decisions about their own businesses led cumulatively to a sharpcontraction of credit and a collapse in confidence and trust. It created adownward spiral, with assets having to be regularly marked down andvalue destroyed.” (Gamble 2009: 25) The credit crunch effectivelystarted in August 2007 with the decision of BNP Paribas to suspend itssub-prime investment funds, and over the following year, lending costsincreased as banks realized that they had taken on toxic debts and (cor-rectly) suspected every other bank of having done the same thing.Investment banks wrote off billions of dollars of debts, and shares inthese banks fell sharply. In March 2008, Bear Stearns was taken over byJP Morgan. The basic problem then was that “banks did not trust that


other banks were creditworthy because they feared the pervasivegeneral scale of the losses from mortgage backed securities and creditdefault swaps that were to come whilst having no clear idea where theparticularity of those losses would unfold.” (Thompson 2010: 102)George Bush II’s first secretary to the Treasury, Paul O’Neill expressedthe problem nicely:

If you had ten bottles of water and one bottle of poison in it, andyou didn’t know which one, you probably wouldn’t drink any one.(cited in Panitch and Gindin 2012: 311)

In September, the privately run but publicly backed US mortgage agen-cies, Fannie Mae and Freddie Mac, exposed bad debts through thesystem, were bailed out and nationalized by the US government. Thesetwo companies were the main originators of mortgage lending in theUS and in the context of the credit crunch, were the only institutionsstill able to make structured finance loans. If they had gone under,then many banks and mortgage companies would have collapsed withthem. Moreover, Chinese pressure was placed on the US to nationalizethem. This was then followed by the collapse of Lehman, and thetumultuous events that were outlined at the start of this section.

From private debt to sovereign debt crisis

It should be clear then that the financial crisis was one that had itsorigins in the private sector, even if state regulation helped to facilitatefinancial expansion. However, by 2010, particularly in the context ofthe crisis in the Eurozone, a neoliberal discourse re-emerged which sug-gested that in fact the crisis was caused by the expansion of the publicsector (Booth 2009; for critiques see Lapavitsas 2012; Blyth 2013;Mirowski 2013). This has occurred because much of the debt has endedup on the balance sheet of governments which have absorbed thesedebts, “which is why we mistakenly call this a sovereign debt crisiswhen in fact it is a transmuted and well camouflaged bank crisis.”(Blyth 2013: 5) In fact, in the case of the Portugal, Greece and Spain,most of the new debt that built up from the late 1990s was attributableto private debt incurred by households and banks. Indeed, and in con-trast to Germany, in the period from 2000 to 2007 Spain and Irelandboth ran fiscal surpluses (Akyuz 2013: 10–11). Portugal had relativelylow government debt, and while Greece’s public debt was higher, it didnot increase at anything like the rate of household and corporate debtfrom the early 2000s (see Lapavitsas 2013: 296–7). The global recession


of 2008 led to falling tax revenues and increased budget deficits; thus,“(f)iscal imbalances in the periphery of the Eurozone were the resultand not the cause of the crisis” (Lapavitsas 2013: 297). It was at thispoint that austerity measures took over, particularly within theEuropean Union, but also to some extent in the United Kingdom. Thisdid not however aid recovery but actually hindered it as Greece faced aseries of bail-out packages, which had the effect of further contractingthe economy and exacerbating the threat of financial contagion asother European economies went into crisis (Blyth 2013: 62–73). Evenin Britain, which at least did not face the straitjacket of Eurozonemembership, the road to recovery slowed significantly after 2010, andthe upturn from 2013 onwards appeared to be linked to a slowdown inausterity and the start of another housing bubble (Berry 2013).

Summary

The above narrative hints at a number of competing interpretations ofthe crisis. While there are various disputes about specifics, in essencethere are three broad positions (see Gamble 2009). The first is that thecrisis was caused by government regulation which distorted marketsand prices (Booth 2009). The second is that the crisis was caused byinadequate regulation which led to market volatility and allowed the‘animal spirits’ of investors to dominate any broader rationality. Thethird is that the crisis was in part caused by regulation, but this regula-tion actually allowed for the expansion and extension of markets, andspecifically financial markets, with deleterious consequences for society(Konings 2010; Mirowski 2013). The first position usually focuses onthe failings of the Federal Reserve and of Fannie Mae and Freddie Mac.In particular the (correct) point is made that the state has been highlyinterventionist in the housing market in the US, at least since the1930s. Much of the blame in this regard is placed at the door of theCommunity Reinvestment Act of 1977, which started a process of statepressure on financial institutions to expand home ownership amongethnic minorities (Wallison 2009). In the Clinton era (1994–2000) thispressure was intensified and mortgages to low income groupsincreased. Alongside this expansion, sub-prime mortgages were secur-itized, and Fannie Mae and Freddie Mac played a leading role inencouraging this expansion through mortgage purchases in secondarymarkets. However, to place the blame for the crisis on these govern-ment sponsored enterprises is unconvincing. Securitization of sub-prime loans actually started two years before those approved throughthe expansion of the Community Reinvestment Act in 1997, and when


the crisis broke out in 2007, Community Reinvestment Act loansaccounted for only 6% of outstanding sub-prime lending (Duke 2009).Indeed, it was in the Bush II era that the problems really arose, particu-larly under the regulation of the Office of Thrift Supervision whicheffectively ignored concerns over the expansion of the proliferation ofnon-depository financial institutions which were creating most of the sub-prime mortgage and Alt-A mortgages (Schwartz 2010).Interestingly, while sub-prime mortgage issues increased from $65 billion in 1995 to $138 billion in 2000, this increased home-ownership by 3.4 percentage points. Conversely, sub-prime origina-tions rose from $332 billion to $625 billion in 2006, but this producedan increase in home ownership of only 1.6 percentage points, a muchsmaller gain which was in any case completely eroded once fore-closures increased from 2007 (Schwartz 2010; see also Mirowski 2013:314–19). This suggests that the second position is more convincing,particularly when allied to an analysis of what was in effect unregu-lated over the counter trading (see above), which in many respectsoperated as close to the kind of free market envisaged by neoliberalideologues as any other in history. The problem with the second posi-tion however is that its account tends to focus on deregulation as if thestate simply stepped back and failed to regulate international capital-ism. As the discussion in Chapter 3 showed, capitalism and indeedneoliberalism always rests on state regulation, and it is a mistake toconstruct a state-market dichotomy to understand both neoliberalismand financialization. What is true is that the regulation that took placegenerally led to the expansion not the contraction of markets.2

From boom to bust: The international origins of the crisis

After the short-term bail-outs of 2008 and 2009, much of the debateover the crisis and its aftermath, particularly in the countries of theglobal North, was dominated by the need for finding the correct poli-cies necessary to recover from recession. Proposals reflected the debatebetween pro-market neoliberals and regulatory neo-Keynesians on thecauses of the crash outlined above. This debate therefore polarized overwhether there needs to be government austerity and public sectorspending cuts which, proponents argued, would help to keep bothinflation and interest rates low, and would allow for recovery led by acompetitive and efficient private sector unhindered by state regulation(Alesina and Ardagna 2010). On the other side of the divide are thoseinfluenced by Keynes (1973), and who argue that in the context where


all economic actors are simultaneously deleveraging, governmentspending is necessary to avoid contraction and to stimulate demand(Krugman 2013).

However, as was suggested at the end of the previous section, there isa need to turn away from such a narrow focus, and understand theinternational causes of both the boom and the crisis of 2008. Our start-ing point is that the booms of the 1990s and 2000s “were essentiallyfuelled by high rates of consumption in key northern economies”(Kaplinsky and Farooki 2010: 132), and this was facilitated by financialbubbles, particularly in housing and cheap imports. In the period from2000 to 2007, US consumption accounted for over one-third of thegrowth in total global consumption (World Bank 2009). In the contextof stagnant real wages in the US, household and personal savings fell,balance of payments deficits increased, as was discussed in the lastchapter. Thus, in 2008, Chinese gross domestic savings as a percentageof GDP was as high as 49%, compared to 14% for the US, whileChinese household final consumption spending as a percentage ofGDP was 37%, while the US’ was as much as 70% (Kaplinsky andFarooki 2010: 133; and see previous chapter). The current account bal-ances of particular countries tells a similar story, with surplus countrieslike China, Japan and Germany playing central roles as exporters, anddeficit countries like the US, Britain and Spain importers. For the US,imports from China and Hong Kong rose from 5.7% to 15% of total USimports in the period from 1990 to 2005 (Schwartz 2009b: 188), andwere a major factor in accounting for the US’ rising current accountdeficit. While China’s current account surplus increased from 3.4% ofGDP in 1990 to 11% in 2008, the US’ deficit increased from 1.4% to4.7% over the same period (OECD database 2009).

What we saw in the last chapter however was that this situation ofinterdependence was central to the booms of the 1990s and especiallythe 2000s. The US benefited from cheap imports (thus keepinginflation low) and low interest rates, while China benefited from accessto the US (and EU) market for its low cost exports. This was a relativelybenign relationship for some (Dooley et al 2009) but by 2007 it wasclear that the favourable factors that had promoted the boom hadcome to an end. Cheap imports supported domestic consumption inthe US, but at the cost of stagnant incomes for lower skilled workers.For the housing market to continue to grow, it needed a steady supplyof new homeowners, and new entrants tend to be from lower incomegroups. So on the one hand there were cheap imports and rising houseprices, and these were central to the boom. But on the other hand,


there were limits of the expansion of home ownership in the contextof stagnant or even falling real wages, and by 2007, despite (or indeedbecause of) all kinds of questionable attempts to continue to expandthe mortgage market, these limits were reached. Indeed, US home own-ership peaked in 2004, and the sub-prime expansion can be seen as adesperate attempt to keep the mortgage market booming in thisunfavourable context (Schwartz 2009b: 189; JCHS 2008: 33).Meanwhile, China’s growth financed its own development efforts, andheavy investment in infrastructure had the effect of increasing rawmaterial prices, as we have seen. This began to push up inflation, thusundermining a further component of the boom. The response to thiswas for the Federal Reserve to push up interest rates from 2004 throughto 2006, thus further undermining the boom. These rises in turn addedto the pressures on the housing market, as mortgage repaymentsincreased at a time when the market was increasingly exhausted.Finally, as we have seen, these processes, seemingly confined to thehousing market, spilt over into the rest of the economy via securitiza-tion of financial products and falling demand due to the end of theboom.

By the time that the crisis emerged, foreign investors, and specificallyforeign central banks, were central players in the US housing market.Fannie Mae and Freddie Mac’s insolvency in 2008 led to successfulpressure from (among others) China for a state takeover of these agen-cies, and a guarantee that creditors’ assets in the mortgage sector wouldbe met. This was not surprising given that liabilities to foreigners in themortgage sector rose by more than 1,000% between 2002 and 2006,most of this in the period of sub-prime expansion from 2004 to 2005(Thompson 2010: 92). If we break down US debt owed to foreigners inthis period we can see the centrality of the mortgage sector. What wesee is a significant expansion of investment in the mortgage sector, andspecifically in Fannie Mae and Freddie Mac, especially by China. In1994, the value of foreign holdings of US Treasury bonds were almost700% greater than those for agency bonds, but by June 2007, the dif-ferential was only 150% (Thompson 2010: 94). At the same time, withthe rise of the debt of Fannie Mae and Freddie Mac from $2,482 billionin 2000 to $5,772 in 2007, the percentage of debt issued to foreignersincreased from 7.3% in March 2000 to 21.4% by June 2007 (Thompson2010: 93). We thus see a picture of growing mortgage-related debt anda growing proportion of this debt being held by foreigners, and Chinain particular. Even more specifically, as Table 5.1 makes clear, much ofthis debt was officially held and was thus in effect debt to foreign


central banks. The story was slightly different in the case of Europe,where private banks invested heavily in Mortgage Backed Securitiesissues less by Fannie Mae and Freddie Mac and more by private banksthat evaded capital requirement regulations. In the period from 2003to 2007, private European banks increased their holdings of agencyMBS’ (i.e. those issued by Fannie Mae and Freddie Mac) from $200 billion to $300 billion, while their purchases of privately issuedMBS’ increased from $100 billion to $500 billion over the same period(Panitch and Gindin 2012: 309). However, for the Chinese and othercentral banks, MBS’ held by Fannie Mae and Freddie Mac were moreimportant because these same banks believed that in the event ofdefault, the US government would guarantee repayment to creditors.As we have seen, this is precisely what happened in September 2008.

Finally, the breakdown was reflected at the level of world trade,which was so central to the factors that facilitated the boom in the firstplace. In the period from 1994 to 2007, global exports grew at anannual average rate of 7.4% per year, but export growth slowed to3.4% in 2008 and then fell in 2009 by 11.3%. In 2009, the volume oftotal world merchandise trade fell by 13%, and in value terms the fallwas as much as 23%. This was compared to a fall in global GDP of2.1% (UNCTAD 2010: 4; UNCTAD 2011: 2). The growth in world traderecovered from the sharp fall of 2009 and grew by 14% in 2010, butafter this bounce-back from the 2009 collapse, the growth in worldtrade slowed down to 5.3% in 2011 and 1.7% in 2012 (UNCTAD2013b: 4–5). At the same time, global growth in GDP was 3.9% in2010, 2.7% in 2011 and 2.2% in 2012 (UNCTAD 2011: 2; UNCTAD2012: 1–2; UNCTAD 2013b: 1).


Table 5.1 Official holdings of China and Japan of long-term agency debt,billions of dollars

Country China Japan

June 2002 58.6 88June 2003 91.1 102.4June 2004 114.9 99.8June 2005 172 139.7June 2006 253.3 184.2June 2007 376.3 228.1

Source: Adapted from Thompson 2010: 95, with author and publisher permission

Much of the growth that did take place was accounted for by thedeveloping world, and growth in the developed world remained low(see Table 5.3). For the United States, while the Federal Reserve com-mitted $1.2 trillion to containing the crisis (almost half of which wasto European financial institutions), a figure higher than the earnings ofall US banks from 2001 to 2010, unemployment increased from 7 million in 2006 to 14 million by 2009. While this helped to avoid adeep depression, the recovery was limited as firms hoarded their profitsrather than invested, banks were reluctant to lend and consumerspending declined (Panitch and Gindin 2012: 329). In other words, asimultaneous process of deleveraging took place in which the state wasable to soften the blow of a downturn but not restore the boom condi-tions that preceded the crisis. The crisis meant that US federal debtincreased from 32% of GDP in 2001 to 67% of GDP in 2009 (Beausang2012: 72). In contrast, the South as a whole recovered swiftly and farmore substantially, so that the approximately 4 to 5% differential ingrowth between South and North that started in 2002 was maintained.Thus the 2008 annual average growth rates for the global North was0.1% and for the South 6.1%; in 2009 the figures were –3.5% (North)and 2.7% (South); by 2011 the figures were 1.6% compared to 6.2%(IMF 2012: 190). This appeared to strengthen the argument about thedecline of the West and the rise of the South.

The consequences of the crisis: The transformation of theinternational order?

We saw in the last chapter that the rise of the South argument owes agreat deal to the boom years after 1992 up until 2007, or whatSchwartz (2009a) calls the ‘long 1990s’. With the crash of 2008, andslower global growth after this period, we would expect a slowdown ofgrowth in the South as well. To some extent this did happen in 2008and 2009, but recovery was particularly striking in the South from2010 onwards, even if this did not necessarily return Southerneconomies to the levels of growth experienced from 2002 to 2007.What was particularly striking though was that recovery was far greaterin much of the South, as the global North as a whole continued toexperience low or even negative rates of growth. This in turn actuallyenhanced the argument that we are witnessing a global transforma-tion, with both the rise of the South and China in particular, and thedecline of the West and the US in particular. Writing before the onsetof the financial crisis (and alas his death in 2009), Arrighi (2007)


identified a close parallel between the economic downturn of 1873 to1897 and the end of British hegemony and its eventual replacement bythe US, and the 2000s, a new era in which Asia, and specifically China,will become the new hegemonic power and the US will continue itsterminal decline. This section focuses on the specifics that followed thefinancial crisis of September and October 2008 and uses this discussionto attempt to answer this more general question. It does so by focusingon the following issues: (i) the immediate response to the crisis; (ii) thequestion of whether or not the South has decoupled from the North;(iii) South-South trade and capital flows to the South; (iv) the implica-tions for the future of US power.

The immediate response to the financial crisis

After 2008, central banks provided a huge amount of money to banks.From September 2008 to mid-2012, the Federal Reserve injected morethan $2 trillion into the banking system, trebling its total assets, whilethe European Central Bank doubled assets within the Eurozone to 3 trillion Euros. But over the same period, bank lending to the privatesector stagnated in Europe, and fell by 4% in the US (UNCTAD 2012:21). This reflects the limits of monetary policy in the context of ascenario in which banks are deleveraging and not lending. The ideathat austerity will clear the way for a newly invigorated private sectorto stimulate growth in the advanced countries also needs to be situatedwithin this context, for “it was the simultaneous cutting of expendi-ture by the private sector (both households and firms) throughout theworld that caused a slump in global revenues and growth.” (UNCTAD2012: 22; see also Hay 2011). The G20 meeting at Pittsburgh inSeptember 2009 led to an informal agreement that an attempt wouldbe made to deal with global imbalances. Deficit countries wouldsupport private savings and fiscal consolidation, while surplus coun-tries would focus on a domestic source of growth. The latter would alsoprovide an opportunity for the former to export to them and thus dealwith their own deficits.

On the eve of the crisis the current account surplus of developingcountries was $700 billion, with China accounting for just over half ofthat. By the end of 2012, the former figure had declined to almost$300 billion, despite a $130 billion windfall from oil exports in thedeveloping world. Within the developing world, Asia’s surplus hadfallen from $400 billion to $130 billion, while Latin America and sub-Saharan Africa had both moved into deficit. Meanwhile the deficits of the developed world fell from $480 billion in 2008 to less than


$60 billion in 2012 (Akyuz 2013: 33). However this ‘rebalancing’reflects more the fact that some deficit countries have focused on aus-terity which has cut off the potential for growth, particularly amongsome Eurozone countries and in the periphery, rather than a con-sciously co-ordinated international policy. Meanwhile, the mainEurozone exporter, Germany, has continued to export at a very highlevel and so its external surplus has only slightly fallen – from 7.5% ofGDP in 2007 to around 5.5% in 2012 (UNCTAD 2012: 16–17). Thiscompares with China’s reduction from 10% of GDP in 2007 to lessthan 3% in 2011–12 (UNCTAD 2012: 16–17). The contribution ofChina’s net exports to growth has been minimal since 2010, which onthe face of it suggests a change of priorities on the part of theCommunist Party leadership, though as we will see, in practice this hasbeen limited. Moreover, the fiscal stimulus in China has largelyfocused on investment and not consumption, which has had the effectof sustaining the boom, in China and beyond, but at the likely cost ofa severe crash at some point in the future. Total lending by banks andother financial institutions in China was almost 200% of GDP in 2012,up from 125% four years earlier. Not only is the total amount of credittwice as large as China’s economy, credit was growing twice as quicklyas the economy (Observer 2013).

The 2008 crisis had a significantly negative immediate effect on theSouth, through financial contagion, a reversal of capital inflows, and afall in exports as world trade and global income fell in 2009. But by2010, most developing countries had recovered and saw the return ofhigh growth rates, which while not as high as in the boom years, werestill significant. According to The Economist (2012), 28 out of 34 coun-tries in the developed world still had lower per capita income in 2008than they had in 2007, while this was true of only 33 out of 150 devel-oping countries. This is significant because it suggests that the 2007–08crisis was very different from previous crises, such as that of 1929, 1974and 1982. In these crises, the developing world was highly dependenton the developed countries and so they suffered greatly from eachglobal downturn, the ‘Third World’ growing at an annual average rateof somewhere between 0% and 0.1% from 1870 to 1890, and 0.3%from 1929–39 (Bairoch 1993: 7). But in the aftermath of 2007–08, thegrowing convergence identified by those who talked of the BRICs andemerging powers was if anything strengthened. One version of thisargument was that, given continued low growth in the global North, itfalls to the BRICs, and especially China, to become major engines ofgrowth in the international economy. If this is the case, then these


countries would have had to have reduced their dependence on thedeveloped world and thus ‘de-coupled’ from the rich countries. Thenext sub-section examines this argument.

The South and the question of decoupling

While not necessarily incompatible with this account, Kaplinsky andFarooki (2010) are more concerned with the idea that the new emerg-ing powers can provide a stimulus to the rest of the South, providingmarkets for the latter’s goods. While they recognize the limits ofChinese demand (Kaplinsky and Farooki 2010: 137) which, in 2008,was still equivalent to less than one quarter of the total consumptionof the US and the EU combined, they argue that when combined withcontinued high growth and trade surpluses, China’s size is significant.They draw on Kharas’ work for the OECD on the global middle class,which is defined as those with annual incomes of between 10 and 100dollars (PPP adjusted, and based on 2005 prices) a day. Projectingforward from middle class expenditure in 2009 through to 2030,Kharas (2010: 28) suggests that there will be some significant changesin the composition of this global middle class. North America’s propor-tion will decline from 26% to 10%, Europe’s from 38% to 20%, LatinAmerica’s will fall from 7% to 6%, sub-Saharan Africa’s proportion willremain static at 1% and the Middle East and North Africa’s will remainstatic at 4% (Kharas 2010: 28).

Interestingly, these figures read less like a transformation of thewhole of the global South, and more like the continued rise of one itsregions, Pacific Asia, whose projected proportion will increase from 23 to 59% (Kharas 2010: 28). As we will see in a moment, this is com-patible with Kaplinsky and Farooki’s broader argument, which is other-wise more questionable. Their basic claim is that given their size,China and India can play a leading role as engines of growth for theSouth in the international order. Both countries still have low percapita incomes, and so their own development over the coming yearswill in some respects complement that of primary goods exports fromthe South. Incomes might be rising but given the low incomes that stillexist, demand for food is likely to persist, and this will involve less rig-orous standards than those demanded by the richer Northern coun-tries. Moreover, continued rising incomes will lead to increaseddemand for meat which in turn fuels greater demand for grain foranimal feed. Furthermore, Chinese and Indian industrialization willcontinue to be resource intensive, thus stimulating demand forprimary commodities (Kaplinsky and Farooki 2010: 142–6). There is


certainly evidence to support these claims. Kaplinsky and Farooki(2010: 145) demonstrate the correlation between high commodityprices and China’s growing share of consumption of certain commod-ities as outlined in Table 5.2 below. Given the sharp increases (andfalls) in prices, this cannot be explained solely by demand from China,and financial speculation in these markets is a very significant factor(UNCTAD 2011: ch.5). Nonetheless, demand from China is important,and it accounted for a high proportion of total global consumptiongrowth from 2002 to 2012, and thus an increasing share of total con-sumption of particular commodities (Table 5.2) and higher prices forthose commodities (Table 5.3).

Commodity prices increased sharply in most sectors, and even aftertheir fall in 2008 and 2009, recovered sharply by 2010 (see Table 5.3),though they partially fell back again from 2012 onwards, as discussedin Chapter 8.

Kaplinsky and Farooki (2010: 149) do not see this as an unambigu-ously positive development, nor a story reflecting the unambiguousrise of the global South. Rather, they argue that this generates someopportunities for income generation from exports, reinforced by thefact that those at lower income levels are less concerned about stan-dards. But at the same time, on the downside many developing


Table 5.2 China’s contribution to global consumption growth of particular commodities, 2002–12, measured as a percentage

Commodity Aluminium Copper Nickel Cotton Corn Meat, Soybeansswine

China’s total 81.1 113.4 132.3 74.9 33.7 69.8 59.6contribution to global consumption growth 2002–2012China’s share 16.2 18.2 7.1 29.7 20.1 46.5 18.5 of global consumption 2002China’s share 44.8 43.3 47.7 33.6 23.9 50 29.5of global consumption 2012

Source: Adapted from UNCTAD 2013b: 54

countries will focus on lower value production, with little incentive toupgrade to higher value activity. This makes Kaplinsky and Farooki’sanalysis compatible with Kharas’ data projections about the globalmiddle class (Table 5.4), and the fact that we do not see any substantialproportionate growth in the middle class across the South as a whole,only in Pacific Asia.

However, there is a further issue in their analysis, which Kaplinskyand Farooki (2010: 139) acknowledge but then rather casually dismiss.For they argue that:

Nothing guarantees sustained growth in the Asian Drivereconomies. The fall in consumption in the northern deficiteconomies may be so large that it undermines export-orientedgrowth in China and India, with a potential combination of neg-ative multiplier effects on economic activity and political disruptionas unemployment grows…Nevertheless, it is the authors’ judgmentthat just as growth is likely to be reduced or to stagnate in thenorthern economies in the future, so growth in Asia in general andin China and India in particular, is likely to be sustained.

They go on to conclude that:

Even without stagnation and falling growth rates in the North, thegrowth rates of the past two decades in China and India are likely tolead to an outcome in which, by virtue of their size, these countriesincreasingly come to dominate the global economy in this century.However, there are persuasive reasons to believe that key largenorthern economies (notably the United States, the UnitedKingdom and Spain) will reduce imports as they rebalance their


Table 5.3 Primary commodity prices, measured by percentage changeover previous year

Commodity Aluminium Zinc Lead Iron Ore Copper

2005 10.6 31.9 10.2 No data 28.42006 35.4 137.0 32.0 No data 82.72007 2.7 –1.0 100.2 77.4 5.92008 –2.5 –42.2 –19.0 26.8 –2.32009 –35.3 –11.7 –17.7 –48.7 –26.32010 30.5 30.5 25.0 82.4 47.0


global orientation, given their large structural trade and fiscaldeficits. This will further accentuate the dominance of China, Indiaand other low income economies in the growth of global demand inthe coming decades. (Kaplinsky and Farooki 2010: 149)

The first of these two quotations recognizes the importance of export-led growth to the developed world, although it then ignores this factor.The second quote suggests that import growth will decline in thedeveloped countries, but this will actually enhance the dominance ofChina and other Southern economies in the international order. Inother words, the South has in effect ‘de-coupled’ from dependence onthe North and can promote growth independently of the latter. Thedecoupling thesis rests on the following broad claims:

First, the recent fast recovery in many large emerging markets hasreflected the strength and sustainability of their national balancesheets. Second, even if the advance of the technological frontierslows in developed countries, developing countries still have a widescope for technological learning and catching up, given the existing“convergence gap” ... Third, the structural dependence of develop-ing countries on exports to developed countries ... may have been ...overstated. (Haddad and Hoekman 2010: 74–5).

In other words, decoupling implies that the global South has reducedits dependence on the North in terms of trade, capital and technology.In the wake of the boom and the crisis, there has been a vigorousdebate among economists about decoupling, with much of it restingon growth rates and the synchronicity or otherwise of business cyclesin the global North and South (Kose et al 2008; Walti 2009; Rose2009). On the one side is the claim that “business cycles in emergingmarkets have gradually decoupled from those in advanced economies,as trade diversification, commodity strength and, particularly, theemergence of China took over the G7 as the main global factor behindoutput fluctuations in the emerging world” (Yeyati and Williams 2012:17), while others suggest that “there has been no decoupling in thecyclical component of developing country growth” even if there hasbeen “a decoupling in underlying trend rates of growth” (Brahmbhattand Pereira da Silva 2009: 2).

The implications for understanding a transformation of the interna-tional order are great, for if decoupling has occurred then we aremoving to a situation in which “the rest of the world pulls the U.S.


forward rather than the opposite.” (Bergsten 2008) We need toexamine this argument in greater depth, first by looking again at thequestion of South-South trade and capital flows to the South, and thenit examines the question of US power and the nature of the US’ rela-tionship with the rest of the world, specifically after the crisis and withChina in particular.

South-South trade and capital flows to the South

The immediate impact of the crisis on the South was a reversal ofcapital flows, falling commodity prices and falling stocks, and as wehave seen, falling growth rates. But as we have also seen, recovery inthe South was fairly rapid. The reason for such a recovery was in partthe stimulus packages in the South, and especially in East Asia. Thefiscal package of the leading fifteen Asian economies amounted to7.5% of GDP in 2008, almost three times the average level in G7 coun-tries (ESCAP 2009). China’s package of $600 billion constituted 13% ofits GDP for that year. China’s stimulus package and investment boomhelped to reverse the decline in commodity prices, as property andinfrastructure investment has a higher commodity import content(UNCTAD 2012: 12–13). In 2010, measured in terms of value, com-modity imports were 75% higher than they were in 2007, compared tojust 30% for manufacturing imports (Akyuz 2012: 36–7, 32). This hadthe effect of changing trade patterns for some countries in the South.In 2007, Brazilian exports to the European Union were about fourtimes the level of exports to China, but by 2012 the levels were moreor less the same, while in 2007 its exports to the US were about twicethe level of its exports to China, but by 2012 exports to the US wereabout half the level of those to the US. Over the same period Brazil’sproportion of export earnings derived from primary commoditiesincreased from 50.1% in 2007 to 63.6% in 2012 (Akyuz 2012: 32). Aswe saw in the last chapter, commodity prices generally increasedsharply from 2003 to the summer of 2008, with the primary commod-ity price index increasing three-fold in this period (Akyuz 2013: 28).While this was followed by a big fall in the second half of 2008, thiswas then followed by a recovery, with prices steadily increasing from2009 through to early 2011, after which prices fell and increased againat relatively smaller rates. By early 2013, prices were around 15% lowerthan the peak of mid 2008 (Akyuz 2013: 28). This meant that in effectthe commodity price boom of 2003 to 2008 was over, and indeed therehad been something of a fall in prices, but this had not translated intoa slump in prices, and indeed prices remained high. This then was onereason why parts of the South recovered so quickly after 2008.


A further reason for recovery in the South was a new surge of capitalflows, which in turn helped to facilitate the expansionary policies out-lined above. A major reason for this was the response of the developedworld to the crisis, and the expansion of liquidity there through quan-titative easing. This policy was designed to bail out financial institu-tions, and maintain or increase asset prices and keep interest rates low,and so maintain or stimulate demand. The effect however has not beento stimulate lending to private companies or individuals who are allsimultaneously deleveraging. What has instead occurred is a newround of capital flows to the South attracted by higher interest rates,and financial speculation, which in turn has helped to facilitate con-tinued increases in commodity prices. Table 5.4 shows that net privateflows into the South peaked in 2007, then fell sharply in 2008, recov-ered slowly in 2009 and substantially in 2010, though not back to the2007 level. However, foreign direct investment inflows were weak, andhad fallen from a peak of $509 billion in 2008 to $350 billion by 2010.At the same time, a more mobile (and thus volatile) portfolio invest-ment has increased enormously since the outbreak of the crisis, from$97 billion inflows in 2007, to minus $86 billion in 2008, back up to$153 billion in 2009 and $199 billion in 2010 (Akyuz 2011a: 10).

These capital flows obviously have an expansionary effect in coun-tries in need of capital and economic growth, but there are a numberof further questions that need to be addressed.3 First, given that mostof the inflows still come from the global North, we must again call intoquestion the de-coupling thesis. Second, as we have seen in our discus-sion of financial crises prior to 2007–08, such as the Asian crisis of1997–98, portfolio investment can easily be withdrawn. Third, it canfacilitate short-term economic growth but at the cost of productiveinvestment – the ‘production substitution’ that we referred to whendiscussing Brazil in Chapter 3. This appears to be what has happened,in slightly different forms, in the recovery from 2010 onwards. That is,


Table 5.4 Capital flows to the South pre- and post-financial crisis, billionsof dollars

Year 2005 2007 2008 2009 2010

Net private inflows 642 1285 594 602 908Net private outflows –497 –825 –772 –527 –500Net private flows 145 460 –178 75 408

Source: Adapted from Akyuz 2011a: 10, with author permission

large capital inflows beyond current account requirements or existingsurpluses created asset bubbles. Equity prices soared in Brazil, China,India and Turkey, and there were credit and property booms, fuelled inpart by fiscal stimuli programmes (see below) and in part by foreigninvestment. In China the share of foreign investment in real estateincreased from 10% in 2006 to 23% by 2010 (Akyuz 2012: 28).Increased current account deficits in Brazil, India and Turkey werecovered by net capital inflows. ‘State capitalist’ efforts have been madeto diversify these economies but as we saw in Chapter 3 they have metwith only limited success.

What should be clear from this discussion then is that the South hasnot de-coupled, and indeed has boomed since the 2008 crisis in partbecause of capital flows, from the West. We now need to discuss theimplications this has for understanding US power in the current inter-national order.

The implications for the future of US power

So far then we have argued that the ‘rise of the South’ should betreated with some scepticism because of favourable circumstances inthe international economy from the early 1990s, but especially from2002 to 2007. These circumstances refer to capital flows to the South,high commodity prices and the centrality of China to wider growthprospects. While on the face of it, the aftermath of the financial crisissuggests that the South can continue to rise, the above analysis hasidentified reasons why this should be treated with some scepticism. Foras Akyuz (2012: 7) argues, for deficit countries in the South, “growthdepends on continued and, in fact, increased flows of capital, but theconditions driving the recent surge in capital inflows cannot beexpected to last forever.” (Akyuz 2012: 7). Meanwhile, “the majorgrowth pole in the South, China, cannot keep creating investmentbubbles in order to fill the demand gap triggered by the slowdown ofits exports to AEs (Advanced Countries – R.K.), as it has done since theoutbreak of the crisis.” (Akyuz 2012: 7)

What then of the other question, namely that of US decline? Thealleged decline of the US should also be situated within this widerinternational context. Here our focus is on US decline relative to otherstates, rather than absolute decline, an issue addressed in the nextchapter. As we have seen, continued US trade deficits are considered tobe perhaps the central manifestation of US decline. These deficitsmeant that by the end of 2007, the US had a net foreign debt of about$2.5 trillion, an amount equivalent to about one-fifth of GDP


(Schwartz 2009a: 24). The US accumulated this debt by consumingmore than it produced in almost every year from 1982 to 2007, butparticularly in the period from 2004 to 2007 (Schwartz 2009a: 24).However, there is a paradox here, for “even though the United Stateshas a considerable net debt to the rest of the world, the world contin-ues to pay its US creditors more money than US debtors pay theirglobal creditors. US overseas investment consistently yielded moreincome than did foreign investments in the United States. In 2007, ifwe remove six zeros, this is rather like a private investor who owed$20,082 while holding investments worth only $17,640 somehowmanaging to pay out only $726 on her debts while earning $818 fromher own investments, thus receiving a net income of $92.” (Schwartz2009a: 25) According to Gourinchas and Rey (2005: 10–11), from 1960to 2001 US overseas assets earned an annualized rate of return of 5.6%,compared to foreigners earning 3.6% on US assets. Crucially, they alsoargue that the gap expanded after 1973, with US rates reaching 6.8%while foreigners earned an annual average of 3.5%. Thus, despitegrowing deficits from 2002 to 2007, US net foreign debt as a percentageof GDP remained at 20% (Schwartz 2009a: 26).

What then accounts for this paradox? As we have seen, Arrighi drawsa parallel between US decline in the current period and British declinefrom the late nineteenth century. Britain’s share of world tradedeclined from 30% in the mid-nineteenth century to 14.1% on the eveof the First World War, while over the same period the US shareincreased from 8.8% to 11.1% and Germany increased its share from9.7% to 12.2% (Lake 1988: 31). From 1870 to 1913, US GDP grew by anannual average of 4.9% and Germany’s by 3.9%, while Britain grew byan annual average of 2.6% a year. US labour productivity grew by anannual average of 2% a year from 1890 to 1913, while Britain’s grew byjust 0.1% (Schwartz 2009a: 122; Maddison 2003).

As well as on-going trade deficits, US shares of world trade and worldproduction have declined from around 50% to 25% from 1945 to 2005(Schwartz 2009a: 117–27), but there is a significant difference betweennineteenth century Britain and the US in the twenty first century, andthis goes some way to explaining why US overseas earnings are greaterthan overseas earnings in the US. For while British industry wasincreasingly out-competed by German and especially US industry, USfirms continue to be highly competitive in the world economy.However, in contrast to British industry around 1900, this has increas-ingly involved a global strategy in which lower value activity withincommodity chains is increasingly out-sourced abroad, either through


direct foreign investment or by subcontracting agreements with localsuppliers (Dicken 2011). This includes sectors such as textiles andclothing, food and beverages and leather goods. At the same time, theUS has continued to concentrate on higher value activity, such asmachinery, electrical and optical equipment and transport equipment,all expanded significantly from the 1990s onwards (Schwartz 2009a:123–4). In 2007, the value of overseas sales by US MNCs was $5.5 tril-lion, around 5 times greater than the value of US exports, and USMNCs overseas operations contributed around 30% of total US profitsin the decade from 2000 onwards, compared to 20% in the 1980s(Panitch and Gindin 2012: 430, n.66, 292).

US productivity in manufacturing grew substantially above theOECD average from 1991 to 2006. In the period from 1980 to 2001,the US’ share of high-tech production remained constant at around32%, while Germany’s share halved, and Japan’s share fell by one third(Panitch and Gindin 2012: 276). From 1983 to 2007, Arrighi’s period ofalleged US decline, the annual average growth rate for the US economywas 3.5%, higher than any other developed country in the same period(Panitch and Gindin 2012: 291). The share of manufacturing in theSouth increased substantially over this period, but as we have seen, thistended to be in lower value added activities, even when it includedcomponents in higher-tech sectors. The concentration of US firms inthese dynamic sectors (high technology manufacturing and the highend of tradable services) is one reason why US overseas activitiestended to be relatively lucrative.

But we also need to explain the converse scenario, namely whyforeign investment in the US is not so lucrative. It has been claimedthat in fact, for foreign direct investment at least, the figures are dis-torted by the transfer pricing practices of foreign firms operating inthe US, and that they claim profits overseas to avoid higher rates ofcorporation tax in the US (Gros 2006). However, as Schwartz (2009a:128–9) points out, higher profits have been a constant feature of USoverseas investment since 1960, irrespective of changes in US taxationlaw, and there is no discernible difference between foreign firms withhigher levels of intra-firm imports (where transfer pricing opportun-ities are greater) than those with lower levels (Mataloni 2000). Perhapsmost tellingly, those foreign firms operating with a larger marketshare in the US – that is those firms more like US firms operating over-seas – had higher rates of return due to their larger market share(Mataloni 2000). But these firms were a minority in terms of foreigndirect investment.


But perhaps more important than foreign direct investment are theother types of foreign investment in the US. US investment to the restof the world in 2007 was concentrated more in foreign direct invest-ment and equities (61.4% combined), rather than less lucrative port-folio debt (Schwartz 2009a: 39). For the rest of the world, as should beclear from some of the previous discussion, the position was reversed.Foreign portfolio debt holdings constituted 38.1% of foreign invest-ment into the US and almost half of this (16% of the total of foreigninvestment into the US) was held by central banks. This again confirmsthe argument above that the US earns more on its foreign investmentabroad than the rest earns on foreign investment into the US. Whatshould be clear by now is that much of this was passive and not par-ticularly lucrative, such as Treasury bonds and bonds linked to thehousing market. While the latter were more lucrative than the former,they were also high risk and as we have seen, turned toxic in theperiod from 2007 to 2008. Even when we consider the equities andwider bond markets, in a study of 52 equities markets and 47 bondmarkets, the US was found to have the lowest rate of return amongequities markets and was 44th out of 47 for bond market returns (Forbes2008).

But for China, purchases of US debt were necessary to maintain theexport boom. However with the contraction in demand and fall inworld trade, China experienced a severe fall in exports and rise inunemployment in late 2008 and early 2009. In January 2009 forexample, following a third consecutive monthly fall in exports, a yearon year monthly decline of 17.5% was recorded, and in this period anestimated 20 million migrant workers in the export sector lost theirjobs (Brannigan 2009). In 2002, export growth accounted for 29.4% ofGDP; in 2003, 26.8%; and in 2004, 28.4%. However by 2008 the figurewas down to 8.6% and in 2009 the figure stood at minus 10.4% (Akyuz2012: 27). By 2010 the figure was back up to 27.6% but this was in partreflected the previous year’s contraction, and by 2011 the figure was12.4% (Akyuz 2012: 27). This slowdown in export led growth was amajor problem, but it also presented an opportunity for China to moveaway from dollar denominated debt purchases and export dependence.In other words, the crisis could have been regarded as a shift awayfrom Dooley et al’s (2009) Bretton Woods 2, and generate a genuinedecoupling from Western consumer markets, in the process rebalan-cing the Chinese economy so that it focused far more on the domesticmarket. There is evidence to support this scenario. As we have seen theyuan was effectively re-valued upwards in the period from 2002


onwards, though this of course was at the cost of the value of Chinesedollar denominated assets. In 2007, Chinese premier Wen Jiabaodeclared that China’s development strategy was “unstable, unbalanced,uncoordinated and unsustainable” (cited in Hung 2009: 19) In 2005,the Chinese central government increased procurement prices for agri-cultural goods and lowered taxes on agriculture, which had the effectof slowing rural-urban migration and thus tightening the labourmarket. This led to labour shortages and wage increases in manufactur-ing, and a retail boom (Hung 2013: 1356; Zhan and Huang 2013).Thus, when exports fell in response to the financial crash and fallingconsumer demand in the US and EU, the government’s response of amassive fiscal stimulus package appeared to enhance the shift towardsthe domestic market and away from dependence on export markets inthe West. As we have seen, this fiscal stimulus also served to restoregrowth in other parts of the South, as investment in infrastructurerelied on primary commodity imports.

However, this boom for much of the South betrays the limits of thestimulus package. Only 20% of the package was actually allocated tosocial spending, and most of the rest went into investment in fixedassets, some of which already suffered from over-capacity (Caijing2009). By 2009, China’s fixed asset investment rate had reached 45% ofGDP, and by 2010 the figure was 48.2%, compared to peaks in Taiwanand South Korea of 25 to 35% in the 1970s (Hung 2011: 221; Akyuz2012: 23). As much as 80% of the growth in 2009 was due to invest-ment (Akyuz 2012: 36). This is simply not sustainable for as Akyuz(2013: 41) argues China “cannot keep on pushing investment to fillthe deflationary gap created by the slowdown in exports in conditionsof exceptionally low shares of wages and household income in GDP.”(Akyuz 2013: 41). Moreover, the government continued to focus onexport promotion, with rebates on tax exports and continued efforts tohold down the value of the yuan. This has involved not only exportsto the US, but to Europe too and China’s trade surplus was higher withthe latter than the former by 2008 (Schwartz 2009a: 168). However,import growth in the developed world has been slow, reaching just 1%year on year growth in 2012 (Akyuz 2013: 31). Most tellingly, theChinese central bank increased its purchase of US treasury bonds, from$618 billion in September 2008 to $1,160 billion in December 2010 (Hung 2011: 234), and although increased purchases slowed down slightly in 2012, by September 2013 the figure had reached$1,293 billion (US Treasury 2013). In other words, in the five yearssince the outbreak of the financial crisis, Chinese purchases have


soared. Even as the crisis was unfolding, when dollar assets were beingsold rapidly by private foreign creditors, official purchases attempted toplug the gap and protect the value of the dollar. There was a rapidincrease in the proportion of US foreign debt held by official sources,from 16.6% in the six month period from January to June 2007 to35.4% in the same period one year later. This reflected a massivedilemma for China in its attempt to preserve the period of interdepen-dence that facilitated the boom before 2007, for as Thompson (2010:105–6) states:

The size of the losses of the large American financial corporations inthe second half of 2007 then created a whole new and intractabledilemma. If China, with other saving-rich states, did not injectcapital into the American financial sector, the financial side of theeconomic relationship between the United States and East Asiawould begin to unravel as dollar losses escalated. Yet if China actedto try to save the American financial sector, unless shares forfinancial corporations recovered reasonably swiftly, it would facenew investment losses.

On a global scale, while it is true that the dollar’s share of allocatedforeign exchange holdings fell from 66.9% in 2005 to 61% by 2011,this was still higher than the figure in 1990, which was 50.6% (Hung2013: 1343). In the period from March 2007 to March 2014, totalforeign holdings of US Treasury securities rose from around $2 trillionto almost $6 trillion (Hung 2014: 156). In other words, in the period inwhich China has emerged as a supposed hegemonic challenger to theUS, the international role of the dollar has intensified, notwithstand-ing some partial reversal since the outbreak of the financial crisis(Hung 2013: 1343).


Table 5.5 Private and official net purchases of US long-term securities byforeigners, 2007–08, billions of dollars

Private Official Total Proportionwhich wasofficial

Jan to June 2007 555.5 110.3 665.8 16.6%July to December 2007 223.9 78.1 302 25.9%January to June 2008 328.8 180.5 509.3 35.4%

Source: Adapted from Thompson 2010: 107, with author and publisher permission

Post-crisis purchases of US Treasuries by China must also be tracedback to domestic political realities within the country. We saw inChapter 3 that China has not only a national developmental state, buta series of local developmental states competing with each other toattract investment. The most successful of these localities are theeastern coastal provinces that are locked into an export regime andwhose supporters among the senior ranks of the Chinese CommunistParty have “established a symbiotic relation with the American rulingclass, which have striven to maintain…domestic hegemony by secur-ing the living standards of US citizens, as consumers and debtors to theworld.” (Hung 2011: 24–5; also Schwartz 2009a: 168–73; Panitch andGindin 2012: 300) With some exceptions such as the period after 2005,wages have remained low due to rapid rural-urban migration. In thecontext of both an ageing population and labour unrest, there areserious questions to be asked about the sustainability of this scenario.But what should be clear is that post-crisis, it is not a straightforwardstory of China’s (and the South’s) continuous rise, but one whereChina faces acute dilemma where it “could have continued export sur-pluses and export-driven growth through an under-valued renminbi,or global financial and economic power through a stronger renminbi,but not both.” (Schwartz 2010: 196) Moreover, if it opts for the firstcourse then export growth is likely to remain considerably lower thanin the boom years, but if it opts for the latter then this is likely toundermine export interests even more (Hung 2013: 1356, 1358–9).

Meanwhile, and not unrelated to these points, quantitative easinghad the effect of lowering the value of the dollar, but it did not seri-ously undermine the international role of the dollar. Again the dilem-mas faced by other states is clear – they faced “a Hobson’s choice. Alower dollar devalued their holdings of US assets, undermined the rela-tive competitiveness of their economies, and – as excess dollars foundtheir way abroad – aggravated inflationary pressures. But given thesestates’ structural positions within global capitalism, and their eco-nomic ambitions, they saw no option but to continue and evenincrease their dollar holdings.” (Panitch and Gindin 2012: 326)

Moreover, it is worth re-emphasizing one of the central points of thelast chapter, namely that China’s role as an exporter must be situatedwithin the wider context of East Asian production networks, and thisrole remains one in which it is mainly a producer of low value goodsproduced by cheap labour. In terms of sub-contracting, Wal-Mart is anillustrative example as it is a company selling cheap goods in its retailstores and thus was central to the low wage, low price, high debt


growth model that preceded the onset of crisis (Appelbaum 2008;Appelbaum and Lichtenstein 2006). We saw in Chapter 3 that thecompany imported $15 billion worth of products from China, whichaccounted for 11% of all US imports from China (Kaplinksy 2005: 176).By 2005, this had increased to $18 billion of imports from China,making it the eighth largest of China’s ‘trading partners’ (Farooki and Kaplinksy 2012: 15–16). In 2008, it had total global sales of $375 billion, and over 80% of its supplies came from China (Gereffiand Christian 2009). This question of subordinate roles within produc-tion networks suggests that there is still evidence for the persistence,albeit ambiguously,4 of a global North-South divide. On the eve of thefinancial crisis, the global North, with one-sixth of the world’s popula-tion, still accounted for 70% of world manufacturing production whenmeasured by value (UNCTADSTAT 2013). China’s population is 24%higher than that of all the high income countries put together, but itsincome is only one-fifth that of those countries. Even its exports areonly 13% that of the high income countries (Nolan 2012: 66). Thecombined outward direct foreign investment of Brazil, Russia, Indiaand China in 2008 was less than that of the Netherlands (Nolan andZhang 2010: 101). Despite the rise of direct foreign investment flowsfrom the South, North-South flows remain far more significant thanSouth-North flows. China’s leading role amongst Southern economiesis central but even in this case, there are limits. Direct foreign invest-ment is far more central to the Chinese economy than it is to the USeconomy. Multinational companies account for around 28% ofChina’s industrial value added, 55% of its exports , and 90% of its hi-tech exports (Nolan 2012: 93–4). While China’s outward FDI hasincreased substantially, from $27 billion in 2000 to $230 billion in2009 (Nolan 2012: 95), inflows into China have persistently exceededoutflows, and this ‘deficit’ has increased from $165 billion in 2000 to$243 billion in 2009 (Nolan 2012: 95). Even leaving aside the low ratesof return on Chinese overseas investment, the absolute amountsinvolved need to be put into some wider perspective. The outwardstock of China’s FDI in 2009 was just 27% that of the US (Nolan 2012:96). Moreover, over two-thirds of China’s FDI goes to Hong Kong andMacao. This means that in 2009, $27 billion of Chinese investmentwas in high income countries, compared to the $500 billion of FDIfrom high income countries that went to China from those same coun-tries (Nolan 2012: 97–8). In comparison, while the sales of MNCs oper-ating in the US stood at $2,761 billion in 2006, the foreign sales of USMNCs was $4,225 billion for the same year (Rude 2008: 24).


Finally, there is the question of the sheer size of China’s foreignexchange reserves. These are indeed large but the $3,200 billion inJune 2011 actually amounts to $2,459 per person, compared to $6,356for each Korean, and $8,889 for each person from Japan (Nolan 2012:103). However, in June 2011 domestic entities made up 52% of thetotal foreign holdings of US government debt, and so China’s share oftotal US public debt is 12% (Nolan 2012: 4). China’s build-up offoreign exchange reserves is in part a wider East Asian response to thepossibility of financial crisis, after which countries decided to accumu-late reserves in order to cushion themselves from any rapid capitalflight such as that which occurred in 1997–98 (Thompson 2010).Moreover, Chinese funds are small when compared with the fundsmanaged by western asset managers, and in 2009 the world’s top assetmanagers had a total of $62 trillion of assets (Nolan 2012: 104). Thiscompares with around $700 billion of funds available to the muchhyped Chinese Sovereign Wealth Funds (Nolan 2012: 105).

Conclusion: Inequality and the crisis in the US as a globalcrisis

This chapter has argued that the financial crisis of 2008 had its rootcauses in both the private sector and the state sector. However it was nota case of the latter either distorting the efficiency of, or failing to regulate,the former, but rather one in which regulation was actually extended toencourage the expansion of financial markets. Liberalization was indeedat the heart of the financial crisis but this is not the same thing as deregu-lation; rather, regulation itself generally served to expand markets, andfinancial markets in particular. But this was also a crisis which was rootedin the boom period after 1992, a central component of which was a par-ticular pattern of interdependence between the United States and Chinain particular. This was a model based on debt and cheap imports on theUS side, and credit and export dependence on the Chinese side. Chinesepurchase of debt was not simply confined to the purchase of US Treasurysecurities, but also included central involvement in the US mortgagemarket, which was the sector in which the crisis finally broke.

In focusing on the US side of this equation, some commentatorshave usefully pointed to the importance of inequality as a factor thatcan help to explain the crisis (see Wade 2009; Galbraith 2012). Thestandard story goes something like this:

without toxic securities, there would be no crisis; without sub-primeloans, there would be no toxic securities; and without a continuous


downward pressure on wages in the US, as in just about every otherarea of the world, there would be no continuous rise in the house-hold demand for bank credit. (Lysandrou 2011b: 198–9)

This is an important part of the story, but in focusing on inequality, itdoes miss an important part of the equation, for as Lysandrou (2011b:199) asks, what about the demand for Collateralised Debt Obligations?Poverty and inequality can usefully help to explain the demand forsub-prime loans at the ‘bottom’ of the ladder, but what of demand forCDOs at the ‘top’? At the end of 2006, 52% of CDOs were held bybanks, asset managers and insurance companies. The other 48% wereheld by hedge funds. Hedge funds held only about 1% of the totalstock of $122 trillion securities at this time, but almost half of allCDOs. This apparent discrepancy can be explained by the fact thathedge funds were searching for above average returns on investments,which led to the search for new financial products generating evergreater yields. This in turn can be linked to pressure from the super-rich, those high net worth individuals who also searched for higherthan average profits. In 2006, 9.5 million people (0.01% of the world’spopulation) had a combined wealth of $37 trillion, $19 trillion ofwhich was invested in securities (Lysandrou 2011a: 338–9).

Insofar as the crisis was caused by inequality then, this must beexplained not only by the demand for cheap mortgages amongst thepoorest in society, but also the richest and their demand for high yieldsecurities. But from this point another significant one follows, which isthat interpretations of the international causes of the crisis which focussolely on global imbalances and Asian savings and US debts (Wolf2008), and by implication the rise of the former and decline of thelatter (Nesvetailova and Palan 2008), miss two connected points. First,the crisis could not simply be about an Asian savings glut, as “thegreater part of the surplus pools of capital in the world were held by USand European institutional investors, banks and wealthy individuals.”(Lysandrou 2011a: 332) Second, and very significantly for the widerconcerns of this book:

Given the preponderant weight of the US capital markets in theglobal financial system, and the corresponding international statusof the US dollar as the major reserve currency, it was entirelyunderstandable why the world’s investors looked to US financialinstitutions in particular to supply the extra financial productsthat were needed to absorb the overflow of demand. (Lysandrou2011a: 333)


Insofar as this was a crisis that originated in the USA, it was also aglobal crisis. In terms of the consequences of the crisis, this should alsobe seen less in terms of US decline as against a rising South, and moreone in which the end of the 1992 to 2007 boom presents new chal-lenges, for all countries, in both North and South. It is true that muchof the South quickly recovered from the crisis, in part because of suc-cessful fiscal policies, above all in China. But this has so far done littleto remove the imbalances in the Chinese economy, above all its depen-dence on investment at the expense of consumption. Furthermore,much of the rest of the South remains dependent on capital flows fromthe North as well as high commodity prices and demand from China.


129

6Global Inequality and the Rise ofthe South

This chapter further develops a theme explored in the conclusion ofthe last chapter, namely the question of inequality, specifically in rela-tion to the rise of the South. It undertakes this task first by examiningdifferent measures and manifestations of inequality. It starts by focus-ing on the question of inequality between countries, examining theevidence as to whether or not this is increasing or diminishing.Second, it then examines inequality more widely, looking at the ques-tions of inequality within countries, and global inequality – that is,inequality between people across countries. This section will alsoinclude an analysis of poverty in the international order. This discus-sion is then used as the basis for a third section, which provides a moredetailed examination of current manifestations of global inequality.Two areas in particular will be addressed: first, the global food crisisand how and where the rise of the South fits into this phenomenon;and second, the question of a new international division of labour.Finally, in the conclusion the chapter will return to the question ofinequality and the wider question of the rise of the South.

The question of international inequality

Previous chapters have demonstrated that growth rate differentialsbetween developed and developing countries increased significantly inthe 2000s, with the latter experiencing much higher rates of growththan the former (see pages 14 and 72). We have also seen that thishigh differential continued in the years that immediately followed thefinancial crisis of 2008. This has meant some significant reduction ininequality between countries in recent years, leading O’Neill (2013:232) to conclude that “Globalization may widen inequality within


certain national borders, but on a global basis it has been a huge forcefor good, narrowing inequality among people on an unprecedentedscale.” Martin Wolf (2003: 4) similarly argued that developing coun-tries are growing faster “thanks largely to increased ‘globalization’ ofthe world economy – especially the increased application by govern-ments around the world of the three great laws of economic success:privatization, liberalization and stabilization.” Though post-crisis, Wolfbecame somewhat more measured in his claims (see Wolf 2008), hestill argued that “(p)owerful market and technological forces arespreading the stock of knowledge across the globe” (Wolf 2011) andthus propelling developing countries towards convergence with therich world.

There is certainly some truth to the claim that in recent years,inequality between countries – international inequality – has beenreduced. There are some disagreements between commentators ontrends but it appears that from the late 1980s to around 2005, therewas a small decline in international inequality. But since the early2000s, and especially since 2005, international inequality has fallen atsuch a rate that it has more than compensated for rising inequalitywithin countries, with the results that global inequality (betweenpeoples irrespective of countries) has fallen (Chen and Ravallion 2012;but see Milanovic 2012). The interaction of these effects means thatwhereas in 1988 within country inequality accounted for around 20 to25% of global inequality by 2010 it had risen to 30% of global inequal-ity (Edward and Sumner 2013: 14). While on the face of it a welcomedevelopment, if China is excluded then in fact inequality betweencountries has actually risen in recent years (Edward and Sumner 2013:14–15; Wade 2011: 514–15).

So in terms of international inequality, what we have seen in recentyears is a reduction, but one that is accounted for solely by the rise ofChina. Taking a longer term perspective, how significant is this shift? Ifwe rely on Maddison’s data, which is probably as reliable a guide asthere can be, then it is clear that up until at least 1700, Asia, Africa andLatin America accounted for the bulk of the world’s population and ofthe world’s income. Maddison (2003) suggests that the figure in 1700for population is 75%, and for income 66%.1 The figure for incomeshowed some decline when compared to 1600, but it was from the1800s that divergence accelerated significantly. From 1820 to 1950, thelatter date a significant approximate one for the start of a wave ofdecolonization in Africa and Asia, the share of Africa, Asia and LatinAmerica in world GDP declined from 63.1% to 27% (Maddison 2003;

Nayyar 2009: 5). After 1950 there is a small upward trend in globalGDP share, from 27% in 1950 to 28.5% on the eve of the oil price risesof 1973. By 2001, the share has increased significantly, up to 42.5%(Maddison 2003; Nayyar 2009: 5), and as much as 47.9% by 2010,according to World Bank data2 (Akyuz 2012: 29).

However, this increased share in the independence period, and par-ticularly after 1973, abstracts from important regional differences.Measured in PPP dollars, the global share of GDP in Africa was 3.8% in1950 and 3.4% in 2008, while Latin America’s share increased from7.8% to 7.9% over the same period (Maddison 2003; Nayyar 2013: 50).In contrast, Asia’s share increased from 15.4% to 38% (Maddison 2003;Nayyar 2013: 50).

World Bank (2007) data, which uses constant market (2007) pricesrather than those adjusted for PPP, present a slightly different storyfrom that used by Maddison. The story is still one of an upward trendfrom the 1970s onwards, but at lower levels. The share stood at 15.4%in 1970, 17.7% in 1980, following the lost decade of the 1980s, 17.5%in 1990 (despite continued growth shares in East Asia), and 19.1% in2000. By 2005, the figure was 21.5% (World Bank 2007). However,population growth was higher in the developing world, and when percapita GDP is factored in, we see a different picture, and the rise iseffectively wiped out, with the share standing at 4.7% in 1970, 4.9% in1980, and 4.9% in 2005 (World Bank 2007). Indeed, based on marketexchange rates, while the ratio of per capita GDP in Asia to that of thedeveloped world shifted from 1:20 in 1970 to 1:11 in 2010, in LatinAmerica it remained broadly the same (1:5) while in Africa it shiftedfrom 1:12 to as much as 1:24 over the same period (Nayyar 2013:59–61). Thus, once population is factored in, the inexorable rise of theSouth does appear to be somewhat limited. Interestingly, the 2010OECD report on ‘Global Shift’ makes the following observation:

the convergence observed in the 2000s was not statisticallysignificant. This suggests that any improvement is tentative, and thesituation could quite easily be reversed if, for instance, the stronggrowth performance of the largest convergers (above all India andChina) fails. Nonetheless, the ‘change of gear’ in the 2000s wasimportant in psychological terms, helping to shake off the develop-ment pessimism of the 1990s. (OECD 2010a: 37)

This qualification to a tale of convergence and of a rising South doesseem quite extraordinary. We have an argument that suggests that any

Global Inequality and the Rise of the South 131

shift is ‘tentative’, and ‘potentially ‘reversible’, and may actually onlybe about perception. What the data above suggests is that there was ashift in the 2000s in particular, but this was small and largely or evensolely accounted for by the rise of China, and that when taken from alonger term historical perspective, should be treated with a great dealof caution. What then of the question of inequality between peoplesrather than countries, and the related question of poverty?

Inequality and poverty within countries

Official measures of absolute poverty use either a $1.25 or $2 a daymeasure, in which anyone below these figures is deemed to be living inabsolute poverty. This measure does not refer to a US dollar (except inthe US), but rather a ‘dollar’ adjusted to take account of local purchas-ing power. Purchasing power parity is measured through a system ofinternational price comparisons, which were made in 1985, 1993, andmost recently in 2005 and 2011,3 and have then been adjusted to takeaccount of annual changes to particular economies. Claims have beenmade that, based on the $1.25 figure, the number of people living inabsolute poverty has declined over recent years, with figures rangingfrom 1.8 billion (1990) to 1.37 billion (2005), 1.4 billion (1980) downto 1.2 billion or 1 billion (2008) (Chen and Ravallion 2010; WorldBank 2002: 30). As a result, the proportion of the world’s people livingin extreme poverty fell from 43% in 1990 to 22.4% in 2008 (UNDP2013: 12). This in part depends on the way that purchasing powerparity (PPP) is measured, which is through a system of internationalprice comparisons, made in 1985, 1993 and 2005, which are thenadjusted to take account of annual changes to particular economies. Inthe past poverty reduction has ‘occurred’ in part through changes inthe methodology used to measure poverty in particular years. Forexample, the shift from the 1985 count to the 1993 count had theeffect of lowering the poverty line in 77 out of 92 countries for whichdata were available, and these countries contained 82% of the totalpopulation of the 92 countries (Reddy and Pogge 2004: 42). Similarly,the shift to the 2005 price comparison had the effect of substantiallylowering per capita GDP in a number of countries, including by asmuch as 38% in both China and India, 41% in the Philippines, 32% inSouth Africa and 50% in Ghana4 (Milanovic 2012: 5). The 2005 counthad the effect of increasing the number of people living in absolutepoverty from 1 billion to 1.4 billion, though this shift in the method ofcalculation had little impact on poverty reduction trends.5 Also ques-


tionable is the method of calculation for arriving at local PPP, becausethe basket of goods that is used to make price comparisons may includegoods which are unlikely to be consumed by the poor, and whichmeasure average income. This under-estimates the numbers of peopleliving in poverty, as consumers with rising income (above poverty level)spend a decreasing proportion of their income on food, and an averagerise in income over time will therefore translate into smaller compar-isons of those goods which the poor actually consume, and whose pricedifferentials may be far more significant (Reddy and Pogge 2004).

Despite these problems, it is likely that there has been a reduction inthe number or proportion of people living in absolute poverty. On theface of it then, this is good news which fits the wider picture of a risingSouth, albeit one that is highly uneven. But the story is actually morecomplex than this. A large proportion of those living in absolutepoverty do not live in the poorest, low income countries, but in thenext tier of developing countries known as middle income countries.According to Kanbur and Sumner (2012: 688), between 71–76% of theworld’s poor live in middle income countries (850–950 million people),while between 24 and 29% (350 million people) live in low incomecountries, mainly in sub-Saharan Africa. China and India (both middleincome countries) accounted for half of the world’s poor in 2007–08,compared to around 66% in 1990. However, this is not the whole storyas there is a significant concentration of the world’s poor in fivemiddle income countries, namely Pakistan, India, China, Nigeria andIndonesia (Kanbur and Sumner 2012: 688–9).

This scenario is open to two possible interpretations. One is that asthese countries continue to grow, more people will be lifted out ofabsolute poverty. Thus, as average incomes have risen, the number ofpeople living on over $2 a day has risen, with those living on around$2 to $4 a day increasing from 700 million to $1.4 billion from 1990 to2008, and those living on $4 to $10 a day increasing from 400 millionto 1.1 billion (Sumner 2012: 2). The proportion of people living inabsolute poverty fell in Brazil from 17.2% in 1990 to 6.1% in 2009; inChina from 60.2% to 13.1% (2008); and in India from 49.4% to 32.7%in 2010 (UNDP 2013: 13). For some, as we have seen in earlier chap-ters, this is a story of a rising middle class. Thus, the South’s share ofthe global middle class (defined as those living on between 10 and 100dollars a day, based on 2005 PPP) has expanded to 58% in 2010, and isprojected to increase to 70% by 2030 (UNDP 2013: 14).

Alternatively it could be argued that the benefits of growth in thesemiddle income countries have been distributed in a very unequal way.


Though there have been significant counter-trends in parts of theSouth in recent years, the overall trend across the world since the1980s has been one of increasing inequality within countries, bothNorth and South. In Britain, the top 1% income group increased itsshare of national income from 6% in 1979 to 16% in 2007, while inthe US, the equivalent figures were 8 and 18%. For the US, if capitalgains are included, then the figures are 8.5% (1979) and 23.5%(UNCTAD 2012: 49–50). The share of national income going to therichest 1% of Americans has doubled since 1980, from 10% to 20%,and the share going to the top 0.01% – some 16,000 families with anaverage income of $24m – has quadrupled, from just over 1% to almost5% (Beddoes 2012). Since 1980, the share of wages in GDP fell by 5 percentage points or more in Australia, Belgium, Finland, France, theNetherlands, Norway, Sweden, the UK and the US, and by 10 points ormore in Austria, Germany, Ireland, New Zealand, and Portugal(UNCTAD 2012: 52). Austerity measures are likely to intensify thisproblem, and it has been estimated that in Britain, the poorest 20% ofthe population will lose 6% of their income from 2011 to 2014 as aresult of government cuts (Elliott 2011).

In China, inequality has risen rapidly and the Gini co-efficient hasrisen from 0.28 in the early 1980s to 0.48 in 2008 (Nolan 2012: 69). Ithas been estimated that 0.1% of households have 45.8% of total house-hold wealth – that is, 1.3 million people hold almost half of the house-hold wealth of 1.3 billion people (Nolan 2012: 69). According to a newsurvey, the top 10% of Chinese households took home 57% of theincome in 2010 (Beddoes 2012). House prices are also high, and haveincreased by 500% in China in ten years, and by 200% in India in fiveyears (Beausang 2012: 110). There are also reasons specific to China fortreating some of the global figures with some scepticism. As we haveseen, the poverty count is linked to income levels but this only tellspart of the story. While there were many human rights abuses in theMaoist era, there were also impressive records in terms of health care,literacy and life expectancy, which were guaranteed to the populationregardless of income. To some significant extent this is no longer thecase and so health or education costs might now have to be met out ofpersonal income. This is one reason for the high rate of savings inChina, but also it is one reason why income as a measurement ofpoverty has its limits. For while incomes might have risen, thefinancial burden of health care or education might have risen for someeven more sharply, leading to less than impressive social developmentindicators (Reddy 2007). From 1980 to 2010, life expectancy rose from


67.8 to 73.5, but this is actually around 50% slower than other coun-tries with similar life expectancy levels in 1980, even though theselatter countries experienced much slower growth rates (Reddy 2007:53; Beausang 2012: 114–15).

While officially India is less unequal than the other BRICs, thisreflects in part the way that inequality is measured there, where con-sumer spending rather than income is the main variable. This distortsthe picture substantially as the rich are more likely to save some oftheir money than the poor. In any case there are still more than 250 million people living below the poverty line, based on most plaus-ible estimates (Corbridge et al 2013: 58). One of the most strikingfeatures of the recent history of growth in India is that the pace ofpoverty reduction has slowed down since the late 1980s (Topolova2008). In other words, if we measured each unit of growth by its effecton poverty reduction, the growth that took place before the late 1980sonwards was more effective in bringing about poverty reduction (seeCorbridge et al 2013: 63). The reason for this is the growth in inequal-ity; for instance, “evidence suggests that wage shares in total nationalincome in the organized sector since the early 1990s have been fallingin parallel with shares of informal sector income in total nationalincome.” (UNCTAD 2012: 54) The share of wages in national incomefell from 40% at the start of the 1990s to 34% by 2009–10, while in theorganized sector the share fell from 69% to 51% (Ghosh 2012). Such isthe combination of continued low per capita income alongsideinequality that India continues to have a very poor human develop-ment record. World Bank data suggests that only five countries outsideAfrica (Afghanistan, Bhutan, Pakistan, Papua New Guinea and Yemen)have a lower ‘youth female literacy rate’ than India; only four coun-tries (Afghanistan, Cambodia, Haiti, Myanmar and Pakistan) do worsethan India in terms of high rates of child mortality; only three havelower levels of ‘access to improved sanitation’ (Bolivia, Cambodia andHaiti); and no country has a higher proportion of underweight chil-dren (Dreze and Sen 2012).

By contrast, Brazil has recently made some significant improvementin terms of reversing historically very high inequality measured byincome distribution, and the Gini index went from 59.3 in 2001 to55.2 in 2007. Most significantly, in the period from 2000–07 there wasa 50% reduction in the number of people living in absolute poverty. Inthis period the income of the poorest 10% grew on average by 7% ayear, which was 4.4% above the national average (Beausang 2012:132).


Overall however, there was a clear trend of increased inequalitywithin countries in the 1980s and 1990s. Based on household incomein 104 countries, inequality increased in 73 of these countries in thisperiod and fell in only 24, with the rest remaining broadly the same.However, in the 2000s, the picture was less clear. Among developedcountries, 9 saw rising and 8 saw falling inequality, with 5 seeing nosignificant change, compared to 15 out of 22 witnessing rising inequal-ity from 1980 to 2000. Latin America and the Caribbean saw fallinginequality in 15 out of 18 countries from 2002 to 2010, compared to14 out of 18 witnessing a rise in inequality from 1980 to 2002. Africasaw a fall in inequality in 15 and a rise in 9 out of 25 countries from1995 to 2007, compared to 10 falls and 10 rises from 1980 to 1995.Eastern Europe and the newly independent states from the formerSoviet Union saw a rise in inequality in all 24 countries assessed from1990 to 1998, while from 1998 to 2010, there were 13 countries withrising and 6 with falling inequality from 1998 to 2010 (UNCTAD 2012:57).

In terms of wages, the gender gap between men and women has nar-rowed in the North, but the narrowing of the gap actually sloweddown in the 2000s. Latin America saw a significant narrowing of thegender gap in the period from 1990 to 2010, when the gap for urbansalaries fell from 25% to 15%, largely because of an increase in theminimum wage for domestic workers (UNCTAD 2012: 71). However,for those with similar educational levels, the gap remained muchhigher, though again there was also a fall – from 38 to 30% from 1990to 2005 (UNCTAD 2012: 71).

So far then, we have seen that there has been a small shift towards adecrease in inequality between countries in recent years, but also atrend of growing inequality within countries over the last thirty years,offset slightly by a partial reversal in some countries in the 2000s.What then of the question of global inequality, which measuresinequality between people and across countries? There are variousmeasures of global inequality, which take in ratio between countries atvarious points based on per capita incomes. This is usually based ondecile or quintile ratios; the former measures countries based on percapita income divided by tenths, while the latter does this by fifths.The Gini co-efficient measures income distribution based on a figurebetween 0 and 1, where zero means perfect equality and 1 means com-plete inequality (see Table 6.3). The Theil index is also based on afigure between zero and 1, where the closer the figure is to 1 the greaterthe inequality (see Table 6.4). While this index is not without its con-


troversies (Sen and Foster 1997), its great merit is that it allows formeasurement based on a combination of both between country andwithin country inequality, which is also weighted based on eachcountry’s share of world income. Though there is some disagreement,most studies suggest that over the last twenty to thirty years, there hasbeen some fall in global inequality. The main reason for this is as wehave seen, inequality between countries has fallen, even if inequalitywithin countries has actually risen, but the latter’s rise is not as great asthe former’s fall. Among the leading studies, Palma (2011) suggeststhat there is a growing uniformity in the income share of the middle50% across countries, but increasing diversity in the share of the top10% (decile 10) and bottom 40% (decile 1–4). Deciles 5 to 9 tend tohave a national income and/or consumption share of around 50 to55% (Palma 2011: 101–2), thus leading him to conclude that there are‘homogenous middles’ and ‘heterogeneous tails’. Milanovic (2011;2012) argues that the years prior to the financial crisis (2002–08) saw adecline in global inequality, a view partially challenged by Chen andRavallion (2012), at least for the years 2005–08, though they too acceptthat over a wider period, global inequality has declined due todecreases in inequality between countries.


Table 6.1 Global Gini Co-efficient, percentage measurement, variousyears

1988 69.21993 69.61998 68.42002 67.92005 66.72008 66.3


Table 6.2 Theil Co-efficient, percentage measurement, various years

1988 90.21993 93.31998 90.72002 89.62005 85.12008 84


Perhaps most useful for our purposes is the study by Edward andSumner (2013), which attempts to examine these trends within a widercontext. As we saw above, they argue that global inequality has fallensince the late 1980s, but by only small amounts, and much of this fallis accounted for by a fall in between country inequality in the 2000s(Edward and Sumner 2013). For those identifying an inexorable rise ofthe South, Edward and Sumner provide little assurance as we haveseen, and suggest that if China is excluded from the calculations, thenbetween-country inequality has actually risen since the late 1980s, par-ticularly among those countries at the very top and very bottom. Likethe OECD qualification to the story of convergence quoted above, this“should give us pause for thought before celebrating too keenly recentand very modest signs of falling overall global inequality. The rapidprogress of China may be masking underlying trends that are consider-ably less progressive.” (Edward and Sumner 2013: 14) Edward andSumner go on to identify four ‘layers’ in the global order: the globalabsolute poor (living on less than two dollars a day); the global in-secure (living on $2 to $10 a day); the global secure (living on ($10 to$50 a day); and the global prosperous (living on over $50 a day), andwithin that group the richest 1% of the population, living on $75 aday. Note that this breakdown of groups avoids the broad definition ofthe global middle class that is commonly used, including one thatdescribes all those living on an income above either $2 or $4 a day (seeKapsos and Bourmpoula 2013), when in fact these people might wellbe “the transient ‘poor’ who are one illness away from poverty”(Sumner 2012: 11). Even the more common definition of middle class,namely those living on between 10 and 100 dollars a day (UNDP 2013:14), briefly discussed in the previous chapter, is too wide a category asit takes in too diverse a range of incomes. But perhaps what is mostuseful about the categories used by Edward and Sumner is that theygive us a sense of perspective, for much of the debate on global povertyhas focused so narrowly on measuring the numbers and proportions ofthose living above or below $1 or $1.25 a day, and the extent to whichany reduction is caused by market friendly policies (Dollar and Kraay2002; World Bank 2002). Causality is rarely proved in such debates butin any case, the debate becomes a rather technocratic one, in whichlifting some people above a certain threshold is considered a success,thus abstracting from the unequal social relations that give rise to andexacerbate poverty in the first place (Harriss 2010), and the continuedinsecurity and vulnerability for those just above this threshold.Though of course Edward and Sumner’s categorizations do not com-


pletely resolve these problems, their approach is certainly a stepforward beyond the debate on absolute poverty. Perhaps most prob-lematic is that the category ‘global secure’ is too wide, as many workersin that category (particularly in the developed world) hardly exist onsecure incomes or have secure employment. This of course has theeffect of over-estimating those in the category of global secure, so inthis regard there is a limit to Edward and Sumner’s categories.However, barely this in mind, the categories (particularly those deemedto be the ‘global insecure’ and the ‘absolute poor’) remain usefulreminders of the realities of inequality in the global economy, andagain we should bear in mind that Edward and Sumner’s categoriesonly under-estimate these realities.

Table 6.3 identifies both the numbers and proportions of each group,and where they live. 90% of the richest 1% of the global populationlive in Europe and North America, and this translates to 15% of thepopulation of the US, 8% of the population of the UK, and 2% of thepopulation of the EU (Edward and Sumner 2013: 37). Among the glob-ally prosperous, 36% of the US population are in this group, 14% ofthe UK, and 8% of the EU (where there is marked differentiation acrosscountries). 5% of the Brazilian population are in this group (Edwardand Sumner 2013: 37). Among the bottom two groups, the global poorand insecure, 90% of the Chinese population, 60% of the Brazilianpopulation and almost all of the populations of South Asia and sub-Saharan Africa are in this group, compared to 12% of the US popula-tion, 13% of the EU population and just 3% of the UK population(Edward and Sumner 2013: 37–8). The global secure segment – onefifth of the world’s population – includes half the population of the USand 80% of the EU, plus one third of Brazil’s population and 10% ofChina’s, though still actually less than 1% of India’s population(Edward and Sumner 2013: 38). This again suggests a picture of risingwealth for some in middle income countries, but equally that any con-vergence based on a generalized rise of the South is an exaggeration.The extent of inequality is also clear from Table 6.4, which examinesthe share of growth on global consumption levels from 1990 to 2010.

Global inequality manifested: The food crisis and the international division of labour

The rise of the South is sometimes presented as a straightforwardlylinear process in which growing numbers of people are lifted out ofpoverty. This has been questioned above but this section tries to


140

Tab

le 6

.3G

lob

al p

op

ula

tio

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y c

on

sum

pti

on

gro

up

s

Less

th

an $

2$2

–$10

$10–

$50

$50+

$75+

Glo

bal

Glo

bal

Glo

bal

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bal

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p 1

%to

tal

Abs

olu

teIn

secu

reSe

cure

Pro

sper

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tal

(mil

lio

ns)

2407

2914

1347

227

6768

94A

s %

of

glo

bal

po

pu

lati

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3542

203

110

0

Reg

ion

al d

istr

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tio

n (

mil

lio

ns)

East

Asi

a an

d P

acifi

c (E

AP)

542

1270

366

233

2202

Euro

pe

and

Cen

tral

Asi

a (E

CA

)27

269

542

5411

891

Lati

n A

mer

ica

and

Car

ibbe

an (

LAC

)70

317

181

203

589

Mid

dle

Eas

t an

d N

ort

h A

fric

a (M

NA

)48

262

685

238

3N

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mer

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(NA

M)

043

175

125

4934

4So

uth

Asi

a R

egio

n (

SAR

)10

9253

74

00

1633

sub-

Sah

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ica

(SSA

)62

721

412

00

854

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by

inco

me

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(m

illi

on

s)LI

Cs

543

177

10

072

2LM

ICs

1459

1097

700

026

25U

MIC

s40

414

9148

328

324

05H

ICs

114

879

319

965

1142

Sour

ce: A

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m E

dw

ard

an

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um

ner

201

3: 3

8, w

ith

au

tho

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issi

on

concretize the discussion through a brief discussion of two concreteareas, that of food and of the changing international division oflabour.

In terms of food, the starting point for analysis is that while incomesmay be growing, food prices may be growing at least as quickly. In theBRICs, inflation rates are quite high, with an average annual rate in2011 of 6.6% in Brazil, 8.7% in Russia, 9.6% in India and 5.5% inChina (Beausang 2012: 107). Food inflation is higher than the averagerate, and the population spends a higher proportion of their incomeon food than in the developed world as per capita incomes are lower.One reason for high food prices is the changing diets of a section ofthe population, with consumers eating more high protein foods suchas meat and dairy products, with the result that more crops are used foranimal feed. The developing world accounts for about three quarters ofthe total growth in global demand for major crops since 2000(Beausang 2012: 107). As previous chapters showed, the 2000s andespecially 2007–08 saw big increases in grain prices, culminating infood riots. Although food prices fell after this, the UN Food Price Indexstill stood at 213.4 on average in 2012, twice the average level (97.7)for 2003 (FAO 2013). With rising incomes people have moved up thefood chain and consuming more grain intensive livestock and poultryproducts, particularly meat, milk and eggs (Brown 2012: 9). This hasled to big price increases for grain, exacerbated further by the use ofethanol for cars, particularly in the United States. In 2011, the US har-vested almost 400 million tons of grain and of this, 127 million (32%)was used for ethanol production (Brown 2012: 9). From 1980 to 2005,the amount of grain used to produce fuel ethanol in the US increased


Table 6.4 Shares of global consumption growth

Global segment Share of global population Share of global in 2010 (%) consumption growth

1990 to 2010 (%)

Global Absolute Poor 34.9 5.1Global Insecure 42.3 24.7Global Secure 19.5 41.4Global Prosperous 3.3 28.7Top 1% 1.0 14.9

Source: Adapted from Edward and Sumner 2013: 38, with author permission

from 1 million to 41 million tons, and by 2011 the figure had risen to127 million tons (Brown 2012: 37). The issue here is that:

It is the increase in consumption of livestock products plus the con-version of grain into fuel that have boosted the annual growth inworld grain demand from the roughly 20 million tons of a decadeago to over 40 million tons in recent years. As incomes continue torise, the pressure on farmers to produce enough grain and soybeansto satisfy the growing appetite for livestock and poultry productswill only intensify….One of the consequences of integrating theworld food and fuel economies is that the owners of the world’s 1 billion motor vehicles are pitted against the world’s poorestpeople in competition for grain. (Brown 2012: 35, 40)

While changing demand may be one factor in accounting for longerterm trends, supply factors are equally, if not of more importance. Inrecent years aggregate and per capita consumption of grain in Chinaand India have actually fallen, but as we have seen, food prices havesoared (Ghosh 2010: 72–3). The diversion of acreage and food outputinto biofuel production is important, but so too is the speculation infood commodity markets. Commodity markets are supposed to sendthe correct market signals to producers. In particular trading andfutures markets should theoretically facilitate hedging against pricefluctuations, so that the selling of futures contracts would exceed thedemand for them. However, in the period from January 2007 to June2008, futures prices were higher than spot prices. As Ghosh (2010: 79)suggests, “(t)his cannot reflect the hedging function and must implythe involvement of speculators who are expecting to profit from higherprices”.

In terms of commodity price rises, there are winners and losers.Those countries exporting commodities have higher export earningsand growth rates and this gives the state some space for fiscal policyreform. But the direct beneficiaries are a small number of privatelandowners (Bello 2009). For commodity importers, they face risingimport bills, particularly for food and fuel. For people who spend ahigh proportion of their income on food, this can be devastating. TheWorld Bank (2011c) estimates that the 2007–08 food price rises eitherkept or pushed 105 million people below the poverty line, and the2010–11 spike did the same to 48.6 million people. High food priceshave led to demands for higher wages, particularly in China where thepopulation is ageing and so the labour market is tightening. As was


noted in Chapter 3, the number of those between the ages of 15 and24 years entering the labour force peaked in 2005 at 227 million, andthis could fall to 150 million by 2024 (Beausang 2012: 48). This couldundermine China’s attempts to continue to develop through cheap,labour intensive manufacturing. For instance, in 2011 a major strike ata LG factory in eastern China was explicitly over the call for bonuses tokeep pace with rising living costs (Beausang 2012: 109).

One result of high food prices has been the growth of ‘land rushes’to acquire land, either directly or through leases (Margolis et al 2013;Oxfam (2011) estimate that 227 million hectares of land have beensold or leased in the developing world since 2001, while more conserv-ative estimates put the figure at 80 million hectares (HLPE 2011). TheWorld Bank (2011c) estimates that there were 464 land acquisitionsbetween October 2008 and August 2009. The amount of land culti-vated was known for only 203 of these projects and it totalled 140 million acres, an amount larger than that for corn and wheat com-bined in the US. Over half of the land was leased or bought in sub-Saharan Africa, and in particular in Ethiopia, Ghana, Liberia,Madagascar, Mozambique, Sudan and Zambia (Brown 2012: 104). Over30% of the land in Liberia has been handed out since 2007. Furtherafield, in Cambodia it has been estimated that an area equivalent ofsomewhere between 56 and 63% of all arable land has been handedout to private companies (Oxfam 2012: 2). More recently, SouthSudan, Papua New Guinea, Indonesia, Argentina and Sierra Leone havebecome important targets (Magdoff 2013: 10). There is some debateover who are the beneficiaries of these land grabs, the case made forthem being that they will generate economies of scale and increasefood production and thus contain price increases. On the other hand,there are serious questions over the extent to which the displacementof people from existing land will lead to them being absorbed by citiesof slums where the growth of the insecure informal sector living in a‘planet of slums’ is so high (Davis 2004; Bernstein 2009; Kiely 2009).Arrighi and Moore (2001: 75) thus reject linear models of capitalistdevelopment, such as those neoliberals who see technological upgrad-ing and the absorption of labour as an inevitable process generated byfree markets (Bhagwati 2004), or orthodox Marxists who regard prole-tarianization as a process by which those separated from the means ofproduction will join the formal labour market (Sender and Johnston2004; Sender and Pincus 2004). They instead argue that “the under-lying contradiction of a world capitalist system that promotes the forma-tion of a world proletariat but cannot accommodate a generalized


living wage (that is, the most basic reproduction costs), far from beingsolved, has become more acute than ever.” (Arrighi and Moore 2001:75) Many of these people comprise what Edward and Sumner call the‘global insecure’ layer of the world’s population. Not unrelated to thispoint, a further contentious issue is the enclave nature of the landacquired, which suggests that the benefits are very unequally distrib-uted (Liberti 2013), and that the export intensity of most of these landgrabs means that they are unlikely to have much impact on local foodneeds. Oxfam (2012: 6) for instance estimates that over 60% of landinvestors in developing countries intend to export everything theyproduce on the land. In the past, some arguments made against cashcrop production set up a false dichotomy between domestic food pro-ducers on the one hand, and cash crop production for export on theother (Shiva 1989), when in fact often the most effective food produc-tion often combined the two. However, in the case of land grabs, inthe majority of cases the dichotomy is of greater relevance (Oxfam2012).

The rise of the South also implies a changing international divisionof labour which, as we saw in Chapter 4, includes a global shift fromfocusing overwhelmingly on primary goods to one in which manufac-turing is central. In terms of inequality this leads to the question of theextent to which the rise of manufacturing in the South also meansincreasing competition between labour in the global North and theSouth. We saw above that inequality within developed countries hasincreased over the last thirty years, and part of the reason for this hasbeen the relatively slow growth of real wages. To what extent is thiscaused by wage competition from the South, particularly (though notexclusively) in manufacturing?

Orthodox trade theory assumes that with free trade, there will be anincrease in the real income of that factor which a country holds inabundance, as demand increases (Ohlin 1933). In terms of labourmarkets, this means that there should be a decline in the price ofunskilled, labour intensive goods and a shift to more skill intensivegoods in the global North, For the South, this should mean an increasein unskilled labour intensive goods, and a boost in demand and wagesfor unskilled workers. Though this perspective owes a great deal toorthodox trade theory, it was also utilized by some supposedly noveltheorists of globalization in the 1990s (Beck 2000: 92–4; 2006: 108–9).More radical accounts did not necessarily share the view that this ledto an international division of labour in which production on theNorth and South were mutually complementary, but some accounts


reached broadly similar analytical conclusions. In the 1970s, Frobel, et al. (1980) explained the emergence of a new international divisionof labour which drew on elements of Marxist and world systemstheory. Their argument was concerned with both the crisis inprofitability and de-industrialization in the developed world, alongsidethe rise of manufacturing in parts of the developing world, and par-ticularly in East Asia. They argued that there was a profit squeeze in theFirst World, caused by rising wages which cut into profits. Capitalresponded to this problem by relocating to the periphery where labourcosts were low. This led both to the deindustrialization of the corecountries, and the ‘super-exploitation’ of workers in the (semi-) periph-ery (Frank 1983). What both these approaches shared was the view thatthe South was beginning to industrialize rapidly, and this could beexplained, at least partly, by lower labour costs.

But both these perspectives were problematic. Skilled workersbenefited from higher pay in both North and South and much of thechange in the price of goods and increases in skill premiums occurredwithin rather than between industrial sectors (UNCTAD 2012: 82).Moreover, at the height of this new international division of labour inthe 1970s and 1980s, the South’s share of direct foreign investmentoriginating from the North was actually falling. Between 1975 and1984, it fell from 27% to 19% in the case of West German investment,and from 19% to 16% in the case of the UK (Jenkins 1992: 35; see alsoGordon 1988). Moreover, as Chapter 3 showed, the most successfullate industrializers at the time, Taiwan and South Korea, were not par-ticularly dependent on foreign capital investment, and indeed, at leastuntil the late 1980s and 1990s, were very restrictive in terms of allow-ing foreign investment in many sectors (Jenkins 1990: 50).

Nonetheless, these approaches remained influential, particularlythrough the argument that the transnationalization of capital has ledto states to compete to attract mobile capital (Robinson 2004). This hasincluded the promotion of a race to the bottom, in which states con-sistently undercut each other in terms of labour and other standards.Robinson (2004: 99) contends that transnational capitalism has led tothe erosion of a global North-South divide and that this “particularspatial form of the uneven development of capitalism is being over-come by the globalization of capital and markets and the gradual equalization of accumulation conditions this entails.” As a result of thisequalization, reflected in part in the rise of the BRICs (Harris 2005),“(w)orldwide convergence, through the global restructuring of capital-ism, means that the geographic breakdown of the world into


north-south, core-periphery or First and Third worlds, while stillsignificant, is diminishing in importance.” (Burbach and Robinson1999: 27–8) This argument was central to the wider debate over global-ization, and the extent to which hyper-mobile capital had escaped theconstraints of comparatively immobile nation states and labour (seeOhmae 1994; Held et al 1999). The response to this argument by glob-alization ‘sceptics’ was that capital was not as mobile as this, capitalcontinued to concentrate in the developed world, and wage disparitiesbetween North and South continued to be high (Hay 2005a). Scepticsalso argued that based on certain measures of globalization, particu-larly trade/GDP ratios, the world was not any more globalized than ithad been on the eve of World War I (Hirst and Thompson 1996: 27).

However, the issue is less one of trade/GDP ratios and more one ofthe ratio between trade and merchandise value added (MVA), whichhas grown faster than the production of these commodities in manydeveloped countries. Between 1913 and 1990 the trade/MVA ratioincreased from 23.3% to 53.5% for France, 29.2% to 57.8% forGermany and 13.2% to 35.8% for the US (Feenstra 1998: 34). Thisprocess has intensified since 1990 (Milberg and Winkler 2009a: 14).Moreover, while in the 1970s and 1980s, foreign investment in theSouth remained relatively low, it increased substantially from the1990s, both in absolute terms, and in terms of the global distributionof shares of foreign investment, which is closely linked to the rise ofglobal commodity chains (see Chapters 4 and 5). As well as the increas-ing importance of trade as a percentage of GDP in recent years, there isalso the increased importance of the South in this process. With theSouth’s share in global exports reaching 30% in 2000, and 40% in2010, it could be argued that the older arguments concerning a newinternational division of labour are more relevant now than they werein the 1970s and 1980s (UNCTAD 2012: 86). Table 6.5 shows thisincreasing trend, especially for the US, and to some extent for the EU,and following discussion in Chapters 4 and 5, again confirms thecentral place of China in this process.

Earlier chapters demonstrated the close interdependence betweenthe US and China in the long boom from 1992 to 2007. In the periodfrom 1996 to 2006, the US Consumer Price Index rose at an annualrate of 2.3%, considerably below the expansion of the money supplyin this period (Milberg and Winkler 2009b: 6). In this period importprices fell and imported inputs of materials and services grew at an annual average rate of almost 2% (Milberg and Winkler 2009b:6–7).


The question which arises then is to what extent is the rise in tradein goods from lower wage economies responsible for the increase ininequality within countries, particularly in the developed world?Establishing causality is probably only possible through an analysis ofspecific sectors, but a number of more general comments can be made.First, the pattern of growing inequality is not necessarily exclusive totradable sectors, and indeed low wages in non-tradable services, includ-ing public services, is a common feature in labour markets in the devel-oped world (Henwood 2003). Second, the extent of inequality andlabour market insecurity varies, partly according to the differing publicpolicy responses carried out by states (Lansley 2012: 76–7). Forinstance, German firms have a higher degree of offshore investmentthan US firms, but its higher degree of labour market and welfare pro-tection means that workers are more secure there than in the US.Similarly, France has higher unemployment than Japan but a higherdegree of economic security for labour, which can again be accountedfor by various social welfare measures (Milberg and Winkler 2009a: 2,6). While these German and French forms of protection have partlyeroded in recent years, they remain comparatively more significantthan in other countries. Third, rising intra-country inequality in thedeveloped world cannot be reduced to wage competition from theSouth, but instead must be seen as part of a broader process, of whichthe new international division of labour is but one part. As has beenshown in the previous two chapters, financialization is a central part ofthis process. This has meant the expansion of financial instrumentsand of credit and debt in the world economy, but it has also meant theincreasing use of financial expansion by supposedly non-financial


Table 6.5 Merchandise imports from low wage economies (as percentageshare of total merchandise imports)

US total imports US imports EU total EU importsfrom low wage specifically imports from from Chinaeconomies from China low wage specifically(including economies from ChinaChina) (including China)

1995 12% 7% 5% 2%2000 15% 9% 7% 3%2005 22% 16% 9% 5%2010 27% 20% 13% 8%

Source: Adapted from UNCTAD 2012: 87, rounded up percentages

corporations. Indeed, the rise of global commodity chains is a centralpart of this process and not external to it (Gibbon and Ponte 2005).Orthodox growth and trade theories see the new international divisionof labour and rise of global commodity chains as part of an efficientprocess of specialization, in which dynamic gains from trade follow(OECD 2013b), but as Milberg and Winkler (2009b: 11–12) point out:

If the increased corporate profit share in the USA – driven inpart…by offshoring – was matched by proportionate increases ininvestment, then we could be reasonably comfortable that thedynamic gains from offshoring were being realised. But there hasbeen a shift in the use of these profits. Firms reduced their spendingon plant and equipment and, instead, expanded their spendingaimed directly at immediately increasing shareholder value. Whilethe profit share rose and investment as a share of profits stagnatedor fell, firms sharply increased their dividend payments and pur-chases of financial assets.

They go on to point out that for the US top 30 ‘non-financial’ firmsinvolved in share buy-backs from 2000 to 2007, many were heavilyinvolved in the use of global commodity chains, including Cisco,Microsoft, Hewlett Packard, Dell and Intel in IT, Wal-Mart and Intel inretailing, and Procter and Gamble in consumer non-durables (Milbergand Winkler 2009b: 11–12). In these cases, intense pressure is placedon suppliers as part of a package which involves maximizing returns toshareholders. A similar pattern can be discerned among European com-panies, where there is again a close link between shareholder value andpressure on suppliers within value chains (see Gibbon 2002; Palpacuer2008).

While the growing shares of world trade and associated reliance oncommodity chains is significant, this is not the same as the claim thatthis has led to a straightforward race to the bottom. There remainssignificant concentration of higher value activity in the developedworld, as we saw in Chapters 4 and 5, and even in the case of unskilledlabour, wage disparities between North and South remain high.Remittances from North to South (and from richer to poor countries inthe South) are increasingly significant, and expanded at a rate of anaverage of 20% per year from 2002 to 2008. In the period from 1980 to2010, remittances grew from $43 billion to $444 billion, and in thesame period the amount going to the developing world increased from


$20 billion to $297 billion (Nayyar 2013: 91). The developing world’sshare of remittances thus increased from 47% to 67% (Nayyar 2013:91). In 2005 remittances accounted for approximately 2% of the totalGDP of developing countries (Akyuz 2013: 26). This low figure fails toaccount for their importance for individual developing countries likeMexico, India, Bangladesh and the Philippines. However, while theseare increasingly important, more so than aid for some countries, theyare unlikely to form the basis for some kind of convergence betweenNorth and South. In the case of professionals, remittances are import-ant but in many case training costs have been met by the developingcountry. In the case of unskilled labour, low wages will limit the extentof remittances, even if the transfer of money has a bigger impact in thepoorer country, and in any case immigration controls remain strong inunskilled labour sectors.

Finally, and most important of all, though they maintain that wagecompetition is a significant factor in the growth of economic insecurityin the developed world, Milberg and Winkler (2009a: 1) also make thefollowing rhetorical point:

How can we dare speak of economic insecurity in the industrializedcountries when the rate of per capita GDP in Germany is 120 timesthat in Uganda, the rate of unemployment in the US is 1/10th ofthat in Nepal, or when the share of population below the povertyline in France is 1/10th that in Zimbabwe?

In other words, some degree of wage competition is one thing, butconvergence based on a generalized race to the bottom quite another.At this point it is perhaps worth referring back to Edward and Sumner’scategories of global absolute poor (those on less than PPP $2 a day,35% of the global population), and global insecure (those on PPP $2 to$10 a day, 42% of the global population), in Table 6.3 on page 140. Of the 2,407 million global absolute poor, only 1 million live in thehigh income, developed countries. In other words, 2,406 million livein the developing countries. And of the 2,914 million global insecure,148 million live in the developed world. Thus, 2,766 million live in theglobal South. We are thus a long way from convergence in the interna-tional order, not only of a levelling up associated with some of themore optimistic scenarios concerning the rise of the South, but alsothose more pessimistic ones that talk about a levelling down processthrough a race to the bottom in the global labour market.


Conclusion

This chapter has focused on inequality, both between and withincountries, and between peoples irrespective of country, and how thishas manifested itself in terms of food production and distribution andthe international division of labour. Its conclusions accord with thefindings of earlier chapters. First, there has been a reduction in inter-national inequality in recent years, and this again confirms the argu-ment regarding the rise of a new South. However, this reduction islimited, both historically and geographically, and is essentially theresult of the rise of China. This finding is broadly compatible with theargument found in earlier chapters, namely that the rise of the South isin some respects a reality but is easily exaggerated and actually quitelimited. It is however true that the reduction in inequality betweencountries has more than offset general trends towards increasedinequality within countries, so that global inequality has also beenreduced in recent years. But this reduction should also be put into per-spective. While there may be general trends showing growing inequal-ity within countries, these manifest themselves between countries invery different and still highly unequal ways. In particular, 149 millionof the global absolute poor and global insecure live in the developedcountries, while 5,172 million live in the global South. This is not thena tale of anything like convergence between the established North andthe rising South. Moreover, even in areas which in part reflect and canbe attributed to a limited rise of the South, such as food price increasesand a changing international division of labour, inequality withinthese countries means that benefits that may derive from them areunequally distributed, a point that applies selectively,6 and in lessintense ways, within the global North as well.

Paradoxically, where there has been some kind of convergence –albeit one resisted in parts of the South, especially Latin America inrecent years – has been in the promotion of policies that haveincreased inequality within most countries. In the last chapter we sug-gested that this was a factor in causing the crisis, both in terms ofincreasing debt stimulating demand among poorer sections of society(thus leading to the sub-prime crisis) and demand among the super-rich for new securities which could be traced back to those same sub-prime loans. In the context of a way out of the crisis, inequalitymatters as well. In the context of growing inequality, exacerbated byausterity, a new era of growth and expansion based on rising incomesfor all is unlikely. This means that expansion in the developed world


might only come about through another debt led bubble, which willagain burst at some point in the future. This is bad news for the ques-tion of inequality within countries. Furthermore, in the absence ofanother boom-bust cycle, we could experience of an era of slowgrowth, higher interest rates and a strong dollar. This is bad news forthe question of inequality between countries.


152

7The South and Geopolitics: FromBandung to the BRICS?

This chapter shifts the focus from political economy to geopolitics, andaddresses the question of whether the ‘new South’ is transforming theinternational order, and if so, in what ways. It does so by first examin-ing the ‘rise and fall’ of the Third World since 1945, discussing as back-ground to the current period the Bandung Conference in 1955 andformation of the Non-Aligned Movement in 1961, the formation ofUNCTAD in 1964 and the oil price rises of 1973–74 and calls for a newinternational economic order in 1974–75. While the mid-1970s areoften regarded as being the height of the period of Third World solidar-ity, this argument is treated with some scepticism and it is shown howthis supposed apex quickly gave rise to the decline of ‘Third Worldism’in the context of the debt crisis of 1982, neoliberalism and the lostdecade of development in the 1980s. The chapter then moves on todiscuss the rise of what has been called the ‘new South’ (Alden et al2012), which is associated with the rise of new international organiza-tions and summits, including the BRICS. Finally, the chapter thenaddresses the question of what the transformation of the internationalorder might actually mean, whether it be the rise of new hegemonicchallengers, a new era of multi-polarity, or simply a new era of South-South cooperation.

The Third World and the South after 1945

The idea of a Third World arose in the context of the intensification ofthe Cold War in the post-war period. While the First World referred tothe advanced capitalist countries, the Second World was the com-munist alternative, though China’s position was ambiguous, not leastafter the breakdown of close relations with the Soviet Union in 1958.

The South and Geopolitics: From Bandung to the BRICS? 153

Though the origins of the term Third World are usually contested, itappears to have been used by some members of the French left to referto a third force, independent of both capitalism and official com-munism (see Worsley 1967: 302). This idea of a third force, non-aligned between hostile capitalism and official Communism, was takenup by a number of anti-colonial and newly independent leaders suchas Nehru in India, as well as Yugoslavia under Tito, which had brokenfrom Soviet domination. In this respect then, the Third World referredto non-alignment, but its usage was wider than this. It usually referredto countries that had been colonized and were relatively poor in theworld economy (Worsley 1967: 9; Alden et al 2012: 4), and so the termwas often linked to the idea of development.

The idea of the Third World was therefore also related to national-ism, in the sense of former colonies building nations (or colonies aspir-ing to independence), promoting protectionist industrializationstrategies (see Chapter 3), and asserting their influence in the interna-tional order. The post-war context was in some respects a favourableone, with both superpowers supporting the end of empire and condi-tionally supporting independence and the extension of sovereignty tonew nation states. The Atlantic Charter of 1942 and the UnitedNations’ Universal Declaration of Human Rights of 1948 both laiddown the normative basis for decolonization, and the defeat of theNazi regime served to undermine, in official circles at least, some of themost extreme forms of racism, colonialism and empire. On the otherhand, the liberal international order promoted by the United Stateswas one in which power was still exercised through vetoes at the UNSecurity Council, and through weighted voting at (admittedly weak)international financial and development institutions like the IMF andWorld Bank. Perhaps above all, the Cold War ensured that geopoliticalinterests continued to dominate, so that for example aid was closelytied to commercial interests or even more to the interests of the com-peting super-powers, and even the sovereignty of nation states wascompromised by US or Soviet responses to particular regimes(Mulholland 2013: ch.12).

It was in this context that non-alignment was developed as an inter-national principle by a number of states, first at the BandungConference in Indonesia in 1955. This conference was convened byBurma, Ceylon, India, Indonesia and Pakistan, and attended byAfghanistan, Cambodia, the Peoples’ Republic of China, Egypt,Ethiopia, the Gold Coast, Iran, Iraq, Japan, Jordan, Laos, Lebanon,Liberia, Libya, Nepal, the Philippines, Saudi Arabia, Sudan, Syria,

Thailand, Turkey, the Democratic Republic of Vietnam, the State ofVietnam, and Yemen (Alden et al 2012: 39). Much of this conferencefocused on cooperation, sovereignty, nationalism and colonialism, buteven at this early stage, prospects for cooperation were hindered by dif-ferences between countries, such as on-going border disputes betweenChina and India (Alden et al 2012: 41–3).

Nonetheless, the impetus to formalize non-alignment continued andactually increased in the context of the emergence of a number ofnewly independent states, particularly in Africa. The Non-AlignedMovement was formally founded at the Belgrade conference inSeptember 1961. Many of those that attended the Bandung Conferencewere again present, plus some new African states including Ghana,Guinea, Mali and Morocco (Alden et al 2012: 50). There were also someobserver states from Latin America present, including Brazil andEcuador. The criteria for invitations to the conference centred aroundthe following:

(i) an independent policy based on the coexistence of states with dif-ferent political and social systems and non-alignment or a trendin favour of such a policy;

(ii) consistent support to movements for national independence;(iii) non-membership of a multilateral military alliance concluded in

the context of Great Power conflicts;(iv) in case of bilateral military agreement with a Great Power, or

membership of a regional defence pact, the agreement or pactshould not be one concluded in the context of Great Powerconflicts; and

(iv) in the case of lease of military bases to a foreign power, the con-cession should not have been made in the context of Great Powerconflicts. (Willetts 1978: 18–19)

Much of the focus here then was on non-alignment, which wasemphasized even more at the conference in Belgrade, which took placeagainst the background of the construction of the Berlin Wall and thusrising geopolitical tensions between First and Second Worlds. Butalongside this geopolitical vision was a more economic interpretationof ‘Third Worldism’. The Non-Aligned Movement did not ignore thismore explicitly developmental approach, but it was through theUnited Nations Conference on Trade and Development (UNCTAD),that this economic approach was emphasized. UNCTAD was foundedin 1964, alongside what remains the largest intergovernmental organ-


ization of developing countries, the Group of 77 (which retains thename G77 but now has over 130 countries as members). The G77 “isthe largest intergovernmental organization of developing countries inthe United Nations, which provides the means for the countries of theSouth to articulate and promote their collective economic interests andenhance their joint negotiating capacity on all major internationaleconomic issues within the United Nations system, and promoteSouth-South cooperation for development.” (www.g77.org)

The G77 took up the UNCTAD agenda, particularly in the 1970swhen calls were made through the UN General Assembly for a NewInternational Economic Order (NIEO). Encouraged by the success ofthe Organisation for Petroleum Exporting Countries (OPEC), whichwas successful in promoting massive price rises in oil in 1973 and1974, a special session of the UN General Assembly called for the estab-lishment of a NIEO in April 1974 (see Prashad 2013a: 29; Alden et al2012: 57; Singham and Hune 1986). The idea of a new internationaleconomic order was intended to provide a favourable internationalcontext for existing nationalist development strategies based on importsubstitution industrialization. In particular, it focused on three coreareas. First, in terms of trade, the NIEO promoted a scheme for alleviat-ing unequal terms of trade and specifically declining prices for primarycommodity exports. The specifics of this needed to be worked out, butcould involve guaranteed prices for certain commodities, or some kindof compensatory fund if market prices fell below a certain level (Anelland Nygren 1980: 135–43). Second, in terms of investment, the NIEOcalled for codes for multinational companies investing in the South,which reflected concerns over certain practices, such as transferpricing. This was where MNCs involved in intra-firm trade mightdeclare profits in a lower taxation country in order to evade tax in ahigher taxation country, even when the profits may have been made inthe latter (Anell and Nygren 1980: 200). Third, in terms of aid, theNIEO called for more aid but at least as important, an improvement inthe quality of aid, so that it would not be tied to geopolitical considera-tions or the commercial interests of particular companies located inthe donor countries (Anell and Nygren 1980: 147–9).

The mid-1970s was in many ways the apex of Third World solidarity,but by the late 1970s and early 1980s, this had come to an end. WhatPrashad (2013a: 1–3) somewhat problematically calls the ‘third worldproject’ of bread, peace and justice was defeated by the Atlantic projectof neoliberalism, as more and more developing countries faced thedebt crisis of 1982, and conditions attached to receiving new loans via


the IMF, and even development aid via the World Bank (see Chapter 3). While the rise of neoliberalism was undoubtedly a factor inthe undermining of Southern solidarity, there is equally good reasonfor questioning the extent of such solidarity in the first place. Non-alignment was always compromised by the fact that in practice, mostThird World states were aligned to either one of the superpowers, evenif this often changed over time. But in the post-Cold War world, non-alignment became an even more problematic idea. Moreover, therewas significant economic differentiation among the countries of theSouth, and this was particularly clear by the late 1970s and early 1980s.There were the rapidly growing first tier East Asian newly industrializ-ing countries, the industrializing countries of Latin America whichwent into severe recession by 1982, some of the poorest countries inparts of sub-Saharan Africa and South and West Asia, and the oilexporters. Given this diversity, some talked about the ‘end of the thirdworld’, both as economic and political reality (Harris 1986). This maybe an over-statement, but certainly the economic divergence betweencountries of the South was important. Indeed, the mid-1970s peak ofThird World solidarity might be seen in another light when we considerthat the oil price rises of 1973 and 1974 were not just a problem forwestern oil importers, but also oil importers from the South as well.Moreover, the oil price windfalls were not used for developmental pur-poses but were recycled via western banks to developing countries facingeconomic difficulties in the 1970s. Prashad (2013a: 27) regards the oilprice rises as a central part of the Third World project, but also then goeson to say, without further comment, that “(b)y the early 1980s, a newworld order had begun to emerge. It was not the NIEO, and it was notrun by Third World states – although it was partly financed by OPEC.”(Prashad 2013a: 47) This latter view would suggest that even at itssupposed high-point, Third World solidarity was limited.

The new South

The rise of a new South must be located in the context outlined in pre-vious chapters, namely the emergence of new powers in the context ofthe long boom of the 1990s. Particularly significant has been the factthat a number of these countries are large developing countries, andhere we return again to the question of the BRICS. Alongside this,there have been a number of developing countries that have at leastpartially challenged some of the main policies of the WashingtonConsensus (see Chapter 3; also Ban and Blyth 2013), not only among


the BRIC countries but elsewhere, particularly in Latin America (Ellner2012). This has laid the basis for regional and wider agreements, insti-tutions and summits by a more assertive South.

This section focuses on how the new South has manifested itself inthe areas of development and of geopolitics, and some comparison willbe made with the earlier era of South-South cooperation and the newinternational economic order, and of non-alignment. It should benoted that the G77, UNCTAD and the Non-Aligned Movement con-tinue to exist, but to some degree these have been displaced by newalliances, and a new context.

Developmental alliances

Since the 1970s and 1980s, there has been a shift from demands for anew international economic order to one of acceptance of the existingorder, but one where different parts of the South have made demandsfor a greater say within that order. This can be seen in the case of theUruguay Round of the General Agreement on Tariffs and Trade(GATT), which culminated in the creation of the World TradeOrganization (WTO) in 1995 (Ostry 2007). In particular parts of theSouth hoped that a shift towards freer trade would be reciprocal, andthat the developed world would liberalize those sectors in which thedeveloping world was particularly export dependent, such as agricul-ture and clothing and textiles. This met with initial disappointment,particularly at the collapsed WTO talks in Seattle in 1999, which inpart were overshadowed by the diverse protests outside of the talks(Kiely 2005: 117–24). While in the longer term there was significantliberalization in the clothing and textiles sectors, much of the develop-ing world remained disappointed with progress in agriculture, as devel-oped countries maintained various protectionist measures outside oftariffs, such as subsidies. The overall level of subsidies to farmers in the developed world increased after the WTO was founded, from $182 billion in 1995 to $318 billion in 2002 (Oxfam 2002: 12). In addi-tion, the promotion of Trade Related Intellectual Property Rights(TRIPS), which often extended both the duration of patents and the sectors to which they applied, was a source of disappointment.Developing countries were also disappointed by procedures at WTOmeetings, such as informal meetings among developed countries wherecountries of the South were largely excluded (Narlikar 2005).

One response was to form coalitions to promote their collectiveinterests. The G20 of developing nations was perhaps the mostsignificant group in terms of promoting market access to developed


world markets, particularly in agriculture. It emerged at the CancunMinisterial meeting in 2003, and took a far more adversarial positionon trade liberalization on agriculture in response to developed worldintransigence (Taylor 2007). However, perhaps more significant thanthese alliances is the fact that a number of large developing countrieshave emerged as powers in the international order, and have devel-oped new alliances as part of this process. As well as the BRICS, there isalso the India, Brazil, South Africa grouping known as IBSA, as noted inChapter 2. This was established in 2003, and stresses the democraticcredentials of the three countries, alongside the fact that they are bothmiddle powers and developing nations. They particularly aim to “con-tribute to the construction of a new international architecture; bringtheir voice together on global issues; deepen their ties in various areas”as well as opening itself up to “concrete projects of cooperation andpartnership with less developed countries.” (IBSA 2013)

But as we saw in Chapter 2, the most significant grouping is theBRICS. This is not only because of the size of the countries that makeup its membership, though this is very important, but also because ofthe question of whether these countries challenge the existing interna-tional order, and specifically US hegemony and development dom-inated by neoliberal prescription. Prashad (2013a: 12) argues that “(t)heBRICs do not promise any kind of revolutionary transformation of theworld order; they are modest in their ambitions. Nevertheless, they arethe first formation in thirty years to challenge the settled orthodoxy ofthe Global North. What the BRICS have enabled is the opening up of some space, allowing a breath of air to oxygenate the stagnant worldof neoliberal imperialism. The BRICS states have their own commit-ment to neoliberal policies, but they are no longer willing to bendbefore imperial power. It is in this gap between neoliberal policy andimperial power that an opportunity presents itself for the bloc of theSouth.”

Once again it is the rise of one power, China, which is reallysignificant. In one sense this can be seen as an era of continuity withthe high-point of non-alignment as Maoist China saw itself as theleader of the global South, and still does in terms of its policies on bothaid and trade. In this regard, we arrive back at the debate over theBeijing Consensus and state capitalism, as outlined in Chapters 2 and3. The next sub-section will examine this issue with particular refer-ence to geopolitics, but here we first examine the developmental ques-tions of aid and trade.


China and the new South: Aid, trade and a new solidarity?

Though as we saw in earlier chapters, China itself is sceptical as to theclaims regarding a Beijing Consensus, the Peoples Republic does seeitself as a leader of and for the Third World. China is a major aid donorto the developing world, and this is seen as being part of a long tradi-tion of leadership of the Third World. Maoist theory argued that Chinawas the leader of the Third World and in 1974, Deng Xiaoping arguedat the United Nations that China “stresses a common destiny with theThird World.” (cited in Chin 2012: 589) The continued commitmentto Southern solidarity was emphasized by General Secretary Hu Jintaoin October 2007 when he stated that:

We support international efforts to help developing countries enhancetheir capacity for independent development and improve the livesof their people, so as to narrow the North-South gap…For otherdeveloping countries, we will continue to increase solidarity andcooperation with them, cement traditional friendship, expand prac-tical cooperation, provide assistance to them within our ability, anduphold the legitimate demands and common interests of develop-ing countries. (cited in Chin 2012: 589–90)

The 2011 White Paper on aid distinguished between Chinese aid to thesouth and western aid, with the emphasis in the case of the former on“helping recipient countries build up their self-development capacity”,“imposing no political conditions” and “adhering to equality, mutualbenefit and common development.” (cited in Chin 2012: 590) At theBRICS summit at Delhi in March 2012, Hu Jintao called for the BRICSto “jointly promote South-South cooperation.” (cited in Chin 2012:592) This is also regarded as a practice that continues from the Maoistera, where the principles of respect for sovereignty, equality and mutu-ality were espoused.

Reliable data for the amount of aid dispensed by China is hard tofind, mainly because of the way in which aid is defined by the Chinesegovernment (Mawdsley 2012: ch3). Chinese grant contributions andinterest free loans managed by the Ministry of commerce (MOFCOM)stood at $866 million in 2009, compared to a US aid total of $31 billion in 2010 (Chin 2012: 581). However, China Eximbank andthe China Development Bank administer low interest ‘foreign eco-nomic cooperation’ loans, which would substantially increase theamount of aid dispensed by China, with estimates that the figure could


be as high as $25 billion in 2009, though most estimates remainconsiderably below this figure (Chin 2012: 582). What is undoubtedlythe case is that there has been a substantial increase in aid to differentparts of the developing world in recent years, and the Chinese self-perception is that this aid is dispensed on far more generous termsthan western aid, where stringent conditions are attached (Brautigam2011: chs.4 and 5).

Even more important has been the development of trade relation-ships between various parts of the South, with China playing a leadingrole in this process. As we saw in Chapters 4 and 5, the rate of growthof developing world exports has increased enormously, alongside asubstantial increase in South-South trade, which accounted for lessthan 9% of world trade in 1960 but as much as 42% in 2008 (Beausang2012: 56). Much of this can be explained by the rise of China. Chapter 4(Tables 4.11 and 4.12) showed how the trade of the ‘other BRICs’ withChina was more significant than trade between each other, but it is notonly trade with the other BRICs that is significant as earlier chaptersalso showed. The share of China in Latin America’s exports increasedseven-fold from 2000 to 2010, and by 2009, China was the top exportmarket for Chile and Cuba as well as Brazil, and the second biggest forColombia, Costa Rica and Peru (Jenkins 2012: 1339). What is particu-larly clear is that Latin America is a major exporter of primary com-modities to China, with copper ore, soybean, soya oil, iron ore, crudeoil, and refined copper leading the way in terms of exports. Table 7.1clearly shows the degree to which Latin America depends on theexport of primary goods. What is striking is that Latin America exportsof primary goods are more dependent on China than they are for therest of the world, and that this dependence has increased in recentyears. Moreover, the concentration, based on a straightforward con-trast of primary goods and manufactured goods, is an under-estimationwhen we factor in resource based manufactures. If we combine primarygoods and resource based manufactures, then in 2008 87.7% of LatinAmerican exports were in these sectors, compared to 53.6% for the restof the world.

It is not only the direct effect of Chinese demand for developingworld exports that is significant, but also the indirect effect of Chinesedemand on global commodity prices (Farooki and Kaplinsky 2012).Measuring this effect is difficult as it would rely on counterfactualswhich are impossible to measure with great precision. For instance, onepossible scenario would be to try to measure China’s impact by factor-ing out its higher than average growth of demand for particular com-


modities, but over a given period, China’s growing demand wouldimpact on demand in the rest of the world; separating one from theother involves some degree of guess work. Nonetheless, a comparisonof consumption growth of particular commodities in China and therest of the world does provide some telling indication of just how fastChina’s growth has been. Table 7.4 provides such a comparison,measuring (percentage) consumption growth in China and the rest ofthe world in the period from 2002 to 2007.

As already shown in Chapters 4 and 5, this period saw hugelysignificant price increases for a number of commodities: iron ore pricesincreased by 184.7%; copper by 356.5%; aluminium by 95.4%; andzinc by 316.4% (R. O. Jenkins 2011: 75). Similar, though not identicalpatterns can be identified in Africa too, where there was a significant


Table 7.1 Composition of Latin America and Caribbean exports to China,and to the rest of the world, rounded up percentages

China China China Rest of Rest of Rest of 1990 2000 2008 world world world

1990 2000 2008

Primary products 40.2 58.1 71.9 49.1 27 38.5Manufactured goods 59.8 41.8 28.1 49.7 71.3 58.5(all goods including resourced based and non-resource based)Manufactured goods 25.1 23.3 15.8 22 17.2 15.1that are resource based only

Source: Adapted from Jenkins 2012: 1334, with author and publisher permission

Table 7.2 Percentage increase in consumption growth, 2002 to 2007

Commodity China Rest of world

Oil 48.7 6.6Iron Ore 224.9 19.5Copper 77.6 6.1Aluminium 124.3 20.4Zinc 70.3 2.9Soybean 37.2 17.7Soybean oil 54.2 18.4

Source: Adapted from R.O. Jenkins 2011: 80, with author and publisher permission

increase in trade with China in the period from 1998 onwards. Africa’sexports to China increased from $1.4 billion in 1995 to $34.4 billionby 2007 (Farooki 2009: 18). In the period from 1999 to 2004, Africa’sterms of trade improved by around 30% (UNCTAD 2005: 94). The mostsignificant exports to China were in minerals and metals (especially inGhana, Namibia, Zambia), timber (Cameroon, Congo, Mozambiqueand Tanzania) and above all, oil (Angola, Sudan and to some extentCameroon and the Democratic Republic of Congo). Indeed, it is themain oil exporters that are most significant and in 2003, Chinaaccounted for 41% of Sudan’s exports and 23% of Angola’s exports(Jenkins and Edwards 2006: 212). About a quarter of total Chinese oilsupplies are sourced from the Gulf of Guinea (Carmody and Owusu2007: 505).

If we recall from the previous section, the demands for a new inter-national economic order in the 1970s included attempts to find waysto stabilize the price of volatile primary commodities. This usuallyinvolved calls for international intervention to compensate for priceshortfalls or to simply agree on prices irrespective of market demand.One could argue that China’s rise has provided a new internationaleconomic order through the backdoor, or at least through globalmarket demand, because it has – in part at least – led to huge increasesin primary commodity prices and thus reversed unfavourable move-ments in the terms of trade for producers in these sectors. This may notbe the result of deliberate political intervention aimed to boost solidar-ity, but that is the outcome all the same.

However, the picture might be more complex than this. One couldargue instead that the relationship between China and the rest of thedeveloping world is unequal and asymmetric, and indeed one thatreplicates former patterns of colonial and neo-colonial relations. Forinstance, Latin America “is much more dependent on the Chinesemarket than China is on the Latin American market as sources ofsupply.” (Jenkins 2012: 1348) China has promoted its own processingindustries, designed to upgrade in terms of climbing the value chain ofparticular commodities, and relied on imports to supply the basic rawmaterials. This has left some countries increasingly reliant on a smallnumber of exports, and this concentration tends to increase with traderelations with China (Jenkins 2012: 1351). Similarly, in Africa the shareof oil, minerals and metals in exports to China increased from 76% oftotal exports in 2000 to 85% in 2006 (Farooki 2009: 18).

One possible response to this objection is ‘so what’? As long as com-modity prices remain high, these kind of objections do not matter.


However, as previous chapters have suggested, they do matter, and thisis for four reasons. First, just as the oil price rises of 1973 and 1974 haddifferential effects, so too the impact of higher commodity prices variesacross the developing world. While higher prices are good news for netcommodity exporters, the opposite is true for net importers. Thus, inthe case of Latin America, El Salvador, Nicaragua, Costa Rica, Panamaand Uruguay, as net importers, have been clear losers (R. O. Jenkins2011: 84). Second, as previous chapters argued, there is the question ofsustainability and the need to diversify to establish wider linkages incountries in desperate need of development. Furthermore, this ques-tion of the sustainability of primary commodity dependence is notonly a question of the volatility of commodity prices, and the conse-quences of a rapid fall in those prices. There is also the question ofcommodity exports inflating the national currency and thereby under-mining domestic industry, and thus potentially underminingdiversification. From 2003 to the end of 2010 in Brazil, the real appre-ciated by 108%, at the same time as the share of manufacturingexports fell from 55 to 44% (Beausang 2012: 39–40). Third, there is the question of competition from China. Thus for instance, with theending of the protectionist measures in clothing and textiles under theMulti-Fibre Agreement in 2005, African clothing and textiles exportsdropped by 11% in value terms in the first ten months after quotaswere removed, while China’s share over the same period increasedsharply (Kaplinsky and Morris 2008). Fourth, we should be careful notto exaggerate the significance of China’s rise for the rest of the South.China is a growing and indeed a major export market for LatinAmerica, but in 2010, just over 8% of the region’s exports went toChina, compared to 41% for the US and 13% for the European Union.In 2009, when Latin American exports fell by 23% compared to theprevious year, exports to the US fell by 26% and to the EU fell by 28%.In the same year, exports to China increased by 7.5%. This translatedinto a fall in the value of exports to the world apart from China andHong Kong of almost $200 billion, and an increase in the value ofexports to China and Hong Kong of just $3.6 billion (Jenkins 2012:1353–4). This suggests then that there is both an unequal trading rela-tionship between China and the South, but also that the total level oftrade is still quite small.

Geopolitics

One of the major concerns of the new South is to demand greater rep-resentation at the major institutions of global governance. For


example, at the International Monetary Fund European countries have32% of the vote and the BRICs have 11.5%, while at the World Bankthe developed world holds 60% of voting shares (Beausang 2012: 85).But the debate reaches beyond simple institutional representation, andone of the major geopolitical debates in the post-Cold War world hasbeen about liberal interventionism. While the specifics of each casevary, there has been a common theme, both in cases of interventionand (relative) non-intervention, that ‘humanitarian military interven-tion’ can be justified on the grounds that state sovereignty is condi-tional on nation states respecting the rights of its citizens. This is notnecessarily a new argument and was part of the case made for the pros-ecution of leading Nazis at the Nuremberg trials of 1945–46 (Hebert2010). However, in the Cold War period, though lip service was paid tothe rhetoric of freedom against Communism, in practice real politicscontinually trumped ethics, and US-led interventions were often madeon the grounds that left-wing or even just nationalist governmentsneeded to be removed (or popular opposition movements had to becrushed) because these were simply proxies for Soviet expansion. Thissometimes involved the overthrow of liberal-democratic governments,and at the very least relatively mild non-democratic regimes, and theirreplacement by highly repressive authoritarian regimes (Latham 2010).In the post-Cold War world, in the absence of a Communist compet-itor, the argument has been made that ethics can now trump real pol-itics. This has partly informed the rhetoric of military intervention inthe former Yugoslavia in the 1990s, Afghanistan and Iraq in the 2000s,and Libya in the 2010s.

The question that needs to be addressed here is whether or not thenew South represents a challenge to this liberal interventionism. Onone level it does, and in the cases of Afghanistan and especially Iraqthere was considerable opposition to military intervention (see Coatesand Kreiger 2004). On the other hand, a considerable number of coun-tries were part of the ‘coalition of the willing’ in the war against Iraq,even if this list was highly selective (BBC 2003).1 In terms of under-standing the emergence of a new South, the case of Libya is particu-larly interesting because all of the leading BRICS were on the SecurityCouncil when UNSC Resolution 1973 was passed, authorizing militaryintervention (UNSC 2011). However, none of the countries chose toexercise the veto (though Russia and China have used this regularly inother cases), and the resolution was passed with 10 votes for, noneagainst and 5 abstentions. These were four of the BRICS (Brazil, China,India and Russia), plus Germany. South Africa voted for the motion.


Two things should be noted about this vote: first, that an abstentionamounts to only limited, if any, opposition to the motion. The absten-tions were made in the full knowledge that this in effect gave a greenlight to military intervention. Second, and in contrast to liberal inter-ventionist hawks who argue that opposition to intervention is tanta-mount to support for dictatorship, much of the critical voices madeabout this intervention were ones concerning due process, practicalityand feasibility, at least as much as simple opposition to military inter-vention per se. Both Russia and India emphasized the question of how,and by whom, the resolution would be enforced, while Brazil andChina were unconvinced that intervention would lead to the end ofconflict (UNSC 2011; Chimni 2013; Evans 2013).

In 2005, all member states endorsed the principle of theResponsibility to Protect (ICISS 2001), thus giving states a legal obliga-tion to protect their populations, while also giving the green light tothe international community to act in the face of genocide, warcrimes, ethnic cleansing and crimes against humanity (UN 2005).However, this has not led to a consensus about intervention. On theone side, liberal interventionist hawks such as former British PrimeMinister Tony Blair have interpreted this as a green light for militaryintervention, and paid only lip service to questions of process (thoughBlair, a Middle East ‘peace envoy’, kept very quiet over the Libya inter-vention as this followed a few years of close ties with former PresidentGadaffi). But much of the new South argues that proper proceduresneed to be followed. In particular, many countries argue that ambigu-ously worded Security Council resolutions are used to give the greenlight to interventions beyond their original remit, which was essen-tially how the BRICs criticized the intervention in Libya after the event(Evans 2013). This is a legitimate fear that was most visible in the caseof the invasion of Iraq in 2003 (and indeed over Kosovo in 1999),when an ambiguous Security Council resolution 1441 was eventuallyignored, or used as the basis for going to war, even though PrimeMinister Blair explicitly promised the House of Commons that the res-olution was not “an automatic trigger point” and stated that “para-graph 12 of the resolution makes it clear that it is not.” (quoted inCoates and Krieger 2004: 57)

This fear of mission creep can also be seen in the case of Syria in2013. Again the debate was often set up in a misleadingly starkfashion, with liberal hawks accusing opponents of military interven-tion of supporting the Assad dictatorship.2 The US administration’ssupport for military intervention was undermined by lack of support,


and this eventually culminated in the shift from war to a compromisein which Syria was tasked to give up its chemical weapons (Manley2013), and in any case the US and its allies substantially shifted theirposition (without acknowledging that this was the case) with the riseof the so-called Islamic State movement in 2014. The most importantmatter for our purposes is the extent to which all this adds up to ageopolitical challenge to the West, both generally and in terms of thespecific example of Syria. As already stated, in one respect it does, inthat leading countries in the new South are less committed to liberalmilitary intervention than the West. Some influential US commenta-tors, from a variety of political perspectives, have called for the forma-tion of a League of Democracies to counter what was perceived to beauthoritarian opposition to humanitarian intervention (Ikenberry andSlaughter 2006; Daalder and Lindsay 2007; Daalder and Kagan 2007;Kagan 2008).

However, the West itself is hardly united over this issue. Germanyhas opposed a number of interventions, most notably in Iraq, forexample. In the case of Syria, the gradual shift away from a commit-ment to military intervention in September 2013 (and towards inter-vention against anti-Assad insurgents in 2014) reflected less thechallenges of the new South and the BRICS in particular, and more thelack of support from different sections of government, most notablyCongress in the US in 2013 at least. Though far from decisive, Britishparliamentary opposition from the US’ most loyal ally over interven-tion against Assad did reflect a shift from the early 2000s, as did publicopposition to the war. This in turn can be traced back to the fiasco ofthe Iraqi intervention. Moreover, we have already suggested that thisopposition is partly one of process as much as a simple defence of statesovereignty, at least in the cases of Libya and Syria. This is less the casein terms of Russia’s close ties to and support for Syria under Assad, asopposed to the more passive opposition of China and India in particu-lar (Evans 2013; Chimni 2013), but this in itself demonstrates furtherlack of unity among the BRICS in terms of formulating a united posi-tion on strategic foreign policy. Indeed, Putin’s support for the Assadregime in part reflects “the Russian leadership’s anxiety about Russianstate order and perceived challenges to Russia’s domestic politicalstructure. This anxiety underlies Moscow’s stark repudiation of movestowards regime change in foreign states that are perceived to bear theimprint of western states” (Allison 2013: 818). In other words, thisposition reflects Russian domestic political weakness more than anyalleged international strategic strength. More generally, it should also


be stressed that there is considerable regional rivalry among at least 3of the BRICS, namely India, China and Russia, particularly in Asia. Notunrelated to this point, though China’s commitment to a peaceful riseto power is not just rhetorical, it is the case that China has ambitionsto be a major power alongside the US, in contrast to Russia, Brazil andIndia who (more realistically) are committed to a multipolar interna-tional order, rather than a bipolar one with the US and China at thetop.3 Russia’s effective annexation of Crimea and the escalation of theUkraine crisis in 2014 should also be seen in this light. On the face ofit, the action appears to represent a return to great power politics (Zala2014), and Brazil, India, China and South Africa abstained from theUN resolution condemning Russian action, while Russia voted againstthe motion (Keck 2014). Moreover, in a response to a move to banPresident Putin from the planned G20 summit in Australia inNovember 2014, BRICS foreign ministers issued a dissenting statement(IRC 2014). However, as we have seen, it is one thing to recognize thecontingent existence of conflict between states, and quite another toexplain this as the necessary product of either an anarchical statesystem or uneven and combined development. Indeed, it is betterexplained in reference to Russian regional ambitions and in particulara desire to counter NATO expansion in the region, rather than aconflict between two global super-powers.

Transforming international order?

Alden et al put forward the case that the rise of the new South doesconstitute a transformation of the international order. The likes of theG15, G20, IBSA “were able to mobilise support in favour of positions atthe WTO, backed in part by an assertive civil society. The result wasthat a new era of Southern activism paved the way for a grand powershift in international politics the likes of which had not been seensince the turn of the nineteenth century.” (Alden et al 2012: 92) This islinked to the rise of the new southern powerhouses, for “(i)n the end,it wasn’t the declaratory politics of the NAM as much as the economicpower of emerging countries in the South in conjunction with theseaspirations that began the process of reshaping parts of the interna-tional system.” (Alden et al 2012: 124) However, does this amount to atransformation of the international order? Or does it instead reflect therise of a new South, one that is limited and which ultimately reflectsthe continued subordinate role of the South in the international order?This of course brings us back to the question of continuities and


discontinuities with the Non-aligned Movement and G77. These were(and are) organizations which did not bring about a transformation ofthe international order, but which were (and are) in effect interna-tional interest groups within a highly unequal order.

To answer these questions we need to return to a discussion of the fivepositions outlined in Chapter 2. These were: (i) there is a Beijing consen-sus or China model and this is a cause for concern; (ii) emerging powersare rising and this is transforming the international order, which carrieswith it a set of dangers; (iii) there is a Beijing consensus, or China orBRICS model, but rather than this being a cause for concern, it should beone for celebration; (iv) insofar as there is a rise of emerging powers in thedeveloping world, this should be seen as a triumph for the West; (v) therise of emerging powers is limited, and US hegemony persists. As we sawin that chapter, these positions are not completely mutually exclusiveand there is some overlap. In terms of the specific discussion in thischapter, what then should we make of these different approaches?

The first position essentially contends that China is in effect a ‘roguedonor’ in terms of aid (Naim 2007), in that aid is dispensed to regimesirrespective of human rights abuses. This is in contrast to conditionsattached to aid by western regimes, which include (in theory at least)respect for human rights on the part of recipient states. The US Houseof Representatives Sub-committee on Africa, Global Human Rights andInternational Operations in 2005 expressed the fear that China’sinfluence in Africa might “undo much of the progress that has beenmade on democracy and governance” in the developing world (cited inBreslin 2011b: 1323). As we saw in Chapter 2, this is sometimes linkedto geopolitical fears over the rise of a Beijing Consensus, so that“China’s strict refusal to act in ways that would, in its view, violate acountry’s sovereignty has meant China has remained apart from suchissues as civil liberties, rule of law, human rights, and democratic gov-ernance.” (Halper 2010: 98) It is the case that China is more preparedthan liberal interventionists in the West to defend the principle of sov-ereignty, but as we saw above in the cases of Libya and Syria, part ofthe opposition to intervention also involves concerns about process,feasibility, and planning. We also saw above that liberal intervention-ists often (albeit misleadingly) contrast the cosmopolitan, solidaristicWest, with self-interested and rogue states in the South (Barnett 2004;Cooper 2002). While this position should not be rejected out of hand,its contrast of a morally repugnant China and an altruistic West is toosimplistic. As we saw in Chapter 3, authoritarian state capitalism is farfrom exclusive to China and characterized the developed countries in


the early stages of their development. This does not of course meanthat one need necessarily apologize for past practice by western gov-ernment as well as present practices by current authoritarian ones, notleast as many dictators used such arguments in an instrumental way torationalize state repression. But it does suggest that some kind ofrealism about the feasibility of human rights as a purely altruisticinstrument of foreign policy is necessary, not least as the division ofthe world between more and less powerful states can lead to humanrights policies being used as instruments for the exercise of power bythe former over the latter. This argument is all the more valid whenone considers the selectivity with which human rights is used as ajustification for policy by those powerful states. Moreover, while anyintervention must involve some form of selectivity, thus discountingthe argument that the West is hypocritical because it intervenes in onerogue state and not another, the fact that such interventions ofteninvolve the use of rogue states as allies is not irrelevant. In the case ofthe 2003 war in Iraq, the US State Department identified 18 of the 30countries willing to be identified as part of the coalition of the willingas having poor or very poor human right records (IPS 2003). Nor canthe predictable deaths of innocent people that result from militaryinterventions, be excused as collateral damage, or the unfortunate con-sequence of good intentions, as if bad actions and outcomes can beexcused in such a way. Weber’s (1984: 360) distinction between anethics of responsibility and an ethics of principled conviction is rele-vant here, as the former “does not feel that he can shuffle off the con-sequences of his own actions, as far as he could foresee them”, whilefor the latter, “(i)f evil consequences flow from an action done out ofpure conviction, this type of person holds the world, not the doer,responsible.” In other words, liberal imperialists believe that if unex-pected – and violent – consequences occur as a result of good inten-tions, these cannot be the fault of the liberal, because the goodintentions supposedly excuse the unforeseen consequences. As well aspropagating the dangerously circular argument that good intentionsself-evidently excuse bad actions, and this must be so as the badactions are unexpected consequences of good intentions, this approachbetrays a poor understanding of political reality: the expectation is thatintervention will be followed to conformity to a liberal norm thatabstracts completely from the violent conflict that has accompanied allprocesses of capitalist development. The argument that a state capital-ist, Beijing-led alternative to US hegemony is a cause for concernshould be put into this wider context.


The second position essentially argues along realist or Leninist lines,and suggests that China’s rise is leading to conflict with the threatenedhegemonic power, the United States (Carmody and Owusu 2007). Thisis reflected in differences over intervention in the developing world,but also has led to competition over limited resources such as oil (Klare2004). There are of course areas of conflict between China, the US andother states, but whether this can be explained as the necessaryoutcome of international anarchy (realism) or uneven development(Leninism) is another matter. Contemporary imperialism differssharply from the imperialism theorized by classical Marxists like Leninand Bukharin, when inter-imperialist rivalries took place in the contextof relatively closed trade and investment relations with the coloniesand semi-colonies, in contrast to the current liberal order of relativelyfree trade and open door investment policies (Kiely 2010; Panitch andGindin 2012). Theorizing current wars in terms of access to raw mater-ials is therefore unconvincing because, in the context of free trade andopen investment, it does not secure access at the expense of potentialrivals.4 It may convey some form of strategic power, but “the form ofthat control is, in fact, very ambiguous and, most importantly, verydifferent to the kinds of exclusive control over raw materials tradition-ally associated with imperial powers.” (Bromley 2005: 228; Stokes andRaphael 2010) More generally, while it is the case that internationalrelations between China and the US are often based on different andconflicting perspectives which act as constraints on cooperation, theseareas of conflict and contestation are not comparable to older rivalriesbetween so-called great powers. In particular, while not agreeing withthe US in a number of crucial areas, China has simultaneously accom-modated itself to the US’ hegemonic global role, even if this is less trueat the level of specific regions (Foot and Walter 2010).

The third position celebrates the rise of China and the BRICS andsees this as paving the way for a new era of Third World solidarity notseen since the 1970s (Desai 2012; 2013). Chinese aid can be seen asbeing part of a wider process which challenges western, and encour-ages alternative models of development. For Radhika Desai (2012):

The BRICS and emerging economies have already set in train awider set of changes in the international architecture of the worldorder. Since western powers maintain their grip on its major institu-tions, these rising powers have side-stepped them, setting up newinstitutions and using old minor ones in new ways.”


Desai has little to say about these institutions though she doesmention a BRICS development bank (Desai 2013), which was first pro-posed by the BRICS summit at Durban in March 2013 (BRICS 2013),and then again at the BRICS meeting in Brazil in July 2014 (BRICS2013; Eichengreen 2014). While this might develop into a significantchallenge to US dollar hegemony, the early signs (in 2014) are that itwill not, above all because of the depth and range of financial marketscentred in the US (see Chapter 5) and because borrowing under theBRICS bank contingent reserve arrangement would still depend on theborrowing country having an on track agreement with the IMF(Panitch 2014). Perhaps more significant is Desai’s wider assertion thatwhat unites the BRICS is a rejection of the neoliberal developmentmodel, and the embrace of a state capitalist alternative, as discussed inChapter 3. This argument parallels Halper’s fears of a Beijing consensusalternative to Washington, but as we have seen, in this case the alter-native is celebrated rather than condemned. It also should be notedthat while it is the case that the rise of the emerging powers cannot beexplained by the neoliberal development model, equally it is far fromclear that these powers have entirely broken from an embrace, albeit aselective one, of neoliberal international economy. This is clear fromprevious chapters which showed the close link between Chineseexports, US deficits, and Chinese financing of US debt. This certainly isin stark contrast to Desai’s (2012) contention that the BRICS system“bypasses the dollar centred world monetary and financial regime.” Aswe have seen, while the Chinese government periodically speaks of theneed to replace the US dollar as the international reserve currency, atthe same time it continues to purchase US debt on an enormous scale(see Chapter 5).

The fourth position, discussed in depth elsewhere, argues that newpowers have emerged by embracing global market forces, a positionrejected in Chapter 3 on the grounds that this ignores the selectivenature of that embrace, and the importance of state capitalist policies,both for understanding current and previous examples of capitalistdevelopment. Though of course the third and fourth positions are inmost respects diametrically opposed to each other, there is someoverlap in the belief that China’s rise represents an opportunity forother developing countries. The third position argues that, in somerespects at least, this is a result of South-South solidarity on the part ofChina (Desai 2013), while the fourth position argues that it is a resultof anonymous, spontaneous market forces (Griswold 2007).


The fifth position argues that the rise of a new South is limited, andthe US remains the dominant power in the international order. Theessential argument of this position is to emphasize both the limitationsof China’s rise (Brautigam 2011), and to argue that insofar as it is areality, it is largely one that is self-interested and not motivated by sol-idarity with the rest of the world. This position shares with the firstview the argument that China’s aid policy is more concerned withaccess to raw materials than the development of the periphery (Halper2010: 99; Jenkins 2012: 1352), even if this aid can and does have somepositive consequences. This position also does not deny changes in theinternational order, but essentially argues two points. First, in terms ofthe emerging powers as leaders of the new South, they “use their mem-bership of the G77 and similar groups to project themselves as repre-sentatives of the interests of the poorer developing countries, the betterto leverage pursuit of their national interests in negotiations withinthat club. This is a balancing act of sorts but not one whose primarypurpose is to strengthen the south as a whole or to prioritise the inter-ests of its vulnerable and poorest member countries.” (Vanaik 2013:205) Second, and following on from this point, is the continued fact ofUS leadership, for the US is “the indispensable and irreplaceable leader,for only it has that combination of qualities making for leadership –namely the distinctive strengths that the others cannot fully emulateyet also the ability to project a social–political–cultural model that ispotentially generalisable, thus serving as an aspirational model world-wide as well as within the quintet. How many states and their rulingand middle classes want to become more and more like Russia, Chinaor India rather than like the USA?” (Vanaik 2013: 207)

Moreover, the challenge from BRICS is itself limited. Prashad (2013b:15) argues that this is the case for four reasons: (i) their integration intoa neoliberal international order through supplies of cheap labour,cheap exports, credit flows, and dependence on primary commodityexports to China; South itself; (ii) beyond a few minor reforms withininstitutions of global governance, the BRICS have failed to construct annew institutional foundation for its emergent authority; (iii) they havenot endorsed an ideological alternative to neoliberalism. While theremay be some criticism of liberalized financial flows, the BRICs are inte-grated into these flows and remain committed to other neoliberal prin-ciples such as free trade; (iv) the BRICS project presents no challenge toUS military dominance. Prashad slightly overstates his case, particu-larly in terms of this third point, and as has been argued in earlierchapters, the BRICs combine elements of state capitalist development


with a wider integration into an international order dominated byneoliberalism. Nonetheless, his more general point about the limita-tions of the BRICS is convincing.

Conclusion

The discussion in this chapter has done three things. First, it has brieflyoutlined and analysed the history and development of the ThirdWorld, and Third Worldist solidarity, after 1945, explaining thereasons for, and limitations of ‘Third Worldism’ in the period up to the1970s. Second, it has examined the reasons for the rise of a new South,both in terms of developmentalism and geopolitics, and related thisback to the earlier period of Third Worldism. Third, it has used this dis-cussion to ask the question whether the rise of this new South adds upto a transformation of the international order, or to something moremodest. The argument made is that there is less a transformation ofthe international order, and more a limited rise of new, emergingpowers, existing within a hierarchical order within which they wish toadvance, but in which real solidarity is limited. This does not necessar-ily mean wholesale dismissal of solidarity within the new South, andthere are areas of contestation around flows of financial capital andliberal intervention. But some of these alternatives are not automat-ically progressive alternatives to US hegemony, and some instances of‘solidarity’ are simply the by-product of wider economic factors, suchas high commodity prices resulting from demand from China. Finally,the US remains the most powerful nation state in the internationalorder, not only in terms of material power and resources, but also interms of ideological attraction for powerful groups among the newpowers. This is not uncontested, and nationalist sentiments remainpowerful, but this combines with the attractions of Americanization interms of access to capital, including financial capital, to consumergoods, and to wider cultural aspirations.


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8Conclusion: Development,Innovation and the Limits ofInternational Transformation

This extended concluding chapter will not only summarize the argu-ment made throughout the book, it will add to it through furtherexamination and analysis. In particular, it will reiterate the argumentmade so far, namely that the rise of the South is exaggerated, as is thedecline of the West and the US in particular. But it will do this by relat-ing the argument to two further issues, only touched on in previouschapters, namely the question of development and, not unrelated tothat question, the issue of technological innovation. The first sectionwill therefore examine the issue of development and in particular thatof development theory, and what this might tell us about the rise ofthe South. On the face of it, the emergence of new powers wouldappear to undermine those arguments associated with various types ofdependency theory in the 1960s, which suggested that the South wasin a subordinate position in the international order. However, througha careful consideration of development theory from the 1950s to the1980s and beyond, the first section will suggest that, notwithstandingsome weaknesses with dependista type approaches, this is not necessar-ily the case. The section will particularly highlight various forms ofdependence on foreign capital, and why this dependence may be dif-ferent for the South compared to the US’ own dependence on foreigncapital. Not unrelated to this point, there is also the question of tech-nological dependence, and this is considered in the second section inthe context of development through technological innovation. Variousapproaches to innovation are considered, and their relevance to themost significant emerging powers of the South is highlighted, as is the limits of innovation. The final section draws out the specifics of theprevious two sections, and the arguments in previous chapters, to

Conclusion 175

summarize the overall argument of the book, relating this to the ques-tion of the transformation of the international order.

The rise of the South and development theory

In the post-war period, US hegemony was successful in promoting amore integrated, liberal international order in the capitalist world, witha long term commitment to global integration, as opposed to the morefragmented (though still partly internationalized) national capitalismsof the period from the 1880s to 1945. This involved the promotion ofinternational organizations, state sovereignty, open door policies interms of investment and trade, and aid such as the Marshall Plan. Inpractice, for the developing world, this meant that the internationalcontext favoured independence for former colonies, which were in anycase undergoing substantial change in response to the rise of national-ist movements. Both superpowers supported political independence forthe colonies, though both of course were concerned that they exerciseconsiderable influence over the political trajectory of the newly inde-pendent sovereign states.

It was in this context that the debate over the causes of globalinequality – and the need for development – emerged. Though therewere various positions in the debate, we can identify two main ones:modernization and dependency theories. The former was the main-stream theory of development, which essentially argued that develop-ing societies – the ‘Third World’ – were backward and undeveloped,and therefore in need of development. This position was developedmost famously by Walt Rostow (1960), who suggested that all nationstates pass through similar stages of development. So, poorer societiesin the 1960s were at a similar stage of development to say, Britain inthe 1780s. The task of development was to hasten the transition todevelopment in the poorer societies. Rostow argued that this was goodfor developing societies, as they would become richer, but also for thesecurity of the West, as richer societies were less likely to be attractedby the communist alternative. Modernization theory suggested thatthe task of development could be facilitated by poorer countriesembracing western investment, technology and values such as entre-preneurship and meritocracy. Whether this was an accurate portrayalof western societies is questionable, not least in the context of institu-tionalized racism in the US, and heightened industrial and socialconflict across the developed world from the 1960s onwards.

But for our purposes, the crucial argument of modernization theorywas that contact with the West was on the whole favourable to thedevelopment of the Third World. On the other hand, some structural-ist economists had argued that the situation of poorer countries couldnot be explained in isolation from the richer world, and that contactwith the latter was in some respects part of the problem. Thus, one ofthe legacies of colonialism was that Third World countries specializedin producing primary products, and this led to an excessive depen-dence on the world price movements of the one or two goods thataccounted for most of their foreign exchange earnings. This was incontrast to the developed countries, which were far more industrializedand diversified, and so were not excessively reliant on the price move-ments of a handful of products. As we have seen (Chapters 3 and 7),Prebisch (1959) and Singer (1950) argued that primary producers facedcertain disadvantages which meant that there was a tendency for theterms of trade to decline for primary goods as against industrial goods.What this meant in barter terms is that in say, a ten year period,primary producers would have to exchange more tonnes of cocoa inorder to buy a similar amount of tractors. Prebisch and Singer sug-gested that this tendency occurred because there was a low incomeelasticity of demand for primary products; in other words, as averageincomes rise, so consumers spend a disproportionate amount of theirincome on primary products. Furthermore, while the prices of manu-factured goods may fall, they are less likely to fall as quickly as those ofprimary goods as there were many primary goods producers but com-paratively few producers of industrial goods. Clearly then, this accountof inequality focused on hierarchies in the world economy, and howcolonial powers had enforced specialization in lower value primaryproduction in the colonies. Even in independent Latin America, thispractice had occurred as powerful land-owners accrued huge wealthfrom land-ownership and used this to import manufactured goodsrather than promote domestic manufacturing production. This accountthus suggested that the western dominated world economy was notthe solution to underdevelopment, as modernization theory con-tended, but in some respects at least, was part of the problem.

At the same time, this account suggested that development in theThird World could be achieved through pro-industrialization policiesdesigned to overcome the colonial legacy. In this way, poorer countriescould reduce their dependence on the import of expensive manufac-tures and the export of cheap primary goods. As we saw in Chapter 3,this policy of import substitution industrialization (ISI) was the main


development strategy employed in the Third World from the 1950s (orearlier) until the late 1970s and early 1980s. Ironically, though therationale for such a strategy was very different from that associatedwith modernization theory, in practice the two theories effectivelyconverged around the idea that development and modernization couldoccur through industrialization.

Dependency theory challenged this view, suggesting that industrial-ization remained dependent on the West. The mechanisms that sus-tained dependence included reliance on foreign capital, foreigntechnology, and foreign markets. Furthermore, the industrializationthat was said to be occurring in the developing world was highlyexploitative and reliant on cheap labour. None of this was leading toconvergence with the developed world; instead it was simply promot-ing new forms of subordination, hierarchy and dependence in theworld economy. Some theories of dependency related this to a crudezero-sum game which suggested that the rich world was rich onlybecause it had underdeveloped the poor world, implying that protec-tionist ISI policies did not go far enough, and that de-linking from thewestern dominated world economy was the only effective way forwardfor the Third World (Frank 1969). In this account, poorer societies werenot so much undeveloped as underdeveloped.

This was essentially what was at stake in the debate over inequalityand underdevelopment in the period from the 1940s into the 1970s.On the one side, modernization theory: poorer countries shouldembrace the opportunities provided by the western-dominated worldeconomy, and in the process hasten the transition to development. Onthe other side, dependency theory: poorer countries are poor in partbecause they are in a structurally subordinate and dependent positionin the world economy, and thus need to find ways to protect them-selves from the constraints that these hierarchies generate. By the1970s and into the 1980s, it was clear that for all their differences, bothsides suffered from some similar weaknesses. In particular they tendedto over-generalize and homogenize a diverse set of countries. In theprocess they made sweeping predictions concerning the inevitability ofdevelopment (modernization theory) or stagnation (dependencytheory). For instance, the rise of the first tier, East Asian newly industri-alizing countries such as South Korea and Taiwan undermined crudeversions of dependency theory, as these countries grew rapidly andexported to the western economies. On the other hand, as we haveseen, these countries did not simply embrace ‘the West’, and protectedcertain sectors from foreign competition in order to develop their own

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national industries. Moreover, the success of these countries may havebeen contingent on certain specific factors – such as land reform, theinfluence of the Cold War, and the specificity of state structures andinstitutions – that could not easily be replicated elsewhere. It was pre-cisely this focus on contingency and specificity that was missing in themodernization versus dependency theory debate. It was also in thiscontext that some argued that the study of development had reachedan impasse, and that from now on we could only focus on specificcases of development without employing the generalizations associatedwith modernization and dependency theory (Booth 1985).

Moreover, changes in the global economy led to important changesin development strategy in the Third World. In particular, the debtcrisis of 1982 saw a shift from the developmentalist strategies associ-ated with ISI, towards neoliberal policies that encouraged trade andinvestment liberalization, privatization and the (theoretical) roll-backof state intervention in the economy (or at least a shift to interventionthat extended the market rather than restricted its role). This wasjustified on the grounds that ISI encouraged the promotion and protec-tion of inefficient industries, rather than facilitating specialization inthose sectors where countries were (relatively) most competitive; inother words, it meant the promotion of the principle of comparativeadvantage. While in the short term, the results of neoliberal policieswere disastrous, and living standards for many fell in the lost decade ofdevelopment (the 1980s), as we have seen the 1990s and beyond saw anew period of optimism concerning the relationship between develop-ment and globalization.

This optimism has culminated in the current discourse over the riseof the South. One of the great ironies of the current debate is how littleanalysis draws on these older debates derived from developmenttheory. This is partly because of the tendency of this debate to over-generalize from specific cases, and as a result a great deal of the studyof development has shifted from drawing on development theory tooutlining concrete cases of development, without drawing on anynotion of a bigger picture (Booth 1994). This is ironic given the turn toglobalization in the 1990s which was essentially an attempt to drawthe kind of bigger picture that development studies increasinglyrejected. To some extent this was unsurprising, as much of the discus-sion of globalization was even more guilty of over-generalization thanthe grand theories of development that seemed to be confined to thedustbin of history. In particular, globalization’s claim to the status of atheory easily ran up against the convincing accusation that in fact it


was based on circular reasoning, for globalization referred to a numberof concrete issues (intensified capital flows, migration patterns, inter-national institutions of global governance) that were explained byglobalization (Giddens 1999; Scholte 2005). This led to the tautologythat globalization was explained by globalization (Rosenberg 2000;2005). But the problem ran deeper than this, for the development ofthe ‘grand theory’ of globalization actually ran parallel with the‘abstracted empiricism’ of development studies (Mills 2000), in thatboth tended to downplay the significance of the neoliberal context inwhich both development and globalization took place (Kiely 2006).This international context did not determine specific development tra-jectories, but it did – and does – strongly influence them.

This point brings us back to modernization versus dependencydebate, for despite its tendency to over-generalize, this still provides uswith some basis for assessing the recent rise of the South. In otherwords, which account, modernization or dependency, provides us witha better account of recent changes in the international order? On theface of it, the clear answer would be modernization theory, as Chinaand others have rapidly developed, and have done so in part throughtheir incorporation into the world economy (Schmitz 2007). This doesnot mean that the newly emerging countries have rigidly followedRostow’s five-stage model, an argument that clearly must be, and hasbeen rejected, not least by neoliberals (Bauer 1958, 1971). But if we usemodernization theory in a much looser sense, we could contend thatdevelopment has taken place in a wide range of countries in recentyears, and this has been because of policies that have embraced theopportunities presented by the global economy.

On the other hand, as Chapter 3 in particular argued, this embrace of‘globalization’ has been selective and it could also be argued that rapidgrowth and development has occurred due to state capitalist policies.This argument is certainly a challenge to the claims of neoliberalism, butit remains one which suggests that catch-up is occurring, which is atleast broadly compatible with a weak version of modernization theory. Itcertainly is not compatible with the claims made of the various trends ofdependency theory, which, for all its diversity, agrees that the South is ina subordinate and dependent position in the world economy. Above all,it is not compatible with the claims made by underdevelopment theoryin the 1960s, which stated that countries are condemned to underdevel-opment so long as they remain part of the world economy.

However, is the rise of the South incompatible with all the claimsmade by various strands of dependency theory? More flexible

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approaches to dependency recognize that capitalist development hasoccurred and is likely to continue to occur (see Kay 1989), in contrastto the stagnationist claims of underdevelopment theory. In this regard,dependency is less a grand theory of development and more a conceptdrawn on to understand the specific conditions of late capitalist devel-opment (Palma 1978; Larrain 1989). Under these conditions, latedevelopment may take the form of continued dependence on theestablished capitalist powers, in the form of dependence on (bothfinancial and productive) capital, western markets and foreign techno-logy (see Sutcliffe 1971). In the discussion in previous chapters, it wasclear that in some respects the emerging powers remain dependent inat least some of these ways, though perhaps in not as straightforward away as dependency writers may have envisaged. We have seen howmuch of the boom in the South since the early 2000s rests on demandfor primary goods, though the increase in demand is accounted formore by China, another emerging power. At the same time however,China itself remains an economy dependent in some respects on theexports of manufactured goods, as well as on the wider investmentdecisions of multinational capital using sourcing strategies in globalproduction networks. Emerging powers have also maintained highgrowth rates both before and after the 2008 financial crisis, in partthrough capital inflows, and in many respects were the beneficiaries ofthe quantitative easing policies introduced by governments in responseto the crisis.

Seen in this way, it could be argued that the new South remainsdependent on the established powers. But there are possible objectionsto this argument. The first is that dependence somehow distortseconomies, which would otherwise not be distorted or, by implication,enjoy ‘normal’ capitalist development (Landsberg 1979). The problemwith this argument is that it begs the question of what exactly is‘normal’ capitalist development, ironically constructing a Eurocentricnorm and a dependent deviation from that norm (Barone 1983; Gulalp1984). Related to this point, one could argue that these economies aredependent, but so what? Indeed, under conditions of late capitalistdevelopment, a ‘normal’, autonomous, capitalist development isimpossible. Furthermore, one could argue that all states are in somesenses dependent (Bernstein 1979). As we have seen, measured interms of foreign capital inflows, in some respects the US is the mostdependent economy in the world today. Seen in this way, we shouldthink less about dependence and more of interdependence.


These are powerful objections to the concept of dependency.However, they do not completely undermine the idea. As we saw inthe case of the US, its dependence on foreign capital has different con-sequences from other countries’ dependence on US capital. AsChapters 4 and 5 showed, in terms of returns on investment, UScapital overseas as a whole is far more lucrative than foreign capitalinvested in the US. The term dependence may be of limited use as allcountries are dependent, but equally we should not underestimate theunequal nature of interdependence. This observation is all the more true ifwe are making the stronger claim that a process of transformation istaking place in the international order. For if such a transformation istaking place, then we would expect the emerging powers to have pow-erful, diverse economies that can compete with the already establishedeconomies, not only in older sectors, but in the new, more dynamicsectors as well. This brings us to the question of technological depen-dence and innovation.

The rise of the South and technological innovation

As we saw in Chapter 2, much of the story of a rising South is derivedfrom the rise of the BRICs, a concept first formulated by Jim O’Neill atGoldman Sachs. This is a story of rapid economic growth among largeemerging powers, as we have seen. Not a great deal is said about inno-vation by O’Neill, but implicit in its approach to technological innova-tion is a neoclassical approach to technology, which regardstechnology as a ‘black box’, and innovation as simply that part of eco-nomic growth not accounted for by labour and capital growth. In con-trast to neoclassical economic theory, Joseph Schumpeter (1961; seealso Mazzacuto 2013: ch.2) highlighted the importance of entrepre-neurship and innovation in the development of capitalism. In ananalysis not unlike Marx’s (1959; see also Rosenberg 2011; Lazonick2011; Galambos 2011) account of capitalist competition and the on-going search for (above average) surplus profits, Schumpeter arguedthat entrepreneurship was characterized by the search for aboveaverage profits derived from innovation. Economic rents are derivedfrom the fact that innovations may initially be difficult to copy and soentrepreneurs earn a profit above the average. Eventually the innova-tion will be copied or even superseded and so profit rates return to anaverage rate (or worse). Capitalism is thus driven by a process of

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creative destruction in which entrepreneurs innovate in their searchfor above average profits or rents.

Though as a conservative, he regretted the rise of large corporations,and instead focused largely on individuals and firms, Schumpeter’shighlighting of the importance of innovation and technological devel-opment was important (see Hodgson 2001: 187–9). Freeman (1987)developed Schumpeter’s ideas further by moving beyond the focus onindividual entrepreneurs and instead talked of national systems ofinnovation, defined as a “system of different institutions that con-tribute to the development of the innovation and learning capacity ofa country, region, economic sector or locality.” (Cassiolato and Lastres2011: 3; Mazzacuto 2013: 36). Thus, in terms of economic rents, it issectors where the barriers to entry are high which are most likely toproduce above average profits, precisely because competition is morelimited in these sectors. As Kaplinsky (2005: 63) states, “barriers toentry are a central component of the theory of rent, and…the theoryof rent provides the key to understanding the availability and sustain-ability of high incomes.”

This account of technology is directly relevant to the earlier claimsmade by dependency theory. Cardoso (1972: 90) for instance explicitlyrelated the question of technology to that of dependency:

Basically the dependency situation is maintained because, in addi-tion to the…factors of direct control by the multinationals, anddependence on the external markets, the industrial sector developsin an incomplete form. The production goods sector (Department I),which is the centre-pin of accumulation in a central economy, doesnot develop fully. Ordinarily, economists refer to ‘technologicaldependency’ and it means that the economy has to importmachines and industrial inputs and consequently has to stimulateexports (especially of primary goods) to generate the necessaryforeign exchange.

As we saw above, dependency theory was often relatively static in itsapproach to understanding a North-South divide, and downplayed therole of agency in the developing world in altering and alleviating con-crete situations of dependency. Much the same point can be madeabout this quote from Cardoso, and indeed, following the rise of theEast Asian first tier NICs, analysis shifted in the 1970s towards anunderstanding of how imported technology was assimilated andadapted to local circumstances (see Fransman and King 1984). On the


other hand as we saw above, development theory moved away from afocus on structural constraints towards one based on agency, but at thecost of ignoring or underestimating the wider context in which con-crete situations of development occurred. Similarly, there was a danger,that in focusing on very real processes of technological assimilation,the reality of the global technological divide was downplayed. We cantherefore usefully draw on Cardoso’s account of technological depen-dency while simultaneously recognizing that this is not a static processand that developing countries attempt to overcome technologicaldependence through a process of industrial upgrading through systemsof innovation.

When it comes to understanding the rise of the South, the key ques-tion then is the extent to which such upgrading has occurred, and thewider context in which this has (or has not) taken place. This wasimplicit in discussions in earlier chapters, particularly in Chapters 4and 5 which examined the nature of Chinese-US interdependence, andin Chapter 7 which examined China’s interdependence with the rest ofthe ‘new South’. What we should first recognize is that the discussionso far needs to recognize that significant changes have taken place inthe international economy. First, as we have seen, there is the global-ization of production which has not necessarily rendered the conceptof national systems of innovation irrelevant, but has certainly alteredthe context in which these occur. Second, Cardoso’s reference to theexport of primary goods to generate foreign exchange is out of date forsome countries, particularly (among the BRICs) China, and to someextent India, where the export of manufacturing goods is so important.Ironically, given their recent focus on primary goods exports, it ispossibly more relevant for Russia and Brazil today than it was at thetime that Cardoso was writing. Russia has boomed in recent years afterthe severe contraction in the 1990s, largely on the basis of primarycommodities, and above all oil. The oil boom period has seen little inthe way of diversification of the economy and indeed there has been asignificant decline in the export of machinery. In the case of Brazil, aswe saw in Chapter 3, investment-GDP ratios have remained low andproductivity increases have lagged behind competitors (Palma 2012).

The question then that needs to be asked is to what extent has therebeen technological upgrading in China and India? In the case of India,liberalization has coincided with a decline in government Research andDevelopment spending as a proportion of GDP, declining from 0.91%in 1987–88 to 0.71% by the mid-1990s (Beausang 2012: 45). Not surpris-ingly total factor productivity was actually lower in the liberalization

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decade of the 1990s than it was in the 1980s. In the case of China, realexports grew by around 500% between 1993 and 2008, and by 2010, itwas the largest exporter in the world (Steinfeld 2010: 71). In the 1980sand 1990s, China essentially exported standard labour intensive goods.However, by the mid-2000s, it had moved into electronics, telecommu-nication, equipment and office machines. Over the same period thecountry underwent a major expansion in Science and Technology train-ing, so that while from 1991 to 2006 there was a 20% expansion in itsworkforce, there was a 200% increase in the number of scientists andengineers involved in science and technology activities (Steinfeld 2010:72). However this does not necessarily mean that China is undergoing aprocess of technological innovation similar to Germany in the nine-teenth century, or Japan in the twentieth century (Steinfeld 2010: 74).As has already been argued more generally in Chapters 4 and 5, thesechanges must be located within the context of wider changes in theglobal economy. As Steinfeld (2010: 75) argues, “China’s integrationinto the global economy has unleashed extraordinary innovative capacity, most conspicuously in the United States and in Americancompanies.”

Steinfeld (2010: 85) points out that in 2008, MNCs accounted for55% of China’s exports, and in high technology sectors this increasedto almost 90%. Indeed, China’s involvement in high technology pro-duction is inseparable from the investment decisions of global produc-tion networks, so that “(s)emifinished or finished components arebrought in from overseas locales, usually neighboring (sic.) Asiannations, assembled into finished products, stamped as ‘made in China’,and then shipped out to markets in North America and Europe.”(Steinfeld 2010: 85) While in 2006 electrical machinery and mechan-ical appliances (TVs, MP3 players, DVD players) accounted for 47% ofChina’s exports, around 70% of these were part of the processing trade(Steinfeld 2010: 86).

Thus, in the case of the Apple iPod classic, a 30gb iPod cost $299 inthe US in 2005. The approximate cost that Apple paid for the productfrom a Taiwan-owned, Chinese based manufacturer was $144. Of this,about 3% went to the Taiwanese assembler operating in China, 51% tothe Japanese hard drive producer (assembled in China using importedinputs), 3% to the US semi-conductor designer, and 2% to the SouthKorean (owned and located) memory chip producer (see Linden et al2007: 6; Steinfeld 2010: 86; see also Froud et al 2012). Similarly, the‘Chinese’ super-computer the Tainhe-1, the fastest computer in the


world, is actually largely designed by Intel and Imidia in California andjust assembled in China (Beausang 2012: 139).

What this shows is that the rise of digital information has loweredthe barriers to entry in the high technology sector, China’s presence “isfor the most part confined to the simplest, most codified activitieswithin those industries.”1 (Steinfeld 2010: 91; see also Steinfeld 2004;Kaplinsky 2005) China has attempted technology transfer through thepromotion of joint ventures with foreign capital. On the eve of entryto the WTO in 2001, over half of their FDI was in the form of jointventures (Beausang 2012: 29). However, entry into the WTO under-mined the joint venture policy as Article 16 of the General Agreementon Trade and Services prohibits using joint venture type requirementsbeing placed on foreign investors (Beausang 2012: 30). By 2008, nearly80% of all FDI was made up of wholly owned foreign subsidiaries(Beausang 2012: 30). Moreover, joint ventures were no guarantors ofsuccess as multinational companies tend to restrict knowledge transfer.The Chinese state encouraged cooperation between foreign companiesand Chinese universities as a way of acquiring technology, but from2001–06, 94% of the technology sold by the 52 MNCs with R and Dcentres in Beijing was bought by their headquarters and other sub-sidiaries in China (Beausang 2012: 31).

The World Economic Forum’s annual report on global competitive-ness is a useful, if imperfect,2 measure of the competitiveness ofnations in the global economy. Competitiveness is defined as “the set ofinstitutions, policies, and factors that determine the level of productivity of acountry.” (World Economic Forum 2013: 4) For 2013–14, the US stoodat number 5 in the world, behind Switzerland, Singapore, Finland andGermany. China however, stood at 29, South Africa at 53, Brazil at 56,India at 60 and Russia at 64 (World Economic Forum 2013: 15). In2010–11, Brazil ranked 42nd, Russia 57th, India 39th and China 26th inthe world (Beausang 2012: 153). This hardly points to overwhelmingevidence of convergence or the transformation of the internationalorder. It also puts Ramo’s (2004: 12) emphasis on innovation as acentral feature of the so-called Beijing Consensus into perspective (seeChapter 2).In terms of Research and Development spending as a pro-portion of GDP, in 2011, the figures were 1.84% for China, 0.9% forIndia, and 1.12% for Russia, compared to 2.77% for the US. For SouthKorea (in 2010), a country that has genuinely upgraded in terms oftechnology, the figure was 3.74% (World Bank 2013; Batelle 2013). Theproportion of triadic patents granted as a proportion of the population

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(per million) stood at 0.31 for Brazil, 0.65 for China, 0.16 for India and0.51 for Russia. This compared to 44.7 for the United States (OECD2013a). In terms of the actual number of triadic patents, this amountedto 60 for Brazil in 2010, 26 for South Africa, 73 for Russia, 201 forIndia, 875 for China and 13,837 for the US (OECD 2013a).

Furthermore, in the leading sectors in terms of innovation, such asnanotechnology, the European Union, Japan and the US remain theworld’s leaders. In 2005 they filed 84% of patents, compared to just2.6% for the BRICs (Beausang 2012: 163). In terms of Research andDevelopment, in 2010, 80% of firms in the G1,400 companies are fromthe US, Japan, Germany, France, the UK, Denmark, Finland, Sweden,Switzerland and the Netherlands. The BRICs have just 34 firms (Nolan2012: 49). Developing country firms were almost entirely absent fromthe list of the world’s top 1000 firms in terms of R and D spending in2009 (Nolan 2012: 50). The possibility that China might catch up tech-nologically with the rich countries through the acquisition of theircompanies is also, so far at least, questionable, for “(t)he main acquisi-tions by Chinese firms have been of loss-making companies in non-strategic industries, notably IBM’s PC division and Ford’s Volvo Cardivision. Both were small-scale acquisitions. The attempt failed at moresubstantial acquisitions in more sensitive sectors, by both state-ownedand private firms, most notably that by CNOOC to acquire Unocal andthe various efforts by Huawei to acquire small segments of the tele-coms equipment sector.” (Nolan 2012: 109)

Moreover, China’s outward FDI increased from $27 billion in 2000to $230 billion in 2009, but “there has been a large and persistent‘deficit’ in China’s FDI, with inflows consistently exceeding outflows.”(Nolan 2012: 95) Indeed, from 2000 to 2009, the gap between theinward stock of FDI and the outward stock increased from $165 billionto $243 billion (Nolan 2012: 95). To get some sense of perspective itshould be pointed out that in 2009, China’s outward stock of FDI was27% that of the Netherlands, 17% that of Germany, 13% that ofFrance, 5% that of the US, and just 2% that of the high income coun-tries as a whole (Nolan 2012: 96). Furthermore, Chinese FDI largelygoes to other developing countries and/or neighbouring Hong Kongand Macau; in 2009, only 11% of its FDI, that is $27 billion, went to high income countries, compared to an inward stock of almost $500 billion (Nolan 2012: 98).

Nolan (2012: 85) is thus correct to conclude that:

At the same time that Chinese firms are trying to ‘go out’, they mustalso face global companies who carry the competitive struggle deep


into the Chinese economy, with their international productionsystems as the foundation. In terms of military strategy, the leadingmultinational companies are taking the ‘war’ into the enemy’scamp, ‘going in’ to China in order to weaken the fighting capabilityof indigenous firms before they can build their capability outsidethe country.

This discussion again shows the importance of locating the rise of thenew South, the BRICs, and above all China within the context ofchanges in the character of international capitalism, and in particularthe rise of global manufacturing organized through production net-works or commodity chains. As we saw in Chapter 6, Burbach andRobinson (1999: 27–8) contend that while social inequality is stillimportant, geographical inequality is declining in significance ascapital increasingly globalizes (see also Robinson 2004: 99; Kitching2001). In contrast, this book has argued that while in some respects wecan talk about the rise of transnational capitalism through global com-modity chains, this has not overcome the spatial unevenness of capi-talist accumulation, and most certainly has not led to the equalizationof accumulation conditions. It has led to the rise of manufacturing inparts of the global South, and indeed there has been some degree ofupgrading within these global value chains (UNCTAD 2013b), whichin larger countries has helped to facilitate the rise of emerging powers.However, the organization of this production remains spatially as wellas socially hierarchical.

The limits of international transformation

This final section provides a broader summary of the argument that weare witnessing a transformation of the international order, and thecounter arguments presented in this book. As we have seen, the basicargument is that in recent years, some new powers have emerged fromthe global South, and in some respects these are challenging the natureof the current international order. This is in part because of the size ofthese emerging powers, and partly because the rise of these powers –and of China – in particular have important beneficial spin-offs for therise of the South as a whole. This is true in terms of developmentalbenefits, such as the demand generated by China for primary productsand the dispensing of aid without conditions, and in terms of widergeopolitical challenges to Western domination of the internationalorder. This has taken the form of changes in the composition of the institutions of global governance, and challenges to liberal

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interventionism in parts of the developing world. Perhaps above all,this has also undermined the primacy and hegemony of the UnitedStates in the international order.

The book has challenged these arguments in a number of ways, butrather than immediately repeat them at this point, we should first takea brief detour. For if the debate is about international transformation,then we need to be clear what is meant by that particular term.Henderson and Nadvi (2011) use the term in a very specific way,replacing what they see as the Eurocentric discourse of development,with the more open-ended concept of transformation. This allowsthem to correctly focus on issues of great significance, such as the com-bination of growth, size, and geopolitical location in the South. Interms of the transformation of the international order, they also focuson China’s wider impact among countries of the global South, and thecentral location of China within global production networks. All theseare issues addressed in previous chapters, and in many ways thechanges that they point to are undeniable. But do they add up to atransformation of the international order?

For our purposes, we are witnessing a possible transformation in twoways. First, we are seeing the erosion of a global North-South divide,and second, we are seeing the (gradual) decline of the West, includingthe leading role of the US in the international order. Much of the liter-ature on international transformation focuses on a third question, thatof globalization. The debate in this case focuses on the extent to whichglobal processes are so great and rapid that they have undermined thenation state, and so global society has displaced international relations.Much of the literature, including even the measured arguments ofglobal transformationalists (Held et al 1999), exaggerated the extent towhich the state had been displaced, just as they exaggerated a past inwhich the state was said to be (more or less) the only actor in interna-tional relations (see for instance Scholte 2005). It is quite clear that interms of various manifestations of economic globalization, such as anincrease in the amount and change in the form of capital flows, nationstates have played leading roles in allowing this to happen (Panitch2000). States were similarly central in promoting the liberalization offinancial flows, and dealing with the fall-out once it was clear that thisliberalization had led to financial crisis in 2008 (see Chapter 5).

So if transformation in this case means the end of the nation state,then clearly this has not happened. Moreover, as we saw above,because global transformationalists conflate description (of globalizingprocesses) and explanation (of why these processes occur), they essen-


tially make the circular argument that globalization (a description ofprocesses) is caused by globalization (an explanation of theseprocesses). Once again the transformationalist position does not appearto be very useful. However, a partial defence of the concept of global-ization may be made if we recognize that it is not a theory at all, butrather a description of a number of processes, the explanation forwhich must be sought elsewhere (Kiely 2014). In particular, the idea ofglobalization usefully points to an increase in the intensity and formsof capital flows in the international order.3 Contrary to the argumentof transformationalists, both liberal (Held et al 1999) and Marxist(Robinson 2004), this is not necessarily happening above or indepen-dently of (some) nation states, but has been actively promoted bythem (Panitch and Gindin 2012). Nonetheless, this has led tosignificant changes in the international order, though not necessarily atransformation of that order.

Perhaps above all, globalization has not taken place ‘above’ onenation state in particular, that of the United States. Much of the USdecline literature (discussed in Chapter 3) focuses on US deficits andthe consequent increase in US national debt, alongside the fact thatthe US’ share of word GDP has declined since 1945. But if we are totake globalization seriously, then we need to move beyond a simplisticmethodological nationalism and examine the ways in which we areeffectively witnessing, to some extent at least, the “Americanisation ofglobal capital” (Starrs 2013: 827; see also Panitch and Gindin 2012;Parisot 2013). We have already discussed this in earlier chapters interms of Chinese and US asymmetrical interdependence, and the ratesof return of US capital overseas in comparison with rates of return offoreign capital in the US. Starrs’ (2013) detailed empirical account ofUS corporations in the international order gives further support tothese arguments. In particular, his comparison of the national sectoralprofit share of the top 2000 corporations in the years prior to (2006),and after (2012), the financial crisis shows the extent of US dominance.Indeed, in aerospace and defence (from 66% in 2006 to 67% in 2012),casinos/hotels and restaurants (46 to 64%), computer hardware andsoftware (70 to 74%), financial services (45 to 53%), media (59 to 67%)and transport (27 to 31%) US leadership increased in this period. Theshare of Chinese companies in all these sectors was minimal, and neveras much as 5% except in the case of transport (Starrs 2013: 822). Evenin electronics, a sector in which China is the world’s largest exporter,its share in 2012 was just 4%, reflecting China’s role as an assembler offinal goods produced as part of a global production network dominated

Conclusion 189

by multinational companies. In 18 of the 25 sectors outlined by Starrs,US companies are still the global leaders, and in 12 of them they havea share of 40% or more – and in two others they have a share close to40% (Starrs 2013: 823). Moreover, in terms of ownership of companies,foreign shareholdings in US companies amounts to about 16% of totalshares of US companies in 2012. Meanwhile, US shares in foreign com-panies is over 20% in most advanced capitalist countries, and indeedalso dominates foreign shareholding in ‘national’ companies in thedeveloping world (Starrs 2013: 823–4). Indeed, in Europe the numberone national owner of the top 20 European companies was the UnitedStates (Starrs 2013: 824–5). Thus, not surprisingly, while US GDP stoodat about 22% of world GDP in 2012, the US accounts for approx-imately 42% of all the world’s millionaires and even 41% of all globalhousehold wealth (Starrs 2013: 826). This is not a story of a ‘flat earth’globalization as envisaged by neoliberals but for similar reasons,neither is it a story of US decline in the context of globalization. Thesekinds of arguments fail to locate the centrality of the US state and UScapitalism in the making of a global capitalism, of which the BRICsand the new South are central parts (Panitch and Gindin 2012).

This brings us back to the argument of the book as a whole, whichrecognizes the rise of a ‘new South’ in recent years and the problemsfaced by the United States, particularly since the onset of the financialcrisis in 2008. However, rather than seeing these factors as evidence ofan international transformation in which the leaders of the new Southare challenging a declining US hegemonic order, the argument hasbeen somewhat different. First, the US has been the leader in the pro-motion of a liberal international order since 1945. The promotion ofthis liberal order intensified from the late 1970s through to the early1990s in the context of the rise of neoliberalism and the end of theCold War. This was followed by the ‘long boom’ of the 1990s, whichlasted from around 1992 to 2007–08, and it was in this era that we sawthe emergence of a new South. However, this new South has not‘decoupled’ from the West, and the US in particular. The South didrecover more rapidly than the developed world after 2009, but this wasdue to the success of fiscal stimuli programmes, continued relativelyhigh commodity prices and capital inflows from the North, in partfacilitated by quantitative easing policies. However by 2012, the effectsof at least some of these were beginning to wear off, and the worldseems on course for a period of lower growth. This means that theboom conditions of the long 1990s, including the favourable interna-tional factors that boosted the rise of the South, are over. The policies


designed to alleviate the effects of the crash were effective but theycannot restore the conditions that existed prior to 2007. Growth ratesin the BRIC countries in 2012–13 were 1% (Brazil), 2% (Russia) and 4%(India), considerably slower than 2010 and 2011 (Roubini 2013). EvenChina’s growth rate slowed to 7.8% in 2012, compared to an annualaverage of 10% over the previous thirty years (Roubini 2013). Whilesome see Chinese growth as continuing and acting as a locomotive forthe world economy in the coming years (OECD 2013b), others suggestthat a combination of the end of the 1992–2007 boom and the promo-tion of credit and property bubbles in China means that a crash willoccur at some point in the future (Wall Street Journal [WSJ] 2013; Frost2013). If the latter occurs, this will lead to declining commodity pricesfor exports to China. Indeed, with the slowdown of growth there in2012 and 2013, commodity prices either fell or slowed down theirrapid growth. In 2012, the price for all commodities (excluding oil) fellby 8.4% and the rise in (January to May) 2013 was only 3.3%(UNCTAD 2013a: 9). There is an ongoing debate over whether or notthe commodity super-cycle has ended (see Farooki and Kaplinksy 2012;Credit Suisse 2013), but what seems to have happened in 2012 and2013 has been a slowdown or partial reversal of high prices, but not acollapse. However, even a slowdown in price rises is likely to havesignificant negative effects on economies in the South. Alongside areversal of capital inflows to the South, and falling current account sur-pluses and increasing deficits, this would see a sharp reversal in the for-tunes of the South. In the summer of 2013 the US Federal Reserve’stentative signals that quantitative easing policies would slow down wasenough to cause considerable panic in the financial markets of theemerging powers (Roubini 2013). From June to August 2013, investorswithdrew $64 billion from developing country mutual funds, and therewere sharp sell-offs in equity, bond and currency markets (Atkins2014). In January 2014, a number of countries, including South Africa,Turkey and above all Argentina, faced the prospect of currency crises,leading some to conclude that at the start of 2014, “the financial guruslooked into their crystal balls and said that for the first time since thecrash of 2008 they were more worried about emerging markets thanthe dull old west” (Elliot 2014b). In was in this wider context of slowergrowth, alongside localized higher prices for public services, that Brazilunderwent a surge in protest in 2013 (Saad-Filho and Morais 2013).None of this necessarily means that we are entering a period ofprotracted stagnation, in which the momentum of growth has come toan abrupt end in a situation described by Mill (1909) as a stationary

Conclusion 191

state (see also Balakrishnan 2009). But we are entering a period of pro-tracted slower growth which, contrary to some accounts (see Gordon2013; King 2013) does not necessarily mean the end of western dom-ination, but does present problems for states still largely committed toneoliberal principles (Palley 2012).

China may of course take more seriously its recent proposals torebalance its economy and reduce its export dependence. This wouldlead to an era of growth based on increased domestic consumption,which in turn might sustain higher primary commodity prices in therest of the South. But as we saw in Chapter 6, the shift towards such apolicy has been limited as China has purchased US Treasuries on amassive scale, wage increases have been limited, and attempts totighten the labour market have been resisted by vested interests in thecoastal regions (Hung 2013: 1358–9). If the Chinese currency were tosharply appreciate (on a scale far greater than the actual appreciationof recent years), then this would be at the costs of powerful, export-oriented vested interests, and indeed would lead to a sharp increase inunemployment. It would also lead to slower growth, which would notbe good news for the rest of the South. The investment and real estateboom of recent years has helped to keep commodity prices high, but aswe have seen the sustainability of this boom is open to question. Onthe other hand, with slower growth in the US and especially in Europe,the export-led strategy has been undermined. Neither scenario suggestsa costless process and it again suggests that the problems for the USeconomy do not necessarily mean an opportunity for a straightforwardrise of potential competitors or supposed hegemonic challengers.

It is true that the most successful emerging powers did not simplyfollow the neoliberal prescriptions recommended by the West, andcurrent discussion of state capitalism should be seen in this context ofattempting to overcome the vulnerabilities associated with continueddependence (thus challenging position 4 in Chapter 2). In terms ofgeopolitics, the point about state capitalism is not a new one and istrue of previous experiences of late capitalist development. In the pastof course, this led to conflict between established and rising powers,but this should be regarded as a contingent and not a necessaryprocess, in contrast to the claims of contemporary ‘Leninists’ and‘offensive realists’ (thus challenging position 2 in Chapter 2).Moreover, the context has shifted and we need to analyse the rise ofemerging powers in the context of the globalization of production.However, and in contrast to those who see a Chinese challenge to theinternational order (positions 1 and 3), and those who see convergence


occurring through the promotion of global market forces (position 4),this has not led to a straightforward diffusion of capitalism throughoutthe globe. Neither, despite some success in upgrading in particularsectors (UNCTAD 2013b), has it led to China playing the leading rolewithin these networks, and the US remains at the cutting edge of pro-duction and capturing value within these commodity chains(Appelbaum 2008), contrary to the claims made by Henderson andNadvi (2011). There remain significant hierarchies based on the con-centration of capital in some locations, and different degrees of statepower in the international order. In other words, the problem ofslower growth in the West is not just a problem for the West, but forall countries in the international economy. This should be clear fromthe analysis in the previous two sections, but it can also be seen if weremind ourselves of the data on poverty and inequality in Chapter 6.‘Only’ 1 million out of the 2,407 million global absolute poor live inthe high income countries, compared to 2,406 million in the develop-ing countries. And ‘only’ 148 million of the 2,914 million global in-secure live in the developed world, compared to 2,766 million in theglobal South. The global transformationalist denial of a ‘crude North-South’ divide should also be seen in this light (see for instance McGrew2000: 351). Not unrelated to this point, the opening chapter cited anumber of works published in recent years that identified a rising oremergent Africa as part of the rise of this new South. However, this isnot new and books published in the late colonial period also wrote ofan ‘emergent Africa’ or a ‘new hope’ in the continent4 (Macmillan1938; Oldham 1955). This is part of a wider process of western repre-sentations of the developing world in which, paralleling the volatilityof financial markets, periods of excessive pessimism are often replacedby wild optimism. Thus while in 2011 The Economist was describingAfrica as a ‘rising star’, in 2000 it was dismissed as a ‘hopeless con-tinent’ (cited in Taylor 2014: 21). This is no substitute for soberreflection on the growth and indeed rise of (parts of) the developingworld, but one where the limits of this rise is also recognized.

Nonetheless, the rise of emerging powers is an issue of greatsignificance, not least when two of these powers are as large as Chinaand India. The world is undergoing important changes, including(among others) the rise of new powers, on-going financial crises,growing inequality and very high rates of poverty (which remains mostacute by far in the South), the rise of new manufacturing powerhouses,the globalisation of industrial production through production networks, changes in representation in the institutions of global

Conclusion 193

governance, and serious environmental crises. But for the reasons out-lined in this book, these do not add up to a transformation of theinternational order in which the US is undergoing terminal decline,and the new Southern powers gradually displace US hegemony. To putthe rise of by far the most important new power in perspective, China’spopulation is 24% higher than that of all the high income countriesput together, but China’s income is only one-fifth that of those coun-tries. Even its exports are only 13% that of the high income countries(Nolan 2012: 66). This is not a story of the inexorable rise of the South,nor of US decline, still less one of international convergence. But asChapter 6 argued, there has been some kind of paradoxical conver-gence over the last thirty years, and that has been one in which therehas been a growing tendency (with some counter-tendencies) towardsincreases in inequality within countries (as well as between countriesoutside of Asia). If there is a story to tell about international trans-formation in recent years, then this growth in inequality is every bit assignificant as the rise of a few countries from the South, as has beenrecognized in recently publicized official reports (WEF 2014; Oxfam2014) and a best-selling academic book (Piketty 2014). Moreover itmatters because a new era of global growth based on universally risingincomes is unlikely. What is more likely is that a new era of substantialgrowth in the global North will come about through a new debt ledbubble, which will prove unsustainable at some point in the future.This however does not mean that a supposedly inexorable shift in thedistribution of power towards (parts of) the global South will continue,because a new boom-bust cycle will have negative implications theretoo, and an era of slower growth, higher interest rates and a strongdollar in the North would not be good news for emerging powers.None of this means of course that US hegemony does not facesignificant problems. Given possible future scenarios in the globaleconomy, we may question the capacity of the US state to manage thedifficult problems. However, we can equally say that US state incapa-city is not only a problem for the US state, but for all states in theinternational order (Gamble 2014). Moreover, a changed context inwhich slower growth exists alongside tightened credit and a reversal ofcapital inflows to the South would seriously undermine not onlygrowing indebtedness in the North, but also those cash transfers thathave been important in partially reversing inequality in some countriesin the South, particularly in Latin America (Lavinas 2013). The ‘rise’ ofthe South, the ‘decline’ of the US, and ‘transformation’ of the inter-national order should be put into this wider context.


195

Notes

Chapter 1 Introduction

1 See Chapter 2 for the definitional difference between the BRICs and theBRICS.

2 In this respect at least the argument is close to one popular book that is scep-tical about the rise of so-called groups of developing countries, that ofSharma (2012). However, the reasons outlined for such scepticism in thisbook are very different from Sharma’s, the latter of who appears to reject thegeneralizing tendencies of analyses rooted in the sub-discipline of inter-national political economy.

Chapter 2 The Rise of the South: Rising BRICs, DecliningUS?

1 The Group of 8 (G8) is made up of Canada, France, Germany, Italy, Japan,Russia, the United States and the United Kingdom. The G20 of developingnations was formed in 2003 and involves around 20 or so countries, includ-ing Argentina, Brazil, Bolivia, Chile, China, Cuba, Egypt, Guatemala, India,Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa,Tanzania, Thailand, Uruguay, Venezuela, and Zimbabwe, as at the 2005summit (see http://commerce.nic.in/wto_sub/g20/pressrel.htm).

The ‘other’ G 20 brings together finance ministers and central bank gov-ernors from 19 countries: Argentina, Australia, Brazil, Canada, China, France,Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico,Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the UnitedStates of America plus the European Union, which is represented by thePresident of the European Council and by Head of the European CentralBank (see http://www.g20.org/docs/about/g20_en.html).

2 On significant differences in terms of security, which implicitly challengeboth offensive realist and Leninist accounts of international relations, seeClark (2014).

Chapter 3 The BRICs, State Capitalism and Globalization:Challenge to or Triumph of the West?

1 These countries are Bangladesh, China, Egypt, India, Indonesia, Iraq,Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam.

2 Those that see state capitalism as a progressive alternative to neoliberalisminclude Milne (2013) and to some extent Ramo (2004) and Jacques (2009),while Halper (2010) is most hostile to it. The Economist (2012) and Bremmer(2009, 2010) recognize rather than welcome its appeal and suggest that the

196 Notes

western free market alternative is still better, but don’t come to the samegeopolitical conclusions as Halper. As will become clear in the chapter, noneof them make a particularly strong analytical case for why state capitalism isregarded as necessary in the developing world.

3 The R for Russia is in brackets as Nolke does not believe that it is compatiblewith the development experiences of Brazil, India and China.

4 On this point about over-generalization and lack of specificity see Hay’s(2005b) critique of the varieties of capitalism approach.

5 Given that most neoliberals are committed to some form of methodologicalindividualism, it is questionable whether a focus on aggregates is permissiblefrom within their world view. What can be said with some certainty is that ifindividual entitlements have been reduced, then this should reduce theincentive for individuals to live off welfare benefits and so should lead to areduction in aggregate spending. In fact the opposite has taken place. Ofcourse aggregate spending could be reduced to zero, as some neoliberalswish, but given that aggregate spending has increased this would suggestthat there are reasons other than individual choice why people might beunemployed or on low wages. But this would also suggest the need for ananalysis that takes us beyond methodological individualism.

Chapter 4 The BRICs, the South and the InternationalEconomy, 1992 to 2007

1 See endnote 1 in Chapter 8 for the reasons why. Also see the discussion oninnovation in Chapter 8.

2 We return to these issues in Chapters 5 and 7 where the issue of China’strade with the South is discussed, and in Chapter 8 which focuses on thequestion of innovation.

3 See Chapter 6 for further discussion of the PPP measures.

Chapter 5 The South and the Causes and Consequences ofthe Financial Crisis, 2007–14

1 This claim to end the boom-bust economy came back to haunt BritishChancellor of the Exchequer and then Prime Minister Gordon Brown.However, Conservative opposition did not warn of an unsustainable bubbleand in fact only criticized the Labour government for insufficiently liberaliz-ing finance. A case can therefore be made that had the Conservatives been ingovernment, the bubble would have actually been worse.

2 Neoliberals can however always point to the absence of market mechanisms,but this acts as a fall-back position or indeed a scapegoat in terms of ex-planations for crisis, not least because even most libertarians still see somerole for non-market mechanisms – and thus the state – in the organization ofsociety. See further Plant (2009), Mirowski (2013) and Kiely (forthcoming).

3 There are also questions around FDI, particularly in countries desperate toattract it. This is considered in the next chapter.

4 The next chapter will address questions of global inequality and poverty inthe context of the ‘rise of the South’.

Chapter 6 Global Inequality and the Rise of the South

1 These figures are based on 1990 PPP dollars.2 These figures are based on PPP and not constant dollars, and so differ sharply

from those found in Chapter 4, and specifically Table 4.9. The pros and consof the different usages are discussed in the text, particularly in Chapter 4.

3 At the time of writing the impact of the 2011 international price comparisonis not known, but some provisional data was published in. For more in-formation on this see http://blogs.worldbank.org/category/tags/international-comparison-program. Early signs suggest that if the $1.25 line remains inplace, then the numbers living in absolute poverty will have declined.However, this is likely to be a reflection of data construction at least as muchas any substantial change in poverty patterns per se, and in any case officialdata on nutrition, health and education poverty suggest numbers far higherthan those focusing only on the income benchmark. Moreover, many criticshave suggested that the income level benchmark is set far too low (seeSumner 2014; Birdsall et al 2014; Pritchett 2006).

4 This then has some significant effect in the measurement of poverty at agiven time, though it may not affect overall trends in poverty, because thelowering effect occurs not just in the ‘present’ year, but in the measurementfor past years as well (Chen and Ravallion 2008).

5 The reason why it had little impact on trends is outlined in footnote 4. Oncethe $1.25 figure was used consistently for all years going back to 1980, theglobal incidence of extreme poverty declined from 52% of the global popula-tion to 25.7% (see Chen and Ravallion 2008).

6 Most obviously, consumers in the North may benefit from low cost productsimported from the South, as was discussed in Chapters 4 and 5. Thishowever reflects the shift away from the high productivity high wage modelthat applied (to some) in the post-war boom, to a high debt model of growththat applied in the period from the 1990s onwards. For further discussion seeChapter 4.

Chapter 7 The South and Geopolitics: From Bandung tothe BRICS?

1 The 30 countries that were prepared to publicly be part of the coalition wereAfghanistan, Albania, Australia, Azerbaijan, Bulgaria, Colombia, the CzechRepublic, Denmark, El Salvador, Eritrea, Estonia, Ethiopia, Georgia, Hungary,Italy, Japan, South Korea, Latvia, Lithuania, Macedonia, the Netherlands,Nicaragua, the Philippines, Poland, Romania, Slovakia, Spain, Turkey, UnitedKingdom and Uzbekistan. Note that this list includes no countries from theMiddle East, some of whom had poor human rights records. See also thepoint made in the text later in the chapter about the poor human rightsrecord of some of the countries listed.

2 In the field of journalism, for an example of a liberal hawk position, see theattack on British Leader of the Opposition Ed Miliband, by Cohen (2013).For an excellent critique of ‘either/or’ positions, both of the liberal interven-tionist and (implicitly) of their anti-imperialist opponents, see Younge(2013). See also Kiely (2010: chs.7 and 10).

Notes 197

3 This multipolarity is still however one in which there would only be a fewpowerful states setting the agenda for the international order. The chapterhas questioned the argument that China is a country committed to solidar-ity with the South, but much the same point applies to Brazil and India (Neland Taylor 2013).

4 A possible exception is the practice of land grabbing, which was discussed inChapter 6, which can be considered a form of ‘security mercantilism’ morecharacteristic of the era of classical imperialism (see McMichael 2013).However, this is not the dominant mode of promoting global integration,and the practice does tend to be carried out by the new rising states of theSouth rather than the established capitalist powers. This of course furtherundermines any notion of the rise of the BRICS representing a new era of‘South-South’ solidarity.

Chapter 8 Conclusion: Development, Innovation and theLimits of International Transformation

1 This point reinforces the data outlined in Chapter 4 for the period up to2002, which showed that while manufacturing output (and exports)increased for parts of the developing world, this did not necessarily translateinto an increase in manufacturing value added – indeed the latter might wellfall as the former rises. The data outlined in Chapter 4 is quite old, and theredoes not (yet) appear to be any newer global data along the lines presentedthere, at least not from the source used there, UNCTAD’s 2002 Trade andDevelopment Report. This is further confirmed by correspondence betweenthe author and Jorg Mayer at UNCTAD, dated 11/10/2013. However Chapter 4does provide some tentative data drawn from Nayyar (2009, 2013) and hisreading of various databases.

2 The annual report is based on twelve pillars of competitiveness, such as insti-tutions, infrastructure, macroeconomic environment, health and primaryeducation, higher education and training, goods market efficiency, labourmarket efficiency, financial market development, market size, businesssophistication, and innovation. Much of this is a useful measure of compet-itiveness but at times (particularly on the macroeconomic environment – seefor instance World Economic Forum [2014: 6]) the pillars betray an implicit,if not explicit, commitment to the kind of market friendly intervention thatwas challenged in Chapter 3.

3 There has been some attempt to give the concept of globalization moreexplanatory weight through an engagement with complexity theory (Urry2003; Axford 2013), which argues that a theory or “metaphor of connec-tions” (Urry 2003: 122) should replace a focus on system, life-world andmacro and micro levels. There is of course a danger in any theoretical expla-nation of reifying social forms as entities with distinct essences. However, itis also the case that any social explanation must hold on to some notion ofessentialism and causality (McLennan 1996), for without these we are leftonly with description, which is the basis for Rosenberg’s initial critique ofglobalization theory. Axford’s (2013: 177–90) defence of a critical socialscience of globality is comprehensive and convincing as a research agenda,

198 Notes

but it does not quite deal with some of the previous errors of globalizationtheory in that it shifts easily from a grand theory to an abstracted empiri-cism, and one is left without either a clear definition of globalization (seeRosenberg 2007) or a completely clear account of how the idea may aidempirical inquiry.

4 Thanks to my colleague Clive Gabay for pointing me in the direction ofthese books.

Notes 199

200

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222 References

223

Index

Note: Italicized page numbers denote tables.

absolute povertymeasures of, 132–3reduction, and globalization, 70

abstentions, in UNSC Resolution1973, 164–5

abstracted empiricism ofdevelopment studies, 179

Afghanistan, military intervention in,23, 164

Africaand China, 89, 161–2, 168inequality in, 136and second world development, 2share in world GDP, 130–1

agency bonds, purchase of, 83, 107aggregate spending, 196n5(ch3)agriculture sector

in China, 122employment, 48

in developing countries, 75in India, 49, 51liberalization in, 157, 158

aid, development, 153, 156, 158Chinese, 159–60, 168, 170, 172,

187food aid programme, 50quality of, 155United States, 50

Akyuz, Y., 118, 122Alden, C., 167Alt-A mortgage loans, 100–1, 105American Insurance Group (AIG), 92,

93, 99, 101Americanisation of global capital, 189anti-dumping measures, in India, 51Apple iPod classic, 184Arrighi, G., 23, 81, 109–10, 119, 120,

143Asia

financial crisis of 1997–98, 36, 61newly industrializing economies, 37Pacific Asia, 112

share in world GDP, 130–1valuation of currency, 81see also East Asia

al-Assad, B., 165–6asset backed securities, 101Atlantic Charter of 1942, 153Atlantic neoliberalism, 155austerity measures, 1, 93, 150

in Europe, 104, 111, 134for private sectors, 110

authoritarianism, market, 18, 63Axford, B., 198n3(ch8)

bail-outs, following financial crisis of 2007–08, 58, 92–3, 104, 117

balance of payments deficits, 35, 52,96, 106

Bandung Conference, 152, 153–4Bank of America, 92banks

BRICS development bank, 171capital reserve of, 98commercial banks, 95

investment of capital ininvestment banking by, 96

lending to indebted countries, 34

creditworthiness of, 102–3investment banks, 101

as intermediaries, 98private, investment in mortgage

backed securities by, 108shadow banking system, 98, 99,

102solvency of, 93–4

Barnett, T., 26Basel II, 98Bear Stearns, 102Beeson, M., 43–4Beijing Consensus, 2, 39–44, 61

basis of, 21

224 Index

Beijing Consensus – continuedas cause for celebration, 4, 21–4,

170–1as cause for concern, 4, 17–18,

168–9Belgrade conference, 154Berlin Wall, 154Bernanke, B., 102Blair, T., 165BNP Paribas, 102Bolsa Família programme, 54bond markets, returns for United

States from, 121bonds

agency bonds, 83, 107US Treasury, 82–3, 121, 122

foreign holdings of, 107Bradford and Bingley, 92Brazil

commitment to multipolarinternational order, 167

development of, 52–5exports of, 116

primary goods, 116, 183food inflation in, 141foreign debt of, 34inequality in, 135move from deficits to surpluses of

current accounts, 35proportion of people living in

absolute poverty in, 133, 135savings and investment rate of, 77on UNSC Resolution 1973, 165

Bremmer, I., 40, 42, 195n2(ch3)Breslin, S., 86Bretton Woods II system, 81, 121B(R)IC variety of capitalism, 43BRICS (Brazil, Russia, India, China,

and South Africa), 15–16, 158broad index secured trust offering

(BISTRO), 100Brooks, S., 26Brzezinski, Z., 20Buiter, W., 38Bukharin, N., 170Burbach, R., 187Bush, G.H.W., 96Bush, G.W., 92, 105business cycles, decoupling of, 115

Callinicos, A., 19capital

Americanisation of global capital,189

competition between, 18–19, 20foreign capital

invested in US, 181promotion of joint ventures with,

185inflows

and globalization, 188, 189into South, 36, 73–7, 116–18, 117

internationalization of, 28, 96investment by commercial banks, 96mobile capital, 145–6reserve of banks, 98

capitalismcrony capitalism, 61entrepreneurship role in

development of, 181–2illiberal capitalism, 42, 63transnational capitalism, 145, 187varieties of, 43see also state capitalism

capitalist development, 42–3, 169and authoritarianism, 63and dependency, 180linear models of, 143normal, 180and state capitalism, 62, 63, 171, 172

Cardoso, F.H., 53, 182Caribbean

exports, share of China in, 160, 161inequality in, 136

cash crop production, 144Centauri (structured investment

vehicle), 99central government deficit in South, 74chaebol (South Korea), 62–3Chen, S., 137China

Beijing Consensus see BeijingConsensus

character of boom in, 80–5conflict with United States, 170 consumption

growth of commodities in, 113,113, 161, 161

of grain in, 142

current account surplus of, 106decoupling of, 121development of, 44–9dollar reserves of, 82economic growth of, 13export of primary goods by, 183fixed asset investment rate of

China, 122food inflation in, 141foreign direct investment in, 125,

186foreign exchange reserves of, 126and globalization, 189–90growth of GDP, 85growth rate of, 114–15as high globalizer, 39, 61high-tech production of, 184house prices in, 134import-consumption ratio of, 86imports

of commodities by, 87of United States from, 106

inequality in, 134–5influence in Africa, 168local developmental states of, 124manufactured imports of, 88as manufacturer of final goods, 88–9measuring between-country

inequality excluding, 138on military intervention in Syria,

166, 167and new South, 159–63and non-alignment, 158official holdings of long-term

agency debt, 108outward foreign direct investment

of, 125, 186population vs. income of, 194post-crisis purchases of US

Treasuries, 124proportion of people living in

absolute poverty in, 133purchase of US debt, 121, 171rise of, 69–70, 69, 167, 170role in growth of South, 112role in US housing market, 107savings and investment rate of, 77share of East Asian countries’

exports to, 88

share of foreign investment in realestate in, 118

state-led growth project of, 63stimulus package of, 116tariff rates in, 39, 45, 47technological upgrading in, 183–4trade with BRICs, 86, 160on UNSC Resolution 1973, 165US-Chinese interdependence, 80–5

China Development Bank, 159China Eximbank, 159China Mobile, 46China National Offshore Oil

Company (CNOOC), 46China Unicom, 46Citigroup, 41, 96, 99Clinton, B., 96, 104clothing sectors

liberalization of, 157market share of China in, 48–9protectionist measures in, 163

Cold Warand communism, 164and geopolitics, 153and liberal international order, 190post-Cold War world

liberal interventionism in, 164non-alignment in, 156

collateralized debt obligations(CDOs), 127

securitization of mortgages into, 100–1colonialism

in India, 49and international division of

labour, 66and primary products, 176

commercial banks, 95investment of capital in investment

banking by, 96lending to indebted countries, 34

Commission on Growth andDevelopment, 38

commoditiesboom, 85–90chains see global commodity chainsin China

consumption growth, 113, 113,161, 161

imports, 87, 113, 113

Index 225

commodities – continuedexports, and diversification, 163Latin America as importers of, 163markets, food, 142prices, 114, 161, 162, 163

changes in, 74, 74, 75, 116global commodities, Chinese

demand on, 160super-cycle, 89, 191see also primary commodities

Commodity Futures ModernisationAct 2000, 96

communism, 55, 153, 164Communist Party (China), 40, 44,

124Community Reinvestment Act 1977,

104–5comparative advantage, 47, 61, 62,

70, 178and manufacturing in South, 67, 79

competitiveness of nations in globaleconomy, 185, 198n2(ch8)

complexity theory, 198n3(ch8)conditionality, for indebted

countries, 35conduits, financial, 98–9, 102consumer spending, 109

on food, 141as measurement of inequality, 135

consumptionin China, 80

consumption growth ofcommodities, 113, 113, 161,161

final consumption spending, 106import-consumption ratio, 86

effect of exports on, 80–1, 84of grain in India, 142growth of commodities in China,

161, 161of Japan, Taiwan and South Korea

combined, 80in northern economies, and booms

of 1990s and 2000s, 106population by consumption groups,

139, 140shares of global consumption

growth, 141in United States, 106

convergence between South anddeveloped world, 1–2, 4, 150

boom from 2002 to 2007, 71–5limits of, 75–90and market friendly policies, 24–5transformation of international

order through, 10–15cooperation, in Third World, 154Corbridge, S., 51corporate fraud, 96, 98credit crunch, 99, 102, 103credit default swaps (CDSs), 100, 103

synthetic CDOs, 101credit rating agencies, 99, 101, 102Crimea, Russia’s annexation of, 167crony capitalism, 61current account

deficitsof developed countries, 14, 72,

74–5, 106of developing countries, 51–2, 71,

106, 118, 191surpluses, 35, 81

of developing countries, 35, 110,191

de-industrialization in developedworld, 145

debt crisisin Brazil, 53in Latin America, 34of 1982, 58, 178sovereign, 103–4

decile ratios, global inequalitymeasure, 136, 137

decoupling of South from North, 6,69, 83, 84, 110, 112–16, 117, 177,190

defensive realist approach, on rise ofChina, 26

deleveraging, 106, 117in United States, 109, 110

Deng Xiaoping, 44, 159dependency theory, 175, 176, 177,

178, 179–81dependent market economies, in East

and Central Europe, 43derivatives market, 96–9Desai, R., 170, 171

226 Index

developed countriesannual average growth rates of, 109current account

deficits of, 72, 110–11surpluses of, 110

de-industrialization in, 145foreign direct investment in, 76growth rate of, 129–30import growth in, 122–3inequality in, 136market, South-South trade

dependence on, 88per capita income of, 111profitability in, 145ratio of government spending to

GDP in, 60research and development

spending of, 185, 186share in global growth, 72share of wages in GDP, 134trade deficits of, 73trade in goods from lower wage

economies, 148developing countries

annual average growth rates of, 109average central government deficit

in, 74capital inflows into, 36, 73–7,

116–18exports of, 160–1, 160foreign direct investment in, 67–8,

76foreign investment boom in, 66–8growth rate of, 129–30investment liberalization in, 39,

67–8investment of MNCs in, 71rise of manufacturing in, 66–8role in demand for crops, 141role in global economy, 11–12stimulus packages in, 116trade surpluses of, 72see also South

development model of China, 21,39–44

development orthodoxy, 89after World War II, 67

development theory, and rise ofSouth, 175–81

developmental alliances, in South,157–8

developmental change of South,10–15

developmental states, 5, 40, 42, 44,48, 60, 64, 124

direct foreign investment (DFI) seeforeign direct investment (FDI)

Dirlik, A., 22diversification

of Chinese exports, 70and commodity exports, 163of foreign exchange reserves, 82of industrial production vs. primary

goods production, 66trade, 10, 115

division of labour see internationaldivision of labour

Dollar, D., 37, 38dollar (United States)

dollar reserves, 14of East Asian countries, 82

as international reserve currency,171

share of allocated foreign exchangeholdings, 123

valuation of, 124domestic demand

effect of import content on, 84and global recovery from financial

crisis of 2007–08, 12domestic savings

in China, 77percentage in GDP, 106

financial liberalization for, 53in India, 77percentage in GDP of United States,

106domestic value-added content of

exports, in China, 84Dooley, M., 81dot.com boom, 65, 71, 98double counting of export values, 84,

86Dow Jones Index, 98

E7, 12–13East Asia

Index 227

East Asia – continuedChina

imports of merchandise from EastAsia, 86

role in production networks, 49exports

of parts and components, 87–8shares to China, 88shares to European Union, 87

foreign exchange reserves of, 82newly industry countries in, 36,

177price distortions in, 61protectionist policies in, 61purchase of mortgage backed

securities, 82state expenditure/GDP ratios in, 60state interventions, 61

Eastern Europe, inequality in, 136economic policies

and capitalism, 18of South, 34–5

economic rents, 181, 182education

in Chinainvestment for, 42social development advances, 44

and income, 134private insurance schemes for, 58role of state in developing, 62and skilled workers, 11

Edward, P., 138, 139, 144, 149elites

alliances between, 52and neoliberalism, 58

emerging markets, 14boom of 1990s, 65–71business cycles in, 115and financial crisis, 115, 191

emerging powers, rise of, 1–5, 7,18–21, 30, 32, 38, 112, 168, 170,172, 173, 180, 187, 192, 193–4

as challenge to the West, 39–44as triumph for the West, 4, 24–6,

34–9, 171see also developing countries; South

employmentin Brazil, 53, 54in China, 48

energy futures, 96Enron, 98entrepreneurship, role in

development of capitalism, 181–2equities

and Beijing Consensus, 21, 22China’s investment in, 14and financial crisis, 83prices in developing countries, 118returns for United States from, 121

ethics of principled conviction, 169ethics of responsibility, 169ethnic minorities, expansion of home

ownership among, 104Europe

annual average growth rates of GDPand exports in, 69

austerity measures in, 104, 111, 134Central Europe, dependent market

economies in, 43countries

technological innovation in, 186voting shares in IMF, 164

Eastern Europedependent market economies in,

43inequality in, 136

exports to, 87–8, 116during financial crisis of 2007–08,

92–3former communist European

countries, foreign directinvestment in, 13, 76

investment in mortgage backedsecurities by private banks, 108

European Central Bank, lendingduring financial crisis, 110

Eurozonedeficits with, 73financial crisis in, 103, 104, 110

export/GDP ratiosof China, 80, 84of Japan, Taiwan and South Korea

combined, 80export valued added/GDP ratios, of

China, 84

Fannie Mae, 83, 103, 104, 107, 108Farooki, M., 112, 113, 114

228 Index

federal debt of United States, 109final goods, 84

China as manufacturer of, 88–9financial bubbles, 106financial crisis of 1990s, 71financial crisis of 1997–98, in Asia,

36, 61financial crisis of 2007–08, 2, 4, 5–6

decoupling of South from North,112–16

derivatives and investmentbanking, 96–9

and government regulation, 95–6,104

and housing crash, 102–3immediate causes of, 5–6, 92–105immediate response to, 5–6, 110–12implications for future of US power,

118–26international origins of, 105–9private debts and sovereign debt

crisis, 103–4recovery of BRICs from, 12recovery of South from, 190–1securitization and sub-prime

mortgage market, 99–101South-South trade and capital flows

to South, 116–18state bail-outs following, 58transformation of international

order, 109–26financialization, and inequality, 147–8fixed asset investment rate, of China,

122food aid programme, in India, 49–50food crisis, 32, 129, 139–49foreign capital

invested in US, 181promotion of joint ventures with,

185foreign debt

of Brazil, 34of Mexico, 34of United States, 118–19, 123, 126

foreign direct investment (FDI), 76boom in developing world, 66–8in developed countries, 76in developing countries, 67–8, 76,

120–1

of developing countries, 13–14,41–2, 186

global, 76China’s share of, 70

inflows in China, 45and international division of

labour, 145as joint ventures, 185outsourcing of lower value activity

through, 119–20of South, 125

foreign economic cooperation loans,159

foreign exchangeexporting primary goods to

generate, 183markets, expansion of, 97

foreign exchange reservesof China, 126of East Asian countries, 82during 2007–08 financial crisis, 14

foreign investmentin real estate in China, 118in United States, 107–8, 121see also foreign direct investment

(FDI)foreign policy

human rights as instrument of, 169

and non-alignment, 6foreign portfolio debt holdings, in

United States, 121former communist European

countries, foreign directinvestment in, 13, 76

Fortis, 92Foster, J.B., 88France, economic security for labour

in, 147Freddie Mac, 83, 103, 104, 107, 108Freeman, C., 182free markets, 11, 24, 36, 57, 58, 105,

143, 195–6n2(ch3)free trade, 61–2, 157, 170, 172

and division of labour, 144Frobel, F., 145FT 500 companies from South, 78fuel economy, and food, 142futures, 28, 75, 94, 96, 97, 142

Index 229

G7, 12G8, 195n1(ch2)G15, 167G20, 110, 157–8, 167, 195n1(ch2)G77, 155, 168, 172Gandhi, I., 50gas companies, in Russia, 56Gazprom, 56General Agreement on Tariffs and

Trade (GATT), 157General Agreement on Trade and

Services, 185geographical inequality, 187geopolitics, 6, 152, 153, 154, 192

and Beijing Consensus, 23, 168and globalization, 26and international order

transformation, 15–16and new South, 163–7

Germanylabour market and welfare

protection in, 147manufacturing in, 120on military intervention in Iraq,

166share in world trade, 119

Ghosh, J., 142Gindin, S., 28Gini co-efficient, 136, 137Glass-Steagall Act 1933, 95global absolute poor category, 138,

139, 140, 149, 150, 193global commodity chains, 77, 86, 147

and foreign direct investment, 146investments of MNCs within, 68involvement of US non-financial

firms in, 148rise of transnational capitalism

through, 187global consumption

China’s contribution to, 113, 113share of US consumption in, 106share of growth on, 141see also consumption

global derivatives market, 97global economy

changes, and Third Worlddevelopment strategy, 178

China’s integration into, 184

competitiveness of nations in, 185,198n2(ch8)

and developing countries, 11–12and financial crisis of 2007–08, 92inequality in, 139

global inequality, 129–51causes of, 175food crisis and international

division of labour, 139–49measures of, 136–7

global insecure category, 138, 139,140, 144, 149, 193

global middle class, 12, 112, 114, 133,138

global order, layers in, 138global production networks see global

commodity chainsglobal prosperous category, 138, 140global secure category, 138, 139, 140globalization

and capital inflows, 188, 189and development, 178friendly policies, 3grand theory of, 179and geopolitics, 26and growth of developing

countries, 25–6of industrial production, 193and inequality, 129–30and nation states, 60of 1990s, 70–1opportunities of, 34–9of production, 183, 192and transformation of international

order, 188–90, 198n3(ch8)and United States, 28and World War I, 146

golden age, 96Goldman Sachs, 11, 14, 21, 30, 55,

75, 181Gourinchas, P-O., 119government

cuts, in Russia, 55regulation, and financial crisis of

2007–08, 95–6, 104role in market friendly

interventions, 59spending, and financial crisis, 106

Gowan, P., 19

230 Index

Gramm, P., 95Gramm-Leach-Biley Act 1999, 95grand theory of globalization, 179Great Depression, 52, 95Greece

bail-outs in, 104private debt in, 103

gross domestic product (GDP)BRICs, annual average real GDP

growth rates of, 14of China, 82, 85

domestic savings percentage in,106

wage income share in, 81of developed countries

foreign direct investment share,68

ratio of government spending toGDP in, 60

share of wages in GDP in, 134of developing countries,

investment/GDP ratios for,76–7

Europe, annual average growthrates in, 69

export/GDP ratios, 80, 84export valued added/GDP ratios, 84global, China share of, 69of Latin America

share in world GDP, 130–1measuring, 79, 80, 131ratio of government spending to,

59–60of Russia, 55, 56state expenditure/GDP ratios, 60trade/GDP ratios, 38–9, 56, 146of United States, annual average

growth rates, 69of United Kingdom, ratio of

government spending to,59–60

world GDP growth, 72, 130–1growth acceleration programme, in

Brazil, 54

Halper, S., 17–18, 23, 31, 40, 41, 42,171, 195n2(ch3)

Harvey, D., 57, 58–9HBOS, 92

health carein China, social development

advances, 44and income, 134

hedge funds, 97, 102, 127hegemony of United States, 2–3, 4,

24–6, 29, 170, 171, 175, 194and Beijing Consensus, 21, 22–3limits of challengers to, 26–8, 172persistence of, 4–5, 26–8, 172

Henderson, J., 188, 193heterogeneous tails, 137hi-tech investments, in United States,

98hierarchical market economies, in

Latin America, 43high household saving, high

corporate debt developmentstrategy, 47

high-tech productionof China, 184of developed countries, 120

higher value activityin developed countries, 148in developing countries, 114in United States, 120

homogenous middles, 137Hong Kong

China’s foreign direct investmentin, 125

imports of United States from, 106liberalization in, 96neoliberalism in, 61

householdsfinal consumption spending in

China and United States, 106savings rate in United States, 72

housingcrash, and financial crisis of

2007–08, 102–3market, in United States, 91, 104,

106–7, 121prices in China and India, 134and US dollar, 82–3

Hu Jintao, 159human rights

abuses, in China, 44, 134, 168and Chinese aid, 168as justification for policy, 169

Index 231

human rights – continuedand state capitalism, 3, 18Universal Declaration of Human

Rights of 1948, 153humanitarian military intervention,

164Hypo Real Estate, 92

IBSA (India, Brazil, South Africa), 158,167

Iceland, during financial crisis of2007–08, 92–3

Ikenberry, J., 27illiberal capitalism, in China, 42, 63imperial power of United States, 28imperialism, 18–19, 158

contemporary, 170Marxist theories of, 18–19, 170

import-consumption ratio, of China,86

import substitution industrialization(ISI) policies, 35, 36, 66, 67, 77,155, 176–7, 178

in Brazil, 52, 53, 54in India, 49, 51and Third World, 176–7

incomeand food chain, 141inequality, in China, 48low income countries, proportion

of people living in absolutepoverty in, 133

as measurement of poverty, 134middle income countries

proportion of people living inabsolute poverty in, 133

rise of wealth in, 139savings rate in, 77

per capita incomeof developing world, 111and inequality, in India, 135

and population, 194and primary commodities, 112share across countries, 137and standards of living, 112,

113income elasticity of demand for

primary goods, 67, 176

Indiacommitment to multipolar

international order, 167consumption of grain in, 142development of, 49–52export of primary goods by, 183food inflation in, 141growth rate of, 114–15inequality in, 134, 135as low globalizer, 39on military intervention in Syria,

166, 167proportion of people living in

absolute poverty in, 133role in growth of South, 112savings and investment rate of, 77tariff rates in, 39technological upgrading in, 183–4trade with other BRICs, 86on UNSC Resolution 1973, 165

industrial policy, of China, 46, 47industrial production

diversification of, 66globalization of, 193

industrializationde-industrialization, 145and development orthodoxy, 67, 89and developmental states, 42export-oriented, 80newly industrializing economies

(NIEs), 37newly industrializing countries

(NICs), 36, 38, 59, 62, 78and open investment policies, 37–8pro-industrialization policies, 176in West, 177see also import substitution

industrialization (ISI) policiesinequality, 6

within countries, 130poverty, 132–9

and financial crisis of 2007–08,126–8

and financialization, 147–8geographical inequality, 187global inequality, 129–51income inequality, in China, 48international inequality, 6, 129–32intra-country inequality, 147

232 Index

and poverty within countries, 132–9social inequality, 187

inflationof food, 141response of United States to, 97

innovation, technological see undertechnology

institutions, 15, 25, 33, 34differences between capitalisms, 43and free markets, 11of global governance, 187, 193–4holding collateralized debt

obligations, 101reforms, in South, 36representation of global

governance, new South in,163–4

set by developing countries, 170–1inter-imperialist rivalries, 170international division of labour, 61,

139–49, 150and colonialism, 66between developed and developing

countries, 79and free trade, 144and labour markets, 144

international inequality, 6, 129–32International Monetary Fund (IMF),

36, 37, 156loan to indebted countries, 34

conditions, 58India, 50

regulation of debt crisis, 58stabilization policies of, 35voting shares of European countries

and BRICs in, 164international order

centrality of US power in, 26–7liberal, 27–8, 29, 31, 153, 175, 190role of United States in, 28transformation of, 109–26, 167–73,

185through convergence, 10–15through geopolitical change,

15–16limits of, 187–94dangers, 4, 18–21, 170and globalization, 188–90,

198n3(ch8)

internationalizationof capital, 28, 96of finance, 96–7of production, 96

intra-country inequality in developedworld, 147

intra-firm trade, 155investment banking, 95–9investment banks, 75, 92, 95, 101

as intermediaries, 98investments

effect of exports on, 80fixed asset investment rate, 122foreign direct investment see

foreign direct investment (FDI)hi-tech investments, 98open investment policies, 37–8, 170overseas investment/sales of United

States, 119, 120, 181portfolio investment, 73, 117rate, in middle income countries,

77structured investment vehicles, 98,

99, 102trade related investment measures,

47investment/GDP ratios, for

developing countries, 76–7investment liberalization

in developing countries, 39, 50,67–8

and globalization, 70in Third World, 178

investment policiesof China, 27of developing countries, 68open investment policies, 37–8, 170

Iraq, military intervention in, 23, 81,164, 165, 166, 169

Irelandduring financial crisis of 2007–08,

92–3private debt in, 103

Islamic State movement, in Syria, 166

Jacques, M., 195n2(ch3)Japan

consumption in, 80export/GDP ratios of, 80

Index 233

Japan – continuedmanufacturing in, 120official holdings of long-term

agency debt, 108trade surplus with China, 87

JP Morgan, 100, 102joint ventures, foreign direct

investment as, 185

Kagan, R., 20Kanbur, R., 133Kaplinsky, R., 112, 113, 114, 182Keynes, J.M., 105–6Khanna, P., 2Kharas, H., 112Korean Development Bank, 92Kraay, A., 37, 38Kubitschek, J., 52Kupchan, C., 30

labour-intensive sectors, market shareof China in, 48–9

labour marketsof China, 49and division of labour, 144and food prices, 142–3insecurity, in developed world, 147

labour productivityof United Kingdom, 119of United States, 119

land acquisitions, 198n4(ch7)and food prices/production, 143, 144

large state national championindustries, 62–3

Latin Americaand China, 89, 162current account deficits of, 74debt crisis, 34exports, share of China in, 160,

161, 163financial crisis of 1990s, 71foreign direct investment in, 77as importers of commodities, 163imports o manufactured goods by

land-owners in, 176inequality in, 136investment of MNCs in, 71manufacturing in, 78share in world GDP, 130–1

total public debt of, 74wages-related gender gap between

men and women in, 136League of Democracies, 166least developed countries (LDCs)

share in world trade, 39tariff rates in, 39

Lehman Brothers, collapse of, 92, 103Leninism, perspective on rise of

emerging powers, 170, 192liberal imperialism, on military

interventions, 169liberal international order, 27–8, 29,

31, 153, 175, 190liberal internationalism, on rise of

South, 21, 28, 29liberal interventionism

and Beijing Consensus, 168foreign policies, 6and new South, 164–7

liberalization, 28in Brazil, 53in China, 45, 47and developmental alliances, 157of export dependent sectors for

developing world, 157and financial crisis of 2007–08, 126of financial flows, 71, 172, 188of financial services, 96–7in India, 50, 51, 183investment, 25, 27, 39, 39, 50,

67–8, 70, 178of legislation concerning mergers

and acquisitions, 96in Russia, 55, 56trade, 27, 35–6, 41, 45, 70

Libya, military intervention in,164–5, 168

life expectancyin China, 44–5, 134–5in Russia, 55

Lim, J., 88Lim, M-H., 88limitations of BRICs, 172–3Lloyds TSB, 92loans

Alt-A mortgage loans, 100–1, 105foreign economic cooperation

loans, 159

234 Index

IMF loan conditions, 58to indebted countries, 34structural adjustment loans, 35

localization, and Beijing Consensus,22

long-term agency debt, officialholdings of China and Japan of,108

long-term securities of United States,purchases by foreigners of, 123

low income countries, proportion ofpeople living in absolute povertyin, 133

low wage economiesmerchandise imports from, 147trade in goods from, 148

Lula da Silva, L., 54Lysandrou, P., 127

Macao, China’s foreign directinvestment in, 125

Maddison, A., 130manufactured goods

Chinaexport by, 80, 180as final producer/assembler, 88

imports by land-owners in LatinAmerica, 176

and international division oflabour, 79

vs. primary goods, 66–7, 160, 176manufacturing

in Brazil, 52, 53in China, 122convergence in, 79exports

growth of China, 69of South, 78

productivity of United States in,120

rise in developing world, 66–8rise in South, 77–9shares of exports by country, 67

manufacturing value added (MVA), ofSouth, 78

Maoism, 159market authoritarianism, 18, 63market-conforming policies, of

China, 46

market deregulation policy, 35, 36market friendly interventions, 5, 38,

39, 46, 59, 60, 61, 62, 198n2(ch8)market friendly policies, 3, 4, 29, 31,

33, 34, 35, 36, 38, 40, 41, 42, 57,70, 138

and convergence between Southand developed world, 24–5

and IMF loan conditions, 58market societies, 62market-supplanting policies, of

China, 46markets

in development of BRICs, 44–57imperfections, role of state in, 61–2and neoliberalism, 57–63prices, for measuring share of South

in global GDP, 79, 80, 131Marshall Plan, 175Marx, K., 181Marxism, 7

and international division oflabour, 144

on neoliberal principles, 58perspective on rise of emerging

powers, 18–19, 20–1perspective on US hegemony, 28,

29theories of imperialism, 18–19, 170

Mason, P., 96, 99McChesney, R., 88Mearsheimer, J., 19–20, 31merchandise

Chinese imports from East Asia, 86imports from low wage economies,

147share of developing countries in, 68

mergers and acquisitionslegislation concerning, 96in North, 76

Merrill Lynch, 41methodological individualism,

196n5(ch3)methodological nationalism, 55, 64,

189 Mexico

foreign debt of, 34move from deficits to surpluses of

current accounts, 35

Index 235

middle class, 138global middle class, 12, 112, 114,

133, 138Middle Eastern countries, holding of

US Treasury bonds by, 82middle income countries

proportion of people living inabsolute poverty in, 133

rise of wealth in, 139savings rate in, 77

Milanovic, B., 137Milberg, W., 148, 149military interventions see liberal

interventionismMill, J.S., 191Milne, S., 195n2(ch3)Ministry of commerce (MOFCOM),

China, 159MINTs (Mexico, Indonesia, Nigeria

and Turkey), 12mobile capital, 145–6modernization theory of

development, 175, 176–7, 178,179

monetary policyand deleveraging, 110and investment banking, 98

moneyPonzi scheme, 99responsibility of states for supply

of, 57–8Moore, J., 143mortgage backed securities (MBS),

100, 103investment of private European

banks in, 108purchase by East Asian countries,

82mortgages

Alt-A mortgage loans, 100–1, 105to low income groups, 104securitization into collateralized

debt obligations, 100–1sub-prime mortgage market,

99–101, 104, 105, 107, 127Mugabe, R., 18Multi-Fibre Agreement (2005), 163multilateralism, and Beijing

Consensus, 22

multinational corporations (MNCs)investments in developing

countries, 71codes for, 155

investments within globalcommodity chains, 68

operating in United States, sales of,125

multipolar international order, 167,198n3(ch7)

Nadvi, K., 188, 193nanotechnology, 186NASDAQ, 98National Intelligence Council (NIC),

29national systems of innovation, 182,

183nationalism, 20

and Third World, 153nationalist catch up theory, 61nationalizations, during financial

crisis of 2007–08, 93, 103Nayyar, D., 198n1(ch8)Nehru, J., 153neo-conservatism, perspective on rise

of emerging powers, 20–1neoliberalism, 41, 94, 105, 152, 156,

172, 173, 179, 192, 195n2(ch3),196n5(ch3), 196n2(ch5)

Atlantic, 155in Brazil, 53, 54definition, 57and growth rates, 72and rise of developing countries,

171and states/markets, 57–63and Washington Consensus, 40–1and welfare state, 60see also state capitalism

neoliberalization practices, 58–9New Deal, 95new international economic order

(NIEO), 6, 155, 157and rise of China, 162

new South, 4, 6, 152–67dependency on established powers,

180emerging powers as leaders of, 172

236 Index

New Special Economic Zones, inChina, 45

newly industrializing economies(NIEs), 37

newly industrializing countries(NICs), 5, 36, 38, 59, 62, 156,177, 182

manufacturing in, 78Next Eleven (N-11) countries, 129/11 terrorist attacks, interest cuts

after, 99Nolan, P., 46, 186Nolke, A., 43, 55Non-Aligned Movement, 32, 152,

154, 157, 168non-alignment, 6

and China, 158Third World, 153, 154, 156

non-financial firmscost of borrowing for, 92financial expansion by, 147–8and global-commodity chains,

148non-tradable services, low wages in,

147North-North trade, 10Northern Rock, 93Nuremberg trials of 1945–46, 164Nye, J., 27

Office of Thrift Supervision, 105offshoring, 147, 148oil

companiesin Russia, 56and state capitalism, 41

exports of, 90, 162prices, and Third World, 156, 163

O’Neill, J., 1, 9, 11, 26, 129–30, 181O’Neill, P., 103open investment policies, 37–8, 170options, financial, 97Organisation for Economic

Cooperation and Development(OECD), 86

Shifting Wealth report, 6, 9, 10Organisation for Petroleum Exporting

Countries (OPEC), 2, 155, 156orthodox trade theory, 144, 148

overseas investment/sales of UnitedStates, 119, 120, 181

see also foreign direct investment(FDI)

ownership of companies, andglobalization, 190

Oxfam, 144

Pacific Asia, rise of, 112Palma, G., 137Panitch, L., 28parts and components

China as assembler of, 84exports by East Asian countries to

United States and EuropeanUnion, 87–8

supply to China, 86per capita income

of developing world, 55, 111, 112,135

of United states, 32Ponzi scheme, 99population

by consumption groups, 139, 140control policies, in China, 45and income, 194triadic patents-population

proportion, 185–6portfolio investment

investment in South, 73since financial crisis, 117

Portugal, private debt in, 103post-Cold War world

liberal interventionism in, 164non-alignment in, 156, 164

povertywithin countries, and inequality,

132–9reduction, and globalization, 70, 71rural poverty, in China, 48

Prashad, V., 155, 156, 158, 172Prebisch, R., 176price distortions, in East Asian

countries, 61price movements, 176Price Waterhouse Coopers, 12–13primary commodities

Brazil’s earnings from, 116demand for, 5, 52, 102, 187

Index 237

primary commodities – continueddependence on, 163, 172exports, 77

to generate foreign exchange, 183of Latin America to China, 160,

161prices for, 155

and income, 112vs. manufactured goods, 66–7, 160,

176prices of, 74, 114, 155, 162, 192specialization in, 89, 176and Third World, 176

private banks, investment inmortgage backed securities inEurope, 108

private debts during financial crisis of2007–08, 103–4

private sectorcutting of expenditure by, 110and financial crisis, 103, 105, 126ownership, and foreign investment,

76privatization, 25, 41, 44, 54, 130, 178

reversing, 93in Russia, 55of state-owned enterprises policy, 35

processing industries, in China, 162production

cash crop production, 144globalization of, 183, 192high-tech production, 120, 184industrial production, 66, 193

production networks, East Asian, 49,86–7, 124

see also global commodity chainsproduction substitution, 54, 77, 117productivity

of Brazil, 54of India, 51manufactured goods, 66, 120of middle income countries, 77total factor productivity, 183

profitability in developed world, 145pro-industrialization policies of Third

World development, 176proletarianization, 143protectionist policies, 35, 38, 57, 157,

163, 177

in Brazil, 52in East Asia, 61and Third World, 153

public health improvements, inChina, 45

public ownership in current statecapitalist countries, 62

public sectorand financial crisis, 103government spending cuts, 105reforming, 36, 53, 60

purchasing power parity (PPP)measurement of, 132for measuring share in global GDP,

69, 79, 131Purushothaman, R., 24–5, 38Putin, V., 166, 167

quantitative easing, 6, 55, 117, 124,180, 190, 191

quintile ratios, global inequalitymeasure, 136

Rahbari, E., 38Ramo, J., 21, 40, 185, 195n2(ch3)Ravallion, M., 137raw materials, China’s access to, 107,

162, 170, 172RBS, 92re-mortgaging, 102Reagan, R., 96real estate

China’s investment into UnitedStates, 14

share of foreign investment inChina, 118

Real Plan (Brazil), 53realism, perspective on rise of

emerging powers, 18, 19–21, 26,28, 170, 192

recession, 65, 66, 71, 79, 84, 97,103–4, 105, 156

reformsin China, 44, 45institutional, 36public sector, 36, 53, 60

remittances from North to South,148–9

238 Index

Research and Development, spendingfor, 185–6

Responsibility to Protect principle,165

revolution, in Brazil, 52Rey, H., 119Robinson, B., 145, 187Rostow, W., 175, 179Rubin, R., 96rural poverty, in China, 48rural-urban migration in China, 48,

122, 124Russia

annexation of Crimea, 167commitment to multipolar

international order, 167development of, 55–7export of primary goods by, 183food inflation in, 141on military intervention in Syria,

166, 167savings and investment rate of, 77on UNSC Resolution 1973, 165

Santander, 92savings rate

in Brazil, 53in middle income countries, 77

Sberbank, 56Schumpeter, J., 181, 182Schwartz, H., 109, 120Second World, 2, 152, 154Securities and Exchange Commission,

98securitization, 99–101, 104, 107selectivity, in military interventions,

169self-determination theory, and

Beijing Consensus, 21, 22semi-skilled workers, effect of rural

poverty on, 48shadow banking system, 98, 99, 102Sharma, R., 195n2(ch1)shock therapy, in Russia, 55short-term borrowing, 102Singapore, neoliberalism in, 61Singer, H., 176skilled workers

and education, 11

effect of rural poverty on, 48in India, 51in IT industry, 51wages of, 145

social inequality, 187solidarity

and rise of China, 159–63, 170Third World, 155–6, 173

solvency of banks, 93–4South

after 1945, 152–6capital inflows into, 36, 73–7,

116–18pre- and post-financial crisis, 117

change in trade patterns of, 116codes for MNCs investing in, 155decoupling from North, 112–16,

117dependency on primary goods, 180new

dependency on establishedpowers, 180

emerging powers as leaders of,172

rise of, 156–67remittances from North to, 148–9rise of, 129–51

and development theory, 175–81and technological innovation,

181–7rise of manufacturing in, 77–9role of China and India in growth

of, 112share in global exports, and

international division oflabour, 146

see also developing countriesSouth Africa, 9, 14, 15

savings and investment rate of, 77on UNSC Resolution 1973, 164

South Koreacentral bank, diversification of

foreign exchange reserves by,82

consumption in, 80export/GDP ratios of, 80neoliberalism in, 60–1newly industry countries in, 36trade surplus with China, 87

Index 239

South-South trade, 2, 10, 85–90,116–18, 160

share in world trade, 85–6sovereign debt crisis, during financial

crisis of 2007–08, 103–4Sovereign Wealth Funds, 14, 41, 126sovereignty principle, China on, 168Spain, private debt in, 103Special Economic Zones, in India, 50stabilization policies, 35, 130Standard and Poor’s, 98, 101standards of living, 56, 124, 178

in BRICs, 14and income, 112, 113

Starrs, S., 189, 190state capitalism, 39–44, 179, 192,

195n2(ch3)in Brazil, 54, 55and capitalist development, 62–3,

171in China, 2, 3, 4, 17–18, 168–9in Russia, 56see also neoliberalism

State Owned Enterprises (SOEs), 47state permeated market economies,

43states

bail-outs following 2008 financialcrisis, 58

in development of BRICs, 44–57and globalization, 188and neoliberalism, 57–63ownership, 60

of Russia, 56responsibility for supply of money,

57–8role in development of capitalism,

64Steinfeld, E., 184stimulus packages, in South, 116,

122stock market volatility, 92, 104strategic sectors, in China, 41–2, 46structural adjustment loans, 35structured investment vehicles (SIVs),

98, 99, 102sub-contracting, 124–5sub-prime mortgage market, 99–101,

104, 105, 107, 127

Sub-Saharan Africa, proportion ofpeople living in absolute povertyin, 133

subcontractingby MNCs, 68, 77outsourcing of lower value activity

through, 119–20Sumner, A., 133, 138, 139, 144, 149super-cycle, commodity, 89, 191super-exploitation of workers, 145swap, 97

credit default swaps, 100, 101, 103Syria, military intervention in, 165–6,

168systemic activism, promoted by

United States, 26

Tainhe-1, 184–5Taiwan

consumption in, 80export/GDP ratios of, 80neoliberalism in, 60–1newly industry countries in, 36trade surplus with China, 87

tariffs, 35in China, 39, 45, 47in India, 39, 50in least developed countries, 39

technologyand competition, 62dependency, 182, 183innovation

and Beijing Consensus, 21, 22, 185and rise of South, 174, 181–7

TED spread, 93textiles sector

liberalization of, 157protectionist measures in, 163

Thatcher, M., 59–60The Spectator (magazine), 3Theil index, 136–7, 137Third World, 35

after 1945, 152–6and China, 159, 170development, 175, 176

global economy changes and, 178pro-industrialization policies of,

176growth rate of, 111

240 Index

investment liberalization in, 178relation with second world

development, 2, 3Third Worldism, 6, 32, 152, 154, 173Thompson, H., 123Tito, 153total factor productivity, 183total public debt, of South, 74trade

deficits, of United States, 118–19diversification, 10, 115free trade, 61–2, 144, 157, 170, 172General Agreement on Tariffs and

Trade, 157General Agreement on Trade and

Services, 185intra-firm trade, 155liberalization, 27, 35–6, 41, 45

and globalization, 70of manufactured goods vs. primary

goods, 67North-North trade, 10orthodox trade theory, 144, 148related investment measures, 47relationship, between China and

South, 160–3South-South trade, 2, 10, 85–90,

116–18, 160, 85–6surpluses, 72, 87world trade see world trade

trade/GDP ratios, 38–9, 146of Russia, 56

trade/merchandise value added ratio,146

Trade Related Intellectual PropertyRights (TRIPS), 157

trade related investment measures(TRIMS), 47

transfer pricing, 120, 155transition economies, and foreign

direct investment, 13, 76transnational capitalism, 145, 187triadic patents-population

proportion, 185–6Troubled Assets Relief Programme

(TARP), 92, 93

Ukraine crisis in 2014, 167underdevelopment theory, 177, 179, 180

unemploymentin China, 48, 121, 192in France, 147in United States, 97, 109, 149

UN Food Price Index, 141UN General Assembly, 155United Kingdom

bail-outs in, 93decline in late nineteenth century,

119labour productivity of, 119on military intervention in Syria, 166national income share of top 1%

income group in, 134ratio of government spending to

GDP in, 59–60share in world trade, 119and United States, declines of, 81

United NationsConference on Trade and

Development (UNCTAD), 39,154–5

Security Council (UNSC), 153Resolution 1441, 165Resolution 1973, 164–5

Universal Declaration of HumanRights of 1948, 153

United Statesannual average growth rates of GDP

and exports in, 69consumption in, 106crisis, as global crisis, 126–8debt, purchase of, 82dollar see dollar (US)exports of parts and components by

East Asian countries to, 87–8federal debt of, 109foreign capital invested in, 181foreign shareholdings of companies

owned by, 190and globalization, 189–90grains used to produce fuel ethanol

in, 141–2housing market in, 106–7imports from China and Hong

Kong, 106liberal interventions led by, 164national income share of top 1%

income group in, 134

Index 241

United States – continuednon-financial firms involvement in

global commodity chains, 148overseas capital of, 181power, future of, 118–26private and official net purchases of

long-term securities byforeigners, 123

private savings, 72shares of East Asian exporters to, 87shares in foreign companies, 190US-Chinese interdependence, 80–5

unskilled workersdemand and wages of, 144effect of rural poverty on, 48and remittances, 149

US Consumer Price Index, 146US Federal Reserve, 99, 104, 191

lending during financial crisis, 109,110

US House of Representatives, Sub-committee on Africa, GlobalHuman Rights and InternationalOperations, 168

US National Security Strategy of 2002,20

US Treasurybonds, 82–3, 121, 122

foreign holdings of, 107post-crisis purchases by China of,

124securities, foreign holdings of, 123

Vargas, G.D., 52variegated capitalisms, 43varieties of capitalism approach, 43vertically integrated activities, in

South and Southeast Asia, 86

wagescompetition, and economic

insecurity, 149gender gap, 136income, share in China’s GDP, 81low wage economies

merchandise imports from, 147trade in goods from, 148

shares in total national income, inIndia, 135

Wal-Mart imports from China, 48,124–5

Waldron, A., 20Wall Street, bail-outs of debts, 2, 92Washington Consensus, 2, 11, 21, 22,

29, 33, 44, 156“one size fits all” policy, 40

Weber, M., 169welfare state, and neoliberalism, 60Wen Jiabao, 122West

free market, 195–6n2(ch3)industrialization in, 177

western aid, vs. Chinese aid, todeveloping countries, 159, 160,168

Williamson, J., 41Wilson, D., 24–5, 38Winkler, D., 148, 149Wohlforth, W., 26Wolf, M., 130World Bank, 25, 36, 59, 61, 142, 143,

156Globalization, Growth and Poverty

report, 36–7, 38loan to indebted countries, 34structural adjustment loans of, 35voting shares of developed world

in, 164World Economic Forum, 185world income, share of South in, 79world systems theory

and Beijing Consensus, 23and international division of

labour, 145world trade, 148

and financial crisis of 2007–08,108–9

imbalances in, 72share of Germany in, 119share of least developed countries,

39share of South-South trade in, 85–6share of United Kingdom in, 119share of United States in, 119

World Trade Organization (WTO), 33,157

membership of China, 47membership of Russia, 56

242 Index

World War I, and globalization, 146World War II, manufacturing during,

66

yuan, value of, 82, 121, 122

zaibatsu, 62Zakaria, F., 29

Index 243

the brics, us â€declineâ€™ and global transformations

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