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Correcting the Southern Bias in Development Economics: Issues and Tensions in Global Structural Transformation

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In order to be neutral to, or actively aid, the industrialization of poorer countries, rich countries must intervene within their domestic economies to internalize the costs of industrial adjustment. Interventions include industrial policy to aid the rapid reallocation of capital & generation of new industries and innovations; social policy to aid the rapid reallocation, upskilling, reskilling, and transitional welfare nets for labour in and from import-competing industries; and fiscal policy to mitigate the negative macroeconomic shocks from intensified import competition. Thus, being neutral to the industrialization of emerging countries does not actually require industrialized nations to take a "hands-off approach" in the sense of simply not placing barriers to the converging country. However, this is also a tensile endeavour, as forces within global industrial capitalism and economic hegemony make such interventions by industrial incumbents very difficult. This includes a limited manufacturing share of global GDP (saturation point of Engel's law), the embeddedness of expansionary interests of merchants and capitalists in the state, and the domestic and international pressures for regional and global industrial great powers to be the hubs of economic liberalism.
Correcting the Southern Bias in Development Economics: Issues and Tensions in Global
Structural Transformation
Abel B.S. Gaiya
Draft Paper
I welcome propositions for collaborative refinement and co-authoring for publishing of part
or all of this paper.
Copyright © 2021 All Rights Reserved
In order to be neutral to, or actively aid, the industrialization of poorer countries,
rich countries must intervene within their domestic economies to internalize the
costs of industrial adjustment. Interventions include industrial policy to aid the
rapid reallocation of capital & generation of new industries and innovations; social
policy to aid the rapid reallocation, upskilling, reskilling, and transitional welfare
nets for labour in and from import-competing industries; and fiscal policy to
mitigate the negative macroeconomic shocks from intensified import competition.
Thus, being neutral to the industrialization of emerging countries does not actually
require industrialized nations to take a “hands-off approach” in the sense of simply
not placing barriers to the converging country. However, this is also a tensile
endeavour, as forces within global industrial capitalism and economic hegemony
make such interventions by industrial incumbents very difficult. This includes a
limited manufacturing share of global GDP (saturation point of Engel’s law), the
embeddedness of expansionary interests of merchants and capitalists in the state,
and the domestic and international pressures for regional and global industrial
great powers to be the hubs of economic liberalism.
Keywords: structural transformation, global development, industrial policy,
international political economy, social policy
This is a revised version of a paper presented at the 10th Annual International Institute for Promoting Political
Economy (IIPPE) conference, themed “Envisioning the Economy of the Future, and the Future of Political
Economy”, at the University of Lille, France, 3-5 July, 2019.
Copyright © 2021 All Rights Reserved
1. Introduction
Since the early modern era, it has always been recognized by many that development and
structural transformation are international processes. Foreign trade, foreign investments and
foreign markets were key adjuncts to domestic trade, structural change and investment.
However, what mercantilism entailed was an aggressive and ravenous international
development environment. Mercantilism formed the corollary of nationalism and imperialism
(Barth, 2016). Therefore, foreign economic policy of mercantilist powers pursued the
suppression of the trade and manufactures of neighbours, peripheral and semi-peripheral
economies; and subjected colonies to systematic mercantile regulations.
At the same time, the victims of such mercantilist great powers have always called their
oppressors to provide at worst a “neutral” environment for international development. This was
advocated by 17th to 19th century thinkers from the global periphery and semi-periphery, such
as the Ireland’s William Molyneux, Scotland’s Andrew Fletcher (Hont, 2008), Switzerland’s
Emer de Vattel (Alimento, 2019), France’s Marquis de Mirabeau, West Africa’s Olaudah
Equiano (Gunn, 2010), Germany’s Frederich List, America’s Alexander Hamilton and Latin
America’s Simon Bolivar (Helleiner and Rosales, 2017). At best, great powers have been called
to provide a more benevolent international environment for developing countries by providing
foreign aid and assistance and robust development policy space. This was advocated at least
since Sun Yat-sen in 1919 (Helleiner, 2014) and developing countries during the great
depression and following the Second World War.
Kalinowski (2019) has criticized realist, liberal and neo-Marxist approaches to international
political economy for not adequately focusing on the role of domestic capitalist institutional
ecologies in influencing nations’ economic interests reflected in their foreign economic
policies. Mainstream economists, on the other hand, take a technocratic approach to
international economic governance that leaves domestic institutional varieties out of the
picture. He therefore, following Katzenstein (1978: 2), calls for a Comparative International
Political Economy (CIPE) which lies at the intersection of comparative capitalism and
international political economy and refuses the tendencies in international studies, for
specialization and compartmentalization into international relations, international political
economy, comparative political economy, comparative capitalism and development studies
(Kalinowski, 2019: 21-22). Taking this approach would mean “that international cooperation
is possible but it always has to be considered in connection with institutional and structural
changes at the domestic level” (Kalinowsk, 2019: 4). This is the approach taken in this paper.
The argument made is that in order to maintain “neutrality” and avoid externalizing the costs
of industrial adjustment to other countries, the industrial incumbent must intervene
domestically. Interventions include industrial policy to aid the rapid reallocation of capital and
generation of new industries and innovations; social policy to aid the rapid reallocation,
reskilling, upskilling and transitional welfare nets for labour in and from import-competing
industries; and fiscal policy to mitigate the negative macroeconomic shocks from intensified
import competition (Cimoli and Porcile, 2011). Thus, being neutral to the industrialization of
emerging countries does not actually require industrialized nations to take a “hands-off
approach” in the sense of simply not placing barriers to the converging country. This form of
‘neutrality’ creates domestic Polanyian counter-movements which seek to protect against
import penetration and mature deindustrialization, reduce competition for foreign markets and
prevent the industrialization of other countries. Rather, neutral development policy space
requires industrialized countries to exert positive effort into enabling a smoother reallocation,
upskilling and upgrading of capital, labour and technological capabilities, respectively, for a
more rapid process of structural change, or else regressive counter-movements more strongly
emerge in favour of protectionism (in lieu of fiscal policy), social imperialism (in lieu of social
policy) and free trade imperialism (in lieu of industrial policy). This is not widely recognized.
For instance Jean Ping (2012: 169), former Gabon MP, former President of the United Nations
General Assembly and former Chairperson of the Commission of the African Union, notes that
the Washington Consensus came at the time of the Reagan/Thatcher philosophy
of less state. The state is not the solution, they said, the state is the problem. Okay.
Now I think that in the United States it was correct at that time. With the Chicago
school and Milton Friedman, it was correct. But, when they brought it to Africa
(first of all, Asia had rejected it outright) we were obliged to accept it. And it was a
total failure.
By failing to see the connection between the emergence and impact of the Washington
Consensus in the U.S. and its export to and impact upon Africa, the critique then remains
exclusive, to many, to its imposition upon developing countries.
This paper argues that the problem of externalization of industrial adjustment was indeed
recognized since the early modern period, but structural conditions gave preference to
aggressive measures for externalizing the costs of industrial development. Social and fiscal
policy were limited options for structural reasons limitations in bimetallic monetary systems,
warfare taking up the majority of public expenditure, and weak labour classes unable to
adequately press for social policy. Protectionism, settler colonialism, imperialism and unequal
treaties were major means of externalizing the costs of industrial adjustment and pacifying
domestic class conflicts. With much of these options foreclosed from the mid-20th century, and
with the structural advances made in the possibilities for social and fiscal policy, the options
of industrial, social and fiscal policy as means of internalizing the costs of industrial adjustment
became more salient. Yet they have not been brought into the mainstream of both general
economics and development economics.
It may then be argued that studying economics for regional and global hegemons should come
with a ‘hegemonic premium’ that is, recognition of the large regional and global
developmental externalities demonstrated and demonstrable by large developing and emerging
economies, and the most industrialized economies in a region or the globe. Studies of industrial,
fiscal, social, trade and development policies among hegemonic nations must therefore not take
such nations as ‘just another country’ where general economic and development theory is
applied. It is important to see the internationalism and continuities in the transition of
capitalism, rural development, the rise of mercantilism, industrialization, social, fiscal and
industrial policy, colonialism, and foreign trade in truly interrelated and global terms.
Nonetheless, these requirements for global structural transformation are ridden with tensions.
There are strong pressures for the regional and global hegemons to be bastions of economic
liberalism and normative laissez faire, thereby making social, fiscal and industrial policy to
internalize the costs of industrial adjustment more difficult to implement. In the long-run, due
to a saturation point for Engel’s law with respect to the manufacturing share of global GDP,
countries are competing for a stable share of global manufacturing in GDP. Therefore, in
addition to the short-to-medium term industrial, social and fiscal policies for internalizing the
costs of industrial adjustment during the industrialization of newcomers, rich countries must
establish “stable” post-industrial polities, institutions, social-economies and political
settlements; and poor countries must establish mini-industrial capabilities, institutions and
social-economies. Moreover, long-term transformations are needed at a time when the labour
class is relatively weak, in a financialized post-industrial hegemon and structurally-
heterogeneous and segmented pre-industrial regional hegemons of the global periphery.
However, the latter can partly prepare legacies which may permit less aggressive foreign
economic policies in the future, including land redistribution and rural development.
This paper makes these arguments by connecting insights from a wide array of secondary
literature. It also adopts a trans-historical approach, drawing from and contextualizing pre-20th
century economic thinkers and histories. Section 2 outlines the domestic requirements for
avoiding a complete externalization of the costs of industrial adjustment, as well as the reason
why these measures were not pursued in the early modern and 19th century periods. Section 3
highlights the structural, political and class tensions involved in adjustment internalization. It
also suggests some means by which pre-industrial regional great powers may prepare
themselves for regional internalization. Section 4 concludes the paper, and highlights avenues
for further research.
2. Correcting the Southern Bias in Development Economics
Development economics typically focuses on industrial, social and macroeconomic policies of
developing countries, while the developed countries are simply expected to be neutral or
positive in their allowance or aid to the former’s development. What is often left out is that the
industrial, social and fiscal policies of the developed countries are just as critical in determining
their developmental attitudes and policies towards the developing world. Protectionist policies
against competing manufactured consumer goods exports of industrialized countries are
important for developing countries and studied in development economics (Cimoli and Dosi,
2009). Yet it is at the expense of the export sectors, capital and labour in the industrialized
country, as well as short-term terms-of-trade and macroeconomic shocks, which is often
neglected in development economics and moves into the purview of developed country-
focused macroeconomics where the link to the developing country is lost and the analytical
starting point is that the shocks are exogenous.
Although some of these interrelations are considered by international economics, the sub-
discipline does not fully appreciate the complexities involved. Factor endowments evolve as
developing countries, with their lower labour costs (due to labour abundance) and Listian
industrial policies (which facilitate technological learning), move from primary goods
producers to labour-intensive manufacturing. The industrialized country’s specialization shifts
over time towards production of high-productivity and capital-intensive goods (due to capital
abundance and product space proximity), which includes some deindustrialization and
servicification (Samaniego and Sun, 2016). This structural change for the industrialized
economic is partly enabled by “implicit reciprocity” – that is, rising capital goods demand from
the industrializing economy (Cimoli and Porcile, 2011).
However, the increased demand for capital goods is often insufficient for the industrialized
country to quickly absorb capital and labour from declining industries. This is due to capital
and skills heterogeneity, the lower employment elasticity of the capital-intensive industries,
and the financial instability risks and income/wealth inequalities which come with
financialization linked to mature deindustrialization (i.e. deindustrialization occurring due to
an evolution of factor endowments after structural transformation has peaked). Moreover, some
capital exits the country to situate production in the lower-wage emerging economies. And
although this increases production efficiency and profits for multinational corporations,
weakens wage growth, labour power and worsens tax competition. Many of these problems
were debated from the very beginning of industrial capitalism, during the late 17th century post-
Glorious Revolution Anglo-Irish and early 18th century Anglo-Scottish rich country-poor
country debates (Hont, 2008), the mid-18th century rich country-poor country debates
(Schumacher, 2016), their early 19th century more empirically-oriented counterparts (Elmslie
and Criss, 1999), and the mid-20th century birth of modern development economics (Endres
and Fleming, 2004).
The problems of negative external shocks, unemployment, financial instability, higher
inequality and lower bargaining power of labour (due to technological specialization, off-
shoring and capital outflows) then emerge for the industrialized country. The manufacturers,
labourers and politicians in the import-competing industries and regions employ their
instrumental, structural and political power to lobby for protectionist policies, a narrowing of
the global development policy space (as the Washington Consensus, Structural Adjustment
Programmes, and breakdown of the Bretton Woods institutions represented), imperialism
(Hobson, 1905; Chamberlain, 1984) and neo-imperialism (Harvey, 2003). In other words,
catch-up by a significant number of industrializers entails economic shocks for industrial
incumbents, triggering reactions from the latter and enabling a “global development cycle
(Ocampo and Parra, 2006). For the hegemons, these reactionary debates were also present in
the 19th century when the industrialization of the U.S. and Germany intensified industrial
competition for Britain, and when Germany, Japan and East Asia did the same to the U.S. in
the 1980s (Bhagwati and Irwin, 1987).
Generally, the late 17th to early 19th century rich country-poor country debates which searched
for means by which the industrial leader can adapt to converging economies focused on
industrial policy (promoting technological innovation, industrial restructuring and low-wage
labour immigration). There was a stark neglect of commensurate fiscal and social policy in the
modern sense. Externalization of these costs through protectionist barriers, colonial
impositions and unequal treaties substituted for fiscal and social industrial adjustment policies.
John M. Keynes in the 20th century inter-war period proposed fiscal policy as an alternative to
reactionary protectionist policy in the face of external trade shocks and domestic class conflict
for developed countries. He could not advocate it earlier because of the fiscal and monetary
constraints imposed by the gold standard (Eichengreen, 1984). Indeed, even the 19th century
gold standard was progressive given the serious monetary constraints which prevailed under
the preceding bimetallic monetary systems, because it enabled some delinking of money supply
from the external shock of changes in the trade balance (Knafo, 2006). Under bimetallic
monetary systems, the centrality of metallic coins in circulation “provided little elasticity for
the supply of money since the increase of provided little elasticity for the supply of money
since the increase of the stock of money required the addition of new gold or new silver”
(Knafo, 2006: 86). Even states' agricultural and industrial concerns suffered from liquidity
shortages and volatility, and the attraction of bullion from other countries posed a zero-sum
solution internationally which was inimical to international economic and monetary
cooperation (Knafo, 2006: 91-92). Banknotes were only over-issued to fund regime-imperative
activities such as war, rather than a welfare state (Knafo, 2006: 98). Therefore, deficit financing
for expansionary fiscal policy and social policy in times of economic stress were unviable.
Despite the improvements gained through the gold standard, the new monetary system still
required strict adherence to orthodox fiscal discipline and adjustment through specie flows.
In addition to the liquidity constraints arising from the structural problems associated with the
currency, there was a major budgetary constraint. Comprehensive poor relief was unviable
because war-making was a key part of the state development and finance (Tilly, 1975). It is
estimated that “Until the nineteenth century, states spent about two-thirds of their income on
war” (Torres-Sánchez, Brandon and Hart, 2018: 4). In England, between 1689 and 1815 the
average share of military expenditure and interest payments of total public expenditure during
wartime was 90%, and during peacetime was 85% (O’Brien, 1988: 2). Hoffman (2011: 57)
notes that in France, for example, military expenditure was about 3 to 7 per cent of GDP in a
year of peace of 1752, “a fraction comparable to defence spending in the US or the USSR at
the end of the Cold War”. In the 17th century, the Dutch Republic spent over 80% of its revenue
on wars; while the kings of Denmark, Russia’s Peter the Great, the Austrian Habsburgs spent
88%, 90% and 93% respectively (Korner, 1995: 411). In Eastern Europe, “Much of the
imported capital was indirect in the form of loans to state governments which were used for
military purposes, to cover budgetary deficits and for building up the state apparatus, and only
a small proportion found its way into what might be termed productive investments” (Aldcroft,
2006: 24). Even in post-colonial Latin America, military expenses amounted on average to 60-
80% of public expenditures beyond the mid-19th century (Marichal, 2006), and in British India
they made up over half of public expenditures between 1809 and 1850 (Sykes, 1859: 457).
It was only from the 1840s, when the free trade movement won political supremacy and war-
making within Europe declined, till 1880 that Britain’s per capita spending on civil government
began to rise, with civil government expenditure remaining a little over 20% of total
government expenditure for the rest of the century (Harling and Mandler, 1993: 57). This
covered spending on education, public health, and public works. Indeed, it was partly due to
the fiscal pressures of war (the Boer Wars) that there was a truncation of Joseph Chamberlain’s
attempt at colonial development through the Colonial Loan Act of 1899. While this generally
applies to European states since the early modern period, Pincus and Robinson (2016)
demonstrate that for Britain after the Glorious Revolution of 1688, civil expenditure increased,
mostly directed towards Scotland, Ireland and the North American colonies. Yet civil
expenditure within England remained limited.
Even within the corpus of transfers for the purpose of war-making there were domestic
limitations. Subsidies disbursed by great powers for military and political aid were done under
pressure of war and based on substantial domestic sacrifice that would not have allowed
disbursements for the development of the economies of others. Poor peasants and farmers did
not have the power to resist taxation as strongly as feudal elites, merchants and capitalists did.
Therefore direct taxation fell disproportionately on the weaker classes. For instance, “French
subsidies, as all of the expenditures of the crown, came from revenues raised overwhelmingly
from comparatively poor peasants and farmers.” (Norrhem and Thomson, 2020: 7). Subsidies
could also strain a country’s finances, as the English subsidies to the duke of Savoy did by
1695 (Storrs, 2017: 324).
Given these monetary, budgetary and political economy constraints, the major means of
alleviating poverty was not through social policy and social expenditure. Although England
was a pioneer in state-delivered and tax-funded poor relief and in its scale due to the social
dislocations caused by an emergent capitalist system poor relief did not get substantially
expanded (Patriquin, 2007). Proposed solutions to poverty beyond the domestic market’s
capacity to absorb ranged from assisted emigration as a form of coercive social policy (Seeleib-
Kaiser, 2019) and settler colonialism (Anievas and Nişancıoğlu, 2015: 150-152), to (weakly)
land redistribution (Cowen and Shenton, 1996: 239-242) and a land tax to break
monopolization of land and open it up for productive purposes (Veracini, 2020: 438).
Alleviating domestic overpopulation problems and poverty by exporting the “surplus
population” to colonies through networks of empire was therefore not unusual. As Wagner
(2016: 46) insists, “colonial emigration redressed the world’s demographic imbalance, caused
by overpopulation in Europe on the one hand and deserted territories overseas on the other”.
Hirschman (1980: 442) suspects that “the history of Europe in the 19th century would probably
have been either far more turbulent or far more repressive and the trend toward representative
government much more halting, had it not been possible for millions of people to emigrate
toward the United States and elsewhere”.
It was therefore not surprising for Friedrich List, the most prominent among the 19th century
neo-mercantilists, not to pay much attention to potential problems for the industrial incumbent
given catch-up from late industrializers. In his 1841 book, he insisted that the best way for a
dominant power to maintain its global position was through free trade policies that would
prevent its firms from suffering from “retrogression and indolence” (Helleiner, 2020: 3). He
thus did not propose means by which an industrial leader could quickly adapt to converging
industrial states. This makes sense if List’s “industrial geography” is kept in mind. List wrote
at a time when a substantial portion of the world the tropical zones such as Latin America,
Africa and Asia (Boianovsky, 2013) was thought to serve as reserves for an industrialized
country’s externalization of these costs of industrial adjustment.
Hence in the late sixteenth century, Richard Hakluyt the leading Elizabethan advocate for
colonization promoted North American settlement to reverse the trade deficit with
Scandinavia for naval stores, “so we should not so exhaust our treasure.” (quoted in Barth,
2016: 269). The 18th century French colonial and re-export trade allowed France to compensate
for trade imbalances with Great Britain, Central Europe and Asia in peacetime (Marzagalli,
2014: 116). Portuguese colonial mineral extractions from Brazil enabled it to sustain persistent
trade imbalances with Britain (Watson, 2017: 261). Late 19th century Britain was only able to
remain “neutral” to 19th century American and German industrialization (Bhagwati and Irwin,
1987) because it externalized the costs of adjustment onto India. Colonial rule over India
allowed its trade surplus with the colony to fund its current account deficits with Germany, the
U.S. and Britain’s white Dominion states (Arrighi, 1994: 263; Anievas and Nişancıoğlu, 2015:
262). Indeed, part of the reason why Morocco sought to create the first trans-Saharan empire
by invading (unsuccessfully) the Western Sudan’s Songhai Empire in 1591 to control the gold
mines and trans-Saharan trade routes was in order to stabilize Morocco’s economy, finances
and balance of payments problem brought about by increasing importation of European-made
goods and its “gradual absorption…into the expanding mercantilist system” centered on
Europe (Kaba, 1981: 462).
In fact, Irwin (1993: 93) notes that colonial trade was a key means of avoiding import
competition from intra-European trade. Expectedly then, “The first real impetus to negotiations
on liberalising European trade came with the collapse of colonial trade routes in the 1770s,
when Britain and France lost among others their North American colonies” (Irwin, 1993: 93).
Britain’s trade was particularly impacted by the shock, with export volume declining between
1772-1773 and 1780-1781 by almost 20%, and the western European share of British exports
rising over the same period from 15-28% (Mitchell, 1988: 496). These events naturally shifted
British attention to the high tariff barriers impeding trade with the continent (Irwin, 1993: 93).
For 19th century Henry Carey, protectionism was a means of displacing manufactures from
Britain to America, thereby enabling American productivity growth, broader improvements
and “raise the value of labour until the most damaging aspects of [industrial] exploitation were
undone” (Veracini, 2020: 430). The idea that trade restrictions could help defend workers’
interests arose as a key rationale for the early modern Republican Party’s protectionism and
remained influential in the 20th century (Goldstein 1993). Indeed, Helleiner (2020: 6) invokes
Huston (1983) in noting that it was not until Roosevelt undertook to protect workers through
domestic labour legislation that U.S. trade policy began to move in a more liberal/’neutral’
direction. As Huston (1983: 5657) puts it, unions finally replaced tariffs as the means of
insuring the worker a decent standard of living. Henry Carey thus “differed from List in
arguing that protectionism was an appropriate policy for the dominant economic power of his
day Britain to embrace”. For him, while some benefits from free trade accrued to Britain,
such gains were concentrated among elites. On the other hand, workers and other domestic
groups suffered from free trade in the same way as their counterparts in other countries
(Helleiner, 2020: 6). Even John M. Keynes believed that protectionism was a viable response
in the absence of a monetary system that allowed expansionary fiscal policy, as in the gold
standard (Eichengreen, 1984). Joseph Chamberlain in the 1890s, also proposed protectionism
(and imperial internalism) as a reaction to intensified international trade, although he also
proposed social policies to aid upskilling and reskilling labour (Cowen and Shenton, 1996:
Carey, however, also believed that settler colonialism was another way of displacing class
conflict, the contradictions of capitalism and ensuring a ‘harmony of interests’ for Carey
(Veracini, 2020). Others argued that if many settlers left through the westward expansion on
North America, “the position of the urban workers who remained would be strengthened”
(Veracini, 2020: 428). When, by the 1870s, there was no more surplus land to settle, Henry
George followed Carey’s reasoning to propose a land tax which would break land monopolies
and put monopolized land to productive use in order to return to a harmony of interests and
obviate the need for revolution (Veracini, 2020: 431-43). This was not uncommon thinking at
the time. Michel Chevalier, one of the French Saint-Simonians made a similar argument in
justifying France’s settler colonialism in Algiers, arguing for “why European countries,
burdened with an excess of population, need for their safety and welfare a West, into which
each may overflow after its own manner” (Chevalier, [1839] 2007: 144)
Given that Britain was the most industrially-advanced nation of the 19th century, it was where
thinking about how to maintain a position of industrial advancement or supremacy was most
advanced in from late 17th (Hont, 2008) to early 19th centuries (Elmslie and Criss, 1999). Early
(Elmslie and Criss, 1999) and late (Cowen and Shenton, 1996) 19th century thinkers recognized
the need for British technological innovation and industrial renewal to avoid deindustrialization
and decline due to catch-up by poorer countries. However, the dominance of Cobdenism and
free trade orthodoxy prevented the entrenchment of state-directed adaptive industrial policy
when faced with the late industrializers of the 19th century. Intensified international
competition contributed to a crisis of overproduction and depression in the late 19th century
(Silver and Arrighi, 2003). A resurgence of calls for policies to improve “national efficiency”
occurred. L.J. Garvin, for instance, pointed to Britain’s adoption of free trade as the cause of
the nation’s decline by allowing protectionist Germany and the U.S. to build competitive
industries to rival Britain’s (Cowen and Shenton, 1996: 252-264). Others like Leopold Amery
and F.S. Oliver drew from Friedrich List’s Theory of National Economy and Alexander
Hamilton’s thought in their arguments (Cowen and Shenton, 1996: 253; Palen, 2014: 197).
Joseph Chamberlain, who served as Mayor of Birmingham in 1874 and Colonial Secretary in
1895, and ran for prime minister in the general elections of 1906, was the embodiment of the
political possibility of a policy of “national efficiency”, in the eyes of the advocates such as
L.J. Garvin (Cowen and Shenton, 1996: 254).
Chamberlain advocated increase in tariffs (Tariff Reform movement of 1903-1906) as a
reciprocal reaction to German (1879 Bismark Tariff) and American (1890 McKinley Tariff)
tariffs. Drawing from his policies implemented in Birmingham, he proposed a political pact
between largescale capitalist enterprise and a well-paid, well-housed and educated industrial
workforce of high productivity which would guarantee the efficiency and competitiveness of
British industry; social insurance and the state provision of labour exchanges to regulate the
surplus population and fend off labour unrest (Cowen and Shenton, 1996: 256). Chamberlain
was initially a Cobdenite, but gradually converted, “especially as his hometown of Birmingham
attempted with great difficulty to recover from the global depression of the 1890s, and as tis
industries struggled more and more to compete with the tariff-protected exports of Germany
and the United States” (Palen, 2014: 194). The tariff reformers, however, achieved only limited
success against the free trade orthodoxy among British officials until the pressures of the Great
Depression compelled the introduction of trade protection, enshrined in the 1932 Import Duties
Act. It would be the control over India and its trade surpluses that enabled Britain to avoid a
major balance-of-payments crisis and therefore persist in its free trade orthodoxy until the 20th
century (Arrighi, 1994: 263). The externalization of the costs of adjustment to colonies also
entailed being in opposition to industrial development of these colonies.
As has been argued, both large scale fiscal and social policy were infeasible prior to the 20th
century, thereby making protectionism and colonialism major channels of externalization of
the costs of industrial adjustment. Yet these generated trade imbalances for other countries
beyond the empire (Marzagalli, 2014: 116) and stifled the industrial growth of the conquered
colonies. In other words, industrial adjustment without industrial, fiscal and social policies
relied upon repressing the developmental potential and achievements of other economies. It is
possible to extrapolate from all this and argue that if all options became foreclosed, due to an
absence of ‘surplus land’ to settle, large swathes of unused monopolized land to revitalize, the
redundancy of protectionism due to the international competitiveness of national industries and
labour, continued class conflict despite industrial progress, and the emergence of a more
flexible monetary system, social policy to mediate between international trade and the domestic
labour class may arise as a solution for protecting labour from global capitalism’s vicissitudes.
However, a crisis of liberal capitalism followed the Great Depression, and the rise of Keynesian
fiscal policy theory, social democratic and social policy movements across Europe, and the
growing acceptability of industrial policy. Whereas substantive development was not available
for most countries due to formal colonization, the onset of modern (post-war) development
economics brought recognition that rich countries would need to be industrially adaptable in
order to profit from the industrial growth of poor countries, rather than respond with
protectionism (Staley, 1945: 188-189). Staley (1945: 197-217), drawing upon William
Beveridge, Allan Fisher, Joseph Schumpeter and Colin Clark (Endres and Fleming, 2004: 211),
presented a comprehensive set of “adaptation” policies to smooth out adjustments through
stimulating industrial mobility and distributing the burden of changing economic conditions by
having the state provide assistance to contracting industries. These included industrial policies
such as active competition policy and research and development policy (Staley, 1945: 201-
202), as well as active labour market and social policy (Staley, 1945: 204-205). Post-war
developing countries argued that, instead of seeking to protect against import penetration,
developed countries should consider the proposition that “dislocation caused by structural
adjustment could, with proper planning and retraining, be eased on the Swedish model” (ODI,
1976, 4). Keynes, of course, proposed ‘Keynesian’ fiscal policy as an alternative to
protectionism in responding to aggregate demand shocks associated with import penetration.
The post-War period also saw the most ambitious and successful supports by an industrial
nation to developing and reconstructing/re-industrializing nations by the U.S. towards
Western Europe and industrializing East Asia. East Asia, including Japan. These benefited
from a post-war bargain offered by the emergent hegemon, the U.S. Due to the strategic value
of East Asia to the world power, and the anti-communist mandate it upheld, the U.S. offered
the region:
a postwar bargain: it would provide Japan and other countries with security
protection and access to American markets, technology, and supplies within an open
world economy; in return, Japan and other countries in the region would become stable
partners that would provide diplomatic, economic, and logistical support for the United
States as it led the wider, American-centred anti-communist postwar order. (Ikenberry,
The developmental orientation of the U.S. to Japan was so positive that it “promoted the import
of Japanese goods into the US during the 1950s so as to encourage Japanese postwar economic
growth and political stability” (Ikenberry, 2004: 355). Generally, the U.S. actively supported
the export-oriented development strategies of Japan and the smaller Asian Tigers by being
willing to accept the imports of these countries and to live with huge trade deficits. This was
only politically tolerable because of security alliances with Japan, South Korea, and other
Southeast Asian countries (Ikenberry, 2004: 355).
For other regions which received less support due to their lower geo-strategic and security
significance to the U.S., such as Latin America, Africa and the Middle East, the post-war
“embedded liberal” order (Ruggie, 1982) fostered the “Golden Age of Development” (Ocampo
and Parra, 2006: 8). This was not only because of decolonization and development policies
carried out by formally independent nations. It was also because, compared with the
“disembedded” liberal order of the 19th century and inter-war periods, economic openness was
facilitated by industrial nations “through compensatory policies at the domestic level that
responded to the volatility and economic transformation that accompany international
economic integration” through “capital controls, active labor market policies, robust welfare
state policies, and Keynesian demand management” (Goodman and Pepinsky, 2021: 414).
War-time and post-war U.S. undertook industrial policy for technological innovation and
industrial renewal through “hidden developmental states” (Block, 2008) and subnational
developmental states (Bateman, 2012).
Nonetheless, just as the domestic structures of the British, Spanish, French and Japanese
colonial powers influenced their colonial economic policy (Cheney, 2019; Kohli, 2004), those
of the post-war great powers also affect their foreign economic policy (Spaulding, 1991: 356-
358). Liberal market economies like the U.S. tend to rely on macroeconomic policies and
market solutions, and tend to export the costs of industrial adjustment to other countries given
their lack of means to “intervene selectively in the economy” (Katzenstein, 1985: 23). Whereas
coordinated market economies such as Japan are better able to pre-empt the costs of economic
change (Katzenstein, 1985: 23; Hays, 2009). Japan’s maintenance of long-term industrial
policy, social policy and fiscal policy enabled it to combine its industrial upgrading with a
facilitation of the most successful case of regional diffusion of industrial capabilities to date,
the famous “flying geese pattern” of East Asia (Akamatsu, 1962). Small open coordinated and
hybrid market economies such as Sweden and Denmark employ both industrial policy and
social policy to adjust to external shocks and long-term structural change (Katzenstein, 1985).
Unfortunately, the post-war sub-discipline of macroeconomics, following Keynes who paid
very little attention to structural change, failed to incorporate these concerns into the field.
Macroeconomics merely acknowledged that full employment in rich countries could help
maximize demand for poor countries to develop.
3. Tensions in the Hegemonic Premium
Thus far, these complexities operate at the neutral level that is, maintaining “neutral”
development policy space and access to foreign markets by the industrialized nation requires
domestic positive exertions in industrial, social and fiscal policies. Maintaining “positive”
provisions require greater exertions. There have always been fears that foreign development
aid and assistance would detract from or destabilize home development. Hence when Joseph
Chamberlain made the call for developing Britain’s imperial estate at the turn of the 20th
century, Prime Minister Campbell-Bannerman (1905-1908) responded by saying:
“We desire to develop our undeveloped estates in this country; to colonise our own
country; to give the farmer greater freedom and greater security in the exercise of his
business; to secure a home and a career for the labourer, who is now in many cases cut
off from the soil. We wish to make the land less of a pleasure ground for the rich and
more of a treasure house for the nation.” (Cowen and Shenton, 1996)
Post-war colonial France, when seeking to implement a more modernizing or inclusive
imperialism also worried that “the process might result in the ‘exhaustion of the Metropole’”
(Cooper, 2018: 8).
There are indeed risks to the benefactor. Australia’s “employment approach” of using
expansionary macroeconomic policy as a means to a positive provision of access to foreign
markets (Scott, 2010: 8) for instance demonstrated in the developmental stimulation of
Vietnam War spending in East Asia (Stubbs, 1999: 344-349) incurs the risk of excessive
inflation for the hegemon, especially if it does not possess complementary labour institutions
to minimize wage inflation (Streeck, 2011). It also hastens its deindustrialization and loss of
export markets if the industrializing country has achieved international competitiveness and
yet still maintains protectionist barriers without actuating reciprocity (as the U.S. complained
about industrializing East Asia). Japan, which is prominent for catalysing the post-war flying
geese (Akamatsu, 1962) pattern of East Asian development through a positive RID, has had
the costs of this measure (which includes banking and institutional inertia, contributing to the
poor state of its banking system and economy) often ignored (Ozawa, 2001). Maintaining
positive development aid of course simply requires a greater percentage of rich countries
national income dedicated to foreign aid. And maintaining positive development policy space
requires the construction of an accommodating international financial and trade policy
architecture which permits and regulates the use of capital controls, trade policy tools, and
other tools development policy tools, yet enabling rules on graduation as Akyüz (2009)
One way to reconcile positive regime of development fostered by the hegemon with some
reduction in rapid deindustrialization arising from import penetration seems to be through
Preferential Trade Agreements (PTAs). It has been noted that the Generalized System of
Preferences (GSPs) helped industrializing nations like Indonesia shift away from import-
substitution to export-oriented strategies in the mid-1980s when oil prices collapsed (Rosser,
2007: 52). PTAs may then be a way for the richer power to absorb the industrial output of the
converging country while avoiding excessive import penetration by reducing absorption of
fellow rich countries' manufacturing (since it makes the former’s industrial goods more
attractive relative to the latter’s goods which remain on a most-favoured nation basis).
The development of strategies for accommodating converging economies is not only a task
meant for industrialized economies. In order to aid the developed countries’ in their domestic
efforts at maintaining neutral or positive regimes of international development, structuralist
development economists also propose the developing countries’ use of fiscal policy to sustain
demand for capital goods, and their reinvestment of foreign reserves (Cimoli and Porcile,
Additionally, persistent export-led development associated with slow or little internal
integration could lead to persistent global imbalances (Palley, 2011) which puts pressure on
industrial incumbents, which may undermine their internal stability. Therefore, industrializing
countries must also be encouraged to foster internal integration and not rely on continuous
wage and labour repression as has been characteristic of developmental states.
A traditional measure has also been to embed the logic of graduation by reducing trade barriers
when international competitiveness of infant industries has been attained, as Alexander
Hamilton and Friedrich List maintained. Yet the political economy of removal of such barriers
introduces rigidity to this process, and thus external multilateral or unilateral influence is often
required. On development aid, the developing country “support” is supposed to come in the
Although the reinvestment of the foreign reserves in the hegemon’s economy may also feed into its excess
liquidity, financialization and asset price bubbles, as occurred with East Asian investments in American real
estate, thus contributing to the housing bubble of the early 2000s.
form of effective use of foreign aid so that development occurs (rather than the aid going into
consumption), aid fatigue is averted, and the country requires less aid over time. More is then
left for other poor countries, and the process of graduation continues.
There is no world government or parliament through which developing countries could vote
for and enforce their demands for neutral or positive environment for international
development. With formally independent nations and unequal supranational institutions, the
coordination of these processes is not in any way easy. Consensus on such issues seemed
impossible to attain at the regional level under the socialist Council for Mutual Economic
Assistance in Eastern Europe (Dragomir, 2015). It was also difficult at the global level within
the League of Nations Economic Consultative Committee (ECC) whose private sector
representatives “exhibited a highest degree of heterogeneity…, held different doctrinal views,
showed different ideological intensities, and bore different class interests (DAlessandro,
2007: 25). The difficulty of coordinating global structural change may even be seen at the
national level, for instance in 17th to 19th century Britain where regional economic
heterogeneity and inequality stifled successful attempts at national consensus and collective
action on economic interests within producer associations and workers associations,
respectively (Langton, 1984: 150-155).
It has typically been under the pressures of large-scale war, crises or revolution that societies
have been forced to redistribute wealth significantly (Scheidel, 2017). This reflects
internationally in the fact that many of the propositions for reform of the inter-state system
came in the context of the disruptions of war: Émeric Crucé’s plan was within the backdrop of
the Thirty Years War (1618-1648); Charles de Saint-Pierre’s plan for a European state in the
context of the War of Spanish Succession (1701-1713); Immanuel Kant’s plans for perpetual
peace and Jean-Baptiste ‘Anarchasis’ Cloots’ plans for a world republic in the context of the
French Revolution (1789-1799); Russia’s League of Armed Neutrality in the context of the
American Revolutionary War (1775-1783); Britain’s ‘world’s first comprehensive
development plan’ (Hopkins, 2002) in the aftermath of the Napoleonic Wars (1803-1815);
Simon Bolivar’s League of American Nations in the context of the Latin American
Independence Wars (1808-1826); the League of Nations and Sun Yat-sen’s International
Development Organization in the context of World War I (1914-1918); the Inter-American
Bank and Roosevelt’s Good Neighbour Policy towards Latin America in the context of the
Great Depression (1929-1933) and inter-war security threats from Germany; the French post-
war imperial developmentalism, British Colonial Development and Welfare Act of 1940, the
American Marshall Plan (1940-1945) and the Soviet Molotov Plan in the context of World War
II, communist insurrections and anti-communism; and the 1974 UN General Assembly
Declaration for the Establishment of a New International Economic Order followed the 1973
global oil shock. It would therefore only be consistent if a new and more redistributive global
economic and political order only emerges after significant devastation of some sort, perhaps
an ecologically-related one.
3.1. The Limits to Luxury and Manufacturing Share of Global GDP
There is even a bigger problem than short-term transition costs for the industrialized countries,
which raises the long-term costs for industrialized countries in allowing poorer countries to
emulate them. In a world with a saturation point for Engel’s Law, it is impossible for all
countries or regions to all have a manufacturing majority share of the national GDP. The
interlocutors of the 18th and 19th century rich country-poor country debates focused on the
supply side, with the debated condition being whether the nature of technology and innovation
limited or made infinite a country’s capacity to grow its industrial sector.
On the demand side, David Hume and others who supported luxury consumption saw it as an
endless source of demand for industrial products and continuous diversification (Hont, 2008)
which all countries could industrialize upon. Luxury becomes a passion that continuously
increases both the quantity and quality of consumables” (Berry, 2008: 55). For Hume, the rich
country would retain industrial capabilities if they re-specialized in higher value-added
industrial goods, structurally made possible by continuous technological innovation on the
supply side, and continuous production of new demand for new types and qualities of luxury
goods on the demand side (Hont, 2008). As early as 17th century France, Jean-Baptiste Colbert
recognized that industrial incumbents such as the Dutch and English would inevitably retaliate
against French import-substitution protectionist policies. He therefore sought to pursue a
strategy of combining import duties (as opposed to import bans) to enable foreign trade to
continue and industrial policies to enable industrial upgrading so that the quality of French
goods would increase and face less aggressive retaliation from importing nations (Isenmann,
There was thus no conceptualization for Hume, Adam Smith and other classical economists of
a perpetual post-industrial stage of development within their stadial theories of development.
This was not unexpected, since the industrial space was still narrow, and incomes still low
enough for income growth to continue increasing the manufacturing share of GDP in line with
Engel’s Law. David Hume, Josiah Tucker and Adam Smith expected that when faced with poor
countries’ low wages attracting industrial relocation, rich countries would retain manufacturing
which used high-skilled labour for high value-added products, enabling them to maintain
employment and wealth in manufacturing. For Smith, division of labour “provides the variety
to cater for these endless human wants(Brewer, 1998: 85), while for Tucker endless
technological innovation enabled the sustenance of rich countries’ industrial growth.
For mercantilists, on the other hand, who argued that the rich country’s manufactures would
be undermined by those of an emerging economy, the argument was often based upon the
latter’s low wages and an implicit sense of a quantitative limit to the industrial sector. The
suppression of other countries’ industrial aspirations, and the subjection of colonies to the
status of absorbers of metropolitan manufactured goods then become a way of escaping the
limitations of industrial relocation. While Isenmann (2017) presents Colbert’s strategy of
improving the quality of French goods to ameliorate the chances of retaliation to its import-
substitution policies from commercial great powers, he fails to mention is that Colbert also
included a strategy of maintaining and pursuing colonial expansion in order to expand demand
for lower quality and other types of French goods.
Veron de Forbonnais, one of the members of the French Gournay Circle of anti-physiocrats,
was one of the few to propose a post-industrial stage in which the deindustrialized state
remained rich (Hont, 2008: 273-274). This was a stage of financialization, where rich countries
can remain rich by lending capital to poor and industrializing countries at exploitatively high
interest rates, entailing the creation of an informal empire based on making poor countries
financially dependent (Hont, 2008: 273-274).
Early modern, 19th century, and even 20th century thinkers, expected that rising incomes in the
developing countries would expand manufacturing demand for industrialized countries’
products; or manufacturing growth in developing countries would increase their incomes and
expand export markets for industrialized countries. The latter was Sun Yat-sen’s argument to
entice industrialized countries to fund China’s development. It was not realized that with a
saturation point for a dispersion of household spending (Chai and Rhode, 2012), growing
incomes for developing countries would indeed increase the global market for manufactured
goods, but at a decreasing rate and until a saturation point which does not accommodate all
countries simultaneously having a majority manufacturing-share of GDP and employment. In
other words, there appears to be some truth to the mercantilists’ argument that being neutral
would cause poorer countries to take manufacturing and trade away from them. However, if
many thinkers before the 20th century believed that a vast swathe of the world the “tropical
zones” of Latin America, Africa and Asia were climatically unable to develop industrial
products, then they would not have had to worry about a saturation point for the manufacturing
share of global GDP. Such a share would cover countries of the “temperate zone” (North
America and Europe), while the Global South would serve as a perpetual market for their
manufactured products. Colonial and neo-colonial penetration of the markets of tropical zones
would provide an outlet for increasing their industrial production and thus their manufacturing
share of exports, GDP and employment.
Notwithstanding, even within the countries of the “temperate zone”, there were limitations to
industrial expansion before the industrial revolution. Reinert (2005: 273-274) argues that the
aggressive protectionist tendency of the pre-industrial revolution era was indeed partly the
result of the limited industrial space and technological capabilities. He notes that “There were
a limited number of goods that benefited greatly from mechanization in the early modern
period, and there were thus few opportunities for mutual trade of manufactured articles”
(Reinert, 2005: 273). This is the case given that structural transformation in the modern sense
did not occur for any economy until the 19th century. Indeed Britain, the leading mercantilist
state by the late 17th century (against which the classical economists were emerging to rebut),
had about 31% of the male workforce was employed in industry by the end of the 17th century
(Wallis et al., 2018: 866) when Britain had bested the Dutch in commerce through navigation
acts and Anglo-Dutch wars. Hence even for those mercantilist countries that had the greatest
manufacturing capabilities, the share of the sector in the domestic economy was small and
productivity growth was much less than that of the 19th and 20th centuries. Around 1800, only
about 6% of the Prussian population was employed in manufacturing (Kopsidis and Bromley,
2014: 9).
The share of global manufacturing in global GDP would therefore also be very small, especially
with the low global income per capita relative to later centuries. Although no global-level data
exists for periods prior to the 20th century, if the manufacturing share of global output and
employment between 1970 and 2010 (with the post-war period having the highest global
incomes up till then) stood at 14% and 16-17% respectively (Felipe and Mehta, 2016: 148),
then early modern to 19th century shares would have been much smaller. It therefore “became
clear that all could not reap the benefits of importing raw wool and exporting finished textiles
simultaneously” (Reinert, 2005: 274). Yet the superior profits, state revenues and national
wealth that the manufacturing trade yielded made it instrumental in the pursuit of defence,
power and plenty, as recognized by Antonio Serra in 1613 and subsequent economic thinkers.
It was clear that “Whoever controlled the mechanizable textile industries the main activity
where technological progress change and increasing demand combined, as in Verdoorn’s Law
of 1949 therefore stood to gain a huge economic advantage over those who did not” (Reinert,
2005: 273). England thus sought a monopoly in supplying the world of manufacturing. Indeed
“the major writers on the subject rejoiced along Cary’s lines that ‘almost the whole World is
supplied by our labour.’” (Cary, 1695: 132, quoted in Reinert, 2011: 95).
Even the form of embodiment of technology made it less easy to diffuse and produce high
growth in total factor productivity, thus increasing competition for the available technology
and its embodiments. In the late 15th and early 16th centuries, the fact that such technical
knowledge was very practical and “based on know-how jealously guarded by the single
craftsman”, meant that the diffusion of technical knowledge therefore “depended first and
foremost on the migration of those in possession of that self-same know-how, rather than on
the proliferation of technical treatises” (Belfanti, 2006: 328). It was therefore a common view
of the times, including the 17th century, that
“If trade follows the skilled workman, and the skilled workman is a commodity of
which the quantity is strictly limited, it is clear that the gain of one State implies the
loss of another; and that State is likely to be more prosperous which can gain over, by
fair means or foul, the greater portion of this rare commodity” (Sargent, [1899] 2004:
In modern times, Keynes’ introduction of aggregate demand constraints, because it did not
focus on structural change or dabble in non-homothetic preferences, did not allow the new field
of macroeconomics, or its application in development economics, as it emerged in the post-
war period to detect the problem of the saturation point of Engel’s Law. Hence by 2008,
Foellmi and Zweimuller (2008: 1318) could argue that to the best of their knowledge, “other
papers rationalizing structural change and steady growth in a unified framework have focused
exclusively on technological differences across sectors”. Even with Engel’s Law promulgated
in 1856, it is only in 2012 that Chai and Rohde (2012) fully postulate a saturation point. In fact,
only in 2016 did Felipe and Mehta (2016) discover that the manufacturing output and
employment shares of global output and employment have remained at constant levels of 14%
and 16-17% respectively over 1970-2010 for 64 countries, using what “appears to be the most
comprehensive database of manufacturing employment shares available to date” (Felipe and
Mehta, 2016: 148). They thus conclude that “Studies of deindustrialization in which countries
are the basic unit of observation provide an incomplete picture of the structural trends at play”
(Felipe and Mehta, 2016: 151). Indeed Atolia et al. (2018: 27-28) suggest that the limited
manufacturing share of global GDP imposes limitations on countries wishing to seek enhanced
economic growth through rapid industrialization since they are all competing for a stable share
of world output.
They therefore note that this has contributed to several middle-income
economies such as Brazil, Malaysia, Mexico, and Peru having recently experienced premature
deindustrialization, as Rodrik (2015) documents.
It is therefore unsurprising that at the global level, industrialization or structural transformation
has always involved international conflict and coercive international demand-stimulation
strategies. The West’s industrial development in the early modern period was linked to inter-
state warfare, mercantilist foreign economic policy and colonial industrial regulations (Reinert,
2011). The industrialization of the West in the 19th century was linked to the de-
industrialization of the rest of the world and the frantic search for export markets through
unequal treaties and colonial rule (Nayyar, 2013). The late industrializers of the late 19th
century produced a global crisis of overproduction (Silver and Arrighi, 2003) and contributed
to the age of imperial expansion. The industrialization of East Asia and re-industrialization of
Western Europe from the mid-20th century (which itself had to be forced by lessons from inter-
war fragilities, the experience of a World War, threats and emergence of communist
insurrections, and great power contestation from the USSR) also produced a crisis of
overproduction (Brenner, 2006), employment de-industrialization in the West (Rodrik, 2015)
and a resort to structural adjustment programmes to open up the Global South and end their
post-war import-substitution experiments. In other words, global conflict over global structural
transformation is inevitable. Hence the persistence of a situation whereby most of the world
Central Asia, South-west Asia, South-east Asia, Africa, Latin America and Eastern Europe
remains non-industrialized and many middle income countries struggle to escape the middle
income trap.
Although modern processes increasingly make the distinctions between agriculture, manufacturing and
services more blurry, since there are agricultural (Cramer and Sender, 2019) and service (Miles, 1993) processes
traditionally associated with manufacturing, and services. Therefore the “manufacturing” share of global GDP
may be underestimated.
The 20th century was a 100-year period of a great experiment an experiment to see the extent
to which the majority of the world, hitherto regarded as a consumption reserve for the
manufacturing sector of colonial powers, could undergo structural transformation as formally
politically independent nations. This has, however, been a failed experiment. First, Africa only
had about 20 years for its experiments with industrialization, before the 1980s when the
counter-movement against Germany, Japan and East Asia re-industrializing, catching up and
producing a global crisis of overproduction emerged (Arrighi, 1994; Brenner, 2006).
In other words, there is a fundamental structural constraint to simultaneous global structural
transformation without industrial incumbents first establishing stable post-industrial
institutions, cultures (such as moving away from measuring social well-being using GDP) and
political settlements. This was not realized prior to the 20th century not only because it was
until the 19th century that the industrial revolution expanded the global industrial space. It was
also because most of the world was either oblivious or ambivalent to, or deliberately excluded
from the process of structural transformation since two continents were completely colonized
prior to the 19th century and there were only few modernization attempts from Africa and Asia
until the late 19th century. This was then too late since by 1914 over 84% of the world’s land
surface was occupied or controlled by Europeans, up from 35% in 1800 (Kennedy, 1987: 150).
Perhaps an additional reason is that to the extent that opportunities for industrial development
(which would have drawn some of the global manufacturing share of GDP) have existed for
Africa, Latin America and the Caribbean, South Asia and other parts of the Global South,
domestic constraints in political settlements, shaped or worsened by colonialism (Whitfield et
al., 2015) or in continuity with it (Herbst, 2000), have represented strong impediments. It is
partly due to the existence of this “margin of domestic explanatory importance” that
development economics, which does not emphasize transitions in the Global North, implicitly
With a saturation point for Engel’s Law limiting the manufacturing share of GDP, in order to
better enable other countries to possess significant industrial capacity, a country would need to
convert a higher percentage of increased national income into greater social development. It is
therefore imperative that industrializing and industrial societies transform their socio-economic
structures earlier towards a social economy that reduces labour pressures for protectionism and
external demand stimuli, as Galbraith (1958) proposes in The Affluent Society. In light of the
saturation point and pressures for premature deindustrialization, the threats of automation and
climate change (and the need for degrowth), not only do rich countries have to create viable
post-industrial societies, poor countries also have to develop viable mini-industrial (economic
systems at an equilibrium of incomplete structural transformation) societies. This may take
various forms of Evans’ (2010) ‘capability-enhancing democratic developmental state’, which
he proposed partly in acknowledgement of the structural constraints to industrialization today,
or Selwyn’s (2016) ‘labour-centered development’ proposed against the elitist conception of
developmentalist thinking. In the absence of unlimited intensive economic growth and
extensive growth through imperial and neo-imperial dispossessions against other societies,
domestic redistributive institutional ecologies take centre stage in a mini-industrial socio-
economy, and is the Southern corollary to Galbraith’s (1958) affluent society. In this sense,
developing countries must be as influenced by the examples of social democratic states of the
global South, such as Costa Rica and Kerala, as they are by the past Western European and
East Asian developmental state models.
In essence, what is supposed to occur is that rich countries maturely de-industrialize and
specialize in highly technologically-intensive and higher value added manufacturing and
services. This, due to narrower demand than mass-produced manufacturing goods, is expected
to represent a smaller share of global GDP than the general global manufacturing sector. These
mature post-industrial economies therefore have to have a massive long-run redistribution of
wealth generated from these small high value added sectors. In reality some lower value added
manufacturing still persists because the rich country increases its immigration demand, thereby
at the same time bringing in lower wage workers and absorbing some of the surplus labour
from poorer countries. Nonetheless, much of agricultural and lower value added manufacturing
in rich countries persists due to industrial policy for these sunset industries, which contributes
to the developmental difficulties of poor countries and the middle income trap for emerging
Even if one’s desire is for post-capitalist systems of production, livelihood and ecological
sustainability, capitalist pre-distributive and redistributive institutions, distributions of power
and historical legacies are important for transitions to less inegalitarian post-capitalist
institutional structures. This is similarly just as pre-capitalist distributions of material power,
institutions and property rights have been an important determinant of cross-societal variation
in capitalist (such as East Asian newly industrialized economies versus Latin American
economies) or late 20th century post-socialist-to-capitalist (such as Slovenia versus Estonia in
post-Soviet Eastern Europe) economic inequalities and egalitarianism.
3.2. Rural Development and the Hegemonic Premium
These mini-industrial aspirations nonetheless entail an intensification of domestic class
struggles for both rich and poor countries, as it requires a high wage and social spending share
of GDP and egalitarian conditions at a time when labour’s power may be reduced. It would
also be more difficult to achieve with certain national economic structures such as structurally
heterogeneous ones (Franzoni and Sánchez-Ancochea, 2013) and firms’ product market
strategies than others, variations which influence the viable emergence of certain varieties of
capitalism than others (Hall and Soskice, 2001).
Nonetheless, for regional great powers around the world which have not yet begun
industrializing, several policies may be undertaken to enable a less intractable institutional path
towards fostering a neutral or positive regional development environment. Landsberg and
Georghiou (2015), in examining the notion of “developmental foreign policy”, do not assess
the structural domestic determinants of such policy towards neighbouring or fellow southern
economies. Yet it could be argued that emerging states must resist the early modern English,
19th century, Latin American, Witte-Russian and 20th century South African models of rural
peasant and poor evictions from land, land concentration and compensatory export-oriented
industrialization. Such a path worsens rural poverty and over-urbanization (wasting the
productive potential of rural peasants and rural and urban poor), while externalizing the costs
of such unnecessary surplus labour upon neighbours and other countries due to emigration of
unskilled workers and greater pressure for industrialists to seek markets for finished goods
abroad rather than from growing rural demand. Instead, the early 19th century Prussian and 20th
century East Asian models of rural land redistributions and rural development must be adapted.
These enabled the creation of larger peasant middle classes and growing rural incomes to
enable greater inward demand for national manufacturing, and thus enable greater leeway to
absorb the exports of regional neighbours and to promote regional aid of manufacturing
Indeed, the father of late 19th century Russian modernization, Minister of Finance (1892-1903)
Sergei Witte, argued that in contrast to Western powers whose small sizes enabled them to
saturate their domestic markets and were forced to pursue an aggressive colonial policy,
Russia’s huge expanse and population allowed a “pacific exchange of her surplus” and
therefore “does not have to have a colonial cultural character” (quoted in von Laue, 1951: 182).
Witte thus argued that “Russia’s mission in the East must be a protective and educational
mission” (quoted in von Laue, 1951: 182). Yet as liberals like Leonid Slonimskii observed
when the Witte System was actually put in place, the Russian economy developed “rather
slowly and faced a large internal demand for internal products. Yet, the state constantly
searched for foreign markets, as if it was as constrained within its borders as English or German
merchants were within theirs” (Fedyashin, 2009: 796). The peasants faced both food deficits
even as agricultural exports were abundant, and higher prices for finished goods due to the
protectionist policies aimed at industrial development. For Shanin, this was because the state
treated agriculture as a milking cow while “growth” happened elsewhere in the city (Fedyashin,
2009: 800). Thus, for these critics, the Ministry of Finance’s focus on the trade balance as a
measure of success allowed an agrarian crisis to emerge and persist, with the agency captured
by both major commodities exporters and the entrepreneurial elite.
Low and slow-growing rural incomes and consumption worsens the aggressive pursuit of
foreign trade as a means of expanding national wealth. It is recognized in the literature on sub-
imperialism that a developing country attracting capital through the “super exploitation of the
working class, based on wage repression and the growth of a huge reserve army”, thereby
disconnecting from domestic consumption and placing more pressure for the search for foreign
markets (Flynn, 2007: 11). Although England had experienced the emergence of agrarian
capitalism, domestic wage and consumption growth were slow. Very low rural incomes meant
that a country would be stuck in an under-consumption trap for manufactured goods for the
towns (Kopsidis and Bromley, 2014: 14). The enclosures replaced communal property with
private property, but this also involved the enclosing of multiple small landholdings into
multiple large ones. This created a large mass of landless labourers, rural poor and urban poor.
As a result, “the sterility of domestic trade was a conviction shared by all 17th century
authors…At that time, foreign trade was the driving force of development” (Perrota, 2016:
221). As Appleby (1976: 500) observes:
“The balance-of-trade explanation of how nations grow wealthy had focused attention
upon production in such a way as to obscure the dynamics of consumption. Inside
England the most noticeable consumers were the very rich and the very poor, and there
was little in their patterns of spending to encourage a re-evaluation of consumption”
In France, the “poor” and “destitute” may have formed one-third to one-half of the population
in 1789 (Patriquin, 2007: 174), and its poor relief continued to be moderate throughout the 19th
century (Patriquin, 2007: 178). Gregory King had estimated in the late 17th century that half
the families in England were poor, owing to unemployment and underemployment (Laslett,
2000). Laslett (2000: 46) deems it:
“probably safe to assume that at all times before the beginnings of industrialization a
good half of all those living were judged by their contemporaries to be poor, and their
standards must have been extremely harsh, even in comparison with those laid down by
Victorian poor law authorities.”
Indeed, while England for a variety of reasons began expanding its economic hegemony over
Europe with the advent of the Tudors in the late 15th century, other states sought to follow its
lead out of national paucity”, since “poverty and hunger killed no less than war and conquest”
(Reinert, 2005: 272). It would only be with early 19th century Prussia that “the first market-
oriented ‘growth with equity’ rural development strategy” emerged as a solution to rural
poverty, through boosting rural incomes, in opposition to the English model of enclosures,
dispossessions and game laws which created larger masses of rural and urban poor (Kopsidis
and Bromley, 2014: 15).
With concerns over overpopulation and poverty in the metropole, in addition to national glory,
empires provided an external source of capital and a foreign market for manufactures. It was
thus the external demand, coming from the Atlantic trade, which enabled England to escape
the limits of agrarian capitalism (Anievas and Nişancıoğlu, 2015: 149-169). Surplus labour
from the commodification of land and low agricultural productivity was exported through
colonial settlement and expansion at the expense of indigenous peoples (Anievas and
Nişancıoğlu, 2015: 150-152), and importation of millions of Africans as slaves on American
land in order to overcome the limits of labour scarcity in the Americas. In other words, while
development economics typically recognizes that the size of the domestic market is a strong
determinant of the viability and suitability of import-substitution (ISI) or export-oriented (EOI)
industrialization strategies (and rural development patterns influence the size of the market),
prior to the mid-20th century anti-colonial era, EOI also meant securing foreign colonial
markets and ensuring continuous demand by destroying competitors. Low levels of rural
development thus contributed to colonial economic policy.
The pattern of agricultural transformation not only increases the success of industrial policy,
but actually makes it more viable to less frictionally absorb the exports of neighbouring and
fellow Southern economies, or at least to reduce the aggressiveness of response to Southern
import penetration. It is therefore no coincidence that the most successful case of regional
diffusion of industrial capabilities (albeit under pressure of war, greater legacy of state
intervention, and a narrower set of colonies in its possession) the East Asian flying geese
pattern was driven by Japan which had undertaken significant land redistribution and rural
development following the Meiji Restoration (Hundt and Uttam, 2017). On the other hand, the
most prominent settler colony with a white minority in Africa, South Africa, failed to absorb
as much regional exports as would have been possible if the Black majority had enjoyed
redistributed land and more transformative rural development efforts (Arrighi Aschoff and
Scully, 2010). Hence The low wages of non-whites make South Africa’s domestic market
small, so that capital seeking to reinvest must either move itself outside South Africa or develop
export markets large enough to produce economies of scale(Legassick, 1975: 262-263).
Similarly, with colonial Brazil being divided by the Portuguese Crown into just fifteen large
land tracts, postcolonial rural development has been limited (Kay, 2009: 118-120). Having 4%
of landowners owning 79% of the land (Kay, 2001: 755) has partly limited Brazil in absorbing
the exports of its neighbours in South America and intensified the urban bias and rural neglect
of its post-war import-substitution industrialization (ISI) strategy.
Early development economics failed to explicitly draw a connection between the type of rural
agricultural transformation and a country’s foreign economic policy because of the prevailing
methodological nationalism. The developmental state literature itself was limited in its
examination of developmental foreign policy (Landsberg and Georghiou, 2015), just as the
international political economy literature was limited in the examination of domestic
determinants of foreign economic policy (Kalinowski, 2019).
The urban bias hypothesis which criticized the neglect of agricultural transformation in favour
of urban and industrial development among many postcolonial states, elaborated most
prominently by Lipton (1977), had a national focus. Even Arthur Lewis’ (1954) two-sector
model which emphasized the role of growth in the industrial sector in absorbing surplus rural
labour was national in focus; this is the same for Schultz (1953) who emphasized directly
improving agriculture to stimulate development. As Kay (2009: 114) notes, the urban bias
“thesis is firmly located at the national level and does not engage with the international system”.
Where recent writings by Lipton (2005) explore an international dimension, it is in terms of
the impact of OECD agricultural policy upon international agricultural prices, incentivizing
urban-biased policies among peripheral countries (Kay, 2009: 114). Additionally, as Lindstrom
(2019: 404) observes, “When landless or semi-landless groups are studied, it is most often in
relation to the transition problem”, and not in relation to foreign economic policy. However,
the incomplete capitalist transition and low level of rural development provides an additional
source of expanding demand for Southern states. In this sense, each additional landless poor
living in rural or urban poverty in excess of what the national capitalist system’s productive
capacity and investments can absorb while much land remains untilled, represents lost demand
which could have absorbed national and regional manufacturing growth.
However, rural development is not a complete constraint against the pressures to pursue an
aggressive regional foreign economic policy. The greater productivity growth in industry over
agriculture means that industrial production capacity growth will outpace rural income growth,
forcing industries to seek foreign vents to match the surplus productive capacity. This is a
concern which Robert Torrens held at the international level (between industrial economies
and non-industrial ones) in the early 19th century (Elmslie and Criss, 1999: 140). Rural
development only helps in reducing the domestic productivity growth gap between urban and
rural areas, not eliminating it altogether. In addition, rural development and land redistribution
are often limited by the power of landed elites and commodity exporters who block such land
reforms. It typically takes the threats of insurrection for large-scale land reforms to be
politically feasible.
The pattern of agricultural transformation not only increases the success of industrial policy
and progressiveness of developmental foreign economic policy, but actually also improves the
ease with which an industrializing state adopts encompassing social policies due to the
increased economic and political power of rural proletariat and narrower income inequality, as
evinced by the East Asian cases (Hundt and Uttam, 2017). This eventually becomes relevant
in order to internalize the costs of industrial adjustment partly through social policy.
3.3. Endogenous Opposition to Inclusive Global Structural Transformation
Adam Smith pointed to one domestic cause of aggressive foreign economic policy: merchants’
influence upon statesmen. Cheney (2019) indeed argues that this accounts for some of the
variation in French, Spanish and British colonial economic policy. In the wake of the Seven
Years’ War (1756-1763), French enlightened administrators “were conscious of the narrow,
self-interested perspective of metropolitan merchants who had hitherto dominated debates
about trade policy, and their drive to reform helped to encourage institutions that gave voice to
colonial public opinion” (Cheney, 2019: 77). Thus, Colonial Chambers of Commerce and
Agricultural societies were established to provide a counterweight to the relentlessly
protectionist views of metropolitan merchants. This was possible because of the absolutist
nature of the French monarchy which weakened the voices of merchants in the state (Cheney,
2019: 78), compared with the “fanaticism and greed” which the English parliamentary system
produced (Alimento and Stapelbroek, 2017: 31). Katzenstein (1985), an exponent of a similar
view for the modern era has been linked with the advocacy for international political economy’s
attention to the domestic structural determinants of foreign economic policy. Katzenstein points
to domestic governance structures, identifying this as determinant of industrial adjustment
strategies among the U.S., France, Japan and small open economies.
Yet there is some endogeneity to this phenomenon. The most structurally-transformed societies
tend to have the largest and most diversified classes of elites and economic power. This tends
to produce limitations on the monarch or executive, and a large space for them to influence state
policy. Hence England’s constitutional monarchy and the bourgeosification of its parliament
followed the rise of merchant and capitalist elites (Khan, 2018). France and Spain, which saw
weaker bourgeois classes during the 16th, 17th and 18th centuries, experienced lesser influence
of merchant classes upon their commercial policies. In other words, the most industrialized
nations from which much regional and global developmental beneficence is expected, tend to
be the ones with the most mercantile influences upon their foreign economic policies which
prevents such beneficence. For late developers, this is partly offset by late development
enabling a greater role for the state (Coates, 2014) and a basis for robust industrial, fiscal and
social policy.
Besides this domestic source of mercantile power, regional hegemons also face international
pressure to adopt conservative policies. They become the regional headquarters of capital
(hence housing the largest stock markets and receive the most influence from capitalists and
financiers), attract the most immigrants (thereby making conventional social policy more
challenging), and receive the most pressure to maintain conservative macroeconomic policies
and low tax rates to secure monetary leadership (Walter, 2006; Lapavitsas, 2019). They also
produce the strongest intra-continental multinational corporations and the largest regional
foreign direct investors and foreign portfolio investors (cumulatively larger than the wealth of
most of the citizens of their home countries and larger than several countries within the region)
with power across the region, and benefit more from liberalization and free trade than other
economies of the region given their technological superiority.
They also have the strongest
capacity to externalize the costs of industrial adjustment through their disproportionate soft (as
the prime regional creditor, FDI source, regional foreign aid source and major export
destination) and hard (military size and capabilities) power over regional multilateral
institutions, and capabilities for unilateral action and influence.
Thus, there are strong pressures for them to become hubs of economic liberalism (Panitch and
Gindin, 2005), in opposition to the forces and institutions needed to enable equitable regional
industrial development. Thus, although England pioneered state-funded poor relief since it was
where the tensions of the emerging capitalist system and primitive accumulation was most
advanced (Patriquin, 2007), it was instead in Germany that the welfare state first emerged; and
although the U.S. New Deal outpaced Sweden’s social policy in the 1930s (Swenson, 2002: 3-
4) by being the centre of the crisis of liberal capitalism, it was in Scandinavia that the welfare
state subsequently saw the broadest and most intensive development. The nature of capitalist
competition also means that the regional great power’s merchants and capitalists would always
seek to capture regional export markets to the exclusion of regional competitors.
Additionally, the systematic nature of capitalist business cycles and economic downturns
increase the lure of seeking to spur aggregate demand through the penetration of neighbouring
regional markets through neo-colonial and sub-imperial means. The strength of labour over
capital within a hegemon does not guarantee a neutral or positive development space for
developing countries. As Hobson (2005) recognized, working class imperialism is also a
phenomenon, whereby domestic tensions are externalized through imperialism, supported by a
hegemon’s working class instead of internalized through social, fiscal and industrial policy.
Even with social, fiscal and industrial policy possible, macroeconomic, political economy and
institutional difficulties can introduce rigidities to their effectiveness. For example, it may be
more difficult to provide comprehensive social policy under macroeconomic constraints during
a recession (when capitalists demand greater labour flexibilization and wage repression to
counter falling profit rates and declining international industrial competitiveness) and
increasing structural heterogeneity from post-industrial structural change. Lags in recovery
after implementing fiscal policy may occur. And delays in completing industrial transitions,
capital reallocation and absorbing previously shed labour can still enable some externalization
For instance, Apple Inc. has a market capitalization larger than 82% of the world’s countries (Banga, 2021:
of the costs of industrial adjustment to be advocated by the working class. Hence labour could
be enlisted to support the externalization of the costs of adjustment through protectionism and
imperialism. This was in contrast to Marx’s expectation that the socialist revolution, brought
about by the immeserization of the working class and political education to raise class
consciousness in the advanced industrial nations, could pave the way for backward countries to
bypass the capitalist stage of development through ‘the generous assistance and full support of
those countries where the socialist revolution had triumphed’ (NCMPR, 1982: 224).
Lastly, industrial supremacy is accompanied by global hegemony. This is a world where
material capabilities, inextricably linked to industrial capabilities due to their superior capacity
for increasing returns, productivity growth and innovation, are an important determinant for
hegemony and the pursuit of power in international politics. Deindustrialization is therefore
strongly linked to crises of hegemony, and catch-up of industrializers is linked to hegemonic
contestations (Arrighi and Silver, 1999). The result is hegemonic cycles and contestations, and
the naivety of expecting hegemons not to fight to retain sunset industrial capabilities or
economic power through aggressive foreign economic policies, and not to war against
competing hegemons through wars in the pre-nuclear age and cold wars and proxy wars in the
nuclear age. In order to reduce the incidence of such hegemonic contestations and cycles, there
must be a progressive refashioning of the international order towards greater multipolarity and
4. Conclusion
Maintaining a neutral or positive international development environment does not entail a
laissez faire policy stance among hegemons and industrialized states. It requires intentional
industrial, social and fiscal policy to enable the reallocation of capital and labour, and
pacification of protectionist counter-movements in light of the pressures for industrial
development caused by catch-up of developing countries. Prior to the middle of the 20th
century, global bellicosity, monetary and budgetary limitations, and international
acceptability of empire-building, colonialism and colonial settlement enabled the costs of
industrial adjustment to be viciously externalized onto other societies and economies. The
structural conditions of the 20th and 21st centuries allow an industrialized country to partly
absorb or internalize some of the costs of industrial adjustment through industrial, social and
fiscal policy.
Nonetheless, neo-colonial and neo-imperial channels of externalization still exist even though
formal colonial occupation and settlement are now largely anathema. The development of
progressive adjustment through industrial, social and fiscal policies is also in tension with the
pressures for hegemons to be bastions of economic liberalism based on normative free trade,
residual social welfare nets and conservative fiscal and monetary policies. Besides,
deindustrialized/post-industrial societies also face the constraints of financialization and
servicification which increase inequality and weaken the power of labour and social policy
especially. The declining power of hegemons due to deindustrialization therefore precipitate
movements for re-industrialization which may involve negative neo-mercantilist development
environments for developing countries.
The invocation of the interrelations among the economic phenomena outlined therefore implies
that the Northern bias of general economics and the Southern bias of development economics
must be corrected. The sub-disciplines of development economics, international economics,
international political economy, macroeconomics and economics of social policy must be
systematically integrated and taught together when learning about economy as a truly global
system. Structural transformation is a global process, and it is not only the Global South that
needs industrial policy; neither are comprehensive social and fiscal policy optional for rich
Developing countries also have a role to play in preparing themselves for the development of
institutions and conditions to enable regional development and neutral regional development
environment, as well as to ease the turbulence faced by industrialized nations required to
undergo industrial adjustment.
There are some who may argue that the absence of bellicist pressures truncates state-building
and development in developing countries today. However, in addition to the benefits of lower
war-related deaths and destruction especially for the conquered, it frees developing countries
from the same bellicist pressures to regionally monopolize manufacturing capabilities which
Britain and other Western European and neo-European powers faced (Reinert, 2011). Although
industrialization may still fuel nationalism (Gellner, 1983), the addition of bellicist pressures
for aggressive nationalism is heavily reduced in present times, creating some (though not
perfect) space for “shared industrialization” within the margins of domestic importance.
Nonetheless, it is clear that there should also be a greater dispersion of international power
across classes. Evans (2008) recognizes that the influence of capital and states are substantially
international whereas the influences of labour and other non-state actors remain largely
national. Therefore, crises within the hegemon may easily lead to the fall of any “embedded
liberal” order since such breakdowns are not adequately contested at the international level.
Evans (2008) gives a “cautious/conditional optimistic” call for a “counter-hegemonic
globalization”. Counter-movements against global economic unilateralism are needed to
systematically defend global societal economic and developmental interests, just as organized
labour does so at the national level. In addition to their independent operations at the global
level, broader transnational movements should be embedded within institutions of global
economic governance. More internationally-coordinated efforts can be taken to limit the
externalization of the costs of adjustment. However, this is easier said than done, as the power
of international capital is still substantially greater than that of transnational labour movements.
Within Africa, there is therefore a hegemonic premium for large states (such as Ethiopia in
East Africa, Nigeria in West Africa, South Africa in Southern Africa and Egypt in North
Africa). The premium is to institutionalize or lay the foundations for pre-emptive industrial
(with a strong egalitarian agricultural component), social and fiscal policy, where windows of
opportunity present themselves, oriented towards absorbing, promoting and enabling the
manufacturing supply and capabilities of their neighbours. This is to enable a less unequal
process of regional development.
The recognition of a hegemonic premium means that scholars need to clearly empirically
explore the dynamics of regional development across the world and across time. The literature
would undoubtedly benefit from case studies and quantitative analyses of the regional
consequences of the industrialization of Britain and France in North-Western Europe, aspiring
Egypt in 19th century North Africa, South Africa in Southern Africa, Japan in East Asia, India
in South Asia, Germany in Central Europe, Russia and the USSR in Eastern Europe, Brazil in
South America and the U.S. in the Americas.
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