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International Political Economy Series

Series Editor: Timothy M. Shaw, Visiting Professor, University of Massachusetts Boston,


USA and Emeritus Professor, University of London, UK
The global political economy is in flux as a series of cumulative crises impacts its
organization and governance. The IPE series has tracked its development in both analysis
and structure over the last three decades. It has always had a concentration on the global
South. Now the South increasingly challenges the North as the centre of development,
also reflected in a growing number of submissions and publications on indebted Eurozone
economies in Southern Europe.
An indispensable resource for scholars and researchers, the series examines a variety
of capitalisms and connections by focusing on emerging economies, companies and
sectors, debates and policies. It informs diverse policy communities as the established
trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise.

Titles include:
Robin Bush, Philip Fountain and Mark Feener (editors)
RELIGION AND THE POLITICS OF DEVELOPMENT
Critical Perspectives on Asia
Markus Fraundorfer
BRAZIL’S EMERGING ROLE IN GLOBAL SECTORAL GOVERNANCE
Health, Food Security and Bioenergy
Katherine Hirschfeld
GANGSTER STATES
Organized Crime, Kleptocracy and Political Collapse
Matthew Webb and Albert Wijeweera (editors)
THE POLITICAL ECONOMY OF CONFLICT IN SOUTH ASIA
Matthias Ebenau, Ian Bruff and Christian May (editors)
STATES AND MARKETS IN HYDROCARBON SECTORS
Critical and Global Perspectives
Jeffrey Dayton-Johnson
LATIN AMERICA’S EMERGING MIDDLE CLASSES
Economic Perspectives
Andrei Belyi and Kim Talus
STATES AND MARKETS IN HYDROCARBON SECTORS
Dries Lesage and Thijs Van de Graaf
RISING POWERS AND MULTILATERAL INSTITUTIONS
Leslie Elliott Armijo and Saori N. Katada (editors)
THE FINANCIAL STATECRAFT OF EMERGING POWERS
Shield and Sword in Asia and Latin America
Md Mizanur Rahman, Tan Tai Yong, Ahsan Ullah (editors)
MIGRANT REMITTANCES IN SOUTH ASIA
Social, Economic and Political Implications
Bartholomew Paudyn
CREDIT RATINGS AND SOVEREIGN DEBT
The Political Economy of Creditworthiness through Risk and Uncertainty
Lourdes Casanova and Julian Kassum
THE POLITICAL ECONOMY OF AN EMERGING GLOBAL POWER
In Search of the Brazil Dream
Toni Haastrup and Yong-Soo Eun (editors)
REGIONALISING GLOBAL CRISES
The Financial Crisis and New Frontiers in Regional Governance
Kobena T. Hanson, Cristina D’Alessandro and Francis Owusu (editors)
MANAGING AFRICA’S NATURAL RESOURCES
Capacities for Development
Daniel Daianu, Carlo D’Adda, Giorgio Basevi and Rajeesh Kumar (editors)
THE EUROZONE CRISIS AND THE FUTURE OF EUROPE
The Political Economy of Further Integration and Governance
Karen E. Young
THE POLITICAL ECONOMY OF ENERGY, FINANCE AND SECURITY IN THE UNITED
ARAB EMIRATES
Between the Majilis and the Market
Monique Taylor
THE CHINESE STATE, OIL AND ENERGY SECURITY
Benedicte Bull, Fulvio Castellacci and Yuri Kasahara
BUSINESS GROUPS AND TRANSNATIONAL CAPITALISM IN CENTRAL AMERICA
Economic and Political Strategies
Leila Simona Talani
THE ARAB SPRING IN THE GLOBAL POLITICAL ECONOMY
Andreas Nölke (editor)
MULTINATIONAL CORPORATIONS FROM EMERGING MARKETS
State Capitalism 3.0
Roshen Hendrickson
PROMOTING U.S. INVESTMENT IN SUB-SAHARAN AFRICA
Bhumitra Chakma
SOUTH ASIA IN TRANSITION
Democracy, Political Economy and Security
Greig Charnock, Thomas Purcell and Ramon Ribera-Fumaz
THE LIMITS TO CAPITAL IN SPAIN
Crisis and Revolt in the European South
Felipe Amin Filomeno
MONSANTO AND INTELLECTUAL PROPERTY IN SOUTH AMERICA
Eirikur Bergmann
ICELAND AND THE INTERNATIONAL FINANCIAL CRISIS
Boom, Bust and Recovery
Yildiz Atasoy (editor)
GLOBAL ECONOMIC CRISIS AND THE POLITICS OF DIVERSITY
Gabriel Siles-Brügge
CONSTRUCTING EUROPEAN UNION TRADE POLICY
A Global Idea of Europe
Jewellord Singh and France Bourgouin (editors)
RESOURCE GOVERNANCE AND DEVELOPMENTAL STATES IN THE GLOBAL SOUTH
Critical International Political Economy Perspectives
Tan Tai Yong and Md Mizanur Rahman (editors)
DIASPORA ENGAGEMENT AND DEVELOPMENT IN SOUTH ASIA
Leila Simona Talani, Alexander Clarkson and Ramon Pachedo Pardo (editors)
DIRTY CITIES
Towards a Political Economy of the Underground in Global Cities
Matthew Louis Bishop
THE POLITICAL ECONOMY OF CARIBBEAN DEVELOPMENT
Xiaoming Huang (editor)
MODERN ECONOMIC DEVELOPMENT IN JAPAN AND CHINA
Developmentalism, Capitalism and the World Economic System

International Political Economy Series


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6XS, England
The BRICs, US ‘Decline’ and
Global Transformations
Ray Kiely
Professor of Politics, Queen Mary University of London, UK
© Ray Kiely 2015
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Contents

List of Tables vii


Acknowledgements ix
1 Introduction 1
2 The Rise of the South: Rising BRICs, Declining US? 9
Developmental change and transformation through 10
convergence
Geopolitical change and transformation 15
Rising South, declining West?: Competing perspectives 16
Conclusions: Issues for further consideration 30

3 The BRICs, State Capitalism and Globalization: Challenge 33


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

4 The BRICs, the South and the International Economy, 65


1992 to 2007
Globalization and the emerging markets boom of the 1990s 65
Convergence at last?: The boom from 2002 to 2007 71
The limits of convergence, 1992 to 2007 75
Conclusion 90
5 The South and the Causes and Consequences of the 91
Financial Crisis, 2007–14
The immediate causes of the global financial crisis 2008 92
From boom to bust: The international origins of the crisis 105
The consequences of the crisis: The transformation of the 109
international order?
Conclusion: Inequality and the crisis in the US as a global 126
crisis

v
vi Contents

6 Global Inequality and the Rise of the South 129


The question of international inequality 129
Inequality and poverty within countries 132
Global inequality manifested: The food crisis and the 139
international division of labour
Conclusion 150
7 The South and Geopolitics: From Bandung to the BRICS? 152
The Third World and the South after 1945 152
The new South 156
Transforming international order? 167
Conclusion 173
8 Conclusion: Development, Innovation and the Limits of 174
International Transformation
The rise of the South and development theory 175
The rise of the South and technological innovation 181
The limits of international transformation 187

Notes 195
References 200
Index 223
List of Tables

Table 2.1 Annual average real GDP growth rates 14


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

vii
viii List of Tables

Table 7.1 Composition of Latin America and Caribbean 161


exports to China, and to the rest of the world
Table 7.2 Percentage increase in consumption growth, 2002 161
to 2007
Acknowledgements

I would like to acknowledge the following for permission to draw on and


adapt tables in this book: Mark Weisbrot, Rebecca Ray and www.cepr.net,
Andrew Sumner, Yilmaz Akyuz, Richard Kozul Wright and UNCTAD,
Rhys Jenkins, Helen Thompson, Francesca Beausang, the United Nations,
Palgrave and Taylor and Francis (www.tandfonline.com).
Much of this project was conceived (and delayed) while Head of
School at SPIR, QMUL. Thanks to the Faculty of Humanities and Social
Sciences and the School of Politics and International Relations at
Queen Mary University of London, a very collegial place to work.
Particular thanks within the School to James Dunkerley and Michael
Kenny for reading and commenting on original proposals related to
this project, and to Bryan Mabee and Rick Saull for comments on and
support related to parts of this work. Adam Fagan, Jean Francois Drolet,
David Williams and Sophie Harman were also important sources of col-
legial support and friendship, especially as this project moved to the
next one without this one being completed. Thanks also to Shaun
Breslin, Andrew Gamble, Leo Panitch, Alfredo Saad-Filho, Andy Storey,
Andy Sumner, for their support for and/or comments on this project at
various stages of development, and to Shirley Tan for copy-editing
with great efficiency. As always, the music of Low, Will Oldham, MBV
and PJ Harvey (among many others), and for much of this project, the
late Gene Clark, and indeed Gabriel-era Genesis, helped keep me sane,
as did work by Vince Gilligan, David Simon and Ed Burns, and Paul
Feig. Bill Haverchuck rocks! Thanks as always and love to Emma, Will
and Ella.

ix
1
Introduction

There is a growing perception that the international order is undergo-


ing a process of transformation. There are two closely related (but far
from identical) contentions used to back up this assertion: first, recent
years have seen the growth of emerging powers, which is part of a
more generalized rise of the South (OECD 2010a; World Bank 2011a;
UNDP 2013); second, and not unrelated to the first point, the United
States has entered a period of decline (Moran 2012). The force of these
arguments has actually intensified since the onset of the global
financial crisis of 2008, based on a contrast of two worlds, “a resurgent
South…where there is much human development progress, growth
appears to remain robust and the prospects for poverty reduction are
encouraging, and a North in crisis where austerity policies and the
absence of economic growth are imposing hardship on millions of
unemployed people and people deprived of benefits as social compacts
come under intense pressure.” (UNDP 2013: 1) The rise of the so-called
emerging powers, and the BRICs in particular is in many respects unde-
niable (O’Neill 2001, 2007; Young 2010). Brazil, Russia, India, and
above all China have enjoyed high rates of growth both prior to and
after the financial crisis, and their share of global output has increased
while the US’ has declined. Jim O’Neill (2013: 3), formerly of Goldman
Sachs, and the person responsible for the term ‘the BRICs’ in 2001, has
argued that in fact it is really after the 2008 crisis that “the BRIC thesis
really came of age.” Though O’Neill himself suggests that the rise of
the BRICs is good news for all countries, as their growth represents new
market opportunities for established companies, others link their rise
to the decline of the West. More specifically, this is the main reason
why some argue that the US is in decline, and convergence (in the
sense of ‘catching up’ with the developed world) is taking place

1
2 The BRICs, US ‘Decline’ and Global Transformations

between parts of the global South and the developed world (Pape
2009).
In the words of Parag Khanna (2009: x), the new second world of
emerging powers is “where the action is. Wall Street flies to Abu Dhabi
for bailouts from its delinquent loans. OPEC is once again a confident
cartel shaping the energy market. Turkey brokers Arab-Israeli negotia-
tions…The second world shapes global order as much as the superpow-
ers do.” However, the rise of the BRICs/BRICS1 is not simply a story of
the rise of a handful of emerging powers. It is good news for the global
South as a whole, for “the second world’s rise might be the best thing
to happen to the third world….Booming second world demand for
third world commodities, investment by second world giants in Africa
and other chronically underdeveloped regions, and rapidly growing
‘south-south’ trade have all contributed to unprecedented world-wide
economic expansion.” (Khanna 2009: x) There is thus much talk for
example of an ‘emerging Africa’, of ‘Africa rising’ and even of ‘Africa’s
moment.’ (Radelet 2010; Rotberg 2013; Mahajan 2008; Severino and
Ray 2013) This point about the emergence of the South as a whole is
all the more significant since the outbreak of the global economic crisis
in 2007–08. The 2007–08 crisis did not have such an adverse impact on
developing countries as previous major financial crises, such as in
1873, 1929 and 1981–2 (UNCTAD 2011). Indeed, rapid recovery and
high rates of growth since 2007–08 in many countries in the global
South, and not just emerging powers such as the BRICs, has led to the
argument that these have become ‘de-coupled’ from dependence on
the West, and indeed China is becoming a new hegemonic power, par-
ticularly for the countries of the South. Moreover, as the quotes from
Khanna above make clear, it is not only the BRICs that have experi-
enced high rates of growth, but other countries in the (former) Global
South, beneficiaries of a new order of trade taking place between
Southern nations. This is reinforced by China’s growing international
influence, and the rise of what has various been described as the
Beijing Consensus (Ramo 2004; Halper 2010), the China model (Zhao
2010), or just state capitalism (Bremmer 2009), all of which challenge
the US-centred, neoliberal Washington Consensus. Even some pro-
ponents of market liberalism see this as a possible state capitalist chal-
lenge to western hegemony (The Economist 2012).
On the other hand, it could be argued that the rise of these countries
represents not so much a challenge to, but rather a triumph for, the
West. The rise of these countries owes less to state capitalist deviations
from neoliberal prescriptions which originated in the West, and more
Introduction 3

to the embrace of globalization friendly policies. Seen in this way,


whatever the geopolitical implications might be, the rise of ‘the Rest’ is
a developmental triumph for the West, demonstrating the superiority
of market friendly policies which embrace the opportunities presented
by globalization. The South is rising through the growth of manufac-
turing in some locations, commodity market booms caused in part by
the rise of those same new manufacturing powerhouses, and with that
a massive reduction in the numbers of people living in absolute
poverty. At the same time, this leads to new opportunities for the
West, and not its imminent decline (O’Neill 2013: 6). In the words of
the centre-right British magazine The Spectator, the year 2012 was ‘the
best year ever’ as “people are being lifted out of poverty at the fastest
rate ever recorded”, and globalization “means the world’s not just
getting richer, but fairer too.” (The Spectator 2012; O’Neill 2013: 232)
In stark contrast to the pessimism emanating from some versions of
the US decline thesis, this is a far more upbeat story; indeed it is a tale
of global convergence, one caused by the adoption of policies pro-
moted above all in western countries, and the US in particular. These
are essentially market friendly, or neoliberal, policies.
In these two accounts of the rise of the South then, we can see some
differences in interpretation and in terms of normative implications.
Some argue that the rise of state capitalism in the BRICs represents
both a geopolitical and developmental challenge to western dom-
inance, as China in particular becomes a new pole of attraction for
developing countries. For some this is a cause for regret, as state capi-
talism is associated with authoritarian politics, neglect of human rights
and ultimately the undermining of individual freedom (Halper 2010;
The Economist 2012). Others welcome this development, suggesting
that state capitalism represents a challenge to the market friendly,
neoliberal policies that have undermined the development of the
former Third World (Ramo 2004; Arrighi 2007). On the other hand
some argue that the real reason for the rise of emerging powers is their
adoption of market friendly policies, and while any geopolitical chal-
lenge to the West might be cause for concern, more significant is the
developmental triumph of new emerging powers, and this triumph has
its roots in pro-western, market friendly policies (World Bank 2002).
Whatever the differences between these interpretations, there are
some shared analytical assumptions. Most notably, all agree that there
has been a significant rise of emerging powers. This may or may not
lead to the decline of the US (compare Mearsheimer 2005; Nye 2011),
but the rise does represent some kind of tendency towards convergence
4 The BRICs, US ‘Decline’ and Global Transformations

in the international order. This book takes a more sceptical position. It


does not deny that there have been significant recent changes in the
international order, and that we can refer to something called the rise
of emerging powers. However, it also suggests that the rise of these
powers has been exaggerated, and has real limits.2 This point applies
even more to the South more generally, and is particularly sceptical
about its supposed rise, both developmental and geopolitical.
Moreover, it is not only the rise of the South which has been exagger-
ated, but also the decline of the United States. The argument is made
above all through an approach which draws on international political
economy and especially an examination of the reasons for the rise of
the South, which are traced back to the global economic boom from
1992 onwards, and which ended with the global financial crisis of
2007–08. This crisis is also examined in great depth, in terms of both
its causes and consequences, above all for the rise of the South and the
decline of the US. This focus on the international political economy of
the period from 1992 to 2014 is not however at the expense of a con-
sideration of geopolitics and the question of the geopolitical rise of a
‘new South’ (Alden et al 2012), which is also investigated in some
depth, though how this relates to political economy questions will also
be central to the argument.
The rest of the book considers these issues in seven chapters. Chapter 2
outlines the arguments briefly considered here in more detail. In par-
ticular it identifies five positions which will be considered throughout
the book. The first position is that there is some kind of (state capital-
ist, Chinese model, or Beijing Consensus) challenge to US hegemony,
and that this is a cause for concern. The second position is that emer-
ging powers are rising and this is transforming the international order,
which carries with it a set of dangers, based on competition between
rising and falling hegemonic powers. The third position is that there is
a Beijing consensus, or China or BRICS model, but this is something to
be celebrated. The fourth position is that insofar as there is a rise of
emerging powers in the developing world, this should be seen as a
triumph for the West, and convergence is occurring because of the
increased promotion of market friendly policies. The fifth and final
position is that the rise of emerging powers is limited, and US hege-
mony persists. This final position is the closest to the one taken in the
rest of the book. However, this does not mean that all of the other
positions are rejected wholesale, and it will become clear in the empir-
ically grounded analysis that follows that some specific points made by
the other perspectives are useful. In particular, and on the face of it
Introduction 5

somewhat paradoxically, the first and third positions do have some


valuable – though also limited – insight to offer, particularly where the
fifth position tends to overstate its case.
Chapters 3 through to 6 then present the empirical arguments in
considerable depth. At points in the chapters, these are related back to
the five positions outlined in Chapter 2, but much of the analysis
focuses in considerable depth on empirical material and analysis
derived from this material. Chapter 3 does this through a discussion of
the rise of the BRICs in particular, relating the debate over their rise to
earlier debates over the rise of the first tier newly industrializing coun-
tries in East Asia (South Korea, Taiwan, Singapore and Hong Kong),
and questions of the developmental state as against market friendly
intervention. This debate is then used to inform the current debate
over state capitalism in the South, and the reason for the rise of the
BRICs. The argument made in the chapter is that the rise of these
emerging powers cannot be explained by the fourth position outlined
in Chapter 2 (a ‘market friendly intervention’ triumph of the West),
and so in this regard – and whatever their differences over the implica-
tions – positions 1 and 3 are more convincing.
However, the chapter also concludes by suggesting that a fully con-
vincing analysis of the rise of these new powers needs to examine the
international political and economic reasons for their emergence, and
this is considered in Chapter 4. This chapter examines the inter-
national factors that facilitated the emergence of these countries, locat-
ing these within the ‘long 1990s’ (Schwartz 2009) from 1992 to 2007.
This chapter clearly shows not only evidence of the growth of these
powers, but also how this led to new configurations in the inter-
national order, such as growing interdependence between the US and
China, which was reflected in US deficits, Chinese purchase of US debt,
and highly lucrative US direct foreign investment overseas (including
in China). At the same time, by the late 1990s/early 2000s, Chinese
development led to increased demand for primary products from the
South, which facilitated growth elsewhere based on high demand and
high commodity prices.
Chapter 5 takes up the story by focusing on the causes and conse-
quences of the financial crisis. While the chapter starts by providing a
relatively straightforward narrative account of the reasons for the crisis,
it then focuses on its international causes, rooting them in the break-
down of the boom years of the 1990s. However, while moving to focus
on the consequences of the crisis, a seeming paradox emerges, which
is that if international factors were so important in facilitating the
6 The BRICs, US ‘Decline’ and Global Transformations

emergence of new powers in the South, then why did these same coun-
tries recover so quickly from the crisis? Indeed, their recovery seem-
ingly strengthens the case for the argument that the South is rising and
the US declining. Through a more detailed examination of the conse-
quences, this argument draws – implicitly at least – on the idea that the
South has decoupled from dependence on the West, and that this
decoupling will increase in years to come. This argument is however
questioned and with it the idea that the continuing rise of the South is
sustainable. An alternative account of Southern recovery is proposed,
which focuses on the success – and limits – of stimulus programmes in
the South, and above all in China, and the impact of this on commod-
ity prices, but also continued dependence of receiving capital from the
West, in part as a consequence of quantitative easing policies.
Chapter 5 concludes by suggesting that (national, international and
global) inequality were significant factors in causing the crisis, and
these issues are addressed in their own right in Chapter 6. Once again,
the argument that we are witnessing a rise of the South is considered in
some detail, though this chapter also notes that the ‘small-print’ in
some of these accounts, such as the OECD (2010a, b) report, Shifting
Wealth, is far more nuanced than is usually suggested. The chapter
then moves on to examine inequality within countries and finally
global inequality. The argument made in this chapter is that for all the
overblown talk of global convergence, those at the bottom end of the
scale are still overwhelmingly concentrated in the South. Moreover, in
focusing on two concrete issues – that of the changing international
division of labour, and that of food – the contradictions and social ten-
sions associated with the rise of the South are examined.
Chapter 7 shifts the focus to a more explicit examination of geopolit-
ical issues. In addressing the history of ‘Third Worldism’, it examines
whether the ‘new South’ is emerging as a major actor in the interna-
tional order. Relating the discussion back to calls for a new interna-
tional economic order (the NIEO) and non-alignment, it is argued that
we are witnessing a return to these debates, albeit in a radically differ-
ent context. In particular the NIEO called, among other things, for
guarantees on commodity prices, which in effect, China’s rise has facil-
itated (for now at least). Non-alignment called for foreign policy inde-
pendent of the superpowers, and the BRICS, among others, have called
into question the promotion of liberal interventionist foreign policies
by western powers, and above all the US. The chapter relates these
issues back to the five positions briefly outlined above and discussed in
more depth in Chapter 2. In doing so it argues again for a perspective
Introduction 7

most influenced by position 5, but one which recognizes the utility of


parts of positions 1 and 3.
Finally, Chapter 8 provides an extended conclusion which puts the
argument in a wider framework. It emphasizes both the reality of the
rise of emerging powers but also their strict limits, and questions US
decline. However it does so not only by summarizing the argument of
the book, but also by putting these arguments in a wider framework. It
does this by first examining and updating theories of development,
and then making these more concrete by examining theories of inno-
vation, and emphasizing their limits in the most ‘advanced’ of the
emerging powers. It then moves back to a consideration of the interna-
tional by engaging with the question of international transformation,
and questioning whether this has taken place.
The book is very much in the tradition of ‘big picture’ academic
work (Tilly 1989), drawing on a number of resources to make the argu-
ment. Given its macro nature, it does not rely on resources such as
interviews, but instead relies heavily on official sources such as trade,
GDP, and investment data, combined with country specific and sec-
ondary material to formulate the argument. Such is the nature of the
data that the book has to rely on existing official material, using this in
a critical and productive way to make an original argument, based on a
‘critical synthesis’ of existing primary and secondary material. Country
specialists are unlikely to find much in the discussion which will aid
their understanding of say, Brazilian national development. What they
might find useful is the way that this development has been located
within an international political economy framework, and how this
can be utilized to explain recent international and national events. Of
course, simply pointing to an IPE framework is not sufficient, as a
(sub)discipline is not the same as a theoretical framework, a conflation
that is sometimes made by some IPE literature (see for instance Payne
2005; Phillips 2005). It should also be stressed that the five positions
outlined above and in the next chapter actually cut across theoretical
traditions – for example, Marxists might identify with positions 2 and
5, and liberal internationalists with 4 and 5, and possibly also 1. What
follows draws on various radical traditions in political economy,
including a non-dogmatic Marxism (Kiely 1995; 2010), alongside work
inspired by (among others) List, Keynes and Polanyi, as well as some
work that draws inspirations from the idea of dependency (Kay 1989).
It also draws on non-orthodox Marxist traditions of geopolitics, which
owes some debt to the work of Kautsky (Panitch and Gindin 2012;
Kiely 2010). At the same time however, the empirical work that follows
8 The BRICs, US ‘Decline’ and Global Transformations

is developed in a constructive dialogue with these theoretical approaches,


and is not intended to fit into pre-conceived theoretical boxes. Indeed,
while there is a good deal of analysis throughout the book, the wider
theoretical approaches are only implicit throughout. Finally, and most
importantly, is the significance of the argument. What is argued in this
book is that the idea that there is a new rising South should be treated
with some scepticism, as should the alleged decline of the West and
the US in particular. This argument is made by considering in depth
the reasons why some have argued that there is a new rising South,
and suggesting why these arguments are flawed, and by presenting an
alternative, and more sceptical account of the limited rise of a new
South. It should be stressed that this argument is analytical, and the
contention that the decline of the US and the West has been exagger-
ated does not imply a simple normative commitment to US or western
hegemony, still less to those neoliberal policies promoted by the West
in recent years.
2
The Rise of the South: Rising
BRICs, Declining US?

This chapter develops further one of the themes of the introduction


and provides a more in depth account of the rise of the South and
related arguments. The first section provides a basic narrative account
about the rise of the South, and of the BRICs, firstly focusing on the
OECD report Shifting Wealth (2010a), and then the work of Jim O’Neill
and other researchers at Goldman Sachs, the investment bank that first
used the term. Other works produced by Goldman Sachs’ rivals will
also be briefly examined. Following on from the discussion in the
introductory chapter, this section mainly focuses on the developmental
rise of the South and the question of transformation through convergence.
The second section then looks at the development of the BRICS (Brazil,
Russia, India, China and South Africa) as a geopolitical actor in the
international system, outlining the development of various themes at a
number of summits since 2008. This section thus focuses on the ques-
tion of transformation through geopolitical change. In both sections, the
treatment of the rise of the South and of the BRICs (or BRICS) will be
quite sketchy, as much of this is developed in a more systematic and
critical fashion in later chapters. The third section outlines various
possible ways of understanding the rise of the BRICs by trying to
situate these arguments within broader perspectives on the inter-
national order, and whether we are witnessing a transformation in that
order. This will involve some consideration of academic work that will
also be addressed in more depth in later chapters, but some initial con-
sideration will be useful for two reasons. First, it will help to situate
more specific debates within wider analytical frameworks. Second, and
perhaps as a starting point for more critical analysis later in the book, it
will be shown that much of the discussion about the rise of the BRICs

9
10 The BRICs, US ‘Decline’ and Global Transformations

is actually really a discussion about one BRIC country, that of China, a


theme that will be revisited in later chapters.

Developmental change and transformation through


convergence

The basic contention concerning convergence is well summarized by


the 2010 Organisation for Economic Cooperation Development
(OECD) report Shifting Wealth:

The new millennium saw the resumption…of a trend towards


strong convergence in per capita income with the high income
countries. The number of…countries doubling the average per
capita growth of the high income OECD countries…more than
quintupled during this period (from 12 to 65), and the number of
poor countries more than halved (from 55 to 25)…Latin America’s
per capita growth rates were the highest since 1965–70…In
Africa…GDP growth for the region averaged 4.4% between 2000
and 2007. (OECD 2010a: 5, 16)

This is indicative of a transformation in the international order, in


which “the world’s economic centre of gravity has moved towards the
east and south, from OECD members to emerging economies…This
realignment of the world economy…represents a structural change of
historical significance.” (OECD 2010a: 15) In other words, we are wit-
nessing a transformation of the international order based on ‘the rise
of the East’, above all India and especially China (OECD 2010a: 37,
44), and this in turn is facilitating the rise of the South as a whole.
The South’s dependence on western markets has eroded and “business
cycles in emerging markets have gradually decoupled from those in
advanced economies, as trade diversification, commodity strength
and, particularly, the emergence of China took over the G7 as the
main global factor behind fluctuations in the emerging world.”
(Yeyati and Williams 2012: 17) This is reflected in the decline in
North-North trade as a proportion of total international trade, the
increase in the proportion of exports originating from the developing
world (from 23% in 1990 to 37% by 2008), and the increase in the
proportion accounted for by South-South trade, which rose from 7.8%
in 1990 to 19% by 2008 (OECD 2010a: 71). For the OECD, and in con-
trast to some perspectives outlined later in the chapter, this rise of the
South is less a threat to the West and more one in which net gains in
The Rise of the South: Rising BRICs, Declining US? 11

the developing world “can benefit both rich and poor countries alike.”
(OECD 2010b: 7)
Central to this story of convergence is the leading role played by a
small number of large developing countries. The financial services
company Goldman Sachs, and more specifically its chief economist Jim
O’Neill (2001), coined the term the BRICs in 2001. His basic argument
is that Brazil, Russia, India and China, and to some extent a number of
other countries, have become more important players in the global
economy. Based on a number of different projections for growth after
2001, it is argued that the BRICs will account for an increasing propor-
tion of global GDP, rising from 8% in 2001 to 14% by 2011, measured
in US dollar terms. When measured in terms of purchasing power
parity, which factors in local purchasing power, the rise is from 23 to
27% over the same ten year period (O’Neill 2001: 6–7). Over the years
that followed, Goldman Sachs’ projections actually became more opti-
mistic, concluding in a 2003 report that “If things go right, in less than
40 years, the BRICs economies together could be larger than the G6 in
US dollar terms.” (Wilson and Purushotaman 2003: 2, 4)
It should be emphasized that these projections are not based on pro-
jecting current growth rates into the future, but rather factor in the fact
that growth is likely to slow down. Thus, “the projections assume that
economies remain on a steady development track, (but) they do not
assume ‘miracle economy’ growth.” (Wilson and Purushotaman 2003:
12) What is assumed is that there are certain conditions for growth
which broadly coincide with the World Bank’s post-Washington con-
sensus, and which thus regard free markets supported by appropriate
institutions as the way in which the BRICs have grown. Conditions for
growth therefore include macro-economic stability (low inflation, price
stability and a low fiscal deficit), appropriate institutions which allow
markets to work, openness to trade and to direct foreign investment,
and good education which promotes the development of a skilled
workforce (Wilson and Purushotaman 2003: 13; O’Neill et al 2005: 10,
14–15).
By 2005, projections were again revised upwards, as countries grew
faster than initial projections had suggested. Between 2000 and 2005
the BRICs contributed 28% of global growth (measured in US dollar
terms) and 55% measured in PPP terms. Over the same period, the
BRICs more or less doubled their share of world trade to 15% of the
global total (O’Neill et al 2005: 4). This final point is a crucial part of
the BRICs story because “what distinguishes the BRICs theme from an
‘emerging markets’ story is that they appear to be a crucial driver of
12 The BRICs, US ‘Decline’ and Global Transformations

markets and investment opportunities outside those countries also.”


(O’Neill et al 2005: 12) This is not just the story of the rise of a small
number of large developing countries, but also of the opportunities
that their rise presents to the developing world as a whole, and indeed
for the developed world as well (O’Neill 2013: 232; World Bank 2011a).
While some way behind, Goldman Sachs identify a ‘next eleven’ (or
N-11) list of countries that are also experiencing significant develop-
ment. These are Bangladesh, Egypt, Indonesia, Iran, South Korea,
Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam (O’Neill et al
2005: 7; O’Neill 2013: 6, 223–5). Most recently, O’Neill added another
acronym, the MINTs to the list of emerging powers, which referred to
Mexico, Indonesia, Nigeria and Turkey (O’Neill 2014; Elliot 2014a and b).
While the global economic crisis of 2007–08 did lead to a sharp slow-
down across the world, what was striking was how quickly and rapidly
recovery took place in the BRICs. Indeed, for Goldman Sachs, the
outcome of the crisis actually reinforced and enhanced the case being
made for the significance of the rise of the BRICs (Goldman Sachs
2009: 1; O’Neill and Stupnytska 2009). Growing domestic demand
within the BRICs could actually lead the global recovery, including for
the advanced economies desperate for export markets in the face of
sluggish demand in their home economies. A new global middle class –
defined as the number of people with incomes greater than $6,000 and
less than $30,000 has grown by hundreds of millions, and these will
lead the world out of the global slowdown (Goldman Sachs 2009;
Goldman Sachs 2010: 1).
Post-crisis projections thus concluded that the BRICs catch-up
with the advanced economies would happen sooner than expected.
By 2009, it was being predicted that China would overtake the US by
2027, rather than the previously thought 2041; Brazil would over-
take Germany by 2029 rather than 2036; Russia would overtake
Japan by 2037 (previously this was not even projected) and India
would overtake Japan by 2027 rather than 2032 (O’Neill and
Stupnytska 2009: 23). In the three years that followed the crisis in
2008, the BRICs contributed over 50% of global growth (Goldman
Sachs 2011: 2).
Not to be outdone by its competitors, Price Waterhouse Coopers iden-
tify an E7 list of emerging economies, which are the BRICs plus Mexico,
Indonesia and Turkey. Projections vary in each report, but the essential
argument is that by 2050, the E7 emerging economies will be around
50% larger than the current G7 (Hawksworth and Cookson 2008: 2).
They also argue that other emerging economies are likely to grow
The Rise of the South: Rising BRICs, Declining US? 13

rapidly, and a PWC 30 is identified, not least for those looking for lucra-
tive investment opportunities (Hawksworth and Cookson 2008: 3).
These projections clearly have some basis in reality. Above all, there
is the emergence of China, which has experienced rapid growth and
emerged as a major international actor in recent years. At market prices
its contribution to global GDP was 1.6% in 1990, but by 2008 it stood
at 7.1% (Nolan 2012: 1). It has the largest amount of foreign exchange
reserves in the world – $3,197 billion in June 2011, more than double
the amount of Japan, the second country (Nolan 2012: 4). Its exports
grew by 14% per annum in the 1990s and by 25% in the 2000s (Nolan
2012: 4), and by 2009 it was the world’s largest exporter (Nolan 2012:
55). It is a major foreign holder of US public debt and in June 2011 it
held $1,170 billion of US Treasury securities, 26% of the total foreign
holdings of US government debt (Nolan 2012: 4).
But as we have seen, it is not simply a story about the rise of China,
and developing countries as a whole have experienced growth in
recent years, on the face of it reversing the disasters of the lost decade
of development of the 1980s (see Table 2.1). In the period from 1986
to 2007, the developing world’s share of debt fell from 80% to below
40% (Beausang 2012: 59). In the period after 1992, there was a massive
boom in foreign investment. The total global amount of direct foreign
investment increased from $59 billion in 1982 to $202 billion in 1990,
$1.2 trillion in 2000, down to $946 billion in 2005, and back up to
$1.3 trillion in 2006 (UNCTAD 2002: 3–5; 2007: 9). For much of this
period foreign investment shares tended to show some degree of con-
centration with the developed world receiving about two-thirds and
the developing world one-third of total foreign investment. Thus, from
1993 to 1998, ‘developed countries’ received 61.2% of world DFI,
developing countries 35.3%, and the former communist European
countries 3.5% (UNCTAD 2002: 3–5). For 1999–2000, foreign invest-
ment inflows to the developed world constituted 80% of total DFI, and
the proportion going to developing countries constituted only 17.9%
of the total (UNCTAD 2002: 5). By 2006, out of a total of $1.3 trillion,
developed countries received $857 billion and developing countries
$379 billion, with transition (former socialist) economies receiving
$69 billion (UNCTAD 2007: 2–3). However, by 2009 developing and
transition (former socialist) economies accounted for almost 50% of
the total global share of foreign investment inflows. By 2012, develop-
ing and transition economies accounted for 52% of global FDI inflows
(UNCTAD 2013a: 2). To some extent this development reflects less a
convergence between developed and developing countries, and more a
14 The BRICs, US ‘Decline’ and Global Transformations

Table 2.1 Annual average real GDP growth rates (sources – UNCTAD
Handbook of Statistics for 1980–2005, IMF World Economic outlook, Jan
2012

1980– 1990– 2000– 2006 2007 2008 2009 2010 2011


90 2000 05

Brazil 2.8 2.9 2.8 3.7 5.7 5.1 –0.2 7.5


China 10.3 10.4 9.6 11.6 13 9 8.7 10.3
India 5.8 6 6.9 9.8 9.3 7.3 7.4 10.4
Russia N.A. –4.7 6.2 7.4 8.1 5.6 –7.9 4.8

significant decline in the amount of foreign investment in recent years.


The 16% global decline in 2008 was followed by a 37% fall in 2009,
which meant that the amount going to developing countries fell, but
fell less sharply than the amount received by developed countries
(UNCTAD 2010a: 2–3). Similarly the increased proportion of FDI
flowing to the developing world in 2012 reflected a total 18% fall in
the amount of FDI compared to 2011 (UNCTAD 2013a: 3). Nonetheless
this still represents a significant change if the proportion and (over a
longer period of time) the amount of FDI going to developing
economies. The BRICS were central to this change in foreign invest-
ment shares, with (in 2009) China the second largest recipient, Russia
sixth, India eighth and Brazil 13th (Beausang 2012: 60). Moreover, the
BRICS (including South Africa) have also emerged as major foreign
investors themselves with outward flows increasing from $7 billion in
2000 (amounting to 1% of total global outflows) to $145 billion in
2012 (10% of total outflows) (UNCTAD 2013a: 5).
Even more significant, on the eve of the 2008 crash, emerging
markets accounted for 75% of foreign exchange reserves. The US had a
current account deficit of 7% of GDP, and so surplus countries became
holders of dollar reserves. China’s investment into the US not only
took the form of the purchase of US Treasury bonds, but also real estate
and equities. Much of this investment was through Chinese state-led
Sovereign Wealth Funds, which are essentially state owned and
managed pools of capital, and are discussed in later chapters.
Clearly then, the story here is an upbeat one in which four develop-
ing countries have emerged as major players in the international eco-
nomic order. Moreover, their rise has presented opportunities for other
developing countries which can benefit from trade and other links
with the BRICs. Goldman Sachs reports do however note some caution,
as “living standards in the BRICs continue to lag far behind the devel-
The Rise of the South: Rising BRICs, Declining US? 15

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

Geopolitical change and transformation

The story of an alleged transformation of the international order is not


however just one about development. Also central to the story is the
idea that we are witnessing a geopolitical transformation in which
leading developing countries give the south a greater voice in the inter-
national order, and thereby challenge western, and specifically US,
hegemony. While the concept of the BRICs was developed by Jim
O’Neill at Goldman Sachs in 2001, the idea became a reality in the
period from 2006–08. Foreign ministers from Brazil, Russia, India and
China first met at a fringe meeting at the United Nations General
Assembly in the autumn of 2006, which was followed by the first
leaders’ meeting at Sapporo on the eve of the G8 Toyako-Hokkaido
Summit in 2008. This was followed by the first full BRICs summit in
Yekaterinburg, Russia, in 2009, and then summits in Brasilia in 2010,
Sanya in China in 2011, and New Delhi in 2012. At the Sanya summit,
South Africa became the newest member so that the BRICs became the
BRICS (Sanya Declaration 2011).
The BRICS act as a kind of international interest group, and possibly
a counter to the G8, a group composed of some of the leading
economies from the ‘advanced’ capitalist world, both through mem-
bership of the G20 major economies and of the G20 developing
economies.1 At each BRICS summit, common themes have emerged
such as the need for “a more democratic and just multi-polar world
order” (Joint Statement 2010) in the context of rapid change in the
international order, which highlights the need for “corresponding
transformations in global governance” (Second BRICS Summit 2010).
Much emphasis has been placed on the need for voting reform within
international institutions such as the World Bank and International
Monetary Fund (Second BRICS Summit 2010; Sanya Declaration 2011;
16 The BRICs, US ‘Decline’ and Global Transformations

Fourth BRICS Summit 2012). Attention is also paid to issues like terror-
ism, the environment and the development gap, and the fact that
“emerging market economies and developing countries have the
potential to play an even larger and active role as engines of economic
growth and prosperity.” (Second BRIC Summit 2010) This is sometimes
situated in the specific context of the global financial crisis of 2007–08,
and the need for changes in the international financial architecture, an
argument that implies some criticism of ‘deregulated’ finance (Joint
Statement 2009). But at the same time, there is strong support for the
World Trade Organization and the call is for “all states to resist all
forms of trade protectionism and fight disguised restrictions on trade.”
(Second BRICS Summit 2010)
The rise of the BRICS as an informal international body is only part
of the story, and there are a number of informal gatherings, summits,
and so on, that could be said to reflect the rise of a ‘new South’ (Alden
et al 2012), asserting itself within the international order. These
include the alliance of G20 developing nations and IBSA, an informal
alliance between India, Brazil and South Africa. These are briefly dis-
cussed in Chapter 7, but what should be clear from this brief outline is
that a more assertive geopolitical voice has emerged alongside substan-
tial economic growth in recent years.

Rising South, declining West?: Competing perspectives

So far this chapter has established that China, other BRICs, and the
South more generally, have grown substantially in recent years. This in
turn has gone hand in hand with the rise of the BRICS as an interna-
tional actor, albeit tentatively. This section provides an introduction to
some different perspectives on the rise of the BRICs, and the not unre-
lated question of US decline. What these perspectives are addressing
are essentially the following questions: (i) is the rise of the BRICS and
the South so significant that we are witnessing a transformation in the
international order?; (ii) is the West, and specifically the US in decline,
and if so is this part of the transformation of the international order?
and (iii) are these changes desirable or a cause for regret?
Five positions will be outlined in what follows. In each case a
number of perspectives will be presented. These are far from uniform
and in some cases the differences between writers will be highlighted.
However, what is more important is the broad arguments made as
these will at least help to inform the more detailed empirical and theo-
retical discussions in the chapters that follow. Thus, if there is a danger
The Rise of the South: Rising BRICs, Declining US? 17

of over-simplification in the presentation in this chapter, this should


be overcome in the more in-depth discussions that will follow. As
already highlighted above, some of the positions outlined largely focus
on the rise of China, and so in some respects are not necessarily
arguing that either the South as a whole, nor all of the BRICs, are rising
and transforming the international order. In particular, some of the
positions outlined focus on what is called the Beijing Consensus,
which may or may not be compatible with arguments which focus
more on the rise of the South. This will be considered further below
and in later chapters.
The five positions outlined are: (i) the Beijing consensus as a cause
for concern; (ii) the rise of emerging powers and the dangers of trans-
formation; (iii) the Beijing consensus as a cause for celebration; (iv) the
rise of the developing world as a triumph for the West and (v) the per-
sistence of US hegemony and the limits of hegemonic challengers.

The Beijing Consensus as a cause for concern


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

China’s true challenge arises in…Beijing’s transformative, leading


role in the rise of a Chinese brand of capitalism and a Chinese con-
ception of the international community, both opposed to and sub-
stantially different from their Western version.
18 The BRICs, US ‘Decline’ and Global Transformations

China’s state capitalism is not only different within China, it acts as a


pole of attraction for other developing countries. For Halper (2010: xx),
“China is exporting something simpler, and indeed more corrosive, to
Western pre-eminence. This is the basic idea of market authoritarian-
ism.” This is a capitalism based on a (controlled) liberal economic
policy, combined with the persistence of authoritarian rule (Halper
2010: 30). This represents a new Southern challenge to western hege-
mony, with China at the helm, and the other BRIC countries also
playing a leading role (Halper 2010: 28). This is a cause for regret
because it undermines Western conceptions of the rule of law, market
freedom and respect for human rights, and gives support for author-
itarian leaders in the developing world such as Robert Mugabe in
Zimbabwe (Halper 2010: 31).
These arguments will be considered in greater depth in later chap-
ters, and while they should not be dismissed out of hand, we should
treat with suspicion someone who makes the statement that “Henry
Kissinger makes the point that we must revitalize the democratic story,
demonstrating to ordinary people in the world beyond the West the
promise of democratic government, transparency, and good manage-
ment.” (Halper 2010: xxi) One need not reject a commitment to liberal
democracy to point out that this would be news to (among others) the
people of Chile, Cambodia and Vietnam (see Hitchens 2002).

The rise of emerging powers and the dangers of transformation


This approach can draw on a number of perspectives, such as Marxism
on the left and realism on the right – the latter case of which overlaps
with the views of Halper outlined above. Marxist approaches owe
something to the classical theories of imperialism that were developed
in the period leading up to the First World War, and especially those of
Bukharin and Lenin. They both argued that imperialism represented a
new stage of capitalism based on the concentration and centralization
of capital, and the merger of banking and industry in the form of
finance capital. Competition between capitals now took place on a
higher level in the form of internationalized state capitalist trusts, so
that states compete aggressively with each other in a new era of inter-
imperialist rivalries (Bukharin 2003: 155–6; Lenin 1977).
The utility of classical Marxist theories of imperialism is a matter of
some considerable debate (Barratt-Brown 1970; Brewer 1990; Kiely
2010), and while many reject a good deal of the details of the classics,
the argument that the international capitalist economy promotes not
only economic competition between capitals, but geopolitical competi-
The Rise of the South: Rising BRICs, Declining US? 19

tion between states, retains some influence. For example, Callinicos


accepts that global interdependence since 1945 partly undermines the
relevance of classical theories of imperialism today, but he retains the
argument that geopolitical competition between states is still a central
feature of the international order. For him, “(t)he combined impact of
continuing slow growth in the core of the system and of a shifting
global distribution of economic power is likely to create significant
centrifugal pressures on the major blocs of capital that, it should never
be forgotten, are in competition with one another.” (Callinicos 2007:
218) As well as specific issues of conflict such as that of the status of
Taiwan, “China’s rise is already destabilizing the existing pattern of
global relationships.” (Callinicos 2007: 219) Although he is careful to
qualify the degree to which China is challenging the US (Callinicos
2007: 219; 2010: 125–6), he still argues that “what classical Marxists
called inter-imperialist rivalries remain a feature of the contemporary
international system, even if the form they take is…not the same as it
was in the first half of the twentieth century.” (Callinicos 2007: 226)
Also writing from a Marxist perspective, the late Peter Gowan (2001:
81) noted “the central fact of contemporary international relations:
one single member…has acquired absolute military dominance over
every other state or combination of states on the entire planet.” He
also suggested that these “US policies are tending to conflict with the
collective interests of major capitalist centres” (Gowan 2002: 22), thus
providing the possibility for competition and conflict between these
same powers.
Writing from a realist perspective, John Mearsheimer (2006: 60)
argues that:

If China continues its impressive economic growth over the next


few decades, the United States and China are likely to engage in an
intense security competition with considerable potential for war.”
As a structural realist, Mearsheimer argues that in the context of
international anarchy, states are principally concerned with their
security and so compete with each other to maximize their share of
world power. Specifically, “China is likely to try to dominate Asia
the way the United States dominates the Western Hemisphere…An
increasingly powerful China is also likely to try to push the United
States out of Asia, much the way the United States pushed the
European great powers out of the Western Hemisphere.”
(Mearsheimer 2006: 162) Mearsheimer argues that this pessimistic
scenario simply reflects the reality of the anarchical international
20 The BRICs, US ‘Decline’ and Global Transformations

system, though interestingly, this is combined with the normative


suggestion that the US should “do what it can to slow the rise of
China. In fact, the structural imperatives of the international
system, which are powerful, will probably force the United States to
abandon its policy of constructive engagement in the near future.
(Mearsheimer 2001: 402)

The neoconservative Arthur Waldron (1997: 48) similarly concluded as


early as 1997 that “sooner or later, if present trends continue, war is
probable in Asia…China today is actively seeking to scare the United
States away from East Asia, rather as Germany sought to frighten
Britain before world War I.” Interestingly, the US National Security
Strategy of 2002 argued along similar lines. It argued that “Our forces
will be strong enough to dissuade potential adversaries from pursuing a
military build-up in hopes of surpassing, or equalling, the power of the
United States”. These potential adversaries were not only China: “We
are attentive to the possible renewal of old patterns of great power
competition. Several great powers are in the midst of internal transi-
tion – most importantly, Russia, India and China.” (National Security
Strategy 2002: 28, 26) Robert Kagan (2012: 98) has also argued that the
autocracies of Russia and China are threats to the international order
and so US primacy must be maintained, based on “a wise and practical
internationalism” combined with “a sound and intense nationalism.”
The former National Security Adviser to President Carter, Zbigniew
Brzezinski has recently argued that US decline is potentially disastrous
for the international order, but that alongside new weaknesses the US
still had sufficient strength to maintain primacy. In particular it should
seek to enhance and extend the Western alliance by bringing Russia
and Turkey into its orbit, while it should be “the balancer and concilia-
tor between the major powers in the East.” (Brzezinski 2012: 185) This
would involve an alliance of sorts with China but also recognition of
the diversity of interests in the East Asian and wider region, which
could be used to limit Chinese power (Brzezinski 2012: 85–6; see also
Luttwak 2012).
These positions cut across different theoretical perspectives, and in
particular realism, neo-conservatism and Marxism. In essence however
the argument is made that the rise of emerging powers and the decline
of the US have gone hand in hand, leading to new dangers in an inter-
national order characterized by anarchy (realism) or competition
between capitalist states in the context of uneven development
(Marxism). In some cases – neo-conservatism and some versions of
The Rise of the South: Rising BRICs, Declining US? 21

realism (and indeed liberal internationalism) – this is linked to a nor-


mative commitment to US primacy, though obviously not in the case
of Marxism.

The Beijing Consensus as a cause for celebration


We have seen that some writers on the political right see the Beijing
Consensus as something of a cause for regret as it undermines the
hegemony of the West. However, the term was originally associated
with the work of Joshua Cooper Ramo (2004), who was far less con-
cerned about China’s rise (Halper 2010: 214). Though the term was
developed separately from the idea of the BRICs, it is interesting to
note that Ramo was, among other things, a senior advisor to Goldman
Sachs when his pamphlet was published in 2004. It should also be
noted that the idea of the Beijing Consensus has been treated with
some scepticism within China itself (Kennedy 2010), and at more or
less the same time that Ramo’s views were published, the Communist
Party Central Committee were actually questioning the development
model in China (Breslin 2011b: 1326). Moreover, there is intense
debate within China between liberals critical of the continued dom-
inant role of the Chinese Communist Party and the Chinese new left
critical of the degree of pro-market reform (Ferchen 2013). It is cer-
tainly the case that too often, western commentators exaggerate the
degree of consensus that exists in China and often conflate the views
of certain leaders with those of all of the Communist Party leadership.
Nonetheless, for Ramo (2004: 11), the Beijing Consensus is based on
“three theorems about how to organise the place of a developing
country in the world”. The first of these is the value of innovation and
the capacity of developing countries to develop and utilize advanced
technology (Ramo 2004: 12). The second of these is the emphasis of
development models on issues of sustainability and equity as well as
that of growth. Third is a “theory of self-determination, one that
stresses using leverage to move big, hegemonic powers that may be
tempted to tread on your toes.” (Ramo 2004: 12) Ramo is essentially
arguing that China represents both an alternative model of develop-
ment for the poorer world, challenging the dominant, US-led and
market friendly Washington Consensus, and that, partly for this
reason, it is a pole of attraction for developing countries, so that
“China’s very emergence is remaking the international order.” (Ramo
2004: 12) Seen in this way, China might be seen as the “biggest ideo-
logical competitor to liberal democratic capitalism since the end of
communism.” (Garton Ash 2008)
22 The BRICs, US ‘Decline’ and Global Transformations

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

Beijing may be on the rise as a new center of gravity in the Third


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

Dirlik then is careful not to suggest that the Beijing consensus or the
China model represents an alternative to US-led neoliberal hegemony.
Rather it is a ‘paradigm for inspiration rather than a model of emula-
tion’ (Dirlik 2011: 135–6). This is partly because China has used the
international economy for its own benefits on the one hand, but
without fully embracing neoliberal policies on the other. This means
The Rise of the South: Rising BRICs, Declining US? 23

that China represents more a countervailing power and less a hege-


monic challenger to the US. The late Giovanni Arrighi more openly
welcomes the rise of China, and is more prepared to regard it as a hege-
monic challenger to the US. Writing from a perspective informed by
world systems theory, Arrighi welcomes the resurgence of China as it
undermines western hegemony and more specifically the US-led hege-
mony which has served to reinforce the subordinate position of most
of the developing world in the international order. The one regional
exception to this subordination has been East Asia, where a labour
intensive and energy saving industrious revolution challenged US
hegemony in the post-war period (Arrighi 2007: 366–8). By the 1970s,
the US faced a ‘signal crisis’ of hegemony, as competitors emerged and
the world economy entered recession. It responded to this crisis by
competing for capital in liberalized financial markets, but this only
delayed the inevitable, for “(a)lthough the response succeeded in reviv-
ing the political and economic fortunes of the United States beyond
the rosiest of expectations of its promoters, it also had the unintended
consequences of aggravating the turbulence of the global political
economy and of making the national wealth and power of the United
States ever more dependent on the savings, capital, and credit of
foreign investors and governments.” (Arrighi 2007: 9) The war on
terror, on-going deficits and (we could add) the financial crisis of
2007–08 has exacerbated the crisis of US hegemony, which is now in
‘terminal crisis’ (Arrighi 2007: 9–10), threatened above all by the rise of
China. China’s rise is thus contrasted to US imperial overstretch and
decline, reflected above all in the twin deficits of the US, and the disas-
trous wars in the 2000s in Afghanistan and Iraq.
This perspective, then, mainly focuses on geopolitics, though it com-
bines this with some analysis of development in that it sees a China
model or Beijing Consensus as a pole of attraction for other developing
countries. In this respect, there is some agreement with Halper’s
version of the Beijing Consensus, but diametrically opposed positions
are taken in terms of the normative implications. These debates are
considered in depth in later chapters, but we should briefly note here
that following Ramo’s initial presentation of the Beijing Consensus, he
suggested that in fact China did suffer from a considerable image
problem and that ‘brand China’ may not have been so successful
(Ramo 2007). These two views, the former reflecting harder economic
power and the latter softer cultural power, may not be incompatible,
but given the centrality of China as a pole of attraction to his initial
formulation, it does at least complicate Ramo’s initial argument. We
24 The BRICs, US ‘Decline’ and Global Transformations

should add however, that while the idea of a Beijing Consensus carried
limited weight within the Chinese leadership, the idea of a Chinese
model did enjoy some influence, particularly in light of the Western
economic crisis and the Chinese recovery after 2008–09 (Paus et al
2009: 17; Breslin 2011b). As should become clear, the usage of terms
like the China model and the Beijing Consensus are used as short-
hands for a (supposed or perceived) state capitalist alternative to
neoliberal capitalism, in what follows, rather than as an endorsement
of the position of Ramo, or indeed Halper.

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


The positions outlined above are mainly concerned with geopolitics:
they focus principally on the question of what are the implications for
the international order of the rise of the BRICs (or more likely, China),
and the decline of the United States? The first and some versions of the
second position are concerned by what they see as a threat from
emerging powers, while the third position welcomes this supposed
threat as it regards US hegemony as undesirable. What all broadly agree
on is that the West, and more specifically the US, is in some respects in
decline, while the South, and more specifically China, is on the rise.
In other words, if we move from geopolitics to international political
economy, then we are witnessing a tale of convergence between the
global North and global South. Seen in this way, this is a cause for cele-
bration even if uncertain geopolitical problems emerge from this phe-
nomenon. The question of what caused this convergence is subject to
debate and some argue, in common with the third position above, that
this is due to policies that break with Western-led market friendly poli-
cies (Arrighi 2007). Others may argue that to some extent this is indeed
true but given the authoritarian nature of China, this is not desirable
and in any case in the long term economic efficiency is best guaran-
teed through free market policies (The Economist 2012).
However, it could be argued that the recent convergence between
the rich and poor world is less a challenge to and more a triumph for
the West, and the market friendly policies advocated by Washington
since the 1980s. The rapid growth and poverty reduction in the devel-
oping world in recent years has happened because poorer countries
have adopted market friendly policies, and liberalized their economies
in terms of investment and trade policies. In other words, “all success-
ful countries have used market signals and international competition
as the fundamental mechanism for resource allocation.” (Harrison and
Sepluveda 2011: 10) Wilson and Purushothaman (2003: 6) argue that
The Rise of the South: Rising BRICs, Declining US? 25

developing countries have two advantages which make convergence


more likely: “Returns on capital are higher and a given investment rate
results in higher growth in the capital stock” and “developing coun-
tries may be able to use technologies available in more developed
countries to ‘catch up’ with developed country techniques.” These
advantages are best secured via the promotion of orthodox, market
friendly reforms, which usually amount to some combination of liber-
alization of trade and investment, secure property rights, privatization,
state reforms and good governance (Wilson and Purushothaman 2003:
13–14; also World Bank 1992; 1993; 1994; 1997).
The World Bank earlier argued that globalization presented many
opportunities for developing countries and that the more globalized
countries – those more open to international trade and the broader
opportunities presented by incorporation into the world economy –
had grown more successfully than less globalized ones (World
Bank 2002: 35–41; Sachs and Warner 1995). The conclusion drawn is
that:

a strong correlation links increased participation in international


trade and investment on the one hand and faster growth on the
other. The developing world can be divided into a ‘globalizing’
group of countries that have seen rapid increases in trade and
foreign investment over the last two decades – well above the rates
for rich countries – and a ‘nonglobalizing’ group that trades even
less of its income today than it did 20 years ago. The aggregate
annual per capita growth rate of the globalizing group accelerated
steadily from one percent in the 1960s to five percent in the 1990s.
During that latter decade, in contrast, rich countries grew at two
percent and nonglobalizers at only one percent. Economists are cau-
tious about drawing conclusions concerning causality, but they
largely agree that openness to foreign trade and investment (along
with complementary reforms) explains the faster growth of the
globalizers. (Dollar and Kraay 2002: 1)

This perspective then suggests less a downbeat story of western decline,


and more one of optimism (The Spectator 2012; O’Neill 2013). This is
because the rise of the South is good news in terms of poverty reduc-
tion, it is the result of policies recommended by western government
and western dominated international institutions, and because the
growth of new economic powerhouses is an opportunity, and not a
threat to the West. Indeed, the BRICS’ self-image of a challenge to
26 The BRICs, US ‘Decline’ and Global Transformations

western hegemony stands in stark contrast to O’Neill’s initial formula-


tion of the term, which was developed in part as a recommendation to
western investors, looking for new, lucrative investment opportunities.
This perspective also informs some geopolitical analyses, such as that
of Thomas Barnett (2009: 1, 4) who suggests that as modern globaliza-
tion can be sourced back to the US, “(t)his is still America’s world”
because the US “isn’t coming to a bad end but a good beginning – our
American system successfully projected upon the world.” The exten-
sion of capitalism throughout the world ultimately owes more to the
US than any other state, and the rise of the likes of Russia and China is
not a threat because “(n)either represents a systemic threat, because
each supports globalization’s advance, and so regards the world’s
dangers much as we do.” (Barnett 2009: 231) This view crosses over
into the final one, which argues that US hegemony persists in the
international order.

The persistence of US hegemony and the limits of hegemonic


challengers
Not all realists believe that US primacy is under threat. Indeed, Brooks
and Wohlforth (2008: 217) believe that the US is so powerful that it
can promote ‘systemic activism.’ By this they mean that, “the United
States can push hard and even unilaterally for revisions to the interna-
tional system without sparking counterbalancing, risking the erosion
of its ability to cooperate within international systems, jeopardizing
the gains of globalization, or undermining the overall legitimacy of its
role.” What this essentially means is that the US is so powerful that it
makes no sense for any rising power to challenge it, and instead states
such as China are more likely to adopt a policy of cooperating with it,
albeit selectively. What this means is that they consciously choose to
embrace, the US-led international order, in order to share in the gains
of that order, and thus avoid a confrontation with a stronger power.
This ‘defensive realist’ approach suggests that China’s rise might be
exaggerated, or at least it is not so significant that it can present a real
threat to US hegemony on the foreseeable future (see also Chan 2008;
Art 2010).
The argument of Brooks and Wohlforth goes very much against the
grain of the rising South thesis. It also usefully reminds us of the con-
tinued centrality of US power in the international order. Where it is
less convincing is in its tendency towards a one dimensional view of
hegemonic power, drawing on classical realist themes of state security,
international anarchy and the balance of power. What is particularly
The Rise of the South: Rising BRICs, Declining US? 27

missing from their account, convincing though it may be in other


respects, is its lack of attention to the specifics of US power in the inter-
national order, which is a major theme in the argument that follows.
Like Brooks and Wohlforth, some liberals suggest that China’s rise
will not inevitably provoke conflict in a changing international order
and that US hegemonic decline – and by implication, China’s rise – has
been exaggerated (Ikenberry 2008). But unlike them, these liberals also
suggest that the reason for this is in part because of the specific nature
of American power and of the international order that it leads (see also
Mabee 2013). In the words of Ikenberry (2008: 24):

The rise of China does not have to trigger a wrenching hegemonic


transition. The US-Chinese power transition can be very different
from those of the past because China faces an international order
that is fundamentally different from those that past rising states
confronted. China does not just face the United States; it faces a
Western-centred system that is open, integrated and rule-based,
with wide and deep political foundations.

What is crucial for Ikenberry is the nature of the liberal international


order. This is a rules based order, based on multilateral governance and
interdependence. This open, transparent order, allows rising powers to
work within that order, rather than against it (Ikenberry 2008: 32) and
this is precisely what China is doing. We can see evidence of this inter-
dependence which in turn has facilitated cooperation between the
United States and China. For example, China is a permanent member
of the United Nations Security Council, and in 2001 it joined the
World Trade Organization. China has liberalized in terms of its trade
and investment policies, and as a result increasingly trades with the
US, and indeed is a major recipient of US direct foreign investment.
Furthermore, while there may be tensions over currency values and the
US’ trade deficit with China, it is the latter which plays a significant
role in financing both the US trade and budget deficits, through for
instance buying up US debt through the purchase of US Treasury
bonds.
This does mean a more economically multipolar world, but not one
in which the rise of one power automatically means the decline of
another. Liberals argue that a liberal international order can facilitate
positive sum games in which new powers emerge but not necessarily at
the expense of existing hegemonic ones. While recognizing the
significance of China’s rise, Nye (2011: 202) argues that “among the
28 The BRICs, US ‘Decline’ and Global Transformations

range of possible futures, the more likely are ones in which China gives
the United States a run for its money but does not surpass it in overall
power in the first half of this century.”
Writing from a Marxist perspective, Panitch and Gindin (2012) share
this view that US hegemony is not in decline. Unlike other Marxists,
they make this argument by focusing on the specificities of US imperial
power, in contrast to older European imperialisms (see also Mabee
2013). They argue that the US state plays a leading role in regulating
the international capitalist order, and other states have increasingly
internationalized through liberalization, investment rules, WTO mem-
bership and so on. In their words, “it was the immense strength of US
capitalism which made globalization possible, and what continued to
make the American state distinctive was its vital role in managing and
superintending capitalism on a worldwide plane.” (Panitch and Gindin
2012: 1) They accept that in some regards the world is economically
multipolar but also emphasize the continued lead role played by the
US in the most dynamic sectors of the international economy, as well
as the privileged role of its national currency as it is simultaneously the
main international reserve currency. US deficits do not alone necessar-
ily equate to decline as other countries are willing to finance these
deficits, and US capital still plays a leading role in the internationaliza-
tion of capital, not least in terms of investment in China. The military
power of the US is neither necessary nor sufficient to discipline other
capitalist powers, all of whom have a collective interest in promoting
the internationalization of capital, and all of whom benefit (albeit
unequally) from the US state leading the regulation of this process
(Bromley 2008: 71–81). Above all, while there may be areas of disagree-
ment between capitalist states, the leading states still look to the US to
lead the regulation of the international capitalist order. This point is as
true after the financial crisis of 2007–08 as it was before, as the role of
the dollar strengthened and international agreements in 2008 and
2009 demonstrated the leading role of the US state in coordinating
other capitalist states to manage a way out of the immediate crisis
(Panitch and Gindin 2012: 318–30). Of course whether or not the US
state, alongside other states, has the capacity to find a longer term way
out of the economic impasse is open to question, but a crisis of global
capitalism should not be conflated with a crisis of US hegemony.
While noting important differences between them, what these three
(realist, liberal internationalist and Marxist) positions share analytically
is the view that the West and specifically the US is not in decline. They
would not necessarily agree on the reasons why new powers have
The Rise of the South: Rising BRICs, Declining US? 29

emerged in the international order, with liberal internationalists closer


to the arguments of position 4 and suggesting liberal policies were
central to their emergence, while Marxists might question the efficacy
of these policies. There is also sharp disagreement over the normative
implications of continued US hegemony, and of the expansion of capi-
talism within the international order, though even the Marxist argu-
ment would accept that as capitalism is more historically progressive
than other modes of production, its expansion is not necessarily an
unwelcome development (Warren 1980). The most obvious disagree-
ment between the positions is that in terms of political economy,
Marxists would focus on capitalism as a system of class relations,
whereas liberal internationalists welcome the expansion of capitalism
as it provides a useful ‘breeding ground’ for the extension of liberal
democracy (compare Hardt and Negri 2000; Bromley 2008; Held et al
1999 and Ikenberry 2012). However, some approaches influenced by
Marx suggest that the uneven and unequal expansion of capitalism
brings with it new structured hierarchies which cannot be reduced to
the capital-labour relation, an argument to which we return through-
out the book (Kiely 2012, 2014). For now though we should stress that
whatever their wider disagreements, the three approaches outlined in
this sub-section all agree that these new powers are less challengers to,
rather than states within, a liberal international order.
These then are the five positions that will be considered in the chap-
ters that follow. At times that consideration will be implicit, and there
will be a lot of attention paid to the empirical arguments about the rise
of the South. It also needs to be stressed that these positions are not
necessarily mutually exclusive, and there are some positions that do
not fit easily into the categories outlined above. For instance Fareed
Zakaria’s (2008) argument concerning a ‘post-American’ world con-
tains elements of a number of positions outlined above. This includes
the argument that ‘the Rest’ is on the rise and that in some respects the
US is in decline, but also recognition that this rise is in part due to
market friendly policies but also that these policies were not simply
based on a full-scale adoption of the Washington consensus. The rise is
also regarded as presenting both opportunities and dangers for the
Western world. Perhaps most crucially, he argues that the question of
the future of US hegemony will ultimately be decided by how the US
accommodates itself to the rise of ‘the Rest’. This is an argument made
by a number of writers outlined above, and by the National
Intelligence Council (NIC) (2008) in its assessment of the future of US
power. As should be clear from some of the analyses briefly outlined
30 The BRICs, US ‘Decline’ and Global Transformations

above, some of it is committed to US primacy and much of the differ-


ence is about how the US should respond to rising powers in order to
maintain its hegemony. The work of Charles Kupchan is interesting in
this regard, for he suggests that the rise of emerging powers is
inevitable and so the West needs to adjust to an interdependent world.
In doing so the West needs to recognize that there are various paths to
modernization and that the US could not dictate a liberal democratic
path as the only one that could be supported. This does not necessarily
mean giving up on US hegemony so much as transforming it, and
living with difference in the international order. But this can also
mean continued US primacy provided it is used more judiciously
(Kupchan 2012: 203).
These analyses are briefly discussed here to highlight the danger of
assuming that the five positions outlined above are mutually exclusive.
As was stated in the opening chapter, the five positions outlined in the
book actually cut across theoretical frameworks, but they are deployed
to aid understanding and explanation. In particular they are employed
to understand the extent to which the South has emerged as a major
player in international politics, and the degree to which the US has
declined. This is a slightly different focus from international relations
which focuses on questions of strategy. Though such questions are not
ignored, and are a particular focus of Chapter 7, the main approach of
this book is not to focus on how the US should (strategically) respond
to the rise of emerging powers of the South, but more one of consider-
ing the extent to which these have risen in the first place. Thus in
questioning for example the view that China is a hegemonic chal-
lenger to the US in the same way that, say, Germany was a hegemonic
challenger before 1914, the book’s principal focus is on the differences
in terms of political economy rather than security, though some refer-
ence will be made to the latter.2

Conclusions: Issues for further consideration

This chapter has provided a broad overview of the debate about the
rise of the South in recent years, examining in particular the develop-
ment of the BRICs, both as a subject of interest to a major investment
bank and as a new international actor. What was shown in considering
the views put forward by various researchers at Goldman Sachs is that
it is not just the BRICs per se which are important, but also how these
are indicative of a wider shift in the international order. The emer-
gence of the BRICS as an international actor may be indicative of this
The Rise of the South: Rising BRICs, Declining US? 31

wider shift, as they may act as a wider pool of attraction for other
countries in the Global South. In other words, and as has been stressed
in this and the last chapter, the story of transformation of the interna-
tional order is also a story of growing convergence in that order.
Having said that, as the discussion that followed implied, when dis-
cussing the rise of the Global South and even of the BRICs, it is clear
that often what is being discussed is the significance of the rise of
China, and whether this is leading to a transformation of the interna-
tional order. This in turn is also a question about the extent to which
China is catching up with richer countries, and what geopolitical
implications follow from the answer to this question. We should at
this point note some caution about China’s rise, which is not necessar-
ily the same thing as the rise of the BRICs or indeed the rise of the
South. This is discussed in depth in the chapters that follow, but we
can highlight one example here. As we saw above, Mearsheimer sees
China’s rise a threat to US hegemony as much as any writers discussed
above. But he does not see this as indicative of a wider rise of the BRICs
or the South, and even suggests that “(m)ost of China’s neighbors –
including India, Japan, Singapore, South Korea, Russia and Vietnam –
will join the United States to contain China’s power.” (Mearsheimer
2006: 160) Though sharing in many respects Mearsheimer’s concerns
about the rise of China, Halper (2010: 28–9), on the other, does see its
rise as possibly part of a wider, BRIC-led transformation. This is but
one example which does not conflate China’s rise with the rise of the
South, and sees the interests of the BRICs – in this case Russia and
India – as conflicting with that of China. We return to these issues in
later chapters, but we can note here that much of the talk of a rising
South is in reality a discussion about the rise of China.
The chapter then examined five positions on these transformations,
showing how these at times cut across different perspectives on inter-
national order and international development. The rest of the book
will consider these positions in more depth, through more detailed
empirical analysis and theoretical reflection. Chapters 3 and 4 start
from a discussion of the fourth position (above); that is, the question
of how emerging powers have successfully developed. Have they done
so through market friendly policies compatible with the Western dom-
inated international order, or have they done so through state capital-
ist policies that challenge that order, whether for good (position 3) or
ill (position 1)? Or even if the policies adopted were not as market
friendly as is commonly supposed, does this in itself constitute a chal-
lenge to the liberal international order? This is explored in Chapter 4
32 The BRICs, US ‘Decline’ and Global Transformations

which further examines the rise of emerging powers, but more


specifically in the context of conditions in the international economy
before the onset of the financial crisis. Are these conditions easily repli-
cated and if they are not then how serious is the challenge from emer-
ging powers (position 5)? Chapter 5 further develops the arguments of
previous chapters by focusing more specifically on the global economic
crisis, relating this to the question of US decline and of the role of the
emerging powers in both the causes and consequences of the crisis.
This will again involve analysis of all five positions outlined above.
One of the arguments made in Chapter 5 will be that inequality was a
central component of the crisis, and this demands wider consideration.
Chapter 6 will therefore discuss inequality as a central problem for the
BRICs and the South more generally and how this may undermine
their rise in the future. Again relating this back to the boom period dis-
cussed in Chapter 4, some brief comparison will be made with the US,
and the question of US absolute decline (as opposed to decline relative
to other powers) will also be considered. While some parallels can be
made between inequality and poverty in the US and in the South, it
will be argued that it is still far more acute in the latter, where per
capita income is so much lower. Inequality also manifests itself in the
global food crisis, where prices have meant that many basic foodstuffs
are out of the reach of consumers in the developing world and this too
will be considered in the Chapter. Chapter 7 then shifts the focus more
to geopolitics and asks whether the BRICs represent a new pole of
attraction for the rest of the south, and what normative implications
might follow (positions 1 and 3). It does so by examining in more
detail the argument that the BRICs might represent a ‘new Bandung’,
for post-colonial, global times. This will involve some consideration of
the history of ‘third worldism’, of recent changes in global governance
and debates over liberal intervention, and of the possibilities of an
internationalized Beijing Consensus (positions 3 and 5). Equally
however, it will show how even if the BRICS do represent a new
Bandung (a questionable argument), like the Non-aligned Movement
before it this should be seen less as evidence of a global transformation,
and simply one of the development of a new or revived actor in the
international order. Finally, Chapter 8 will bring together the argu-
ments of the previous chapters, and add some further detailed consid-
eration of the questions of innovation and development, to conclude.
3
The BRICs, State Capitalism and
Globalization: Challenge to or
Triumph of the West?

This chapter examines the rise of the South, and more specifically the
larger BRIC countries, by focusing on the development policies which
facilitated their rise. It particularly focuses on the question of states
and markets and their respective roles in the rise of the BRICs, and
what lessons this might have for the South as a whole. The chapter
starts by examining the argument that the rise of various parts of the
South is less a challenge to, and more a triumph of, the West, and
specifically the market friendly policies recommended by international
institutions like the World Bank, International Monetary Fund (IMF)
and the World Trade Organization (WTO). This is done through an
assessment of the case made for ‘neo-liberal’, ‘globalization friendly’
policies in the last thirty years. This section suggests some reasons why
this case is problematic, which leads on to the second section, which
examines the argument that the rise of the BRICs represents both a
developmental and geopolitical challenge to the West. This is because
of the rise of a state capitalist, Beijing-led alternative to the
Washington Consensus. The third section examines this case in more
depth, through an investigation of development in Brazil, Russia, India
and China, particularly focusing on the role of the state and the
market in these countries in recent years. It also asks whether we can
talk of a BRIC ‘variety of capitalism’ that challenges the market friendly
policies advocated by the dominant international institutions. The
fourth and final section provides a critical assessment of the discussion
by focusing on the state versus market debate, and of the related ques-
tion of neoliberalism. The argument made here is that the issue is less
one of state versus market, and more one of different forms of inter-
vention. However, as a prelude to the next chapter, it is also argued

33
34 The BRICs, US ‘Decline’ and Global Transformations

that we also need to look at how different ‘national capitalisms’ inter-


act with the international economy.

Triumph of the West? The South and the opportunities of


globalization

While much of the literature on the BRICs/BRICS tends to see them as


geopolitical challengers to the West, another interpretation suggests
that, in terms of development at least, they actually represent a
triumph for the West. This is because their rise has been the product of
market friendly policies like those advocated by the World Bank and
IMF since the 1980s. In 1982, Latin America experienced a debt crisis
in that, faced with higher interest rates, a number of states (and private
sectors within those countries – see Diaz-Alejandro 1985) found that
they could not meet their debt obligations. International banks had
loaned money to southern countries in the 1970s at low rates of inter-
est, but the US under Carter and then Reagan had increased interest
rates. Mexico defaulted on its foreign debt in 1982, and Brazil looked
likely to follow, thus causing a panic on the part of international
lenders and the drying up of new sources of credit (see Brett 1985). It
made sense for each individual bank to stop lending as each was
unsure that it would receive the interest, let alone the principal, on its
loans. Moreover, if one individual bank loaned any more money to an
indebted country, this might help that country to continue to meet its
debt obligations, but there was no guarantee that any other bank
would do the same thing. From a wider perspective however, if no
individual bank would lend money, then this threatened to undermine
all of the banks. This collective action problem thus needed to be
resolved in such a way that loans continued to flow to indebted coun-
tries, but in such a way that there was some kind of guarantee that
these countries could meet their debt obligations.
The IMF played this role by lending to indebted countries, or by
giving approval to policy packages so that other institutions might
lend, though this latter policy met with limited success in the case of
private financial institutions and new commercial bank lending to
heavily indebted countries fell from $19 billion in 1983 to $6.7 billion
in 1986 (Corbridge 1993: 53). What was particularly important was
that this period saw a significant change in the development policies
that occurred in the South. The argument was made that, with the
exception of some countries in East Asia, the South faced severe eco-
nomic difficulties by the early 1980s because of poor economic policies
The BRICs, State Capitalism and Globalization 35

(World Bank 1981). In particular, there had been too much govern-
ment intervention in these economies, which had led to a number of
negative effects. The policy of import substitution industrialization
(ISI) was particularly targeted. ISI advocated the development of indus-
try (initially) serving the home market in order to replace, or to substi-
tute for, dependence on the import of manufactured goods. This
involved the utilization of protectionist policies such as the use of
tariffs, import quotas and subsidies. For critics, this was an ineffective
policy as it led to neglect of traditional export earners, such as agricul-
ture and other primary goods, the development of high cost,
inefficient industries insulated from competition, and the development
of state regulations which encouraged corruption, hindered initiative,
and crowded out the private sector (Lal 1983). It was therefore unsur-
prising that by 1982, many developing countries – and not just those
in Latin America – faced severe balance of payments problems and
were unable to meet their interest payment obligations.
What was needed then was some form of ‘conditionality’ which
ensured that in the short-term, indebted countries could generate
current account surpluses and therefore meet interest payment obliga-
tions, and in the long term, these countries could promote more sus-
tainable growth and development. In practice, conditions varied and
were subject to intense negotiations, but the IMF stabilization policies
and World Bank structural adjustment loans did have a certain family
resemblance (Toye 1994). Some countries, like Brazil and Mexico, did
move from deficits to surpluses very quickly, though this was largely
achieved by cuts to imports and (to some extent) cuts on government
expenditure. For critics of both left (Bienefeld 2000) and right (Buiter
and Srinivasan 1987; Bauer 1991), this was less a market friendly solu-
tion to the crisis, and more one in which the IMF played a regulatory
role that ensured creditors as well as debtors were bailed out rather
than be subject to market discipline (and therefore be left to go
bankrupt).
However, this was also the period which saw a gradual turn to more
market friendly policies, albeit through the interventionism of
Southern states alongside the conditionality of the World Bank and
IMF. For what was increasingly taking place were policies that disman-
tled the ISI policies that had dominated what was then known as the
Third World from the 1950s onwards. The new policy mantra was – in
theory at least – one in which states should be ‘rolled back’ and protec-
tionism replaced by privatization, liberalization and deregulation. This
in effect meant privatizing state owned enterprises, making economic
36 The BRICs, US ‘Decline’ and Global Transformations

sectors subject to competition through trade liberalization (the reduc-


tion of tariffs, import controls and subsidies), and reforming the public
sector to make sure that this operated in ways that were more market
friendly (through league tables, internal competition, contracting out,
and so on).
The short-term results of these policies were disappointing as even
the IMF admitted (IMF 1989). Indeed, the 1980s was a lost decade of
development for much of the South (UNDP 1999). However,
significant changes did occur in the early 1990s, as the World Bank
(1989, 1992) encouraged institutional reforms and ‘good governance’,
which meant transparent, open and accountable government, and a
commitment to the rule of law (World Bank 1994). But more
significant, optimism in the 1990s replaced the pessimism of the 1980s
as a new foreign investment boom occurred, which incorporated at
least parts of the developing world. From 1990–94, $524 billion in
capital flowed into the South, an annual average of $105 billion, which
was three times the annual average in the years preceding the debt
crisis (1977–82), and twelve times the 1983–89 average (Henwood
1997: 14).
This optimism led to the World Bank replicating earlier arguments
that what was needed was market friendly policies in which prices were
set by the laws of supply and demand rather than by distorting govern-
ment activity, and countries adopted outward oriented policies rather
than the inward orientation of ISI (World Bank 1983). It was on these
grounds that some concluded that the East Asian miracle associated
with the first tier newly industrializing countries, or NICS (South
Korea, Taiwan, Hong Kong and Singapore) “was achieved not by eco-
nomic tricks, but by sensible policies based on sound neo-classical eco-
nomic principles.” (Tsiang and Wu 1985: 329) This view was later
modified and it was accepted there was some significant degree of
intervention in the market in these NICs, especially South Korea and
Taiwan, though it was also argued that this intervention was either
ineffective or that it in effect simulated a free market (Berger 1979: 64;
World Bank 1991, 1993: 325). In other words, intervention was market
friendly. We return to a consideration of this idea in the second and
fourth sections of this chapter, but we should note immediately that
the market friendly discourse was also abandoned when South Korea
suffered a major recession following the Asian financial crisis of
1997–98 (IMF 1998).
The wider optimism concerning the growth of the South was
perhaps most clear in the World Bank’s 2002 report, Globalization,
The BRICs, State Capitalism and Globalization 37

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

The more globalized developing countries have increased their per


capita growth rate from 1% in the 1960s, to 3% in the 1970s, 4% in
the 1980s, and 5% in the 1990s. Their growth rates now substan-
tially exceed those of the rich countries: they are catching up just as
during earlier waves of globalization there was convergence among
OECD countries… (World Bank 2002: 5)

While careful not to assign causality to what was identified as a strong


correlation between participation in world trade and investment and
growth (World Bank 2002: 12, 36; Dollar and Kraay 2002: 4), the report
distinguishes between 24 ‘more globalised’ and 49 ‘less globalised’
countries and concludes that the former countries saw significant
advances in economic growth and poverty reduction in comparison
with the latter (World Bank 2002: 35–6). Dollar and Kraay thus con-
cluded that “The accelerated growth rates of globalizing countries such
as China, India and Vietnam are consistent with cross-country compar-
isons that find openness going hand in hand with faster growth.”
(Dollar and Kraay 2002: 4)

The IMF (1997: 72) similarly argued that:

Countries that align themselves with the forces of globalization and


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

For advocates of open policies, industrialization can occur through


open investment policies which allow foreign (or national) companies
to take advantage of low labour costs, and this promotes properly com-
petitive industrialization rather than the high cost, white elephant
approach associated with ISI. In the long run, competitive industrializa-
tion will lead to full employment, which in turn will lead to upgrading
38 The BRICs, US ‘Decline’ and Global Transformations

to a more developed kind of manufacturing, as occurred in the case of


the earlier developers (World Bank 2000: 1).
Given that Globalization, Growth and Poverty was published in early
2002, and that China and India was so central to its story, it can be
seen in some respects as complementing the arguments developed at
Goldman Sachs about the BRICs in 2001. Wilson and Purushothaman
(2003: 13) similarly argue that openness, alongside macroeconomic
stability, institutional capacity and education, were central to the
growth of the BRICs. Buiter and Rahbari (2011: 4) argue that beyond
just the BRICs, there are a number of other countries1 which “have
opened up to international trade and foreign direct investment, have
adopted some kind of market economy and have reached the
minimum threshold level of institutional quality and political stability
that enables them to launch themselves on a path of rapid conver-
gence and catch up growth.” While the Commission on Growth and
Development is careful not to dismiss the role of government, it still
talks of a renaissance in the world economy in which “(g)lobalization
has...proceeded apace, aided by legislation (the lowering of tariffs and
quotas and the relaxation of capital controls) and innovation.”
(Commission on Growth and Development 2008: 18)
What we see then is an on-going narrative stretching back to the
early 1980s at least (World Bank 1983) in which the more market
friendly countries grow fastest, and begin to converge with the already
rich countries. This narrative has been modified in the face of certain
challenges, such as the reality of state intervention in the first tier East
Asian NICs, the Asian financial crisis, and a policy shift towards
emphasizing institutional change as well as market friendly policies.
But the story is one of limited or market friendly intervention and
outward orientation leading to the growth of the South, to emerging
markets, and indeed, in the context of the BRICs, the rise of emerging
powers.
We should however note some problems with this narrative. We
have already suggested that the East Asian NICs were far more inter-
ventionist than this narrative implies, and indeed we will see that this
intervention was far from market friendly. But for the moment, let us
return to the 2002 report and the work of Dollar and Kraay. Central to
this work is a comparison of changes in trade/GDP ratios between 1977
and 1997. The problem with this argument is that trade/GDP ratios tell
us less about trade policy than they do about trade outcomes. It is per-
fectly possible to have a high trade/GDP ratio and have protectionist
policies, as a high proportion of goods produced may be exported.
Moreover, even if trade/GDP ratios did tell us something about
The BRICs, State Capitalism and Globalization 39

changes in trade policy, using the changes in trade/GDP ratios is useless,


as it is perfectly feasible for a country to have low but increasing ratios
between 1977 and 1997, while another has high but constant ratios
between these years. For the Bank report, the former is the more glob-
alized and the latter less globalized. Indeed, if we look at the amount
rather than the change, the trade/GDP ratio for the least developed
countries in 1997–98 was not appreciably lower than the world’s
average, but the share of these LDCs in world trade fell by 47% from
1980 to 1999 (UNCTAD 2002: 103). If we look at average tariff rates (a
flawed but better measure of openness than trade/GDP ratios), then the
Bank’s own data suggests that the supposedly high globalizers had
higher average tariffs (35% in 1997) than low globalizers (20%)
(Sumner 2004: 1174). In an analysis of 46 of the least developed coun-
tries, UNCTAD (2004: 16–17) found that in 2002, average tariff rates
were less than 25% for 42 of these countries, and less than 20% for 36
of them. This is hardly a story of closed economies failing to integrate
and embrace the opportunities afforded by globalization.
In terms of the BRICs, and especially India and China, they are a
central part of the World Bank’s story, for the distinction between high
and low globalizers is weighted according to population, and these two
account for a significant proportion of those assessed in the 2002
report. This weighting is highly controversial as there is no good
reason why a single government should count for more in such an
exercise (Milanovic 2003: 674). Moreover, there are serious questions
about whether they can really be counted as more globalized than
other countries. It is true that tariff reductions and investment liberal-
ization have taken place, and average tariff rates in India fell from 91%
in the 1980s to 50.5% in the 1990s, and China’s rates fell from 42.4%
to 31.2% in the same period (Rodrik 2000: table 1). However, while
this represented a significant change, they were still higher than the
average for the South (Rodrik 2000), subsidies and high tariffs in
selected industries persisted, and capital controls were maintained.
This suggests that the state may have been, and continues to be, more
significant than the market friendly perspective suggests. We now turn
to look at the argument that in fact the story is one of state capitalism
rather than market friendly intervention.

Challenge to the West?: State capitalism, the China model


and the Beijing Consensus

This section examines a very different understanding of the BRICs, and


to some extent of development policy in the last thirty years. It starts
40 The BRICs, US ‘Decline’ and Global Transformations

by outlining some popular accounts of what is sometimes seen, for


good or ill, as a state capitalist to the market friendly policies of the
neoliberal, so-called Washington Consensus (Williamson 1990). It then
relates these issues to the argument that we have a variety of capi-
talisms in the international order (Hall and Soskice 2001), which in
turn is related to earlier debates around the developmental state and its
role in the East Asian miracle (White 1988).
The state capitalism thesis is a fairly simple one. While there are dif-
ferent normative views as to the desirability or not of the state capital-
ist alternative,2 analytically there is common agreement that the
growth of the South and the emerging powers in particular, has less to
do with the market friendly policies discussed above, and more to do
with a state capitalism which actually challenges those policies. Ian
Bremmer (2010: 55) has argued that an “era of state capitalism has
dawned, the natural by-product of a global economy which will
increasingly depend for most of its growth on China, the Persian Gulf
states, and other emerging market economies…” The Economist (2012:
3; also Bremmer 2010) similarly argues that state capitalism “tries to
meld the powers of the state with the powers of capitalism. It depends
on the government to pick winners and promote economic growth.
But it also uses capitalist tools such as listing state-owned companies
on the stock market and embracing globalisation.”
This story of state capitalism is sometimes associated with the Beijing
Consensus. As we saw in the last chapter, Ramo (2004: 4) broadly wel-
comes this development as he sees it as an alternative to the failed
Washington Consensus. Halper (2010: 122) is far more hostile to the
rise of the Beijing Consensus, and in some respects his work is more a
call to arms for a more aggressive US policy towards China than a rig-
orous analysis of China’s rise. Both Ramo and Halper are also guilty of
exaggerating the degree of consensus among Chinese policy makers
within the Chinese Communist Party (Ferchen 2013). Nevertheless, the
analysis of state capitalism is to some extent useful and deserves
serious consideration. Halper is less critical of the Washington
Consensus than Ramo, but he agrees that in some respects the Beijing
Consensus has emerged as an alternative to the Washington
Consensus and the latter’s “one size fits all” policy (Halper 2010: 61).
He does not regard the Washington Consensus as anything like a com-
plete failure, but does argue that the implementation of policies associ-
ated with it was too insensitive to local contexts. Quite what
constitutes the Washington Consensus is an open question, and the
person that first used the term believes that it has been caricatured by
The BRICs, State Capitalism and Globalization 41

critics of, and apologists for, neoliberalism (Williamson 2008). In its ori-
ginal formulation, Williamson (1990) used it to refer to fiscal discipline,
a reduction in public subsidies, tax reform, market determined interest
rates, competitive exchange rates, trade liberalization, the free flow of
foreign direct investment, privatization, deregulation and the legal pro-
tection of property rights. Some of these are open to interpretation, both
in how they are to be achieved and the mechanics of their implementa-
tion. Even a relatively straightforward policy such as trade liberalization
could find broad support among say, neoliberals (Dollar and Kraay 2001)
and neo-Keynesians (Krugman 1986), but there might be substantial dis-
agreement about the timetable for such a policy. Moreover, China’s
development model has broadly conformed to at least some of the ten
policy requirements identified by Williamson, even if there are also
significant (and decisive) differences (Kennedy 2010).
Essentially however, and regardless of Williamson’s original formula-
tion, what the debate is about is that of the market friendly policies
associated with neoliberalism, against the state capitalist policies asso-
ciated with the (so-called) Beijing Consensus. Halper (2010: 121) argues
that “(t)he marriage of free politics and free economies is being
replaced by governments determined to reassert control over their
economies, enhancing both their autocratic base and their global
influence.” State capitalism is not confined to the BRIC countries and
is attractive to a number of countries. Halper’s ‘list of shame’ includes
Indonesia, Vietnam, Nigeria, Turkey, Saudi Arabia, Pakistan, Venezuela,
Brazil, South Africa, Ukraine and Egypt. Moreover, state capitalism is
common in countries with significant oil supplies, and the thirteen
largest oil companies are state owned. But other sectors “are no longer
content with merely regulating the market. Instead they use state-
owned or national champion industries to bolster their political posi-
tion domestically.” (Halper 2010: 122) Such sectors include
petrochemicals, mining, iron and steel, weapons, heavy machinery and
telecommunications (Bremmer 2010: 55–6). Moreover, governments
have built up large reserves of currency, and channelled these into
state-owned investment funds, known as Sovereign Wealth Funds.
These funds are “being channelled into global markets in ways that
reaffirm the role of governments over markets.” (Halper 2010: 125–6)
As Halper (2010: 126) points out, some of these funds were used to
bail-out troubled financial institutions such as Citigroup and Merrill
Lynch in the financial crisis in 2007–08.
While China has in many respects liberalized and privatized, and in
the process become a major recipient of foreign investment, it also has
42 The BRICs, US ‘Decline’ and Global Transformations

a great deal of state-owned and directed large, strategic sectors, such as


steel, aluminium, energy, transport, communications and banking
(Halper 2010: 124). As Bremmer (2008: 59) states:

Beijing has substantially liberalised the Chinese economy over the


past two decades, with private firms now accounting for more than
60% of ‘Communist’ China’s gross domestic product. But while the
state sector has grown considerably smaller, Beijing’s strategic deci-
sion to build and subsidise large, technologically advanced and
internationally competitive state-owned enterprises in key eco-
nomic sectors and to send them abroad in search of long-term sup-
plies of precious commodities has had a profound effect on
international politics and global markets.

China is a global leader in the promotion of ‘illiberal capitalism’,


which in some respects replicates earlier East Asian models (Halper
2010: 69) based on cheap labour, undervalued currencies, state subsi-
dies to ensure export competitiveness, high levels of personal and busi-
ness savings, high levels of foreign direct investment and state
investment in education (Halper 2010: 70).
Halper’s reference to earlier East Asian models can be traced back to
earlier debates about the developmental state (Johnson 1982; White
1988). This far more sophisticated literature was designed to show that
the state was central to the rise of East Asia, and that in many respects
the interventions carried out were not necessarily market friendly
(Amsden 1989; Wade 1990). These developmental states were ones that
promoted and led industrialization and wider social transformation.
This was done in part through markets, but these markets were subject
to the discipline of the state as much as the discipline of market com-
petition. The developmental state ensured selective protection for
specifically chosen national industries regarded as necessary to the
strategic needs of the national economy, selective investment in these
same sectors (through state allocation or direction of finance), specific
measures designed to control capital (such as restrictions on capital
export) and labour (such as restrictions on trade unions).
In other words, for the developmental state perspective, capitalist
development is less a product of spontaneous market forces (Hayek
1949), or indeed immanent capitalist development (Cowen and
Shenton 1995), and more a product of states directing capitalist
markets in specifically designed ways. This is the product of states
“whose politics have concentrated sufficient power, autonomy and
The BRICs, State Capitalism and Globalization 43

capacity at the centre to shape, pursue and encourage the achievement


of explicit developmental objectives, whether by establishing and pro-
moting the conditions and directions of economic growth, or by
organising it directly, or a varying combination of both” (Leftwich
1995: 401).
The merits of this perspective suggests that we might be able to iden-
tify a specifically BRIC variety of capitalism. The varieties of capitalism
approach was developed to understand institutional differences
between capitalisms in the developed world, and specifically that of
Anglo-American liberal, market-led capitalism, and North European
corporatism associated with the Rhineland and Scandinavian models
(Hall and Soskice 2001). The argument of the varieties of capitalism
school is that specific institutional complementarities are able to
explain divergent patterns of innovation, at least in the advanced cap-
italist world (Hall and Soskice 2001: 17–33). This account has been crit-
ically expanded to take in dependent market economies in East and
Central Europe (Nolke and Vliegenthart 2009) and the hierarchical
market economies of Latin America (Schneider 2009). This approach is
sometimes used to explain the deficiencies of capitalism in particular
regions, compared to the success of more advanced capitalisms in the
developed world (Schneider 2009; Schneider and Soskice 2009). On the
other hand, used in a more critical way, one can identify varieties of
capitalism and locate these within an unequal and uneven interna-
tional context (Ebenau 2012: 220). In this way, ‘variegated capitalisms’
may be identified, but these are analysed not simply in terms of alleged
internal institutional deficits which hinder progress to advanced cap-
italism, but as a product of a particular configuration of national, polit-
ical and social forces promoting capitalism, and which exist in an
unequal international context.
Nolke (2012: 125; compare with Bremmer 2010) identifies a B(R)IC3
variety of capitalism characterized by state permeated market
economies which “are dominated by a particularly close cooperation
between public and business actors that is at least indirectly based on
informal personal relations – particularly even family ties – supported
by common values and a shared social background.” This description is
unsatisfactorily specific in that the characterization identified could be
applied to other countries, but equally it over-generalizes by failing to
identify specific differences between China, India and Brazil.4 However,
of potentially more use is the recognition that there may be a resur-
gence of state capitalist alternatives to neoliberalism, and this is
being led by the BRIC countries. Beeson (2013: 288) argues that the
44 The BRICs, US ‘Decline’ and Global Transformations

significance of state capitalism is that it shows that there is an alterna-


tive to the neoliberal Washington Consensus, which means that “we
might expect to see the persistence, rather than the end, of differences
between capitalist systems.”
This argument in effect combines a critical use of varieties of capital-
ism approaches alongside – to some extent – the developmental state
perspective. The next section examines further the development of the
BRIC countries, Brazil, Russia, India and China.

States and markets in the development of the BRICs

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

China
China’s reform process can be traced back to the late 1970s, and the
period which followed Mao’s death in 1976. Under Deng Xiaoping, a
number of reforms were introduced which allowed for the limited pri-
vatization of formerly state owned assets, and some liberalization poli-
cies such as the opening up of some regions and sectors to foreign
investment. Though there were undoubtedly some disastrous periods,
such as the Great Leap Forward years of 1958 to 1964, average growth
rates in the Maoist era were actually quite high. Though accurate
figures are difficult to obtain, estimates of annual growth rates from
1963 to 1978 vary from Maddison’s low figure of 5.1% (based on 1990
constant prices) to the official figure of 6.4% (based on 1970 prices)
(Bramall 2009: 292). There were also important social development
advances in health care and education, although these were accom-
panied by some awful human rights abuses which could ultimately be
traced back to the leadership of, and conflicts within, the Communist
Party (Walder and Yang 2003). Nonetheless, life expectancy increased
The BRICs, State Capitalism and Globalization 45

markedly. Figures before the revolution are distorted by war with Japan
from 1931, but by the end of the Mao era, life expectancy had
increased to somewhere between 63 and 66 years of age (Bramall 2009:
295), an increase from around 25 years on the eve of war with Japan.
Though a shift to population control policies from the late 1960s may
distort the figure (as less children being born also meant that there
were less infant deaths), the decline in infant mortality pre-dated this
policy, due in large part to improvements in public health. This
included large vaccination programmes and improvements in sanita-
tion, as well as likely indirect benefits derived from the expansion of
rural education (Bramall 2009: 295–6; Dreze and Sen 2002).
In the reform period however, growth rates were unprecedented,
averaging 8.1% per year from 1978 to 2001. During the same period
exports grew by an annual average of 12%, and by the latter year, man-
ufacturing accounted for 90% of total exports (Nolan 2004: 3, 9–10).
New Special Economic Zones were created, which replicated the Export
Processing Zones that could be found in a number of developing coun-
tries, in that incentives were granted to investors, including foreign
capital, such as tax breaks, controls on trade unions and broadly equiv-
alent treatment for multinational companies and local enterprises
(Bramall 2009: ch.11). While the 1980s witnessed high rates of growth,
it was in the 1990s, during the ‘long boom’ from 1992 to 2007, where
growth really soared, fuelled in part by a substantial increase in direct
foreign investment. In 1991, FDI inflows stood at $436 million, but by
1992 had risen to $1.1 billion; by 1998 annual inflows totalled $4.03
billion and, after falling back slightly in the period after the Asian
crisis, they reached $5.27 billion by 2002 (Harvey 2005: 124).
China’s reform process saw an initial phase of liberalization, and the
growth of small and medium enterprises which, alongside the multina-
tional companies that began to invest in the country, played a role in
the export drive that followed (Bramall 2009: 366–72). However, liber-
alization has not meant simply conforming to neoliberal policies, and
the decision to selectively liberalize investment and trade has existed
alongside a strategy designed to target selected industries, keep strict
controls over the capital account, and persist with large state-owned,
national champion industries (Breslin 2011a: 1331, 1338–9). While
average tariffs fell substantially in the 1990s, by the end of the decade,
they still stood at 25% and were much higher in some sectors, such as
vehicle imports (80–100%) and farm products (31%). Moreover, non-
tariff barriers (such as technology transfer or joint venture require-
ments in some sectors) were still in place (Nolan 2001: 18). In the
46 The BRICs, US ‘Decline’ and Global Transformations

1990s, 120 large enterprise groups were selected by the State council as
sectors regarded as being of strategic importance. These included elec-
tricity generation, coal mining, automobiles, electronics, pharmaceut-
icals, transport and aerospace; the most cutting-edge sectors within
these industries, such as IT hardware, were also included.
China’s industrial policy, therefore, has been similar to those of both
Japan and South Korea, in that the state has deliberately attempted to
foster large companies, or national champions (Anderson 2007).
However, this strategy has occurred in a different context from that of
its East Asian predecessors, which ‘took off’ in the Bretton Woods era
and into the 1970s, when there was far more room for state-directed
development and the protection of new industries. In China, some
progress has been made, but unlike Japan and South Korea, hardly any
companies have emerged as globally competitive players. Indeed, as
Nolan (2001: 91) pointed out, “in export markets, China’s aspiring
global giant corporations must content themselves mainly with selling
lower end sophisticated products (for example, power stations, steel
mills, fighter planes), mainly to other developing countries.”
Otherwise, these firms concentrate on the domestic market or export
in low value sectors, such as bicycles and motorbikes. In 2000, China
had just three firms in the Financial Times 500 (based on market cap-
italization). These were the China National Offshore Oil Company
(CNOOC), China Mobile and China Unicom, each of which operates
in a protected domestic market. In one category in the Fortune 500,
China had six of the top ten firms, but this was in terms of number of
employees, and each one of these was mainly state owned and pro-
tected. As Chapter 8 will show, there remain high levels of concentra-
tion of firms in the developed world, particularly in terms of the most
dynamic economic sectors in the world today.
For advocates of market friendly approaches to development, these
failings reflect the inefficiencies of Chinese industrial policy. Growth
has occurred but this is despite, rather than because of, such a policy,
and it has occurred in sectors largely outside of the influence of indus-
trial policy. By implication, growth would be even greater if the
Chinese state was liberalized further and market-friendly intervention
was extended by an enabling state. China’s growth is thus attributable
to its market-conforming policies, while future potential problems are
attributable to ‘market-supplanting’ policies (Fan and Woo 1996;
World Bank 2002). While China certainly has experienced an eco-
nomic miracle alongside older ‘developmentalist’ state policies, neolib-
erals argue that these policies are largely irrelevant.
The BRICs, State Capitalism and Globalization 47

However this view underestimates the ease with which dynamic


firms can break into world markets, ignores the strong tendencies
towards capital concentration, and supports the reversal of policies
(such as industrial policy) designed to alleviate these tendencies. It is in
this context that China’s industrial policy should be located. Like the
East Asian miracles before it, China has some of the characteristics of a
‘high household saving, high corporate debt’ development strategy (Lo
2005), which involves a commitment to long-term, industrial upgrad-
ing which in turn relies on high intensity investment, rather than
simply competing in the world economy based on ‘static’ comparative
advantage. Instead, investment is characterized by high start-up costs
and slow returns – conditions not conducive to development led solely
by the market. This strategy relies heavily on bank-led finance medi-
ated by states who direct credit into certain potentially dynamic and
high value sectors.
As we have seen, it was successfully employed in South Korea and
Taiwan from the 1960s through to the 1980s, but this was in a very dif-
ferent context to that now faced by China. WTO membership was
agreed in 1999 and came into effect in 2001, but this has occurred “at
the point at which the degree of unevenness of business capability has
never been greater” (Nolan 2001: 187). China was given a five-year
adjustment period before fuller implementation of WTO rules, which
would include reduction in average tariff levels from 24.6% to 9.4%,
the observation of WTO rules on trade related investment measures
(TRIMS), the elimination of local content requirements for foreign
investment, increases in guarantees for intellectual property, and open
access for foreign firms to sell to State Owned Enterprises (SOEs). In the
automobiles sector, tariffs were to be reduced from 80–100% to 25% by
2006, and quotas were to be phased out, chemicals from 15% to 7% by
2005, and steel from 10.3% to 6.1% by the end of 2002 (Nolan 2001:
198–205).While these policies were largely (though not completely)
implemented, China stalled on liberalization in some areas. Optimists
argued that liberalization would allow China to specialize in its most
competitive sectors and shed those high-cost industries that constitute
a drain on the economy. In this scenario, upgrading will occur as it did
for earlier East Asian miracle economies. Certainly, quota reductions
have allowed China to increase its market share in lower value activ-
ities – though this was likely to happen whether or not China joined
the WTO. This does not, however, mean that a transition to higher
value production will necessarily occur. The first-tier newly industrial-
ized countries upgraded and developed in a very different international
48 The BRICs, US ‘Decline’ and Global Transformations

environment, which gave far more room for the interventions associ-
ated with the developmental state. We return to these issues in the
chapters that follow.
Historically, the incidence of rural poverty has had an adverse effect
on wages for unskilled and semi-skilled workers, including in the
towns. This is because declining or stagnant rural incomes make migra-
tion to the towns more likely, which has put downward pressure on
wages in those sectors. About 60% of the population still lives in the
countryside. However, employment in agriculture has been relatively
stagnant, despite substantial population increases. While total popula-
tion increases at around 16 million a year, and the working age popula-
tion grew from 679 million in 1990 to 829 million by 1999,
employment in agriculture fell slightly, from 333 million in 1995, to
329 million in 1999. It has been estimated that there could be as much
as 150 million surplus farm workers. Moreover, employment in town-
ship and village enterprises has also stagnated. While the proportion of
people living in the countryside has remained more or less constant,
the share of the rural population in total consumption has fallen from
60% in the early 1980s to 42% by 2001. This has also occurred in the
context of increasing inequality: income distribution in the country-
side has also increased, with the rural Gini co-efficient moving from
0.21 in 1978 to 0.4 in 1998. Indeed, some estimates suggest that rural
poverty is actually increasing (Nolan 2004: 11–13). Thus, Woo et al
(2004) argued that the proportion of rural residents with income of less
than 50 cents a day rose from 1.8% to 2.9% between 1996 and 2002,
while the proportion of rural residents with daily income below $1 a
day (PPP adjusted) has stagnated at 11% over the same period. These
problems have been exacerbated by growing urban unemployment –
employment in state-owned enterprises fell from 76 million in 1995 to
35 million by 2002 (Harvey 2005: 128). Regular employment in the
urban, non-state-owned formal sector grew from 21 million in 1995 to
35 million in 2002, but this is nowhere near enough to cope with
rural-urban migration and lay-offs in other sectors (Khan and Riskin
2001; Liu and Wu 2006; Nolan 2004: 14–15).
It is the case that China has been successful in exporting low value,
labour-intensive goods. Thus, in 2003, the US retail company Wal-Mart
imported $15 billion worth of products from China, which accounted
for as much as 11% of all US imports from China (Kaplinksy 2005:
176). China has also successfully expanded its market share in labour-
intensive sectors, such as clothing, and this is likely to expand further
as the effect of the phasing out of quotas takes hold. Thus, in clothing
The BRICs, State Capitalism and Globalization 49

sectors where there have been quota removals, China’s share has
increased enormously. For instance, in 2002, the USA removed quotas
in 29 categories of clothing, and China’s share in these sectors rose
from 9% to 65%, as prices fell by an average of 48% (Kaplinsky 2005:
176). Breslin (2005: 742–4) suggested that China’s rise itself may be
exaggerated, as its economic miracle cannot be divorced from its role
in East Asian production networks. In particular, China specializes in
completing the production of low value, labour-intensive goods, and
relies on technologies produced in other East Asian countries, with
which it has a substantial trade deficit. Moreover, the East Asian region
provided over 50% of total foreign investment into China for much of
the 1990s. There is now some debate as to whether there are significant
changes in China’s labour market. In essence, the argument is that the
labour market is tightening due to the country’s ageing population.
The number of those between the ages of 15 and 24 years entering the
labour force peaked in 2005 at 227 million, and this could fall to
150 million by 2024 (Beausang 2012: 48). One effect is to put upward
pressure on wages, which will undermine the country’s low wage
advantage compared to other countries. China’s competitiveness will
then depend on its capacity to upgrade into more technologically
sophisticated areas of production. Although there is some evidence of
wage increases in recent years, this has not led to consumption led
growth keeping pace with investment led growth, and this is an impor-
tant part of the story, as we will see. Neither, it should be said, is a
figure of 150 million new arrivals into the labour force a small or
insignificant number. Whatever the merits of the debate over the
future of China’s labour force, this discussion suggests that China’s rise
must, in part, be located in the context of the wider restructuring of
international capitalism, an issue taken up in the following two
chapters.

India
From independence in 1947 until the early 1980s, and perhaps even
the 1990s, India deployed an ISI strategy for development. This
involved the use of state planning, and 5 year plans were adopted from
1951. The second and third of these plans were ones where the state
guided economic development, and attempted to promote heavy and
capital goods industries such as iron and steel, chemicals and heavy
engineering, as part of a nation-building project designed to leave
behind the legacy of colonialism. As part of this project, resources were
transferred from agriculture to industry (Byres 1991). The expectation
50 The BRICs, US ‘Decline’ and Global Transformations

was that any shortfall in food output would be met by the takeover of
unproductive land, and by the food aid programme developed by the
United States from 1954 onwards (Sahn et al 1981).
The plans did not meet expectations as the population grew faster
than food output and by the 1960s, there was growing criticism of
urban bias in the country’s development strategy. Challenges emerged
from within the ruling Congress party, and in the 1970s there was
increasing criticism of the so-called ‘Hindu rate of growth’. Having
been out of office in the late 1970s, Indira Gandhi returned to office in
1980 and pursued policies that business interests supported (Kohli
2006), such as the removal of price controls and the reduction of cor-
porate taxation. The 1980s saw substantial growth though critics
argued that this was unsustainable as it had led to increasing debt and
still involved the promotion of inefficient domestic industry (Bhagwati
1993; Lal 1999). By 1991 the government faced a massive deficit and
the economy a large external debt, which paved the way for more sub-
stantial liberal reforms following the loan of $1.8 billion from the IMF
(Ghosh 1998). The most immediate reform was the devaluation of the
rupee, and then the government began to reduce tariffs, so that
average weighted tariffs declined from 72.5% in 1991–92, to 25% by
the mid-1990s, and the import licensing system was abolished
(Corbridge et al 2013: 37). Though liberalization continued to be quite
gradual (Manor 1995; 2011), there was some cumulative impact, not
least as each local state effectively competed with each other to “adopt
the same or even more robust pro-business policies to catch up with
their stronger (or richer) rivals.” (Corbridge et al 2013: 135; see also
Jenkins 2011). Investment liberalization was a crucial part of this
process, and by 2010 almost 600 Special Economic Zones had been
approved, aiming to attract foreign investment through the usual
package of tax incentives, decent infrastructure and state policies gen-
erally favouring capital over labour (Jenkins 2011).
The period after 1980 did see a substantial improvement in annual
average rates of growth. From 1950–51 to 1979–80, the annual average
was 3.7% while from 1980–81 to 2000–01, it was 6% (Corbridge et al
2013: 23). As Chapter 2 showed, the annual average for the period
from 2001–05 was 6.2%, and this rose to 7.4% and 8.1% in the two
years that preceded the financial crisis. While growth slowed to 5.6%
in 2008, and the economy contracted by as much as 7.9% in 2009, by
2010 growth was back up to 4.8% (IMF 2012). Notwithstanding the
negative growth of 2009 and what appears to be some slowing down of
growth after the global financial crisis, the general trend is certainly
The BRICs, State Capitalism and Globalization 51

one of higher rates of growth after 1980. For some these differences
reflect the success of liberalization as against the disasters of the ISI
period (Pangariya 2008).
However we do need to be cautious in presenting such a stark
dichotomy. First, the annual average rates of growth from the 1950s
through to the late 1970s were hardly disastrous (De Long 2003), and
some have argued that the higher growth from the 1980s onwards
reflects less efficiency gains associated with liberalization, and more
“slow growing towards faster growing areas of the economy” (Wallach
2003: 4312). In the 1950s and 1960s, agriculture still dominated the
economy, but this was not the case by the 1980s and 1990s, when
higher growth areas such as industry became more important. This
argument is useful but limited because the fact is that there were pro-
ductivity improvements within sectors, particularly manufacturing
(Madsen et al 2010). On the other hand, these productivity increases
were greater (2.49% per year) in the 1980s – before liberalization – than
they were in the decade of liberalization in the 1990s, when it
increased by 1.57% (Rodrik and Subramanian 2005). India has also in
some respects been a reluctant liberalizer, deploying anti-dumping
measures on a major scale. From 1995–2006, it initiated 457 such
measures (15% of the world’s total) and since then its share of the
world’s total has actually increased to 16.5% (Beausang 2012: 43).
Moreover, the high growth of the 1980s onwards was partly facil-
itated by the ISI policies that preceded it; as Corbridge et al (2013: 32)
argue, we should not neglect the fact that “Nehruvian investments in
heavy engineering and infrastructure, or indeed in Indian institutes of
management or technology, can be shown over a long period of fifty
or so years to have delivered significant benefits to long-run economic
growth.” This is especially the case in skilled labour, which has been
central to the IT boom (Saraswati 2008). Software and IT account for
over 20% of merchandise exports (Beausang 2012: 46), but this is also
part of the legacy of ISI, when an infrastructure base for science and
technology was developed.
India has then experienced significant growth in recent years but
this is not simply because of a straight-forward correlation, let alone
causal relationship between liberalization and growth. Furthermore,
Chapter 6 shows that India’s record on poverty reduction is unimpres-
sive when compared to other countries in the South (see Corbridge
et al 2013: 58–69). Finally, and we return to this issue later chapters,
India has run trade and current account deficits, covered by capital
inflows from overseas. By mid-2013, the current account deficit stood
52 The BRICs, US ‘Decline’ and Global Transformations

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

Brazil
Brazil’s development policies in recent years have been influenced by
the perceived failure of ISI policies in the period up to 1982. The period
after 1930 was the first period of experimentation with ISI, and this
took place in response to state centralization, urbanization and the
development of an urban middle and working class, the influence of a
military committed to modernization, and to international influences
and in particular falling demand for primary commodities in the
context of the Great Depression (Skidmore and Smith 1992: 162–3;
Furtado 1970). Although limited in its initial formulation, not least by
the continued power of an agrarian elite disinterested in national
industrialization (Cardoso and Faletto 1974), the influence of the ‘rev-
olution’ under President Vargas in the 1930s persisted after his death
in 1954. The high point came under the presidency of Kubitschek
(1956–60) when the state set about building on the domestic industrial
base initiated by Vargas, through protectionist policies such as tariffs
and import controls. The state also played a leading role in investment
in steel, oil refining and infrastructure. The state also provided foreign
capital with incentives to invest in, rather than export to, Brazil, and
this increased substantially in the automobile, chemicals and machin-
ery sectors, as well as in some consumer goods. Multinational com-
panies were happy to invest to take advantage of tax holidays, but also
to avoid tariffs on goods that might otherwise have been produced in
their home country. Between 1957 and 1961, manufacturing output
increased by 62% and rose very sharply in sectors like automobiles and
electrical machinery (Hewitt 1992: 74).
However, ISI faced a number of problems such as on-going balance
of payments and government deficits (Saad-Filho 2010a: 6–10).
Alongside the breakdown of the national populist alliance between the
urban middle class and urban workers, Brazil entered a period of crisis
which culminated in the military coup of 1964. This allowed for the
continuation of a version of ISI (albeit one which also focused more
deliberately on breaking into export markets) which was facilitated less
by populist agreement and more by repression of labour by the mili-
tary government (Skidmore and Smith 1992: 181). Insofar as alliances
persisted, this was strictly between elites, and a triple alliance between
state elites, local capital and foreign capital, though with continued
The BRICs, State Capitalism and Globalization 53

influence from agrarian interests (Evans 1979: 236–49; Saad-Filho


2010a: 11). Growth rates were very high in the period from 1968–74,
and while some claimed that this was because Brazil moved in a more
neoliberal direction (Balassa 1981), in fact the role of the state
increased in this period (Munck 1984: 223).
However, this boom was short-lived and faced with an increase in
the price of oil imports after 1974, and negative spin-offs as a result of
its reliance on the automobile industry, Brazil began to borrow heavily.
When interest rates increased, Brazil faced a potentially unsustainable
debt crisis. While in the short-term there were severe costs in ensuring
that Brazil could meet its interest payment obligations, as imports and
government spending was cut drastically, the longer-term was sup-
posed to promise a better future. This led to a series of policies which
began Brazil’s transition in a neoliberal direction, albeit one in which
the legacy of ISI was never completely eradicated (Ban 2013;
Musacchio and Lazzarini 2012). Under President Sarney, the domestic
financial system was reformed in 1988 and the following year flows of
international capital were liberalized. In 1990, under President Collor,
import restrictions were gradually lifted. But it was through the Real
Plan, a response to high inflation from 1992–94, that neoliberal poli-
cies were more rapidly implemented (Saad-Filho 2010a: 16). This
included a deeper liberalization of imports, a re-valued exchange rate,
further domestic liberalization, fiscal reforms designed to cut public
sector deficits (privatizations, spending cuts and some tax increases)
and the liberalization of the capital account, which was designed to
attract foreign savings and investment.
These policies were implemented under Cardoso (who was Finance
Minister from 1992–94, and President from 1995 to 1998 and then
again from 1999 to 2002. They also persisted into the first term of
Lula’s presidency. In some respects this was a boom period but it was
one that hid underlying weaknesses in the Brazilian economy. The
upward revaluation of the exchange rate led to a surge in imports,
which fuelled a consumer boom. However at the same time domestic
manufacturing suffered and the proportion of manufacturing value
added in GDP declined from 41% in 1980 to 27% by 2001.
Manufacturing employment and average real wages in the sector both
fell substantially as well (Saad-Filho 2010a: 17; Palma 2012: 48–54).
Similarly financial liberalization was designed to increase domestic
savings and so fund investment but instead savings rates fell from 28%
of GDP in 1985 to 15% in 2001, and investment rates fell from 22.2%
of GDP on average in the 1980s to 16.1% in the period from 2001–06.
54 The BRICs, US ‘Decline’ and Global Transformations

The annual average growth rate for the period from 1994–99 was 2.6%,
compared to an annual 6.4% in the ‘inefficient’ ISI period from
1933–80 (Saad-Filho 2010a: 17).
The basic problem with the new, neoliberal strategy was that
“(c)heap imports were allowed in, while high interest rates, foreign
loans, mass privatisations and TNC takeovers of domestic firms
brought the capital that paid for them…Neoliberalism discarded
import substitution and promoted ‘production substitution’ financed
by foreign capital instead.” (Saad-Filho 2010a: 17, 18; see also Palma
2012) In the period from 1980 onwards, Brazil’s productivity growth
was actually negative. The recovery after 2002 has not reversed longer
term trends. While in 1980 its productivity was similar to that of South
Korea, by 2011 its productivity level was on average three times lower
than that of South Korea. One effect of this was that as South Korea’s
productivity gap with the US narrowed, from 25% of the US’ in 1980
to 60% by 2011, Brazil’s fall behind from 28% in 1980 to 19% in 2011
(Palma 2012: 7–8).
The second Lula administration saw a significant response to these
problems, partly in response to a serious corruption scandal that engulfed
the ruling Workers Party, and also partly reflecting shifting social
support for Lula away from the middle class towards poorer sections of
society (Saad-Filho and Morais 2012). In particular there was a shift in a
more developmentalist direction, more compatible with the state capital-
ism outlined above (Bresser-Pereira 2010). Alongside monetary stability
promoted by the central bank, there was a growth acceleration pro-
gramme (the Programa de Aceleração do Crescimento) which included
investment in energy, transport and infrastructure, and the expansion of
social provision to deal with the problem of inequality. The Bolsa Família
programme of direct but conditional cash transfers to the poor reached
11.4 million households, the minimum wage was increased by 67%
(between 2003–10) and social security was expanded (Saad-Filho and
Morais 2012: 5). The old policy of the state promoting national cham-
pions was revived, such as in construction (Odebrecht), beverages
(Ambev), steel (Gerdau) and processed foods (Friboi), much to the con-
sternation of neoliberal critics (The Economist 2012). The period saw
faster growth which meant greater tax revenues, which in turn helped to
finance increased public sector activity. There was also expansion in
employment and a significant fall in both inequality (the Gini co-
efficient fell from 0.57 in 1995 to 0.52 in 2008) and the number of
households living in absolute poverty declined from 35.8% of house-
holds in 2003 to 21.4% in 2009 (Saad-Filho and Morais 2012: 6).
The BRICs, State Capitalism and Globalization 55

These policies continued both after the immediate negative fall-out


from the financial crisis of 2007–08, when growth fell sharply but
quickly recovered, and under the Rouseff administration elected in
2010. What we see here is some evidence of a shift in a market friendly
direction from the 1980s onwards, but with disappointing results.
Since then, we have also seen a tentative shift back towards a develop-
mentalist state capitalism since 2006, with, on the face of it, quite con-
siderable success. However, we should draw a note of caution, which is
that successes in recent years must also be linked to favourable interna-
tional circumstances, especially high global liquidity before the
financial crisis, and indeed to some extent after foreign capital flows
quickly returned, one of the unintended effects of quantitative easing
in the advanced countries. Also central to the success story, and one
that might confirm some version of the Beijing Consensus, has been
high primary commodity prices. This point relates to a wider issue con-
cerning the methodological nationalism of the varieties of capitalism
approach, and I return to this in the next section.

Russia
The fourth of the BRICs is Russia. Nolke (2012) excludes Russia from
his discussion, and suggests that one motivation for including Russia
in the original formulation of Goldman Sachs was simply so that the
letter ‘R’ could be used to make up the acronym, BRIC. This is an exag-
geration but not completely without foundation, as Russia’s recent
history is dominated by the two inter-linked issues of the collapse of
Communism and the collapse of a territorial entity much larger than
Russia, namely the Soviet Union. This is a history in which per capita
income and indeed life expectancy fell sharply in the aftermath of the
collapse of Communism and the introduction of rapid market reform,
known as shock therapy. In the period from 1991 to 1992 Russia
underwent a series of policies which rapidly liberalized prices, priva-
tized state enterprises and attempted to promote macro-economic sta-
bility, above all through large cuts in government spending. Prices rose
by as much as 250% in one fell swoop, while government cuts
included the ending of subsidies to basic food (Gaidar 1999). While
these cuts led to the government deficit turning into a surplus, rapid
liberalization and privatization was a failure and GDP fell by around
50% in the period from 1990 to 1995 (Beausang 2012: 32).
Privatization also largely failed as high interest rates discouraged the
purchase of newly privatized assets (Stiglitz 2003), and a great deal of
money was invested overseas rather than domestically. According to
56 The BRICs, US ‘Decline’ and Global Transformations

official statistics, Russian capital flight amounted to $182 billion in the


period from 1992 to 1999 (Tsygankov 2010: 49).
The year 1998 also saw a serious financial crisis but in the 2000s,
there was a substantial recovery, led above all by the boom in primary
commodities, and especially oil. Russia has an estimated 13% of the
world’s known oil reserves and as much as 34% of its gas reserves
(Tsygankov 2010: 46). By 2007, Russia’s economy had recovered to its
1990 level (Young 2010: 6–7), and at current prices, GDP rose from
$200 billion in 1999 to $1680 billion in 2008 (Rutland 2013: 351). Its
share of world exports grew from 1.64% in 2000 to 2.63% in 2008, and
the importance of trade was reflected in a trade/GDP ratio of as much
as 55% in 2008, almost as high as China (Beausang 2012: 34). By 2012,
Russia had joined the WTO. These developments all reflected Russia’s
re-emergence as a regional power. But it was also in this period that
Russia developed a form of state capitalism that differed sharply from
both ‘state socialism’ and ‘liberal capitalism’. Following the failures of
market led reform in the 1990s, the government has promoted a
national champion policy of developing large companies, often under
state ownership. In the period from 2000 to 2008 the state’s share of
the economy, measured in terms of state ownership, rose from 30% to
40% (Rutland 2013: 357). As The Economist (2012: 10) noted in 2012:

the Russian state once again controls the commanding heights of


the economy – only this time through share ownership rather than
directly. The state holds huge chunks of the shares of the country’s
biggest and most strategic companies, including Transneft, a
pipeline company; Sukhoi, an aircraft maker; Rosneft; Sberbank;
United Energy Systems, an electricity giant; Aeroflot; and Gazprom.

Two of these companies, Sberbank and Gazprom account for more


than half of the turnover on the Russian stock exchange and are
central to the oil and gas sectors (The Economist 2012: 6, 10). Oil and
gas companies accounted for 20% of Russia’s GDP and 60% of its
exports in 2011 (The Economist 2012: 10). By 2005, manufactures
accounted for only 8% of Russia’s exports (Rutland 2013: 355).
Given its history of liberalization, falls in living standards, financial
crisis, recovery and embrace of a particular form of state capitalism in
the 2000s, Russia is not necessarily as different from the other BRICs as
Nolke implies. Conversely, the similarities between the so-called BIC
countries are often over-stated in any case (though much the
same point can be made about the older idea of a ‘Third World’, as
The BRICs, State Capitalism and Globalization 57

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

States, markets and the question of neoliberalism

So far then, this chapter has examined the argument that the South is
rising because of market friendly policies, or whether state capitalist
policies are an alternative. What best explains the rise of the BRICs was
considered in the third section through some consideration of the
empirical record in those countries. This final section provides a discus-
sion of how we can make sense of these debates, by examining more
thoroughly the question of neoliberalism and state intervention. This
discussion will then be related explicitly to the question of whether the
BRICs represent a triumph for the West or a challenge to it. The cases
briefly outlined above show that there has been significant degrees of
liberalization, but also continuing forms of state intervention. How
then are we to make sense of these developments, and in particular
does continued intervention mean that neoliberal policies have not
been implemented? Does it mean that they have been implemented
and state intervention has been irrelevant? Or does it mean something
else, namely that we must reject the state-market dichotomy proposed
by neoliberal theory and instead examine different forms of interven-
tion, some of which can be described as neoliberal, some of which
cannot?
Harvey (2005: 2) defines neoliberalism as:

a theory of political economic practices that proposes that human


well-being can best be advanced by liberating individual entrepre-
neurial freedoms and skills within an institutional framework char-
acterized by strong private property rights, free markets and free
trade. The role of the state is to create and preserve an institutional
framework appropriate to such practices.

The question then is what constitutes an ‘appropriate institutional


framework’. Harvey, a critic of neoliberalism, argues that for neoliber-
als, the state should guarantee the supply and value of money, and
should provide military, defence and legal structures, and where appro-
priate, create markets. But this list is far from straightforward. Some
58 The BRICs, US ‘Decline’ and Global Transformations

libertarian neoliberals reject the view that states should be responsible


for the supply of money and indeed argue that central banks should be
abolished (Dowd 2001; Hayek 1976). Much the same point could be
made about nationalized defence forces, or education, which could
both be provided via private insurance schemes (Rothbard 1973;
Hoppe 2003; Friedman 2002). But perhaps even more fundamentally,
which laws are compatible with, and which laws challenge, the free
market? Immigration controls, universal restrictions on the working
day, safety standards in food, or the outlawing of child labour can all
in some respects be seen as paternalist government interventions in
choices made between freely contracting individuals. The fact that
they are not necessarily considered in this way in some places reflects
less the fact that these are interventions and more that some people
assume that the boundaries of states and markets can easily be drawn
(Chang 2003). We have also seen (in the first section) an example of
these tensions in the context of the IMF’s regulation of the 1982 debt
crisis. For many critics, this was the start of the shift away from neo-
developmentalism towards neoliberalism in the developing world. For
some neoliberals, IMF regulation did not conform to neoliberal prin-
ciples, which instead should have meant that both creditors and
debtors be left to market discipline and face bankruptcy (Buiter and
Srinivasan 1987; Bauer 1991). A similar position was taken by some
neoliberals in their opposition to the state bail-outs following the 2008
financial crisis (Nothstine 2009). On the other hand, conditions
attached to loans, either directly from the IMF or indirectly through
IMF approval for policy changes implemented by states after 1982,
were central to the shift towards market friendly policies; in other
words, neoliberalism, and the market order to which it is committed,
was in some respects, designed or planned. This paradox reflects the
great tension in neoliberal thought and practice, namely that “their
revolution in government requires that a group of individuals be found
who are not governed by self-interest, but are motivated purely by the
public good of upholding the rules of the market order. Yet if such
a group existed it would contradict a basic premise of neo-liberal
analysis.” (Gamble 2006: 28; see also Evans 1995: 25)
Harvey (2005: 19), as a Marxist, argues that “when neoliberal prin-
ciples clash with the need to restore or sustain elite power, then the
principles are either abandoned or become so twisted as to be unrecog-
nizable.” This is not necessarily completely wrong, but if they become
unrecognizable then how can we continue to call them neoliberal?
Again Harvey (2005: 19) attempts to provide an answer, when he
The BRICs, State Capitalism and Globalization 59

argues that this reflects “a creative tension between the power of


neoliberal ideas and the actual practices of neoliberalization that have
transformed how global capitalism has been working over the last
three decades….We have to pay careful attention, therefore, to the
tension between the theory of neoliberalism and the actual pragmatics
of neoliberalization.”
In other words, we need to bring out the tensions between neoliber-
alism as theory and neoliberalization as neoliberal practice (see also
Peck 2010). This task is not quite as straightforward as Harvey implies
(see Kiely forthcoming), but for our purposes we need to focus on this
tension in the case of the role of the state. We saw above that the
World Bank in 1993 accepted that the state had not been insignificant
in the rise of the first tier NICs, but this could be incorporated into a
neoliberal explanation through the idea of market friendly interven-
tion. This idea was first put forward in an earlier report, which argued
that intervention can be market friendly if:

(i) States intervene reluctantly, preferring to ‘let markets work’.


(ii) States apply checks and balances, subjecting interventions ‘to the
discipline of international and domestic markets’.
(iii) States intervene openly, and are ‘subject to rules rather than to
official discretion’. (World Bank 1991: 5)

In this framework, “the appropriate role for government is to ensure


adequate investments in people, provide a competitive climate for
private enterprise, keep the economy open to international trade, and
maintain a stable macroeconomic economy.” (World Bank 1993: 10)
The first tier East Asian NICs conformed to these market friendly prin-
ciples in contrast to much of the indebted developing world in the
1980s (World Bank 1993: 325, 351).
The traditional way of measuring state intervention is to examine
the ratio of government spending to GDP. For OECD countries as a
whole, state expenditure as a share of GDP has increased from just less
than an average of 10% in 1870 to around 45% by the 1990s, and the
significant expansion since the 1930s and 1940s did not slow down in
the 1980s. At most, the rate of increase of state spending as a share of
GDP slowed down in the 1990s, but this hardly constitutes rolling back
the state (Hay and Lister 2006: 3). Even in the case of Margaret
Thatcher’s governments in Britain in the 1980s, her commitment to
“roll back the frontiers of the state” (Thatcher 1993: 745) was mixed at
best. State spending increased in real terms for every year but two
60 The BRICs, US ‘Decline’ and Global Transformations

(1985–6, 1989–90) of her premiership, and on average it increased in


real terms by 1.1% a year. It is true that state spending as a share of
GDP did fall, from 44.6% of GDP in 1979–80, to 39.2% in 1989–90, but
this is hardly the straightforward roll-back envisaged by neoliberals
(Rogers 2013; Eaton 2013). Such data has been used, both by some
neoliberals to argue that the state has not been rolled back in recent
years (Pennington 2011), and by some ‘globalisation sceptics’ to argue
that globalization has not eroded the importance of the nation state
(Hay 2005a). In a broadly similar way, the World Bank used such data
to claim that East Asian states were examples of market friendly inter-
vention in the early 1990s. Thus, in 1989 South Korea’s ratio was
16.9% compared to Brazil’s 30.9% and South Africa’s 33% (World Bank
1991: 224–5).
In the case of the developed world, this lack of roll back is explained
in part by a growing welfare bill caused by increases in unemployment,
low wages and an ageing population since the 1980s (Hay 2005a). In
one respect this does reflect the failure of neoliberalism to cut the
welfare state in the developed world as much as many neoliberals
would like, even though individual welfare benefits have declined in
real terms, and there has been an increase in spending at the aggregate
level5 (see Korpi and Palme 2007; Scruggs 2008). But more relevant for
our purposes, simply focusing on state spending alone tells us little
about the changing priorities of neoliberal states, and the shift away
from spending on housing and industry, and towards law and order
and defence, increasing reliance on indirect taxation, and reform of the
public sector (Gamble 2006: 31–2). Similarly, for developmental states
in East Asia, state expenditure/GDP ratios tell us little about the extent
of state intervention, which “has been conducted less through state
ownership and budgetary outlays, but more through measures which
need little state ownership or budgetary outlay.” (Chang 2003: 85) In
other words, while the extent of state intervention is not unimportant,
more significant is its form. This is not an argument which rejects the
reality of neoliberalism, rather it is one that rejects the neoliberal ideo-
logy that the debate is one between cases for and against intervention;
instead it is one about different kinds of intervention, and whether we
can talk about intervention which is market friendly or which governs
and challenges the market.
For it is the case that, from the 1960s to the 1980s the state in South
Korea and Taiwan guided the market in ways that were far from market
friendly, and hardly conformed to the neoliberal ideal of a state that
set the general framework for private individual behaviour to flourish
The BRICs, State Capitalism and Globalization 61

but did not set common purposes or goals. The state allocated credit to
targeted industries, controlled the movement of capital (including
overseas), heavily subsidized selected industries, and restricted foreign
investment (Amsden 1989: Wade 1990). Even in Singapore and Hong
Kong, the state played a central role in regulating labour costs through
providing access to cheap public housing, health care and food. To
argue, as the World Bank (1993: 325, 351; also Lin 2012) did, that suc-
cessful interventions were irrelevant because they created market
friendly outcomes becomes a tautology, for as “this test is formulated,
industrial policy cannot win: if it fulfils neo-classical expectations, it is
‘ineffective’; if it violates them, it is inefficient.” (Amsden 1994: 629;
see also Kwon 1994)
Some of these ‘distortions’ were belatedly highlighted by the IMF in
1998, as it attempted to explain the Asian financial crisis through the
idea of a statist ‘crony capitalism’. The World Bank also suggested that
among East Asian countries, the most market friendly (based on
outward orientation and low rates of price distortion) were Hong Kong,
Malaysia, Singapore, Indonesia and Thailand, in contrast to Japan,
South Korea, Taiwan and China (World Bank 1993: 301). This did not
stop the attempt made less than 10 years later to describe China as a
high globalizer (World Bank 2002). Moreover, in the 1993 report South
Korea and Taiwan actually rank below Brazil and India in terms of
meeting the market friendly criteria of low levels of price distortion
and high levels of outward orientation, even though the report was
designed to show precisely the opposite (Kiely 1998: 122).
State intervention in East Asia was actually deliberately market
unfriendly in that interventions were designed to challenge static com-
parative advantage and to build a domestic industrial base through
strategic and protectionist policies. This included high tariffs, subsidies,
and the state directing credit at selected industries (Amsden 1989;
Wade 1990; Payne and Phillips 2010). This makes perfect sense because
“there are formidable barriers to entry for developing countries
attempting to move up the ladder of the international division of
labour – because of cumulative causations in technical progress…
imperfect domestic and international financial markets…and a lack of
marketing skills and infrastructure, and so on.” (Chang 1995: 215; see
also 2002) This is an argument that in effect derives from “nationalist
catch up theory” approaches to development (Payne and Phillips 2010:
42), which is not necessarily against free trade as a long term goal, but
argues that this can only take place once the productive power of
nations is relatively equalized (List 1966: 79; Tribe 1988). In the
62 The BRICs, US ‘Decline’ and Global Transformations

absence of this equalization of productive powers, free trade will exac-


erbate and not reduce uneven development between countries (Shaikh
2005). The problem with the liberal case for free trade is that it
assumed “a state of things which has not yet come into existence.”
(List 1966: 102) While some contemporary writers accept a role for the
state in dealing with market imperfections and in developing the skills
and education necessary for upgrading, they still suggest that the state
plays an enabling or facilitating role (World Bank 1997; Lin in Lin and
Chang 2009), which essentially complements rather than challenges
comparative advantage and free trade. This is an updated version of
market friendly intervention, which assumes precisely what needs to
be explained, which is differential and unequal technological capacity
which leads to competitive advantage. For, in the end, “the rich coun-
tries are rich, and the poor countries are poor because the former can
use, and develop, technologies that the latter cannot use, let alone
develop.” (Chang in Lin and Chang 2009: 490).
This point applies not only to the first tier East Asian NICs or the
current state capitalist countries. For in contrast to neoliberal claims,
state capitalism has characterized more or less all processes of capitalist
development in history (Polanyi 1957; Chang 2002; Reinert 2007).
This contrasts not only with the Hayekian argument that market soci-
eties are the outcome of spontaneous market processes, but also those
radical approaches to development that set up a dichotomy between
immanent capitalist development through the market order and inten-
tional development designed to ameliorate the unintended conse-
quences of this immanent development (Hayek 1949; Cowen and
Shenton 1995).
This does not mean however that contemporary state capitalism is
simply identical to previous processes of capitalist development. The
most significant difference is the degree of public ownership in the
current state capitalist countries. In 2011, state companies made up
80% of the value of the stock market in China, 62% in Russia, and 38%
in Brazil, and accounted for one third of the developing world’s foreign
direct investment and a higher proportion of its foreign takeovers (The
Economist 2012: 4). However, this again should be regarded less as a
geopolitical challenge to the West and more a specific version of devel-
opmentalism for as we have seen, attempts to promote large state com-
panies is a central component of a longer running strategy of
promoting national champions, such as the zaibatsu in Japan (Johnson
1982). The chaebol in South Korea obtained capital from surplus funds
following state directed land reform and from US aid in the 1950s, and
The BRICs, State Capitalism and Globalization 63

then the most successful exporters received government subsidies, and


cheap credit from state owned banks in the 1960s and 1970s, all under
the direction of the state. In 1974, sales by the top 10 chaebol repre-
sented 15% of GDP but by 1984 this figure had increased to as much as
67% of GDP (Amsden 1989: 116). This concentration and centraliza-
tion was a product of close connections between government, finance
and industry, in which cheap loans were granted to favoured sectors
on condition that these broke into export markets.
Seen in this way, we need to be cautious about the idea of a suppos-
edly unique Chinese model, still less a perceived Beijing Consensus
(Kennedy 2010). Certainly China’s development is not one that con-
forms to neoliberal approaches, no matter how flexibly defined, but
“the Chinese experience broadly conforms with a state-led growth
project that places national development at the centre of policy, points
to the importance of promoting and protecting key economic sectors
and actors, and involves using a central financial institution and a
form of (at least) soft planning as the means of national construction
and economic development.” (Breslin 2011a: 1342) State capitalism
can be regarded as in some sense incompatible with, and even a chal-
lenge to, neoliberalism, but it is hardly something new in the history
of capitalist development, still less something unique to China (Chang
2002; Peerenborm 2007: ch.2). It is not an exception to the history of
capitalist development precisely because states have played a leading
role in structural transformation, and have done so even more in the
case of late development, where potential capitalist enterprises face the
reality of competition from already established producers from over-
seas (Gerschenkron 1962; Amsden 2001; Polanyi 1957; Chang 2002;
Reinert 2007). Thus, in contrast to Halper, we should not conclude
that just because state capitalism has re-emerged in recent years, this
automatically means that it constitutes a geopolitical and/or hege-
monic challenge to the West. Drawing on concepts of ‘market author-
itarianism’ (Halper 2010: xx) and ‘ illiberal capitalism’ (Halper 2010:
69) may describe something of the process taking place in China, and
to some extent Russia, Brazil and even India, but it downplays the
authoritarianism that characterized early capitalist development in the
now advanced capitalist countries.

Conclusion

This chapter has argued that if we must choose between state capital-
ism and neoliberalism as explanations for the rise of the BRICs, than
64 The BRICs, US ‘Decline’ and Global Transformations

the former is more convincing. However, this conclusion is somewhat


reluctantly drawn because much of the material associated with the
state capitalism approach is purely descriptive and often couched in
terms of regret that this alternative has emerged. However as my dis-
cussion in the final section made clear, the state has been central to the
development of all capitalisms, and perhaps even more acutely those
later capitalisms that emerged after the rise of the West (Amsden
2001). This leads on to the point that just because state capitalism is
different from market capitalism, it does not necessarily mean that it is
a threat to the West. Nor does it mean that state capitalism is intrins-
ically related to a supposed Beijing Consensus that overlaps with a
uniquely state capitalism – my argument in this chapter is that this is
not the case. These geopolitical questions are considered further in
Chapter 7.
Those more sophisticated theories of the developmental state and
varieties of capitalism are certainly more useful than the more populist
interpretations of state capitalism. But there is still a further problem,
hinted at in places in this chapter, which is that the varieties approach
at least tends towards a methodological nationalism which downplays
and underestimates the influences of the international political
economy. This should be clear in the context of the fallout from global
economic crisis, and for instance the crisis of the Eurozone. But for our
purposes we need to consider the extent to which international factors
may have helped to facilitate the rise of the South, both in the boom
years of the early 2000s (and before), and after the financial crisis. The
latter is considered further in Chapter 5, while the former is the subject
of the next chapter.
4
The BRICs, the South and the
International Economy, 1992 to
2007

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

Globalization and the emerging markets boom of the 1990s

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

65
66 The BRICs, US ‘Decline’ and Global Transformations

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

The foreign investment boom and the rise of manufacturing in the


developing world
One of the legacies of colonialism was an international division of
labour in which the developing world predominantly produced and
exported primary products. While the developed world itself produced
large amounts of primary goods, it also produced almost all of the
manufactured goods that were traded in the international economy.
On the eve of World War Two, 71% of manufacturing production was
concentrated in just four core countries, and 90% in 11 countries from
the core of the world economy (Dicken 2011: 14–15). This was to
change to some extent in the post-war period, as developing countries
followed the ISI strategies that were outlined in the last chapter. But it
was also to change in the neoliberal period, and especially from the
1990s onwards.
The rise of manufacturing was considered to be very important for
developing countries, as industrial production had certain advantages
over primary goods production. Many developing countries had been
dependent on the export of a small number of primary goods, and if
the world prices of these goods fell, then there was a real danger that
these countries would go into recession, as there was limited capacity
for diversification. Industrial production could provide the capacity to
diversify into a number of sectors, and provide greater forward and
backward linkages for the economy as a whole. It also tends to be asso-
ciated with the generation of economies of scale, more sophisticated
The BRICs, the South and the International Economy, 1992 to 2007 67

technology, and higher productivity than primary goods production.


Moreover, it was often argued that the prices of primary goods tend to
be low when compared to manufactured goods, and that there is ten-
dency for the terms of trade to decline for the former as against the
latter (Prebisch 1959; Singer 1950; Spraos 1983). This is partly because
primary goods suffer from a low income elasticity of demand, which
means that as average incomes rise, consumers spend a declining pro-
portion of their income on primary goods. But also, as there is particu-
larly intense competition between the many primary goods producers
as against the relatively few manufacturers, prices are less ‘sticky’
upwards than they are downwards. When combined with the depen-
dence for foreign exchange on a small amount of products, this carried
enormous dangers, and so the development orthodoxy after World
War Two was that in order to develop countries must industrialize
(Kitching 1982). This was an orthodoxy that crossed the ideological
divide (Rostow 1960; Myrdal 1968).
However, as we have seen, ISI was subject to a number of criticisms
which on the face of it, suggested that countries should return to exer-
cising their comparative advantage and specialize in the production of
primary goods. But the period after the 1980s saw the rise of manufac-
turing in the developing world on a substantial scale (see Table 4.1),
though we will see later that there have been some changes for indi-
vidual countries since 2000.
The reason for the rise of manufacturing in the South was less to do
with trade liberalization and specialization, and more to do with a
factor that the original theory of comparative advantage assumed
would not, or could not, take place, namely the international mobility
of capital. In other words, with investment liberalization, multinational

Table 4.1 Manufacturing shares of exports by country, excluding oil

1980 2000

South Korea 87% 94%


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

Source: Adapted from Kozul-Wright and Rayment 2004: 10, with author permission
68 The BRICs, US ‘Decline’ and Global Transformations

companies increasingly invested in manufacturing in the developing


world. At constant prices, total direct foreign investment increased
from $59 billion in 1982 to $1.2 trillion by 2000 (UNCTAD 2002: 3).
Developing countries increased their share of world production, trade
and FDI, particularly from the 1990s onwards: from 18.4% (1990) to
26% for GDP (2007), from 19% to 30.3% for exports and from 20.6%
to 28.7% for inward FDI stocks (Dicken 2011: 25). In the period from
1980 to 2010, developing countries increased their share of world mer-
chandise trade from 25 to 47% (UNDP 2013: 3). At the same time,
developing countries consistently liberalized their investment policies;
in 2001 for example, 71 developing countries made 208 changes to
their investment policies, 194 of which were more favourable to FDI
(UNCTAD 2002: 7). Even in recent years, where state capitalism in
some countries has led to some restrictive policies regarding foreign
investment, the general trend is still towards the extension of invest-
ment liberalization (UNCTAD 2013a).
Over a broadly similar period (1990 to 2008), inward FDI’s share of
GDP increased in many developing countries: China from 5.8% to
8.7%; South Korea from 2.1% to 9.8%; India from 0.5% to 9.9%; Brazil
from 8% to 18.3%; Mexico from 8.5% to 33%; Chile from 33.2% to
59.6%; and Thailand from 9.7% to 38.4% (Dicken 2011: 22).
As part of their increasingly global strategies, MNCs have drawn on
different locations for different stages of the production process, and
thus there was a substantial increase in global commodity chains, or
global production networks. These networks or chains of production
reflect the fact that production processes are linked through a chain, “a
transnationally linked sequence of functions in which each stage adds
value to the process of production of goods or services.” (Dicken 2003:
14) Within these networks, multinationals might invest directly in
overseas production, or enter into subcontracting arrangements with
local producers and suppliers. Accurate aggregate data on subcontract-
ing is difficult to find, but what can be said with some certainty is that
the rise of manufacturing in the developing world is not simply due to
direct foreign investment, but equally a significant proportion of
domestic production is closely linked to local capital’s integration into
these global networks. Moreover, the emergence of these global com-
modity chains is not new, but what is relatively novel was the use of
them within different stages of the production process within manu-
facturing. This was an important factor in China’s growth and develop-
ment from the 1990s onwards.
The BRICs, the South and the International Economy, 1992 to 2007 69

The rise of China


We have already considered the rise of China in Chapter 3, so we can
be brief. What we should emphasize here is the link between China’s
manufacturing export growth and its wider economic growth. For now
we will simply provide some figures, without subjecting them to crit-
ical scrutiny but we should highlight the fact that the precise link
between China’s exports and its growth is far from being a trivial ques-
tion, and goes to the heart of the question about whether or not China
remains dependent on the West. This in turn relates to the central
issues of whether or not the South has ‘decoupled’ from the West, and
thus whether or not there has been a transformation of the interna-
tional order, an issue discussed later in the chapter.
What is not in doubt is China’s extraordinary growth in recent years.
Using PPP measures, its share of global GDP rose from less than 5% in
1973 to 17% by 2006 (Maddison 2003). This rise is reflected in rapid
annual average growth rates since the late 1970s, which compare
favourably with annual rates of growth in the US and Europe. Table 4.2
provides a breakdown of growth since the late 1970s, comparing
growth of annual output and of annual export growth.
The rates of growth of China’s exports saw a significant shift from
1990 onwards. Real exports grew by about 500% from 1993 to 2008, by
which time China had emerged as the world’s third fastest exporter
(Steinfeld 2010: 71). China’s share of global exports was just 1.9% in
1990, compared to 8.5% for Japan, 11.6% for the US and 12.1% for
Germany. By 2005, the comparable figures were 7.3% China, 9.4%
Germany, 5.7% Japan and 8.7% the US. By 2010, post-crisis, the figures
were 10.6% China, 8.1% Germany, 5.2% Japan and 8.6% the US

Table 4.2 Annual average growth rates (percentages) of GDP and exports
in China, US and Europe since the late 1970s, up to the financial crisis in
2008

China US Europe

1979–88 (GDP) 10.1 3 2.3


1989–2000 (GDP) 9.8 3.2 2.3
2001–08 (GDP) 10.2 2.1 1.7
1979–88 (exports) 8.1 5.7 4.1
1989–2000 (exports) 13.6 7.3 6.9
2001–08 (exports) 16.5 3.1 4.4

Source: Adapted from UNCTAD 2011


70 The BRICs, US ‘Decline’ and Global Transformations

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

Globalization and the 1990s: Optimism or scepticism?


For the reasons outlined above, we could argue that the decade of the
1990s was one of optimism when it came to the question of develop-
ment. This in many respects was the dominant popular interpretation
of the globalization decade (Giddens 1999; World Bank 2002): The
argument was quite clear: globalization, or at least economic globaliza-
tion, was an opportunity for developing countries and countries
should adopt market friendly policies which embraced these oppor-
tunities. This meant that in contrast to ISI policies, trade and invest-
ment liberalization would mean countries specializing in their
respective comparative advantages, and drawing on world savings and
thus receiving high rates of foreign investment. This in turn would
lead to economic growth and subsequently pave the way for poverty
reduction. Claims made for absolute poverty reduction include figures
such as a fall from 1.8 billion (1990) to 1.37 billion (2005), 1.4 billion
(1980) down to 1.2 billion or 1 billion (2000), or even lower (Chen and
Ravallion 2010; World Bank 2002: 30). We thus arrive back at the case
for globalization friendly policies discussed in the last chapter, and
indeed in some respect the optimism surrounding the rise of the BRIC
countries at the start of 2001.
However, in other respects the optimism of the 1990s was misplaced.
This will be discussed in depth later in the chapter but essentially,
growth rates for most of the South were not especially high, invest-
ment by multinational companies in the developing world was not as
great as it was in the developed world and the evidence for poverty
The BRICs, the South and the International Economy, 1992 to 2007 71

reduction was problematic (Reddy and Pogge 2004; Wade 2004a, b;


and see Chapter 6). Thus for example, while annual average growth
rates in Latin America were, at 1.4%, an improvement on the 1980s
figure of a negative 0.3 rate, this was far less than the decades of the
1950s, 1960s and 1970s (Weisbrot and Ray 2011). The 1990s also saw
periodic financial crises, such as Mexico in 1994–95, East Asia (1997–
98), Russia (1998) and Argentina (2000–01). Each of these had specific
causes but in each case the liberalization of financial flows led to an
inflow of foreign capital designed to make money from non-productive
sources. This led to consumer booms in which imports flooded into
these markets, but which were unsustainable and led to increased
current account deficits. With falling confidence, flows rapidly left
these countries as quickly as they entered them, plunging each of them
into recession (Grabel 1996; Wade and Venereso 1998; Bello et al
2000). The US itself entered a brief recession in the second quarter of
2000, as stock prices fell by 33% (Brenner 2002: 252). This followed the
so-called ‘dot.com boom’ in IT industries, in which share prices mas-
sively outpaced real earnings following a speculative boom (Henwood
2003). As we will see in the next chapter, though these financial crises
were effectively managed by states, they were dwarfed by events in
2007–08.

Convergence at last?: The boom from 2002 to 2007

The response to the financial crisis in 2001 was central to the boom in
the 2000s as we will see. What is also important though is that while
the claims made for the boom of the 1990s were exaggerated, there was
something more substantial in terms of development in the period
before (and possibly even after) the financial crash of 2008. While as
we have seen, average annual growth rates in the South exceeded those
in the North in the 1990s by 1% a year, a figure that was cancelled out
by population growth, in the period from 2002 to 2007–08, the differ-
ence was as much as 5% a year. Even after this fell back in 2008–09, it
quickly recovered so that the difference for the period from 2002–12
remained as high as 5% a year (Akyuz 2012: 10; and see Table 4.3).
Growth rates did of course vary across countries. For instance annual
average growth rates in the period from 1990 to 2002 were 1.9% for
Argentina, 1.9% for Brazil, –0.9% for Russia, and 1.9% for South Africa.
In the period from 2003 to 2007, annual average growth rates were
8.8% for Argentina, 4% for Brazil, 7.5% for Russia, and 4.8% for South
Africa (IMF 2012). Even for the poorest countries, there was substantial
72 The BRICs, US ‘Decline’ and Global Transformations

Table 4.3 World output growth (annual percentage change)

2004 2005 2006 2007 2008 2009 2010 2011

World 4.1 3.5 4.1 4 1.5 –2.3 4.1 2.7


Developed world 3 2.4 2.8 2.6 0 –3.9 2.8 1.4
Developing world 7.4 6.8 7.6 7.9 5.3 2.4 7.5 5.9

Source: Adapted from UNCTAD 2012: 2

growth, which certainly compared favourably to the period from the


1980s onwards, and indeed the period from 1960 to 1980. Table 4.4
breaks down growth rates according to levels of per capita income
(based on 2005 dollars) and provides a useful historical comparison.
Taken together, Tables 4.4 and 4.5 show that growth rates were dis-
appointing in the period from 1980–2000, but were relatively high in
the period before the implementation of neoliberal policies in the
1980s. But they also tell us a story of impressive growth rates in the
2000s, with each quintile recording comparable or better growth rates
in the third period than in the first, with the exception of the highest
income group, which is essentially the developed world. Another
reflection of this trend is the fact that from 2006–12, 74% of world
GDP growth was generated in the South and only 22% in the devel-
oped countries (UNCTAD 2012: 3). From 2000–06, the developed
world accounted for just over 50% of global growth. In contrast, in the
1980s and 1990s, the developed countries accounted for 75% of global
growth (UNCTAD 2012: 3).
This was also a period which saw substantial changes in imbalances
in world trade, which are central to those claims made that we are wit-
nessing a transformation in the international order. In a nutshell, the
developed world faced current account deficits which were overwhelm-
ingly accounted for by the US’ external deficit, which exceeded 6% of
GDP by 2007 (Akyuz 2012: 12; Thompson 2010: 31). US private savings
fell in the 1990s and again after 2001, after the Federal Reserve brought
down interest rates in response to the bursting of the dotcom bubble.
By 2008, household savings had all but disappeared – the US house-
hold net savings rate fell from just over 10% in 1980 to 0.5% in 2006
(Thompson 2010: 41). Meanwhile the surpluses on the developing
world exceeded $600 billion in 2007 and international reserves had
reached as much as $5 trillion (Akyuz 2012: 11). These figures of course
tended to over-generalize from the specifics, as China and some other
East Asian countries accounted for around two-thirds of the 2007 sur-
The BRICs, the South and the International Economy, 1992 to 2007 73

Table 4.4 Average annual percentage GDP growth, 1960–2010

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5


($303 to ($1429 to ($3133 to ($5890 to ($12289
$1429 per $3103 per $5885 per $12723 per per capita
capita GDP) capita GDP) capita) capita) and above)

1960–80 2 2.4 3.1 3.2 2.4


1980–2000 1.1 0.7 1.5 1.1 1.1
2000–2010 2.5 3.1 3.1 3.4 1.3

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

pluses, with the other third accounted for by oil exporters (Akyuz
2012: 11). This is discussed further below in the context of China’s
boom and Chinese-US interdependence. In the developed world,
serious deficits had built up within the Eurozone periphery, particu-
larly in Spain, Portugal and Greece. Much, though not all, of this
deficit was with core Eurozone countries and especially Germany, and
these deficits were financed by banks from the core of the Eurozone, at
least until the outbreak of the financial crisis (Lapavitsas 2012: ch.4).
Germany had surpluses, not only with the rest of the Eurozone but
also with the US. Japan also relied on exports to the US market. So
there were important differences within the North and the South, but
it remained the case that the most significant power in the latter had
built up surpluses as the most significant power in the former faced
mounting deficits.
We will look at the post-crisis period in the next chapter, but here we
need to understand the international factors that help to account for
this boom. The first of these was the renewal of the boom in capital
flows to the South after 2001. This was due to the lowering of interest
rates (from 6.5% to 3.5% in the first eight months of 2001) and the
expansion of liquidity in the developed world, which was a response to
the end of the dotcom boom and to some extent, the uncertainty that
followed the terrorist attacks on the US in September 2001 (Mason
2009: 84). Private capital inflows to the South reached close to
$200 billion in 2000, and then fell in 2001, increased to $280 billion
by 2003, and then increased sharply from 2004 onwards, reaching a
peak of around $1,285 billion in 2007 (Akyuz 2013: 99), before falling
back in 2008 and 2009 and then partially recovering in 2010 (see
Chapter 5). In the peak year of 2007, around $500 billion was in the
form of direct foreign investment, $97 billion in portfolio investment,
74 The BRICs, US ‘Decline’ and Global Transformations

Table 4.5 Percentage change (increase/decrease) in primary commodity


prices over previous year (excluding crude petroleum)

2006 2007 2008 2009 2010 2011

30.2 13 24 –16.9 18.2 17.40

Source: Adapted from UNCTAD 2012: 11

$451 billion in commercial bank loans and $237 billion in non-bank


private loans (Akyuz 2013: 99).
Thus, “while growing US external deficits were being financed
‘officially’, there was plenty of highly leveraged private money search-
ing for yield in DEEs (developing and emerging economies – R.K.). A
mutually reinforcing process emerged between private flows to DEEs
and official flows to the US – the former were translated into reserves of
DEEs and constituted an important part of official flows to the US, and
supported lower rates there and private flows to DEEs.” (Akyuz 2012:
14) With the rapid expansion of liquidity and growth in the world
economy after 2003, commodity prices started to rise substantially.
The commodity price boom was a product of rising demand from
China, low initial stocks, a weak dollar and increasingly financialized
markets. After 2002, developing countries with a high share of oil and
mineral and mining products in their total merchandise exports saw a
substantial improvement in their terms of trade (see Table 4.5), and
those with high fuel exports saw their terms of trade double from
2002–11 (UNCTAD 2012: 8).
The positive impact of these price rises on economies in the South
was substantial. At the start of 2000, average central government
deficits in the South stood at around 3.5% of GDP but by 2006–07, this
figure had declined to 0.5% (Akyuz 2012: 20). Total public debt as a
proportion of GDP also fell, for instance in Latin America from 50% to
35% of GDP over the same period (Akyuz 2012: 20). While current
accounts saw deficits of around 3 to 4% of GDP in 2000, by 2007, Latin
American current accounts had an average surplus of 1% of GDP in
2007, and Africa had surpluses averaging 3% of GDP (Akyuz 2012: 22).
However, rising commodity prices and revenues from commodity
taxes, profits and royalties account for as much as half of the increase
in the fiscal revenue ratio in Latin America (Cornia et al 2011), and
indeed budgets went into deficit in 2008–09 following the financial
crisis and the fall in commodity prices (ECLAC 2011). It has been esti-
mated that without the 2002–06 average improvement of 50% in the
The BRICs, the South and the International Economy, 1992 to 2007 75

terms of trade for primary commodity prices, current accounts would


have shown a deficit of 4% of GDP (Calvo and Talvi 2007). The real
prices of energy and metals more than doubled from 2003–08, and
food increased by 75% (UNCTAD 2012: 9). In the first half of 2008,
crude petroleum and food prices rose by more than 50% (UNCTAD
2012: 8–10). While energy and metal reached some of their highest
prices in history, in agriculture price levels only reversed the trends since
the 1980s (Erten and Ocampo 2012). In the second half of 2008,
investors withdrew money from commodity futures. This coincided with
capital flows falling and the rise of the dollar. These factors combined
and the price of commodities fell rapidly (see Table 4.8): oil from $140 a
barrel in July 2008 to $50 a barrel by December; grain prices fell from
$440 a ton in February 2008 to $220 in November, and wheat from
$1000 a ton to $550 a ton over the same period (UNCTAD 2012: 9).
The decade from 2000 did see a substantial boom in the developing
world, which was of far greater significance than the growth of the
South in the 1990s. Indeed, as we saw in Chapter 2, as this boom con-
tinued, the optimistic predictions concerning the BRICs, made by
investment banks such as Goldman Sachs, were regularly upgraded.
What this section has essentially described is the international factors
that facilitated this growth, and particularly capital flows to the South
and high commodity prices. The next section provisionally questions
whether these conditions can continue in the longer term, and sug-
gests other reasons why convergence might be limited. This will be
done before a more detailed consideration of the financial crisis in the
next chapter.

The limits of convergence, 1992 to 2007

This final section of the chapter examines in more depth the explana-
tions cited for the booms of the 1990s and the 2000s. We have already
suggested that the 1990s boom was not of great significance, or at least
it was not as significant as the boom in the 2000s. Nonetheless, we will
examine both periods together in this section as at least some of the
reasons for the emergence of the South are similar in both decades.
Equally however, these reasons might give rise to some caution in dis-
cussing the rise of the South as we shall see. This section further breaks
down and revisits five reasons for the rise: first, capital inflows into the
developing world; second, the rise of manufacturing in the South;
third, the character of the Chinese boom; fourth, the commodities
boom of the 2000s, and the question of South-South trade. In addition
76 The BRICs, US ‘Decline’ and Global Transformations

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

Capital inflows and the developing world


As we have seen, there was a direct foreign investment boom from the
early 1990s right through to 2008, with only a brief interruption in
2001. Thus, the total global amount of direct foreign investment
increased from $59 billion in 1982 to $202 billion in 1990, $1.2 trillion
in 2000, down to $946 billion in 2005, and back up to $1.3 trillion in
2006 (UNCTAD 2002: 3–5; 2007: 9). However, we need to treat the
data with some caution. Between 1993 and 1998, the global North
received 61.2% of world DFI, developing countries 35.3%, and the
former communist European countries 3.5% (UNCTAD 2002: 3–5). For
1999–2000, foreign direct investment inflows to the developed world
constituted 80% of total DFI, and the proportion going to developing
countries constituted only 17.9% of the total (UNCTAD 2002: 5). This
was however an unusual year as a great deal of mergers and acquisi-
tions within different countries in the North distorted the figures. As
we saw in Chapter 2, by 2006, out of a total of $1.3 trillion of direct
foreign investment, developed countries received $857 billion and
developing countries $379 billion, with transition economies receiving
$69 billion (UNCTAD 2007: 2–3), and by 2010 developing and transi-
tion (former socialist) economies accounted for around 50% of the
total global share of foreign investment inflows, and by 2012 this had
gone beyond 50% to 52% (UNCTAD 2013b: 2). To some extent this
reflects falls in direct foreign investment figures, and sharper falls in
the developed world. We investigate FDI patterns further in the next
chapter but it is still relevant to stress that for much of the boom
period, from 1993 to 2007, the direction of FDI was very concentrated,
with developing countries receiving around one-third of the global
total, and of this third, only a few developing countries received most
of this.
Moreover, though foreign investment levels had increased, this often
reflected a shift in ownership from the state to private sector, rather
than genuinely new, greenfield investment. Indeed, investment/GDP
ratios were lower across the board since the reform process started in
the early 1980s. Thus, investment/GDP ratios for sub-Saharan Africa
fell from a peak of around 23% in the early 1980s, down to around
15% in 1985. By 2000, the figure stood at around 17%. For the big
The BRICs, the South and the International Economy, 1992 to 2007 77

Latin American five (Argentina, Brazil, Chile, Colombia, and Mexico),


the investment/GDP ratio of a peak of close to 25% in 1981 fell to 16%
by 1984. By 1989, just before the FDI boom, it stood at 19%, and by
2000, it had only increased to 20% (Kozul-Wright and Rayment 2004:
30).
In the 2000s, the average savings rate in middle income countries
was actually lower than the rate in the 1990s, and investment rates and
productivity increases showed at best a mixed record (Akyuz 2012: 23).
Only China and India saw large increases in domestic savings and
investment. India’s ratio of investment to GDP increased substantially
from 24.3% in 2000 to 37.4% in 2007, but Brazil’s increased only
slowly, staying at 18.3% in 2000 and in 2007, but increasing post-crisis
to a still low 19.3% in 2010 (Akyuz 2012: 23–4). South Africa’s savings
and investment rates stood at 15.6% and 15.7% of GDP in 2000; by
2007, these had increased to only 16.7% and 15.9%. Russia’s savings
rate fell from 36.7% to 28.5% from 2000 to 2007, and its investment
rate showed only a minor increase, from 18.7% to 20% over the same
period. By 2007, the current accounts of various countries were also,
given the boom that preceded this, unimpressive, with Brazil actually
showing a deficit. By 2010, Brazil (–2.3%), India (–2.6%) and South
Africa (–2.8%) all recorded deficits, while Russia’s surplus fell from a
massive 18% of GDP in 2000 to 4.8% by 2010. In short, in many cases
economic growth was fuelled by primary goods exports and consumer
goods imports booms, the latter of which was only made possible
because of the inflow of speculative rather than productive foreign
capital. This brings us back to the question of whether, in much of the
South, the import substitution industrialization period has been
replaced, not by new economic miracles but rather production substi-
tution (Saad-Filho 2005).

The rise of manufacturing in the South


At the same time, there was of course some significant manufacturing
development in the South, but this too needs to be put into context.
Foreign investment flows and the increased use of sub-contracting
agreements by multinational companies were major reasons for the
growth of this manufacturing. The concept of a global commodity
chain was introduced earlier in the chapter, and it “describes the full
range of activities that are required to bring a product or service from
conception, through the different phases of production (involving a
combination of physical transformation and the input of various pro-
ducer services), delivery to final consumers, and disposal after use.”
78 The BRICs, US ‘Decline’ and Global Transformations

(Kaplinsky 2005: 101) The question then is the extent to which devel-
oping countries have managed to capture value within these commod-
ity chains. Since the start of the 1980s, while the developed countries’
share of manufacturing exports fell (from 82.3% in 1980 to 70.9% by
1997), their share of manufacturing value added increased from 64.5%
to 73.3%. Over the same period, Latin America’s share of world manu-
facturing exports increased from 1.5% to 3.5%, but its share of manu-
facturing value added fell from 7.1% to 6.7% (Kozul Wright and
Rayment 2004: 14). Though there are only limited data updating this
contrast between manufacturing exports and manufacturing value
added,1 there is still strong evidence that even after the boom in the
2000s, upgrading by industries in the South is limited. It is the case
that the period since 1990 has seen a significant increase in the South’s
share of manufacturing value added (MVA), from approximately 16%
in 1990 to 27% by 2007, and 32% by 2010 (Nayyar 2009: 20–1; 2013:
107–8; see also Saad-Filho 2014; UNCTAD 2013b). However, the diver-
gence between manufacturing exports on the one hand, and MVA on
the other, has (until recently) sharpened. While in 1980, as far as we
have reliable figures, these shares were broadly similar at around 10%
each, by 2000 the export share was 28.1% and the MVA share 20.9%,
and by 2006 export share stood at 34.2% and MVA at 25.9% (Nayyar
2009: 20, 21, 24). This still of course constitutes an increase in the
South’s share of MVA, but this is growing less rapidly than export share
which once again shows the importance of understanding changing
global strategies by MNCs and the use of networks of production. In
the immediate aftermath of the financial crisis, as the developed world
made only a slow economic recovery, the developing world’s share of
manufacturing exports and manufacturing value added converged
once again. Nevertheless, this increase in share is concentrated in only
a few developing countries, of which the older East Asian newly indus-
trializing countries and China are most significant (Nayyar 2009: 20;
Nayyar 2013: 109–11; Saad-Filho 2014). More generally, and not un-
related to these points about capturing value within commodity
chains, while the number of companies from the South in the FT 500
increased from 8 in 2000 to 79 in 2010, these are widely concentrated
in a narrow range of sectors – banking, oil and gas, metals and
telecommunications services – and not in sectors which generate the
most advanced technology (such as aerospace, chemicals, electronic
and electrical equipment, pharmaceuticals, retail, IT hardware) (Nolan
2012: 49). Most of these operate within protected domestic markets
and are often state owned.
The BRICs, the South and the International Economy, 1992 to 2007 79

What we have seen then is the rise of manufacturing in the South,


but we can question the extent to which this constitutes a trans-
formation of the international order. Rather, while manufacturing
exports have increased for developing countries, most of these
exports remain in low value sectors. Core countries still tend to dom-
inate in high value sectors, with high barriers to entry, high start up
and running costs, and significant skill levels. In the periphery, there
are large amounts of surplus labour, and barriers to entry, skills and
wages are low. While this gives such countries considerable compet-
itive advantages, at the same time the fact that those barriers are low
means that competition is particularly intense and largely deter-
mined by cost price, which also means low wages (Kaplinsky 2005).
Thus, while the old North-South divide could be characterized by an
international division of labour in which the developed world pro-
duced most manufactured goods (and a lot of primary goods) and the
developing world overwhelmingly produced primary goods, the new
international division of labour is more complex. Both North and
South produce manufactured goods but there remains a division
based on the type of goods manufactured, and specifically the value
added nature of the manufacturing activity (Kaplinsky 2005;
Steinfeld 2010; Nolan 2012; UNCTAD 2013b). This of course is not
static and there are examples of successful upgrade (as well as benefits
derived from high commodity prices), but it is hardly a story of con-
vergence between North and South.2
Some sense of continued divergence can be seen when we look at
shares of world income. While the share of the South in world
income has increased substantially, accounting for as much as 47.9%
of the global total by 2010 (IMF 2011), figures like this exaggerate as
they measure by using local purchasing power parity and not market
rates of exchange.3 This is misleading as it is “the market (exchange)
value of goods and services, not the PPP values that determine the
economies’ contributions to global supply and demand and the
expansionary and deflationary impulses they transmit to others.”
(Akyuz 2012: 28) If we instead use constant market rates, then the
picture is somewhat different, as Table 4.6 demonstrates. What this
shows is a quite substantial increase in the share of the developing
world, and of China’s within that share, but even then the share
remains less than the share of the US, which had been hit by a major
recession just before 2010. This demonstrates a small tendency
towards convergence at most. This issue is discussed further in
Chapter 6.
80 The BRICs, US ‘Decline’ and Global Transformations

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

2000 2010

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

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

The character of the boom in China and US-Chinese


interdependence
We saw above that China’s high rates of GDP growth were accom-
panied by high rates of growth in manufacturing, and in the export of
manufactured goods. Export-oriented industrialization was a
significant feature of the success of the original Asian tigers (see
Chapter 3), but in fact China’s export dependence was far greater. In
the period from 1965 to 2004, the combined export/GDP ratio for
Japan, Taiwan and South Korea combined varied from around 10 to
20%, but usually around 15%, with the higher 20% figure almost being
reached in the mid-1980s and 2004 (Hung 2009: 8). China’s by con-
trast was consistently between 20 and 30% from the early 1990s, and
from 2000 to 2004, it increased to over 30% a year (Hung 2009: 8).
In China from 2002–08, exports grew on average by as much as 25%
a year, while domestic consumption lagged behind growth. About one-
third of GDP growth in China was directly due to exports, and when
the multiplier effect of exports is taken into account, thus factoring in
the effect of exports on domestic consumption and investment, the
figure rises to almost 50% (Akyuz 2012: 27). The destination of these
exports was overwhelmingly to the North. In 2005, 82.9% of exports
went to the North (including Eastern Europe), and 79.8% in 2007. Post
crisis, this figure had fallen, but it was still as high as 76.4% in 2010
(Akyuz 2012: 27–8).
At the same time, while growth rates were high, the growth in con-
sumption grew less rapidly (see Table 4.7). For Japan, South Korea and
Taiwan combined, consumption as a share of GDP averaged some-
where between 50 and 60% from 1965 to 2004, for China the figure
dropped from just below 50% to below 40% in the period from 2000 to
2004 (Hung 2009: 8). The lower growth in domestic consumption
reflected in part the fact that “the intensity of the PRC’s (People’s
The BRICs, the South and the International Economy, 1992 to 2007 81

Republic of China – R.K.) export-led and private consumption growth


model has made its market and financial dependence on the US even
greater than that of its predecessors.” (Hung 2009: 9) Not unrelated to
this is the decline on the share of wage income in China’s GDP from
53% in 1998 to 41.4% in 2005 (Hung 2011: 21). This can be seen
further when we compare GDP growth rates and consumption growth
rates in China in the 2000s, discussed further below and in Table 4.7.
China’s exports to the US were a significant reason for the US’ on-
going trade deficits which, we have already seen, is an important part
of the argument that the international order is undergoing a period of
transformation. Giovanni Arrighi (2005: 64) makes the case that there
is a close parallel between British decline from the late nineteenth
century, and US decline today:

As in Britain’s case at a comparable stage of relative decline, escalat-


ing US current account deficits reflect a deterioration in the compet-
itive position of American business at home and abroad.

Indeed, Arrighi argued that for the US, the situation was worse than it
was for Britain as the latter had an empire, and particularly colonial
India, from which it could finance deficits. The US on the other hand,
has to compete in international capital markets, and imperial adven-
tures such as Iraq in 2003 make things worse as the cost of the wars
leads to fiscal deficits and the threat of higher interest rates.
Dooley et al (2009) however did not share this pessimism. They
argue that in effect, the relationship represented a new Bretton Woods
II, under which Asian countries under-valued their currencies, tied
them to the dollar, and exported to the US, thus generating current
account surpluses. The overvalued US dollar meant that imports were
cheaper in the US, albeit at the cost of increasing debt and the decline
of US manufacturing. For Asia, they faced the risk of a devaluation of
the dollar as so many foreign assets were held in dollars, but Dooley et
al argued that this was a worthwhile risk as Asia, or more specifically
China, still needed to absorb labour leaving the countryside and
migrating to urban areas. This can continue, at least as long as China
needs to absorb rural labour. This argument suggests that on the one
side, the US benefits from cheap imports and the financing of deficits
that arise in part through these cheap imports, while China (and
others) benefit from access to the lucrative US market as part of their
dominant export-orientated development strategy. In the period from
82 The BRICs, US ‘Decline’ and Global Transformations

1997–2006, nominal GDP nearly tripled, while the stock of foreign


reserves rose from 15 to 41% of GDP (Schwartz 2009a: 166).
The debate here is quite straightforward. On the one side is the argu-
ment that China’s exports led to cheap imports for the US, and China
then recycled its export earnings in the form of purchasing US debt,
which in turn helped to keep interest rates low in the US. On the other
side, the US provided a lucrative export market for Chinese goods, and
the purchase of US debt helped to keep the value of the yuan low, thus
facilitating further exports. This represented a ‘Chimerican’ interde-
pendence (Ferguson and Schularik 2007), in which both sides
benefited. Critics argued that due to a number of fault lines, this inter-
dependence was unsustainable. Though there was disagreement about
some of the specifics, critics generally identified an undervalued yuan,
capital mobility, and the hollowing out of US manufacturing as the
main problems, and most suggested that at some point, surplus coun-
tries would want more for the purchase of US debt, but the resultant
higher interest rates would undermine both the US economy and
Chinese exports to the US (Eichengreen 2004).
It is undoubtedly the case that “the East Asian states were by the
middle of the decade accumulating ever more dollar reserves at a low
rate of return at ever greater currency risk.” (Thompson 2010: 45) From
2002 to 2007, the weighted dollar index against a basket of currencies
(the euro, yen, sterling, Swiss franc, krona and Canadian dollar) fell by
36% and by 40% against the euro (Thompson 2010: 45). On the other
hand, efforts to diversify foreign exchange reserves by the South
Korean central bank in 2005 led to retreat in the face of the fall of the
dollar and the consequent threat of a wholesale devaluation of Korea’s
dollar denominated assets (Thompson 2010: 43–4). Covering much of
the period of the falling value of the dollar, from June 2003 to June
2005 China’s official holdings of dollar bonds rose from $255 billion to
$527 billion (Thompson 2010: 39). In the period from 2003–07,
Middle Eastern and developing Asian countries (mainly China)
increased their holdings of US Treasury bonds by $771 billion, an
increase of 23% (Panitch and Gindin 2012: 309; Bernanke et al 2011).
We should also note in passing for now (see the next chapter) that
these same states increased their purchase of mortgage backed secur-
ities by 231% (to $656 billion) over the same period, a trend replicated
by private European banks as well (Panitch and Gindin 2012: 309).
As well as the housing boom, a further reason for the increase in the
purchase of housing debt was the weakening of the dollar. From 2005
to 2007, some energy exporters adopted policies which further under-
The BRICs, the South and the International Economy, 1992 to 2007 83

mined the dollar’s value, with Russia and Nigeria diversifying into
other sources of foreign exchange, and Kuwait abandoning its dollar
peg. Even Saudi Arabia failed to match the US Fed’s interest rate cut,
despite a pegged exchange rate policy (Thompson 2010: 49). States and
private investors responded by purchasing fewer Treasury bonds and
more housing bonds, which were guaranteed by the US’ two leading
mortgage corporations, Fannie Mae and Freddie Mac. In the twelve
months up to January 2005, foreign central banks made net purchases
of $182 billion of long-term Treasury bonds and $60.3 billion of
agency bonds (mainly issued by Fannie Mae and Freddie Mac). In the
year up to January 2008, these same central banks made net purchases
of $44 billion of treasury bonds and $103.4 billion of agency bonds
(Thompson 2010: 50).
We thus see a mixed picture in the boom years, with some evidence
supporting the optimistic scenario regarding Chinese-US interdepen-
dence, and some suggesting a darker picture. Whatever the merits of
the two sides on this debate, we can identify a number of important
considerations. First, the boom from the early 2000s up until 2007 was
one that reflected interdependence between the US and China, and
other countries that purchased US debt. As we will see in the next
chapter, this is important when thinking about the causes and conse-
quences of the financial crisis of 2008. Second, we need to understand
the specifics of that crisis, which emerged in the housing market and
not in the equities or currency markets. Third, and following on from
this point, while some pessimists identified certain dangers in this
interdependence, the crisis that did emerge and the responses to it did
not necessarily confirm the views of at least some of the pessimists, not
least when investors, in the short-term at least, flocked to the dollar
and the dollar value increased. Fourth, we need to understand how the
conditions that led to a boom from 2002–07 (and indeed from 1992 to
2000) gave rise to a crisis in 2007 and 2008. These questions are impor-
tant for understanding the post-crisis world, both in terms of tran-
scending that crisis and in terms of whether or not China, the BRICs,
and the ‘new South’ represent a new powerhouse in the world
economy which has effectively decoupled from the West. These ques-
tions are considered in depth in the next chapter, but the discussion
here immediately suggests some scepticism concerning the decoupling
thesis.
However there is one further argument that we should consider,
which is that China’s export dependence is exaggerated (Anderson
2007). This is an important argument because if it is true, then this
84 The BRICs, US ‘Decline’ and Global Transformations

would strengthen the case made for a decoupling thesis and the argu-
ment that in the post-crisis world, China can lead the South and
perhaps the rest of the world out of recession and stagnation. The
essential claim made is that China’s export dependence is a statistical
illusion based on misleading figures such as export/GDP ratios. This is
because of China’s role within the East Asian global production chain
which means that its role as a final assembler of parts and components
made elsewhere distorts the figures. Thus, “the gross value of finished
products includes a big chunk of the value of imported parts and com-
ponents, inflating the overall number.” (Hongbin and Wang 2013)
What this means is that the figures are distorted because of double
counting in terms of value added. For example if China exports $100
of goods to the US, $10 of which is originally produced in Vietnam,
then only $90 of goods should ‘count’ for China but official
export/GDP ratios count $100. This double counting also distorts the
figures on South-South trade (see below) and China’s trade surplus
with the US. For example in the case of the latter China’s official trade
surplus with the US was $172 billion in 2005 but in value added terms
the figure was only $40 billion (Akyuz 2011b: 11). The appropriate
figure to measure then is not export/GDP ratios but export valued
added/GDP ratios, and the latter figure is far lower than the former.
Anderson (2007) suggests it was only around 7.7% for much of the
boom years.
While it is certainly true that China’s exports have a high import
and high foreign value added content, this does not necessarily mean
that China did not have a high degree of export dependence in the
boom years. This is because this approach ignores the impact of
exports on domestic demand. Anderson for example deducts from
exports both the import content directly linked to sectors producing
exportables, but also inputs from other sectors, and thus “excludes the
indirect domestic value-added content of exports, which…exceed
direct domestic value-added by a large margin.” (Akyuz 2011b: 14) If
we take into account the effect of import content on exports and
domestic demand then the figure is much higher, perhaps as much as
over 30% according to Akyuz (2011b: 14). High growth rates are there-
fore accompanied by comparatively low rates of increase in domestic
consumption and very high rates of increase in exports, as demon-
strated in the case of the latter by an increase in the trade surplus/GDP
ratio from 3% in 2002 to 8.2% in 2006 and 9.3% in 2007 (Akyuz
2011b: 13). Table 4.7 shows the differences in rate of growth of GDP
compared to consumption, investment and exports.
The BRICs, the South and the International Economy, 1992 to 2007 85

Table 4.7 Growth of GDP and other components in China, annual


average percentage growth

Year GDP Consumption Gross Fixed Capital Exports


formation

2002 9.1 7.4 13.2 29.4


2003 10 6.6 17.2 26.8
2004 10.1 7.1 13.4 28.4
2005 10.4 7.3 9 24.3
2006 11.6 8.4 11.1 23.8
2007 14.2 10.8 14.2 20
2008 9.6 8.5 11 8.6
2009 9.1 8.5 19.8 –10.4

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

It should be noted however that while growth rates were lower in


2008 and 2009, they remained high even though export growth fell
substantially (2008) or even fell in real terms (2009). This would appear
to challenge the view that China has a high degree of export depen-
dence. But as the next chapter will show, much of this growth must be
linked to the fiscal stimulus put into place in response to the collapse
of export demand.

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


One of the main arguments made for a transformation of the interna-
tional order has been the rise of South-South trade, which increased
substantially in the 2000s. The share of this trade in total world trade
increased from 9.9% in 2000–01, to 14.5% in 2006–07, to as much as
16.9% in 2009 (ADB 2011). This is not so high that it can really be
called a global transformation, but there is also much more to say
about its rise. First, it is heavily concentrated, with East Asia account-
ing for 75% of all South-South trade, and China 40% (Akyuz 2012: 30).
Second, in terms of the BRICs, and the trade that takes place between
these countries, China is significant but the others are not. This can be
seen if we look at Table 4.8 and 4.9 below, which compares China’s
trade with other BRICs with India’s trade with other BRICs.
The East Asian share is however of particular interest because it
demonstrates an enormous problem with the figures which show
growing South-South trade. The increase in South-South trade can be
seen less as evidence of growing solidarity between these countries,
and more one that reflects the unequal and subordinate integration of
parts of the South into global production networks. The South’s share
86 The BRICs, US ‘Decline’ and Global Transformations

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

China exports China exports China imports China imports


2001 2009 2001 2009

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

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

Table 4.9 India’s trade with the other BRICs

India exports India exports India imports India imports


2001 2009 2001 2009

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

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

of world trade has increased in part because of the greater import


intensity of its exports, as the OECD (2010a: 72) recognizes:

About 60% of trade within South and South-East Asia is related to


vertically integrated activities – that is, the provision of inputs for
goods consumed outside the region. If China is now the world’s
workshop, then large parts of South-East Asia have become China’s
supplier of parts and components.

In other words, much of the increase in the share of South-South trade


reflects the double counting associated with the high import intensity
that comes with integration into the global commodity chains dis-
cussed above. The import component of consumption in China is far
lower than that of the developed world, and between 2003 and 2007,
possibly as much as 60% of total Chinese imports were used for
exports, while only around 15% of imports are for domestic consump-
tion, which is about a quarter of the US’ import-consumption ratio
(Akyuz 2012: 31). Chinese merchandise imports from East Asia is dom-
inated by manufactures (see Tables 4.10 and 4.11). These parts and
components are then used for China’s export industries. Breslin (2005:
742–4) suggest that China’s rise itself may be exaggerated, as its eco-
nomic miracle cannot be divorced from its role in East Asian produc-
tion networks. In particular, China specializes in completing the
The BRICs, the South and the International Economy, 1992 to 2007 87

Table 4.10 Commodities imports of China in $ billions

Trading partner 2003 2003 2007 2007 2010 2010


(region) Non-fuel Fuel Non-fuel Fuel Non-fuel Fuel

Africa 2.3 4.9 7.9 26.1 19.5 41.5


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

Source: Adapted from Akyuz 2012: 32, with author permission

production of low value, labour intensive goods, and relies on tech-


nologies produced in other East Asian countries, with which it has a
substantial trade deficit. Thus for example, South Korea, Japan and
Taiwan combined had a $30 billion trade surplus with China in 2000;
by 2010 that figure had increased to over $200 billion (Huang 2012).
Moreover, the East Asian region provided over 50% of total foreign
investment into China for much of the 1990s China has increased its
exports to the European Union and the United States, while the rest of
East Asia (excluding Japan) has seen its share of exports to the EU and
the US fall, while its export share to China has increased. Thus, China’s
percentage of manufacturing exports to the US increased from 9.1% in
1992 to 22.9% in 2000, and to the EU it increased from 9.5% to 16.7%
for the same years. Over the same period, Thai export shares to the US
fell from 26.4% to 22.9% and the EU from 21.3% to 17.7%, and South
Korea’s fell from 25.9% to 23.9% (US), although they showed a small
increase in shares to the EU, far bigger was the share of exports to the
rest of East Asia. With some small variations, there has been a
significant increase in shares by East Asian exporters to the rest of the
region, while EU and US shares (either taken together or individually)
have generally fallen or stagnated (Athukorala 2003: 40–1). Even more
significant has been the increase in shares in parts and components
rather than finished goods. Indeed, between 1992 and 2000, these
accounted for 55% of the export growth of Indonesia, Thailand,
Malaysia, Singapore, the Philippines and Vietnam (Athukorala 2003:
33). There was no clearly identifiable pattern in the share of com-
ponents and parts in trade to the US or EU from East Asian countries,
with some showing increases and some decreases, but generally the far
bigger increases in shares of parts and components was in East Asian
countries trade with China. By 2000, the shares were 50.6% for
Malaysia, 54% for Thailand, 50.3% for Singapore, 81.8% for the
88 The BRICs, US ‘Decline’ and Global Transformations

Table 4.11 Manufactured imports of China (totals and percentages)

Trading partner 2003 2003 2007 2007 2010 2010


(region) $ % of $ % of $ % of
billions total billions total billions total

Africa 0.8 0.3 1.8 0.3 2.6 0.3


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

Source: Adapted from Akyuz 2012: 32, with author permission

Philippines, 26.7% for South Korea, and 29.8% for Taiwan. At the same
time, parts and components in China’s share of exports to the US
(4.3% to 9.1%) and EU (2.9% to 10.9%) increased from 1992 to 2000,
but from far lower bases and the total shares remained low (Athukorala
2003: 48–9). In the period from 1992–2003, parts and components
accounted for 52% (Taiwan), 44% (Malaysia), 70% (Philippines), 59%
(Singapore) and 31% (Thailand) of the total manufacturing export
growth for particular countries (Athukorala and Yamashita 2005: 33).
For China, the figure was 17% (Athukorala and Yamashita 2005: 33)
Taken together, these figures suggest that China has increased its role
as a manufacturer of final goods produced within the East Asian
region, which are exported to the EU and US (and Japanese) market.
Lim and Lim (2012) suggest that around 22% of exports of the main
East Asian countries to each other are for final demand, while 60% is
destined for final demand in the US, Europe and Japan. Seen in this
way, the rise of South-South trade reflects less the rise of the South and
more its continued dependence on the markets of the North. The share
of East Asian countries’ exports to China increased significantly in the
period from 1995 to 2005: from 5% to 13.5% for Japan; from 7% to
21.8% for South Korea and from 0.3% to 23.3% for Taiwan (Hung
2009: 17). This reflects a growing pattern in which China has increas-
ingly played the role of final producer and/or assembler of manufac-
tured goods produced in East Asia and exported to the West. Bellamy
Foster and McChesney (2012: 13–14) thus argue that:

In the complex global supply lines of multinational corporations,


China primarily occupies the role of final assembler of manufac-
tured goods to be sold in the rich economies. Export manufacturing
The BRICs, the South and the International Economy, 1992 to 2007 89

is directed not at the actual production of goods, but at commodity


assembly using parts and components produced elsewhere and then
imported into China. The final commodity is then shipped from
China to the developed economies.

The centrality of the East Asian production network does not of course
mean that Africa and Latin America are irrelevant, though of course it
might mean that the latter two regions need China (or at least Chinese
growth) more than China needs them. We will revisit this argument in
later chapters, but for now, the fact remains that both Africa and Latin
America have benefited from a primary commodity boom in the 2000s.
In some respects, this boom represents a substantial shift away from
the idea that there is a tendency for the terms of trade to decline for
primary goods. It also therefore challenges the old development ortho-
doxy that in order to develop one must industrialize, discussed above
and in the previous chapter. Moreover, some manufacturing goods
have seen a decline in their terms of trade in recent years, largely as a
result of rising demand from China pushing up the prices of some
primary commodities, alongside financial speculation in these markets
(Farooki and Kaplinsky 2012: 180–6). This might suggest that special-
ization in primary commodities is a useful strategy for at least some
developing countries.
However, we might interpret the boom very differently. We saw that
there was a substantial decline in commodity prices in the immediate
aftermath of the financial crisis, and while there has since been some
recovery (discussed in the next chapter), the commodities boom could
be “viewed as a new super-cycle (i.e. a trend rise in real prices of a
broad range of commodities that lasts for one to two decades and is
driven by urbanization and industrialization in at least one major
economy)” (UNCTAD 2012: 12) If this is the case, then the question
becomes one of locating the point at which this super-cycle comes to
an end. This is not an easy task but asking this question forces us to
locate the source of the commodities boom in factors external to those
countries benefiting from it, namely continued high rates of growth in
China (alongside financial speculation, which is discussed in Chapters
5 and 6). We have suggested the reasons above why the high rates may
not be sustainable, though of course post-crisis they were maintained
for a period and commodity prices rose accordingly. This is discussed
in the next chapter (and in Chapter 8), but what we can immediately
say is that if there is a slowdown in industrialization and urbanization
in China, then this will have negative knock-on effects elsewhere, and
90 The BRICs, US ‘Decline’ and Global Transformations

then all the old vulnerabilities associated with specialization in


primary goods production will re-appear.

Conclusion

The booms of the 1990s and especially the 2000s occurred in the
context of a particularly favourable international context for the
South. Latin America and Africa benefited from increasing commodity
prices and lower costs of financing payments deficits, which facilitated
growth and the expansion of demand. Oil exporters benefited from
high oil prices and for oil importers, any external shocks were covered
by capital inflows. But at the centre of this process was the relationship
between China and East Asia on the one hand and the US and the
developed world on the other, whereby the former grew rapidly
through exports to the latter, which in turn benefited from cheap
imports. While this gave rise to on-going trade deficits for the US, these
same exporting countries were willing to finance these deficits through
capital flows to the US, initially mainly in the form of US Treasury debt
but also in the form of agency debt linked to the US mortgage market.
This process further reinforced the boom as capital inflows into the US
allowed interest rates to remain low, thus further fuelling an increase
in debt, including in the US mortgage market. This debt in turn
allowed for the continued expansion of exports from East Asia and
especially China. This relationship also facilitated a wider boom in the
South, based on both the US and Chinese ‘ends’ of this relationship.
The South benefited from increased demand from China for its goods,
which led to rising commodity prices in the period from 2002–07, and
from capital flows, both from China and from the US and elsewhere.
There were thus very specific international economic relations,
which facilitated the booms of the 1990s and the 2000s. But this
period also saw regular financial crises, culminating in the global crisis
of 2007–08, which was intimately connected to the international
factors that had facilitated the boom. This is the subject of the next
chapter.
5
The South and the Causes and
Consequences of the Financial
Crisis, 2007–14

This chapter examines the causes and consequences of the financial


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

91
92 The BRICs, US ‘Decline’ and Global Transformations

The immediate causes of the global financial crisis 2008

The autumn of 2008 saw a period of almost unprecedented tumult in


the international economic order, perhaps best summarized by George
W. Bush’s statement that “(i)f we don’t loosen up some money into
the system, this sucker could go down.” (quoted in Mason 2009: 28)
Whilst it had been clear for at least a year that there were difficulties in
the global economy, September and October 2008 saw some dramatic
developments. On September 15th, after failing to be bought out by the
Korean Development Bank and the Bank of America, the leading
investment bank Lehman Brothers collapsed (FCIC 2011: 324–42). The
following day, the US government agreed a major bail-out and 80% in
the main insurance group in the US, American Insurance Group (AIG).
AIG was increasingly exposed to the drying up of short-term lending
by money markets, and the declining value of its collateral, much of
which was in mortgage backed securities, discussed further below.
Finally, AIG increasingly had to pay out to counterparties that had
insured against falling securities, leaving it exposed to massive pay outs
but with little access to short-term credit (FCIC 2011: 344). Panic
ensued and lending between banks, crucial to the circulation of credit,
effectively dried up, as the interest rate at which banks were prepared
to lend to one another increased substantially. This rate is usually quite
close to the rate at which it costs governments – and the US govern-
ment in particular – to borrow, with an average discrepancy of around
0.3 points, but on September 18th, it reached 3.02 percentage points. At
the same time, the cost of borrowing for non-financial firms increased
from around 2 to 8% (Mason 2009: 17).
The collapse of Lehmans led to stock market volatility, with
significant losses on Wall Street, London and elsewhere, which were
then counter-acted at rumours of impending government bail-outs.
The Troubled Assets Relief Programme (TARP) planned a US govern-
ment bail-out of $700 billion to buy up Wall Street’s toxic debts. This
led to considerable opposition from both anti-corporate left and liber-
tarian right, and an initial defeat of the bail-out plan in Congress on
September 29th. This again led to substantial stock market falls.
Meanwhile in Europe, banks were desperate to purchase dollars in a
market where there was limited availability, and simultaneously some
were exposed to the bad debts of Lehmans and AIG. In the UK,
Bradford and Bingley was nationalized and sold on to Santander, and
there was pressure on HBOS, Lloyds TSB and RBS. Hypo Real Estate was
bailed out by the German government and the joint Dutch-Belgian
operation Fortis was semi-nationalized, while Iceland and Ireland saw
The South and the Causes and Consequences of the Financial Crisis, 2007–14 93

the removal of money from their banks, which in the case of the latter
was only reversed when the government stepped in to guarantee all
deposits in its 6 major banks. This decision in turn threatened a run on
British banks as investors moved money into Ireland, thus threatening
the start of a process of competitive bail-outs. Meanwhile, the rate at
which banks leant to each other increased, with a 3.83% discrepancy
between what is known as the TED spread, namely the aforementioned
inter-bank lending and bank-government lending (Mason 2009: 41).
While nationalizations and bail-outs spread across Iceland, Russia
and Spain, Britain and the US dithered until it became clear once again
that there was a need for bail-outs and nationalizations. Eventually,
after considerable opposition from Congress, the $700 billion Troubled
Asset Relief Programme (TARP) was passed in early October 2008
(Doran 2008). This in essence meant that the US state bought up the
bad debts of banks at prices that were advantageous to the banks
(that is, above the market rate at that point in time). In Britain, a
£500 billion bail-out was implemented on October 8, 2008 (Wearden
2008). But these were only the first stage of a number of bail-outs and
nationalizations of loss making financial companies. The total value of
the renationalization of banks and insurance companies in the US, UK
and Europe was approximately equivalent to reversing about half of
the total global privatizations of the last thirty years; the nationaliza-
tion of the insurance agency AIG was the equivalent in value terms of
reversing all the privatizations in post-Communist Europe; in 2008, the
UK government’s liability for Northern Rock debts was greater than the
combined total value of all private finance provided by EU-wide private
finance initiatives since 1991; and the total cost of constructing sewers
and drainage and water systems throughout the world’s cities for 75%
of the world’s urban population would be about 280 billion euros,
about 5% of the guarantees awarded to banks (Hall 2008). However,
this is not a straightforward ‘return of the state’, for as Fine (2012: 54)
points out, “we now have the paradox of what would be generally
characterized as the adoption of neoliberal austerity measures to cut
the fiscal deficits that have been incurred by state support to private
(financial) markets.”
How then do we make sense of this crisis? In terms of immediate
manifestation, as good a place to start is one of the most popular
accounts of the crisis:

If the global economic crisis can be reduced to one single phenom-


enon, it is this one: the fact that nobody knows which banks are
solvent. Because banks are crucial to the creation and operation of
94 The BRICs, US ‘Decline’ and Global Transformations

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

Many questions follow from the crash of 2008. How did we get to
this position? What changes had occurred in international finance that
brought us to such a precarious situation? Was the crisis caused by
financial markets or by inadequate regulation of these markets (or a
combination of both)? What does the crisis mean for economic
futures, and how in turn does this relate to public policy? (Gamble
2011) Does the economic crisis mean a political crisis, and specifically
does it mean the end of neoliberalism? (Mason 2009; McNally 2011)
Or are we in a situation where there is a crisis in neoliberalism but not
of neoliberalism (Saad-Filho 2010b), one in which the old order will
continue in the absence of a convincing alternative? (Hay 2011)
Related to these broad issues, and of more direct relevance to our con-
cerns, what does the future hold for the international order, and the
leading role of the US in that order? Are we witnessing the transcen-
dence of US hegemony and the rise of China as a (peaceful or other)
hegemonic challenger? (Arrighi 2007) And what does this mean for the
supposed rise of a new South, the BRICs and so on?
Full justice cannot be given to answering all of these questions, and
our main focus is inevitably on the last two questions. However, to
adequately answer these questions we will at least touch on answers to
those other questions. For as the conclusion of the previous chapter
made clear, the boom years of the 1990s and especially the 2000s were
also the years that paved the way for the crash of 2008. We therefore
need to understand how boom gave way to crisis, and this involves
addressing questions around regulation and the growing centrality of
finance in the world economy. These in turn have implications for
understanding the relationship between US hegemony, neoliberalism
and the international order.
The rest of this section, then, will focus on the lead-up to, and out-
break of, the crisis, with a particular (though not exclusive) focus on
the country where the crisis originated, the USA. It will examine in
The South and the Causes and Consequences of the Financial Crisis, 2007–14 95

more depth four crucial issues: (i) changes in regulation in the US in


particular up to 2007–08; (ii) the rise of derivatives, securitization, and
off-sheet banking; (iii) securitization and the sub-prime mortgage
market, and; (iv) the housing crisis that culminated in the financial
crisis. In addition, a fifth sub-section will also briefly show how there
took place an international shift from a private to a sovereign debt
crisis.

Regulation and the financial crisis


Much of the debate that has followed the crisis is over whether it was
caused by either poor, or insufficient, government regulation. The
debate here is the long-standing one about whether markets can be
self-correcting, and if so, what is the appropriate role for government,
or whether markets and particularly financial markets, are prone to
failure and so in need of more active and visible regulation which is
more effective than market forces (Hayek 1949; Keynes 1973). On the
other hand, rather than set up a state-market dichotomy, we could
argue that regulation was poor precisely because it was market friendly;
in other words, regulation was specifically designed to expand and
extend the reach of finance, rather than to contract it. Two pieces of
legislation were important in expanding some of the key practices of
the 2007–08 crisis. In 1999, the Gramm-Leach-Biley Act was passed
(FCIC 2011: 55), which repealed the 1933 Glass-Steagall Act that was
passed at the height of the New Deal. Glass-Steagall had placed a major
restriction on the activities of US banks, and had specifically enforced
the separation of commercial and investment banking. The former is
essentially mainstream high-street banking activity in which banks
lend out deposits from customers at a higher rate of return than they
pay to those customers who deposit their incomes. This is a relatively
safe and secure practice, at least when compared to the speculative
activity of investment banking. In the Great Depression, many people
had their savings wiped out by speculative activity, and Glass-Steagall
was designed to ensure that this could not happen again. New Deal
measures also ensured that banks had limited access to capital across
different states, thus ensuring that they could not become too big –
and indeed, too big to fail. Investment banks existed but these limits
on their activities meant that they largely acted as intermediaries for
the savings of very wealthy individuals, while the commercial banks
dealt mainly with the savings of ordinary Americans.
While the 1999 Act, led by Republican Senator Phil Gramm, repealed
Glass-Steagall, in many respects it simply formalized, though also
96 The BRICs, US ‘Decline’ and Global Transformations

enhanced, a process of reversal that had already taken place. Under


Reagan, Bush I and Clinton, measures were put in place which allowed
commercial banks to invest some of their capital in investment
banking. The proportion increased from 5% in 1987 to 25% in 1996
(Mason 2009: 62). Legislation concerning mergers and acquisitions was
also liberalized, including of financial institutions across national
boundaries, and banks were allowed to expand into insurance activ-
ities. Similar liberalization processes took place in Britain and Hong
Kong, and even to some extent in Germany and Japan. These develop-
ments led to a wave of mergers, culminating in the merger of Travelers
and Citicorp into Citigroup in 1998, even though this was contrary to
the Glass-Steagall rules still in place. This merger was approved by
President Clinton’s then Treasury Secretary, Robert Rubin, just a year
before he became joint Chief Executive Officer of Citigroup (FCIC
2011: 92–3; Mason 2009: 62–3).
In 2000, the Commodity Futures Modernisation act was passed,
without any meaningful debate, through Congress. The effect of this
Act was to exempt futures and derivatives from any meaningful regula-
tion. This applied particularly to energy futures, reflecting the
influence of Enron on the passage of the Act, just one year before it
collapsed in the wake of massive corporate fraud. As Mason (2009: 58)
contends, the effect of these two acts was to enhance the development
of four things that were central to the financial crisis. First, they dereg-
ulated investment banking. Second, they expanded sub-prime mort-
gage lending. Third, they expanded the derivatives market, and fourth,
they facilitated the growing merger between banking and insurance.
We now turn our attention to these, first looking at investment
banking and derivatives.

Investment banking and derivatives


Liberalization of financial services pre-dates the actions outlined above,
and can be traced back to a number of developments after 1945.
Briefly, in the post-war period the US ran balance of payments deficits
to stimulate the international economy with dollars. This period saw
the expansion of trade and production, and a growing international-
ization of capital as multinational companies invested in a variety of
countries. The very success of this so-called golden age (Marglin and
Schor 1992) facilitated not only the internationalization of production,
but the internationalization of finance, including offshore banking and
the Eurodollar market. This in turn stimulated financial accumulation,
The South and the Causes and Consequences of the Financial Crisis, 2007–14 97

which increasingly by-passed the regulations that were essential to the


financial repression of the neo-Keynesian era. At the same time, the
US-led system led to the recovery and rise of competitors, which
undermined US hegemony. Financial expansion soared in the context
of the breakdown of Bretton Woods and the shift from a fixed
exchange rate system, with for instance all manner of hedge funds
developing in response to the uncertainties caused by trading in fluctu-
ating currency values. But these very same funds became a source of
instability as they were also used to speculate against the price of
certain commodities and currencies. The 1970s also saw the further
stimulation of the market in international dollars, as oil producers
placed their increased wealth in various financial institutions which
then lent this money to Latin America in particular. From 1979, the US
responded to the inflationary crisis by massively increasing interest
rates, which led to recession and unemployment in the developed
world, and unsustainable debt in the developing world (Kiely 2005:
ch.3). In this context of floating exchange rates, financial markets
expanded enormously, a process reinforced and extended further
by the growing liberalization of financial services across different
countries.
Thus, the market for foreign exchange expanded enormously, from
$70 billion a day in 1980 to $500 billion a day in 1988 and up to as
much as $3.2 trillion a day in 2007 (Mason 2009: 65). While the devel-
opment of derivatives made sense in the context of floating exchange
rates, this unprecedented expansion was clearly not simply designed
for traders or producers to hedge against unexpected fluctuations in
currency prices. Instead, the expansion reflected the fact that the deriv-
atives market had itself become a source of speculation, as traders sold,
swapped or gambled on a future price of a commodity (or a derivative
linked to a commodity). This wider derivatives market involved the use
of futures and options. Futures were where a party agreed to buy some-
thing in the future at a price fixed in the present, and these were taken
on by traders hoping to sell something on at a higher price somewhere
down the line. An option is similar but in this case, a party agrees on
an option to buy. Finally, a swap is where a party agrees to swap a
commodity, bond, stock or currency at a set price for a set time.
Though some of these transactions take place through exchanges, most
notably oil, most are over the counter, between buyer and seller. The
global derivatives market has thus clearly moved way beyond foreign
exchange markets, and it reached $596 trillion by 2007, compared to
world GDP of $65 trillion (Mason 2009: 65–6).
98 The BRICs, US ‘Decline’ and Global Transformations

These developments alone only go so far in explaining the crash of


2007–08, and to move to the specifics of that we need to understand
what happened in the period after 2000–01. The 1990s saw a boom in
hi-tech investments, and NASDAQ, the main stock exchange for hi-
tech industries reached a peak of 5048 in March 2000. By October
2002, it had lost 78% of its value, the dot.com bubble had come to an
abrupt end, and many internet firms went bankrupt without ever
becoming profitable (see Chapter 4). At the same time, corporate fraud
was exposed through the collapse of Enron, and a whole series of scan-
dals were uncovered. Particularly significant was the common invest-
ment bank practice of giving conflicting information to parties in share
transactions, telling clients one thing and divisions of their own
investment bank quite another. This was made possible by the fact that
investment banks could act as intermediaries for both buyers and
sellers of shares, and in 2003, the Securities and Exchange Commission
issued $1.4 billion of fines and compensation orders to ten Wall Street
banks for misleading investors (Mason 2009: 73). This crisis spread
across the economy as a whole and both Standard and Poor’s and the
Dow Jones Index saw sharp falls in the early 2000s.
However, two factors shifted attention away from corporate scandals
for a while. First, monetary policy was eased and interest rates cut,
which helped to fuel a new investment bubble. This is addressed in
more detail below. Second, and more relevant to our immediate
purpose, the banking system developed new methods that effectively
evaded any regulations that might restrict them. In particular, banks
have capital reserve requirements, as agreed at Basel II, a treaty signed
in 2004 and designed to set international standards for banks; in effect
banks were supposed to hold 4% of their capital in case of economic
downturns. While this might be a useful safety tool for the system as a
whole, for each individual bank it is a cause for regret because it is idle
capital, or capital that is not being used to make a profit. What banks
did was find a way to evade this system of capital requirements, so that
they could borrow short (at low interest rates) and lend long (at higher
interest rates), but under this shadow banking system “they were doing
it with no depositors, no shareholders and no capital cushion to fall
back on. They were pure intermediaries.” (Mason 2009: 78) In order to
do this, banks created two kinds of front companies that were off the
official balance sheet: conduits and structured investment vehicles.
Conduits were set up by banks in tax havens, and they did not
have to declare these on annual accounts unless they were deemed to
be significant by regulators and most were not (Palan et al 2009;
The South and the Causes and Consequences of the Financial Crisis, 2007–14 99

Shaxson 2012). Banks insured themselves for part of their exposure to


conduits, with AIG taking much of this on, and Credit Ratings
Agencies declared these safe investments. Structured investment vehi-
cles (SIVs) had no back up at all, and were shrouded in secrecy.
Citigroup held 25% of the market for all SIVs, and Centauri, its biggest
SIV, lent out $21 billion by the time of the outbreak of the crisis, but
there was no mention at all of this SIV in Citigroup’s 2006 annual
report (Mason 2009: 80). With few exceptions (see Tett 2010), the
shadow banking system was ignored in annual reports and by most
journalists, but it was “as central to the official banking system as
Enron’s secret companies had been.” (Mason 2009: 80) Structured
investment vehicles thus in effect “allowed banks to increase their
borrowing without breaching minimum capital requirements.”
(Thompson 2010: 76) In effect the shadow banking system took on the
form of an elaborate global Ponzi scheme whereby money was effec-
tively being transferred from one source on to another to give the illu-
sion of continually expanding wealth and indeed the supposed end of
boom-bust cycles1 (see Minsky 1982: 36; Kindleberger 2000: ch.5). As
Mason (2009: 80) suggests, “It could only work as long as every piece
of paper on sale could find a buyer. It collapsed because certain pieces
of paper that had become central to the profitability of the system
suddenly became unsellable.”
To understand why certain pieces of paper became unsellable we
now turn our attention to securitization and the US sub-prime mort-
gage market.

Securitization and the sub-prime mortgage market


On the face of it, one of the puzzling issues about the financial crisis
was how defaults by some low income mortgage holders in the US led
to a credit crunch which brought the financial system to its knees.
To do this, we need to link the low income mortgage market to the
phenomenon of securitization.
In response to the economic downturn of 2000–01, exacerbated by
the uncertainty around the terrorist attacks in September 2001, the US
Federal Reserve successfully boosted a recovery by cutting interest rates.
In the first 8 months of 2001 they were cut from 6.5% to 3.5%, and
after September 2001, they eventually fell to just 1%, lower than the
rate of inflation (Mason 2009: 84). At the same time, money poured in
from surpluses generated in East Asia and so there was a great deal of
cheap money looking for profitable investment (see the next section for
a detailed discussion). This outlet was to be housing, and in particular
100 The BRICs, US ‘Decline’ and Global Transformations

the market for mortgages for low income families, which in turn helped
to keep the whole housing market booming, at least for a time.
But before we examine the sub-prime mortgage market, we also need
to examine some further practices of financial institutions around this
time. A few years before, in 1997, JP Morgan launched BISTRO, which
stood for broad index secured trust offering (see Tett 2010: 59–60). In
effect, this was what was later called a collateralized debt obligation, in
which JP Morgan took a bundle of loans worth $10 billion, set up a
front or arm’s length company, and swapped the risk/insurance on
these loans (which were valued at $700 million) with that company. In
other words, they swapped the risk of default with that front company
– this was a Credit Default Swap (CDS). The debt of $10 billion was not
an actual debt, but rather a debt that might be incurred in the future –
it was a derivative. JP Morgan then sold off the front company, in
chunks to investors, and this in effect was a collateralized debt obliga-
tion or CDO. What this meant was that JP Morgan got $10 billion of
risk off their books at a cost of only $700 million, and so it was not sur-
prising that other investment banks followed. This bundling of risk
into chunks which were then sold off to investors was securitization
(see Tett 2010: 51–4).
However, for this to work there needed to be a new supply of high risk
loans, and it was at this point that the sub-prime mortgage market
entered the picture. Sub-prime lending had taken place on a relatively
small scale in the 1980s and 1990s, but it was in the 2000s that the sub-
prime boom really took off. From 2001 to 2005, sub-prime mortgages
grew from 7 to 20% of the total US mortgage market, and Alt-A loans
from 2.5% to 12% (Thompson 2010: 74). Sub-prime mortgages in places
like Detroit and Baltimore were high interest as the loans were riskier
(though initial rates might have been lower), they were generally vari-
able rates, and had lots of small-print such as obligatory renewal with
the same mortgage firm, often with an additional fee. Detroit’s city
council attempted to restrict sub-prime lending in 2002 but without
success, and though already by 2004, 8% of sub-prime homes had been
seized after default, the sub-prime boom persisted from 2004–06.
What happened in the boom years, then, was quite simple.
Mortgages were packaged together with other debts, or securitized, into
a CDO. In the United States, approximately $6 trillion of the $10 tril-
lion owed in outstanding mortgages had been packaged into Mortgage
Backed Securities, and the issuing of CDOs rose by almost 10% in 2006
to $1.2 trillion (Elliot and Atkinson 2009: 204). In 2001, sub-prime and
Alt-A mortgages made up 9% of the new mortgages that were secur-
The South and the Causes and Consequences of the Financial Crisis, 2007–14 101

itized; by 2006, this figure had risen to 40% (Thompson 2010: 74).
Banks then bought insurance on the CDOs, thus (in theory) averaging
out the securitized risks, and moving them off the company’s balance
sheet. With the averaging out, and backed by some complicated (and
ultimately spurious or at least inappropriately used) mathematical for-
mulae for spreading risk (Black and Scholes 1973; Merton 1973;
Li 2000), Credit Rating Agencies generally gave their approval. The
CDOs were then broken into chunks and sold on, and CDO buyers had
a ‘guaranteed’ return. The value of Asset Backed Securities (of which
Mortgage Backed Securities were one type) soared from a few billion in
the late 1990s to $2 trillion in 2007, and CDS’ grew from zero to
$58 trillion in 2008, while the profits of investment banks increased
from $9.5 billion in 2002 to $30 billion in 2006 (Mason 2009: 94).
Mortgage lenders had little interest in repayment as they sold the debt
on the mortgages to willing purchasers. This practice could continue so
long as house prices continued to rise, and credit ratings agencies
joined the herd in giving AAA ratings to all kinds of financial products.
One anonymous manager at the Credit Rating Agency Standard and
Poor’s bluntly stated that a securitized package “could be structured by
cows and we would rate it.” (cited in Thompson 2010: 75)
However, there was an enormous problem. The value of the original
debts fell as house prices began to fall. This not only affected mortgage
holders, but all those financial institutions holding CDOs, who did not
know the value of those that they held (or of those held by other insti-
tutions), and indeed those insurance agencies – above all AIG – who
had insured against the risk of default, and were therefore “done in by
CDSs on CDOs.” (Lanchester 2010: 60) CDOs usually combined riskier
loans (such as sub-prime mortgages) with low risk loans. This division
generally took the form of high risk (but high reward) equity, lower
risk but still risky mezzanine, and low risk senior tranches. The idea
was that the high risk would be cancelled out by the low risk. But
securitization took this process further, as CDOs were combined with
other CDOs (CDOs squared) and even CDOs of CDOs of CDOs (CDOs
cubed) and even synthetic CDOs, which packaged CDSs into a CDO.
The idea that risk could be spread in this way was exposed however, as
when mortgages started to default, it became clear that the valuations
bore no resemblance to reality, thus exposing “an utterly opaque,
impenetrable financial system rip for a panic.” (Roubini and Mihm
2010: 67) The upside of CDOs (namely that they spread risk) now
became the downside, as risk became contagious and no one knew
which of the CDOs were toxic and which were not.
102 The BRICs, US ‘Decline’ and Global Transformations

From housing crash to financial crisis


House prices began to fall as substantial numbers of mortgage holders
defaulted on their mortgage payments. Before 2007, the foreclosure
rate in the US was less than 1% a year. In 2009, 2.2% of all residential
properties received at least one foreclosure filing, and in the autumn of
2010, 1 in every 11 outstanding residential mortgage loans in the US
was at least one payment overdue. Estimates vary, but between 8 and
13 million people may have lost their homes in the aftermath of the
mortgage crisis in the US (FCIC 2011: 402). These defaults were a
product of re-mortgaging after initial favourable conditions ended and,
related to this, an increase in interest rates to stem inflationary pres-
sures. Interest rates increased from the second half of 2004, reaching a
high of 6.25% in June 2006 (Thompson 2010: 99). Inflation had begun
to increase for a number of reasons, including growing demand for
primary commodities in China, and speculation on some of these com-
modities by financial institutions looking for the next source of lucra-
tive investments. Above all, oil prices increased. There were clear signs
of stress in the mortgage market, and in Detroit, 8 out of the top 10
mortgage brokers had gone out of business by early 2007. Nevertheless,
Ben Bernanke argued in May 2007 that “we believe the effect of the
troubles in the subprime sector on the broader housing market will
likely be limited.” (cited in Mason 2009: 97) Throughout 2007, prob-
lems began to show up in the shadow banking system and various SIVs
and conduits called on their parent companies to meet their losses,
hedge funds ran by investment banks announced losses, and the Credit
Rating Agencies began to downgrade loans. The problem now faced by
banks was that they had held many short-term debts while issuing
longer-term loans, and they had financed these loans by short-term
borrowing. However, short-term borrowing was becoming increasingly
scarce, and so “(t)he result of thousands of bankers all making indi-
vidual decisions about their own businesses led cumulatively to a sharp
contraction of credit and a collapse in confidence and trust. It created a
downward spiral, with assets having to be regularly marked down and
value destroyed.” (Gamble 2009: 25) The credit crunch effectively
started in August 2007 with the decision of BNP Paribas to suspend its
sub-prime investment funds, and over the following year, lending costs
increased as banks realized that they had taken on toxic debts and (cor-
rectly) suspected every other bank of having done the same thing.
Investment banks wrote off billions of dollars of debts, and shares in
these banks fell sharply. In March 2008, Bear Stearns was taken over by
JP Morgan. The basic problem then was that “banks did not trust that
The South and the Causes and Consequences of the Financial Crisis, 2007–14 103

other banks were creditworthy because they feared the pervasive


general scale of the losses from mortgage backed securities and credit
default swaps that were to come whilst having no clear idea where the
particularity of those losses would unfold.” (Thompson 2010: 102)
George Bush II’s first secretary to the Treasury, Paul O’Neill expressed
the problem nicely:

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

In September, the privately run but publicly backed US mortgage agen-


cies, Fannie Mae and Freddie Mac, exposed bad debts through the
system, were bailed out and nationalized by the US government. These
two companies were the main originators of mortgage lending in the
US and in the context of the credit crunch, were the only institutions
still able to make structured finance loans. If they had gone under,
then many banks and mortgage companies would have collapsed with
them. Moreover, Chinese pressure was placed on the US to nationalize
them. This was then followed by the collapse of Lehman, and the
tumultuous events that were outlined at the start of this section.

From private debt to sovereign debt crisis


It should be clear then that the financial crisis was one that had its
origins in the private sector, even if state regulation helped to facilitate
financial expansion. However, by 2010, particularly in the context of
the crisis in the Eurozone, a neoliberal discourse re-emerged which sug-
gested that in fact the crisis was caused by the expansion of the public
sector (Booth 2009; for critiques see Lapavitsas 2012; Blyth 2013;
Mirowski 2013). This has occurred because much of the debt has ended
up on the balance sheet of governments which have absorbed these
debts, “which is why we mistakenly call this a sovereign debt crisis
when in fact it is a transmuted and well camouflaged bank crisis.”
(Blyth 2013: 5) In fact, in the case of the Portugal, Greece and Spain,
most of the new debt that built up from the late 1990s was attributable
to private debt incurred by households and banks. Indeed, and in con-
trast to Germany, in the period from 2000 to 2007 Spain and Ireland
both ran fiscal surpluses (Akyuz 2013: 10–11). Portugal had relatively
low government debt, and while Greece’s public debt was higher, it did
not increase at anything like the rate of household and corporate debt
from the early 2000s (see Lapavitsas 2013: 296–7). The global recession
104 The BRICs, US ‘Decline’ and Global Transformations

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

Summary
The above narrative hints at a number of competing interpretations of
the crisis. While there are various disputes about specifics, in essence
there are three broad positions (see Gamble 2009). The first is that the
crisis was caused by government regulation which distorted markets
and prices (Booth 2009). The second is that the crisis was caused by
inadequate regulation which led to market volatility and allowed the
‘animal spirits’ of investors to dominate any broader rationality. The
third is that the crisis was in part caused by regulation, but this regula-
tion actually allowed for the expansion and extension of markets, and
specifically financial markets, with deleterious consequences for society
(Konings 2010; Mirowski 2013). The first position usually focuses on
the failings of the Federal Reserve and of Fannie Mae and Freddie Mac.
In particular the (correct) point is made that the state has been highly
interventionist in the housing market in the US, at least since the
1930s. Much of the blame in this regard is placed at the door of the
Community Reinvestment Act of 1977, which started a process of state
pressure on financial institutions to expand home ownership among
ethnic minorities (Wallison 2009). In the Clinton era (1994–2000) this
pressure was intensified and mortgages to low income groups
increased. Alongside this expansion, sub-prime mortgages were secur-
itized, and Fannie Mae and Freddie Mac played a leading role in
encouraging this expansion through mortgage purchases in secondary
markets. However, to place the blame for the crisis on these govern-
ment sponsored enterprises is unconvincing. Securitization of sub-
prime loans actually started two years before those approved through
the expansion of the Community Reinvestment Act in 1997, and when
The South and the Causes and Consequences of the Financial Crisis, 2007–14 105

the crisis broke out in 2007, Community Reinvestment Act loans


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

From boom to bust: The international origins of the crisis

After the short-term bail-outs of 2008 and 2009, much of the debate
over the crisis and its aftermath, particularly in the countries of the
global North, was dominated by the need for finding the correct poli-
cies necessary to recover from recession. Proposals reflected the debate
between pro-market neoliberals and regulatory neo-Keynesians on the
causes of the crash outlined above. This debate therefore polarized over
whether there needs to be government austerity and public sector
spending cuts which, proponents argued, would help to keep both
inflation and interest rates low, and would allow for recovery led by a
competitive and efficient private sector unhindered by state regulation
(Alesina and Ardagna 2010). On the other side of the divide are those
influenced by Keynes (1973), and who argue that in the context where
106 The BRICs, US ‘Decline’ and Global Transformations

all economic actors are simultaneously deleveraging, government


spending is necessary to avoid contraction and to stimulate demand
(Krugman 2013).
However, as was suggested at the end of the previous section, there is
a need to turn away from such a narrow focus, and understand the
international causes of both the boom and the crisis of 2008. Our start-
ing point is that the booms of the 1990s and 2000s “were essentially
fuelled by high rates of consumption in key northern economies”
(Kaplinsky and Farooki 2010: 132), and this was facilitated by financial
bubbles, particularly in housing and cheap imports. In the period from
2000 to 2007, US consumption accounted for over one-third of the
growth in total global consumption (World Bank 2009). In the context
of stagnant real wages in the US, household and personal savings fell,
balance of payments deficits increased, as was discussed in the last
chapter. Thus, in 2008, Chinese gross domestic savings as a percentage
of GDP was as high as 49%, compared to 14% for the US, while
Chinese household final consumption spending as a percentage of
GDP was 37%, while the US’ was as much as 70% (Kaplinsky and
Farooki 2010: 133; and see previous chapter). The current account bal-
ances of particular countries tells a similar story, with surplus countries
like China, Japan and Germany playing central roles as exporters, and
deficit countries like the US, Britain and Spain importers. For the US,
imports from China and Hong Kong rose from 5.7% to 15% of total US
imports in the period from 1990 to 2005 (Schwartz 2009b: 188), and
were a major factor in accounting for the US’ rising current account
deficit. While China’s current account surplus increased from 3.4% of
GDP in 1990 to 11% in 2008, the US’ deficit increased from 1.4% to
4.7% over the same period (OECD database 2009).
What we saw in the last chapter however was that this situation of
interdependence was central to the booms of the 1990s and especially
the 2000s. The US benefited from cheap imports (thus keeping
inflation low) and low interest rates, while China benefited from access
to the US (and EU) market for its low cost exports. This was a relatively
benign relationship for some (Dooley et al 2009) but by 2007 it was
clear that the favourable factors that had promoted the boom had
come to an end. Cheap imports supported domestic consumption in
the US, but at the cost of stagnant incomes for lower skilled workers.
For the housing market to continue to grow, it needed a steady supply
of new homeowners, and new entrants tend to be from lower income
groups. So on the one hand there were cheap imports and rising house
prices, and these were central to the boom. But on the other hand,
The South and the Causes and Consequences of the Financial Crisis, 2007–14 107

there were limits of the expansion of home ownership in the context


of stagnant or even falling real wages, and by 2007, despite (or indeed
because of) all kinds of questionable attempts to continue to expand
the mortgage market, these limits were reached. Indeed, US home own-
ership peaked in 2004, and the sub-prime expansion can be seen as a
desperate attempt to keep the mortgage market booming in this
unfavourable context (Schwartz 2009b: 189; JCHS 2008: 33).
Meanwhile, China’s growth financed its own development efforts, and
heavy investment in infrastructure had the effect of increasing raw
material prices, as we have seen. This began to push up inflation, thus
undermining a further component of the boom. The response to this
was for the Federal Reserve to push up interest rates from 2004 through
to 2006, thus further undermining the boom. These rises in turn added
to the pressures on the housing market, as mortgage repayments
increased at a time when the market was increasingly exhausted.
Finally, as we have seen, these processes, seemingly confined to the
housing market, spilt over into the rest of the economy via securitiza-
tion of financial products and falling demand due to the end of the
boom.
By the time that the crisis emerged, foreign investors, and specifically
foreign central banks, were central players in the US housing market.
Fannie Mae and Freddie Mac’s insolvency in 2008 led to successful
pressure from (among others) China for a state takeover of these agen-
cies, and a guarantee that creditors’ assets in the mortgage sector would
be met. This was not surprising given that liabilities to foreigners in the
mortgage sector rose by more than 1,000% between 2002 and 2006,
most of this in the period of sub-prime expansion from 2004 to 2005
(Thompson 2010: 92). If we break down US debt owed to foreigners in
this period we can see the centrality of the mortgage sector. What we
see is a significant expansion of investment in the mortgage sector, and
specifically in Fannie Mae and Freddie Mac, especially by China. In
1994, the value of foreign holdings of US Treasury bonds were almost
700% greater than those for agency bonds, but by June 2007, the dif-
ferential was only 150% (Thompson 2010: 94). At the same time, with
the rise of the debt of Fannie Mae and Freddie Mac from $2,482 billion
in 2000 to $5,772 in 2007, the percentage of debt issued to foreigners
increased from 7.3% in March 2000 to 21.4% by June 2007 (Thompson
2010: 93). We thus see a picture of growing mortgage-related debt and
a growing proportion of this debt being held by foreigners, and China
in particular. Even more specifically, as Table 5.1 makes clear, much of
this debt was officially held and was thus in effect debt to foreign
108 The BRICs, US ‘Decline’ and Global Transformations

central banks. The story was slightly different in the case of Europe,
where private banks invested heavily in Mortgage Backed Securities
issues less by Fannie Mae and Freddie Mac and more by private banks
that evaded capital requirement regulations. In the period from 2003
to 2007, private European banks increased their holdings of agency
MBS’ (i.e. those issued by Fannie Mae and Freddie Mac) from
$200 billion to $300 billion, while their purchases of privately issued
MBS’ increased from $100 billion to $500 billion over the same period
(Panitch and Gindin 2012: 309). However, for the Chinese and other
central banks, MBS’ held by Fannie Mae and Freddie Mac were more
important because these same banks believed that in the event of
default, the US government would guarantee repayment to creditors.
As we have seen, this is precisely what happened in September 2008.
Finally, the breakdown was reflected at the level of world trade,
which was so central to the factors that facilitated the boom in the first
place. In the period from 1994 to 2007, global exports grew at an
annual average rate of 7.4% per year, but export growth slowed to
3.4% in 2008 and then fell in 2009 by 11.3%. In 2009, the volume of
total world merchandise trade fell by 13%, and in value terms the fall
was as much as 23%. This was compared to a fall in global GDP of
2.1% (UNCTAD 2010: 4; UNCTAD 2011: 2). The growth in world trade
recovered from the sharp fall of 2009 and grew by 14% in 2010, but
after this bounce-back from the 2009 collapse, the growth in world
trade slowed down to 5.3% in 2011 and 1.7% in 2012 (UNCTAD
2013b: 4–5). At the same time, global growth in GDP was 3.9% in
2010, 2.7% in 2011 and 2.2% in 2012 (UNCTAD 2011: 2; UNCTAD
2012: 1–2; UNCTAD 2013b: 1).

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

Country China Japan


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

Source: Adapted from Thompson 2010: 95, with author and publisher permission
The South and the Causes and Consequences of the Financial Crisis, 2007–14 109

Much of the growth that did take place was accounted for by the
developing world, and growth in the developed world remained low
(see Table 5.3). For the United States, while the Federal Reserve com-
mitted $1.2 trillion to containing the crisis (almost half of which was
to European financial institutions), a figure higher than the earnings of
all US banks from 2001 to 2010, unemployment increased from
7 million in 2006 to 14 million by 2009. While this helped to avoid a
deep depression, the recovery was limited as firms hoarded their profits
rather than invested, banks were reluctant to lend and consumer
spending declined (Panitch and Gindin 2012: 329). In other words, a
simultaneous process of deleveraging took place in which the state was
able to soften the blow of a downturn but not restore the boom condi-
tions that preceded the crisis. The crisis meant that US federal debt
increased from 32% of GDP in 2001 to 67% of GDP in 2009 (Beausang
2012: 72). In contrast, the South as a whole recovered swiftly and far
more substantially, so that the approximately 4 to 5% differential in
growth between South and North that started in 2002 was maintained.
Thus the 2008 annual average growth rates for the global North was
0.1% and for the South 6.1%; in 2009 the figures were –3.5% (North)
and 2.7% (South); by 2011 the figures were 1.6% compared to 6.2%
(IMF 2012: 190). This appeared to strengthen the argument about the
decline of the West and the rise of the South.

The consequences of the crisis: The transformation of the


international order?

We saw in the last chapter that the rise of the South argument owes a
great deal to the boom years after 1992 up until 2007, or what
Schwartz (2009a) calls the ‘long 1990s’. With the crash of 2008, and
slower global growth after this period, we would expect a slowdown of
growth in the South as well. To some extent this did happen in 2008
and 2009, but recovery was particularly striking in the South from
2010 onwards, even if this did not necessarily return Southern
economies to the levels of growth experienced from 2002 to 2007.
What was particularly striking though was that recovery was far greater
in much of the South, as the global North as a whole continued to
experience low or even negative rates of growth. This in turn actually
enhanced the argument that we are witnessing a global transforma-
tion, with both the rise of the South and China in particular, and the
decline of the West and the US in particular. Writing before the onset
of the financial crisis (and alas his death in 2009), Arrighi (2007)
110 The BRICs, US ‘Decline’ and Global Transformations

identified a close parallel between the economic downturn of 1873 to


1897 and the end of British hegemony and its eventual replacement by
the US, and the 2000s, a new era in which Asia, and specifically China,
will become the new hegemonic power and the US will continue its
terminal decline. This section focuses on the specifics that followed the
financial crisis of September and October 2008 and uses this discussion
to attempt to answer this more general question. It does so by focusing
on the following issues: (i) the immediate response to the crisis; (ii) the
question of whether or not the South has decoupled from the North;
(iii) South-South trade and capital flows to the South; (iv) the implica-
tions for the future of US power.

The immediate response to the financial crisis


After 2008, central banks provided a huge amount of money to banks.
From September 2008 to mid-2012, the Federal Reserve injected more
than $2 trillion into the banking system, trebling its total assets, while
the European Central Bank doubled assets within the Eurozone to
3 trillion Euros. But over the same period, bank lending to the private
sector stagnated in Europe, and fell by 4% in the US (UNCTAD 2012:
21). This reflects the limits of monetary policy in the context of a
scenario in which banks are deleveraging and not lending. The idea
that austerity will clear the way for a newly invigorated private sector
to stimulate growth in the advanced countries also needs to be situated
within this context, for “it was the simultaneous cutting of expendi-
ture by the private sector (both households and firms) throughout the
world that caused a slump in global revenues and growth.” (UNCTAD
2012: 22; see also Hay 2011). The G20 meeting at Pittsburgh in
September 2009 led to an informal agreement that an attempt would
be made to deal with global imbalances. Deficit countries would
support private savings and fiscal consolidation, while surplus coun-
tries would focus on a domestic source of growth. The latter would also
provide an opportunity for the former to export to them and thus deal
with their own deficits.
On the eve of the crisis the current account surplus of developing
countries was $700 billion, with China accounting for just over half of
that. By the end of 2012, the former figure had declined to almost
$300 billion, despite a $130 billion windfall from oil exports in the
developing world. Within the developing world, Asia’s surplus had
fallen from $400 billion to $130 billion, while Latin America and sub-
Saharan Africa had both moved into deficit. Meanwhile the deficits
of the developed world fell from $480 billion in 2008 to less than
The South and the Causes and Consequences of the Financial Crisis, 2007–14 111

$60 billion in 2012 (Akyuz 2013: 33). However this ‘rebalancing’


reflects more the fact that some deficit countries have focused on aus-
terity which has cut off the potential for growth, particularly among
some Eurozone countries and in the periphery, rather than a con-
sciously co-ordinated international policy. Meanwhile, the main
Eurozone exporter, Germany, has continued to export at a very high
level and so its external surplus has only slightly fallen – from 7.5% of
GDP in 2007 to around 5.5% in 2012 (UNCTAD 2012: 16–17). This
compares with China’s reduction from 10% of GDP in 2007 to less
than 3% in 2011–12 (UNCTAD 2012: 16–17). The contribution of
China’s net exports to growth has been minimal since 2010, which on
the face of it suggests a change of priorities on the part of the
Communist Party leadership, though as we will see, in practice this has
been limited. Moreover, the fiscal stimulus in China has largely
focused on investment and not consumption, which has had the effect
of sustaining the boom, in China and beyond, but at the likely cost of
a severe crash at some point in the future. Total lending by banks and
other financial institutions in China was almost 200% of GDP in 2012,
up from 125% four years earlier. Not only is the total amount of credit
twice as large as China’s economy, credit was growing twice as quickly
as the economy (Observer 2013).
The 2008 crisis had a significantly negative immediate effect on the
South, through financial contagion, a reversal of capital inflows, and a
fall in exports as world trade and global income fell in 2009. But by
2010, most developing countries had recovered and saw the return of
high growth rates, which while not as high as in the boom years, were
still significant. According to The Economist (2012), 28 out of 34 coun-
tries in the developed world still had lower per capita income in 2008
than they had in 2007, while this was true of only 33 out of 150 devel-
oping countries. This is significant because it suggests that the 2007–08
crisis was very different from previous crises, such as that of 1929, 1974
and 1982. In these crises, the developing world was highly dependent
on the developed countries and so they suffered greatly from each
global downturn, the ‘Third World’ growing at an annual average rate
of somewhere between 0% and 0.1% from 1870 to 1890, and 0.3%
from 1929–39 (Bairoch 1993: 7). But in the aftermath of 2007–08, the
growing convergence identified by those who talked of the BRICs and
emerging powers was if anything strengthened. One version of this
argument was that, given continued low growth in the global North, it
falls to the BRICs, and especially China, to become major engines of
growth in the international economy. If this is the case, then these
112 The BRICs, US ‘Decline’ and Global Transformations

countries would have had to have reduced their dependence on the


developed world and thus ‘de-coupled’ from the rich countries. The
next sub-section examines this argument.

The South and the question of decoupling


While not necessarily incompatible with this account, Kaplinsky and
Farooki (2010) are more concerned with the idea that the new emerg-
ing powers can provide a stimulus to the rest of the South, providing
markets for the latter’s goods. While they recognize the limits of
Chinese demand (Kaplinsky and Farooki 2010: 137) which, in 2008,
was still equivalent to less than one quarter of the total consumption
of the US and the EU combined, they argue that when combined with
continued high growth and trade surpluses, China’s size is significant.
They draw on Kharas’ work for the OECD on the global middle class,
which is defined as those with annual incomes of between 10 and 100
dollars (PPP adjusted, and based on 2005 prices) a day. Projecting
forward from middle class expenditure in 2009 through to 2030,
Kharas (2010: 28) suggests that there will be some significant changes
in the composition of this global middle class. North America’s propor-
tion will decline from 26% to 10%, Europe’s from 38% to 20%, Latin
America’s will fall from 7% to 6%, sub-Saharan Africa’s proportion will
remain static at 1% and the Middle East and North Africa’s will remain
static at 4% (Kharas 2010: 28).
Interestingly, these figures read less like a transformation of the
whole of the global South, and more like the continued rise of one its
regions, Pacific Asia, whose projected proportion will increase from
23 to 59% (Kharas 2010: 28). As we will see in a moment, this is com-
patible with Kaplinsky and Farooki’s broader argument, which is other-
wise more questionable. Their basic claim is that given their size,
China and India can play a leading role as engines of growth for the
South in the international order. Both countries still have low per
capita incomes, and so their own development over the coming years
will in some respects complement that of primary goods exports from
the South. Incomes might be rising but given the low incomes that still
exist, demand for food is likely to persist, and this will involve less rig-
orous standards than those demanded by the richer Northern coun-
tries. Moreover, continued rising incomes will lead to increased
demand for meat which in turn fuels greater demand for grain for
animal feed. Furthermore, Chinese and Indian industrialization will
continue to be resource intensive, thus stimulating demand for
primary commodities (Kaplinsky and Farooki 2010: 142–6). There is
The South and the Causes and Consequences of the Financial Crisis, 2007–14 113

Table 5.2 China’s contribution to global consumption growth of


particular commodities, 2002–12, measured as a percentage

Commodity Aluminium Copper Nickel Cotton Corn Meat, Soybeans


swine

China’s total 81.1 113.4 132.3 74.9 33.7 69.8 59.6


contribution
to global
consumption
growth
2002–2012
China’s share 16.2 18.2 7.1 29.7 20.1 46.5 18.5
of global
consumption
2002
China’s share 44.8 43.3 47.7 33.6 23.9 50 29.5
of global
consumption
2012

Source: Adapted from UNCTAD 2013b: 54

certainly evidence to support these claims. Kaplinsky and Farooki


(2010: 145) demonstrate the correlation between high commodity
prices and China’s growing share of consumption of certain commod-
ities as outlined in Table 5.2 below. Given the sharp increases (and
falls) in prices, this cannot be explained solely by demand from China,
and financial speculation in these markets is a very significant factor
(UNCTAD 2011: ch.5). Nonetheless, demand from China is important,
and it accounted for a high proportion of total global consumption
growth from 2002 to 2012, and thus an increasing share of total con-
sumption of particular commodities (Table 5.2) and higher prices for
those commodities (Table 5.3).
Commodity prices increased sharply in most sectors, and even after
their fall in 2008 and 2009, recovered sharply by 2010 (see Table 5.3),
though they partially fell back again from 2012 onwards, as discussed
in Chapter 8.
Kaplinsky and Farooki (2010: 149) do not see this as an unambigu-
ously positive development, nor a story reflecting the unambiguous
rise of the global South. Rather, they argue that this generates some
opportunities for income generation from exports, reinforced by the
fact that those at lower income levels are less concerned about stan-
dards. But at the same time, on the downside many developing
114 The BRICs, US ‘Decline’ and Global Transformations

Table 5.3 Primary commodity prices, measured by percentage change


over previous year

Commodity Aluminium Zinc Lead Iron Ore Copper

2005 10.6 31.9 10.2 No data 28.4


2006 35.4 137.0 32.0 No data 82.7
2007 2.7 –1.0 100.2 77.4 5.9
2008 –2.5 –42.2 –19.0 26.8 –2.3
2009 –35.3 –11.7 –17.7 –48.7 –26.3
2010 30.5 30.5 25.0 82.4 47.0

Source: Adapted from UNCTAD 2011: 13

countries will focus on lower value production, with little incentive to


upgrade to higher value activity. This makes Kaplinsky and Farooki’s
analysis compatible with Kharas’ data projections about the global
middle class (Table 5.4), and the fact that we do not see any substantial
proportionate growth in the middle class across the South as a whole,
only in Pacific Asia.
However, there is a further issue in their analysis, which Kaplinsky
and Farooki (2010: 139) acknowledge but then rather casually dismiss.
For they argue that:

Nothing guarantees sustained growth in the Asian Driver


economies. The fall in consumption in the northern deficit
economies may be so large that it undermines export-oriented
growth in China and India, with a potential combination of neg-
ative multiplier effects on economic activity and political disruption
as unemployment grows…Nevertheless, it is the authors’ judgment
that just as growth is likely to be reduced or to stagnate in the
northern economies in the future, so growth in Asia in general and
in China and India in particular, is likely to be sustained.

They go on to conclude that:

Even without stagnation and falling growth rates in the North, the
growth rates of the past two decades in China and India are likely to
lead to an outcome in which, by virtue of their size, these countries
increasingly come to dominate the global economy in this century.
However, there are persuasive reasons to believe that key large
northern economies (notably the United States, the United
Kingdom and Spain) will reduce imports as they rebalance their
The South and the Causes and Consequences of the Financial Crisis, 2007–14 115

global orientation, given their large structural trade and fiscal


deficits. This will further accentuate the dominance of China, India
and other low income economies in the growth of global demand in
the coming decades. (Kaplinsky and Farooki 2010: 149)

The first of these two quotations recognizes the importance of export-


led growth to the developed world, although it then ignores this factor.
The second quote suggests that import growth will decline in the
developed countries, but this will actually enhance the dominance of
China and other Southern economies in the international order. In
other words, the South has in effect ‘de-coupled’ from dependence on
the North and can promote growth independently of the latter. The
decoupling thesis rests on the following broad claims:

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

In other words, decoupling implies that the global South has reduced
its dependence on the North in terms of trade, capital and technology.
In the wake of the boom and the crisis, there has been a vigorous
debate among economists about decoupling, with much of it resting
on growth rates and the synchronicity or otherwise of business cycles
in the global North and South (Kose et al 2008; Walti 2009; Rose
2009). On the one side is the claim that “business cycles in emerging
markets have gradually decoupled from those in advanced economies,
as trade diversification, commodity strength and, particularly, the
emergence of China took over the G7 as the main global factor behind
output fluctuations in the emerging world” (Yeyati and Williams 2012:
17), while others suggest that “there has been no decoupling in the
cyclical component of developing country growth” even if there has
been “a decoupling in underlying trend rates of growth” (Brahmbhatt
and Pereira da Silva 2009: 2).
The implications for understanding a transformation of the interna-
tional order are great, for if decoupling has occurred then we are
moving to a situation in which “the rest of the world pulls the U.S.
116 The BRICs, US ‘Decline’ and Global Transformations

forward rather than the opposite.” (Bergsten 2008) We need to


examine this argument in greater depth, first by looking again at the
question of South-South trade and capital flows to the South, and then
it examines the question of US power and the nature of the US’ rela-
tionship with the rest of the world, specifically after the crisis and with
China in particular.

South-South trade and capital flows to the South


The immediate impact of the crisis on the South was a reversal of
capital flows, falling commodity prices and falling stocks, and as we
have seen, falling growth rates. But as we have also seen, recovery in
the South was fairly rapid. The reason for such a recovery was in part
the stimulus packages in the South, and especially in East Asia. The
fiscal package of the leading fifteen Asian economies amounted to
7.5% of GDP in 2008, almost three times the average level in G7 coun-
tries (ESCAP 2009). China’s package of $600 billion constituted 13% of
its GDP for that year. China’s stimulus package and investment boom
helped to reverse the decline in commodity prices, as property and
infrastructure investment has a higher commodity import content
(UNCTAD 2012: 12–13). In 2010, measured in terms of value, com-
modity imports were 75% higher than they were in 2007, compared to
just 30% for manufacturing imports (Akyuz 2012: 36–7, 32). This had
the effect of changing trade patterns for some countries in the South.
In 2007, Brazilian exports to the European Union were about four
times the level of exports to China, but by 2012 the levels were more
or less the same, while in 2007 its exports to the US were about twice
the level of its exports to China, but by 2012 exports to the US were
about half the level of those to the US. Over the same period Brazil’s
proportion of export earnings derived from primary commodities
increased from 50.1% in 2007 to 63.6% in 2012 (Akyuz 2012: 32). As
we saw in the last chapter, commodity prices generally increased
sharply from 2003 to the summer of 2008, with the primary commod-
ity price index increasing three-fold in this period (Akyuz 2013: 28).
While this was followed by a big fall in the second half of 2008, this
was then followed by a recovery, with prices steadily increasing from
2009 through to early 2011, after which prices fell and increased again
at relatively smaller rates. By early 2013, prices were around 15% lower
than the peak of mid 2008 (Akyuz 2013: 28). This meant that in effect
the commodity price boom of 2003 to 2008 was over, and indeed there
had been something of a fall in prices, but this had not translated into
a slump in prices, and indeed prices remained high. This then was one
reason why parts of the South recovered so quickly after 2008.
The South and the Causes and Consequences of the Financial Crisis, 2007–14 117

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

Year 2005 2007 2008 2009 2010

Net private inflows 642 1285 594 602 908


Net private outflows –497 –825 –772 –527 –500
Net private flows 145 460 –178 75 408

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

A further reason for recovery in the South was a new surge of capital
flows, which in turn helped to facilitate the expansionary policies out-
lined above. A major reason for this was the response of the developed
world to the crisis, and the expansion of liquidity there through quan-
titative easing. This policy was designed to bail out financial institu-
tions, and maintain or increase asset prices and keep interest rates low,
and so maintain or stimulate demand. The effect however has not been
to stimulate lending to private companies or individuals who are all
simultaneously deleveraging. What has instead occurred is a new
round of capital flows to the South attracted by higher interest rates,
and financial speculation, which in turn has helped to facilitate con-
tinued increases in commodity prices. Table 5.4 shows that net private
flows into the South peaked in 2007, then fell sharply in 2008, recov-
ered slowly in 2009 and substantially in 2010, though not back to the
2007 level. However, foreign direct investment inflows were weak, and
had fallen from a peak of $509 billion in 2008 to $350 billion by 2010.
At the same time, a more mobile (and thus volatile) portfolio invest-
ment has increased enormously since the outbreak of the crisis, from
$97 billion inflows in 2007, to minus $86 billion in 2008, back up to
$153 billion in 2009 and $199 billion in 2010 (Akyuz 2011a: 10).
These capital flows obviously have an expansionary effect in coun-
tries in need of capital and economic growth, but there are a number
of further questions that need to be addressed.3 First, given that most
of the inflows still come from the global North, we must again call into
question the de-coupling thesis. Second, as we have seen in our discus-
sion of financial crises prior to 2007–08, such as the Asian crisis of
1997–98, portfolio investment can easily be withdrawn. Third, it can
facilitate short-term economic growth but at the cost of productive
investment – the ‘production substitution’ that we referred to when
discussing Brazil in Chapter 3. This appears to be what has happened,
in slightly different forms, in the recovery from 2010 onwards. That is,
118 The BRICs, US ‘Decline’ and Global Transformations

large capital inflows beyond current account requirements or existing


surpluses created asset bubbles. Equity prices soared in Brazil, China,
India and Turkey, and there were credit and property booms, fuelled in
part by fiscal stimuli programmes (see below) and in part by foreign
investment. In China the share of foreign investment in real estate
increased from 10% in 2006 to 23% by 2010 (Akyuz 2012: 28).
Increased current account deficits in Brazil, India and Turkey were
covered by net capital inflows. ‘State capitalist’ efforts have been made
to diversify these economies but as we saw in Chapter 3 they have met
with only limited success.
What should be clear from this discussion then is that the South has
not de-coupled, and indeed has boomed since the 2008 crisis in part
because of capital flows, from the West. We now need to discuss the
implications this has for understanding US power in the current inter-
national order.

The implications for the future of US power


So far then we have argued that the ‘rise of the South’ should be
treated with some scepticism because of favourable circumstances in
the international economy from the early 1990s, but especially from
2002 to 2007. These circumstances refer to capital flows to the South,
high commodity prices and the centrality of China to wider growth
prospects. While on the face of it, the aftermath of the financial crisis
suggests that the South can continue to rise, the above analysis has
identified reasons why this should be treated with some scepticism. For
as Akyuz (2012: 7) argues, for deficit countries in the South, “growth
depends on continued and, in fact, increased flows of capital, but the
conditions driving the recent surge in capital inflows cannot be
expected to last forever.” (Akyuz 2012: 7). Meanwhile, “the major
growth pole in the South, China, cannot keep creating investment
bubbles in order to fill the demand gap triggered by the slowdown of
its exports to AEs (Advanced Countries – R.K.), as it has done since the
outbreak of the crisis.” (Akyuz 2012: 7)
What then of the other question, namely that of US decline? The
alleged decline of the US should also be situated within this wider
international context. Here our focus is on US decline relative to other
states, rather than absolute decline, an issue addressed in the next
chapter. As we have seen, continued US trade deficits are considered to
be perhaps the central manifestation of US decline. These deficits
meant that by the end of 2007, the US had a net foreign debt of about
$2.5 trillion, an amount equivalent to about one-fifth of GDP
The South and the Causes and Consequences of the Financial Crisis, 2007–14 119

(Schwartz 2009a: 24). The US accumulated this debt by consuming


more than it produced in almost every year from 1982 to 2007, but
particularly in the period from 2004 to 2007 (Schwartz 2009a: 24).
However, there is a paradox here, for “even though the United States
has a considerable net debt to the rest of the world, the world contin-
ues to pay its US creditors more money than US debtors pay their
global creditors. US overseas investment consistently yielded more
income than did foreign investments in the United States. In 2007, if
we remove six zeros, this is rather like a private investor who owed
$20,082 while holding investments worth only $17,640 somehow
managing to pay out only $726 on her debts while earning $818 from
her own investments, thus receiving a net income of $92.” (Schwartz
2009a: 25) According to Gourinchas and Rey (2005: 10–11), from 1960
to 2001 US overseas assets earned an annualized rate of return of 5.6%,
compared to foreigners earning 3.6% on US assets. Crucially, they also
argue that the gap expanded after 1973, with US rates reaching 6.8%
while foreigners earned an annual average of 3.5%. Thus, despite
growing deficits from 2002 to 2007, US net foreign debt as a percentage
of GDP remained at 20% (Schwartz 2009a: 26).
What then accounts for this paradox? As we have seen, Arrighi draws
a parallel between US decline in the current period and British decline
from the late nineteenth century. Britain’s share of world trade
declined from 30% in the mid-nineteenth century to 14.1% on the eve
of the First World War, while over the same period the US share
increased from 8.8% to 11.1% and Germany increased its share from
9.7% to 12.2% (Lake 1988: 31). From 1870 to 1913, US GDP grew by an
annual average of 4.9% and Germany’s by 3.9%, while Britain grew by
an annual average of 2.6% a year. US labour productivity grew by an
annual average of 2% a year from 1890 to 1913, while Britain’s grew by
just 0.1% (Schwartz 2009a: 122; Maddison 2003).
As well as on-going trade deficits, US shares of world trade and world
production have declined from around 50% to 25% from 1945 to 2005
(Schwartz 2009a: 117–27), but there is a significant difference between
nineteenth century Britain and the US in the twenty first century, and
this goes some way to explaining why US overseas earnings are greater
than overseas earnings in the US. For while British industry was
increasingly out-competed by German and especially US industry, US
firms continue to be highly competitive in the world economy.
However, in contrast to British industry around 1900, this has increas-
ingly involved a global strategy in which lower value activity within
commodity chains is increasingly out-sourced abroad, either through
120 The BRICs, US ‘Decline’ and Global Transformations

direct foreign investment or by subcontracting agreements with local


suppliers (Dicken 2011). This includes sectors such as textiles and
clothing, food and beverages and leather goods. At the same time, the
US has continued to concentrate on higher value activity, such as
machinery, electrical and optical equipment and transport equipment,
all expanded significantly from the 1990s onwards (Schwartz 2009a:
123–4). In 2007, the value of overseas sales by US MNCs was $5.5 tril-
lion, around 5 times greater than the value of US exports, and US
MNCs overseas operations contributed around 30% of total US profits
in the decade from 2000 onwards, compared to 20% in the 1980s
(Panitch and Gindin 2012: 430, n.66, 292).
US productivity in manufacturing grew substantially above the
OECD average from 1991 to 2006. In the period from 1980 to 2001,
the US’ share of high-tech production remained constant at around
32%, while Germany’s share halved, and Japan’s share fell by one third
(Panitch and Gindin 2012: 276). From 1983 to 2007, Arrighi’s period of
alleged US decline, the annual average growth rate for the US economy
was 3.5%, higher than any other developed country in the same period
(Panitch and Gindin 2012: 291). The share of manufacturing in the
South increased substantially over this period, but as we have seen, this
tended to be in lower value added activities, even when it included
components in higher-tech sectors. The concentration of US firms in
these dynamic sectors (high technology manufacturing and the high
end of tradable services) is one reason why US overseas activities
tended to be relatively lucrative.
But we also need to explain the converse scenario, namely why
foreign investment in the US is not so lucrative. It has been claimed
that in fact, for foreign direct investment at least, the figures are dis-
torted by the transfer pricing practices of foreign firms operating in
the US, and that they claim profits overseas to avoid higher rates of
corporation tax in the US (Gros 2006). However, as Schwartz (2009a:
128–9) points out, higher profits have been a constant feature of US
overseas investment since 1960, irrespective of changes in US taxation
law, and there is no discernible difference between foreign firms with
higher levels of intra-firm imports (where transfer pricing opportun-
ities are greater) than those with lower levels (Mataloni 2000). Perhaps
most tellingly, those foreign firms operating with a larger market
share in the US – that is those firms more like US firms operating over-
seas – had higher rates of return due to their larger market share
(Mataloni 2000). But these firms were a minority in terms of foreign
direct investment.
The South and the Causes and Consequences of the Financial Crisis, 2007–14 121

But perhaps more important than foreign direct investment are the
other types of foreign investment in the US. US investment to the rest
of the world in 2007 was concentrated more in foreign direct invest-
ment and equities (61.4% combined), rather than less lucrative port-
folio debt (Schwartz 2009a: 39). For the rest of the world, as should be
clear from some of the previous discussion, the position was reversed.
Foreign portfolio debt holdings constituted 38.1% of foreign invest-
ment into the US and almost half of this (16% of the total of foreign
investment into the US) was held by central banks. This again confirms
the argument above that the US earns more on its foreign investment
abroad than the rest earns on foreign investment into the US. What
should be clear by now is that much of this was passive and not par-
ticularly lucrative, such as Treasury bonds and bonds linked to the
housing market. While the latter were more lucrative than the former,
they were also high risk and as we have seen, turned toxic in the
period from 2007 to 2008. Even when we consider the equities and
wider bond markets, in a study of 52 equities markets and 47 bond
markets, the US was found to have the lowest rate of return among
equities markets and was 44th out of 47 for bond market returns (Forbes
2008).
But for China, purchases of US debt were necessary to maintain the
export boom. However with the contraction in demand and fall in
world trade, China experienced a severe fall in exports and rise in
unemployment in late 2008 and early 2009. In January 2009 for
example, following a third consecutive monthly fall in exports, a year
on year monthly decline of 17.5% was recorded, and in this period an
estimated 20 million migrant workers in the export sector lost their
jobs (Brannigan 2009). In 2002, export growth accounted for 29.4% of
GDP; in 2003, 26.8%; and in 2004, 28.4%. However by 2008 the figure
was down to 8.6% and in 2009 the figure stood at minus 10.4% (Akyuz
2012: 27). By 2010 the figure was back up to 27.6% but this was in part
reflected the previous year’s contraction, and by 2011 the figure was
12.4% (Akyuz 2012: 27). This slowdown in export led growth was a
major problem, but it also presented an opportunity for China to move
away from dollar denominated debt purchases and export dependence.
In other words, the crisis could have been regarded as a shift away
from Dooley et al’s (2009) Bretton Woods 2, and generate a genuine
decoupling from Western consumer markets, in the process rebalan-
cing the Chinese economy so that it focused far more on the domestic
market. There is evidence to support this scenario. As we have seen the
yuan was effectively re-valued upwards in the period from 2002
122 The BRICs, US ‘Decline’ and Global Transformations

onwards, though this of course was at the cost of the value of Chinese
dollar denominated assets. In 2007, Chinese premier Wen Jiabao
declared that China’s development strategy was “unstable, unbalanced,
uncoordinated and unsustainable” (cited in Hung 2009: 19) In 2005,
the Chinese central government increased procurement prices for agri-
cultural goods and lowered taxes on agriculture, which had the effect
of slowing rural-urban migration and thus tightening the labour
market. This led to labour shortages and wage increases in manufactur-
ing, and a retail boom (Hung 2013: 1356; Zhan and Huang 2013).
Thus, when exports fell in response to the financial crash and falling
consumer demand in the US and EU, the government’s response of a
massive fiscal stimulus package appeared to enhance the shift towards
the domestic market and away from dependence on export markets in
the West. As we have seen, this fiscal stimulus also served to restore
growth in other parts of the South, as investment in infrastructure
relied on primary commodity imports.
However, this boom for much of the South betrays the limits of the
stimulus package. Only 20% of the package was actually allocated to
social spending, and most of the rest went into investment in fixed
assets, some of which already suffered from over-capacity (Caijing
2009). By 2009, China’s fixed asset investment rate had reached 45% of
GDP, and by 2010 the figure was 48.2%, compared to peaks in Taiwan
and South Korea of 25 to 35% in the 1970s (Hung 2011: 221; Akyuz
2012: 23). As much as 80% of the growth in 2009 was due to invest-
ment (Akyuz 2012: 36). This is simply not sustainable for as Akyuz
(2013: 41) argues China “cannot keep on pushing investment to fill
the deflationary gap created by the slowdown in exports in conditions
of exceptionally low shares of wages and household income in GDP.”
(Akyuz 2013: 41). Moreover, the government continued to focus on
export promotion, with rebates on tax exports and continued efforts to
hold down the value of the yuan. This has involved not only exports
to the US, but to Europe too and China’s trade surplus was higher with
the latter than the former by 2008 (Schwartz 2009a: 168). However,
import growth in the developed world has been slow, reaching just 1%
year on year growth in 2012 (Akyuz 2013: 31). Most tellingly, the
Chinese central bank increased its purchase of US treasury bonds, from
$618 billion in September 2008 to $1,160 billion in December
2010 (Hung 2011: 234), and although increased purchases slowed
down slightly in 2012, by September 2013 the figure had reached
$1,293 billion (US Treasury 2013). In other words, in the five years
since the outbreak of the financial crisis, Chinese purchases have
The South and the Causes and Consequences of the Financial Crisis, 2007–14 123

Table 5.5 Private and official net purchases of US long-term securities by


foreigners, 2007–08, billions of dollars

Private Official Total Proportion


which was
official

Jan to June 2007 555.5 110.3 665.8 16.6%


July to December 2007 223.9 78.1 302 25.9%
January to June 2008 328.8 180.5 509.3 35.4%

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

soared. Even as the crisis was unfolding, when dollar assets were being
sold rapidly by private foreign creditors, official purchases attempted to
plug the gap and protect the value of the dollar. There was a rapid
increase in the proportion of US foreign debt held by official sources,
from 16.6% in the six month period from January to June 2007 to
35.4% in the same period one year later. This reflected a massive
dilemma for China in its attempt to preserve the period of interdepen-
dence that facilitated the boom before 2007, for as Thompson (2010:
105–6) states:

The size of the losses of the large American financial corporations in


the second half of 2007 then created a whole new and intractable
dilemma. If China, with other saving-rich states, did not inject
capital into the American financial sector, the financial side of the
economic relationship between the United States and East Asia
would begin to unravel as dollar losses escalated. Yet if China acted
to try to save the American financial sector, unless shares for
financial corporations recovered reasonably swiftly, it would face
new investment losses.

On a global scale, while it is true that the dollar’s share of allocated


foreign exchange holdings fell from 66.9% in 2005 to 61% by 2011,
this was still higher than the figure in 1990, which was 50.6% (Hung
2013: 1343). In the period from March 2007 to March 2014, total
foreign holdings of US Treasury securities rose from around $2 trillion
to almost $6 trillion (Hung 2014: 156). In other words, in the period in
which China has emerged as a supposed hegemonic challenger to the
US, the international role of the dollar has intensified, notwithstand-
ing some partial reversal since the outbreak of the financial crisis
(Hung 2013: 1343).
124 The BRICs, US ‘Decline’ and Global Transformations

Post-crisis purchases of US Treasuries by China must also be traced


back to domestic political realities within the country. We saw in
Chapter 3 that China has not only a national developmental state, but
a series of local developmental states competing with each other to
attract investment. The most successful of these localities are the
eastern coastal provinces that are locked into an export regime and
whose supporters among the senior ranks of the Chinese Communist
Party have “established a symbiotic relation with the American ruling
class, which have striven to maintain…domestic hegemony by secur-
ing the living standards of US citizens, as consumers and debtors to the
world.” (Hung 2011: 24–5; also Schwartz 2009a: 168–73; Panitch and
Gindin 2012: 300) With some exceptions such as the period after 2005,
wages have remained low due to rapid rural-urban migration. In the
context of both an ageing population and labour unrest, there are
serious questions to be asked about the sustainability of this scenario.
But what should be clear is that post-crisis, it is not a straightforward
story of China’s (and the South’s) continuous rise, but one where
China faces acute dilemma where it “could have continued export sur-
pluses and export-driven growth through an under-valued renminbi,
or global financial and economic power through a stronger renminbi,
but not both.” (Schwartz 2010: 196) Moreover, if it opts for the first
course then export growth is likely to remain considerably lower than
in the boom years, but if it opts for the latter then this is likely to
undermine export interests even more (Hung 2013: 1356, 1358–9).
Meanwhile, and not unrelated to these points, quantitative easing
had the effect of lowering the value of the dollar, but it did not seri-
ously undermine the international role of the dollar. Again the dilem-
mas faced by other states is clear – they faced “a Hobson’s choice. A
lower dollar devalued their holdings of US assets, undermined the rela-
tive competitiveness of their economies, and – as excess dollars found
their way abroad – aggravated inflationary pressures. But given these
states’ structural positions within global capitalism, and their eco-
nomic ambitions, they saw no option but to continue and even
increase their dollar holdings.” (Panitch and Gindin 2012: 326)
Moreover, it is worth re-emphasizing one of the central points of the
last chapter, namely that China’s role as an exporter must be situated
within the wider context of East Asian production networks, and this
role remains one in which it is mainly a producer of low value goods
produced by cheap labour. In terms of sub-contracting, Wal-Mart is an
illustrative example as it is a company selling cheap goods in its retail
stores and thus was central to the low wage, low price, high debt
The South and the Causes and Consequences of the Financial Crisis, 2007–14 125

growth model that preceded the onset of crisis (Appelbaum 2008;


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

Finally, there is the question of the sheer size of China’s foreign


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

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


crisis

This chapter has argued that the financial crisis of 2008 had its root
causes in both the private sector and the state sector. However it was not
a case of the latter either distorting the efficiency of, or failing to regulate,
the former, but rather one in which regulation was actually extended to
encourage the expansion of financial markets. Liberalization was indeed
at the heart of the financial crisis but this is not the same thing as deregu-
lation; rather, regulation itself generally served to expand markets, and
financial markets in particular. But this was also a crisis which was rooted
in the boom period after 1992, a central component of which was a par-
ticular pattern of interdependence between the United States and China
in particular. This was a model based on debt and cheap imports on the
US side, and credit and export dependence on the Chinese side. Chinese
purchase of debt was not simply confined to the purchase of US Treasury
securities, but also included central involvement in the US mortgage
market, which was the sector in which the crisis finally broke.
In focusing on the US side of this equation, some commentators
have usefully pointed to the importance of inequality as a factor that
can help to explain the crisis (see Wade 2009; Galbraith 2012). The
standard story goes something like this:

without toxic securities, there would be no crisis; without sub-prime


loans, there would be no toxic securities; and without a continuous
The South and the Causes and Consequences of the Financial Crisis, 2007–14 127

downward pressure on wages in the US, as in just about every other


area of the world, there would be no continuous rise in the house-
hold demand for bank credit. (Lysandrou 2011b: 198–9)

This is an important part of the story, but in focusing on inequality, it


does miss an important part of the equation, for as Lysandrou (2011b:
199) asks, what about the demand for Collateralised Debt Obligations?
Poverty and inequality can usefully help to explain the demand for
sub-prime loans at the ‘bottom’ of the ladder, but what of demand for
CDOs at the ‘top’? At the end of 2006, 52% of CDOs were held by
banks, asset managers and insurance companies. The other 48% were
held by hedge funds. Hedge funds held only about 1% of the total
stock of $122 trillion securities at this time, but almost half of all
CDOs. This apparent discrepancy can be explained by the fact that
hedge funds were searching for above average returns on investments,
which led to the search for new financial products generating ever
greater yields. This in turn can be linked to pressure from the super-
rich, those high net worth individuals who also searched for higher
than average profits. In 2006, 9.5 million people (0.01% of the world’s
population) had a combined wealth of $37 trillion, $19 trillion of
which was invested in securities (Lysandrou 2011a: 338–9).
Insofar as the crisis was caused by inequality then, this must be
explained not only by the demand for cheap mortgages amongst the
poorest in society, but also the richest and their demand for high yield
securities. But from this point another significant one follows, which is
that interpretations of the international causes of the crisis which focus
solely on global imbalances and Asian savings and US debts (Wolf
2008), and by implication the rise of the former and decline of the
latter (Nesvetailova and Palan 2008), miss two connected points. First,
the crisis could not simply be about an Asian savings glut, as “the
greater part of the surplus pools of capital in the world were held by US
and European institutional investors, banks and wealthy individuals.”
(Lysandrou 2011a: 332) Second, and very significantly for the wider
concerns of this book:

Given the preponderant weight of the US capital markets in the


global financial system, and the corresponding international status
of the US dollar as the major reserve currency, it was entirely
understandable why the world’s investors looked to US financial
institutions in particular to supply the extra financial products
that were needed to absorb the overflow of demand. (Lysandrou
2011a: 333)
128 The BRICs, US ‘Decline’ and Global Transformations

Insofar as this was a crisis that originated in the USA, it was also a
global crisis. In terms of the consequences of the crisis, this should also
be seen less in terms of US decline as against a rising South, and more
one in which the end of the 1992 to 2007 boom presents new chal-
lenges, for all countries, in both North and South. It is true that much
of the South quickly recovered from the crisis, in part because of suc-
cessful fiscal policies, above all in China. But this has so far done little
to remove the imbalances in the Chinese economy, above all its depen-
dence on investment at the expense of consumption. Furthermore,
much of the rest of the South remains dependent on capital flows from
the North as well as high commodity prices and demand from China.
6
Global Inequality and the Rise of
the South

This chapter further develops a theme explored in the conclusion of


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

The question of international inequality

Previous chapters have demonstrated that growth rate differentials


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

129
130 The BRICs, US ‘Decline’ and Global Transformations

certain national borders, but on a global basis it has been a huge force
for good, narrowing inequality among people on an unprecedented
scale.” Martin Wolf (2003: 4) similarly argued that developing coun-
tries are growing faster “thanks largely to increased ‘globalization’ of
the world economy – especially the increased application by govern-
ments around the world of the three great laws of economic success:
privatization, liberalization and stabilization.” Though post-crisis, Wolf
became somewhat more measured in his claims (see Wolf 2008), he
still argued that “(p)owerful market and technological forces are
spreading the stock of knowledge across the globe” (Wolf 2011) and
thus propelling developing countries towards convergence with the
rich world.
There is certainly some truth to the claim that in recent years,
inequality between countries – international inequality – has been
reduced. There are some disagreements between commentators on
trends but it appears that from the late 1980s to around 2005, there
was a small decline in international inequality. But since the early
2000s, and especially since 2005, international inequality has fallen at
such a rate that it has more than compensated for rising inequality
within countries, with the results that global inequality (between
peoples irrespective of countries) has fallen (Chen and Ravallion 2012;
but see Milanovic 2012). The interaction of these effects means that
whereas in 1988 within country inequality accounted for around 20 to
25% of global inequality by 2010 it had risen to 30% of global inequal-
ity (Edward and Sumner 2013: 14). While on the face of it a welcome
development, if China is excluded then in fact inequality between
countries has actually risen in recent years (Edward and Sumner 2013:
14–15; Wade 2011: 514–15).
So in terms of international inequality, what we have seen in recent
years is a reduction, but one that is accounted for solely by the rise of
China. Taking a longer term perspective, how significant is this shift? If
we rely on Maddison’s data, which is probably as reliable a guide as
there can be, then it is clear that up until at least 1700, Asia, Africa and
Latin America accounted for the bulk of the world’s population and of
the world’s income. Maddison (2003) suggests that the figure in 1700
for population is 75%, and for income 66%.1 The figure for income
showed some decline when compared to 1600, but it was from the
1800s that divergence accelerated significantly. From 1820 to 1950, the
latter date a significant approximate one for the start of a wave of
decolonization in Africa and Asia, the share of Africa, Asia and Latin
America in world GDP declined from 63.1% to 27% (Maddison 2003;
Global Inequality and the Rise of the South 131

Nayyar 2009: 5). After 1950 there is a small upward trend in global
GDP share, from 27% in 1950 to 28.5% on the eve of the oil price rises
of 1973. By 2001, the share has increased significantly, up to 42.5%
(Maddison 2003; Nayyar 2009: 5), and as much as 47.9% by 2010,
according to World Bank data2 (Akyuz 2012: 29).
However, this increased share in the independence period, and par-
ticularly after 1973, abstracts from important regional differences.
Measured in PPP dollars, the global share of GDP in Africa was 3.8% in
1950 and 3.4% in 2008, while Latin America’s share increased from
7.8% to 7.9% over the same period (Maddison 2003; Nayyar 2013: 50).
In contrast, Asia’s share increased from 15.4% to 38% (Maddison 2003;
Nayyar 2013: 50).
World Bank (2007) data, which uses constant market (2007) prices
rather than those adjusted for PPP, present a slightly different story
from that used by Maddison. The story is still one of an upward trend
from the 1970s onwards, but at lower levels. The share stood at 15.4%
in 1970, 17.7% in 1980, following the lost decade of the 1980s, 17.5%
in 1990 (despite continued growth shares in East Asia), and 19.1% in
2000. By 2005, the figure was 21.5% (World Bank 2007). However,
population growth was higher in the developing world, and when per
capita GDP is factored in, we see a different picture, and the rise is
effectively wiped out, with the share standing at 4.7% in 1970, 4.9% in
1980, and 4.9% in 2005 (World Bank 2007). Indeed, based on market
exchange rates, while the ratio of per capita GDP in Asia to that of the
developed world shifted from 1:20 in 1970 to 1:11 in 2010, in Latin
America it remained broadly the same (1:5) while in Africa it shifted
from 1:12 to as much as 1:24 over the same period (Nayyar 2013:
59–61). Thus, once population is factored in, the inexorable rise of the
South does appear to be somewhat limited. Interestingly, the 2010
OECD report on ‘Global Shift’ makes the following observation:

the convergence observed in the 2000s was not statistically


significant. This suggests that any improvement is tentative, and the
situation could quite easily be reversed if, for instance, the strong
growth performance of the largest convergers (above all India and
China) fails. Nonetheless, the ‘change of gear’ in the 2000s was
important in psychological terms, helping to shake off the develop-
ment pessimism of the 1990s. (OECD 2010a: 37)

This qualification to a tale of convergence and of a rising South does


seem quite extraordinary. We have an argument that suggests that any
132 The BRICs, US ‘Decline’ and Global Transformations

shift is ‘tentative’, and ‘potentially ‘reversible’, and may actually only


be about perception. What the data above suggests is that there was a
shift in the 2000s in particular, but this was small and largely or even
solely accounted for by the rise of China, and that when taken from a
longer term historical perspective, should be treated with a great deal
of caution. What then of the question of inequality between peoples
rather than countries, and the related question of poverty?

Inequality and poverty within countries

Official measures of absolute poverty use either a $1.25 or $2 a day


measure, in which anyone below these figures is deemed to be living in
absolute poverty. This measure does not refer to a US dollar (except in
the US), but rather a ‘dollar’ adjusted to take account of local purchas-
ing power. Purchasing power parity is measured through a system of
international price comparisons, which were made in 1985, 1993, and
most recently in 2005 and 2011,3 and have then been adjusted to take
account of annual changes to particular economies. Claims have been
made that, based on the $1.25 figure, the number of people living in
absolute poverty has declined over recent years, with figures ranging
from 1.8 billion (1990) to 1.37 billion (2005), 1.4 billion (1980) down
to 1.2 billion or 1 billion (2008) (Chen and Ravallion 2010; World
Bank 2002: 30). As a result, the proportion of the world’s people living
in extreme poverty fell from 43% in 1990 to 22.4% in 2008 (UNDP
2013: 12). This in part depends on the way that purchasing power
parity (PPP) is measured, which is through a system of international
price comparisons, made in 1985, 1993 and 2005, which are then
adjusted to take account of annual changes to particular economies. In
the past poverty reduction has ‘occurred’ in part through changes in
the methodology used to measure poverty in particular years. For
example, the shift from the 1985 count to the 1993 count had the
effect of lowering the poverty line in 77 out of 92 countries for which
data were available, and these countries contained 82% of the total
population of the 92 countries (Reddy and Pogge 2004: 42). Similarly,
the shift to the 2005 price comparison had the effect of substantially
lowering per capita GDP in a number of countries, including by as
much as 38% in both China and India, 41% in the Philippines, 32% in
South Africa and 50% in Ghana4 (Milanovic 2012: 5). The 2005 count
had the effect of increasing the number of people living in absolute
poverty from 1 billion to 1.4 billion, though this shift in the method of
calculation had little impact on poverty reduction trends.5 Also ques-
Global Inequality and the Rise of the South 133

tionable is the method of calculation for arriving at local PPP, because


the basket of goods that is used to make price comparisons may include
goods which are unlikely to be consumed by the poor, and which
measure average income. This under-estimates the numbers of people
living in poverty, as consumers with rising income (above poverty level)
spend a decreasing proportion of their income on food, and an average
rise in income over time will therefore translate into smaller compar-
isons of those goods which the poor actually consume, and whose price
differentials may be far more significant (Reddy and Pogge 2004).
Despite these problems, it is likely that there has been a reduction in
the number or proportion of people living in absolute poverty. On the
face of it then, this is good news which fits the wider picture of a rising
South, albeit one that is highly uneven. But the story is actually more
complex than this. A large proportion of those living in absolute
poverty do not live in the poorest, low income countries, but in the
next tier of developing countries known as middle income countries.
According to Kanbur and Sumner (2012: 688), between 71–76% of the
world’s poor live in middle income countries (850–950 million people),
while between 24 and 29% (350 million people) live in low income
countries, mainly in sub-Saharan Africa. China and India (both middle
income countries) accounted for half of the world’s poor in 2007–08,
compared to around 66% in 1990. However, this is not the whole story
as there is a significant concentration of the world’s poor in five
middle income countries, namely Pakistan, India, China, Nigeria and
Indonesia (Kanbur and Sumner 2012: 688–9).
This scenario is open to two possible interpretations. One is that as
these countries continue to grow, more people will be lifted out of
absolute poverty. Thus, as average incomes have risen, the number of
people living on over $2 a day has risen, with those living on around
$2 to $4 a day increasing from 700 million to $1.4 billion from 1990 to
2008, and those living on $4 to $10 a day increasing from 400 million
to 1.1 billion (Sumner 2012: 2). The proportion of people living in
absolute poverty fell in Brazil from 17.2% in 1990 to 6.1% in 2009; in
China from 60.2% to 13.1% (2008); and in India from 49.4% to 32.7%
in 2010 (UNDP 2013: 13). For some, as we have seen in earlier chap-
ters, this is a story of a rising middle class. Thus, the South’s share of
the global middle class (defined as those living on between 10 and 100
dollars a day, based on 2005 PPP) has expanded to 58% in 2010, and is
projected to increase to 70% by 2030 (UNDP 2013: 14).
Alternatively it could be argued that the benefits of growth in these
middle income countries have been distributed in a very unequal way.
134 The BRICs, US ‘Decline’ and Global Transformations

Though there have been significant counter-trends in parts of the


South in recent years, the overall trend across the world since the
1980s has been one of increasing inequality within countries, both
North and South. In Britain, the top 1% income group increased its
share of national income from 6% in 1979 to 16% in 2007, while in
the US, the equivalent figures were 8 and 18%. For the US, if capital
gains are included, then the figures are 8.5% (1979) and 23.5%
(UNCTAD 2012: 49–50). The share of national income going to the
richest 1% of Americans has doubled since 1980, from 10% to 20%,
and the share going to the top 0.01% – some 16,000 families with an
average income of $24m – has quadrupled, from just over 1% to almost
5% (Beddoes 2012). Since 1980, the share of wages in GDP fell by
5 percentage points or more in Australia, Belgium, Finland, France, the
Netherlands, Norway, Sweden, the UK and the US, and by 10 points or
more in Austria, Germany, Ireland, New Zealand, and Portugal
(UNCTAD 2012: 52). Austerity measures are likely to intensify this
problem, and it has been estimated that in Britain, the poorest 20% of
the population will lose 6% of their income from 2011 to 2014 as a
result of government cuts (Elliott 2011).
In China, inequality has risen rapidly and the Gini co-efficient has
risen from 0.28 in the early 1980s to 0.48 in 2008 (Nolan 2012: 69). It
has been estimated that 0.1% of households have 45.8% of total house-
hold wealth – that is, 1.3 million people hold almost half of the house-
hold wealth of 1.3 billion people (Nolan 2012: 69). According to a new
survey, the top 10% of Chinese households took home 57% of the
income in 2010 (Beddoes 2012). House prices are also high, and have
increased by 500% in China in ten years, and by 200% in India in five
years (Beausang 2012: 110). There are also reasons specific to China for
treating some of the global figures with some scepticism. As we have
seen, the poverty count is linked to income levels but this only tells
part of the story. While there were many human rights abuses in the
Maoist era, there were also impressive records in terms of health care,
literacy and life expectancy, which were guaranteed to the population
regardless of income. To some significant extent this is no longer the
case and so health or education costs might now have to be met out of
personal income. This is one reason for the high rate of savings in
China, but also it is one reason why income as a measurement of
poverty has its limits. For while incomes might have risen, the
financial burden of health care or education might have risen for some
even more sharply, leading to less than impressive social development
indicators (Reddy 2007). From 1980 to 2010, life expectancy rose from
Global Inequality and the Rise of the South 135

67.8 to 73.5, but this is actually around 50% slower than other coun-
tries with similar life expectancy levels in 1980, even though these
latter countries experienced much slower growth rates (Reddy 2007:
53; Beausang 2012: 114–15).
While officially India is less unequal than the other BRICs, this
reflects in part the way that inequality is measured there, where con-
sumer spending rather than income is the main variable. This distorts
the picture substantially as the rich are more likely to save some of
their money than the poor. In any case there are still more than
250 million people living below the poverty line, based on most plaus-
ible estimates (Corbridge et al 2013: 58). One of the most striking
features of the recent history of growth in India is that the pace of
poverty reduction has slowed down since the late 1980s (Topolova
2008). In other words, if we measured each unit of growth by its effect
on poverty reduction, the growth that took place before the late 1980s
onwards was more effective in bringing about poverty reduction (see
Corbridge et al 2013: 63). The reason for this is the growth in inequal-
ity; for instance, “evidence suggests that wage shares in total national
income in the organized sector since the early 1990s have been falling
in parallel with shares of informal sector income in total national
income.” (UNCTAD 2012: 54) The share of wages in national income
fell from 40% at the start of the 1990s to 34% by 2009–10, while in the
organized sector the share fell from 69% to 51% (Ghosh 2012). Such is
the combination of continued low per capita income alongside
inequality that India continues to have a very poor human develop-
ment record. World Bank data suggests that only five countries outside
Africa (Afghanistan, Bhutan, Pakistan, Papua New Guinea and Yemen)
have a lower ‘youth female literacy rate’ than India; only four coun-
tries (Afghanistan, Cambodia, Haiti, Myanmar and Pakistan) do worse
than India in terms of high rates of child mortality; only three have
lower levels of ‘access to improved sanitation’ (Bolivia, Cambodia and
Haiti); and no country has a higher proportion of underweight chil-
dren (Dreze and Sen 2012).
By contrast, Brazil has recently made some significant improvement
in terms of reversing historically very high inequality measured by
income distribution, and the Gini index went from 59.3 in 2001 to
55.2 in 2007. Most significantly, in the period from 2000–07 there was
a 50% reduction in the number of people living in absolute poverty. In
this period the income of the poorest 10% grew on average by 7% a
year, which was 4.4% above the national average (Beausang 2012:
132).
136 The BRICs, US ‘Decline’ and Global Transformations

Overall however, there was a clear trend of increased inequality


within countries in the 1980s and 1990s. Based on household income
in 104 countries, inequality increased in 73 of these countries in this
period and fell in only 24, with the rest remaining broadly the same.
However, in the 2000s, the picture was less clear. Among developed
countries, 9 saw rising and 8 saw falling inequality, with 5 seeing no
significant change, compared to 15 out of 22 witnessing rising inequal-
ity from 1980 to 2000. Latin America and the Caribbean saw falling
inequality in 15 out of 18 countries from 2002 to 2010, compared to
14 out of 18 witnessing a rise in inequality from 1980 to 2002. Africa
saw a fall in inequality in 15 and a rise in 9 out of 25 countries from
1995 to 2007, compared to 10 falls and 10 rises from 1980 to 1995.
Eastern Europe and the newly independent states from the former
Soviet Union saw a rise in inequality in all 24 countries assessed from
1990 to 1998, while from 1998 to 2010, there were 13 countries with
rising and 6 with falling inequality from 1998 to 2010 (UNCTAD 2012:
57).
In terms of wages, the gender gap between men and women has nar-
rowed in the North, but the narrowing of the gap actually slowed
down in the 2000s. Latin America saw a significant narrowing of the
gender gap in the period from 1990 to 2010, when the gap for urban
salaries fell from 25% to 15%, largely because of an increase in the
minimum wage for domestic workers (UNCTAD 2012: 71). However,
for those with similar educational levels, the gap remained much
higher, though again there was also a fall – from 38 to 30% from 1990
to 2005 (UNCTAD 2012: 71).
So far then, we have seen that there has been a small shift towards a
decrease in inequality between countries in recent years, but also a
trend of growing inequality within countries over the last thirty years,
offset slightly by a partial reversal in some countries in the 2000s.
What then of the question of global inequality, which measures
inequality between people and across countries? There are various
measures of global inequality, which take in ratio between countries at
various points based on per capita incomes. This is usually based on
decile or quintile ratios; the former measures countries based on per
capita income divided by tenths, while the latter does this by fifths.
The Gini co-efficient measures income distribution based on a figure
between 0 and 1, where zero means perfect equality and 1 means com-
plete inequality (see Table 6.3). The Theil index is also based on a
figure between zero and 1, where the closer the figure is to 1 the greater
the inequality (see Table 6.4). While this index is not without its con-
Global Inequality and the Rise of the South 137

troversies (Sen and Foster 1997), its great merit is that it allows for
measurement based on a combination of both between country and
within country inequality, which is also weighted based on each
country’s share of world income. Though there is some disagreement,
most studies suggest that over the last twenty to thirty years, there has
been some fall in global inequality. The main reason for this is as we
have seen, inequality between countries has fallen, even if inequality
within countries has actually risen, but the latter’s rise is not as great as
the former’s fall. Among the leading studies, Palma (2011) suggests
that there is a growing uniformity in the income share of the middle
50% across countries, but increasing diversity in the share of the top
10% (decile 10) and bottom 40% (decile 1–4). Deciles 5 to 9 tend to
have a national income and/or consumption share of around 50 to
55% (Palma 2011: 101–2), thus leading him to conclude that there are
‘homogenous middles’ and ‘heterogeneous tails’. Milanovic (2011;
2012) argues that the years prior to the financial crisis (2002–08) saw a
decline in global inequality, a view partially challenged by Chen and
Ravallion (2012), at least for the years 2005–08, though they too accept
that over a wider period, global inequality has declined due to
decreases in inequality between countries.

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


years

1988 69.2
1993 69.6
1998 68.4
2002 67.9
2005 66.7
2008 66.3

Source: Adapted from UNCTAD 2012: 64

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

1988 90.2
1993 93.3
1998 90.7
2002 89.6
2005 85.1
2008 84

Source: Adapted from UNCTAD 2012: 64


138 The BRICs, US ‘Decline’ and Global Transformations

Perhaps most useful for our purposes is the study by Edward and
Sumner (2013), which attempts to examine these trends within a wider
context. As we saw above, they argue that global inequality has fallen
since the late 1980s, but by only small amounts, and much of this fall
is accounted for by a fall in between country inequality in the 2000s
(Edward and Sumner 2013). For those identifying an inexorable rise of
the South, Edward and Sumner provide little assurance as we have
seen, and suggest that if China is excluded from the calculations, then
between-country inequality has actually risen since the late 1980s, par-
ticularly among those countries at the very top and very bottom. Like
the OECD qualification to the story of convergence quoted above, this
“should give us pause for thought before celebrating too keenly recent
and very modest signs of falling overall global inequality. The rapid
progress of China may be masking underlying trends that are consider-
ably less progressive.” (Edward and Sumner 2013: 14) Edward and
Sumner go on to identify four ‘layers’ in the global order: the global
absolute poor (living on less than two dollars a day); the global in-
secure (living on $2 to $10 a day); the global secure (living on ($10 to
$50 a day); and the global prosperous (living on over $50 a day), and
within that group the richest 1% of the population, living on $75 a
day. Note that this breakdown of groups avoids the broad definition of
the global middle class that is commonly used, including one that
describes all those living on an income above either $2 or $4 a day (see
Kapsos and Bourmpoula 2013), when in fact these people might well
be “the transient ‘poor’ who are one illness away from poverty”
(Sumner 2012: 11). Even the more common definition of middle class,
namely those living on between 10 and 100 dollars a day (UNDP 2013:
14), briefly discussed in the previous chapter, is too wide a category as
it takes in too diverse a range of incomes. But perhaps what is most
useful about the categories used by Edward and Sumner is that they
give us a sense of perspective, for much of the debate on global poverty
has focused so narrowly on measuring the numbers and proportions of
those living above or below $1 or $1.25 a day, and the extent to which
any reduction is caused by market friendly policies (Dollar and Kraay
2002; World Bank 2002). Causality is rarely proved in such debates but
in any case, the debate becomes a rather technocratic one, in which
lifting some people above a certain threshold is considered a success,
thus abstracting from the unequal social relations that give rise to and
exacerbate poverty in the first place (Harriss 2010), and the continued
insecurity and vulnerability for those just above this threshold.
Though of course Edward and Sumner’s categorizations do not com-
Global Inequality and the Rise of the South 139

pletely resolve these problems, their approach is certainly a step


forward beyond the debate on absolute poverty. Perhaps most prob-
lematic is that the category ‘global secure’ is too wide, as many workers
in that category (particularly in the developed world) hardly exist on
secure incomes or have secure employment. This of course has the
effect of over-estimating those in the category of global secure, so in
this regard there is a limit to Edward and Sumner’s categories.
However, barely this in mind, the categories (particularly those deemed
to be the ‘global insecure’ and the ‘absolute poor’) remain useful
reminders of the realities of inequality in the global economy, and
again we should bear in mind that Edward and Sumner’s categories
only under-estimate these realities.
Table 6.3 identifies both the numbers and proportions of each group,
and where they live. 90% of the richest 1% of the global population
live in Europe and North America, and this translates to 15% of the
population of the US, 8% of the population of the UK, and 2% of the
population of the EU (Edward and Sumner 2013: 37). Among the glob-
ally prosperous, 36% of the US population are in this group, 14% of
the UK, and 8% of the EU (where there is marked differentiation across
countries). 5% of the Brazilian population are in this group (Edward
and Sumner 2013: 37). Among the bottom two groups, the global poor
and insecure, 90% of the Chinese population, 60% of the Brazilian
population and almost all of the populations of South Asia and sub-
Saharan Africa are in this group, compared to 12% of the US popula-
tion, 13% of the EU population and just 3% of the UK population
(Edward and Sumner 2013: 37–8). The global secure segment – one
fifth of the world’s population – includes half the population of the US
and 80% of the EU, plus one third of Brazil’s population and 10% of
China’s, though still actually less than 1% of India’s population
(Edward and Sumner 2013: 38). This again suggests a picture of rising
wealth for some in middle income countries, but equally that any con-
vergence based on a generalized rise of the South is an exaggeration.
The extent of inequality is also clear from Table 6.4, which examines
the share of growth on global consumption levels from 1990 to 2010.

Global inequality manifested: The food crisis and the


international division of labour

The rise of the South is sometimes presented as a straightforwardly


linear process in which growing numbers of people are lifted out of
poverty. This has been questioned above but this section tries to
140

Table 6.3 Global population by consumption groups

Less than $2 $2–$10 $10–$50 $50+ $75+ Global


Global Global Global Global Top 1% total
Absolute Insecure Secure Prosperous
Poor

Total (millions) 2407 2914 1347 227 67 6894


As % of global population 35 42 20 3 1 100
Regional distribution (millions)
East Asia and Pacific (EAP) 542 1270 366 23 3 2202
Europe and Central Asia (ECA) 27 269 542 54 11 891
Latin America and Caribbean (LAC) 70 317 181 20 3 589
Middle East and North Africa (MNA) 48 262 68 5 2 383
North America (NAM) 0 43 175 125 49 344
South Asia Region (SAR) 1092 537 4 0 0 1633
sub-Saharan Africa (SSA) 627 214 12 0 0 854
Distribution by income category (millions)
LICs 543 177 1 0 0 722
LMICs 1459 1097 70 0 0 2625
UMICs 404 1491 483 28 3 2405
HICs 1 148 793 199 65 1142

Source: Adapted from Edward and Sumner 2013: 38, with author permission
Global Inequality and the Rise of the South 141

Table 6.4 Shares of global consumption growth

Global segment Share of global population Share of global


in 2010 (%) consumption growth
1990 to 2010 (%)

Global Absolute Poor 34.9 5.1


Global Insecure 42.3 24.7
Global Secure 19.5 41.4
Global Prosperous 3.3 28.7
Top 1% 1.0 14.9

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

concretize the discussion through a brief discussion of two concrete


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

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

It is the increase in consumption of livestock products plus the con-


version of grain into fuel that have boosted the annual growth in
world grain demand from the roughly 20 million tons of a decade
ago to over 40 million tons in recent years. As incomes continue to
rise, the pressure on farmers to produce enough grain and soybeans
to satisfy the growing appetite for livestock and poultry products
will only intensify….One of the consequences of integrating the
world food and fuel economies is that the owners of the world’s
1 billion motor vehicles are pitted against the world’s poorest
people in competition for grain. (Brown 2012: 35, 40)

While changing demand may be one factor in accounting for longer


term trends, supply factors are equally, if not of more importance. In
recent years aggregate and per capita consumption of grain in China
and India have actually fallen, but as we have seen, food prices have
soared (Ghosh 2010: 72–3). The diversion of acreage and food output
into biofuel production is important, but so too is the speculation in
food commodity markets. Commodity markets are supposed to send
the correct market signals to producers. In particular trading and
futures markets should theoretically facilitate hedging against price
fluctuations, so that the selling of futures contracts would exceed the
demand for them. However, in the period from January 2007 to June
2008, futures prices were higher than spot prices. As Ghosh (2010: 79)
suggests, “(t)his cannot reflect the hedging function and must imply
the involvement of speculators who are expecting to profit from higher
prices”.
In terms of commodity price rises, there are winners and losers.
Those countries exporting commodities have higher export earnings
and growth rates and this gives the state some space for fiscal policy
reform. But the direct beneficiaries are a small number of private
landowners (Bello 2009). For commodity importers, they face rising
import bills, particularly for food and fuel. For people who spend a
high proportion of their income on food, this can be devastating. The
World Bank (2011c) estimates that the 2007–08 food price rises either
kept or pushed 105 million people below the poverty line, and the
2010–11 spike did the same to 48.6 million people. High food prices
have led to demands for higher wages, particularly in China where the
population is ageing and so the labour market is tightening. As was
Global Inequality and the Rise of the South 143

noted in Chapter 3, the number of those between the ages of 15 and


24 years entering the labour force peaked in 2005 at 227 million, and
this could fall to 150 million by 2024 (Beausang 2012: 48). This could
undermine China’s attempts to continue to develop through cheap,
labour intensive manufacturing. For instance, in 2011 a major strike at
a LG factory in eastern China was explicitly over the call for bonuses to
keep pace with rising living costs (Beausang 2012: 109).
One result of high food prices has been the growth of ‘land rushes’
to acquire land, either directly or through leases (Margolis et al 2013;
Oxfam (2011) estimate that 227 million hectares of land have been
sold or leased in the developing world since 2001, while more conserv-
ative estimates put the figure at 80 million hectares (HLPE 2011). The
World Bank (2011c) estimates that there were 464 land acquisitions
between October 2008 and August 2009. The amount of land culti-
vated was known for only 203 of these projects and it totalled
140 million acres, an amount larger than that for corn and wheat com-
bined in the US. Over half of the land was leased or bought in sub-
Saharan Africa, and in particular in Ethiopia, Ghana, Liberia,
Madagascar, Mozambique, Sudan and Zambia (Brown 2012: 104). Over
30% of the land in Liberia has been handed out since 2007. Further
afield, in Cambodia it has been estimated that an area equivalent of
somewhere between 56 and 63% of all arable land has been handed
out to private companies (Oxfam 2012: 2). More recently, South
Sudan, Papua New Guinea, Indonesia, Argentina and Sierra Leone have
become important targets (Magdoff 2013: 10). There is some debate
over who are the beneficiaries of these land grabs, the case made for
them being that they will generate economies of scale and increase
food production and thus contain price increases. On the other hand,
there are serious questions over the extent to which the displacement
of people from existing land will lead to them being absorbed by cities
of slums where the growth of the insecure informal sector living in a
‘planet of slums’ is so high (Davis 2004; Bernstein 2009; Kiely 2009).
Arrighi and Moore (2001: 75) thus reject linear models of capitalist
development, such as those neoliberals who see technological upgrad-
ing and the absorption of labour as an inevitable process generated by
free markets (Bhagwati 2004), or orthodox Marxists who regard prole-
tarianization as a process by which those separated from the means of
production will join the formal labour market (Sender and Johnston
2004; Sender and Pincus 2004). They instead argue that “the under-
lying contradiction of a world capitalist system that promotes the forma-
tion of a world proletariat but cannot accommodate a generalized
144 The BRICs, US ‘Decline’ and Global Transformations

living wage (that is, the most basic reproduction costs), far from being
solved, has become more acute than ever.” (Arrighi and Moore 2001:
75) Many of these people comprise what Edward and Sumner call the
‘global insecure’ layer of the world’s population. Not unrelated to this
point, a further contentious issue is the enclave nature of the land
acquired, which suggests that the benefits are very unequally distrib-
uted (Liberti 2013), and that the export intensity of most of these land
grabs means that they are unlikely to have much impact on local food
needs. Oxfam (2012: 6) for instance estimates that over 60% of land
investors in developing countries intend to export everything they
produce on the land. In the past, some arguments made against cash
crop production set up a false dichotomy between domestic food pro-
ducers on the one hand, and cash crop production for export on the
other (Shiva 1989), when in fact often the most effective food produc-
tion often combined the two. However, in the case of land grabs, in
the majority of cases the dichotomy is of greater relevance (Oxfam
2012).
The rise of the South also implies a changing international division
of labour which, as we saw in Chapter 4, includes a global shift from
focusing overwhelmingly on primary goods to one in which manufac-
turing is central. In terms of inequality this leads to the question of the
extent to which the rise of manufacturing in the South also means
increasing competition between labour in the global North and the
South. We saw above that inequality within developed countries has
increased over the last thirty years, and part of the reason for this has
been the relatively slow growth of real wages. To what extent is this
caused by wage competition from the South, particularly (though not
exclusively) in manufacturing?
Orthodox trade theory assumes that with free trade, there will be an
increase in the real income of that factor which a country holds in
abundance, as demand increases (Ohlin 1933). In terms of labour
markets, this means that there should be a decline in the price of
unskilled, labour intensive goods and a shift to more skill intensive
goods in the global North, For the South, this should mean an increase
in unskilled labour intensive goods, and a boost in demand and wages
for unskilled workers. Though this perspective owes a great deal to
orthodox trade theory, it was also utilized by some supposedly novel
theorists of globalization in the 1990s (Beck 2000: 92–4; 2006: 108–9).
More radical accounts did not necessarily share the view that this led
to an international division of labour in which production on the
North and South were mutually complementary, but some accounts
Global Inequality and the Rise of the South 145

reached broadly similar analytical conclusions. In the 1970s, Frobel,


et al. (1980) explained the emergence of a new international division
of labour which drew on elements of Marxist and world systems
theory. Their argument was concerned with both the crisis in
profitability and de-industrialization in the developed world, alongside
the rise of manufacturing in parts of the developing world, and par-
ticularly in East Asia. They argued that there was a profit squeeze in the
First World, caused by rising wages which cut into profits. Capital
responded to this problem by relocating to the periphery where labour
costs were low. This led both to the deindustrialization of the core
countries, and the ‘super-exploitation’ of workers in the (semi-) periph-
ery (Frank 1983). What both these approaches shared was the view that
the South was beginning to industrialize rapidly, and this could be
explained, at least partly, by lower labour costs.
But both these perspectives were problematic. Skilled workers
benefited from higher pay in both North and South and much of the
change in the price of goods and increases in skill premiums occurred
within rather than between industrial sectors (UNCTAD 2012: 82).
Moreover, at the height of this new international division of labour in
the 1970s and 1980s, the South’s share of direct foreign investment
originating from the North was actually falling. Between 1975 and
1984, it fell from 27% to 19% in the case of West German investment,
and from 19% to 16% in the case of the UK (Jenkins 1992: 35; see also
Gordon 1988). Moreover, as Chapter 3 showed, the most successful
late industrializers at the time, Taiwan and South Korea, were not par-
ticularly dependent on foreign capital investment, and indeed, at least
until the late 1980s and 1990s, were very restrictive in terms of allow-
ing foreign investment in many sectors (Jenkins 1990: 50).
Nonetheless, these approaches remained influential, particularly
through the argument that the transnationalization of capital has led
to states to compete to attract mobile capital (Robinson 2004). This has
included the promotion of a race to the bottom, in which states con-
sistently undercut each other in terms of labour and other standards.
Robinson (2004: 99) contends that transnational capitalism has led to
the erosion of a global North-South divide and that this “particular
spatial form of the uneven development of capitalism is being over-
come by the globalization of capital and markets and the gradual
equalization of accumulation conditions this entails.” As a result of this
equalization, reflected in part in the rise of the BRICs (Harris 2005),
“(w)orldwide convergence, through the global restructuring of capital-
ism, means that the geographic breakdown of the world into
146 The BRICs, US ‘Decline’ and Global Transformations

north-south, core-periphery or First and Third worlds, while still


significant, is diminishing in importance.” (Burbach and Robinson
1999: 27–8) This argument was central to the wider debate over global-
ization, and the extent to which hyper-mobile capital had escaped the
constraints of comparatively immobile nation states and labour (see
Ohmae 1994; Held et al 1999). The response to this argument by glob-
alization ‘sceptics’ was that capital was not as mobile as this, capital
continued to concentrate in the developed world, and wage disparities
between North and South continued to be high (Hay 2005a). Sceptics
also argued that based on certain measures of globalization, particu-
larly trade/GDP ratios, the world was not any more globalized than it
had been on the eve of World War I (Hirst and Thompson 1996: 27).
However, the issue is less one of trade/GDP ratios and more one of
the ratio between trade and merchandise value added (MVA), which
has grown faster than the production of these commodities in many
developed countries. Between 1913 and 1990 the trade/MVA ratio
increased from 23.3% to 53.5% for France, 29.2% to 57.8% for
Germany and 13.2% to 35.8% for the US (Feenstra 1998: 34). This
process has intensified since 1990 (Milberg and Winkler 2009a: 14).
Moreover, while in the 1970s and 1980s, foreign investment in the
South remained relatively low, it increased substantially from the
1990s, both in absolute terms, and in terms of the global distribution
of shares of foreign investment, which is closely linked to the rise of
global commodity chains (see Chapters 4 and 5). As well as the increas-
ing importance of trade as a percentage of GDP in recent years, there is
also the increased importance of the South in this process. With the
South’s share in global exports reaching 30% in 2000, and 40% in
2010, it could be argued that the older arguments concerning a new
international division of labour are more relevant now than they were
in the 1970s and 1980s (UNCTAD 2012: 86). Table 6.5 shows this
increasing trend, especially for the US, and to some extent for the EU,
and following discussion in Chapters 4 and 5, again confirms the
central place of China in this process.
Earlier chapters demonstrated the close interdependence between
the US and China in the long boom from 1992 to 2007. In the period
from 1996 to 2006, the US Consumer Price Index rose at an annual
rate of 2.3%, considerably below the expansion of the money supply
in this period (Milberg and Winkler 2009b: 6). In this period import
prices fell and imported inputs of materials and services grew at
an annual average rate of almost 2% (Milberg and Winkler 2009b:
6–7).
Global Inequality and the Rise of the South 147

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

US total imports US imports EU total EU imports


from low wage specifically imports from from China
economies from China low wage specifically
(including economies from China
China) (including China)

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

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

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

corporations. Indeed, the rise of global commodity chains is a central


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

If the increased corporate profit share in the USA – driven in


part…by offshoring – was matched by proportionate increases in
investment, then we could be reasonably comfortable that the
dynamic gains from offshoring were being realised. But there has
been a shift in the use of these profits. Firms reduced their spending
on plant and equipment and, instead, expanded their spending
aimed directly at immediately increasing shareholder value. While
the profit share rose and investment as a share of profits stagnated
or fell, firms sharply increased their dividend payments and pur-
chases of financial assets.

They go on to point out that for the US top 30 ‘non-financial’ firms


involved in share buy-backs from 2000 to 2007, many were heavily
involved in the use of global commodity chains, including Cisco,
Microsoft, Hewlett Packard, Dell and Intel in IT, Wal-Mart and Intel in
retailing, and Procter and Gamble in consumer non-durables (Milberg
and Winkler 2009b: 11–12). In these cases, intense pressure is placed
on suppliers as part of a package which involves maximizing returns to
shareholders. A similar pattern can be discerned among European com-
panies, where there is again a close link between shareholder value and
pressure on suppliers within value chains (see Gibbon 2002; Palpacuer
2008).
While the growing shares of world trade and associated reliance on
commodity chains is significant, this is not the same as the claim that
this has led to a straightforward race to the bottom. There remains
significant concentration of higher value activity in the developed
world, as we saw in Chapters 4 and 5, and even in the case of unskilled
labour, wage disparities between North and South remain high.
Remittances from North to South (and from richer to poor countries in
the South) are increasingly significant, and expanded at a rate of an
average of 20% per year from 2002 to 2008. In the period from 1980 to
2010, remittances grew from $43 billion to $444 billion, and in the
same period the amount going to the developing world increased from
Global Inequality and the Rise of the South 149

$20 billion to $297 billion (Nayyar 2013: 91). The developing world’s
share of remittances thus increased from 47% to 67% (Nayyar 2013:
91). In 2005 remittances accounted for approximately 2% of the total
GDP of developing countries (Akyuz 2013: 26). This low figure fails to
account for their importance for individual developing countries like
Mexico, India, Bangladesh and the Philippines. However, while these
are increasingly important, more so than aid for some countries, they
are unlikely to form the basis for some kind of convergence between
North and South. In the case of professionals, remittances are import-
ant but in many case training costs have been met by the developing
country. In the case of unskilled labour, low wages will limit the extent
of remittances, even if the transfer of money has a bigger impact in the
poorer country, and in any case immigration controls remain strong in
unskilled labour sectors.
Finally, and most important of all, though they maintain that wage
competition is a significant factor in the growth of economic insecurity
in the developed world, Milberg and Winkler (2009a: 1) also make the
following rhetorical point:

How can we dare speak of economic insecurity in the industrialized


countries when the rate of per capita GDP in Germany is 120 times
that in Uganda, the rate of unemployment in the US is 1/10th of
that in Nepal, or when the share of population below the poverty
line in France is 1/10th that in Zimbabwe?

In other words, some degree of wage competition is one thing, but


convergence based on a generalized race to the bottom quite another.
At this point it is perhaps worth referring back to Edward and Sumner’s
categories of global absolute poor (those on less than PPP $2 a day,
35% of the global population), and global insecure (those on PPP $2 to
$10 a day, 42% of the global population), in Table 6.3 on page 140.
Of the 2,407 million global absolute poor, only 1 million live in the
high income, developed countries. In other words, 2,406 million live
in the developing countries. And of the 2,914 million global insecure,
148 million live in the developed world. Thus, 2,766 million live in the
global South. We are thus a long way from convergence in the interna-
tional order, not only of a levelling up associated with some of the
more optimistic scenarios concerning the rise of the South, but also
those more pessimistic ones that talk about a levelling down process
through a race to the bottom in the global labour market.
150 The BRICs, US ‘Decline’ and Global Transformations

Conclusion

This chapter has focused on inequality, both between and within


countries, and between peoples irrespective of country, and how this
has manifested itself in terms of food production and distribution and
the international division of labour. Its conclusions accord with the
findings of earlier chapters. First, there has been a reduction in inter-
national inequality in recent years, and this again confirms the argu-
ment regarding the rise of a new South. However, this reduction is
limited, both historically and geographically, and is essentially the
result of the rise of China. This finding is broadly compatible with the
argument found in earlier chapters, namely that the rise of the South is
in some respects a reality but is easily exaggerated and actually quite
limited. It is however true that the reduction in inequality between
countries has more than offset general trends towards increased
inequality within countries, so that global inequality has also been
reduced in recent years. But this reduction should also be put into per-
spective. While there may be general trends showing growing inequal-
ity within countries, these manifest themselves between countries in
very different and still highly unequal ways. In particular, 149 million
of the global absolute poor and global insecure live in the developed
countries, while 5,172 million live in the global South. This is not then
a tale of anything like convergence between the established North and
the rising South. Moreover, even in areas which in part reflect and can
be attributed to a limited rise of the South, such as food price increases
and a changing international division of labour, inequality within
these countries means that benefits that may derive from them are
unequally distributed, a point that applies selectively,6 and in less
intense ways, within the global North as well.
Paradoxically, where there has been some kind of convergence –
albeit one resisted in parts of the South, especially Latin America in
recent years – has been in the promotion of policies that have
increased inequality within most countries. In the last chapter we sug-
gested that this was a factor in causing the crisis, both in terms of
increasing debt stimulating demand among poorer sections of society
(thus leading to the sub-prime crisis) and demand among the super-
rich for new securities which could be traced back to those same sub-
prime loans. In the context of a way out of the crisis, inequality
matters as well. In the context of growing inequality, exacerbated by
austerity, a new era of growth and expansion based on rising incomes
for all is unlikely. This means that expansion in the developed world
Global Inequality and the Rise of the South 151

might only come about through another debt led bubble, which will
again burst at some point in the future. This is bad news for the ques-
tion of inequality within countries. Furthermore, in the absence of
another boom-bust cycle, we could experience of an era of slow
growth, higher interest rates and a strong dollar. This is bad news for
the question of inequality between countries.
7
The South and Geopolitics: From
Bandung to the BRICS?

This chapter shifts the focus from political economy to geopolitics, and
addresses the question of whether the ‘new South’ is transforming the
international order, and if so, in what ways. It does so by first examin-
ing the ‘rise and fall’ of the Third World since 1945, discussing as back-
ground to the current period the Bandung Conference in 1955 and
formation of the Non-Aligned Movement in 1961, the formation of
UNCTAD in 1964 and the oil price rises of 1973–74 and calls for a new
international economic order in 1974–75. While the mid-1970s are
often regarded as being the height of the period of Third World solidar-
ity, this argument is treated with some scepticism and it is shown how
this supposed apex quickly gave rise to the decline of ‘Third Worldism’
in the context of the debt crisis of 1982, neoliberalism and the lost
decade of development in the 1980s. The chapter then moves on to
discuss the rise of what has been called the ‘new South’ (Alden et al
2012), which is associated with the rise of new international organiza-
tions and summits, including the BRICS. Finally, the chapter then
addresses the question of what the transformation of the international
order might actually mean, whether it be the rise of new hegemonic
challengers, a new era of multi-polarity, or simply a new era of South-
South cooperation.

The Third World and the South after 1945

The idea of a Third World arose in the context of the intensification of


the Cold War in the post-war period. While the First World referred to
the advanced capitalist countries, the Second World was the com-
munist alternative, though China’s position was ambiguous, not least
after the breakdown of close relations with the Soviet Union in 1958.

152
The South and Geopolitics: From Bandung to the BRICS? 153

Though the origins of the term Third World are usually contested, it
appears to have been used by some members of the French left to refer
to a third force, independent of both capitalism and official com-
munism (see Worsley 1967: 302). This idea of a third force, non-
aligned between hostile capitalism and official Communism, was taken
up by a number of anti-colonial and newly independent leaders such
as Nehru in India, as well as Yugoslavia under Tito, which had broken
from Soviet domination. In this respect then, the Third World referred
to non-alignment, but its usage was wider than this. It usually referred
to countries that had been colonized and were relatively poor in the
world economy (Worsley 1967: 9; Alden et al 2012: 4), and so the term
was often linked to the idea of development.
The idea of the Third World was therefore also related to national-
ism, in the sense of former colonies building nations (or colonies aspir-
ing to independence), promoting protectionist industrialization
strategies (see Chapter 3), and asserting their influence in the interna-
tional order. The post-war context was in some respects a favourable
one, with both superpowers supporting the end of empire and condi-
tionally supporting independence and the extension of sovereignty to
new nation states. The Atlantic Charter of 1942 and the United
Nations’ Universal Declaration of Human Rights of 1948 both laid
down the normative basis for decolonization, and the defeat of the
Nazi regime served to undermine, in official circles at least, some of the
most extreme forms of racism, colonialism and empire. On the other
hand, the liberal international order promoted by the United States
was one in which power was still exercised through vetoes at the UN
Security Council, and through weighted voting at (admittedly weak)
international financial and development institutions like the IMF and
World Bank. Perhaps above all, the Cold War ensured that geopolitical
interests continued to dominate, so that for example aid was closely
tied to commercial interests or even more to the interests of the com-
peting super-powers, and even the sovereignty of nation states was
compromised by US or Soviet responses to particular regimes
(Mulholland 2013: ch.12).
It was in this context that non-alignment was developed as an inter-
national principle by a number of states, first at the Bandung
Conference in Indonesia in 1955. This conference was convened by
Burma, Ceylon, India, Indonesia and Pakistan, and attended by
Afghanistan, Cambodia, the Peoples’ Republic of China, Egypt,
Ethiopia, the Gold Coast, Iran, Iraq, Japan, Jordan, Laos, Lebanon,
Liberia, Libya, Nepal, the Philippines, Saudi Arabia, Sudan, Syria,
154 The BRICs, US ‘Decline’ and Global Transformations

Thailand, Turkey, the Democratic Republic of Vietnam, the State of


Vietnam, and Yemen (Alden et al 2012: 39). Much of this conference
focused on cooperation, sovereignty, nationalism and colonialism, but
even at this early stage, prospects for cooperation were hindered by dif-
ferences between countries, such as on-going border disputes between
China and India (Alden et al 2012: 41–3).
Nonetheless, the impetus to formalize non-alignment continued and
actually increased in the context of the emergence of a number of
newly independent states, particularly in Africa. The Non-Aligned
Movement was formally founded at the Belgrade conference in
September 1961. Many of those that attended the Bandung Conference
were again present, plus some new African states including Ghana,
Guinea, Mali and Morocco (Alden et al 2012: 50). There were also some
observer states from Latin America present, including Brazil and
Ecuador. The criteria for invitations to the conference centred around
the following:

(i) an independent policy based on the coexistence of states with dif-


ferent political and social systems and non-alignment or a trend
in favour of such a policy;
(ii) consistent support to movements for national independence;
(iii) non-membership of a multilateral military alliance concluded in
the context of Great Power conflicts;
(iv) in case of bilateral military agreement with a Great Power, or
membership of a regional defence pact, the agreement or pact
should not be one concluded in the context of Great Power
conflicts; and
(iv) in the case of lease of military bases to a foreign power, the con-
cession should not have been made in the context of Great Power
conflicts. (Willetts 1978: 18–19)

Much of the focus here then was on non-alignment, which was


emphasized even more at the conference in Belgrade, which took place
against the background of the construction of the Berlin Wall and thus
rising geopolitical tensions between First and Second Worlds. But
alongside this geopolitical vision was a more economic interpretation
of ‘Third Worldism’. The Non-Aligned Movement did not ignore this
more explicitly developmental approach, but it was through the
United Nations Conference on Trade and Development (UNCTAD),
that this economic approach was emphasized. UNCTAD was founded
in 1964, alongside what remains the largest intergovernmental organ-
The South and Geopolitics: From Bandung to the BRICS? 155

ization of developing countries, the Group of 77 (which retains the


name G77 but now has over 130 countries as members). The G77 “is
the largest intergovernmental organization of developing countries in
the United Nations, which provides the means for the countries of the
South to articulate and promote their collective economic interests and
enhance their joint negotiating capacity on all major international
economic issues within the United Nations system, and promote
South-South cooperation for development.” (www.g77.org)
The G77 took up the UNCTAD agenda, particularly in the 1970s
when calls were made through the UN General Assembly for a New
International Economic Order (NIEO). Encouraged by the success of
the Organisation for Petroleum Exporting Countries (OPEC), which
was successful in promoting massive price rises in oil in 1973 and
1974, a special session of the UN General Assembly called for the estab-
lishment of a NIEO in April 1974 (see Prashad 2013a: 29; Alden et al
2012: 57; Singham and Hune 1986). The idea of a new international
economic order was intended to provide a favourable international
context for existing nationalist development strategies based on import
substitution industrialization. In particular, it focused on three core
areas. First, in terms of trade, the NIEO promoted a scheme for alleviat-
ing unequal terms of trade and specifically declining prices for primary
commodity exports. The specifics of this needed to be worked out, but
could involve guaranteed prices for certain commodities, or some kind
of compensatory fund if market prices fell below a certain level (Anell
and Nygren 1980: 135–43). Second, in terms of investment, the NIEO
called for codes for multinational companies investing in the South,
which reflected concerns over certain practices, such as transfer
pricing. This was where MNCs involved in intra-firm trade might
declare profits in a lower taxation country in order to evade tax in a
higher taxation country, even when the profits may have been made in
the latter (Anell and Nygren 1980: 200). Third, in terms of aid, the
NIEO called for more aid but at least as important, an improvement in
the quality of aid, so that it would not be tied to geopolitical considera-
tions or the commercial interests of particular companies located in
the donor countries (Anell and Nygren 1980: 147–9).
The mid-1970s was in many ways the apex of Third World solidarity,
but by the late 1970s and early 1980s, this had come to an end. What
Prashad (2013a: 1–3) somewhat problematically calls the ‘third world
project’ of bread, peace and justice was defeated by the Atlantic project
of neoliberalism, as more and more developing countries faced the
debt crisis of 1982, and conditions attached to receiving new loans via
156 The BRICs, US ‘Decline’ and Global Transformations

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

The new South

The rise of a new South must be located in the context outlined in pre-
vious chapters, namely the emergence of new powers in the context of
the long boom of the 1990s. Particularly significant has been the fact
that a number of these countries are large developing countries, and
here we return again to the question of the BRICS. Alongside this,
there have been a number of developing countries that have at least
partially challenged some of the main policies of the Washington
Consensus (see Chapter 3; also Ban and Blyth 2013), not only among
The South and Geopolitics: From Bandung to the BRICS? 157

the BRIC countries but elsewhere, particularly in Latin America (Ellner


2012). This has laid the basis for regional and wider agreements, insti-
tutions and summits by a more assertive South.
This section focuses on how the new South has manifested itself in
the areas of development and of geopolitics, and some comparison will
be made with the earlier era of South-South cooperation and the new
international economic order, and of non-alignment. It should be
noted that the G77, UNCTAD and the Non-Aligned Movement con-
tinue to exist, but to some degree these have been displaced by new
alliances, and a new context.

Developmental alliances
Since the 1970s and 1980s, there has been a shift from demands for a
new international economic order to one of acceptance of the existing
order, but one where different parts of the South have made demands
for a greater say within that order. This can be seen in the case of the
Uruguay Round of the General Agreement on Tariffs and Trade
(GATT), which culminated in the creation of the World Trade
Organization (WTO) in 1995 (Ostry 2007). In particular parts of the
South hoped that a shift towards freer trade would be reciprocal, and
that the developed world would liberalize those sectors in which the
developing world was particularly export dependent, such as agricul-
ture and clothing and textiles. This met with initial disappointment,
particularly at the collapsed WTO talks in Seattle in 1999, which in
part were overshadowed by the diverse protests outside of the talks
(Kiely 2005: 117–24). While in the longer term there was significant
liberalization in the clothing and textiles sectors, much of the develop-
ing world remained disappointed with progress in agriculture, as devel-
oped countries maintained various protectionist measures outside of
tariffs, such as subsidies. The overall level of subsidies to farmers in
the developed world increased after the WTO was founded, from
$182 billion in 1995 to $318 billion in 2002 (Oxfam 2002: 12). In addi-
tion, the promotion of Trade Related Intellectual Property Rights
(TRIPS), which often extended both the duration of patents and
the sectors to which they applied, was a source of disappointment.
Developing countries were also disappointed by procedures at WTO
meetings, such as informal meetings among developed countries where
countries of the South were largely excluded (Narlikar 2005).
One response was to form coalitions to promote their collective
interests. The G20 of developing nations was perhaps the most
significant group in terms of promoting market access to developed
158 The BRICs, US ‘Decline’ and Global Transformations

world markets, particularly in agriculture. It emerged at the Cancun


Ministerial meeting in 2003, and took a far more adversarial position
on trade liberalization on agriculture in response to developed world
intransigence (Taylor 2007). However, perhaps more significant than
these alliances is the fact that a number of large developing countries
have emerged as powers in the international order, and have devel-
oped new alliances as part of this process. As well as the BRICS, there is
also the India, Brazil, South Africa grouping known as IBSA, as noted in
Chapter 2. This was established in 2003, and stresses the democratic
credentials of the three countries, alongside the fact that they are both
middle powers and developing nations. They particularly aim to “con-
tribute to the construction of a new international architecture; bring
their voice together on global issues; deepen their ties in various areas”
as well as opening itself up to “concrete projects of cooperation and
partnership with less developed countries.” (IBSA 2013)
But as we saw in Chapter 2, the most significant grouping is the
BRICS. This is not only because of the size of the countries that make
up its membership, though this is very important, but also because of
the question of whether these countries challenge the existing interna-
tional order, and specifically US hegemony and development dom-
inated by neoliberal prescription. Prashad (2013a: 12) argues that “(t)he
BRICs do not promise any kind of revolutionary transformation of the
world order; they are modest in their ambitions. Nevertheless, they are
the first formation in thirty years to challenge the settled orthodoxy of
the Global North. What the BRICS have enabled is the opening up
of some space, allowing a breath of air to oxygenate the stagnant world
of neoliberal imperialism. The BRICS states have their own commit-
ment to neoliberal policies, but they are no longer willing to bend
before imperial power. It is in this gap between neoliberal policy and
imperial power that an opportunity presents itself for the bloc of the
South.”
Once again it is the rise of one power, China, which is really
significant. In one sense this can be seen as an era of continuity with
the high-point of non-alignment as Maoist China saw itself as the
leader of the global South, and still does in terms of its policies on both
aid and trade. In this regard, we arrive back at the debate over the
Beijing Consensus and state capitalism, as outlined in Chapters 2 and
3. The next sub-section will examine this issue with particular refer-
ence to geopolitics, but here we first examine the developmental ques-
tions of aid and trade.
The South and Geopolitics: From Bandung to the BRICS? 159

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

We support international efforts to help developing countries enhance


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

The 2011 White Paper on aid distinguished between Chinese aid to the
south and western aid, with the emphasis in the case of the former on
“helping recipient countries build up their self-development capacity”,
“imposing no political conditions” and “adhering to equality, mutual
benefit and common development.” (cited in Chin 2012: 590) At the
BRICS summit at Delhi in March 2012, Hu Jintao called for the BRICS
to “jointly promote South-South cooperation.” (cited in Chin 2012:
592) This is also regarded as a practice that continues from the Maoist
era, where the principles of respect for sovereignty, equality and mutu-
ality were espoused.
Reliable data for the amount of aid dispensed by China is hard to
find, mainly because of the way in which aid is defined by the Chinese
government (Mawdsley 2012: ch3). Chinese grant contributions and
interest free loans managed by the Ministry of commerce (MOFCOM)
stood at $866 million in 2009, compared to a US aid total of
$31 billion in 2010 (Chin 2012: 581). However, China Eximbank and
the China Development Bank administer low interest ‘foreign eco-
nomic cooperation’ loans, which would substantially increase the
amount of aid dispensed by China, with estimates that the figure could
160 The BRICs, US ‘Decline’ and Global Transformations

be as high as $25 billion in 2009, though most estimates remain


considerably below this figure (Chin 2012: 582). What is undoubtedly
the case is that there has been a substantial increase in aid to different
parts of the developing world in recent years, and the Chinese self-
perception is that this aid is dispensed on far more generous terms
than western aid, where stringent conditions are attached (Brautigam
2011: chs.4 and 5).
Even more important has been the development of trade relation-
ships between various parts of the South, with China playing a leading
role in this process. As we saw in Chapters 4 and 5, the rate of growth
of developing world exports has increased enormously, alongside a
substantial increase in South-South trade, which accounted for less
than 9% of world trade in 1960 but as much as 42% in 2008 (Beausang
2012: 56). Much of this can be explained by the rise of China. Chapter 4
(Tables 4.11 and 4.12) showed how the trade of the ‘other BRICs’ with
China was more significant than trade between each other, but it is not
only trade with the other BRICs that is significant as earlier chapters
also showed. The share of China in Latin America’s exports increased
seven-fold from 2000 to 2010, and by 2009, China was the top export
market for Chile and Cuba as well as Brazil, and the second biggest for
Colombia, Costa Rica and Peru (Jenkins 2012: 1339). What is particu-
larly clear is that Latin America is a major exporter of primary com-
modities to China, with copper ore, soybean, soya oil, iron ore, crude
oil, and refined copper leading the way in terms of exports. Table 7.1
clearly shows the degree to which Latin America depends on the
export of primary goods. What is striking is that Latin America exports
of primary goods are more dependent on China than they are for the
rest of the world, and that this dependence has increased in recent
years. Moreover, the concentration, based on a straightforward con-
trast of primary goods and manufactured goods, is an under-estimation
when we factor in resource based manufactures. If we combine primary
goods and resource based manufactures, then in 2008 87.7% of Latin
American exports were in these sectors, compared to 53.6% for the rest
of the world.
It is not only the direct effect of Chinese demand for developing
world exports that is significant, but also the indirect effect of Chinese
demand on global commodity prices (Farooki and Kaplinsky 2012).
Measuring this effect is difficult as it would rely on counterfactuals
which are impossible to measure with great precision. For instance, one
possible scenario would be to try to measure China’s impact by factor-
ing out its higher than average growth of demand for particular com-
The South and Geopolitics: From Bandung to the BRICS? 161

Table 7.1 Composition of Latin America and Caribbean exports to China,


and to the rest of the world, rounded up percentages

China China China Rest of Rest of Rest of


1990 2000 2008 world world world
1990 2000 2008

Primary products 40.2 58.1 71.9 49.1 27 38.5


Manufactured goods 59.8 41.8 28.1 49.7 71.3 58.5
(all goods including
resourced based and
non-resource based)
Manufactured goods 25.1 23.3 15.8 22 17.2 15.1
that are resource
based only

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

modities, but over a given period, China’s growing demand would


impact on demand in the rest of the world; separating one from the
other involves some degree of guess work. Nonetheless, a comparison
of consumption growth of particular commodities in China and the
rest of the world does provide some telling indication of just how fast
China’s growth has been. Table 7.4 provides such a comparison,
measuring (percentage) consumption growth in China and the rest of
the world in the period from 2002 to 2007.
As already shown in Chapters 4 and 5, this period saw hugely
significant price increases for a number of commodities: iron ore prices
increased by 184.7%; copper by 356.5%; aluminium by 95.4%; and
zinc by 316.4% (R. O. Jenkins 2011: 75). Similar, though not identical
patterns can be identified in Africa too, where there was a significant

Table 7.2 Percentage increase in consumption growth, 2002 to 2007

Commodity China Rest of world

Oil 48.7 6.6


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

Source: Adapted from R.O. Jenkins 2011: 80, with author and publisher permission
162 The BRICs, US ‘Decline’ and Global Transformations

increase in trade with China in the period from 1998 onwards. Africa’s
exports to China increased from $1.4 billion in 1995 to $34.4 billion
by 2007 (Farooki 2009: 18). In the period from 1999 to 2004, Africa’s
terms of trade improved by around 30% (UNCTAD 2005: 94). The most
significant exports to China were in minerals and metals (especially in
Ghana, Namibia, Zambia), timber (Cameroon, Congo, Mozambique
and Tanzania) and above all, oil (Angola, Sudan and to some extent
Cameroon and the Democratic Republic of Congo). Indeed, it is the
main oil exporters that are most significant and in 2003, China
accounted for 41% of Sudan’s exports and 23% of Angola’s exports
(Jenkins and Edwards 2006: 212). About a quarter of total Chinese oil
supplies are sourced from the Gulf of Guinea (Carmody and Owusu
2007: 505).
If we recall from the previous section, the demands for a new inter-
national economic order in the 1970s included attempts to find ways
to stabilize the price of volatile primary commodities. This usually
involved calls for international intervention to compensate for price
shortfalls or to simply agree on prices irrespective of market demand.
One could argue that China’s rise has provided a new international
economic order through the backdoor, or at least through global
market demand, because it has – in part at least – led to huge increases
in primary commodity prices and thus reversed unfavourable move-
ments in the terms of trade for producers in these sectors. This may not
be the result of deliberate political intervention aimed to boost solidar-
ity, but that is the outcome all the same.
However, the picture might be more complex than this. One could
argue instead that the relationship between China and the rest of the
developing world is unequal and asymmetric, and indeed one that
replicates former patterns of colonial and neo-colonial relations. For
instance, Latin America “is much more dependent on the Chinese
market than China is on the Latin American market as sources of
supply.” (Jenkins 2012: 1348) China has promoted its own processing
industries, designed to upgrade in terms of climbing the value chain of
particular commodities, and relied on imports to supply the basic raw
materials. This has left some countries increasingly reliant on a small
number of exports, and this concentration tends to increase with trade
relations with China (Jenkins 2012: 1351). Similarly, in Africa the share
of oil, minerals and metals in exports to China increased from 76% of
total exports in 2000 to 85% in 2006 (Farooki 2009: 18).
One possible response to this objection is ‘so what’? As long as com-
modity prices remain high, these kind of objections do not matter.
The South and Geopolitics: From Bandung to the BRICS? 163

However, as previous chapters have suggested, they do matter, and this


is for four reasons. First, just as the oil price rises of 1973 and 1974 had
differential effects, so too the impact of higher commodity prices varies
across the developing world. While higher prices are good news for net
commodity exporters, the opposite is true for net importers. Thus, in
the case of Latin America, El Salvador, Nicaragua, Costa Rica, Panama
and Uruguay, as net importers, have been clear losers (R. O. Jenkins
2011: 84). Second, as previous chapters argued, there is the question of
sustainability and the need to diversify to establish wider linkages in
countries in desperate need of development. Furthermore, this ques-
tion of the sustainability of primary commodity dependence is not
only a question of the volatility of commodity prices, and the conse-
quences of a rapid fall in those prices. There is also the question of
commodity exports inflating the national currency and thereby under-
mining domestic industry, and thus potentially undermining
diversification. From 2003 to the end of 2010 in Brazil, the real appre-
ciated by 108%, at the same time as the share of manufacturing
exports fell from 55 to 44% (Beausang 2012: 39–40). Third, there is
the question of competition from China. Thus for instance, with the
ending of the protectionist measures in clothing and textiles under the
Multi-Fibre Agreement in 2005, African clothing and textiles exports
dropped by 11% in value terms in the first ten months after quotas
were removed, while China’s share over the same period increased
sharply (Kaplinsky and Morris 2008). Fourth, we should be careful not
to exaggerate the significance of China’s rise for the rest of the South.
China is a growing and indeed a major export market for Latin
America, but in 2010, just over 8% of the region’s exports went to
China, compared to 41% for the US and 13% for the European Union.
In 2009, when Latin American exports fell by 23% compared to the
previous year, exports to the US fell by 26% and to the EU fell by 28%.
In the same year, exports to China increased by 7.5%. This translated
into a fall in the value of exports to the world apart from China and
Hong Kong of almost $200 billion, and an increase in the value of
exports to China and Hong Kong of just $3.6 billion (Jenkins 2012:
1353–4). This suggests then that there is both an unequal trading rela-
tionship between China and the South, but also that the total level of
trade is still quite small.

Geopolitics
One of the major concerns of the new South is to demand greater rep-
resentation at the major institutions of global governance. For
164 The BRICs, US ‘Decline’ and Global Transformations

example, at the International Monetary Fund European countries have


32% of the vote and the BRICs have 11.5%, while at the World Bank
the developed world holds 60% of voting shares (Beausang 2012: 85).
But the debate reaches beyond simple institutional representation, and
one of the major geopolitical debates in the post-Cold War world has
been about liberal interventionism. While the specifics of each case
vary, there has been a common theme, both in cases of intervention
and (relative) non-intervention, that ‘humanitarian military interven-
tion’ can be justified on the grounds that state sovereignty is condi-
tional on nation states respecting the rights of its citizens. This is not
necessarily a new argument and was part of the case made for the pros-
ecution of leading Nazis at the Nuremberg trials of 1945–46 (Hebert
2010). However, in the Cold War period, though lip service was paid to
the rhetoric of freedom against Communism, in practice real politics
continually trumped ethics, and US-led interventions were often made
on the grounds that left-wing or even just nationalist governments
needed to be removed (or popular opposition movements had to be
crushed) because these were simply proxies for Soviet expansion. This
sometimes involved the overthrow of liberal-democratic governments,
and at the very least relatively mild non-democratic regimes, and their
replacement by highly repressive authoritarian regimes (Latham 2010).
In the post-Cold War world, in the absence of a Communist compet-
itor, the argument has been made that ethics can now trump real pol-
itics. This has partly informed the rhetoric of military intervention in
the former Yugoslavia in the 1990s, Afghanistan and Iraq in the 2000s,
and Libya in the 2010s.
The question that needs to be addressed here is whether or not the
new South represents a challenge to this liberal interventionism. On
one level it does, and in the cases of Afghanistan and especially Iraq
there was considerable opposition to military intervention (see Coates
and Kreiger 2004). On the other hand, a considerable number of coun-
tries were part of the ‘coalition of the willing’ in the war against Iraq,
even if this list was highly selective (BBC 2003).1 In terms of under-
standing the emergence of a new South, the case of Libya is particu-
larly interesting because all of the leading BRICS were on the Security
Council when UNSC Resolution 1973 was passed, authorizing military
intervention (UNSC 2011). However, none of the countries chose to
exercise the veto (though Russia and China have used this regularly in
other cases), and the resolution was passed with 10 votes for, none
against and 5 abstentions. These were four of the BRICS (Brazil, China,
India and Russia), plus Germany. South Africa voted for the motion.
The South and Geopolitics: From Bandung to the BRICS? 165

Two things should be noted about this vote: first, that an abstention
amounts to only limited, if any, opposition to the motion. The absten-
tions were made in the full knowledge that this in effect gave a green
light to military intervention. Second, and in contrast to liberal inter-
ventionist hawks who argue that opposition to intervention is tanta-
mount to support for dictatorship, much of the critical voices made
about this intervention were ones concerning due process, practicality
and feasibility, at least as much as simple opposition to military inter-
vention per se. Both Russia and India emphasized the question of how,
and by whom, the resolution would be enforced, while Brazil and
China were unconvinced that intervention would lead to the end of
conflict (UNSC 2011; Chimni 2013; Evans 2013).
In 2005, all member states endorsed the principle of the
Responsibility to Protect (ICISS 2001), thus giving states a legal obliga-
tion to protect their populations, while also giving the green light to
the international community to act in the face of genocide, war
crimes, ethnic cleansing and crimes against humanity (UN 2005).
However, this has not led to a consensus about intervention. On the
one side, liberal interventionist hawks such as former British Prime
Minister Tony Blair have interpreted this as a green light for military
intervention, and paid only lip service to questions of process (though
Blair, a Middle East ‘peace envoy’, kept very quiet over the Libya inter-
vention as this followed a few years of close ties with former President
Gadaffi). But much of the new South argues that proper procedures
need to be followed. In particular, many countries argue that ambigu-
ously worded Security Council resolutions are used to give the green
light to interventions beyond their original remit, which was essen-
tially how the BRICs criticized the intervention in Libya after the event
(Evans 2013). This is a legitimate fear that was most visible in the case
of the invasion of Iraq in 2003 (and indeed over Kosovo in 1999),
when an ambiguous Security Council resolution 1441 was eventually
ignored, or used as the basis for going to war, even though Prime
Minister Blair explicitly promised the House of Commons that the res-
olution was not “an automatic trigger point” and stated that “para-
graph 12 of the resolution makes it clear that it is not.” (quoted in
Coates and Krieger 2004: 57)
This fear of mission creep can also be seen in the case of Syria in
2013. Again the debate was often set up in a misleadingly stark
fashion, with liberal hawks accusing opponents of military interven-
tion of supporting the Assad dictatorship.2 The US administration’s
support for military intervention was undermined by lack of support,
166 The BRICs, US ‘Decline’ and Global Transformations

and this eventually culminated in the shift from war to a compromise


in which Syria was tasked to give up its chemical weapons (Manley
2013), and in any case the US and its allies substantially shifted their
position (without acknowledging that this was the case) with the rise
of the so-called Islamic State movement in 2014. The most important
matter for our purposes is the extent to which all this adds up to a
geopolitical challenge to the West, both generally and in terms of the
specific example of Syria. As already stated, in one respect it does, in
that leading countries in the new South are less committed to liberal
military intervention than the West. Some influential US commenta-
tors, from a variety of political perspectives, have called for the forma-
tion of a League of Democracies to counter what was perceived to be
authoritarian opposition to humanitarian intervention (Ikenberry and
Slaughter 2006; Daalder and Lindsay 2007; Daalder and Kagan 2007;
Kagan 2008).
However, the West itself is hardly united over this issue. Germany
has opposed a number of interventions, most notably in Iraq, for
example. In the case of Syria, the gradual shift away from a commit-
ment to military intervention in September 2013 (and towards inter-
vention against anti-Assad insurgents in 2014) reflected less the
challenges of the new South and the BRICS in particular, and more the
lack of support from different sections of government, most notably
Congress in the US in 2013 at least. Though far from decisive, British
parliamentary opposition from the US’ most loyal ally over interven-
tion against Assad did reflect a shift from the early 2000s, as did public
opposition to the war. This in turn can be traced back to the fiasco of
the Iraqi intervention. Moreover, we have already suggested that this
opposition is partly one of process as much as a simple defence of state
sovereignty, at least in the cases of Libya and Syria. This is less the case
in terms of Russia’s close ties to and support for Syria under Assad, as
opposed to the more passive opposition of China and India in particu-
lar (Evans 2013; Chimni 2013), but this in itself demonstrates further
lack of unity among the BRICS in terms of formulating a united posi-
tion on strategic foreign policy. Indeed, Putin’s support for the Assad
regime in part reflects “the Russian leadership’s anxiety about Russian
state order and perceived challenges to Russia’s domestic political
structure. This anxiety underlies Moscow’s stark repudiation of moves
towards regime change in foreign states that are perceived to bear the
imprint of western states” (Allison 2013: 818). In other words, this
position reflects Russian domestic political weakness more than any
alleged international strategic strength. More generally, it should also
The South and Geopolitics: From Bandung to the BRICS? 167

be stressed that there is considerable regional rivalry among at least 3


of the BRICS, namely India, China and Russia, particularly in Asia. Not
unrelated to this point, though China’s commitment to a peaceful rise
to power is not just rhetorical, it is the case that China has ambitions
to be a major power alongside the US, in contrast to Russia, Brazil and
India who (more realistically) are committed to a multipolar interna-
tional order, rather than a bipolar one with the US and China at the
top.3 Russia’s effective annexation of Crimea and the escalation of the
Ukraine crisis in 2014 should also be seen in this light. On the face of
it, the action appears to represent a return to great power politics (Zala
2014), and Brazil, India, China and South Africa abstained from the
UN resolution condemning Russian action, while Russia voted against
the motion (Keck 2014). Moreover, in a response to a move to ban
President Putin from the planned G20 summit in Australia in
November 2014, BRICS foreign ministers issued a dissenting statement
(IRC 2014). However, as we have seen, it is one thing to recognize the
contingent existence of conflict between states, and quite another to
explain this as the necessary product of either an anarchical state
system or uneven and combined development. Indeed, it is better
explained in reference to Russian regional ambitions and in particular
a desire to counter NATO expansion in the region, rather than a
conflict between two global super-powers.

Transforming international order?

Alden et al put forward the case that the rise of the new South does
constitute a transformation of the international order. The likes of the
G15, G20, IBSA “were able to mobilise support in favour of positions at
the WTO, backed in part by an assertive civil society. The result was
that a new era of Southern activism paved the way for a grand power
shift in international politics the likes of which had not been seen
since the turn of the nineteenth century.” (Alden et al 2012: 92) This is
linked to the rise of the new southern powerhouses, for “(i)n the end,
it wasn’t the declaratory politics of the NAM as much as the economic
power of emerging countries in the South in conjunction with these
aspirations that began the process of reshaping parts of the interna-
tional system.” (Alden et al 2012: 124) However, does this amount to a
transformation of the international order? Or does it instead reflect the
rise of a new South, one that is limited and which ultimately reflects
the continued subordinate role of the South in the international order?
This of course brings us back to the question of continuities and
168 The BRICs, US ‘Decline’ and Global Transformations

discontinuities with the Non-aligned Movement and G77. These were


(and are) organizations which did not bring about a transformation of
the international order, but which were (and are) in effect interna-
tional interest groups within a highly unequal order.
To answer these questions we need to return to a discussion of the five
positions outlined in Chapter 2. These were: (i) there is a Beijing consen-
sus or China model and this is a cause for concern; (ii) emerging powers
are rising and this is transforming the international order, which carries
with it a set of dangers; (iii) there is a Beijing consensus, or China or
BRICS model, but rather than this being a cause for concern, it should be
one for celebration; (iv) insofar as there is a rise of emerging powers in the
developing world, this should be seen as a triumph for the West; (v) the
rise of emerging powers is limited, and US hegemony persists. As we saw
in that chapter, these positions are not completely mutually exclusive
and there is some overlap. In terms of the specific discussion in this
chapter, what then should we make of these different approaches?
The first position essentially contends that China is in effect a ‘rogue
donor’ in terms of aid (Naim 2007), in that aid is dispensed to regimes
irrespective of human rights abuses. This is in contrast to conditions
attached to aid by western regimes, which include (in theory at least)
respect for human rights on the part of recipient states. The US House
of Representatives Sub-committee on Africa, Global Human Rights and
International Operations in 2005 expressed the fear that China’s
influence in Africa might “undo much of the progress that has been
made on democracy and governance” in the developing world (cited in
Breslin 2011b: 1323). As we saw in Chapter 2, this is sometimes linked
to geopolitical fears over the rise of a Beijing Consensus, so that
“China’s strict refusal to act in ways that would, in its view, violate a
country’s sovereignty has meant China has remained apart from such
issues as civil liberties, rule of law, human rights, and democratic gov-
ernance.” (Halper 2010: 98) It is the case that China is more prepared
than liberal interventionists in the West to defend the principle of sov-
ereignty, but as we saw above in the cases of Libya and Syria, part of
the opposition to intervention also involves concerns about process,
feasibility, and planning. We also saw above that liberal intervention-
ists often (albeit misleadingly) contrast the cosmopolitan, solidaristic
West, with self-interested and rogue states in the South (Barnett 2004;
Cooper 2002). While this position should not be rejected out of hand,
its contrast of a morally repugnant China and an altruistic West is too
simplistic. As we saw in Chapter 3, authoritarian state capitalism is far
from exclusive to China and characterized the developed countries in
The South and Geopolitics: From Bandung to the BRICS? 169

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

The second position essentially argues along realist or Leninist lines,


and suggests that China’s rise is leading to conflict with the threatened
hegemonic power, the United States (Carmody and Owusu 2007). This
is reflected in differences over intervention in the developing world,
but also has led to competition over limited resources such as oil (Klare
2004). There are of course areas of conflict between China, the US and
other states, but whether this can be explained as the necessary
outcome of international anarchy (realism) or uneven development
(Leninism) is another matter. Contemporary imperialism differs
sharply from the imperialism theorized by classical Marxists like Lenin
and Bukharin, when inter-imperialist rivalries took place in the context
of relatively closed trade and investment relations with the colonies
and semi-colonies, in contrast to the current liberal order of relatively
free trade and open door investment policies (Kiely 2010; Panitch and
Gindin 2012). Theorizing current wars in terms of access to raw mater-
ials is therefore unconvincing because, in the context of free trade and
open investment, it does not secure access at the expense of potential
rivals.4 It may convey some form of strategic power, but “the form of
that control is, in fact, very ambiguous and, most importantly, very
different to the kinds of exclusive control over raw materials tradition-
ally associated with imperial powers.” (Bromley 2005: 228; Stokes and
Raphael 2010) More generally, while it is the case that international
relations between China and the US are often based on different and
conflicting perspectives which act as constraints on cooperation, these
areas of conflict and contestation are not comparable to older rivalries
between so-called great powers. In particular, while not agreeing with
the US in a number of crucial areas, China has simultaneously accom-
modated itself to the US’ hegemonic global role, even if this is less true
at the level of specific regions (Foot and Walter 2010).
The third position celebrates the rise of China and the BRICS and
sees this as paving the way for a new era of Third World solidarity not
seen since the 1970s (Desai 2012; 2013). Chinese aid can be seen as
being part of a wider process which challenges western, and encour-
ages alternative models of development. For Radhika Desai (2012):

The BRICS and emerging economies have already set in train a


wider set of changes in the international architecture of the world
order. Since western powers maintain their grip on its major institu-
tions, these rising powers have side-stepped them, setting up new
institutions and using old minor ones in new ways.”
The South and Geopolitics: From Bandung to the BRICS? 171

Desai has little to say about these institutions though she does
mention a BRICS development bank (Desai 2013), which was first pro-
posed by the BRICS summit at Durban in March 2013 (BRICS 2013),
and then again at the BRICS meeting in Brazil in July 2014 (BRICS
2013; Eichengreen 2014). While this might develop into a significant
challenge to US dollar hegemony, the early signs (in 2014) are that it
will not, above all because of the depth and range of financial markets
centred in the US (see Chapter 5) and because borrowing under the
BRICS bank contingent reserve arrangement would still depend on the
borrowing country having an on track agreement with the IMF
(Panitch 2014). Perhaps more significant is Desai’s wider assertion that
what unites the BRICS is a rejection of the neoliberal development
model, and the embrace of a state capitalist alternative, as discussed in
Chapter 3. This argument parallels Halper’s fears of a Beijing consensus
alternative to Washington, but as we have seen, in this case the alter-
native is celebrated rather than condemned. It also should be noted
that while it is the case that the rise of the emerging powers cannot be
explained by the neoliberal development model, equally it is far from
clear that these powers have entirely broken from an embrace, albeit a
selective one, of neoliberal international economy. This is clear from
previous chapters which showed the close link between Chinese
exports, US deficits, and Chinese financing of US debt. This certainly is
in stark contrast to Desai’s (2012) contention that the BRICS system
“bypasses the dollar centred world monetary and financial regime.” As
we have seen, while the Chinese government periodically speaks of the
need to replace the US dollar as the international reserve currency, at
the same time it continues to purchase US debt on an enormous scale
(see Chapter 5).
The fourth position, discussed in depth elsewhere, argues that new
powers have emerged by embracing global market forces, a position
rejected in Chapter 3 on the grounds that this ignores the selective
nature of that embrace, and the importance of state capitalist policies,
both for understanding current and previous examples of capitalist
development. Though of course the third and fourth positions are in
most respects diametrically opposed to each other, there is some
overlap in the belief that China’s rise represents an opportunity for
other developing countries. The third position argues that, in some
respects at least, this is a result of South-South solidarity on the part of
China (Desai 2013), while the fourth position argues that it is a result
of anonymous, spontaneous market forces (Griswold 2007).
172 The BRICs, US ‘Decline’ and Global Transformations

The fifth position argues that the rise of a new South is limited, and
the US remains the dominant power in the international order. The
essential argument of this position is to emphasize both the limitations
of China’s rise (Brautigam 2011), and to argue that insofar as it is a
reality, it is largely one that is self-interested and not motivated by sol-
idarity with the rest of the world. This position shares with the first
view the argument that China’s aid policy is more concerned with
access to raw materials than the development of the periphery (Halper
2010: 99; Jenkins 2012: 1352), even if this aid can and does have some
positive consequences. This position also does not deny changes in the
international order, but essentially argues two points. First, in terms of
the emerging powers as leaders of the new South, they “use their mem-
bership of the G77 and similar groups to project themselves as repre-
sentatives of the interests of the poorer developing countries, the better
to leverage pursuit of their national interests in negotiations within
that club. This is a balancing act of sorts but not one whose primary
purpose is to strengthen the south as a whole or to prioritise the inter-
ests of its vulnerable and poorest member countries.” (Vanaik 2013:
205) Second, and following on from this point, is the continued fact of
US leadership, for the US is “the indispensable and irreplaceable leader,
for only it has that combination of qualities making for leadership –
namely the distinctive strengths that the others cannot fully emulate
yet also the ability to project a social–political–cultural model that is
potentially generalisable, thus serving as an aspirational model world-
wide as well as within the quintet. How many states and their ruling
and middle classes want to become more and more like Russia, China
or India rather than like the USA?” (Vanaik 2013: 207)
Moreover, the challenge from BRICS is itself limited. Prashad (2013b:
15) argues that this is the case for four reasons: (i) their integration into
a neoliberal international order through supplies of cheap labour,
cheap exports, credit flows, and dependence on primary commodity
exports to China; South itself; (ii) beyond a few minor reforms within
institutions of global governance, the BRICS have failed to construct an
new institutional foundation for its emergent authority; (iii) they have
not endorsed an ideological alternative to neoliberalism. While there
may be some criticism of liberalized financial flows, the BRICs are inte-
grated into these flows and remain committed to other neoliberal prin-
ciples such as free trade; (iv) the BRICS project presents no challenge to
US military dominance. Prashad slightly overstates his case, particu-
larly in terms of this third point, and as has been argued in earlier
chapters, the BRICs combine elements of state capitalist development
The South and Geopolitics: From Bandung to the BRICS? 173

with a wider integration into an international order dominated by


neoliberalism. Nonetheless, his more general point about the limita-
tions of the BRICS is convincing.

Conclusion

The discussion in this chapter has done three things. First, it has briefly
outlined and analysed the history and development of the Third
World, and Third Worldist solidarity, after 1945, explaining the
reasons for, and limitations of ‘Third Worldism’ in the period up to the
1970s. Second, it has examined the reasons for the rise of a new South,
both in terms of developmentalism and geopolitics, and related this
back to the earlier period of Third Worldism. Third, it has used this dis-
cussion to ask the question whether the rise of this new South adds up
to a transformation of the international order, or to something more
modest. The argument made is that there is less a transformation of
the international order, and more a limited rise of new, emerging
powers, existing within a hierarchical order within which they wish to
advance, but in which real solidarity is limited. This does not necessar-
ily mean wholesale dismissal of solidarity within the new South, and
there are areas of contestation around flows of financial capital and
liberal intervention. But some of these alternatives are not automat-
ically progressive alternatives to US hegemony, and some instances of
‘solidarity’ are simply the by-product of wider economic factors, such
as high commodity prices resulting from demand from China. Finally,
the US remains the most powerful nation state in the international
order, not only in terms of material power and resources, but also in
terms of ideological attraction for powerful groups among the new
powers. This is not uncontested, and nationalist sentiments remain
powerful, but this combines with the attractions of Americanization in
terms of access to capital, including financial capital, to consumer
goods, and to wider cultural aspirations.
8
Conclusion: Development,
Innovation and the Limits of
International Transformation

This extended concluding chapter will not only summarize the argu-
ment made throughout the book, it will add to it through further
examination and analysis. In particular, it will reiterate the argument
made so far, namely that the rise of the South is exaggerated, as is the
decline of the West and the US in particular. But it will do this by relat-
ing the argument to two further issues, only touched on in previous
chapters, namely the question of development and, not unrelated to
that question, the issue of technological innovation. The first section
will therefore examine the issue of development and in particular that
of development theory, and what this might tell us about the rise of
the South. On the face of it, the emergence of new powers would
appear to undermine those arguments associated with various types of
dependency theory in the 1960s, which suggested that the South was
in a subordinate position in the international order. However, through
a careful consideration of development theory from the 1950s to the
1980s and beyond, the first section will suggest that, notwithstanding
some weaknesses with dependista type approaches, this is not necessar-
ily the case. The section will particularly highlight various forms of
dependence on foreign capital, and why this dependence may be dif-
ferent for the South compared to the US’ own dependence on foreign
capital. Not unrelated to this point, there is also the question of tech-
nological dependence, and this is considered in the second section in
the context of development through technological innovation. Various
approaches to innovation are considered, and their relevance to the
most significant emerging powers of the South is highlighted, as is
the limits of innovation. The final section draws out the specifics of the
previous two sections, and the arguments in previous chapters, to

174
Conclusion 175

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

The rise of the South and development theory

In the post-war period, US hegemony was successful in promoting a


more integrated, liberal international order in the capitalist world, with
a long term commitment to global integration, as opposed to the more
fragmented (though still partly internationalized) national capitalisms
of the period from the 1880s to 1945. This involved the promotion of
international organizations, state sovereignty, open door policies in
terms of investment and trade, and aid such as the Marshall Plan. In
practice, for the developing world, this meant that the international
context favoured independence for former colonies, which were in any
case undergoing substantial change in response to the rise of national-
ist movements. Both superpowers supported political independence for
the colonies, though both of course were concerned that they exercise
considerable influence over the political trajectory of the newly inde-
pendent sovereign states.
It was in this context that the debate over the causes of global
inequality – and the need for development – emerged. Though there
were various positions in the debate, we can identify two main ones:
modernization and dependency theories. The former was the main-
stream theory of development, which essentially argued that develop-
ing societies – the ‘Third World’ – were backward and undeveloped,
and therefore in need of development. This position was developed
most famously by Walt Rostow (1960), who suggested that all nation
states pass through similar stages of development. So, poorer societies
in the 1960s were at a similar stage of development to say, Britain in
the 1780s. The task of development was to hasten the transition to
development in the poorer societies. Rostow argued that this was good
for developing societies, as they would become richer, but also for the
security of the West, as richer societies were less likely to be attracted
by the communist alternative. Modernization theory suggested that
the task of development could be facilitated by poorer countries
embracing western investment, technology and values such as entre-
preneurship and meritocracy. Whether this was an accurate portrayal
of western societies is questionable, not least in the context of institu-
tionalized racism in the US, and heightened industrial and social
conflict across the developed world from the 1960s onwards.
176 The BRICs, US ‘Decline’ and Global Transformations

But for our purposes, the crucial argument of modernization theory


was that contact with the West was on the whole favourable to the
development of the Third World. On the other hand, some structural-
ist economists had argued that the situation of poorer countries could
not be explained in isolation from the richer world, and that contact
with the latter was in some respects part of the problem. Thus, one of
the legacies of colonialism was that Third World countries specialized
in producing primary products, and this led to an excessive depen-
dence on the world price movements of the one or two goods that
accounted for most of their foreign exchange earnings. This was in
contrast to the developed countries, which were far more industrialized
and diversified, and so were not excessively reliant on the price move-
ments of a handful of products. As we have seen (Chapters 3 and 7),
Prebisch (1959) and Singer (1950) argued that primary producers faced
certain disadvantages which meant that there was a tendency for the
terms of trade to decline for primary goods as against industrial goods.
What this meant in barter terms is that in say, a ten year period,
primary producers would have to exchange more tonnes of cocoa in
order to buy a similar amount of tractors. Prebisch and Singer sug-
gested that this tendency occurred because there was a low income
elasticity of demand for primary products; in other words, as average
incomes rise, so consumers spend a disproportionate amount of their
income on primary products. Furthermore, while the prices of manu-
factured goods may fall, they are less likely to fall as quickly as those of
primary goods as there were many primary goods producers but com-
paratively few producers of industrial goods. Clearly then, this account
of inequality focused on hierarchies in the world economy, and how
colonial powers had enforced specialization in lower value primary
production in the colonies. Even in independent Latin America, this
practice had occurred as powerful land-owners accrued huge wealth
from land-ownership and used this to import manufactured goods
rather than promote domestic manufacturing production. This account
thus suggested that the western dominated world economy was not
the solution to underdevelopment, as modernization theory con-
tended, but in some respects at least, was part of the problem.
At the same time, this account suggested that development in the
Third World could be achieved through pro-industrialization policies
designed to overcome the colonial legacy. In this way, poorer countries
could reduce their dependence on the import of expensive manufac-
tures and the export of cheap primary goods. As we saw in Chapter 3,
this policy of import substitution industrialization (ISI) was the main
Conclusion 177

development strategy employed in the Third World from the 1950s (or
earlier) until the late 1970s and early 1980s. Ironically, though the
rationale for such a strategy was very different from that associated
with modernization theory, in practice the two theories effectively
converged around the idea that development and modernization could
occur through industrialization.
Dependency theory challenged this view, suggesting that industrial-
ization remained dependent on the West. The mechanisms that sus-
tained dependence included reliance on foreign capital, foreign
technology, and foreign markets. Furthermore, the industrialization
that was said to be occurring in the developing world was highly
exploitative and reliant on cheap labour. None of this was leading to
convergence with the developed world; instead it was simply promot-
ing new forms of subordination, hierarchy and dependence in the
world economy. Some theories of dependency related this to a crude
zero-sum game which suggested that the rich world was rich only
because it had underdeveloped the poor world, implying that protec-
tionist ISI policies did not go far enough, and that de-linking from the
western dominated world economy was the only effective way forward
for the Third World (Frank 1969). In this account, poorer societies were
not so much undeveloped as underdeveloped.
This was essentially what was at stake in the debate over inequality
and underdevelopment in the period from the 1940s into the 1970s.
On the one side, modernization theory: poorer countries should
embrace the opportunities provided by the western-dominated world
economy, and in the process hasten the transition to development. On
the other side, dependency theory: poorer countries are poor in part
because they are in a structurally subordinate and dependent position
in the world economy, and thus need to find ways to protect them-
selves from the constraints that these hierarchies generate. By the
1970s and into the 1980s, it was clear that for all their differences, both
sides suffered from some similar weaknesses. In particular they tended
to over-generalize and homogenize a diverse set of countries. In the
process they made sweeping predictions concerning the inevitability of
development (modernization theory) or stagnation (dependency
theory). For instance, the rise of the first tier, East Asian newly industri-
alizing countries such as South Korea and Taiwan undermined crude
versions of dependency theory, as these countries grew rapidly and
exported to the western economies. On the other hand, as we have
seen, these countries did not simply embrace ‘the West’, and protected
certain sectors from foreign competition in order to develop their own
178 The BRICs, US ‘Decline’ and Global Transformations

national industries. Moreover, the success of these countries may have


been contingent on certain specific factors – such as land reform, the
influence of the Cold War, and the specificity of state structures and
institutions – that could not easily be replicated elsewhere. It was pre-
cisely this focus on contingency and specificity that was missing in the
modernization versus dependency theory debate. It was also in this
context that some argued that the study of development had reached
an impasse, and that from now on we could only focus on specific
cases of development without employing the generalizations associated
with modernization and dependency theory (Booth 1985).
Moreover, changes in the global economy led to important changes
in development strategy in the Third World. In particular, the debt
crisis of 1982 saw a shift from the developmentalist strategies associ-
ated with ISI, towards neoliberal policies that encouraged trade and
investment liberalization, privatization and the (theoretical) roll-back
of state intervention in the economy (or at least a shift to intervention
that extended the market rather than restricted its role). This was
justified on the grounds that ISI encouraged the promotion and protec-
tion of inefficient industries, rather than facilitating specialization in
those sectors where countries were (relatively) most competitive; in
other words, it meant the promotion of the principle of comparative
advantage. While in the short term, the results of neoliberal policies
were disastrous, and living standards for many fell in the lost decade of
development (the 1980s), as we have seen the 1990s and beyond saw a
new period of optimism concerning the relationship between develop-
ment and globalization.
This optimism has culminated in the current discourse over the rise
of the South. One of the great ironies of the current debate is how little
analysis draws on these older debates derived from development
theory. This is partly because of the tendency of this debate to over-
generalize from specific cases, and as a result a great deal of the study
of development has shifted from drawing on development theory to
outlining concrete cases of development, without drawing on any
notion of a bigger picture (Booth 1994). This is ironic given the turn to
globalization in the 1990s which was essentially an attempt to draw
the kind of bigger picture that development studies increasingly
rejected. To some extent this was unsurprising, as much of the discus-
sion of globalization was even more guilty of over-generalization than
the grand theories of development that seemed to be confined to the
dustbin of history. In particular, globalization’s claim to the status of a
theory easily ran up against the convincing accusation that in fact it
Conclusion 179

was based on circular reasoning, for globalization referred to a number


of concrete issues (intensified capital flows, migration patterns, inter-
national institutions of global governance) that were explained by
globalization (Giddens 1999; Scholte 2005). This led to the tautology
that globalization was explained by globalization (Rosenberg 2000;
2005). But the problem ran deeper than this, for the development of
the ‘grand theory’ of globalization actually ran parallel with the
‘abstracted empiricism’ of development studies (Mills 2000), in that
both tended to downplay the significance of the neoliberal context in
which both development and globalization took place (Kiely 2006).
This international context did not determine specific development tra-
jectories, but it did – and does – strongly influence them.
This point brings us back to modernization versus dependency
debate, for despite its tendency to over-generalize, this still provides us
with some basis for assessing the recent rise of the South. In other
words, which account, modernization or dependency, provides us with
a better account of recent changes in the international order? On the
face of it, the clear answer would be modernization theory, as China
and others have rapidly developed, and have done so in part through
their incorporation into the world economy (Schmitz 2007). This does
not mean that the newly emerging countries have rigidly followed
Rostow’s five-stage model, an argument that clearly must be, and has
been rejected, not least by neoliberals (Bauer 1958, 1971). But if we use
modernization theory in a much looser sense, we could contend that
development has taken place in a wide range of countries in recent
years, and this has been because of policies that have embraced the
opportunities presented by the global economy.
On the other hand, as Chapter 3 in particular argued, this embrace of
‘globalization’ has been selective and it could also be argued that rapid
growth and development has occurred due to state capitalist policies.
This argument is certainly a challenge to the claims of neoliberalism, but
it remains one which suggests that catch-up is occurring, which is at
least broadly compatible with a weak version of modernization theory. It
certainly is not compatible with the claims made of the various trends of
dependency theory, which, for all its diversity, agrees that the South is in
a subordinate and dependent position in the world economy. Above all,
it is not compatible with the claims made by underdevelopment theory
in the 1960s, which stated that countries are condemned to underdevel-
opment so long as they remain part of the world economy.
However, is the rise of the South incompatible with all the claims
made by various strands of dependency theory? More flexible
180 The BRICs, US ‘Decline’ and Global Transformations

approaches to dependency recognize that capitalist development has


occurred and is likely to continue to occur (see Kay 1989), in contrast
to the stagnationist claims of underdevelopment theory. In this regard,
dependency is less a grand theory of development and more a concept
drawn on to understand the specific conditions of late capitalist devel-
opment (Palma 1978; Larrain 1989). Under these conditions, late
development may take the form of continued dependence on the
established capitalist powers, in the form of dependence on (both
financial and productive) capital, western markets and foreign techno-
logy (see Sutcliffe 1971). In the discussion in previous chapters, it was
clear that in some respects the emerging powers remain dependent in
at least some of these ways, though perhaps in not as straightforward a
way as dependency writers may have envisaged. We have seen how
much of the boom in the South since the early 2000s rests on demand
for primary goods, though the increase in demand is accounted for
more by China, another emerging power. At the same time however,
China itself remains an economy dependent in some respects on the
exports of manufactured goods, as well as on the wider investment
decisions of multinational capital using sourcing strategies in global
production networks. Emerging powers have also maintained high
growth rates both before and after the 2008 financial crisis, in part
through capital inflows, and in many respects were the beneficiaries of
the quantitative easing policies introduced by governments in response
to the crisis.
Seen in this way, it could be argued that the new South remains
dependent on the established powers. But there are possible objections
to this argument. The first is that dependence somehow distorts
economies, which would otherwise not be distorted or, by implication,
enjoy ‘normal’ capitalist development (Landsberg 1979). The problem
with this argument is that it begs the question of what exactly is
‘normal’ capitalist development, ironically constructing a Eurocentric
norm and a dependent deviation from that norm (Barone 1983; Gulalp
1984). Related to this point, one could argue that these economies are
dependent, but so what? Indeed, under conditions of late capitalist
development, a ‘normal’, autonomous, capitalist development is
impossible. Furthermore, one could argue that all states are in some
senses dependent (Bernstein 1979). As we have seen, measured in
terms of foreign capital inflows, in some respects the US is the most
dependent economy in the world today. Seen in this way, we should
think less about dependence and more of interdependence.
Conclusion 181

These are powerful objections to the concept of dependency.


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

The rise of the South and technological innovation

As we saw in Chapter 2, much of the story of a rising South is derived


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

creative destruction in which entrepreneurs innovate in their search


for above average profits or rents.
Though as a conservative, he regretted the rise of large corporations,
and instead focused largely on individuals and firms, Schumpeter’s
highlighting of the importance of innovation and technological devel-
opment was important (see Hodgson 2001: 187–9). Freeman (1987)
developed Schumpeter’s ideas further by moving beyond the focus on
individual entrepreneurs and instead talked of national systems of
innovation, defined as a “system of different institutions that con-
tribute to the development of the innovation and learning capacity of
a country, region, economic sector or locality.” (Cassiolato and Lastres
2011: 3; Mazzacuto 2013: 36). Thus, in terms of economic rents, it is
sectors where the barriers to entry are high which are most likely to
produce above average profits, precisely because competition is more
limited in these sectors. As Kaplinsky (2005: 63) states, “barriers to
entry are a central component of the theory of rent, and…the theory
of rent provides the key to understanding the availability and sustain-
ability of high incomes.”
This account of technology is directly relevant to the earlier claims
made by dependency theory. Cardoso (1972: 90) for instance explicitly
related the question of technology to that of dependency:

Basically the dependency situation is maintained because, in addi-


tion to the…factors of direct control by the multinationals, and
dependence on the external markets, the industrial sector develops
in an incomplete form. The production goods sector (Department I),
which is the centre-pin of accumulation in a central economy, does
not develop fully. Ordinarily, economists refer to ‘technological
dependency’ and it means that the economy has to import
machines and industrial inputs and consequently has to stimulate
exports (especially of primary goods) to generate the necessary
foreign exchange.

As we saw above, dependency theory was often relatively static in its


approach to understanding a North-South divide, and downplayed the
role of agency in the developing world in altering and alleviating con-
crete situations of dependency. Much the same point can be made
about this quote from Cardoso, and indeed, following the rise of the
East Asian first tier NICs, analysis shifted in the 1970s towards an
understanding of how imported technology was assimilated and
adapted to local circumstances (see Fransman and King 1984). On the
Conclusion 183

other hand as we saw above, development theory moved away from a


focus on structural constraints towards one based on agency, but at the
cost of ignoring or underestimating the wider context in which con-
crete situations of development occurred. Similarly, there was a danger,
that in focusing on very real processes of technological assimilation,
the reality of the global technological divide was downplayed. We can
therefore usefully draw on Cardoso’s account of technological depen-
dency while simultaneously recognizing that this is not a static process
and that developing countries attempt to overcome technological
dependence through a process of industrial upgrading through systems
of innovation.
When it comes to understanding the rise of the South, the key ques-
tion then is the extent to which such upgrading has occurred, and the
wider context in which this has (or has not) taken place. This was
implicit in discussions in earlier chapters, particularly in Chapters 4
and 5 which examined the nature of Chinese-US interdependence, and
in Chapter 7 which examined China’s interdependence with the rest of
the ‘new South’. What we should first recognize is that the discussion
so far needs to recognize that significant changes have taken place in
the international economy. First, as we have seen, there is the global-
ization of production which has not necessarily rendered the concept
of national systems of innovation irrelevant, but has certainly altered
the context in which these occur. Second, Cardoso’s reference to the
export of primary goods to generate foreign exchange is out of date for
some countries, particularly (among the BRICs) China, and to some
extent India, where the export of manufacturing goods is so important.
Ironically, given their recent focus on primary goods exports, it is
possibly more relevant for Russia and Brazil today than it was at the
time that Cardoso was writing. Russia has boomed in recent years after
the severe contraction in the 1990s, largely on the basis of primary
commodities, and above all oil. The oil boom period has seen little in
the way of diversification of the economy and indeed there has been a
significant decline in the export of machinery. In the case of Brazil, as
we saw in Chapter 3, investment-GDP ratios have remained low and
productivity increases have lagged behind competitors (Palma 2012).
The question then that needs to be asked is to what extent has there
been technological upgrading in China and India? In the case of India,
liberalization has coincided with a decline in government Research and
Development spending as a proportion of GDP, declining from 0.91%
in 1987–88 to 0.71% by the mid-1990s (Beausang 2012: 45). Not surpris-
ingly total factor productivity was actually lower in the liberalization
184 The BRICs, US ‘Decline’ and Global Transformations

decade of the 1990s than it was in the 1980s. In the case of China, real
exports grew by around 500% between 1993 and 2008, and by 2010, it
was the largest exporter in the world (Steinfeld 2010: 71). In the 1980s
and 1990s, China essentially exported standard labour intensive goods.
However, by the mid-2000s, it had moved into electronics, telecommu-
nication, equipment and office machines. Over the same period the
country underwent a major expansion in Science and Technology train-
ing, so that while from 1991 to 2006 there was a 20% expansion in its
workforce, there was a 200% increase in the number of scientists and
engineers involved in science and technology activities (Steinfeld 2010:
72). However this does not necessarily mean that China is undergoing a
process of technological innovation similar to Germany in the nine-
teenth century, or Japan in the twentieth century (Steinfeld 2010: 74).
As has already been argued more generally in Chapters 4 and 5, these
changes must be located within the context of wider changes in the
global economy. As Steinfeld (2010: 75) argues, “China’s integration
into the global economy has unleashed extraordinary innovative
capacity, most conspicuously in the United States and in American
companies.”
Steinfeld (2010: 85) points out that in 2008, MNCs accounted for
55% of China’s exports, and in high technology sectors this increased
to almost 90%. Indeed, China’s involvement in high technology pro-
duction is inseparable from the investment decisions of global produc-
tion networks, so that “(s)emifinished or finished components are
brought in from overseas locales, usually neighboring (sic.) Asian
nations, assembled into finished products, stamped as ‘made in China’,
and then shipped out to markets in North America and Europe.”
(Steinfeld 2010: 85) While in 2006 electrical machinery and mechan-
ical appliances (TVs, MP3 players, DVD players) accounted for 47% of
China’s exports, around 70% of these were part of the processing trade
(Steinfeld 2010: 86).
Thus, in the case of the Apple iPod classic, a 30gb iPod cost $299 in
the US in 2005. The approximate cost that Apple paid for the product
from a Taiwan-owned, Chinese based manufacturer was $144. Of this,
about 3% went to the Taiwanese assembler operating in China, 51% to
the Japanese hard drive producer (assembled in China using imported
inputs), 3% to the US semi-conductor designer, and 2% to the South
Korean (owned and located) memory chip producer (see Linden et al
2007: 6; Steinfeld 2010: 86; see also Froud et al 2012). Similarly, the
‘Chinese’ super-computer the Tainhe-1, the fastest computer in the
Conclusion 185

world, is actually largely designed by Intel and Imidia in California and


just assembled in China (Beausang 2012: 139).
What this shows is that the rise of digital information has lowered
the barriers to entry in the high technology sector, China’s presence “is
for the most part confined to the simplest, most codified activities
within those industries.”1 (Steinfeld 2010: 91; see also Steinfeld 2004;
Kaplinsky 2005) China has attempted technology transfer through the
promotion of joint ventures with foreign capital. On the eve of entry
to the WTO in 2001, over half of their FDI was in the form of joint
ventures (Beausang 2012: 29). However, entry into the WTO under-
mined the joint venture policy as Article 16 of the General Agreement
on Trade and Services prohibits using joint venture type requirements
being placed on foreign investors (Beausang 2012: 30). By 2008, nearly
80% of all FDI was made up of wholly owned foreign subsidiaries
(Beausang 2012: 30). Moreover, joint ventures were no guarantors of
success as multinational companies tend to restrict knowledge transfer.
The Chinese state encouraged cooperation between foreign companies
and Chinese universities as a way of acquiring technology, but from
2001–06, 94% of the technology sold by the 52 MNCs with R and D
centres in Beijing was bought by their headquarters and other sub-
sidiaries in China (Beausang 2012: 31).
The World Economic Forum’s annual report on global competitive-
ness is a useful, if imperfect,2 measure of the competitiveness of
nations in the global economy. Competitiveness is defined as “the set of
institutions, policies, and factors that determine the level of productivity of a
country.” (World Economic Forum 2013: 4) For 2013–14, the US stood
at number 5 in the world, behind Switzerland, Singapore, Finland and
Germany. China however, stood at 29, South Africa at 53, Brazil at 56,
India at 60 and Russia at 64 (World Economic Forum 2013: 15). In
2010–11, Brazil ranked 42nd, Russia 57th, India 39th and China 26th in
the world (Beausang 2012: 153). This hardly points to overwhelming
evidence of convergence or the transformation of the international
order. It also puts Ramo’s (2004: 12) emphasis on innovation as a
central feature of the so-called Beijing Consensus into perspective (see
Chapter 2).In terms of Research and Development spending as a pro-
portion of GDP, in 2011, the figures were 1.84% for China, 0.9% for
India, and 1.12% for Russia, compared to 2.77% for the US. For South
Korea (in 2010), a country that has genuinely upgraded in terms of
technology, the figure was 3.74% (World Bank 2013; Batelle 2013). The
proportion of triadic patents granted as a proportion of the population
186 The BRICs, US ‘Decline’ and Global Transformations

(per million) stood at 0.31 for Brazil, 0.65 for China, 0.16 for India and
0.51 for Russia. This compared to 44.7 for the United States (OECD
2013a). In terms of the actual number of triadic patents, this amounted
to 60 for Brazil in 2010, 26 for South Africa, 73 for Russia, 201 for
India, 875 for China and 13,837 for the US (OECD 2013a).
Furthermore, in the leading sectors in terms of innovation, such as
nanotechnology, the European Union, Japan and the US remain the
world’s leaders. In 2005 they filed 84% of patents, compared to just
2.6% for the BRICs (Beausang 2012: 163). In terms of Research and
Development, in 2010, 80% of firms in the G1,400 companies are from
the US, Japan, Germany, France, the UK, Denmark, Finland, Sweden,
Switzerland and the Netherlands. The BRICs have just 34 firms (Nolan
2012: 49). Developing country firms were almost entirely absent from
the list of the world’s top 1000 firms in terms of R and D spending in
2009 (Nolan 2012: 50). The possibility that China might catch up tech-
nologically with the rich countries through the acquisition of their
companies is also, so far at least, questionable, for “(t)he main acquisi-
tions by Chinese firms have been of loss-making companies in non-
strategic industries, notably IBM’s PC division and Ford’s Volvo Car
division. Both were small-scale acquisitions. The attempt failed at more
substantial acquisitions in more sensitive sectors, by both state-owned
and private firms, most notably that by CNOOC to acquire Unocal and
the various efforts by Huawei to acquire small segments of the tele-
coms equipment sector.” (Nolan 2012: 109)
Moreover, China’s outward FDI increased from $27 billion in 2000
to $230 billion in 2009, but “there has been a large and persistent
‘deficit’ in China’s FDI, with inflows consistently exceeding outflows.”
(Nolan 2012: 95) Indeed, from 2000 to 2009, the gap between the
inward stock of FDI and the outward stock increased from $165 billion
to $243 billion (Nolan 2012: 95). To get some sense of perspective it
should be pointed out that in 2009, China’s outward stock of FDI was
27% that of the Netherlands, 17% that of Germany, 13% that of
France, 5% that of the US, and just 2% that of the high income coun-
tries as a whole (Nolan 2012: 96). Furthermore, Chinese FDI largely
goes to other developing countries and/or neighbouring Hong Kong
and Macau; in 2009, only 11% of its FDI, that is $27 billion, went
to high income countries, compared to an inward stock of almost
$500 billion (Nolan 2012: 98).
Nolan (2012: 85) is thus correct to conclude that:

At the same time that Chinese firms are trying to ‘go out’, they must
also face global companies who carry the competitive struggle deep
Conclusion 187

into the Chinese economy, with their international production


systems as the foundation. In terms of military strategy, the leading
multinational companies are taking the ‘war’ into the enemy’s
camp, ‘going in’ to China in order to weaken the fighting capability
of indigenous firms before they can build their capability outside
the country.

This discussion again shows the importance of locating the rise of the
new South, the BRICs, and above all China within the context of
changes in the character of international capitalism, and in particular
the rise of global manufacturing organized through production net-
works or commodity chains. As we saw in Chapter 6, Burbach and
Robinson (1999: 27–8) contend that while social inequality is still
important, geographical inequality is declining in significance as
capital increasingly globalizes (see also Robinson 2004: 99; Kitching
2001). In contrast, this book has argued that while in some respects we
can talk about the rise of transnational capitalism through global com-
modity chains, this has not overcome the spatial unevenness of capi-
talist accumulation, and most certainly has not led to the equalization
of accumulation conditions. It has led to the rise of manufacturing in
parts of the global South, and indeed there has been some degree of
upgrading within these global value chains (UNCTAD 2013b), which
in larger countries has helped to facilitate the rise of emerging powers.
However, the organization of this production remains spatially as well
as socially hierarchical.

The limits of international transformation

This final section provides a broader summary of the argument that we


are witnessing a transformation of the international order, and the
counter arguments presented in this book. As we have seen, the basic
argument is that in recent years, some new powers have emerged from
the global South, and in some respects these are challenging the nature
of the current international order. This is in part because of the size of
these emerging powers, and partly because the rise of these powers –
and of China – in particular have important beneficial spin-offs for the
rise of the South as a whole. This is true in terms of developmental
benefits, such as the demand generated by China for primary products
and the dispensing of aid without conditions, and in terms of wider
geopolitical challenges to Western domination of the international
order. This has taken the form of changes in the composition of
the institutions of global governance, and challenges to liberal
188 The BRICs, US ‘Decline’ and Global Transformations

interventionism in parts of the developing world. Perhaps above all,


this has also undermined the primacy and hegemony of the United
States in the international order.
The book has challenged these arguments in a number of ways, but
rather than immediately repeat them at this point, we should first take
a brief detour. For if the debate is about international transformation,
then we need to be clear what is meant by that particular term.
Henderson and Nadvi (2011) use the term in a very specific way,
replacing what they see as the Eurocentric discourse of development,
with the more open-ended concept of transformation. This allows
them to correctly focus on issues of great significance, such as the com-
bination of growth, size, and geopolitical location in the South. In
terms of the transformation of the international order, they also focus
on China’s wider impact among countries of the global South, and the
central location of China within global production networks. All these
are issues addressed in previous chapters, and in many ways the
changes that they point to are undeniable. But do they add up to a
transformation of the international order?
For our purposes, we are witnessing a possible transformation in two
ways. First, we are seeing the erosion of a global North-South divide,
and second, we are seeing the (gradual) decline of the West, including
the leading role of the US in the international order. Much of the liter-
ature on international transformation focuses on a third question, that
of globalization. The debate in this case focuses on the extent to which
global processes are so great and rapid that they have undermined the
nation state, and so global society has displaced international relations.
Much of the literature, including even the measured arguments of
global transformationalists (Held et al 1999), exaggerated the extent to
which the state had been displaced, just as they exaggerated a past in
which the state was said to be (more or less) the only actor in interna-
tional relations (see for instance Scholte 2005). It is quite clear that in
terms of various manifestations of economic globalization, such as an
increase in the amount and change in the form of capital flows, nation
states have played leading roles in allowing this to happen (Panitch
2000). States were similarly central in promoting the liberalization of
financial flows, and dealing with the fall-out once it was clear that this
liberalization had led to financial crisis in 2008 (see Chapter 5).
So if transformation in this case means the end of the nation state,
then clearly this has not happened. Moreover, as we saw above,
because global transformationalists conflate description (of globalizing
processes) and explanation (of why these processes occur), they essen-
Conclusion 189

tially make the circular argument that globalization (a description of


processes) is caused by globalization (an explanation of these
processes). Once again the transformationalist position does not appear
to be very useful. However, a partial defence of the concept of global-
ization may be made if we recognize that it is not a theory at all, but
rather a description of a number of processes, the explanation for
which must be sought elsewhere (Kiely 2014). In particular, the idea of
globalization usefully points to an increase in the intensity and forms
of capital flows in the international order.3 Contrary to the argument
of transformationalists, both liberal (Held et al 1999) and Marxist
(Robinson 2004), this is not necessarily happening above or indepen-
dently of (some) nation states, but has been actively promoted by
them (Panitch and Gindin 2012). Nonetheless, this has led to
significant changes in the international order, though not necessarily a
transformation of that order.
Perhaps above all, globalization has not taken place ‘above’ one
nation state in particular, that of the United States. Much of the US
decline literature (discussed in Chapter 3) focuses on US deficits and
the consequent increase in US national debt, alongside the fact that
the US’ share of word GDP has declined since 1945. But if we are to
take globalization seriously, then we need to move beyond a simplistic
methodological nationalism and examine the ways in which we are
effectively witnessing, to some extent at least, the “Americanisation of
global capital” (Starrs 2013: 827; see also Panitch and Gindin 2012;
Parisot 2013). We have already discussed this in earlier chapters in
terms of Chinese and US asymmetrical interdependence, and the rates
of return of US capital overseas in comparison with rates of return of
foreign capital in the US. Starrs’ (2013) detailed empirical account of
US corporations in the international order gives further support to
these arguments. In particular, his comparison of the national sectoral
profit share of the top 2000 corporations in the years prior to (2006),
and after (2012), the financial crisis shows the extent of US dominance.
Indeed, in aerospace and defence (from 66% in 2006 to 67% in 2012),
casinos/hotels and restaurants (46 to 64%), computer hardware and
software (70 to 74%), financial services (45 to 53%), media (59 to 67%)
and transport (27 to 31%) US leadership increased in this period. The
share of Chinese companies in all these sectors was minimal, and never
as much as 5% except in the case of transport (Starrs 2013: 822). Even
in electronics, a sector in which China is the world’s largest exporter,
its share in 2012 was just 4%, reflecting China’s role as an assembler of
final goods produced as part of a global production network dominated
190 The BRICs, US ‘Decline’ and Global Transformations

by multinational companies. In 18 of the 25 sectors outlined by Starrs,


US companies are still the global leaders, and in 12 of them they have
a share of 40% or more – and in two others they have a share close to
40% (Starrs 2013: 823). Moreover, in terms of ownership of companies,
foreign shareholdings in US companies amounts to about 16% of total
shares of US companies in 2012. Meanwhile, US shares in foreign com-
panies is over 20% in most advanced capitalist countries, and indeed
also dominates foreign shareholding in ‘national’ companies in the
developing world (Starrs 2013: 823–4). Indeed, in Europe the number
one national owner of the top 20 European companies was the United
States (Starrs 2013: 824–5). Thus, not surprisingly, while US GDP stood
at about 22% of world GDP in 2012, the US accounts for approx-
imately 42% of all the world’s millionaires and even 41% of all global
household wealth (Starrs 2013: 826). This is not a story of a ‘flat earth’
globalization as envisaged by neoliberals but for similar reasons,
neither is it a story of US decline in the context of globalization. These
kinds of arguments fail to locate the centrality of the US state and US
capitalism in the making of a global capitalism, of which the BRICs
and the new South are central parts (Panitch and Gindin 2012).
This brings us back to the argument of the book as a whole, which
recognizes the rise of a ‘new South’ in recent years and the problems
faced by the United States, particularly since the onset of the financial
crisis in 2008. However, rather than seeing these factors as evidence of
an international transformation in which the leaders of the new South
are challenging a declining US hegemonic order, the argument has
been somewhat different. First, the US has been the leader in the pro-
motion of a liberal international order since 1945. The promotion of
this liberal order intensified from the late 1970s through to the early
1990s in the context of the rise of neoliberalism and the end of the
Cold War. This was followed by the ‘long boom’ of the 1990s, which
lasted from around 1992 to 2007–08, and it was in this era that we saw
the emergence of a new South. However, this new South has not
‘decoupled’ from the West, and the US in particular. The South did
recover more rapidly than the developed world after 2009, but this was
due to the success of fiscal stimuli programmes, continued relatively
high commodity prices and capital inflows from the North, in part
facilitated by quantitative easing policies. However by 2012, the effects
of at least some of these were beginning to wear off, and the world
seems on course for a period of lower growth. This means that the
boom conditions of the long 1990s, including the favourable interna-
tional factors that boosted the rise of the South, are over. The policies
Conclusion 191

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

state (see also Balakrishnan 2009). But we are entering a period of pro-
tracted slower growth which, contrary to some accounts (see Gordon
2013; King 2013) does not necessarily mean the end of western dom-
ination, but does present problems for states still largely committed to
neoliberal principles (Palley 2012).
China may of course take more seriously its recent proposals to
rebalance its economy and reduce its export dependence. This would
lead to an era of growth based on increased domestic consumption,
which in turn might sustain higher primary commodity prices in the
rest of the South. But as we saw in Chapter 6, the shift towards such a
policy has been limited as China has purchased US Treasuries on a
massive scale, wage increases have been limited, and attempts to
tighten the labour market have been resisted by vested interests in the
coastal regions (Hung 2013: 1358–9). If the Chinese currency were to
sharply appreciate (on a scale far greater than the actual appreciation
of recent years), then this would be at the costs of powerful, export-
oriented vested interests, and indeed would lead to a sharp increase in
unemployment. It would also lead to slower growth, which would not
be good news for the rest of the South. The investment and real estate
boom of recent years has helped to keep commodity prices high, but as
we have seen the sustainability of this boom is open to question. On
the other hand, with slower growth in the US and especially in Europe,
the export-led strategy has been undermined. Neither scenario suggests
a costless process and it again suggests that the problems for the US
economy do not necessarily mean an opportunity for a straightforward
rise of potential competitors or supposed hegemonic challengers.
It is true that the most successful emerging powers did not simply
follow the neoliberal prescriptions recommended by the West, and
current discussion of state capitalism should be seen in this context of
attempting to overcome the vulnerabilities associated with continued
dependence (thus challenging position 4 in Chapter 2). In terms of
geopolitics, the point about state capitalism is not a new one and is
true of previous experiences of late capitalist development. In the past
of course, this led to conflict between established and rising powers,
but this should be regarded as a contingent and not a necessary
process, in contrast to the claims of contemporary ‘Leninists’ and
‘offensive realists’ (thus challenging position 2 in Chapter 2).
Moreover, the context has shifted and we need to analyse the rise of
emerging powers in the context of the globalization of production.
However, and in contrast to those who see a Chinese challenge to the
international order (positions 1 and 3), and those who see convergence
Conclusion 193

occurring through the promotion of global market forces (position 4),


this has not led to a straightforward diffusion of capitalism throughout
the globe. Neither, despite some success in upgrading in particular
sectors (UNCTAD 2013b), has it led to China playing the leading role
within these networks, and the US remains at the cutting edge of pro-
duction and capturing value within these commodity chains
(Appelbaum 2008), contrary to the claims made by Henderson and
Nadvi (2011). There remain significant hierarchies based on the con-
centration of capital in some locations, and different degrees of state
power in the international order. In other words, the problem of
slower growth in the West is not just a problem for the West, but for
all countries in the international economy. This should be clear from
the analysis in the previous two sections, but it can also be seen if we
remind ourselves of the data on poverty and inequality in Chapter 6.
‘Only’ 1 million out of the 2,407 million global absolute poor live in
the high income countries, compared to 2,406 million in the develop-
ing countries. And ‘only’ 148 million of the 2,914 million global in-
secure live in the developed world, compared to 2,766 million in the
global South. The global transformationalist denial of a ‘crude North-
South’ divide should also be seen in this light (see for instance McGrew
2000: 351). Not unrelated to this point, the opening chapter cited a
number of works published in recent years that identified a rising or
emergent Africa as part of the rise of this new South. However, this is
not new and books published in the late colonial period also wrote of
an ‘emergent Africa’ or a ‘new hope’ in the continent4 (Macmillan
1938; Oldham 1955). This is part of a wider process of western repre-
sentations of the developing world in which, paralleling the volatility
of financial markets, periods of excessive pessimism are often replaced
by wild optimism. Thus while in 2011 The Economist was describing
Africa as a ‘rising star’, in 2000 it was dismissed as a ‘hopeless con-
tinent’ (cited in Taylor 2014: 21). This is no substitute for sober
reflection on the growth and indeed rise of (parts of) the developing
world, but one where the limits of this rise is also recognized.
Nonetheless, the rise of emerging powers is an issue of great
significance, not least when two of these powers are as large as China
and India. The world is undergoing important changes, including
(among others) the rise of new powers, on-going financial crises,
growing inequality and very high rates of poverty (which remains most
acute by far in the South), the rise of new manufacturing powerhouses,
the globalisation of industrial production through production
networks, changes in representation in the institutions of global
194 The BRICs, US ‘Decline’ and Global Transformations

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

Chapter 1 Introduction
1 See Chapter 2 for the definitional difference between the BRICs and the
BRICS.
2 In this respect at least the argument is close to one popular book that is scep-
tical about the rise of so-called groups of developing countries, that of
Sharma (2012). However, the reasons outlined for such scepticism in this
book are very different from Sharma’s, the latter of who appears to reject the
generalizing tendencies of analyses rooted in the sub-discipline of inter-
national political economy.

Chapter 2 The Rise of the South: Rising BRICs, Declining


US?
1 The Group of 8 (G8) is made up of Canada, France, Germany, Italy, Japan,
Russia, the United States and the United Kingdom. The G20 of developing
nations was formed in 2003 and involves around 20 or so countries, includ-
ing Argentina, Brazil, Bolivia, Chile, China, Cuba, Egypt, Guatemala, India,
Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa,
Tanzania, Thailand, Uruguay, Venezuela, and Zimbabwe, as at the 2005
summit (see http://commerce.nic.in/wto_sub/g20/pressrel.htm).
The ‘other’ G 20 brings together finance ministers and central bank gov-
ernors from 19 countries: Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico,
Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United
States of America plus the European Union, which is represented by the
President of the European Council and by Head of the European Central
Bank (see http://www.g20.org/docs/about/g20_en.html).
2 On significant differences in terms of security, which implicitly challenge
both offensive realist and Leninist accounts of international relations, see
Clark (2014).

Chapter 3 The BRICs, State Capitalism and Globalization:


Challenge to or Triumph of the West?
1 These countries are Bangladesh, China, Egypt, India, Indonesia, Iraq,
Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam.
2 Those that see state capitalism as a progressive alternative to neoliberalism
include Milne (2013) and to some extent Ramo (2004) and Jacques (2009),
while Halper (2010) is most hostile to it. The Economist (2012) and Bremmer
(2009, 2010) recognize rather than welcome its appeal and suggest that the

195
196 Notes

western free market alternative is still better, but don’t come to the same
geopolitical conclusions as Halper. As will become clear in the chapter, none
of them make a particularly strong analytical case for why state capitalism is
regarded as necessary in the developing world.
3 The R for Russia is in brackets as Nolke does not believe that it is compatible
with the development experiences of Brazil, India and China.
4 On this point about over-generalization and lack of specificity see Hay’s
(2005b) critique of the varieties of capitalism approach.
5 Given that most neoliberals are committed to some form of methodological
individualism, it is questionable whether a focus on aggregates is permissible
from within their world view. What can be said with some certainty is that if
individual entitlements have been reduced, then this should reduce the
incentive for individuals to live off welfare benefits and so should lead to a
reduction in aggregate spending. In fact the opposite has taken place. Of
course aggregate spending could be reduced to zero, as some neoliberals
wish, but given that aggregate spending has increased this would suggest
that there are reasons other than individual choice why people might be
unemployed or on low wages. But this would also suggest the need for an
analysis that takes us beyond methodological individualism.

Chapter 4 The BRICs, the South and the International


Economy, 1992 to 2007
1 See endnote 1 in Chapter 8 for the reasons why. Also see the discussion on
innovation in Chapter 8.
2 We return to these issues in Chapters 5 and 7 where the issue of China’s
trade with the South is discussed, and in Chapter 8 which focuses on the
question of innovation.
3 See Chapter 6 for further discussion of the PPP measures.

Chapter 5 The South and the Causes and Consequences of


the Financial Crisis, 2007–14
1 This claim to end the boom-bust economy came back to haunt British
Chancellor of the Exchequer and then Prime Minister Gordon Brown.
However, Conservative opposition did not warn of an unsustainable bubble
and in fact only criticized the Labour government for insufficiently liberaliz-
ing finance. A case can therefore be made that had the Conservatives been in
government, the bubble would have actually been worse.
2 Neoliberals can however always point to the absence of market mechanisms,
but this acts as a fall-back position or indeed a scapegoat in terms of ex-
planations for crisis, not least because even most libertarians still see some
role for non-market mechanisms – and thus the state – in the organization of
society. See further Plant (2009), Mirowski (2013) and Kiely (forthcoming).
3 There are also questions around FDI, particularly in countries desperate to
attract it. This is considered in the next chapter.
4 The next chapter will address questions of global inequality and poverty in
the context of the ‘rise of the South’.
Notes 197

Chapter 6 Global Inequality and the Rise of the South


1 These figures are based on 1990 PPP dollars.
2 These figures are based on PPP and not constant dollars, and so differ sharply
from those found in Chapter 4, and specifically Table 4.9. The pros and cons
of the different usages are discussed in the text, particularly in Chapter 4.
3 At the time of writing the impact of the 2011 international price comparison
is not known, but some provisional data was published in. For more in-
formation on this see http://blogs.worldbank.org/category/tags/international-
comparison-program. Early signs suggest that if the $1.25 line remains in
place, then the numbers living in absolute poverty will have declined.
However, this is likely to be a reflection of data construction at least as much
as any substantial change in poverty patterns per se, and in any case official
data on nutrition, health and education poverty suggest numbers far higher
than those focusing only on the income benchmark. Moreover, many critics
have suggested that the income level benchmark is set far too low (see
Sumner 2014; Birdsall et al 2014; Pritchett 2006).
4 This then has some significant effect in the measurement of poverty at a
given time, though it may not affect overall trends in poverty, because the
lowering effect occurs not just in the ‘present’ year, but in the measurement
for past years as well (Chen and Ravallion 2008).
5 The reason why it had little impact on trends is outlined in footnote 4. Once
the $1.25 figure was used consistently for all years going back to 1980, the
global incidence of extreme poverty declined from 52% of the global popula-
tion to 25.7% (see Chen and Ravallion 2008).
6 Most obviously, consumers in the North may benefit from low cost products
imported from the South, as was discussed in Chapters 4 and 5. This
however reflects the shift away from the high productivity high wage model
that applied (to some) in the post-war boom, to a high debt model of growth
that applied in the period from the 1990s onwards. For further discussion see
Chapter 4.

Chapter 7 The South and Geopolitics: From Bandung to


the BRICS?
1 The 30 countries that were prepared to publicly be part of the coalition were
Afghanistan, Albania, Australia, Azerbaijan, Bulgaria, Colombia, the Czech
Republic, Denmark, El Salvador, Eritrea, Estonia, Ethiopia, Georgia, Hungary,
Italy, Japan, South Korea, Latvia, Lithuania, Macedonia, the Netherlands,
Nicaragua, the Philippines, Poland, Romania, Slovakia, Spain, Turkey, United
Kingdom and Uzbekistan. Note that this list includes no countries from the
Middle East, some of whom had poor human rights records. See also the
point made in the text later in the chapter about the poor human rights
record of some of the countries listed.
2 In the field of journalism, for an example of a liberal hawk position, see the
attack on British Leader of the Opposition Ed Miliband, by Cohen (2013).
For an excellent critique of ‘either/or’ positions, both of the liberal interven-
tionist and (implicitly) of their anti-imperialist opponents, see Younge
(2013). See also Kiely (2010: chs.7 and 10).
198 Notes

3 This multipolarity is still however one in which there would only be a few
powerful states setting the agenda for the international order. The chapter
has questioned the argument that China is a country committed to solidar-
ity with the South, but much the same point applies to Brazil and India (Nel
and Taylor 2013).
4 A possible exception is the practice of land grabbing, which was discussed in
Chapter 6, which can be considered a form of ‘security mercantilism’ more
characteristic of the era of classical imperialism (see McMichael 2013).
However, this is not the dominant mode of promoting global integration,
and the practice does tend to be carried out by the new rising states of the
South rather than the established capitalist powers. This of course further
undermines any notion of the rise of the BRICS representing a new era of
‘South-South’ solidarity.

Chapter 8 Conclusion: Development, Innovation and the


Limits of International Transformation
1 This point reinforces the data outlined in Chapter 4 for the period up to
2002, which showed that while manufacturing output (and exports)
increased for parts of the developing world, this did not necessarily translate
into an increase in manufacturing value added – indeed the latter might well
fall as the former rises. The data outlined in Chapter 4 is quite old, and there
does not (yet) appear to be any newer global data along the lines presented
there, at least not from the source used there, UNCTAD’s 2002 Trade and
Development Report. This is further confirmed by correspondence between
the author and Jorg Mayer at UNCTAD, dated 11/10/2013. However Chapter 4
does provide some tentative data drawn from Nayyar (2009, 2013) and his
reading of various databases.
2 The annual report is based on twelve pillars of competitiveness, such as insti-
tutions, infrastructure, macroeconomic environment, health and primary
education, higher education and training, goods market efficiency, labour
market efficiency, financial market development, market size, business
sophistication, and innovation. Much of this is a useful measure of compet-
itiveness but at times (particularly on the macroeconomic environment – see
for instance World Economic Forum [2014: 6]) the pillars betray an implicit,
if not explicit, commitment to the kind of market friendly intervention that
was challenged in Chapter 3.
3 There has been some attempt to give the concept of globalization more
explanatory weight through an engagement with complexity theory (Urry
2003; Axford 2013), which argues that a theory or “metaphor of connec-
tions” (Urry 2003: 122) should replace a focus on system, life-world and
macro and micro levels. There is of course a danger in any theoretical expla-
nation of reifying social forms as entities with distinct essences. However, it
is also the case that any social explanation must hold on to some notion of
essentialism and causality (McLennan 1996), for without these we are left
only with description, which is the basis for Rosenberg’s initial critique of
globalization theory. Axford’s (2013: 177–90) defence of a critical social
science of globality is comprehensive and convincing as a research agenda,
Notes 199

but it does not quite deal with some of the previous errors of globalization
theory in that it shifts easily from a grand theory to an abstracted empiri-
cism, and one is left without either a clear definition of globalization (see
Rosenberg 2007) or a completely clear account of how the idea may aid
empirical inquiry.
4 Thanks to my colleague Clive Gabay for pointing me in the direction of
these books.
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Index

Note: Italicized page numbers denote tables.

absolute poverty share in world GDP, 130–1


measures of, 132–3 valuation of currency, 81
reduction, and globalization, 70 see also East Asia
abstentions, in UNSC Resolution al-Assad, B., 165–6
1973, 164–5 asset backed securities, 101
abstracted empiricism of Atlantic Charter of 1942, 153
development studies, 179 Atlantic neoliberalism, 155
Afghanistan, military intervention in, austerity measures, 1, 93, 150
23, 164 in Europe, 104, 111, 134
Africa for private sectors, 110
and China, 89, 161–2, 168 authoritarianism, market, 18, 63
inequality in, 136 Axford, B., 198n3(ch8)
and second world development, 2
share in world GDP, 130–1 bail-outs, following financial crisis
agency bonds, purchase of, 83, 107 of 2007–08, 58, 92–3, 104,
aggregate spending, 196n5(ch3) 117
agriculture sector balance of payments deficits, 35, 52,
in China, 122 96, 106
employment, 48 Bandung Conference, 152, 153–4
in developing countries, 75 Bank of America, 92
in India, 49, 51 banks
liberalization in, 157, 158 BRICS development bank, 171
aid, development, 153, 156, 158 capital reserve of, 98
Chinese, 159–60, 168, 170, 172, commercial banks, 95
187 investment of capital in
food aid programme, 50 investment banking by, 96
quality of, 155 lending to indebted countries,
United States, 50 34
Akyuz, Y., 118, 122 creditworthiness of, 102–3
Alden, C., 167 investment banks, 101
Alt-A mortgage loans, 100–1, 105 as intermediaries, 98
American Insurance Group (AIG), 92, private, investment in mortgage
93, 99, 101 backed securities by, 108
Americanisation of global capital, 189 shadow banking system, 98, 99,
anti-dumping measures, in India, 51 102
Apple iPod classic, 184 solvency of, 93–4
Arrighi, G., 23, 81, 109–10, 119, 120, Barnett, T., 26
143 Basel II, 98
Asia Bear Stearns, 102
financial crisis of 1997–98, 36, 61 Beeson, M., 43–4
newly industrializing economies, 37 Beijing Consensus, 2, 39–44, 61
Pacific Asia, 112 basis of, 21

223
224 Index

Beijing Consensus – continued Callinicos, A., 19


as cause for celebration, 4, 21–4, capital
170–1 Americanisation of global capital,
as cause for concern, 4, 17–18, 189
168–9 competition between, 18–19, 20
Belgrade conference, 154 foreign capital
Berlin Wall, 154 invested in US, 181
Bernanke, B., 102 promotion of joint ventures with,
Blair, T., 165 185
BNP Paribas, 102 inflows
Bolsa Família programme, 54 and globalization, 188, 189
bond markets, returns for United into South, 36, 73–7, 116–18, 117
States from, 121 internationalization of, 28, 96
bonds investment by commercial banks, 96
agency bonds, 83, 107 mobile capital, 145–6
US Treasury, 82–3, 121, 122 reserve of banks, 98
foreign holdings of, 107 capitalism
Bradford and Bingley, 92 crony capitalism, 61
Brazil entrepreneurship role in
commitment to multipolar development of, 181–2
international order, 167 illiberal capitalism, 42, 63
development of, 52–5 transnational capitalism, 145, 187
exports of, 116 varieties of, 43
primary goods, 116, 183 see also state capitalism
food inflation in, 141 capitalist development, 42–3, 169
foreign debt of, 34 and authoritarianism, 63
inequality in, 135 and dependency, 180
move from deficits to surpluses of linear models of, 143
current accounts, 35 normal, 180
proportion of people living in and state capitalism, 62, 63, 171, 172
absolute poverty in, 133, 135 Cardoso, F.H., 53, 182
savings and investment rate of, 77 Caribbean
on UNSC Resolution 1973, 165 exports, share of China in, 160, 161
Bremmer, I., 40, 42, 195n2(ch3) inequality in, 136
Breslin, S., 86 cash crop production, 144
Bretton Woods II system, 81, 121 Centauri (structured investment
B(R)IC variety of capitalism, 43 vehicle), 99
BRICS (Brazil, Russia, India, China, central government deficit in South, 74
and South Africa), 15–16, 158 chaebol (South Korea), 62–3
broad index secured trust offering Chen, S., 137
(BISTRO), 100 China
Brooks, S., 26 Beijing Consensus see Beijing
Brzezinski, Z., 20 Consensus
Buiter, W., 38 character of boom in, 80–5
Bukharin, N., 170 conflict with United States, 170
Burbach, R., 187 consumption
Bush, G.H.W., 96 growth of commodities in, 113,
Bush, G.W., 92, 105 113, 161, 161
business cycles, decoupling of, 115 of grain in, 142
Index 225

current account surplus of, 106 share of foreign investment in real


decoupling of, 121 estate in, 118
development of, 44–9 state-led growth project of, 63
dollar reserves of, 82 stimulus package of, 116
economic growth of, 13 tariff rates in, 39, 45, 47
export of primary goods by, 183 technological upgrading in, 183–4
fixed asset investment rate of trade with BRICs, 86, 160
China, 122 on UNSC Resolution 1973, 165
food inflation in, 141 US-Chinese interdependence, 80–5
foreign direct investment in, 125, China Development Bank, 159
186 China Eximbank, 159
foreign exchange reserves of, 126 China Mobile, 46
and globalization, 189–90 China National Offshore Oil
growth of GDP, 85 Company (CNOOC), 46
growth rate of, 114–15 China Unicom, 46
as high globalizer, 39, 61 Citigroup, 41, 96, 99
high-tech production of, 184 Clinton, B., 96, 104
house prices in, 134 clothing sectors
import-consumption ratio of, 86 liberalization of, 157
imports market share of China in, 48–9
of commodities by, 87 protectionist measures in, 163
of United States from, 106 Cold War
inequality in, 134–5 and communism, 164
influence in Africa, 168 and geopolitics, 153
local developmental states of, 124 and liberal international order, 190
manufactured imports of, 88 post-Cold War world
as manufacturer of final goods, 88–9 liberal interventionism in, 164
measuring between-country non-alignment in, 156
inequality excluding, 138 collateralized debt obligations
on military intervention in Syria, (CDOs), 127
166, 167 securitization of mortgages into, 100–1
and new South, 159–63 colonialism
and non-alignment, 158 in India, 49
official holdings of long-term and international division of
agency debt, 108 labour, 66
outward foreign direct investment and primary products, 176
of, 125, 186 commercial banks, 95
population vs. income of, 194 investment of capital in investment
post-crisis purchases of US banking by, 96
Treasuries, 124 lending to indebted countries, 34
proportion of people living in Commission on Growth and
absolute poverty in, 133 Development, 38
purchase of US debt, 121, 171 commodities
rise of, 69–70, 69, 167, 170 boom, 85–90
role in growth of South, 112 chains see global commodity chains
role in US housing market, 107 in China
savings and investment rate of, 77 consumption growth, 113, 113,
share of East Asian countries’ 161, 161
exports to, 88 imports, 87, 113, 113
226 Index

commodities – continued convergence between South and


exports, and diversification, 163 developed world, 1–2, 4, 150
Latin America as importers of, 163 boom from 2002 to 2007, 71–5
markets, food, 142 limits of, 75–90
prices, 114, 161, 162, 163 and market friendly policies, 24–5
changes in, 74, 74, 75, 116 transformation of international
global commodities, Chinese order through, 10–15
demand on, 160 cooperation, in Third World, 154
super-cycle, 89, 191 Corbridge, S., 51
see also primary commodities corporate fraud, 96, 98
Commodity Futures Modernisation credit crunch, 99, 102, 103
Act 2000, 96 credit default swaps (CDSs), 100, 103
communism, 55, 153, 164 synthetic CDOs, 101
Communist Party (China), 40, 44, credit rating agencies, 99, 101, 102
124 Crimea, Russia’s annexation of, 167
Community Reinvestment Act 1977, crony capitalism, 61
104–5 current account
comparative advantage, 47, 61, 62, deficits
70, 178 of developed countries, 14, 72,
and manufacturing in South, 67, 79 74–5, 106
competitiveness of nations in global of developing countries, 51–2, 71,
economy, 185, 198n2(ch8) 106, 118, 191
complexity theory, 198n3(ch8) surpluses, 35, 81
conditionality, for indebted of developing countries, 35, 110,
countries, 35 191
conduits, financial, 98–9, 102
consumer spending, 109 de-industrialization in developed
on food, 141 world, 145
as measurement of inequality, 135 debt crisis
consumption in Brazil, 53
in China, 80 in Latin America, 34
consumption growth of of 1982, 58, 178
commodities, 113, 113, 161, sovereign, 103–4
161 decile ratios, global inequality
final consumption spending, 106 measure, 136, 137
import-consumption ratio, 86 decoupling of South from North, 6,
effect of exports on, 80–1, 84 69, 83, 84, 110, 112–16, 117, 177,
of grain in India, 142 190
growth of commodities in China, defensive realist approach, on rise of
161, 161 China, 26
of Japan, Taiwan and South Korea deleveraging, 106, 117
combined, 80 in United States, 109, 110
in northern economies, and booms Deng Xiaoping, 44, 159
of 1990s and 2000s, 106 dependency theory, 175, 176, 177,
population by consumption groups, 178, 179–81
139, 140 dependent market economies, in East
shares of global consumption and Central Europe, 43
growth, 141 derivatives market, 96–9
in United States, 106 Desai, R., 170, 171
Index 227

developed countries developmental alliances, in South,


annual average growth rates of, 109 157–8
current account developmental change of South,
deficits of, 72, 110–11 10–15
surpluses of, 110 developmental states, 5, 40, 42, 44,
de-industrialization in, 145 48, 60, 64, 124
foreign direct investment in, 76 direct foreign investment (DFI) see
growth rate of, 129–30 foreign direct investment (FDI)
import growth in, 122–3 Dirlik, A., 22
inequality in, 136 diversification
market, South-South trade of Chinese exports, 70
dependence on, 88 and commodity exports, 163
per capita income of, 111 of foreign exchange reserves, 82
profitability in, 145 of industrial production vs. primary
ratio of government spending to goods production, 66
GDP in, 60 trade, 10, 115
research and development division of labour see international
spending of, 185, 186 division of labour
share in global growth, 72 Dollar, D., 37, 38
share of wages in GDP, 134 dollar (United States)
trade deficits of, 73 dollar reserves, 14
trade in goods from lower wage of East Asian countries, 82
economies, 148 as international reserve currency,
developing countries 171
annual average growth rates of, 109 share of allocated foreign exchange
average central government deficit holdings, 123
in, 74 valuation of, 124
capital inflows into, 36, 73–7, domestic demand
116–18 effect of import content on, 84
exports of, 160–1, 160 and global recovery from financial
foreign direct investment in, 67–8, crisis of 2007–08, 12
76 domestic savings
foreign investment boom in, 66–8 in China, 77
growth rate of, 129–30 percentage in GDP, 106
investment liberalization in, 39, financial liberalization for, 53
67–8 in India, 77
investment of MNCs in, 71 percentage in GDP of United States,
rise of manufacturing in, 66–8 106
role in demand for crops, 141 domestic value-added content of
role in global economy, 11–12 exports, in China, 84
stimulus packages in, 116 Dooley, M., 81
trade surpluses of, 72 dot.com boom, 65, 71, 98
see also South double counting of export values, 84,
development model of China, 21, 86
39–44 Dow Jones Index, 98
development orthodoxy, 89
after World War II, 67
development theory, and rise of E7, 12–13
South, 175–81 East Asia
228 Index

East Asia – continued energy futures, 96


China Enron, 98
imports of merchandise from East entrepreneurship, role in
Asia, 86 development of capitalism, 181–2
role in production networks, 49 equities
exports and Beijing Consensus, 21, 22
of parts and components, 87–8 China’s investment in, 14
shares to China, 88 and financial crisis, 83
shares to European Union, 87 prices in developing countries, 118
foreign exchange reserves of, 82 returns for United States from, 121
newly industry countries in, 36, ethics of principled conviction, 169
177 ethics of responsibility, 169
price distortions in, 61 ethnic minorities, expansion of home
protectionist policies in, 61 ownership among, 104
purchase of mortgage backed Europe
securities, 82 annual average growth rates of GDP
state expenditure/GDP ratios in, 60 and exports in, 69
state interventions, 61 austerity measures in, 104, 111, 134
Eastern Europe, inequality in, 136 Central Europe, dependent market
economic policies economies in, 43
and capitalism, 18 countries
of South, 34–5 technological innovation in, 186
economic rents, 181, 182 voting shares in IMF, 164
education Eastern Europe
in China dependent market economies in,
investment for, 42 43
social development advances, 44 inequality in, 136
and income, 134 exports to, 87–8, 116
private insurance schemes for, 58 during financial crisis of 2007–08,
role of state in developing, 62 92–3
and skilled workers, 11 former communist European
Edward, P., 138, 139, 144, 149 countries, foreign direct
elites investment in, 13, 76
alliances between, 52 investment in mortgage backed
and neoliberalism, 58 securities by private banks, 108
emerging markets, 14 European Central Bank, lending
boom of 1990s, 65–71 during financial crisis, 110
business cycles in, 115 Eurozone
and financial crisis, 115, 191 deficits with, 73
emerging powers, rise of, 1–5, 7, financial crisis in, 103, 104, 110
18–21, 30, 32, 38, 112, 168, 170, export/GDP ratios
172, 173, 180, 187, 192, 193–4 of China, 80, 84
as challenge to the West, 39–44 of Japan, Taiwan and South Korea
as triumph for the West, 4, 24–6, combined, 80
34–9, 171 export valued added/GDP ratios, of
see also developing countries; South China, 84
employment
in Brazil, 53, 54 Fannie Mae, 83, 103, 104, 107, 108
in China, 48 Farooki, M., 112, 113, 114
Index 229

federal debt of United States, 109 of developing countries, 13–14,


final goods, 84 41–2, 186
China as manufacturer of, 88–9 global, 76
financial bubbles, 106 China’s share of, 70
financial crisis of 1990s, 71 inflows in China, 45
financial crisis of 1997–98, in Asia, and international division of
36, 61 labour, 145
financial crisis of 2007–08, 2, 4, 5–6 as joint ventures, 185
decoupling of South from North, outsourcing of lower value activity
112–16 through, 119–20
derivatives and investment of South, 125
banking, 96–9 foreign economic cooperation loans,
and government regulation, 95–6, 159
104 foreign exchange
and housing crash, 102–3 exporting primary goods to
immediate causes of, 5–6, 92–105 generate, 183
immediate response to, 5–6, 110–12 markets, expansion of, 97
implications for future of US power, foreign exchange reserves
118–26 of China, 126
international origins of, 105–9 of East Asian countries, 82
private debts and sovereign debt during 2007–08 financial crisis, 14
crisis, 103–4 foreign investment
recovery of BRICs from, 12 in real estate in China, 118
recovery of South from, 190–1 in United States, 107–8, 121
securitization and sub-prime see also foreign direct investment
mortgage market, 99–101 (FDI)
South-South trade and capital flows foreign policy
to South, 116–18 human rights as instrument of,
state bail-outs following, 58 169
transformation of international and non-alignment, 6
order, 109–26 foreign portfolio debt holdings, in
financialization, and inequality, 147–8 United States, 121
fixed asset investment rate, of China, former communist European
122 countries, foreign direct
food aid programme, in India, 49–50 investment in, 13, 76
food crisis, 32, 129, 139–49 Fortis, 92
foreign capital Foster, J.B., 88
invested in US, 181 France, economic security for labour
promotion of joint ventures with, in, 147
185 Freddie Mac, 83, 103, 104, 107, 108
foreign debt Freeman, C., 182
of Brazil, 34 free markets, 11, 24, 36, 57, 58, 105,
of Mexico, 34 143, 195–6n2(ch3)
of United States, 118–19, 123, 126 free trade, 61–2, 157, 170, 172
foreign direct investment (FDI), 76 and division of labour, 144
boom in developing world, 66–8 Frobel, F., 145
in developed countries, 76 FT 500 companies from South, 78
in developing countries, 67–8, 76, fuel economy, and food, 142
120–1 futures, 28, 75, 94, 96, 97, 142
230 Index

G7, 12 competitiveness of nations in, 185,


G8, 195n1(ch2) 198n2(ch8)
G15, 167 and developing countries, 11–12
G20, 110, 157–8, 167, 195n1(ch2) and financial crisis of 2007–08, 92
G77, 155, 168, 172 inequality in, 139
Gandhi, I., 50 global inequality, 129–51
gas companies, in Russia, 56 causes of, 175
Gazprom, 56 food crisis and international
General Agreement on Tariffs and division of labour, 139–49
Trade (GATT), 157 measures of, 136–7
General Agreement on Trade and global insecure category, 138, 139,
Services, 185 140, 144, 149, 193
geographical inequality, 187 global middle class, 12, 112, 114, 133,
geopolitics, 6, 152, 153, 154, 192 138
and Beijing Consensus, 23, 168 global order, layers in, 138
and globalization, 26 global production networks see global
and international order commodity chains
transformation, 15–16 global prosperous category, 138, 140
and new South, 163–7 global secure category, 138, 139, 140
Germany globalization
labour market and welfare and capital inflows, 188, 189
protection in, 147 and development, 178
manufacturing in, 120 friendly policies, 3
on military intervention in Iraq, grand theory of, 179
166 and geopolitics, 26
share in world trade, 119 and growth of developing
Ghosh, J., 142 countries, 25–6
Gindin, S., 28 of industrial production, 193
Gini co-efficient, 136, 137 and inequality, 129–30
Glass-Steagall Act 1933, 95 and nation states, 60
global absolute poor category, 138, of 1990s, 70–1
139, 140, 149, 150, 193 opportunities of, 34–9
global commodity chains, 77, 86, 147 of production, 183, 192
and foreign direct investment, 146 and transformation of international
investments of MNCs within, 68 order, 188–90, 198n3(ch8)
involvement of US non-financial and United States, 28
firms in, 148 and World War I, 146
rise of transnational capitalism golden age, 96
through, 187 Goldman Sachs, 11, 14, 21, 30, 55,
global consumption 75, 181
China’s contribution to, 113, 113 Gourinchas, P-O., 119
share of US consumption in, 106 government
share of growth on, 141 cuts, in Russia, 55
see also consumption regulation, and financial crisis of
global derivatives market, 97 2007–08, 95–6, 104
global economy role in market friendly
changes, and Third World interventions, 59
development strategy, 178 spending, and financial crisis, 106
China’s integration into, 184 Gowan, P., 19
Index 231

Gramm, P., 95 health care


Gramm-Leach-Biley Act 1999, 95 in China, social development
grand theory of globalization, 179 advances, 44
Great Depression, 52, 95 and income, 134
Greece hedge funds, 97, 102, 127
bail-outs in, 104 hegemony of United States, 2–3, 4,
private debt in, 103 24–6, 29, 170, 171, 175, 194
gross domestic product (GDP) and Beijing Consensus, 21, 22–3
BRICs, annual average real GDP limits of challengers to, 26–8, 172
growth rates of, 14 persistence of, 4–5, 26–8, 172
of China, 82, 85 Henderson, J., 188, 193
domestic savings percentage in, heterogeneous tails, 137
106 hi-tech investments, in United States,
wage income share in, 81 98
of developed countries hierarchical market economies, in
foreign direct investment share, Latin America, 43
68 high household saving, high
ratio of government spending to corporate debt development
GDP in, 60 strategy, 47
share of wages in GDP in, 134 high-tech production
of developing countries, of China, 184
investment/GDP ratios for, of developed countries, 120
76–7 higher value activity
Europe, annual average growth in developed countries, 148
rates in, 69 in developing countries, 114
export/GDP ratios, 80, 84 in United States, 120
export valued added/GDP ratios, 84 homogenous middles, 137
global, China share of, 69 Hong Kong
of Latin America China’s foreign direct investment
share in world GDP, 130–1 in, 125
measuring, 79, 80, 131 imports of United States from, 106
ratio of government spending to, liberalization in, 96
59–60 neoliberalism in, 61
of Russia, 55, 56 households
state expenditure/GDP ratios, 60 final consumption spending in
trade/GDP ratios, 38–9, 56, 146 China and United States, 106
of United States, annual average savings rate in United States, 72
growth rates, 69 housing
of United Kingdom, ratio of crash, and financial crisis of
government spending to, 2007–08, 102–3
59–60 market, in United States, 91, 104,
world GDP growth, 72, 130–1 106–7, 121
growth acceleration programme, in prices in China and India, 134
Brazil, 54 and US dollar, 82–3
Hu Jintao, 159
Halper, S., 17–18, 23, 31, 40, 41, 42, human rights
171, 195n2(ch3) abuses, in China, 44, 134, 168
Harvey, D., 57, 58–9 and Chinese aid, 168
HBOS, 92 as justification for policy, 169
232 Index

human rights – continued India


and state capitalism, 3, 18 commitment to multipolar
Universal Declaration of Human international order, 167
Rights of 1948, 153 consumption of grain in, 142
humanitarian military intervention, development of, 49–52
164 export of primary goods by, 183
Hypo Real Estate, 92 food inflation in, 141
growth rate of, 114–15
inequality in, 134, 135
IBSA (India, Brazil, South Africa), 158, as low globalizer, 39
167 on military intervention in Syria,
Iceland, during financial crisis of 166, 167
2007–08, 92–3 proportion of people living in
Ikenberry, J., 27 absolute poverty in, 133
illiberal capitalism, in China, 42, 63 role in growth of South, 112
imperial power of United States, 28 savings and investment rate of, 77
imperialism, 18–19, 158 tariff rates in, 39
contemporary, 170 technological upgrading in, 183–4
Marxist theories of, 18–19, 170 trade with other BRICs, 86
import-consumption ratio, of China, on UNSC Resolution 1973, 165
86 industrial policy, of China, 46, 47
import substitution industrialization industrial production
(ISI) policies, 35, 36, 66, 67, 77, diversification of, 66
155, 176–7, 178 globalization of, 193
in Brazil, 52, 53, 54 industrialization
in India, 49, 51 de-industrialization, 145
and Third World, 176–7 and development orthodoxy, 67, 89
income and developmental states, 42
and food chain, 141 export-oriented, 80
inequality, in China, 48 newly industrializing economies
low income countries, proportion (NIEs), 37
of people living in absolute newly industrializing countries
poverty in, 133 (NICs), 36, 38, 59, 62, 78
as measurement of poverty, 134 and open investment policies, 37–8
middle income countries pro-industrialization policies, 176
proportion of people living in in West, 177
absolute poverty in, 133 see also import substitution
rise of wealth in, 139 industrialization (ISI) policies
savings rate in, 77 inequality, 6
per capita income within countries, 130
of developing world, 111 poverty, 132–9
and inequality, in India, 135 and financial crisis of 2007–08,
and population, 194 126–8
and primary commodities, 112 and financialization, 147–8
share across countries, 137 geographical inequality, 187
and standards of living, 112, global inequality, 129–51
113 income inequality, in China, 48
income elasticity of demand for international inequality, 6, 129–32
primary goods, 67, 176 intra-country inequality, 147
Index 233

and poverty within countries, 132–9 internationalization


social inequality, 187 of capital, 28, 96
inflation of finance, 96–7
of food, 141 of production, 96
response of United States to, 97 intra-country inequality in developed
innovation, technological see under world, 147
technology intra-firm trade, 155
institutions, 15, 25, 33, 34 investment banking, 95–9
differences between capitalisms, 43 investment banks, 75, 92, 95, 101
and free markets, 11 as intermediaries, 98
of global governance, 187, 193–4 investments
holding collateralized debt effect of exports on, 80
obligations, 101 fixed asset investment rate, 122
reforms, in South, 36 foreign direct investment see
representation of global foreign direct investment (FDI)
governance, new South in, hi-tech investments, 98
163–4 open investment policies, 37–8, 170
set by developing countries, 170–1 overseas investment/sales of United
inter-imperialist rivalries, 170 States, 119, 120, 181
international division of labour, 61, portfolio investment, 73, 117
139–49, 150 rate, in middle income countries,
and colonialism, 66 77
between developed and developing structured investment vehicles, 98,
countries, 79 99, 102
and free trade, 144 trade related investment measures,
and labour markets, 144 47
international inequality, 6, 129–32 investment/GDP ratios, for
International Monetary Fund (IMF), developing countries, 76–7
36, 37, 156 investment liberalization
loan to indebted countries, 34 in developing countries, 39, 50,
conditions, 58 67–8
India, 50 and globalization, 70
regulation of debt crisis, 58 in Third World, 178
stabilization policies of, 35 investment policies
voting shares of European countries of China, 27
and BRICs in, 164 of developing countries, 68
international order open investment policies, 37–8, 170
centrality of US power in, 26–7 Iraq, military intervention in, 23, 81,
liberal, 27–8, 29, 31, 153, 175, 190 164, 165, 166, 169
role of United States in, 28 Ireland
transformation of, 109–26, 167–73, during financial crisis of 2007–08,
185 92–3
through convergence, 10–15 private debt in, 103
through geopolitical change, Islamic State movement, in Syria, 166
15–16
limits of, 187–94 Jacques, M., 195n2(ch3)
dangers, 4, 18–21, 170 Japan
and globalization, 188–90, consumption in, 80
198n3(ch8) export/GDP ratios of, 80
234 Index

Japan – continued total public debt of, 74


manufacturing in, 120 wages-related gender gap between
official holdings of long-term men and women in, 136
agency debt, 108 League of Democracies, 166
trade surplus with China, 87 least developed countries (LDCs)
JP Morgan, 100, 102 share in world trade, 39
joint ventures, foreign direct tariff rates in, 39
investment as, 185 Lehman Brothers, collapse of, 92, 103
Leninism, perspective on rise of
Kagan, R., 20 emerging powers, 170, 192
Kanbur, R., 133 liberal imperialism, on military
Kaplinsky, R., 112, 113, 114, 182 interventions, 169
Keynes, J.M., 105–6 liberal international order, 27–8, 29,
Khanna, P., 2 31, 153, 175, 190
Kharas, H., 112 liberal internationalism, on rise of
Korean Development Bank, 92 South, 21, 28, 29
Kraay, A., 37, 38 liberal interventionism
Kubitschek, J., 52 and Beijing Consensus, 168
Kupchan, C., 30 foreign policies, 6
and new South, 164–7
labour-intensive sectors, market share liberalization, 28
of China in, 48–9 in Brazil, 53
labour markets in China, 45, 47
of China, 49 and developmental alliances, 157
and division of labour, 144 of export dependent sectors for
and food prices, 142–3 developing world, 157
insecurity, in developed world, 147 and financial crisis of 2007–08, 126
labour productivity of financial flows, 71, 172, 188
of United Kingdom, 119 of financial services, 96–7
of United States, 119 in India, 50, 51, 183
land acquisitions, 198n4(ch7) investment, 25, 27, 39, 39, 50,
and food prices/production, 143, 144 67–8, 70, 178
large state national champion of legislation concerning mergers
industries, 62–3 and acquisitions, 96
Latin America in Russia, 55, 56
and China, 89, 162 trade, 27, 35–6, 41, 45, 70
current account deficits of, 74 Libya, military intervention in,
debt crisis, 34 164–5, 168
exports, share of China in, 160, life expectancy
161, 163 in China, 44–5, 134–5
financial crisis of 1990s, 71 in Russia, 55
foreign direct investment in, 77 Lim, J., 88
as importers of commodities, 163 Lim, M-H., 88
imports o manufactured goods by limitations of BRICs, 172–3
land-owners in, 176 Lloyds TSB, 92
inequality in, 136 loans
investment of MNCs in, 71 Alt-A mortgage loans, 100–1, 105
manufacturing in, 78 foreign economic cooperation
share in world GDP, 130–1 loans, 159
Index 235

IMF loan conditions, 58 market deregulation policy, 35, 36


to indebted countries, 34 market friendly interventions, 5, 38,
structural adjustment loans, 35 39, 46, 59, 60, 61, 62, 198n2(ch8)
localization, and Beijing Consensus, market friendly policies, 3, 4, 29, 31,
22 33, 34, 35, 36, 38, 40, 41, 42, 57,
long-term agency debt, official 70, 138
holdings of China and Japan of, and convergence between South
108 and developed world, 24–5
long-term securities of United States, and IMF loan conditions, 58
purchases by foreigners of, 123 market societies, 62
low income countries, proportion of market-supplanting policies, of
people living in absolute poverty China, 46
in, 133 markets
low wage economies in development of BRICs, 44–57
merchandise imports from, 147 imperfections, role of state in, 61–2
trade in goods from, 148 and neoliberalism, 57–63
Lula da Silva, L., 54 prices, for measuring share of South
Lysandrou, P., 127 in global GDP, 79, 80, 131
Marshall Plan, 175
Macao, China’s foreign direct Marx, K., 181
investment in, 125 Marxism, 7
Maddison, A., 130 and international division of
manufactured goods labour, 144
China on neoliberal principles, 58
export by, 80, 180 perspective on rise of emerging
as final producer/assembler, 88 powers, 18–19, 20–1
imports by land-owners in Latin perspective on US hegemony, 28,
America, 176 29
and international division of theories of imperialism, 18–19, 170
labour, 79 Mason, P., 96, 99
vs. primary goods, 66–7, 160, 176 McChesney, R., 88
manufacturing Mearsheimer, J., 19–20, 31
in Brazil, 52, 53 merchandise
in China, 122 Chinese imports from East Asia, 86
convergence in, 79 imports from low wage economies,
exports 147
growth of China, 69 share of developing countries in, 68
of South, 78 mergers and acquisitions
productivity of United States in, legislation concerning, 96
120 in North, 76
rise in developing world, 66–8 Merrill Lynch, 41
rise in South, 77–9 methodological individualism,
shares of exports by country, 67 196n5(ch3)
manufacturing value added (MVA), of methodological nationalism, 55, 64,
South, 78 189
Maoism, 159 Mexico
market authoritarianism, 18, 63 foreign debt of, 34
market-conforming policies, of move from deficits to surpluses of
China, 46 current accounts, 35
236 Index

middle class, 138 multinational corporations (MNCs)


global middle class, 12, 112, 114, investments in developing
133, 138 countries, 71
Middle Eastern countries, holding of codes for, 155
US Treasury bonds by, 82 investments within global
middle income countries commodity chains, 68
proportion of people living in operating in United States, sales of,
absolute poverty in, 133 125
rise of wealth in, 139 multipolar international order, 167,
savings rate in, 77 198n3(ch7)
Milanovic, B., 137
Milberg, W., 148, 149 Nadvi, K., 188, 193
military interventions see liberal nanotechnology, 186
interventionism NASDAQ, 98
Mill, J.S., 191 National Intelligence Council (NIC),
Milne, S., 195n2(ch3) 29
Ministry of commerce (MOFCOM), national systems of innovation, 182,
China, 159 183
MINTs (Mexico, Indonesia, Nigeria nationalism, 20
and Turkey), 12 and Third World, 153
mobile capital, 145–6 nationalist catch up theory, 61
modernization theory of nationalizations, during financial
development, 175, 176–7, 178, crisis of 2007–08, 93, 103
179 Nayyar, D., 198n1(ch8)
monetary policy Nehru, J., 153
and deleveraging, 110 neo-conservatism, perspective on rise
and investment banking, 98 of emerging powers, 20–1
money neoliberalism, 41, 94, 105, 152, 156,
Ponzi scheme, 99 172, 173, 179, 192, 195n2(ch3),
responsibility of states for supply 196n5(ch3), 196n2(ch5)
of, 57–8 Atlantic, 155
Moore, J., 143 in Brazil, 53, 54
mortgage backed securities (MBS), definition, 57
100, 103 and growth rates, 72
investment of private European and rise of developing countries,
banks in, 108 171
purchase by East Asian countries, and states/markets, 57–63
82 and Washington Consensus, 40–1
mortgages and welfare state, 60
Alt-A mortgage loans, 100–1, 105 see also state capitalism
to low income groups, 104 neoliberalization practices, 58–9
securitization into collateralized New Deal, 95
debt obligations, 100–1 new international economic order
sub-prime mortgage market, (NIEO), 6, 155, 157
99–101, 104, 105, 107, 127 and rise of China, 162
Mugabe, R., 18 new South, 4, 6, 152–67
Multi-Fibre Agreement (2005), 163 dependency on established powers,
multilateralism, and Beijing 180
Consensus, 22 emerging powers as leaders of, 172
Index 237

New Special Economic Zones, in overseas investment/sales of United


China, 45 States, 119, 120, 181
newly industrializing economies see also foreign direct investment
(NIEs), 37 (FDI)
newly industrializing countries ownership of companies, and
(NICs), 5, 36, 38, 59, 62, 156, globalization, 190
177, 182 Oxfam, 144
manufacturing in, 78
Next Eleven (N-11) countries, 12 Pacific Asia, rise of, 112
9/11 terrorist attacks, interest cuts Palma, G., 137
after, 99 Panitch, L., 28
Nolan, P., 46, 186 parts and components
Nolke, A., 43, 55 China as assembler of, 84
Non-Aligned Movement, 32, 152, exports by East Asian countries to
154, 157, 168 United States and European
non-alignment, 6 Union, 87–8
and China, 158 supply to China, 86
Third World, 153, 154, 156 per capita income
non-financial firms of developing world, 55, 111, 112,
cost of borrowing for, 92 135
financial expansion by, 147–8 of United states, 32
and global-commodity chains, Ponzi scheme, 99
148 population
non-tradable services, low wages in, by consumption groups, 139, 140
147 control policies, in China, 45
North-North trade, 10 and income, 194
Northern Rock, 93 triadic patents-population
Nuremberg trials of 1945–46, 164 proportion, 185–6
Nye, J., 27 portfolio investment
investment in South, 73
Office of Thrift Supervision, 105 since financial crisis, 117
offshoring, 147, 148 Portugal, private debt in, 103
oil post-Cold War world
companies liberal interventionism in, 164
in Russia, 56 non-alignment in, 156, 164
and state capitalism, 41 poverty
exports of, 90, 162 within countries, and inequality,
prices, and Third World, 156, 163 132–9
O’Neill, J., 1, 9, 11, 26, 129–30, 181 reduction, and globalization, 70, 71
O’Neill, P., 103 rural poverty, in China, 48
open investment policies, 37–8, 170 Prashad, V., 155, 156, 158, 172
options, financial, 97 Prebisch, R., 176
Organisation for Economic price distortions, in East Asian
Cooperation and Development countries, 61
(OECD), 86 price movements, 176
Shifting Wealth report, 6, 9, 10 Price Waterhouse Coopers, 12–13
Organisation for Petroleum Exporting primary commodities
Countries (OPEC), 2, 155, 156 Brazil’s earnings from, 116
orthodox trade theory, 144, 148 demand for, 5, 52, 102, 187
238 Index

primary commodities – continued in Brazil, 52


dependence on, 163, 172 in East Asia, 61
exports, 77 and Third World, 153
to generate foreign exchange, 183 public health improvements, in
of Latin America to China, 160, China, 45
161 public ownership in current state
prices for, 155 capitalist countries, 62
and income, 112 public sector
vs. manufactured goods, 66–7, 160, and financial crisis, 103
176 government spending cuts, 105
prices of, 74, 114, 155, 162, 192 reforming, 36, 53, 60
specialization in, 89, 176 purchasing power parity (PPP)
and Third World, 176 measurement of, 132
private banks, investment in for measuring share in global GDP,
mortgage backed securities in 69, 79, 131
Europe, 108 Purushothaman, R., 24–5, 38
private debts during financial crisis of Putin, V., 166, 167
2007–08, 103–4
private sector
quantitative easing, 6, 55, 117, 124,
cutting of expenditure by, 110
180, 190, 191
and financial crisis, 103, 105, 126
quintile ratios, global inequality
ownership, and foreign investment,
measure, 136
76
privatization, 25, 41, 44, 54, 130, 178
reversing, 93 Rahbari, E., 38
in Russia, 55 Ramo, J., 21, 40, 185, 195n2(ch3)
of state-owned enterprises policy, 35 Ravallion, M., 137
processing industries, in China, 162 raw materials, China’s access to, 107,
production 162, 170, 172
cash crop production, 144 RBS, 92
globalization of, 183, 192 re-mortgaging, 102
high-tech production, 120, 184 Reagan, R., 96
industrial production, 66, 193 real estate
production networks, East Asian, 49, China’s investment into United
86–7, 124 States, 14
see also global commodity chains share of foreign investment in
production substitution, 54, 77, 117 China, 118
productivity Real Plan (Brazil), 53
of Brazil, 54 realism, perspective on rise of
of India, 51 emerging powers, 18, 19–21, 26,
manufactured goods, 66, 120 28, 170, 192
of middle income countries, 77 recession, 65, 66, 71, 79, 84, 97,
total factor productivity, 183 103–4, 105, 156
profitability in developed world, 145 reforms
pro-industrialization policies of Third in China, 44, 45
World development, 176 institutional, 36
proletarianization, 143 public sector, 36, 53, 60
protectionist policies, 35, 38, 57, 157, remittances from North to South,
163, 177 148–9
Index 239

Research and Development, spending effect of rural poverty on, 48


for, 185–6 in India, 51
Responsibility to Protect principle, in IT industry, 51
165 wages of, 145
revolution, in Brazil, 52 social inequality, 187
Rey, H., 119 solidarity
Robinson, B., 145, 187 and rise of China, 159–63, 170
Rostow, W., 175, 179 Third World, 155–6, 173
Rubin, R., 96 solvency of banks, 93–4
rural poverty, in China, 48 South
rural-urban migration in China, 48, after 1945, 152–6
122, 124 capital inflows into, 36, 73–7,
Russia 116–18
annexation of Crimea, 167 pre- and post-financial crisis, 117
commitment to multipolar change in trade patterns of, 116
international order, 167 codes for MNCs investing in, 155
development of, 55–7 decoupling from North, 112–16,
export of primary goods by, 183 117
food inflation in, 141 dependency on primary goods, 180
on military intervention in Syria, new
166, 167 dependency on established
savings and investment rate of, 77 powers, 180
on UNSC Resolution 1973, 165 emerging powers as leaders of,
172
Santander, 92 rise of, 156–67
savings rate remittances from North to, 148–9
in Brazil, 53 rise of, 129–51
in middle income countries, 77 and development theory, 175–81
Sberbank, 56 and technological innovation,
Schumpeter, J., 181, 182 181–7
Schwartz, H., 109, 120 rise of manufacturing in, 77–9
Second World, 2, 152, 154 role of China and India in growth
Securities and Exchange Commission, of, 112
98 share in global exports, and
securitization, 99–101, 104, 107 international division of
selectivity, in military interventions, labour, 146
169 see also developing countries
self-determination theory, and South Africa, 9, 14, 15
Beijing Consensus, 21, 22 savings and investment rate of, 77
semi-skilled workers, effect of rural on UNSC Resolution 1973, 164
poverty on, 48 South Korea
shadow banking system, 98, 99, 102 central bank, diversification of
Sharma, R., 195n2(ch1) foreign exchange reserves by,
shock therapy, in Russia, 55 82
short-term borrowing, 102 consumption in, 80
Singapore, neoliberalism in, 61 export/GDP ratios of, 80
Singer, H., 176 neoliberalism in, 60–1
skilled workers newly industry countries in, 36
and education, 11 trade surplus with China, 87
240 Index

South-South trade, 2, 10, 85–90, Sub-Saharan Africa, proportion of


116–18, 160 people living in absolute poverty
share in world trade, 85–6 in, 133
sovereign debt crisis, during financial subcontracting
crisis of 2007–08, 103–4 by MNCs, 68, 77
Sovereign Wealth Funds, 14, 41, 126 outsourcing of lower value activity
sovereignty principle, China on, 168 through, 119–20
Spain, private debt in, 103 Sumner, A., 133, 138, 139, 144, 149
Special Economic Zones, in India, 50 super-cycle, commodity, 89, 191
stabilization policies, 35, 130 super-exploitation of workers, 145
Standard and Poor’s, 98, 101 swap, 97
standards of living, 56, 124, 178 credit default swaps, 100, 101, 103
in BRICs, 14 Syria, military intervention in, 165–6,
and income, 112, 113 168
Starrs, S., 189, 190 systemic activism, promoted by
state capitalism, 39–44, 179, 192, United States, 26
195n2(ch3)
in Brazil, 54, 55 Tainhe-1, 184–5
and capitalist development, 62–3, Taiwan
171 consumption in, 80
in China, 2, 3, 4, 17–18, 168–9 export/GDP ratios of, 80
in Russia, 56 neoliberalism in, 60–1
see also neoliberalism newly industry countries in, 36
State Owned Enterprises (SOEs), 47 trade surplus with China, 87
state permeated market economies, tariffs, 35
43 in China, 39, 45, 47
states in India, 39, 50
bail-outs following 2008 financial in least developed countries, 39
crisis, 58 technology
in development of BRICs, 44–57 and competition, 62
and globalization, 188 dependency, 182, 183
and neoliberalism, 57–63 innovation
ownership, 60 and Beijing Consensus, 21, 22, 185
of Russia, 56 and rise of South, 174, 181–7
responsibility for supply of money, TED spread, 93
57–8 textiles sector
role in development of capitalism, liberalization of, 157
64 protectionist measures in, 163
Steinfeld, E., 184 Thatcher, M., 59–60
stimulus packages, in South, 116, The Spectator (magazine), 3
122 Theil index, 136–7, 137
stock market volatility, 92, 104 Third World, 35
strategic sectors, in China, 41–2, 46 after 1945, 152–6
structural adjustment loans, 35 and China, 159, 170
structured investment vehicles (SIVs), development, 175, 176
98, 99, 102 global economy changes and, 178
sub-contracting, 124–5 pro-industrialization policies of,
sub-prime mortgage market, 99–101, 176
104, 105, 107, 127 growth rate of, 111
Index 241

investment liberalization in, 178 unemployment


relation with second world in China, 48, 121, 192
development, 2, 3 in France, 147
Third Worldism, 6, 32, 152, 154, 173 in United States, 97, 109, 149
Thompson, H., 123 UN Food Price Index, 141
Tito, 153 UN General Assembly, 155
total factor productivity, 183 United Kingdom
total public debt, of South, 74 bail-outs in, 93
trade decline in late nineteenth century,
deficits, of United States, 118–19 119
diversification, 10, 115 labour productivity of, 119
free trade, 61–2, 144, 157, 170, 172 on military intervention in Syria, 166
General Agreement on Tariffs and national income share of top 1%
Trade, 157 income group in, 134
General Agreement on Trade and ratio of government spending to
Services, 185 GDP in, 59–60
intra-firm trade, 155 share in world trade, 119
liberalization, 27, 35–6, 41, 45 and United States, declines of, 81
and globalization, 70 United Nations
of manufactured goods vs. primary Conference on Trade and
goods, 67 Development (UNCTAD), 39,
North-North trade, 10 154–5
orthodox trade theory, 144, 148 Security Council (UNSC), 153
related investment measures, 47 Resolution 1441, 165
relationship, between China and Resolution 1973, 164–5
South, 160–3 Universal Declaration of Human
South-South trade, 2, 10, 85–90, Rights of 1948, 153
116–18, 160, 85–6 United States
surpluses, 72, 87 annual average growth rates of GDP
world trade see world trade and exports in, 69
trade/GDP ratios, 38–9, 146 consumption in, 106
of Russia, 56 crisis, as global crisis, 126–8
trade/merchandise value added ratio, debt, purchase of, 82
146 dollar see dollar (US)
Trade Related Intellectual Property exports of parts and components by
Rights (TRIPS), 157 East Asian countries to, 87–8
trade related investment measures federal debt of, 109
(TRIMS), 47 foreign capital invested in, 181
transfer pricing, 120, 155 foreign shareholdings of companies
transition economies, and foreign owned by, 190
direct investment, 13, 76 and globalization, 189–90
transnational capitalism, 145, 187 grains used to produce fuel ethanol
triadic patents-population in, 141–2
proportion, 185–6 housing market in, 106–7
Troubled Assets Relief Programme imports from China and Hong
(TARP), 92, 93 Kong, 106
liberal interventions led by, 164
Ukraine crisis in 2014, 167 national income share of top 1%
underdevelopment theory, 177, 179, 180 income group in, 134
242 Index

United States – continued Wal-Mart imports from China, 48,


non-financial firms involvement in 124–5
global commodity chains, 148 Waldron, A., 20
overseas capital of, 181 Wall Street, bail-outs of debts, 2, 92
power, future of, 118–26 Washington Consensus, 2, 11, 21, 22,
private and official net purchases of 29, 33, 44, 156
long-term securities by “one size fits all” policy, 40
foreigners, 123 Weber, M., 169
private savings, 72 welfare state, and neoliberalism, 60
shares of East Asian exporters to, 87 Wen Jiabao, 122
shares in foreign companies, 190 West
US-Chinese interdependence, 80–5 free market, 195–6n2(ch3)
unskilled workers industrialization in, 177
demand and wages of, 144 western aid, vs. Chinese aid, to
effect of rural poverty on, 48 developing countries, 159, 160,
and remittances, 149 168
US Consumer Price Index, 146 Williamson, J., 41
US Federal Reserve, 99, 104, 191 Wilson, D., 24–5, 38
lending during financial crisis, 109, Winkler, D., 148, 149
110 Wohlforth, W., 26
US House of Representatives, Wolf, M., 130
Sub-committee on Africa, Global World Bank, 25, 36, 59, 61, 142, 143,
Human Rights and International 156
Operations, 168 Globalization, Growth and Poverty
US National Security Strategy of 2002, report, 36–7, 38
20 loan to indebted countries, 34
US Treasury structural adjustment loans of, 35
bonds, 82–3, 121, 122 voting shares of developed world
foreign holdings of, 107 in, 164
post-crisis purchases by China of, World Economic Forum, 185
124 world income, share of South in, 79
securities, foreign holdings of, 123 world systems theory
and Beijing Consensus, 23
Vargas, G.D., 52 and international division of
variegated capitalisms, 43 labour, 145
varieties of capitalism approach, 43 world trade, 148
vertically integrated activities, in and financial crisis of 2007–08,
South and Southeast Asia, 86 108–9
imbalances in, 72
wages share of Germany in, 119
competition, and economic share of least developed countries,
insecurity, 149 39
gender gap, 136 share of South-South trade in, 85–6
income, share in China’s GDP, 81 share of United Kingdom in, 119
low wage economies share of United States in, 119
merchandise imports from, 147 World Trade Organization (WTO), 33,
trade in goods from, 148 157
shares in total national income, in membership of China, 47
India, 135 membership of Russia, 56
Index 243

World War I, and globalization, 146 yuan, value of, 82, 121, 122
World War II, manufacturing during,
66 zaibatsu, 62
Zakaria, F., 29