Catching up and falling behind, capitalism and global development – Michael Roberts
By Michael Roberts
Brazilian Marxist economists Adalmir Antonio Marquetti, Alessandro Miebach and Henrique Morrone have produced an important and insightful book on global capitalist development, with an innovative new way of measuring the progress for the majority of humanity in the so-called Global South in ‘catching up’ on living standards with the ‘Global North’.
In this book Marquetti et al argue that unequal development has been a defining characteristic of capitalism. “Throughout history, countries and regions have exhibited differences in labor productivity growth – a key determinant in poverty reduction and development – and although some nations may catch up with the productivity levels or well-being of developed economies at times, others fall behind.”
They propose a model of economic development based on technical change, profit rate and capital accumulation, on the one hand, and institutional change, on the other. Together these two factors should be combined to explain the dynamics of catching up or falling behind.
They base their development model on what Duncan Foley called the ‘Marx-bias’ and what Paul Krugman has called ‘capital bias’; namely that in capitalist accumulation there will be a rise in the organic composition of capital (rising mechanization compared to labour input) leading to an increase in the productivity of labour, but also a tendency for the profitability of accumulated capital to fall.
Surprisingly, however, the authors do not use Marx’s specific categories to analyse this development of capitalism globally. They adopt what they call is a model in the ‘classical- Marxian tradition’ (so not actually Marxist), which is composed of two variables: rising labour productivity (defined as output per worker); and falling capital productivity (which is defined as output per unit of capital or fixed assets). The problem with this model is that the Marxist categories of surplus value (s/v) and the organic composition of capital (C/v) are now obscured. Instead, we have labour productivity (v+s)/v) and ‘capital productivity’ (v+s/C)). Cancelling out v+s, we get C/v or Marx’s organic composition of capital.
In Marx’s theory of development, the key variable is the rate of profit. Put in its most general terms, if total assets grow, due to the labour-shedding nature of new technologies, employment grows less (or even falls) than the growth in total assets (C/v rises). Since only labour produces value and surplus value, less surplus value (s/v) is generated relative to total investments. The rate of profit falls and less capital is invested. Thus, the rate of change of the GDP falls.
To me, it seems unnecessary to use their particular measures over Marx’s own categories, which I think provide a clearer picture of capitalist development than this ‘classical-Marxian’ one. At one point, the authors say that “The decrease in capital productivity in the follower country reduces the profit rate and capital accumulation.” But using Marx’s categories should lead you to say the opposite: a falling profit rate will reduce capital accumulation and lower ‘capital productivity’.
Nevertheless, it is these two measures that the authors measure, using the fantastic Extended World Penn Tables that Adalmir Marquetti has perfected over the years from the Penn World Tables. “The dataset we employ is the Extended Penn World Tables version 7.0, EPWT 7.0. It is an extension of the Penn World Tables version 10.0 (Feenstra, Inklaar and Timmer, 2015), associating the variables in the data set with the growth-distribution schedule. The EPWT 7.0 allows us to investigate the relations between economic growth, capital accumulation, income distribution, and technical change in the processes of catching up and falling behind.”
Using these two measures the authors confirm that the ‘Marx-biased’ pattern of technical change of capital-using and labor-saving occurred in 80 countries. The authors then compare their two measures of ‘productivity’ and argue that economies can ‘catch up’ with the leading capitalist economies, with the US at the head, “if accumulation rates are higher in the follower country, leading to a reduction in disparities in labor and capital productivities, the capital-labor ratio, the average real wage, the profit rate, capital accumulation, and social consumption between countries.”
The authors’ model argues that capital productivity will tend to fall as labour productivity rises for all countries. Countries with lower labor productivity tend to exhibit higher capital productivity, while countries with high labor productivity tend to have lower capital productivity.
The ‘follower’ countries (the Global South) will generally have higher profit rates than the ‘leader’ countries (the imperialist Global North) because their capital-labour ratio (in Marxist terminology, the organic composition of capital) is lower. Marx too reckoned that a less developed country has lower ‘labour productivity’ and higher ‘capital productivity’ than the developed one. However, he described it as: “the profitability of capital invested in the colonies … is generally higher there on account of the lower degree of development.”
Not surprisingly, the authors find that the capital-labour ratio and labour productivity have a positive correlation. “For countries with low capital-labor ratios, there exists a concave relationship between these variables. Furthermore, the fitted lines illustrate a movement toward the northeast between 1970 and 2019, indicating that countries have been increasing their capital-labor ratios and labor productivity along the path of economic growth.”
As these countries try to industrialise, the capital-labour ratio will rise and so will the productivity of labour. If the productivity of labour grows faster than in the leader countries, then catching up will take place. However, capital productivity (and more important to me, the profitability of capital accumulation) will tend to decline and this eventually will slow the rise in labour productivity. In a joint work by Guglielmo Carchedi and me, using Marxist categories, we also found that the dominated countries’ profitability starts above that of the imperialist ones because of their lower organic composition of capital BUT also “the dominated countries’ profitability, while persistently higher than in the imperialist countries, falls more than in the imperialist bloc.”
The authors also identify the trajectory of the relative profitability of capital between the leaders and the followers in the process of development and the importance of this in ‘catching up’. “The advantages of lower mechanization in follower countries, implying in smaller labor productivity and higher capital productivity and, therefore a higher profit rate, begin to erode when capital productivity declines more rapidly than labor productivity increases. It indicates that the follower country is gradually losing its backwardness advantage as the disparities in profit rates and incentives for capital accumulation diminish relative to the leading country, potentially jeopardizing the catching-up process.”
What this tells me is that many Global South countries will never ‘bridge the gap’ on labour productivity and thus on living standards because the profitability of capital in the Global South will quickly dissipate compared to the Global North. This is what we found in our study: “Since 1974, the rate of profit of the imperialist (G7) bloc has fallen by 20%, but the higher rate of the dominated bloc has fallen by 32%. This leads to a convergence of the two blocs’ profit rates over time.”
Through their model, the authors were able to analyse the dynamics of the catching up process. They found that “there is no consistent pattern of catching up, about half of the sample fell further behind. The increasing data spread as the labor productivity gap and the distance from the leader expanded suggests that while some countries benefit from their backwardness, others in a similar situation do not take advantage of it. “
Asia was the continent with the highest number of successful countries in catching up, in contrast to Latin America which generally failed to make much progress. Many Eastern European economies also experienced ‘falling behind’ while African countries in general “still suffer from the consequences of decolonization” – or to be more accurate, I think, from previously lengthy and vicious colonization.
What this shows is the importance of institutional factors in the development process – which the authors correctly emphasise. “The interplay between institutional organization, on one side, and how technical change and income distribution affect the profit rates, which is a key determinant of capital accumulation and growth, on the other, is crucial in addressing the fundamental question of how developing countries can initiate and maintain rapid labor productivity growth over time.”
And here we come to an important conclusion in relation to the theory of imperialism in the 21st century. Marx once said that “the country that is more developed industrially only shows to the less developed the image of its own future.” The book’s economic model aligns with Marx’s view that underdeveloped countries should follow the path of technical change set by developed capitalist nations. But as the authors recognize “this trajectory often leads to a decline in the profit rate and, therefore, a decrease in the incentives for investment and capital accumulation. How to circumvent this problem is one of the central issues that a national development plan must face.”
Without strong state intervention, the contradiction between a falling rate of profit and increasing the productivity of labour cannot be overcome. As the authors put it “This issue is observed in many middle-income trap countries. In these cases, state intervention becomes essential, expanding investment even as the profit rate declines, as in China.” Exactly. China’s success in catching up, which so frightens US imperialism now, is down to state-led investment overcoming the impact of falling profitability on capital investment.
In recognizing this, the authors strangely refer to the “Keynesian proposition of socialization of investment, contrasting sharply with the policies pursued by most Latin American countries during neoliberalism, when there was a decline in investments by the state and public enterprises.” Apparently, the authors seem to suggest, if Latin American governments had adopted Keynesian policies, they would not be locked into the so-called ‘middle income trap’ but instead be catching up like China. But China is not a model of Keynesian ‘socialised investment’ (which, by the way, Keynes never promoted in his economic policy prescriptions); instead, it is a model of development based on dominant public ownership of finance and strategic sectors and a national plan for investment and growth (something Keynes vehemently opposed), with capitalist forces relegated to following not controlling.
Indeed, as the authors say: “the aspects discussed above point to the fundamental relevance of state capacities as the primary locus where strategies and conditions for industrialization are conceived and implemented. Unlike the market, which allocates resources primarily to maximize profits without guaranteeing national development, the state remains, in the XXI Century, the political and economic entity capable of intentionally driving industrialization.” And they point out that “China increased its investment rate, even in the face of declining profitability ….. China has demonstrated a capacity to adapt to developmental challenges, suggesting that the labor productivity gap between China and the US, even if at a lower velocity, will continue to decline.”
The reality is that in the 21st century, catching up is not happening for nearly all countries and populations of the ‘Global South’. Take the so-called BRICS. Only China is closing the gap on per capita GDP with the imperialist bloc. Over the last 40 years, South Africa has fallen further behind, while Brazil and India have made little progress.
The authors provide us with a startling statistic. In 2019, the average worker in the Central African Republic, one of the poorest countries worldwide, produced 6.8 dollars per day when measured at 2017 purchasing power parity. In India, the average worker produces 50.4 dollars daily, while in the United States, the average worker produces 355.9 dollars. “The rapid expansion of labor productivity is a fundamental step in reducing poverty and improving the well-being of the poor population. However, it has been an enormous challenge for backward nations to achieve high growth rates in labor productivity and catch up with the developed countries.”
- This article was originally published on Michael Roberts’ blog The Next Recession on 17 July 2024.
- Michael Roberts is an economist and author – you can follow his work on his blog, as well as on Facebook and YouTube.
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