Capitalism in the Global South (II)

By Sumanasiri Liyanage

Let me start by repeating the sentence I wrote down towards the end of the first part of this article that appeared last week. “I do not deny the possibility of capitalistic development in countries in the Global South as I view it as one among the vector of possibilities open to the countries of the Global South. In fact, many countries have made an attempt to develop their economies within the framework of capitalism, but only a few have succeeded in achieving the goal.” Returning to the concrete experience in Sri Lanka, I further wrote: “In 1977, when a new economic policy was introduced by the UNP Government headed by J R Jayewardene, the aim was to emulate  the Singaporean or South Korean path of economic development. The experiment of 40 years has failed miserably. 

How do we explain this failure? Has the growth been truncated by the continuous presence of a pre-capitalist mode of production? Many mainstream economists seem to think that capitalistic development was marred by not applying the correct dose of the reform package so that the operation of market fails to produce an optimum outcome.”

My principal argument was the development on capitalistic lines has not produced the expected results in Sri Lanka, not because there are imperfections in the operation of the market but because of the very nature of the operation of the market. Under capitalism the transfer of capital takes place in response to the behaviour of the rate of profit or as Marx said rate of profit of enterprise. Capital moves from low profit sectors to sectors of a higher level of profit. Hence, there is a tendency for an equalisation of the profit rate. In Sri Lanka, high profit rates exist in sectors like banking, trade, insurance and real estate. The relative profit rate in industries and agriculture is lower. Hence the growth of production was made sluggish because capital has moved to unproductive sectors. The existing tendency for the equalisation of profit was blocked not by economic factors but by the relative balance the political power, intra-class competition.

Recipe for Development 

To understand the failure of Sri Lanka, the success stories should be examined, analysed and their lessons should be learned. Nonetheless, it does not mean that the same path, the same policies may be emulated without critically examining concrete country experiences. In the twentieth century two separate groups of countries managed to develop their economies on capitalistic line. The first group of countries had an advantage of being closer to the capitalistic centre, Western Europe. These economies in the Nordic countries achieved capitalistic economic development in the early phase of the twentieth century. The second group of countries was in the East Asian Region and these countries took-off in the late 1960s. And the wind is still blowing. It is interesting to note that two groups of countries took significantly distinct trajectories in achieving capitalistic development. Nonetheless, certain similarities and parallels may be easily identified in spite of those seeming differences. 

Limiting the Operation of Law of Value

The first similarity is that both groups of countries had purposefully restrained the operation of the law of value that means in determining what is produced, how it is produced, how the product is distributed between productive use and unproductive use, who owns the product and what do they do with it outside the market with conscious action. In other words, the substantial portion of those decisions were taken in plan. Instead of giving primacy to Smithian invisible hand, they purposefully and intentionally make visible hand predominant and hegemonic especially in taking macro level decisions. Hence, the State played a prominent role in the both group of countries in spite of the fact that the way in which the State had operated was significantly different. While the State in the Nordic countries followed the basic democratic norms in governance and developed institutional mechanism promoting democratic principles, the East Asian countries restrained the peoples’ democratic rights and followed an authoritarian paradigm of governance. The second model followed the dictum, the development first democracy later. Irrespective of this difference, the role of the State was more or less similar. 

The second similarity is that both groups of countries focused on the generation of surplus value, an accumulation of surplus into capital and the compression of wages. Here again, two different systems were adopted. While in the Nordic countries, a system of solidaristic bargaining was applied, the suppression of trade union rights and direct control of trade unions by the Government was the mechanism deployed in the East Asian countries.  A commitment to the reduction of wage inequality and to the welfare policy of providing basic goods and services to all as a right of citizenship were embedded into a system of solidarity bargaining. Nonetheless, the outcome is the same as both systems lead to a wage compression achieved through highly centralised wage-setting institutions.

Role of the State: not a Minimum State

The third similarity is State’s intervention in the process of capital accumulation and increased Government spending. In the Nordic countries Governments increase  Government spending on policies such as unemployment benefits, public housing and agricultural prices support. The State intervention in the East Asian countries, especially in South Korea was substantially different from that of the Nordic countries. As Ha-Joon Chang has recorded, Korea’s State sector is about twice as that of Argentina and five times larger than that of the Philippines in terms of its share in national GDP. The dramatic and interesting example of a successful public enterprise is the South Korean steel maker, POSCO, State enterprise fully owned and managed by the State. 

Now one may ask why many countries in the Global South failed to achieve capitalistic development even though there have been two different kinds of recipes to be followed. This is a highly controversial issue. We may give a myriad of answers to this question. The possibility does not mean it may invariably materialise. Let me conclude by saying that Sri Lanka has failed as it tried to enter the path of capitalistic development by superimposing the South Korean model because the socio-political situation in the country was qualitatively different. Sri Lanka thought the social welfarist model was expensive and costly. As a result, the model faced enormous conflicts at political and social levels that hinder economic development.   

(This is the second part of the text of the speech given to a group of Sri Lankans living in Australia, Europe and North America.) 

The writer is a retired teacher of Political Economy at the University of Peradeniya.