The Global Economic System

I. Wallace

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134887217
• Edition: 1
• Topic: Physical Sciences
• Subtopic: Geography
• Index: Geography

The author provides a treatment of world economic geography as a whole. He sets out the historical context of the modern world along with the principal philosophies that have shaped our study of it, and identifies the importance of the biophysical environment as well as cultural and political settings for economic activity.

1 The global economy: orientations

Introduction

One of the most significant characteristics of the contemporary world is that the economic prospects of nations, regions, and even individual communities are fundamentally interrelated. Investment decisions made by foreign firms, the currency devaluation of a distant government, or the consequences of drought in another continent can all affect the livelihood of men and women thousands of kilometres away. In this sense at least, the concept of a global economic system is not hard to grasp.

For as long as people have traded goods between different regions, which takes us well back into prehistory, societies have experienced some degree of economic interdependence, and of the vulnerability to external events which it entails. But for centuries, the majority of the world’s population was engaged in meeting its subsistence needs within localized, essentially self-sufficient societies (see ch. 2). The evolution of an economy based upon the production and trade of marketed commodities was gradual. It began to emerge in Europe in the 16th century and reached fully global proportions by the early 20th century. Even the non-market-based command economies of the Soviet variety (see ch. 9), which appeared after 1917, are increasingly linked into international markets. The speed and intensity of change within the global economic system have greatly increased since the early 1970s. As a result, it is more important than ever to understand the dynamics of economic interdependence and their impact in different parts of the world. That is essentially what this book sets out to explain.

The capitalist world-economy

Capitalism

The evolution of the global economic system has been interpreted by Wallerstein (1976) as the emergence of the ‘capitalist world-economy’. As Marx defined it, capitalism is a specific mode of production: a set of institutionalized practices within which human beings work to provide their material needs. The term is not narrowly ‘economic’, in the sense of referring only to mechanisms of resource allocation: it treats economic activity as an inherently social enterprise, governed by political and legal regulations which embody a particular set of cultural values. Historically, capitalism has flourished in societies which have embraced it as the economic basis of individual freedom. Capitalist societies are marked by a strong commitment to private property ownership, and by limited acceptance of government interference in the decisions of individuals to allocate resources (including their own labour) on the basis of the values which markets (impersonal mechanisms of exchange) set on them.

In comparison to other modes of production (reviewed in ch. 2), capitalism is distinguished by three characteristics: its expansionary tendencies, its uneven results, and its enduring cultural appeal. The expansionary tendencies stem from the basic logic of a capitalist economy: the ‘actors’ (whether individuals or transnational corporations) constantly aim to accumulate capital derived from their business. One route to this goal is to expand the geographical area within which transactions are carried out. Another is to widen the sphere of social life within which markets operate (so that, for instance, care-giving moves out of the home and into commercial institutions). A third thrust is to promote scientific discovery and technological innovation as a means of harnessing new knowledge to commercial ends.

The unevenness of capitalist economic development is also multidimensional. Geographically, it is marked by the emergence of differentiated types of activity and different levels of prosperity in different areas, at global, national, and regional scales. How far these differences are ‘disparities’, created by the functioning of the capitalist economy (which many of them certainly are), and how far they are the undevised outcome of spatial variations in environmental conditions or contrasting cultural histories is a focus of theoretical disagreement (see ch. 10). Nevertheless, the dynamics of economic and political interaction which sustain or erode these interregional inequalities are captured in the concept of ‘core-periphery relations’, which Seers (1979a, p.xiii) argues is ‘shorthand for a set of structural relationships’ which link powerful core regions to weaker peripheries.

The temporal unevenness of capitalist development is evident in the cycles of growth, of varying duration and suggested cause, which economic historians have identified. Of particular significance for interpreting the recent evolution of the global economic system are the Kondratieff ‘long waves’, which have appeared since the Industrial Revolution (Fig. 1.1). Controversy surrounds their measurement and explanation, but the suggestion that they be regarded as ‘distinct “modes of growth” of the total [social] system’, in which decline is associated with ‘a serious mismatch between the techno-economic subsystem and the socio-institutional framework’ (Perez 1985, p. 36), indicates the complexity of forces producing them.

Figure 1.1 Kondratieff Waves in the economy of the USA, 1780-1980.
Source: Media General Financial Services Inc., Richmond, Va., 5 June 1974.

Marxist interpretations link the Kondratieff waves to the inherent dynamics of capitalist economies (Mandel 1980). Recession sets in as a natural consequence of the declining profitability of production. Overinvestment by competing firms, each attempting to capture larger markets during periods of expansion, and the success of wage-earners in increasing their share of gross revenues when business is buoyant eventually lead to excess (under-utilized) productive capacity and uncompetitive labour costs. Redundancies and bankruptcies mark a period of intensified competition, from which surviving firms emerge ‘leaner and meaner’, with a more profitable configuration of production establishments and labour costs to supply the prevailing level of market demand. It is crucial to recognize that this process does not proceed uniformly among firms, industrial sectors, regions, or national economies. The recovery of economic growth, which is by no means automatic, is associated with a new round of profit-enhancing innovations, embodied in industries whose locational preferences invariably differ from those of more traditional branches of production (see ch. 8).

Emphasis on the revolutionary impact of technological innovation, as its effects spread throughout the economy, underlies the major non-Marxist explanations of long waves (Freeman 1987). The first Kondratieff expansion phase (approximately 1790–1815) was associated with the earliest technologies of the Industrial Revolution (mechanized textile production, improved iron production, and the steam engine). The fourth, following the Second World War, involved chemical, nuclear, and electronic technologies, together with rapid advances in aircraft performance. The fifth expansion, whose emergence Hall (1985) identifies, highlights the rôle of microelectronics (in such areas as computing, telecommunications, and industrial process control) and biotechnologies in transforming the economy.

The cultural durability of capitalism, despite the dehumanizing tendencies of unfettered market forces, has been explained in terms of its association, not just with freedom, but with ‘progress’ (Goudzwaard 1979). The predisposition towards growth and openness to change which characterizes all ‘modern’ societies finds broad and deep-seated acceptance; not least because it has promoted that technological mastery of the natural environment which underlies the high standard of living of the industrialized Western nations. To recognize this is not to deny the force of cultural and ethical critiques of capitalism, nor of sceptical appraisals of its economic ‘benefits’ (see ch. 12). However, it should help us to appreciate why most contemporary state-socialist societies are facing identity crises arising out of internal demands for greater economic and political freedom, and for the greater affluence which is perceived to stem from it (see ch. 9).

The world-economy

Wallerstein (1976) identifies the distinguishing characteristics of the capitalist world-economy as follows. There are two meaningful categories of socio-economic system. One consists of localized, self-sufficient groups which are not part of a hierarchical and geographically extensive system that demands some share of their human and material resources. Many ‘traditional’ societies were of this nature. The second category, which he terms ‘world-systems’, comprises societies which are geographically extensive and are specifically ‘defined by the fact that their self-containment as an economic-material entity is based on extensive division of labor and that they contain within them a multiplicity of cultures’ (1976, p. 230). There are two types of world-system; ‘world-empires’ and ‘world-economies’. The Roman Empire is a good example of the former, in that it embodied a single political system which controlled, with varying degrees of effectiveness, the entire area within its boundaries. The prime example of a world-economy is the contemporary capitalist economic system. Capitalism’s distinctiveness ‘is based on the fact that the economic factors operate within an area larger than that which any political entity can totally control. This gives capitalists a freedom of maneuver that is structurally based’ (Wallerstein 1976, p.230; italics added). The strategies and operations of modern transnational corporations (TNCs) demonstrate the reality of this freedom, which accounts for the tension frequently experienced in relations between them and territorially bounded national governments (see ch. 7).

Within the capitalist world-economy, as in all world-systems, power is unequally distributed among its constituent units, whether these are defined as nations, social classes, or economic institutions. Between states, the inequalities are expressed in core-periphery relationships embracing political, economic, and military dimensions. A core state which enjoys overwhelming dominance within the world-economy is termed hegemonic, and for most of its history the capitalist world-economy has been shaped by the policies of a hegemonic state, most recently by Britain in the 19th century and the United States of America in the mid 20th. The common thrust of these policies has been towards the globalization of market transactions:

Hegemony involves more than core status. It may be defined as a situation wherein the products of a given core state are produced so efficiently that they are by and large competitive even in other core states, and therefore the given core state will be the primary beneficiary of a maximally free world market. Obviously, to take advantage of this productive superiority, such a state must be strong enough to prevent or minimize the erection of external and internal political barriers to the free flow of the factors of production (Wallerstein 1980, p.38).

The capitalist world-economy is in a turbulent era at the close of the 20th century. The post-1945 hegemony of the USA has gradually dissolved, and no single state looks capable of taking its place. Military power may still be overwhelmingly concentrated in the USA (and the USSR), but efficiency in manufacturing production and financial leadership are more obviously associated with Japan or West Germany. Moreover, core-periphery relationships at a global scale are much less clearly defined than they were in the 1960s, when the distinction between the First (industrialized capitalist) World and the Third World was coined. The emergence of ‘high-income oil-exporting’ nations, such as Saudi Arabia, and of ‘newly industrializing countries’ (NICs), such as Taiwan, not to mention the increasing size and diversity of the Chinese, Indian, Brazilian, and Mexican economies, makes the global economy a much more complex and dynamic system. Core states which feel vulnerable to the shifts in economic power, as the USA and many European nations have in recent years, are more prone to adopt protectionist trade policies, restricting imports, than to favour global free trade. The many Third World nations dependent upon international trade to finance their development are invariably the first casualties of such measures.

The changing structure of the economy

The decline of US hegemony, and of the relatively orderly conduct of international economic relations which was imposed by it, is clearly one source of turbulence in the contemporary global economy (Hirsch 1976b). The changing technological and institutional structure of economic activity is another. Recent and fundamentally novel developments have been summarized in terms of three divergencies:

1. The primary-products economy has come ‘uncoupled’ from the industrial economy.
2. In the industrial economy itself, production has come ‘uncoupled’ from employment.
3. Capital movements rather than trade (in both goods and services) have become the driving force of the world economy (Drucker 1986, p.768).

We will review them in turn.

The rôle of resources

Despite scares in the 1970s that the world was running out of resources, popularized by the computer simulations of The limits to growth (Meadows et al. 1972) and given apparent support by the leap in raw material prices concurrent with the 1973 OPEC-induced oil supply crisis, it has become increasingly clear that most are in substantial oversupply relative to aggregate global demand (see p. 56). Between 1972 and 1985, world agricultural output rose by one third, with Africa the only continent not to share in the increase. By the mid-1980s, base-metal producers were receiving prices as low in real terms as those of the Depression in the 1930s. More recently, the chronic problems of subsidized agricultural overproduction in the European Community (EEC), the USA, and Japan have risen to the top of the agenda in international trade negotiations. It appears, in other words, that continued growth in the capitalist world-economy, albeit at a slower pace than during the 1950s and 1960s, requires proportionately fewer raw material inputs than in the past. Conservation, introduction of less resource-intensive technologies, and a structural shift in the industrialized nations from goods production towards services have all contributed to the ‘uncoupling’ of economic growth and the demand for resources.

Production and employment

In the period of sustained economic growth which followed the Second World War, the volume of world trade increased even faster than the rise in global output. Exchanges of manufactures between industrialized core nations grew particularly rapidly, and would have done so even more but for the proliferation of investment by TNCs, first from the USA and later from Europe, in foreign markets. Manufacturing investment in the larger developing countries was initially geared to import-substitution, typically resulting in uncompetitive products with limited markets. During the 1970s, however, a small group of Third World nations rapidly developed export markets for a widening range of manufactures. These NICs, spearheaded by the four Asian states of Hong Kong, Singapore, Taiwan, and (South) Korea, exploited changes in the world-economy to provide intense competition to labour-intensive industries in the core states of Western Europe and North America. Accelerated diffusion of sophisticated production technologies, improved transportation systems involving containerization and air freight, and the greater managerial capacity for international coordination of production (whether by subsidiary enterprises or through subcontracting) permitted by advanced computer and telecommunication technologies made this development possible. The combination of effective government, an entrepreneurial culture, low wages, but high labour productivity was the basis on which the Asian NICs vigorously expanded their exports to core markets (see ch. 7).

Within core nations, a major shift in the pattern of employment was already under way. Primary-sector employment, particularly in agriculture, continued to shrink in nations where it was not already down to about 5% of the working population. Manufacturing employment declined proportionately, but increased absolutely, until the early 1960s. Thereafter, in many industrialized countries, including the UK and the USA, it began an absolute decline despite continued growth in the volume of output (Fig. 8.3). These shifts were not immediately apparent, and rising levels of industrial unemployment tended to be explained exclusively in terms of import penetration. Measures to limit the growth of manufactured imports from NICs, notably the Multi-Fibre Agreement governing trade in textiles (Steed 1981), became part of a growing tend...

Table of contents

• Cover page
• Title page
• Copyright page
• Preface
• Acknowledgements
• List of tables
• 1: The global economy: Orientations
• 2: Society, the economy and the environment
• 3: Population and resources in an industrialized world-economy
• 4: The evolution of the modern world-economy
• 5: States and the global economic system
• 6: The corporation and the global production system
• 7: Transnational corporations in a world of sovereign states
• 8: The industrialized Western nations in a turbulent global economy
• 9: Industrialized state-socialist economies
• 10: The Third World: Varieties of under development
• 11: Challenges of Third World development
• 12: Prospects for the global economy
• Bibliography