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by Róbinson Rojas (1999)

The world economy today is a multidimensional system within which
factors of production ( capital and labour ) move according to
decisions that are made by transnational agents ( transnational
corporations ) operating in oligopolistic markets.

Trade flows, capital movements, inward and outward foreign direct
investment, technology flows, and labour movements are all regulated
by transnational agents operating in oligopolistic markets.

The world economy joins industrialized societies and less developed
societies in a web built by the main agents dominating these
oligopolistic markets where in less developed societies the
relationships between EXTERNAL and INTERNAL FORCES form a
COMPLEX WHOLE whose structural links are not based on mere external
forms of exploitation and coercion, but are rooted in coincidences
of interests between local dominant classes and international ones,
and, on the other side, are challenged by local dominated groups
and classes ( see Cardoso and Faletto, "Dependency and Development
in Latin America", and Rojas, "Latin America: Blockages to

Because of the above, to understand the political economy of
developing societies, we must study first the internal dynamics
of the free-market system, better known as "capitalist system".

On September 15, 1997, United Nations Conference on Trade and
Development -UNCTAD- released its Trade and Development Report 1997.
That reports summarizes the main features of the world economy
since the early 1980s in a way that is very useful for focusing
this lecture.

UNCTAD characterises the world economy as follows:

 A) increasing integration through the unleashing of market forces
 B) increasing social and economic divisions among, and within,
 C) mounting evidence that slow growth and rising inequalities
    are becoming more permanent features of the world economy

UNCTAD's report documents SEVEN "troublesome" features of the
contemporary global economy:

1) growth is too slow, whether to generate sufficient employment
   with adequate pay or to alleviate poverty

2) gaps between developed and developing countries, as well as
   within the latter, are widening steadily  (see BOX 2)

3) the rich have gained everywhere...and not just in comparison
   to the poorest sections of society; "hollowing out" of the
   middle-class has become a prominent feature of income
   distribution in many developing and developed countries

4) finance has been gaining an upper hand over industry, and
   rentiers over investors ( see BOX 3)

5) the share of income accruing to capital has gained over that
   assigned to labour

6) increased job and income insecurity is spreading

7) The growing wage gap between skilled and unskilled labour is
   becoming a global problem

In a nutshell, states the report, "rapid liberalization has
delinked finance from trade and investment" creating huge economic
unbalances and leading to "an increased concentration of wealth
in the hands of a few" which "is associated with stagnant
investment, rising unemployment and reduced pay"...

Why all of this is happening at the same time that the free-market
system is becoming more free? The capitalist system is
becoming more efficient, that is. 

UNCTAD attempts an answer saying that "contrary to much current
economic thinking, increased global competition does not
automatically bring faster growth and development"..."nor do growth
and development automatically bring about a reduction in inequality".

And emphasizes: "no economic law exists that will make developing
economies converge automatically towards the income levels of
developed countries if they only open up".

And the above is because "growth and income distribution both depend
on how PROFITS are managed"...and, of course, PROFITS drive growth
in a market economy". Thus, "there are links between profits, income
levels and investment" in today's globalizing world.


The main assumptions of the capitalist system are as follows:
- whatever the size of the population, there are not enough
  resources for everybody ( the scarcity principle. See
  R. Rojas, "Notes on economics: assuming scarcity")
- therefore, an "allocating" device must be put into place. That
  device is the market
- the market makes possible that resources are enjoyed by those
  who can buy them
- those who cannot afford the "market price" of goods and
  services are excluded from the system as "inefficient agents"
- to ensure production maximization of profits is given as
  the aim of the system
- from the above it follows that WHAT to produce, HOW to produce
  and FOR WHOM to produce will be decided by those who attempt
  maximise profits (the owners of capital, that is)


To understand more the philosophy of the capitalist system let us
put the following example, abiding by the rules of the free-market

--price per unit of output will decrease from 10 to 1
--each unit of labour will produce 1,000 units
--profits will be 10 percent of total revenue (price x units)

Number of Units    Price    Total   Total   Remainder
workers   produced per unit revenue profits per worker
   1       1,000     10     10,000   1,000   9,000
   2       2,000      9     18,000   1,800   8,100
   3       3,000      8     24,000   2,400   7,200
   4       4,000      7     28,000   2,800   6,300
   5       5,000      6     30,000   3,000   5,400
   6       6,000      5     30,000   3,000   4,500
   7       7,000      4     28,000   2,800   3,600
   8       8,000      3     24,000   2,400   2,700
   9       9,000      2     18,000   1,800   1,800
  10      10,000      1     10,000   1,000     900  

In this model maximization of profits happens when only
fifty percent of potential output is produced. Therefore,
maximization of profits is in contradiction with
maximization of output.

In this model employment will stop at 5 workers, leaving
5 excluded from the production system as "inefficient

In this model the "remainder per worker" decreases with 
increases in output leading to an ever increasing gap
between levels of profits and wages. Leading to an ever
increasing polarization in distribution of income.

Making our model a bit more complex (introducing the law
of diminishing returns, productivity, etc), we can conclude that
the internal dynamics of the capital system behaves as

- employment grows at a slower pace than unemployment. The
  free-market system creates more and more redundant population,
  that is. ( see tables in The Robinson Rojas Archive)

- there is a long trend that pushes profits and unemployment
  in the same direction.

- to maintain such a polarizing system of production, political
  arrangements must be a mix of authoritarian and democratic
  procedures, where most of the democracy will be enjoyed by
  owners of capital and most of the authoritarian rules will be
  suffered by the non-owners of capital.

- The instances of exploitation and oppression will be present in
  the national dimension and the international dimension.

The adoption/imposition of the free-market system worldwide has
dramatic effects on the following areas of development:
                        Poverty reduction
                        Unequal social relations
                        Environmental protection
                        Human development
                        Patterns of participation
                        Institutional development

And those effects can easily lead to unwelcome types of economic
grow such as:
   1.- JOBLESS GROWTH: the overall economy grows, but fails to
                       expand employment enough
   2.- RUTHLESS GROWTH: the rich get richer, and the poor get
   3.- VOICELESS GROWTH: the economy grows, but democracy/empowerment
                         of the majority of the population fails to
                         keep pace
   4.- ROOTLESS GROWTH: cultural identity is submerged or deliberately
                        outlawed by central government
   5.- FUTURELESS GROWTH: the present generation squanders resources
                          needed by future generations.
   6.- DEPENDENT GROWTH: the economy grows, but as an appendage of 
                         transnational capital, fracturing societies 
                         socially and economically
                         (see R. Rojas,"Latin America: the making
                          of a fractured society" )


1.- BOX 2                                               Back to text
Share of regional GDP as percentage of total GDP -172 market economies)
                                1980      1985      1990      1992
   TOTAL OECD [21]            77.408    78.955    82.083    82.536
   TOTAL WEST AFRICA[23]       1.387     1.084     0.479     0.425
   TOTAL E&S AFRICA[27]        1.413     1.071     0.947     0.876
   TOTAL N. AFRICA[5]          1.293     1.274     0.828     0.719
   TOTAL M. EAST[14]           4.135     3.863     2.195     1.800
   TOTAL S. ASIA[8]            2.203     2.460     1.919     1.485
   TOTAL E. ASIA&P.[27]        3.302     3.749     4.297     4.837
   TOTAL LATINAM[21]           7.188     6.126     5.470     5.540
   TOTAL THE CARIB.[20]        0.396     0.417     0.321     0.270
   TOTAL DEV. EUR.[6]          1.276     0.999     1.461     1.511
   TOTAL MARKET ECON.[172]   100.000   100.000   100.000   100.000
                                1960      1965      1970      1975
   TOTAL OECD [21]            82.082    81.798    82.219    79.435
   TOTAL WEST AFRICA[23]       0.809     0.814     0.887     1.143
   TOTAL E. & S. AFRICA[27]    1.627     1.487     1.371     1.380
   TOTAL N. AFRICA[5]          0.743     0.809     0.854     1.028
   TOTAL M. EAST[14]           0.978     1.544     1.704     3.143
   TOTAL S. ASIA[8]            3.834     4.027     3.082     2.411
   TOTAL E. ASIA & P.[27]      1.974     1.688     2.031     2.555
   TOTAL LATIN AMERICA[21]     6.160     6.316     6.259     7.048
   TOTAL THE CARIBBEAN[20]     0.396     0.410     0.431     0.420
   TOTAL DEV. EUROPE[6]        1.397     1.107     1.162     1.436
   TOTAL MARKET ECON.[172]   100.000   100.000   100.000   100.000
Click here for complete table 1960-1975
Click here for complete table 1980-1992
3.- BOX 3                                         Back to text
Most of speculative investment is made through currency trading.
In 1995 $ 1.2 trillion of foreign exchange swapped hands in a 
typical day. That is roughly 50 times the value of world trade in
goods and services.

In the early 1970s, prior to the liberalisation of the world's
capital markets, the value of currency trading was only six times
greater than the value of real trade.

If we take 1973 as 100, we have the following:

                        1973     1983    1995
World Trade              100      300    1,000
Foreign exchange trade   600     6100   48,000
July 1998