Trade and Poor Economies

TRADE AND POOR ECONOMIES TRADE AND POOR ECONOMIES Edited by Sheila Smith and John Toye FRANK CASS First publishe...

Author: John Toye

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TRADE AND POOR ECONOMIES


Edited by

Sheila Smith and John Toye

FRANK CASS

First published 1979 in Great Britain by FRANK CASS AND COMPANY LIMITED Gainsborough House, Gainsborough Road, London E11 1RS, England This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” and in the United States of America by FRANK CASS AND COMPANY LIMITED c/o Biblio Distribution Centre 81 Adams Drive, P.O. Box 327, Totowa, N.J. 07511 Copyright © 1979 Frank Cass & Co. Ltd. British Library Cataloguing in Publication Data Trade and poor economies. 1. Underdeveloped areas—Economic conditions 2. Underdeveloped areas—Foreign economic relations 3. Underdeveloped areas—Commerce I.Smith, Sheila II. Toye, John III. ‘Journal of development studies’ 382′.09172′4 HC59.7 This collection of essays first appeared in a Special Issue on Trade and Poor Economies of the Journal of Development Studies, Volume 15 No 3, published by Frank Cass and Company Limited. All rights reserved. No part of this publication may be repro duced in any form, or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior per mission of Frank Cass and Company Limited in writing ISBN 0-203-98813-2 Master e-book ISBN

ISBN 0 7146 3137 X (Print Edition)

Contents

INTRODUCTION: THREE STORIES ABOUT TRADE AND POOR ECONOMIES Sheila Smith and John Toye

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VENT FOR SURPLUS RECONSIDERED WITH GHANAIAN EVIDENCE Barbara Ingham

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COLONIALISM IN ECONOMIC THEORY: THE EXPERIENCE OF NIGERIA Sheila Smith

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TRADE CONCENTRATION AND EXPORT INSTABILITY James Love

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STRUCTURAL ASPECTS OF THIRD WORLD TRADE: SOME TRENDS AND SOME PROSPECTS G.K.Helleiner

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THE EXPORT PERFORMANCE OF MULTINATIONAL CORPORATIONS IN MEXICAN INDUSTRY Rhys Jenkins

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OLIGOPOLISTIC TACTICS TO CONTROL MARKETS AND THE GROWTH OF TNCs IN BRAZIL’S ELECTRICAL INDUSTRY Richard S.Newfarmer

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ECONOMIC INTEGRATION AND EXPORT INSTABILITY IN CENTRAL AMERICA: A PORTFOLIO MODEL Luis René Cáceres

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SIMULATION ANALYSIS OF AN INTERNATIONAL BUFFER STOCK FOR JUTE Walter C.Labys

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Introduction: Three Stories about Trade and Poor Economies by Sheila Smith and John Toye*

1. THREE TYPES OF THEORY AND POLICY

Development economists, when they discuss the role played by international trade in a country’s economic development, tend to tell one of three types of story. The first and oldest is a happy story which shows how the welfare of both (and by easy extension, all) countries which engage in trade is increased, even when one country is absolutely very rich and the other is absolutely very poor. The second, of much more recent vintage, is a dull and detailed story about the way in which differences in economic structure between countries bias the gains from trade in favour of the rich, technologically advanced and industrialised economies and against the poor, low-technology agricultural economies. The third story, more recent still, is tragic. It asserts that trade and economic specialisation have actually caused the underdevelopment of the periphery of the world by the very same processes that have developed the capitalist metropolis. The unhappy ending of permanent global polarity could only be rewritten if the international capitalist system were to be superseded. Each of these types of story usually comes with a ready-made set of policy recommendations. If trade makes both partners better off, obviously all policy makers should promote trade by dismantling tariff and non-tariff barriers to trade (except in a few very exceptional sorts of circumstance). Policymakers in developing countries should adopt liberal, open, ‘outward-looking’ commercial policies in order to exploit their comparative advantage in labour-intensive products. If, however, the distribution of the gains from trade is biased against poor, backward economies for structural and institutional reasons, policy-makers should focus their efforts on changing the international economic order in a way that eliminates these biases. But if commercial contact actually causes the underdevelopment of the periphery, then the obvious policy is to multiply the barriers to trade until each developing country has withdrawn into national self-sufficiency, or self-insufficiency, as the case may be. In general, recent trade literature shows the link between each type of theory and policy quite clearly. The massive series of volumes published by the Organisation for Economic Cooperation and Development, summarised by Little, Scitovsky and Scott [1970], and for the US National Bureau for Economic Research, presided over by Bhagwati and Kreuger [NBER, 1975], exemplify the link between the theory of comparative advantage and the advocacy of trade liberalisation. The work of Singer, [1950; 1974] and to a lesser extent Prebisch [1959], illustrates the link between theories of *Assistant Directors of Development Studies, University of Cambridge. The views and interpretations in this Introduction are solely the responsibility of the editors.

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structural differences and asymmetric trade gains, on the one hand, and policies for reforming the international economic order, via ECLA, UNCTAD and now the North-South dialogue, on the other. Finally, Samir Amin shows the characteristic link between ‘underdevelopment’ theorists and the policy of autarchy, at least as a prelude to international socialist cooperation [1974; 1976; 1977]. One should not exaggerate the rigidity with which each set of policies is linked to each type of story about the role of trade in development. Utilitarian marginalism is a fairly flexible system of thought, and one is not wanting to say that, in principle, it could not be made to reproduce the pessimistic conclusions of dependency theory, by altering a function here and a time-lag there: only that it usually does not. Again, the structuralists and the dependency theorists are sometimes seen embracing each other’s policies; but this must surely be attributable either to opportunism or to confusion, or to the fact that they share, in some cases, common intellectual origins. To a regrettable degree, even professional economists seem to choose one or other of these three broad policy attitudes on grounds of interest and inclination, and then operate within the fundamental assumptions of the appropriate type of theory. A more rational approach is to reexamine some of these assumptions in order to find out why the types of theory are mutually incompatible; and then to ask which assumptions are to be preferred as the more reasonable ones. 2. THE STORY OF MUTUALLY BENEFICIAL TRADE

The story of mutually beneficial trade rests on a number of quite distinct pieces of analysis, which are, on examination, incompatible with each other. This is both unsatisfactory and paradoxical, in that the conditions for mutually beneficial trade do not seem particularly difficult to specify in a purely static analysis. One would expect international trade to be mutually beneficial when it involves the products of localised natural resources, products for which the consumers of the two countries have different degrees of preference, products of localised skilled labour and products of manufacturing establishments which have achieved different economies of scale. Given the uneven distribution of metals, precious stones, oil and gas, soils and climate in relation to (often highly arbitrary) national boundaries, it would require very odd national consumption preference patterns for there to be no scope for mutually beneficial trade in minerals, foodstuffs and agricultural raw materials. Skills which cannot be quickly acquired, and differences in unit costs deriving from scale of operation, create scope for mutually beneficial trade in some industrial products and services. The original variant of the story of mutually beneficial trade, the theory of comparative advantage, should not be seen as an explanation of how trade comes about. Rather it should be seen as a reminder that opportunities for mutually beneficial trade can exist, and that static welfare losses will be incurred if these opportunities are neglected. The reminder can be shown to retain its validity even when there are large absolute differences in productivity between the trading partners in all commodities traded. The benefit is mutual because both countries can increase the total volume of consumables at their disposal by shifting inputs into the production of the commodity for which the ratio of domestic input costs to foreign input costs is lower. What we have here, then, is the analysis of static welfare gains from trade, on the assumption that resources are fully mobile within a country and completely immobile between countries. But there is nothing in this argument to the effect that every country must have a comparative advantage in some product (since conceivably the relevant ratios could be identical for all tradeable products), or to indicate whether any existing comparative advantage is natural—arising from,

INTRODUCTION: THREE STORIES

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say, climate or geology—or created historically—by the prior destruction of indigenous handicraft industries, or colonial development of mineral or agricultural mono-product economies, for example. Thus there is the danger that, in joining the chorus of praise for the theory of comparative advantage (‘beautiful’, ‘never…controverted’, Samuelson, 1970:647; Johnson, 1974:30) one is persuaded to overlook its severe limitations, both as an explanation of how comparative advantages arise, are lost or are taken away, and as a policy guide in a world in which resource mobility is low within poor countries and high between poor countries and rich ones. The second variant of this story, the Heckscher—Ohlin theory, attempts to give a specific account of how comparative advantages arise by rooting them in international differences in what are called ‘factor endowments’, their stocks of capital and labour at a given point in time. But this involves a change in assumption from those that underlie comparative advantage theory. Whereas the latter depends on the assumption of different techniques of production (which account for the large differences in absolute productivity between rich and poor countries) for any given product, the Heckscher—Ohlin theory begins by reversing this assumption, so that each commodity is produced by the same technique in each country [Robinson, 1974:8]. Differences in the factor-intensity of products, combined with stocks of capital and labour varying between countries, are then left to account for comparative advantages. It is on the strength of this reasoning that poor countries are recommended to specialise in labour-intensive products and trade their surplus of such products for imports of the rich countries’ capital-intensive goods. This reasoning has only to be set down for its weaknesses, both as an explanation of actual poor country/rich country trade and as a guide to which commodities ought to enter their trade, to become patent. Its persuasive force derives entirely from its exclusion by assumption of all the other relevant determinants of comparative advantage. Localised natural resources are excluded by restricting the meaning of ‘factor endowments’ to stocks of capital and labour. The cost advantages conferred by scale of operation are excluded by the assumptions of constant returns to scale, and of a level of technology that is independent of the average level of capital stock per man. Differential labour skills are excluded by assuming labour to be homogeneous. Differences in taste, which (leaving aside natural re sources) heavily influence which commodities are produced domestically, and hence which are available for export, are excluded by the assumption of identical tastes. Thus, even without introducing into the argument such substantial queries as whether prices in fact adjust in the way that the economists’ model of perfect competition predicts, or the effects of monetary institutions in modifying the interactions of the underlying real variables, the Heckscher—Ohlin theory appears to be no more than an elaborate tautology. In fact, even stronger assumptions than those already mentioned are required to underwrite its validity. The possibility of factor-intensity reversals (i.e. changes in which good is the capital- or labour-intensive one as capital and labour prices change) has to be ruled out; the degree of variation in the capital and labour endowments of the two countries must be restricted; and the analysis must be confined to only two goods—a third good, let alone an intermediate product that does not enter final consumption, cannot be incorporated [Johnson, 1958:28–30]. What was paradoxical about Leontief’s s finding that the United States’ exports were labour-intensive was not that it contradicted the Heckscher—Ohlin theory, but that it was received as a test of a theory that was in principle untestable. The third variant of the story of mutually beneficial trade, the idea of trade as a ‘vent for surplus’, again rests on different assumptions from those underlying comparative advantage analysis or the factor endowment theory. This time we revert to the assumption of differences in technology between the rich and the poor country, but combine this with the assumption that, before trade takes place,

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some productive resources in the poor country are unemployed. Trade is said to benefit the poor country because incomes are created thereby for the previously unemployed resources, incomes which must be more valuable than the leisure thereby sacrificed because the transition to exporting was made voluntarily. This type of analysis is discussed at length in the opening papers by Smith and Ingham, so that elaborate comment here would be superfluous. Suffice it to say that examination of the fine texture of the colonial history of Ghana and Nigeria seems to undermine the validity of the view that idle resources existed before trade, and that the switch towards agricultural export was a matter of voluntary choice rather than of the economic and political pressure of the colonial state. The happy ending of the story of mutually beneficial trade would therefore need very considerable dilution. While there are static welfare gains from specialising according to comparative advantage when internal resources are fully mobile, the general presumption that poor countries have a comparative advantage in goods with low capital/labour ratios cannot be sustained. Therefore, general recommendations that poor economies should specialise in labour-intensive exports are simple-minded or mischievous. Further, when trade opportunities do bring unemployed resources into voluntary employment, static welfare is obviously increased thereby. But the existing trade patterns between rich and poor countries cannot be interpreted as merely a result of this pleasantly painless transition to full employment of resources in the poor country. Indeed, the best documented examples of vent-forsurplus trade are of a significantly different version from that mentioned above: the only idle resource in this version is a poor country’s natural resource (e.g. Peruvian guano), which enters the poor country’s exports only because of an inflow of both foreign capital and foreign labour, and it’s exploitation creates nothing except the familiar export enclave [Levin, 1960]. Clearly this version of vent-for-surplus is not a story of mutually beneficial trade, but of structural biases in the grains from trade. 3. THE STORY OF STRUCTURALLY BIASED GAINS FROM TRADE

The theories of trade which suggest that the benefits of trade accrue disproportionately to rich countries not only recognise differences in technological level between rich and poor countries, but make these differences (and associated institutional dissimilarities) the pivot on which their arguments turn. In addition, they depart from the exclusive emphasis on static resource reallocation in order to consider dynamic or historical processes. For example, the natural resource version of the vent-forsurplus model cites institutional rigidities related to pre-capitalist technology to explain why domestic capital and labour fail to combine with particular natural resources in poor countries, and analyses the growth spurts of poor countries, export industries over the long run. The best known exponent of the view that gains from trade are biased against poor countries is undoubtedly Prebisch. Prebisch argued that the bias operates through a secular decline in the terms of trade of primary producers vis-à-vis those of manufactured goods producers. Such a decline is equivalent to long-period transfers of income from less developed to developed countries and is a result of the former’s failure to regulate trade in the right way. Empirically, the secular decline is not well established, but this failure results not so much from Prebisch’s admittedly inadequate choice of indicators as from the general difficulty of gathering reliable relevant statistics over the hundred years or so which the theory requires [Helleiner, 1972:20–22; Yotopoulos and Nugent, 1976:341–345]. In these circumstances it would be over hasty to dismiss the theory simply because of its weak empirical basis. Rather, suppose that, on the most exacting of definitions, a deterioration of primary producers’


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terms of trade can be demonstrated, and accept that this would be equivalent to an international transfer of income. How far do the explanations of secular decline which Prebisch puts forward provide a plausible theory of the determinants of the terms of trade? Prebisch gives his views of the effect of technical change on the terms of trade in a concrete context. Policies to improve the productivity of primary producers’ export industries are self-defeating, ‘as some of the fruits of such technical advance will usually be transferred…to the outer world’ in the form of lower primary product export prices: prices fall because labour in the LDCs is unable, because of population pressure, to take out its productivity gains in the form of higher wages—unlike labour in developed countries which benefits from strong unions and a monopolistic product market. As a remedy, protection of LDCs’ domestic manufacturing industry permits wages there and in the primary export sector to rise, and thus prevents the latter’s expansion beyond the point where marginal social benefit equals marginal social cost. There is empirical evidence [Salter, 1960:114–160–166–201] to suggest that (at any rate, before the introduction of ‘productivity agreements’) productivity gains in developed countries were not appropriated by the labour in the industry where they arose, but were diffused throughout the economy in the form of price reduction or slower price rises than would otherwise have taken place. Nor is there any reason to distinguish between developed countries’ export and non-export industries in this distributive process. It seems plausible that the developed countries are in fact distributing their productivity gains to their overseas customers, including the LDCs. If this is so, there is no longer any asymmetry between developed and less developed countries, and the bias in the world economy that chronically worsens poor countries’ terms of trade still awaits an explanation. What remains of the Prebisch thesis is a statement of the economic problems arising from a partially monetised labour market, from which is derived a familiar argument for tariffs. It is not correct, as both Prebisch and his critics [e.g. Flanders, 1964] suggest, that this argument rests on or is strengthened by the existence of over-population. The justification for intervention in trade, not necessarily by means of a tariff, is based on the premise of a primary products export sector which, if not checked, would tend to expand production beyond the point where marginal social benefit equals marginal social cost, because for social and institutional reasons labour in the primary products export sector is paid above its marginal social productivity. This is a situation which could arise no less in a sparsely than in a densely populated country. Moreover, although the analysis is cast in terms of a primary product export sector, the institutional arguments apply equally to any export sector which can draw on unlimited supplies of labour in the Lewis sense [Lewis, 1954]. The second important element which Prebisch introduced into the discussion were variables on the demand side, which may be labelled ‘tastes’. It is another of the assumptions of the simplified Heckscher-Ohlin model that tastes do not alter. Prebisch maintains that increasing world income will alter tastes, and that the changing pattern of demand can be predicted from estimates of different products’ income elasticities of demand. Since the income elasticities for poor economies’ exports are consistently smaller than for their imports, poor economies cannot grow at the same rate as developed economies without running into foreign exchange crises at fixed exchange rates—and exchange depreciation turns the terms of trade against the depreciator. Is this the explanation which Prebisch requires? The disparity between income elasticities of demand is said to be due to Engel’s law of food consumption—that households with smaller incomes spend a larger proportion of their income on food, and that as their income increases a smaller share of each marginal increment is spent on food. The food demand arising within the poor economies themselves may slow down the deterioration of food producers’ terms of trade, but will not arrest it altogether, because, even in Asia and the Far East, the

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income elasticity of demand for food does not equal, still less exceed, unity. Nonetheless, the quantitative importance of food should not be exaggerated: it forms only two-fifths of the poor economies’ total exports of primary products. Apart from food, the rich countries’ demand for raw materials is undermined by technical progress, which develops substitutes for the raw materials pre viously imported from primary producers. Thus the relative rate of growth of demand for imported raw cotton, natural rubber and cane sugar, for example, slackens as world economic activity expands. However, is the switch to synthetics a pure demand factor, equivalent to other changes in tastes? This view only makes sense given Prebisch’s very primitive concept of technical progress as a force both ‘disembodied’, i.e. not incorporated in any way in the only factor of production he allows, labour, and ‘exogenous’, i.e. not related to other economic variables such as costs, profits and output. Synthetics do not simply appear: they are substituted when market conditions make it profitable to do so. Nor are they immutable once introduced. Rising labour or other costs in their production may make the natural product again competitive. Of course, developed countries do establish domestic production of substitutes that is inefficient judged by world market prices, and then protect them by tariffs—for example, the US or EEC beet sugar industry. But this is best regarded as an example of the deleterious effects of economic nationalism, and not as an inevitable result of the process of income expansion. How will the demand for manufactures change as world income expands? There seem to be few reliable estimates of income elasticities for industrial goods as such. Intuitively, it seems likely that they are higher than those for food. Of more importance is the flexibility of the industrial production structure which allows switching away from those manufactures with low elasticities, which thus are long-run losers in the export market. In general, one can agree that Prebisch has been rightly criticised for his crude identification of poor countries with primary production, and rich countries with industrial and manufacturing production. In the context of the structure of world trade, this is misleading. Developed countries contribute a larger share by value of world exports of primary products than do the less developed countries. In addition, they take up a very much larger share of developed countries’ manufactured exports than do the poor economies. To regard a price fall for manufactures as a gain exclusive to poor economies involves an heroic simplification. It is immensely to Prebisch’s credit that, by stressing the need to examine the world’s real historical experience and dynamic factors like changes in technology and tastes, he attempts to escape from the pitfalls of simple static analysis. Yet he does not provide a proper dynamic analysis in its place. Too much of his thesis rests on institutional factors introduced without any look at their social and economic causation: technical change is introduced without its dynamic—e.g. the causes of its transmission, its countervailing and stabilising effects; and even in the most reasonable section, on demand influences, the equilibrating forces that would tend to arrest secular terms of trade decline are neglected. Apart from vent-for-surplus in its natural resources version and Prebisch’s analysis of the determinants of poor countries’ terms of trade, a third strand of structuralist analysis is provided by socalled ‘product cycle’ theories of trade [e.g. Vernon, 1966]. These theories hinge on an assumed technological and institutional gulf between rich and poor countries, as a result of which product innovation can be done successfully only in the former. Trade patterns are therefore determined in the field of manufactures by the vintages of particular products, the oldest having become standardised in production and so exported from poor countries to rich, and the most recent needing the technological equivalent of bespoke tailoring and so exported from rich countries to poor. This sort of theory explicitly recognises poor countries’ ability to export manufactures, unlike other structuralist theories


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which, in analysing the terms of trade, presume that they can export only natural resource or agricultural products, but it resembles these theories because, with the plausible assumption that bespoke manufactures carry a much higher profit margin than standardised products, it becomes another explanation of structurally biased gains from trade. The policy prescriptions which follow from structuralist analyses of international trade cluster around the central issue of finding ways of intervening in markets that will improve the terms on which poor countries trade, as compensation for the structural disadvantages which they suffer in international exchange. The proposals currently being put forward by UNCTAD and being discussed in the continuing North-South dialogue on a new international economic order consist of a scheme for a Common Fund to finance price stabilisation of ten core primary commodities and eight others; agreeing a code of conduct for multinational companies operating in poor countries (including such matters as the transfer of technology); securing reductions in tariff and non-tariff barriers to poor countries’ exports on a non-reciprocal basis, rather than by the agreed mutual reductions under the aegis of GATT; and increasing the volume of international finance available to mitigate the effects of balance-of-payments crises in poor countries. The discussion and negotiation of these proposals has produced a wealth of fascinating empirical information on the specific characteristics of particular commodity markets, on the abundance and ingenuity of non-tariff barriers in rich countries and on the operating practices of multinational firms. The snail-like pace at which the status quo is changed is only partly a reflection of the very dull and detailed nature of the negotiations. The lack of progress in many areas is partly also a reflection of the fact that information and ‘correct’ arguments are insufficient as a means of changing the trade policies of advanced capitalist countries. As has been argued elsewhere [Abdel-Fadil et al., 1977], ‘present arrangements reflect an existing balance of world power and give the third world as a bloc little opportunity for altering the balance of power at the international level. The bargaining position of third world countries depends also on a community of common interests which is not necessarily sustainable’ (pp. 211–12). The notion of common interests among underdeveloped countries is important in structuralist analysis and policy, but rests on the doubtful conception that the principal economic division of the world is between rich and poor countries, and that this economic division is reflected in a political division. The determinants of political positions cannot, however, be ‘read off’ from levels of economic development in this way; for example the regimes in Nicaragua, Central African Empire and Haiti have little in common politically with the regimes in Tanzania, Algeria, Mozambique and Angola; we cannot expect this heterogeneous collection of nation states to have common political positions in relation to aspects of international capitalism. On the other hand, two positive points may be made: first, the current negotiations for an NIEO may bring material improvments for certain groups within some underdeveloped countries, particularly for exporters of the core primary commodities; secondly, individual nation states have varying degrees of freedom of manoeuvre in relation to international trade and economic relations, both in isolation and as part of collectives; this freedom of manoeuvre cannot, however, be determined in the abstract. 4. THE STORY OF TRADE-INDUCED GLOBAL POLARITY

Marxist analyses of international trade, though analytically more heterogeneous than those in the comparative advantage tradition, tend to analyse trade within the context of world capitalism or imperialism. Samir Amin’s recent effort in this tradition is discussed here, not because it is taken to be

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the ‘best’ Marxist analysis of trade, but because it illustrates sharply some fundamental problems of analyses conducted at this generalised level [Amin, 1974; 1976; 1977]. Amin’s analysis of world capitalism is conducted in terms of two categories: centre and periphery [1977, ch. 5]. Capitalism at the centre developed on the basis of the expansion of the home market, whereas capitalism in the periphery was introduced from the outside: the economies of the periphery ‘are without any internal dynamism of their own’ [1976:279]. Furthermore peripheral capitalism is ‘distorted’ in three main ways: the distortion towards export activities (‘extraversion’); the ‘hypertrophy’ of the tertiary sector; and the distortion towards light branches of activity and the use of modern production techniques [1976, ch. 4]. As economic growth proceeds, features of underdevelopment—such as disarticulation, domination by the centre, etc.—are accentuated; autocentric growth is impossible, since the periphery is ‘complementary and dominated’ [1976:288]. According to Amin, economic relations between central and peripheral economies can be understood by means of the theory of unequal exchange [1977, Part 1V]. Amin’s version of the latter differs from that of Emmanuel [1972], with whom the theory is usually associated, in certain important respects. The essential elements of the theory, in Amin’s view, are the preeminence of ‘world values’; that is, in the world capitalist system, ‘social labour is crystallised in goods which have an international character’ [1977: 181]; and the universal character of capitalist commodity alienation, by means of the direct or indirect sale of labour power. Since capital is internationally mobile, the rate of profit tends to equality throughout the world, but since labour is internationally immobile, wages vary between countries. Hence the transformation of international values (the only meaningful ones) into international prices (again, the only meaningful ones) implies the transfer of value from some nations to others [1977:187]. Simply stated, unequal exchange is the exchange of goods whose production involves wage differentials greater than those of productivity. Brevity prevents examination here of many logical difficulties in these propositions, such as the use of the value-form, the glossing over of the problem of transforming values into prices and the assumption that identical production processes will generate equal organic compositions of capital despite variations in wages (and hence differences in variable capital). Even if a systematic relationship between prices and values could be established, however, many vital political and economic issues remain unilluminated by analysing trade exclusively in terms of unequal exchange. More generally, the logical status of Amin’s argument is unclear. Certain categories (centre and periphery) are defined as having certain characteristics; these characteristics are asserted to be determining; then it follows that all other characteristics are secondary, or results of membership of the category. Information presented by Amin, although impressive in its scope, is used to demonstrate the correctness of the theory; thus, the basis of selection of the information is given by the theory. In the event of information not demonstrating the correctness of the theory, resort is had to the ‘appearances—essences’ dichotomy, particularly the version which regards appearances of diversity as disguising an underlying unity [e.g. Amin, 1977:166–7]. Neither advanced capitalist countries nor the underdeveloped countries can be regarded as facing similar problems in relation to world markets, world financial institutions, etc. The problems economies face depend upon the structure of these economies and their particular location within the international capitalist system. Within the framework of Amin’s type of ‘universal theory’, discussion of particular economies takes the form of illustrations and exemplars of the validity of the universal theory itself, rather than advancing our understanding of those economies. Amin’s analysis, therefore, cannot provide an understanding of any particular economy and its relationship to the international capitalist system, since it denies the need to do so [cf. Cutler et al., 1977, II:243–254].


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The policy implications of Amin’s analysis can be summarised in two main points. First, underdeveloped countries have no freedom of manoeuvre in relation to world capitalism: ‘so long as the underdeveloped country continues to be integrated in the world market, it remains helpless…the possibilities of local accumulation are nil’ [1974; 131]. Second, as economic growth at the periphery occurs, so underdevelopment develops; therefore, only a radical and complete break with the world capitalist system will provide the conditions necessary for genuine development. To illustrate the style and strategy of Amin’s argument, it is worth quoting at some length his views on the possibilities of national financial independence: The creation of a national currency confers on the local authorities no power of effective control so long as a country’s inclusion in the world market is not challenged: even control of the exchange and of transfers does not prevent the transmission to the periphery of fluctuations in the value of the dominant currencies of the centre, nor does it prevent transmission to the periphery of the centre’s price structure. Money here, constitutes the outward form of an essential relation of dominance, but it is not responsible for this relation [1974:483]. Thus economic policy at the national level in a peripheral capitalist economy is ineffective; the only solution is a revolutionary break with the world capitalist system. Amin’s policy conclusions are based on a denial of national economies as units of analysis, a denial of the significance of differences between peripheral economies, and a denial that national economic policy is a legitimate arena of debate, dispute and political struggle. Yet the level of a national economy is a level at which crucial issues are determined which affect the conditions of operation of capitalism; these conditions vary between econ omies and have important effects on economic, social and political organisation. Some examples of issues which affect the conditions of operation of capitalism are the nature of multinational activity and policies towards multinationals, e.g. requirements concerning localisation of labour and training; local content requirements concerning inputs; taxation policies; disclosure requirements with respect to information; the level of long-term indebtedness and hence the relationship of a national economy to institutions such as the IMF, which significantly affects the scope for independent national economic policies; policies towards trade unions and the distribution of income and wealth, which can significantly affect the structure of demand and the composition of output. There are many ‘peripheral’ countries where the political forces for a socialist revolution are weak or nonexistent. Therefore areas of research, analysis and policy which concern the relationship of a particular national economy to the international capitalist system cannot be dismissed without disregarding the conditions of life for the majority in such countries in the short and medium term. There are some peripheral countries where the freedom of manoeuvre may be limited, others where it may be less limited, but this cannot be determined in the abstract. In any event, for socialists to dismiss such issues as irrelevant is irresponsible. One is not belittling the tragic possibilities of the contemporary socioeconomic world by suggesting that international trade is not the stuff of tragedy. On the contrary, such possibilities are done less than justice by analyses which rely on ‘aprioristic’ reasoning at a high level of abstraction. It would be better, as others have already suggested, to redirect investigation towards the dynamic of innovation and accumulation within the core capitalist economies, and to the different forms which the expansion of capitalist social relations have taken on the periphery [Brenner, 1977]. This might elucidate the hypothesis that this expansion produces a variety of particular deformations of international

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trade—forced specialisation, vulnerability to foreign economic control—but that the causes of these deformations do not lie within the realm of international trade itself. 5. RESEARCH RELEVANT TO POOR COUNTRIES’ TRADE PROBLEMS

The previous arguments imply that, while some variants of each type of theory suggest certain valuable insights into either the rationale for, or the historical determinants of, trade by poor countries, no one story preeminently compels rational assent. At the same time, a self-imposed and sceptical silence need not follow. No logical objection arises if, for example, historical analysis in a Marxist conceptual tradition is introduced to explain the structural differences between rich and poor countries which the structuralists take as their point of departure; if technological and institutional gaps are used to explain internal and international maldistribution of the benefits from trade; and if Ricardian comparative advantage is accepted as one of the elements that should enter into the planning of a country’s foreign trade, alongside long-run dynamic economic considerations and the objective requirements of national security. The prospects for intelligent eclecticism in trade theory are far from hopeless. Intelligent eclecticism is, however, at a great discount. Perhaps from a mistaken understanding of intellectual purity, or perhaps for less laudable reasons, it is more popular to project from the partial insights of each type of theory a total view which vociferously excludes the insights of the other types of theory. This produces prolonged and noisy disputes between antagonists who entirely fail to connect with each other’s arguments, plus a general tendency to assume that relevant empirical information is either already to hand or easily predictable from the chosen theoretical approach. In these circumstances, the appetite for new research into particular institutions, economies and processes gets blunted. By challenging the exclusivity of partial insights, one may hope to whet it again, so that the research papers collected in this volume may reach a more appreciative professional audience than might otherwise be the case. The call for ‘relevant’ research is, of course, a hackneyed one, while the claim that any given research is ‘relevant’ only provokes the question, ‘relevant to what?’. The papers in this volume are relevant to those aspects of trade policies which have proved, and still prove, most problematic to poor countries in the aftermath of formal political decolonisation (or in the case of semi-colonies, the withering away of informal political spheres of influence maintained by colonial powers). At formal independence, each poor country inherits a specific volume and pattern of trade (by commodity composition and by area). The policy question that immediately arises for it is, how much of this inheritance is the result of its former powerlessness rather than the facts of resource distribution, the indigenous structure of consumption and real transport costs? How much of the inherited pattern would it be advantageous to alter, to the extent that purely political decolonisation permits alterations to be made? It should be noted that the answer to the first question does not necessarily answer the second. Just because coercion was needed in the past to ensure that a particular kind of trade was undertaken, it does not follow that its discontinuance now must be advantageous: circumstances may have changed in the interim in a way that makes voluntary activities which previously depended on coercion. But making due allowance for such changes in circumstances, it is a reasonable rule of thumb that those exports and imports which were promoted/hampered by the legislated monopolies, tariffs and tax/subsidy pressures of the colonial state are good candidates for omission/inclusion in a post-indepencence pattern of trade.


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Thus the erosion of colonial and imperial trade relationships during the post-colonial period (which in the case of India, for example, has been heavily lamented [Lipton and Firn, 1976]) seems to be not only predictable, but also desirable. This is so, unless one regards the previous trade links as entirely the reflection of an underlying harmony of interests, and, more generally, colonialism and imperialism as forms of voluntary association between peoples entered into for their mutual benefit. The belief that the trade patterns that existed at independence were entirely ‘natural’ and founded on economic rationality has been assiduously cultivated, and lent support at the academic level by certain types of economic theory. Whatever the intentions of the authors of these economic theories, their political thrust has been to rationalise the colonial past and to prolong the economic relationships which were created under colonialism. In order to neutralise this view, theories of economics which are applied as explanations of colonial history need to be confronted with historical research itself, so that the determination and diligence with which the colonial and imperial economic order was created can be documented. Research in this spirit, represented here by the opening papers by Smith and Ingham, is a necessary prerequisite for the selective dismantling of colonial patterns of trade. One of the most economically powerful policies of the colonial era was the deliberate management of labour supplies. Alongside the mass migration of European labour to temperate zones, which soon adopted racially discriminatory immigration laws, colonial authorities made extensive and successful efforts to direct a large migration of Indian and Chinese indentured labourers to colonial plantations in the tropics [Tinker, 1974]. Given the superior yields of foodgrain per acre of European labour in temperate areas compared with Indian and Chinese labour in the tropics, temperate primary products enjoyed an apparently natural, but in fact engineered, price advantage of considerable magnitude, which was related not only to their superior techniques of production, but also to differences in productivity arising from soil and climate. In addition, for various reasons, cash crops which could grow on either tropical or temperate land were produced largely by temperate farmers. Under these circumstances, the range of commodities that could become export crops of the poor countries was a very narrow one, so that most poor countries relied for their export earnings mainly on overseas sales of two or three products [cf. Lewis, 1978:14–20]. This problem of export concentration is the problem of having large components of foreign exchange earnings subject to a few particular risks, natural and political. A policy of diversifying exports was widely espoused by post-colonial governments as a means of spreading their risks, reducing short-term fluctuations in export receipts and attempting to gain the benefits of specialisation in the only sector in which they amount to more than a row of beans—the modern manufacturing sector [Singh, 1978]. A sizeable literature has grown up around the question whether the alleged link between export concentration and instability of export receipts in poor countries is consistent with the statistical evidence. The latest discussion of this question is the paper here by Love, which claims that in his sample of 52 poor countries, the commodity which contributed the largest share of export receipts also contributed more than proportionately to the instability of export receipts. The sense of this finding goes against the weight of the accumulated empirical studies on the association between export concentration and export instability. The consensus of these studies has been that the association cannot be empirically established. Love has, however, identified weaknesses in the standard approach of that literature and decided to abandon international cross-section regression analysis in favour of a fresh approach focused on the experience of individual countries. If this approach withstands the critical scrutiny of the many expert statisticians interested in this problem, it will be an important contribution to our understanding of the structural problems of poor countries’ trade sectors. It will also provide extra support for export diversification policies in many poor countries.

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The attempt by poor countries to diversify their exports into modern manufactures forces them to confront the phenomenon of the large, multi national firm. In their present incarnation, they present themselves as bearers of the gifts of capital, technology and management skills, who will combine them with local labour into exports of manufactures. Helleiner’s excellent paper analyses the role of the multinationals in trade, suggesting a change of emphasis in the 1970s from primary product trade to trade in manufactures, and stressing their constant resilience and adaptability. Other research indicates that multinationals still account for a very minor share of poor countries’ manufactured exports, and that these exports are highly concentrated in origin in a small number of poor countries [Nayyar, 1978; Morrison, 1976: 15–20]. The paper by Jenkins in this collection shows with data from Mexico, that the export performance of subsidiaries of multinationals is no better than that of local firms, perhaps because their potential marketing advantages are neutralised by centrally imposed exporting restrictions. In Mexico, at least, it seems that the primary motive for multinational direct investment is to maintain the ability to sell to internal, domestic markets despite the emergence of an import substituting foreign trade regime. But in some instances, the picture is bleaker than that. Multinationals may not only fail to exceed local firms in export performance, they may also use their superior resources to gain the domestic market from local firms by ruthless competitive tactics. Newfarmer’s paper reveals in fascinating detail what some of these tactics have been in the Brazilian electrical industry. This excellent example of the institutionalist approach to economics puts us on our guard against assuming that the size and power of multinationals is solely a result of their superior economic performance, if such a warning is still needed. It also underlines the point that the effects of investment incentives cannot be measured in terms only of the volume of investment which they attract. The amount of investment which they deter, and the amount of disinvestment which they directly cause, must be brought into the account. This negative component will probably be greater, if the attracted firms are multinationals skilled in the tactics of market control. Since the governments of most poor countries have not yet fashioned the long spoon which they require to sup with the multinationals, it is fortunate for them that inviting in the multinationals is not the only possible policy to achieve export diversification. A much explored alternative is to form poor economies into regional trading groups committed to increasing inter se trade in general, and in particular to switching demand for manufactures from rich country markets to one another, behind a common external tariff. Despite the very obvious attractions of such a policy for poor economies, it has proved very hard to put into effect [Vaitsos, 1978]. To pursue the objectives of economic nationalism by—a policy of regional cooperation involves a contradiction which can be fatal if not handled with great care, as the East African common market has sadly discovered. The critical question is always, ‘which member country shall actually have the coveted industrial investment which the common market makes possible?’ There are cases in which a workable answer has been arrived at and sustained for a sufficiently long period for the effects of the trade changes on export instability to be monitored. Cáceres has completed such a study for the Central American Common Market, of which the results presented here show that two of the five CACM countries seem to have had their external sector stabilised as a result of membership. Cáceres ends his paper by sounding a warning, that export diversification will not directly decrease export instability very much because the intra-regional demand for the new exports will depend on incomes generated by receipts from the traditional exports. The potential effect is an indirect one, which works when the demand for one member country’s traditional exports helps to sustain the demand for other members’ traditional exports, and also incidentally for the new exports that are being produced.


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Those poor economies which have failed, or are not in a position to try, to dampen export instability by joining a regional common market may have something to gain by international agreements to stabilise the prices of primary commodities. The fact that the demand for such agreements is perhaps the most prominent feature in the present negotiations for a ‘new international economic order’ should not lead one to be very optimistic about either their potential benefits or their prospects of becoming operational. It is a mistake to think that price stabilisation schemes will increase primary producers’ incomes, which ought to be the aim of any new economic order. The very attempt to make them do so is what ruins them as price stabilisation schemes. Even if they succeed in the more modest ambition of dampening the fluctuations around a given price trend, they will not necessarily stabilise primary producers’ gross incomes, or the bulk of poor economies’ export receipts, which depend not only on price, but also on quantity sold. Further, supposing that the gross incomes of primary producers were to be stabilised thereby, this would probably bring no improvement to the mass of peasants and workers who actually produce these products. Their net incomes have usually been stabilised for them for many years by private merchants, landowners, employers or government marketing boards—at subsistence level. Since few price stabilisation schemes have started functioning it would be rash to say that their prospects are good. To be effective, there must be genuine agreement among all the parties to them, who tend to be numerous and to include powerful capitalist countries or blocs (either as consumers or co-producers, e.g. of sugar and wheat). Quite apart from the conflicts of interest between Third World countries, there is immense scope for the advanced capitalist countries, who would have to pay most of the costs of these schemes, to delay agreement until the schemes reflect heavily their own national interests. Prevarication, nicely set off by a good deal of liberal hand-wringing, has been, and continues to be, the name of this particular game. Apart from this, little can be said in general. Commodity agreements are peculiarly individual, with effective solutions depending upon the production characteristics of the particular commodity, the structure of its market and the historic trend of its price [Rangarajan, 1978:53–88]. To design an agreement which might work, if it could be agreed to, the economist must combine a detailed knowledge of the particular features of the commodity to be stabilised with the principles of microeconomics. A good illustration of this essential combination is to be found here in calculations by Labys of the size and cost of the buffer stock that would be needed to stabilise the price of jute. Each story about trade and poor economies has a distinctive set of attitudes to the problems and policies just discussed. Proponents of mutually beneficial trade seem to quite overlook the existence of ‘colonial’ trade patterns, justifying actual trade patterns as a reflection of comparative advantage, except for the ‘distortions’ resulting from tariffs. Multinationals are seen as efficient and rational enterprises caught between the political pressures of their home and their host governments, whose chief defect is that their over-indulgence in self-financed investment preempts the optimal allocation of funds that would be produced by the international capital market [Penrose, 1971]. Regional common markets and commodity stabilisation schemes are disapproved of as ‘second best’ solutions for export instability: the ‘first best’ solution is taken to be the total removal of trade barriers plus the increment to international liquidity needed to finance the short-term balanceof-payments deficits which instability creates for poor economies. Theorists of asymmetric gains from trade originally argued as if the bias in trade benefits resulted from differences in the degree of modernisation between the rich and the poor economies. More recently it has been suggested that colonial relationships are the origin of rich countries’ firms’ market power in some poor economies, and that it is the abuse of this market power that biases the gains from

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trade—a line of reasoning given empirical support by a close study of French iron and steel exports to her ex-colonial territories in Africa [Yeats, 1978:167–180]. Multinationals are seen not just as monopolists, but as creators and exploiters of their monopoly power, which needs to be curbed by the same kind of antimonopoly regulations as already exist at the national level [Feld, 1978]. The advocacy of economic intervention carries over to the positive encouragement of regional cooperation and commodity schemes, given a clear recognition that the conditions for ‘global welfare maximisation’ are politically unattainable in a divided world. With theories of trade-induced polarisation, one has moved completely from Mancunian to Manichaean economics. Here, as has been noted, all reformist policies, indeed policies tout court are impotent. The determinism of the system can only be broken by a spontaneous revolution. Those who thought that the structuralist approach failed to make all the necessary connections in theory, and condemned its supporters to a very innocent brand of political practice, may well quail at the crudity of some recent Marxist responses to the demand for a more comprehensive and realistic attack on the problems of international relations and world poverty. But one is free to dissent from the view that comprehensiveness and realism are indistinguishable from rigid determinism and radical despair. Socialists need not be forced back to the old structuralist positions, let alone to neoclassical versions of comparative advantage theory, by the weakness of many of the Marxist views which have been heard so far. We can still ask for the structuralist approach to be developed less economistically and more fully in relation to the history of world society and politics. We can still ask that the insights to be derived in this way be used to combat the naivety of many of the reforms paraded under the structuralist banner. We can also ask that the Marxist approach, based on historical analysis, and the setting of economic issues in their social and political context, be developed more in relation to the specificities of economies, institutions and agencies. There is another kind of story about trade and poor economies, which sooner or later should be able to be told. REFERENCES Abdel-Fadil, M.,T.F.Cripps and J.Wells, 1977, ‘A New International Economic Order?’, Cambridge Journal of Economics, 1, 205–213. Amin, S., 1974, Accumulation on a World Scale, New York, Monthly Review Press. Amin, S., 1976, Unequal Development, Brighton,Harvester Press. Amin, S., 1977, Imperialism and Unequal Development, New York,Monthly Review Press. Brenner, R., 1977, ‘The Origins of Capitalist Development: A Critique of neo-Smithian Marxism’, New Left Review, No. 104. Cutler, A., B.Hindess, P.Q.Hirst and A.Hussein, 1977, Marx’s Capital and Capitalism Today, London, Routledge and Kegan Paul. Emmanuel, A., 1972, Unequal Exchange: the Imperialism of Trade, London, New Left Books. Feld, W.J., 1978, ‘United Nations Proposals for a Code of Conduct for Multinational Enterprises’, in W.G.Tyler (ed.), Issues and Prospects for the New International Economic Order, Lexington, Massachusetts, D.C.Heath. Flanders, J., 1964, ‘Prebisch on Protectionism: an Evaluation’, Economic Journal Helleiner, G.K., 1972, International Trade and Economic Development, London, Penguin Education. Johnson, H.G., 1958, International Trade and Economic Growth: Studies in Pure Theory, London Allen and Unwin. Johnson, H.G., 1974, Technology and Economic Interdependence, London, Macmillan (for the Trade Policy Research Centre). Levin, J.V., 1960, The Export Economies, Cambridge, Mass., Harvard University Press.


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Lewis, W.A., 1954, ‘Economic Development with Unlimited Supplies of Labour’, The Manchester School, April. Lewis, W.A., 1978, The Evolution of the International Economic Order, Princeton, N.J., Princeton University Press. Lipton, M. and J.Firn, 1976, The Erosion of a Relationship, Oxford, Oxford University Press (for the Royal Institute for International Affairs). Little, I.M.D., T.Scitovsky and M.F.G.Scott, 1970, Industry and Trade in Some Developing Countries: a Comparative Study, Oxford, Oxford University Press (for the Organisation for Economic Cooperation and Development). Morrison, T.K., 1976, Manufactured Exports from Developing Countries, New York, Praeger. National Bureau of Economic Research, 1975, Foreign Trade Regimes and Economic Development (12 volumes; 10 country studies by various authors and two comparative studies by J.N.Bhagwati and A.C.Kreuger), New York and London, Columbia University Press. Nayyar, D., 1978, ‘Transnational Corporations and Manufactured Exports from Poor Countries’, Economic Journal, March. Penrose, E.T., 1971, ‘Problems Associated with the Growth of International Firms’, in The Growth of Firms, Middle East Oil and Other Essays, London, Frank Cass. Prebisch, R., 1959, ‘Commercial Policy in the Underdeveloped Countries’, American Economic Review, May (AEA Proceedings). Rangarajan, L.N., 1978, Commodity Conflict, London, Croom Helm. Robinson, J.V., 1974, Reflections on the Theory of International Trade, Manchester, Manchester University Press. Salter, W.E.G., 1960, Productivity and Technical Change, Cambridge, Cambridge University Press, second edition. Samuelson, P., 1970, Economics, New York, McGraw-Hill, eighth edition. Singer, H.W., 1950, ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, May (AEA Proceedings). Singer, H.W., 1974, ‘The Distribution of Gains from Trade and Investment—Revisited’, Journal of Development Studies, Vol. 11. Singh, A., 1978, ‘Basic Needs versus the New International Economic Order: the Significance of Third World Industrialisation’, Cambridge, Department of Applied Economics (mimeo). Tinker, H., 1974, A New System of Slavery; Export of Indian Labour Overseas 1830– 1920, Oxford, Oxford University Press (for the Institute of Race Relations). Vaitsos, C.V., 1978, ‘Crisis in Regional Economic Cooperation (Integration) among Developing Countries: A Survey’, World Development, June. Vernon, R., 1966, ‘International Investment and International Trade in the Product Cycle’, Quarterly Journal of Economics, Vol. 80, May. Yeats, A.J., 1978, ‘Monopoly Power, Barriers to Competition and the Pattern of Price Differentials in International Trade’, Journal of Development Economics, Vol. 5, No. 2, June. Yotopoulos, P.A., and J.B.Nugent, 1976, Economics of Development: Empirical Investigations, New York, Harper and Row.

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Vent for Surplus Reconsidered with Ghanaian Evidence by Barbara Ingham*

Adam Smith’s vent for surplus theory of international trade was revived by Myint in the 1950s and subsequently generated a number of new contributions on the nature of the trade-growth relationship in traditional peasant economies under colonialism. The theme of this paper, which uses some empirical material from Ghana (Gold Coast) in the nineteenth and early twentieth centuries, is to suggest that economists have been too ready in their acceptance of these newer versions of vent for surplus, which now set the approach firmly within neoclassical microeconomics and a framework of comparative statics, as valid representations of the historical experience. Modern ‘vent for surplus’ theory seeks to explain how and why peasants’ own exports of primary products from certain parts of Africa and SouthEast Asia during the nineteenth and early twentieth centuries should have increased with such rapidity given that there were apparently (i) no significant inflows of capital, labour and enterprise from outside the domestic economy (the contrast here being with the migration of European capital and labour into the ‘newly settled’ agricultural exporting regions of North America and Australasia); (ii) no significant productivity changes within the agricultural sector, techniques of production employed in domestic agriculture being carried over into export activities; (iii) no significant reductions in the output of agriculture for domestic consumption; (iv) no significant increase in the rate of growth of the population. The supposition of ‘vent for surplus’ theory is that before the increase in exports, the economy was characterised by some unused land and labour resources. It thus became possible, under sufficient stimuli, for the economy to realise a rapid increase in agricultural exports without the necessity for a switch of resources from output for domestic consumption. Because the orthodox economic approach is to deny the possibility of a long-run underutilisation of the productive potential of an economy, it becomes a point of some significance as to why these tropical economies should have been characterised by unused resources. There are two possible explanations for the persistence of surplus capacity over time. One runs in terms of consumer preferences, a low or even a zero income elasticity of demand domestically for exportable commodities. Alternatively there is the notion of long-term

*Lecturer in Economics, University of Salford.

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immobility and underemployment associated with an imperfectly developed market mechanism which fails to register pressures of demand and supply. It is the neoclassical characterisation of unused resources arising out of consumer preferences which has come to dominate the more recent contributions on the vent for surplus. The writings of, among others, Fisk, Szereszewski, Hymer and Resnick, and Findlay, all in this respect now set the model firmly within a framework of neoclassical optimisation [Fisk, 1964; Szereszewski, 1965; Hymer and Resnick, 1969; Findlay, 1970]. Given this form of analysis, a major modification has been the introduction into the model of a low productivity handicrafts sector, in order to overcome certain logical difficulties which arise out of the concept of voluntary underemployment of resources. Suppose that the limitation on the full employment of land and labour resources is a low or zero marginal utility for foodstuffs. In other words the economy has reached satiation point. What is there to prevent a nonfoodstuffs sector, handicrafts and services for instance, growing up and absorbing surplus labour? Perhaps the economy is satiated with these goods too? In this case only imported consumer goods, which do not act as substitutes for domestically produced handicrafts and services, could operate to overcome the constraint of consumer preferences on the level of activity.1 Alternatively, if handicrafts are produced in this economy with specialised labour, how do these goods exchange against foodstuffs, which have no price because they are virtually free goods? Following Findlay the resolution runs thus. Poor economies with rudimentary capital equipment have low labour productivity in handicrafts. This results in highly unfavourable terms of trade between foodstuffs and handicrafts. Production of foodstuffs for exchange with handicrafts is discouraged, because of the very small quantity of handicrafts which can be obtained for a unit of food. This results in a certain amount of unused resources in the economy, idle land plus labour time taken as leisure. When the country is opened up to trade the peasants are able to obtain significantly more of those imported manufactures which substitute for domestic handicrafts for each unit of food they produce. The terms of trade between foodstuffs and manufactures (handicrafts) have thus improved, raising in turn the opportunity cost of leisure. The result is increased supplies of work inputs into the production of foodstuffs for export, which also have the effect of absorbing the surplus land. Trade has thus provided a ‘vent’ for the unused land and voluntarily underemployed labour, by shifting the terms of trade between foodstuffs and handicrafts. A significant amount of empirical work is nominally associated with the vent for surplus model.2 But the question of whether the above-described sequence is a valid representation of the historical experience still remains an open one. This is true to some degree for the preliminary supposition of the model, i.e. the existence of unused resources. The expansion of exports itself, without prima facie any compensatory reduction in output elsewhere, appears to be the main evidence put forward. It is also true of the way in which these unused resources are characterised, that is, as arising out of preferred idleness. Associated with this is the particular character of the ‘growth mechanism’ on which the model hinges, viz. relative price changes for domestic foodstuffs, domestic and imported handicrafts and leisure. These also tend to go untested and therefore unsupported by empirical evidence. In fact much of the empirical work cited in respect of vent for surplus has been directed towards investigating the hypothesis of export-led growth in a general sense, rather than testing the micro foundations of the neoclassical version. To illustrate the point about empirical evidence, we may take the interpretation of cocoa exports in the Ghana case which was offered by the late Robert Szereszewski. His book does, in fact, come closer than most to an empirical exploration of the micro foundations of the neoclassical model. Even so, the main evidence of the existence of idle land and labour is taken to be the spread of cocoa itself. And,

VENT FOR SURPLUS: GHANAIAN EVIDENCE

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though evidence is presented to show that in Ghana traditional non-cocoa exports (palm products) did not decline at first with the growth of new cocoa exports, constant per capita output and consumption of domestic goods are simply asserted. As for the growth mechanism on which the model is based, Szereszewski reported that ‘no direct data are available on the comparative efficiency of obtaining consumer goods via cocoa as compared to forest produce’, though he found some indirect corroboration in movements of the barter terms of trade for cocoa as compared with palm products [Szereszewski, 1965:82]. The hypothesis of export—led growth was then tested by Szereszewski at the macro level, by measuring the correspondence between cocoa exports and increased levels of economic activity. These latter activities were taken to be the induced spending on imports and on local services required for the supply and distribution of these imported goods, plus induced domestic investments and induced governmental expenditures. Secondary rounds of activity were assumed to lead to further domestic wage employment and expenditures.3 The following section of this paper offers some further empirical evidence for the Ghana case. It is evidence which relates mainly to the micro level, to the motivations and responses of the peasant farmers involved in the cocoa boom. Some of the empirical evidence, for instance that provided by the work of Polly Hill, draws on anthropological-type sources. Although the value of this sort of evidence is acknowledged nowadays by development economists, its implications tend to be neglected when formal models are constructed and tested. It is not claimed that the evidence presented here relating to the Ghana case constitutes a refutation of the neoclassical version. Nevertheless, it is claimed that the evidence presented is sufficiently suggestive to cast doubt on the applicability of the neoclassical version to the historical experience, and to indicate the possibility of more fruitful work within an alternative framework of analysis. THE GHANA CASE

Polly Hill (and others) have shown that cocoa exports from Ghana were, and continue to be, the outcome of a migratory system of land cultivation [Hill, 1963; Hunter, 1963; Johnson, 1965]. The basis of the Ghana cocoa industry was the migration of Ga, Krobo, Akwapim and Shai peoples from the south east, westwards into the forest belt where they established new farms for cocoa growing. To this day it is a migratory system of cultivation, which has pushed cocoa production in Ghana outwards towards the border with the Ivory Coast. The first export of cocoa from Ghana took place in 1894. The subsequent growth in these exports was remarkable by any stan dard. By 1911 nearly 40,000 tons of beans, worth about £1 million at current prices, were being exported annually. On the eve of Independence in 1957 the volume had risen to 200,000 tons, worth over £50 million at current prices. In considering the applicability of alternative theoretical versions to the historical experience, this paper focuses on the ‘pioneering period’ for cocoa, between 1891, when the first cocoa trees were being planted in the south, and 1911, when cocoa began to be produced to the north in Ashanti. The paper focuses on four critical issues arising out of the neoclassical interpretation. First the absorption of surplus labour time taken as leisure by cocoa exports: how credible in this neoclassical supposition in the light of empirical evidence? Secondly, the motivations of the farmers involved in the cocoa boom: to what extent does the empirical evidence support the import-consumption motivation implied by the neoclassical model? Thirdly, the growth mechanism invoked for the new crop: does empirical evidence support a key role for changes in the relative prices of imports/leisure/ domestic goods? Fourthly, the linkages associated with export-led growth: what implications do the induced effects indicated by the empirical evidence have for the wider development of the Ghana economy?

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1. Work Inputs to Cocoa

The two basic propositions of the paper are, first, that those labour inputs to cocoa which were supplied by the pioneer migrant farmers themselves and their families probably did not come about at the expense of leisure, which could mean the entire labour input to cocoa up to 1900. From 1900 hired labour began to play an increasingly important role. By 1911 there were perhaps as many labourers as farmers [Hill, 1963:17, 187–90]. The second proposition is that it is misleading, too, to regard this hired labour as being in a state of leisure preference before cocoa. The first proposition is supported by the following empirical evidence. First, there are descriptions provided by Polly Hill, and others, of the types of individuals who pioneered and worked in the cocoagrowing industry in Ghana. These descriptions have certain implications for a supposed leisuresacrificing response on their part. Further support is provided by calculations of labour inputs to cocoa. These calculations suggest that labour inputs to cocoa initially were quite marginal to the economy and labour force as a whole. This means that in the early stages of cocoa they are unlikely to have been reflected to a significant degree in reductions in the output of domestic goods and traditional exports, such as palm produce and rubber. The anthropological evidence indicates that the Ghana cocoa industry was not established by native farmers (i.e. those living and working in the areas where they were born), but rather by migrants from the south-east, who purchased land for cocoa-growing from its ‘owners’, the chiefs of the native Akim peoples. Strictly speaking the Akim chiefs did not own the land, but merely held it in trust for their peoples. Its disposal should not, therefore, have been a matter for them alone. In practice however, aaaaa TABLE 1 GHANA: VOLUME OF EXPORTS 1891–1911

[Sources: Hill 1963:177] for cocoa and palm kernels. Colonial Reports for rubber.


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they did not consult or seek approval for land sales. Most of the finance employed by the early Most of the finance employed by the early cocoa farmers in the purchase of land for cocoa growing was derived from production of, and particularly trading in, palm products and rubber. Trading profits from the 1890 rubber boom were especially important as a source of financialcapital for land purchase. Also significant as sources of capital were trading in salt, skins, blankets, ivory, cloth and imported rum. Some farmers too, had obtained cash through wage employment abroad [Hill, 1963:164–167]. The picture painted by Polly Hill (and other field researchers, such as M.J.Field, J.M.Hunter and Marion Johnson) is of a capable and energetic group of people, who were most probably fully engaged, before turning to cocoa production, in money-making activities. For it was these activities which provided the financial capital to initiate cocoa production through land purchase. If the pioneer farmers and their families had been in gainful employment before cocoa, why then was there no decline in traditional exports of palm produce and rubber as labour resources were reallocated? And what is supposed to have happened to the output of domestic goods and services as work inputs switched to cocoa production? A major piece of evidence put forward in support of the vent for surplus in the Ghana case is that traditional exports of palm produce and rubber did not decline simultaneously with the rise in cocoa exports (Table 1). Therefore, it is suggested, cocoa must have tapped some surplus potential in the form of idle labour. Against this I would argue that, until 1900 at least, before hired labour became important, the absorption of labour into cocoa was so marginal that one would not expect to find a significant drop in the output of traditional exports. Table 2 shows labour inputs to cocoa between 1894 and 1911. This period is crucial because after 1912 exports of both palm products and rubber dwindled to an insignificant level. By 1900 about 400,000 man-days per annum were being devoted to cocoa. On the basis of 200 man-days per annum for each farmer or family worker, this would imply a total of only 2,000 persons per annum out of a total population in the south of about one million.4 From 1900 onwards labour was beginning to flow into the cocoa belt from neighbouring territories, which somewhat complicates the ‘vent for surplus’ argument. Even so, in 1911 total man-days in cocoa were about 8,000,000, which implies no more than 40,000 persons out of a total population of 1.2 million.5 Though there are no direct data on the output of domestic goods and services, it is to be noted that Ghana’s consumption of imported goods increased by about 6 per cent per annum between 1900 and 1911 (Table 3). Even allowing for the 20 per cent increase in population between these dates, there is plenty of scope for some substitution of imports for domestic goods. The output of traditional exports may have remained constant, but it is not certain that the output of some domestic goods, both foodstuffs and handicrafts, did not decline. Rising imports of foodstuffs, drink and tobacco, textiles and other consumer goods could have permitted from the very outset some substitution of domestic output by imports, thus releasing labour services to cocoa. By 1900 the migrant farmers were beginning to employ labour. This brings the second proposition. According to Szereszewski and others, this labour was also migrant. It came from the poorer agricultural territories surrounding the cocoa-growing forest belt, from neighbouring Togo and Dahomey and from the northern region of Ghana. Migrants came into cocoa in order to earn money at aaaaaaa

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TABLE 2 LABOUR INPUTS TO COCOA PRODUCTION 1894–1911

NOTES: Labour inputs are divided into two categories:

(a) Inputs for establishment (Col. 2) Since it takes about six years for a cocoa farm to become established and yield cocoa, increased labour inputs for establishment are assumed to take place in the six years before the observed increase in cocoa output. The estimates are arrived at in two stages. The increases in cocoa output per annum, plus Beckett’s [1947] estimate of the yield per acre (1.8 tons) provide the new acreage requirements with a six-year lag (Col. 1). Then estimates of the increase in labour inputs per annum for establishment are arrived at on the basis of the labour requirement of establishing new cocoa acreage (Beckett, 170 man-days per acre). The technique employed is essentially similar to Szereszewski’s own method of assessing labour inputs for establishment, though he has a slightly lower estimate of the labour requirement of establishing new cocoa acreage. [Szereszewski, 1965, Appendix C: 137]. (b) Inputs for the harvesting of the crop and the maintenance of farms (Col. 3) These are derived from current changes in cocoa output per annum (Table 1), using Beckett’s estimate of 200 man-days per ton of cocoa required for maintenance and harvesting of the crop. Inputs involved in transporting the crop to market have been deliberately excluded, since it is assumed that, in this area, hired migrant labour played an important role. In support of this assumption see Hill [1963: 187], Szereszewski [1965:8–60].


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TABLE 3 BREAKDOWN BY END USE OF IMPORTS INTO GHANA 1900–1919

Sources: Board of Trade Journal (Gold Coast sections) and Colonial Reports (Gold Coast).

cocoa harvest time. There was, and still is, an important seasonal element in this rural—rural migration [Davison, 1957]. They came presumably because the opportunities for earning cash on their own family farms were few. Being only partially committed to cocoa, they would return to their villages after one or a few seasons on cocoa or other food farms. They may have been underemployed, albeit on a seasonal basis, in their own villages. But this is more properly to be regarded as evidence of lack of opportunities for making money, either because of the poverty of complementary resources or because of a dearth of profitable markets (or a combination of both), rather than as some form of preferred idleness. Finally, it is to be noted in a more general sense that induced migration in response to export opportunities has long been recognised as crucial in the development of the ‘newly settled’ regions of North America and Australasia. It has begun to feature in formal models of ‘staple’-based growth [Caves, in Bhagwati, 1971:413]. Empirical evidence has pointed to the quantitative importance of induced labour migration in the Ghana case. It seems moreover that Ghana migration may not have been an isolated example among peasant export economies.6 But induced migration is disallowed as a theoretical possibility for the peasant export economy, in adherence to a leisure preference version of vent for surplus, which offers what is essentially a reallocative mechanism. Indeed, when formulated thus, vent for surplus has been correctly characterised as no more than an extreme case of comparative costs with zero opportunity cost for exports.

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2. The motivation for engaging in cocoa production

Central to vent for surplus is the concept of the utility—maximising individual or household, induced into exporting activities by the availability of novel imported consumer goods, or (as in the neoclassical version which postulates unchanging preferences) by the availability of imported consumer goods on ‘better terms’. These are the goods which are supposed to have brought forth greater effort from a lowproductivity, low-income, high-leisure peasant society. On the other hand, the anthropologists suggest that the pioneering cocoa farmers of Ghana were a sophisticated and energetic group, to the extent permitted by social value systems in relation to entrepreneurship. They are supposed to have ‘held as rigid a view as many old-fashioned communists or capitalists as to the wastefulness of consumption expenditure’ [Hill, 1963: 181]. Interested apparently in money-making and empire-building for its own sake, money earned from cocoa was almost instantly ‘reinvested’ in further land purchases [Field, 1943; Hill, 1963; Hunter, 1963; Johnson, 1965]. Though a meaningful distinction may be drawn between the motivations assumed in the neoclassical model and the same as viewed by the anthropologists, it is not a straightforward matter to devise empirical tests which will discriminate adequately between the two. One possibility is to look at the extent of farmers’ induced expenditures on imported consumer goods. High expenditures on imports out of export earnings would lend support to the neoclassical version. But low expenditures would not necessarily disqualify the model, since farmers may have been abstaining from present consumption for the sake of enhanced future income and consumption.7 There are no data relating exclusively to the expenditures of cocoa farmers on imported consumer goods at that time. Aggregate data are available, and Table 4, which follows Szereszewski’s estimates of the components of GDP in 1891, 1901 and 1911, shows the total private consumption of imports. His import figures throughout included an allowance for the undoubtedly high domestic transport and distribution costs involved in the consumption of imports. (I have added in, for sake of comparison, the landed value of imports in 1901 and 1911—figures in parentheses). From Table 4 it is evident that over the period of the boom in cocoa earnings, i.e. from 1901 to 1911, consumption of imports, including transport and distribution costs, remained fairly stable as a percentage of the GDP. TABLE 4 GHANA EXPORTS, IMPORTED CONSUMER GOODS AND GDP, £ 000,1911 PRICES

Source: Szereszewski [1965].


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TABLE 5 COCOA INCOME NET OF INTERNAL TRANSPORT COSTS FOR EXPORTS

Source: Transport costs from Gould [1960]. Transport costs then subtracted from FOB export prices net of brokerage charges, and multiplied by export volume, to arrive at cocoa income.

I have estimated (Table 5) that cocoa income, net of internal transport costs for exports, was approximately £31,000 in 1901 and £1,131,000 in 1911. (Transport costs are discussed further on p. 15 below.) If the pioneer farmers and their employees had spent their incremental income between these dates largely on imported consumer goods (plus their transport and distribution costs), this would have absorbed about three-quarters of the documented aggregate increase. There were, it must be remembered, other (non-cocoa-producing) recipients of money GDP. These included indigenous palm and rubber producers, employees in the European-owned gold mining sector, railway workers, construction workers and those in government services. If cocoa income had in fact absorbed some three-quarters of the rise in private consumption of imports, to allow for this the ratio of importconsumption to income would have had to have fallen for all other workers. The required fall would be from 22 per cent in 1901 to 17 per cent in 1911. Yet we know that this particular ratio had been rising steadily up to 1901. In 1891 it had been only 14 per cent. I would suggest that a fall from 1901 to 1911 is therefore improbable, and that, in consequence, a significant proportion of earnings from cocoa exports is shown not to have gone into imported consumer goods. This suggestion corroborates the view of the anthropologists, but in no sense constitutes a refutation of the neoclassical version, which can refer to the savings horizons relevant in deferred consumption of imports. It illustrates the difficulties inherent in devising discriminatory tests of a quantitative nature, when dealing with theories about individuals’ motivations. 3. THE GROWTH MECHANISM

The arrival of novel imported European consumer goods, as the stimulus to increased economic activity through cocoa, is largely ruled out by our knowledge of the extensive external trade flows which had been a feature of the West African coast for centuries. European influence dated from the late fifteenth century and the gold exports which gave the Coast its name. Slaves were being exported from the Gold Coast as late as the 1840s, followed then by palm products and rubber. Part of the payment was in the form of imported consumer goods, such as textiles, weaponry, spirits, sugar and metalware, for which there existed an elaborate system of barter equivalencies. The remainder of the payment was in the form of local currencies, which varied from region to region. On some parts of the Coast the indigenous currency was the cowrie shell. Elsewhere it was metal bars or gold dust. From the

26


1840s onwards the export of palm produce from the West African coast had involved the import of large quantities of cowries. Even at this early stage, therefore, one might question whether a simple import consumption motivation wholly governed the export trade. It is the availability of imported consumer goods on ‘better terms’, causing the opportunity cost of leisure to rise, which is invoked as the growth mechanism in the neoclassical version of vent for surplus. Although Szereszewski offered no direct empirical support for the ‘better terms’ he envisaged for the Ghana case, some rough and ready calculations confirm his hypothesis. The yield (in tons) per man-day in cocoa can be derived from Table 2. A man-day is calculated on the basis of a seven-hour day. This yield figure is then translated into a money return per man-day by using the cocoa FOB export price. Deflated by an import price index, this gives the real return per manday in cocoa. The basis for comparison is the real return per man-day in palm kernel production. There are no contemporary data on yields (in tons) per man-day in palm kernels, and approaches to making estimates are hampered by absence of research. Using yield estimates for Nigeria in the 1950s [Galletti et al., 1956], yield figures are multiplied by the Ghana palm FOB export price and deflated by the import price index, to give the real return per man-day in palm. The results are given in Table 6. From Table 6 it can be seen that the real return to effort in cocoa was substantially greater than the real return in palm exporting activities throughout the period in question. At the beginning of the period cocoa offered a real return to labour ten times higher than the return obtainable in palm. At the end of the period, with declining cocoa and rising palm prices, the return in cocoa was still treble that in palm. The figures in Table 6 are gross returns, in the sense that no adjustment has been made for transport costs incurred by producers in getting their crops to the port. These costs were undoubtedly mmmmmmmmmm TABLE 6 REAL RETURN PER MAN-DAY (GROSS OF INTERNAL TRANSPORT COSTS) IN COCOA AND PALM EXPORTING ACTIVITIES 1894–1911


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substantial. The period of enquiry here, 1891–1911, pre-dates motor transport and even the railway, for the rail link between Koriforidua, in the heart of the new cocoa producing areas, and Accra on the coast was not completed until 1915. Until then produce was head-loaded to the ports. Before the establishment of the produce marketing boards in the 1940s, which paid a single delivered price for exports at various buying centres in the interior, farmers themsleves had to bear the costs of the transport of exports to the ports. In the early days many farmers endeavoured to reduce their transport costs by the use of family labour, but even here the costs of feeding the carrier both on his journey out to the ports and on his journey back home would have to be met. When family labour became inadequate, hired carriers were employed—in large numbers from about 1900. Gould has estimated the one-way money cost of head-loading a ton of produce along feeder roads to the ports at something of the order of £1.75 per mile in the pre-railway era [Gould, 1960]. The assumptions on which this estimate is based are not given, but a fair guess would be that this represented the reward for hired labour on a one-way journey to the ports. The significance of cocoa versus palm in relation to transport costs is that cocoa’s higher price per unit of weight enabled it to absorb more readily the enormous transport costs involved in getting produce to market in the pre-railway era. This was not a period of innovation in internal transport insofar as it affected local farmers. For a household a hundred miles or more inland, transport costs would have absorbed the entire FOB export price of a ton of palm produce in a normal year. For this same household producing cocoa instead, there would still have been about half the FOB export price remaining in a normal year, after internal transport cost had been accounted for. These rough estimates of real rate of remuneration in cocoa versus palm products undoubtedly support the Szereszewski hypothesis. But they would equally well support a framework of analysis in which a decision—making process different from the neoclassical constrained maximisation underlay the supply responses of the pioneer farmers. Following the anthropologists, one could look at the attitudes and behaviour of the cocoa producers themselves, a group of rural capitalists with well defined attitudes towards wealth, personal consumption, investment, the employment of labour and so on. Their object was to expand their businesses, possibly for reasons of security, prestige and power, with the enhanced consumption possibilities implied thereby playing an important but secondary role. If one is to view the cocoa expansion in terms of a capitalist investment response to a new export opportunity, cocoa production needs to be seen as a market activity which could generate confident prospects of long-term profits to the farmers. The generally low level of real returns per man-day in palm products during the last two decades of the nineteenth century is, therefore, of immediate relevance to the rise of cocoa exports at that time. The relatively high FOB export prices per ton for cocoa helped defray transport costs and increase profits for producers living at some distance from the ports. To illustrate the point that it is not altogether fanciful to describe the supply responses of the pioneer farmers as ‘capitalist’, one may refer to the initial cash stakes by them in this new enterprise. By 1900 some 5,000 acres of land were under cocoa. To the cost of buying this land may be added something for the money cost involved in migration (transport costs, housing, and so on), plus the costs of working capital (hoes and cutlasses for land clearance, cocoa seeds for planting and storage facilities). Though the average conceals very wide differences between individuals, I have estimated from published data that the cash staked initially per migrant land-holder must have been something of the order of £20, not a negligible sum when the cash wage of an unskilled labourer was between £5 and £10 per annum.8

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The source of this capital has not been adequately researched. It is to be noted that many of the pioneer farmers had been prominent traders in palm, salt, rubber and imported goods. In West Africa in the nineteenth century it was possible for African traders to raise very substantial sums by purchasing, distributing and selling goods. The purchase of land in instalments also appears to have been an important though unresearched aspect of credit. But there was no capital market in the conventional sense. In the rubber industry peasant producers did receive advances from European merchants to establish new plantations. There is no evidence that this happened in cocoa. It is possible that the need for external sources of credit was greater for rubber producers living far inland than it was for the pioneer cocoa farmers. The Ashanti rubber trade was short-lived (1890–1905) but significant, in that during this period it was the largest source of rubber in the British Empire [Dumett, 1971]. Ashanti was outside the margin of profitable cultivation for palm products. Transport costs to the ports were high, about £18 per ton in the south of Ashanti, rising to as much as £37 per ton in the north of the region. This also ruled out cocoa before the coming of the railway. It probably meant that rubber producers had not the opportunity to accumulate financial capital through the production of, or trading in, traditional forest products. Rubber, with its high value per unit of weight, overcame transport problems. At the peak of the trade a ton of rubber was selling at about £148 on the coast. 4. Linkages Associated with Export-Led Growth

The growth of the export sector does not always have significant favourable carry-over effects on the rest of the domestic economy. This point was made by Baldwin, when he suggested that, in comparing exports from ‘newly settled’ regions, such as North America and Australasia, with exports from tropical plantation agriculture, account might be taken of the impact of differing production functions for the two types of staple [Baldwin, 1954, 1963]. Tropical plantation agriculture was undertaken on a labour-intensive basis, involving little skilled labour and small amounts of capital. Wheat production, operating in newly settled regions under the basic constraint of a labour shortage, employed relatively capital-intensive techniques of production and a high skill content for the labour input. Thus, argued Baldwin, the relatively low productivity gains within the export sector, and in the domestic economy at large, which were associated with staple exports from tropical agriculture, could be explained in terms of the particular factor inputs associated with the crop. In the case of cocoa exports from Ghana one is not dealing with the foreign-owned plantation agriculture which Baldwin had in mind. The entrepreneurial input, as well as labour, capital and natural resources, was of domestic origin, though the description of production as being of low capital intensity and having a low skill requirement still applied. Undoubtedly this was a major factor explaining the industry’s relatively slight impact on what Meier has termed the ‘development foundations’ of the Ghana economy, viz. its learning rate, its social infrastructure, the supply of entrepreneurship and expanded financial capacity [in Duignan & Gann, 1975:427–469]. The particular character of the supply response at the micro level also has implications for the ‘forward linkages’ from the export expansion. The hypothesis of a capitalist-type response involves the special feature of entrepreneurial savings behaviour, a relatively high marginal propensity to save, which has been noted and discussed elsewhere [Ingham, 1973]. As might be expected, there are no direct data available on the relation of cocoa farmers’ savings to their income levels in the early years of this century. But the macro data reveal a substantial rise in domestic savings, from 1% of GNP in 1901 to over 15% of GNP in 1911.


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Though farmers reinvested substantially in new cocoa lands, a point which emerges very clearly from the qualitative evidence is their reluctance to venture into commercial activities, both agricultural and non-agricultural, which were directed at supplying domestic markets. Non-cocoa investments were largely restricted to housebuilding and education. Having regard to the commercial attitudes of farmers, as evidenced in the cocoa supply response, and the fact that there was no obvious shortage of financial capital, one may speculate that investment in activities aimed at supplying domestic markets was not attaractive in terms of the expected rate of profit. As far as the supply of manufactured goods is concerned, one may surmise that domestic enterprise could not compete successfully with the lowercost imported consumer goods which had been arriving in West Africa since the seventeenth century. The only profitable domestic outlet then would be a limited range of traditional items of consumption, for which there were no adequate imported substitutes. For domestic foodcrops, which commanded a low price per unit of weight, constraints on access to markets, associated with an inadequate transport system serving a small and widely scattered population, might have been an important factor. Moreover, outside the main population settlements at the coast, subsistance production would have made the majority of households largely independent of purchased foodstuffs. High domestic savings ratios, coupled with limited domestic investment opportunities, help to accommodate a long-run historical feature which Ghana has in common with some other vent for surplus exporters of the late nineteenth and early twentieth centuries, viz. a capital outflow (Table 7) which has no direct implications for domestic growth. CONCLUSION

Although the empirical evidence outlined in this paper does not represent a scientific refutation of the neoclassical version of vent for surplus, there are areas where prima facie evidence for Ghana is at odds with the formal model. In particular the notion of preferred idleness before the boom in cocoa exports is not readily reconcileable either with the energetic individuals who came to pioneer the cocoa industry in Ghana, or with the migrant labourers who were drawn into the cocoa belt from the povertystricken regions surrounding it. Nor is the overriding import-consumption motivation assumed by the neoclassical version immediately evident in the thoroughly capitalistic behaviour of those early farmers, with their high propensities to save, to invest and to bear risks. Furthermore, there is an important element of differential behaviour, and a time dimension to the cocoa supply response, which is not accounted for by orthodex trade theory, in either its vent for surplus or its more usual comparative costs version.Why did some farmers respond, while others, principally the Akim land sellers, did not? Why did cocoa come later to Ashanti (and to Nigeria) than it did to southern Ghana? A related question concerns the timing of the entry of West Africa into the world cocoa market. If West Africa had a comparative advantage in cocoa production, why did this advantage not operate from the start? When Ghana entered the world cocoa market, towards the end of the nineteenth century, her main competitors (soon to be outpaced) were Brazil, Ecuador, Dominica and the Caribbean. Cocoa had been exported from these regions for more than a century before West African cocoa emerged. Yet on the face of it cocoa was always a good prospect in West Africa. Not only was it a superior crop to palm (even in the latter’s mid-nineteenth-century heyday, cocoa would have had a better price compensation), but there were cost advantages over the South American product.9 In addition Accra was better placed geographically for European markets than was Rio de Janiero. Why then was the ‘superior alternative’ of cocoa not taken up in West Africa until the late nineteenth century?

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TABLE 7 VALUE OF EXPORTS (FOB) AND IMPORTS (CIF) FROM AND INTO GHANA 1900–1932

Source: Board of Trade Journal (Gold Coast section)

Finally, though space precludes a fuller discussion of these issues, it may be that the historical experience of cocoa exports in the Ghana case conflicts at a number of other points with a broader neoclassical vision. For example, there is a tendency in neoclassical economics to view economic progress as an adaptation to changes in exogenous factors. More law and order, transport improvements, changes in social structure, expatriate influence—all these have been quoted at some point or other by writers on tropical exports.10 Briefly in answer, one finds that historians are somewhat divided on the causes and effects of Tax Britannica’ in West Africa in the late nineteenth century [Hopkins, 1968; Ajaya and Austen, and Rejoinder by Hopkins, 1972]. It also seems that the social system of the extended family in West Africa not only was maintained throughout the expansion of peasants’ exports, but actually reinforced and assisted it, through the use of family labour, family landpurchase schemes and so on. Internal transport facilities in Ghana followed on from, rather than preceded, the growth in exports.11 Indeed, some important improvements were financed by farmers themselves out of higher export earnings [Hill, 1963:247]. What is more, the role of European buying


31

and selling firms was a passive rather than an active one, with expatriate traders being quite happy to stay at the ports, with very little idea how the local trade was organised.12 Two further issues on which the Ghana case may conflict with the orthodox vision are in the role of effective demand, and in the long-run role of money. With a domestic economy characterised by shortages of profitable private investment opportunities (associated with the prevalence of subsistence production, high transport costs involved in serving small and widely scattered populations, and later, perhaps, an inability to compete with low cost imports from abroad), the role of effective demand generated abroad becomes crucial. The subsequent expansion of exports can then be viewed in terms of the emergence of new and profitable opportunities arising on the side of foreign demand, the share of domestic producers in that demand being determined by their ability to produce at a lower cost than actual or potential rivals. The second issue, the role of money, would merit further investigation. West Africa had an extensive indigenous money before the boom in tropical exports, but colonial authority in the late nineteenth century brought about a remarkable increase in the stock of money. No separate figures are available for Ghana, but between 1891 and 1911 some six-million-pounds’ worth of silver was shipped to West Africa from the British mint. There are a number of accounts suggesting a high demand for British silver on the part of peasant exporters, with a probable effect of increased supplies in stimulating production. Finally, though historical studies indicate the experience of peasants’ exports to have been quite diverse through time and space, there are hints in the literature of a common thread in terms of entrepreneurial initiative and capital accumulation, possibly even migration, which may make the conclusions for the Ghana case more generally applicable (Hogendorn, in Duignan and Gann, 1975: 283–328). One or two writers have recently hinted at the inadequacies of leisure preference models in the light of evidence from anthropological and other sources (Hymer, preface to Hill 1970; Berry, 1975:3–5). Where alternatives have been tentatively suggested by economists, it seems that what is being called for is either a return to classical theory, especially Smith’s theory as revived by Myint in the 1950s, or to a Marxist interpretation, such as the one proffered by Stephen Hymer in his preface to Polly Hill’s Studies in Rural Capitalism in West Africa. This paper does not offer a fully articulated alternative to the neoclassical version of vent for surplus. But the sort of approach which is suggested as being helpful in interpreting the Ghana case is likely to have the following characteristics: (a) as a theory of change and growth, it must give a central role to human attitudes to risk-taking and money-making, and to savings and the accumulation of capital. In the analysis of changes in such attitudes and changes in factor supplies in general, the endogenous character of the growth process would warrant explicit consideration; (b) there would be, in this approach, an important place for explanations of relative underdevelopment in terms of constraints on access to markets, resulting in spatially uneven levels of economic activity. This would enable the important link between migration and capital formation to be explored; (c) the approach would be able to accommodate a historically important role both for money itself and for the credit mechanism which is associated with it. The suggestion is that developments of vent for surplus along these lines represent a serious alternative to the neoclassical version, offering fresh insights into the historical character of peasant exports.

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NOTES 1. Myint undoubtedly envisaged the impact of imported consumer goods in this classical sense: ‘In this

2.

3. 4.

5.

6. 7.

8. 9.

10. 11.

early phase of international trade, imports were not merely a cheaper way of satisfying the existing wants of the peasants. Many of them were novelties hitherto unknown in the subsistence economy. By stimulating new wants among the peasants, the expansion of imports was a major dynamic force facilitating the expansion of exports’ [Myint, 1967:41–42]. A list of tropical countries to which ‘vent for surplus’ analysis has been applied would include New Guinea [Fisk, 1964]; Nigeria [Helleiner, 1967]; Ghana [Szereszewski, 1965]; Malaysia [Drake, 1972]. There are a number of tests of the export-led-growth hypothesis which invoke secondary induced effects of the Keynesian type. [Bhagwati, 1971:403–442]. This is the population of the colony, excluding Ashanti and the Northern Territories [Kuczynski’s estimates, Kay, 1972]. This is appropriate because 1914 Ghana cocoa exports were concentrated in the colony proper, which stretched about 100 miles inland from the coast. The number employed suggested by Szereszewski is some 185,000 people by 1911 [1965:57]. But consideration of the relevant passage reveals that this number is the outcome of an error in calculation. It states ‘An example that we made points out that cocoa cropping and investment alone, excluding transport, absorbed in 1911 something like 37 million labour days. On the basis of an average of 200 days per man, this would mean an employment of 185,000 people.’ But Table 2, which employs a technique essentially similar to Szereszewski’s own method of estimating labour inputs, suggests a total of 33 million man-days devoted to cocoa over the entire twenty-year period, and not in the single year of 1911. See, for example, Sara Berry’s account of migration in the Nigerian cocoa industry [Berry, 1975]. Positive rates of time-preference in the consumption of imports are formally specified by Szereszewski [1965:80]. More generally a ‘sufficiently low time-preference’ and ‘readiness to bear risk’ are stated by him to be the key elements in the response of farmers, what he terms ‘the propensity to capitalise’ [105–106]. At the turn of the century £1 per acre was the recorded price of land. A further assumption is that the ratio of land-holders to working dependents was about 1:5. Some rough calculations suggest that the cost of establishing an acre of cocoa on the family cocoa farms of Ghana was about one third of the cost of establishing an acre of cocoa on South American plantations. Lower costs of production on family farms could, therefore, have provided the basis for the entry of West Africa into the world cocoa industry. See for instance many of the essays in Lewis [1970]. There were improvements in oceanic transport throughout the nineteenth century, but it is difficult to assess their precise impact on the rise of cocoa exports in the 1890s. By that time steam had overtaken sail on the West African trade routes. A number of technical improvements from the 1850s onwards had further reduced the costs of shipping freight across the Atlantic. In a general sense this undoubtedly had the effect of widening the market for primary products, which tend to have a low value per unit of weight. Presumably, together with rising incomes in consuming countries, it was a long-term development which helped make farmers and traders more optimistic about the likely market prospects for cocoa. For our particular period however, there is, prima facie, no evidence that falling freight rates had a favourable incentive impact on import prices. Between 1890 and 1911 the import price index rose by 20% [Szereszewski, 1965:148]. Nor were there any significant improvements in port facilities. Cocoa in the pioneering period was shipped either through Sekondi or through Accra, neither of which possessed proper harbour facilities at that time.


33

12. The establishment of a cable link between Liverpool and Accra in the 1880s, however, undoubtedly

had a beneficial effect on communications between final consumers and expatriate merchants and traders. REFERENCES Ajayi, J.F.A. and Austen, R.A., 1972, ‘Hopkins on Economic Imperialism in West Africa’, Economic History Review, 21, December and ‘Rejoinder’ by Hopkins in same volume. Baldwin, R.E., 1954, ‘Patterns of development in Newly Settled Regions’, Manchester School, 24, May. Baldwin, R.E., 1963, ‘Export Technology and Development from a Subsistence Level’, Economic Journal, 63, March. Beckett, W.H., 1947, Akokoasa: A Survey of a Gold Coast Village, London, LSE Monographs in Social Anthropology, no. 10. Berry, S., 1975, Cocoa, Custom and Socio-Economic Change in Rural Western Nigeria, Oxford: Clarendon Press. Bhagwati, J.N. (ed.), 1971, Trade, Balance of Payments and Growth: Essays in Honor of C.P.Kindleberger, Amsterdam: North Holland. Davison, R.B., 1957, ‘Labour Migration in Tropical Africa’, Indian Journal of Economics, April. Drake, P.J., 1972, ‘Natural Resources versus Foreign Borrowing in Economic Development’, Economic Journal, September. Dumett, R., 1971, ‘The Rubber Trade in the Gold Coast and Asante in the Nineteenth Century: African Innovation Market Responsiveness’, Journal of African History, 12. Duignan, P. and Gann, L.H. (ed.), 1975, Colonialism in Africa, Vol. 4, The Economics of Colonialism, Cambridge: Cambridge University Press. Field, M.J., 1943, ‘The Agricultural System of the Manya Krobo of the Gold Coast’, Africa, 14. Findlay, R., 1970, Trade and Specialisation, Harmondsworth: Penguin. Fisk, R., 1964, ‘Planning in a Primitive Economy: From Pure Subsistence to the Production of a Market Surplus’, Economic Record, 40, June. Galletti, R. et al., 1956, Nigerian Cocoa Farmers, London: Oxford University Press. Gould, P.R., 1960, The Development of the Transportation Pattern in Ghana, Evanston, Northwestern University Press. Helleiner, G., 1967, Peasant Agriculture, Government and Economic Growth in Nigeria, Homewood, Illinois: Richard D.Irwin. Hill, P., 1963, The Migrant Cocoa Farmers of Southern Ghana, Cambridge: Cambridge University Press. Hill, P., 1970, Studies in Rural Capitalism in West Africa, Cambridge: Cambridge University Press. Hopkins, A.G., 1968, ‘Economic Imperialism in West Africa: Lagos 1880–1892’, Economic History Review, 21 December. Hopkins, A.G., 1973, An Economic History of West Africa, London: Longmans. Hunter, J.M., 1961, ‘Akotukron: A Devastated Cocoa Village in Ghana’, Institute of British Geographers— Transactions and Papers, No. 29. Hunter, J.M., 1963, ‘Cocoa Migration and Patterns of Land Ownership in the Densu Valley near Suhum, Ghana’, Institute of British Geographers—Transactions. Hymer, S., and Resnick, S., 1969, ‘A Model of an Agrarian Economy with non-Agricultural Activities, American Economic Review, 59. Ingham, B., 1973, ‘Ghana Cocoa Farmers—Income, Expenditure Relationships’, Journal of Development Studies, 3. Johnson, M., 1965, ‘Migrant’s Progress’, Bulletin of the Ghana Geographical Society. Kay, G.B., 1972, The Political Economy of Colonialism in Ghana, Cambridge: Cambridge University Press. Lewis, W.A., (ed.), 1970, Tropical Development, 1880–1913, Evanston: Northwestern University Press.

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Myint, H., 1958, ‘The “Classical” Theory of International Trade and the Underdeveloped Countries’, Economic Journal, 68, June. Myint, H., 1967, The Economics of Developing Countries (3rd ed.), London: Hutchinson. Szereszewski, R., 1965, Structural Changes in the Economy of Ghana, 1891–1911, London: Weidenfeld & Nicholson.

Colonialism in Economic Theory: the Experience of Nigeria by Sheila Smith

I INTRODUCTION

During the colonial period many areas of the underdeveloped world were converted within a short period—perhaps 10 or 20 years—into major primary produce exporters. The process whereby this massive shift in the economic structures of colonial territories occurred is of central concern in this paper. Some standard economic analyses of this process will be discussed and criticised in the context of an examination of important aspects of the colonial economic transformation of West Africa, mainly Nigeria. The major questions to be addressed will be the means by which the rapid growth of export production was brought about, and the role of the colonial state in the transformation process. A central feature of the West African colonial experience, in contrast to the rest of the continent, was that the principal means of production, land, remained in African ownership. Thus the massive increase in the production of primary agricultural exports occurred without any direct control over production by the colonial authorities, and without any action by the colonial authorities to create new units of production in the hands of non-Africans.1 This is in contrast with the dominance of Europeanowned plantations and large estates in the economies of Kenya, Southern Rhodesia, Angola and South Africa; and the significance of foreign-owned mining in the Congo, Northern and Southern Rhodesia, Mauretania and Sierra Leone.2 It is, perhaps, this feature of West Africa’s colonial experience that has generated certain simplistic economic analyses of the process of export expansion, analyses which derive from Adam Smith’s vent-for-surplus theory, some of them with neoclassical modifications. Such analyses attribute the expansion potential to the existence of surplus land and voluntary or involuntary surplus labour before colonisation. The realisation of this potential is explained by any or all of the following: the ‘opening up’ of the territory to international trade, the development of transport and communications, pacification and the establishment of law and order, and the availability of new, imported consumer goods which induced African peasant farmers to work harder.3 In contrast to these views, this paper contends that the institution of colonial rule in West Africa had certain profound economic, political and social effects which were interrelated, and that the political and social, as well as economic, changes attendant upon colonial rule must be examined in order to understand the process of export expansion. It argues that an analysis of the colonial state cannot be confined to the ‘enabling’ role of the state in establishing law and order, transport and communications. *I am grateful to Barry Hindess, John Toye, Phil Leeson and Valpy FitzGerald for valuable comments, and to Henry Finch and Julian Clarke for helpful comments on an earlier version of this paper.

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COLONIALISM IN THEORY: NIGERIA

Rather, the active interventions of the state were crucial in generating and maintaining the conditions for the production of cash crops for export. These interventions, discussed in more detail below, include the abolition of slavery, changes in the political and economic powers of the African rulers, changes in the terms on which Africans could engage in economic activities, and taxation and monetary policies. Analysis of these changes provides the basis for understanding the massive increase in export production during the colonial period; the more conventional economic analyses provide an account of the transformation which is not only simplistic, but misleading. The organisation of this paper is as follows: in Section II certain important features of colonial economic transformation in Nigeria are discussed, documented primarily from Colonial Office records. Section III provides an account of some of the conventional economic analyses of the process of export expansion, and presents a critique based upon the discussion in Section II. Section IV presents concluding comments. II STRUCTURAL TRANSFORMATIONS IN NIGERIA DURING THE COLONIAL PERIOD

The process of establishment of colonial rule in Nigeria was a combination of treaties negotiated by persuasion and treaties imposed by coercion. Thence institutions of colonial administration were created, by adaptation or by imposition. Taxation, financial institutions, commercial arrangements and infrastructure developments followed.4 The success of colonialism in an economic sense can be indicated predominantly by the growth of exports from the colonies: Table 1 shows the growth of Nigeria’s major exports 1900–1929. The table indicates the massive increase in export volumes which occurred. During 1900–1930, Britain supplied approximately 75 per cent of British West Africa’s imports, and received about 50 per cent of its exports. Imports were mainly consumer goods, of which textiles were predominant, having replaced guns, ammunition and liquor as the major imports. Imports to Nigeria in 1895 were valued at almost £lm, and by 1925 imports had increased to more than £16m, of which 71 percent were supplied by Britain.5 It is principally these economic changes, and the mechanisms by which they occurred, which form the central concern of this paper. In this section, important aspects of the colonial transformation process will be discussed, in order to illustrate the way in which effective colonial rule influenced African economic and political systems. The discussion is documented from Colonial Office records for the period 1880–1910, the period during which effective colonial rule was established.6 The following issues will be discussed: the complexity of precolonial economic structures and some aspects of precolonial relations of production—landownership and slavery; and the role of the colonial state in the abolition of slavery; changes in the powers of the African rulers, changes in the terms on which Africans could engage in economic activities, the introduction of colonial currency and taxation, and the development of wage labour. These illustrations provide some insights into the way in which political and economic factors interacted in generating major changes in the colonial economy.


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TABLE 1 NIGERIA: VOLUME OF MAJOR EXPORTS, 1900–29

Source: Helleiner [1966].

(a) Precolonial Economic Structures

Despite the primitive nature of the forces of production in precolonial Nigeria—shifting cultivation in agriculture, handicraft techniques in processing, and head transport, canoes and camels in transportation, a major feature of precolonial economic structures was the diversity and complexity of economic activities and of social relations of production, in sharp contrast with the assumptions of many economists of simple, traditional, subsistence economies. Manufacturing production in precolonial Nigeria was widespread, both within the household unit for subsistence, and for exchange. Alvan Millson, Commissioner to the Interior, wrote in 1890 of Yorubaland: each compound has several of its members busily engaged in spinning, dyeing and weaving. I have indeed calculated, from personal observations and enquiries, that 25 percent of the population are engaged in the preparation of yarn, dyes and cloth during the greater portion of

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their hours of labour. In addition to this every farm has its patch of cotton and many people are engaged from time to time in picking and cleaning the fibre, while others make it their business at certain times of the year to grow and collect dye plants…the gathering, boiling and spinning of the native silk occupies a small proportion of the population [CO 879/33, No.399, 1890]. J.E.Flint writes, in addition, that Women engaged in the manufacture of their household pots, baskets and clothing as part of their normal household duties. Other crafts had become more specialized, especially the metal working industries. Blacksmiths were specialists, with the ‘mysteries’ of their craft concealed from the common people…Some towns became centres where blacksmiths had congregated in cooperative guilds numbering several dozen craftsmen. [Flint, 1974:381].7 Furthermore, In 1800, despite three centuries of European cloth imports, West Africans still produced the bulk of the cloth that was consumed—in a bewildering variety of fabrics which utilized almost every substance from which cloth could be made, including animal hairs and the bark of trees, as well as cotton. Much of it was plain stuff produced by village women in the household, but for high quality cloth specialized centres had developed exporting their goods over long distances. These centres produced cotton cloth almost exclusively, and each would have its distinctive shapes, sizes, colours and pattern designs. In such places a definite artisan class, often female, maintained itself almost exclusively by the cloth trade, and the professions of weaving, spinning, dyeing and embroidering were often quite distinct [Flint, 1974:388]. Thus production for exchange, and the division of labour, had advanced to the point where a substantial body of artisans existed, organised into craft guilds, and concentrated in major towns. Although the separation of agriculture and industry was far from complete, with many households producing and processing a wide range of agricultural and nonagricultural goods, local and long-distance trade were well developed, and many commodity-currencies were in use, such as cowrie shells, brass rods and manillas, as well as slaves. Lugard, in a report on Northern Nigeria in 1900, wrote ‘Kano is said to be the greatest commercial emporium of Africa. There are collected caravans from Tripoli, Morocco and the Sahara in the North, from Chad and Wadai in the East, and Salaga in the West…Large caravans chiefly consisting of very small donkeys, come southwards through Zaria, Bida and Keffi, paying toll at many places and occupying many months on the road’ [CO 879/58, No. 45, 1900].8 Upon what relations of production were these economic activities based? The importance of examining social relations of production, i.e. the structure of resource ownership, has been rightly insisted on in the Marxist tradition.9 Two aspects of precolonial relations of production will be discussed here: the land ownership system, and slavery.10 Land was relatively abundant throughout West Africa in the precolonial period, and rights in land held by individuals derived from their membership of a community which had acquired control over a given area of land. The specific rights of individuals in land varied in different parts of West Africa, but all land tenure systems were in this sense ‘communal’, in that individual rights derived from membership of a community. Marx describes the effects of communal land tenure as follows:


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The fundamental condition of property based on tribalism (which is originally formed out of the community) is to be a member of the tribe. Consequently a tribe conquered and subjugated by another becomes propertyless and part of the inorganic conditions of the conquering tribe’s reproduction, which that community regards as its own. Slavery and serfdom are therefore simply further developments of property based on tribalism [Marx, 1964:91]. Furthermore, Marx suggests that ‘the object of all these communities is preservation’ [Marx, 1964:92], and that ‘War is therefore one of the earliest tasks of every primitive community of this kind, both for the defence of property and for its acquisition…Where man himself is captured as an organic accessory of the land and together with it, he is captured as one of the conditions of production, and this is the origin of slavery and serfdom’ [Marx, 1964:89]. When land is abundant, there is no necessary connection between warfare and control over land, except in a defensive sense; wars are fought for reasons other than control over land, for example for political reasons, or for the capture of slaves. The relationship between forms of subjection (slavery, serfdom) and an abundance of land are, however, clear.11 According to Hindess and Hirst, the separation of the worker from the means of production on the basis of the wage form is not possible in the absence of the monopoly ownership of land by non-labourers and the existence of land free for cultivation. Under such conditions free labourers would tend to become independent proprietors and artisans. Marx tells the story of a Mr Peel, an English capitalist, who tried to establish large-scale capitalist production at Swan River in Australia, taking with him capital to the value of £50,000 and 3,000 working-class men, women and children. On arrival he was deserted and ‘left without a servant to make his bed or fetch him water from the river’. Marx drily remarks: ‘Unhappy Mr. Peel, who provided for everything except the export of English modes of production to Swan River! [Hindess & Hirst, 1975:158]. Land in West Africa was abundant, thus in the absence of forms of subjection, all labourers would become independent proprietors or artisans; given an abundance of land, if there are any propertyless sections of the community, then they must be slaves or serfs. The actual forms of subjection in West Africa varied widely: slavery was widespread throughout Nigeria and Ghana; taxes and tribute were imposed to extract surpluses from independent proprietors; and military levies were a common feature of precolonial states, to enable the states to engage in offensive or defensive wars. Furthermore the means by which the class of slaves was reproduced also varied widely, involving slave-raiding and wars to capture members of other tribes, and also forms of subjection of members of a tribe by members of the same tribe. Despite these variations, the essential point is that the general conditions under which these forms of subjection arose were the communal form of landownership and the availability of land free for cultivation. The widespread existence of slavery in West Africa has been well documented, by colonial administrators, economic historians and travellers to Africa at the time.12 The extent of slavery within West Africa is not clear: C.H.Robinson, who travelled widely in Hausaland in the 1890s, wrote that in Hausaland at least one-third of the population were in a state of slavery [Robinson, 1896:127]. The sources of slaves were various: Sir Ralph Moor, in a letter to Joseph Chamberlain in 1901, stated that

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the existing sources from which slaves are at present originally obtained in the Territories [Southern Nigeria] are (a) Natives seized by organized slave-raiding and sold in slave markets; (b) Natives accused of witchcraft or crime; (c) Natives seized in internecine and other wars; (d) Natives, mostly children, sold by parents, guardians or Chiefs, in trade transactions to liquidate debts or obtain trade goods; (e) Native children born in a state of slavery [CO 520/12, No. 340 1901]. Thus slaves were obtained both from outside the tribe and from within it, with internal sources also varied. One system common in the Gold Coast was the system of ‘pawning’, under which the ‘pawn’ provided security for loans. According to Mr Fairfield, the chief features of pawning were ‘that the pawn remains in servitude to a temporary master as a pledge for debt. Debts by native law bear interest at 50 per cent per year, and the labour of the ‘pawn’ does not go in reduction of the principal or interest of the debt’. Mr Fairfield noted, in addition, that ‘the great majority of the people of the Gold Coast are in actual slavery [CO 879/6, No. 47, 1874]. (b) The Abolition of Slavery within West Africa

Abolition of slavery by the Colonial government presented three sets of problems: administrative, political and economic. The administrative problem arose because the colonial administration rested on a handful of British administrators; the political problem was related to this, that effective colonial rule depended upon support for the colonial administration by indigenous rulers, whose power and authority were maintained by forms of subjection such as slavery. The economic problems were related to the disruption which would have resulted from the sudden abolition of slavery, since slaves performed important economic functions: agricultural labour, military service, means of transportation, currency, means of payment of tribute, collateral security for loans and means of accumulating wealth.13 The problems of abolition of slavery were well recognised by the British government:14 in Mr Fairfield’s memorandum, quoted above, it is suggested that with a barbarous, mutinous and treacherous people, speaking an unknown tongue and inhabiting a primeval forest and an impenetrable bush, an Emancipation Act would be difficult to carry into effect, and might also be mischievous in some respects as loosening the bonds of patriarchal and family authority, which are there the sole foundation of the social order [CO 879/6, No. 47]. Furthermore Mr. Chalmers, Acting Chief Magistrate and Judicial Assessor of the Gold Coast, wrote in 1875 it may be well to keep in view that the effect of emancipation on the industry of the country can scarcely as yet be considered as sufficiently tested. In the culture of the oil palm, and especially in the transport of the oil from the forests to the coast, much manual labour is involved…and it is


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not impossible that some of the owners of the plantations may experienced difficulty from an inadequate supply of labour [CO 879/8 No. 82, 1875]. In letters from Governor Sir G.T.Carter of Lagos to Mr Chamberlain in 1896, it is stated that ‘there are many difficulties in the way of the total abolition of salvery in West Africa…The main industries of the country would be gravely disorganized, if not extinguished, and, I suppose, some regard must be paid to the rights of property, even in West Africa’ [CO 879/45, No. 509,1896]. Sir Ralph Moor, the High Commissioner for Southern Nigeria, wrote to the Colonial Office in 1901 that ‘Doing away with slavery means revolutionising the entire economic conditions of the country’ [CO 879/66, 1901]. In 1901, the ‘legal status’ of slavery was abolished, but this merely granted the slave the power to assert his freedom. Lugard wrote in 1919 that this form of abolition was necessary because The sudden abolition of the institution of domestic slavery would have produced social chaos, and the wholesale assertion of their freedom by slaves was therefore discouraged’, but that In Sokoto, which received tribute in slaves, and where at the time of its conquest the great majority of the labouring class were slaves, and the masters most tenacious of their rights under Moslem law, the registers show 21,711 slaves freed by regular process up to the end of 1917… The example set by Government of prompt payment to the individual labourer, the introduction of currency…have all contributed to the formation of a free labour market [CO 879/119, No. 1070, 1919]. As discussed above, with the existence of land free for cultivation, the abolition of slavery would tend to transform slaves into independent peasant proprietors or artisans. Thus the economic activities carried out by slaves for their masters would not, after the abolition of slavery, be carried out by a class of wage-labourers (freed slaves), since the conditions for the creation of a class of wage-labourers had not been established. The effective abolition of slavery occurred gradually, alongside the gradual establishment of effective colonial rule, up to approximately 1920.15 Effective colonial rule had a profound impact upon most major aspects of West African economic and political systems, involving a transformation of social relations and in the nature and activities of the state: changes occurred in the political, military and economic powers of the African rulers and in the terms on which Africans could engage in economic activities; a currency system was introduced; taxes were imposed, payable only in the new currency; and forms of wage labour were introduced. It is important to discuss these changes in more detail, since the process of colonial economic transformation can only be understood by considering these changes as a totality. (c) Activities of the Colonial State

Changes in the political, military and economic powers of the African ruling groups were an inevitable outcome of the conquest and occupation of the territory by an alien power. British rule was established either by military defeat of African states (e.g. in Ashanti, Ilorin, Egbaland, etc.), or by treaties in which the African rulers recognised the superiority of British military power, and consented to the imposition of British authority. Proclamations prohibiting the sale, barter, gift or transfer of arms and ammunition were enacted to provide the British with a monopoly of the means of warfare. In dealing

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with African rulers who opposed British rule by military means, and whose economic power was sufficient to challenge the power of British trading companies, direct means were employed to destroy these concentrations of African economic and political power. Important examples were King Pepple of Bonny, King Jaja of Opobo, and King Nana of Warri.16 The major general result of the military conquest of West Africa was, thus, that African chiefs who consented to accept the supreme authority of the colonial government retained certain powers; the colonial government retained sole authority to control military forces,17 to determine the types and levels of taxation, to levy taxes and to determine trade policies. The African rulers, in turn, ruled with the protection of the colonial government and with a share of the revenues they collected its behalf. Internal wars were gradually suppressed; thus the African rulers, though their powers had been curtailed, enjoyed greater security than in the precolonial period, subject to their recognition of the suzerain power. An important effect of the establishment of colonial rule was a change in the terms on which Africans could engage in economic activity. These changes ultimately determined the structure of the economy and the control over economic activities exerted by Africans on the one hand, and Europeans on the other. The first important activity to consider is that of control over trade, the major activity with which foreign capital was involved in West Africa. The Royal Niger Company (RNC) is of interest in this connection, since it controlled a major part of Nigeria by Royal Charter until 1900, and continued to dominate West African trade thereafter. In territories controlled by the RNC, every foreigner wishing to engage in barter or retail selling had to obtain a retail trade licence costing £100: ‘the licensing system was created with the deliberate intention of excluding the African traders, who almost always caused Goldie to lose his sense of proportion’ [Flint, 1960:97–8]. Difficulties were thus created for Africans trying to conduct small scale trade; however, African traders operating on a scale significant enough to effectively challenge British monopoly power were destroyed by military means.18 Similar anti-monopoly criteria were not employed in assessing British activities: Lugard, for example, wrote The argument of those who hold that the policy of amalgamation of European interests in underdeveloped countries is preferable to competition in the purchase of native produce deserves to be seriously considered. If fair dealing, enterprise and energy be assured, an amalgamation of European interests may prevent the undue enhancement of prices, and enable the amalgamated trading corporation to set aside capital for ex tension and development, which else would be absorbed in the struggle of competition [CO 879/58, No. 458, 1900–1901]. Even Lugard, however, a former RNC employee, felt that the RNC ought to enable or even encourage Africans to become ‘small traders’ [CO 879/58, No. 458]. Thus large-scale trading, especially the import—export trade, was monopolised by British capital: the means of achieving this varied with the extent of African opposition, with frequent resort to arms where economic, administrative, diplomatic or other means failed. States which attempted to impose tolls and retain a share of ‘middlemen’s’ profits were also dealt with by military means. The imposition of tolls and duties by African states had the effect of protecting indigenous manufactures, for British imports were usually transported over longer distances and subjected to more duties than local manufactures. This was one of the major problems of the Jebus, who imposed duties on goods transported between Lagos and Yorubaland. It was estimated that, since


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the Yoruba were all fully clad, and at least 95 per cent of cloth consumed was of local manufacture, the interference of the Jebus cut the British off from a market of 30m yards of cloth per year [CO 879/33, No. 399]. Attempts to supplant locally produced manufactures, especially cloth, by imports, were vigorously carried out, particularly by Lugard, who regarded the northerners’ independence from imports as a major problem: The Hausa…when faced with inflated prices, or…the absence of the cheap class of cloth he desires, no longer exports his raw cotton but reserves it for his own looms…it is earnestly to be hoped that interference with the economic laws of supply and demand will soon be no longer necessary [CO 879/119, No. 1070]. Lugard’s opinion was ‘the native is more profitably employed in growing and collecting raw materials for export’ [CO 879/119, No. 1070], and he sought to reinforce this greater profitability by imposing tolls on native manufactures, but exempting imports.19 This policy was reversed by Wallace, acting Governor of Northern Nigeria in 1907. Despite attempts to undermine it, West African cloth manufacture was able to withstand European ‘competition’ with greater resilience than many other industries (such as iron smithing.) According to Flint, ‘colours and patterns were highly specialized…Lancashire cloth was at first much inferior in quality to the hand-made local product…in the far north…the high cost of transportation from the coast delayed the triumph of Lancashire cloth until the coming of the railway after 1911’ [Flint, 1974]. In the longer run, improvements in transportation, and the imposition of direct taxation, which forced Africans to seek ways of earning colonial currency, were more effective and administratively simpler as means of ‘encouraging’ Africans to produce agricultural raw materials for export. It is clear that the process whereby African manufactures were replaced by imported manufactures cannot be regarded as a question of ‘changes in tastes’ or ‘the creation of new demands’, as some economists have suggested.20 Imports from Europe had been available throughout the eighteenth and nineteenth centuries, and the trans-Saharan trade had made available a great variety of imported goods. Local manufacturing had developed to the extent that much of Nigeria was self-sufficient in consumer goods, to the disappointment of many colonial administrators.21 Restrictions were also imposed on entry into other economic activities; for example, after 1909, licences for prospecting were granted only to existing licence-holders, and all licence-holders applying for renewal had to prove that they had a capital of at least £500.22 Furthermore, Africans were effectively excluded from shipping and the import trade by the operation of a shipping ring: In 1909, Sir Walter Egerton wrote to Lord Elgin: There is a combination or agreement or understanding between the shipping lines trading to West Africa controlled by Sir Alfred Jones…and the Woermann Line23…it is the usual arrangement under which a merchant is compelled to ship all his goods by the lines forming the combination… The only ships visiting the Southern Nigerian ports are the ships of the companies mentioned above…The shipping combination is believed to be the cause of the excessively high rates of freight now current to Southern Nigerian ports…The principal firms in the Protectorate of Southern Nigeria have an arrangement amongst themselves as to prices…and there is no doubt that an almost complete monopoly of the trade has been maintained at certain ports by these firms because of this arrangement [Newbury, 1971:512–3].

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Thus a significant characteristic of the economic transformation of West Africa was the monopolisation of certain economic activities by the British—shipping, mining and the import— export trade—and the destruction of African economic power in these areas if Africans were able to effectively challenge British capital. Other aspects of the changed terms of economic activity were indirectly related to the ways in which African manufactures were replaced in African consumption by British imports, and in which ‘encouragement’ was given to the production by Africans of raw materials for export. A further important change was the introduction of a colonial currency system. Although commodity currencies were used throughout West Africa in the precolonial period, the colonial authorities were concerned about the growth of trade because of obstacles arising from the lack of a homogeneous, universally acceptable, convenient currency, and because of the lack of recognised and stable rates of exchange between the major commodity currencies. This was in contrast to the attitude of the big trading companies, who were the principal suppliers of currency commodities and thus profited from their sale.24 Apart from the effects of the new currency upon the development of trade, therefore, the effect upon the distribution of profits from currency issue must also be considered, since currency issue and creation always have definite distributive effects. The effect of the change from a decentralised mode of currency creation to a centralised mode in the hands of the state was to transfer the profits from currency issue and creation from the merchant capitalists to the British government: in 1898, for example, ‘British silver coin of the face value of £10,000, delivered in West Africa, cost, exclusive of the expenditure due to the recoining of worn coins, £4,419, giving a profit of £5,581’ [CO 879/62, No. 616, 1900]. Colonial governments were allowed no share in the profits from seignorage, yet these profits were considerable: during 1900– 1910, net silver imports provided the Imperial Treasury with profits of £2m [Newlyn and Rowan, 1954: Ch. 2]. A Currency Board was established, based on reserves of gold and securities held in London, with coin issued against prepayment in sterling. The system effectively established a sterling exchange standard, since the West African pound had no existence independent of sterling [Newlyn and Rowan, 1954]. The gradual adoption of the colonial currency was facilitated by the development of trade, taxation and wage labour, and in 1911 the Native Currency Repeal Ordinance was passed in Nigeria, demonetising brass rods and manillas [McPhee, 1926:238]. A further significant activity of the state was the levying of taxes. Forms of taxation had been levied in West Africa over a long period before colonial rule; thus taxes were not a colonial innovation. Colonial taxes represented a threefold change: a change in the authority levying the tax; a change in the form in which taxes were paid; and a change in the nature of activities on which taxes were levied. The objectives of colonial taxation were fourfold: to raise revenue; to facilitate the adoption of the new currency; to reinforce the political changes attendant upon colonial rule; and to influence the structure of economic activity. The first objective, raising revenue, was a general objective of British colonial finance, as summarised in 1852 by Earl Grey: ‘the surest test for the soundness of measures for the improvement of an uncivilised people is that they should be self-supporting’ [Hopkins, 1973, Ch. 6]. In addition, the colonisation of Africa was not overwhelming popular in Britain, so that the resources available from the Imperial Treasury were limited. The second objective, facilitating the adoption of the new currency, was summarised by Lugard: ‘To avoid the trouble of transporting bulky produce, the native quickly appreciates the advantage of securing sufficient cash to pay his tax, thus promoting the adoption of currency, which facilitates


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trade’ [Lugard, 1965:251]. In most cases the ‘native’ had no choice, since direct taxes were to be paid in the new currency. The third objective, reinforcing the political changes attendant upon colonial rule, was also expressed by Lugard, who wrote that the institution of taxation ‘marks the recognition by the community of the Suzerainty of the Protecting Power, and the corresponding obligation to refrain from lawless acts’ [Lugard, 1965:218]. Furthermore, according to Lugard, direct taxation was an essential feature of the effective abolition of slavery: it is obvious that the native rulers must have some means of livelihood, and of maintaining their position. If there be no legal and recognized tax, the necessary income must be obtained by arbitrary levies on the peasantry, subject to no control by the Government. In the Moslem states the tax is the corollary of the abolition of slavery [Lugard, 1965:231]. Moreover, by means of taxation ‘the upper classes can be paid salaries for public works; slavery, forced labour, and all other forms of exactions from the peasantry can be declared illegal without reducing the ruling classes to poverty.’ [Lugard, 1965:233]. This objective was also expressed in relation to the Ashanti, upon whom an annual tax of £7,000 was imposed in 1899 in order to repay the British for the costs of the Ashanti wars; the tax was to be collected by the kings and chiefs, who would retain 10 per cent of the total, since, ‘being the collectors of it and realising that the more revenue they collect the larger will be their reward, will, it is fair to presume, more probably assist the Resident than oppose the collection of the tax.’ [CO 879/62, No. 632,1900]. The fourth objective, that of influencing the structure of economic activity, was achieved principally through direct taxation, i.e. poll taxes or hut taxes. By this means all Africans were forced to seek some cash-earning activity.25 In order to pay their taxes, Africans had two alternatives: to work for wages or to produce cash crops for export. Crowder wrote that the colonial system, primarily through taxation, forced [the African] to concentrate on export crops to the detriment of his subsistence crops. Thus in the Gold Coast, where there was no taxation, but a shortage of labour for the cocoa plantations and gold mines, migrants from the heavily taxed regions of the Upper Volta filled the gap [Crowder, 1968:274].26 Thus direct taxation was an important element in the creation of a wagelabour force and in generating increased production of export crops: not only did the colonial authorities collect revenue, but all revenues collected represented, in addition, a comparable amount of wage work, or value of cash crops sold, or a combination of these. Of these four objectives, the first could be achieved with taxes of any type, but the last three objectives involved direct taxes of a specific type: money taxes, levied on as wide a section of the population as possible.27 Lugard, the architect of the system of ‘Indirect Rule’, regarded indirect rule as dependent upon direct taxation [CO 879/119, No. 1070:1919]. The problem which arose, however, was that customs duties were administratively easier to impose and to collect, and aroused less opposition from the Africans, than direct taxes. Taxes on traded goods tended, on the other hand, to conflict with the objectives of encouraging the importation of British manufactures and the production of export crops, and afforded protection to African manufacturing; furthermore taxes on traded goods aroused powerful opposition from the British trading companies.28 Lugard wrote that ‘Excessive

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import duties will result in a diminution of the stimulus to production…since the wants of the African are rarely necessities, and he can leave them ungratified’ [Lugard, 1965:266]. In the early colonial period most of the tax revenue generated was from customs duties: for example in 1899–90, total revenue for Southern Nigeria was £164,108, of which £150,847 was specific customs duties and £5,645 ad valorem customs duties. A large proportion of the tax revenue was derived from duties on imported spirits. Lugard advocated the replacement of the revenue from spirits by ‘a light and equitably imposed direct tax such as I instituted in the North—shared as to a portion of it with the native authorities, by which means their position and authority can alone be assured’ [CO 879/117, No. 1043]. In 1913, customs duties formed 51.2 per cent of Nigerian revenue, but by 1918 the proportion had fallen to 36.3 per cent, largely because of the introduction of direct taxation into the South [CO 879/119, No. 1070]. As Lugard noted at that time, The proceeds of the native income tax in the Northern Provinces, which is shared by the native administrations, steadily increased from year to year, and it is estimated to yield at least £894,000 in 1919, approx. one-half of which appears as general revenue…the Native Treasuries are in a prosperous condition, and have been able to invest further sums, and to make liberal donations in aid of the War…The inauguration of the system in the Egba and Yoruba countries will, I hope, be complete by the end of the current year, and a revenue of £162,000 is anticipated, half of which will accrue to colonial funds [CO 879/118, No. 1057]. The introduction of direct taxation also enabled Lugard to abolish the taxation of salt, levied at £1 per ton.29 The levying of taxes on Africans was an important factor in generating a wage labour force and increased production of cash crops for export. This did not, however, wholly obviate the use of forced labour for public works and infrastructure. Crowder wrote that in Southern Nigeria, ‘all able-bodied males between 15 and 50, and females between 15 and 40, were liable for labour for road-making and similar work up to 6 days a quarter’, and that the construction of the railways in Nigeria was dependent upon compulsory labour. He states that, in 1925, 38 per cent of the 12,500 labourers engaged in railway construction in Northern Nigeria were ‘political’ labourers, recruited forcibly through the native chiefs [Crowder, 1968:208]. Lugard strongly disapproved of forced labour, believing that the institution of direct taxation was an adequate means of generating a wage-labour force [CO 879/116, No. 1028]. One problem which frequently arose was that wage rates were regarded as ‘too high’ by government and European firms.30 The level of wages was a reflection of the prevailing economic conditions, in which Africans were not separated from the land, and thus were not a ‘free’ wage labour force. The use of forced labour to supplement the labour force generated as a result of direct taxation can be understood in a way similar to the use of slavery in precolonial Africa, as a result of the availability of land free for cultivation, and thus the absence of a free wage-labour force.31 The transformations in aspects of the West African political, economic and social systems had effects which were complex and far-reaching. In the economic sphere, two were of major significance: first, effective colonial rule established conditions under which Africans could become independent peasant smallholders; secondly, it established conditions under which British capital could monopolise important areas of West African economic activity. The first effect was the result of the gradual abolition of slavery, and the changes which occurred in the economic and political powers of the African rulers, within conditions of a relative abundance of


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land and the absence of a monopoly in land. Africans did not become ‘free wage labourers’ as a result of the abolition of slavery: wage-work occurred on a limited scale, and was frequently related to the necessity of earning cash incomes in areas unsuitable for the production of cash crops. At times the labour force available for wage-work was inadequate; hence the supplementation of free wagelabour by forms of forced labour. The need to earn cash incomes was a result partly of the imposition of taxes and partly of the gradual replacement of domestically produced non-agricultural commodities by imports. The second effect, the monopolisation of certain important areas of West African economic activity by British capital, was concerned mainly with the import—export trade, shipping and banking. Monopolisation of the import—export trade occurred in many cases by the military defeat of large African competitors, and by the manipulation of administrative arrangements to exclude small African competitors. By 1930, according to Kilby, four companies accounted for 60 per cent of the import— export trade in the whole of British and French West Africa (United Africa Company, John Holt, SCOA and CFAO), and by means of fully owned subsidiaries and interlocking directorships, exercised partial or total control over the main shipping lines and banks. In many cases the trading firms had a contractual relationship with manufacturers in the metropolitan countries, or a direct stake, such as Unilever’s subsidiary, British Oil and Cake Mills, [Kilby, 1969: 470–520].32 Little direct investment was undertaken by private British capital; most of the direct investment in West Africa at this time was undertaken by the government, mainly in the development of transportation and other infrastructure. The role of the state in the colonial economy was crucial, in creating conditions under which these changes occurred, and in ensuring continued conditions for the operation of the British monopolies and for the production of cash crops for export. It is remarkable that colonial economic policies have been analysed as ‘laissez-faire’, or as passive: it is clear from the above discussion that the colonial state played an active role in transforming the colonial economy. III STANDARD ECONOMIC ANALYSES OF COLONIAL ECONOMIC TRANSFORMATION—A CRITIQUE

The aim of this section is to discuss some of the standard economic analyses of colonial economic transformation, and to criticise them in the light of the discussion of colonialism in Section II. The standard analyses—vent-forsurplus and its neoclassical modifications—do not claim to be theories of colonial transformation, but theories of the process of export expansion. Nevertheless the process of export expansion was an integral part of colonial economic transformation, and the standard theories, implicitly or explicitly, assume the existence of conditions for a massive increase in exports, rather than analysing how these conditions were generated, and the role of colonialism in generating them. It is for these reasons that standard theories of export expansion can be regarded as theories of colonial economic transformation by assumption. One well known and widely cited analysis of the process of export expansion is the vent-for-surplus theory, which derives from Adam Smith, and which has been more recently developed by Caves [1965], Myint [1958, 1967 ], and Findlay [1970 ], among others.33 A clear statement of the theory itself is provided by Caves, who writes that vent-for-surplus theories depict the effects of trade on growth as involving the exploitation of resources lacking, in that place and at that time, any alternative uses of significant economic value. The existence of these

48


‘surplus’ resources reflects the state of economic organization in general and not a failure of the market mechanism in any narrow sense. The pace of growth and the changes in the pattern of international trade associated with the absorption of such resources gives these models their distinctive stamp, in contrast to models involving resource reallocation and thus lying nearer to the core of traditional trade theory [Caves, 1965:96]. A major proponent of the applicability of vent-for-surplus theory to the tropical underdeveloped countries in the late nineteenth century is Hlå Myint. Myint’s version analyses trade as providing new effective demand for the output of resources which would otherwise remain unused. On the supply side, two factors enabled peasant exports to expand so rapidly: the existence of unused land, and underemployed labour. Myint establishes the latter thus: since there was no large-scale immigration and no drastic change in methods of production, and since output rose much more quickly than the natural increase in the working population, this suggests that initially there must have been a considerable amount of underemployed or surplus labour in these [peasant] families…There was abundant waste land waiting to be cultivated, but labour remained underemployed because there was a lack of effective demand for its potential increase in output. In the initial situation, with the available surplus land and surplus labour, and with the traditional methods of cultivation, a peasant family could have produced a much larger agricultural output than it was actually producing for its own subsistence consumption. But it chose not to do so, for the simple reason that every other peasant family could do the same and there would be no one in the locality who would want to buy the surplus output. With the poor transport and communications, and the rudimentary exchange system which existed before the opening up of the export trade, the local and domestic market of the underdeveloped countries was too narrow and unorganized to absorb their potential surplus agricultural output. At this stage, therefore, the main function of international trade was to create effective demand: it linked up the world market demand for the type of things which the peasant could produce with the surplus productive capacity the peasant had locked up in the subsistence economy [Myint, 1967:42–3] Resources in the pre-trade situation were thus unused, because of inelastic domestic demand for the goods, and because of internal immobility and specificity of resources. The existence of surplus productive capacity should not be regarded as a surprise, for ‘Given the genuine historical setting of an isolated economy, might not its initial disproportion between its resources, techniques, tastes and population show itself in the form of surplus productive capacity?’ [Myint, 1971:127]. According to Myint, the process of export expansion had two broad features: first, the underdeveloped countries of South East Asia, Latin America and Africa started off with sparse populations relative to natural resources; secondly, once the opening-up process started, export output grew rapidly, with a subsequent tapering off in the growth rate. The relevance of the vent-for-surplus theory in explaining this process was that the export growth required no changes in techniques of production; the contribution of the colonial powers in the development of transport and communications had the effect of increasing the total volume of resources rather than increasing productivity per unit of land or labour: ‘All these factors suggest an expansion process which kept itself going by drawing an increasing volume of hitherto unused or surplus resources into export production’ [Myint, 1971: 129]. The process was, therefore, based on constant returns to scale and


49

re latively rigid factor combinations. Assuming a technically specified relationship between manhours and land, any increase in output per capita was assumed to be a once-for-all increase, resulting from an increased quantity of land per farmer, an increase in working hours, and an increase in the proportion of gainfully employed in the population. Having established the existence of surplus productive capacity in the pre-trade situation, Myint suggests that two changes were necessary to start the process of bringing the idle resources into productive use: first, infrastructural developments, principally improved transport and communications, and law and order; secondly, the establishment of foreign import—export firms as middlemen between the peasants and the world market: these firms performed two functions, which were to collect, process and transport peasant produce to foreign buyers, and to offer the peasants the inducement to increase export production by selling them imported goods. This inducement to the peasants was as important, perhaps even more important, than the other function of the firms. For in this early phase of international trade, imports were not merely a cheaper way of satisfying the existing wants of the peasants. Many of them were novelties hitherto unknown in the subsistence economy. By stimulating new wants among the peasants, the expansion of imports was a major dynamic force facilitating the expansion of exports. The speed with which the peasants of S.E. Asia and West Africa (with their different cultural backgrounds) acquired the taste for the new imported commodities and expanded their export production in order to be able to buy them offers us concrete evidence of their capacity to respond positively to economic incentives [Myint, 1967:41–42]. In the vent-for-surplus theory, therefore, output in the pre-trade situation was demand-constrained, and since the expansion of exports occurred by means of the use of hitherto idle resources, the increased output could be regarded as ‘something for nothing’: the surplus productive capacity provided these countries with a virtually ‘costless’ means of acquiring imports which did not require a withdrawal of resources from domestic production but merely a fuller employment for their semi-idle labour. Of course, one may point to the real cost incurred by the indigenous peoples in the form of extra effort and sacrifice of the traditional leisurely life and also to the various social costs not normally considered in the comparativecosts theory, such as being sometimes subject to the pressure of taxation and even compulsory labour…But for the most part it is still true to say that the indigenous peoples of the underdeveloped countries took to export production on a voluntary basis and enjoyed a clear gain by being able to satisfy their developing wants for the new imported commodities [Myint, 1971: 141–2]. An important implication of this approach is that criticisms of the colonial powers based upon notions of ‘export bias’ are unfounded: in the vent-for-surplus theory the notion of ‘export bias’ can be discounted, since the process of export expansion was based on the use of idle resources, not upon a reallocation of resources already in use. Neoclassical adaptations of the vent-for-surplus theory regard output in the pre-trade situation as supply-contrained, rather than demand-constrained, emphasising the role of peasants’ preferences in

50


the process. This approach can be illustrated by the work of Szereszewski on Ghana and of Helleiner on Nigeria. The latter, for example, writes Output increased because the terms at which leisure could be traded for material goods altered… The appearance of external markets for the products of the Nigerians’ land and labour broke the traditional terms of trade (price) between leisure and goods; greater prizes, in the form of cloth, weapons and salt, could be obtained for their products than ever before. The Nigerian peasant producer responded by increasing his labour (and land) inputs so as to raise his output. These better terms of trade were gradually pushed out to more and more remote areas; more and more individual peasants were thus induced to sacrifice some of their leisure. These peasant producers could thus be induced, with unchanged preference functions, to abandon still more of their leisure in favour of the labour required to produce exportable output. There was probably also occurring a continued shift of producers’ preferences away from less ‘productive’ activities and leisure towards the material goods which would be obtained through trade, which also tended to raise labour inputs [Helleiner, 1966:11–12].34 Thus according to this view, before the ‘opening up’ of trade with Europe, West Africa was operating at a traditional, low-level equilibrium. This equilibrium was disturbed by trade with Europe, which had the effect of changing the terms on which peasant farmers chose between work and leisure. The new equilibrium was characterised by an increase in hours worked per head, and an increase in the quantity of land in productive use. A major problem for the vent-for-surplus analysis concerns the conditions under which a ‘surplus’ of resources can be said to exist. An extreme illustration is as follows: in a Moslem area, where women are confined to their family compound, in what sense is the women’s labour a ‘surplus’ resource? Clearly if religious attitudes changed, so that is became acceptable for women to undertake employment outside the compound, the supply of labour would be increased. However, given such religious attitudes, the women’s labour cannot be regarded as a ‘surplus’ resource. It is obvious that, in any economy, if certain fundamental changes occur (such as the abolition of advertising, of armies, of universities, changes in conditions and attitudes concerning the employment of children, changes in th provision of nursery facilities, etc.), then resources may be released which might be used for other purposes. As indicated in Section II, in the precolonial period African states were organised in political, military and economic ways which differed fundamentally from their organisation in the colonial period. In many areas of precolonial West Africa, where the precolonial state maintained armies and slavery was widespread, the soldiers and slaves were not available for alternative, ‘productive’ work, nor can their activities be described as ‘leisure’. With the gradual abolition of slavery and the monopolisation of means of warfare by the colonial state, the ‘supply of labour’ would inevitably increase, but the extent to which this labour can be described as ‘surplus’ is severely ‘limited. More illuminating is an explanation of the means by which the resources were generated, rather than an assertion that they were ‘surplus’. A further problem of the vent-for-surplus analysis is that the constancy of the output of non-traded food and of manufactures is demonstrated by assertion,35 and important aspects of labour reallocation are ignored: the concentration of the analysis on the use of idle resources involves, implicitly, the assumption that other economic activities were not adversely affected by the process. It is clear from the discussion in Section II that, in the precolonial period, African manufacturing activity was well


51

established, widespread and diverse, and, further, that African manufacturing was adversely affected during the colonial period.36 The emphasis in the vent-for-surplus analysis on the ‘voluntary’ nature of the export expansion process, or on ‘individual choices’, as in the neoclassical version, can also be questioned. For example, the imposition of taxes payable in the colonial currency was a means of forcing Africans to produce commodities for which European demand existed, hence constraining their ability to ‘choose’; in the precolonial situation, involvement in military levies could hardly be regarded as voluntary. The problem is that by concentrating on individual choices, the analysis takes as given the conditions within which those ‘choices’ occur, rather than analysing the conditions themselves. The vent-for-surplus analysis proceeds by assuming that, before colonial rule, the colonies were ‘closed’. Trade with Europe then ‘opened up’ the territory, ‘new goods’ were introduced, thus starting the growth process. However, international trade was not a new phenomenon for West Africa in the late nineteenth century: aside from the slave trade, which began in the seventeenth century, and the era of ‘legitmate commerce’—a euphemism given to the trade in non-human commodities after the abolition of the slave trade—West Africa had long been involved in the trans-Saharan trade; production for exchange, both for local and long-distance markets, was widespread. Thus the vent-forsurplus analysis is historically inaccurate. The notion that imports from Europe were ‘new’ is similarly inaccurate. As indicated in Section II, imports from Europe frequently displaced local manufactures, and the means by which this substitution took place were based, in many cases, not on ‘free competition’ but on administrative manipulation of the terms on which local and imported manufactures competed. The vent-for-surplus analysis ‘proves’ its accuracy thus: since imported consumer goods motivated the peasants to work harder, the expansion of exports ‘offers us concrete evidence of their capacity to respond positively to economic incentives’ [Myint, 1967:41–42]. This form of argument is circular, historically inaccurate and misleading, since direct and indirect means of forcing the shift from local to imported manufactures, and from production for domestic consumption to exports, are ignored. The historical inaccuracy of the vent-for-surplus theory derives in part from its conception of the precolonial social formation, a conception which involves the following elements: a simple, subsistence society, isolated from international trade, in which the inhabitants have much leisure time, simple tastes, and consume little apart from food. This conception is a fantasy, an ‘idle savage’ mythology which has no basis in reality. In Myint’s view, two elements were necessary to start the process of export expansion: infrastructural developments and the establishment of foreign import—export firms as middlemen between the peasants and the world market. As discussed above, the monopoly position of British merchant capital in the import—export trade was established by the destruction of African competitors and by preventing Africans from competing on similar terms, for example by licensing and the operation of shipping rings. An important conclusion of the vent-for-surplus analysis is that the process of export expansion represented ‘something for nothing’, that a clear net gain accrued to the colonies, and that colonial governments cannot be criticised for having imparted an ‘export bias’ into the colonial economies, since the process of export expansion was based on the use of surplus resources and not on resource reallocation. Little credence can be attached to such conclusions, since they derive from an analysis in which surplus resources are assumed to exist and the output of other commodities is assumed to remain constant. The analysis attempts to abstract from the major social, political and economic changes that occurred during the colonial period, even though an analysis of these changes is vital for understanding the process of export expansion. Finally the fantastic conception of precolonial societies on which the

52


vent-for-surplus theory is based, and its consequent historical inaccuracies, are such that it is remarkable that the theory has been taken seriously as an explanation of the process of export expansion in West Africa. IV CONCLUSIONS

In this paper an attempt has been made to indicate the complex nature of the economic changes which occurred in Nigeria during the colonial period, and to discuss certain standard economic analyses of these changes in the light of the historical analysis. Emphasis has been placed, first, upon the interactions between political, social and economic changes, and secondly, upon the role of the colonial state in the transformation process. The state was crucial in creating conditions for the operation of British monopolies and for the production of cash crops for export by independent peasant farmers. These conditions involved far-reaching changes, such as the abolition of slavery, changes in the political and military powers of the African ruling groups, changes in the terms on which Africans could engage in economic activity, and the introduction of new forms of currency and taxation. The question of the ‘costs’ and ‘benefits’ of colonialism and whether colonialism was ‘good’ or ‘bad’ for the colonies has not been discussed. This paper argues that colonialism occurred, had certain effects, and that it is important to examine these effects, both because of their importance in African (and British) economic history, and because of the impact of these effects on the structures of West African economies throughout the twentieth century. Certain ‘standard’ explanations of the colonial economic changes, principally the vent-for-surplus theory, have been criticised as inadequate because they rely on proof by assumption and an historically inaccurate notion of precolonial societies. Vent-forsurplus theory does unambiguously conclude that colonialism was ‘good’ for the colonies. To point to this theory’s inadequacies is thus also to indicate that this conclusion rests on extremely shaky intellectual foundations. Perhaps the major problem for such theories is their attempt to explain economic changes without dealing with the constitution of specific economies. NOTES 1. Nevertheless there were considerable changes in the nature of land ownership. See, for example,

Clarke [1979]. 2. See, for example, Szentes [1969]. 3. Examples of such analyses, to be discussed in detail below, are Myint [1958], Helleiner [1966] and

Szereszewski [1965]. 4. The process of establishment of colonial rule in West Africa was complex and has been well

5. 6. 7. 8. 9.

documented in Crowder [1968], Ajayi and Crowder [1974], Newbury [1971], Gann and Duignan [1969], Ikime [1977]. See Hopkins [1973], Geary [1965]. Since data collection was at a somewhat rudimentary stage in that period, one of the most informative sources is the confidential print CO 879, which has been most heavily used here. For further discussion of the guilds, see Ekundare [1973], Ch. 3. See also Robinson [1896], Barth [1890], Hopkins [1973]. See, for example, Hindess and Hirst [1977].


53

10. This is not to suggest that precolonial Nigeria was a ‘slave mode of production’. Slavery is discussed

11. 12. 13.

14. 15. 16. 17.

18.

19. 20. 21.

22. 23. 24.

25. 26.

27.

28. 29.

because it was an important feature of the precolonial social formation which was altered during colonial rule. This is not to imply that slavery only exists under conditions of land surplus. See, for example, Lugard [1965], Hopkins [1973], Meek, MacMillan and Hussey [1940], and Robinson [1896]. The use of slaves for these purposes is indicated in Colonial Office records; for example, their use as currency. This was widespread, because of the exceptionally cumbersome nature of other currencies as means of payment of large amounts: for example, it was estimated that the maximum value of brass rods which one man could carry was 30/- (CO 879/59, No. 21). In 1901, Sir Ralph Moor wrote to Colonial Office, urging the establishment of a currency system. Trade in the territories is now conducted by barter and through the medium of cumbersome imported commodities…and slaves, who in actual trade transactions are a sort of ambulating currency, transporting, together with themselves, the native currencies’ (CO 879/66, 1901). Despite the irony that the earlier justification for British military presence on the coast of West Africa was the suppression of the overseas slave trade. ‘Effective’ here is used in contrast to formal ‘diplomatic’ rule, established at the Congress of Berlin in 1885. See Dike [1956], Ikime [1977], Geary [1965]. The decline of warfare and monopolisation of military force by the British released manpower on a considerable scale, e.g. Hogendorn [1969] writes that ‘surplus labour must have been generated by the decline of warfare after the colonial pacification, which released manpower on a large scale from the need to serve in military levies. This view is reinforced by the prevalence of women as cultivators of food in the traditional economy’ [p. 290]. A major example was Jaja of Opobo, who was deported because he could exert a significant degree of control over trade, which the RNC could not defeat by economic or administrative means. See Ikime [1977]. See CO 586, Northern Nigeria Gazettes, 1903–1906. See, for example, Barber [1964], Myint [1967], Szereszewski [1965]. See Geary [1965]. Geary quotes Sir Hesketh Bell, who wrote in 1911 that ‘the development of external trade has been disappointingly slow…The great markets of the principal centres are full of wares of all sorts,…but everything is of local make or manufacture’ [p. 231]. CO 586/4, Northern Nigeria Gazettes, 1912–13. Includes the African Steamship Co., the British and African Steam Navigation Co., Elder Dempster and the Compagnie Belge Maritime du Congo. See CO 876/66. In a letter to Mr Chamberlain, Sir R.Moor wrote ‘With reference to brass rods the selling price when freshly imported may be taken to be about 4 to the shilling, and when used by the natives for purchasing trade goods 5 are required to represent a shilling’ (CO 879/66, No. 47, 1902). See, for example, Pim [1940]. See also, for example, Usoro [1974], who suggests that the expansion of palm produce exports from Eastern Nigeria can, in large part, be attributed to increases in producers’ obligations, such as taxes, rather than to any ‘change in tastes’ or shifts in producers’ terms of trade. A further effect of direct taxation levied widely was to influence household organisation by the identification of some members of the household as responsible for paying the tax, e.g. the oldest male, or all adult men. See, for example, CO 879/31, 1889. The North was dependent on imported salt and, salt being a necessity and one of the few imported items upon which all Africans in the North were dependent, salt taxes served a purpose similar to that of direct taxation. Lugard estimates that, for farmers, direct taxes were about 10 per cent of gross

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30. 31.

32. 33.

34.

35. 36.

income. For small farmers he estimates that 10 per cent of gross income was equivalent to 25 per cent of net income [Lugard, 1965, Ch. 12]. See, for example, CO 879/119, No. 1028. Also see CO 879/58, No. 45, in which Lugard refers to ‘the preposterous rates of pay which have been instituted for local labour of all kinds.’ Many local chiefs actually regarded the use of wage-labour by Europeans as a way of transferring slaves to the colonial government or to European firms. Lugard wrote: ‘The employment—of course for wages—by Europeans, or on public works, of slaves liberated by Government, is a matter in which great care should be exercised, for any seeming inconsistency is jealously noted, and it is said that Government, while depriving the owners of their rights in their slaves, connives at their acquisition by its employees or other Europeans’ [Lugard, 1965:380]. The United Africa Company, the direct descendent of the RNC, is, of course, a Unilever subsidiary. Other economists accept vent-for-surplus as a ‘commonplace’; for example, Bauer writes: ‘The provision of a market for export crops has often provided an outlet for surplus labour and unused land, a vent-for-surplus…a sequence which has helped material progress in many underdeveloped countries. Such sequences are commonplaces of economic history’ [Bauer, 1971:38–9]. Szereszewski’s arguments are similar: ‘The economy of the forest belt of the Gold Coast, with its abundance of forest land and considerable mobility of population and flexibility of arrangements governing access to land, was effectively constrained in production by the volume of labour services supplied by the population. What is more, the labour constraint can be said to have been determined not by physical limitations, but by the alternative evaluation of labour and leisure, given the technological conditions and economic possibilities…i.e. the economy is said to have been working subject to limitations originating in preferences, not in physical capacity or involuntary constraints on activity’ [1965:76]. In Szereszewski’s work the constancy of food production is both an assumption and a conclusion [Szereszewski, 1965:75]. See also Hill [1967]. For a more detailed discussion see Smith [1976]. REFERENCES

Ajayi, J.F.A. & Crowder, M. (eds.), 1974, History of West Africa, London: Longman. Barber, W.J., 1964, ‘The Movement into the World Economy’, Ch. 14 in Herskovits & Harwitz [1964]. Barth, H., 1890, Travels and Discoveries in North and Central Africa, London. Bauer, P.T., 1971, Dissent on Development, London: Weidenfeld & Nicholson. Caves, R.E., 1965, ‘Vent-for-Surplus Models of Trade and Growth’, in R.Caves, H. Johnson and P.Kenen, Trade, Growth and Balance of Payments, North Holland. Clarke, J., 1979, ‘Peasantisation and Landholding’, in Martin Klein (ed.), Peasants in Africa, Sage, forthcoming. Colonial Office, Confidential Print: CO/879, Public Records Office, London. Colonial Office, Northern Nigeria Gazettes, CO/586, Public Records Office, London. Crowder, M., 1968, West Africa Under Colonial Rule, London: Hutchinson. Dike, K.O., 1956, Trade and Politics in the Niger Delta 1830–1885, Oxford: Clarendon Press. Ekundare, R.O., 1973, An Economic History of Nigeria 1860–1960, London: Methuen. Findlay, R., 1970, Trade and Specialization, Harmondsworth: Penguin Flint, J.E., 1960, Sir George Goldie and the Making of Nigeria, London: Oxford University Press. Flint, J.E., 1974, ‘Economic Change in West Africa in the Nineteenth Century’, in Vol. II of Ajayi & Crowder [1974]. Gann, L., & Duignan, P. 1969, Colonialism in Africa, Cambridge: Cambridge University Press. Geary, W.N.M., 1965, Nigeria Under British Rule, London: Cass. Helleiner, G.K., 1966, Peasant Agriculture, Government and Economic Growth In Nigeria, Illinois: Irwin.


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Herskovits, M.J., & Harwitz, M. (eds.), 1964, Economic Transition in Africa, London: Routledge and Kegan Paul. Hill, P., 1967, Review of Szereszewski [1965], Economic Development and Cultural Change. Hindess, B., & Hirst, P.Q., 1975, Precapitalist Modes of Production, London: Routledge. Hindess, B., & Hirst, P.Q., 1977, Mode of Production and Social Formation, London: MacMillan. Hogendorn, J., 1969, ‘Economic Initiative and African Cash Farming: Precolonial Origins and Early Colonial Developments’, Ch. 8 in Vol. IV of Gann and Duignan [1969]. Hopkins, A., 1973, An Economic History of West Africa, London: Longman. Ikime, O., 1977, The Fall of Nigeria: The British Conquest, London: Heinemann. Kilby, P., 1969, ‘Manufacturing in Colonial Africa’, Ch. 12 in Gann & Duignan [1969]. Lugard, F.D., 1965, The Dual Mandate in British Tropical Africa, London: Cass. McPhee, A., 1926, The Economic Revolution in British West Africa, London: Routledge. Marx, K., 1964, Precapitalist Economic Formations, London: Lawrence & Wishart. Meek, C.K., MacMillan, W.M., & Hussey, E.R.J., 1940, Europe and West Africa, London: Oxford University Press. Myint, H., 1958, ‘The Classical Theory of International Trade and the Underdeveloped Countries’, Economic Journal Myint, H., 1967, The Economics of the Developing Countries, London: Hutchinson. Myint, H., 1971, Economic Theory and the Underdeveloped Countries, London: Oxford University Press. Newbury, C.W., 1971, British Policy Towards West Africa, Select Documents, 1875– 1914, Oxford: Clarendon Press. Newlyn, W., & Rowan, D., 1954, Money and Banking in British Colonial Africa, Oxford: Clarendon Press. Pim, A., 1940, The Financial and Economic History of the African Tropical Territories, Oxford: Clarendon Press. Robinson, C.H., 1896, Hausaland, London: Sampson Low & Marston. Smith, S.M., 1976, ‘An Extension of the Vent-for-Surplus Model in Relation to Longrun Structural Change in Nigeria’, Oxford Economic Papers. Szentes, T., 1969, Introduction to the Economy of Tropical Africa, Budapest: Centre for Afro-Asian Research. Szereszewski, R., 1965, Structural Change in the Economy of Ghana, 1891–1911, London: Weidenfeld and Nicholson. Usoro, E.J., 1974, The Nigerian Oil Palm Industry, Ibadan: Ibadan University Press.

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Trade Concentration and Export Instability by James Love*

Conventionally commodity and geographic concentration are thought to be important factors contributing to the instability in export earnings of the developing countries. Empirical investigations have, however, provided little support for this proposition. Moving away from the customary cross-country methods of measurement, this paper examines the relationship between the forms of concentration and export instability for each country in a sample of 52 developing countries. The results obtained suggest that there are causal relationships for a wide range of countries. INTRODUCTION

A recurrent theme in discussions of the relationship between international trade and economic development is the importance of the problems created for the developing countries by fluctuations in their export earnings. Among the possible explanations of these fluctuations are those concerning the concentration of exports. Typically exports from African. Asian and Latin American countries are characterised by dependence on a narrow range of commodities which are sold to a small number of foreign markets. The concentration of exports on only a few commodities is often thought to be an important cause of export fluctuations because, as MacBean points out, ‘it is always risky to put all one’s eggs in a single basket. Concentration on a few products reduces a country’s chances of having fluctuations in one direction in some of its exports offset or ameliorated by counter-fluctuations or stability in others’ [MacBean, 1966:41]. An analogous argument is advanced with respect to geographic concentration. Massell argues that ‘high geographic concentration is likely to imply greater dependence on economic conditions in one or a few countries. Fluctuations in demand in any recipient country will then have a more pronounced effect on receipts of the exporting country than if receipts were more diversified among recipients’ [Massell, 1970:622]. These arguments concerning concentration have the properties of simplicity and of immediate intuitive appeal, given that many developing countries are ‘one-crop economies’ and that trade patterns frequently reflect former colonial ties or simply the weight of the United States market in trade in primary products. Moreover, if the arguments are valid and if export fluctuations do have adverse effects on the economies of the developing countries, it follows that policies aimed at diversification

*Lecturer, Department of Economics, University of Strathclyde. The author is particularly indebted to A.I.MacBean, A.I.Clunies Ross, A.R.Gloyne and P.McGregor for constructive comments and criticisms.

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TRADE CONCENTRATION & EXPORT INSTABILITY

are an obvious prescription. Surprisingly, however, empirical analyses by various authors have shown little association between either form of concentration and export instability. Early studies into the effects of geographic concentration [Coppock, 1962; Massell, 1964:47–63; MacBean, 1966] produced similar and largely unexpected findings. The results all indicated ‘that if any association exists between geographical concentration and export fluctuations it is negative’ [MacBean, 1966:44]. More recent studies [Massell, 1970:618–630; Naya, 1973:629–641; Khalaf, 1974:81–90; Kingston, 1976:311–319] have found geographic concentration to be insignificant as an explanatory variable of, although positively related to, export instability. With regard to commodity concentration, MacBean noted that his results coincided with those of other authors1 [Coppock, 1962; Massell, 1964:56–57; Michaely, 1962] and concluded that ‘all the correlation analyses yielded roughly the same answer of a very weak, if any, association between commodity concentration and export fluctuations’ [MacBean, 1966:43]. This conclusion is supported by the results obtained in the subsequent studies by Naya, Khalaf and Kingston. Only Massell found a significant relationship between commodity concentration and instability [Massell, 1970:626]. The available evidence is heavily weighted, therefore, against accepting either form of concentration as an important cause of export fluctuations. Despite the results of these empirical studies there does seem to be a considerable degree of prima facie soundness in the traditional arguments. Opening almost any textbook on problems of trade and development one finds reference to the extent of both geographical and commodity concentration in the exports of a wide range of developing countries. Given these characteristics, it is difficult to accept that whatever instability is experienced is not related to the concentration of exports and this paper sets out to examine the causal link between the two forms of concentration and export fluctuations. I GINI-HIRSCHMAN COEFFICIENTS AND REGRESSION ANALYSIS

The technique most commonly used in cross-country investigations into the association between concentration and instability is regression analysis. This approach requires that one has statistical measures of the extent of concentration and of instability. Customarily, concentration is measured by the Gini—Hirschman coefficient, which defines the degree of commodity concentration in a country’s exports, Cxt, as

where Xjt is the value of exports of commodity j in year t and Xt is total export earnings in that year. The squaring of each commodity’s share in total earnings prior to sum mation is designed to place greater weights on the more important export items. The highest possible value of the coefficient is 100, which occurs when a country exports only one product. The value of the Gini—Hirschman coefficient will be lower the greater is the number of export items and the more even is the distribution of proceeds among these various products. When the shares of all products exported in total proceeds are the same, the lowest possible value of the coefficient will be obtained and is defined as


59

where n is the number of different commodities being sold abroad. Where Xjt represents the value of exports to market j in year t, Cxt measures the degree of geographical concentration. While each of the authors concerned with the question of export instability has employed the Gini— Hirschman index as a measure of concentration, they have not used any one single index of instability. The basic problem in the whole issue of export instability is the degree to which export earnings fluctuate around their trend values,2 and the use of different indices reflects differences among the authors as to the appropriate trend correction and measure of dispersion. Indices which have been used to calculate the degree of export instability include (a) the standard error of estimate divided by the mean of the observations, (b) the standard deviation from a logarithmic trend and (c) the average proportionate deviation from a logarithmic trend. Clearly these instability indices will produce different numerical values from the same data series, although various authors [Coppock, 1962; Erb and Schiavo-Campo, 1969:263–283; Leith, 1970:267–272] have observed a high degree of correlation among results obtained using different indices. After calculating instability indices and coefficients of geographic and commodity concentration for a sample of countries, the relationship between instability and concentration is estimated using a regression equation of the form (1)

where Ij is the index selected to measure the degree of instability in total export earnings of country j, Cxj is the coefficient of commodity concentration for country j and Gxj is the coefficient of geographical concentration for country j. For an individual country the argument that the greater the dependence on one product or market, the more likely it is that fluctuations in earnings from the particular product or market will influence total export earnings, is nothing more than a tautology. When extending the argument to a crosscountry study one moves from this tautology to a similar but different formulation which is implicit in the above approach, namely, that those countries with the higher indices of geographical and commodity concentration will also be those experiencing the greater degrees of instability in their export proceeds. Only if this formulation of the problem holds could one obtain significant results from regression analyses of the form above. There are grounds for believing, however, that this formulation is misleading. The first problem arises because, whereas the various indices of instability involve measuring deviations from trend and provide one statistic summarising the degree of instability over the whole period of analysis, the Gini—Hirschman index measures concentration in one year. Most authors mentioned above have chosen to use indices of geographical and commodity concentration calculated for an arbitrarily chosen year.3 The value of a coefficient for a particular country may change from year to year, however, and the choice of year is important where, as in the case of Brazil, exports have become more diversified over time. If one were to select an early year in a time series, the Gini— Hirschman coefficient associated with an instability index for total Brazilian export earnings would be higher than would be the case if a later year were chosen. Averaging the series of coefficients4 may

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help to overcome this problem of arbitrary selection, but does not solve a more fundamental second problem. Countries differ, on the one hand, in the commodities they export and the relative importance of different export items and, on the other hand, in the markets to which they export and the relative importance of their trading partners. These differences mean that greater concentration is not necessarily associated with greater instability. For example, Chad’s exports of its major commodity, cotton, may be substantially greater relative to its total exports in each year than is the case for the Cameroons’ major export item, cocoa, and, thus, indices of commodity concentration will be consistently greater for Chad. However, any one or some combination of a variety of factors, such as differences in the extent of demand—or supplyinduced changes in aggregate quantities traded and in prices ruling on world markets, the relative effectiveness of commodity agreements and differences in domestic supply conditions, may cause Chad’s earnings from cotton to be less volatile than cocoa earnings for the Cameroons. Consequently, the Cameroons may experience the greater degree of instability in total earnings. Attempts to avoid specification bias and to raise the explanatory power of the model have led to the introduction of variables or proxy variables for factors other than the forms of concentration which may affect the stability of earnings, including some of those mentioned above. The fullest model was developed by Massell [Massell, 1970:618–630]. There was, however, evidence of collinearity. Even in the simple model of equation (1) this problem may arise. If, for instance, Ethiopia’s exports of coffee increase, ceteris paribus, this will raise the coefficient of commodity concentration, but since its coffee exports go principally to one market, the United States, this will simultaneously increase the coefficient of geographic concentration. If such behaviour is repeated in other countries in the sample, collinearity will result. The coefficient of geographic concentration was indeed one of the variables each of which Massell found to be collinear with several of the remaining independent variables in his model [Massell, 1970:626]. While it is recognised that the use of regression analysis may obscure the true position for a few individual countries in a sample, the results obtained can usually be regarded as representing the general state of affairs. Thus, in the various empirical studies, statistically insignificant results are understandably interpreted by the authors as showing that most developing countries do not suffer from the effects of geographical and commodity concentration. The foregoing discussion, however, outlines difficulties which may arise from the use of Gini—Hirschman coefficients and instability indices in regression analysis, and it follows that the insignificant results of the empirical studies may reflect these problems rather than, as the authors have suggested, the absence of causal relationships. Consequently, one may wish to avoid using Gini—Hirschman coefficients and instability indices in empirical investigations. Moreover, one might wish to move away from the use of cross-country regression analysis, since, even if such analysis were to provide satisfactory evidence of a statistically significant relationship between concentration and instability over a sample of countries, policymakers in individual countries need to know the extent to which fluctuations in their export earnings are the result of commodity and/or geographic concentration. II CONCENTRATION AND INSTABILITY

The approach adopted here begins from a reconsideration of the nature of the basic problem. Underlying the issue of concentration and the a priori case for diversification, say, of the commodity


61

composition of exports, are two main assumptions. First, there is assumed to be a major product which simply as a consequence of its weight in total earnings can largely determine the degree of instability of total earnings. Secondly, the minor export items are assumed to contribute little to the instability in total proceeds because, as individual products, although they may exhibit relatively high degrees of instability, their shares in total earnings are relatively small and because, to the extent that the minor products are affected by different market forces, fluctuations in earnings tend to be offsetting. This latter point, which is the key to the arguments about diversification, means that the major product may contribute disproportionately to the fluctuations in total earnings. The implication of this is that, even where the major source accounts for a relatively low export share, there might still be a case for diversification. For example, the major product and the remaining products as a group may have export shares of 25 per cent and 75 per cent respectively, but may be responsible for 45 per cent and 55 per cent respectively of the instability experienced. Then it may be argued that diversification, in the form of increased exports of each of the minor products, will tend to produce greater stability in total earnings. In order to investigate the extent to which instability in a particular country’s total earnings is related to concentration, total earnings are divided here into earnings from the major source (M) and the sum of earnings from all other sources (S).5 As mentioned earlier, export instability is concerned with fluctuations around the trend of export earnings. Instability is defined here as the variance. This measure was selected because it is easily understood and because it provides the basis for many of the more specific indices of instability. The variance of total earnings (Vt) is not determined simply by the variances of earnings from the major source and of the sum of earnings from all other sources (Vm and Vx respectively) and their respective shares in total earnings (xm and xs respectively). It depends also on the degree to which M and S vary together,6 i.e. on the covariance of M and S (cov(ms)). Vt is a weighted average of the variance and covariance of earnings from the two sources and can be expressed as: (2)

The contribution of the major source to instability in total earnings (Cm) can be written as: (3)

What may be termed the ‘proportionate contribution statistic’ for the major source (Pm) is given as: (4)

The possibility that the major source may contribute disproportionately to total instability may be examined by estimating the ratio of the ‘proportionate contribution statistic’ to the export share of the major source. This ratio, Rm, is expressed as: (5)

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Crucial to the debate on instability is the question of appropriate trend correction and, although various authors have observed similarity in the results obtained from indices based on different forms of trend correction, both a linear and an exponential trend were empoyed here for purposes of crosschecking. III DATA

The sample covers 52 developing countries. In order to obtain a sample of this size the period chosen here begins in 1961. Reliable data are not available for all these countries before that date. The terminal year 1974 was determined by the availability of the latest data. For each country in the sample the major product was identified at the 3-digit level of the SITC. IV RESULTS

Percentage contribution statistics were calculated for the major sources using a linear trend (P1) and using an exponential trend (Pe). The associated ratios of the percentage contributions to the shares in total earnings were also estimated and are denoted by R1 and Re. Values of P1, Pe, R1 and Re obtained for the major markets are presented in Table 1. From inspection of these results one can see broad similarity in the values of P1 and Pe obtained for each country. Those countries with high values of P1 tend also to be those with high values for Pe. Clearly, however, the values of P1 and Pe vary considerably among countries. At one extreme, both P1 and Pe indicate that the major product was responsible for almost all of the instability experienced by the Gambia. At the other extreme, the major product accounted for only 0.13 and 0.09, as given by P1 and Pe respectively, of Mali’s instability. For 19 countries the major product contributed more than 0.5 of the fluctuations in total earnings as measured by both indices. The mean values of P1 and Pe calculated from the results in Table 1 are 0.47 and 0.49 respectively. In 36 countries the major product contributed more than proportionately to fluctuations in total earnings. Within this group the lowest values of R1 and Re were obtained for the Gambia. Thus, the high values of P1 and Pe reflect simply the high share of the major product in the Gambia’s exports. The values of R1 and Re were greatest for Tanzania and indicate that the contribution of the major commodity was in the region of three times greater than its export share. Unlike the Gambian case, therefore, the values of P1 and Pe for Tanzania result principally from the high degree of instability in proceeds from the major product relative to that of the sum of earnings from the other export items. Values of P1 and Pe for the major markets are given in Table 2. The highest values of P1 and Pe, 0.71 and 0.79 respectively, were recorded for Sierra Leone, while the major market contributed least, 0.11 as measured by both indices, in Pakistan. Only for 12 countries were both P1 and Pe greater than 0.5 and mean values of 0.38 for P1 and Pe respectively were estimated from the data in Table 2. Comparison of these results with those for the major products suggests that over the sample of countries geographical concentration is a less significant problem than commodity concentration.


TABLE 1 PROPORTIONATE CONTRIBUTION STATISTICS AND RATIOS OF PERCENTAGE CONTRIBUTIONS TO EXPORT SHARES FOR MAJOR PRODUCTS

63

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TABLE 2 PROPORTIONATE CONTRIBUTION STATISTICS AND RATIOS OF PERCENTAGE CONTRIBUTIONS TO EXPORT SHARES FOR MAJOR MARKETS


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For 35 countries the major market contributed disproportionately to fluctuations in earnings. Within this group R1 and Re were just greater than unity for Costa Rica, while at the other extreme the contribution of El Salvador’s major market was approximately five times as great as its market share. Inspection of the results in Tables 1 and 2 shows that in 46 of the 52 countries in the sample the major product and/or the major market contributed disproportionately to instability in total earnings. Twenty-five countries experienced disproportionate contributions for both the major product and the major market. CONCLUSION

The approach employed here differs from the use of Gini—Hirschman coefficients in cross-country regression analysis in two important respects. First, it tackles the problem of the relationship between concentration and instability at the level of individual countries. Secondly, it allows one to focus directly on the degree to which one product or market is responsible for fluctuations in total earnings. The results indicate that the contributions of the major products and markets differ considerably among the 52 countries in the sample, but that for almost all of these countries the major product and/or the major market contributed disproportionately to earnings instability. NOTES 1. It should be noted that Michaely’s principal concern was not with the relationship between

2. 3.

4. 5.

6.

commodity concentration and fluctuations in export earnings, but with the relationship between commodity concentration and fluctuations in export prices [Michaely, 1962]. It has long been recognised that this is an arbitrary but convenient approach [Massell, 1964]. Coppock was concerned with the question of instability during the years 1946–58 and he calculated GiniHirschman coefficients for the year 1957 [Coppock, 1962: 98 and Appendix Table A-2]. In his study covering the period 1948–59 Massell estimated coefficients for the year 1959 [Massell, 1964:52]. For his later study for the years 1950–66 Massell estimated coefficients for the year 1960 [Massell, 1970: 624]. MacBean took coefficients for the year 1954 from Michaely’s study [MacBean, 1966:40]. In a study covering the 1960s Naya attempted to overcome, at least partially, possible biases by averaging the ceofficients for two years, 1962 and 1967 [Naya, 1973:636]. The major source is defined here as that product or market with the highest individual share in total earnings. While this paper deals only with the single most important product or market, it is recognised that concentration might be interpreted as dependence on a few products or markets. Kingston attempted to examine the relationships between concentration and instability at the level of individual developing countries. He estimated a ‘percentage contribution statistic’ for the major source by:

(i) weighting the average values of earnings from each source (M and S) by their respective instability indices, and (ii) calculating the result obtained in (i) for the major source as a percentage of the sum of the two results obtained in (i) [Kingston, 1973:281–296]. This approach ignores, however, the extent to which earnings from different products or markets vary together.

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REFERENCES Coppock, J.D., 1962, International Economic Instability, New York: McGraw-Hill. Erb, G.F., and Schiavo-Campo, S., 1969, ‘Export Instability, Level of Development and Economic Size of Less Developed Countries’, Bulletin of the Oxford Institute of Economics and Statistics, Vol. 31. Khalaf, N.G., 1974, ‘Country Size and Trade Concentration’, Journal of Development Studies, Vol. 11. Kingston, J.L., 1973, ‘Export Instability in Latin America: The Postwar Statistical Record’, Journal of Developing Areas, Vol. 7. Kingston, J.L., 1976, ‘Export Concentration and Export Performance in Developing Countries, 1954–67’, Journal of Development Studies, Vol. 12. Leith, J.C., 1970, ‘The Decline in World Export Instability: A Comment’, Bulletin of the Oxford University Institute of Economics and Statistics, Vol. 32. MacBean, A.I., 1966, Export Instability and Economic Development, Cambridge, Mass.: Harvard University Press. Massell, B.F., 1964, ‘Export Concentration and Fluctuations in Export Earnings: A Cross-Section Analysis’, American Economic Review, Vol. 54. Massell, B.F., 1970, ‘Export Instability and Economic Structure’, American Economic Review, Vol. 60. Michaely, M., 1962, Concentration in International Trade, Amsterdam: North-Holland. Naya, S., 1973, ‘Fluctuations in Export Earnings and the Economic Patterns of Asian Countries’, Economic Development and Cultural Change, Vol. 21.

Structural Aspects of Third World Trade: Some Trends and Some Prospects by G.K.Helleiner*

The changing role of the intrafirm trade carried out by transnational corporations deserves more attention. In Third World primary product exports the ‘old order’ of intrafirm trade is changing to one of more arms’-length relationships; and this is generating new problems in marketing. Transnationals are becoming more important than before in Third World exporting of manufactures, and the new protectionism of the OECD countries is encouraging this trend. Transnationals have easily adapted to changing economic and political circumstances; labour has had more difficulty. The New International Economic Order which has been so vigorously supported by Third World spokesmen in international conferences in recent years is not a target which, like landing a man on the moon, will be attained through a concentrated unidirectional push on the part of all those concerned with it. In the rough and tumble of international diplomacy it will only be achieved—if indeed it ever moves beyond rhetoric—by a series of reforms, most, of themselves fairly small in impact; progress is bound to be punctuated by many backward steps. While all the pulling and tugging goes on over a common fund, a code of conduct for technology transfer, the rewriting of article XIX of the GATT, the introduction of an aid-sdr link, etc., not to speak of the detailed deals on sugar price stabilisation, market access for footwear, revised Lomé Conventions and so forth, the world of international commerce and finance does not stand still. Changes in the international order may take place, without any particular reference to the agenda of the New International Order, which are important enough to dwarf in significance the negotiated agreements over which the diplomats strain. One must beware of devoting so much attention to the daily struggle to achieve slow and probably marginal improvements through North—South intergovernmental negotiation that one misses the significant changes which are occuring with a momentum of their own. There have indeed been many major changes in the Third World’s place in the international economy in recent years, some of which raise new policy issues and concerns for those contemplating its future. This paper calls attention to some of those which seem particularly deserving of notice. My intention is not to denigrate in the slightest the effort to negotiate a series of international and multilateral *Professor

of Economics, Department of Political Economy, University of Toronto. An earlier version of this paper was presented to the Twentyfifth Anniversary Conference of the Institute of Social Studies, The Hague, December, 1977; it will appear in Development: the Next Twentyfive Years, edited by Ken Post and published by the ISS in conjunction with Martinus Nijhoff, The Hague. I am grateful to participants in that conference and to Dudley Seers and John Toye for their helpful comments.

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THIRD WORLD TRADE: TRENDS & PROSPECTS

agreements leading toward a New International Order. These efforts must continue. Rather, it is to sketch in part of the sometimes neglected backdrop to these negotiations, by standing back from ‘the action’ and looking for longer run structural trends. For those who are sceptical about the likely outcome of all these international conferences, these trends may be considered the most important to understand. There have been significant changes in the composition of Third World trade over the past twentyfive years, which should be understood as a backdrop for any discussion of international structural change. On the export side, there have been two major developments: (1) the substantial and continuing increase in the share which manufactured products make up in the total Third World nonfuel export bill (43 per cent in 1975) [World Bank, 1978:50], largely as a result of extremely high rates of export growth in fewer than a dozen of the more advanced developing countries (this includes a little noticed increase in the degree to which primary commodities are processed before export, about which more below); (2) the astonishing increase in the price of petroleum in 1973–74, which followed a period of steady decline in its real price (and has been followed by further erosion in the real price). Neither of these developments were foreseen by most development economists. Both raise broader issues for international economic policy, some of which will be discussed below. The structure of Third World imports has also changed substantially during the postwar period, in consequence of vigorous import substitution programmes in many countries; typically, the share of imports which is accounted for by manufactured consumer goods has fallen and those made up by intermediate inputs (including energy) and capital goods have increased. (In some cases, food imports have also increased in importance, and some analysts forecast continuing increases in the importance of food in particular developing countries’ import bills.) Commodity compositon of trade is only one dimension of the structural change which has taken place in the world markets which are of greatest concern to developing countries. No less interesting and important, although the data are frequently not as accessible, are the questions of ‘market structure’—the degree of competition, the openness of markets, the unpackaging of what is being traded, etc. In the sphere of primary commodity markets, particularly those for minerals, there have been significant changes which can already be characterised as a ‘breakup of the old order’. These changes have to do with the still imperfectly understood role of transnational corporations in world trade, of both primary and manufactured products. Some of the resulting policy issues will be addressed below. There have also been important changes in the international policies of industrialised countries’ governments, some of which have had and will continue to have profound implications for the structure of Third World trade and the international distribution of the gains therefrom. These are, in part, related to the changes in commodity composition and market structure to which reference has already been made, and will be considered in that context. At least as important as these structural influences on Third World trade is the prospect of slower growth in conventionally defined income in the OECD countries over the next several decades. This prospect raises extreme dangers for the entire world economic system in the short run, because of the present fragility of the world financial system, and poses major political and economic problems for the Third World in the longer run. It would seem that there are now new grounds—based on hard projections of demand prospects, rather than romantic aspirations for ‘solidarity’—for the stimulation and encouragement of South—South trade, and for various other forms of ‘collective self-reliance’. But to consider these prospects would require a separate paper.


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This article will focus primarily on those structural aspects of Third World trade which are related to the policies of the industrialised countries’ governments, and to the activities of transnational corporations based in these countries. Section I outlines the changing (and still understudied) role of international intra-firm trade in the Third World. Section II considers other elements of transnational corporate practices and their relations with the governments of the industrialised countries. The arguments are sufficiently self-contained to require only a very brief conclusion. I INTRAFIRM TRADE AND THE THIRD WORLD

The most striking fact about the evolution of post-Second-World-War international trade is its phenomenal real rate of growth (in developing as well as industrialised economies). Much of this has been accomplished under the auspices of transnational corporations, often very large ones, active in many countries and many branches of trade. Moving their capital, technology and skill efficiently and flexibly about the globe, these large enterprises have effectively demolished the basis for one of the prime assumptions of traditional trade theory: that of factor immobility between nations. Perhaps even more important, they have also undermined the basis for the major underlying assumption of orthodox market theory: that transactions take place at arms’-length between independent actors. Increasing proportions of total world trade are being conducte on an intrafirm basis; i.e. the transactors are related by ownership and/or other ties. Where there is intrafirm trade, both the volumes and prices of the transactions are likely effectively to be ‘centrally planned’ in the interest of the firm which is both buyer and seller.1 In 1975 nearly one-third of all US imports originated with majority-owned foreign affiliates (MOFAs) of US—based firms (compared with a quarter ten years previously). Those from developing countries were even more likely to originate in these affiliates (Table 1) and between 1971 and 1975 the proportion of this developing country MOFA trade which moved directly to US parents rose from 69 per cent to 82 per cent [UN, ECOSOC, 1978:221]. Fully 45 per cent of total US imports in 1975 came from firms which are related by ownership (to the extent of 5 per cent of equity or more) to the importer. Such evidence as there is suggests that the proportions of US exports which take place on an intrafirm basis have been even higher. These are matters which are of potentially very great significance in the assessment of the distribution of the gains from trade, the interpretation of recorded trade statistics and the analysis of markets. The role of intrafirm international trade is likely to be great in developing countries where foreign firms have established a strong presence. Yet a closer inspection of the data for Third World trade reveals that, as is so often the case, one cannot simply ‘project’ the recent global experience and draw conclusions for the developing countries. During the past decade, while the share of total US imports which originated with US majority-owned affiliates has risen markedly in Europe and Canada, this was not universally the case; when petroleum is excluded from the total, it has actually fallen in the developing countries. Whereas in 1967 20 per cent of US nonpetroleum imports from developing countries originated in US affiliates there, by 1975 this had fallen to only 11 per cent (see Table 2).

of Belgium, Luxembourg, France, Germany, Italy and the Netherlands Source: Chung [1977:35].

aConsists

TABLE 1 AFFILIATE SALES TO THE UNITED STATES AS PERCENTAGE OF TOTAL U.S. MERCHANDISE IMPORTS BY AREA OF ORIGIN, 1966–75

70 THIRD WORLD TRADE: TRENDS & PROSPECTS


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TABLE 2 AFFILIATE SALES TO THE UNITED STATES AS PERCENTAGE OF TOTAL AND NONPETROLEUM U.S. MERCHANDISE IMPORTS FROM DEVELOPING COUNTRIES 1966–75

Source: Calculated from data in Chung [1975:35], and OECD, Foreign Trade. Commodity Trade: Imports, various years.

What accounts for these perhaps unexpected structural trends in Third World trade, and what are their implications? In large part, they are undoubtedly the consequence of the conscious ‘delinking’ policies of many developing countries. These policies have both sought to diversify their sources of capital, their trade links, etc., and introduced new institutional arrangements to replace primary resort to wholly-owned direct foreign investments, particularly in the resource sector. The former (diversification) has led to the phenomenon of non-US-owned firms exporting from developing countries to the US, thus lowering the measured proportion of US imports originating with US majority-owned affiliates, without necessarily reducing the proportions of imports taking place within firms. The latter has reduced the degree to which resource exports flow between majority-owned affiliates, without necessarily affecting the degree to which this trade continues to take place between parties which are related in less obvious ways. Let us consider the emerging trends in intrafirm exports from developing countries on a more disaggregated basis. Primary Products Trade

Two—somewhat contradictory—points may be made about the abovementioned trend in US MOFA trade (which is primarily attributable to events in the primary product sector). First, the data undoubtedly present a quite misleading picture of the trend in the role of transnational corporations in Thrid World trade. Minority ownership, technology contracts, management contracts, marketing contracts, etc., may be just as effective as indicators of close relationships (or ‘nonarmslengthness’) between buying and selling firms and of the potentiality for foreign control, as majority ownership. Certainly the newly available data showing the extent to which US imports originate with firms which are related by ownership (5 per cent equity or more) to the buying firms suggest that intrafirm trade still dominates many primary product markets. While on average US importers acquired 45 per cent of their total imports from related parties in 1975, the equivalent shares of related-party imports in US purchases of some primary products from developing countries was much higher—88 per cent in the case of bauxite, 80 per cent in rubber, 68 per cent in bananas and cotton [Helleiner, 1977:26]. One must not be seduced by the more readily available direct investment data into believing that they tell one about the total role of transnational corporations. Many developing countries have learned by painful experience that nationalisation does not put an end to foreign control. What becomes necessary

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is a more sophisticated understanding of the detailed functioning of transnational corporations in circumstances where their ‘control’ is less total than it has traditionally been and is exerted through new institutional mechanisms. The second point to be made about the downward trend in US MOFA trade with developing countries is that the breakup of the old order in world minerals ‘markets’ is now well under way.2 The system in which vertically integrated transnational corporations controlled volumes and terms of flows within their own ‘closed’ systems provided a degree of security to the importing countries and their firms which is no longer there. Kissinger’s proposal for an International Resources Bank to facilitate the continued flow of technology and capital for resource development in the Third World constituted implicit recognition that some type of ‘new order’ for these commodity markets was required. From the industrialised countries’ standpoint what is most essential is that the old security of supply at reasonable prices be restored, or at least that the present uncertainty be reduced. The producing countries are clearly more concerned that they themselves acquire greater shares of resource rents, quasi-rents on capital and technology, and oligopoly rents, together with generally increased control and the prospect of developing forward-linked industries. New arrangements, in which commodity trade takes place at greater arms’-length but is nevertheless constrained as to fluctuations in its terms, must be developed—longer-term contracts, new ‘rules for the game’ combining price and supply guarantees, etc. If mutually satisfactory new rules are not developed there are predictable difficulties to be faced by Third World exporters of mineral and other primary products. There are already some important ‘unfriendly’ reactions emanating from the developed countries in consequence of more effective Third World policies in this sphere. They aim, in effect, to ‘residualise’ those markets over which transnational corporations based in the developed countries do not have firm control. Moran has warned of this danger in world copper markets. If Third World copper producers do not ‘cooperate’ with traditional buyers, he argues, they may find themsleves with ‘a dual market system in which the CIPEC countries gradually become suppliers of last resort, outside the main network of semi-integrated ties between corporate producers and consumers, onto whom will be shifted the major costs of uncertainty about supply and demand for the entire industry’ [Moran, 1974:233]. Traditional copper interests have already begun to reshape their plans in accordance with the new realities. While CIPEC made up 35–40 per cent of world copper production in the early 1970s, it is estimated that by the late 1970s their share will have fallen in consequence of differential rates of expansion, to the extent that 70% of world demand will be met from ‘secure’ sources through ‘sales between regular buyers and sellers in the historical semiintegrated pattern’ [Moran, 1974:239]. (For the immediate future, the power of the CIPEC countries is of course further reduced by the enormous privately held stocks of copper which now overhang the market.) Moran generalises his point as follows: the large industrial countries need secure sources of raw materials so badly that they will be willing to pay the price of neutralizing economic nationalists who threaten to upset the old and dependable system. There is nothing in history or logic to suggest that corporate boards of directors (or the governments they and their customers influence) will simply sit and let the price and terms of supply be dictated to them by outsiders, if they have other options available to them [238]. These rather ominous possibilities increase the need for careful assessment of the means of achieving greater benefits for the developing countries from their primary exports, without thereby acquiring new and potentially unmanageable marketing problems. They imply that strenuous efforts


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will have to be made to develop unified host government positions vis-à-vis foreign firms in the resource sectors; in some instances, the governments of developed countries (Canada, Australia) will have to be induced to cooperate if total success is to be realised.3 It is therefore likely that large transnational corporations will not forever be almost exclusively based in the industrialised countries. The advantages of scale in marketing and information-gathering, even if not always evident in production, seem likely to lead to larger transnationally-oriented firms in developing countries as well. Sometimes state-owned, sometimes private but working in close collaboration with the state, transnational enterprises are already beginning to emerge within the more industrialised segments of the Third World. Some have even bought into the oligopolies of the developed countries themselves, e.g. a private Brazilian firm’s purchase of an American coffee processing firm which accounted for 12 per cent of the US market and the takeover by a Malaysian government-owned holding company (PERNAS) of a major transnational tin producer with activities in Nigeria, Thailand and Australia, as well as Malaysia. (More likely, for the present, are expanded transnational enterprise activities within the Third World; in Latin America such ‘joint enterprises’ are already attracting considerable interest.) [Diaz-Alejandro, 1977; INTAL, 1977.] It is important to recognise that even where maximum (social) efficiency requires the retention of small productive units, as in most types of agriculture and in many areas of manufacturing (where scale economies are offset by the fact that increased capital-intensity is inevitably associated with increased scale) [Felix, 1977; Morley and Smith, 1977], there are still likely to be advantages obtainable from the creation of large-scale marketing agencies or boards, or what the Japanese would call trading houses. Not only are such arrangements efficient, but there is also increased market power for the sellers. Marketing Boards for agricultural products have a long history in the Third World. But the argument for their creation carries equal force when it comes to the export of manufactured products. In a world of increasing resort to ‘voluntary export restraints’, such marketing arrangements (or else private cartels) are willy-nilly being encouraged by the industrialised countries, which are content to pay slightly higher import prices in return for an assurance of reduced import volume. It may therefore be that Third World producers and producer associations will increasingly conduct their business affairs in a manner very similar to that of the earlier foreign-owned oligopolistic firms. Specifically, in the minerals sector, they may calculate that ‘their oligopolist position would be best preserved by a willingness to absorb short-run demand shocks through inventory variation or excess capacity’ [Moran, 1974, 236], thus continuing to insure consumers somewhat against the risk of sudden scarcity. At all events, there is obviously a great need for research on the relative merits of different types of institutional arrangements for the conduct of international trade in primary products, the politics and economics of producer alliances, and the potential for Third-World-based processing and marketing activities—perhaps through vertically integrated and oligopolistic transnational corporations of their own. Manufactured Goods Trade

The growth in importance of manufactured exports from developing countries has probably also contributed to the decline in the apparent importance of intrafirm US imports, since majority ownership is less frequent in this type of trade than it has been in primary products trade. (This is because it does not generate resource rents, its most crucial barriers to entry are at the marketing rather mmmmm

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TABLE 3 U.S. IMPORTS UNDER TARIFF ITEMS 807.00 AND 806.30, 1966–76 ($ MILLIONS)

Source: United States International Trade Commission.

than the production end, it frequently involves little capital investment in production, and it has developed during the postcolonial period, when independent governments had become more sensitive to the issue of foreign control.) On the other hand, it seems that intrafirm trade in manufactures is growing exceptionally rapidly. At the very time that primary commodity exports from the Third World are being sold increasingly outside the closed channels of the transnational corporations, manufactured exports from developing countries seem to be growing disproportionately quickly inside them. The latter phenomenon is illustrated by the extraordinary rate of growth (32 per cent per year in the 1970s) in US imports from developing countries under the encouragement of that country’s value added tariff provisions (items 806.30 and 807.00 of the tariff, which require that duties only be paid on foreign value-added when inputs orginate in the US itself) (Table 3). Similar international subcontracting of component manufacture and assembly activities is increasingly being undertaken with tariff encouragement from European bases as well; and these data do not tell the entire story, since some such activities do not qualify for these tariff provisions.4 (On average, primary goods trade is nevertheless still probably more firmly under transnationals’ ownership and control than is manufactured goods trade.) Other things being equal, it will be easier for developing countries to penetrate the markets of the industrialised countries when they have powerful allies ‘in court’ than where they do not.5 Even with final products, the established firms in the importing countries have information and marketing networks, all profiting from substantial scale economies and experience as well as the benefits of well known brand names, which render market penetration easier. There is thus some tendency for Third World trade—notably the rapidly expanding exports of manufactured products—to be driven into the marketing channels which are controlled by the established transnationals of North America, Europe and Japan. This channeling of the most dynamic aspect of developing countries’ exports has two likely consequences: (1) the bargaining power of the transnational enterprises vis-à-vis the exporting firms or countries is rendered very great, and hence the terms of contracts—whether product prices or marketing, management or technology provisions—are likely disproportionately to favour the former; (2) that part of the trade which remains outside the established networks of the large transnational enterprises is rendered risker, because of the narrowing of the ‘residual’ market and the volatility and


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uncertainty which it implies. Third World exporters may therefore increasingly be confronted with a choice between low-risk/low-return trading arrangements negotiated with transnationals and high-risk/ high-return ones which they develop for themselves. As Cohen has argued in the Far Eastern context, the choice made by particular countries may ultimately be determined by political calculations rather than economic ones [Cohen, 1975:135]. As has been seen, the role of transnational corporations in Third World trade is not adequately represented by the data on trade between majority-owned foreign affiliates and their US parents. Their activities include the provision of management and marketing services, the sale of technology, and the supply of arms’-length or minority capital, as well as the continued participation in direct investment. Relationships between firms which are connected in any of these ways are likely to be different from those between transactors who deal with one another fully at arms’-length, in that there can be greater joint planning, cooperation (not to say collusion) with respect to prices, volume or directions of trade, etc. II TRANSNATIONAL CORPORATIONS, OECD GOVERNMENTS AND CHANGES IN TRADE STRUCTURE

The role of transnational corporations in the formation of trade policies, in the determination of actual trading practices, and in adapting to governmental policies, needs greater research attention. As a stimulus to further thought on these issues let me offer some brief reflections on: (1) the changed nature of protectionism in industrialised economies, (2) the phenomenon of private nontariff trade barriers, or what are more commonly known as restrictive business practices in international trade; and (3) the different capacities of actors in the industrialised economies to adjust to changing economic circumstances. (i) The ‘New Protectionism’ and the Third World

Changes in productivity generated by technological progress, changes in money wage rates and other costs, and changes in exchange rates, all operate to alter the competitiveness of the industries of the rich countries vis-à-vis those of the poor countries. The further effect of trade barriers on this competitiveness may therefore, by itself, be relatively small. Technological change and wage rate increases can probably be assumed to possess a momentum of their own. While it therefore does make some sense to focus on the level of trade barriers and changes therein, exchange rate changes have in recent years usually dwarfed those of tariff levels in importance. The most important policy-induced changes which have occurred lie in the realm of nontariff barriers and exchange rates. The former have been important for specific industries of interest to developing countries and thus to the overall structure of protection. The latter have been of greatest importance to the overall average level of ‘protection’ to tradeable goods sectors. ‘Protectionism’ has thus acquired a new face in the course of the last five years; or, more accurately, a formerly slightly blurred vision has now come into sharp focus. This change has been brought about by the appearance of flexible exchange rates in all the major industrialised countries. When one of these countries runs into balance-of-payments difficulties they are quickly reflected in its exchange rate; similarly, if short-term macro-economic (usually monetary) policy is brought to bear upon an

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unemployment problem it is likely to generate immediate effects on the exchange rate. Protective trade barriers have therefore been displaced as generalised policy approaches to short-run balance-ofpayments and unemployment problems. (They were, in any case, never recommended for this purpose by most economists.) The generalised instrument for reallocating both consumption and production is the exchange rate, which has the further attribute, beyond the use of tariffs and nontariff barriers, of relating to all tradeables rather than simply to importables. As far as the major industrialised countries are concerned, the problem of uncoordinated adjustments is today more likely to be reflected in competitive exchange rate changes than in tariff wars. Yet, that protectionism is on the rise seems to be a matter of general agreement and concern. It is important to recognise that the ‘new protectionism’ is not a matter of macro-economic policy response to employment or balance-of-payments problems. It has instead become, overwhelmingly, a matter of structural policy—indeed, perhaps even an imperfect form of ‘adjustment assistance’. It is not the overall level of trade barriers which is rising (although this is difficult precisely to tell, in view of the well known problems of calculating tariff averages). Rather, trade barriers in particular industries are rising; while those in others continue, as proposed in the Tokyo Round of the GATT, to fall. The purpose of these industry-specific trade barriers is clearly to slow down the speed with which (inevitable) adjustment to new low cost imports takes place. Those industries which are receiving increasing (or at least unchanged) protection, despite the increased potential role in readjustment which exchange rates now play, are those which were already benefitting disproportionately from trade barriers before the advent of flexible rates. In the last (Kennedy) round of tariff cuts, those which retained the highest levels of protection were unskilledlabour-intensive, stagnant and large in the US; unskilled-labour-intensive, relatively unconcentrated, and low in resource content in Canada; and unskilled-labour-intensive in West Germany,6 [Cheh, 1974; Helleiner, 1977; Riedel, 1977]. Unskilled-labour-intensity is everywhere the dominant characteristic of the protected sectors. Fluctuating exchange rates have introduced a new element to the structure of Third World international economic relationships. At present, of the more than 100 less developed member countries in the International Monetary Fund, fully 36 do not have their currencies pegged to major national currencies and several more maintain a peg, but change it very frequently. These countries either let their currencies float freely or peg them to the SDR (a particular basket of currencies with its own weighting system) or some other basket of currencies of their own choosing; in the latter cases, flexibility with respect to the currencies of individual industrialised countries is implied. Thus the ‘competitiveness’ of these countries’ exports in their major markets can fluctuate within fairly wide ranges over fairly short periods. For those which maintain a peg to a major currency, which is likely to be that of their major trading partner, there will be short-term fluctuation with respect to all the other countries with which they trade. These continual alterations in the relative values of currencies dwarf the changes or, for that matter, the overall levels of overall import protection in individual countries. The recent rapid decline in the value of the US dollar vis-à-vis the mark and yen—in seven months of 1977, by 6 per cent and 11 per cent respectively—shows the extent of the possible change; the overall average tariff imposed on industrial products in 1973 was about 7 per cent in the US and the EEC, and a little higher in Japan [GATT, 1974]. (The precise figures depend on the weighting system chosen.) Again, to a degree never before seen, the ‘protection problem’ has become a matter of the structure of trade barriers rather than their overall level.


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The 1977 annual report of the GATT states that: The spread of protectionist pressures may well prove to be the most important current development in international economic policies, for it has reached a point at which the continued existence of an international order based on agreed and observed rules may be said to be open to question [GATT, 1977]. In the words of the British Foreign Minister, The advanced industrialised countries should be starting to consider whether the basically free-market (i.e. free-trade) system can cope’ [Economist, 22 October 1977:119]. This burst of protectionism is not (at least not yet) reflective of a general inward-turning of the world’s industrialised economies, such as typified the 1930s, but is very industry—and productspecific. At the highest level of generalisation, this protectionism is found disproportionately in (1) manufactured products exported by low-income countries, (2) products which flow at arms’-length across international boundaries rather than ‘within’ transnational corporations. (As has been seen, it is increasingly taking the form of administrative controls—‘the organisation of trade’—rather than tariffs.) These structural characteristics of emerging trade barriers impart a particular bias to the constellation of forces which shape the evolution of Third World trade. This is not to suggest that there is an inevitable path onto which the developing countries are being driven, but only to call attention to the influences against which they must struggle if they are to expand manufactured exports by autonomous Third World enterprises. New trade barriers in the industrialised countries can effectively slow the rate at which particular types of export-oriented industrialisation proceed in the Third World. Their structure also influences the types of manufacturing for export which emerge. Physical controls on textiles and clothing, increasingly on footwear, and possibly soon on steel and other products, seem likely to limit opportunities for expansion to modest rates of annual growth which are considered low enough to prevent ‘market disruptions’ in the importing countries. The so-called semi-industrialised countries, rather than the poorest countries, are most severely constrained by these limitations in the short run. Of greater immediate concern to the latter is the fact that tariff systems discourage the location in developing countries of raw material processing establishments, in which transnationals’ capital and technology may often be involved. The escalation of tariffs with further levels of fabrication still generates high levels of effective protection for processing in industrialised countries. Of at least equal importance is the frequent similar escalation in transport rates with increased levels of processing of the products to be transported [Finger and Yeats, 1976]. (Thus, reductions in tariffs imposed on the products of less developed countries as they enter the industrialised countries are not necessarily beneficial to the former countries. When tariffs on raw materials are reduced proportionately more than those on processed products—as is indeed not so unusual a circumstance—the effective protection for processors in the importing countries is thereby increased. The enthusiasm with which such tariff reductions are greeted must therefore be tempered by consideration of the implications for industrialisation prospects. Similar considerations apply to relative changes in transport charges. Reductions in rates on raw materials are not necessarily the ‘good thing’ which they might superficially appear.)

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TABLE 4 TOTAL OECD IMPORTS OF RAW, SEMI-PROCESSED AND MANUFACTURED MATERIALS FROM DEVELOPING COUNTRIES, 1966 AND 1974


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a

Exclusive of cotton Source: Helleiner and Welwood [1978:39].

Other influences (the emergence of more skilled lcoal labour, more developed local infrastructure, continued widening of international wage gaps, anti-pollution laws in the industrialised countries, preferential tariffs in major markets and local governmental incentives or moral suasion) [Helleiner, 1976: 201–3; Roemer, 1977] are operating which, despite these impediments, have led to gradual relocation of processing facilities in most sectors (but not sugar, copper or lead) from rich countries to poor ones in recent years, often under the auspices of transnationals which can be expected to assist thereafter in campaigns to prevent future increases in protection. This has been so little remarked that I present the relevant data in Table 4. (ii) Restrictive Business Practices as ‘Private NTBs’

As the average level of tariffs has fallen through successive rounds of GATT bargaining, the role of already existing non-tariff barriers (NTBs) has graduallly been thrown into sharper relief and there has been increasing resort to new ones. Discussions of NTBs among governments have so far been focused on those for which governments are directly responsible. Eventually the issue of NTBs imposed by private firms will have to be faced as well. This is, to some degree, a matter of international anti-trust policies to regulate restrictive business practices in the international arena, which may be outside individual nations’ jurisdictions. It may also be necessary, however, to learn far more than we at

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present know about the decision-making practices of sellers and buyers of goods and services moving in and out of the Third World, whether or not they are strictly ‘in restraint of trade’. It has been established, for example, that small countries pay more for imported machinery, iron and steel, and chemicals than do large ones [Hufbauer and O’Neill, 1972; Yeats, 1976; Yeats, 1978]. But the reasons for these phenomena are not clearly understood (and indeed the detailed data are few and far between). As far as restrictive business practices are concerned, it is fairly clear that the developing countries are those most likely to be hit by their continued existence in their present form. This is not merely a matter of the frequently quite high levels of market concentration which confront their exports, where high levels of buyer concentration have long characterised petroleum and minerals markets, and markets for such agricultural products as bananas, cocoa, tea and rubber.7 It is also a problem in the markets in which they buy. Arrangements to fix prices, allocate markets and customers, pool knowledge and plans, and predetermine levels of bids, are all quite frequent among selling firms from the industrialised countries. These practices, while illegal domestically, are frequently exempt as far as exports are concerned—as in the case of the Webb—Pomerene Act of the US—so that countries without the will or capacity to police the degree of competition in their markets are the only ones affected. It follows, as a recent paper written within the GATT puts it, that ‘cartel arrangements and the abuse of dominant position are probably more widespread and damaging in exports to developing than to developed countries’ [Tumlir and Robinson, 1975:18]. (iii) OECD Adjustment to Changes in the Structure of Trade

Just as different economic and political actors differ in their capacity to influence changing events, such as trade policies and technical change, they also differ in their capacities to adapt, adjust and respond to them. Large, internationally oriented and experienced firms are much better able to adjust their activities than are smaller, less diversified, less mobile firms or individual workers. As governments in the Third World offer increased incentives for exporting, as many trade barriers in the industrialised countries come down, and as unit labour cost differentials and technologies change, transnational corporations can be expected relatively quickly to react. They will relocate their productive activities, redirect their international trade flows and change their composition, retool or diversify the plants which they prefer not to close and frequently even retrain their employees. Instead of investing their capital, where such investment is no longer wanted, they will happily sell their technology or other inputs. In many industries they have already made significant adjustments of this kind in response to changes in governmental policies, political climate or economic conditions. They can be expected to respond in a similarly flexible and pragmatic fashion to the development of manufactured exports from developing countries to the industrialised countries. In fact, they have themselves been active promoters of a good deal of this international relocation of industry through their ‘runaway plants’ and international subcontracting activities. Opposition to ‘the new international division of labour’ tends to come from less internationally oriented, less diversified, less efficient and usually smaller firms—and from the labour movement. (Inefficient producing firms in the industrialised countries frequently begin to import from developing countries themselves, in order to retain their earnings while they increase their pressure for increased protection.) The important role which transnational corporations seem likely to continue to play in the growth of manufactured exports is analogous to that which they played in much of the import-substituting industrialisation of the 1950s and 1960s. It is, after all, worth asking why there was so little reaction to


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the restructuring of world industry attendant upon the major industrial import substitution efforts in the Third World over the past thirty years. Tariffs, quotas, exchange controls and other measures were added to the ‘natural forces’ of markets and location economics to alter in quite a dramatic fashion the composition of the import-substitution countries’ import bills. Firms accustomed to exporting to these markets were forced to ‘adjust’ to new market realities in which these opportunities had vanished. Yet there was nothing like the clamour over adjustment problems then that there is over manufactured exports from the Third World to Europe and North America today. The principal reason for the ‘benign neglect’ with which transnational exporting firms viewed these import-substituting developments was, of course, that they were not thereby excluded from the profitable business of supplying Third World markets. On the contrary, these very firms were frequently significant gainers from protectionist policies which enabled them to extract high rates of return from local productive enterprises, while continuing to export intermediate inputs, equipment, technology, and marketing and management knowhow. Transnational corporations had no great difficulty in adapting their worldwide systems to these changing incentive structures; although the composition of their international trading operations and the product-mix of their developed country plants must have been altered thereby. In many instances, Third World markets were not of sufficient size, by themselves, to generate large such shifts; but internal readjustment in response to changing circumstances in a variety of different foreign economies (including those of the Third World) has nevertheless been an ongoing process. Developed country firms which had reached the point of exporting significant volumes to import-substituting Third World countries were typically of sufficient size, flexibility and power not to be hampered much by the emergence of new policies directed against their exports.8 Labour, on the other hand, has greater difficulty adapting to economic change. Even protection which is introduced purportedly in its defence is unlikely to be very effective in protecting its interest. Protection for an industry through a tariff or other devices, after all, provides no assurance that the labourers working in the industry thereby become better off. A recent study of the British jute products industry, for instance, shows that ‘although protection postpones trade adjustment, it may precipitate technological adjustment’ [ODI, 1978:00]. Tariff protection which was ostensibly designed to protect jobs threatened by import competition actually made it possible for firms in the industry to develop jobdestroying innovations (through the development of synthetics), leaving workers no better off than they would have been with continued imports. Only the firms benefitted from governmental protection. Explanations of developed countries’ tariff policies which are based on the purported objective of protecting labour from foreign competition—while perhaps reflecting some of the political realities— do not encompass them all. Governments which really want to assist labour will, one would think, do so directly—through adjustment assistance to workers and communities. [Frank, 1977:2–109]. CONCLUSION

There are important structural changes under way in Third World trade. Those relating to market structure and institutional factors deserve more attention than they have received. While the data which would permit a complete analysis of the role of transnational corporations in Third World trade are not available, it is possible nevertheless to discern their changing relationship with developing countries in primary products trade, and their growing importance in manufactured goods trade. The governments of the developed countries seem to be working, through their trade policies, to channel as much of this

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trade as possible through the transnational corporations. Moreover, although transnationals are far more adaptable than labour to changing economic circumstances, governmental assistance programmes have not taken much account of this. What is now clearly required is more detailed research on the politics and economics of developed countries’ trade policies, adjustment policies and experiences, and the emerging institutional structure of Third World trade. Only with the resulting knowledge of market structures and barriers to their entry into various activities will decision-makers in developing countries be able to construct successful policies for future trade.

NOTES 1. A more extensive treatment of the phenomenon of intrafirm trade may be found in Helleiner

[forthcoming]. Much of the material in the succeeding two paragraphs is drawn from this source. 2. For an excellent exposition of the changing scene in the world minerals sector see Diaz Alejandro

[1976]. 3. Since this paper was written new and disturbing evidence has emerged on these possibilities. Between

4. 5. 6.

7. 8.

1970 and 1973 more than 80 per cent of total expenditures on mineral exploration in the non-socialist world was concentrated in Australia, Canada, South Africa and the United States [UN, Development Forum, 1978:1], The developing countries’ share of European companies total exploration expenditures fell from 57 per cent in 1961 to 13.5 per cent in 1973–75 [Courier, Brussels, 1978, No. 49:85]. In the US the loss of control over production facilities abroad has generated strong copper industry pressure for protection. For further discussion of this type of trade, see Helleiner [1973], Sharpston [1975], Finger [1975]. This argument is developed with special reference ot the US in Helleiner [1977]. In Germany the structure of nominal tariff protection for industry appears to have been changing in the direction of more uniform levels of protection for all. Other non-tariff measures have increasingly been employed to achieve the same sort of interindustry discrimination as is found in the US and Canada, but it remains true that total effective protection is moving in the direction of greater crossindustry uniformity [Riedel, 1977]. For a much more wide-ranging assessment of ‘imperfections’ and ‘concentrations’ in markets of interest to developing countries, see Helleiner [1978]. These firms are more threatened by the development of alternative technologies—whether of production or consumption—over which they do not possess market power. It is in fact in the very nature of many cheap consumer goods and unskilledlabour-intensive processes that they are easily copied; private returns from their development are therefore difficult to appropriate and firms in possibly affected sectors will not only refrain from developing them, but would also gain from resolutely suppressing them . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


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REFERENCES Cheh, John H., 1974, ‘United States Concessions in the Kennedy Round and Short-run Labor Adjustment Costs’, Journal of International Economics, Vol. 4, No. 4. Chung, William K., 1977, ‘Sales by Majority-Owned Foreign Affiliates of US Companies, 1975’, Survey of Current Business, Vol. 57, No. 2. Cohen, Benjamin I., 1975, Multinational Firms and Asian Exports, New Haven and London, Yale University Press. Diaz Alejandro, Carlos F., 1976, ‘International Markets for Exhaustible Resources, Less Developed Countries, and Transnational Corporations’, Economic Growth Center, Yale University, Discussion Paper No. 256. Diaz Alejandro, Carlos F., 1977, ‘Foreign Direct Investment by Latin Americans’, in Tamir Agmon and Charles P.Kindleberger (eds.), Multinationals from Small Countries, Cambridge, MIT Press. Felix, David, 1977, The Technological Factor in Socioeconomic Dualism: Toward an Economy-of-Scale Paradigm for Development Theory’, Economic Development and Cultural Change, Vol. 25, Supplement. Finger, J.M., 1975, ‘Tariff Provisions for Offshore Assembly and the Exports of Developing Countries’, Economic Journal, Vol. 85, No. 338. Finger, J.M. and Yeats, A.J., 1976, ‘Effective Protection by Transportation Costs and Tariffs: A Comparison of Magnitudes’, Quarterly Journal of Economics, Vol. 110, No. 1. Frank, Charles R., Jr., 1977, Foreign Trade and Domestic Aid, Washington, Brookings Institution. GATT, 1974, Basic Documentation for the Tariff Study, Geneva. GATT, 1977, International Trade 1975/76, Geneva. Helleiner, G.K., 1973, ‘Manufactured Exports from Less-Developed Countries and Multinational Firms’, Economic Journal, Vol. 83, No. 329. Helleiner, G.K., 1976, ‘Multinationals, Manufactured Exports and Employment in the Less Developed Countries’, in International Labour Office, Tripartite World Conference on Employment, Income Distribution and Social Progress and the International Division of Labour, Background Papers, Volume II: International Strategies for Employment, Geneva. Helleiner, G.K., 1977a, ‘Transnational Enterprises and the New Political Economy of U.S. Trade Policy’, Oxford Economic Papers, Vol. 29, No. 1. Helleiner, G.K., 1977b, ‘The Political Economy of Canada’s Tariff Structure: An Alternative Model’, Canadian Journal of Economics, Vol. X, No. 2. Helleiner, G.K., 1978a, ‘Freedom and Management in Primary Commodity Markets: U.S. Imports from Developing Countries’, World Development, Vol. 6, No. 1. Helleiner, G.K., 1978b, ‘World Market Imperfections and the Developing Countries’, Overseas Development Council, Occasional Paper No. 11. Helleiner, G.K., forthcoming, ‘Intrafirm Trade and the Developing Countries: An Assessment of the Data’, Journal of Development Economics. Helleiner, G.K., and Welwood, Douglas, 1978c, ‘Raw Material Processing in Developing Countries and Reductions in the Canadian Tariff, Economic Council of Canada, Discussion Paper No. 111. Hufbauer, G.C., and O’Neill, J.P., 1972, ‘Unit Values of U.S. Machinery Exports’, Journal of International Economics, Vol. 2, No. 3. INTAL (Instituto para la Integracion de America Latina), 1977, ‘A Study on Latin America Joint Enterprises’, Doc. 1, Progress Report, Buenos Aires. Moran, Theodore H., 1974, Multinational Corporations and the Politics of Dependence, Copper in Chile, Princeton, N.J., Princeton University Press. Morley Samuel A., and Smith, Gordon W., 1977, ‘The Choice of Technology: Multinational Firms in Brazil’, Economic Development and Cultural Change, Vol. 25, No. 2. ODI (Overseas Development Institute), 1978, and Fraser of Allander Institute, Trade Adjustment and the British Jute Industry, London.

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Riedel, James, 1977, ‘Tariff Concessions in the Kennedy Round and the Structure of Protection in West Germany: An Econometric Assessment’, Journal of International Economics, Vol. 7, No. 2. Roemer, Michael, 1977, ‘Resource-Based Industrialisation in the Developing Countries, A Survey of the Literature’, Harvard Institute for International Development, Development Discussion Paper No. 21. Sharpston, Michael, 1975, ‘International Subcontracting’, Oxford Economic Papers, Vol. 27, No. 1. Tumlir, J., and Robinson S., 1975, ‘What is Feasible in Legal Regulations of Restrictive Business Practices in International Trade’, mimeo. UN, ECOSOC (United Nations, Economic and Social Council), 1978, Transnational Corporations in World Development: A Re-Examination, New York. World Bank, 1978, World Development Report, 1978, Washington. UN Development Forum, 1978, ‘Disturbing Trend in Minerals Search’, Vol. VI, No. 4. Yeats, A.J., 1976, ‘An Analysis of Import Price Differentials Paid by Developing Countries’, Geneva, UNCTAD Research Division, mimeo. Yeats, A.J., 1978, ‘Monopoly Power, Barriers to Competition and the Pattern of Price Differentials in International Trade’, Journal of Development Economics, Vol. 5, No. 2.

The Export Performance of Multinational Corporations in Mexican Industry Rhys Jenkins*

The role of multinational corporations in exporting manufactures from underdeveloped countries has been held up as a major contribution by supporters of the multinationals and played down by their critics. Three aspects of export behaviour are analysed: the share of output exported, the destination of exports and the import content of exports. It is shown that in most sectors locally owned firms have a greater propensity to export than foreign subsidiaries, that subsidiaries send a higher share of their exports to regional markets and that their exports have a higher import content than those of local firms. I INTRODUCTION

Recent years have seen a rapid growth of manufactured exports from the underdeveloped countries, which has led to a discussion of the emergence of a new international division of labour, in which the role ascribed to these countries in world trade is no longer that of primary product exporters. At the same time there has been a growing awareness of the importance of multinational corporations in international economic relations. Supporters of multinational enterprise have argued that their ability to export manufactured products from host countries is an important contribution to solving the balanceof-payments problems of the underdeveloped countries, while critics have tended to minimise the extent of such exports or to question the benefits which they generate. This paper seeks to throw some light on the export behaviour of subsidiaries of foreign firms operating in Mexico (one of the leading exporters of manufactures among the underdeveloped countries) in comparison with locally-owned firms. Exports of manufactures from the underdeveloped countries increased by 25 percent a year between 1966 and 1974 [Nayyar, 1978: Table 3]. Developed country imports of manufactures from the underdeveloped countries grew by 18.7 percent p.a. between 1962 and 1973, slightly faster than the growth of total imports [ibid., Table 7]. The fastest growing sector, as far as exports from underdeveloped countries to industrialised countries are concerned, has been engineering products, followed by iron and steel, clothing and light manufactures. More traditional manufactured exports,

*Lecturer, School of Development Studies, University of East Anglia. The data on which this article is based were collected while the author was a Visiting Research Fellow at the Centro de Investigación y Docencia Económicas, Mexico City. I should like to thank the Instituto Mexicano de Comercio Exterior, the Secretaría de Hacienda y Credito Publico and the Secretaría de Industria y Comercio for access to unpublished data.

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such as processed foodstuffs, drink and tobacco, and textiles, have seen their share of manufactured exports to the advanced countries decline substantially in this period. In view of the penetration of the industrial sectors of most underdeveloped countries by multinational corporations, it is not surprising to find that these firms participate prominently in the export of manufactures. Among the most important countries exporting manufactures, in the early 1970s multinational companies accounted for 31 percent of manufactured exports from South Korea [Jo, 1976: Table 1–8], about 50 percent from Mexico,1 about 40 percent from Brazil [Brasseul, 1975, quoted in Newfarmer, 1977: Table VIII 13], nearly 70 percent from Singapore [Nayyafr, 1978: Table 1], 36 percent from Argentina [Instituto Nacional de Tecnologia Industrial, 1974] and more than 20 percent from Taiwan [Cohen, 1975]. Only in India (5 percent approximately), with its relatively strict control of foreign capital, and Hong Kong (10 percent), where multinational buying groups may have been particularly important, was the participation of the multinationals in exports low [Nayyar, 1978: 62–3]. This has led a number of writers to view the growth of exports by foreign subsidiaries as an important contribution to economic development. The Council for Latin America, for instance, estimated that US subsidiaries accounted for more than 40 percent of Latin American exports of manufactured goods in 1966, although their share of gross manufacturing value added was less than 10 percent [Vernon, 1973:107]. Vernon comments that ‘without multinational links, the subsidiaries probably would not have increased their exports on anything like the same scale’ [ibid: 107]. It has also been argued that the marketing skill of the multinational firm is a vital factor in enabling exports from underdeveloped countries to penetrate advanced country markets in industries where the marketing barrier to entry is high [De la Torre, 1972]. Some sceptics, however, have tended to play down the role of foreign subsidiaries in the expansion of exports from under-developed countries. Vaitsos has shown that between 1966 and 1972 the share of output exported by majority-owned foreign manufacturing affiliates of US companies in LDCs fell from 8.4 percent to 8.3 percent, and that this reduction was particularly marked in Latin America (from 6.2 percent to 5.4 percent) [Vaitsos, 1976: Table 14]. Thus, not only is US investment in LDCs predominantly oriented towards the internal market, but there is also no shift towards a more open policy by these firms. Nayyar has estimated that the share of US affiliates in the total exports of manufactures from less developed countries did not increase between 1966 and 1974 and that their share in exports from Latin America declined drastically from a peak of 40 percent in 1967 to less than 20 percent in 1974 [Nayyar, 1978: Table 4]. There is little evidence on the exports of non-US multinationals, but what there is does not suggest any substantial change in this pattern. A second line of argument advanced by the critics of the multinationals questions the assumption that the growth of exports by multinational corporations does in fact contribute to the economic development of the host country. The growth of manufactured exports is seen as part of the strategy of internationalisation of the companies, who correspondingly appropriate the greater part of the gains from this form of trade [Hymer, 1975; Adam, 1975]. It has been pointed out that these exports frequently have a high import content, so that domestic linkages are limited and the net effect on foreign exchange earnings is far less than would appear from looking at export figures alone. The exports of multinational firms are often of relatively capital-intensive products, so that the employment generation effects are reduced compared to the expectations of the advocates of export promotion [Vaitsos, 1976; Jenkins, 1977]. Furthermore a large share of such exports takes the form of intra-firm transactions, consequently giving scope for transfer price manipulation. In 1970, over half the manufactured exports of US majority-owned affiliates from developing countries were to related firms

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[UNCTAD, 1977: Table 1]. The overall effect is seen as one of increasing the dependence of the underdeveloped countries on forces external to them and of weakening their bargaining power vis-à-vis the multinationals—‘banana republics becoming pyjama republics’ [Adam, 1975]. Despite the controversy that exists and the obvious importance of the questions at issue, relatively little detailed empirical work has been carried out on the export performance of foreign subsidiaries in underdeveloped countries. What work there is has tended to be focused on the highly export-oriented economies of south-east Asia, while there is very little on those economies in Latin America and Asia where the bulk of foreign investment has gone into import substitution, but which have now emerged as important exporters of manufactures (Argentina, Brazil, Colombia, Mexico, India and Parkistan). This paper concentrates on three main aspects of the export behaviour of multinational firms in Mexico, compared with locally-owned firms, namely the proportion of output exported, the destination of exports and the import content of exports. First, however, we will briefly consider the existing evidence on these points from studies of other countries. Benjamin Cohen, in a study of South Korea, Singapore and Taiwan, found that foreign subsidiaries exported a higher proportion of output than local firms in South Korea, a lower proportion in Singapore and about the same proportion in Taiwan [Cohen, 1975:115]. By analysing only three industries for which he had data on both foreign and domestic firms, Cohen came to the conclusion that local firms had a slightly greater propensity to export than foreign firms. Jo’s data confirm the view that foreign subsidiaries are substantially more export-oriented than local firms in South Korea [Jo, 1976: Table 1–8]. In another study of six industries in Taiwan, it was found that only in electronics did foreign subsidiaries export a significantly higher proportion of their output than local firms [Riedel, 1975]. A study of six important export products in the Indian engineering industry concluded that there was an inverse relationship between export performance and the level of foreign association of the firm [Subrahmanian and Pillai, 1977]. A related question is whether or not foreign firms are more likely to have some export activities than their local counterparts. A study of Brazil found that in 1969 one out of every three foreign subsidiaries in the country exported, a far higher proportion than for local firms [Fajnzylber, 1971:203]. The question of the destination of exports by multinational corporations has not been analysed in the case of the Asian countries, where exports have in the main been the result of world-wide sourcing decisions by the parent. In Latin America, however, the question is of greater relevance, since studies have shown that foreign subsidiaries tend to sell a higher proportion of their exports to other Latin American Free Trade Association countries than local firms. In Argentina a study of firms with foreign technology transfer contracts found that 82 percent of the exports of foreign subsidiaries went to other LAFTA countries in 1972 [Instituto Nacional de Tecnologia Industrial, 1974: p. 39]. This compares with only about a half of all the country’s exports of manufactures which went to LAFTA [CEPAL, 1976]. Similarly in Brazil it was found that in 1969 the share of intra-regional exports was 70.5 percent for foreign subsidiaries compared with 57.5 percent for national firms [Fajnzylber, 1971:238]. The third question to be analysed is the extent of local value-added in the exported product, or, put another way, the import content of exports. In the previously quoted study, Cohen found that foreign firms had a greater propensity to import than local firms in South Korea, a lower propensity in Taiwan and a similar propensity in Singapore [Cohen: 1975:115]. Riedel’s study of Taiwan, however, came to the opposite conclusion, finding that import-dependence was the most consistently significant difference between the two types of firms, with foreign firms importing a higher proportion of their raw materials and intermediate inputs [Riedel, 1975:521]. The Indian engineering industry also

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displayed a positive relationship between import intensity and the level of foreign ownership [Subrahmanian and Pillai, 1977: Table VIII]. As can be seen from this brief review of a number of existing studies, the evidence is fragmentary and no very clear-cut conclusions can be drawn. It is these issues that the rest of the paper will deal with, as applied to the case of Mexico. Section II analyses the importance of the multinational corporation in Mexican industry and its participation in the export of manufactures. Section III compares the export propensities of foreign subsidiaries and locally-owned firms, section IV analyses the destination of exports and section V advances some evidence on the import intensity of exports. II MANUFACTURED EXPORTS AND MULTINATIONAL CORPORATIONS IN MEXICO

Mexico is one of the most important exporters of manufactures among the less developed countries. In 1972 it ranked seventh in terms of manufactured exports after Hong Kong, Taiwan, South Korea, India, Singapore and Brazil [Nayyar, 1978: Table 1]. In 1974 Mexican exports of manufactures came to almost US $1,250 million, to which can be added over US $450 million representing the value-added of the in-bond firms on the Mexican—US border.2 Between 1965 and 1974 manufactured exports grew at an average annual rate of 16 percent in real terms, increasing their share of Mexican exports from 16.5 percent to 43.8 percent [Jenkins, 1976]. The sectors whose exports grew most rapidly in this period were transport equipment, clothing and footwear, drink, rubber, petroleum and coal derivatives, electrical machinery and non-electrical machinery. The importance of multinational companies in Mexican manufacturing has been well documented [Fajnzylber and Martinez Tarrago, 1976; Sepulveda and Chumacero, 1973; Newfarmer and Mueller, 1976; Robinson and Smith, 1976]. It has been estimated that between a third and two-fifths of Mexican industrial output was produced by such firms in 1970. Foreign control was particularly marked in rubber, chemicals, machinery and transport equipment, all of which had been fast growth sectors in the preceeding period and were also (with the exception of chemicals) sectors where exports had grown at above average rates. Foreign firms are also prominent among the largest industrial firms in the country. Of the largest 300 industrial firms in Mexico ranked by assets, 150 were foreign-owned and they controlled 52 percent of the total assets of the group [Newfarmer and Mueller, 1975: Tables 3–5 and 3–6]. Over time the share of foreign firms in manufacturing has been on the increase, giving rise to concern about the denationalisation of local industry [ibid: 53–59]. Not surprisingly the foreign firms also have a significant participation in Mexico’s exports of manufactures.3 It was estimated that slightly more than a third of manufactured exports were by foreign firms in 1974.4 Table 1 indicates the distribution of exports by sector of origin and the share of foreign firms in the exports of each sector. A small number of sectors account for the bulk of exports— chemicals, transport equipment and electrical machinery alone making up 70 percent. As in production, foreign control is particularly marked in certain sectors, with electrical machinery, transport equipment, printing and publishing, chemicals and rubber all showing above average shares.


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III THE PROPENSITY TO EXPORT OF FOREIGN SUBSIDIARIES

The existing evidence on the proportion of output exported by subsidiaries of multinational corporations in the manufacturing sector suggests that it is not significantly different from that exported by manufacturing firms as a whole. At the macro level, Fajnzylber and Martinez estimated that transnational enterprises in Mexico exported, on average, 2.8 percent of their output in 1970, compared with 2.6 percent for industry as a whole [Fajnzylber and Martinez Tarrago, 1976: Table 12]. A micro-economic study by Fairchild comparing 25 locally owned firms and 25 firms with direct US equity investment located in Monterrey found no statistically significant difference in the percentage of sales exported [Fairchild, 1977: Tables 1 and 2]. Both these studies are subject to certain limitations which may have affected their conclusions. The macro approach, by including all industrial firms, is not able to discriminate between those firms which export and those which do not. It is therefore possible that the export coefficient obtained for local firms is biased downwards in comparison with that of foreign-owned firms, because of the inclusion of a large number of small companies which have little perspective of operating internationally. The Fairchild study is based on 50 firms, only a minority of which registered any exports, so that comparisons of export performance are based on a very small sample. TABLE 1 EXPORTS BY FOREIGN FIRMS BY SECTOR OF ORIGIN, 1974

Source: Own elaboration from data provided by the Secretaria de Hacienda y Credito Publico.

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For the purpose of the present study data were used from a survey undertaken by the Instituto Mexicano de Comercio Exterior. The analysis included 658 firms, which exported manufactures in 1974 to the value of $12,063 million pesos or 77 percent of Mexico’s total exports of manufactures in that year. The IMCE survey gave data on both the value of exports and sales of these companies in 1974. All the firms were classified by two-digit industry on the basis of the Registro de Inversiones Extranjeras industrial classification for foreign subsidiaries, and information from the IMCE survey on the principal products produced by each firm for locally owned companies. All companies were also identified according to whether they were majority foreign-owned subsidiaries, minority owned subsidiaries, locally owned firms with technology contracts from foreign companies or locally owned firms without such technology contracts.5 Of the total number of firms, 154 were majority foreignowned, 64 minority foreign-owned, 70 locally owned with foreign technology and 370 locally owned without technology contracts. Table 2 indicates exports as a proportion of sales for the two major groups of firms, foreign subsidiaries and locally owned companies. This indicates that on aggregate the locally owned firms included in the sample exported 19.5 percent of their total sales, a higher proportion than the 12.6 percent registered by foreign subsidiaries. The table also shows the situation at the level of industrial sector for 19 two-digit industries. (No firms from the tobacco industry were included but in any case the exports of that sector in 1974 were minimal.) Of the 17 industries for which it was possible to compare the two types of firm, the export coefficient was substantiallyhigher (more than a third higher) for national firms in ten sectors, slightly higher in three and substantially lower in four sectors. TABLE 2 EXPORTS AS A PROPORTION OF SALES, NATIONAL AND FOREIGN FIRMS, 1974 (%)

Source: Own elaboration from data provided by IMCE.


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TABLE 3 EXPORTS AS A PROPORTION OF SALES OF NATIONAL AND FOREIGN FIRMS BY TYPE OF INDUSTRY, 1974

Source: Table 2 Note: Unweighted ratios were significantly different at the 5 percent level for traditional industries (z=2.25) and intermediate industries (z=4.46), but not for the engineering industries (z=1.16) and other industries (z=1.62).

The pattern of inter-sectoral differences is particularly interesting. In the traditional industries (sectors 20–26 and 29), the export coefficient of local firms is substantially higher than that of foreign companies in all sectors apart from one. The exception is the clothing and footwear industry, where foreign subsidiaries have an export coefficient almost three times that of the national firms. This is almost entirely due to the performance of one foreign subsidiary, which exports 45 percent of its total output, and accounts for 96 percent of the exports of foreign firms in this industry. The same pattern is observed in intermediate industries (sectors 27 and 30–34). In all six of these sectors the export coefficients of foreign subsidiaries are substantially lower than those of the other group of firms. The difference is least marked in the case of base metals, which is a raw material processing industry. Three of the four sectors in which the export coefficients of foreign subsidiaries exceed those of national firms are normally classified as engineering industries, namely non-electrical machinery, electrical machinery and transport equipment. In the fourth such sector, metal products, the export coefficient of the local companies is marginally higher than that of the foreign subsidiaries. Finally in the two sectors not readily classified into any of the three major types of industries, printing and publishing and other industries, the performance of the two types of company does not differ greatly in either case. Table 3, which aggregates industries into four broad groups, confirms this picture. The ratio of exports to sales (weighted by sales) is higher for national firms than for foreign firms in both the traditional industries and the intermediate industries, while the reverse is true for engineering. The unweighted export ratio was also calculated, in order to test for the significance of the difference between means, and this confirmed the view that the exports of national firms were significantly higher than those of foreign subsidiaries in both traditional and intermediate industries. These findings suggest a number of hypotheses. The interesting datum is the comparison of the export performance of the two types of firm in the same industry, since it can generally be assumed that they face roughly similar problems of access to overseas markets. Comparisons between the proportion of output exported by multinational corporations in, say, the food and chemical industries, are difficult to interpret, because of tariff distortions and non-tariff barriers to trade. On the other hand, the relatively poor performance of foreign firms in traditional and intermediate industries and their good performance in metal working industries do not suffer from such distortions.

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It appears that it is precisely in the engineering industries that it is easiest for the transnational enterprises to realise an international division of labour within the firm. It is in these sectors that it is possible to decompose the labour process—transferring certain production processes or the manufacture of certain parts and components to the periphery. It is also in these sectors that the marketing advantage of the multinational corporations in terms of brand names and trade-marks is particularly important. As a point of comparison, it is interesting to consider the situation of the intermediate industries, in which the export performance of national firms is substantially superior to that of foreign subsidiaries. Industries such as pulp and paper and chemicals are continuous process industries, in which the subdivision of the productive process into various stages cannot be effected with the same facility as in the engineering industries. Specialisation within the multinational corporation is therefore not possible in the same way. Secondly, since the products of these industries are intermediate inputs to other manufacturing sectors, brand names and trade-marks do not generally acquire the same importance. Indeed, in many cases there are standard international specifications for the products concerned. Thus the marketing advantages of the multinational enterprise play a less important role. The situation of transnational enterprises in the traditional industrial sectors is not so clear. Whereas in both intermediate and metal working sectors the original foreign investment was mainly designed to supply the local market, in some traditional industries exports were important from the beginning. This is particularly true in the case of the food sector, where some firms set up with the intention of using Mexican agricultural products for export to the United States. In other cases, however, investment was to substitute for imports, so that the net result observed in terms of the export coefficients of foreign firms in these sectors is a combination of two elements. So far both foreign firms and national firms have been considered as homogeneous groups as far as ownership and/or control are concerned. However, it is by no means certain that firms with different levels of foreign ownership will behave in the same way. Similarly firms classified as locally owned may in some cases be linked with a foreign company through some kind of licensing arrangement, and this may affect the Mexican firm’s export performance. In the case of foreign-owned firms, which are assumed to be under effective control of the parent company, the hypothesis can be advanced that the higher the level of foreign ownership the more of its output the subsidiary is likely to export. This derives from the assumption that the parent company allocates world-wide production and sales in terms of an objective of global long-term profit maximisation. Thus it will prefer to export from a wholly owned subsidiary when the costs of that subsidiary are lower and hence its profits higher than in any of its other affiliates. However, if the parent company only has 50 percent of the shares of the subsidiary, it will only be entitled to half of the profits earned through exports.6 It will therefore tend to prefer to export from the parent or a wholly owned subsidiary, unless the profits of the joint venture are substantially larger.7 It is therefore probable that majority owned subsidiaries will export a higher proportion of their output than minority owned subsidiaries.8 Plausible though this model may be, it is not borne out by the data in this case. Contrary to expectations, the proportion of their output exported by majority and minority foreign-owned subsidiaries in Mexico differed only marginally. Whereas the majority foreign-owned subsidiaries in the sample exported 12.6 percent of their output, minority owned firms performed almost equally well, exporting 12.3 percent of output. A more disaggregated approach showed differences in performance between sectors, but no tendency for the majority owned subsidiaries to have a systematically higher export ratio.


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Turning to those firms classified as Mexican owned, a distinction was made between those which had a technology contract with a foreign company and those which did not. This was done because many technology contracts that have been examined have been found to contain specific clauses that restrict the ability of the recipient firm to export. This may take a number of forms: a global prohibition on exports, a requirement that permission be obtained from the foreign company in order to export, the limitation of exports to certain specific markets or a prohibition of exports to certain countries. In Mexico a study of 109 contracts containing restrictive clauses found that 104 contained clauses restricting exports and of these more than half (53) prohibited exports completely [UNCTAD, 1971, quoted in Wionczek, Bueno and Navarrete, 1974:64]. Such export restrictions were forbidden in 1973 under the Mexican Law on Transfer of Technology, and a number of contracts were rejected by the Registro Nacional de Transferencia de Tecnologia because they included such restrictions. Out of 856 contracts rejected by the Register, 164 (19.3 percent of the total) mentioned export restrictions as a factor in the decision to refuse registration [Registro Nacional de Transferencia de Tecnologia, n.d.]. Nevertheless, although it is no longer possible to formally limit exports through technology contracts, the foreign technology supplier may still find ways of doing so informally. For instance, the licensor may sell intermediate inputs at a price which makes it unprofitable to export or the royalty charged on exports may be such as to make them an unattractive proposition. Consequently there may be differences in export performance between national firms with or without foreign technology contracts and such differences may throw further light on the behaviour of multinational corporations. Table 4 indicates the export coefficients of firms with and without technology contracts in 15 industries for which comparable data were available. On average national firms without technology contracts exported 24.3 percent of their output, compared with only 15.5 percent for firms which had such contracts. Moreover, the same pattern was reproduced across almost all the industrial sector. In 12 of the 15 sectors covered, firms without any technological link exported a higher proportion of output than those which had technology contracts. Only in three traditional industries (textiles, clothing and footwear and leather) did firms with foreign technology export a higher proportion, suggesting that perhaps in these sectors imported technology permitted modernisation, which made these firms more competitive internationally. On the other hand, in all the intermediate, metal-working and miscellaneous industries no such process appears to have taken place. Indeed, in these sectors association with a foreign technology supplier goes with a poor export performance. The above data indicate the export performance of a group of firms which accounted for the bulk of all Mexico’s manufactured exports, but cannot be taken as representative of all Mexican manufacturing firms. Thus although the data indicate that locally owned firms which export are more export-oriented than foreign exporting firms, it does not indicate how far the two groups of firms taken as a whole are export oriented. In 1974, a total of 759 foreign firms had some exports, out of a total of 1888 registered with the Registro de Inversiones Extranjera. That is to say, two out of every five foreign firms in Mexico were exporters. Only 2,738 local firms exported in the same year, and the proportion that this represents of all locally owned firms (on which we have no data) must have been substantially less.9 The interpretation that can be put on the data examined in this section so far is that foreign subsidiaries are more likely to have some exports than their local counterparts. However, this is a consequence of the fact that a large number of local firms are of very small scale and produce exclusively for the local market. If these firms are left aside and attention is focused on the firms which do export, then the locally owned firms tend to be more export oriented than the foreign subsidiaries. On balance it is not clear whether the export coefficient of all foreign subsidiaries will be higher or lower than that of local firms.

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TABLE 4 EXPORTS AS A PROPORTION OF SALES BY NATIONAL FIRMS WITH AND WITHOUT TECHNOLOGY CONTRACTS, BY SECTOR, 1974

The data in Table 5 indicate that, at least among the 185 largest industrial companies in Mexico, including both the exporters and non-exporters, the same pattern is found as in the case of exporting companies. The 98 locally owned firms had a slightly higher export coefficient than the foreign subsidiaries in aggregate, but the differences at the sectoral level were even more striking. Local firms had substantially higher coefficients in both the traditional and intermediate industries, whereas the situation was reversed in the engineering industries, confirming the picture drawn above. No significance can be attached to the differences in other industries, which arise from comparing three locally owned printing and publishing firms with one foreign owned firm in miscellaneous manufacturing. IV THE DESTINATION OF EXPORTS

It was indicated above that studies in other Latin American countries have found that the destination of products exported by multinational corporations differed significantly from the destination of the exports of national firms. In both Argentina and Brazil foreign companies exported mainly to other member countries of the Latin American Free Trade Area. The situation in Mexico is somewhat different, in that intra-LAFTA trade is much less important in aggregate than for the South American countries. In 1973, 45 percent of Argentina’s manufactured exports were to other LAFTA countries mmmmm


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TABLE 5 EXPORTS AS A PROPORTION OF SALES OF 185 LARGEST INDUSTRIAL COMPANIES BY OWNERSHIP AND TYPE OF INDUSTRY: 1974 (%)

Source: Secretaria de Industria y Comercio for sales and IMCE for exports.

and 22 percent of Brazil’s, compared with only 11 percent for Mexico.10 Thus it is unlikely that exports to LAFTA will play a predominant role, even in the exports of the group of multinational firms. However, it is still possible that they will assume a greater weight than in total exports. It would obviously be an extremely laborious process to identify the destination of the exports of all the foreign companies that registered exports in 1974. However, the high level of concentration of exports among a reduced group of firms makes the exercise feasible. 211 firms accounted for 95.5 percent of the exports of foreign subsidiaries from Mexico. Thus this group of firms, which had exports exceeding $2.5 million pesos in 1974, was taken as a sample. With such a high coverage it is unlikely that the exclusion of the smallest exporters would bias the results significantly. Data on exports by firm and country of destination from the Instituto Mexicano de Comercio Exterior were used in order to classify the exports of the selected firms by region of destination. The five regions which were considered were the United States, the Latin American Free Trade Area, Central Amerca,11 the Caribbean,12 and the rest of the world. These geographical regions were defined in terms of an interest in analysing the extent to which foreign companies in Mexico were closely integrated with the US economy, or in the main exported to regional markets, either as equal partners within LAFTA, or possibly enjoying a hegemonic position in Central America and the Caribbean. Table 6 shows that the main market for the exports of foreign subsidiaries in Mexico was the United States, which accounted for 32.2 percent of such exports. This was followed by the Latin American Free Trade Area, which took almost a quarter of the exports of the firms studied (24.3 percent). The countries of Central America (including Panama) absorbed a further 7.7 percent, while the Caribbean market accounted for only 2.9 percent of exports. There remained a 32.9 percent of these firms’ exports, which went to the rest of the world, particularly Canada, Western Europe and Japan. It is interesting to compare these figures with data given by the Economic Commission for Latin America for the geographical distribution of all Mexico’s exports of manufactures in 1974 [CEPAL, 1976a: Table 10]. Although the definition of manufactured products adopted by the ECLA study is not identical with that used in the present study, the differences are not such as to give rise to large discrepancies.13 Again the United States proves to be the most important market for Mexican manufactured exports. In this case, however, 46.6 percent of manufactured exports go to the United States, a percentage which is almost half as much again as that observed for foreign subsidiaries. Remembering that by far the greater part of the foreign investment in Mexico is of US origin, the above finding implies that subsidiaries of US companies operating in Mexico have not enjoyed

Source: IMCE

TABLE 6 EXPORTS OF FOREIGN FIRMS BY SECTOR AND DESTINATION, 1974

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privileged access to the US market. In fact it suggests that US parents have on the whole preferred to avoid competition from their Mexican subsidiaries. It should be noted, of course, that none of the data in this study include the maquiladora firms operating on the US—Mexican border. Obviously, if these firms were included, the proportion of total Mexican exports going to the United States would increase, as would the proportion of the exports of foreign subsidiaries, since such firms predominate among the maquiladoras. A second feature that emerges from a comparison with the ECLA data is that foreign firms tend to export a higher percentage to other LAFTA countries than the average for all firms. Thus, whereas only 14.4 percent of all Mexican manufactured exports go to LAFTA, 24.5 percent, almost 10 percent more, of the exports of foreign countries go to the region. A similar pattern is found with exports to Central America, where the proportion for foreign subsidiaries is almost double that for manufactured exports as a whole (4.1 percent).14 These differences in destination of exports could not be explained in terms of the type of product exported, since foreign subsidiaries exported relatively less to the USA and more to LAFTA in each of the major product groups.15 It appears, therefore, that foreign subsidiaries in Mexico send a substantially higher proportion of their exports to what may be considered regional markets. Between them the Latin American Free Trade Area, Central America and the Caribbean account for more than 35 percent of the exports of mmmm TABLE 7 IMPORT COEFFICIENTS OF MNCs AND ALL FIRMS BY SECTOR, 1970

Source: Fajnzylber and Martinez [1976:290], for columns (1) and (2). Own elaboration from Newfarmer and Mueller [1976: Tables 4–1 and 4–12].

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such companies, a higher share than for the United States. Although exports to regional markets by multinational corporations do not achieve the high levels, in excess of 70 percent, observed in Brazil and Argentina, they do nevertheless indicate a significant difference in behaviour between foreign and national firms as regards the destination of exports. A further reflection of the different destinations of manufactured exports by foreign and national firms is to be found in the share of exports to different regions coming from multinational companies. On the assumption that the share of exports from our own sample going to the USA and to LAFTA did not differ from the proportions indicated by ECLA, it was estimated that, whereas foreign firms accounted for only 23.6 percent of exports of manufactures to the United States, they made up 57.5 percent of such exports to other Latin American Free Trade Area members. This compares with an average for exports to all destinations of 34.1 percent. The view that it is the multinationals which have been best able to take advantage of LAFTA concessions is further supported by the fact that over 70 percent of the exports of engineering industries (two-digit sectors 35–39) to the region have been made by such firms. These sectors account for the bulk of the LAFTA complementarity agreements in which Mexico has participated.16 V IMPORT INTENSITY

One of the most consistent differences between foreign and national firms that has been found in studies of the operations of multinational companies is in the extent to which they use imported inputs in production. Obviously the contribution made by the exports of such companies to the balance of payments must take into account the import content of exported goods. Where, as in the case of the companies studied, exports account for only a part of the total output of the firm, it is difficult to estimate the precise import content of exports. Strictly speaking, it is not possible to take global coefficients for all firms and assume that these hold for the portion of output exported; however, in the absence of any direct information that is the only alternative. The previously mentioned study of Fajnzylber and Martinez indicates that subsidiaries of multinational corporations tend to have a higher level of imports relative to sales than industry as a whole. It was not possible to obtain data on the proportion of the imports of such firms that were intermediate imports at the sectoral level, but it was estimated that on aggregate 34 percent of the imports of MNCs were of capital goods. Thus on aggregate the intermediate import coefficient of foreign subsidiaries is 7.8 percent, compared with 3.4 percent for national firms. Data from a survey of US multinational corporations in Mexico confirm that imported inputs are more important for such firms at the level of sectors (see Table 7). For ten sectors on which it was possible to obtain comparable data on import coefficients, that of the MNCs was higher than the average in seven. According to this study the average import coefficient of US subsidiaries was more than three times that of national firms. Since there is no reason to believe that the import content of the exports of foreign subsidiaries in Mexico will be lower than the import content of production for the local market, it is probable that the exports of such firms will have a lower local value-added than the exports of national firms. A specific case where this can be confirmed for products exported is the automobile parts and components industry. Here the Secretaria de Industria y Comercio estimates a figure for ‘net exchange earnings’ in addition to the commercial value of exports, in order to calculate quota entitlements for the vehicle assemblers. Comparing ten foreign-owned parts producers with 26 local firms in the same


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sector, it was found that the exports of the foreign companies had a local content (i.e. ratio of net exchange generation to commercial value) of only 69.5 percent, while the corresponding figure for local firms was 89.0 percent, almost twenty percentage points higher.17 Put another way, the import content of the foreign firms was 30.5 percent, compared with 11 percent for local firms, almost three times as high. VI CONCLUSION

The data presented in this paper suggest that, although foreign subsidiaries account for an important share of Mexican exports of manufacturers, the competitive advantage which they enjoy in terms of marketing and production know-how is not such as to result in a better export performance than that of local firms. Indeed, in the traditional and intermediate industries, locally owned firms had a significantly better export performance than their foreign competitors. It seems that the allocation of international markets by parent companies in these sectors is such that the opportunities for exporting are limited and this more than offsets the potential advantages which their subsidiaries may enjoy. There are also grounds for questioning the contribution which the growth of exports by multinational corporations makes to economic development in Mexico. The evidence in this paper suggests that the contribution in terms of foreign exchange earnings is less than that of locally owned firms. Exports by foreign subsidiaries to other Latin American countries under LAFTA complementarity agreements usually involve a corresponding import of products from the area. Olivetti, for instance, which is amongst the leading multinationals exporting from Mexico, sells portable and semi-portable typewriters to its subsidiaries in Argentina and Brazil. In turn the Mexican subsidiary imports calculators from Argentina and electric and standard typewriters from Brazil. As a result the company makes no net contribution to the Mexican balance of payments, since its total imports exceed the value of exports. As was seen above, almost a quarter of the exports of foreign subsidiaries in Mexico went to other LAFTA countries. A second aspect of the balance-of-payments inpact of manufactured exports is the extent to which they represent local value-added. Compared with local firms, foreign subsidiaries’ exports have a higher import content, not only within particular industries, but also in aggregate, because of the high share of import-intensive sectors, such as chemicals and transport equipment, in their export mix. Repatriation of profits and royalties attributable to exports should also be taken into account in estimating the net foreign exchange generated by exports. This paper has focused on only some aspects of the exports of multinational firms operating in Mexico. The aspects which have not been considered here do not lead to a more favourable overall picture. I have estimated elsewhere that the direct employment generated by exports of manufactures by multinational firms in 1974 came to approximately 0.1 percent of the Mexican economically active population [Jenkins, 1977]. An increasing proportion of manufactured exports by US affiliates in Mexico are going to other parts of the same corporation. Intra-firm trade increased from 54 percent of total exports in 1960 to 82 percent by 1972 [Newfarmer and Mueller, 1975, Table 4–10], and there is evidence to suggest that underpricing of exports has occurred.18 These factors raise further questions about who gains from trade.

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NOTES 1. See below, Section II. 2. In the rest of this paper, the border industry is excluded from the analysis, since almost all the firms

involved are foreign-owned and we are interested in comparing foreign and local firms. 3. For the purpose of this study a firm was considered to be foreign if over 25 percent of the share

4.

5.

6. 7. 8.

9. 10. 11. 12. 13.

14.

15. 16. 17. 18.

capital was foreign-owned, providing that the Mexican government was not a majority shareholder in the company. This figure would rise to about a half if the exports of the border industries (maquiladoras) were included. The problems of monitoring such exports and other frontier zone transactions are considerable, so that the exact value involved is open to question. Firms with foreign technology contracts were identified from the Registro Nacional de Transferencia de Technologia. It is possible that some firms with technology contracts have not been registered, resulting in some misspecification of companies. It may of course be able to get more than half through using royalties, technical assistance payments and transfer pricing. It is assumed that exports can be supplied from existing capacity without requiring any new investment, whatever the location decision taken. Strictly speaking, the higher the shareholding of the foreign company, the higher the proportion of output exported. This would be translated into a higher export coefficient for majority owned firms than for minority owned companies. There were over 100,000 industrial establishments reporting in the 1970 industrial census. Calculated from CEPAL [1976]. The data for Mexico include the exports of the border industries. This region included the Central American Common Market countries and Panama. Cuba, Haiti, Jamaica, Puerto Rico, Dominican Republic, Trinidad, Tobago, the Dutch Antilles and the Bahamas. The present study estimates exports of manufactures in 1974 as $15,602 million pesos, whereas the ECLA study gives a figure of US $1,372 million, or $17,150 million pesos at the exchange rate which prevailed in 1974 ($12.50 pesos = US $1) [CEPAL, 1976a, Table 10]. These two figures are not strictly comparable, since that for total exports refers only to the central American Common Market, while that for foreign subsidiaries also includes Panama. No comparison was possible for exports to the Caribbean area, since ECLA did not break out this region. Those used by ECLA were non-durable consumer goods, intermediate goods and engineering goods. For further support of this view see Tomasini [1977]. Calculated from data provided by the Secretaria de Industria y Comercio. See Jenkins [1976] for evidence of underpricing of Mexican pharmaceutical exports. REFERENCES

Adam, G., 1975, ‘Multinational Corporations and Worldwide sourcing’, in H.Radice (ed)., International Firms and Modern Imperialism, Harmondsworth, Penguin. Brasseul, H., 1975, Les Firmes Multinationales dans les exportations de produits manufactures du Bresil, 1969– 1974, IPEA, Ministry of Planning, working document. CEPAL, 1976, Las Exportaciones de Manufacturas en America Latina: Informaciones Estadisticas y Algunas Consideraciones generales, E/CEPAL/L.128. CEPAL, 1976a, La Exportacion de Manufacturas en Mexico y La Politica de Promocion, Version Provisional, CEPAL/MEX/76/10. Cohen, B.J., 1975, Multinational Firms and Asian Exports, New Haven, Yale University Press.


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De La Torre, J., 1972, ‘Marketing Factors in Manufactured Exports from Developing Countries’, in L.T.Wells Jr. (ed), The Product Life Cycle and International Trade, Cambridge, Harvard University Press. Fairchild, L.G., 1977, ‘Performance and Technology of United States and National Firms in Mexico’, Journal of Development Studies, Vol. 14, No. 1. Fajnzylber, F., 1971. Sistema Industrial e Exportacao de Manufacturados, Rio de Janeiro, Instituto de Pesquisas, INPES. Fajnzylber, F., and Martinez Tarrago, T., 1976, Las Empresas Transnacionales, Mexico City, Fondo de Cultura Economica. Hymer, S., 1975, ‘The Multinational Corporation and the Law of Uneven Development’, in H.Radice (ed.), International Firms and Modern Imperialism, Harmondsworth, Penguin. Instituto Nacional de Tecnologia Industrial, 1974, Aspectos Economicos de la Importacion de Tecnologia en la Argentina en 1972, Buenos Aires, INTI. Jenkins, R.O., 1976, Foreign Firms, Exports of Manufactures and the Mexican Economy, mimeo. Jenkins, R.O., 1977, ‘Foreign Firms, Manufactured Exports and Development Strategy: The Case of Mexico’, Boletin de Estudios Latinoamericanos y del Caribe, No. 23, December. Jo, Sung-Hwan, 1976, The Impact of Multinational Firms in Employment and Incomes: the Case Study of South Korea, Geneva, ILO, World Employment Programme Research, WEP2–28/WP 12. Nayyar, D., 1978. ‘Transnational Corporations and Manufactured Exports from Poor Countries’, Economic Journal, Vol. 88, March. Newfarmer, R., 1977. Multinational Conglomerates and the Economics of Dependent Development, unpublished Ph.D. thesis, University of Wisconsin, Madison. Newfarmer, R. and Mueller, W., 1976. Multinational Corporations in Brazil and Mexico: Structural Sources of Economic and Non-economic Power, Report of the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, US Senate. Registro Nacional de Transferencia de Tecnologia, n.d., Resumen de actividades de la Direccion General del RNTT en materia de evaluacion e incripcion de contratos (1/2/73–31/7/75), unpublished document. Riedel, J., 1975. ‘The Nature and Determinants of Export-oriented Direct Foreign Investment in a Developing Country: A Case Study of Taiwan’, Weltwirtschaftliches Archiv, Vol. 111. Robinson, H.J., and Smith, R.G., 1976. The Impact of Foreign Private Investment on the Mexican Economy, Stanford Research Institute for the American Chamber of Commerce of Mexico. Sepulveda, B. and Chumacero, A., 1973. La Inversion Extranjera en Mexico, Mexico City, Fondo de Cultura Economica. Subrahmanian, K.K. and Pillai, P.M., 1977. Transnationalisation of Production and Marketing Implications of Trade: some Reflections on Indian Experience, paper presented to the IDS/UNCTAD Seminar ‘Intra-firm Transactions and their Impact on Trade and Development’ Tomasini, R., 1977. Acuerdos de Complementacion de ALALC y la participacion de las empresas transnacionales: los casos de maquinas de oficina y productos electronicos, Division de Desarrollo Economico, Dependencia conjunta CEPAL/CET, Documento de Trabajo No. 3. UNCTAD, 1971, Restrictive Business Practices, TD/B/C, 2/104. UNCTAD, 1977, Dominant Positions of Market Power of Transnational Corporations: Use of the Transfer Pricing Mechanism, UNCTAD/ST/MD/6. Vaitsos, C.V., 1976, Employment Problems and Transnational Enterprises in Developing Countries: Distortions and inequality, Geneva, ILO, World Employment Programme Research Working Paper, WEP 2–28/WP11. Vernon, R., 1973, Sovreignty at Bay, Harmondsworth, Penguin. Wionczek, M., Bueno, G. and Navarrete, J., 1974, La Transferencia Internacional de Tecnologia: El caso de Mexico, Mexico City, Fondo de Cultura Economica.

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Oligopolistic Tactics to Control Markets and the Growth of TNCs in Brazil’s Electrical Industry by Richard Newfarmer*

Most conventional explanations of the rapid expansion of transnational corporations in developing countries attribute their growth to the superior efficiency of TNCs relative to their domestically owned competitors. An alternative interpretation focuses on the industrial structures of oligopoly that are associated with transnational investment and the market power of TNCs. This paper explores some market and extra-market tactics used by TNCs to protect their monopolistic advantage in host countries. Using the example of Brazil’s electrical industry, the paper considers the economic consequences of seven forms of TNC conduct: interlocking directorships, mutual forbearance, control of supply channels, cross-subsidisation and predation, formal and informal collusion, formal political ties, and TNC acquisition behaviour. It concludes that neither efficiency nor technologically determined barriers to entry are fully satisfactory in explaining the increase in the transnational market share; at least in the case of Brazil’s electrical industry, the market power associated with TNC behaviour is equally, or perhaps more, important. As in many other markets of developing countries, transnational corporations (TNCs) have dramatically increased their share of control in Brazil’s electrical industry. In 1960, TNCs controlled about 66 per cent of the assets of the 100 largest electrical firms; their share had grown to nearly 80 per cent by 1976.1 Orthodox interpretations of the expansion of transnational corporations in developing economies have most often emphasised the superior efficiency of TNCs relative to their domestic competitors [e.g., Johnson, 1970 and 1973]. While these explanations have a theoretical elegance and deductive appeal, they often capture only part of the underlying reasons, because they rarely make the transition to the real world development context, where market imperfections are the rule, not the exception. An alternative explanation, growing out of the institutionalist school, has emphasised the role of imperfect market structures in explaining the overseas growth of TNCs. Beginning with Hymer [1960] and extending through Kindleberger [1969] and Caves [1971, 1974], this school of thought argues that the expansion of TNCs is predicated upon some ‘monopolistic advantage’. In this view, TNCs possess a package of ‘special assets’—perhaps a differentiated product or an innovation—which allows them to create barriers facing potential competitors and maintain their market share at home and abroad.

*Department of Economics, University of Notre Dame, Indiana.

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While oligopolistic rivalry among TNCs may produce a deterioration of entry barriers and a near-competitive industrial performance, as Vernon [1977] seems to be arguing, this school has generally recognised the importance of oligopolistic interdependence in maintaining entry barriers and in influencing industrial performance. Nonetheless, there have been few case studies of the conduct link in the structure—conduct—performance relationship for TNCs in the manufacturing sectors of developing economies. This paper, then, seeks to look beyond efficiency questions and consider specific market and extramarket tactics of TNCs which have the aim of controlling competitive forces, market conditions and market development. Using a case study of Brazil’s electrical industry, my objective is to see whether and how TNCs can use such tactics to prevent or slow the erosion of their monopolistic advantages and the deterioration of entry barriers confronting potential competitors, especially domestic enterprises. While the paper does trace some consequences of TNCs’ conduct for industrial performance, its emphasis is upon the ‘feedback’ of corporate behaviour on industrial structure. In the wake of the recent US Security and Exchange Commission investigations into corporate payoffs, only the naïve would dismiss the importance of restrictive business practices and the extramarket use of economic power. However, there is no firm legal or normative standard on which to base an approach to the issue. In Brazil, for example, the legal traditions in this area are less established than in the United States or the European Economic Community, and the administrative procedures for dealing with restrictive practices are woefully inadequate. Eduardo White, in an excellent study of five Latin American legislations on restrictive practices, concludes that other development priorities and ‘possibly…the lack of political will’ are responsible for an absence of market power regulation [1975:v]. Consequently, these issues of corporate conduct cannot be addressed with an indigenous legal standard in mind. Nor do I propose to deal with these issues in a normative manner, though others might consider this a fruitful approach. We can, however, consider the structural and performance consequences of certain corporate practices and illustrate the modes of market control used by TNCs. I examine seven forms of TNC conduct in this paper: interlocking directorships, mutual forbearance, control of supply channels, crosssubsidisation and predation, formal and informal collusion, formal political ties, and TNC acquisition behaviour. INTERLOCKING DIRECTORSHIPS

In the United States interlocks between competitors are per se illegal under Section 8 of the Clayton Act.2 In Brazil, the law reads: It is considered an abuse of economic power (1) to dominate national markets or totally or partially eliminate competition by…(e) accumulating directoships of more than one enterprise (Article 2, Sec. 1, Law 4137). Because of the lack of historical precedent in Brazil and the underdeveloped state of antitrust law [Canedo de Magalhăes, 1975: Magalhăes, 1965], the ex tent of the practice merits close investigation. Methodology. There are well over 50,000 corporations and limited partnerships in Brazil, each with a plethora of directors. To capture the major interlocks within industry, I traced the directors of the 100 largest consolidated electrical enterprises and the 100 largest manufacturing enterprises using Banas [1975] and [1966] and Bernet [1975/76]. State enterprises were considered along with the private

TNCS IN BRAZIL’S ELECTRICAL INDUSTRY

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sector. Of the 200 firms in the sample, 114 were TNCs. The compilation produced a list of over 1000 directors. In addition, those directors who were related to directors in other companies were placed on the list to assess the significance of family interlocks. Once this basic list was formulated, the names of the interlocked individuals were compared with a list of directors of financial institutions (given in Banas [1974]), and financial interlocks were added.3 The combining of directorships from the 100 largest consolidated manufacturing firms and electrical firms respectively produced 44 individuals or families with multiple interlocks. The methodology was directed at electrical connections within the industry, so interlocks outside the industry were less frequent. The process revealed a total of 49 interlocks among electrical manufacturers and among electrical industrials and other industrials (Table 1). In addition, electrical firms had 21 interlocks with financial enterprises. Industrials based outside the electrical industry recorded ten interlocks with manufacturing enterprises and three with financial firms. Foreign firms showed a strikingly higher propensity to establish director interlocks than did Brazilian firms. In fact, 44 of the 49 electrical interlocks among consolidated industrials involved only multinational conglomerates. Only one Brazilian enterprise was linked by an interlock; this was a family lie involving separate individuals (the Voigts). Second, interlocks between Brazilian firms and TNCs were also rare. In six out of seven of these cases, the interlock was through family relations rather than through the same individual. Typical is the Pirelli—Matarrazzo group tie. Also, two of these cases involved state-owned steel firms. If family interlocks are omitted, there remains only one interlock involving Brazilian enterprise. (This is the case of a foreign director who also owns his own publishing house.) The indisputable conclusion is that no significant inter-ownership group (i.e. TNCs, state, and/or Brazilian) interlocks occur in the industry, while transnational groups rely most heavily— almost to the exlusion of the other groups—on interlocks as a market tactic. TNCs also predominate among financial interlocks. Transnational electrical firms accounted for 19 of 21 ties among electrical firms and financial corporations. Since over half of these financial corporations were Brazilian-controlled, it is in the industrial—financial links that international capital has merged with domestic Brazilian capital. In industry itself, as with joint ventures, ownership groups maintain their separate identities. In total, fully 79 of 83 interlocks involved a transnational firm, creating a powerful social group that represents the interests of the transnational corporate sector. The Competitive Effects of Electrical Industry Interlocks

Analysing the competitive effects of interlocks involves more complex evaluations. The electrical industry provides the opportunity to scrutinise more closely these directorship relations. There are seven directors and one family of directors who, taken together, interlock all of the major European electrical producers (Table 2; Fig. 1). Notable for their absence are the Japanese and General Electric. Westinghouse’s ties are through their Europeanheld subsidiaries. General Electric does employ as its corporate lawyer an interlocking director of Westinghouse and Philips, Joăo Pedro Vieira. It is represented in some of its heavy electrical equipment dealings by Mariano Marcondez Ferraz’s firms, WERCO and MARFER, this being a family that has director links with the Brown Boveri group and Philips. Vieira is a member of the França Ribeiro law firm in Săo Paulo, whose chairman, Luiz de França Ribeiro, is on the board of Philco and Philips. Coincidentally, this law office and the offices of Paulo Reis de Magalhaes, director of a Siemens company, Philips, Asea and Pirelli, are one floor apart in the same building.

Source: Newfarmer (1979) Method of tabulation: If one of the enterprises directed was an electrical firm (defined as in Visăo list or ABINEE), the interlocks are counted within ‘electrical industry’; the exception to this is where the primary activity of the interlocked group is in another industry or the electrical firm is less than $500,000 in size. Interlocks between subsidiaries (including finance) of the same parent group are not counted as an interlock, nor are ex-directorships. Family directorships are considered as one individual. aFinance companies were not distinguished by ownership category; most are Brazilian. bOwnership designation of interlock refers only to industrials. Finance companies are for the most part Brazilian-owned.

TABLE 1 DIRECTOR INTERLOCKS WITHIN THE ELECTRICAL INDUSTRY AND WITH OTHER MANUFACTURERS



TABLE 2 DIRECTOR INTERLOCKS AND ASSOCIATIONS IN THE BRAZILIAN ELECTRICAL INDUSTRY, 1974

Notes: Vieira and França Ribeiro are law partners. Ribeiro law offices are located in the same building as those of Paulo Reis de Magalhăes, one floor below. M.M.Ferraz was GE representative intraction equipment sales (as well as representative for Hitachi line in the same industry). Vieira is a corporate legal representative of GE do Brasil. Source: Banas [1975], [1966], Testimony of Thomas Smiley, Conselho Administrativo de Defesa Economica (CADE) Proceeding no. 19. Interviews and investigations of the author.

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DIRECTOR INTERLOCKS AMONG PRINCIPAL MNCs IN THE ELECTRICAL INDUSTRY

FIGURE 1



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The anticompetitive consequences of these interlocks are especially severe when they occur between subsidiaries in directly competiting products. Philips, for example, closely coordinates the several Philips companies through its holding company, Industrias Brasileiras Reunidas Philips (IBRAPE). Paulo Reis de Magalhăes is the chairman of the group. He is also on the board of Pirelli (the industry’s major supplier of copper wire), and Asea (a transformer producer affiliated with Arno; Arno is a direct competitor of Philips’ Walita, IBRAPE, and Philips SA in light home applicances, components and electronic sound products). Senhor Magalhaes also represents the Philips share of Discos Phonogram, a joint venture with Siemens, with whom Philips shares its portion of the record market. Luiz de França Ribeiro sits on the board of both Philips SA and Philco, direct competitors in electronic consumer products. This interlock effectively gives these two companies a dominant position in the television market and a large share of the radio and sound equipment industry. The two companies provided market share information to the author for these:

As discussed in the next section, the interlock helps maintain the apparent market division within these product lines. Another example is the interlock between Westinghouse’s Induselet, a transformer producer acquired with the American parent’s purchase of ACE-Charleroi of Belgium, and Transformadores Uniăo, a Siemens/AEG joint venture. These two interlocked companies account for about 40 per cent of the small and medium transformer market. Senhor Salvador Durazzo is also on the board of SACE, a Brown Boveri company. SACE itself does not produce transformers, but Brown Boveri manufactures large transformers. When combined with Induselet and Transformadores Uniăo, the three companies control upwards of 60 per cent of large transformers (2,500 KVA and above). More difficult to assess are the anti-competitive effects of directors who interlock competing groups, but do not sit on the board of the two competing subsidiaries. J.P.Vieira, for example, is on the board of Westinghouse’s Induselet, a maker of transformers, and on the board of Philips’ holding and managing company. Philips’ Walita, a subsidiary of the holding company, competes directly with Westinghouse’s Eletromar in some light household appliances. Vieira is also a corporate legal representative of GE,4 which is active in the market as well. Proceeding no. 13 before the Brazilian government agency charged with controlling abuse of economic power, Conselho Administrativo de Defesa Economica (CADE), presents a case of how interlocks may be used to restrict competition. Saab Scania, the Swedish manufacturer of diesels and heavy construction equipment, was the sole Brazilian manufacturer of 125 to 175 h.p. diesel motors used to make diesel generator sets in the early 1960s. Saab authorised Codima, a Brazilian owned special motor and generator manufacturer, to resell its motors as well as buy them for its diesel generators at wholesale prices. This machine accounts for about half of Codima’s sales; the other half is large specialised electric motors (CADE Proceeding no. 9). Beginning in 1966, Saab cancelled the dealership and refused to supply motors to Codima at wholesale prices. Carmos, another Brazilian generator manufacturer, soon began to experience similar difficulties (Testimony of Augusto Labes, CADE Proceeding no. 13). It was about this time that ASEA, a member of Sweden’s Wallenberg financial group (as is Saab), arranged for its merger with Arno. Euardo Caio da Silva Prado, already on the board of directors of Saab and ASEA Electrica, moved to the directorship of Arno. Besides light home appliances, Arno produces large speical motors above 200 h.p. Codima also produces specialised

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motors in competition with Arno. Allegations about whether ASEA/Arno pressured Codima through its director link with a sister company cannot be verified until the CADE Proceeding no. 13 verdict is rendered. The importance of this question is highlighted when analysing the various electrical industry markets. These transnationals, along with some Japanese companies, meet in several markets (Table3). If we assume some coordination at the director level within each TNC group, there emerge four or more interlocks in eight of twenty-nine product markets. The overall restrictive effects on market competition cannot be definitively judged solely on the basis of the directorship interlocks themselves. The degree of firm integration within the country and the dynamic circumstances of the markets themselves must be considered. That important qualification made, however, this high degree of directoral association between rival transnational groups hardly encourages active price competition. Interlocks doubtless foster the friendly atmosphere of fraternity and collaboration which abates vigorous price competition in certain product markets at specific times. Moreover, they leave the companies involved open to suspicion in their dealings with government price regulators and other competitors in the market who are not members of the club. FORBEARANCE AND SPHERES OF INFLUENCE

Not all forms of transnational coordination need be overt. One means of maintaining tacit oligopolistic equilibrium involves mutual forbearance. Because giant, diversified enterprises meet in many markets, there is a tendency for international rivals to divide up major markets into ‘spheres of influence’. In this theory, advanced to describe the behaviour of large diversified firms in the US [see Mueller, 1977], large multimarket rivals compete less sharply in their many markets, preferring a ‘live and let live strategy’, becuase each knows his rivals are in a position to strike back [Edwards, 1955]. They may refrain from entering markets controlled by rivals in return for privileged positions in their own markets. New entrance may provoke retaliation in their own markets elsewhere. Forbearance and market allocation are difficult to distinguish from overall company strategy of riding ‘separate waves of the product cycle’ or retreating from a hotly contested market in favour of exploiting one’s competitive advantage in another. This distinction is made particularly difficult by the newness of the Brazilian market and its rapid growth. Many companies are moving to establish a ‘beachhead’ in the market, and stable patterns have not yet emerged in may product lines. Most of the TNCs produce at home the many lines of their principal rivals. (Brown Boveri is an exception to this.) Yet many of these producers have chosen not to make in Brazil some product lines and instead concentrate on others. Certain cases illustrate how forbearance might work. GE in 1975 decided to withdraw from local large transformer production and to specialise in large electric motors. However, as long as government regulation permitted, it would import transformers when it won international bids. This occurred at a time when local transformer prices were rising (see O Globo, 19 September 1975). Concurrently, Brown Boveri, GE’s principal rival in both markets, decided to devote greater attention to transformer production and concentrate less on large motors. In another market, light home appliances and electrical goods, GE let its market share languish in relation to other producers, and chose to emphasise capital goods production. Its share of television fell from nearly half of the market in 1966 to less than 10 percent in 1974. Philips grew to be one of the dominant producers. Meanwhile, GE’s share of the light bulb market, in which Philips is the dominant rival with about 30 percent, has dfgdfgdg

ELECTRICAL INDUSTRY: MARKET POINT OF CONTACT FOR TNC SUBSIDIARIES IN BRASIL

TABLE 3

TNCS IN BRAZIL’S ELECTRICAL INDUSTRY 111

Sources: ABINNE [Anuario, 1973/74]; Bernet [1975/76].



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remained stable at about 50 percent since the late 1950s and perhaps earlier [see Geiger, 1961]. As important as trading markets is refraining from entering them. AEG has not entered the electrical installation market, though it produces this equipment in Germany, because, an executive reported to this inverviewer, ‘Siemens is there’. AEG has several important joint ventures worldwide with its home country rival. Forbearance is also a local strategy adopted within product markets to segment them and provide leading producers with control over prices and quantities, a phenomenon alluded to by Bhagwati [1977]. No better example is available than the case of electronics products. The two leading producers are Philco and Philips, undisputed since the phased withdrawal of GE, Standard Electric and GTE— Sylvania.5 As noted above, Philips and Philco have interlocking directorates. By 1976 the firms had segmented the market in radios, black and white televisions, colour televisions, and some refrigeration equipment. In radios, Philips produces 1 to 4-band radios, large and small pocket radios, and sound equipment, while Philco produces 3 and 8-band radios and clock radios. In black and white television, the two firms both produce the standard model lines, but Philco produces the small 12-inch portable AC/DC models while Philips does not. In colour televisions, Philips produces the 17- and 20-inch models and Philco produces the 22- and 26-inch models.6 Philco produces air conditioners while Philips has entered the refrigerator market.7 This evident segmentation of the market contributed to high returns for both companies: in 1974 Philips reported before-tax profits on equity of 25 percent and Philco reported 45 percent. CONTROL OF SUPPLIES

One of the most effective market tactics used to maintain barriers to entry is gaining control over necessary supplies. This is particularly important in the consumer electronics industry, where control of the upstream components and technologies allows the dominant producers to control entrance into the secondary market of final products. Although it is difficult to study this problem systematically, several examples came to light in interviews and onsite research. In Brazil, Philips established a dominant position in the primary components market in the mid-1950s. Philips had long before reached agreement through patent cross-licences with the old ‘radio group’ in the United States—RCA, GE and Westinghouse—that RCA and Philips would share the South American market instead of competing. These agreements remained in effect at least through the late 1940s, and probably longer [See UNCTAD, 1973:64; Frankfurt Institute, 1966:10–16]. As a result RCA is a relatively minor firm in the components markets in Brazil, though a major force elsewhere in Latin America. While RCA was number 91 on the list of the 100 largest electrical firms in 1974, Philips was the largest firm in the industry, controlling eleven separate firms throughout the Brazilian electrical industry [Newfarmer, 1979]. Since Philips is the dominant producer of television components, its subsidiary, IBRAPE, could regulate the costs of most domestic competitors in the final product market. In 1972, according to a government report, it charged AEG—Telefunken of Germany Cr$1,117, and Colorado, a Brazilianowned firm, Cr$1,250 for tubes. Smaller Brazilian firms were charged more. It is possible that these differences reflect quantity discounts, but the effect is to place Brazilian firms at an absolute cost disadvantage. Supply shortages of components in 1977 forced many producers to buy from the retail market. During the 1960s, more than ten Brazilian producers were driven from the market because of the squeeze between component costs and final selling price.8 This squeeze prompted some independent television producers to start their own parts production, a decision which, one small but

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viable firm reported to me, ‘saved our position within the Brazilian market’. Supply channels were further narrowed when Philips acquired Constanta, and AEG—Telefunken acquired Electronica Stevenson, both Brazilian component firms. Epstein and Mirow [1977] tell of cases in other branches of the industry where control of supply channels subsequently led to the reduction of the number of Brazilian firms in the industry. CROSS-SUBSIDISATION

Another practice that allows large transnational conglomerates to control markets on the basis of a long-term strategy is their ability to finance extended losses in one market with earnings from others. Other case studies have reported this TNC tactic, such as Sciberras’ study of the electronics industry in the United Kingdom [1977:252]. One executive explained the practice by saying: To earn money it is sometimes first necessary to lose it’ The practice of financing losses of a subsidiary, especially in the first one or two start-up years of a new plant, is not uncommon. However, crosssubsidising losses for much longer periods may be undertaken to gain a targeted share of a market in order to achieve economies of scale or to overcome barriers to entry. Or the tactic may be used to discipline smaller firms at the periphery of the market. In its predatory form, the tactic may be designed to alter the structure of the market so that competitors without access to finance are driven from the market. Intentional predation is difficult to prove, although several cases have been recorded in US business history [Scherer, 1970:272–72]. The extent to which large multiproduct affiliates subsidise losing product lines internally in Brazil from their earnings in other lines is unknowable.9 However, at least some cases of international crossfinancing can be traced. A sample of 44 of the largest consolidated firms10 in the electrical industry (including its suppliers) produced many examples of cross-subsidisaiton in the 1966–1974 period. Twenty-seven consolidated enterprises were foreign-owned and 17 were Brazilian. Nine enterprises in the sample of 44 recorded losses for at least five of seven consecutive years (Table 4). Within this group of losers, positive earnings years were the rare case; of the total of 52 loss years’ (column 1) only nine contained positive profits (four of which accrued to Siemens). A striking characteristic of the sample is that all the firms on the list are subsidiaries of TNCs. None of the 17 large national firms had experienced continued losses—and survived to 1974. This is understandable, since Brazilian firms are smaller, less diversified, and have less access to financing. Another characteristic of the cross-subsidised enterprises is that they grow relatively rapidly, often much faster than the norm for the industry.11 It is conceivable that these losses are not ‘real’ losses, but merely ‘accounting’ losses reflecting transfer pricing practices of the TNCs. If this is the case, such transfers represent considerable net losses to national income through lost tax revenue and payments to local stockholders, as well as lost investment surplus through retained earnings. However, several facts argue against this interpretation: first, Brazil has extremely liberal profit repatriation rules by Latin American standards, reducing the incentive to engage in complicated transfer pricing practices; second, huge losses such as these invite the scrutiny of regulatory bodies which control the terms of imports (CACEX of the Central Bank) and price regulators (CIP); third, interviews with national and transnational firms in the industries involved confirm the depressed state of demand during the period covered; and fourth, the national firms competing with the cross-subsidising TNCs complained bitterly of their dumping practices and tactics dfsfdsdf

enterprises are all of the ‘no-earnings’ firms taken from the 44 largest consolidated firms in the electrical (or supply-related) industries for which Visăo data were available for the 1966–74 period. Of these 44, 27 were foreign and 17 were Brazilian-owned. bThese values represent current growth in net assets (patrimonio liquido). Due to accounting difficulties it is not possible to state real growth rates of these firms’ equity with available data. By way of comparison, the 20 largest consolidated enterprises in the industy grew at an annual rate of 27 percent, Uses year following loss as growth base. Source: Calculated from Visăo, Quem é Quem, various issues.

aThese

TABLE 4 SELECTEDa ELECTRICAL (OR SUPPLY-RELATED) SUBSIDIARIES CROSS-SUBSIDISED BY PARENT: 1966–1974


from data given by Central Bank (FIRCE) to CPI. Source: Years 1957–1959 Banas Proceeding [1961] for 1961–1972, data provided by Brown Boveri in deposition for CADE no. 9, p. 517F; years 1973 and 1974 from Visăo, Quem é Quem, August 1974 and 1975.

aCalculated

TABLE 5 BROWN BOVERI: PROFITS AND LOSSES, 1957–1972 (Cr$000 current)



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of selling below costs in the market. This is not to say that transfer pricing does not exist in the industry, but rather that the substantial losses of these particular firms are better explained when seen as a TNC tactic to maintain or create a dominant market share. It can be argued that these losses of foreign subsidiaries represent socialgains to Brazil. Firms that would disappear from the market are maintained. If the losses are the result of competition between TNCs, then consumers may reap a surplus in the form of lower prices. If losses are financed from abroad, capital inflows contribute to the foreign exchange balance. However, the benefits of these TNC ‘gas wars’ may be illusory. Often they induce structural changes in the market which may exact long-term social costs. As less wealthy firms are driven from the market, concentration may rise, giving remaining producers power within the market to raise margins and entry barriers. The firms most likely to be driven from the market are Brazilian-owned, and to the extent that this changes firm and industrial performance, it represents a social cost. Stated in terms of efficiency, large, financially strong, but perhaps inefficient, firms may be able to drive out small but efficient companies. Finally, as Evans [1977] notes, these tactics may prolong excess capacity and industrial inefficiency. To understand how this works it is worthwhile to examine one case in detail. Cross-subsidisation in Capital Goods—the Brown Boveri Case

Brown Boveri of Switzerland founded an export outlet subsidiary in Brazil in 1942. Prompted by tariff restrictions and import substitution policies, the parent invested about Cr$230 million in plant and equipment imports through Instruction 113, innaugurating small transformer production in 1957. Production was expanded to 150,000 KVA by 1959 [Banas, 1961: 1099–1100]. A line of generators (with a high foreign component) was begun in 1960, followed with large motor production in 1965/66. By the end of 1974, the firm had sales of about Cr$243 million (US $38 million) and had achieved leadership positions in the various heavy electrical equipment markets. The 1975 sales of the subsidiary, Industria Eletrica Brown Boveri (IEBB), were divided among large electric motors and generators (32 percent), large transformers (34 percent), smaller rotating motors and drives (13 percent), furnaces and boilers (five percent), and industrial presses (15 percent). Before-tax operating profits reached 10.5 percent on net equity (patrimonio liquido) in 1974. The climb to a dominant position in the market had not been without considerable cost. Between 1957 and 1974, the subsidiary experienced losses in seven of the seventeen years for which data are available. Often these amounted to over 20 percent on invested equity (Table 5). Between 1960 and 1974, IEBB carried forward cumulative losses in its earnings balance for ten years of the fifteen-year period. An infusion of foreign loans amounting to US $36.3 million was necessary to prevent bankruptcy and provide continued growth. Brown Boveri/Baden elected to pay this cost rather than be excluded from the market. Brazil represents one of the world’s largest markets for heavy hydroelectrical equipment, a market that has virtually dried up in Europe with the completion of most feasible hydroelectric projects. As a comparatively undiversified producer, the company cannot turn to a consumer goods sector for support. Even though its operations were hardly efficient12 and demand after 1963 quite weak, the firm continued its practice of selling orders below cost and cross-subsidising growth. According to a planning document released to the author in an interview,operating margins declined steadily from 1964 to 1967. From 1964 to 1966, Brown Boveri’s orders increased (as did sales billed).

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After 1967, orders dropped substantially, and the company continued its policy of selling below cost. It was not until mid-1971 that operating results turned positive. These practices ultimately led one of its small, nationally owned competitors, Codima, to file a ‘dumping’ suit13 against Brown Boveri and then later against a group of multinational producers for collusive practices. Indeed, the practice of below-cost selling to maintain a market position in the industry is not unique to Brazil.14 Despite its losses—or perhaps because of them—IEBB’s share in its major markets was preserved. Data are available only for the large motor and generator markets between 1962 and 1972. Prior to 1966 executives of competing Brazilian firms reported that the company had widely expanded its operations in these lines from a small share to assume the dominant position. The importance of its strategy after 1966 lies not so much in its expanded market share, which was only marginal, but in the rapid growth of the markets themselves. The value of the 200–1000 h.p. motors nearly tripled between 1966 and 1972; it rose tenfold in electric motors above 100 h.p.; and expanded fifteen-fold in generators greater than 240 KVA (Table 6). The composition of this specialised product shifted slightly toward the larger sizes in the generator market, as those of 1000 KVA or more grew from under half of the market to comprise over two-thirds. Brown Boveri captured over 90 percent of these products in the large end of the market. The structural changes that took place in the market as a whole were dramatic. All three markets are highly concentrated, and there was little impact on concentration. Using a Herfindal index, medium size motors diminished slightly in concentration, large motors increased and large generators declined slightly. The high overall concentration—with the leading three firms accounting for over 75 percent of production—outweighs these slight changes. More important are ownership changes. In both markets which previously had national producers, the Brazilian share dropped considerably. In medium size electric motors, the Brazilian share of the market fell from 51 percent to 22 percent, and in generators it fell from 17 percent to three percent. Two acquisitions were responsible for this—the de facto merger of Arno with ASEA in 1966 and Toshiba’s takeover of Irmaos Negrini (IRNE) in 1967. Had the Toshiba acquisition not ccurred and IRNE been able to expand as rapidly under national control, the foreign share would not have increased in large generators. The Brazilian participation would have declined in medium size motors but not nearly as rapidly as it did. Both these producers were driven into financial straits because of the low, below-cost selling price and the cross-subsidisation of other producers in the industry. Arno, the strongest and most diversified of the Brazilian electrical firms, was able to negotiate a special arrangement with ASEA of Sweden, which had hitherto entered only the transformer market. In exchange for loan and equity financing, ARNO was to sell heavy equipment under an ASEA licence and in turn take an equity share in ASEA Electrica, ASEA/ Sweden’s transformer producer in Brazil.15 During this period, a number of other small and perhaps less efficient firms that were Brazilianowned disappeared or suffered significant declines in market shares. For example, an electric motor producer, Anel, was stunted, and Carmos, a generator firm, nearly went under. Several firms which originated in the early 1950s and were competitive at the start of the 1960s had disappeared by 1974.

not include GE sales which did not report for the first four years shown. Their 1972 sales were 4,746 in this market, giving them about 26 percent of total sales. Brown Boveri’s share of the total market is reduced with the inclusion of GE to 30 percent of the market. Source: Calculated from data presented by all manufacturers to CADE in Proceeding no. 9, 1974.

aDoes

RELATIVE MARKET SHARES OF BROWN BOVERI: 1966–1972

TABLE 6


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FORMAL COLLUSION Background

Cases of formal collusion are rarely observable by outsiders. Documents made available to CADE, however, provide an opportunity to examine an alleged formal cartel in heavy transformers. The case (no. 19) is now in progress, and the discussion that follows is based upon my own interviews and reading of the evidence. Brazilian business environment.Brazil was at the periphery of the international export market for the first half of the century. Local producers had successfully met local demand growth through the middle 1950s. In transformer production, such names as Manocheretti, Marongoni, Dedini, Capellari, Barmolli, Maretti, and Torrani were prominent [Banas, 1962]. Most of the TNCs’ heavy equipment producers jumped into the market in the 1950s, and imported whole plants under Instruction 113. With the entrance of TNCs, capacity grew very far ahead of demand. Then came the 1963 to 1967 depression. Government spending for generation and transmission equipment declined. As one indicator, growth in installed generating capacity, which had been over 10 percent in 1962 and 1963, declined to 1.6 percent in 1965–66 [Eletrobras Annual Report, 1974: 7]. Inflation rose rapidly. Backlogs and delivery time fell. As one manager put it: The industry could have been declared a state of disaster.’ Pricing decisions in special order heavy equipment. It was in this business climate that producers had to make pricing judgments. Pricing is a function of inflation, value and direct costs. Inflation tends to rise, carrrying equipment prices with it, while direct costs per kilowatt (or kilovolt) tend to fall due to technological improvements. This provides a ‘discretionary zone’ within which producers can set prices depending on factory backlogs and capacity. Increases in factor costs generally provide the rationale given to consumers for price increases during periods when demand is strong and capacity utilisation high. On the other hand, when plants are operating at less than capacity, prices can fall as low as direct costs, as managers attempt to spread fixed costs over a greater number of units. Direct costs (labour, materials and other variable costs) are relatively low percentages of total costs. Overhead or indirect costs, including marketing, engineering, administration and finance, are high and must be borne regardless of the production volume [see Sultan, 1974:172–221]. Thus there is a strong incentive under conditions of declining demand to reduce prices to obtain business from fellow rivals to maintain capacity utilisation. Differing cost functions between firms accentuate this tendency. High fixed cost firms have an incentive to cut prices to increase utilisation and reduce per unit losses, while firms with a higher direct cost component experience fewer losses below optimal capacity rates of utilisation. In other words, everything else being equal, firms with higher direct costs will experience smaller losses at lower utilisation of planned capacity. If the producer in the market has the highest fixed costs per unit at full capacity, it will be his direct costs that will set the floor on industry prices in periods of recession [Sultan, 1974:170–222]. In the Brazilian transformer oligopoly, the smallest firms appear to have the lowest fixed cost component of total costs. The consensus among transformer producers I interviewed was that the smaller firms had low overhead expenditures and were thus able to be very competitive, especially in the smaller transformer sizes. The implications of this during the cyclical downturn were twofold. On the one hand, lower prices throughout the industry would not ensure the elimination of the competitive


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fringe and their capacity from the industry, and, on the other, market price cuts could amount to severe losses, especially for industry leaders, if the large producers engaged in price competition. Scherer notes: Industries with high overhead costs are particularly susceptible to pricing discipline breakdown when a cyclical or secular decline in demand forces members to operate well below designed plant capacity [1968:192].16 Indeed, the same circumstances which drove major US producers to collude formally in the US market in the 1950s were present in Brazil in the mid1960s. Two factors heightened the probability of collusion: the existence of an international heavy equipment cartel centered in Europe [see Newfarmer, 1978a] and the absence of market power regulation in Brazil. ‘Special Agreement Brazil’

On 18 March, 1964—a brief two weeks before the military coup and at the zenith of political— economic instability—eight producers of electrical equipment formed the ‘Instituto Brasileiro de Estudos Sobre O Desenvolvimento da Exportacăo de Material Eletrico Pesado’ (IBEMEP). Signing were the following individuals, representing their respective companies: Mauro Mendonca Kannebley—AEG-Cia. Sul Americana de Eletricidade (Germany) Karl Fredrik Longgren—ASEA Eletrica (Sweden) Vittorio Magozzi—Industria Eletrica Brown Boveri (Switzerland) Jean Rousseau—Induselet (ACEC, Belgium and later Westinghouse of the US) Jose Manoel Azuza Urgarte—ITEL (a Brazilian firm) Frederico Zausmer—Line Material do Brazil (Line and later Hitachi of Japan) Kurt Dietz—Siemens do Brasil (Germany) Gastăo Correia da Cruz—General Electric do Brasil (GE of the US) Jorge Alcides de Campos Marques—Coordinator of IBEMEP17 In addition, three other producers were admitted shortly thereafter: Marini Daminelli (Westinghouse) ALCACE (H.K.Porter, later Harvey Hubbel) Coemsa (ASGEN affiliate of GE later and E.Marcoli, Italy)18 Of the twelve participating members, all were transformer producers, except Marini, Daminelli and ALCACE, who supplied transformer-related semimanufactured products. Equally important, all producers were foreign controlled except ITEL, a smaller Brazilian-owned national producer. Line Material was initially a Brazilian licensee, but soon acquired by Hitachi. These companies probably together controlled an estimated 70 percent of transformer production in Brazil. The official stated purpose of the organisation was to ‘promote actively the development of exports’ and ‘to promote within the law…the international and interamerican interchange of ideas… information…considered useful for the development of a prosperous heavy electrical industy’.19 The Institute was to organise market studies, set up schools for labour training, help enforce Brazilian import

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and export laws, organise conferences on the heavy electrical industry and its exports and offer support where possible to scientific research institutions.20 The organisation apparently had other purposes as well, especially since most of the stated activities were not carried out.21 CADE investigators have substantial evidence that IBEMEP provided an institutional cover for collusive agreements among these transformer producers. Three contractual agreements dated in 1965 and 1967 have been filed with CADE in their suit against the major electrical manufacturers in Brazil.22 These agreements closely model international agreements sponsored by member companies of the International Electrical Association, discussed in detail in a recent UNCTAD report [Newfarmer, 1978a]. Both the contracts and the mode of cartel operation are nearly identical to those of the international cartel, sponsored by the International Electrical Association. The European contracts contain the same basic notification and compensation agreements contained in the Brazilian contracts, though the territorial restrictions, transformer size classes and pricing arrangements obviously varied. Informants reported similar operating procedures. The similarity of the Brazilian cartel to the international cartel has led Epstein and Mirow [1977] to conclude there was a direct link between the two. As Kronstein notes, such linkages between international and local cartels are common occurrences [1970:140], and certainly have been demonstrated in other electrical related cartels, such as cables [Newfarmer, 1978a: 64–66]. Nonetheless, from my interviews it was impossible to assess the extent of coordination between the two, though it was clear that ‘cartel technology’ had been imported from abroad. These transformer agreements specify in detail the rules regarding transformer specifications, participants, meetings, power of the coordinator, notification of other sellers, prices and rotations of sellers designated to ‘win’ bids. Heavy provisions for penalties are contained in the contracts. In addition, ‘the final sales prices agreed upon during the meeting will include a two percent payable by the winning member to a reserve for combat purposes’ (Article 24). If the need for combat arises, it will be taken up first by the company that has accumulated the largest amount of reserves’ (Article 27). A former participant, who has since left the electrical firm that employed him, explained to me how the cartel system worked. Meetings between producers were held on two levels, an executive session (reuniŏes de cupola) and working groups (reunioes de trabalho). The working group meetings were called whenever two or more members received word from a prospective client of a large transformer order, usually once a week or so. If a client phoned a transformer salesman, the latter was obliged to contact the coordinator. The salesman had to wait 24 hours, after which time, if no other producer had called the coordinator the salesman could close the deal. If salesmen from other companies did phone the coordinator to say they had been contacted, the coordinator arranged a meeting between the ‘competitors’.23 The working group decided on the bid winner in accord with the letter next in the rotation (see Section VII of the respective contracts). Each letter represented a company. In 1968 the corresponding code letters for participants were: miASEA—B Brown Boveri—C General Electric—H Induselet—D ITEL—A


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Line Material—unknown Siemens—G Prices were formulated on the basis of lists sent ‘from Europe’, according to the former participant. The losers were to submit prices of 3 percent, 6 percent and 9 percent and so forth higher than the list price in accord with their rank. Asterisks by reference prices meant the winning bid should be 3 percent lower than the listed reference price; the second bid equal to list; and the third 3 percent above, etc. If by chance the client chose a supplier other than the designated winner, that supplier was to raise his price by 5 percent—alleging the need for ‘accessories’. Only at 9 percent above the list price was the non-favoured supplier free to take the sale. The group adopted a rigorous system of fines. If a firm took an order out of turn, it was required to forego orders equal in size to the order times the number of members in the cartel. Working group meetings thrashed out the details of individual bids, questions and disputes. Executive meetings were held as needed, usually about once a month. At these, company representatives, often directors, approved the actions taken in the working groups and discussed the specific problems of the firms. On the basis of instructions from Europe, the cupola allocated orders too large for the price list. When disagreements occurred the executives would consult the European office for final decisions. Executives also decided when ‘combat’ with outsiders was to be undertaken. The firm with the largest fund was instructed to win the bid at belowcost prices. In about 1968 the group allegedly decided to exclude Marongoni from the large transformer market. Induselet was selected to predate on an order for 150 transformers. By studying Marongoni prices on previous orders, Induselet engineers calculated Marongoni’s minimum prices and subtracted 10 percent. Off and on for ten years Marongoni and Gordon, another national producer, were systematically exluded from the large transformer markets. Marongoni was later driven into receivership (concordata) proceedings, and both national firms were left with only smaller orders coming from buyers in the non-industrial states. The collusive agreements in small transformers reportedly lasted in effect until 1970, when demand regained full strength. The large transformer agreement was reported to be in effect at least through 1972. A Digression: Some Implication for Market Structure and Industrial Performance

Denationalisation. Already hit by the recession, many smaller national producers were wiped out. In power and distribution transformer more than seven producers went out of business between 1960 and 1974, including some firms, such as Industria de Maquinas Eletricas Nacionais (IMAN) established in the 1940s.24 National firms that did survive were linked to small geographic markets outside Sao Paulo, Rio de Janeiro and the south, and enjoyed favoured status with state and municipal-owned utilities. Meanwhile, by 1975, Brown Boveri and ASEA Eletrica had captured at least 25 percent each of the large transformer market. These firms, together with Transformadores Uniao (Siemens/AEG), CoemSa (ASGEN/E. Marcoli), Induselet and ITEL, gained control of the entire large transformer market. ITEL was allocated aobut 10 percent of the market. In the medium range (150– 2,500 KVA) of the market these firms came to control nearly 85 percent, and about 80 percent of the small transformer production (5–150 KVA).

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Technology. Because dominant producers allocated markets in transformers as low as 25 KVA and had an interest in eliminating excess capacity on the competitive fringe, the possibility that small national producers could ever develope their own technology to compete in the larger size brackets was virtually eliminated [Epstein and Mirow, 1977]. Moreover, such practices erected an enormous barrier to entry to Brazilian firms and entrenched the market power of the collusive foreign firms. Besides undergoing these structural changes, industrial performance suffered in certain respects. Prices. Producers received the price increases they sought, at least in small distribution transformers. Data are available for distribution transformers (presumably 5–500 KVA) only after 1968.25 I calculated real price per unit and indexed monthly production from January 1968 to December 1974. Quarterly price and quantity averages are shown in Fig. 2. They reveal an appreciable rise in real per unit price at a time when unit sales were generally declining. The new agreements stemming from meetings in June were due to go into effect in late August 1968, but were renewals of previous agreements. Real prices per unit rose from Cr$149 in the first quarter of 1968 to Cr$518 in the fifth quarter (January to March 1969). The quantity index declined from 184 to 96. The fall of prices in 1970 and the increase in production are consonant with the informant’s description of events, namely that the cartelisation of small transformers ended. Still, since we do not know the complete history of price—quantity performance prior to 1968 or of the conspiracy, this evidence can only be taken as suggestive. Imports. The effects of cartelisation on the import propensity of the industry also appear to have been adverse. After the 1963–67 recession, importation of transformers grew at a rate twice that of the manufacturing as a whole and greater than other industries within the electrical sector. The trade deficit in transformers rose from less than $1 million in 1965 to nearly $20 million in 1974. The import coefficient rose from an estimate 10 percent in 1970 to 18 percent four years later [calculated from ABINEE and Census data]. At the same time, transformer producers in Brazil were operating at between 58 and 73 percent of capacity [Techometal, 1971 and Newfarmer, 1979]. Part of the reason for this was the impact of the oil crisis on the demand for electrical equipment in the developed countries. As fuel-burning utilities and other equipment purchasers faced cuts in demand, they purchased less electrical equipment. Parent companies looked to overseas markets for orders to keep their high-fixed-cost plants operating with minimal losses. Thus, General Electric announced it would close its tranformer operations in Brazil because, it told Brazilian newspapers, the market ‘was well served by existing producers and now has excess capacity…and due to the lack of skilled personnel which results in limiting our ability to expand all product lines simultaneously’ [O Globo, 19 September 1975]. Two weeks before, General Electric/US broke the news to Electrical Week, but emphasised that it was ‘relying on its exports from its Massachusetts and Georgia facilities’ to satisfy Brazilian demand [4 August 1975]. Other Examples of Collusive Behaviour

Collusive practices do not always involve written accords, though they often do in the case of specialised heavy equipment. In some other products, price fixing can be accomplished simply by meetings and convention, and government price control procedures may unwittingly contribute to this end.

quarterly averages; prices deflated by wholesale price index. Source: Price and quantity data from IBGE, Pesquisa Mensal.

aRolling

FIGURE 2 DISTRIBUTION TRANSFORMERS: AVERAGE PER UNIT PRICE AND VOLUME, QUARTERLYa 11968–1974


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Lamps and light bulbs, for example, are almost the sole domain of General Electric (50 percent of the incandescent bulb market in Brazil), Philips (30 percent), Osram (a joint venture based in Germany between Siemens and GE) and GTE—Sylvania, which divide the remaining 20 percent. The producers’ trade group, the Lamp Association, reports cost increases of the producers on a joint basis to the Interministerial Price Control Commission (CIP). According to three unrelated interviewees, producers meet in the Lamp Association to reevaluate prices and costs, and these are then forwarded to the CIP. The main industry association, ABINEE, which embraces most of the products and firms in the industry, is divided into 22 product groups. These groups meet on a regular monthly basis to discuss ‘market conditions’. Some of the product groups report cost and price information directly to the CIP, much as does the Lamp Association. The effects of these arrangements on potential competitors outside the market, and on marginal insiders, is mixed. If high prices result from the practices, they may provide a price umbrella for the less efficient producers. On the other hand, the dominant firms with the largest market share and lowest costs hold the important cards, and can set prices to prevent the expansion of the competitive fringe. They can also use prices to deter new entry. POLITICAL RELATIONS AND TNCs TABLE 7 ‘POLITICAL INTERLOCKS’: SELECTED DIRECTORS AND FIRM OFFICERS WITH FORMER OR PRESENT POLITICAL AFFILIATIONS, APPOINTMENTS, OR MILITARY AFFILIATIONS

Sources: Banas [1974], Bernet [1975], Epstein & Mirow [1977]. Secondary sources and interviews.

Transnational conglomerates’ market power also includes the potential mobilisation of noneconomic power through political influence. As hearings before the US Senate Subcommittee on Multinational Corporations have shown, political relations are sometimes used to influence the business environment.26 In an economy where the state is a large economic force and where private producers touch government bureaucracies at many levels, these relationships warrant special attention.


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There are several ways TNCs (or wealthy Brazilian enterprises, for that matter) can obtain political influence. The most obvious is buying the influence of available officials or politicians.27 In countries where government regulation is essential to industry performance—and where official approval of a contract can be worth millions—regulators can be placed under severe pressure.28 Another indicator of potential political influence is to look at interrelations between military, political figures and compnay directors. A partial list of these was traced by matching the names of the directors of the largest 100 consolidated manufacturing enterprises and the 100 largest electrical firms with name bibliographies of recent books on Brazil, supplemented with articles from the press. This casual procedure produced a selected list of ‘political interlocks’ (Table 7). Within the electrical industry, the telecommunications companies are most heavily represented. Siemens, Nippon Electric Company, Standard Electric (ITT) and Ericsson have directors who hold or have held government posts. It is difficult in the absence of precise and inside knowledge to ascertain how these ‘political interlocks’ function. Inferences can be made only with great risk of error.29 These relationships probably are used to facilitate access to high level communication channels in government and business. These relationships expose foreign companies to public suspicion. One nebulous case is that of GE’s relation to the Costa e Silva government. The Folha de Săo Paulo reported on 21 February 1976 that the Costa e Silva government had approved a special degree law no. 882, permitting use of special governments funds to purchase 180 GE locomotives. GE imported 100 of these directly from its US plant. ‘At this time, Coronel Alcio da Costa e Silva, son of the ex-president of the Republic, Artur da Costa e Silva, occupied a directorship at GE.’ Likewise, when GE sought to import 200 locomotives in 1974, its former manager, Jose Flavio Pecora, was Secretary General within the Finance Ministry.30 GE has denied any inappropriate conduct. But the larger question remains: why do companies leave themselves open to public suspiction if no influence comes from these relationships? At the time these orders came from the National Railroad, General Electric do Brasil was (as it still is) the only maker of electric locomotives in the country. ACQUISITIONS

Though mergers and takeovers are hardly a restrictive practice, they are one form of corporate behaviour that can affect market structure. Some of the other corporate practices reviewed here may contribute to vulnerability of domestic firms to takeover or create an atmosphere of insecurity that compells them to seek out prospective buyers. Cross-subsidisation, for example, puts less financially powerful firms in a ‘no win’ situation, no matter how efficient they are. The outcome is often acquisition. Also, the imperfections of the financial and technology markets surrounding the ‘merger market’ make it a poor reflector of optimal allocation of control of productive assets between various ownership groups.31

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TABLE 8 LEADERSHIP IN ABINEE, 1974, AND SINAEES, 1962

aThe

same person may hold more than one post. not include alternates, of which 2 of 3 are representatives of Brazilian firms. cNot distinguished. dSince committee chairmen were not given, it was assumed the first member named was the chairman. Source: Calculated from ABINEE, Annario, 1973/74 and Banas, [1963], pp. 9 & 10. bDoes

Between 1960 and 1974, I traced 47 changes in ownership due to acquisitions in the Brazilian electrical industry. All but one of these resulted in a new firm that was foreign controlled. The impact on market structure were twofold. First, acquisitions of TNCs raised concentration in several product markets, and often had the effect of narrowing supply channels. Second, TNC takeover activity raised the level of foreign ownership in the industry. By separating the effects of rapid growth, entry and exit from the industry from those due to acquisition behaviour, I was able to conclude that takeovers accounted for over 90 percent of the increase in the foreign share of the electrical industry between 1960 and 1974 [Newfarmer, 1978b]. One immediate consequence of the increased foreign aprticipation in the electrical machinery industry was a more active participation in ABINEE, the industry trade group that represents the interests of the sector to the government. The leadership in the organisation exercises a strong role in association policy formation, so examining the composition provides a clue to the foreign role. In 1962, more than two-thirds of the officers of the trade association (then named SINAEES) came from Brazilian companies. By 1974, the leadership role had almost reversed, with TNCs controlling 60 percent of the leadership posts (Table 8). The industry association had adopted a generally friendly stance towards issues related to foreign enterprise in its policy positions made to the government,32 helping to create a propitious climate for the growth of foreign investment.


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CONCLUSIONS

This review of corporate conduct in the Brazilian electrical industry suggests that economists should be very careful in inferring that TNC expansion in developing economies is solely due to their superior efficiency. It may be that if TNCs and Brazilian firms were to compete in workably competive markets, one group or the other would indeed increase its market share because of superior technical efficiency.33 However, the case of the Brazilian electrical industry is clearly not one of competition among equals; TNCs exhibit strong propensities towards organising and preserving various forms of market power in host economies. These tactics are often based on the advantages of global financial strength (such as in the case of cross-subsidisation or acquisitions) or perceived international and local interdependence (such as with interlocking directorates, mutual forbearance or collusion). The school of thought that traces corporate conduct to market structure, internationally and locally, may be getting closer to the heart of the denationalisation process, because such a search leads to a discussion of market power and its effects on industrial structure and performance. Clearly, barriers to entry which protect the monopolistic advantage of TNCs are not solely based on superior technology, but include specific corporate practices designed to deter new entry. These findings point to the usefulness of strengthening host country control mechanisms of selected aspects of TNC activity. Perhaps such measures would take different forms than those used in the developed countries; after all, antitrust and other pro-competition policies in the home countries of TNCs show only occasional successes in the social control of market power, and there is no guarantee these policies would fare better in the smaller markets of the developing economies. On the other hand, as one tool of national planning, serious measures to curb restrictive practices, to prevent nonsocially beneficial takeovers, and to generally counterbalance the disadvantaged position of domestic entrepreneurs, could bring considerable long-term benefits to developing countries. NOTES 1. These data and this paper are part of a large study entitled Transnational Conglomerates and the

Economics of Dependent Development, to be published by JAI Press in 1979. 2. However, the anticompetitive consequences of indirect interlocks, even in the United States, are

potentially severe. A recent US staff report to the Committee on Governmental Affairs concluded: ‘interlocking directorates can be both good business for corporations and bad business for the public. Directors who also sit on other company boards occupy positions with potential for antitrust abuse and conflicts of interests. [The type of direct interlocks prohibited by Section 8 of the Clayton Act], while deterring the most blatant of interlocks—common directorships between direct competitors—have only provided respectability for a wide variety of other kinds of interlocks, which may have similar, but more subtle, abusive effects.’

Interlocking Directorates Among the Major US Corporations, Staff Study prepared by the Subcommittee on Reports, Accounting, and Management of the Committee on Governmental Affaris, US Senate, Washington: Government Printing Office, June 1978, p. 279. 3. The list of interlocks with two or more companies outside the parent group are presented in the appendix of Newfarmer [1979]. 4. Testimony of Thomas Smiley, President of GE do Brasil, CADE Proceeding no. 19.

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5. GTE-Sylvania first entered the final television market with its purchase of Empire in 1973. In 1975,

6. 7.

8. 9.

10.

11.

12. 13. 14. 15.

16.

fire destroyed the Empire production plant, and GTE—Sylvania has not yet returned to the television market. Philips has just recently introduced a 26-inch colour set. Philips has obtained its position in the refrigerator market by buying refrigerators of Consul and marketing them under its own brand. In 1975 Philips attempted to buy Consul but was prevented by Brazilian authorities. See Journal do Brasil, ‘Industria eletrica compra componentes no mercado paralelo’, 9 March 1977 and Exame, ‘Industria cresce menos por falta de componentes’, 28 July 1976. The tactic of cross-subsidisation is difficult to trace because of the hidden nature of intrafirm transfers. When Brazilian subsidiaries are diversified they may subsidise one product line loss with above normal profits from other Brazilian markets. At the international level the tactic is easier to trace, because transfusions which come from abroad sometimes show up on local balance sheets. These were all the electrical firms for which complete time series information was available in the 1966–1974 period. Data were taken from the series Quem é Quem na Economia Brasileira, initiated in 1966. This list is not inclusive, as many firms outside the sample were too small or unincorporated in the earlier years of the series to be included in it. We defined ‘cross-subsidisations’ to be those subsidiaries or national firms which incurred losses or had neglible earnings (i.e. 3 percent or less on equity before taxes) for five of any seven consecutive year period. Thus firms with short term losses of four or fewer years or those with a poor earnings record were excluded. The concept behind the methodology is that presumably firms without access to the ‘deep pocket’ of a larger ‘brother’ would be driven from the market in five harsh years. By way of comparison, the largest ten foreign and ten national enterprises in the industry grew by a rate of 27 percent annually while the cross-subsidised enterprises growth rates ranged from 28 percent to 66 percent. See testimony of ex-director Mario Negro before the Congressional Investigation into Multinationals in Brazil in 1975. CADE Proceeding no. 9 decided in favour of the defendant. In 1971, the US Treasury Board ruled that European discounts offered on the US market in the 1960s were so great that they constituted ‘dumping’ [Sultan, 1974:260]. The three members of Arno’s board came onto the board of ASEA and one from ASEA Electrica went to Arno. At year end 1966 Felipe Arnstein Arno, Carlos Sergio Arnstein Arno and Eduardo Caio da Silva Prado were on both boards [Banas, 1966:151, 152]. Prado had long been associated with the Swedish TNCs, having been simultaneously on the board of SKF and Scania Vabis since the late 1950s [Banas, 1961:1258, 1259]. Although Arno claims complete autonomy, the result is an ‘unofficial merger’ of the two interests. Arno registered $3.9 million in equity investments from ASEA/Sweden (Central Bank data) varying from 20 to 30 percent of Arno equity during the 1966 to 1974 period [Bernet, 1971 and 1975/76]. Arno in turn held a similar share in ASEA Electrica. ASEA/ Sweden did not enter the large electric motor business. This arrangement was not without cost to Arno. Technical assistance payments began immediately for Arno, $38, 168 in 1966. By 1975, Arno had remitted to its foreign benefactors $1.7 million in profits and technology related fees (CPI data). By 1974, stock ownership in Arno was more widely distributed among investment banks and funds, though ASEA held the largest outstanding block, with 19.2 percent. The two unofficially merged companies published a joint annual report in 1974. Former GE Vice-President William Ginn testifying about the US, electrical equipment conspiracy in the late 1950s described the problem: ‘The thing that is disturbing is when you see your business begin to drop off, and your price is such an important factor. It takes roughly a 20 percent increase in volume to take care of a 5


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percent price cut. The most natural inclination of any human being when these things begin to happen is to go down the street and see their competition and say “Boys, we are sitting up here committing suicide. Can’t we cut it out?” They may say, “That’s all right. We will cut it out. We won’t do this no more.” Until just about the time you get back to the office, here is an inquiry, and the whole thing is back in the ash can. If you need the business, right away the mistrust and all that begins, and you are right back on the bicycle heading downhill [quoted in Sultan, 1974:209]’. 17. Original contract—ordem no. 10165; livro A No. 15. Diario Oficial, April 1965. 18. Testimony of J.M.A.Urgarte, 10 October 1975, CADE Proceeding no. 19. It should be noted that US

19. 20. 21. 22.

23.

24. 25.

26.

27. 28.

law under the Sherman Act forbids participation of US—based firms if such participation affects US trade. More recently, the US Justice Department issued guidelines that suggest US businesses might not be vulnerable to prosecution if the cartel did not substantially affect US trade and if the host government ordered local participation [US Department of Justice, 1977]. Articles a and f, Institute Official Registration, Ordem no. 10165. Articles g-p, Ibid. See testimony of President J.A.Urgarte and AEG Director Karl Goelner, CADE Proceeding no. 9. The case of CADE no. 19, now in process. The 1967 agreement is reproduced in the appendix of Newfarmer [1979]. The transformer cartel in Brazil was first made public by Kurt R.Mirow, a Brazilian businessman, who had obtained a copy of the contracts from a former employee of one of the firms. He later wrote a report for UNCTAD together with Barbara Epstein, which discusses two of the restrictive practices covered here, the cartel case and the control of supply channels [Epstein and Mirow, 1977]. I am indebted to Mr Mirow for providing the documents and background information on the Brazilians and international cartels. The analysis presented here is based upon my own interviews with former representatives of the cartel and the evidence presented is the CADE case. The contracts in Brazil and the mode of operation are virtually identical with those used by the companies in the pre-1948 days and presently for international transformer sales. My informant disclaimed any knowledge of an international organisation and international contracts. Nevertheless, whether formally linked or not, the international companies clearly had transferred the technology of cartelisation to Brazil. These were traced by author from Banas [1962] and ABINEE [1973/4]. Unfortunately, the specialised nature of the product, lumpiness of orders, lags, and incomplete price data and knowledge about when and for how long the companies colluded, render interpretations of even available data hazardous. See Hearings on Lockhead Aircraft Corporation, 4–6 February & 4 May 1976. Washington: Government Printing Office, 1976. For an extensive review of the issue of questionable payments, see Gladwin and Walter [1977]. See the hearings on corporate bribery and ‘Antitrust and the Overseas Payoffs’, New York Times, 30 May 1976. One former high official in the National Industrial Property Institute (INPI), charged with ruling on the level and terms of technology contracts, told me: It was a common occurence to receive ‘gifts’ from companies wanting approval of licensing agreements. These ranged from cuff links and liquor to expensive items. One executive invited me for a weekend I again refused. He phoned the following week and invited me to lunch. Finally, the firm sent over a very attractive young lady at the end of one work-day who carried an invitation to dine out at the company’s expense. Their intentions—and hers—were not difficult to interpret.

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29. For example, while Minister of Telecommunications, Senhor H.Corsetti sat on the CDI which

approved the entrance of NEC of Japan into the Brazilian telecommunications industry. After leaving his cabinet post, Corsetti was made President Director for NEC do Brazil. In 1976, the Japanese multinational conglomerate was awarded a hefty $100 million contract on a bidding for Embratel, a large state enterprise. 30. Folha de Paulo ‘Gravacao confirma as de GE’, 21 November 1976 see also Jornal do Brasil, ‘Goncalves pede nomes do suborno’, same date. 31. These arguments are developed at length and discussed in terms of an empirical study of the acquisition process in Brazil in another article. See Newfarmer [1978b]. 32. See, for example, the opening statement of Manŏel da Costa Santos, President of ABINEE, testifying before the Congressional Investigating Commission on the activities of TNCs in Brazil: The point of view always defended by us (ABINEE) is that we favour alliance (acolhimento) with foreign capital that…comes with the goal of integrating itself into our national economy and contributing to our progress. …The electrical industry has a large participation of foreign capital that resides here as amicus permanenti and becomes national through profits, which are generally reinvested, as much as the human element in employment. …The open policy of cooperation with foreign capital which we elect does not exclude— indeed it reinforces—the primacy of a large effort to strengthen firms with majorityowned national capital. …Brazil has had a great contribution from multinational enterprises, which established themselves here more than 50 years ago. …What is necessary is to learn to live with this new entity in the modern world, establishing rules to curb possible abuses and seeking to take advantage of their positive aspects. They are capable of bringing us to great economic and technological potential (Opening statement to the CPI/Multinationals, 1975).

Da Costa Santos is the director of Arno, an affiliate of Sweden’s ASEA, and is also on the board of Ericsson do Brasil. 33. Statistical evidence on the productive efficiency of the two ownership groups does not support the hypothesis that TNCs are more efficient than Brazilian firms in the electrical industry, controlling for other factors of market structure and economic environment [see Newfarmer and Marsh, 1979]. REFERENCES ABINEE ( Brasileira da Industria Eletroeletionica), Anuario (various years), Paulo: ABINEE. Banas, G. (ed.), 1961, O Capital Estrangeiro no Brasil, Rio de Janeiro: Editora Banas. Paulo: Editora Banas. Banas, G. (ed.), 1962, A Industria de Material Elétrico e Eletronico 1962, Paulo: Editora Banas. Banas, G. (ed.), 1963, Elétrica e Eletroeletronica 1963, Banas, G. (ed.), 1966, Banas Eletroeletronica 1966, Rio de Janeiro: Editora Banas. Paulo: Editora Banas Banas, G. (ed.), 1974, Banas Financeira 1972/73, Banas, G. (ed.), 1915, Banas Industrial 1975, Rio de Janeiro: Editora Banas. Bernet, J. (ed.), (various years), Guia Interinvest, Rio de Janeiro: Editora Interinvest. Bhagwati, J.N., 1977, ‘A Review Symposium’, Journal of Development Economics, 4:387–400. , G.A., 1975, O abuso do Poder Economico: Apuracăo e , Rio de Janeiro: Editora Canedo de ARtenoria.


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Caves, R.E., 1971, ‘International Corporations: The Industrial Economics of Foreign Investment’, Economica, No. 149, February. Caves, R.E., 1974, ‘Industrial Organization’, in John Dunning (ed.), Economic Analysis and the Multinational Enterprise, New York: Praeger. Cilingiroglu, A., 1969, Manufacture of Heavy Electrical Equipment in Developing Countries, World Bank Staff Occasional Papers No. 9, Baltimore: Johns Hoplins Press. Edwards, C.D., 1955, ‘Conglomerate Bigness as a Source of Power’, in National Bureau of Economic Research, Business Concentration and Price Policy, London: Oxford University Press. Eletrobras Annual Report, 1974, Rio de Janeiro: Eletrobras. Epstein, B. and K.R.U.Mirow, 1977, ‘Impact of Restrictive Practices by Multinational Companies on the Industrialization Programs of Developing Countries, Electrical Equipment in Brazil: A Case Study’, prepared for UNCTAD, Geneva: United Nations, ST/MD/9. Evans, P.B., 1977, ‘Direct Investment and Industrial Concentration’, Journal of Development Studies, 13:4. Frankfurt Institute, 1966, Study on the Adverse Effects of Specific Restrictive Business Practices on International Trade, ‘Radio and Television Technology’, Institut für Auständisches und Internationales Wirtschaftsrecht, Federal Repbulic Republic of Germany, October. Geiger, T., 1961, Genral Electric Co., New York: National Planning Association. Gladwin, T.N. and I.Walter, 1977, ‘Thinking About Overseas Corporate Payoffs’, New York University Faculty of Business Administration Working Paper no. 77–31. Hymer, S.H., 1960, ‘The International Operations of National Firms: A Study of Direct Investment’, Ph.D. dissertation, MIT. IBGE, Pesquisa Mensal (various years), Rio de Janeiro: IBGE. IBRD-International Bank for Reconstruction and Development, 1965, Current Economic Position and Prospects of Brazil, Vol. III, ‘Electric Power’, 11 May. Johnson, H.G., 1970, The Efficiency and Welfare Implications of the International Corporation’, in C.P.Kindleberger (ed.), The International Corporation, Cambridge: MIT Press. Johnson, H.G., 1973, ‘Economic Benefits of MNCs’, in H.R.Hahlo (ed.), Nationalism and the Multinational Enterprise, Dobbs Ferry, New York: Oceana Publishing. Kindleberger, C.P., 1969, American Business Abroad, New Haven: Yale University Press. Kronstein, H., 1970, The Law of International Cartels, Ithaca: Cornell University Press. , P.G., 1965, A Nova Liberdade: o Combate aos Trustes e Carteis, Rio de Janeiro: Tempo Brasileiro. Mueller, W.F., 1977, ‘Conglomerates: A Non-industry’, in Walter Adams (ed.), Structure of American Industry, New York: Macmillan. Newfarmer R.S., 1978a, The International Market Power of Transnational Corporations: A Case Study of the Electrical Industry, report prepared for UNCTAD. Newfarmer, R.S., 1978b, ‘TNA Takeovers in Brazil: The Uneven Distribution of Benefits in the Market for Firms’, World Development, 7:1 January. Newfarmer, R.S., 1979, Transnational Conglomerates and the Economics of Dependent Development, Greenwich: JAI Press. Newfarmer, R.S., and L.C.Marsh, 1979, ‘The Influence of Transnationals on the Pattern of Development in Host Economies: Comparing the Behaviour of Foreign Subsidiaries and Domestic Firms in Brazil’s Electrical Industry’, University of Notre Dame Working Paper. Scherer, F., 1970, Industrial Market Structure and Economic Performance, Chicago: Rand McNally. Sciberras, E., 1977, Multinational Electronic Companies and the National Economic Policy, Greenwich: JAI Press. Sultan, R.G., 1974, Pricing in the Electrical Oligopoly: Competition or Collusion?, Cambridge: Hafvard University Press. Tecnometal (Consulting Group), 1971, Sector do Producăo de Bens de Capital (Sintese de Persquisa), Rio de Janeiro: Tecnometal.

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UNCTAD (United Nations Conference on Trade and Development), 1973, Restrictive Practices Studies on Great Britian, Northern Ireland and Japan, New York: United Nations. United States Department of Justice. 1977, Antitrust and International Operations, Chicago: Commerce Clearing House, Report no. 266, February. Vernon, R., 1977, Storm Over the Multinationals, Cambridge; Harvard University Press. , Quem é Quem na economia brasileira (various years), Paulo: Visao Editora. White, Eduardo, 1975, Control of REstrictive Business Practices in Latin America, Geneva: UNCTAD.

Economic Integration and Export Instability in Central America: A Portfolio Model by Luis René Cáceres*

After a review of the literature on export instability in the less developed countries, this paper investigates the effect that economic integration has had on the stability of the Central American countries’ export sectors. A portfolio model is formulated to determine whether the Central American inter-regional trade flows are capable of exerting stabilising forces on the countries’ export sectors. The experience of the first decade of Central American economic integration shows that for Nicaragua and Costa Rica interregional trade has smoothed the fluctuations originating in their traditional exports. INTRODUCTION

The problem of export instability in the less developed countries (LDCs) has been a source of debate among economists for over two decades. The debate was initiated by the appearance of studies contending that the degree of export instability was larger in the LDCs than in the developed countries (DCs) and that export instability constituted an obstacle to the LDCs’ economic planning and growth.1 The causes of export instability have traditionally been believed to rest on the primary nature of LDCs’ exports and on their high geographical and commodity concentration.2 The second phase of the debate set in when several economists conducted empirical investigations on LDCs’ export instability, encountering little or no empirical support for the contentions listed above. Thus, Coppock [1962], using data for 83 countries for the period from 1946 to 1958, found no evidence of a relationship between instability of export proceeds and geographic and commodity concentration of exports. Massell [1964] could not find a significant association between instability of exports proceeds, on the one hand, and primary product ratio and concentration of exports on the other hand. MacBean’s [1966] empirical results indicated that DCs and LDCs experience similar levels of export instability and that specialisation in primary products could not be accounted a source of LDCs’ export instability. However, these latter studies soon encountered serious rebuttals. Erb and Schiavo-Campo [1969] reported evidence that the level of export instability of the LDCs relative to that of DCs has increased when the 1946–58 and 1954–66 periods are compared. These authors also found a relationship between LDCs’ level of instability and economic size (measured by gross domestic product), the larger *Central American Bank for Economic Integration, Tegucigalpa, Honduras. This paper is part of the author’s Ph.D. dissertation [Caceres, 1977, Chapter 3]. The author gratefully acknowledges comments from Dr Stephen Reynolds. The author is solely responsible for any remaining errors.

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countries showing lower instability. Massell [1970], in a second study employing data for 55 less developed countries for the 1950–66 period, found positive associations between stability and food exports and between instability and export commodity concentration. Naya [1973], using data for 18 developed and 48 developing countries, reported that the latter experience larger export fluctuations and that there exists a negative relationship between total value of exports and instability. The argument that LDCs experience larger export instability than DCs was also substantiated in the empirical results of Glezakos [1973] and Mathieson and McKinnon [1974]; we should add that Glezakos, and later Voivodas [1974], reported negative associations between economic growth and export instability of LDCs. But far from being settled, the instability debate has been revived with the recent appearance of works by Knudsen and Parnes [1975] and Yotopoulos and Nugent [1976, ch. 18] putting forward the view that export instability exerts a salutary influence on the LDCs’ capital formation process and economic growth. To present this argument, these authors have resorted to Freidman’s [1957] permanent income hypothesis, which, as is well known, postulates that the marginal propensity to consume out of permanent income is a decreasing function of the level of uncertainty. Then, their argument continues, to a higher level of uncertainty, represented by large export instability, there corresponds a higher marginal propensity to save, higher investment and hence higher rates of economic growth. Knudsen and Parnes [1975:94] introduce the index of transitory export instability (ITE) defined as: (1)

where Et = actual exports = ‘permanent’ exports Et−E* = ‘transitory’ exports ‘Permanent’ exports are in turn defined as (2)

where r is the annual rate of growth of exports obtained by regressing the logarithms of exports on time and α. is an adaptations coefficient. After estimating the model and computing indexes of instability for 28 countries, using data for the 1958 to 1968 period, Knudsen and Parnes’ results suggest the existence of an inverse relationship between marginal propensity to consume out of permanent income and the index of ‘transitory’ export instability, and also of a positive association between transitory export instability, gross saving ratio and rate of economic growth. These results are diametrically opposed to widely held views on the detrimental effects of export instability. However, objections to the ‘permanent’ export approach to export instability are several. First, the validity of Freidman’s permanent income hypothesis in the developed countries still remains debatable, and there is no reason to rush to the conclusion that it would be valid in an LDC.3 A test of the permanent income hypothesis of consumption for 16 Latin American countries showed that it could be valid only in three countries [Caceres, 1973].

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Second, while there is a large literature supporting the view that uncertainty about future income reduces consumption,4 the point that uncertainty stimulates investment has not been substantiated. On the contrary, theoretical microeconomic studies have shown that the firm reacts to uncertainty by raising its price and reducing both the optimal stock and rate of utilisation of capital [Smith, 1969; Sadmo, 1970]. In a situation of capital risk, the risk facing investors, Sadmo [1969] showed that the more an individual invests the more he stands to lose, and in consequence he may increase his consumption or reallocate his assets toward less risky portfolios. It is thus possible then that in an open economy the uncertainty-induced savings end up in safe bank deposits or investments abroad.5 Moreover, we should add that Webber [1972:214], besides showing that uncertainty leads firms to adopt smaller than optimum production scales, conducted empirical tests which led him to conclusions directly opposed to those of the ‘permanent’ export hypothesis: The rate of savings is associated with per capita income and with export variability: The rate of saving is high when incomes are high and variability is low. These two factors account for 40 percent of the differences between countries in the rate of gross domestic saving.’6 The discussion above has served to show that the topic of export instability in the LDCs is still very much alive and relevant. The rest of this paper will explore the role that economic integration has played on the stability of the Central American countries’ export sectors. A portfolio model of export diversification will be presented and estimated, and finally the implications of the model will be discussed. THE MODEL

At first thought it would appear that the Central American Common Market (CACM) should have played a stabilising role in relation to the countries’ external sector. For the CACM has permitted the Central American countries to reduce the commodity and geographic concentration of their exports, factors that are believed to be positively associated with export instability. In point of fact, the stabilising impact of regional economic integration has been endorsed by several authors. Allen [1961: 328] has written that ‘Integration among primary producers would probably tend to reduce fluctuations in export earnings. Price variation in the products exported by any one regional group do not move together precisely. When the price of cocoa is down, the price of ground nuts may be stable or rising so that for the region as a whole export earnings are more stable.’ The United Nations Economic Commission for Latin America [1959:5] reported that ‘the Common Market could play a leading role in mitigating the Latin American Countries’ vulnerability to external contingencies and fluctuations.’ Naya [1973:641], in his study of Asian countries’ exports, concluded that ‘enlarged trade through regional arrangements among these countries could be a strong stabilising force.’ Finally, Erb and Schiavo-Campo [1969] have found evidence that the European Common Market has exerted a stabilising force on the member countries’ exports. To study the impact of economic integration in Central American export stability we resort to portfolio theory. As is well known, portfolio theory was developed by Markowitz [1952] and Tobin [1958] to study the allocation of personal wealth among financial assets so as to minimise the individual’s portfolio risk. This thoery has recently been extended to studies of regional employment stability and strategies for regional industrial diversification [Conroy, 1974; Barth et al., 1975; Renaud, 1976].

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For a case of regional industrial diversification when industry is already established in the region and industry 2 is being considered for location, if these industries have respective expected returns R1 and R2, with variances V(R1) and V(R2), the expected industrial return to the region E(R) is given by: (3)

and its variance V(R) is equal to (4)

where b is the percentage of regional resources to industry 1 and Cov(R1, R2) is the covariance between the returns of industries 1 and 2. The importance of portfolio theory resides in the fact that, as expression (3) above shows, if industry 1 is the only industry in the region (say ‘coffee industry’), the introduction of industry 2 (‘manufacturing industry’) would act to stabilise regional returns only if 2b(1−b) Cov(R1, R2) is negative and larger in absolute value than (1−b)2 V(R2); it is in this case that diversification ‘pays’ [Bierman, 1968]. There have been applications ‘of portfolio theory to development economies. In an important study on the covariation of prices of primary products, Brainard and Cooper [1968], acknowledging that LDCs are beset by export instability because ‘their exports all depend primarily on industrial production in the major countries or they are subject to the same vicissitudes of rainfall and sunshine’, went on to recommend that LDCs introduce in their export ‘portfolio’ those crops ‘with returns not highly positively correlated with those already in the portfolio’. But after computing correlation coefficients between various pairs of crops and finding them to be in most cases positive, these authors viewed the stabilising potential of crop diversification as very limited.7 For the task at hand we utilise a portfolio model to investigate whether the Central American countries’ inter-regional trade flows have been or can be capable of exerting stabilising influences on the countries’ total export sector; that is, the aim of this model is to shed light on the conditions under which the flow of inter-regional exports can smooth out fluctuations originating in the traditional export sector. Elsewhere [Caceres, 1977, ch. 2] an export matrix was derived in which the Central American countries’ level of regional exports are expressed as a function of the level of exogenous expenditures (traditional exports and public consumption) existing in the rest of Central America. This matrix is shown in Table 1. Table 1 indicates that, for example, if Guatemala’s traditional exports increased by $100, El Salvador’s and Honduras’ exports to Guatemala would increase by $20.22 and $3.81 mmmmm TABLE 1 MATRIX OF INTRA-CENTRAL AMERICAN EXPORTS


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respectively; and if public consumption increased by $100 in Costa Rica, its imports from Nicaragua and Honduras would increase by $7.35 and $3.49, respectively. From Table 1 the intra-regional exports of the ith country can be written as (5)

where ECAi=i’s total Central American exports EOi=i’s s traditional exports (exports outside Central America) Gi=i’s s public consumption Total exports are given by: (6)

(7)

And the variance of total exports V(ETi) is given by:

(8)

In the expression above it can be seen that the effect of economic integration on the variability of a Central American country’s total exports is felt in two forms. First, the variance of total exports is increased by the introduction of its integration partners’ variances of public consumption and traditional exports, weighed by the respective multipliers. Second, a positive or negative effect is

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received from several covariance terms: that between its own traditional exports and public consumption, plus those between these two variables and the rest of Central America’s public consumption and traditional exports, plus the covariances between the rest of Central America’s traditional exports and public consumption; all these covariances are of course weighed by the corresponding intra-regional trade multipliers. The variance of a given country’s total exports will be decreased if the net sum of the products of the covariance terms is negative and larger in absolute value than the sum of the variance terms. EMPIRICAL ANALYSIS

In order to calculate the variance of total exports as indicated above, the matrix of variances and covariances between the Central American countries’ traditional exports and public consumption was calculated using time series data for the 1962–73 period.8 This series was detrended by taking first differences and the variance—covariance matrix was calculated on the first differences. Moreover, since the resulting elements of this matrix still reflected differences in the magnitude of the countries’ export and public sectors, they were normalised by dividing by the mean values of the corresponding variables. In order to appreciate the degree of intertemporal association between the Central American countries’ ∆EOs and ∆Gs, the matrix of correlation coefficients between these variables is presented in Table 2. Several important points should be noted in Table 2. One is that, with the exception of Costa Rica, the Central American countries’ annual changes in traditional exports tend to be synchronised. The highest positive correlation between ∆EOs is found between Guatemala and El Salvador, neighbours whose main traditional exports consist of coffee. These two countries’ annual changes in traditional exports are also highly correlated with the rest of Central America’s ∆E0s. Conversely, Nicaragua and Honduras, the only Central American countries whose main traditional export is not coffee, show annual changes in traditional exports only weakly correlated with those of the rest of Central America. An interesting result is that, even though Costa Rica is a large exporter of coffee and bananas, the traditional Central American exports, its annual changes in exports are of a counter-cyclical nature relative to the changes of the other countries. There also exists a tendency for the Central American countries’ annual changes in public consumption to move in unison. The highest positive correlation coefficient is found between Guatemala and El Salvador (0.74); Costa Rica presents a high negative correlation coefficient with Honduras (−0.72) and Nicaragua (−0.54). The correlations between annual changes in a country’s own traditional exports and its public consumption are negative only in Guatemala (−0.48) and El Salvador (−0.19); the highest positive correlation is found in Costa Rica (0.58). El Salvador’s, Guatemala’s and Costa Rica’s annual changes in public consumption are negatively correlated with changes in traditional exports in the rest of Central America. It seems, then, that public spending policy in Guatemala and El Salvador tends to counteract fluctuations in the traditional mmmm

CORRELATION MATRIX (1962–1973)

TABLE 2


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COMPONENTS OF NORMALISED VARIANCE OF TOTAL EXPORTS DUE TO TRADITIONAL EXPORTS

TABLE 3



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export sector both at home and in the rest of Central America; Costa Rica’s policy is pro-cyclical on a national level and counter-cyclical on a Central American level. In contrast, Honduras’ and Nicaragua’s public sector tends to spend in a pro-cyclical fashion on both national and regional levels. It can be concluded that via the traditional exports channel, only Costa Rica exerts counter-cyclical demand forces on the rest of Central America; and only Costa Rica, El Salvador and Guatemala exert stabilising stimuli through the public spending mechanism. The variances of the Central American countries total exports, as denoted by equation (8), were computed and the results have been disaggregated into three components by source of origin: those originating in the traditional export sectors, in the public consumption sectors and by the interaction of these two sectors. They are shown in Tables 3, 4, and 5 respectively. It can be seen in Table 3 that only Nicaragua and Costa Rica receive a negative impact on the variance of their total exports originating in the negative covariances between their own traditional exports and those of the rest of Central America. These effects (−0.0745 and −0.9131 respectively) are larger than the positive components received through the variances of the rest of Central America’s traditional exports (0.0473 and 0.0990 respectively), and in consequence the variances of their total exports are reduced. In contrast, the positive covariances between Guatemala’s and El Salvador’s traditional exports and those of the rest of Central America are almost as large as the variances of their own traditional exports, thus greatly increasing the variance of their total exports. Table 4 indicates that the components of the variance of total exports introduced by the variances of and covariances between the public consumption sectors are much smaller than those originating in the traditional export sector. Table 5 shows the components of the variance of total exports due to the interaction between traditional exports and public consumption. As was pointed out before, Guatemala and El Salvador have pursued public spending policies of a counter-cyclical nature relative to the fluctuations arising in their traditional export sectors, and as Table 5 indicates, a result is that the components of their total export variances represented by the covariances between their own public consumption on the one hand, and their own and the rest of Central America’s traditional exports on the other hand, as well as those between their own traditional exports and the rest of Central America’s public consumption, are negative. However, the negative public consumption covariance terms shown by those two countries are of a limited impact, compared with the much larger positive components originating in the covariances existing between their own and the rest of Central America’s traditional exports. The total variances and standard deviations of the Central American countries’ total exports are shown in Table 6. We can see that Costa Rica and Nicaragua have variances of total exports smaller than the variances of their traditional exports (Table 3, first column), we can then say that for these countries the CACM has been a vehicle for the stabilisation of their external sectors. Honduras’ variance of total exports is only slightly higher than the variance of its traditional exports. For Guatemala and El Salvador, the variances of their total exports are larger than those of their traditional exports. This is a consequence of the high positive covariation between these countries’ own traditional exports and the rest of Central America’s, plus the fact that their intraregional trade multipliers, the channels of transmission for those covariances, are very large. It seems paradoxical that Costa Rica and Nicaragua, the only countries where public spending policies followed the cycle of

COMPONENTS OF NORMALISED VARIANCE OF TOTAL EXPORTS DUE TO PUBLIC CONSUMPTION

TABLE 4


TABLE 5 COMPONENTS OF NORMALISED VARIANCE OF TOTAL EXPORTS DUE TO COVARIANCES BETWEEN TRADITIONAL EXPORTS AND PUBLIC CONSUMPTION

EXPORT INSTABILITY IN CENTRAL AMERICA 145

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TABLE 6 TOTAL VARIANCE OF TOTAL EXPORTS

TABLE 7 MARGINAL PROPENSITIES TO INVEST

their own traditional export sectors, end up with more stable external sectors, while for Guatemala and El Salvador, the only countries that have followed local counter-cyclical public spending policies, the effect of the CACM has been to magnify the variability of their traditional export sectors. But we should recall that, as shown in Table 4, the impact that public spending exerts on the variance of total exports is very limited compared with the impacts exerted by the covariance between the countries’ traditional exports. We present in Table 7 the countries’ marginal propensities to invest (mpi) as estimated in Caceres [1977]. The existence of an inverse association between countries’ export variability and marginal propensity to invest is evident. The rank correlation coefficient between mpi and the variance of total exports was calculated to be—0.70. Note that El Salvador and Guatemala, the countries with highest and second highest variances of total exports, also have lowest and second lowest mpis.9 This result runs contrary to the postulates of the ‘permanent’ export theories discussed previously. CONCLUSIONS

After a review of the literature on export instability and portfolio theory, a portfolio model for the Central American countries intra-regional exports was developed. Our results indicate that CACM trade, in a potential sense, offers a mechanism for stabilising the Central American countries’ external sectors. However, in the period 1962–73, only in Costa Rica and Nicaragua did the CACM present a stabilising influence. The key to the stabilising role of the CACM lies in the traditional export sectors. The Central American countries’ diversification of exports into new products and markets, made possible by the CACM, is not necessarily conductive to more stable external sectors, for, as we have shown, the countries’ traditional export sectors, the main determinant of the demand for intra-regional exports, tend to fluctuate in synchronism, inducing a synchronic tendency at the level of intra-regional trade.


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NOTES See United Nations [1954], Myrdal [1956], and Nurkse [1957]. For recent investigations of this point, see Khalaf [1976] and Sheehey [1977]. See Bodkin [1959]. See Sadmo [1970], Dreze and Modigliani [1972] and Juster and Taylor [1975]. In a study of the investment behaviour of Minnesota farmers, Girao et al. [1974: 148] concluded that ‘the stable income group tends to invest more savings in farm capital, while the unstable income group tends to invest less than the full amount in the farm, presumably investing the remainder outside the farm.’ 6. But still the question remains why Knudsen and Parnes found positive correlations between export instability and savings and growth. A clue is given by their definition of ‘permanent’ exports as a function of the rate of growth of actual exports, which raises the possibility that the index of transitory instability may be a measure of export growth. Examination of Knudsen and Parnes’ and Yutopoulos and Nugent’s results reveals a tendency for the indexes of transitory export instability to be positively correlated with rates of export growth. In effect, Yotopoulos and Nugent [1976:337] present a regression equation showing a positive association between rate of export growth and transitory index of instability (ITE): 1. 2. 3. 4. 5.

But at this point we have to ask ourselves which way the causality runs. Is transitory instability a determinant of export growth, as assumed in the equation above, or is ITE, due to the definitions of ‘permanent’ and ‘transitory’ exports, a function of the rate of growth of exports? If instability leads to rapid growth, can we then ascribe the phenomenal increase in exports of coffee that some LDCs have recently achieved to their high export instability? Or have Peru’s fish meal exports decreased dramatically because they were too stable? A negative answer permits us to reverse the regression equation above to express the transitory export index as a function of export growth. But then Knudsen and Parnes’ contention that instability is conductive to lower marginal propensity to consume and higher rates of capital formation and economic growth can be easily explained by results of studies that have reported that exports constitute a large portion of LDCs’ savings [Maizels, 1968; Chenery and Eckstein, 1970; Lee, 1971], and by other studies that have reported positive associations between rates of export and economic growth [Haring and Humphrey, 1964; Emery, 1967; Caves, 1970]. 7. A portfolio diversification model that includes the agricultural supply sector in addition to the price sector is developed by Zarembka [1972]. This model has been extended to a two-country case by Caceres [1976]. 8. The source of data is Secretaria Permanente del Tratado General de Integracion Economica Centroameriana [1975]. At this point an important caveat is in order. The time period under consideration comprises the years when the International Coffee Agreement was in effect, which may be a source of bias in the computed covariance matrix. 9. A portfolio model to study the effect of the CACM on the stability of the rates of GNP growth is developed in Caceres [1977, appendix B]. A perfect negative rank correlation is found between rates of economic growth and the standard deviation of total exports.

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REFERENCES Allen, R., 1961, ‘Integration in Less Developed Areas’, Kyklos, Vol. XIV, pp. 315–335. Barth, J., et al., 1975, ‘A Portfolio Theoretic Approach to Industrial Diversification’, Journal of Regional Science, Vol. XV, pp. 9–15. Bierman, H., 1968, ‘Using Investment Portfolios to Change Risk’, Journal of Financial and Quantitative Analysis, Vol. III, pp. 151–156. Bodkin, R.G., 1959, ‘Windfall Income and Consumption’, American Economic Review, Vol. XLIX, pp. 602–614. Brainard, W. and R.Cooper, 1968, ‘Uncertainty and Diversification in International Trade’, Food Research Institute Studies in Agricultural Economics, Trade and Development, Vol. VIII, pp. 270–295. Cáceres, L.R., 1973, ‘Consumption Function for Latin America’, Intermountain Economic Review, Vo. IV, pp. 55–63. Cáceres, L.R., 1976, ‘La Inestabilided de las Exportaciones de los Paises Centroamericanos’, forthcoming in El Trimestre Economico Cáceres, L.R., 1977, Economic Integration and Underdevelopment in Central America, unpublished Ph.D. Dissertation, University of Utah, Salt Lake City. Caves, R., 1970, ‘Export-Led Growth: The Post-War Industrial Setting’, in Induction, Growth and Trade, W.A.Eltis (ed.), London: Oxford University Press. Conroy, M., 1974, ‘Alternative Strategies for Regional Industrial Diversification’, Journal of Regional Science, Vol. XIV, pp. 31–45. Coppock, J.D., 1962, International Economic Instability, New York: McGraw-Hill. Chenery, H., and P.Eckstein, 1970, ‘Development Alternatives for Latin America’, Journal of Political Economy, Vol. LXXVIII, pp. 966–1006. Dreze, J., and F.Modigliani, 1972, ‘Consumption Decisions Under Uncertainty’, Journal of Economic Theory, Vol. V, pp. 308–353. Economic Commission for Latin America, 1959, The Latin American Common Market, New York: United Nations. Emery, R., 1967, ‘The Relation of Exports and Economic Growth’, Kyklos, Vol. XX, pp. 470–486. Erb, F.G. and S.Schiavo-Campo, 1969, ‘Export Instability, Level of Development and Economic Size of Less Developed Countries’, Bulletin of Oxford Institute of Economics and Statistics, Vol. XXXI, pp. 263–283. Friedman, M., 1957, A Theory of the Consumption Function, Princeton: Princeton University Press. Girao, J.A., W.G.Tomek and T.D.Mount, 1974, ‘The Effect of Income Instability on Farmers’ Consumption and Investment’, Review of Economics and Statistics, Vol. LVI, pp. 141–149. Glezakos, C., 1973, ‘Export Instability and Economic Growth: A Statistical Verification’, Economic Development and Cultural Change, Vol. XXI, pp. 670–678. Haring, J. and J.Humphrey, 1964, ‘Simple Models of Trade Expansion’, Western Economic Journal, Vol. II, pp. 173–174. Juster, F. and L.Taylor, 1975, ‘Towards a Theory of Saving Behavior’, American Economic Review, Vol. LXV, pp. 203–209. Khalaf, N., 1976, ‘Country Size and Economic Instability’, Journal of Development Studies, Vol. XII, pp. 422–428. Knudsen, O. and A.Parnes, 1975, Trade Instability and Economic Development, Lexington: D.C. Heath. Lee, J., 1971, ‘Exports and the Propensity to Save in LDCs’, Economic Journal, Vol. LXXXI, pp. 341–351. MacBean, A.I., 1966, Export Instability and Economic Development, New York: Allen and Unwin. Maizels, A., 1968, Exports and Economic Growth in Developing Countries, Cambridge: Cambridge University Press. Markowitz, H., 1952, ‘Portfolio Selection’, Journal of Finance, Vol. VII, pp. 77–91. Massell, B.F., 1964, ‘Export Concentration and Fluctuations in Export Earnings: A Cross-Section Analysis’, American Economic Review, Vol. LIV, March 1964, pp. 47–61.


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Massell, B.F., 1970, ‘Export Instability and Economic Structure’, American Economic Review, Vol. LX, pp. 618– 630. Mathieson, D.J. and R.I.McKinnon, 1974, ‘Instability in Under-developed Countries: The Impact of the International Economy’, in Nations and Households in Economic Growth, P.A.David and M.W.Reder (eds.), New York: Academic Press. Myrdal, G., 1956, An International Economy, New York: Harper and Row. Naya, S., 1973, ‘Fluctuations in Export Earnings and Economic Patterns of Asian Countries’, Economic Development and Cultural Change, Vol. XXI, pp. 670–678. Nurkse, R., 1957, ‘Trade Fluctuations and Buffer Policies of Low Income Countries’’, Kyklos, Vol. XI. Renaud, B., 1976, ‘Employment Structure and the Stability of Urban Growth During the Urbanisation Process’, Urban Studies, Vol. XIII, pp. 83–86. Sadmo, A., 1969, ‘Capital Risk, Consumption and Portfolio Choice’, Econometrica, Vol. XXXVI, pp. 586–599. Sadmo, A., 1970, ‘The Effect of Uncertainty in Saving Decisions’, Review of Economic Studies, Vol. XXXVII, pp. 353–360. Secretaria Permanente del Tratado General De Integracion Economica Centroamericana, VI Compendio Estadistico Centroamericano, Guatemala: 1975. Smith, K., 1969, ‘The Effect of Uncertainty in Monopoly Price, Capital Stock and Utilisation of Capital’, Journal of Economic Theory, Vol. I, pp. 48–59. Sheehey, E., 1977, ‘Levels and Sources of Export Instability: Some Recent Evidence’, Kyklos, Vol. XXX, pp. 319–324. Tobin, J., 1958, ‘Liquidity Preference and Behavior Towards Risk’, Review of Economic Studies, Vol. XXV, pp. 68–85. United Nations, 1954, Commodity Trade and Economic Development, New York: United Nations. Voivodas, C.S., 1974, ‘The Effect of Foreign Exchange Instability on Growth’, Review of Economics and Statistics, Vol. LVI, pp. 410–411. Webber, M., 1972, Impact of Uncertainty on Location, Cambridge: MIT Press. Yotopoulos, P., and J.Nugent, 1976, Economics of Development: Empirical Investigations, New York: Harper and Row. Zarembka, P., 1972, Toward a Theory of Economic Development, San Francisco: Holden-Day.

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Simulation Analysis of an International Buffer Stock for Jute by Walter C.Labys*

This paper deals with the problems and prospects of organising an international buffer stock for raw jute. Such a study is important for several reasons: (1) Instability of this commodity has had a severe impact on one of the least developed economies, Bangladesh; (2) With exports concentrated in a single country prospects for organising a buffer stock would seem to be good; and (3) Only limited econometric analysis of the jute market and its stabilisation prospects have appeared to date. Dealt with here are the nature of the jute market, prospects for organising a jute buffer stock, and the economic and financial implications of alternative buffer stock policies. The results confirm the suitability of this market for buffer stock stabilisation. THE WORLD JUTE MARKET

Jute is an important industrial fibre, ranking second only to cotton in terms of world supply and demand. Its proportion of the annual output of natural industrial fibres is 15–20 percent. At the same time, it suffers many of the problems typical of primary commodities. Production and exports take place mostly in developing countries: Bangladesh, India and Thailand. Consumption occurs mainly in industrial countries: the EEC, United Kingdom, United States and Japan. And large movements in price are necessary to bring supply and demand into equilibrium. This implies that supply and demand are both relatively price inelastic. Most of the instability in the jute market stems from swings in production and this leads to fluctuations in prices and exchange earnings as well. For Bangladesh, India and Thailand, fluctuations in production over 1960–74 averaged 22, 28, and 29 percent, compared with price fluctuations of 12, 17, and 21 percent. Fluctuations in exports of raw jute are about the same as those of production for Bangladesh and Thailand, while fluctuations in jute goods exports for India are greater than production. This is crucial for Bangladesh, since over 68 percent of its foreign exchange earnings are derived from the exports of raw jute. Possibilities for expanding consumption in the industrial countries have also been hampered by competition from synthetics, leading to a deterioration of the natural fibre’s market share over time. Conditions such as these have led to consideration of a possible jute stabilisation arrangement.

*Professor of Economics, College of Mineral and Energy Resources, West Virginia University

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Demand

Jute consumption, including true jute, kenaf, mesta and allied fibres, expanded in the 1950s and 1960s. Although traditional uses such as packaging declined, new uses were found in felts, padding and wall coverings. But since then, research and development efforts by manufacturers of synthetics have led to greater competition in product markets. As a consequence, natural jute consumption has remained approximately the same. However, and more seriously, the share of the developing countries in total consumption has fallen. Beginning with a share of 46 percent in 1961–63, the proportion has declined from 41 percent in 1964–66 to 30 percent in 1974. Nonetheless, there is the possibility that this trend could be reversed, since higher petroleum prices are increasing the price of synthetics relative to jute. But definitive changes in this direction have not been found. Recent decreases in jute production, together with speculation on jute inventories, have forced prices upwards from $US 354 per metric ton in 1973 to $US 462 in 1975 and to $US 526 in the first half of 1978 (Bangladesh White C). Since petroleum inputs into synthetics constitute only a small proportion of their total costs, manufacturers have been able to hold their prices more closely. Synthetic price increases have averaged only 5–14 percent annually over the same period. Thus, the competitive position of jute has suffered a relative deterioration. Supply

The world supply of jute remained relatively constant throughout the 1960s and the early 1970s, varying between 1.9 million tons in 1960–61 to 2.8 million tons in 1970–71 (excluding centrally planned countries). However, since then the decline has been more noticeable, mainly in Bangladesh, and has also been reflected in raw jute exports. Regarding area planted, India has expanded its acreage in order to reduce its imports of raw jute, while Bangladesh has reduced its acreage. It is difficult to forsee whether acreage planted will expand or contract in the future. There is the problem of an unfavourable jute/rice ratio, as well as the pressure of population growth, which would favour production of food commodities in the jute producing countries. Other factors affecting raw jute production relate to tariffs and quotas, with government policies in Bangladesh encouraging the export of jute goods. Competition from Synthetics

The major substitutes for jute and jute products are the polyolefin plastics, noted for their high tensibility, stiffness, impact resistance, low weight and low production costs. Of the two major forms of polyolefin, polypropylene and polyethylene, it is the former which has proven the more competitive in areas such as carpet backing, backing yarn for woven carpets, and hessian cloth for bags and sacks. Polyrpopylene is a product of propylene which is made from steam cracking of naptha in Western Europe, and from refining of natural gas liquids and liquified petroleum gases in the United States. The costs of polypropylene can be divided roughly into 55 percent fixed and 45 percent variable. Of the former, capital costs are the major component. Since the commercial exploitation of polypropylene began in the 1960s, technological improvements have resulted in a price reduction from approximately /1b in 1962 to 16 /1b in 1972. 33

INTERNATIONAL BUFFER STOCK FOR JUTE

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Prices

While many commodity markets are reasonably competitive, with a substantial number of major buyers and sellers, prices in the jute market are determined mostly by what happens in a single country, Bangladesh. However, the country has little control over price and the jute market still experiences substantial price fluctuations. Labys [1976] has shown that of the 31 major primary commodities traded internationally, only 6 have fluctuations more severe than jute. The coefficient of variation of these commodities measured over 1960–73 reveals a range of 45 to 68 percent for the 6 commodities, a value of 42 percent for jute, and a range of 40 to 8 percent for the remaining 24 commodities. Among the causes of fluctuations in raw jute prices are variations in acreages planted, speculation, minimum price policies and exchange rate variations. THE PROSPECT FOR A JUTE BUFFER STOCK

Among the techniques available for stabilising commodity earnings are export controls, multilateral contracts, compensatory finance, and buffer stock operations. Possibilities for a jute buffer stock have been discussed on various occasions, as recorded in various FAO, IBRD and UNCTAD documents.1 It would appear that the basic criteria necessary for operating a price-adjusting buffer stock are present in jute. Jute is a storable commodity and is relatively homogeneous in its major grades. Prices of jute also have been shown not to display a long-run trend, making stabilisation about some average or slight trend gradient possible. If anything, the influence of polypropylene substitutes will be to push jute prices downwards. In addition, there is not substantial forward speculation against jute stocks, except that typical of crisis situations. Finally, it would appear that sufficient common interest appears among the producing countries to arrive at a common set of principles for any governing international agreement. Concerning the operation of the buffer stock, the arrangement most often discussed is a single international stock, where storage occurs in more than one country and management stems from a central agency. Coverage of the buffer stock should, at least at the initial stages, concentrate on raw jute and kenaf, Grades or qualities to be included would be the major or most commonly used types, which are of a relatively homogeneous nature. Since raw jute is the basic material for jute goods, stabilisation of the former should reduce fluctuations in jute goods markets and reduce the need for mills to hold speculative stocks. The actual size of the buffer stock which would stabilise the jute market has been suggested in a number of studies, summarised in Table 1. Considerable variation exists among the individual estimates for the initial level of a raw jute stock, ranging from 50,000 to 400,000 tons or between 8 and 61 percent of world trade (1975–76) in jute and allied fibres. Since the 50,000-ton estimate relates to a national stock operated by Bangladesh, the lowest suggested stock which is international amounts to 150,000 tons or 23 percent of world trade. The problem of deciding which stock level would be optimal from an economic welfare point of view is one of analysing the simultaneous interdependence between stock levels and other variables. Most important is the magnitude or width of the price range to be stabilised; the narrower the range of prices the greater the stock size required. Also influencing this relationship are the price elasticities of demand and supply. Storage capacity should not be a problem, since Bangladesh alone has some 276,000 tons of capacity, with an additional 500,000 tons projected for construction in the next 10 years. Considerable capacity also exists in India and Thailand. Storeability in the tropical producing countries mmmmm

bPrice

at 10% of acquisition costs range set between 5–10% above/below the mean

aEstimated

TABLE 1 JUTE BUFFER STOCK PROPOSALS



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is limited to a maximum of 24 months. In temperate zones, ventilated warehouses can store jute almost indefinitely. The costs of storage have been computed to average $US 25 per ton per year among the major producing and consuming countries, except Greece and the United Kingdom [UNCTAD, 1978a:62]. Related to the costs of storage are operational costs, and more importantly, the capital costs. The latter relate directly to the size of the buffer stock required. Table 1 also lists estimates of capital requirements for the various buffer stock proposals. For example, UNCTAD [1975] estimated $US 136 million for its suggested stock size of 500,000 tons of jute and jute goods. In terms of raw jute and fibres alone, the implied stock of 400,000 tons purchased at $US 250 per ton would require $US 100 million. These costs would vary depending on the policy adopted for buying-in the initial stocks. Concerning the annual operational costs, the major components would be supervision of the buffer stock and managing the buffer stock agency. An initial estimate of managing the agency is $US 150,000 per year, but this would vary depending on its size and location.2 To meet the total buffer stock costs, financing would have to be sought. The actual nature of these arrangements would depend on the extent and character of the countries participating. Since it is doubtful that the producing countries alone could support these costs, direct contributions might have to be solicited from the consuming countries. One potential source of finance for meeting annual costs would be a tax on exports or imports of raw jute. Such a tax, representing 3 percent of market price, has been suggested by Kofi for operating a buffer stock in cocoa [Kofi, 1972]. Economic and Financial Implications

The approach taken to analyse the financial and economic implications of a jute buffer stock has been to determine the net welfare impact in the form of producer and consumer benefits. In order to learn what might be the optimal buffer stock policies to be followed, the net welfare impact is measured subject to different conditions regarding buffer stock rules and market price elasticities on a historical and on a projections basis. Historical Analysis

Analysis of the jute buffer stock is based initially on a simulation of the historical sequence of production and export fluctuations between 1960 and 1974. The buffer stock model employed specifies price stabilisation according to upper and lower price limits which conform to some preassigned price range. The analytical procedure involves, first, deciding on the price range, and secondly, determining which levels of storage are possible to maintain that range. The price ranges selected for analysis, as suggested in Table 1, are between 5 and 10 percent of the mean price. Price Stabilisation

Range

Lower limit

Upper limit

Narrow Moderate Broad

±5% ±7.5% ±10%

$257 $250 $243

$284 $291 $298

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The level of storage necessary to meet these limits is determined by production capacity constraints and storage activities. As previously indicated, storage capacity is sufficiently large not to impose any constriants. Thus we need only consider the initial level of stocks needed to support buying and selling operations over time. Initial levels selected for analysis are 100,000, 200,000, 300,000, 400,000, 500,000, and 600,000 tons. It is assumed that these stocks would have been purchased over a three-year period prior to operation. At an average price of $US 181 per ton (1957–59), this amounts to initial captial requirements for the selected stock levels of $US 18.1, 36.2, 54.3, 72.4, 90.5 and 108.6 million respectively. The buffer stock model selected to explain the relationships between quantities and prices on the world jute market is based on a simple supplydemand or ‘mini-model’ framework consisting of three equations3

where miDt = world jute demand Qt = world jute supply Pt = world jute prices Using the market clearing condition, the reduced form for prices can be derived as follows.

Based on the estimated model, the elasticity of response for demand has been assumed to vary between −0.2, −0.4 and −0.6. The value selected for supply has not been made to vary and is assumed to be 0.25. Concerning the data employed, the world demand for jute has been defined to include those major countries which are either producers or consumers. Of those countries for which ample data are available, the former include Bangladesh, India and Thailand, while the latter consist of the United States, the United Kingdom and Japan. It would have been perferable to include all of the major importing countries in the demand analysis, but data in the form of complete time series since 1960 were lacking. This same constraint faced Khan in his model [Khan, 1972] of jute trade, making analysis of the market difficult at the country level. The three producer countries mentioned account for most of the world’s raw jute supply. In fact, most of Thailand’s production is of kenaf rather than jute, but because of kenaf’s substitutability with lower grades of jute, it is included. The jute price used is that considered most representative at the world level, Bangladesh White C. Computation of the financial and economic benefits in dollar terms has been based on the approach of Reutlinger [1976]. Financial gains and losses derived are obtained from the purchase, sales and


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storage activity of the buffer stock agency, given the above relation between stocks and prices. For any given year, the buffer stock financial losses and gains are defined by

where FC is purchase costs, FR is revenue from sales, and FS is the cost of storage. The latter is derived from

where costs of storage are assumed to be $25 per ton per year; handling costs for moving in stocks (STI) and for moving out stocks (STO) are $4 per ton per year; and BS is the buffer stock required. Interest costs are included in the $25 estimate. To this can be added the cost of purchasing the initial buffer stock BSO at $ 181 per ton and the costs of managing the stock, previously estimated at $150,000 per year. Financial benefits can also be considered in the context of ‘flow of funds’, the annual net flow of revenues and costs for the agency. These have been assumed to consist of

where FC is the revenue collected annually to cover operating costs by placing a duty or tax on jute. A $3 per ton annual production tax has been included for this purpose. Producers’ and consumers’ gains and losses are difficult to quantify. The approach employed here is based on the approximation of Reutlinger [1972: 1–12]. Producer gains and losses depend on whether jute is purchased for or released from the buffer stock. When stock purchases are made, producers sell the same amount as they would without purchases, but at a higher or stabilised price

where PA is the actual price, PS is the stabilised price and QA is the quantity produced.4 When sales are made out of stock, producers receive a lower price and hence experience a loss

Consumer gains and losses similarly differ depending on whether purchases or sales are made. When sales occur, consumers gain by the reduction in costs of the jute demand.

where QS is the stabilised quantity. When purchases are made, the reduction in consumer surplus because of the higher prices becomes a loss.

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TABLE 2 PRESENT VALUE OF TOTAL ANNUAL BENEFITS FROM BUFFER STOCK OPERATIONa (000,000 $US)

aInitial

stock level of 300,000 tons, discount rate of 8.0%. stabilisation examined over different elasticities of demand, E. c000 tons dDoes not include purchase costs for initial stocks. bPrice

The economic benefits or losses described earlier consist of the financial, together with producers’ and consumers’, gains and losses. For a period of stock purchases, these are given by5

and for a period of stock sales

In the following discussion these various benefits and losses have been summed over the given period to provide an approximation of the total benefits and costs derived from alternative storage rules.6 All figures are expressed as present values, discounted at 8 percent. Table 2 summarises these totals for a number of simulation runs conducted with the buffer stock model. Depending on the price elasticities assumed, the gains and losses are shown to vary according to the width of the price range. Peculiar to the 1960–74 production period was the bad harvest of 1960, which requires an immediate sale from the buffer stock. The largest sale has been estimated to be 238,000 tons; consequently an initial stock level of 300,000 tons was deemed optimal for the policy comparisons provided in the table. Of course, the initial stock required diminishes as the price range selected widens, as shown. Economic benefits in all cases are negative. They are shown to become higher or more negative as the desired level of price stabilisation increases from 10 to 5 percent about the mean. The most important of these high costs are the financial costs of the buffer stock itself. These are not shown to change substantially as price stabilisation increases within the above range. The flow of funds follows the same pattern, although it is positive for the case of the highest inelasticity, E=−0.2. There


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is a small dip in both the financial costs and the negative flow of funds for the price stabilisation range of 7.5 percent about the mean. This is probably due to trade-offs between the amount of stock to be stored and the transactions or movement activity required, more movement being required at higher degrees of stabilisation. In addition to remaining relatively the same across elasticities, the producer benefits tend to be higher than consumer benefits as the desired degree of stabilisation lessens. Consumer benefits are also shown to decline as the degree of stabilisation lessens. This would suggest that consumers ultimately may benefit more from a jute buffer stock with a higher degree of stabilisation. The converse is true for producer benefits. This would imply that a bargaining point could be reached which maximises producer benefits and minimises consumer losses. Although consumer and producer gains and losses vary with initial stock levels, the major impact of the latter falls upon the financial gains and losses. Table 3 illustrates how these gains vary with stock levels, given different degrees of price stabilisation. While a number of stock levels have been included for comparative purposes, the stock level of 300,000 tons would be optimal from the point of view of the 1960–74 period. The financial costs increase sharply as the initial stock level increases. This appears to be true regardless of changes in the degrees of stabilisation or in the degree of elasticity. The flow of funds increases negatively with higher initial stocks. Where the flow of funds is positive, this suggests that the subsidisation or taxation specified would be sufficient to reduce or to reverse the financial losses. With respect to the variations of buffer stock levels and market elasticities, lower elasticity values imply that larger quantity adjustments are needed to effect price changes and vice versa. In Table 3, the economic benefits shown differ considerably with the assumed levels of price elasticity. They can be seen to increase (become less negative) as the demand elasticities decline. Projections Analysis

Here insights are provided regarding the operation of the buffer stock beyond the period of historical analysis. This is difficult to accomplish, because of the high degree of uncertainty that surrounds the future of the jute market. Demand for jute does appear to be declining because of competition from synthetics. However, decreases in the costs of production due to possible increases in productivity could offset this decline, given the likelihood of high petroleum prices eventually affecting synthetic production costs. Consenquently, the results of the projections analysis can be interpreted as only approximate, based on the particular assumptions made. Concerning the data used, the historical production and consumption data have been replaced with trend forecasts made by the World Bank [IBRD, 1976a:21–28]. Jute production is forecast to grow at annual rate of 1.5 percent from 1977 to 1980 and of 1.2 percent from 1981 to 1985. Jute consumption under the most favourable conditions is expected to grow at an annual rate of 1.4 percent from 1977 to 1980 and of 0.4 percent between 1980 and 1985. Export and import projections are the more relevant here. Exports of jute and fibres are forecast to decline at an annual rate of −4.0 percent from 1977 to 1980 and −3.6 percent from 1981 to 1985. For imports the figures are −3.0 percent for 1977 to 1980 and −3.6 percent for 1980 to 1985. Since the present analysis has been extended for 15 years from 1977, the 1980 to 1985 rate has been assumed to continue through 1986 to 1991. To account for instability about these trends, random fluctuations in production based on the historical standard deviations have been added to the trend projection. The relation between quantities

aBased

on 1957–59 average of $US 181 per ton, discount rate 8.0%.

TABLE 3 PRESENT VALUE OF TOTAL ANNUAL FINANCIAL BENEFITS AND FLOW OF FUNDS (000,000 $US)



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and prices in the simple model has been based on the 0.4 elasticity of the previous alternatives above. Sufficient information is not available as to what the future elasticities might be and so the middle range of the previous set has been adopted. Table 4 summarises results of the buffer stock simulation at ±5 percent and ±10 percent stabilisation, based on stochastic variation about forecast trend values from 1977 through 1991. Included are the initial stock levels, average stock levels, gross economic benefits, producer benefits, consumer benefits, financial benefits, flow of funds and interest costs. Although the latter have been included in the financial cost of buffer stock operation, they are reported separately here. Gross economic benefits for the different ranges and probabilities of success vary between −143 and −256 million dollars. This is most probably due to the small quantities of jute available for export, as well as the shrinking jute demand expected for the future. Both financial benefits and flow of funds are negative. As with the historical analysis, taxes or collective cost subsidies could be used to help offset these losses. The computed results do not suggest that required stock levels would differ much from those required for stabilisation in the historical period. Similar to the results presented in the UNCTAD jute study [UNCTAD, 1976], the average stock levels found report a need in the vicinity of 250,000 ton range, depending on the assumed degree of price stabilisation. Conclusions

The results suggest that a buffer stock of 300,000 tons would be sufficient to offset sales from stock of the magnitude experienced over the period 1960–74. Of course this figure would vary depending on the price elasticity in the market. A more detailed study is necessary to estimate these elasticities more carefully. The determined stock level would also seem to be adequate for operating the stock in any future period based on the projections analysis. Compared to other raw jute buffer stock proposals listed in Table 1, the 300,000 tons suggested appears reasonable. The study made by UNCTAD in 1975 suggested a level between 236,250 and 472,000 tons. Their more recent estimate [UNCTAD, 1978] implies a smaller stock of 160,000 tons. The higher figures are closed to the FAO estimate [1968] of 336,000 tons. The capital cost of acquiring an initial stock of 300,000 tons at 1975 price levels in $US 143.1 million.

TABLE 4 PRESENT VALUE OF TOTAL ANNUAL BENEFITS FROM BUFFER STOCK OPERATION, 1977–1991a (000,000 $US)

aElasticity b000

tons.

of −0.40, discount rate of 8.0%.

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The findings also suggest the relative dollar benefits and costs that would accompany jute buffer stock operations. Producers have been shown to benefit possibly more than consumers where demand response is more inelastic. The only dollar figures which can be interpreted in absolute terms are those pertaining to financial benefits and flow of funds. The financial costs for the historical period, shown in Table 2 to be in the range of 90 to 112 million dollars, include stock acquisition costs of $US 54 million in 1957–59 prices or $US 143 million in 1975 prices. This suggests annual costs of operation in the vicinity of $US 15 to 24 million, which does not differ notably from the UNCTAD estimates [1976] of $US 21 to 22 million shown in Table 1. The corresponding flow of funds can also be averaged over the same 15-year period. Operating revenues are positive for an inelastic demand situation, but losses vary for the elastic markets between $US 0.7 and 2.7 million annually. These losses occur even though a jute tax of $US 3 per ton is assumed as a source of revenue. Increasing this tax and shifting its incidence could help to offset these losses to a greater extent. NOTES 1. For example, see ECAFE [1962], FAO [1962], FAO [1968], FAO [1970], IBRD [1976], UNCTAD

[1976], and UNCTAD [1978]. 2. This estimate is an approximate one, based on costs estimated for the operation of the cocoa buffer

3.

4.

5. 6.

stock. It was selected to provide comparisons of revenues and costs, but a better estimate would be necessary for a more detailed cost analysis. An attempt was made initially to construct an econometric model of the world jute market including supply, demand and stock equations for the major nations involved. A number of problems were encountered relating both to data and to estimation. However, better results were obtained when dealing with the model at the world level. Thus the present model is given in this form. Results of the more disaggregated jute model are available from the author. The production tax has not been subtracted from producer gain or added to producer loss, since its incidence is subject to negotiation, perhaps being spread between producers and consumers according to the relative elasticities of supply and demand. The sign of the buffer stock costs is not necessarily fixed. The dollar values of the gains and losses provided are intended for comparisons of orders of magnitude rather than for comparisons of exact dollar values. REFERENCES

Doyle, J.C., 1975, ‘A Strategy for Jute’, draft, UNCTAD, 14 May. ECAFE, 1962, ‘Fluctuations in World Jute Markets, 1947–48 to 1960–61’. CCP/Jute Ad Hoc/62/8, E/CN.11/ Trade/JJP/18, FAO,Rome. FAO, 1968, ‘Issues Relating to an International Buffer Stock Policy for Raw Jute’, Study Group on Jute, Kenaf and Allied Fibres, CCP JU/CC 68/7, Rome. FAO, ‘Stabilisation Reserves: Proposal of Pakistan’, Intergovernmental Group on Jute, Kenaf and Allied Fibres, CCP: JU/CC 70/3, Rome. FAO, 1970, ‘Stabilisation Reserves: Proposals of India’, CCP: JU/CC/70/4, Rome. IBRD, 1973, The World Jute Economy, Vol. 1, Washingotn, DC. IBRD, 1976, ‘An International Program for Jute’, Washington, DC.


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