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North-South relations: the economic component

Published online by Cambridge University Press:  22 May 2009

Carlos F. Díaz-Alejandro
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Extract

This essay presents a framework for viewing North-South economic relations which, it is hoped, will facilitate positive analysis and will contribute toward normative prescriptions regarding the desirable trend of North-South economic relations in the future. The primary point of departure is the viewpoint of the South as it faces the whole range of its relationships with the North.

Type
Section III
Information
International Organization , Volume 29 , Issue 1 , Winter 1975 , pp. 213 - 241
Copyright
Copyright © The IO Foundation 1975

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References

1 See, for example, Kuznets, Simon, Modern Economic Growth (New Haven, Conn.: Yale University Press, 1966)Google Scholar; and Chenery, Hollis B., “Alternative Strategies for Development,” paper presented to the Rehovot Conference on Economic Growth and Developing Countries, 09 1973Google Scholar.

2 This paragraph paraphrases Cline, William R., “Income Distribution and Economic Development: A Survey and Tests for Selected Latin American Cities,” paper prepared for Estudios Conjuntos de Integración Económica de America Latina, International Conference on Consumption, Income and Prices, Hamburg, 10 1973, p. 50Google Scholar.

3 For a strong statement of this view, see Bergsten, C. Fred, “The Threat from the Third World,” Foreign Policy, no. 11 (Summer 1973)Google Scholar and “The Response to the Third World,” Foreign Policy, no. 17 (Winter 1974–1975)Google Scholar.

4 As put by Premier Chou En lai, in his report to the 10th National Congress of the Chinese Communist Party: “They contend as well as collude with each other. Their collusion serves to the purpose of more intensified contention. Contention is absolute and protracted, whereas collusion is relative and temporary” (New York Times, 1 September 1973, p. 6).

As an example of what the cartelized world would look like, consider the following remarks of Mr. Harold Geneen, president of ITT: “What these countries [the LDCs] need most are long-term investments. If our government is not going to support us, there is going to be less investment. The answer may be a multinational approach. By this I mean the Germans, the Swiss, the World Bank, and others share in the investment. Then six countries are involved, not one. If something goes wrong, the countries can get tough and do things. You don't go to war, but maybe everybody refuses to give the offending country credits” (Business Week, 3 November 1973, p. 44).

5 However, as noted in the introductory essay, important asymmetries have now developed between the military and economic power of nations: both those that are economically strong but militarily weak, such as the smaller oil producers, and those that are militarily strong (at least in regional terms) but economically weak, such as India.

6 “To achieve efficiency in world production it is unnecessary that both commodities and factors move freely. … If it were not for the problem of transporting interest payments … one mobile factor will be sufficient to ensure price equalization.” Mundell, Robert A., International Economics (New York: Macmillan Co., 1968), p. 95Google Scholar. In this barter model, interest is paid in the form of commodities.

7 Some have argued that this statement exaggerates the adjustment burden borne by migrant. workers already residing in Western Europe, claiming that changes in the demand for labor are mainly reflected in the gross inflow rate of fresh guest workers. Nevertheless, a real burden remains. The Economist (London) reported, in its issue for 26 01 1974, p. 43Google Scholar, in a story entitlted “Holiday at Your Peril,” reluctance among Turkish workers in the Federal Republic of Germany of returning home for the new year holidays, for fear of being fired while they were away. The report added:

… how do the foreign workers, who make up a tenth of the German labour force, feel? Very frightened indeed.…

The way to protect German workers, and at the same time avoid paying out millions of marks in unemployment benefits, would seem to be to encourage a million or so foreigners to go home. The problem is how.

One idea that has been kicked around … is that the foreign workers should be given a departing financial handshake. … Other, cruder, methods are rather more effective. At local level, a wink from an employer to a local authority can result in the non-renewal of work and residence permits. Or accommodations that used to be considered acceptable can suddenly become “uninhabitable.”

8 Economist (London), 9 02 1974, p. 48Google Scholar. The same article reports that Germany plans an outright ban on further hiring of guest workers in cities with an immigrant population of more than a quarter of the total. A kind of crude rule-of-thumb restriction much lamented when imposed by LDCs on DFI.

9 In an article informing readers on the editorial page of the Wall Street Journal, 13 December 1972, p. 22, that “the relations among nations are governed by a few fragile covenants which we call international law, by some vague consensus of world opinion which we call international morality and, above all by common sense,” the Henry Luce Professor of Urban Values at New York University, Dr. Irving Kistol, goes on to say: “Gunboats are as necessary for international order as police cars are for domestic order. Smaller nations are not really worried about American atom bombs any more than the Mafia is. And smaller nations are not going to behave reasonably—with a decent respect for the interests of others, including the great powers—unless it is costly to them to behave unreasonably.”

10 See the stimulating article by Connor, Walker, “Nation-Building or Nation-Destroying?,” World Politics 24 (04 1972): 319–55Google Scholar. He charges that theoreticians of LDC nationalism and of nation building have slighted problems associated with ethnic diversity. One could speculate that in the same fashion that economists have sought to define optimal currency areas, political scientists could attempt to define optimal nation states, bearing in mind ethnic diversity, which plays the role of factor immobility in limiting larger optimal areas.

11 Bergsten, C. Fred, “The Threat is Real,” Foreign Policy, no. 14 (Spring 1974): 84–90Google Scholar; and Bergsten, , “The New Era in World Commodity Markets,” Challenge, 09–10 1974: 32–39Google Scholar.

12 Carlos Díaz-Alejandro, “Some Characteristics of Recent Export Expansion in Latin America,” and Bergsten, C. Fred, “The Future of World Trade and a Resume of the Conference,” both in Giersch, Herbert, ed., The International Division of Labour Problems and Perspectives (Tubingen: J. C. B. Mohr, 1974), pp. 215–36Google Scholar, and pp. 543–54, respectively.

13 The Keynes plan for commodities, recently unearthed from British archives by DrJayawardena, Lai and published in the Journal of International Economics 4, no. 3 (08 1974): 299–315Google Scholar, deserves at least a fresh look in discussions about a new international monetary and economic order. The second draft, dated December 1942, opens by referring to the fourth point of the Atlantic Charter, quoted above. Note that the Keynes plan coupled freedom of access for DCs to freedom of sales at predictable prices for LDCs, a point ignored by most DC observers and officials. In his original draft, Keynes starts by calling for the internationalization of Vice-President Wallace's “ever-normal granary.” I recently heard a brilliant mainstream US political economist justify US bans on its wheat exports. He went on to argue that wheat sales should be permitted only to foreign countries willing to sign long-term purchase agreements. He was clearly surprised by, and failed to answer, a question as to whether he also advocated long-term contracts for US purchases of primary products. It is not without certain irony that the same officials who not long ago turned down Venezuelan requests for greater access to the US oil market now complain of unreliability of foreign oil supplies. It is also ironic that as late as 13 September 1973, the New York Times, p. 71, reported attempts by US diplomats to organize a boycott of Libyan oil.

14 See Nordhaus, William D., “The Allocation of Energy Resources,” Brookings Papers on Economic Activity, no. 3, 1973; 529–71Google Scholar. Using energy as an example of exhaustible resources, and noting that besides the basic economic problems (lack of future markets, uncertainty about future technology, etc.), political interference is also present, Nordhaus remarks: “It takes an act of faith to believe that the market can somehow see the proper allocation through this tangle of complexity, uncertainty, and politics” (p. 538).

15 The improvement of LDC foreign trade policies by itself cannot be expected to provide automatically in all countries substantial help in achieving development targets, except for faster growth, not related directly to the foreign trade sector. For example, export promotion policies may hurt equity in income distribution (by much or little) in some countries while helping equity in others (by much or little). Neither qualitative nor quantitative generalizations appear warranted regarding the link between trade policies and income distribution. The problem, relevant also for DCs, is that different positive theories of trade have different implications for income distribution and, therefore, for political attitudes toward freer trade. If one believes, for example, that the key source of comparative advantage for a given country is a large endowment of capital to labor, one will expect all capitalists to be protrade biased as compared with all laborers. But if the key source of comparative advantage is best explained by research and development in new products, industries leading in that field will be the main champions of freer trade.

16 In passing, it may be noted that tourism is made more palatable to host countries by the application of the Calvo doctrine to foreign guests. The occasional injustices suffered by DC tourists at the hands of unscrupulous LDC officials abusing the Calvo doctrine have not led to many calls for international arbitration tribunals, as far as I know, but have led to some passable popular songs, such as “Tijuana Jail.” Nevertheless, it should be noted that alleged fears for the lives of DC nationals happening to be visiting a given LDC going through acute political turmoil have been used as an excuse to land DC “guest troops” (without visas or tourist cards) in LDCs.

17 See, for example, Vaitsos, Constantine V., Intercountry Income Distribution and Transnational Enterprises (Oxford University Press, forthcoming)Google Scholar; Katz, Jorge M., Patents, the Paris Convention and Less Developed Countries, Yale Economic Growth Center Discussion Paper No. 190 (New Haven, Conn.: Yale University, 11 1973)Google Scholar; and Penrose, Edith, “International Patenting and the Less Developed Countries,” The Economic Journal 83 (09 1973): 768–86Google Scholar.

18 Bhagwati, Jagdish and Dallalfar, William have advanced a concrete proposal along these lines in their paper, “The Brain Drain and Income Taxation: A Proposal,” Working Paper No. 92, Massachusetts Institute of Technology Department of Economics, 09 1972Google Scholar.

19 See Business Latin America, 12 December 1973, pp. 393–94. Canadian subsidiaries of US-owned firms have also been plagued by this issue. Recently, a Canadian political leader asked: “On what basis is it necessary for the Canadian Government to request the intercession of a foreign government in an export deal between a Canadian company and some other company?” (New York Times 6 March 1974, p. 47). Some hope exists that the US will finally decide to end its extraterritorial claims on foreign subsidiaries of US-owned firms during 1974.

20 See report “A Warm Hand for US Business,” in Business Week, 8 December 1974, pp. 24, 27. The Wall Street Journal reported on 30 August 1973, p. 8, that Senator Lloyd Bentsen of Texas had personally appeared in court to express his reservations about the Canadian attempts to purchase Texasgulf, Inc.

21 Myint, Hla, “International Trade and the Developing Countries,” in Samuelson, P. A., ed., International Economic Relations (London: Macmillan, 1969), p. 35Google Scholar.

22 McKinnon, Ronald I., Money and Capital (Washington, D.C.: The Brookings Institution, 1973), p. 172Google Scholar. Both Myint and McKinnon refer favorably to the Japanese experience during the Meiji period.

23 Gaud, William S., “Private Investment and Local Partnership,” speech at a Financial Times conference on “The European Community and the Third World,” London, 7–8 11 1973, pp. 2–4 (distributed by the International Finance Corporation). The same speech notes the sensitivity of the Eurocurrency market to speculative waves, and the difficulty of planning investments under the Eurodollar regime of floating interest rates. It should be noted that Mr. Gaud recognizes positive features in LDC Eurodollar market borrowingGoogle Scholar.

24 See Kindleberger, Charles P., “Less Developed Countries and the International Capital Market,” in Industrial Organization and Economic Development, In Honor of E. S. Mason, edited by Markham, Jesse W. and Papanek, Gustav V. (Boston: Houghton Mifflin, 1970), pp. 337–49Google Scholar. See also Cooper, Richard N. and Truman, Edwin M., “An Analysis of the Role of International Capital Markets in Providing Funds to Developing Countries,” Weltwirtschaftliches Archiv, no. 2 (06 1971): 153–82Google Scholar. It should be clear that international bankers must not be credited with extraordinary angelic virtues, and LDCs must be on guard to prevent 1920s-type abuses arising from high-pressure salesmanship, more recently associated with suppliers' credits.

25 Aid, particularly bilateral aid, is likely to be tied not only to commodities from the donor country but also to accepting the donor country's direct foreign investment. As expressed by the US secretary of the treasury, DrSchultz, George P.: “Every sovereign nation has, of course, the right to regulate the terms and conditions under which private investment is admitted or to reject it entirely. When such capital is rejected, we find it difficult to understand that official donors should be asked to fill the gap” (New York Times, 26 09 1973, p. 5)Google Scholar.

26 This viewpoint is eloquently presented by Patel, I. G., “Aid Relationship for the Seventies,” in Ward, Barbara et al. , eds., The Widening Gap; Development in the 1970's (New York: Columbia University Press, 1971), pp. 295–334Google Scholar. See also Hirschman, Albert O. and Bird, Richard M., Foreign Aid—A Critique and A Proposal, Princeton Essays in International Finance, no. 69 (Princeton, N.J.: Princeton University Press, 07 1968)Google Scholar.

27 See Gerald Helleiner, “The Less Developed Countries and the International Monetary System” Journal of Development Studies, forthcoming. Some LDCs, confident in their resources and macroeconomic management, may consider that disturbances are more likely to arise outside rather than inside their economies, and therefore will use changes in their exchange rates to shield themselves from inflation coming from the industrialized world.

28 Inflationary LDCs, i.e., those whose price levels rise chronically at a faster rate than the world price level or than that of the major industrial country to which they would otherwise peg, may also have a legitimate claim to larger reserves if all their crawling pegs achieve is the elimination of the difference in inflationary trends, without seriously smoothing out other sources of balance-of-payments disturbances, which may remain virulent in those countries.

29 On this point, see the outstanding document presented by Tanzania to the Lusaka conference of nonaligned states, Cooperation Against Poverty, es Salaam, Dar, Government Printer, United Republic of Tanzania, 1970Google Scholar.

30 Those confident of their technological and military muscle are calling for just that. The Watt Street Journal, 17 December 1973, p. 14, has editorially suggested, in the following terms, that the US should withdraw from the UN Law of the Sea Conference: “Enough is enough. For the sake of form, the United States may as well send its negotiators to Venezuela and Vienna, though there is much to recommend a clean break. But the important thing is that the US government should free the petroleum and mining industries of any caveats linked to some future treaty, and let them go to work adding to the world's store of available resources.”

31 On 21 September 1973, the Wall Street Journal, p. 12, reported from Nairobi that: “For all their old complaints, though, officials of industrial countries now find it difficult to suppress their longing for the days when they could meet without having to share every secret with, or explain every technicality to, the Tanzanians and Chileans.”