Inequality Gap between the Global North and South

Introduction:

The term Global South refers to “The Third World” which it colloquially replaced to describe the poorest countries in the world, countries particularly in the South Asia, Middle East, Central and South America, Africa and Oceania that were unaligned with either the Communist Soviet bloc or the Capitalist NATO bloc during the Cold War. There is an immense social, economic and political gap between the wealthy Global North and the poorer least developed countries of Global South.

The Geographical division of the world differentiating the rich from the poor starting from the Global South includes all of Asia except Japan, Australia, New Zealand, Brunei, and the South East Asian ‘dragons’ of Hong Kong, South Korea, Malaysia, Singapore, Taiwan, and Thailand; all of Africa; the Middle East, except the oil-rich UAE, Qatar, Saudi Arabia, and Bahrain; and Central and South America. The North includes Europe; the USA, except Bermuda and the Bahamas; Canada; and the European republics of the former Soviet Union. Newly industrialized countries such as South Korea and Taiwan now have more in common with the industrialized North and fast-developing Argentina, Mexico, Brazil, Peru, and Chile than with other countries in the developing world. (http://www.talktalk.co.uk/reference/encyclopaedia/hutchinson/m0030871.html)

The Third World or Global South’s persistent underdevelopment can be explained by analysing both the internal and the external factors that consistently contribute towards halting its progress.

When Imperialism started in United States, which was a natural product of economic pressure due to sudden advance of capitalism which needed foreign markets for goods and investments. Europe was going through the same scenario, overproduction in the sense of excessive manufacturing plants and surplus capital which could not find stable investments within the countries, forced Great Britain, Holland, Germany and France to place large portions of their economic resources and capital outside their own political domain and stimulate a foreign policy of expansion to new regions and areas. Germany in the early 1900s was suffering severely from what is called a glut of capital and manufacturing power and had to move to new markets and trade settlements were forced upon Asia Minor, West Africa and other colonies. Improvements in method of production and industrial revolution boosted a machine economy with one nation after another adapting industrial methods, it became difficult for their merchants, manufacturers and financiers to dispose profitably their economic resources, so they used their Governments in order to secure for their particular use, some distant underdeveloped countries by annexation or protection. These economic conditions of affairs form the taproot of Imperialism.(Hobson, 1954)

Hence my point being that the developed world has used the developing world for its own gain and cheaper raw materials and labour. Due to the relationship of interdependence between world economies and world trade there are dominant countries which expand because they are self sufficient and there are dependent countries that can only do this only as a reflection of these dominant countries. The concept of dependence allows us to see the situation of these countries internally as a part of the world economy. In the Marxist tradition, the theory of imperialism has been developed as a study of this process of expansion of these imperial centres and their quest of world domination.

Scholars following the Marxist tradition have presented the most extensive analysis of foreign economic policy. Karl Marx himself was primarily concerned with developments within national economies, although he did not ignore international and global problems. The international aspects of capitalism assumed a place of importance for Marxist scholars. Marxist theories can be divided into two basic types: instrumental and structural. (Laski, 2003)

Instrumental Marxist theories view governmental behaviour as a product of direct social and societal pressure. In its sophisticated form, Marxist arguments analyze the general ties between the government officials and the capitalist sector. I would like to quote Mr. Harold Laski here who argued that ‘historically we always find that any system of government is dominated by those who at the time wield economic power; and what they mean by ‘good’ is, for the most part, the preservation of their own interests.’ (Laski, 2003)

Structural Marxist have different arguments. They do not link the behaviour of the state to any capital class and see the state playing an independent role within the whole capitalist system. Analysing this from an economic perspective, we can see that capitalism is not self sustained towards general equilibrium in the long run profit because the labour cannot be exploited in the long run due to technological advancements which decrease the ratio of labour to capital in the long run. This process leads to more goods produced than its members can consume also known as under consumption and this drives the weaker firms out of the market and capital accumulation and greater power in the hands of owners or managers of capital.

The relationship between giant multinationals, advanced capital societies and foreign activity has been emphasized by some recent Marxists like Harry Magdoff and James O’ Conner. Through the behavioural theory of the firm, Magdoff suggests that corporations are systems of power and each firm tries to control and capture its own market. This fact could not be realized at the beginning of capitalism because the level of competition was too high. Businesses seek to maximize control over actual and potential sources of raw material and foreign markets. The foreign investment by these multinational guarantees this control. And these corporations are the foundation of the American capitalist system and their political power is immensely great and for these reasons the United States, the leading capitalist nation in the world maintains an international economic system with minimum constraints on the functioning and operation of these giant multinationals. (Magdoff, 1960)

Although another Marxist James O’Conner maintains that in modern capitalist systems, monopoly sector is the most important source of profits. However the monopoly sector can expand rather quickly than demand and employment and this leads to aggressive foreign policy. Thus overseas activity can create new opportunities of investment, sales and profit. Marxist analysts have also suggested a relationship between capitalist system, military expenditure and imperialism. This military power is important in direct sense because the use of force may be necessary to keep foreign areas open to investment and trade. (Connor, 1973)

One of the main focuses of these capitalists was the supply of cheap raw materials and United States was itself dependent on foreign sources for some commodities that were essential for industrial operations and also military equipment. One author argues that all American foreign policy can be explained by the need “to insure that the flow of raw materials from the Third World is never interrupted.” (Dean, 1966)

Marxist theories tend to explain the effect of imperialism and capitalism on underdeveloped countries. A famous quote of Karl Marx, “Capitalist production, therefore, develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth – the soil and the labourer.”

Modernization Theory is another competing theory which tends to explain the underdevelopment of the Global South and also gives an essence of the internal factors involved in its causation. Modernization Theory suggests that the cause of underdevelopment in third world nations is their own policies and socio-economic structures that are based on feudalism, tribal system, family/cultural ties and primitive economic structures. The Third World society is lacking rules, regulations, law rule of jurisprudence and democracy and their underdevelopment is a product of their own slowness and failure to adapt to the modern worlds patterns of efficiency to modernize and develop themselves. While the modernization theory does recognize that the developed world has a role to play in the progress of the third world, the main focus of modernization theory is that the developed countries only have limited responsibility for the underdevelopment of the third world as the third world is largely responsible for its own poverty. They have a traditional societal approach and the new generation is expected to imitate their ancestors. In these societies there is hardly any belief of development and improved living conditions or the eagerness to engage in fundamental social changes such as a switch from subsistence economies to market economies. Traditional economies is where groups and individuals in position of immense power cause corruption and halt economic development and redistribute profits into their own hands. In order for underdeveloped countries to develop they have to abandon their traditional approach and their social and cultural models in replacement for the western traditions of free market system, good governance and stable economic planning. For capitalism to take hold and entrepreneurial environment with individual innovation and political freedom is required. (Isbister, 2003)

A sound economic environment which will draw investment and prudent spending of public funds by officials for maintaining social infrastructure such as public safety and education is necessary for development. Disciplined monetary and fiscal policies are needed to create an investing environment for both domestic and foreign investors. Rule of law such as tort law and contract law should be enforced for businesses to expand from traditional family/tribal/cultural ties to person who will be trusting non-relative person, who will invest capital.  

The benefit that the first world can give to the underdeveloped nations is the transfer of technological knowledge and assistance though enabling transnational corporations to introduce advance technology in their third world branch of plants. (Isbister, 2003)

While the modernization theory implies that underdeveloped countries have to follow the same path of the first world , the dependency theory opposes the modernization theory and rather argues that impoverishment of the third world is caused by the economic well being of the first world.

While contemporary dependency theory is largely Marxist in origin (Isbister, 2003), the foundation for the concept of dependency theory goes way far back to Adam Smith who acknowledged that the imperialist economic practices of the European nations had denied colonized peoples the benefits of socio-economic progress.

The dependency theory argue that unfair economic practices and unequal trade conditions transfer the surplus generated in the dependent countries to dominant countries; financial relations are based on the viewpoint of the dominant countries based on export and loans of capital giving them interest in return and also control over the developing economy.

Trade relations are based on monopolistic control of the market and the developing country are exporting their profits and interests out of their country but also bear the loss of control of their domestic resources. From colonial dependence in earlier times where the colonial countries of Europe economically dominated the colonized countries, to the financial-industrial dependence of the nineteenth century, where raw materials where supplied from these developing nations, each of the forms of dependence corresponds directly to the control that the first world had over the dependent world.

Third world poverty is, therefore, not the result of tradition or accident but rather the direct result of plunder conducted by the first world for its own development and to sustain its economic position. As a result of first world actions in shaping the world order, in the eyes of dependency theorists, the third world has been impoverished and rendered incapable of balanced development. (Isbister, 2003)

These two main theories discussed above (Modernization Theory & Dependence Theory) are the primary theories of political science which try to explain the connection of Third World poverty and underdevelopment. The modernization theory adds value to these countries intrinsically and shares the fact that if the LDCs(less developed countries) do not change and move from their traditional socio-economic societal structures to the more modern and western style of governance, capitalism, democracy and rule of law.

In my point of view the structure of dependence, by this I mean a situation in which one economy can only expand if another economies expansion in expected i.e. its own growth is dependent on a dominant country’s growth.

The possibility of generating new investments depends on the existence of financial resources in foreign currency for the purchase of capital, machinery and raw materials that are not available domestically. The capital-industrial development depends on the amount of foreign currency a nation has to buy the raw materials and inputs for its industrial sector. The balance of trade in these countries is also less favourable and also the trade relations take place in a highly monopolistic international market which tends to lower prices of agricultural products, raw materials exported and raise the price of industrial capital equipment.

Belonging to a Third World country myself and living majority of my life there in Pakistan, I personally think that the modernization theory goes beyond the dependency theory to explain the position of these LDCs as far as the internal factors are concerned where the more traditional society of the Third World like Pakistan need stability and change of reforms. Rule of law, democracy, equal distribution of wealth, human rights and openness in the mindset of a nation is very important for progress.

However I do agree with the dependency theory in explaining the new world order which is purely market and capitalist. The true influence of external forces and world has been seen on developing nations and their economies. Foreign capital retains control over the most robust and dynamic centres of the economy and sends the profits back to the home country causing a highly unfavourable capital account in the LDCs Balance Of Payments thus ultimately limiting the supply of imported inputs. And the value of their export is usually very low and unfavourable terms of trade compared to the capital and technological export base of the First World.

However the dependency theory criticises the modernization theory, both these theories tend to explain the economic gap between rich and poor countries. I tend to see the modernization theory with some bias as well because they suggest that the way of the western world is the only way towards development and progress but with development of nations such as China, whose export-manufacturing growth and totally different way of governance has proved the western philosophy wrong. However, in LDCs such as my country Pakistan, the feudal system has to be abolished. Feudalism halts the advancement of generations of workers and creates slavery and halts all kinds of advancement because of traditional ancestral approach unequal distribution of resources and wasting of what could actually be future human capital.

I find parts of both these theories convincing for explaining the economic gap between the developed nations and the countries of Global South. External factors from the dependency theory and the internal factors of the modernization theory, together dissect completely the causes of the economic gap between the whole South/North divide.

Bibliography:

• Connor, O. (1973). Fiscal Crisis.
• Dean, H. (1966). Scarce Resources.
• Gold, L. Recent Development in Marxists Theories Of the Capitalist State.(1975)
• Gold, L. W.(1975)
• Hobson, J. A. (1954). Imperialism. London: George Allen & Unwin .
• http://www.talktalk.co.uk/reference/encyclopaedia/hutchinson/m0030871.html. (n.d.).
• Isbister, J. (2003). Promises Not Kept: Poverty and the Betrayal of Third.
• Laski. (2003). Foundations Of soverignity.
• Magdoff, H. (1960). Imperialism without Colonies.