4. DEPENDENCE

Commercial, Financial, and Technological Dependence

So far as commercial exchanges are concerned, domination by the center is not a consequence of the fact that the periphery’s exports are made up of basic products, but of the.fact that the peripheral economies are only producers of basic products — in other words, that this production is not integrated into an auto­centric industrial structure.

Domination is also expressed in the structure of the financing of the economy. At the center, capitalism being national, this financing is internal; but in the periphery it comes to a large extent from foreign capital, at least so far as productive investments are concerned.! Now, if productive investments are financed by foreign capital, they must inevitably lead, sooner or later, to an outflow of profits, so that growth is blocked. External aid (public and free of charge, or partly so) then becomes a necessary condition for the system of “inter­national specialization” to function. The effect of this is that responsibility for the direction that development is to take lies with those who provide the funds. It intensifies the mechanisms of economic domination, in addition to.those of direct political dom­ination.

There is not much information about the movement of exported profits. The balance of payments of a large number of under­developed countries are not well-documented, and in some cases (including several African countries) the information is totally imaginary. The official figures for the export of profits reveal a wide “scatter” of the underdeveloped countries from this standpoint: exported profits represent from 2 to 25 percent of the gross domestic product, and from 8 to 70 percent of exports.

All these figures are inclined to err by underestimation, and they are only partly indicative of the decisive role played by foreign capital in the periphery. The statistics of the balance of payments cover, in the best of cases, only the profits that are actually exported. In Egypt, for instance, between 1945 and 1952 the profits of foreign capital represented 20 to 30 percent of the total amount of the reward of capital, and exported profits. represented 15 percent. Export of the profits of foreign capital reduced Egypt’s growth rate between 1882 and 1914 from 3.7 percent per annum (the potential rate if these profits had been reinvested) to 1.7 (the actual rate), and, similarly, from 3 or 4 percent to 1.4 percent in the period between 1914 and 1950. In the Ivory Coast private transfers increased from 7.3 billion CFA francs in 1950 to 25.2 billion in 1965, amounting to much more than the public aid and private capital that flowed in between the same years (from 4.6 to 15.4 billion). For the five franc-area countries of Central Africa the outflow of profits amounted as an annual average between 1960 and 1968 to 44.2 billion CFA francs, while public aid and foreign investment flowing into these countries did not exceed 34.4 billion.

Harry Magdoff has shown that the information available to ns understates the significance of the phenomenon. The accumulation abroad of the profits of American enterprises has been so great that it has made them, in the course of twenty years, the third economic power in the world. It needs to be added that the available information shows only what these flows amount to at market prices, and the latter already contain a massive transference of value.

History shows that the dynamic of foreign investment leads to a reversal in the balance of flows, with the backflow of profits eventually exceeding the inflow of capital. It also shows that the dynamic of foreign investment is very different in the young capitalist countries, namely, the new central formations in process of development — in the nineteenth century the United States, Japan, Germany, Russia, and IaterCanada, Australia, South Africa — from what it is in the peripheral formations.

The young capitalist countries on the road to independent development — in other words, autocentric and to a large extent autodynamic development — were able to receive substantial amounts of foreign capital. This flow nevertheless played, in their case, only an auxiliary role, secondary in quantitative terms, and also of diminishing importance. Thus, in the United States the proportion of foreign capital in the national wealth declined steadily from 10 percent in.1790 to 5 percent in 1850-1870, to fall to 1 percent in 1920 and disappear altogether thereafter, and the experience of Sweden, Canada, Germany, Japan, and Australia was similar.

This was not.the situation of the countries of the periphery, which never arrived at the stage of exporting capital, but only passed from being “young borrowers” (with the inflow of capital exceeding the outflow of profits) to being “old borrowers” (with the outflow of profits exceeding the inflow of capital). The date at which the turning point was reached varied, of course, from country to country. For the old peripheral countries, such as Argentina, it had already occurred at the end of the nineteenth century. Broadly speaking, Latin America and the Asian countries that were reduced to colonial status long ago (India and Indonesia) became “old borrowers" several decades, and in some cases half a century, ago; whereas Tropical Africa is only now reaching this state. The development of new wealth, ofinterest to foreign capital, such as the oil of the Middle East since the Second World War, may temporarily set moving a new wave Ofinvestment and thereby revive the situation of “young borrower” for the countries concerned. But for all that, it cannot make possible an escape from this process.

What is true of the balance of private capital is also true of that of public funds. Although in this sphere the conditions are regarded as being particularly favorable (substantial proportion of gifts, favor­able interest rates for loans, etc.), depreciation of the public debt absorbed, already in 1965-1967: 73 percent of the flow of new public contributions in Africa; 52 percent in East Asia; 40 percent in Southern Asia and the Middle East; 87 percent in Latin America.

From these historical experiences of the periphery we can conclude that as development — that is, the development of under­development — proceeds, the balance of payments of the periphery tends to worsen, both because the periphery passes from the “young borrower” to the “old borrower” stage and because the increasing commercialization of the economy, in the setting of unequal inter­national specialization, gives rise to growing waves of imports, induced, indirect, and secondary.

The reversal of the balance of financial flows is delayed so long as the profits of foreign capital can be systematically reinvested, which is what happens during the prosperous periods of colonial develop­ment. But the national wealth then passes increasingly into the control of foreign capital, and the profits of development are to an increasing extent annexed by foreigners. To this basic mechanism is added the increasing competitive power of the foreign capitalist sector that, in some cases, ousts the local capital constituted in the first stages of integration into the international markets. This was what happened in Senegal, the bourgeoisie of which country, who had played their part in the economic de traite in the nineteenth century, were ruined between 1900 and 1940. The gradual transfer of the national wealth into foreign hands may attain, as in Black Africa, very high proportions: 15 to 80 percent of the gross domestic product (in money terms) of the countries of Black Africa comes from the foreign-owned sector. In the Ivory Coast in 1965 foreign income accounted for 47 percent of the country’s nonagricultural product and 32 percent of the gross domestic product. In the Maghreb, then a “colony of settlement,” these two proportions were in 1955 respectively 70 and 57 percent.

Forces exist, of course, which hinder the geometrical progression of foreign profits from attaining the astronomical levels that calculation designates. These are the same forces as those that prevent the total income from capital from accounting for an increasing share of income within an economy. All these forces — apart from monetary accidents (inflation) or political ones (nationalizations) — arise from the fall in the rate of profit. For if the reward of capital were stable, its accumulation would lead to an increase in the share of profit in the national income. It remains true that, in the model of prosperous underdeveloped countries, such as Rhodesia or South Africa, the polarization of control of the national wealth in the hands of minorities becomes extreme.

Appropriation by central capital of the surplus generated in the periphery results directly from appropriation by this capital of the principal means of production. Is this direct appropriation a necessary condition for transfer of the surplus? Certainly not. There is reason to think that technological dependence will gradually tend to replace domination through direct appropriation. Monopoly of the supply of specific types of equipment, after-sales services and the supply of spare parts, patents, and all the various forms of “good will” will make it increasingly possible to exact a substantial share of the surplus value generated in an enterprise without even being its legal owner. It is possible today to conceive a wholly dependent economy in which industry would still be national, and even publicly owned.

The Tendency to Deficit in the External Balance of Payments of the Periphery

The history of the periphery shows two phases in quick succession: a first' phase marked by a surplus in the balance of payments, corresponding to the opening up of a country as a colony, the establishment of the underdeveloped economy, the development of underdevelopment, followed by a phase of chronic tendency to deficit, corresponding to the crisis of this system, the blocking of growth based upon external demand. The foreign-exchange standard conceals for a time this tendency toward external deficit; sooner or later, however, this obliges the underdeveloped countries to go in for monetary independence — an independence that cannot represent a real solution of the problem, but can only give rise to additional monetary disorders.

Since the underdeveloped economies are extraverted, all their problems emerge in the balance of payments. Every considerable economic change that occurs in the course of development has an effect on the various elements in the balance of payments. Can the same be said of the advanced countries? There, too, it is hard to imagine any big change that would be without effect on the conditions governing relations between the national economy and foreign countries. But the two problems are different in kind. It is possible to construct a valid model of the development of capitalist economy without bringing international relations into the schema of this development: capitalist economy forms a coherent entity that is self-sufficient. Such an entity is inconceivable in relation to an underdeveloped country, which, by definition, cannot be isolated from the international market..

The problem therefore does not consist in discovering whether there are mechanisms that ensure spontaneous equilibrium in the external balance in general, and in particular in relations between the dominant advanced center and the dominated underdeveloped periphery: such mechanisms obviously do not exist, at least not in a form that would ensure automatic equilibrium. The problem is to discover why, despite the absence of such mechanisms, the system does nevertheless function. Now, function it does, and ensures a relative equilibrium in the relations between the advanced capitalist countries, as in relations between these countries and those of the system’s periphery. If, as regards relations between advanced countries, the system works, it does so through continual crises, which make up the history of the development of capitalism: the classical cyclical crises of the nineteenth century and the first third of the twentieth, external monetary and political crises of particular states, the “dollar shortage” crisis of the period after the Second World War, and then the crisis of the international monetary system. Permanent structural adjustment forms the backdrop of this history — an adjustment that is always characterized by unevenness, asymmetry, and domination (yesterday by Britain, today by the United States).

As regards relations between the center and the periphery, adjustment that is fundamentally unequal in character takes place through a permanent tendency to external deficit on the part of the underdeveloped countries; a tendency that is continually being overcome, thanks precisely to this structural adjustment. The periphery is so shaped as to conform to the needs of accumulation at the center, the price structures and the distribution of relative profitability being established in such a way that the development of capitalism in the periphery remains peripheral, that is, based essentially upon the external market. The adjustment is therefore accompanied by a chronic tendency toward deficit in the periphery’s external balance. Attempts to explain the phenomenon of asymmetry in the balance of payments without referring to the structural adjustment (that is, to the mechanism of international specialization) can only be partial and descriptive. This is true of explanations that describe the state and movement of “elasticities” and “propensities” that are as they are just because they express the deepest mechanisms of structural adjustment.

How the phenomenon is manifested. If we assume a stable exchange (gold standard or foreign-exchange standard), the tendency to deficit is constantly being overcome by the slowing down of potential growth. It is very hard to register this phenomenon in statistical terms: it operates as an underlying tendency that does not show itself in obvious outward symptoms. When, however, the exchange is allowed to fluctuate freely, the tendency to disequilibrium is constantly reflected in devaluation of the currency. It is therefore easier in this case to register the phenomenon, even though the devaluation may have been caused by internal inflation and not by disequilibrium of the external balance. Only a knowledge of the actual history of the issuing of money enables one to place responsibility where it belongs. One may also try to disclose the phenomenon by observing the movement of the international reserves (in gold and foreign currency) held by the underdeveloped countries.

From what date, approximately, did the balance of payments of the periphery become chronically deficitary? It is hard to say, for the reversal of the situation seems to have occurred at different periods in different countries. It seems that the balance of real payments of Cuba and of the French and British colonies in Africa, for example, was for a long time chronically in surplus, a fact that caused some to say, mistakenly, that the import of monetary liquidities must have been paid for by real exports. Already in the nineteenth century, however, the rate of exchange of nearly all the states of Latin America was regularly lowered. In the case of Brazil, the deficit in the external balance was no less responsible for this than was the inflationary issue of paper money. The same thing happened in Argentina between 1880 and 1900. This means that probably the external balance of these countries — big suppliers of basic products, they were more fully integrated into the international market than the recently colonized countries of Africa and Asia — was already in the nineteenth century chronically deficitary.

For the twentieth century there can be no doubt about it. The gold value of the different currencies fell everywhere between 1929 and 1937; but its fall was noticeably greater in the case of. the underdeveloped countries than in that of the advanced ones. If some of the former retained unaltered their rate of exchange with the metropolitan country (French, Belgian, Portuguese, Spanish, British colonies, and colonial members of the sterling area), this was not because they experienced no difficulty in keeping their balance even. Rather it was in spite of these difficulties that the metropolitan countries acted in this way, so as to allow the income mechanism to exhaust its effects. We have seen that their reserves in foreign currency (which for them take the place of gold as international currency) were less in 1937 than they had been in 1929, which shows that the tendency to deficit was chronic. The situation in Latin America also reflects such a deficit. For even at the depreciated rates that these countries adopted, the deficit persisted, as is shown by the fall in their central reserves of gold currency between 1927 and 1937 (an entire cycle), as well as in their currency reserves generally. For the advanced countries, on the contrary, all these reserves increased during the same period.

After the Second World War a system of relatively rigid rates took the place of the fluctuating exchanges of former times. Nevertheless, devaluations have occurred very frequently in the underdeveloped countries, with the approval and even on the recommendation of the IMF. They have sometimes been necessitated by previous internal inflation, but often also by the chronic external deficit, this having merely been reinforced-by inflation. At the same time, the periphery’s international reserves have diminished. It is true that the immediate postwar period was also marked by an external deficit in several of the advanced countries: the system was then — during the reconstruction period — almost exclusively to the advantage of the United States. The center (the United States, Europe, Japan) was not, as a whole, to recover its traditional position until this first stage had been passed, and not without serious problems of readjustment between the separate advanced countries themselves. However, between 1948 and 1967 the currencies of Europe lost only 5.2 percent of their value in relation to the dollar — as against a loss of 38.4 percent suffered by the currencies of the Middle East; 46.1 percent by those of the rest of Asia (Japan excluded); 47.6 percent by those of Africa; and 62.2 percent by those of Latin America.

Asymmetry in international relations: current explanations. Kin- dleberger seems to have been the first writer to try to give a systematic explanation of the asymmetry in the behavior of the external balances of trading partners. It was not, to be sure, with regard to the problem of relations between the underdeveloped countries and the advanced ones that he made his analysis, but in connection with the problem of relations between Europe and the United States in the years following the Second World War. Harrod, defending British interests, blamed the “dollar famine” on the policy of the United States, and in particular on the overvaluation of the dollar in relation to gold, together with the American customs tariff, which he considered too high. Kindleberger answered Harrod in the terms of a general theory. He started from the observation that the mechanism that causes the underdeveloped countries to be victims of the conjuncture in all its phases is similar to the mechanism that now operates in relations between Europe and the United States. In 1949 even a minor recession in the United States resulted in European exports to that country falling by about 50 percent. Kindleberger considers that for the effects of a variation in the national income in the United States and in Europe on international economic relations to be symmetrical, five conditions need to be fulfilled: (1) the degree of dependence by one region upon another (measured by the ratio of exports to national income in each of the two countries) must be of the same order of magnitude; (2) inflationary and deflationary pressures must work in the same direction of both countries; (3) price elasticities must be the same for the exports of both countries; (4) innovations must not always originate in the safne country; and (5) in both countries the response of supply to the urgings of demand must be the same.

Now, in the relations between the United States and Europe, just as in the relations between the advanced countries in general and the underdeveloped countries, these five conditions are not present. There is therefore asymmetry in the balance of payments. The listing of these five conditions constitutes, however, only a description of the phenomenon, but not an explanation.

The same applies to Raul PrebisclTs thesis regarding the asymmetry between center and periphery. According to this, fluctuations in income are assumed to have been greater in the nineteenth century in the advanced countries (mainly Britain) than in the under­developed ones. During depression periods the fall in the national income, which was relatively more serious in Britain than in the countries of the periphery, entailed a fall in the imports of the dominant center of that time that was relatively greater than the fall in the imports of the peripheral countries. Britain then attracted the gold of these countries to itself, since the balance (assumed to be in equilibrium over the period of the cycle as a whole) was, during depression, unfavorable to the underdeveloped countries. On the contrary, however, during periods of prosperity, the symmetry of the phenomenon caused gold to flow back to the underdeveloped countries: the relatively greater expansion of the national income of Great Britain entailed an increase in the level of British imports that was greater than that of the imports into the underdeveloped countries. In the twentieth century, Prebisch considers, the phe­nomenon has lost its symmetry because the United States’s pro­pensity to import has been continually falling, while that of Britain has remained stable.

Prebisch’s proposition to the effect that the balance of the under­developed countries was in equilibrium over a long period in the nineteenth century, and is today chronically unfavorable, is not based on the relative size of the fluctuations at the center and in the periphery of the system, nor on the absolute size of the propensities to import, but exclusively on the movement of the center’s propensity to import. What₁,then, does his thesis signify? Quite simply, that the development of the center is based on the internal market (that constituted by the advanced countries as a whole), whereas the development of the periphery is based on the external market (the advanced countries). It is this fundamental asymmetry in the structure that explains the evolution of the ratio of propensities to import. But this movement is not peculiar to the twentieth century. It dates from the integration of the periphery into the world market. How, then, are we to explain why the chronic tendency of the periphery’s external balance to show a deficit has appeared only late in the day? By bringing in the factor that Prebisch neglects in his analysis, namely, the movement of capital. Prebisch takes into account only the trade balance, ignoring the other items in the balance of payments. The chronic tendency of the trade balance of the underdeveloped countries to be unfavorable can be offset by the influx of foreign capital. This influx, at certain periods only of the cycle (those of prosperity), may indeed cause the fluctuations in the balance of these countries to be greater, but it nevertheless contributes to equalizing the surpluses and deficits over the cycle as a whole. It is true that this inflow carries the implication of a backflow of profits that must eventually exceed it in volume. It is this backflow of profits, growing bigger and bigger, that in the end becomes responsible, together with the movement of the trade balance already analyzed, for the chronic deficit in the balance of the under­developed countries in our time. During the nineteenth century the increasing flow of foreign capital, exceeding the backflow of profits, made up for the progressive worsening in the trade balance. In the twentieth century the increasing backflow of profits, exceeding the inflow of new capital, is added to the progressive worsening of the trade balance, and so makes the overall balance of payments even less favorable.

Kindleberger’s analysis remains restricted to the sphere of the trade balance, and therefore needs to be completed in the same way as Prebisch’s. Furthermore, this analysis, too, remains purely descriptive. Why is the developed countries’ propensity to import what it is and that of the underdeveloped countries what it is? Why are the price elasticities and the responses of supply to the pressures of demand what they are?

The answer is forced upon us: it is the place of the external market in the development of peripheral capitalism that explains the way these propensities move. Thus, the degree of dependence upon external trade is the product of a historical change the stages of which we have traced; what are called “deflationary” pressures are accounted for by the state of maturity, the price elasticities by the degree of monopolization of the economy — monopolized industrial production resists a fall in prices more firmly than agricultural production, which has remained competitive. As for innovations, obviously they must come from the advanced countries, not the underdeveloped ones. These innovations and the “demonstration effects” they engender in the underdeveloped countries reinforce the propensity to import by diverting demand from local goods toward imports. Finally, supply is markedly elastic in a capitalist structure in which the dynamic entrepreneur runs ahead of demand, but not very elastic in a structure in which the enterprise follows demand (itself external). This situation intensifies the effect of the difference in the degree of monopolization of production upon the relative elasticity of prices.

The causes of asymmetry in international relations: dependence. It is the center that takes the initiative in trading relations — the center that imposes upon the periphery the particular forms its specialization assumes. This asymmetry, which reflects the commercial dependence of the periphery, is shown in the anteriority of the center’s exports in relation to its imports (the exports of the periphery, which has submitted to the forms of specialization required by the center).

The periphery’s Cothmercial dependence is aggravated by its financial dependence. The basic reason for this is that the investments of foreign capital in the underdeveloped countries automatically engender a reverse flow of profit transfers. At the average rates of reward of capital, which range between 15 and 20 percent, the back- flow ofprofιts does not take long to become bigger than the inflow of capital investment, and, after a certain level has been reached, the balance of external payments tips. This reversal reflects the transition from the phase in which the territory newly made accessible to capital is being “opened up” to the phase in which it is being exploited “at cruising speed.” The absence of stimulating side effects of foreign investment in an underdeveloped country means that such investment does not play the role of catalyst of the process of accumulation that can be played by foreign investment in countries with a capitalist structure.

Under the conditions of foreign investment in an underdeveloped country, equilibrium in the balance of payments necessitates a rapid growth of exports — not only more rapid than the growth of the gross domestic product but also more rapid than the growth of imports. Now, there are many forces that tend to hasten the growth of imports into the underdeveloped countries, the principal ones being: (1) urban development, together with inadequate increase in agricultural production of foodstuffs, which make necessary increasing imports of basic food products (wheat, rice, etc.); (2) increase in administrative expenditure, out of proportion with the possibilities of the local economy; (3) change in the structures of income distribution, with “Europeanization” of the way of life and consumer habits of the privileged strata (demonstration effects); and (4) inadequate industrial development and disequilibrium in the indus­trial structures (excessive predominance of consumer-goods indus­tries), which necessitate imports of production goods and inter­mediate goods. The combined working of these forces renders the underdeveloped countries dependent on external aid, which tends to become permanent.

The dialectic of this specific contradiction between the tendency to external deficit and the resorption of this deficit through structural adjustment of the periphery to the center’s needs for accumulation explains why the history of the periphery consists of a series of “economic miracles” — brief periods of very rapid growth while the system is being established, followed by periods of blocked develop­ment, stagnation, and even regression: miracles without any future and take-offs that have failed.

The foreign-exchange standard, with integration of the periphery into monetary systems dominated by the central metropolitan countries, eliminates the temporary difficulties that result from disequilibrium in the balance of payments, even if this is persistent: this disequilibrium is bound eventually to be resorbed by the working of the income mechanism. Adoption of the foreign-exchange standard enables the system to recover equilibrium by slowing down the growth of the underdeveloped country through acceptance of a “domination” rate of exchange, which facilitates the structural readjustment.

If this monetary integration is abandoned and independent monetary systems are established in the periphery, does this affect the mechanisms of structural adjustment? Not automatically. If we continue to think of development merely in terms of increasing international specialization —that is, development, first and fore­most, of production for export on the world market — then external equilibrium can be obtained only at the cost of checking development, even peripheral development. The underlying tendencies to disequi­librium continue to operate, and sooner or later control proves ineffectual and it is necessary to devalue the currency.

The Role of the Monetary Systems of the Periphery in the Shaping of Dependence

The alleged ‘‘perverse mechanisms" of issue. Most of the under­developed countries now have an independent monetary system, that is, a central bank that is empowered to aid the national treasury and that manages the country’s external holdings, in accordance with principles similar to those that apply in the advanced countries. Control of exchange and transfers is practiced, usually with a hope that liberalization may become possible: control is looked upon as a sad necessity due to the difficulties of the balance of payments, rather than as a regular instrument of economic policy.

None of the national currencies of the Third World can aspire to play the role of a key currency in the international monetary system, even though some of them are strong, because the external balances of these countries are unfavorable. Thus the external holdings of the Third World countries consist largely of foreign currency, meaning key currencies (the dollar first and foremost, followed by the pound sterling) and the currencies of the other advanced countries, partic­ularly the old metropolitan centers. In this sense, all these countries live under a foreign-exchange standard regime. The term is used more narrowly when speaking of an organism that agrees to exchange its local currency at a fixed rate and in unlimited quantity (without any control) for the dominant currency, and vice versa.

Systems based on this principle were until recent times characteristic of almost all the countries of the periphery. The most straightforward is certainly the Currency Boards system, in which an issue of the local currency is backed only by an equivalent deposit of sterling. Actually, this local currency has no existence of its own — it is sterling that circulates under a special denomination. In the monetary system of the French colonies, the mechanisms of which still govern the African countries of the franc area, the same situation prevails, despite appearances to the contrary; the central banks of these countries are in fact merely outposts of the Bank of France, which is the only real central bank of the franc area. It alone is empowered to give public support — and only to the French treasury, moreover — and it alone manages the external holdings of the area as a whole. Transfersbeingfree and unlimited, at a fixed rate, and the network of commercial banks consisting of branches of the metropolitan banks, the various masses of currency are in practice all one mass. The “franc area” might well be called, instead, the “area of the French franc.” There can be no talk of a monetary area here except where the partners possess a certain degree of independence in monetary policy, that is, when their central banks are equally endowed with the general powers that are characteristic of such institutions, while undertaking to supply each other with their respective currencies at a fixed rate. In this case, the monetary institutions of the center of the area agree to supply advances to those of the periphery, if need be. This is the case with Mali, the only country that really belongs to the “franc area.”

This margin of freedom can be expanded to the point at which there is almost an independent national monetary system. Even then, however, it is to be observed that, among the three possible forms ofbacking for issue of currency (external holdings, aid to the economy, aid to the public treasury), the first-mentioned, the external element, plays a larger part than in the advanced countries. This fact reflects the extraverted character of economic activity.

However, it Enables economists of the classical school to put forward a new thesis, that of the “perverse mechanisms” of issue, according to which issue is not, in these countries, in conformity with need defined as the second member of the quantitative equation (PT: level of prices multiplied by volume of transa being determined automatically by the external balance. thesis, upheld by Chabert, has been refuted by Newlyn and Rowan and also by Ida Greaves.) The consequence is said to be that issue is excessive in periods of prosperity, when the external balance is favorable, and this sets off local inflation, whereas in depression periods, the balance being unfavorable, it is inadequate, and this delays recovery.

Let us assume that the balance is favorable. An importer obtains foreign currency, which he exchanges for local notes and deposits in a (foreign-owned) commercial bank. The cash-in-hand of this bank having increased, it is in a position to grant more credit to the local economy. If advances are in fact asked for, and if the bank agrees to grant these, so that the coefficient of liquidity is restored to its previous level, the volume of liquid assets in money form will have increased by a multiple of∙the difference in the balance, if there is a fixed ratio between the use of fiduciary money and that of represen­tative money, determining a rigid coefficient of liquidity. Contrariwise, says this thesis, if the external balance is unfavorable, the banks are obliged to restrict the volume of credit. Iflocal producers were to ask their bank to grant them more credit, the bank would not be able to do so. This is just where the mistake in the argument lies.

Let us take a concrete example. In Southern Rhodesia, between 1946 and 19S1, the external balance was unfavorable. On the one hand, therefore, local currency was taken to the Currency Board to be changed into sterling for payment of the deficit. On the other, however, the banks changed sterling (their own) into Rhodesian notes in order to finance a considerable expansion of their local credits. Some will then say that the deficit in the balance was covered by an influx of short-term credit from abroad. The formula­tion is unacceptable because of its ambiguity: it implies that this inflow of credit is induced by the disequilibrium in the balance and that it is necessarily equal to the latter.

. It is important to distinguish between what I call the balance of real payments — made up of exports and the flow of capital intended for long-term investment, constituting the credit side, and imports and the backflow of profits from foreign investments, constituting the debit side — and the balance of movements of bank capital (import and export of funds by the banks on their own account, and not as representatives of a client).

The balance of real payments is whatever it is. I have said that there is a tendency toward long-term equilibrium of this balance through the income-effect (a deficit constitutes a transfer of purchasing power) but that the deficit is not reabsorbed automatically — especially given that the rate of exchange is rigid and transfers are unlimited. In the case of independent currencies, there is in addition to this income-effect also an exchange-effect (disequilibrium leads to deval­uation, which acts upon the balance in either a favorable or a perverse direction, depending on the elasticities) and this sometimes contributes to bringing about short-term re-equilibration.

As for the balance of movements of bank capital, this is independent and not induced by the balance of real payments. Therefore, although the balance of real payments automatically affects circulation, this effect is without importance, since it can be either counterbalanced or not by the movement of bank capital, which is always determined solely by the economy’s need for money, and is limited by nothing else.

This is why it is possible for the volume of liquid assets in money, and even the volume of circulation, to increase although the balance of payments shows a deficit. There is no proof that imports and exports of money are induced by external payments; this is the finding of the best empirical studies that have been made of the working of monetary systems based on the foreign-exchange standard.

This analysis leads us to the real problem, namely, how the network of commercial banks is constituted, and what economic activities (extraverted or autocentric) it serves. If the network is made up of branches of the metropolitan banks, then the thesis of perverse mechanisms loses all validity. But this applies also, to a large extent, if the banking network is national. In this case, if a need for money is felt — a demand for internal credit — the external deficit merely leads to a reduction in the foreign-exchange cover, a reduction that reflects a diminution in the extraverted character of the economy.

Concomitance between the movements of the external balance, of the volume of money, and of prices confers no greater scientific validity upon the quantity-theory explanation. It is normal for prices to fall in a period of depression (especially the prices of raw materials), for the volume of money to shrink, and for the external balance of the underdeveloped countries to worsen. But it is the fall in prices that causes the external deficit, not the other way round.

The foreign-exchange standard system, which is typical of the. underdeveloped countries, was not introduced without protracted preliminary tentative measures. True, it was introduced without its theory having been worked out beforehand: thus, for a long time, cash vouchers circulated in the West Indies that were not convertible into gold but were convertible into bills on the metropolitan country. The exchange fluctuated with the state of the external balance, because there was no organ that ensured exchange at a fixed rate and in unlimited amounts.

In general, all through the nineteenth century, the colonies, the countries of the East, and those of Latin America made use of gold, or more commonly silver, coins (China, India, Dutch East Indies, Persia, and Latin America with the exception of Brazil). Only gradually was the foreign-exchange standard system introduced, beginning in 1898 in India and then becoming widespread at the beginning of the twentieth century, especially in the colonies. A direct gold-exchange standard was introduced in Argentina in 1899, when the Conversion Office undertook to exchange gold for the.local currency and vice versa. The same system was introduced in Brazil a little later. China alone continued to use its silver coins and its ingots of the same metal. As for Latin America, that was all through the nineteenth century the region par excellence of paper money, which circulated.alongside silver coins that were more or less at a premium, depending on the volume of issue. Mexico moved belatedly from this situation, in which the rate of exchange fluctuated with the price of silγer, to the foreign-exchange standard. The other states hesitated to take this decision, and only in the twentieth century did they at last stabilize their currencies by setting up central systems of the modem type (inconvertible credit money).

The experience of Latin America, where paper money issued by the state treasuries circulated, is worth some attention. Money, here introduced into the economy not by way of commercial bank credit but through the budget, may prove to be excessive in quantity. In the case of a budget deficit, money incomes are created without any real counterpart. Let us assume that the budget is balanced. A mere

The Development of Underdevelopment 265 disequilibrium of the external balance results in a fall in the rate of exchange. This brings in its train price inflation through the increased price of imports. If the disequilibrium of the external balance is part of a permanent tendency, as is the case with the underdeveloped countries unless exchange control is applied, then what occurs is an endless series of devaluations, price increases, and fresh devaluations. Let us now assume that the balance of real external payments is, like the budget, in equilibrium. The money in circulation may prove to be insufficient. Money being introduced into the economy only by way of state expenditure, a trader who finds himself momentarily short Ofliquidities applies to the foreign- owned commercial banks. In order to respond to his application, the latter need an extra quantity of the local paper money that is legal tender in the given country. They import funds that belong to them, and buy local currency on the exchange market. This transaction tends to raise the rate of exchange, which in turn causes prices to fall. In this case the amount of money does indeed adjust itself to requirements, but only at the cost of continual upsets in the level of the exchange rate and of prices.

Independent monetary systems have been established in Latin America on the basis of the paper-money system previously obtaining there, and in Asia, the Middle East, and the English-speaking countries of Africa on the basis of the previous foreign-exchange standard system. Only the French-speaking countries of Africa remain outside this movement.

Freedom to fix the rate of exchange does not mean that the latter ceases to be determined by the cover and by the state of the external balance. If the cover of the money issued still consists of foreign exchange, fluctuations in the value of the foreign currency will continue to be transmitted. As for the external balance, this operates via the rate of exchange to influence the market — whether free, official, or black. Only exchange control is capable, by imposing equilibrium on the country’s balance, of keeping its currency in good condition.

Under the foreign-exchange standard system, local issue is controlled, just like issue in the metropolitan country, by the central bank of the metropolitan country. This means control of credit, the

importance of which economists tend to exaggerate. Generally speaking, those who have shown that circulation has adapted itself to needs have rejected the possibility of real management of the issuing of money. All the same, it has been said that, with the abolition of convertibility into gold, on the one hand, and the development of the monopolies, on the other, an inflationary issue (with the agreement of the central bank) has become a real possibility. In this sense, management of credit (checking or agreeing to this issue) has become significant, even though it is limited by the impossibility of issuing currency if the economy does not require this.

Does the creation of an independent monetary system in a dependent peripheral economy give the central bank a similar power to control credit? If we assume that freedom of transfer is maintained, the central bank remains powerless, since the (foreign-owned) commercial banks can refuse to submit to the discipline of a restriction on credit, and appeal to their head offices. The central authorities are thus in danger of clashing with the foreign-owned commercial banks if there is disagreement on general policy. In this struggle the government possesses, of course, one effective means of coercion, namely, possible control of transfers. All the methods by which the foreign banks may try to get around the regulation of credit by the central bank are liable to be neutralized by control of transfers. But this means, for an underdeveloped country, necessarily excluding itself from the international capital market. How, indeed, is it possible to distinguish between the capital that comes in to be invested and the capital that the banks import in order to supply the economic system with the liquidities necessitated by development? The central bank can now dictate to the expatriate banks. This advantage is nevertheless bought at a very high price, since, hence­forth, (1) the fluctuations in the balance affect issue directly; (2) the foreign-exchange backing of the currency is paid for in real exports; and (3) the foreign-owned commercial banks make the economy pay for a service they can no longer render — providing advances backed by the guarantee of a stable and widely accepted currency.

The fluctuations in the volume of reserves that constitute the cover of the local issue compel the banks to regulate the volume of credit in accordance with the vicissitudes of the balance of payments. A

deficit in the balance may thus lead them to restrict the volume of credit allowed. Restriction of the volume of activity risks aggravating the external deficit. Conversely, a surplus in the external balance brings no advantage to the local economy. Not only may the banks find themselves in a situation such that, no additional credit being asked for by the local producers (because the volume of exports, already considerable, cannot be increased), the surplus of foreign exchange rendered is sterile, but also, should an injection of credit actually,take place, it is possible that the tendency to increased prices that it entails (together with other effects, such as the excessive demand pressing upon the local market, as a result of the country’s prosperous condition following a successful export drive) may prevent the volume of exports from growing, or even reduce this volume, with the consequence that the country will soon lose its favorable situation in relations with the outside world.

It must be added that monetary independence implies a real cost for the underdeveloped systems. The foreign exchange that forms the cover for the local currency is hence forth obtained by means of a real surplus of exports over imports, which was not the case with a foreign-exchange standard: then the cover was provided, if necessary free of charge, by an import of capital through the foreign-owned commercial banks. It is only because they do not distinguish between the balance of real payments and the balance of bank flows that conventional economists are able to claim that the foreign- exchange standard system is equivalent to a 100 percent system of gold circulation.

With. the establishment of control over transfers and consequently the ending of these bank flows, does the service rendered by the foreign- owned banking system to local economic activity justify what it costs? This question raises a serious problem indeed, that of the real cost of the banking system to the economy. The interest paid to the banks by the rest of the economic system for the service constituted by short-term loans destined to ensure the normal functioning of the economy constitutes a transfer of income the explanation of which is to be sought in history. If all the entrepreneurs of the nineteenth century had possessed an initial stock of gold equal to the volume of necessary liquidities, and if the production of new gold had kept in step with the pace of economic growth, then short-term credit would not perhaps have developed in the way it has. But, in fact, gold circulated in quantities that were increasingly inadequate, although it was the only currency acceptable in the society of those days. The banks were able to use this situation in order to issue fiduciary money: the convertible note, or representative money, in return for the payment of interest. They then ran the risk, to be. sure, that was implicit in convertibility, since at any moment the entrepreneur might demand metal coins. It may be claimed that since convertibility has been abandoned, this risk no longer applies. It is true that the commercial banks do still run a certain risk, since the receiver of credit may always ask for banknotes. But if these banks accept the discipline of the central bank they are in practically no danger. Interest no longer appears as corresponding to risk. The central bank has become a public service providing the economy with instruments of payment. Interest is no longer the reward for this service but a convenient device for restricting demand for money (which may account for Keynes’s attempt to explain theoreti­cally the role of interest on these grounds). There are other ways of restricting the supply of money: the quantitative and qualitative control of credit has multiplied these techniques. In any case, the payment ofinterest by borrowers of bank credit does not impoverish the economy in the least, since it passes from the hands of those for whom it would have constituted additional profit (the entrepreneurs) into the hands of those for whom it will constitute the same kind of income (bankers’ profit), even though this does have ah effect on the pace of development and the direction taken by it.

It is not at all the same in the underdeveloped countries, where this payment represents a real loss for the economy. In so far as the banking network is foreign-owhed and can transfer freely the funds that move from or to its head offices, this cost can be justified by reference to the advantage constituted by making a reliable currency available to borrowers. As soon as control over transfers is established, however, no special guarantee is provided from outside the economy.

This is why the underdeveloped countries have been led to go further. So long as an extraverted economic structure is accepted there is no reason to reject the foreign-exchange standard. This certainly does make impossible any local control over credit — but such control is pointless except in an autocentric economy. And

The Development of Underdevelopment 269 what it actually comes down to is the possibility for the central bank to refuse to accept a price increase desired by the monopolies as a means of redistributing income in their favor, and considered unacceptable by the state, either for reasons of economic equilib­rium or even for political reasons. But this problem of planning does not exist for a dependent peripheral economy.

If monetary independence, which implies nationalizing the foreign- owned banks, is a necessity, this is because bank credit must be made to serve a different policy — a policy of structural trans­formations aimed at strengthening the autocentric character of the economy.

The functions and orientation of bank credit in the dependent peripheral economies. The criticism leveled at the monetary system of the underdeveloped countries, to the effect that it supplies the economy alternately with too much money or not enough, is there­fore without foundation. The monetary and banking system, even when foreign-controlled, supplies the economy with as much money as it requires. But to whose requirements does the activity of the expatriate commercial banks correspond? That is the real question. Alienated economists, especially those of the monetary school, pretend to be unaware of the structural relations that exist between the world of business and that of finance. Now, the banks never serve the economy “in general” but a specific group of economic activities.

In the underdeveloped countries the banks have a history that is closely linked with the history of the installation of peripheral capitalism in these countries. The European banks established branches there when international trade had attained large-scale dimensions, and with the aim of facilitating this trade. Gradually, starting from this extraverted sector, banking activity spread to the branches of capitalist production directed toward the home market, in the context of the import-substitution industrialization of recent decades. It is important to note, however, that a large part of these activities, often the major part, is controlled by the big multi­national companies. These possess substantial financial resources, scattered all over the world. Depending on the difference in the rates of interest prevailing in this place or that, they will draw upon bank credit in one center of their activity in order to finance

operations located in another center. By internal book entries — the conventional prices at which their various establishments sell each other their products — they will be able to transfer their financial resources in disregard of any controls over transfers that there may be. Thus the policy of local control of credit increasingly ceases to matter to them: in fact, control over these companies, to be effective, would have to be International in scope.

From another angle, when a sector of national capitalism has come into existence it has been obliged to set up its own financial institutions, because the foreign banks confined their support to the foreign capital with which they were connected. The example of Bank Misr in Egypt is typical. In Tropical Africa local private capital complains that the foreign banks regularly refuse to give it support.

If this is so, it is because the function of the monetary system cannot be reduced to putting short-term liquidities at the disposal of economic activity. Besides this passive function it has an active one, which is essential to the working of the mechanism of accumu­lation. Without the intervention of credit it is impossible to realize surplus value. The ways in which short-term saving is transformed into long-term investment, to use the financial jargon, are indeed various. But this indispensable transformation has always been carried out in the autocentric economies, either by the banks, or by specialized institutions, or by the public treasury. Whereas in the autocentric economies the financial institutions have facilitated the transformation of reserve saving into long-term investments, in the underdeveloped countries everything tends to foster the use of savings, including sums the saver would like to invest on a long­term basis, either for short-term financing of the economy (in so far as this saving, deposited in the banks, is used to finance external trade operations) or for financing state expenditure, much of which, unproductive for the economy, is productive only of interest for the holders of state bonds. Here the transforming mechanism works in reverse.

The efforts made in recent times by many states to create a monetary and financial market, the promotion by the state of financial institutions of a public or semipublic character — stock markets, saving banks, industrial and mortgage credit — have produced only poor results. The cause of these setbacks lies in the actual situation of the underdeveloped economy. The creation of financial institutions may well favor the mobilization and centrali­zation of capital: these funds will nevertheless lie unused if local industry fails to come into being as a result of foreign competition.

Monetary disorders and inflation in the periphery of the world system. Critics of the foreign-exchange standard not only charge this system with insusceptibility to management in accordance with local needs but also declare that it favors the automatic trans­mission of fluctuations in the value of the dominant currency.

True, as Bloch-Laine writes (p. 39): “When products are freely exchanged, and the different masses of money are in practice all one mass, the price level necessarily tends to be the same every­where; if this is not so, the disparities are to be imputed to structural causes (cost of transport, of labor, or of power, for example) that are immune to monetary manipulation.” In cases, however, where unlimited exchange at a fixed rate has been abolished, and where there is a managed currency backed by foreign exchange, this one-way influence nevertheless remains basically the same: if the value of all the foreign exchange is reduced, so that the cover possessed by the local currency declines in value, this currency itself very soon loses its initial value, because it owes this, to a large extent, to public confidence.

It is not only because imports become dearer that the local currency loses value. One might well suppose that the rise in internal prices would be localized in the international sector, while the domestic sector remained unaffected. This is what usually happens in relations between advanced countries when exchange rates are readjusted. Here we have an apparently paradoxical situation: in the advanced countries, in which all the sectors of activity “hold together,” a price rise can be restricted to a single sector, whereas in the underdeveloped countries, where two sectors coexist without interpenetrating and the economy does not form an integral unity, a rise in prices in the capitalist sector linked with the international market is passed on in full to the native sector, which seems to be independent of it.

Perhaps the explanation of this phenomenon should be sought through analysis of human behavior. There are people who endeavor merely to adapt their nominal income to the level of prices. They follow the economic movement. Their behavior is neutral. Others, on the contrary — and these are the economically dominant categories — are constantly engaged in trying to discover what the value of money is going to be. As they have reserves of money at their disposal, and as a large fiduciary element enters into the deter­mination of this value, they exert a serious influence on the way it evolves. In an underdeveloped country the individual who possesses a big income is often a landowner. He dreams of how he will spend his income, and he knows that he has to buy the luxury goods he wants from abroad. The value of money means for him the value of the relevant foreign currency. In an advanced country, on the contrary, the individual possessing a big income is normally an entrepreneur. He dreams of investing his money, and he knows that most of his production expenses — purchase of machinery, payment of wages — will be paid out in the country where he is. The devaluation of the currency abroad does not devalue the local currency, to his way of thinking, except, and only except, in so far as foreign trade supplies his country’s internal market. Condillac devoted a chapter of his Essay on the Nature of Commerce to studying the mechanisms by which the tastes of the ruling class determined all prices and the amounts in which goods were pro­duced.

The continuous creeping inflation that characterizes the func­tioning of the capitalist system in the age of monopoly (and which is responsible for the abandonment of convertibility into gold, as it provides the framework of monetary policy), thus transmits the climate of permanent price increases from the center of the system to its periphery.

The development of capitalism in Europe and in the United States proceeded in a climate of monetary stability and declining prices (the fall in prices being itself brought about by development, which was reflected in a steady reduction in real costs). In the underdeveloped countries, however, the current development of peripheral capitalism is proceeding in a climate of price increases transmitted from outside.

It has often been maintained that inflation favors forced saving at the expense of free saving. This is true only when the state, the promoter of inflation,, uses the purchasing power it has created for productive investment. More generally, inflation is a way of redis­tributing income. In the underdeveloped countries the price rise transmitted from without enables the profits of the foreign monopolies to bite into the share of the weaker national sector. This transfer is not in the least a mere theoretical mechanism. The Africanization of certain sectors of activity (road transport, forestry, building, etc.), in most of the countries of Black Africa where this has taken place in the last twenty years, has been accompanied by a marked lowering in the profitability of these activities, to the advantage of those, whether upstream or downstream, which are controlled by foreign capital. This lowering of profitability has been greatly facilitated by the increase in prices, which has been uneven as between sectors. The other powerful element in an underdeveloped economy often consists of the landlords. They spend their extra income, due to inflation, upon Iuxuryimports- Furthermore, in the general increase in prices, the ratio of wages to profits behaves very differently in the advanced and in the underdeveloped countries. In the former, wages, broadly speaking, follow the rise in prices, and the gains in productivity due to technical progress are thus constantly shared and shared again between the two categories of income. Over a long period experience shows that the share going to wages re­mains more or less the same. In the underdeveloped countries wages follow the rise in prices much less consistently, for deep structural reasons and in the first place because of the pressure of the excess supply of labor resulting from the breakup of the precapitalist rural milieus. At best, real wages manage to remain steady, despite improved productivity. What applies to wages applies also to the income earned by the peasants who produce commodities, especially for export. Creeping inflation constitutes a principal factor in the worsening of the double factoral terms of trade, a steady reinforce­ment of unequal exchange.

Transmission of the creeping inflation in the advanced centers to the world system as a whole is clearly not the only cause of inflation and monetary disorder in the periphery. According to Eli Lobel, three types of disorder need to be distinguished. The first two (disproportionate increase in consumption, public or private, and strains connected with industrialization) originate within the economy and may have effects on the external balance, while the third originates in the external balance itself.

Increase in consumption, public or private, at a rate that exceeds the growth rate of the productive, economy, with its mani­festations either in a budget deficit or in disproportionate credits for consumption purposes, or to cover.the structural deficits of enterprises, constitutes the most familiar example of disequilibrium of internal origin. In such a case it may be necessary to devalue the currency: this will have effects comparable to an increase in the amount taken by taxes and the subsequent reduction in demand, although these effects will be less selective.

Some strains can set off a price spiral without total supply and demand being thrown off balance. This assumes a balanced budget, a neutral credit policy (the liquidities created not exceeding the desired increases in cash in hand), an equally neutral wage policy (wages rising in step with productivity), and no difficulties as regards the balance of payments. Nevertheless, a policy of accelerated indus­trialization may result in inflationary strain if the production of consumer goods, and especially foodstuffs, develops more slowly than industrial employment, which risks bringing about an increase in the prices of agricultural products, and so an increase in wages, and so of all prices, a subsequent deficit in the public finances caused by increased rewards together with driay in receipts, and strains in the external balance, because the price increase restricts export possibilities, and eventually has repercussions in the monetary sphere. There is in practice no way of avoiding strains of this kind, which necessarily accompany accelerated development: they can only be contained by means of constant readjustments (e.g., of the state’s financial structures). It is clear that in this case inflation makes the situation worse.

A policy of industrialization based on “import-substitution,” even if we assume that the quantity of agricultural products available keeps pace with industrial employment, may have the same effects if the infant industries produce at higher cost than the prices of the imported goods they replace. In such a case though, the currency may have to be devalued, which will have the same effect as a protective tariff for the infant industries. It would have to be selective, however (multiple exchange rates), if it is desired to avoid-a general increase of internal prices.

Analysis of the imbalances originating in the external balance of payments starts from the case that is simplest but also certainly the most fundamental: the flooding in of an external inflation, by way of a pilot currency, which is what happens to countries that are integrated in a currency area, or that, though not so integrated, have an essentially bilateral foreign-trade structure. Here the rigidity Ofthe system does not allow of much adjustment. On the world scale something like this happens when inflation spreads from countries whose national currency serves as reserve currency for others in the outside world.

The fall in the price of exports causes — quite apart from any action that may be taken to alter the rate of exchange, if this entails a disturbance in the external balance — a necessary con­traction in imports, which is not always parallel to the fall in the income of exporters, and, consequently, sectoral imbalances between the supply and demand of different products, and spiral increases similar to the preceding ones. What is essential here is rather to combat possible speculative movements by trying to maintain key supplies at a satisfactory level; but this cannot always be done.

The increase in export prices does not always, however, produce symmetrical inverse effects. On the contrary, we see here a tendency for internal prices to become aligned with external ones, and a spiral of continuous increase may occur if the excess income encounters a feeble elasticity of supply. This is how this situation, which theoretically provides the possibility of accelerated accumu­lation, very often prevents this potential extra accumulation from being realized.

The structural conditions of underdevelopment reduce very considerably the possibility of mastering external relations and putting them at the service of a development policy. It is therefore important not to confuse “development inflation,” which has been effectively carried out by some countries at certain periods, with “inflation without development,” which constitutes the experience of the underdeveloped countries.

Inflationaiy experiences in the Third World, which were practically confined to Latin America down to the Second World War, have become a common factor during the last twenty years. Inflation in Zaire resulted from the sudden coming to power of a new social class, the- state bureaucracy, who sought to annex a part of the national income but were unable either to encroach seriously upon the share taken by foreign capital (owing to the outward orientation of some of the activities of this capital, or even, as regards the autocentric industrial groups of Kinshasa, because∙ these foreign- owned enterprises were strong enough to be able to adapt themselves to inflation) or to levy tribute directly from the peasant masses (who resisted, either by open rebellion or by passive resistance through ceasing production for export). With the aid of the Unitad States and the IMF an equilibrium was restored after eight years of inflation, marked by very considerable changes in relative prices and real incomes in Zaire as compared with the situation in 1960, reflecting a transfer of income from the peasants and lower-paid wage earners (the real wages of the working class were cut by half) to the new ruling class. This equilibrium, a regressive one, has a content that is more biased toward consumption by the new privileged strata, so that the equilibrium of the public finances and that of the balance of payments (on which the former is based) are extremely fragile.

Most of the inflation in the Third World of today is of this type — for example, that in the Indonesia of Sukarno, that in Mali, or that in a number of countries of Latin America. In some cases there is juxtaposed to this type of inflation a process of credit inflation associated with a disordered process of industrialization, mediocre in its effect, for the same reasons of predominance by the new bureaucracy.

These particular processes of adjustment lie behind the struc­turalist thesis regarding inflation. But the same results can be secured without inflation. Thus, in the former French colonies of Black Africa, where the monetary system forbids any budgetary inflation, a progressive increase in the tax burden in the form of indirect taxes has reduced the real income of the agricultural producers and the wage earners in the towns, for the benefit of the same social strata as in the previously mentioned cases.

Quite different is inflation employed as a method of forced saving, in the context of a national policy of systematic autocentric development, such as occurred in Japan between 1877 and 1914. Here the state’s aid to the old merchant families who, around 1870, became transformed into industrialists, was effected by way of loans without security. These advances weighed heavily on the market, causing prices to rise, and thus made possible a transfer of purchasing power from the peasant masses to the new bourgeoisie, who used this purchasing power to pay for the machinery they imported from abroad. This deliberate inflation of credit made investment possible before real saving had been obtained from production. The issue of currency, always ahead of requirements, certainly entailed a secondary price increase, but basically it made possible an increase in the level of economic activity. Part of the purchasing power created by the state for the benefit of the entre­preneurs found its way on to the external market, as it was necessary to import large quantities of machinery. These imports were paid for by liquidating the nation’s stocks of gold and silver. In the Japanese case, the surplus of imports over exports was due to a sudden increase in imports of investment goods, and not to an increase in imports of luxury goods resulting from a transfer of income to the parasitical rich classes, as in the case of the under­developed countries. It was not external demand in general that had risen but only the level of demand for investment goods. The difficulties of the external balance were thus, in this case, the result of the acceleration of growth through internal inflation and not the cause of the increase in prices.

It is interesting to compare this pattern of development-inflation with that of Jhe inflation and price rise in the underdeveloped countries during the Second World War. Here, the price increase, though internal in origin, was nevertheless closely bound up with the balance of payments. However, it occurred in a special war situation, so that some of its negative effects on accumulation were unable to take concrete form.

Indeed, since the demand of Great Britain and the United States increased during the war, as in a period of prosperity, and since the need, as well as the possibility, for these countries to export manufactured goods declined during this period, these cir­cumstances resulted in an improvement in the terms of trade for the overseas countries, which favored local accumulation. A large part of this surplus income realized through the improvement in the balance of payments would in normal times have been spent on luxury imports. This surplus income thus constituted in part a forced saving that soon found investment locally, all the more so because the absence of foreign competition and the acute reduction in imports favored the creation of local industries. It is true that some contrary forces worked against this development, such as the decline in the productivity of agriculture due to the impossibility of importing fertilizers, and the difficulty in getting machinery from Europe and America. Accordingly, part of this surplus income was directed into the local market for luxury goods (building of luxury villas, etc.), where it caused a price increase. This unrestrained consumption of luxury products resulted, moreover, in investment in fast-food outlets, which served as a pole of development for local luxury expenditure. Part of the deficit in the balance of the Allied countries was paid for by liquidating gold reserves, and also, especially, by transferring foreign investments to local ownership — starting with the least profitable of these investments. In this way the war contributed to the formation of local capital, if only by this transfer of ownership, the consequence of which was to be that the profits subsequently realized would no longer be exported. Later, the deficit in the European balance was paid for either in depreciating currency or in “war debt” (sterling credits, for example), which also depreciated as the European currencies were inflated. European inflation was thus transmitted to the overseas countries, where it was intensified by the expenditure of the foreign armies.

The final outcome, despite the particularly favorable conditions for local development, was rather meager. Inflation was reflected in increased gross investment, but at the same time the war involved such a squandering of capital (nonreplacement of worn- out equipment, as in the case of railways, roads, harbors, etc.) that it is very hard to decide whether, ultimately, net investment was positive. Altogether, this type Ofinflation seems to have been nega­tive in its effect. What did play a positive role was not the inflation itself but the momentary disappearance of foreign competition.

Thus, monetary structures are not the main thing in under­development. Whatever these structures may be, the' value of money at the periphery of the system cannot differ from that of the dominant currencies of the center.

The Functions of the Periphery in the Movement of the World Conjuncture

Current economic theory, which identifies the underdeveloped countries with the advanced countries as they were at an earlier stage of their development, fails to take account of the conjunc- tural.phenomena that are peculiar to the periphery. It takes refuge in a mechanistic theory of the conjuncture transmitted from the advanced countries to. the underdeveloped ones either through the channel of monetary mechanisms or else through that of the external-trade multiplier. Actually, the economies of the system’s periphery have no real Conjunctural phenomena of their own, even transmitted from outside, because they are without any internal dynamism of their own.

The periphery does nevertheless occupy a position that can be important in the development of the cycle, or of the fluctuations in the conjuncture, on the world scale. It provides a field of possible extension for the capitalist mode of production at the expense of precapitalist milieus. Although this extension of the capitalist mode of production is not essential to the working of the mechanism of accumulation, it does play the role of a catalyst and an accelerator of growth at the center. It certainly played an important role from this standpoint in the initial period of colonization. It seems to have lost this importance in the present period, but may perhaps recover it in the setting of a new structure of international special­ization.

Critique of economic theories of transmission. Contrary to the schemas put forward by Haberler and Clark, the economic oscilla­tions experienced by the underdeveloped countries bear little resem­blance to a cycle. When the conjuncture is favorable in the advanced countries, the level of exports from the underdeveloped countries goes up.

The incomes that benefit first and foremost in these countries consist mainly of ground rent. Most of the profits of enterprises of the capitalist type are exported, and wages may be assumed to be relatively stable. The elasticity of the rents drawn by the landowners, however, enables this income to absorb the supplement engendered by the increased price and volume of exports of agricultural produce. The small peasants also benefit to some extent from this prosperity (though less than the landowners, because they have to deal through intermediaries, in the shape of merchants who may absorb part of the extra income). This prosperity of ground rents finds reflection in a marked increase in imports OfJuxury goods and to a lesser extent in the level of imports of the cheap manufac­tured goods that the small peasants buy. Conversely, if the con­juncture is unfavorable in the advanced countries, primary products are sold in smaller quantities and at lower prices. The whole economy of the underdeveloped country suffers from this, but wages, being relatively rigid, are less affected than rents. As for profits, the volume of which also diminishes, they are still by definition exported and so do not affect the situation in the under­developed country. If, however, exports decline, and with them ground rents, then imports of luxury goods and goods for con­sumption by the peasantry will soon suffer the same fate..

The cycle is therefore not in the least transmitted by way of the balance of payments. The latter continues to be kept in equilibrium, in periods of prosperity and depression alike, since exports, rents, and imports all vary together in the same direction. Haberler’s anal­ysis, which might have some validity in the case of relations between countries with a central capitalist structure, has none in the case of relations between countries with such profoundly different structures as those of the center and the periphery.

Can we say that the cycle is transmitted directly by fluctuations in the volume of exchanges? No, for the special role of analysis of the foreign-trade multiplier is to show that the primary fluctuations in the volume of external exchanges (fluctuations due to the state of the conjuncture abroad, constituting an independent datum) give rise to secondary internal fluctuations. Here we have nothing of that kind. It is in this sense that it can be said that there is no true cycle in the underdeveloped economies. The fact that rent constitutes the elastic income in these economies means that the multiplier does not function there. The increased purchasing power available as a result of the increased value of exports is not mainly spent and partly saved — it is spent in its entirety. The increased demand does not here give rise to induced investments. As the accelerator is transferred abroad, there is no true cycle, not even a transmitted one, but only a sinusoidal oscillation of total income.

A study of the history of the world conjuncture leads to the following observations:

(1) Fluctuations in the total real income seem to be less marked in the underdeveloped countries, taken as a whole, than in the advanced countries, at least in the twentieth century — which does not mean that they may not have been more marked in certain underdeveloped countries. Furthermore, while the magnitude of Conjunctural fluctuations is comparable between the different ad­vanced countries, the “scatter’-’ in the underdeveloped countries in this respect is very considerable. Fluctuations are more violent in proportion to the degree in which the country is integrated into the international market. In a country that is well integrated they may be no less violent than in the most advanced countries.

(2) Fluctuations in the unit value of export prices for primary products varied between 5 and 21 percent, depending on the particular product, between 1900 and 1970. The magnitude of these fluctuations increased by successive stages during the three peacetime periods: 11 percent per annum for 1901-1914; 13 to IS percent from 1920 to 1939; and 18 percent from 1946 to 1965. Cyclical fluctuations in prices averaged 27 percent. Annual fluctua­tions in the volume of exports averaged 19 percent. After 1945 they amounted to 24 percent. Cyclical fluctuations in the volume of exports have been, on the average, of the same magnitude as those of prices. Finally, fluctuations in receipts from exports (cumulative effects of fluctuations in price and in volume) have amounted to 22 percent, both annually and cyclically. This magnitude gets bigger as time goes by: 19 percent in 1901-1913; 21 percent in 1920-1939; and 30 percent in 1946-1965. The variations in real values (obtained by dividing these variations in nominal values by the index of prices of British manufactured exports) show that the variations in real values (13.5 percent for the period 1902-1960) have been the same as the variations in nominal values (13.7 percent).

(3) There are no precise rules for the way the trade balance behaves, either in the advanced countries or in the underdeveloped ones, for exports and imports vary in the same direction and in similar proportions. Even so, there is a certain tendency for the imports of the underdeveloped countries to shrink less sharply than their exports.

(4) The contraction in the trade of the advanced countries is due mainly to contraction in the volume of both their exports and their imports. The contraction in the trade of the underdeveloped countries, however, is due mainly to the fall in the prices of their exports, to the deterioration in their terms of trade that this expresses, and to the weakening of.their real capacity to import that results from it.

(5) The cyclical movement of the balance of payments is due to that of capital far more than to that of the trade balance. The fluctua­tions in the value of exports are not compensated by equal and in­verse fluctuations in the movement of capital. On the contrary, these oscillations reinforce the first-mentioned ones. It is during depres­sion periods that least foreign capital flows into the periphery. While, therefore, the fluctuations in the total value of exports are compen­sated by equal fluctuations in imports (connected with the movement of ground rent), the oscillations in the movement of capital, which reinforce the terms of the trade balance, have the effect of periodically upsetting the balance of external payments, in one direction or the other. True, the outward.movement of the exported profits of foreign capital serves to mitigate this disturbance. In fact, it is in a period of prosperity, when foreign capital is flowing in, that the volume of profits exported is also greatest. However, the magnitude of the fluctuation in capital movements often proves greater than that in the movement of profits.

(6) Fluctuations in national income increased sharply after 1914, both in the advanced countries and in the underdeveloped ones, as did fluctuations in exports and imports and in prices. Since the Second World War,' fluctuations have lost their regular cyclical character, giving place to a shifting conjuncture with movements of limited magnitude.

(7) Fluctuations in industrial production in the underdeveloped countries depend on the destination of its products and on the degree of the given country’s dependence on foreign trade. Fluctuations in agricultural income in the underdeveloped countries depend on the same factors, that is, on the extraverted or autocentric character of economic activity.

(8) Fluctuations in the total real income of the underdeveloped countries are often smaller than those that occur in the advanced ones. Fluctuations in income in current prices are, however, notably bigger, owing to the great volatility of prices in these countries.

From these observations I deduce the following four propositions:

1. The cycle is not transmitted through fluctuations in the quantity of money. While it is true that,, the balance of payments being positive for the underdeveloped countries in a prosperity period and negative in a depression period, these countries see their resources in international liquidities alternately increasing and decreasing, infernal circulation remains neutral, that is, pro­portional to money income (real income multiplied by the price level).

2. Nor is the cycle transmitted by the trade balance, through the working of the multiplier. The behavior of the trade balance is in fact extremely variable, both in different periods and in different countries. It must be added that even when the balance is positive in an underdeveloped country, we do not observe a wave of induced secondary investments engendered by this net surplus.

3. The cycle is, then, quite simply the cyclical aspect of the movement in the income of those agriculturists who live by exporting, which takes the form of a cyclical deterioration in the terms of trade for their exports. This oscillation has secondary effects on industrial production destined for the local market, as also on services as a whole; but these effects are rather weak, in so far as the oscillation parallels the general movement of imports. The cycle of the underdeveloped countries is merely the cycle of their capacity to import.

4. In the international cycle, the underdeveloped countries play an important role at the moment of recovery, because they provide supplementary outlets for the exports of the advanced countries, through the possible breakup of precapitalist milieus. In a period of recession, trade between the advanced and the underdeveloped countries often declines less than that between the advanced countries themselves, and often the imports of the advanced countries increase during depression (as was particularly the case in the nineteenth century).

The role of the periphery in the world conjuncture. The periphery plays a role which is far from negligible in the mechanism of international recovery. The point is that, however deep a depression may be, it can come to an end sooner in the underdeveloped countries than in the central capitalist economies, because it is more superficial in the former. During a depression in the advanced countries a considerable mass of labor is thrown out of employment. All incomes contract — profits first and foremost, but wages, too. During the preceding period of prosperity, new enterprises were set up, which are now working at a reduced rate. The burden of unutilized productive capacity weighs heavily, making recovery all the more difficult. In the underdeveloped countries, on the other hand, while oscillations in the predominant form of income, ground rent, are very considerable, this is not true of the mixed incomes of the bulk of the population, and especially of income from sub­sistence economy. From a certain moment onward, the relative rigidity of the underdeveloped markets may thus constitute a factor of recovery. The existence of exchange relations between the periphery and the center of the system offers the latter the possibility of finding new external markets through the disintegration of the indigenous precapitalist economy.

The further disintegration of primitive indigenous production at the end of the depression is reflected in a new wave of exports from the advanced countries' However, the money incomes distributed as a result of this imply a future increase in imports. This is why the opening of new external outlets does not constitute a final solution of the problem. In theory, this opening of a new field for the extension of capital is not needed in order that recovery may take place. This recovery is due very largely to a deepening of the internal market caused by the generalizing of a new, more capital- intensive technique. Nevertheless, we observe, after each depression at the center, the opening of new outlets in the periphery, which thus play an active role in the mechanism of international recovery.

The same thing happens during the cumulative process that is characteristic of the prosperity period. For the development of prosperity, marked by the growth of total income, is reflected in an increase in the share taken by profits, and consequently in an increase in the relative volume of saving that is accumulated. The relative share taken by wages decreases. Accordingly, capacity to consume falls farther and farther behind capacity to produce. The new equipment created by investment of the additional saving is not long in throwing on to the market a mass of consumer goods

The Development of Underdevelopment 285 that cannot be absorbed. The working of the accelerator maintains for a time the illusion of the profitability of the new equipment made necessary by the increase in the absolute volume of consumption. There is thus overproduction of consumer goods, since the purchasing power distributed and destined for purchase of these goods (mainly wages) is less than the total value of this production. Trade between the advanced and underdeveloped countries continues, also, to conceal this imbalance, and so contributes to protracting the periods of prosperity. Exchange between advanced and under­developed countries in no way constitutes, of course, the solution to alleged general overproduction by the capitalist countries. Develop­ment of the capitalist countries is perfectly possible even when there are no precapitalist milieus to be disintegrated. But the advanced countries, which are always ahead of their backward partners in exchange, take the offensive by exporting to them. Only later does the structure of the underdeveloped countries'become modified, adapting itself to the evolution of production in the advanced countries so as to make possible the export of primary products to them. Imbalance is therefore a permanent feature of trade relations between the center and the periphery of the system. This permanent imbalance is,' however, always being corrected. It therefore plays, in the development of the most advanced countries, only the role of a catalyst, comparable to credit. It is the products that tend to be overproduced during the prosperity phase that are the first to seek an outlet in the economies of the periphery — namely, manufactured consumer goods. Contrariwise, the growing demand of the advanced countries, during the prosperity phase, for those products that are relatively least plentiful leads to adjustment of the structure of the underdeveloped countries to the needs of the most advanced economies. The underdeveloped economies specialize in producing goods the supply of which tends to be less than the demand for them in the advanced countries during the prosperity phase: primary products that contribute to the equipment of the advanced countries — in the main, raw materials. Exchange of consumer goods, in respect of which supply is greater than demand, for intermediate goods, in respect of which, on the contrary, demand is greater than supply, thus facilitates the upward trend in the advanced

countries. We can now appreciate better the real place occupied by the periphery in the world conjuncture. Although the extension of the capitalist mode of production to the periphery is not essential to the working of the mechanism of accumulation, this extension plays the role of a catalyst and an accelerator of growth at the center.

This is so, for example, in the present period. Capitalism has been experiencing, since the end of the Second World War, a period of brilliant growth, in which the Third World has played only a very secondary part. It is the modernization of Western Europe that has been the essential factor in this “miracle.” Modern­ization means deepening (not spreading) the capitalist market, a solution which — always possible, as Marx and Lenin showed — has become real through the conjunction of elements situated on different planes (such as the political plane, e.g., fear of communism), so that any mechanistic “economistic” interpretation is ruled out. The European Common Market and the influx of American capital into Europe constitute the most obvious expressions of this phe­nomenon.

Nevertheless, although during this period the extension of capi­talism to the periphery has not played an important role, this does not mean that it has always been so, nor that it will always be so in the future. In the past, the extraordinary wave of extension of the capitalist market to the colonies during the nineteenth century very certainly played an important part in the relatively peaceful course taken by accumulation at the center. This first wave determined an initial series of forms of international specialization between center and periphery, the latter, of course, adapting itself to the require­ments of the former. These forms of adaptation implied, after a certain level had been reached, a relative blocking of the mechanism of the extension of capitalism ■— whence the crisis of the 1930s.

The type of growth that the capitalist world has known since 1945 is tending in its turn to exhaust its possibilities. The world monetary crisis is perhaps a symptom of this. What will take over the role of ensuring the growth of capitalism? I see three possibilities. First, progressive integration of the countries of Eastern Europe into the world market, and their modernization. Second, the contemporary scientific and technical revolution, which along with automation, the conquest of the atom, and the conquest of space, may open up substantial possibilities for deepening the market. Third and last, a new wave of extension of capitalism to the Third World, based on a new type of international specialization made possible by the technical revolution of our time. In this context, the countries of the center would specialize in ultra-modern activities, while forms of classical industry that had hitherto been reserved for them would be transferred to the periphery. Once again, by adapting itself to the requirements of the center, the periphery will have played an important role in the mechanism of accumulation on the world scale.

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