Russia’s Repeat Failures
Moscow’s New Strategy in Ukraine Is Just as Bad as the Old One
SINCE the end of World War II the literature of international politics and economics in America and Western Europe has concerned itself more and more with the problems of the world's underdeveloped areas. Although the definition of what constitutes underdevelopment is far from precise, the term generally has been applied to most of the political entities of Latin America, Africa, the Middle East, South Asia and Southeast Asia --with their combined populations of well over a billion people, or about two-thirds of the inhabitants of the free world.
There is little doubt that one important reason why Western interest has thus focussed on the problems of the underdeveloped areas has been the obvious turn of Soviet strategy, which singles out the areas of relatively low industrial activity and appalling low per capita incomes as the vulnerable point of attack. The engulfment of China, and successively of North Korea and Northern Vietnam, conjured up for the West the specter of the possible alienation of other great areas in which there exist similar disparities between low economic standards and high national aspirations. The undercurrent of unrest in a major part of the underdeveloped areas, and the overt political upheavals in a large number of the nations or dependencies of these regions, have given such fears a reality that cannot be ignored. Although history provides no assurance that economic progress promotes political stability and international concord, there has been a growing conviction in the industrialized West that opportunity for the satisfaction of the aspirations of the peoples of the underdeveloped areas for economic growth had better be provided within the orbit of the free world. Frustration of their hopes, it is believed, strengthens the Soviet drive to alienate them.
Quite apart from such imperatives of Western defensive strategy there has arisen in addition an increasing awareness that the economic dynamism of the highly industrialized nations of the free world is genuinely dependent upon the achievement of a comparable dynamism in the underdeveloped economies. In 1952, one-third of the combined exports of the United States, Western Europe and Canada found outlets in the markets of underdeveloped countries. Something like 40 percent of their total exports of manufactured goods were also marketed in these areas. No business interest can afford to be complacent about future prospects in such an important segment of its markets.
The degree of interdependence is shown even more conclusively by the amount of supplies the industrialized nations draw from these regions. The records show (also as of 1952) that the United States, Western Europe and Canada are dependent upon the underdeveloped areas for 50 percent of their combined imports of industrial raw materials and 48 percent of crude foodstuffs. Since these import needs of the industrialized nations have been steadily expanding, and promise to increase at an accelerated pace, growth in the underdeveloped economies is obviously to the interest of the West.
These three imperatives--the strategic considerations, the quest for access to expanding export markets, and the need to assure an increasing source of primary products--impel the industrialized West to forward the development in the backward sectors of the free world.
Clearly there are non-material motivations as well--humanitarian and moral--which have an important weight in the traditional American attitude toward other peoples. One of the major impediments to the development of a coherent and effective United States policy in this field has been the tendency here and abroad to regard the various motives as necessarily in conflict with one another, so that those who are influenced by one kind must regard the others as spurious, or ignoble or "soft-minded."
In particular, programs which give weight to factors of defense or trade have been vociferously attacked by those to whom another motivation carries the greater appeal, and these criticisms seem often to be based more on folklore than fact. The resultant discord has engendered suspicions and fears in the underdeveloped areas, many of which are newly emerged from colonial status or are striving to emerge from it. And such misgivings have, of course, been skillfully abetted by those whose major aim is to convince the peoples of the underdeveloped areas that their aspirations for economic betterment can be achieved only if they detach themselves from the political procedures and the economic orbit of the Western democracies. In the babel of conflicting counsel, the fundamental consideration is lost sight of. It is simply that the fulfillment of each of the different objectives, and of all of them combined, depends upon forwarding the same end--the prompt achievement of economic growth in the underdeveloped areas.
The analysis presented here will be restricted to the implications of only one of the three material motivations listed above --the necessity of promoting growth in the underdeveloped economies to assure an adequate supply of primary products for growth in the economy of the free world. The emphasis needs to be placed on that factor because the rôle of the underdeveloped areas as producers and exporters of crude foodstuffs and, particularly, of industrial raw materials, has been so consistently misinterpreted. The misunderstanding threatens seriously to impair the economic advancement that can take place in such areas if their potential as producers of primary products is properly used.
There has been a voluminous literature in recent years illustrating the prevailing misconceptions about the rôle of primary products in economic development. One quotation--and a relatively moderate one--from a recent book[i] dealing with development problems must suffice to establish the flavor of existing sentiment:
While extractive industries provide a fine source of employment, of local expenditures, and of royalties to the government, they cannot and do not contribute as much to over-all development as do manufacturing, service and distributive industries. As the local people are very well aware, the oil and mining companies are after all primarily engaged in taking wealth out, not in bringing it in.
This observation, offered in a context that discounts the importance of the contribution to development of direct foreign investments in petroleum and mining activities, would not be entitled to serious consideration if it did not mirror a viewpoint widely prevalent in the underdeveloped areas themselves. Their understandable rejection of the rôle of "hewers of wood and drawers of water" for the industrialized world has in a number of cases been carried to the point of actively discouraging the further expansion of primary products. At least one nation which through agricultural exports had achieved a per capita income level comparable to that of many industrialized nations adopted a policy in the postwar period which seemed deliberately designed to make agricultural enterprise unattractive. The step was taken as a means of promoting industrialization, but the result was that a healthy growth was effectively arrested: agriculture was depressed, and sufficient industrial activity to compensate for this loss was not achieved.
The jaundiced view held by most underdeveloped areas toward the part which primary production can play in their economic development is mainly the result of outside influences. To be explicit, it is based largely on the findings of research carried out in America, in Europe, and by United Nations agencies. There are indeed huge gaps in our knowledge of the field, particularly with respect to industrial raw materials, where we have not even a reasonably accurate summation of the over-all production in recent years or of how it is divided geographically. But there has been a veritable flood of analyses tending to make raw materials the whipping boy of underdevelopment. The popular folklore which has been developed as a result is held with a tenacity almost in inverse ratio to the amount of convincing supporting evidence. The preconceptions now current as "common knowledge" may be summarized as follows:
1. The so-called underdeveloped, or primary-producing areas, are the major producers and exporters of primary products, including industrial raw materials.
2. In their exchange of primary products for the manufactures of the highly industrialized nations, the underdeveloped countries have been seriously handicapped by the exceptionally erratic demand and pattern of prices for their exports, in comparison to the comparatively stable prices and demand for manufactured goods in international trade.
3. Because of the comparatively violent fluctuations of the foreign exchange earnings of the primary producing areas, and of doubt that future prices of primary products will hold their own with manufacturing prices, there is a strong case for the establishment of intergovernmental controls to stabilize the relationship between the prices of primary products and manufactures in international trade and to regularize the demand for the former.
4. Since manufacturing demonstrably brings higher per capita income returns than does primary production considered as a whole, and since there are other undoubted advantages in a broad rather than an overly specialized pattern of national production, underdeveloped areas should focus their efforts on developing manufacturing enterprise. Available domestic capital and additional foreign capital should be channeled to that purpose; foreign capital investment in further raw materials production should be discouraged since it is "exploitative" rather than "constructive" and tends to perpetuate a colonial pattern.
The stakes at issue for the entire free world are of sufficient importance to warrant a careful winnowing of these preconceptions to separate the fact from the folklore.
First, let us examine the common belief that the underdeveloped areas are the major producers and exporters of primary products, as the description "primary producing areas" suggests.[ii] The free world production of primary products in 1950 was of the general dimension of 120 billion dollars, of which industrial raw materials accounted for about 46 billion dollars. The so-called industrialized areas, with about one-third of the free world's population, produced well over two-thirds of its industrial raw materials, and their industries processed more than 90 percent of the free world total. Estimates of the incidence of production and consumption of crude foodstuffs are less adequate, but from the known fact that the great bulk of this category of primary products is consumed in the areas where it is produced, and from estimates that establish per capita calory consumption in the underdeveloped areas at about two-thirds that of the industrialized countries, it may be inferred that the production of crude foodstuffs is more or less equally divided between the two.
When trade in primary products between the industrialized and the underdeveloped countries is examined on the basis of a representative sample, it is found that, through trade among themselves, the nations of the industrialized areas supplied each other with 50 percent of their combined industrial raw material imports and with a slightly higher percentage of their combined food imports. Furthermore, they exported to the underdeveloped areas primary products valued at more than one-fourth the value of the primary products they drew from these areas.
The term "primary producing nations," as applied to the underdeveloped economies, needs careful interpretation. The industrialized nations actually produce more primary products than the underdeveloped nations do, and their total exports of such products bulk somewhat larger in international trade. It is true, however, that their manufactures are overwhelmingly larger, both with respect to production and exports. The underdeveloped economies may properly be referred to as "the primary producers" only in the sense that a disproportionately large share of their total economic effort is devoted to the production of foods and industrial raw materials. And they may be called "the primary exporters" only in the sense that something like 90 percent of their foreign exchange earnings from Western Europe, the United States and Canada are derived from exports of primary products, while only 35 percent of the combined foreign exchange earnings of those industrialized countries are earned by shipments of food and industrial raw materials.
Thus, clearly, if the long-term record of international trade showed that foreign exchange earnings derived from exports of crude foodstuffs and raw materials suffered much more severe yearly declines than the export revenue from manufactures and semi-manufactures, this would be evidence that the underdeveloped areas were suffering disproportionate hardship.
However, this is not the case, as becomes plain when we examine another preconception. This is the preconception, fostered by a variety of recent studies,[iii] that short-term fluctuations in the pattern of demand and price of internationally-traded primary products, as compared with fluctuations in the price of manufactures, have worked a particular disadvantage to exporters of primary products. The case made out for this appears formidable. But its weaknesses stem from the fact that most of the documentation is based on a limited list of selected commodities; that fluctuations upward are weighed along with downward fluctuations to establish a record of instability; and, generally, that the documentation fails to examine in detail the record of either individual manufactured articles or of the category as a whole in terms of price and volume fluctuations and foreign exchange earnings.
From another recent study, "International Trade--1952," published by GATT, a quite different picture is derived. This study has the advantage of being much more comprehensive, in that its indexes cover production, trade and prices for all primary products and manufactures. Its principal limitation is that it presents data for only 18 years; it begins with 1925 and runs to 1951, but the war and immediate postwar years 1939-1947 are omitted. The chief finding from this study is that neither in the case of production nor trade was the record of values for primary products (i.e. volumes multiplied by prices) more volatile than that for manufactures. For the period 1925-1938, the values of the two moved in essentially the same pattern. For the postwar years, the curves again were similar, with manufactures moving to slightly higher levels than primary products in terms of production, and primary products moving ahead somewhat in trade.
Thus, on the crucial question of the comparative exchange earnings from international trade, it may be stated flatly that for the period covered there is no evidence that the realized exchange earnings from primary product exports were characterized by greater downswings than those realized from manufactured exports. On the score of prices alone, primary products did fall off somewhat more sharply than manufactures in the first four years of the depression thirties, but recovered much more dramatically in the postwar years.
Fortunately, it is possible to make a comparison over a far longer period of the dollar exchange provided by the United States market through its imports of crude materials and crude foodstuffs on the one hand, and its imports of finished manufactures, semi-manufactures, and manufactured foodstuffs on the other. Here the record has been examined from 1900 through 1953, which provides a 53-year experience of annual fluctuations. It is relevant to note that the U.N. studies, mentioned above, cite the United States market as a particularly flagrant contributer to exchange instability in the underdeveloped areas. The evidence is to the contrary. United States imports of primary products afforded their suppliers a greater return than was realized in the previous year in 35 years, a lesser return in 18 years. Imports of manufactured goods yielded the suppliers a greater return in 37 years, less in 15 years; in one year there was no measurable change. For both categories the percentage of decline in the years of lesser profits was 16 percent. In the case of primary products, the average increase in the years of advance was almost 20 percent, as against 16.5 percent for manufactures.
If crude materials alone are compared with finished manufactures alone, the former show a somewhat greater instability--19 years with an average decline of 19 percent, against 16 with an average decline of 13 percent. The difference was not very great; and the average advance in the favorable years was 23 percent for crude materials against 14 percent for manufactures.
It may be worth while, as a further check, to compare the relative stability of United States exports of manufactured goods as an earner, rather than a provider, of foreign exchange. There were increases in 37 out of 53 years, and decreases in 16, with the averages of the former 26 percent and of the latter 21 percent. For cotton manufactures alone, there were 20 years of lowered earnings, averaging 22 percent in magnitude; in the case of iron and steel mill products (from 1900 to 1952), there were 22 years in which exchange earnings fell by an average 23 percent; and in the category of machinery of all classes there were 14 years of decline also averaging 23 percent.
The conclusion from the evidence, which could be amplified, is that there has been considerable instability in foreign trade markets, but that the earnings from exports of primary products have not been subject to declines markedly more extreme than those from manufacturing exports. Contemporary scholarship has done a disservice by describing one side of the coin and neglecting an adequate examination of the other. This has had at least two unfortunate results. The first is a set of solutions which have gained wide advocacy, but which, if workable at all, would promise to benefit the major importers of primary products, rather than the underdeveloped areas in whose name the proposals were put forth. The second misfortune is that the underdeveloped nations have been encouraged to neglect their possibilities as producers and exporters of primary products--possibilities that may well hold the key to the achievement of a rounded economy and the realization of all their aspirations. These proposals, so uncritically taken up by many men of good will, need examination in some detail.
In 1952, the U.N. General Assembly adopted a resolution urging national governments to coöperate "in establishing multilateral as well as bilateral agreements or arrangements relating to individual primary commodities as well as groups of primary commodities and manufactured goods, for the purpose of:
(a) Ensuring the stability of the prices of the said commodities in keeping with an adequate, just and equitable relationship between these prices and those of capital goods and other manufactured articles;
(b) Safeguarding the continuity of the economic and social progress of all countries, those producing as well as those consuming raw materials."
The United States did not support this resolution, which passed by a vote of 36 to 4, with 20 nations abstaining. There is certain to be continuing agitation for programs to put this recommendation into force.
International control over commodity allocation has been practised in times of emergency--during World War II, and again after Korea, when an International Materials Conference was organized, on a voluntary basis, to allocate scarce materials in an equitable fashion. But the control of primary products trade upon a broad scale and under other than emergency conditions presents many problems. Three variant types of procedure are generally considered possible, and there is a record of experience with at least two of them in limited application, though with less than conclusive results.
The first procedure calls for the use of restrictive quota agreements. Prices are controlled by means of agreed limitations on the production and export of a commodity on a quota basis, varied to equate supply with demand. The international sugar agreement of 1953 is of this type. The second device, the use of long-term contracts, is typified by the international wheat agreement under which exporting countries agree to supply a fixed minimum amount at a given ceiling price, and importing countries agree to purchase a fixed minimum amount at a given floor price. When the free market is functioning between the floor and ceiling prices the guaranties are inoperative. The third procedure, which calls for control over commodity markets through the operation of international buffer stocks, has never been tried. Purchases and sales from such buffer stocks would be depended upon to regulate prices.
There are cogent reasons to question the workability of any of these devices, particularly if an attempt were made to apply them to a broad list of commodities. One unsolved problem that is basic to all is that of finding a way to make them effective in modifying short-term price fluctuations of undue severity without interfering with the longer term trends that are depended upon to adjust supply to demand, eliminate inefficient producers and allocate resources between alternate uses. Another difficulty is how to obtain managing personnel sufficiently wise and objective to operate the controls in the common interest, and as effectively as through the workings of the free market.
Each device raises a number of special problems; but there is one more general question that is fundamental. Who would benefit if any of these expedients were adopted and could be made to work? The Assembly resolution mentions the interests of both producers and consumers of raw materials; but its case was documented and supported largely as a measure to remove the alleged disabilities of the underdeveloped countries which concentrate upon primary production and trade. The same resolution suggests that the control should operate to preserve "an adequate, just and equitable relationship" between the prices of primary and manufactured goods, presumably in international trade.
The record of price movements for various categories of goods in international trade shows that the postwar level of raw mateterials prices as a whole has an entirely different and much higher relationship to the prices of manufactured goods than in the prewar period. The much longer record of U.S. prices shows the same phenomenon. If the proposed program had been in existence over a 25-year period, would the earlier relationship have been considered "adequate, just and equitable?" Is the relationship now existing, after a relatively deeper fall of raw materials prices in 1952 and 1953 and a subsequent movement toward rebalancing, the best that the market is likely to afford to raw materials in the years ahead? The United Nations economic studies find no persuasive evidence to suggest a further improvement in the relative prices of primary products, but other economists do. Before discussing that, however, I would like to register my own conviction that to peg prices of primary product prices to the prices of manufactured goods would be more likely to benefit the net purchasing areas for these products than the underdeveloped areas which are net exporters.
The last of the preconceptions deals with the widespread conviction that underdeveloped areas should turn away from the production of raw materials in order to develop economies based on manufacturing. To keep the record straight, let us start with an unqualified endorsement of heroic efforts to broaden the base of underdeveloped economies. Certainly this calls for an expansion of domestic manufacturing, as fast as capital, equipment, labor and managerial skills, materials and market outlets can be mobilized. It calls, too, in most underdeveloped areas, for a vast improvement in agricultural production, which means at the least a greater degree of mechanization and increased use of fertilizers and chemical weed and insect controls. It calls for improved transport and power facilities, which again means more equipment.
The "value added" to the gross national product by manufacturing is generally greater per person employed than that in the case of agriculture (though not more than is contributed by the extractive industries). This is another reason for developing manufactures. A third reason is that a broad economic activity based on a domestic market can help to cushion the shock of declines in export demand, which, as we have shown, are of considerable dimension for primary products and manufactures alike.
But to start manufacturing activities, to mechanize agriculture, to establish transport and power facilities in underdeveloped areas--all these require equipment. Most such equipment has to come from abroad; it is necessarily the product of an established and complex industrial economy. There are only three ways in which it can be acquired in substantial quantity. It can be purchased for cash--and that requires foreign exchange as well as locally mobilized capital. It may be purchased on credit or through loans--but repayment calls for foreign exchange. It may be brought in as a capital contribution by foreign investors--but such investment will not be made unless there is prospect of both business profit and sufficient foreign exchange from some source to cover the remittance of earnings and amortization. Equipment is an essential key to industrialization, and foreign exchange is an essential key to equipment.
How can the underdeveloped countries get the requisite foreign exchange of the major industrial countries? In the past, they have earned the great bulk of their foreign exchange by exports--54 percent from exported industrial raw materials and 34 per cent from exported foods. Primary products are likely to be their main source of earning power for some time, although increased local processing of export products at least to the semi-manufactured stage is desirable and should be progressively feasible.
Since it can be stated with assurance that an increase of the tempo of industrialization calls for an increase in exports in its early stages, it is relevant to appraise the outlook of the underdeveloped countries for increased exports in the field of their greatest opportunity--industrial raw materials. Future projections are always hazardous, but development planning necessarily calls for a long view and must be based upon a reading of prospects.
Upon a reasonable estimate from past trends, we can say that the free world consumption of industrial raw materials may increase from about 46 billion dollars in 1950 to about 80 billion (at 1950 price levels) by 1975-80. The international trade in these commodities may increase from 27 billion dollars to about 50 billion in the same period. Such an increase in consumption should afford presently underdeveloped areas an opportunity to increase their combined production of industrial raw materials from the 14.5 billion dollars of 1950 to something like 31.5 billion within 25 years, and their exports in this field from 13.5 billion dollars to about 28.5 billion. Increases of this magnitude, almost double the expected population increases, would exert a markedly stimulating effect upon the underdeveloped economies. It is quite possible that if a sufficiently vigorous and enlightened effort were made, the share of the underdeveloped areas in both the production and the export of industrial raw materials might increase by even more than the amounts indicated. To date they have made far less drastic inroads upon their known and potential stores of such resources than have the industrialized countries, especially on resources that can be produced at low costs.
The opportunities for increased exchange revenues from larger food exports are also considerable and should be fostered. though they are by no means correspondingly large. There is equal urgency for expanded agricultural output, but chiefly to improve the woefully inadequate nutritional levels that prevail in most underdeveloped countries, and to save the exchange now spent on imported foodstuffs.
In summary, there is need for a reorientation of current thinking about the rôle of primary products, and particularly of industrial raw materials, in the economic planning of underdeveloped areas. It is much to the advantage of the underdeveloped areas to take vigorous advantage of the opportunities for increased production and trade in raw materials offered by an exceptionally favorable outlook in demand and price. They possess the most economic stores of supply. They should exploit these advantages to increase the initial processing stages of raw materials in their own countries, and thus promote industrial development in the field where they have the clearest competitive advantage. They should employ the need of manufacturing nations for raw materials imports as a lever to pry from them a major part of the capital funds upon which increased output depends, and thus conserve their limited local capital for developments of less appeal to foreign investors. Above all, they should use the increased foreign exchange earnings obtainable in this field to buy the equipment needed to broaden their domestic industrial base.
Finally, I think it is justifiable to suggest a thorough overhauling of the scholarship that, in recent analyses of the problems of underdevelopment, has so consistently disparaged the rôle that raw materials can play. The production and export of raw materials should not be regarded by underdeveloped nations as the terminus of their economic aspirations; nevertheless, it is a way station that cannot be bypassed. To seek to persuade the peoples who possess these resources that they should make less than the maximum feasible use of them is absurd in theory and disastrous in practice. If this counsel is followed, it will deprive the underdeveloped areas of their single most promising opportunity for attaining the broad, sound and vigorous economic growth that is central to their own objectives and essential to the strength and security of the entire free world.
[i] Jonathan B. Bingham, "Shirt Sleeve Diplomacy." New York: John Day, 1954, p. 149.
[ii] The conclusions summarized here are based on estimates set forth in a paper, "The Outlook for Industrial Raw Materials Demand in 1980 and Its Relation to International Development," presented by the author of this article at the World Population Conference, Rome, September 1954. Other conclusions drawn in later sections of this article are documented in the same paper.
[iii] See particularly the studies of the United Nations, Department of Economic Affairs: "Instability in Export Markets of Under-Developed Countries," New York, 1952, and "Commodity Trade and Economic Development," New York, 1953.