The Downside of Imperial Collapse
When Empires or Great Powers Fall, Chaos and War Rise
THE GLOBAL UNEMPLOYMENT CRISIS
SEVERAL factors are creating a new phenomenon in the developing world. It is what Robert McNamara of the World Bank has called the rising number of "marginal men"-people who have reached adulthood with no useful role to play in their societies. Largely the product of an unprecedented "baby survival" boom the world over, these individuals now find a dearth of jobs, of the means to provide for themselves and take part in life around them. Quite simply, there is a serious and growing unemployment problem in countries from one end of the developing world to the other and it is likely to dominate international development in the 1970s much as the food issue did in the 1960s.
The impact of the population explosion on employment has been aggravated in most developing countries by an equally unprecedented migration from the countryside to the cities, by the use of increasingly capital-intensive technology and by financial policies favoring use of capital rather than labor. At the same time, living standards are rising rapidly for a sizable segment of the population. This sharpens the contrast between those who are relatively well off and those for whom the present system is not working at all.
The lack of jobs, along with its consequences, is thereby helping to create the preconditions for political upheaval in many countries. It is probably no accident that many of the most severe of these upheavals in recent history have occurred in countries with the highest level of unemployment. In 1957, the average unemployment rate in Cuba was 16 percent, with a further fifth of the labor force reported as partially unemployed. The Philippines, Peru, Colombia and Ceylon are examples of countries which have high rates of unemployment and which today face problems that are nearly as serious.
This growing problem is already contributing to shifts in governments, often toward the two extremes: toward the Left, as in Ceylon, India, Peru and Chile, in response to pressures from the dissatisfied, or toward the Right, as in Brazil, in an attempt to contain these pressures. And, as several recent Latin American cases show, the whole gamut of intergovernmental and business relations can be affected.
The problem of marginal men is thus clearly of considerable importance to peoples and governments alike. But how big is the problem? We still have only a vague idea. Our Western concepts of "work" and "the labor force" do not apply in poor countries, and there are few adequate statistical or even descriptive surveys of conditions in these countries. But we do know that the problem is large already and rapidly becoming more urgent.
Even worse, the unemployed are only the tip of an iceberg composed of a wider group of underemployed. Since the cushion of social security does not exist in almost any poor countries, unemployment can be "afforded" only by people who have working relatives to provide support. Most people in the third world, therefore, must take whatever work they can find. Millions subsist on casual labor, while others often work extremely long hours for pittances as shoeshine boys or petty traders.
These problems are well-nigh universal in the developing world. In Latin America, for example, the number of people who were openly unemployed approximately tripled in number between 1950 and 1965. The number doubled as a percentage of the labor force, from 5.6 percent to 11.1 percent. The figures are even higher today. Furthermore, unemployment rates of 15 to 20 percent are increasingly common in large cities throughout the developing world. Young people, particularly those with an education, generally have even higher rates of joblessness.
In general, the labor force of the non-communist developing world will increase by 170 million in the 1970s, adding at least 25 percent to the size of the work force during the decade. In some areas, particularly in Latin America, where the population explosion started earlier, the increase will be even higher, up to one-third or more. Even in India, a late-comer to rapid population growth, the work force should increase from 210 million in 1970 to 273 million by the end of the decade.
Unfortunately, there is still no end in sight to the population explosion in the developing world. Worse still, for about 20 years after it does end, the labor force will continue to grow accordingly. Therefore the problem of absorbing workers is far more serious for the developing countries than it was for the presently developed countries during their period of industrialization. The populations of the European nations rarely grew by as much as one percent a year, compared to the current annual increase of 2.6 percent in the LDCs.
The population explosion is not the only cause of the employment problem, however. Despite historically unprecedented rates of economic growth throughout the third world over the last decade, the supply of productive jobs is not increasing fast enough to meet the demand. Both the patterns of economic growth and technological changes have slowed the creation of jobs. For example, a million dollars invested in industrial expansion today does not generate as many jobs as it did 20 or 30 years ago, because of growing technological sophistication. At the same time, many of the policies designed to speed industrial growth have effectively encouraged substitution of capital for labor. These policies include overvalued exchange rates, excessive protection for import-substitution industries and low interest rates. They provide incentives for entrepreneurs to use machinery, especially imported machinery, despite the abundant supply of poorly employed labor. These policies also encourage entrepreneurs to favor capital-intensive import enterprises over labor-intensive export industries.
The job problem is further aggravated by the rate of migration from the country to the city, which also has no precedent in American or European history. A type of "gold rush fever" afflicts underemployed and jobless peasants who are flocking to the cities in increasing numbers. Many seek the rewards of high-paying factory jobs which only few can find. In Latin America, urban populations have grown twice as fast as urban jobs. Today, the cities include more than 50 percent of total population-breeding enormous problems of slums, crime and disease.
What should be done about these problems? In most developing countries there is no clear answer. Planners, administrators and political leaders do not yet have more than the beginnings of a consensus on the way to provide enough productive jobs for their expanding labor forces. But there are sparks of hope, deriving from successful programs during the sixties. In particular, there are new possibilities for programs capitalizing on progress in agriculture, and from lessons learned in some of the smaller countries of East Asia.
The search for new policies is spurred by the knowledge that the traditional approach to development could achieve reasonable employment objectives only by attaining unrealizable rates of economic growth. According to one recent estimate, it may be necessary to increase the gross domestic product (GDP) in most developing countries by nine to eleven percent annually. But these rates would only absorb the increase in the labor force in nonagricultural jobs. They would not decrease the absolute number of people working on the land, nor would they affect the existing backlog of unemployment and underemployment. These are striking estimates, particularly when compared with the U.S. experience where we reached the same point while achieving a GDP growth rate of only three percent per year.
It is this type of analysis which led Raul Prebisch to call in his recent report[i] for a growth rate in Latin America of at least eight percent annually. But would attaining even this target-a very ambitious one-be enough? Some economists are skeptical of this approach, arguing that without other major structural changes, most countries are likely to achieve such high growth rates only through much heavier emphasis than before on modern industry. And this concentration would aggravate the problems of high wages in a small portion of the economy, leading to further inequities, migration to the cities and the intensification of urban problems. Thus, more growth is a necessary but insufficient condition for resolving the employment problem.
There is no complete solution to these difficulties, no one strategy that will encompass all the quandaries of development in a single theoretical sweep. Certainly, in practice, even the communist system has problems in combining adequate employment with economic growth in countries where population is increasing rapidly.
There are, however, several initiatives that developing countries could take in order to change the nature of their growth. They could remove biases favoring use of scarce capital over abundant labor, they could develop and favor labor-intensive technologies, and they could develop and use the potential of the Green Revolution. These steps would provide more employment in agriculture and permit programs for greatly increasing employment elsewhere in the economy-programs that have not been previously feasible because of their inflationary potential where food is already in short supply.
First, in most developing economies, there remain serious and persistent imbalances in the prices attached to capital and labor even though there is far more labor than capital available. It is no accident that countries such as Taiwan, Korea, Hong Kong and Singapore, which have taken the lion's share of the growing markets for manufactured products, have consciously avoided the capital-labor distortions prevalent in most poor countries. These countries have many means available to them to correct the distortions they have created. They could begin to make the price of capital more realistic by ceasing subsidies to it, devaluing exchange rates and raising interest rates. By raising interest and broadening access to savings institutions, the poor countries should be able to increase rates of saving, especially among farmers and small-scale entrepreneurs. Most poor countries should also extend less protection to their import- substitution industries, which tend to be capital-intensive and favor instead those industries which ultimately can withstand international competition, on the basis of their low-cost labor. And wage increases in industry and government should be slowed.
A second step for the developing countries relates to the use of technology. Assuming that price structures are made more realistic, industrialists and farmers will have an incentive to look for technologies that employ more labor and less scarce capital. For some basic heavy industries, such as steel and fertilizer production, the most modern technology used in the West may still represent the best use of resources in the poor countries. But in other types of industry, such as textiles and rubber, a range of technologies exists. In Japan, textile manufacturers adapted Western machinery and speeded it up, and thereby used three to seven times as much of their cheaper labor per machine as was typical in the United States. In Korea and Taiwan, the scarcity of capital is reflected in realistic exchange rates and in interest rates of 25 to 30 percent. In these countries, only one-half to one-quarter the amount of fixed capital has been expended per worker in the highly successful export rubber industries than is true in India and the Philippines. Therefore Korea and Taiwan were able to obtain higher payoffs on their investment, more savings, much higher economic growth than the others, as well as to create employment faster.
But where are these technologies to come from? Here we encounter a vast vacuum of knowledge, beyond the adaptation in some cases of Western machinery. Unfortunately, perhaps 99 percent of all expenditures on research and development are made in the rich countries and are devoted largely to finding more capital-intensive ways of displacing high-cost labor. The poor countries therefore desperately need an expansion of research in labor-intensive technology.
A third step for the developing countries is rural development. Indeed, as Robert Shaw has explained in considerable detail,[ii] increasing the use of labor through broad institutional and organizational changes in agriculture- an integrated approach to rural areas-may be the most promising way both to promote growth and to ease the unemployment problem. After all, the third world is still essentially rural, and most of its people, outside of Latin America, will live in the rural areas for at least the next generation despite high rates of migration to the cities.
The agricultural sector of a typical developing country will therefore remain central to its total economy. This becomes even clearer if we look at the way cities and towns are linked economically. To begin with, if more employment is provided in the towns and through public works, much of the wages generated will be spent on food. But if food prices are not to rise, more food must be produced, which means more jobs in rural areas. At the same time, rural areas comprise the largest mass market for urban products- provided, of course, that enough income is being generated there to make the purchases. Complemented by policies to improve social infrastructure, such as rural educational and health facilities, programs to create better job and income opportunities for hundreds of millions of peasant farmers could also substantially slow the rate of migration.
Fortunately, there are some signs that government interest in agriculture and rural areas in general is growing. In particular, the success of the new dwarf wheat and rice varieties in many parts of South and Southeast Asia has renewed interest in the possibilities of agricultural progress. The new seeds have much higher yields than traditional varieties, provided there is careful cultivation-preparation of the land, water control, fertilizer and weeding. Where there is a market for increased food production, therefore, the combination of higher yields and more careful cultivation increases the amount of labor used per acre of land, and also increases the income of those laborers. Precisely this sort of spur to labor-intensive agriculture is required in tackling the problems of the countryside. At the same time, of course, the higher yields give governments greater flexibility to increase employment, without having to worry as much about inflationary demand for food caused by increased incomes.
While agricultural technology is becoming a source of hope, however, it is also contributing to some of the problems it could be useful in solving. The same economic forces active in industry in such countries as Mexico, India and Pakistan are subsidizing tractors and combines which are displacing the agricultural laborer. As an alternative to the rapid mechanization of agriculture, several countries have developed a system of agriculture centered on small-holders able to use the new seed varieties, small machinery and fertilizer, demonstrating that it can be profitable and create more jobs. A farmer with suitable water control and no more than two or three acres can make a decent income for his family, providing that he has access to credit, fertilizer, high-yielding seeds and a place where he can sell his produce for a reasonable price.
In Taiwan, for example, where there is a seven-acre limit on farms, the agricultural breakthrough has been highly labor-intensive. And the cereal yields achieved in Taiwan have been higher than those in the Indian Punjab, where the size of farms is effectively unrestricted and the bigger ones make use of large-scale mechanization. This is a strong argument for those policies collectively known as land reform.
The demands made by hundreds of millions of small farmers for agricultural inputs, for marketing facilities and for basic consumer goods would also stimulate the development of small towns in the rural areas. This development would create more employment, as well as possible alternatives to the big cities as the goals of migration.
Finally, increased food production provides governments with an opportunity to experiment with ambitious public works programs as a partial solution to their unemployment problem. Of course, if the programs are of the leaf- raking variety, the effect on employment is likely to be short-term, but it is possible to use public works as a means to create investment that in turn will increase production and create new jobs. If the labor in these programs is used to build canals, roads, dams and tubewells, it will help create the infrastructure essential to the speeding up of rural regeneration. Furthermore, these projects are likely to be far more profitable in the context of rapidly increasing agricultural productivity. Returns on investment in farm-to-market roads and in small-scale irrigation are very high when they enable farmers to use new agricultural technologies and to market their newly increased production at lower cost.
All of these measures that can be taken by poor countries to ease their employment problems inevitably involve questions of distribution-who is to benefit from the growth of the economy? The national product of most developing countries is growing at rates which could provide increasing income per capita at rates equal to those in the industrialized countries during comparable periods. In actual terms, however, only a minority of people are benefiting significantly from the rapid growth in the developing countries. These include industrialists, larger landowners, government employees and factory workers. This was brought out in the recent International Labour Office study of Colombia. It noted that even with considerable economic growth, urban unemployment today is probably worse than at the height of the Great Depression and the bottom third of the rural population may be no better off now than in the 1930s. Of course, it is sometimes argued that unequal distribution of income is necessary in poor countries because it is the wealthy who save, and these savings are essential to future economic growth. But the recent performance of most poor countries has not borne this out. Rather, some of the countries with the highest savings rates, such as Japan, Taiwan and Korea, are precisely those with the most equal distribution of income-providing that they have suitable institutions to collect and use the savings.
Interestingly, solutions to the problems of both unemployment and distribution may go hand in hand. Raising the incomes of the poor will result in the creation of more jobs than an equivalent rise in the incomes of the wealthy, for the luxury goods bought mainly by the wealthy tend to be relatively capital-intensive in nature, whereas the goods a poorer person normally buys require more labor to produce. The production of an automobile, for example, requires large amounts of capital but little labor, while the production of bicycles, shirts or food tends to use much more labor. Luxury products also generally put a higher strain on foreign exchange reserves, either because the luxury goods themselves are imported, or because their manufacture requires more complex, imported machinery than do labor-intensive goods. Thus the concentration of income in a few hands in most poor countries not only reflects the lack of job opportunities; it also contributes to the employment problem.
Despite all the efforts made by developing countries, the employment problem is becoming so monumental that they cannot cope with it alone, even where they take the initial-and painful-decisions to reorder their priorities. The rich countries have an indispensable supporting role to play in providing capital, research and technology, and access to their markets. Otherwise the poorer countries will never achieve substantially higher growth rates nor will they be able to make the major innovations which are required.
These facts are well illustrated in the field of trade, which currently is the source of nearly four-fifths of the poor countries' foreign exchange. The rest comes from aid and private investment. Unfortunately, despite the very rapid growth in world trade, most poor countries are not sharing fully in it. In the 1960s, for example, the value of total world trade grew by more than ten percent annually, but the exports of the developing nations only grew by some seven percent annually. In order to create more jobs in export production and to earn the foreign exchange required for expanded domestic production the poor countries must obtain a greater share of this trade.
In the past two decades, the policy of most developing countries has been to save foreign exchange by substituting domestic production for imports rather than to earn foreign exchange through aggressive export policies. However, this situation can be changed if the poor countries are prepared to capitalize on their advantages, and especially on their labor supply. By altering pricing policies and encouraging the use of appropriate technologies, many poor countries should be able to produce labor-intensive products that can compete on the world market in terms of price and quality. A few countries, especially in East Asia and Mexico, have shown how important these shifts can be.
When poor countries reach this stage, however, they begin to encounter problems. It takes two to trade. In the longer term, of course, both rich and poor countries would gain if workers in the former countries concentrated on products requiring high levels of skills and capital. Workers in the latter countries would concentrate on products with a high labor content at least while labor remains their most abundant resource. Unfortunately, the rich countries usually follow contrary policies. In the face of competition from cheaper labor abroad, they place the principal financial burden of adjustment on workers producing the same goods that the poor countries are trying to export. This is true of the cotton textile worker in South Carolina, the shoemaker in Maine, the French beet sugar farmer or the Japanese rice farmer. These groups usually are disadvantaged, they receive low wages arid have little skill or training. Not surprisingly, they protest-politically. Thus, success in exporting by the poor countries is breeding restrictive reactions in rich countries.
Two highly significant pieces of legislation coming before Congress in 1971 and 1972 illustrate the conflicting tensions in the trade area. On the one hand, President Nixon will ask Congress in 1971 to pass preferential legislation to cut import tariffs to zero on all imports into the United States of manufactured goods from the poor countries. This request follows a series of negotiations in the Organization for Economic Cooperation and Development and the U.N. Conference on Trade and Development, in which all the Western industrialized nations agreed to this principle of preferences. And on the other hand, the Trade Bill of 1970 may reappear in a similar format this year or next. The purpose of the original bill was to give the President power to limit imports of so-called "sensitive" products. These are mainly such products as textiles and shoes in which American industries face competition from the labor forces of poor countries. If passed, this legislation would not only restrict many of the present imports from the third world, but it would also discourage the building of new export industries there. It could, for example, restrict about one-fourth of Mexico's present exports to the United States, one-third of Korea's, and 40 percent of Taiwan's.
In addition to trade, the large multinational corporations are increasingly becoming factors in the employment picture, both in the poor countries and in the United States. These corporations have been increasing their investment in manufacturing in the third world, originally for local markets but more now as part of a new process of international production. In recent years, low-cost labor in certain countries has come to be treated as a valuable resource in its own right, and multinational corporations have worked effectively with these countries to utilize this resource. The U.S. electronics industry, for example, has reacted to tough foreign competition by moving most of its labor-intensive production overseas to countries like Taiwan, Hong Kong, South Korea and Mexico. The fruits of these labors are then re-imported for assembly in the United States. These imports from developing countries are made under Tariff Schedule 807 (which confines tariffs to the value added abroad for components shipped from the United States and assembled in foreign plants). They have been growing rapidly from $60.5 million in 1966 to $366.9 million in 1969.
This is the beginning of a new movement toward production based on the law of comparative advantage-not between different companies operating in different countries, but within a single company itself. Corporations organized on this model are producing components that require a lot of labor in countries where labor is cheap and capital-intensive parts where capital is cheap. Not surprisingly, this nascent innovation is being met with loud outcries from some people in the American labor movement who see U.S. jobs going abroad. They demand controls on foreign investment and protection against cheap foreign imports. Their position merits great sympathy. But are the solutions they propose really in their own long-term interest or that of the nation as a whole? As with restrictions in general, the proposed controls on multinational corporations would raise prices here in the United States. In addition, the dollars earned by the poor countries through exporting are spent in the world market on goods from the rich countries. The labor case would be stronger if it called for better adjustment assistance, not blockage of imports from poor countries.
In addition to improving the foreign exchange situation of the developing countries, the multinational corporations can make other significant contributions to the solution of the employment problem. But their resources have only been partially tapped. Most importantly, the multinational corporations almost inevitably fall back on the most capital- intensive technology available. In present circumstances this is a rational action: these technologies are the ones with which they are most familiar; they are made profitable by the economic policies of the poor countries; and they avoid the possibility of trouble with large numbers of workers. However, if poor countries change their policies to make fuller use of their labor forces, the multinational corporations will increasingly find it worthwhile to invest in research into more appropriate technologies for their affiliates in the third world. Already some firms are beginning to do this. For example, a research division of the Dutch electronics manufacturer, Phillips, has developed small-scale, labor-intensive production methods for use in Indonesia.
The efforts of the multinational corporations, however, will not be enough to meet the problem of unemployment in the developing world. The need to create jobs in the poor countries, and the serious consequences of not doing so also add a new imperative to the case for financial assistance by the rich to the poor countries. Jobs cannot be created without investment. Therefore, the United States needs not only to reverse the downward trend of its aid but to increase it substantially, as most other developed countries are doing. Unfortunately, for the first time since the start of the coöperative global effort in 1961, the U.S. net official assistance to the developing countries will drop below $3 billion in 1971.
But money alone is not enough. If the approach to development is to be reëxamined in the light of the employment crisis, then development assistance will also need to be reëxamined. For example, many aid practices have tended to support the old approach to development, which has stressed modern capital-intensive equipment. Happily, there are ways in which the aid donors could modify their policies in order to make their help a major contribution to the solution of the employment problem.
This would involve, first, taking employment issues into consideration in the making of loans. By making more loans that are not tied to specific projects, and by supplying some of the local currency costs of projects, the aid donors would help remove the bias in favor of projects that emphasize the use of imported machinery. Second, removing the requirement that aid be spent in the donor country (tying) would allow the poor countries more latitude in choosing appropriate technologies. Third, increased and diversified food aid from the agricultural surpluses of North America, Western Europe and Japan could be used to support programs for expanding employment, by serving both as an interim source of supply pending expanded production and as standby against crop failure. Finally, technical assistance programs need to be revamped, particularly to stress research and development of appropriate technology.
The potential for dealing successfully with this problem is perhaps best illustrated by a few small countries such as Taiwan and Korea. They had very high rates of increase in their work forces in the 1960s, yet achieved rapid growth, improved income distribution and reduced both unemployment and birth rates. Of course, both these countries combined the right national policies with significant aid, foreign investment and access to rich country markets.
There are sobering implications in these success stories. At the very least, duplicating them elsewhere during the 1970s will require the rich countries to meet their aid and investment target of one percent of GNP. It would also require a sharp upward revision in the seven percent target for increases in LDC trade. Most poor countries would need to make major, politically difficult, changes ranging from devaluation to land reform. Rarely, and then only for fleeting periods, are countries able to move quickly on such a broad range of reforms.
India is an excellent illustration in 1971 of both opportunity and problems. India is momentarily at a point where difficult reforms are possible, following the landslide electoral victory in March 1971 by Indira Gandhi. But Mrs. Gandhi may not be able to make these necessary moves without outside coöperation.
At best, the employment problem cannot be solved easily, and not fully until population growth is brought under control. Yet, with enough innovation, reform and increased effort, both within developing countries and between them and the rich nations, there are reasonable prospects of limiting the damaging effects of unemployment. Certainly, reforms within developing countries, as well as changes in trade and investment patterns between rich and poor countries, are now becoming more than requirements of justice; they are becoming requirements for survival of a world economic system.
[i] Raul Prebisch, "Transformacion y Desarrolo: la Gran Tarea de America Latina." (Report for the Inter-American Development Bank; Santiago, April 1970).
[ii] Robert d'A. Shaw, "Jobs and Agricultural Development." Overseas Development Council, November 1970.