Modern Cambridge Economics

The political
economy of
underdevelopment

AMIYA KUMAR BAGCHI

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THE POLITICAL ECONOMY
OE UNDERDEVELOPMENT
MODERN CAMBRIDGE ECONOMICS

Editors
Phyllis Deane Gautam Mathur Joan Robinson

Also in the series

Phyllis Deane
The Evolution of Economic Ideas

Michael Ellman
Socialist Planning

Joan Robinson
Aspects of Development and Underdevelopment
THE POLITICAL
ECONOMY OE
UNDERDEVELOPMENT

Amiya Kumar Bagchi

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University of Cambridge
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The University has printed
and published continuously
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CAMBRIDGE UNIVERSITY PRESS

CAMBRIDGE
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Published by the Press Syndicate of the University of Cambridge
The Pitt Building, Trumpington Street, Cambridge CB2 iRP
32 East 57th Street, New York, NY 10022, USA
10 Stamford Road, Oakleigh, Melbourne 3166, Australia

© Cambridge University Press 1982

First Published 1982

Reprinted 1983, 1984, 1985, 1987

Printed in the United States of America

Library of Congress catalogue card number: 81—10237

British Library Cataloguing in Publication Data
Bagchi, A. K.
The political economy of underdevelopment.
— (Modern Cambridge economics)
1. Underdeveloped areas — Economic conditions
I. Title II. Series
33°-972'4 HC59.7
ISBN o 521 24027 7 hard covers
ISBN o 521 28404 x paperback
CONTENTS

Series preface pagevi

Preface vii

1 Political economy and the study of social change in the

third world i
2 Methods of exploitation and the phenomenon of
economic retardation 20
3 Underdevelopment in Latin America: historical roots 41

4 Colonialism in Asia: Indonesia, India, China 69

5 Growth and fluctuations in economically retarded

societies 112
6 Rural classes, land reforms and agrarian change 147

7 Labour, capital and the state 179

8 Population growth and the quality of life in the third
world 202
9 Planning for capitalism in the third world 220

A guide to further reading 251

References 254

Index 277

v
 SERIES PREFACE

The modern Cambridge Economics series, of which this book is one, is

designed in the same spirit as and with similar objectives to the series of
Cambridge Economic Elandbooks launched by Maynard Keynes soon
after the First World War. Keynes’ series, as he explained in his
introduction, was intended ‘to convey to the ordinary reader and to
the uninitiated student some conception of the general principles of
thought which economists now apply to economic problems’. He went
on to describe its authors as, generally speaking, ‘orthodox members of
the Cambridge School of Economics’ drawing most of their ideas and
prejudices from ‘the two economists who have chiefly influenced
Cambridge thought for the past fifty years, Dr Marshall and Professor
Pigou’ and as being ‘more anxious to avoid obscure forms of expression
than difficult ideas.’
1 his series of short monographs is also aimed at the intelligent
undergraduate and interested general reader, but it differs from
Keynes’ series in three main ways: first in that it focuses on aspects of
economics which have attracted the particular interest of economists
in the post Second World War era; second in that its authors, though
still sharing a Cambridge tradition of ideas, would regard themselves
as deriving their main inspiration from Keynes himself and his
immediate successors, rather than from the neoclassical generation of
the Cambridge school; and third in that it envisages a wider audience
than readers in mature capitalist economies, for it is equally aimed at
students in developing countries whose problems and whose in¬
teractions with the rest of the world have helped to shape the economic
issues which have dominated economic thinking in recent decades.
F inally, it should be said that the editors and authors of this Modern
Cambridge Economics series represent a wider spectrum of economic
doctrine than the Cambridge School of Economics to which Keynes
referred in the 1920s. However, the object of the series is not to
propagate particular doctrines. It is to stimulate students to escape
from conventional theoretical ruts and to think for themselves on live
and controversial issues.
JOAN ROBINSON
GAUTAM MATHUR

PHYLLIS DEANE

vi
PREFACE

I undertook first to write a book on development economics at the

suggestion of Jo Bradley, then with the Cambridge University Press.
The editors of the Modern Cambridge Economics series approved of
the idea. This book is the result. However, the immediate stimulus for
writing on problems of underdevelopment was provided by the revolt
of young students all over the world in the late 1960s. I was a witness of
this revolt in Cambridge and in Calcutta, and I owe more to the
challenge mounted by my students and their friends, than I know how
to acknowledge properly.
The intellectual antecedents of the book will, I hope, be evident
from the first chapter. But very directly I have benefited from the
general climate of critical social science provided by my friends in
Calcutta and other places, in particular by Gautam Bhadra, Amit
Bhaduri, Krishna Bharadwaj, Nirmal Chandra, Pramit Chaudhuri,
Barun De, Andre Gunder Frank, Ranajit Guha, Saugata Mukherji,
Suzy Paine, Prabhat and Utsa Patnaik, S. K. Rao, Ranjit Sau,
Amartya Sen and Asok Sen. I should like to record the debt I owe to
editors of two outstanding weeklies, Krishna Raj and Rajani Desai of
the Economic and Political Weekly and Samar Sen of the Frontier. During
these years they have stoked the fires of radical, non-sectarian social
science with unwavering courage and loyalty. In the actual writing ol
the book my greatest debt is to the editors of the series - particularly
Joan Robinson and Phyllis Deane, who commented on more than one
draft of the book. An early draft was read by Ashok Mitra, who, along
with Joan Robinson, tried to keep me from straying too far from
contemporary reality into the bylanes of history. Ranajoy Karlekar
helped weed out obscurities in the final manuscript. Finally, I must
thank an anonymous referee for helpful comments.
Bristol University and Jesus College, Cambridge, supplied me with
the necessary facilities for browsing among books, and testing out my
fledgeling ideas at an early stage. I would like to thank the authorities
of the two institutions - and two friends in particular, Esra Bennathan
viii Preface

and Moses Finley - who made this possible. The Centre for Studies in
Social Sciences, Calcutta, provided me with the freedom and facilities
to carry out my work in an unconstrained fashion. In particular, Arun
Ghosh, the librarian of the Centre, was ever resourceful in finding
books and materials. Subhendu Das Gupta helped with proof-reading
and with arranging the references in an orderly fashion. The typists at
the Centre, particularly Arun Sanyal, Asoke Sen Gupta and Gauri
Bandyopadhyaya coped competently with the typing of more than one
draft of the book. Arundhati Sen Gupta helped with the checking of
the penultimate manuscript. I would like to thank them all.
During the time the book was in progress, I had to be away from
home for considerable lengths of time. In spite of her own heavy
teaching and research commitments, my wife, Ratna, forgave those
long absences, and gave me unstinting support. I only hope that the
outcome meets with her approval.

A. K. Bagchi
1

POLITICAL ECONOMY AND THE STUDY

OF SOCIAL CHANGE IN THE THIRD
WORLD

1.1 INTRODUCTION

The division of the world into a small group of rich nations and a large
group of poor nations has been apparent to careful observers for a long
time. The division of the poor nations between a very small group of
affluent persons and the vast majority of very poor persons living
continually on the brink of disaster is also apparent. However, there is
no unanimity as regards the reasons for either the poverty of the poor
nations or the wretchedness of the ordinary people belonging to the
group of poor nations. This book aims to elucidate some at least of the
historical origins of these cleavages among peoples and nations, and
also to discuss the typical ways in which inequalities among classes and
peoples are maintained and propagated.
Although in tracing the detailed effects of certain kinds of changes
we shall employ economic analysis in the conventional sense, the
analysis will by no means be confined to the domain of economic
variables alone. Men engage in producing or procuring goods and
services in order to support themselves; however, the framework
within which they engage in such activities is provided by the society
and polity they live in. One particular way of viewing social
organization is to regard it as consisting of several classes which are
interconnected with one another, but which are in fundamental
conflict in respect of the rules governing distribution of goods and
services. For example, in a slave society, the interests of masters and
slaves are in obvious conflict in normal times. It can be argued that
man’s unceasing quest for mastery over nature, which provides him
with the resources for earning a livelihood, can be hampered or
encouraged by a particular kind of social organization. For example,
those latter-day Hindus who believed that crossing the ocean was a sin
were allowing a particular belief associated with a particular social
organization to fetter their search for better sources of the goods they
valued. In fact, one way of viewing social change is to regard it as
resulting from interaction between ‘the relations of production’, that
i
2 Political economy and study of social change

is, the relations between classes of men, grouped according to their

relationships to the means of production, and the ‘forces of production
which define the limits of man’s power over the forces of nature in a
particular society in a particular epoch.
This way of looking at social change was given a classic formulation
by Karl Marx (see in particular, Marx’s ‘Preface’ to A Contribution to the
Critique of Political Economy, in Marx, 1859, pp. 20—1) :

In the social production of their existence, men inevitably enter into definite
relations, which are independent of their will, namely relations of production
appropriate to a definite stage of development of their material productive
forces ... At a certain stage of development, the material productive forces of
society come into conflict with the existing relations of production, or — this
merely expresses the same thing in legal terms - with the property relations
within the framework of which they have operated hitherto. From forms of
development of the productive forces these relations turn into their fetters.
Then begins an epoch of social revolution.

Marx formulated the basic principles underlying the general process

of social change propelled by conflicts between classes comprehended
within a ‘mode of production’ — that is, a particular configuration of
classes along with a certain postulated degree of development of
productive forces. He also provided a detailed analysis of the
contradictions implicit in the capitalistic mode of production at a
particular stage of its development. But the notion that the process of
economic or social change involves more than just economic variables,
such as prices and quantities of output or ‘factors of production’, or the
more particular notion that existing societies are characterized by
conflicts between classes, were not Marx’s inventions. Adam Smith
was the author, both of The Theory of Moral Sentiments (1 759) and of An
Inquiry into the Nature and Causes of the Wealth of Nations (1776). Both
Adam Smith and David Ricardo, following him, took it for granted
that their society was divided into three classes, landlords, capitalists,
and wage-earners, and that there were fundamental conflicts of
interest between them. Smith recognized the manufacturers, owning
machinery and buildings and setting propertyless wage-earners to
work, as the class which was spearheading progress in England. And
by advocating the abolition of legal monopolies and cumbersome
restrictions on trade and manufactures, he objectively represented the
interests of the industrial bourgeoisie. But he relentlessly exposed how
merchants as a class and manufacturers of older types of staples
‘conspired’ against the interests of other people and how landlords
used their bargaining advantage to depress real wages of labourers to
the level of subsistence or even below (Smith, 1776, Book 1, chapter vm
Political economy and study of social change
3
and Book iv, chapters n and hi). Ricardo’s theoretical system was a
brilliant exposition of the conflict between the interests of the landlords
on the one hand and the capitalists and workers on the other.
Following Ricardo, first the ‘Ricardian Socialists’ such as Hodgskin
and Bray, and then Marx, brought the conflict between capitalists and
workers into primary focus (Marx, 1963, and Dobb, 1973,
chapters 2—6).
The admission of class struggle as one of the main planks of analysis
in political economy distinguishes both Marx and the classical
economists from the general run of neoclassical economists who
emerged after 1870 and who managed to conjure social classes away
from the universe of discourse of economics. Indeed, the Austrian
school of marginalism quite consciously took combating the influence
of Marxism as one of their major tasks (Sweezy, 1975).

1.2 NEED FOR ANALYSIS OF DIFFERENT TYPES OF SOCIAL

ORGANIZATION

When, after the Second World War, economists turned their attention
to problems of economic development, many went back consciously to
classical economics for concepts and even tools (see, for example,
Lewis, 1954). But the majority of such economists tried to combine
neoclassical and classical economics in an eclectic synthesis, and most
refused to see existing societies as riven into classes and driven by their
conflicts. In this book, I shall go back to the analysis of classical
economists, including Marx, in a more whole-hearted fashion, because
I would contend that actual historical change cannot be explained
without bringing in conflicts between capitalists and workers, capi¬
talists and landlords, capitalists of the ruling country and capitalists of
the ruled nation, and so on. But, of course, neither in analysis nor in
time can we wholly go back to the classics. For, in economics, with the
work of Rosa Luxemburg, Kalecki and Keynes and their followers, we
have a more extended analysis of problems of effective demand and
capitalist crises than was attempted by Ricardo, Malthus or even
Marx (see in particular chapters below). In the analysis of social
classes, Lenin and Mao Tse-tung have given us a finer typology of
social classes than is available in the work of Marx and Engels (see
chapters 6 and 7 below).
We have witnessed, since 1917, the emergence of a world-wide
socialist bloc covering a quarter of the world surface and population,
the latest additions to the bloc being South Vietnam and Cambodia
(Kampuchea). We have seen the crumbling of all the formal empires
4 Political economy and study of social change

controlled by Europeans or North Americans. The majority of the

world population now belong to the so-called third world. This
consists roughly of all those nations which are neither advanced
capitalist nor affluent socialist. That is, it includes all the countries of
Latin America except perhaps Cuba, all the countries of Africa and all
the countries of Asia except Japan.
For understanding the development of third world countries, the
delineation of non-capitalist modes of production and social for¬
mations is essential. For, at the time European merchant adventurers
‘discovered’ the third world countries, the latter generally had not
become capitalist and were not on the path of transition to capitalism.
Furthermore, most of these societies evolved along paths that are
recognizably different from the paths of development of advanced
capitalist countries such as Britain and France, or the USA and
Canada. In their societies the property relations have not yet
simplified themselves into those between capitalists and free wage-
earners alone, or even between capitalists, landlords and free wage-
earners. There are many segments of society with ties between people
which are non-contractual in appearance and substance, and cannot
be reduced to those simply between unattached buyers and sellers. It
will thus be necessary to pay particular attention to precapitalist
relations of production even when the dominant relations are capitalist
in nature.

1-3 WESTERN EUROPEAN FEUDALISM AS A TYPE OF

PRECAPITALIST SOCIAL FORMATION

The precapitalist formation which has been studied most intensively,

in both its conceptual and historical aspects, has been western
European feudalism. A mode of production and a social system which
is claimed to have operated (albeit with variations from country to
country both in respect ofform and duration), from the eighth century
A.D. to the nineteenth century A.D., cannot be defined by a short
formula and even an approximate definition will not be universally
accepted. But those who agree that such a society preceded the phase
of industrial capitalism in Europe also generally accept that it had
certain common characteristics. To use the formulation of Marc
Bloch,

the feudal system meant the rigorous economic subjection of a host of humble
folk to a few powerful men. Having received from earlier ages the Roman villa
(which in some respects anticipated the manor) and the German village
chiefdom, it extended and consolidated these methods whereby men exploited
Political economy and study of social change 5
men, and combining inextricably the right to the revenues from the land with
the right to exercise authority, it fashioned from all this the true manor of
medieval times (Bloch, 1962, p. 443).

Having thus indicated that the feudal system in Europe could be

traced back to at least two distinct ancestors, Bloch further elaborated
the characteristics of feudalism in another passage:

A subject peasantry; widespread use of the service tenement (i.e. the fief)
instead of a salary, which was out of the question; the supremacy of a class of
specialized warriors; ties of obedience and protection which bind man to man
and, within the warrior class, assume the distinctive form called vassalage;
fragmentation of authority - leading inevitably to disorder; and, in the midst
of all this, the survival of other forms of association, family and state, of which
the latter, during the second feudal age, was to acquire renewed
strength — such then seem to be the fundamental features of European
feudalism (Bloch, 1962, p. 446).

At the core of the feudal economic system was the manor

(Kosminsky, 1956, ‘Preface’). The manor comprised mainly two types
of land, one part cultivated by the lord of the manor directly (called
the demesne), and another part cultivated by a class of dependent
tenure-holders, serfs, villeins or bondsmen. The demesne was culti¬
vated partly by the ‘prebenders’ or serfs attached to the lord’s
household, and partly by the other bondsmen, who would labour on it
without payment for a specified number of days. The manor would
also generally contain dependent artisans who would fashion farming
tools, weave cloth for the lord’s household and so on. The surplus
received by the lord consisted of the surplus over the cost of cultivation
(in real terms generally) of the demesne, taxes paid by the residents in
the lord’s domain, and the produce delivered by the tenure-holders.
Not all tenure-holders were bondsmen; some held ‘alloidal’ tenures
without the taint of villeinage. However, a freeman might be
converted into a bondsman because that was the condition on which
he would receive protection from the lord, or he might lose his freedom
because he came to hold a dependent tenure. (For further details, see
Titow, 1969, and Brenner, 1976).
The extraction of the surplus under feudalism was direct - not
mediated by the market mechanism, although rudimentary local
markets and long distance trade existed throughout the period of feu¬
dalism and, in particular, gathered strength in what Bloch calls the
second age of feudalism. (The first feudal age comprised roughly the
period from the ninth to the middle of the eleventh century; the second
feudal age commenced in the middle of the eleventh century and went
on till the thirteenth century in practically the whole of western
6 Political economy and study of social change

Europe.) The proportion of tenure-holders to the direct ‘prebenders’

of the lord tended to increase over time; however a group of free
peasantry survived throughout the period. With depopulation of
Europe in the Black Death epidemics of the fourteenth century, the
objective position of the serfs and the peasantry improved, whereas the
warring, extravagant lords felt the need for an ever-larger surplus to be
extracted out of a reduced population. The rise of towns to which the
serfs could flee, and the craving for luxuries supplied by the channels of
eastern trade were two other factors causing tension and instability in
the feudal system.
There are differences of opinion among economists and historians
about the relative importance of the different factors in the final
breakdown of feudalism (see Hilton, 1976). One group, following the
historian Henri Pirenne, would ascribe a major importance to the rise
of long-distance trade and the growth of a money economy. The feudal
economy was basically a ‘natural economy’ and the operations of
merchants and bankers introduced disturbing elements, and con¬
verted more and more of the obligations into monetary obligations.
Demands were soon made for altering the feudal legal arrangements
all down the line. However, many historians (including Marx) had
claimed that trade relations which did not disturb the internal
production relations within the manor would in fact strengthen the
hands of the lord who could now have access to a new source of
power - command over financial resources. Marc Bloch has provided
corroborative evidence that the growth of trade and commerce in the
second feudal age of western Europe, which went hand in hand with an
upsurge of population, strengthened, rather than weakened, the feudal
system. This does not mean that no importance is to be attached to the
growth of transactions in money or the growth of trade as such in the
final breakdown of feudalism. It just means that such factors can
destabilize the society only if there are other factors that cause ten¬
sions in the production relations prevailing in the core system, viz. the
manor in the case of western European feudalism.
In some recent articles on the transition from feudalism to
capitalism in Europe, Robert Brenner (1976, 1978) has again
emphasized the primacy of class relations and the strength of different
classes (feudal lords, free peasants and serfs) in determining the
outcome. In western Europe the feudal lords gave way (between the
fourteenth and sixteenth centuries) in the face of resistance by peasants
and erstwhile serfs. In eastern Europe, by and large, the feudal lords
won the day and often managed to enserf a free peasantry. Economic
factors, such as the pull of the demand for eastern grain in western
Political economy and study of social change 7

Europe, motivated the lords in renewed efforts at repression of the

peasantry, but their success did not depend on such market factors
alone.
Western European feudalism combined with the manorial system
certain particular legal forms and certain types of political organi¬
zation. Politically, the whole continent was divided up into principa¬
lities, dukedoms, etc. The rulers of these principalities were vassals of
kings, but no single king or emperor exercised a unified authority over
large territories. The whole society was hierarchically ordered, but the
hierarchy resembled a pyramid with a rather flat top. Furthermore,
the men at one level of hierarchy paid homage to superior levels
usually only through the men at the next higher level of hierarchy.
This feudal system also generally permitted the co-existence of royal
and manorial courts, and secular and religious areas of jurisdiction.
However, in this respect there were important differences even
between neighbouring countries such as France and England.
The tendency on the part of some historians and social anthro¬
pologists to see the western European model of feudalism replicated in
all precapitalist settings - such as the medieval kingdom of the Nupe in
Nigeria (evocatively designated as a Black Byzantium by S. F. Nadel
in a book of the same title), the chieftancies and principalities of
Rajasthan in India (whose annals were culled by James Tod in 1829),
the empire of the Mughals in India, and the long succession of Chinese
empires — had led to the extreme reaction of rejecting ‘feudalism’ as a
useful category for comparative study. Daniel Thorner, for example,
examined the working of the state system in Rajasthan and in Mug¬
hal India, and found that ‘using feudalism as a method of
government. . . we have to conclude that neither the Rajput states nor
the Muslim regimes of northern India were feudal’ (Thorner, 1956,
p. 150). He claimed that, in the Rajput states, the power of clans and
kinship was much too strong, and the association of vassalage with
holding of fiefs conferred by the liege lord much too weak, compared
with the case under European feudalism. Contrariwise, in the case of
the Mughal empire in its heyday, the power of the central government
with its transferable civil and military service was much too strong.
However, as against Thorner’s view, it can be urged that power in
many European feudal states, particularly in the early years, was
associated with ties of kinship (Bloch, 1962, chapter ix) and that, in the
later years of the feudal regime, the degree of political centralization in
France was far greater than in the classic age of feudalism. Thus, some
at least of the divergences between the archetype of western European
feudalism and the political organization of Rajput states and of
8 Political economy and study of social change

Mughal India can be accommodated in the varying patterns of

western European feudalism in its different phases of evolution and in
the different areas under its sway.
In any case, the extraction of surplus in the form of rent in kind,
performance of forced (corvee) labour, and money rent on the basis of
actual harvest rather than as a ground rent on the market value of land as
under capitalism, were characteristic of both Rajput states and
Mughal India (for the distinction between feudal rent and capitalist
ground rent, see Hindess and Hirst, 1975, chapters 4 and 5). However,
in both the cases we find admixtures of a tribal organization (in the
case of Mughals, various central Asian tribes or clans came to exercise
power as functionaries in the central government and as subordinate
rulers and landlords in particular regions) and the inter-penetration of
the ‘natural economy’ of feudalism by a developing commercial and
financial network. (In chapter 5 we refer to the salient characteristics
of precapitalist production relations before colonial conquest of the
third world.) In many African polities, such as the kingdom of
Bunyoro in western Uganda, the chiefs enjoyed a considerable degree
of autonomy in many respects and the ties of kinship, neighbourhood
and communal organization were quite strong (see, for example,
Beattie, 1967). In Chi’ng China and Mughal India, on the other hand,
bureaucracy and centralization had developed much further than in
the classic period of western European feudalism (for a balanced view
of a social anthropologist regarding the nature of non-European
societies, see Goody, 1971).
While we shall bear these qualifications in mind, we shall sometimes
use the word ‘feudalism’ to connote a society in which landlords
dominate over dependent tenureholders and peasants, and in which
the predominant method of coercion is direct legal control rather than
indirect control through market forces. Such usage is sanctioned by the
writings of Lenin and Mao Tse-tung, the architects of the two greatest
revolutions of this century. Many writers, including Mao, have also
used the term ‘semi-feudalism’ to denote a situation in which the non-
market power of landlords coexists with the market power of landlords
(as employers of wage-labour), moneylenders and traders, and in
which neither the peasantry nor the wage-earners are fully ‘free’
from various legal and customary disabilities.

1-5 PRECAPITALIST SOCIETIES OTHER THAN

FEUDALISM : SOME ILLUSTRATIONS

Tribal or primitive communist organizations have been observed over

several centuries in all parts of the world. They can be of several
Political economy and study of social change 9
different types, pure food-gathering tribes living in forests, hunting,
fishing and food-gathering tribes, nomadic tribes mainly subsisting off
domesticated livestock, partly pastoral and partly agricultural tribes
and tribes subsisting mainly on settled agriculture (cf. Marx and
Engels, 1976, pp. 38-41 ; Sahlins, 1968, chapter 3, and Sahlins, 1974,
chapters 2 and 3). The division of labour among tribal peoples tends to
be rather rudimentary; even when the stage of settled agriculture is
reached, the same person may perform several different functions.
There may be a division of labour within the family rather than
between families. But, of course, families in tribes are often extended
kinship groups. In the relatively ‘pure’ forms of tribes, there is little
class differentiation partly because of the small surplus above sub¬
sistence. There may be a tribal chief, who is an elected or hereditary
head, and there may be certain families which are considered pre¬
eminent. But, in general, there are elaborate precautions among the
members of the tribe to prevent differentiation on the basis of holding
of wealth or property. These include communal ownership of the land
to which the tribe stakes a claim, communal right to fruits of the hunt,
periodic redistribution of wealth among the different families includ¬
ing periodic reallocation of land, periodic destruction of the items
considered valuable among the tribesmen1 and so on. Inequality
among tribes generally took the form of enslaving defeated enemies,
and subjecting women to the domination of males. But over whole
continents, such inequalities apparently did not lead to any long-run
process of class differentiation as between families or kin groups.
We shall later be concerned with certain aspects of the working of a
tribal economy, such as the system of shifting cultivation (jhoom in
India, ladang in Indonesia, swidden in Old English usage) and its
replacement by a system of perennial cultivation of the same group of
plots, either with rests at two to three year intervals, and/or with
rotation of crops on those plots. However, it is important to note that
most of the available descriptions of tribal economies come from
necessarily incomplete historical evidence, or from observations of
travellers and anthropologists in recent times. In the latter case, the
tribal economies have already been penetrated by colonialism, or by a
centralized state system, so that it is practically impossible to observe a
tribal economy in a ‘pure’ form. Furthermore, the features picked out
often serve as pieces in a preconceived model of ‘primitive society’, so

1 For description of ceremonies at which food or other goods were consumed and
were redistributed among North American Indians, see P. Drucker, ‘The potlatch’, in
Dalton, 196 7; for a description of the elaborate ritual of gift exchanges serving a similar
purpose, see B. Malinowski, ‘Kula: The circulating exchange of valuables in the
archipelagoes of eastern New Guinea’, in Dalton, 1967.
10 Political economy and study oj social change

that it is necessary to avoid the idealistic trap of the model-builder.

The same observation is valid for descriptions of another type of
social organization, viz. the village community, or communal owner¬
ship of property in general. Marx had, in his unpublished manuscript,
Grundrisse der Kritik der Politischen Okonomie, clearly distinguished
between three types of communal property in history:

the real existence of the community is determined by the specific form of its
ownership of the objective conditions of labour. The property mediated by its
existence in a community, may appear as communal property, which gives the
individual only possession and no private property in the soil; or else it may
appear in the dual form of state and private property which coexist side by
side, but in such a way as to make the former the precondition of the latter so
that only the citizen is and must be a private proprietor, while on the other
hand his property qua citizen also has a separate existence. Lastly, communal
property may appear merely as a supplement to private property, which in this
case forms the basis; in this case the community has no existence except in the
assembly of its members and in their association for common purposes (Marx,
‘Precapitalist economic formations’, in Hobsbawm, 1964, p. 82 ; italics in the
original).

Marx identified the second and the third forms with the ancient
Roman and German forms of communal property, and the first form
with the ‘Asiatic’ village community. Other commentators have also
compared ‘village communities of the East and West’ and they have
differed greatly about the typical character of village communities as
observed in the eighteenth, nineteenth and twentieth centuries. The
following characteristics seem to have been common to ‘village
communities’ over most of pre-British and early British India: the
villagers were governed by a local council, either a panchayat of all
castes, or a panchayat of the major ‘clean’ castes, or a panchayat of the
most powerful castes. While some land was individually owned, there
was also some common land. Furthermore, transfer of land through
sale was restricted in various ways. For example, in Maharashtra
under Maratha rule, the purchaser of land in a village had to have the
consent of the village headman as well as all the cultivators who were
recognized as having a stake in the village (Kumar, 1968, pp. 26-7,
and Fukazawa, 1972, 1974). Generally, the village or a group of
villages had several artisan or service groups whose products or
services were obtained by other villagers through a system of
customary payments, including the right to enjoy the usufruct of
certain specially allotted plots of land. In these transactions the
landholding upper castes had the decisive voice. However, the ‘village
communities’ were not by any means self-sufficient. They were
Political economy and study of social change i i

involved in various cash transactions in buying salt, handicraft

products, etc., from the outside world, and selling their grain and other
crops which could be marketed outside the village or group of villages
concerned. Furthermore, they had to pay taxes to the central or
regional governments. Cash transactions were fairly common, though
not very pervasive compared with the modern situation. Land
transfers were also permissible, though certainly they were less
frequent and more hedged about with customary restrictions than
under British rule (for example, a landholder could rarely be sold up
for realization of the debt of a moneylender, although his crops could
be distrained).
When the British tried to create full private property in land, most of
the communal rights were gradually eroded. But some features of the
old community survived, although with gradually diminishing force,
in the so-called jajmam system. ‘Briefly, tht jajmani system is a system of
distribution in Indian villages whereby high-caste landowning fa¬
milies called jajmam are provided services and products by various
lower castes such as carpenters, potters, blacksmiths, water-carriers,
sweepers and laundrymen’ (P. M. Kolenda, ‘Toward a model of the
Hindu jajmam system’ in Dalton, 1967, p. 287). Here every serving
caste (kamins) had its circle of jajmans or clients (who were really their
patrons); this circle generally did not include the village as a whole. As
the number of people in the serving castes grew, their bargaining
position vis-a-vis the landowners tended to deteriorate, so that they
had to eke out their income from the traditional occupation with some
other work, or migrate. In a rudimentary form, the jajmani system
could be found also among the Muslims. In Bihar, it was observed in
1901, that ‘The exclusive right to employment by the people in the
circle constituting a man’s brit [i.e. traditional occupation] is so well
established, that it is regarded as hereditable property, and with
Muhammadans is often granted as dower’ (Census of India, 1901,
p. 473). The further advance of commercial relations into the
countryside in the twentieth century rendered the system of customary
payments practically unimportant. But, of course, the system of
dependence of the landless lower castes on superior, landholding upper
castes, which had a deeper foundation than the jajmani system has
survived to a more significant extent (cf. Epstein, 1971 and Breman,
!974)-
We have described these precapitalist forms in some detail, because
western European capitalism transformed the third world countries
partly by interacting with, and partly by destroying, such structures.
When we come to discuss the processes of change in Asia and Latin
!2 Political economy and study of social change

America, the modes of interaction and destruction will crop up

extensively.

1.6 DIFFERENT PHASES OF CAPITALISM IN

WESTERN EUROPE AND THE MEANING

OF EXPLOITATION

Following Marx, we shall take the essence of the capitalist mode of

production to be the predominant use of legally free but propertyless
wage labour by owners of means of production for the purpose of
making a money profit (cf. Marx, 1887, Parts 11 and in, and Dobb,
1963, chapter 1).
The surplus product is here realized by the owners of means of
production typically in the form of‘surplus value’, that is, the money
value of output produced by wage labour (after allowing for the value
of materials used up and the depreciation of capital stock) over and
above the wages paid to labour.2 Under the capitalistic mode of
production, labour power itself becomes a commodity, to be sold and
purchased in the market. Furthermore, production is here pre¬
dominantly for sale rather than for direct use.
However, the mere development of trade or the use of money, or
even the production of commodities for the market, is not evidence
that capitalism has developed. For the capitalist mode of production to
exist we must have the bifurcation of society into a group of propertied
employers and a group of wage-earning proletariat, with the former
employing the latter for the creation of surplus value in production.
The competition between capitalists generally results in continuous
accumulation of capital, and the development of techniques of
production which produce more and more surplus value. But these
latter characteristics must be regarded as the results of the develop¬
ment of capitalism rather than as its identifying marks.
An acquaintance with the ways in which merchants’ activities, the
breakdown of serfdom, the rise of wage labour and exploitation of
colonies interacted to bring capitalism into being in western Europe
could be suggestive in understanding the working of capitalism in the
third world. However, it could be highly misleading to use actual
western European patterns of development for predicting develop¬
ments in the third world. For, since capitalism had triumphed in
western Europe first and the western European capitalists had
managed to subordinate the economies of the third world for their

2 Here we have ignored the distinction between ‘value’ and ‘price’ which figures so
prominently in Marxian theory.
Political economy and study of social change 13
purposes, this central fact conditioned all the later developments in the
dominated group of societies.
This recognition of the overriding nature of the initial conditions
created by western Europe as the cradle of capitalism also shows why it
is not very sensible to ask whether, independently of European contact,
transition to capitalism could have taken place in other parts of the
world. For, once the contact had taken place with a society which was
further along on the capitalistic path, the lagging societies could not
possibly develop in an autonomous fashion. In that respect, capitalism
is probably far more of a contaminating system than all the systems
that preceded it. We shall argue in the later sections that contact with
western European capitalism retarded the development of anything
resembling capitalism in third world countries.
In the western European context it is usual to distinguish between
the mercantile (or commercial) and industrial phases of capitalism. In
the era of mercantilism, in the Netherlands and England and even in
France, most of the personal ties of dependence characteristic of
feudalism gradually dissolved, and production came to be governed
more by the pull of the market than by the needs of the manorial
establishment. More and more people earned their living as wage-
earners either in handicraft industry or in agriculture. Agricultural
estates were increasingly managed for profit rather than for pomp or
display of the military strength of the lord. In England and the
Netherlands the feudal system had crumbled by the middle of the
seventeenth century. Even in other countries, many of the feudal dues
were commuted to payment in money and assumed the aspect of
contractual payment. However, the population remained overwhelm¬
ingly agrarian, and, what is perhaps more important, most of the
producers remained owners of their rather primitive, though slowly
improving, means of production: In this era, ‘trade was the great
wheel driving the whole engine of society’ (Glamann, 1974, p. 427).
This was particularly true of international trade, which provided the
surpluses for capital accumulation, the gold or silver or silver bullion
for lubricating the process of exchange, the wherewithal and the
incentive for increase in the tonnage of shipping and its quality, and
the major vehicle for increase in the power of the new nation states of
Europe. In this phase, what has been called ‘profit on alienation’ that
is, profit made in procurement, transport and distribution of goods,
was perhaps the biggest base of capitalist accumulation (cf. Marx,
1887, Part vm, and Dobb, 1963, chapter 5).
The mercantile phase was succeeded by industrial capitalism, which
was heralded by the Industrial Revolution in Britain. In England, and
 Political economy and study oj social change

to a lesser extent, in such countries as France and the Netherlands, the

stage for the rise of modern industry was prepared by deep-seated
changes in rural society. Agriculture was converted into a mainly
commercial activity and gave rise to a class of rural capitalists who
employed landless rural workers working for a wage and invested
capital in land (see Moore, 1967, Hobsbawm 1968 and Saville, 1969).
Among the main characteristics of the Industrial Revolution in Britain
were (a) the growth of steam power as the main source of energy for
production, (b) the rapidly increasing use of machinery partly to assist
labour and partly to supplant it, (c) the rise of large-scale factories
where hundreds of workers were assembled under one roof, (d) the
rapid decimation of handicraft industries, first in the cotton trades and
then in woollen and other textiles, (e) the growth of a large-scale
metallurgical and capital goods industry for supplying the needs of
industry and locomotion, (f) the rise in the share of secondary industry
both in national income and in the gainfully occupied population and
the displacement of agriculture as the main source of livelihood and
employment, and (g) the increasingly strict separation of employers
owning the means of production in industry, agriculture and transport,
and employees who earn their living by selling their labour power.
The succession of mercantile capitalism by industrial capitalism is
primarily a phenomenon characterizing western Europe and, to a
lesser extent, the USA. In the overseas offshoots of Europe, such as
Canada or Australia, there was practically no phase of mercantile
capitalism. Even in the USA, where the War of Independence was
triggered off as a reaction to some of the mercantile policies of Britain,
there was no great internal struggle against mercantile capitalism as
there was in western Europe. (Of course, slavery might be regarded as
the last remnant of the mercantile system; to that extent, the American
Civil War marked the final struggle between mercantilism and
industrial capitalism in the USA.)
The dependencies of the European countries in the third world and
even formally independent countries such as the Latin American
republics of the nineteenth century saw primarily one face of western
European capitalism - and that was mercantile capitalism. Rulers
took away a part of the product in the form of tribute, for which, of
course, no payment was made; then merchants and chartered
monopolies bought up products from peasants and artisans at prices
which were absurdly low by internal and international standards, and
various coercive devices and the closing of alternative markets kept
these prices low; planters and mine-owners employed the local
population and imported labour as slaves, serfs or other kinds of unfree
Political economy and study of social change !5
labour, at wages which were often insufficient even to allow the
workers to survive and reproduce themselves. The products of these
mines and plantations then went directly or indirectly to service the
growing capitalism of western Europe. These modes of extraction of a
surplus in the colonies and other countries of the third world survived
long after industrial capitalism had grown to maturity in western
Europe and North America. Even when native capitalists succeeded
Europeans in the third world countries, many of these methods of
extraction of surplus from peasantry and semi-free labour were kept
alive, at the same time as capacity was being built up in modern,
mechanized industries. Thus there is no neat succession of stages of
mercantile and industrial capitalism in third world countries. This, of
course, would also follow from the fact that, as we shall see later, many
features of precapitalist social organizations have remained intact side
by side with the growth of commercial relations within the economies
of the third world.
The process of extracting a surplus from the third world countries by
the ruling classes - in particular the capitalist class — of the European
and North American capitalist countries (and later on also of Japan)
will be termed ‘exploitation’ in this book. We shall often qualify this as
‘colonial’ or ‘imperialistic’ exploitation in order to distinguish it from
the exploitation of labour within the same country. ‘Exploitation of
labour’ in Marxian economics has a precise meaning. In order to
arrive at that meaning, we need Marx’s definition of labour-power
and its value. ‘By labour-power or capacity for labour is to be
understood the aggregate of those mental and physical capabilities
existing in a human being, which he exercises whenever he produces a
use-value of any description’ (Marx, 1887, p. 167). ‘The value of
labour-power is determined, as in the case of every other commodity,
by the labour-time necessary for the production, and consequently
also the reproduction of this special article’ (Marx, 1887, pp. 170-1)-
Assuming that the capitalist buys labour-power at its value, the
surplus value is the excess of the value produced by this labour-power
over the value of the labour power and the value of the raw materials
used up in the process and the value of depreciation of the fixed capital.
Exploitation of labour is the extraction of this surplus value by the
capitalist by virtue of his ownership of the means of production
without which labour power cannot produce value. More generally,
exploitation of labour means the extraction of a surplus by the owners
of the means of production over and above the wages of labour, the
costs of raw materials or other current inputs and the amortization cost
of fixed or durable capital. When we talk about exploitation in the
i6 Political economy and study of social change

international context, it means ultimately the appropriation of labour

power of the exploited country by paying it less than the full value it
produces.

1.7 THEORIZING ABOUT WESTERN ECONOMIC

DEVELOPMENT AND THEORIZING ABOUT THE
DEVELOPMENT OF THIRD WORLD COUNTRIES

In this book, particularly in the chapters delineating the evolution of

underdevelopment (or, as we shall call it, ‘retardation ) in the third
world, we shall be concerned with the analysis of social systems, and
prices, outputs, incomes, balances of payments, and other entities
familiar to the professional economist will not be the sole objects of
interest. Only a minority among economists adopt a similar approach
though there are books by Leo Huberman, Joan Robinson and John
Eatwell which share this perspective, besides books by Marxists
concerned with social evolution and revolution. (See in this connection
Baran, 1962, Huberman, 1976, Robinson, 1971a, Robinson and
Eatwell, 1974.) Furthermore, we share with classical economists,
including Marx, a concern with analysis of explicit or implicit conflicts
among social classes, because such conflicts are among the major
propellers of history.
However, just as we cannot generalize the western European
patterns of emergence of capitalism out of the shell of feudalism
without analysis of the local-historical conditions in other continents
or regions, so also we cannot use even the analytical framework of
classical economists or their contemporary exponents without testing
whether the special conditions they assumed to be valid held in the case
of other countries.
One outstanding case illustrating the type of limitation we have in
mind is the Ricardian theory of comparative costs. Ricardo explained
the pattern of international trade by invoking the principle of
comparative (labour) costs, which stated that if two countries A and B
entered into trade relations, each capable of producing commodities X
and T, country A would sell the commodity in which its relative
(rather than absolute) cost was lower, and correspondingly B would
sell the commodity in which its own comparative cost was lower.
Ricardo took trade between England and Portugal as his example.
England sold textiles to Portugal, and the latter sold wine to England,
according to the comparative cost principle. This was, for him, the
natural order of things which could be realized by adopting universal
free trade between nations. Adam Smith and Ricardo advocated the
Political economy and study of social change 17

principle of free trade as against the mercantilist practice of protection

of home production. England had already become the leading
manufacturing nation of the world by 1815; and she had done so
partly with the help of the despised mercantilist policies (including stiff
tariffs on, and in some cases, outright prohibition of, imports of
competing goods, and various types of protection and state patronage
for English shipping under the Navigation Laws). She stood to gain by
adopting the principle of free trade and forcing it on others whenever
and wherever she could. The application of this principle to countries
lacking an independent capitalist class, a substantial industrial base or
independent state power doomed them to the position of suppliers of
raw materials and grain.
Where the capitalists had any independent hold over state power or
where the ruling classes were astute and strong enough to resist the
pressures of British (or western European) capitalism, the free trade
doctrines of the classical economists and their followers were rejected.
Alexander Hamilton in the USA and Friedrich List in Germany
advocated alternative policies for industrial progress in countries
which were backward in relation to Britain (Hamilton, 1791, and List,
1857). They provided the rationale for protectionist policies which
were already being pursued by all western European nations and by
the USA (and were to be followed by other overseas offshoots of
Europe such as Australia, Canada and South Africa). The policies of
List were later generally adopted by nationalists in the third world
countries as being conducive to economic development. However, two
qualifications should be made regarding the unrestricted advocacy of
Listian policies. First, List did not regard industrial growth as
attainable by all countries. He envisaged the development of manufac¬
tures only for countries of the temperate zone, and relegated the
colonial empires of Europe to the role of producers of raw materials
and agricultural commodities. Since he believed that manufacturing
production was subject to decreasing costs in the long run, he also
postulated that the European countries and the northern part of the
USA would grow faster than the tropical countries. (For an interesting
interpretation of List, see De Cecco, 1974, pp. 9-12.) Secondly - and
this is the more serious limitation from the point of view of today’s third
world countries - List’s prescriptions needed for their effectiveness a
capitalist class and a state apparatus capable of standing up to the
challenge of the other developed capitalist countries, with some initial
help given to the capitalists through the public exchequer. In
particular, the capitalist class would be able to protect its home market
and invade the colonial markets of other advanced capitalist countries
i8 Political economy and study oj social change

and thus would be able to realize the economies of scale

postulated - partly at the expense of other countries. With the
vanishing of the frontiers of capitalism and the emergence of a
dominant group of capitalist nations, Listian medicines would no
longer sustain the growth of the weak capitalist classes of third world
countries.
Neoclassical economics can offer little in the way of intellectual tools
for even posing the problems of today’s third world. The completely
ahistorical nature of neoclassical economics, which takes a price-
guided market system as the only ‘rational’ economy worth discussing
is a first stumbling block. ‘Money’, for example, is endowed in
neoclassical economics with all kinds of virtues which are to be found, if
at all, only in the most developed capitalist societies. In actual history,
‘money’ has performed only a limited set of functions in most
precapitalist societies, and even as a medium of exchange it has had
clearly defined spheres of operation in such societies (see, for example,
the articles by Bohannan, Thurnwald, Armstrong and Dalton, in
Dalton, 1967). Again, ‘monetization’ or ‘commercialization’ has been
regarded as a more or less automatic process, under which economic
activities are brought into a uniform relation under the rationalizing
influence of monetary exchange, and which, therefore, leads to the
development of the economy. The more sophisticated analysts are
aware of some of the costs exacted by the process, but they would argue
that, nonetheless, when traditional attitudes have been overcome, and
the undue influence of usurious moneylenders or exploitative
middlemen have been eliminated, third world countries have
definitely benefited from these changes (see, for example, Lewis, 1956,
chapter hi and Myint, 1965, chapter 3). Our argument will be that
commercialization has been forced on many third world countries by
using non-market coercion, and that the process of commercialization
has often resulted in an economic structure which has acted as a brake
on economic development; further, the process of commercialization
generally led to the removal of surpluses from third world countries.
Instead of developing these arguments in abstract, we shall de¬
monstrate their general validity by analysing certain concrete histori¬
cal processes.

1.8 THE PROSPECTUS FOR THIS BOOK

In this book we shall concentrate on the characterization of a state of

economic underdevelopment or ‘economic retardation’ and on the
diagnosis of its causes. In the next chapter we try to provide an analytic
Political economy and study of social change
19

summary of the processes which keep the third world capitalist

countries in a state of retardation. 1 his will help clarify the principles
which were used to select some particular historical developments for a
somewhat detailed presentation. In the next two chapters we present
certain aspects of historical development of societies in Latin America
and Asia - societies which have been hybridized under the dual stress
of the logic of evolution of its pre-existing social structure and of
the buffetings of an evolving world capitalist system.
In chapter 5, the typical modes of growth and fluctuations of the
third world countries under the influence of capitalist forces are
analysed at a rather high level of abstraction. Behind these patterns
of fluctuation and interaction lie the class configurations in towns and
villages of the third world. In chapters 6 and 7 we provide an analysis
of the class structures (particularly concentrating on the characteris¬
tics of the peasantry, the working class and the capitalist class of these
countries), the class conflicts and the role of the state in the
underdeveloped countries. One of the themes of this book will be the
way in which the development of a particular class (most importantly
the bourgeoisie) not only influences the character of income and power
distribution within the country concerned but also determines the
place of that society in the international hierarchy of capitalist
countries. That in its turn influences the direction and magnitude of
flows of resources (including people) between different countries.
We use the perspective presented in the earlier seven chapters, to
deal with two topics of current interest: population growth and
environmental damage caused by economic growth. The ways in
which predatory capitalism damages the environment and the ills of
capitalism and exploitation are foisted on to population growth as such
form major themes in this chapter.
I n chapter 9, we discuss what has been done in the name of economic
planning in typical third world countries. The actual processes
through which the stated aims of planning have been subverted, and
governmental policies have mostly ended up by strengthening the
forces for inequality, retardation and dependence are described.
In this book, we have concentrated on the non-socialist third world
countries or on the non-socialist phase of the socialist countries of the
third world. A discussion of the experience of socialist countries such as
China or Vietnam would require a different focus. However, the
literature on developments in socialist China has been signposted in ‘A
guide to further reading’ appearing after chapter 9.
2

METHODS OF EXPLOITATION AND THE

PHENOMENON OF ECONOMIC
RETARDATION

2.1 CHARACTERIZATION OF ECONOMIC

RETARDATION AND UNDERDEVELOPMENT

We regard third world countries as retarded, because, in respect of the

ability to transform their production capacities so as to meet the
growing needs of the population, they have fallen behind advanced
capitalist countries on the two sides of the North Atlantic, and also
Japan. We call them ‘underdeveloped’, because, not only does their
actual development fall far short of their potential, but also because
their capacity for exerting themselves to realize this potential is
impaired by their internal social and political structure, and by the
dominating effect of the advanced capitalist countries which limit their
choices all the time. This usage was, of course, advocated a long time
back by Paul Baran (1962).
Most social scientists today would readily agree that in order to assess
the present and past performance of a particular society, income per
head is not the only criterion. Yet in actual practice, some kind of index
of income per head often serves as the sole criterion to characterize the
‘underdeveloped’, or rather the ‘less developed’, or ‘developing’ count¬
ries. This usage is not just an excusable over-simplification, but
generally goes with a tendency to believe in certain simple causal
mechanisms producing poverty and to ignore complications that
might point to the existence of deep-seated social conflicts.
In this book, we shall take into account the social and political
structures of the third world countries in order to place them relative to
the advanced capitalist countries with whom they have had many
decades, if not centuries, of a relationship of dominance and sub¬
ordination. In such relationships, the position or the strength of the
capitalist classes of the respective countries and their relative abilities
to control resources yielding profit - particularly labour - and exploit¬
ing them efficiently, play a very important role. For in the era of
domination of the world (barring the socialist countries of the
twentieth century) by the advanced capitalist countries, it is the drive
20
Methods of exploitation and retardation 21

for more exploitation and more accumulation by the capitalists that

provides the main dynamic of history until that drive is challenged by
the peasants and workers affected by the whole process.
In the next two sections we shall describe the chief methods of
exploitation that have been used by capitalists - both foreign and
indigenous - in order to accumulate capital. The extracted surplus
was often not invested in the country where it originated - and that is
an integral part of the story of retardation and underdevelopment.
(We discuss the typical class configurations of third world countries in
chapters 6 and 7.)

2.2 CONTROL OF LABOUR AND THE PEASANTRY

UNDER CAPITALISM AND COLONIALISM

Capitalists maintain themselves as capitalists and increase their power

by extracting a surplus from labour and marketing it as surplus value.
Given the level of productivity of labour, the higher the ratio of net
value added to wages the higher, ceteris paribus, is the rate of profit
(among other things, the capital per man and rate of utilization of
capacity is taken as constant).1 Given the rate of exploitation of labour
(that is, roughly, the ratio of net value added to wages) and its
productivity, the larger the labour force which the capitalists can use,
the higher is their total income. Marx devoted about half of his magnum
opus, Capital, Vol. 1, to the analysis of the ways in which capitalists
extract surplus value from labour and try to increase the rate of
extraction of surplus value. These included the practice of landlords
(turned capitalist entrepreneurs) of using their tenants or serfs as
labour power, and the attempts of capitalists to lengthen the working
day, to lower wages even below the level at which labourers could
subsist for any length of time, to use children as workers and shorten
their poor lives, and, concurrently with all this, to deprive peasants
and artisans of their land and tools, and convert them into members of
the proletariat.
From the time of the Industrial Revolution onward, and, more
particularly, after research and development techniques and product
innovation had been made into a regular activity of capitalist firms
and industries, there was also a struggle to raise the productivity of
workers, and thus to raise the relative surplus value (the proportion of
surplus value to the wage or cost of labour) realized by the capitalists
(on the role of division of labour, modern machinery and modern

1 For definitions of ‘labour power’ and ‘surplus value’, see chapter 1.

22
Methods of exploitation and retardation

industrial processes in making labour more productive and intensify¬

ing its exploitation, see Marx, 1887, chapters xiv and xv and
Braverman, 1974). In the earlier phases of capitalist development
(that is to say, up to the beginning of the eighteenth century in all
capitalist countries and up to the beginning of the nineteenth century
in nearly all countries except Britain), the extension of capitalists’
power over labour and the intensification of exploitation of labour
were the more important means of expansion of the base of capitalism.
In the third world, these two basic modes of exploitation and
expansion remained the dominant ones until the onset of limited
industrialization, starting from the third quarter of the nineteenth
century. In fact, slavery and debt bondage, which died out in western
Europe at the end of the Middle Ages, re-emerged in the non-white
colonies and ex-colonies. In all these countries the European con¬
querors had to subjugate various types of precapitalist formations
(Luxemburg, 1963, chapters xxvi - xxvm). However, in many of the
conquered societies, particularly in Asia, there were sectors involved in
what Marx calls ‘simple commodity production’ and in multilateral
exchange involving money, and very often Europeans came in first as
traders who provided new opportunities for trade and employment of
money to the proto-capitalist groups. But, of course, the conquering
guns of the Europeans were never far from their measuring balances.
The Europeans generally established their suzerainty in territories
which were already organized in states with a ruling group extracting
a surplus from the ultimate producers. The conquerors could not
simply displace the native rulers and take over; they also had to
change the commodity composition of the surplus so as to make it
internationally exchangeable. In effecting such redirection, force and
political authority played a very important part.
Force was used by the rulers to deprive a large proportion of the
population of access to means of production, although not all the
labour so released could be fruitfully utilized. This led to an
intensification of exploitation; labour was now subjected to the harsh
routine of the quarries or plantations with the recompense of only a
so-called subsistence wage. The theme that native workers need be
paid only a ‘subsistence’ wage and no more, recurs frequently in the
policy pronouncements of colonial administrators and businessmen
(see, for example, Bettison, 1961, quoted in Harris, 1975). There was
also a prevailing rationalization of low wages or of taxation designed to
force people in colonial countries to work in the mines or plantations
run by metropolitan capitalists, viz. that the natives would not work if
they were offered, or allowed to retain, incomes that might leave them
Methods oj exploitation and retardation 23

with a surplus above subsistence. This rationalization was, of course,

primarily a myth to justify the extreme degree of exploitation practised
by the alien rulers, but it gained a kind of authenticity because of the
severe ill-treatment of the native workers who were then naturally
reluctant to embrace the conditions imposed by their white masters.
The myth will be further examined in chapter 6.
One basic device for keeping wages low was combination among the
masters; this combination was sometimes explicit, but very often an
agreement about the inborn ‘inferiority’ of the natives was enough.
The monopsonistic and/or authoritarian control of labour and its
ruthless exploitation has been the red thread running through the
stories of all colonial and dominated countries.2 We have already
referred to the chattel slavery used in the American South, in the West
Indies and Latin America up to almost the very end of the nineteenth
century, and to the system of indenturing labour used prior to, and
after, the peak period of slavery. Besides these systems of authoritarian
control, in South Africa we witness from the end of the nineteenth
century a system by which African peasants and tribesmen were forced
out of their villages and confined in prison-like barracks in the interest
of gold and capitalist profit. (For an early account of the ‘discipline’
imposed on African labour through what Rosa Luxemburg has called
a ‘peculiar combination between the modern wage system and
primitive authority’, see Bryce, 1897, as quoted in Luxemburg, 1963,
pp. 363-4; for evidence of the forced depression of wages for black
workers in South Africa, see Wilson, 1972).
In order to force labour out of the precapitalist relations under
which they had access to a means of livelihood, however primitive it
might be, capitalists had to restrict the scope of such access. In
advanced capitalist countries, such precapitalist social formations
gradually vanished; in colonial countries they never did, primarily
because none of the countries made a full transition to industrial
capitalism. While such precapitalist formations lasted, the metropo-

2 D. S. Landes has defined imperialist exploitation as ‘the employment of labour at

wages lower than would obtain in a free bargaining situation’ or ‘the appropriation of
goods at prices lower than would obtain in a free market’ (Landes, 1968). This is,
however, too inclusive a definition of colonialism. As Adam Smith knew, there can really
be no free bargaining between masters and men who are in an unequal bargaining
position : ‘Masters are always and everywhere in a sort of tacit, but constant and uniform
combination not to raise the wages of labour above their actual rate’ (Smith, 1776,
vol. 1, pp. 59-60). The colonial situation is distinguished by the pervasiveness and
persistence of non-market constraints (and not just constraints imposed by monopsony
of labour) and the explicit nature of the legal and other sanctions used against workers
and the peasantry.
24 Methods of exploitation and retardation

litan capitalists not only exploited them through various devices such
as taxation, purchase of products at prices that were lower than could
be obtained in the best contemporary markets, and through usury and
its supporting financial mechanism. These precapitalist formations
also acted as reservoirs of labour which effectively subsidized the
advanced capitalist sector by supporting the workers in their infancy
and their decrepitude (when the capitalists had extracted the
maximum out of the workers), and by keeping alive their families.
After the worker had reached an age when he could earn some money
and thus pay the taxes etc. imposed by the colonial authorities, he
would leave home, earn his pittance, send some of it back home in
order to enable the family to pay the hut tax or meet other cash
obligations such as the interest due to the moneylender, visit his home
to recuperate periodically and finally go back there to die. Meanwhile
the capitalist entrepreneur could obtain the worker’s services at a wage
which was lower than was needed to support his family because the
latter were gathering a miserable subsistence in the home village or
tribal reservation. Such a process was most obvious in the British
colonies of east and central Africa, such as Rhodesia or Kenya, but it
could be observed also with respect to Amerindian labour in Latin
America before and after its political liberation, and in the case of
labour pressed into the jute mills, tea plantations and coal mines of
India. The seasonal ‘absenteeism’ that British capitalists grumbled
about in India was part of the system maintaining the low level of
wages. (On Africa, see Arrighi, 1970a and Leys, 1976, chapter 2; see
also chapter 7 below).
In many countries, particularly those of Asia, which had large
populations, capitalist colonialism uprooted the native ruling class
that consumed the better class of craft products, introduced machine-
made products from the West and thus effectively decimated the
traditional crafts; and the tribal people or peasantry were deprived of
their customary access to land by making it a vendible asset and giving
exclusive property rights to a very restricted set of individuals. An open
or disguised surplus of labour emerged in the process. Low wages could
then be rationalized on the ground that there was an excess supply of
labour. The disguised or open unemployment in the agricultural or
artisanal sector in the third world has been mistakenly attributed to
the primordial scarcity of fixed and working capital. It is, in fact, the
result of a colonial mode of exploitation in which traditional crafts
were destroyed for the sake of extracting a surplus from the colonies
but the surplus was not used to create alternative avenues of
employment. A second type of misunderstanding has clouded the
Methods of exploitation and retardation
25
perception of the true nature of such unemployment. As we shall show
in the next section, the operation of capitalist colonialism systemati¬
cally curbs the growth of native capital and hence the drive to
accumulate capital within the boundaries of the colony. This factor,
allied with the continuous drain of surplus abroad, created a long-term
problem of lack of employment.
It is now recognized that when unemployment of labour becomes
chronic, the labour market is fragmented into a series of bargains
between the masters and the men, with the masters naturally holding
the whip hand.3 Whatever the formal character of the bargain, in
many third world countries, the condition of labour - particularly of
unorganized labour - is depressed to a level at which it merely subsists.
The more slowly growing the economy, other things remaining the
same, the lower is generally both the level and the rate of growth of real
earnings of labour. This is true not only for capitalist countries but also
for countries containing major sectors characterized by precapitalist or
mercantile methods of exploitation. (For a rigorous analysis of the
connection between rate of investment, rate of growth of income and
rate of growth of real wages under capitalist conditions, see Robinson,
1956). To take a bizarre but significant example, the living conditions
and natural rates of growth of slaves were better in the southern
United States than in the Caribbean islands and Brazil (see Curtin,
1969.) One major reason for the difference is probably that the
American South was part of a fast-growing capitalist economy with a
large volume of net inflow of capital, whereas the others were at best
parts of dominated societies which acted as net transferrers of capital to
western Europe and its overseas offshoots.

2.3 DOMINATION OF COLONIAL CAPITAL BY

METROPOLITAN CAPITAL AND THE NETWORK

OF UNEQUAL INTERDEPENDENCE

The metropolitan capitalists were competing among themselves all the

time, and trying to fight off challenges from potential competitors. ‘In
that “struggle for existence” which provided the basic metaphor of the
economic, political, social and biological thought of the bourgeois
world, only the “fittest” would survive, their fitness certified not only
by their survival but by their domination’ (Hobsbawm, 1975, p. 116).

3 This was first formally recognized in the case of commodity markets, by Michael
Kalecki who built up his theory of unemployment on the assumption that capitalists
exercise monopoly power - particularly in the pricing of industrial products. See
Kalecki, 1972a, which contains a selection of his relevant writings from 1933 onwards.
For recognition of the formal point by a neoclassical economist, see Arrow, 1959.
26 Methods of exploitation and retardation

When, at the end of the fifteenth century, the Spaniards and the
Portuguese discovered the route to the Americas and the new route to
Asia, the world outside Europe had already been divided by the two
powers (by the Treaty of Tordesillas) in order to keep out other
European powers from the territories they meant to conquer or
dominate. The Portuguese and the Spaniards did effectively keep the
other Europeans out of their spheres of influence until the end of the
sixteenth century, although the Spaniards’ control of the sea was
increasingly challenged by the British, the Dutch and the French and
their treasure-laden ships were the objects of attack of chartered and
unchartered privateers.
With the entry of the English, the French and the Dutch into the
fray using royally chartered monopoly companies, a new phase in the
struggle of the western European powers for supremacy began. In
effect, the power of the emerging nation states of western Europe was
mobilized (although not always with the same degree of efficacy)
behind the marauding seafarers of western Europe and their finan¬
ciers. In Asia, particularly in the Indian Ocean and the littoral states,
they directly faced the competition of Asian traders and shipowners.
Naval and military defeat at the hands of the Portuguese and then the
Dutch and the English eliminated most of the Asian traders’
competition. Ironically enough, many Indian merchants financed the
activities of the foreign intruders. The plunder of foreign peoples was
rationalized in terms of racial superiority or the superiority of the
Christian religion, and so from the beginning the right of the
conqueror was converted into a permanent position of superiority over
the non-white and non-Christian natives. (The conversion of the
natives to Christianity did not improve their position much, except, in
a few cases, as subordinate collaborators of the conquerors.) Hence
there was no question of recruitment of the local proto-bourgeoisie into
the ranks of the metropolitan bourgeoisie.
Capitalists of the dominant countries and the potential capitalists of
the colonial countries are normally involved in a predator — prey
relationship. Initially, in some countries such as India, there were
alliances of convenience between conquering Europeans and some
native merchants and financiers. But such alliances soon gave way to
an unequal relationship within a structure of hierarchical control in
which the levers of power were held by Europeans or other capitalists
from dominant nations. Most of the surplus extracted by the foreign
rulers and capitalists was transferred to the metropolitan countries or,
from the nineteenth century onwards, to colonies of white settlement
such as the USA, Canada, Australia, etc. This left little with which the
Methods of exploitation and retardation 27

local capitalists could expand their own capital base. In any case, in
the process of expansion, the metropolitan capitalists closed many
avenues of profit to the native businessmen who, perforce, ceased to be
capitalists. Thus, in many cases, the local pressure for changes in
institutions favouring industrialization could not surface effectively,
because the capitalist strata who could give voice and substance to
such demands had been stunted or eliminated altogether. It is only
when advanced capitalism entered a phase of irreconcilable conflicts
within its ranks, and local bourgeoisie or petty bourgeoisie of the third
world could struggle for a bigger share of the surplus, that challenges to
the older policies could materialize.
Through the conquest of the Americas by the Portuguese and the
Spanish, and, following them, by the other European powers, and
later on through the domination of the Asian trade with Europe and
through the conquest of major parts of Indonesia and India, the
European countries had already achieved dominance over world
trade, finance and shipping by the end of the eighteenth century. Even
in this mercantile phase of exploitation, the political or military
authority of the European conquerors was backed by superiority in
technology, applied science, organization and information systems. In
the first place, important innovations in shipbuilding, navigation,
weaponry and ammunition made possible European victories in the
eastern seas (where they battled with the Arabs, the Indians, the
Indonesians and, less successfully, with the Chinese and the Turks)
and on the American terrafirma (Parry, 1963, Part 1, and Parry, 1974,
Part hi). In the second place, European capitalists enjoyed, through
their very process of expansion at home and abroad, important
economies of scale in finance, trade, transport, and managerial
organization. These advantages were, of course, not available to any
and every group of capitalists. Political control and deliberate
discrimination were used to exclude outsiders abroad and at home.
The monopoly companies created by European states by royal or
parliamentary charter were the most public, but not necessarily the
most successful, examples of monopoly power wielded by European
capitalists to control resources and exclude potential competitors.
The role of the monopoly power, backed by political authority, that
was exercised by European capitalists in suppressing the growth of
native bourgeoisie has tended to be obscured by the attention paid to
the character and role of the so-called ‘comprador bourgeoisie’ in such
countries as China, India, Indonesia and Brazil. The extension of the
bourgeoisie has a dual aspect - increase in the power of the class as a
whole and the erection of barriers so as to keep it exclusive - without in
28 Methods of exploitation and retardation

the process losing its capacity to extend its control over resources. The
metropolitan bourgeoisie might sometimes foster a subaltern native
bourgeoisie in its own interest when it is struggling against pre¬
capitalist formations in the colonies. But it will try to suppress the
collaborators if thereby it can increase its total surplus or stave off a
threat to its dominance. Racial discrimination, which serves at one end
to keep the non-white labour force in subjugation, also serves at the
other end to exclude native capitalists from the most profitable
avenues of investment. We have seen already that it might pay the
metropolitan capitalists to preserve some precapitalist formations and
utilize precapitalist methods of exploitation, in the sense that it thereby
increases the expropriable surplus. But formation of native capitalist
strata is largely thwarted.
In this book, we shall portray the relationships among the capitalists
in terms of relations of dominance and subordination. The question
still remains as to why the capitalist classes of North America and
Western Europe are regarded as belonging to the block of dominant
metropolitan bourgeoisie, whereas, let us say, the capitalist classes of
South Asia are not so regarded. This subject is not yet as well
researched as it should be. The provisional answer is that the early rise
of nation states in Europe and their support for their native bourgeoisie
served to mark out the latter as powerful on their own; and then open
or covert racialism helped to cement the bonds between these initially
dominant bourgeoisies and keep out the rest. Something quite similar
seems to be happening in east Asia. After the Second World War, the
Japanese capitalist class became one of the most aggressive (com¬
mercially, that is) in the world. The scattered fractions of the overseas
Chinese bourgeoisie in Hong Kong, Singapore, Taiwan profited
from Japanese dynamism, and the spin-off from the Ame-
rican-Vietnamese war, and had perforce to invest in industry
since the Chinese mainland was closed to them for speculative
purposes. Although the Second World War left bitter memories about
the Japanese in the minds of the ordinary Chinese, there is no
permanent racial barrier between the Chinese and Japanese bour¬
geoisie. This factor helped to consolidate a block of east Asian
bourgeoisie and has acted as a stimulus to the growth of the east Asian
economies of South Korea, Taiwan, Hong Kong and Singapore. The
latter, of course, have benefited from other factors - such as acting as
smuggling centres or supply bases for the American war machine in the
east - but these alone would not explain the high rate of growth
without bringing in the factor of effective integration with Japanese
capitalism.
Methods oj exploitation and retardation 29

Racialism can have a paradoxical effect in helping preserve the

identity of a subordinate bourgeoisie. One reason why Latin American
capitalists, in spite of a longer history of political independence, have
tended to merge again and again as subordinate strata of the North
Atlantic bourgeoisie, whereas the South Asians have not, is that the
former were socially conformable with the North Americans and
Europeans but the latter were not.
To come back to our main story, by the inevitable logic of capitalist
accumulation the countries under the sway of capitalism were brought
closer and closer together. This became most obvious with the coming
of the railways, steamships and telegraph systems linking the different
continents. But the process had been gathering momentum from the
second quarter of the fifteenth century when the Portuguese tried to
find new routes to the East. The expansion of the network of
interdependence under capitalist colonialism and imperialism is well
summarized by the Russian revolutionary, Nikolai Bukharin (1972,
p. 28):

International connections may grow in scope, spreading over territories not

yet drawn into the vortex of capitalist life. In that case we speak of the extensive
growth of world economy. On the other hand, they may assume greater depth,
become more frequent, forming as it were a thicker network. In that case we
have an intensive growth of world economy. In actual history, the growth of
world economy proceeds simultaneously in both directions, the extensive
growth being accomplished for the most part through the annexaiionist policy
of the great powers.

This type of ‘extensive growth’ was easily accomplished by the

European capitalist powers up to the end of the nineteenth century at
the expense of the third world. It was when room for such expansion
became extremely limited that the struggle for redivision of the formal
and informal colonies among the advanced capitalist countries began
in earnest, and what Lenin called ‘imperialism, the highest stage of
capitalism’ was ushered in. We shall see in the next section that the
process of capitalist expansion left permanent gaps and tears in the
network of interdependence as far as third world countries are
concerned.
For the present, we want to draw attention to the fact that the
network of interdependence in physical space, and in the flows of
commodities and surpluses, also established relations of unequal
interdependence among capitalist groups and other groups (such as
landlords) subserving the capitalist interests. The identities of the
dominant and dominated partners in the third world countries were
never in doubt: the political levers were in the hands of the foreign
 Methods of exploitation and retardation
30

capitalists, the major enterprises were dominated by them and the

direction of flow of net surpluses (for which no equivalent payment was
made) was away from such countries. But within the group of
European countries, the positions of different partners changed over
time. Spain remained the formal sovereign of Spanish America from
the beginning of the sixteenth to the beginning of the nineteenth
century. But because of the incubus of feudal institutions in Castile
(which were reinforced by the easy spoils of conquest), the surpluses
extracted from the Americas ended up in Antwerp, Amsterdam or
London. In the same way, Portugal surrendered most of her surplus to
Britain and other advanced capitalist countries, although formally
she retained political sovereignty over parts of her empire until the
twentieth century. At a later stage, we see this process being repeat¬
ed in Britain. Britain had the largest empire until the Second World
War, extracted the biggest surplus from her formal and inform¬
al colonies, but then invested a major part of the proceeds in the
USA, South Africa, Canada and Australia. The capitalist class staying
at home or migrating to the white settlements gained enormously, but
the home economy gradually fell behind.
The case of British investment overseas and its consequences for the
home economy illustrates that we can have a situation where a
capitalist class is strong, but its home base is weakened because of its
global interests. In a much more attenuated form, the same pheno¬
menon is observed with overseas Chinese and Indian traders and
financiers in the interwar period, when they participated on a large
scale in the trade and finance of south-east Asia and east Africa, but
their home bases remained extremely backward. However, the
converse phenomenon is rarely observed within the capitalist world
economy. A society which fails to develop a strong native capitalist
class tends to slip back in the race for domination. The gradual
retardation of Argentina which we shall take up for specific discussion
is a case in point. This is one reason why such crude indexes as the level
of per capita domestic product or even income, or the degree of
urbanization achieved are not reliable guides for projecting the future
course of a society, for they leave out a crucial indicator: the strength of
the native capitalist class (which may be composed of immigrants) in
relation to the other classes in the home society, and in relation to the
other capitalist classes with an interest in that economy.
The developments in Portugal, Argentina and Britain that we have
referred to also indicate that even in peacetime the subordination of
some capitalist groups to others across national boundaries goes on
incessantly, as a result of competition between large and small capital,
Methods oj exploitation and retardation 31

and between relatively advanced and backward segments of the

capitalist class. But, of course, competition between capitalist classes
can erupt into war, and the struggles of the dominated economies of
the third world against their formal or informal rulers have led to wars
of liberation. However, because of the head start of the European
countries in the field of capitalism and the political hegemony
obtained by them over the third world, it was hardly possible to talk
about global ‘competition’ between metropolitan capitalists and
capitalists of third world countries until the end of the Second World
War. The continuous flow of surpluses out of the third world and the
consequent failure to reinvest any major fraction of surplus value in the
form of capital goods or working capital was a major factor perennially
handicapping the third world countries and helping keep them
retarded in relation to the advanced capitalist countries. We turn to
the wider consequences of such failure of investment in the next
section.

2.4 FAILURE OF INVESTMENT AND ASSOCIATED

PHENOMENA OF RETARDATION IN THE THIRD WORLD

Accumulation of capital for the purpose of making a profit is

characteristic of capitalism. There was little accumulation of capital in
this sense in precapitalist societies, although there were massive
investments in cities, palaces and temples, roads and irrigation works
in such countries as India, China, Egypt and the Inca empire of South
America. When the European powers conquered the Americas in the
sixteenth century and parts of Africa and Asia in the sixteenth and
seventeenth centuries, they systematically removed the fruits of labour
to Europe or the new countries of white settlement; accumulation of
capital in the conquered lands was hampered both by the removal of
the ‘surplus’ (which often ate into the subsistence requirements of the
people) and by the lack of a capitalist class to invest whatever surplus
there might have been and increase the productive assets in the
country. In this phase of mercantile capitalism in Europe, the
aggregate rate of investment in the European economies perhaps
remained low. Nevertheless, a large fraction of this investment owed its
origin to the exploitation of the third world colonies.
In the phase of industrial capitalism in Europe and the USA, which
developed in the nineteenth century, the densely populated countries
of Asia were drawn much more closely into the network of exploitation
of European capitalism. It was in this phase that the advanced
capitalist countries began a systematic drive to capture the markets of
 Methods of exploitation and retardation

the dominated countries. In Latin America, and much more mas¬

sively in India, Egypt and China, handicraft industries were damaged
by the onslaught of manufactures from western Europe (see Bagchi,
1976a). I n contrast to the countries of western Europe, the destruction
of handicrafts was not accompanied by a commensurate growth of
modern manufacturing industries.
The reasons for this failure are several-fold. First, in European coun¬
tries other than Britain and in the USA, Canada, Australia and
South Africa, a considerable degree of state patronage, including
tariff protection, guarantee of purchase by government agencies and
financial help, was extended to help modern industries against the
competition of manufactures from other countries, particularly British
manufactures. As against that, third world countries were either forced
or ‘persuaded’ to adopt free trade policies, so that investment in
modern industries became unprofitable. Secondly, much of the
investible surplus was transferred overseas, so there was a short¬
age of funds available to entrepreneurs who might venture into
the field of manufacture catering to the home market. Many devices
were used to transfer resources from the third world to Europe and
thence to the white settlements of North America, Australia, etc. First
of all, a major part was removed as a straight political tribute from
such large colonies as India and Indonesia. The colonies were saddled
with the ‘cost’ of conquering themselves — this may be called the
payment for self-ransoming (a term used in a related context by
Pearse, 1975). The colonies were also charged with the cost of defence
against revolt or invasion by other powers; Indian revenues, for
example, had to pay for the whole cost of defending the British Empire
east of the Nile. The colonies also had to pay for the administrators
imposed on them by the rulers.
The ruling country usually acted as the entrepot for the produce of the
colonies, however distant they might be. Hence there was a restricted
world market for the primary products of the colonies. The financial
power of London enabled it to attract the produce of many other
nominally independent countries in a similar way. The shipping
services, banking (particularly exchange banking), insurance were
monopolized by firms from metropolitan countries, often with direct
help from the foreign rulers. Foreign firms also monopolized public
utilities, extractive industries, foreign trade and processing industries
in many cases (for India see Bagchi, 1972a; for French Madagascar,
Dumont, 1966). The success of foreigners in these enterprises in the
services or extractive industries largely depended on explicit or
implicit barriers against the entry of natives into these fields (for
Methods of exploitation and retardation 33

Indonesia, see Wertheim, 1959; and for India, Bagchi, 1972a).

When the British capitalists invested in railways in India or
Argentina, they purchased their capital goods in their home countries,
and there was little control on the values at which these purchases were
entered in the books of the particular companies. A significant fraction
of the loans to such countries as Turkey and the Latin American
republics never found their way to those countries (Jenks, 1963,
chapters 2 and 3; Cameron, 1961, chapter 15). The claims amassed by
the foreigners against the colonial or semi-colonial countries - often on
the basis of high monopoly profits reaped in those countries themselves
and charging of exorbitant prices on the assets of the companies - all
show up as ‘foreign investment’ in conventional accounts. As it
happens, even conventional accounts show that most of the foreign
investment by European countries went to the developed capitalist
countries of today. There was in fact a massive net transfer of surplus
from the third world countries to the metropolitan heartland, to be
distributed thence to the white-settled colonies of the USA, Canada,
Australia, South Africa, etc.
Careful computations of the true figure of transfer of capital (the
nearest approximation is the computation made by Edward Long for
Jamaica in 1774, which we have quoted in chapter 3) from the third
world do not exist. Assuming that the major part of the surplus
transferred took the form of unrequited exports, I have used the
difference between merchandise exports and merchandise imports of
such countries as India and Indonesia as a measure of the surplus
transferred overseas without any return (see chapter 4 below). We
should remember that such a measure may often be an underestimate
of the surplus transferred, since it excludes the large expenditure
incurred by the ruling foreigners in the colony itself for their security
and consumption.
Apart from lack of state patronage and removal of surplus from the
third world to the metropolitan countries, another factor which
inhibited the growth of modern manufacturing was the slow growth ol
a native capitalist class. This was, of course, connected with the other
two factors. The native traders or financiers who survived or even
thrived in the colonies or semi-colomal lands acted as subordinate
collaborators of the foreign capitalists (whose interests centred on the
export-import sector) or as direct participants in activities connected
with foreign trade. The condition for their survival was precisely that
they should not venture into the hazardous field of modern manufac¬
turing except where it enjoyed some overwhelming natural
advantages.
 Methods of exploitation and retardation
34

The destruction of handicrafts thus led to the de-industrialization of

many third world economies in the nineteenth century in the sense that
the proportion of national income generated by, and the percentage of
the population dependent on, industry of various kinds declined. Most
of the population released in this process had to find an alternative
means of livelihood in agriculture. In order to absorb all these people
in agriculture, while giving them at least a standard of living which
they had enjoyed before, massive investment in agriculture would
have been necessary. However, such investment was not forthcoming
either in the public or in the private domain. While some spectacular
irrigation works were constructed in Egypt and India, such investment
was quite small as a proportion of national incomes or domestic
products of these countries. Furthermore, it was specifically designed
to stimulate the growth of export crops, and to raise revenue for the
government. The uncompensated costs imposed by such works on the
local population in the form of the spread of such diseases as bilharzia
and malaria, destruction of temporary wells or minor irrigation works,
and eventual waterlogging and salinity, were ignored. Such invest¬
ment further strengthened the hold of the metropolitan capitalists on
the economy.
The phenomenon of de-industrialization was associated with the
penetration of railway networks within the third world countries. The
railways connected ports with points in the interior, and increased the
relative distances between places in the hinterland, since very often the
only connections they now had between themselves passed through the
ports. The railway revolution thus turned the third world economies
inside out and enormously increased the intensity of dominion of
advanced capitalist countries over them. The accompanying stress on
cultivation of exportable cash crops, on the vendibility of land as an
asset, and on prompt payment of obligations to the state, landlords and
moneylenders in cash, enormously increased the economic power of
the landlord, the trader and the moneylender over the primary
producer (the producer might be either the increasingly insecure,
cultivating peasant or the vanishing artisan, or the most wretched of
all, the landless labourer in the fields). The increase in the intensity of
these internal methods of exploitation made investment in industry a
decidedly less attractive proposition. In many third world countries,
the displaced rulers of earlier times found a place in the colonial
schemes as ‘native princes’, petty chieftains and landlords. They, along
with the landlords and moneylenders (who primarily dealt in
consumption loans), contributed to an increase in the share of
consumption in that part of the surplus which was retained within
Methods oj exploitation and retardation 35

these countries. Thus the stunting of native capitalist growth by the

metropolitan countries found its own vicious logic in the proliferation
of the spendthrift exploiters native to such societies.
The peasantry who lost their land or the artisans who lost their
professions swelled the ranks of the unemployed. It then became easier
for the landlords to treat them practically as serfs, and for the
European planters in various lands to get them as indentured
labourers. For, with a weak accumulation drive in the third world, the
supply of labour often exceeded the demand for it.
While mercantile capital was exploiting the third world economies
in the nineteenth century, primarily as a junior partner of industrial
capital in Europe and North America, industrial capital in Europe
and the USA was evolving towards ‘monopoly capital’ (Sweezy, 1964,
chapter 14). Practically alone among the social scientists of his day,
Marx had foreseen the rise of large monopolistic or oligopolistic
production units on the basis of what he called the processes of
concentration and centralization of capital. Under the process of
concentration, the enterprise accumulates more capital either by
ploughing back part of its profits or by raising more capital on the
market. Under the second process an enterprise grows by absorbing
other units of production through formal mergers and take¬
overs, or acquisition of the business of bankrupt firms. The in¬
corporation of enterprises as joint-stock companies with limited
liability facilitates both the processes enormously. In time, some
business enterprises became the giant transnational corporations that
straddle the capitalist world today. The difference between these
monopolies and the monopolies incorporated by royal charter in the
mercantilist phase is that the former are primarily producing and
financing rather than trading and collecting organizations, and that
they owe their position not so much to legal restrictions on the entry of
rivals as to economies of scale in production, finance and management
(see Baran and Sweezy, 1968, chapter 2; Galbraith, 1967, chapters
2-8, and Murray, 1972).
The phase in which industrial firms of capitalist countries acquire
the character of monopolistic organizations is also the phase of
imperialism as defined by Lenin.4 In this phase, among other things,

4 We shall not deal with the Hobson-Lenin theory of imperialism directly, because
while our focus is on the impact of western European and American capitalism on the
third world countries and the development of the latter, the main purpose of Lenin’s
book on imperialism, as Lenin explained in his preface to the French and German
editions, was ‘to present, a composite picture of the world capitalist system in its
international relationships at the beginning of the twentieth century - on the eve of the
 Methods of exploitation and retardation

‘The export of capital, as distinguished from the export of com¬

modities, becomes of particularly great importance, international
monopoly combines of capitalists are formed which divide up the
world, the territorial division of the world by the greatest capitalist
powers is completed’, and a struggle begins to redivide the world
among the advanced capitalist nations, leading to world-wide con¬
flagrations (Lenin, 1917; Dobb, 1940, chapter 7 and Sweezy, 1964,
chapter 17). The export of capital from advanced capitalist to third
world countries still takes a second place to the extraction of surplus
from the latter, most of the re-investment going to other advanced
capitalist countries or to countries with large white populations (see,
for example, Thomas, 1967).
But the other aspects of monopoly capital affect the third world
countries directly. The struggle among advanced capitalist countries,
leading first to the Bolshevik Revolution of 1917 and, along with other
factors, to the long crisis of the period between the two World Wars,
gave the newly emerging capitalist and professional strata of the third
world some room for manoeuvre on a political plane. Many third
world countries consciously tried to adopt a programme of in¬
dustrialization, partly under the stimulus of the slightly loosened hold
of imperialism on the world and partly under the pressure of the severe
depression of the 1930s which caused acute balance of payments crises.
But most of them found themselves handicapped by the effects of the
earlier history of exploitation and by their phase lag behind the
monopoly capital of western Europe and North America. The lack of
modern industry, de-industrialization and failure to invest in agricul¬
ture had left a large part of their population desperately poor and
therefore unable to provide the enlarged markets that the minimum
economic scale of many industries demanded. The same processes of
exploitation had also deprived their populations of traditional skills,
without endowing them with either new skills or literacy. There had
been no opportunity either to build up those capital goods industries
which are at the base of modern industrial development. During the
period when the third world economies were integrated forcibly with
the outside world, the earlier linkages between different parts of the
economy were snapped, and the only links between different sectors
were provided by the world market. As we shall see in chapter 6,

first world imperialist war’ (Lenin, 1917, p. 181). Since Lenin’s focus was on the
explanation of the origins of the First World War, the conflicts among the imperialist
powers received his primary attention, whereas in our case such conflicts figure only in so
far as they bear on the development of the third world countries.
Methods of exploitation and retardation
37

paradoxically enough, the spread of the market economy effectively

forced many people off the market, when they faced a choice between
starvation as an unsuccessful seller of unwanted labour power or
unwanted commodities in the market, on the one hand, and scroung¬
ing a living out of various types of subsistence activities or a
relationship of‘voluntary’ bondage with a patron on the other. Thus
when third world countries began their industrialization drive, they
encountered various gaps in linkages and bottlenecks in supply.
In advanced capitalist countries, technological development had
continued and the scales of output and spans of control of modern
joint-stock companies had expanded enormously. These larger and
technologically advanced corporations were hungrily looking for
markets, and often they became the major beneficiaries of the tariff
walls and import restrictions erected by third world countries in
pursuit of industrial development.
The phase lag between monopoly capital in advanced capitalist
countries and the embryonic industrial capitalism in third world
countries had a doubly retarding effect on the latter because the
industrial capital had at its base a structure of exploitation which
remained basically mercantilist or even smacked of feudalism. Land
continued to be monopolized by a small group of landlords who had
little direct connection with production or, alternatively, who used
various types of non-market pressures to get a surplus out of the tenants
or labourers. Peasants also had traders and usurious moneylenders as
other exploiters demanding a part of their output. Often the landlord
himself was also the trader and moneylender. Some landowners began
to behave like capitalist farmers consciously using new methods,
wherever profitable. But they continued to use instruments of debt-
bondage or non-market power when such use would advance their
economic position or provide them with a more secure long-run
return. Thus the existence of capitalist farmers in such countries has
not always been associated with capitalist relations of production. Nor,
of course, has the existence of capitalist relations in one sector of the
economy led to its transformation into a full-fledged industrial
capitalist economy.
In the following chapters the strength or weakness, the advance or
retrogression of a class or country will be judged by looking at its
position in relation to all the major constituents with which it is
continually in contact: the capitalist classes of advanced economies,
the economically advanced countries themselves, the other classes
which make up the coalitions that rule the advanced capitalist
countries, and the peasantry and workers whom the indigenous
gg Methods of exploitation and retardation

capitalist class exploits in collaboration with the capitalist classes ol

advanced countries. T he relations of the third world and its capitalists
with the socialist bloc are also relevant. The capitalist and other ruling
classes of third world countries would enter into friendly relations with
the socialist bloc so long as they see such relations strengthening their
position vis-a-vis their own peoples or vis-a-vis other capitalist
countries. Since they cannot remove the basic causes of retardation
without destroying the effects of past history of exploitation, and, in
effect, eliminating themselves (since they are an integral part of the
present structure of exploitation) they will not progress in a genuinely
socialist direction just because they have friendly relations with the
socialist bloc. Thus no qualitatively new principles are introduced into
the analysis of problems of individual third world countries through
the recognition of the possibility of friendly intercourse between them
and the socialist world.

2-5 CONTRADICTIONS OF CAPITALIST DEVELOPMENT IN

THE COLONIAL AND P O S T - C O L O NIA L ERA

Summing up, we can say that capitalist colonialism and imperialism

supported a mechanism of exploitation which had strong elements of
usury, speculation and domination by landlords in its structure. Such
a structure, which has been characterized sometimes as ‘semi¬
feudalism’ becomes particularly characteristic of the third world
during the era of industrial capitalism in Europe. For, while industrial
capitalism transformed the occupational structures of advanced
capitalist countries, reducing agriculture to the status of the smallest
sector in terms of both employment and income generated, in third
world countries (including the ones which had already been subjected
to colonial exploitation in the mercantile era of European capitalism)
it led to a decline in the employment and income generated by
industry (particularly in the nineteenth century), and a relative rise in
the position of agriculture. Furthermore, in many third world
countries, this was associated with a premature rise in the share of the
tertiary sector in both income and employment generated (see Holub,
1970, for the experience of Asian countries in this regard).5 This is
because, on the one hand, many people who could not be employed in

5 The category, ‘income from services’ includes a variety of imputed incomes to

people who are, for the most part, underemployed, and earnings of pimps, meddling
bureaucrats or torturers in police cells, which are liabilities from a social point of view,
and cannot therefore be treated on the same level as output of agriculture, industry, or
transport.
Methods oj exploitation and retardation 39

agriculture or industry took up small-scale trade or other services as a

last resort and swelled the ranks of the underemployed connected with
these branches of activity, and, on the other hand, usury, high trading
margins, profits from speculative trade, etc., went to swell the incomes
of many who had little direct part in productive activities. (For
connection between capital transfers and changes in occupational
structure under capitalism, see Bagchi, 1972b; for the consequences of
de-industrialization in the third world, see Bagchi, 1976a.)
Such antithetical results of the development of capitalism in
advanced and retarded capitalist countries suggest that industrial
capitalism is not a system that can be simply diffused through countries
like, say, literacy. The typical paths of development in the past have
needed some countries to stay retarded, transferring capital, providing
cheap raw materials and markets for manufactures (particularly the
lagging branches of manufactures, the more progressive lines finding
markets in the more affluent countries), acting as reservoirs of cheap
labour and sometimes — but more rarely — functioning as easy new
frontiers to be conquered through very private (and often socially
reprehensible) enterprise (as in Brazil today). Such a paradoxical
perspective becomes plausible when we realize that capitalism is, of
necessity, a deeply unequal system of domination of one class by
another, of one nation by the ruling class of another. In chapters 3 and
4 we provide some histories of this unequal system in operation. In
chapters 5-8 we delineate the logic of inequality as it works through
economics, class relations, political alignments and the environment.
When third world countries attained political independence, some
of the more naked forms of colonial exploitation and consequent
capital transfer were ended. In the meantime, however, advanced
capitalist countries had evolved new techniques of production, and
huge conglomerate enterprises which straddled more than one nation.
Although the scientific developments were often financed by the state
in advanced capitalist countries, they were developed by the trans¬
national enterprises. Through the system of patent rights and the
development of knowhow closely guarded by the firms, much of the
new technological developments came to be controlled by the
transnationals and other firms based in advanced capitalist countries.
The third world countries in most cases allowed the foreign firms to go
on working within their frontiers and generally recognized the
international patent laws, although in most cases the patents were held
by foreign firms. On the other hand, they remained technically
backward and failed to introduce an alternative spectrum of tech¬
niques, which would have required an alternative strategy of develop-
4o Methods of exploitation and retardation

ment altogether. Furthermore, many third world countries became

dependent on ‘aid’ (mostly loans) from the advanced capitalist
countries for solving their balance of payment problems. This 'aid’ in
turn created markets for the transnational corporations in the third
world. Hence the third world countries were deeply penetrated by
these Trojan horses of foreign firms, often acting in collusion with local
collaborators.
These local collaborating enterprises were in many cases public
sector corporations which found it easier to depend on transnationals
than to alter the economic environment so as to prepare for
technological independence. The transnationals in turn found third
world public sector organizations more pliable and better endowed
with financial resources than local private firms. Thus, in a strange
inversion of the usual logic, a symbiotic relationship grew up between
the monopolistic transnationals and local public sector enterprises,
which were originally supposed to be spearheads in the third world
countries’ struggle for independence. Of course, dependence on
transnationals, on foreign aid, and on advanced capitalist countries
and the socialist bloc have led to a drain of resources from the third
world, and produced new contradictions. The symbiosis of third world
enterprises with transnationals or enterprises in the Soviet bloc has not
cured the internal stresses in the third world social fabric. These
external and internal contradictions portend further change in the
disorderly progress of retarded societies through economic sub¬
jugation, political instability and revolution or counterrevolutionary
authoritarianism.
Some of the other aspects of the relations of third world economies to
transnationals and foreign capital in general are dealt with in chapters
5, 7 and g below.
3

UNDERDEVELOPMENT IN LATIN AMERICA :

HISTORICAL ROOTS

3-1 INTRODUCTION

In this chapter we shall first describe the typical social and exploitative
institutions inherited by Latin America at the beginning of the
nineteenth century when Spanish and Portuguese rule ended in all
mainland countries of Latin America. We follow this up with a brief
review of the development of three large countries of the region, viz.
Argentina, Brazil and Chile. Their history has a special interest in
highlighting the constraints on autonomous national development
and social progress under the aegis of international capitalism even
when the countries are formally independent.

3.2 DEPOPULATION IN AMERICA UNDER

EUROPEAN RULE AND THE RISE OF THE

ATLANTIC SLAVE TRADE

In the early sixteenth century the Spaniards overthrew the Aztec

empire in Mexico and the Inca empire in Peru. Their superiority lay in
the military arts rather than in the arts of production, and, in their
conviction that they were ethnically superior to the Amerindians, they
conquered by guile and force (see Parry, 1973, chapters 3-5; and
Parry, 1963, chapters 3-7). The conquistadores wanted to exploit the
labour of the indigenous population and make fortunes as quickly as
possible.
However, excessive and inefficient exploitation of Amerindian
labour, combined with the outbreak of epidemics, led to the de¬
cimation of the Amerindian population. This exploitation took the
following main forms, (i) The Amerindians were confined to special
villages and their labour was commandeered for use by the Spanish
officials and settlers, (ii) The local people were uprooted from their
villages and sent to work in the mines of Mexico and Peru, where they
died in their thousands, (iii) The Indians were deprived of their best
pieces of land, and of essential sources of water supply, which the

41
 Underdevelopment in Latin America

Spaniards occupied, so that the income of the former declined, (iv)

The local people were often compelled to grow crops which were
unfamiliar to them, and which were not fully adapted to their careful
system of irrigation (for a description of the pre-Columbian system of
irrigation, see Price, 1971). (v) The Spaniards introduced livestock
farming in well-populated areas. The Indians often practised shifting
cultivation with long rotational cycles, or irrigated agriculture with
careful allocation of water and the fields. Naturally, the horses, cattle
and sheep owned by the Spaniards ‘ate up’ the Indians.
According to Borah and Cook, the Amerindian population of New
Spain (Mexico and parts of central America) numbered between 20
and 28 million in 1519 - a very high figure indeed.1 From this level, the
Indian population of New Spain fell to a mere 1075 million in 1605.
The Carib Indians, who numbered about 300,000 in 1492, and who
tenaciously resisted the Spanish invaders, were practically wiped out
(see Rich, 1967).
The demographic disaster in Spanish America coincided with a
serious demographic reversal in Spain (Parry, 1973, pp. 230-3),
so that even were the Spaniards willing to replenish the active work
force in Latin America, Spain could not re-populate the land
with her own inhabitants. This disaster reinforced the social re¬
tardation that had set in in Spain in the wake of the inflow of precious
metals. While the rich Spaniards lived as grandees on the fruits of the
American plunder, the other western European nations took advan¬
tage of their parasitism by destroying the local manufactures of Spain
and taking over many branches of Spanish trade. The nascent
capitalism of Catalonia was smothered by the decadent feudalism of
Castile, and Spain suffered a long-term retardation in comparison
with the Netherlands, England and France (see Borah, 1951, Elliott,
1963, and Israel, 1974).
Spain needed exploitable labour to carry on her empire and this
labour was increasingly supplied by Africans transported as slaves
across the Atlantic. The Arabs had traded in African slaves for a long
time before the west African coast was invaded by Portugal and other
European nations (Oliver and Fage, 1969). But these slaves were used
mostly as servants in the court, as mercenary soldiers or as domestic
servants, rather than as the mainstay of the exploited labour force and
their numbers were far smaller than those involved in the Atlantic
slave trade, particularly in the late eighteenth and nineteenth

1 For comparison, it should be noted that, as late as 1800, the two countries of western
Europe with the highest populations, viz. France and Germany, had populations of 26.9
and 24.5 million respectively. See Glass and Grebenik, 1965, table 7.
Underdevelopment in Latin America 4.3

centuries. The Portuguese were the first European nation to make

slave-raids on the west coast of Africa or to purchase slaves from
African chiefs on the coast, from the early fifteenth century onwards.
They were soon joined by other European nations when a demand for
slaves arose in the Caribbean plantations, in Spanish America, and in
Brazil, which was under Portuguese rule.
This trade in human beings was rationalized by racialism. A class
society needs an ideology of inequality in order to maintain the status
quo (Mason, 1970, chapter 1, and Robinson, 1972, chapter 4).
Racialism is a special kind of divisive and inegalitarian ideology; it is
an ideology of domination over the majority of human beings on the
basis of skin colour (white versus black or brown), the shape of the
nose, and the texture of hair. When the European navigators and
pirates began first to explore the Caribbean islands, they regarded the
autochthonous population as material for either enslavement or
extermination. In the early years of settlement of such islands as
Barbados and St Christopher by the British, white servants were press-
ganged to emigrate to these islands as indentured labourers. But such
workers soon left the plantations to set up as freeholders, and proved
too expensive for their masters. Negro slaves were then imported in
vast numbers to convert the Caribbean islands into vast sugar
plantations run on the basis of slave labour justified by racialism (see
Dunn, 1973).2 The apparent freedom of the Latin conquering peoples
from racialism, as evidenced primarily by the ease with which they
tolerated miscegenation between white males and black or brown
females, has been shown to be largely a myth (Boxer, 1973a,
chapter 11, and R. Bastide, ‘Dusky Venus, black Apollo’ in Baxter and
Sansom, 1972). Bartolomeo Las Casas, who earned the sobriquet of
the ‘Apostle of the Indians’, by passionately pleading the case for
banning the enslavement of the Indians, had to combine his plea with
toleration of the fate of chattel slavery for black Africans (for
contemporary justification or denunciation of Spanish rule in America
and for evaluation of the various policies pursued by Spain to ‘protect’
and segregate the Indians, see Hanke, 1969a, section in).
The racialist ideology served the purpose of justifying not only

2 Some writers have tried to represent racialism as basically an after-birth of the need
to use slaves in the Caribbean and on the mainland of America (see, for example,
Williams, 1944 and Oliver C. Cox, ‘Race and exploitation: A Marxist view’, in Baxter
and Sansom, 1972). But the attitude that non-European and non-Christian peoples
were ipso facto inferior to Europeans was already there among the early European
navigators to Africa and America. Of course, the racialist doctrine was given a new
‘scientific’ basis in the nineteenth century by thinkers as diverse in range and ability as
Count de Gobineau and Charles Darwin (see Curtin, 1971).
^ Underdevelopment in Latin America

Negro slavery, but also other modes of exploitation of labour. At a later

stage, carefully propagated doctrines of superiority of whites served to
keep the oppressed peoples divided among themselves. Racialism and
similar ideologies based on caste and religion are among the most
potent instruments still preventing exploited groups from uniting
together. Several Latin American governments have had an official
policy of encouraging European immigration with the objective of
‘whitening’ the race (see Dumont, 1965, chapter 3, and Mason, 1970).
At another level, racialism was used by the conquering European
capitalists to exclude native merchants and financiers from the most
profitable opportunities of trade and investment in India, China and
Indonesia.
According to Philip Curtin (1969, table 77), during the whole
period of the Atlantic slave trade, lasting from, say, 1451 to 1870,
about 10 million slaves were transported across the Atlantic.3 Of
these, almost 2 million were imported into the Americas over the period
1801-70- that is, after slave trade had been declared illegal in the
British Empire! Of the total number of slaves imported, Spanish
America accounted for 1.6 million, Brazil for 3.6 millions, British
colonies and ex-colonies (including the USA) for 2 million, and the
French Caribbean for 1.6 million.
The trade in slaves increased from the late seventeenth to the
nineteenth century as a result of the rapidly expanding market for
sugar and other tropical products in Europe, and the competition
among plantation owners and their need to cut down costs as much as
possible. Furthermore, under the brutal conditions of exploitation,
particularly in the Caribbean and Brazil, slaves failed to reproduce
themselves, so that fresh supplies were continually needed to replenish
the stock of worn-out and dying slaves. The net imports of slaves into
Jamaica, for example, between 1731 and 1775 amounted to 266,320,
but the net increase in slave population between 1730 and 1778
amounted only to 136,369 (Sheridan, 1965, tables 1 and 2; see also
Sheridan, 1976). Since there was no large-scale manumission or
migration of slaves, this state of affairs indicates that capitalist
enterprise in the eighteenth century was now eating up whole African
communities, after killing off millions of Amerindians in the sixteenth
century. In this enterprise - which was so profitable for plantation-
owners and for the European metropolis and so disastrous for everyone
else — an average human being was valued in Jamaica at slightly more

3 Curtin’s estimates are on the conservative side. Anstey has indicated that for
important sectors of the slave trade Curtin’s estimates may have to be revised upwards
by 10 per cent or more. See Anstey, 1975 and 1977.
Underdevelopment in Latin America 45

than twice the value placed on a typical unit of livestock on the

plantations (see Sheridan, 1965, tables 6 and 7). The conditions in the
plantations on the islands under Spanish rule were probably much
worse.4
The slave trade and slavery were highly profitable to individual
slavers and planters, and also to the advanced capitalist
countries - particularly Great Britain. Although the early demands
for African slaves originated in the Spanish colonies, Spain was herself
unable to supply these slaves. The trade was carried on mainly by
nationals of other countries. For Spanish colonies this was organized
under asiento (licence) by Portuguese, Dutch, French and British
shippers. These nations, of course, supplied their own colonies as well.
Thus production by means of slave labour and the slave trade became
joint enterprises of western European capitalists. As the British gained
naval supremacy of the western, and later of the entire, world, they
also became the leading ‘slavers’, carrying off the major share of the
profits from the slave trade.
The slave trade and the slave-based plantations formed vital links in
the overseas flows of commodities and capital supporting the Industrial
Revolution in eighteenth-century Britain. Slavers obtained slaves
through raids in which they enlisted the support of African chiefs, and
sold them to the planters in the Caribbean and South America. These
slaves were ‘paid for’ by providing the chiefs and other collaborators
with consumer goods produced in Britain. The planters produced
rum, sugar and other tropical products which were sold to Britain and
the northern British colonies (which became the USA later on). The
northern colonies in turn provided the planters with foodstuffs, timber,
animals, etc., and obtained many of their manufactures from Britain.
Normally the West Indian colonies had an export surplus with Britain,
and the northern colonies had an import surplus which was partly
covered by capital exports from Britain. This sort of pattern, in which
the ‘colonies of exploitation’ (West Indies in this case) have an
(unrequited) export surplus and the colonies of European settlement

4 Jamaican plantations, as the outposts of British capitalism, were more heavily

capitalised than the average plantation on other islands. This proved a handicap when
slavery was first abolished in the British Empire and West Indian sugar lost its special
tariff advantages in Britain. Spanish colonies in the Caribbean evaded the British
embargo on slave trade far into the nineteenth century. They thereby passed the cost of
breeding the slaves on to the African societies, and enjoyed lower costs per slave than the
British colonies (in the period between abolition of slave trade and of slavery). When free
trade in sugar was introduced at last, the slave-produced sugar found a ready market in
Britain. Thus it is one of the ironies of capitalism in advanced countries that it thrived on
slave-produced cotton (imported from the southern USA) and slave-produced sugar.
^6 Underdevelopment in Latin America

have an import surplus which is covered by capital exports from the

metropolis becomes much more pronounced in the nineteenth cen¬
tury, as we shall see in chapter 4. For most of the eighteenth century,
colonial trade provided the most dynamic element in British export
trade, which in turn helped expand the market for British manufac¬
tures. Furthermore, British capitalists controlled practically all the
links in the production and trade of the West Indian colonies (as
opposed, for instance, to the case of North America); this rendered
them among the most valuable possessions Britain had (Saul, i960,
pp. 7—8; and Deane and Cole, 1967, p. 34).
The gains made by the ruling country from a colony are not always
easy to compute. The usual balance of payments data are often quite
useless for computing such gains. For, in such computations a
metropolitan country is often credited with the performance of non¬
existent services (where the payment by the colony is really a political
tribute) or the nationals of the metropolitan country exercise an
effective monopoly on the supply of certain commodities and services
and the monopolistic element in the payments made by the colony
cannot be separated out. We shall discuss such problems in greater
detail in chapter 4. For Jamaica, we are fortunate in the possession of a
contemporary computation by Edward Long, a leading planter,
which is comprehensive in the sense that it takes account of all the ways
in which Britain earned an income from that colony (see table 3.1).

Table 3.1 Annual income of Great Britain from the Jamaica trade, 1773
(figures in pounds sterling)

Freight inwards and outwards 414,600

Insurance 20,000
Commissions, brokerage and other charges 260,000
Profit on merchandise trade
!30,357
Profit on the slave trade 125,142
Absentees, expenditures 200,000
Interest on borrowed funds
35>°oo
Transport of merchants, planters and servants
4>5°°
Balance paid to North America and remitted to
Great Britain
45>321
Balance paid to Ireland and remitted to
Great Britain !4,244

TOTAL 1,249,164

Source: Edward Long, The History of Jamaica (3 vols., London, 1774), vol. 1
p. 507, quoted by Sheridan, 1965, as table 9.
Underdevelopment in Latin America 47

To these profits must be added that portion of the annual income

‘which was not repatriated but held in idle balances, reinvested or lent
out locally’, and the total would then come to £ 1.5 million per annum
(Sheridan, 1965, p. 305). Sheridan concluded that ‘from 8 to 10 per
cent of the income of the mother country [i.e. Britain] came from the
West Indies in the closing years of the eighteenth century, and
probably a larger percentage in the period preceding the American
War of Independence’ (Sheridan, 1965, p. 306).5 In the following, we
shall mostly be concerned with Latin America which also imported
slaves from Africa. How were the African societies affected by the slave
trade?
The West African societies suffered terribly from the operations of
the fishers of men. The absolute depopulation of the favourite hunting-
grounds of the slave traders was severe enough. But even more
important was perhaps the intensification of wars fought with firearms
and the retarding effect of the channelling of economic activities
towards the forcible enslavement and export of human beings. In this
phase of West African history, when the Europeans chose to operate
through chiefs rather than rule the African states directly, the effect of
western man on the internal structure of these societies could not have
been profound. The example of Europe slave-raiders was not likely to
be considered worth looking up to either. ‘Read book and learn to be
rogue as well as white man’ went a common west African saying
(quoted by J. D. Hargreaves, ‘Relations with Africa’, in Goodwin,
1965, p. 246). For similar reasons, the western impact on the culture of
Angola or Congo was also entirely superficial, or simply bestial (cf.
Boxer, 1973a, chapter 4).
In the Caribbean islands, after the formal abolition of slavery, a
peasant society gradually grew up. But its growth was hampered by the
existence of European-owned plantations, in whose interest the
development of peasant agriculture was often deliberately throttled, as
in Guyana (Adamson, 1972, chapters 1-3): a landowning peasantry
would demand higher wages for working on the plantations and would
resist the oppression of the planters in a more determined fashion. In

5 There is considerable controversy surrounding the question of why Britain took the
lead in abolishing so profitable an enterprise as the slave trade and slavery itself. Eric
Williams has successfully demolished the view that it was simply the pressure exerted by
a group of humanitarians in England that effected the miracle. But for full understand¬
ing of the issues involved, it would be necessary to look beyond the narrow economic
interests of slavers and plantation owners towards the larger interests of industrial
capitalism; the latter needed to free capital from more backward-looking enterprises
and to demolish the mercantile system of which slave trade and slavery were such
important components. For a balanced summary of the debate and a bibliography, see
Hopkins, 1973, pp. 112-16.
^8 Underdevelopment in Latin America

several colonies, the plantations were kept practically intact by

importing indentured labourers. When these labourers in turn became
free, they merged with the general mass of ex-slaves and other
indigenous peoples. But, of course, the ‘plurality’ in the society created
by colonialism was carefully nurtured in the interests of the ruling
classes.
In West Africa, a new chapter in colonialism began with the
‘scramble for Africa’ at the end of the nineteenth century, that was the
prelude to the first imperialist world war. There also the majority of
Africans were converted into peasants, and the usual mercantile
methods of exploitation were deployed (see chapter 2). However, the
major arena of exploitation of peasantry in the nineteenth century
shifted to Asia - to India, Indonesia and China. We discuss the
underdevelopment of societies peopled predominantly by formally
free peasants in chapter 4. But we shall take up certain specific
illustrations from West Africa again in our chapters on class structure
and the nature of the state in retarded societies. We now turn to the
mainland of South America, to see how Spanish and Portuguese
colonialism up to the beginning of the nineteenth century and the
‘voluntary colonialism’ of the era of liberalism led to many of the
problems of underdevelopment today (for an authoritative account of
developments in West Africa see Hopkins, 1973; see also Rodney,
r973)-

3-3 LATIN AMERICAN SOCIETY UNDER SPANISH

RULE AND AT THE TIME OF LIBERATION

After the conquest of Mexico and Peru, the Spanish conquistadores were
rewarded by the Crown with encomiendas, which were essentially the
right to exact tribute in the form of goods, money, or, most important
of all, labour lrom the Indians who were ‘entrusted’ to th a encomenderos.
Hernan Cortes, the conqueror of Mexico, had, officially, the right to
exact tribute from 23,000 tributaries, and in actual fact from many
more. A grant of land to the encomendero was made separately and was
not tied up legally with the encomienda. Nor was an encomienda meant to
be heritable except by special permission. Thus by separating the
control over labour from the control over land, the Spanish Crown
tried to prevent the emergence of great landed chieftains who might
challenge the central authority. The ban on Indian slavery was also
probably motivated by the same consideration, although theological
arguments might have played their part. The Spanish Crown, over the
course of the sixteenth century, succeeded in asserting its authority
Underdevelopment in Latin America 49

over the conquistadores, and in largely preserving the personal liberty of

the Indians (except those who had already been enslaved during the
course of conquest, or those who had been later enslaved as rebels). But
it needed Indian labour for working the inhospitable mines and for
public works. It then resorted to repartimiento (division) of Indian
labour, under which officials had the right to allocate labour for
‘public’ purposes, which also included work on private estates and
ranches and, of course, on private mines, mainly of silver and mercury,
in Mexico and Peru. Mercury mining was horrible in its effect on living
workers and even more in killing off miners. The apologia was then
used that forced labour, called mita, had been exacted also by the Inca
rulers in Peru whom the Spaniards overthrew (see Whitaker, 1941).
The Spanish Crown appointed officials called corregidores, to guard
the interests of Indians. They used their position to exploit the latter,
who had to pay tribute to the encomenderos or other private lords, and to
satisfy the greed of the corregidores (who bought up the goods produced
by Indians at low prices and sold to them the goods they had to buy, at
high prices, and who took bribes for exempting particular Indians
from the obligadons of repartimiento). However, the Spanish Crown
did try to prevent the emergence of centres of local power under the
criollos (that is, Americans born of Spanish ancestors). The society
remained extremely hierarchical, with authority exercised by various
kinds of royal officials - centred on towns — with estate-owners lording
it over the Indians in the interior - but in theory, subject to supervision
and correction by royal officials. Criollo and immigrant European
merchants made fortunes and then married into the established landed
families, and the sway of a narrowly based ruling class over the whole
society was consolidated (Halperin-Donghi, 1975, chapter 1). Indians
retained a large part of their land, although many of them effectively
became peones - bound under debt bondage to particular estate-
owners. Indians were also divided up into segregated communities,
which made it difficult for them to unite and revolt effectively against
Spanish rule, although the whole of Spanish colonial history was
interspersed with heroic revolts and resistance by the Indians.6
Spain, in spite of her steep decline as a military power in Europe,
retained her possessions on the American mainland until the be¬
ginning of the nineteenth century. During this period, enormous

6 For descriptions of society under Spanish rule, and of attempts to exercise royal
authority over the local rule by criollo estate-owners, see Parry, i94ff 1973» *974 and
Israel, 1974; for the effect of Spanish rule on the solidarity of the Indians, see Gibson,
1969; on general issues of the nature of the society in Latin Amenca, see Frank, 1971
and Luis Vitale, ‘Latin America: Feudal or capitalist?’, in Petras and Zeitlin, 1968.
_ Underdevelopment in Latin America

quantities of silver, gold, sugar, hides, etc., were exported to Europe,

silver taking pride of place. The value of exports from Spanish America
greatly exceeded that of imports, since most of the Spaniards in control
went there primarily to make enough money to be able to cut a figure
back at home (Furtado, 1972, p. 13). The extravagance of the royal
treasury in Madrid also had its share in these developments. But
because of various restrictions put on trade and because of difficulty in
communications, some local manufactures, such as textiles and leather
products, grew up in Spanish America.
Spain and Spanish America were involved in a recession in the
seventeenth century, partly stemming from decline in silver pro¬
duction but mainly from depopulation of Indians; this left a per¬
manent imprint on the structure of society. Royal or official demands
on Indian labour through the instrument of repartimiento were
gradually restricted. On the other side, Indians abandoned much of
their land, and sought the ‘protection’ of powerful criollo estate-owners.
Indian reserves became reserves of bonded labour for the estate-
owners. Thus the typical Latin American institution of hacienda with
its necessary complement of peonage or hereditary debt-bondage of
the Indians grew up, although, in theory, such institutions did not
have royal sanction behind them. In parts of Spanish America, such as
central Peru, where the control of the colonial authorities was
necessarily loose, almost from the beginning, the conquistadores tried to
combine the ownership of land with control over the Amerindian
peoples. Thus a structure of society tended to be built up which was
much nearer the traditional pattern of a feudal economy in Europe,
except that the landlords were the subjects of the Crown rather than
vassals, and their aims were mercantile rather than to extend political
power for its own sake. But the condition of the subject Amerindian
peoples was often much more servile than that of the serfs of Europe
(Bauer, 1975, chapter 1).
In the eighteenth century, under the Bourbon monarchs of Spain,
attempts were made to assert Crown authority, and at the same time to
stimulate production and trade. Some of the more irksome restrictions
on trade such as a prohibition on direct trade between Peru and
Mexico were removed in 1774. With partial recovery of the
Amerindian population, with increased flows of silver from the mines,
and increase in demand emanating from an industrializing Europe,
Spanish American production and trade also recovered. This na¬
turally benefited the criollos and Spaniards controlling trade and
production. They began to smart under the tighter administration
brought in by the Bourbon monarchs. The benefits of freer trade and
Underdevelopment in Latin America 51

the example of the thirteen colonies of the United States, whose

struggle for independence had been actively assisted by France and
Spain, opened the eyes of the criollos to what they could gain out of full
independence and freedom to trade with whomever they liked. Thus
was set the stage for the wars of liberation of the Spanish colonies from
1810 onwards.
Except in Mexico, the call for the revolt was generally given by
upper-class criollos immediately after Napoleon’s usurpation of power
in Spain. Only in Mexico did the struggle for independence start also
as a struggle for a more just social order. There a parish priest, Miguel
Hidalgo, led the Indians in revolt in 1810 with the cry of freedom and
land. He was quickly captured and defeated. But his banner was taken
up by another priest, Jose Maria Morelos. Morelos’ revolt, too, was
defeated by a union of the army, the church, the criollo land-owners
and the Spanish Crown (Galeano, 1973, pp. 57—8, Paz, 1961, and
Wolf, 1973, pp. 8-9). But Hidalgo and Morelos remained beacons for
all later revolutionary movements in Latin America.
The wars of independence against Spain were wars for attainment of
power by the criollo elite led by the great landowners and merchants.
Ultimately, everywhere in liberated Spanish America power fell into
their hands. The landowners wanted free trade with the outside world,
particularly Britain, and the enjoyment of power in their own locality.
The continent disintegrated into numerous states connected only
through the international market. They all produced primary pro¬
ducts on the basis of traditional Indian or Spanish techniques, and
were competitive rather than complementary with one another.7 This
situation was aggravated by the adoption of‘liberal’ policies at home
and abroad. In return for their support of the local revolts against
Spain, and because of their ability to supply the wants of the
landowners and merchants, the British easily acquired a dominant
position. The merchants who had earlier acted as agents of Spanish
principals often switched over to being agents of British firms
(Halperin-Donghi, 1975). The flood of British manufactures de¬
stroyed the handicrafts that had grown up on the basis of the internal
market in Peru, Mexico and the interior provinces of Argentina. The
adoption of a ‘liberal’ ideology by the ruling classes led to the removal
of the protective barriers erected by the Spanish Crown around the
surviving Indian communities and to their wholesale expro-

7 Alexander von Humboldt, the German traveller, estimated the values of agricul¬
tural produce, minerals and manufactures in New Spain at the end of the eighteenth
century at 30 million, 25 million and between 7 and 8 million pesos respectively (Parry,
1973. P- 3i8)-
 Underdevelopment in Latin America
52

priation. At the same time, most of the land became concentrated in

the hands of an oligarchy (Bauer, 1975). We shall study the
consequences of these developments in some detail in the case of two
Spanish American republics, Argentina and Chile, and the single
Portuguese American state, Brazil, which became a monarchy on
liberation from Portuguese rule, and a republic on the abdication of
Dom Pedro Segundo in 1889.
While exploitation in Spanish America was centred on mining,
Portuguese Brazil started out as primarily a colony based on tropical
agricultural products. The leading item among these products was
sugar, but ancillary activities, particularly cattle-breeding, grew up in
the areas not monopolized by the sugar plantations (Furtado, 1971,
Parts 1 and 11; Boxer, 1973a, chapters 4 and 5). Then for about fifty
years starting in the last decade of the seventeenth century, Brazil had
a ‘golden age’, when gold was discovered and quickly exhausted in
Minas Gerais (Boxer, 1969). This gold benefited the gold-diggers from
the state of Sao Paulo, and other mining entrepreneurs following on
their trail, and, later on, the royal treasury at Lisbon. But Portugal was
already involved in a semi-colonial relationship with Britain, and
much of the gold found its way eventually to the London market (see
R. Davis, ‘English foreign trade, 1700-1774’ in Minchinton, 1969,
and Fisher, 1969). There is here an exact parallel to what happened to
Spanish silver in the sixteenth and seventeenth centuries and for
substantially the same reasons: in the era of emerging capitalism, a
country which does not transform its own society fast enough in the
direction of capitalism is likely to become dependent on the advanced
capitalist countries with which it is linked through trade relationships.
During the period immediately preceding the birth of industrial
capitalism in Britain, Brazilian gold was extremely useful to her in
lubricating her internal payments mechanism and in settling her trade
deficits with the East and the Baltic countries. Thus the importance of
exploitation of colonies under capitalism has to be assessed in a global
perspective, rather than as a phenomenon that relates to the colony
and the directly governing country alone.
The Brazilian colony of Portugal from the beginning depended
greatly on the import and use of slaves. Portugal had been a slave¬
owning country before her colonial conquests began, and
theological sanction was given to her thriving slave-raiding expe¬
ditions on the West coast of Africa by the Papal Bull of 1454, which
gave the Portuguese a permit to ‘attack, subject and reduce to
perpetual slavery the Saracens, Pagans, and other enemies of Christ
Underdevelopment in Latin America
53

southward from Capes Bojador and Non, including all the coast of
Guinea’ (quoted in Rich, 1967, p. 309). With command over slave¬
raiding stations in West Africa exercised by Portugal, Brazil became a
predominantly slave-owning society, with the plantation-owners in
the countryside, and slave-traders, and foreign merchants at the ports,
on top. There were adventurous elements among this upper crust,
particularly among the inhabitants of the State of Sao Paulo, but their
adventures often consisted in illegal raids in Spanish and Portuguese
American territories in search of Amerindian slaves.
When Portuguese Brazil formally became independent of the
‘mother country’, it was a society divided between an upper crust of
people of Portuguese extraction and masses of slaves, ex-slaves and
poor peasants of Amerindian, African and mixed origins at the
bottom. The vast majority of the population were not only poor but
also bonded in some way to their owners and ‘patrons’ (cf. D. Aulden,
‘The population of Brazil’ in Hanke, 1969a). There were some
important regional differences as between the North East, where the
sugar planters and fazenderos (estate-owners) settled down into a
typical semi-feudal pattern of existence, and the southern parts,
particularly Sao Paulo, which was the home of the bandeirantes, slave-
raiders, smugglers and discoverers of gold in Minas Gerais. But the
undoubted enterprise of the latter remained mercantile in nature, and
very much tied to a slave-using, and race- and class-divided agrarian
society.

3.4 FROM ‘VOLUNTARY COLONIALISM’ TO THE DRIVE

FOR IMPORT-SUBSTITUTING INDUSTRIALIZATION:

ARGENTINA, BRAZIL AND CHILE

Of the three countries we have taken up for study, the ruling class in
Argentina, up to 1914, followed, in an extreme form, the twin policies
of strengthening the position of a landowning oligarchy and virtually
unresisting adaptation to the forces transmitted by advanced capi¬
talism in Britain and other metropolitan countries. The Chilean ruling
class and then the Chilean masses (in the twentieth century) engaged
in periodic struggles to attain national autonomy in economic
life - struggles that usually ended in tragic failures. The Brazilian case
falls in between these two extremes - in some respects the ruling class
followed more adventurous economic policies than in Argentina but,
because of their unwillingness to change the social structure radically,
could not ultimately escape the logic of international capitalism.
 Underdevelopment in Latin America
54

3.4.1 Export-dependence and arrested industrialization in Argentina

Argentina proclaimed her independence by declaring the port of

Buenos Aires open to the trade of all nations. Buenos Aires had
prospered in the eighteenth century as the inlet for trade in goods and
slaves (for a long time illegal) to Paraguay and Upper Peru or Bolivia,
and as the outlet for the leather and tallow produced by the feral cattle
of the pampas; the opening of saladeros or factories for producing salt
beef, used for feeding soldiers and slaves in Brazil and the Caribbean,
increased its profit. The portenos (those who lived in the port of Buenos
Aires) went in wholeheartedly for free trade and became suppliers of
dairy livestock and agricultural products to the outside world, in
exchange for the flood of manufactured goods from Britain.
Argentina had a vast, practically unpopulated, prairieland. The
new rulers decided to ‘engross’ most of this land, and, beginning with
Rosas, the dictator of Argentina in the 1830s and 1840s, the rulers gave
away huge parcels of land to a few influential families, practically free
of cost (see Rennie, 1945, pp. 70-1 and 137-40).8 Thus was laid the
basis of a highly unequal distribution of land.
As in other parts of Latin America, political struggles among
different groups of the ruling classes, and lack of adequate transport
facilities linking the hinterland with the ports at first protected some of
the handicrafts and local industries that had grown up under Spanish
rule. But the 1860s witnessed a marked change in this respect. The
'liberal’ economic policy which had earlier on been professed by many
politicians could now be enforced by an effectively centralized
government at Buenos Aires. An active policy of collaboration with
foreign business interests and of encouragement of immigration from
Europe was pursued. Leading liberals and educators such as Alberdi
and Sarmiento propagated European-style education and styles of
living, including dress, in the hope of‘civilizing’ the Argentine people.
The 1860s also saw the rapid spread of railways outside Europe and
North America, and Argentina shared in this. The decade marked a
quickening of the rate of migration of Europeans, a stream which
assumed the proportions of a flood by the first decade of the twentieth
century (see Woodruff, 1966, tables 111/4 and 111/5). ‘Liberal’ Argentine
governments and publicists prepared the ground for this integration of
the Argentine economy to the world capitalist order as a supplier of
primary products. The Sociedad Rural, an organization of the more

8 Adam Smith (1776) gave a lucid analysis of the beneficial effects of the lack of
‘engrossing’ or monopolization of the land in the thirteen colonies of the USA. The
analysis can be applied in reverse to derive the wage-depressing, inegalitarian
consequences of the ‘engrossing’ of land in republican Argentina.
Underdevelopment in Latin America 55

‘progressive’ estancieros (estate-owners), was founded in 1866, and

played an important role in preparing the estancieros for profitable
innovations in livestock or arable farming, and in shaping government
policy to favour the estancieros.
Before the acceleration of the flow of migrants and foreign capital
into Argentina from the 1860s onwards, the agricultural economy was
dominated by the crude processing of the meat, fat and hides of the
traditional cnollo cattle of the open Argentine pampas. Short-horn
cattle and fencing of the fields were introduced by English ranchers
such as Newton and Miller, but these innovations did not make much
headway. The Argentine landlords could see their sheep and cattle
multiplying without much investment of effort or capital, and
Argentina imported cereals from abroad. With immigration of
Spaniards, Italians, Germans and Swiss into the economy, land could
be better cultivated, and better varieties of cattle could be raised.
These immigrants showed the way towards a more intensive use of
land, and the estancieros followed in their wake, generally by using
tenancy arrangements, rather than cultivating the land themselves. As
a result, the amount of tilled land per head increased from 0.13 acres in
1865 to 7.7 acres in 1914 (Jefferson, 1926, p. 43).
The developments in Argentine agriculture and industry after the
1860s can be regarded as the adaptation of an open, export economy to
the expanding world trade of the late nineteenth century under the
impulse of immigration of southern Europeans and the direction of
advanced foreign capital based in London. With the help of the
immigrants, Argentina began to utilize her land better — raising
maize, wheat and linseed. From being a net importer of wheat,
she changed over to become an exporter of wheat and other
cereals on a large scale (see J. Colin Crossley, ‘The River Plate
countries’, in Blakemore and Smith, 1974). In the meantime, impor¬
ted breeds of cattle were bred for their meat, which was now processed
in frigoroficos, or chilling plants, particularly after the export of live
cattle to European countries fell off because of official restrictions.
Sheep farming prospered, particularly in the south, which was
‘conquered’ by driving out or exterminating the Patagonian Indians
in the late 1870s. The principal industries of Argentina before the First
World War were based directly or indirectly on agriculture. These
were sugar milling in the interior, flour milling, refrigeration of meat,
breweries and dairy industries, with some tanning and some weaving
of cloth (see Martinez and Lewandowski, 1911, part hi, chapter 11).
These latter industries were mostly concentrated in Buenos Aires (see,
for example, Mulhall, 1896, pp. 365-6).
Large-scale immigration from Europe did modify the Argentine
^6 Underdevelopment in Latin America

social structure but its extremely inegalitarian character survived,

particularly in rural areas. Except for a small fraction of immigrants
who came with some capital and were settled on model colonies such as
Esperanza, most started as tenants. Tenancy contracts in the cattle¬
raising belt normally specified that over a three-year period only three
crops, wheat, maize or linseed, coidd be grown and at the end the land
had to be sown with alfalfa, which was the best fodder for fattening
cattle. As land values increased, standard rentals rose from i o to 12 per
cent to 25 to 30 per cent by 1912 or so. The rental could even go up to
50 per cent and approximate the conditions prevalent in poor
underdeveloped countries (see, for example, Scobie, i960, pp. 8—9).
Tenants had less and less chance to become owners and the typical
landholdings of immigrants were small. The census of 1937 revealed a
high degree of tenancy, particularly in the cattle and wheat belts. In
1948, Carl Taylor concluded from his observations that, while existing
tenants had acquired more farm equipment and some pure wage-
earners had become tenants, it had remained as difficult as ever to
become a property-owning farmer, and that very large family estates
remained the norm, the top families owning several large estates each
(Taylor, 1948, chapters 1, 11, and pp. 190-204; and Germani, 1966).
In the meantime, the mestizos and Indians who had been peones in the
colonial and early republican era became the lowest stratum of this
society under the dual impact of their own initial landlessness and the
racialist ideology favouring whites in employment.9 Thus the initial
‘engrossing’ of uncultivated land by the oligarchy permanently
affected the rural class structure and naturally also influenced the
urban class structure.
Partly owing to lack of access to land, most of the immigrants came
to settle in urban areas. A small minority among them formed the top
crust among Argentine businessmen, below the British businessmen
and managers, who normally did not settle down in the country. The
rest of the immigrants in the urban areas became artisans, tradesmen
and workers in the services and the agriculture-based industries.
In the adaptation of the Argentine economy to the needs of the
expanding world trade of the late nineteenth century, while the
immigrants supplied the bulk of the additional labour force needed,
the direction and entrepreneurship were largely supplied by capitalists

9 Even in the 1880s when Mark Jefferson visited the sugar ingenios of the interior
province of Tucuman, the typical worker was virtually a serf. In order to ensure the
control of the owners, laws were passed requiring every worker to show proof of gainful
employment, and employers were authorized to realize any advances made to the
workers directly out of their wages (Jefferson, 1926, pp. 32-3).
Underdevelopment in Latin America 57

and managers from advanced capitalist countries, particularly

Britain. Naturally they exacted a still'price for these services. The first
Argentine railway, 39 kilometres in length, was built with local
capital. The next railway, the Ferrocarril Central Argentine, was built
by a British company, for which the government guaranteed a rate of
return of 7 per cent, besides allowing the cost of construction to be 60
per cent above the initial estimate. The company was also granted
three miles of land free on both sides of the track, "liberal tax
exemptions and a guarantee against rate fixing until 15 per cent was
being earned on the stock’ (Rennie, 1945, p. 153; see also Ferns, i960,
pp. 325—6). Other railway companies, mostly foreign, were given even
greater concessions. Apparently, in spite of considerable effort, the
Ferrocarril Central Argentina (and other foreign railway companies)
could not interest the rich Argentina families as investors (Ferns, i960,
pp. 334—5). Their abdication of responsibility led to payments abroad
to make up artificially created deficits below guaranteed interest, to
watering of capital, to the inflation of the cost of acquisition of new
assets by railway companies, and to unduly high railway rates. All
these phenomena occurred also in the case of railways in Brazil, but
probably on a lesser scale, and we shall not dwell on them separately.
Such inflation of so-called ‘foreign investment’ (at the cost of the host
country) is also met with in nineteenth-century India, except that
there the ruling class was foreign and the colonialism was not
‘voluntary’ (see Rennie, 1945, pp. 155-7; for Brazil, see Graham,
1968, PP- 57-6o).
The consequences of acceptance of direction by foreign capital are
illustrated by the Argentine foreign exchange and monetary policy in
the period 1880-1914. Argentine imports, particularly of capital
goods, were greatly dependent on foreign borrowings. In an advanced
capitalist economy, investment expenditures normally expand with
national income, even if foreign loans are not forthcoming. By
contrast, in Argentina, in the 1890s, while incomes went on expanding,
imports of capital goods (which were practically synonymous with
investment in fixed capital) declined drastically, because foreign
borrowings (which had been substantial in the 1880s) also declined
(see Ford, 1962, chapters vi-ix). Investment thus depended more on
the enterprise and willingness to lend of foreign investors rather than
on the initiative of the Argentine rich. Their habits of extravagance in
private and public life did not help either (see Scobie, 1968).
From the 1870s onwards, Argentina, in common with most other
countries, used gold for international payments and for settling foreign
debts. From 1881 to June 1884, the Argentine peso was convertible
5g Underdevelopment in Latin America

into gold; but from 1884 to 1899 Argentina kept her paper peso
inconvertible and then, until the First World War, adopted gold as the
medium of both internal and external payments (see Ford, 1962; and
Williams, 1920).
The Argentine ruling class, which derived its main income from
agricultural exports, allowed the peso to depreciate freely as the
volume of paper currency rose, for such depreciation increased their
peso incomes. When inflows of foreign funds or increases in exports
aggravated domestic booms, or when outflows of foreign capital or
decreases in exports caused a recession, no counteracting measure was
adopted. During the regime of inconvertible paper money, prices rose
faster than wages in Argentina, thus redistributing incomes in favour
of employers. When, around the end of the century, the Argentine peso
began to appreciate and threatened to redistribute incomes in favour
of wage-earners, the government decided to make the peso fully
convertible into gold again.
On the eve of the First World War, Argentina had apparently
achieved a high per capita income comparable, say, to that of Italy in
Europe. But the structure of that income was peculiar for a country at
her level of income or industrialisation: agriculture (and livestock
farming) contributed 37 per cent, manufacturing 14 per cent and
services fully 49 per cent of Argentine GNP (Scobie, 1964, p. 177).
Furthermore, while accumulated ‘foreign investment’ in Argentina
was estimated as £384 million around 1908, she was paying at least
£ 18 million net in order to service that debt (probably more, since the
average rate of return was taken as 6 per cent), and she generated an
export surplus of around £24 million annually out of exports of £73
million in order to support that drain (Martinez and Lewandowski,
1 g 11, pp. 227, 233, and 363). Argentina’s exports became con¬
centrated on a few products; and she depended for about 20 per cent of
her exports on one single market, Great Britain. British citizens also
accounted for the bulk of the investments in the country, including
those in the crucial meat-packing industry and in the railways. This
dependence on a few agricultural exports, and the intimate tying up of
the interests of the great landowners and British traders and investors,
caused severe problems from the late 1920s onwards as the world
capitalist economy became involved first in an agricultural, and then
in a general, depression.
With the coming of the depression, the Argentine ruling class had to
adopt measures which proved protective for manufacturing industries.
However, lack of foreign exchange and the virtual non-existence of
domestic industries making industrial capital goods limited invest-
Underdevelopment in Latin America 59

ment in industry. Furthermore, the dependence of the Argentine

landed oligarchy on the British market forced it to give concessions
to foreign exporters of industrial goods at the very moment
when Argentine industry needed state patronage most. Under the
Roca-Runciman pact, Argentina was forced to ‘buy British’ in
exchange for promises of maintaining her market for wheat, wool and
beef. Further concessions were extracted by Britain as the depression
lingered (Scobie, 1964, pp. 183-4). However, the depression did force
some industrialization in Argentina, and, by 1939, according to one
estimate, the share of agriculture in GNP had declined to 23 per cent,
and that of construction and manufacturing had increased to 27 per
cent, while that of services remained more or less constant at 49 per
cent (Scobie, 1964, p. 279; see also Furtado, 1972, chapter 11). The
crisis of the 1930s revealed Argentina as a dominated capitalist
country, vulnerable to pressures emanating from advanced capitalist
countries and unable to steer her destiny autonomously. The Second
World War ended the domination of Argentine economic life by
British interests, only to usher in the USA as the new overlord in the
economic sphere. The post-Second-World-War period has been
characterized by stop-go cycles - primarily governed by external
influences - that are familiar in many third world countries. We will
take up the discussion of such phenomena in chapter 5 below.

3.4.2 Nationalism and the curse of mineral exports in Chile

At the time of liberation from Spanish rule, Chile’s social structure was
set in a pattern very similar to that of the rest of Latin America (see
McBride, 1936; Frank, 1971; and Bauer, 1975). Chilean landed
estates were known asf undos; and Chile developed her peculiar form of
bonded labour in the shape of inquilinaje. Inquilinos were tenants who
were obliged to put in labour services, in return for a small allotment of
land. The Chilean landowners had earlier on been producing livestock
products for the Peruvian market; over the course of the eighteenth
century, demand shifted towards wheat, and the landowners acquired
a greater degree of control over the settled land. With these
developments, there occurred a regression from payment of cash rents
by tenants to payment in the form of services. By the beginning of the
nineteenth century inquilinos had become hereditary farm servants.
As in other parts of Spanish America, Chilean Indians had suffered a
severe demographic decline as a result of Spanish conquest. But the
Araucanian Indians resisted the conquerors all the way, and, before
the nineteenth century, had restricted Spanish occupation to the north
6o Underdevelopment in Latin America

of the river Bio-Bio. As in Argentina, so in Chile, the last resistance of

the Indians was overcome in savage wars of extermination during the
nineteenth century.
Perhaps because Chile was relatively inaccessible to Europe in the
first half of the nineteenth century, the government was, for a time,
able to follow a protectionist policy for fostering modern industry
(Rippy and Pfeiffer, 1948). It also tried to encourage Chilean shipping
by a system of differential import duties on goods carried in Chilean
ships. Under the governments ofBulnes and Montt (1841-61), efforts
were made to open up coal mines, and to build telegraph lines, roads
and railways. Railways were built through state help and without
much participation offoreign capital (Frank, 1971, p. 83). Even in this
phase, foreign enterprise played an important part. With the help of
British capital, William Wheelwright, an American, provided
Valparaiso with various port and town facilities, founded the Pacific
Steam Navigation Company, to link the ports of Chile with Peru,
Panama and Europe, and built the first telegraph line in the country
(Pendle, 1971, pp. 145-6).
Chile was forced gradually to accept the regime of free trade from
the 1860s onwards. In 1864, for example, the laws protecting native
Chilean shipping against foreign competition were abolished. In spite
of this, particularly under the stimulus of the War of the Pacific
(1879—82), in which Chile came out victorious against Peru and
Bolivia, metal-making industries producing ploughs, threshing ma¬
chines, railway wagons, and steam locomotives expanded. However,
paradoxically enough, victory in the War of the Pacific, and the
further addition to the already rich mineral wealth of Chile as a result
of that victory undid the residual autonomy of Chile in economic
matters.
Chile had exported copper first in 1749, and her copper output
increased over time. For the three decades starting in 1851 Chile
became the top copper-producing nation of the world. In this phase
native (Urmeneta) and immigrant (Charles Lambert and his son)
Chilean entrepreneurs were responsible for some innovations in the
copper-mining industry. But when the richest copper ores ran out, the
Chilean entrepreneurs were apparently unable to solve the technical
problems of reducing the huge reserves of porphyry ores economically,
and the disadvantage of being a rather small and isolated capitalist
country showed up (although this smallness and isolation had to some
extent protected her) (see Gedicks, 1973).

As a result of the victory in the War of the Pacific, Chile acquired

sovereignty over nitrate producing territories in the north but
Underdevelopment in Latin America 61

promptly lost control over the mines to foreign, particularly British,

nationals. When the areas producing nitrate were within Peru and
Bolivia, it was Chilean workers and businessmen who operated the
mines and carried on as the main traders in the ports. Then Peru
decided to nationalize the nitrate mines and Chile went to war with
Peru and Bolivia in the name of free enterprise and private property.
In the meantime, British businessmen, among whom the most sinister
figure was John Thomas North, bought up the Peruvian bonds which
were in effect titles to the mines, at knockdown prices, with the help of
credit extended by the Bank of Valparaiso and other Chilean banks.
When Chile won the war, she had to honour the titles - particularly
because international recognition of her claims to the new acquisitions
depended on placating the big foreign powers (see Galeano, 1973,

pp. 156-7, Blakemore, 1974, pp. 522-3, and Mamalakis, 1971).

After the rise of nitrate as the major export-earner in the Chilean
economy, the traditional Chilean oligarchy became more firmly
linked and subordinated to the dominant capitalist classes from
advanced capitalist countries. A dramatic conflict between the
interests linked to foreign business and the spokesmen of autonomous
development took place during the presidency of Balmaceda.
Balmaceda tried, though in a halting and confused manner at first, to
prevent the complete takeover of Chilean nitrate and the nitrate-
producing territory by foreign businessmen, develop railways under
some degree of state control, encourage domestic manufactures
(including the processing of Chilean minerals at home) and undertake
extensive public works. These policies led to a rise in real wages, and
threatened the interests of established foreign capitalists, the church
and the landowning oligarchy. Almost symbolically for nineteenth-
century imperialism, the vested interests fomented a rebellion in the
navy in 1891. The rebels were able ultimately to occupy Santiago and
overthrow the government. President Balmaceda committed suicide.
(For the history of the civil war see Encyclopaedia Bntannica, tenth
edition, vol. 27. For interpretations of the reasons for the conflict, see
Frank, 1971, p. 93; and articles by Pike, Necochea and Blakemore, in
Hanke, 1969b, section v.) The rebels succeeded not only because of
foreign backing but also because the dominant section of the ruling
classes was behind them.
A new phase of expansion of copper production and export in Chile
began in the early twentieth century, when the US corporations,
Anaconda and Kennecott, acquired ownership rights over the huge
low-grade ore deposits in the Norte Chico and established the Gran
Mineria. In the earlier phases, enterprises had been small, and
62 Underdevelopment in Latin America

technology fairly simple. In the second phase, exploitation was based

on large-scale, capital-intensive technology. The Anaconda-owned
Chiquicamata mine, for example, had by the 1960s a production
capacity of over 100,000 tons of copper ore per day, and had produced
between 1913 (the year it started) and 1958 a total of 6 million tons of
copper (over 300 million tons of oxide ore had been removed;
Blakemore, 1974, p. 532). While the scale and the technology of
Gran Mineria were impressive, capital came out of the profits made in
Chile. Between roughly the First World War and the victory of the
Unidad Popular led by Salvador Allende (in November 1970),
Anaconda and Kennecott together had taken out of Chile $ 4 billion,
whereas their total nominal investment in Chile was at most $ 800
million (the real investment was a lot less) (Galeano, 1973, p. 159)-
Pointing out that both Anaconda and Kennecott were built up by
immigrants into the USA with little initial capital of their own,
Norman Girvan asks why immigrants into Chile could not achieve
similar feats (Girvan, 1972). The explanation would lie in factors
internal to Chile and in the general pattern of advance of capitalism
which progressed furthest in the dominant capitalist countries such as
the USA. In the first place, Kennecott and Anaconda could draw
directly on the much vaster base of technological innovations, and of
economies of scale, production and management, which they transfer¬
red to Chile. In the second place, the Chilean upper class, which was
an amalgam of landowners, bankers, large-scale traders and in¬
dustrialists, had come fully to depend on foreign capital for major
innovations. For breaking out of their dependence, they would need to
change the highly unequal social structure, with precapitalist relations
surviving in agriculture. This they were naturally unwilling to do.
Chile’s dependence on copper and nitrate increased until the
depression of 1929 led to a disastrous contraction of export earnings.
Her rulers had to find substitutes for imports of both manufactures and
foodstuffs. This was the beginning of an industrialization process under
state patronage. Over the period 1929-47, the increase in the
proportion of industrial income to total GDP was greater in Chile
than in Argentina, Brazil, Mexico or Colombia. But the initial
percentage of industrial output in Chile was lower than in the other
countries except Colombia. However, the formation (in 1939) of
CORFO, an agency for promoting domestic production, which was
responsible for an electrification plan, for establishing a steelworks and
for other measures of industrial development, also played a part in the
industrialization drive (Furtado, 1972, chapter 11).
In many ways import-substituting industrialization accen-
Underdevelopment in Latin America 63

tuated class conflicts in Chile as in other Latin American countries. We

shall briefly review the major postwar economic developments in
Argentina, Brazil and Chile in section 3.5.

3.4.3 Sugar, coffee, and enforced industrialization in Brazil

Brazil became independent as a separate empire under the rule of the

Crown Prince of Portugal, in the aftermath of the migration of the seat
of the Portuguese empire to Rio de Janeiro, when Napoleon occupied
Portugal. Britain played a decisive role in getting Portugal to
recognize, in 1825, the independence of Brazil. The new Empire
promptly (in 1827) signed a commercial treaty with England, in effect
duplicating in Brazil ‘those special privileges which Britain had long
enjoyed in her trade with Portugal’ (Humphreys, 1965, p. 632).
Brazilian society continued to be based on slavery: Brazil imported
1.15 million African slaves between 1801 and 1870, in addition to the
2.5 million she had imported by 1801, and emerged as the top slave¬
importing territory in the world (Curtin, 1969, p. 268). The Brazilian
upper class, while they went ‘liberal’ in other ways, were reluctant to
abolish the slave trade and slavery. The former was abolished, under
British pressure, in the 1850s and the latter, effectively, only in 1889
(Graham, 1968, pp. 163-4; for descriptions of slave trade and slavery
in nineteenth-centrury Brazil, see articles collected in section 4 of
Hanke, 1969b; and for analysis of forces leading to the ultimate
abolition of slavery, see Emilio Viotti da Costa, ‘Why slavery was
abolished’, in Hanke, 1969b).
The economy of Brazil remained basically agrarian, the small
manufacturing sector suffering further under the impact of the free
import of machine-produced manufactures from Britain. The sugar
plantations in the north and north-east of the country survived, but
became backward in comparison with the rising sugar industries of
Indonesia or many of the Caribbean islands. Coffee plantations then
came up in the area near Rio de Janeiro and the Paraiba valley
and spread towards the southern states of Sao Paulo, and even down to
Parana. Up to the 1880s or so, many of the large coffee plantations
were based on slave labour, and so some of the most persistent opposi¬
tion to the abolition of slavery came from these ‘dynamic’ regions; later
the problem of labour supply was solved by the flood of immigrants
arriving from southern Europe. Between 1887 and 1900, the state of
Sao Paulo received more than a million immigrants (see Galloway,
1974, pp. 356-67; and Furtado, 1971, chapters 20, 22, 24). The
eventual domination of the Brazilian economy by coffee (Brazil
 Underdevelopment in Latin America
64

became the leading producer and exporter of coffee in the world) had
serious consequences in the twentieth century.
Apart from coffee and sugar, the most important manufacture to
develop in the nineteenth century was the cotton textile industry,
which grew mainly on the basis of the home market. The en¬
trepreneurs in the textile industry pursued highly restrictionist
policies, based upon a self-justifying assumption of a narrow and
inelastic domestic market. The industry also remained unprogressive
in technology and dependent entirely on imports of machinery and
knowhow (see Stein, 1955).
Much of the infrastructure and other accessories for the nineteenth-
century growth in Brazil, including railways, port facilities, other
public utilities and banking were provided by British enterprise. Even
the legendary Baron Maua, who was a daring innovator in many
fields, was an Anglophile and had close British connections (Graham,
1968, chapter 7). British domination in business and other fields was
enthusiastically supported by many liberal ‘sepoys’ among the native
upper class (Graham, 1969). The inflow of capital supporting the
foreign enterprise is inflated to an unknown extent, as in the case of
other third world countries, by the arbitrary writing up of capital, by
the overvaluation caused by effective tying of loans and purchases to
the major imperialist country and by similar other factors.
Nonetheless, even the nominal inflows of capital rarely came up to the
cost of servicing the foreign debt (Furtado, 1971, p. i75n).
Coffee prices in the world market fell drastically from 1893 to 1899.
Credit inflation, however, supported further expansion of coffee
production, causing a glut. The coffee planters of Brazil persuaded the
governments of the coffee-growing states to adopt a price-boosting or
‘valorization’ scheme (under the Taubate Agreement of February
1906). T he government under this scheme purchased any surpluses in
the market, with the help of foreign loans. The loans were serviced by a
new tax levied in gold on every bag of coffee exported. The expansion
of plantations was also to be discouraged (see Furtado, 1971, chapters
30-33, for a stimulating analysis of the crisis in the coffee economy
and the consequences for Brazilian industrialization).
However, this defence plan of the coffee planters kept prices steady
and provided an incentive for extension of plantations. For example,
between 1925 and 1929 coffee production grew by almost one hundred
per cent. However, exports did not expand correspondingly, primarily
because consumption per head in the chief export market, the USA,
levelled off. As a result, stockpiles of coffee were already very high when
Underdevelopment in Latin America 65

the world crisis of 1929 broke out. Within two years (1929-31) prices of
coffee exported fell from 22.5 to 8 cents a pound. After trying to indulge
in the luxury of a convertible currency, and exhausting the foreign
exchange reserves accumulated earlier, the Brazilian government had
to devalue the currency. In the meantime, the federal government
took upon itself a new valorization scheme under which coffee stock¬
piles were financed with internal credit and the stocks withheld were
destroyed. This scheme, together with the depreciation of the
currency, led to a transfer of losses from coffee growers to consumers
(who paid in the form of higher prices both for imported and domestic
goods). The effective increase in deficit financing by the government
also helped maintain money incomes. If the depression in the coffee
sector had been allowed to run its course, with the eventual
abandonment of plantations and large-scale unemployment of coffee
workers, money incomes would have declined more drastically. This
factor made import-substitution in Brazil a more powerful engine of
industrialization than in countries such as India, where the govern¬
ment did not try to protect the money incomes of the people, but
responded to the situation by enforcing the principles of orthodox
public finance (see chapter 4).

3.5 THE POSTWAR CRISIS OF IMPORT-SUBSTITUTING

INDUSTRIALIZATION AND AUTONOMOUS DEVELOPMENT
IN LATIN AMERICA

In almost all big Latin American countries, the growth in demand and
the interruption of supplies of manufactured goods experienced during
the Second World War intensified the drive towards industrialization
through the process of import substitution. But the transition to the
postwar world was marked by apparently different types of development
in different countries.
In Brazil, the regime of Getulio Vargas gave a name, Getulismo, to a
populist style of government, stressing amelioration of social con¬
ditions and a high rate of growth - particularly in industry. His regime
straddled the 1930s and the Second World War. In Argentina, an
extremely conservative regime, which won power through a coup in
1930, ruled until 1943, when a pro-labour, anti-American colonel,
Juan Peron, helped topple that regime. Peron claimed to represent
the interests of the descamisados (the shirtless people) primarily
in the towns, and during the first few years of his rule the
organized workers made notable gains. But a balance of payments
crisis and inflation forced him to compromise with his earlier
66 Underdevelopment in Latin America

principles. He was overthrown in 1955 by the military. This was

only the beginning of a series of coups, mildly democratic regimes and
rule by military juntas, which paralleled the stop-go cycles in
economic life that we take up for further analysis in chapter 5.
Meanwhile in Brazil, the basic tenets of Getulismo were adhered to by
a succession of Presidents, until, in 1964, frightened by prospects of
agrarian reform and concessions to labour, the established interests in
land and industry encouraged the military to take over power.
In the case of both Argentina and Brazil, the motives for right-wing
military coups included both the prevention of social changes which
might threaten the power of the oligarchy with its interests in land and
industry, and the threat to US interests posed by expansionist and
etatist policies (that is, policies offering state patronage to development
programmes in all fields) pursued by populist regimes. Most of the
populist regimes were at best mildly reformist. But after the Cuban
revolution of 1958, the fear of communism shadowed all existing
regimes in Latin America, and further darkened the vision of the
White House in Washington as regards that backyard of American
power. In Chile, the threat both to the established social order and to
American interests came near to being realized under the regime of
Salvador Allende, and so the suppression of that threat by the military
coup of Pinochet naturally assumed the bloodiest form in the gory
history of Latin America since the Second World War (see
Niedergang, 1971, Pendle, 1971, Petras and Zeitlin, 1968, and Scobie,
1964.)
The Chilean case illustrates how difficult it is for a small retarded
capitalist country to win national control of her own resources in this
era of domination by a few advanced capitalist countries, and how the
battle for national autonomy, if carried far enough, becomes merged in
the battle for social revolution. Two American companies, Anaconda
and Kennecott, came to control the most valuable resource of Chile,
viz. copper, from the mining to the marketing stage. Throughout their
history, these companies ploughed back only a fraction of the final
value of copper or the profits made by them into the Chilean economy.
On the other side, the USA, one of the biggest buyers of Chilean
copper, imposed tariffs on it during periods of slump in the
copper market, but denied to Chile the extraordinary profits that
should normally have resulted in a rise in prices in periods of boom, by
buying copper at controlled prices. The Chileans tried to market their
own copper in the 1950s. But the experiment was abandoned as soon as
it ran into trouble, partly deliberately engineered by the monopolistic
interests in copper. The government of Chile tried to bribe the copper
Underdevelopment in Latin America 67

companies to invest more in the industry, but the latter simply

reaped the higher profits without carrying out investment on the
promised scale because such investment did not fit in with their world¬
wide plans. The regime of President Frei gave another bribe in the
form of inflated prices for ‘Chileanization’ of part of the copper mines,
but this had no better effect on company performance than earlier
measures. The nationalization of copper mines by Allende in 1971 at a
price which was fixed after allowing for various kinds of illegal
appropriation by the companies was an act of national self-defence,
transcending class interests (Gedicks, 1973, Girvan, 1972, Griffin,
1969b, pp. 149—73, and Johnson, 1973, chapter 4). The American
copper companies fought the Chilean government in various world
courts and in the world copper market. The traditional oligarchy of
Chile teamed up with American interests and ultimately succeeded in
overthrowing the popularly elected Allende regime in 1973. The new
regime ‘compensated’ the copper companies on a generous scale, thus
paying back part of its debt to its US patrons (for an account of
the various American attempts to prevent Allende from gaining
power and then to topple him, see BRPF, 1972).
We shall take up the analysis of the class structure supporting the
economically retarded societies of the third world in detail in chapters
6 and 7. Here we note two characteristics of the Latin American upper
classes that seem to explain the chronic political instability and its
solution by extremely authoritarian methods. The first is that these
classes are generally an amalgam of ruling groups in land, banking and
industry, and have not been formed by new groups which have an
interest in breaking the power of the traditional oligarchs. Growth in
industry did not occur through the bursting asunder of the traditional
social fabric. Instead, the traditional ruling classes themselves engaged
in new economic activities, to the extent that this could be done while
retaining their monopoly of land and government, and incorporated
the few new industrialists into their ranks (see, for example, Frank
Safford’s study of entrepreneurship in Colombia in Hanke, 1969b, and
Pike, 1968). The situation did not change radically during the
intensive process of import substitution in the 1930s and after (see
Johnson, 1967-68).
Another notable characteristic is that, from the last half of the
nineteenth century onwards, economic life in the Latin American
countries has been largely guided by the enterprise and requirements
of the dominant capitalist country of the day - Britain up to 1914, and
the USA since the 1930s, with a short interregnum in between. In such
a situation, even the members of the upper classes have not had much
68 Underdevelopment in Latin America

leeway for action. However, sometimes they gave away even the
freedom of manoeuvre they had for the furtherance of short-run
sectional interests (cf. section 3.4.1 and Rock, 1975). The control of
government has then been seen as an instrument for gaining an
advantage over rival native groups, and perhaps as a bargaining
weapon in the unequal contest with foreign capital. Hence sudden
changes in government have been brought about even for adjustment
of claims as between different members of the ruling coalition, and
authoritarian measures have been used (for a lucid explanation see
Kling, 1968). When a threat has been posed to the established order by
the exploited classes, then, of course, both the traditionalists and
‘modernizers’ among the rulers have combined, with moral and
material help from the USA and her allies to impose an ‘orderly’
solution by bloody methods. Latin American rulers and their powerful
Big Brother to the North, have thus shown the way to authoritarian
rulers of other third world countries.
The issues of class composition and class domination are vital for
understanding the course of development in the third world. Hence we
take these up separately in chapters 6 and 7.
4

COLONIALISM IN ASIA : INDONESIA,

INDIA, CHINA

4-1 INTRODUCTION

In this chapter, we shall analyse the impact of capitalism on the

economies of China, Indonesia and the subcontinent of India, which in
1970 accounted for about 1,543 million out of the total population of
2,564 million of the less developed countries; the last figure repre¬
sented a little less than three quarters of the total world population of
3,632 million (the estimates are taken from Bairoch, 1975, pp. 6 and
246). Indonesia was the major colony of the Dutch until 1949; and
India the most important colony of the British up to 1947 (we shall call
the joint territory of India, Pakistan and Bangladesh, by the pre¬
independence designation of India or British India), while China
became one of the most important bones of contention for imperialist
powers, until her liberation by the Communists in 1949. These three
countries together provided the major fraction of the surplus extracted
by the colonial powers from the third world until 1914. Hence for
understanding both the mechanics of capitalist colonialism on a global
scale, and for assessing the nature of the present predicament of the
peoples of India and Indonesia, and the background of the Communist
revolution in China, a quick review of the way capitalist colonialism
exploited and moulded their societies is essential.

4.2 THE RULE OF INDONESIA BY THE DUTCH

IN THE PHASES OF MERCANTILE CAPITALISM AND
INDUSTRIAL CAPITALISM

The Indonesian archipelago was the most important source of spices

for Europe in the mercantile period. For cloves, nutmegs and mace,
the most valuable spices, the Moluccas were practically the only
source. The Portuguese managed to control the major part of the spice
trade from Indonesia in the sixteenth century, but in the seventeenth
century the Dutch wrested control from them and set about enforcing
a far more effective monopoly in the sale of Indonesian spices than the

69
 Colonialism in Asia
7°
Portuguese had managed to achieve. As in other areas of the globe,
trade, piracy and war were closely linked with European expansion.
The builder of Batavia and the founder of the Dutch empire, Jan
Pieterszoon Coen, wrote in 1614 to the Directors of the Dutch East
India Company (known by its Dutch initials as VOC): ‘Your Honours
should know by experience that trade in Asia must be driven and
maintained under the protection and favour of Your Honours own
weapons, and that the weapons must be paid for by the profits from the
trade; so that we cannot carry on trade without war nor war without
trade’ (quoted by Boxer, 1973b, p. 107).
By employing their superior firepower and naval strength, and by
playing one local ruler against another and one claimant for a throne
against another in the widely dispersed kingdoms or sultanates of
Indonesia, the Dutch managed to subjugate most of that archipelago
between 1609 and the beginning of the eighteenth century (for
detailed accounts of Dutch conquest and rule up to 1800, see Boxer,
1973b; Furnivall, 1967, chapter 11; Parry, 1974, chapter 5; and the
chapters by G. B. Masefield and E. E. Rich in Rich and Wilson, 1967).
The Dutch did not accept the responsibility of direct rule except in the
part of Java where Batavia was located. But they exercised suzerainty
over all the islands, and tightly controlled the trade and production of
spices. They forbade the production of high-value spices to all except a
specified few and compelled the latter to grow them in required
quantities. Thus the production of nutmegs was limited to the small
Banda Islands and that of cloves to Amboyna. The system was policed
by annual inspection tours, or ‘Hongi’ raids, in which all production in
excess of Dutch requirements was destroyed. These measures at first
led to a drastic decline in the output of spices. Then the Dutch took to
prescribing the amounts of particular crops to be grown by the
different islanders. They appointed ‘regents’ to enforce their decisions,
except in the part of Java where they ruled directly. ‘Regents’ were
former chiefs who had acknowledged Dutch sovereignty, or traitors
who had been recognized as rulers. The VOC levied a political tribute
(contingenten) from the islanders, generally in the form of spices, indigo
and cotton yarn. But it also exacted forced deliveries (called leveringen)
of whole crops of certain products, generally spices or other crops,
naturally at abnormally low prices (Parry, 1974, pp. 1 10-11).
Because of the increasing popularity of coffee in Europe the Dutch
tried to get the Indonesians to cultivate the crop, at first by
compulsion. And then when the crop became popular in Indonesia,
and coffee prices in export markets were considered too low, the Dutch
tried to restrict its cultivation, as they had done with the valuable
Colonialism in Asia 71
spices. As in the case of the latter, the Dutch paid absurdly low prices
for the coffee they ‘bought’ as forced deliveries. In 1777, for example,
because of exactions by the ‘regents’, the VOC officials in their private
capacity, and arbitrary deductions by the VOC itself, the cultivator of
coffee had to supply 240 to 270 pounds, for every pikol of 126 pounds
shipped, and he received payment for only 14 pounds of coffee,
presumably at the depressed domestic price of Indonesia! (Furnivall,
1967, p. 40).
The Dutch, by monopolizing all the important items and routes of
external trade in Indonesia and eliminating all rivals, also naturally
raised the prices of imports, which included such necessities as textiles
and rice. They managed in addition, to choke off indigenous industries
either by selling imported stuff forcibly or denying them their usual
sales outlets. Many of the islands suffered considerable depopulation
under Dutch rule. It is difficult to find one redeeming feature of this
period of Dutch rule, which seems to have merited all the strictures of
Adam Smith against rule by a monopoly company (Smith, 1776,
vol. 2, pp. 126—36). However, the control of major branches of the
spice trade enabled the Dutch to reap fabulous profits (in some cases,
the profit margins on spice trade exceeded a thousand per cent), and
doubtless fed that stream of Dutch finance which eased the birth of the
new industrial system in Britain.
Dutch rule in Indonesia suffered an eclipse during the Napoleonic
Wars, when Indonesia was occupied by the British. But the latter
handed the islands back to the Dutch in 1816. By then industrial
capitalism was beginning to spread out from Britain and Belgium to
other western European countries. In this phase, the Dutch began to
take a more direct part in administration and in the production
decisions of the Indonesian peasant.
The first part of this period was dominated, as far as economic policy
was concerned, by the ‘culture system’.1 This was introduced by
Governor Van den Bosch in 1830. Its essence was the expropriation of
a certain percentage (generally a fifth) of total labour and land in a
village for the production of valuable export crops (coffee, sugar, etc.).
The villagers could either deliver the stipulated share of the crop to the
government or could set aside a stipulated fraction of the land for
producing the crops (generally under strict supervision) to be
delivered to the government. These exports were channelled through a
monopolistic trading organization, Nederlandsche Handelma-

I Our account of developments in Indonesia from 1816 to 1939 is based mainly on

Boeke, 1946; Furnivall, 1967; Geertz, 1963; R. J. Van Leuwen, ‘Indonesia’ in Lewis,
1970; and Wertheim, 1959.
 Colonialism in Asia
72
atschappij or NHM for short. J he 'culture system lasted formally
for more than thirty years, after which Dutch private planters achi¬
eved through contracts what the government had sought to
accomplish through direct expropriation of land and labour of the
Indonesian (primarily Javanese) peasants. The private sugar plan¬
tations (generally controlled by large joint-stock companies) usually
entered into 21J years leases with the villagers. The sugar estate
planted one third of the cultivated land of the village in sugarcane.

The cane occupied these fields for about fifteen months; after eighteen months
the land was returned to the holders and another third of the village’s land was
taken for sugar, and so on around the cycle. But, as the new cane planting
usually took place before the old one was harvested, any particular field was in
sugar about a half rather than a third of the time; or to put it aggregatively,
about one-half of the village’s land, now one-third, now two-thirds, was in
sugar, and half in peasant crops - either rice, or dry-season second crops such
as soya or peanuts (Geertz, 1963, pp. 86—7).

Over the course of the nineteenth century, coffee was replaced by

sugar as the major export crop of Indonesia, and a larger and larger
fraction ofjava’s land was planted in sugarcane. In spite of a great deal
of labour intensification for cultivation of rice and resort to dry crops
requiring only small amounts of water, Java had to import increasing
quantities of rice to meet the subsistence requirements of a growing
population. By imposing a tremendous burden on the Indonesian
people, the Dutch succeeded in (a) extracting, on a long-term basis, a
very large fraction of the produce of the Inner Islands of Indonesia and
(b) keeping the surplus from passing straight into the hands of the
British (as happened in the case of the surplus extracted from Brazil by
Portugal in the seventeenth and eighteenth centuries). This latter
objective was achieved by monopolizing the external trade as much as
possible. The Indonesian surplus helped the Dutch in overcoming the
state of relative backwardness in modern industry with which they had
started after the Napoleonic Wars.2
1 have not found any estimate of the value of the surplus extracted
by the Dutch (and, to a much more limited extent, by other advanced
capitalist powers), from Indonesia. Such an estimate should ideally
include the kinds of items Edward Long listed in his estimate of British
profits from the possession of Jamaica (see chapter 3 above). As I have
pointed out earlier (in chapter 2) such figures have not been computed

2 It is a curious commentary on the objectivity of bourgeois academic scholarship

that in the account of industrialization of the Netherlands by Jan Dhondt and Marinette
Brouwier in Cipolla, 1973, the role of the surplus extracted from Indonesia does not find
even a fleeting mention.
Colonialism in Asia
73
for most countries, and I have used instead the excess of merchandise
exports over merchandise imports as a minimal measure of the surplus
extracted. In ordinary international accounts, if a country shows a
persistent surplus of exports over imports, then the balance accu¬
mulates as (a) claims against foreign countries or (b) reserves of gold or
foreign currencies. If we scrutinize Indonesian or Indian balance of
trade accounts up to 1939, we find that while both countries had
persistent balance of trade surpluses, Europeans were all the time
accumulating claims against them in the form of ownership of private
capital and holdings of public securities of various kinds. The basic
reason was that the Europeans were appropriating the export surplus
in various ways (mainly as a political tribute, or as a return from
monopolized occupations and monopolistic enterprise) without much
of a return. This is why the export-import gap provides in these cases
a measure of the unrequited export surplus from these countries.
Table 4.1 provides the estimates of the export surplus generated by
the Netherlands Indies. In spite of the entry of some British and
American capital into Indonesia, particularly in the twentieth cen¬
tury, most large-scale enterprises continued to be owned by the Dutch.
For most of the nineteenth century, the Netherlands accounted for al¬
most half or more of the exports from Indonesia. But she accounted for
a much smaller fraction of imports into Indonesia, for she was not a
major exporter of either the manufactured goods or the foodstuffs that
Indonesia imported in large quantities. Much of the exports by
Indonesia to the Netherlands were re-exported. Taking everything
together, the Dutch doubtless reaped the lion’s share of the surplus
extracted from Indonesia by foreigners. In the fourteen years from
1865 to 1878, the national exchequer of Holland made a clear gain of
-£ 18 million from the colonial administration of Indonesia (Britan-
nica, 1881, p. 819). But this is only a fraction of the total export surplus
generated by Indonesia-or appropriated by the Dutch from that
country. Apart from increasing the fund for accumulation (and
consumption) of capitalists in the Netherlands, the Indonesian surplus
also served to balance the external payments accounts of the
metropolitan country. This function is analogous to that performed by
the Indian trade surpluses in the payments accounts of the British
Empire, except that its importance was probably greater in the case of
the Netherlands. For, unlike the British, the Dutch were not a leading
manufacturing nation until the First World War, and a large part of
their total external earnings came from direct exploitation of
Indonesia and control of her external trade.
The annual export surplus of Indonesia in the years 1876-80 was 51
74 Colonialism in Asia

T able 4.1 Exports from and imports into Netherlands Indies of merchandise in
selected years, and five-year averages from 1876 to 1930 (million guilders)

Year or five-year Export surplus

period (annual on merchandise
average) Exports Imports account

(1) (2) (3)

1830-34 20 '5 5
'835 32 16 16
1840 74 26 48
1845 64 27 37
1850 58 24 34
'855 79 32 47
i860 99 44 55
1865 101 4° 6l
1870 108 44 64
1875 172 108 64
1876-80 180 129 5'
1881-85 189 142 47
1886-90 185 130 55
1891-95 206 162 44
1896-1900 227 170 57
1901-05 275 '97 78
1906-10 414 258 156
'9"-'5 643 407 235
1916-20 '339 685 654
192'—25 1417 8'7 600
1926-30 1501 994 507
!929 '443 1052 39'
'933 468 318 150
'938 658 478 180
!94o 882 432 450

Note:
(a) For international comparison, f 1 sterling can be taken as equivalent to
12 guilders or florins over most of the period: see Furnivall, 1967, p. xxiii.
(b) Although nowhere is the basis of computation of the figures specifically
mentioned, the values of exports are assumed to be f.o.b. and of imports, c.i.f.

Sources: For the period up to 1875, Furnivall, 1967, pp. 171, 207; for the
period 1876 to 1930, Wertheim, 1959, p. 101, and for 1929, 1933, 1938 and
1940, Boeke, 1946, pp. 22 and 26.
Colonialism in Asia 75

million guilders, roughly £4.25 million. The estimated population of

Java, Bali and Lombok, which generated most of the exports, was
about 19 million in 1877 (Boeke, 1946, chapter 11). Thus every
inhabitant of these islands contributed about 4 shillings to the export
surplus. If the income per head in these islands can be taken as about
£ 3, which was the income per head in British India around 1900, then
more than 6 per cent of the Indonesians' income was taken away
abroad every year. Over time, the ratio of export surplus to total
exports increased, and came to form more than a third of total exports
by the beginning of the twentieth century. Since the importance of
export crops themselves seemed to have increased over time, the
degree of exploitation also seems to have risen. Indonesia con¬
tinued to be a vital adjunct of the Dutch economy until the Japanese
invasion altered the situation completely. According to one esti¬
mate, the total foreign capital invested in plantations, railways,
shipping companies, banks, etc., operating in Indonesia in 1929 came
to about 4,000 million guilders of which the Netherlands owned about
two thirds. In that year, the ‘Indonesian connection’ is estimated to
have generated an employment of 150,000 persons or about one tenth
of the Dutch working force (see La V alette, 1938a and 1938b). Besides
this, 241,000 Europeans (mostly Dutchman) lived in Indonesia in
1930 (Furnivall, 1967, p. 347).
The systematic extraction of a large proportion of the fruits of labour
in Indonesia was achieved at the cost of retarded development of the
colonial society. This retardation became much more pronounced in
the era of industrial capitalism in Europe. Taking up the most
important manufacture of the earlier era, viz. cotton textiles, we find
that already by the end of the eighteenth century Javanese exports of
cotton goods had been eliminated by exports of Indian textiles, which
also made some inroads on the Javanese domestic market. Further¬
more, in the eighteenth century the VOC obtained forced deliveries of
cotton yarn from the Indonesians, often paying little more than half
the market price in Java, and thus thwarted this branch of the industry
(Matsuo, 1970, chapter 1). But on the whole, before the coming of
machine-made cotton goods from Europe, the Indonesian textile
industry had managed to carry on and supply most of the domestic
needs. The situation changed radically in the nineteenth century: the
value of imports of cotton goods increased from 3.9 million guilders in
1830 to 35.7 million guilders in 1900 (Furnivall, 1967, pp. 130 and 207).
Nothing was done to halt the process of destruction of native
handicrafts until the beginning of the twentieth century. Then half¬
hearted measures were proposed but could not make any headway
76 Colonialism in Asia

against the resistance of Dutch plantation-owners who feared that

encouragement of industry would raise wages. Finally, the depression
of the 1930s compelled the government to adopt some measures for
fostering small-scale industries, as a policy of unemployment insurance
(Matsuo, 1970, pp. 19-21).
We have already seen how estate agriculture was promoted by the
Dutch government by compelling Javanese villagers to grow cash
crops either under the name of taxation (the ‘culture system’) or under
the system of long-term leases of village land. This led to the growth of
cash crops, partly at the expense of the growing of paddy and partly
through the application of more labour. The leases were supposed to
be voluntary, but were in fact forced on the villagers by village
headmen and officials — with the incentive of the advance of several
years’ rent to the impoverished peasantry. Under the Agrarian Law of
1870, European planters were given long leases of‘waste lands’, that is,
all lands that were not already cultivated. This measure helped confine
the peasantry to their original villages, and secured a captive, low-
wage labour force for the sugar factories. With little capital at their
disposal and with a rising population, the peasantry changed over,
where there was scope for such a change, from ladang (shifting
cultivation), to sawah (annual, intensive cultivation) and then applied
more and more labour to the same quantity of land. This is the process
that Geertz has called ‘agricultural involution’ (Geertz, 1963).
In the Outer Islands, because Dutch rule was indirect for a long
time, the control of European planters on the land and labour was a
little less absolute. Even there, through contracts with the local sultans
who leased their land to them and through the use of such laws as a
Police Regulation (which gave masters the right to penalize servants
for breach of contract), and a Coolie Ordinance, which gave
employers ‘effective legal control over their imported labourers’
(Furnivall, 1967, P- ^2), the planters acquired firm control over large
tracts of land and the labourers employed there. Still, the native
landholders in the Outer Islands did better than in Java, because (a)
they had more land available, and (b) since the exactions on them by
Dutch planters were not as severe, they could save and invest more,
and diversify their output.
In spite ol the fact that the Dutch imposed various restrictions on
alienation of land from the Indonesians and that most contracts were
made with the village as a unit rather than with individual peasants,
there was considerable differentiation among the Javanese peasantry,
with the majority of the residents in a village being either landless or
poor peasants and a small minority owning the major fraction of the
Colonialism in Asia 77

land (Wertheim, 1959, pp. 111-14). However, until the end of the
First World War, few of the rural rich could invest as capitalists since
there were few channels of investment other than the purchase of land.
The emergence of a unified capitalist class was also inhibited by
deliberate Dutch policy. The Dutch had in the very beginning
destroyed the commerce of Mataram and hence the most important
base of operations of Javanese businessmen. By monopolizing all
external trade and driving its claws deep into the sphere of production,
the VOC completely eroded the base of an Indonesian capitalist class.
Dutch policy, both at a governmental and private level, favoured the
‘Foreign Orientals’, mostly Chinese, as intermediaries in the bazaar
and as petty traders serving the local markets. But in order to prevent
Indonesian dissatisfaction at the possible loss of land to the ‘Foreign
Orientals’, various laws were passed to limit the power of moneylen¬
ders over debtors, and banning the alienation of land owned by
Indonesians to others. By using other laws regulating the movement
and residence of‘Foreign Orientals’, the Dutch authorities managed
to segregate the former from the general Indonesian population (see
Fairbank, Reischauer and Craig, 1969, pp. 733-4, and Furnivall,
i967> PP- 45-8, 213-14, 239-42).
Thus was born the ‘dual society’ described by Boeke. According to
his apologia, the eastern peoples were incapable of reacting rationally
to economic incentives, or adopting profit maximizing behaviour.3 As
we have seen above, the basic reasons for the apparent difference in the
behaviour of the Indonesians, the Chinese and the Europeans - where
such differences did exist-lay in the fact that the last group
systematically monopolized all profit-earning opportunities and all
highly-paid posts and kept the Indonesians without education and
without hope for control of their own assets. (Even in 1938, 92.2 per
cent of higher personnel in government and 83.97 per cent of all
controlling staff among administrative personnel were Europeans:
Wertheim, 1959, p. 149.)
In such circumstances an Indonesian business community was slow
to emerge, and slower to develop. The use of imported yarn allowed a
small textile sector to develop in the twentieth century. A putting-out
system soon developed under the stimulus of some government
encouragement to small-scale industry from the 1920s onwards, and
under the compulsion of the effects of depression of the 1930s, which led
to a disastrous fall in the value of agricultural exports and hence made

3 For a representative selection of the opinions of Dutch economists and policy¬

makers, including Boeke, see Indonesian Economics, 1961. For a critique of such
theories, see Wertheim, 1959, and Higgins, 1970
 Colonialism in Asia
78
industrial investment more attractive than before, the process ot
formation of an Indonesian business community, not entirely confined
to landownership, accelerated (Matsuo, 1970, pp. 20-48, and Geertz,
1963). But this community still remained extremely small and
singularly unprepared for the role ofleadership in the economic sphere
to which it was catapulted in 1949 by the successful outcome of the
Indonesian struggle for independence.

4.3 INDIA IN THE EARLY YEARS OF BRITISH RULE-

EXPLOITATION THROUGH THE MERCANTILE SYSTEM

In the nineteenth century, the Dutch constructed probably the biggest

system of plantations in any colonial territory, but they did it not with
slave or indentured labour, but with peasants and formally free
labourers. Even when direct government compulsion on peasant
production was abolished and when formally free trade was in
operation, the essentials of the system remained unchanged.
In some ways, the British in India behaved very similarly to the
Dutch. The British East India Company which conquered India was a
legally chartered monopoly like the VOC. Like the Dutch, the British
also organized plantations for producing indigo, sugar, coffee, tea and
rubber. But they managed to get a much greater fraction of peasant
output through indirect taxation and through purchase of com¬
modities from the peasants and sale of manufactures. The British may
indeed be regarded as the real founders of modern neocolonialism, for
both in Latin America and in India in the late nineteenth century they
depended more on economic power and political influence than on
direct use of political power at every stage for obtaining the lion’s share
of the surplus of the dominated economies.
But in the initial sixty years or so of British rule in India, monopoly
and levy of political tribute were the major instruments of exploitation.
The effective British conquest of India began in 1 757 with the defeat of
the Nawab of Bengal by Robert Clive, primarily because of the
treachery of the Nawab’s Commander-in-chief. From then until 1813 is
the purely mercantilist phase of the exploitation of India. For, during
this period, the East India Company enjoyed a monopoly of trade
between Europe and the East, including India and China. In 1813, the
Company’s monopoly of trade between Europe and India was
abolished, but it retained the monopoly of trade with China, which
was in turn abolished in 1834. The East India Company ruled India
until 1858, when, because of the great mutiny by its Indian troops
marking the first national war of independence in India, the task of
Colonialism in Asia 79

ruling India was taken over directly by the British Parliament. The
period 1813-34 may be characterized as that of transition to
exploitation through free trade. The period 1858-1914 saw the zenith
of that system of exploitation. The policy of free trade was augmented
in this period by the public works policy of the British Indian
government, which helped open up India fully to the influence of the
world capitalist market, and provided new levers for extracting the
surplus from India. Finally, the period 1914-47 marked the end of the
colonial exploitation of India by the British and the beginning of
neocolonial exploitation by advanced capitalism in general. I shall
divide this brief analysis of the economic impact of British rule in India
into two sections: in the first section, I shall primarily be concerned
with the period 1757-1858, and in the next with the period
1858-1947, but there will inevitably be some overlapping of themes
between the two sections.
The East India Company conquered Bengal in 1757, but for a few
years they tried to rule through their local puppets. This proved
impossible because of the greed of the European servants of the East
India Company and other private British traders, who flouted all laws
in order to increase their profits. The British gradually assumed all the
formal powers of a ruler. In 1765, they acquired from the titular
Mughal Emperor the dewany, i.e. the charter to collect the land
revenue of Bengal. They kept most of the basic features of the Mughal
land revenue system but raised the proportion of the produce collected
as revenue enormously. Anthony Lambert, a British trader writing in
1795, recognized this quite clearly. In the first year of the Company’s
dewany, the revenue came to Current Rs. 27,857,485:

This exhibits the revenue nearly doubled since Akbar’s reign, or, rather (from a
much later period) since the Subaship of Suja Khan, the expiration of which
was nearly coeval with the fall of the Mogul empire. The annual revenues of
Bengal, and its tribute, had continued nearly uniform from the establishment
of the empire by Akbar, to its dismemberment in the reign of Mohammed
Shah. But, in less than forty years after this event, we find the revenue nearly
doubled (Colebrooke and Lambert, 1795, p. 232).

Partly as a result of the misrule under the system introduced by the

East India Company, a succession of terrible famines led to a decline ol
the population by about a third over the years 1 769-71. But the actual
revenue collections in the immediately succeeding years, instead of
falling, rose above pre-famine levels (Dutt, 1963, p. 47).
Thus in terms of tax exaction, the British proved much harsher than
the earlier Mughal rulers. Furthermore, a major fraction of the tribute
formally exacted by the Mughals had come back through various
 Colonialism in Asia
8o

channels to stimulate the demand for the local products ol Bengal,

whereas very little of the tribute levied by the British came back that
way. On the contrary, the operation of the monopoly ot the East India
Company and the associated European merchants meant that the
post-tax output of the Indians was paid for at very low prices indeed.

While Europe has demanded more productions from India, it has returned less
in money and commodities, d he English Company has drawn from Bengal a
greater tribute than was remitted to Delhi; and, for the purchase of production
required by Europe, Bengal has ceased to receive what formerly replaced the
tribute it paid. It is immaterial whether the tribute has been drawn from the
money of circulation, or its manufactures; either, ultimately becomes a tribute
of labour (Colebrooke and Lambert, 1795, pp. 221-2).

The Company not only taxed the land. For decades together, it
monopolised the manufacture and sale of salt, and production and sale
of Bengal opium, a crucial item of the Company’s commerce with
China, remained a Company monopoly throughout its rule. Wherever
it had any direct interest in production, it depressed the wages of the
producers to levels that often went below subsistence and deprived
them of freedom of choice of occupation or employer. For silk goods it
substituted the production of raw silk and compelled the weavers
under its control to give up silk weaving when the sale of raw silk in
Europe proved more profitable than the sale of silk goods.
Throughout this first phase, the trade under the control of the
Company was riddled with restrictions - most of them harmful to the
Indian interest. Thus, for example, the import of Indian cotton goods
into England was restricted by duties and by sumptuary regulations.
Most of the imports of such goods into Britain were re-exported. Much
more damagingly, Indian cotton goods produced in India had to pay
considerably higher duties than cotton goods imported from England
(see Dutt, 1963, chapter xvii; Sinha 1970, chapter 3; and Trevelyan,
1835). This proved crucial in the period when the Indian handloom
industry was overwhelmed by the competition of British goods, that is,
during the period 1815-30: internal custom and transit duties were
not abolished until 1836.
The exploitation of India during the period 1757-1813 was carried
out with the East India Company as the legal monopolist, but with the
active assistance of a number of private European traders whose co¬
operation proved very important in the trade with China. During this
period, the Company’s trade and tribute included Indian cotton goods
and other handicraft products as well as agricultural materials such as
raw cotton, indigo and opium. Part of the surplus realised through the
Colonialism in Asia 81

trade and revenue system in Bengal was utilized to extend the British
dominion over the rest oflndia and to balance the trade account with
China (with whom Britain normally had a deficit until about the first
quarter of the nineteenth century). The rest of it was transferred to
Britain as unrequited export surplus in goods or bullion. Since after
acquiring dominion over India, the East India Company and private
traders could appropriate Indian goods as tribute of profits without
really paying for them, Britain did not any longer have to send bullion
to India to balance her accounts. Instead, bullion was now sent out
from India either to China or to Britain.
The existing estimates of the external ‘drain’ or unrequited exports
from Bengal or British dominions in general put it at an aggregate of
£38 million for the period 1757-80 (Sinha, 1927, pp. 51-2), £1.78
million annually over the decade from 1783-84 to 1792-93 (Furber,
1951, pp. 312—16), and between £3 million and £4 million per annum
around the years 1813 to 1822 (Prinsep, 1823, pp. 63-4 and 64m).
Taking a detailed estimate of Colebrooke for the output of agri¬
culture as the base (see Bagchi, 1973c), the external drain from Bengal
could be put at about 3 to 4 per cent of the gross domestic material
product. If we add another 2 or 3 per cent as the expenditure on the
wars of conquest incurred by the East India Company in this period,
we can see that at least 5 to 6 per cent of resources of the ruled land
were siphoned off from any possibility of investment. If we compare
this waste with the 7 or 8 per cent of national income invested by
Britain during the period of her Industrial Revolution, we can begin to
gauge the magnitude of the damage inflicted by this period of British
rule on the Indian economy - particularly when we remember that
the period was punctuated by wars, famines, and arbitrary exactions
by British tax collectors.
Some orderliness was introduced into the revenue system and ad¬
ministration by the reforms of Cornwallis in the 1790s, but at the
expense of raising the rate of exploitation attained through torture and
force, and excluding Indians from all responsible or highly-paid posts.
The revenue system introduced by Cornwallis in Bengal was different
from the so-called ryotwari system that found favour with other officials
such as Elphinstone in Bombay or Munro in Madras. However, all
these systems had the common characteristic of making land an
alienable commodity without creating full private property in it, and
providing a large surplus in the hands of the British rulers with very
little expenditure in recompense. These systems endured, with little
modification, throughout the British period.
In respect of the formal organization of external trade and its
82 Colonialism in Asia

commodity composition, the period 1813—5^ witnessed two major

changes. First, as already mentioned, the East India Company lost its
monopoly of trade between India and Europe, and between China and
European 1813 and 1834 respectively. Then, as we have also noted, the
internal transit and town duties in most parts of India were abolished
in 1836. These measures ushered in the era of formal free trade in
India: this has been called a system of ‘one-way free trade’ (Dutt,
1949), for this did not involve any reciprocal concessions either by
Britain or by other countries trading with India. The position of the
East India Company was in many respects taken over by a small group
of European business firms (‘agency houses’ - later transformed into
‘managing agencies’) which controlled practically all the external
trade (barring a portion of this trade in western India) and much of the
wholesale internal trade, especially in exportable commodities.
Secondly, India ceased to be a leading manufacturing country of the
precapitalist era and was reduced to the position of a supplier of
agricultural goods and raw materials to the industrializing economies
of the West, particularly Britain.
The long process of de-industrialization of India started with the
catastrophic disappearance of cotton manufactures from the list of
exports of India and the meteoric rise and the steep ascent of cotton
manufactures in the list of her imports — almost exclusively from
Britain. For more than seventy-five years up to 1913, India remained
the major importer of cotton goods from Britain, often taking more
than forty per cent of the British exports. For example, in 1886, the
exports of cotton goods from the UK amounted to £68.9 million
(Mitchell and Deane, 1976, p. 304); in the fiscal year 1886-87, Indian
imports of cotton yarn and cotton goods produced in the UK
amounted to about £28 million (O’Conor, 1887). In terms of quantity
of cotton piece-goods, the proportion of Indian imports to British
exports was generally even higher. Other rural or urban manufactures
were ruined partly by the rise of alternative sources of supply and by
government restrictions. Thus the manufacture of saltpetre was ruined
by the rise of the Chilean nitrate industry and by rigorous and
oppressive methods of licensing and inspection by the government.
The gun-making industry of Monghyr was ruined by the discrimi¬
natory licensing policy of the government and withdrawal of all
government custom. The de-industrialization of India, along with
government policies relating to land and land revenue led to a
structure of society which has often been characterized as ‘semi-
feudal’.
Colonialism in Asia 83

4.4 THE SYSTEM OF FREE TRADE, PUBLIC WORKS AND

THE SPOLIATION OF INDIA

While the British took over much of the Mughal system of land revenue
administration, they altered the whole basis of revenue assessment
and the mode of collection of that revenue, and thereby effected some
fundamental changes in the production relations on land. The
Mughals had assessed land revenue on the area actually cultivated,
whereas the British assessed land revenue on the basis of the amount of
land a person was entitled to cultivate. The Mughals had calculated the
revenue in cash, but often collected it in kind. The British calculated the
revenue in cash and collected it in cash. Under the Mughals, although
land changed hands as between peasants, and as between various title-
holders to the rent from land, normally failure to pay rent in time or to
repay other kinds of debt did not lead to the loss of land. Since the
assessments were based on actual output, there was a built-in
flexibility in the system. The notional rent was in fact rarely collected
in full. Since the Mughal system evolved over two centuries, since
customs varied as between different parts of the country, and since
different parts of the country were affected in different degrees by the
growth of commerce and monetary transactions, there were many
exceptions to the generalizations mentioned above, but these were
recognised as exceptions rather than the rule.
The system introduced by the British made revenue demands
inflexible in terms of cash. It also permitted the sale of land or rights to
collect rents for realization of arrears of revenue or the dues of the
superior tenure-holders. As a corollary, British law allowed moneylen¬
ders to sell up peasants and ‘zamindars’ (the superior tenure-holders)
for the failure to repay a debt and the interest accumulated on it. But
the British by no means introduced full private property in land. For a
start, arrears of rent or government revenue demand were allowed as a
prior claim on the land, and thus restricted the rights of other creditors.
Secondly, titles to land were complicated by the recognition of rights of
a whole series of intermediate tenure-holders, the claims of many of
whom were overlapping. Thus when the British government wanted
to favour the European planters in Assam and encourage them to open
up tea gardens, they gave them land on ‘fee simple’ terms on the British
pattern, with the government as the only claimant to land revenue.
There were two basic variations on the British Indian system of land
revenue. The first was the Permanent Settlement of Bengal under
which the government farmed out the right to collect revenue to a
handful of zamindars, and gave the latter special powers over the actual
84 Colonialism in Asia

cultivators, most of whom were initially degraded to the position of

tenants. In return, the zamindars had to pay a fixed sum to the
government which was fixed in perpetuity in certain areas (although
the government managed to raise its collections marginally over time
by levying certain special imposts). In the temporarily settled
zamindari areas, the same system prevailed, except that the revenue
demands were revised at, say, thirty-year periods. Under the other
basic variation, the ryotwari system, various layers of intermediary
rights grew up over time, although such areas probably escaped the
extremes of proliferation of intermediary tenures that plagued the
zamindari areas.
Various theories, including the theories of the French Physiocrats
and English utilitarians, were invoked by the British law-makers and
administrators to justify particular levels and systems of revenue
collection in India (see, for example, Stokes, 1969 and Guha, 1963).
But, in actual fact, the revenue settlements were dictated mainly by
considerations of expediency, ease of collection and maximization of
government revenue in the long run, subject to the constraint of
avoiding any costly revolt. Under most forms of revenue settlements,
revenue collections went up from year to year, whatever the state of the
weather, or the level of prices. In fact, a rise in revenue collection was
ipso facto taken to be proof of prosperity of a region!
Under the system introduced by the British, the cultivators were
forced to raise crops that would enable them to pay rent in money,
and they had to intensify labour on the fields and extend the margin of
cultivation. They could no longer treat pasture as an untaxed capital
asset, for if they claimed any right they had to pay rent on it as on the
cultivated land. Since the cultivators were left with very little surplus,
they could not maintain the fertility of soil or replace their main capital
stock and consumer durable, viz. cattle (see Bagchi, 1976c).
Under this system, in the agricultural sector, most of the cultivators,
whether formally landless or not, were reduced to near-subsistence
level. Landlords and moneylenders emerged as the lords of the
countryside licensed by the British Raj. Moneylenders had been
lending money to cultivators and revenue-farmers, and in some cases
even acquiring titles to land, before the British came into the picture.
But, as we have mentioned above, usually there were safeguards
against the proletarianization of the actual producer. The landlord or
the moneylender was interested in directly appropriating a part of the
labour of the cultivator (or artisan) in the form of goods and labour
services rather than in depriving him of his basic productive equip¬
ment. Under British rule, with the compulsion to pay land revenue
Colonialism in Asia ^5
fixed in money and with the removal of restrictions on transfer of land
and on usuary, the situation changed drastically. The process of dein¬
dustrialization of India, particularly of those regions where handloom
production for export markets had been formerly extensive, further
depressed the position of the cultivator. Although formally a free
market in labour was legalized in 1843 with the abolition of slavery, in
actual fact the labourer, faced with the prospect of unemployment and
starvation, often chose to opt out of his profitless freedom, and bind
himself to a landlord, with the hope that the latter would give him a
subsistence wage.
The policies the British pursued in other areas did little to alter these
production relations centring on land. Marx wrote in 1853:

There have been in Asia, generally, from immemorial times, but three
departments of Government: that of Finance, or the plunder of the interior;
that of War, or the plunder of the exterior; and finally, the department of
Public Works . . . Now, the British in East India accepted from their prede¬
cessors the department of finance and of war, but they have neglected entirely
that of public works
(Marx, 1853, p. 33).
However, the last deficiency in the running of the state on the
pattern of Oriental despotism was already being remedied when Marx
wrote. The East India Company started in the 1820s by restoring and
extending the East and West Jumna canals of pre-British times. The
work was later extended to the excavation of the Ganges canal, and a
start was made with the irrigation system in the Punjab. In the south,
the ancient irrigation works based on the Cauvery were renovated and
extended. In 1854, the first few miles of the two trunk railway systems
in Western and eastern India, viz. the Great Indian Peninsula
Railway and the East Indian Railway, were opened for traffic.
The work of extending the railway system received a new impetus
after the assumption of direct power to rule over India by the British
Parliament. The British manufacturing interests, for commercial
reasons, and the British civilian and military authorities in India, for
reasons of internal security and military expediency, pushed the
construction of railways forward, very often with loans raised in
England. By the beginning of 1914, India had 34,000 miles of railways.
In the same year, the total amount of area irrigated by government
works in India including Burma came to 25 million acres (Anstey,
1952, pp. 614 and 616).
Before I discuss the wider economic impact of railways and
irrigation works in India, let me note that but for certain military
railways built in the north-western part of India, and certain
86 Colonialism in Asia

protective works constructed by the government in the late nineteenth

and early twentieth centuries, the public works were eminently
profitable to the government in a commercial sense. There was a
period when the government guaranteed a certain minimum rate of
interest on the capital invested by the railway companies, but there
was virtually no check on expenditures incurred, so that the companies
could easily convert profits into losses and mulct the state of millions
of rupees. Even when construction of railways under guarantee ceased,
the purchase of materials and equipment, the financing and adminis¬
tration of railways remained concentrated in British hands. In contrast
to what happened in Britain, the USA or other advanced capitalist
countries, no railway equipment industry grew up on the basis of
railway building in India, since the state pursued a policy of free
trade, with a strong bias towards the purchase of British goods for the
railways. The irrigation works constructed by the Government were
generally strictly commercial propositions; the most profitable of them
yielded a rate of profit far higher than the market rate of interest.
A notable effect of these public works was to convert India into a
major supplier of raw materials and foodgrains for Europe and many
of its colonies overseas. The route alignments and rate structures of
railways were such as to make it cheaper to transport goods from the
ports to the interior and back rather than between points in the
interior. India was opened up to the inflow of manufactures, primarily
from Britain; in return, she supplied raw cotton, jute, indigo, hides and
skins, oilseeds and wheat to western countries, to South America, and,
later on, to Japan. The large-scale irrigation works in western LTtar
Pradesh, Punjab and Sind were particularly important in supporting
the exports of raw cotton and wheat.
The gross command area of these large-scale works did not always
equal the net increase in irrigated area; for, they often displaced the
earlier irrigation works in the form of wells and ponds, which were
under the direct control of farmers and which supported agricultural
practices that paid due attention to crop mixtures and the preservation
of soil fertility. Moreover, while the canals helped expand the
exportable surplus of foodgrains and commercial crops, they displaced
dry crops such as millets or pulses. The millets were often the staple
food of the poor, and pulses were a very important source of protein.
Furthermore, the payment of water rates, the raising of the assessed
value of the land, the pressure to grow commercial crops - all these
factors increased the indebtedness of the cultivators to moneylenders
and traders and, consequently, the control of the latter over the former
(Whitcombe, 1972, chapters 11 and iv). Because large-scale alienation
Colonialism in Asia
87
of land to moneylenders led often to disaffection among the cultivators,
the Government of India was compelled to impose restrictions on the
transfer of land from cultivators to non-cultivators (Nanavati and
Anjaria, 1951, chapter xn). However, this often meant simply that
landowners themselves became moneylenders (if they were not
already functioning in such a dual capacity) and the position of the
actual cultivator did not improve. Apart from the effect of large-scale
irrigation aggravating such social cleavages, it also caused widespread
problems of waterlogging, salinity and alkalinity, which rendered
millions of acres infertile (see Whitcombe, 1972).
Besides constructing railways, irrigation works and port facilities,
the British in India opened up coal and mica mines, tea plantations
and coffee plantations and, from the 1850s onwards, they also began to
build up a large jute mill industry. They ran indigo and sugar
plantations in the areas of settled agriculture. For the recruitment of
labourers in the tea gardens, they used a system of indentured labour,
under which the condition of the labourers approximated to that of
slaves. The same system was used to export Indian labour and replace
the erstwhile slaves in the West Indian and Mauritian sugar plan¬
tations. Indian indentured labour was also exported to Natal,
Malaysia, Ceylon and Fiji (Tinker, 1974). The planters interested in
indigo and sugar generally gave advances to peasants and induced and
coerced them to grow indigo or sugarcane. Their oppressive methods
led to the so-called ‘Indigo Mutiny' in Bengal proper in the 1860s; but
they continued the same practices in other parts of India until the First
World War at least. In these activities they were often assisted by the
zamindars, from whom they leased in part of the land or the zamindari
rights. Thus the British, with one hand introduced private property
rights and abolished slavery, and with the other hand helped
strengthen many of the precapitalist relations of bondage on the fields,
plantations and in the mines. Such relations of bondage in turn shored
up the system of excessively long hours of work and primitive working
conditions for factory labour.
From the 1850s onwards, mostly in western India, an Indian
capitalist class began to build up a cotton textile industry, partly
supplying the lower counts of yarn to Indian handloom weavers,
partly exporting such yarn to China, and partly supplying the coarser
varieties of cloth to the Indian market. Their example was taken up in
other parts of India, and Indian capitalists also acquired some interest
in coal and mica mines, and in tea and coffee plantations. But modern
enterprises in manufacturing, mining and plantations, and in banking,
shipping and insurance in 1914 were mostly under European control,
88 Colonialism in Asia

with cotton mills in western India providing the only major exception.
The growth of this comparatively small modern industrial sector
hardly made an impact on the basic framework of Indian society,
which remained dominated by colonialism, landlordism and usurious
moneylending interests.
In the period from the 1850s up to 1918 or so, India played an
extremely important role in squaring the British imperial balances.4
She not only generated vast surpluses in her aggregate balance of trade
accounts; she had a deficit with Britain in her balance of payments,
and a large surplus with the rest of the world. Thus Britain was able to
use Indian surpluses to balance her accounts with third countries and
to smoothly effect capital transfers to the latter. In the later part of the
nineteenth century, in particular, Indian exports to Latin America,
and to continental Europe became vital for financing British deficits
with the USA and Europe (Saul, i960, chapters iii-iv).
These trade relations were consonant with the international
investment pattern that developed in the nineteenth century, centred
primarily on Britain - and, to a smaller extent, France. Britain built
up foreign assets worth about £4,000 million by 1914. Most of this
investment was concentrated in the USA, Canada, Australia, New
Zealand, and South Africa (see Simon, 1967 and Thomas, 1967). The
mechanism of international trade and investment in the nineteenth
century in effect served to mop up the surpluses of today’s underde¬
veloped countries - particularly the Asian countries - in order to
transport, feed and equip the white settlers of the temperate-region
colonies. The formal policy of free trade pursued by Britain was an
integral part of this mechanism. India was the biggest market for
Britain’s cotton goods, which in turn were the single largest item of
British exports until almost the end of the nineteenth century. This was
especially important because tariff barriers restricted the export of
British goods to other developed capitalist countries — particularly
western Europe, the USA, Canada, Australia and South Africa. In
order to prevent retaliation against exports of Indian primary
products to countries outside the British Empire, Britain had to enforce
a policy of free trade in India. (For a fuller discussion of the nineteenth
century interconnections of growth and underdevelopment, see
Bagchi, 1972b).
Such a policy went hand in hand with systematic discrimination
against Indians in both official and unofficial British policy. Indian

4 The triangle of trade relations between Britain, China and India in the era
preceding the Opium War is described in section 4.6.
Colonialism in Asia 89
industrialization was thwarted through the policy of ‘one-way free
trade’ (see the preceding section), the stunting of the Indian capitalist
class by means of political and racial barriers against their entry into
business, and through the draining away of resources as political
tribute and as monopolistic rents of foreign enterprises. This thwarting
in turn led to further drain of surplus product through many vents. We
have discussed above how the flow of unrequited export surplus in
colonial or semi-colonial countries can be approximately measured as
the difference between merchandise exports and merchandise imports.
In table 4.2 are given the export surpluses of India from 1871/72 to
1938/39. As the population subject to exploitation grew and as the
economy became ever more subject to the influence of international
capitalism, the export surpluses also grew until the interwar period.
This export surplus rarely fell below a sixth, and sometimes exceeded a
fifth, of Indian exports. This period was marked by several devastat¬
ing famines and epidemics, costing millions oflives. Setting aside the
cost in human lives, the other costs of exploitation of India can perhaps
be approximated by the cumulative difference, over time, between the
actual income controlled by Indian citizens and the income they could
have enjoyed if India had been allowed to pursue the same in-

Table 4.2 Export surplus of British India on merchandise

account, 1871/72 to 1938/39

Period Annual average value (Rs. ’ooo)

1871/72 to 1875/76 212,258

1876/77 to 1880/81 223,513
1881/82 to 1885/86 278,199
1886/87 t0 1890/91 254,143
1891/92 to 1895/96 SbS.oio
1896/97 to I900/I90I 200,854
1901/02 to 1905/06 4!3,759
1906/07 to 1910/11 477,700
1911 /12 to 1915/16 527,993
1916/17 to 1920/21 457,401
1921/22 to 1925/26 617,417
1926/27 to 1930/31 509,101
1931l32 t0 l93bl36 173,854
1936/37 to 1938/39 304,200

Source: Based on Bagchi, 1976c, Table 2 (original data from Annual

Statements of the Seaborne Trade of British India).
 Colonialism in Asia
90
dustrializing policies as Canada and Australia were pursuing and if the
systematic discrimination against Indians in government, business and
the sphere of foreign trade and finance had been ended.
Most of whatever growth occurred in India up to 1914 was
concentrated on either raw or crudely processed agricultural com¬
modities. (Besides cotton and jute mills, tea and coffee plantations, and
coal and mica mines, the only modern industries of any significance to
begin their life in this era were sugar mills, a steel mill and paper mills.)
In the absence of domestic industrialization, Indian producers of
primary commodities became extremely vulnerable to international
business cycles. Among other things, India and China were used as
dumping grounds for depreciating silver (during the period 1872-94
in the case of India, and up to a much later period in the case of China)
when the advanced capitalist countries adopted gold as their mo¬
netary standard. In any financial crisis, generally the banks, exporters,
importers and the wholesale merchants covered themselves ade¬
quately, and the brunt of adjustment was borne by the ultimate
producers whose credit was cut off while the prices obtained by them
fell precipitously (Triffin, 1969).5

4.5 THE CRISIS OF THE BRITISH EMPIRE AND THE FIRST

PHASE OF IMPORT-SUBSTITUTING INDUSTRIALIZATION
IN INDIA

Throughout the nineteenth century in India, handicraft industries

declined, while large-scale industry made but a feeble beginning. The
result was almost certainly a net decline in the proportion of the
population engaged in industry (see Bagchi, 1976a). The effective rate
of gross investment as a proportion of national income could hardly
have exceeded the 5 per cent which is conventionally taken to be

5 The situation was not exactly symmetrical for primary producers from advanced
capitalist countries (including white colonies). For, in the latter, the trade in primary
products was in general controlled by indigenous capitalist groups, so that the
redistribution as a result of credit contraction occurred as between two indigenous
groups, rather than as between a foreign group and an indigenous one. Moreover, the
primary producers in white colonies typically operated with much larger volumes of
capital at their command and had effective political lobbies to fight the bankers and the
foreigners. In non-white colonies, the primary producers were mostly small peasants
who were at the mercy of everybody else. Thus decline in the price of raw cotton had
very different implications for the producers of the Indian Deccan, or the Egyptian
fellaheen and the owners of large cotton plantations in the southern USA. This is one of
the reasons why the usual terms of trade calculations (in which prices at the border are
used) are so misleading for unravelling the process of redistribution as between classes
and countries.
Colonialism in Asia 91
needed just to maintain capital intact. This was not because of any
absolute shortage of finance for investment in the hands of the tiny
native capitalist class or in the hands of the foreign capitalist class. It is
simply that under the policy of free trade and with an economic
environment where mass poverty was endemic, it was not profitable to
invest in domestic industry for supplying the home market.
The First World War revealed starkly how shaky Britain’s sup¬
remacy in the capitalist world had become. The crisis of the British
empire and the growth of the nationalist movement in India opened
up new opportunities in that the British Government was compelled to
modify its free-trade policy in significant ways. But the situation did
not change radically. War time shortage of capital goods apart,
investment in modern industry continued to be limited by the relative
lack of profitability springing from the constriction of the home
market, rather than by a shortage of raw materials, labour, finance, or
even local entrepreneurship (though almost certainly the base of the
local business class had been broadened by the forced disengagement
of most British businessmen in India from their normal business
pursuits). (For development of the argument, see Bagchi, 1972a).
Beginning with the First World War, India’s links with the UK were
loosened, and she entered into a situation of multilateral dependence
on the advanced capitalist countries. However, the passage from
unilateral to multilateral dependence was slow for several reasons.
First, much of the interwar period was one of recession and instability
for the capitalist world, so that the USA, the new overlord, retreated
into an isolationist position — except, of course, that her ‘special
relationship’ with Latin America grew in strength. (This was the
period when many Latin American countries including Argentina
gradually passed from the British to the American sphere of inlluence.’
Capitalist instability was increased by the lack of a clear directing
centre and by the renewed struggle of Germany to succeed to the
position that Britain was forced to vacate. (T he rise of the Soviet
Union further weakened the capitalist world and increased its internal
contradictions.) Secondly, in east, south, and south-east Asian markets
(including India and China), Britain was competing with Japan. And
the USA, to a large extent, acted as Britain’s ally. Britain had to grant
some concessions to Indian capitalists, partly in response to the
nationalist struggle, and partly in order to counter the Japanese
threat. In the third place, the depression of the thirties seemed to
presage for Indian capitalists a final state of independence. Their assets
grew faster than those of the British capitalists in India, and much of
 Colonialism in Asia
92
the public debt of India held in Britain was liquidated. As it turned
out, this promise proved to be an illusion, and it led to a new kind of
multilateral dependence on the advanced capitalist camp. But the
onset of this latter process was delayed by the interval of loosening of
older types of colonial ties.
The Government of I ndia was granted a measure of fiscal autonomy
after the First World War, and it adopted a policy of‘discriminating
protection’ with effect from 1924 onwards. Protective tariffs began to
be used to shelter some existing Indian industries against foreign
competition. (But imports from countries of the British Em¬
pire-including, of course, Britain - were accorded a preferential
treatment.) Tariff protection was not intended as a promotional
measure and was not accompanied by other measures of state
assistance on any scale. Furthermore, the latter half of the 1920s was
already marked by depression in world agriculture, and in 1929 the
great depression of the 1930s set in. Agricultural prices declined to
levels below those obtained even before 1914, and they declined far
more precipitously than industrial prices. Thus the money and real
incomes of the average Indian declined at the time tariff protection
really made its mark. The government’s taxation and expenditure
policies, instead of cushioning the decline in money incomes, aggra¬
vated it. In attempting to balance its budget, and protect India’s
‘credit’ abroad (in reality, the prices of existing securities of the Indian
government held by bondholders in Britain), the Government of India
slashed its expenditure as its revenues fell. (In this, its policy was in
strong contrast with that of the Brazilian government; see chapter 3
above.) There occurred a redistribution of incomes within India in
favour of fixed-income groups and people deriving their incomes from
sources other than agriculture. Such redistribution helped stimulate
the demand for industrial consumer goods. But the growth of
industries remained tied to a basically stagnant economy, and
government policy did little to ensure sustained growth. By the end of
the 1930s, India achieved a fair degree of self-sufficiency in the basic
consumer goods produced by industry, and also in such crude
producer and intermediate goods as pig iron, steel and cement (see
Bagchi, 1972a, chapters 7-13). This phase of import-substituting
industrialization did not strain the supplies of labour, capital or
entrepreneurship. Beyond strengthening the Indian capitalist class,
and filling some obvious gaps in the industrial structure, it did not
usher in a period of sustained growth either.
In the interwar period, India’s value to Britain and the advanced
capitalist world as a source of surplus declined considerably (cf.
Colonialism in Asia 93

table 4.2 above). During the First World War and for a few years after
it, the British Government had forced India to contribute massively to
the British war effort (including an ex gratia payment of/) 100 million)
and had foisted on India a very great increase in the external public
debt. Since most of this debt was held by British stockholders, the
British Government had an important stake in Indian fiscal and
monetary policies (for evidence of the concern of the Government of
India to protect British imperial interests and British stockholder
interests, see Keynes, 1973, p. 13). By the end of the 1920s, the excuses
for and the feasibility of, raising new loans for India in London had
been well nigh exhausted. However, India’s importance as the
centrepiece of the British Empire in the East still remained. The
position of the foremost supplier of export surpluses to the imperial
system was now taken by Malaysia, whose tin and rubber helped
Britain to square her accounts with countries outside the sterling area
(Kahn, 1946, chapters xi-xv). The Indian empire was a declining
asset in other respects too, for, the finances of the Government of India
were often embarrassed, and British businessmen’s pickings from
governmental expenditure and borrowings were nowhere near as
large as they had been before the First World War.
There was probably little actual transfer of British-owned assets to
Indians before the Second World War. But Indians were more active
than Europeans in the held of new enterprise, and their share in
industrial capital grew. Conflicts of interest in industry, banking and
shipping between Indian and European capitalist groups were starkly
revealed. The upsurge of a nationalist movement forced the British
government to make some concessions to Indian capitalists, whose
alliance they sought to purchase thereby. Nevertheless, as we have
mentioned above, the freedom of manoeuvre that the Indian capi¬
talists enjoyed during this period proved to be short-lived. Large
international companies and cartels had already began to dominate
world capitalism, and India could not escape their grip, particularly in
fields characterized by advanced and rapidly changing technology.
The Imperial Chemical Industries set up a manufacturing plant in
India at the end of the 1930s, and companies like General Motors set
up assembly plants for cars. On the other side, Indian firms entering
new fields of industry (such as the manufacture of textile machinery, or
railway locomotives) sought the collaboration of foreign firms for plant
design and process knowhow, as well as the use of licences and patents.
These tendencies became accentuated during the Second World
War, in spite of restrictions on investment imposed by the policies of
the Government of India. From the War, Indian industry emerged
 Colonialism in Asia
94
with the first phase of import substitution, in which basic consumer
goods industries predominated, essentially complete and with huge
unsatisfied demand for new equipment, and new facilities for building
up consumer goods industries. Between 1946 and 1951, much of the
wartime backlog of demand for capital goods was worked off, and
India embarked on her series of Five Year Plans which were expected
to bring her to the door of self-reliance.
Few economists at the time noticed that between 1937 and 1946
India had exchanged a state of unilateral dependence on Britain for
that of multilateral dependence on the advanced capitalist countries.
This latter type of dependence was caused by her earlier history and by
her socio-economic structure. As a backward, predominantly illi¬
terate country, India lacked the base for autonomous technological
development or for successful imitation of techniques developed
abroad. With a poor population and a social structure dominated by a
weak and far from homogeneous capitalist class, the market for the
better types of consumer goods, particularly durables, remained
extremely restricted. The state apparatus precariously balanced the
interests of the landlords, monopoly capitalists, professional classes,
and collaborationist elements in the upper classes. Hence government
policy was never radical enough to release agriculture from conditions
of semi-feudal bondage, and lay a firm base for assured growth. India
had in effect made a transition from the demand-constrained stasis of
colonial times to the multiply-constrained three-legged race of a
neocolonial, retarded society. We attempt a theoretical analysis of this
latter type of growth in chapter 5, and analyse the typical class
structures of neocolonial, semi-feudal, retarded societies in chapters 6
and 7.

4.6 THE DECADENCE OF THE CHANG EMPIRE

AND THE COLONIAL AND S EM I - C O L O N IA L
EXPLOITATION OF CHINA IN THE PERIOD
UP TO I 895

Even as late as the eighteenth century, the unified, aloof empire of

China, ruled by the Ch’ing (Manchus) since 1644 excited the
admiration of Europeans. Francois Quesnay thought that ‘such an
empire as that of China is equal to what all Europe would be if, the
latter were united under a single sovereign’ (F. Quesnay, ‘Despotism
in China’, in Schurmann and Schell, 1967). China was a country with
a huge bureaucracy manned by scholar officials. The latter were
generally recruited from the ranks of landlords who in turn exercised
Colonialism in Asia
95
most of the local power which was not appropriated directly by the
imperial officials. We shall usejoseph Needham’s phrase ‘bureaucratic
feudalism to characterize Chinese society as it was before European
penetration changed it drastically (J. Needham, ‘The past in China’s
present’ in Needham, 1969; see Balazs, 1972, for a different
characterization).
1 his society was basically agrarian, supporting an elaborate
bureaucracy and highly exploitative landlords. Artisanal production,
specialized crafts and their guilds had developed on a large scale; the
use of money had been widespread at least since the eighth and ninth
centuries, and merchants accumulated large volumes of capital and
carried on long-distance trade. Many of the signs of existence of private
capitalist strata are discernible by the end of the eighteenth century.
These included marketing of crops on a large scale, the widespread
borrowing and lending of money, the growth of private enterprise in
textiles, the payment of rent in cash, and so on. Development in
techniques of production in agriculture and industry supported the
growth of private enterprise.
However, this primitive capitalism remained on a tight leash. While
licensed salt merchants might amass great wealth, the state and the
landlords would tax or regulate the merchants down to size whenever
they threatened to become too powerful. And the prosperity of
particular merchants depended on official favour.6 When Europeans
came to trade in China, for example, the Chinese government licensed
some selected Chinese merchants (the so-called ‘Hong merchants’) to
handle the trade with the foreigners under the supervision of
government officials. As the imperial government became weaker in
relation to the foreigners in course of the nineteenth century, many of
the Chinese merchants in the so-called ‘treaty ports’ became agents of
the foreigners, thus exchanging one set of patrons for another.
Under the system recognized by the Chinese imperial authorities
until 1842, the foreigners could trade only through the intermediation
of the Co-hong or the guild of Hong merchants (see Morse, 1909 and
Greenberg, 1969). They refused to enter into any ‘equal’ trading
relations with the foreigners, and Canton was the only port where they
were allowed to trade. In 1793, Lord Macartney was sent as an envoy
by the King of England to China, with magnificent presents, hoping for
the opening up of trade. Emperor Ch’ien-lung accepted the presents as

6 For developments in textile manufacture and in the rice trade, see Myers, 1965,
and Chuan and Kraus, 1975, respectively. For the relation of state to private enterprise,
see Lattimore, i960, and Balazs, 1972. For a summary of technical developments, see
Mark Elvin’s paper in Perkins, 1975.
 Colonialism in Asia
96
‘tribute’ from the English King but was constrained to observe that
‘our celestial empire possesses all things in prolific abundance’
(Fairbank, Reischauer and Craig, 1969, p. 77). Nothing came ol that
embassy. The next British embassy of Lord Amherst in 1816 did not
even receive an audience from the Emperor, partly because the British
were then involved in an aggressive war against Nepal, a tributary of
China.
In the meantime, the lure of profits to be made from trade with
China was increasing for the British. With the progress of the
Industrial Revolution in Britain and the continued stagnation of the
Chinese economy and society, the ability of the latter to defend itself
against British designs was declining all the time. In the period up to
1830, the profitability or necessity of trade with China had little to do
with the direct results of the Industrial Revolution (except in so far as
the growth in incomes in Britain increased the demand for Chinese
tea). In the eighteenth century, there was a profitable market for
Chinese handicrafts, and, much more importantly, for Chinese tea in
Britain and other European countries. There was, however, no
corresponding demand for European goods in China. Hence Britain
had an adverse balance of trade with China, which was met by the
export of bullion. After the conquest of Bengal, Indian textiles and
silver obtained from Indian exploitation served to square Britain’s
balance of trade with China. Their place was increasingly occupied by
exports of raw cotton and opium from India. Opium, as a habit¬
forming drug, could be sold without meeting a saturation level. But
trade in opium was under an imperial ban in China (proclaimed in
1796) and the British East India Company used private European
traders to smuggle the drug into China.
As early as 1786, Lord Cornwallis, the then Governor General of
India, was pleading for the East India Company to extend special
facilities to private traders trading between India and China (al¬
though theoretically the Company enjoyed a monopoly of trade both
with China and India). For this was the only way of transferring the
vast tribute of Bengal to England without losing heavily through
exchange depreciation, and of at least partly meeting China’s bill for
tea and other goods bought by Britain and other European countries
(Greenberg, 1969, chapter 11 and Singh, 1966, p. 38). The East India
Company kept up the polite fiction that its ships could not be used for
exporting opium to China. But it did everything in its power to push
the sale of the drug, by monopolizing its production in Bengal (it could
not yet control its production in central and western India), regulating
prices, and assisting the private European smugglers.
As a result, the shipment of Indian opium to China grew from
Colonialism in Asia 97

49,619 chests (ot 133^- lbs) in the decade 1801 —10 to 276,143 chests
in the decade 1831-40 (the estimates are based on Tan Chung, 1973,
table xv.)
The growth of exports of opium and, to a much smaller extent, of
raw cotton from India soon led to a situation in which China was
having to pay for her imports with silver, thus reversing the direction of
flow of bullion.
By 1828, exports of European goods paid only for about a quarter of
the purchases of tea by the East India Company, the rest being paid for
by exports of Indian raw cotton and Indian opium (Greenberg, 1969,
p. 13). The British traders thus succeeded in obtaining their profits
from both China and India by inducing a change in their structures of
production. Both China and India were gradually reduced to the
status of exporters of raw materials or primary products, such as tea,
cotton, opium and raw silk. By 1828, private traders accounted for
more than two thirds of the total trade and acted as the carriers of silver
from China to Britain. The China trade became the channel of
remittance by the East India Company from India to London.

This was partly because a considerable proportion of the Company’s

territorial revenue was obtained in kind, in such goods as could be sold
profitably only in Canton; partly because by remitting through China via the
Country Trade [i.e. the intra-Asian trade as distinguished from trade with
Europe] the Company was able to gain a large advantage from its control over
the rate of exchange of its bills (Greenberg, 1969, p. 15).

The Company and the private European traders thus participated in a

collective monopoly of foreign trade between China, India and
Europe. The dominant British private traders in the China trade, as in
the case of Indo-British trade, were only a few in number. Two British
firms, Jardine, Matheson & Co., and Dent & Co., came to control two
thirds of the British trade in China. On the eve of the Opium War, the
British in their turn controlled two thirds of the foreign trade of China.
With the growth of imports of opium and the drain of silver, China
was involved in a fiscal crisis. Furthermore, since copper was the
normal medium of exchange for the poorer people whereas silver was
the unit of account for most payments, the drain of silver meant a rise
in its value in relation to copper and increased hardship for the Chinese
peasantry and other toiling people. The state naturally tried hard to
enforce the ban on the import of opium.7 On the other side, the
abolition of the formal monopoly of the East India Company in the

7 The contact with the foreigners had already produced collaborationists who
wanted to enter into a compromise with foreigners. The gains of corrupt officials from
the system of opium smuggling made many of them drag their feet over the execution of
official policy. See in this connection, Opium War, 197®, chapter 3.
98 Colonialism in Asia

trade between China and Europe removed the last restraint on the
British side on trade with China, and private European traders began
to chafe at the restrictions on ‘freedom of trade’ imposed by the
Chinese system of licensed foreign trade.
At the end of the 1830s, the Chinese authorities appointed an
incorruptible and vigorous official in the person of Lin Tse-hsu in order
to enforce the ban on opium trade. Lin tried first to persuade the
British to abjure smuggling in the name of international law and
common morality. When these appeals did not produce the desired
effect, he adopted sterner measures, including confiscation of smuggled
opium. The British replied with guns and a naval blockade. The
military and naval technology of the dominant capitalist power easily
proved superior to the war junks and shore batteries of the Chinese.
The latter were compelled to sign the first of the series of unequal
treaties, the Treaty of Nanking. Under its provisions, the monopoly of
foreign trade by the Co-hong merchants was abolished, Hong Kong
was ceded to Britain, and five more ports, including Canton and
Shanghai, were opened to British trade; further, a ‘fair and regular
tariff on trade was promised. The British also exacted an indemnity of
21 million dollars (Fairbank, Reischauer and Craig, 1969,
pp. 128-46; Greenberg, 1969, chapters vii and viii; and Opium War,
!976).
The Treaty of Nanking was followed in rapid succession by the
British Supplementary Treaty of the Bogue, the American Treaty of
Wang hsia, and the French Treaty of Whampoa. These treaties
reinforced one another, for the privileges obtained by one foreign
power were also claimed by other like-minded foreign powers under
the so-called ‘most favoured nation clause’. The rest of the nineteenth
century was a story of escalation of first Western, and then Japanese,
demands on China for various kinds of privileges including rights of
extraterritoriality. The second Opium War of 1856-60 was fought
under the most frivolous excuse of redressing ‘an insult to a British flag
lowered by Chinese police from a Chinese-owned vessel registered at
Hong Kong’ (Fairbank, Reischauer and Craig, 1969, p. 169). In this
war, the French joined the British, their arch rivals in European
diplomacy at the time, to share in the kill. Chinese defeat in the war
resulted, among other things, in the formal handing over of Chinese
customs to the supervision of the foreign powers, represented by a
British official, the opening up of the whole of China to penetration by
foreign traders, and the payment of an indemnity of 8 million taels.
In the 1850s and 1860s, China was convulsed by a series of peasant
revolts, which included the Muslim rebellion in the north-west, the
Colonialism in Asia 99
revolt of the Nien and, most important, the Taiping Rebellion (see
Chesnaux, 1973; and Taiping Revolution, 1976, for accounts of these
revolts). The Taiping Rebellion has been called the greatest peasant
revolt in history. It was a direct response to the humiliation suffered by
the Chinese at the hands of the foreigners beginning with the Opium
War. But it was also in the great tradition of Chinese peasant revolts of
earlier times, which, however, generally led only to a dynastic change
and not to any fundamental changes in society (see Mao Tse-tung,
‘The Chinese Revolution and the Chinese Communist Party’ in Mao,
1967, vol. 11, for an analysis of the significance of these revolts). This
rebellion was inspired by a millenarian Christian ideology, and had
staunchly egalitarian ideals. It failed because it could not create a state
apparatus which was essentially different from the Ch’ing regime it
was fighting. The French and the British, after humiliating the Ch’ing
in the second Opium War, jointly helped it to crush the Taiping revolt.
Until Japan’s bid to carve out a separate sphere of influence in
China and detach actual territories from the Empire changed the rules
of the game, the Western imperialist powers pursued a dualistic policy:

From time to time one country or another thought it necessary to chasten a too
obdurate China. Once chastened, however, China’s incompetent Manchu
government had to be put back in business again, for it could not be expected
that future demands would be carried out if the government was too weak to
carry them out. Thus there emerged an interesting principle: for international
purposes, the ideal government of China was a government strong enough to
carry out orders, but not strong enough to defy orders (Lattimore, i960,
pp. 104-5).

This policy of the imperialist powers and the system of treaty ports
which limited the direct impact of the foreigners to the coastal regions,
effectively restricted the impact that industrial capitalism could have
on China throughout the nineteenth century. The absence of any
railways linking the coast with the interior further circumscribed such
impact.8 A clear distinction thus emerged between the ‘comprador

8 One important reason for the differences in the degree of foreign domination of
India and of China lay in the relative degrees of strength of the Mughal and Ch’ing
emperors at the time the Western capitalist powers made a bid for conquest. ‘While
China, even in the days of her weakness maintained a political unity, and the Emperor
was able to enforce his authority in the most distant provinces and the viceroys
“trembled and obeyed”, in India by 1740 the Imperial authority had completely broken
down ... In China the issue had to be fought out in every case with the central
government, while in India the British and French companies dealt with local
governors, viceroys, and princelings and were therefore able to exert pressure on them’
(Panikkar, 1970, pp. 93-4). The Chinese Empire also disintegrated when the western
powers and the Japanese could play one viceroy or general against another in the pursuit
of their self-interest.
100 Colonialism in Asia

bourgeoisie’ in the treaty ports in subservient alliance to the foreign

capitalists, and ‘the national bourgeoisie’ in the interior. The distin¬
ction between the two, however, became a little blurred in the
Republican period.
Until the 1880s, the predominant methods of exploitation of China
by the Western powers were mercantilist in nature. Opium, which was
a product of India, rather than of the industrialized economies of
Europe, remained extremely important as an item of import into
China and source of profit to the British businessmen and the British
Indian government until the very end of the century. According to one
estimate, Indian exports of opium to China and the Straits Settlements
(most of the opium from the Straits Settlements found its way to
China) grew from about £ 8 million per year in the second half of the
1850s to more than £ 10 million in the second half of the 1870s, the
peak period of opium exports to China.9 According to Chinese official
statistics (see Hsiao Liang-lin, 1974, tables 2 and 9a) imports of opium
varied between £8 million and £ 12 million per annum during the
period 1867-94; though quantities imported declined from a peak of
83,000 chests in 1883 to 18,000 chests in 1913, the value never went
down below £\ million before 1914.
Although opium was the produce of Indian cultivators, they were
not willing partners in the exploitation of China. Rather, they as
producers and the Chinese as consumers were yoked to the same
system of oppression. T he system of government supervision over the
cultivation of opium has been summarized as follows:

The opium industry in Bengal is a Government monopoly, and the districts are
divided into two agencies, Bihar and Benares, which are under the control of
officials residing respectively at Patna and Ghazipur . . . Anyone who chooses
may enter the industry, but cultivators are obliged to sell the opium exclusively
to the Government agent at a price fixed beforehand by the latter, which is
approximately 3s.6d. per lb., the government selling it at about 1 is. per lb
(Britannica, 1884, p. 789).

Adding 45 per cent to us. we get 16s. as the landed cost of opium in
China; import duties and likin (local tariffs) would make the price still
higher for the Chinese consumer. The Indian producer thus obtained
at most one fourth of the landed cost and less than one fifth of the price
paid by the Chinese consumer. The Indian peasant often had to be
coerced to cultivate opium, through a combination of advances and
the threat of loss of land in case of failure to fulfil government

9 The estimate is based on Royal Commission on Opium, 1894, Appendix xn,

pp. 390-1.
Colonialism in Asia IOI

obligations in time. The greatest beneficiaries of the system were the

British Indian Government and the British business firms dealing in
the drug. But quite a few Indian capitalists in western India also made
their fortunes in the opium trade.
The legal and illegal import of opium soon led to ‘import
substitution’ in the product. Even before the first Opium War,
extensive cultivation of opium had begun in China. After the war and
the increasing crisis of the Ch'ing empire, the output of the poppy crop
spread enormously, particularly in the south-western provinces of
Szechwan and Yunnan. (See the evidence of W. B. Spence, British
Consul at Ichang, in Royal Commission on Opium, 1894, Appendix
xii.) Landlords and merchants, and officials taxing the crop (and
retaining a part of the ‘squeeze’ from the traders and peasants), came
to acquire a vested interest in it, and peasants were compelled, often
under share-cropping arrangements, to cultivate the crop. Long
before the trade in the drug was banned officially (which happened in
the early twentieth century), China had become practically self-
sufficient in it. Chu Teh remembered with bitterness the deterioration
in the condition of the people which forced them to take up the
cultivation of poppy (in the late nineteenth or early twentieth century)
(Smedley, 1972, p. 43). The taking of opium continued to spread
among the people throughout the period of warlordism, Kuomintang
militarism and Japanese aggression succeeding the fall of the Ch’ing in
1911 (Chen, 1969) and was stopped only by the communist victory in

I949'
As in the case of India, the most important traditional handicraft,
namely, spinning of cotton yarn and weaving of cotton cloth, was
adversely affected by imports of machine-made goods from abroad. As
a result of imports of yarn, the traditional spinning industry definitely
declined. But this cheap imported yarn arrested the decline of the
handloom industry. Lurther, the competition from foreign cloth led to
unemployment among handloom weavers, whose wages declined, thus
restoring a degree of competitiveness to the handloom industry (see
Leuerwerker, 1970, and Kang Chao, 1975). But even if the handloom
industry might have been helped by cheaper yarn and lower earnings
of weavers, there must have been a net contraction in employment in the
cotton handicraft sector, because handspinning required more labour
than hand-weaving. A similar contraction must have occurred also in
other branches of handicrafts. These developments were probably
much less severe than in India because of factors mentioned elsewhere.
But since the growth of modern mechanized industry was on a smaller
scale than in India, the effect this had in countering the de-
I02 Colonialism in Asia

industrialization caused by decline of traditional handicrafts was also

weaker (see Bagchi, 1976a).
The trade in opium illustrates how advanced capitalist countries
have in the past moulded the production and consumption structures
of whole subcontinents and have impeded their progress. In the
Chinese case, the depredations of advanced capitalism aggravated the
contradictions of a feudal-bureaucratic society. The disintegration of
the empire in turn provided opportunities for banking firms and other
enterprises from the imperialist nations to make extraordinary profits.
On the British side, for example, Jardine Matheson and Company,
which was one of the main beneficiaries of the first Opium War, acted
in concert with the Hong Kong and Shanghai Banking Corporation to
mulct the Chinese treasury. The former gave accommodation to
corrupt officials, who would float loans on behalf of the empire, and the
latter would arrange for the underwriting and floatation of the loans
(see, for example, Collis, 1965, chapter 3). The guarantee for the loans
was generally provided by Chinese customs or specially designated
internal taxes. In this way, most of the fiscal resources of the empire
came to be mortgaged to foreigners, and its downfall was hastened.
The operations of foreign firms in China in this respect were very
similar to those of French and British financiers in Egypt, except that,
because of the sheer size of the country and the intensity of
interimperialist rivalry, China escaped the fate of actual conquest by
any particular power.

4.7 THE FINAL PHASE OF IMPERIALIST AND

SEMI-FEUDAL EXPLOITATION OF CHINA

The specific mode of exploitation associated with industrial capi¬

talism, viz. through the setting up of manufacturing enterprises using
machine-based methods, had its beginning in the final phase of
disintegration of the Ch’ing regime. In 1894, Japan attacked Korea,
which had recognized China as her suzerain. China tried to defend her
territorial claims, but the Japanese destroyed the Chinese navy in a
naval engagement. By the Treaty of Shimonoseki, signed in 1895,
China ceded Formosa, the Pescadores and the Liaotung Peninsula;
and Korea, under the guise of independence from China, became a
Japanese colony. Thus began Japan’s protracted aggression against
China and her persistent effort to convert north China, including
Manchuria, into a Japanese colony. Japan also exacted an indemnity
of 200 million taels, which was increased to 230 million taels, when she
had to give up her claims to the Liaoning Peninsula (in north China)
Colonialism in Asia 103

under Russian-German-French pressure. The commercial part of the

treaty gave Japan, and therefore other imperialist powers, the
additional privilege of carrying on ‘industries and manufactures’ in the
treaty ports. The payment of indemnity by China did not cease there.
The Boxer Rebellion, which was a nationalist and conservative
movement directed against the foreigners, broke out in 1898, and all
the imperialist powers joined together in suppressing it. They then
stipulated the payment of an indemnity of 450 million taels (Outline
History, 1958, pp. 272-3).10
The Treaty of Shimonoseki opened up the field of manufacturing
enterprises to foreigners, and the British and the Japanese took the
greatest advantage of this opportunity. Before this, a section of the
bureaucrats and landlords, of whom Tseng Kuo-fan and Li Hung-
chang were the most important, tried to promote industries with a
modern technological base, without, however, endangering the
inherited structure of society. The enterprises thus promoted came to
be known as Kuan-tu shang-pan enterprises, that is, they were
government-supervised and merchant-managed. They comprised
munition factories, steamships, telegraph lines, and, later, cotton mills.
They were, however, too few in number, too dependent on foreign help
and too conservative in conception to be effective agents for the
industrialization of China. They derived much of their profit from
officially protected monopolistic privileges or special tax concessions,
and much of their capital and management from the comprador
capitalists in the treaty ports. They were the direct ancestors of the
system of ‘bureaucratic capitalism’ spawned by the Kuomintang,
which we shall discuss below (see Feuerwerker, 1958, and Outline
History, 1958, chapter 42).
The Treaty of Shimonoseki was followed by a scramble for rail¬
way concessions. They were both the formal imprint that a
particular region belonged to the sphere of influence of a particular
foreign power, and an excuse for extending the spheres of influence of
respective powers. To some extent, the foreign claims tended to offset
one another, for a concession often informally or verbally extended by

10 The period of payment was stipulated as 39 years. With accrued interest it would
have amounted to 980 million taels (Outline History, 1958, pp. 272-3). Some of the
indemnity was later waived by foreign powers because of defeat in the First World War
(as in the case ofGermany), because of socialist revolution in the home country (as in the
case of Russia), or as a concession to the Kuomintang government. But some part was
also used to spread the light of Western education and ideologies, in the hope of making
the Chinese - particularly the upper class Chinese - see things through western eyes,
through such institutions as the American-built Tsinghua University (Smedley, 1972,
P- 56)-
104 Colonialism in Asia

a high central official or a provincial governor with only ill-defined

areas of jurisdiction could be set against other concessions whose claims
to legality were equally uncertain. The imperialist powers generally
insisted on treating all such vague, dubiously legal, concessions as
treaty obligations (Willoughby, 1920, chapters 1 and x; see also Allen
and Donnithorne, 1962, chapter vm). The British and the Russians
were early in the field with their respective railway concessions. Those
two old partners in the game of milking China, Jardine Matheson &
Co., and the Hong Kong and Shanghai Banking Corporation, set up
the British and Chinese Corporation to build railways in China, with
Jardine, Matheson looking after the contracting side, and the Hong
Kong and Shanghai looking after the finances (Allen and
Donnithorne, 1962, p. 139 and Collis, 1965, chapters 3 and 5). Other
foreign powers used similar instruments but also direct state power to
extract and execute railway concessions. By the end of the First World
War, the foreigners owned and operated some of the most important
railways in China such as the South Manchuria Railway (Japan),
Chinese Eastern Railway (Russia), Yunnan Railway (France), and
Shantung railway (Japan-then Germany) (the particular power
involved is mentioned within brackets). In other cases also, foreigners
generally exercised a large measure of administrative control: it was
often stipulated formally that certain top supervisory posts should be
held by foreign engineers and accountants (Willoughby, 1920,
chapter xx).
When the Ch’ing empire was overthrown by revolutionary na¬
tionalists under the leadership of Sun Yat-sen in 1911, the imperialist
powers tried to ensure that China stayed within their sphere of-control.
The older imperialist powers at first wanted a unified China, under the
control of the traditional scholar officials, generals and landlords.
Yuan Shih-kai, who undid the work of the nationalists and usurped
supreme authority for himself enjoyed the support of the western
powers (Collis, 1965, chapter 6). But once the empire was formally
broken up into territories of different warlords, the imperialist powers
did everything to accelerate the process by throwing their support
behind particular warlords. In this way, Japan gradually consolidated
her hold on north China, and by the end of the 1920s converted
Manchuria into a puppet state.
Under Sun Yat-sen, the Kuomintang made an effort to unite all of
China under the nationalist flag. But after his death, and after the
victory of the Kuomintang over the northern warlords, Chiang Kai-
shek turned against the Communists. In effect Chiang emerged as the
supreme warlord, basing his power on the landlords, control over
Colonialism in Asia 105

regional warlords, and support of the western imperialist powers. In

1931, Japanese militarists began their final thrust to occupy all of
northern China. The Communists, under the leadership of Mao Tse-
tung, survived several extermination campaigns launched by the
Kuomintang, and retained a base in north-west China. When
Japanese aggression escalated, the Communists fought the aggressors
much more tenaciously than Chiang Kai-shek and in the process
extended their political control in Japanese occupied areas.
The Kuomintang regime emerged from the Second World War
apparently stronger than ever with enormous stocks of military
equipment and assured flows of American aid. But their refusal to
carry out any basic reforms, particularly in the field of land relations,
their preference for killing Communists and other democratic elements
to fighting the Japanese, their unwillingness to tax the rich and hence
their inability to control inflation, and the rampant corruption at all
levels of the army and the administration had robbed them of all
popular support and sapped their real power irremediably.11 The
village-based Communists then encircled the Kuomintang strong¬
holds, and ultimately compelled the Chiang Kai-shek clique to seek
refuge in Taiwan, under American protection. A unified China came
into being again in 1949 after the lapse of half a century, under the
leadership of Mao Tse-tung and the Communist Party of China.
This very brief sketch of the political history of modern China
indicates how quickly China’s economy and society must have
changed since 1895, so that a Communist regime could replace the
Ch’ing empire within a period of 38 years. The operations of foreign
capitalists backed by their governments contributed greatly to this
outcome. At the same time, the earlier resistance of Chinese society
against foreign penetration, represented by the confinement of the
foreigners to the treaty ports and the later popular resistance to many
of the activities of foreign capitalists and missionaries kept alive a
strong sentiment for patriotic unity against foreigners. One example of
this resistance is provided by the slowness of railway construction in
China after the initial scramble for concessions.
The total rail mileage in China, including Manchuria, came to only
12,000 miles in 1942. Their organization was highly regionalized, and
might be considered inefficient from the point of view of a truly
national transportation system (see Sun, 1955). Both the slow growth
of railways and decentralization of their control had their positive

11 On the inefficiency and corruption prevalent in the Kuomintang regime, see

Stilwell, 1948, and Belden, 1973.
io6 Colonialism in Asia

aspects. The Chinese people, often led by patriotic landlords and

national capitalists, resisted the building of railways by foreigners in
the interest of foreigners. The decentralization itself was sometimes the
result of assertion of local, basically patriotic, interest, against the
pressure of the imperialists, exerted through Peking. The slow
development of the railways (and the alignment of major railways
along existing waterways) continued to limit the direct influence of the
foreigner to the littoral provinces, and prevented the conversion of all
surviving native capitalists into collaborators, or the wholesale
destruction of local handicrafts. In these respects, China differed
greatly from India (cf. Smedley, 1972, pp. 65 and 90).
But in spite of the limits placed on the operations of foreigners
by imperial and popular resistance, the amount of ‘foreign invest¬
ment’ in China mounted rapidly in the twentieth century. Foreign
investment, as conventionally computed, grew from 787.9 mil¬
lion US dollars in 1902 to US $ 1,610.3 million in 1914 and US
$3,242.5 million in 1931. Great Britain remained the leading in¬
vestor until the early 1930s, but Japan rapidly rose to be the lead¬
ing ‘creditor’ nation, particularly after 1931 when she became
master of Manchuria and North China (Remer, 1933, p. 76).
Sectorwise, transportation accounted for 33.0 per cent and 26.1 per
cent of the total foreign investments in 1914 and 1931 respectively,
thus indicating the importance of railway investments. The next
important category was ‘general purposes of the Chinese government’,
which accounted for 20.5 per cent and 13.2 per cent of the foreign
investments in 1914 and 1931 respectively. In 1914, ‘imports and
exports’ made up 14.9 per cent of the total foreign investments.
Manufacturing formed only 6.9 per cent of foreign investments in
1914, but 11.6 per cent of the total in 1931. These foreign-owned
manufacturing firms dominated modern coal mining, cotton weaving,
electric power generation and cigarette making, among others
(Feuerwerker, 1968, p. 16).
If we look at the growth of modern manufacturing in the Japanese-
occupied or Kuomintang-ruled China, in percentage terms it might
look impressive, because the base was very small. But in absolute terms
the growth was not very striking. In table 4.3 we give figures of looms
and spindles in place in India and China in 1912 and 1936. These
figures show that in about the best year of Kuomintang rule the
Chinese cotton mill industry was much smaller than that of India,
which was a colonial country, with a smaller population.
Furthermore, while the contribution of modern industry to national
income in the 1930s has been estimated to be about 7 per cent in India,
Colonialism in Asia 107

Table 4.3 Spindles and looms (in ’000s) in the cotton mills of
India and China

Spindles Looms

1912—13 5)737 83
India
1936-37 8,441 .78

CO
1912

CO
2
China
CO
O')

5)635 58

Sources: For India, Reports of the Bombay Millowners’ Association.

The figures are underestimates by between 5 and 10 per cent.
For China, Chang, 1966, and Kang Chao, 1975.

it has been estimated by an apologist of Kuomintang achievement in

industry to be only 3 per cent.12
The conditions of the factory workers in these modern industries
with little labour legislation or supervision of existing factory laws, and
of artisans in the languishing handicraft industries were as inhuman as
possible. Shanghai, the biggest centre of foreign-owned industry
became a byeword for the state of its slums and its working class
poverty. In agriculture, the conditions of ordinary cultivators were as
desperate as in most of India. Tenancy was widespread in China, but
more extensive in south China than in the north (see Tawney, 1964).
Under the impact of the terrible famines in north China from 1928 to
1933, there were huge land transfers from the peasantry to the
landlords, and in Shensi, for example, insecurity of tenancy became a
serious problem. Civil officials, army officers, landlords had close links
in most parts of China, and this facilitated their exploitation of the
peasantry. The breakdown of civil authority and the increased scope
for arbitrary decisions, and the growing commercial involvement of
the landlords led to more intensive exploitation of the peasants (see
Selden, 1972).
In Kwantung in southern China, Chen Han-seng (1936) found in
the 1930s extreme degrees of incidence of tenancy and exploitation of
the peasantry through share rents, taxes, payments for ‘feasts’ and
other forms of exactions. There were many payments to the landlords
which were outside the contract or lease agreement, and the terms of
the contractual agreement could be altered by asserting non-market

12 The estimate for India is from Sivasubramonian, 1965; the estimate for China is
from Chang, 1966.
io8 Colonialism in Asia

power and exercising violence13 (see also Smedley, 1972, P- J6, and
Selden, 1972, pp. 6-7). In various parts of Kwangtung, rich mer¬
chants would lease land from the clans and then sublease it to
others. Sometimes this subleasing extended as far as five stages. In the
negotiations for lease by rich merchants, various kinds of threat were
used against the weaker landlords, such as the threat of higher taxes
(where merchants were in league with office-holders) or employment
of hired toughs to forcibly harvest the crop (Chen Han-seng, 1936,
PP- 49-56).
Generally speaking, the commercial exploitation of peasants was
more intense in those parts (such as Kwangtung or Fukien) where
commercialization had proceeded furthest. These were also generally
areas which had been penetrated most deeply by foreign capital,
particularly foreign banking capital. The collaboration of the various
Chinese governments with such capital was generally rationalized in
the name of‘modernizing’ agriculture or industry.14 Foreign banking
capital operated through the Chinese merchants or landlords but often
also directly to affect the conditions of production and distribution in
the countryside (IPR, 1939, section hi) . Foreign industrial capital also
intervened directly in some cases. For example, the British-American
Tobacco Company subsidized the introduction of tobacco-growing in
Shantung. Tobacco was generally more labour-intensive than other
crops; it was found (by Chen Flan-seng) that if labour costs were
included, tobacco was less profitable than the competing crops. But if
labour costs were neglected, tobacco was more profitable. However, as
was found in the case of many other cash crops in the third world,
the peasantry grew the crop because they had to earn cash to meet their
obligations and because there was not enough work for them at the
going wages (see Allen and Donnithorne, 1962, pp. 169-73, Wiens,
1975, and ‘Tobacco marketing in eastern Shantung’ and ‘Foreign
industrial capital and the peasantry in Hunan’ in IPR, 1939).

13 The difference between the Indian and Chinese situations was that in India,
generally all contracts for share tenancy were verbal, and written agreements were an
exception. There was also perhaps less explicit resort to violence (for British rule was far
more ‘orderly’ and exploitation was far better organized in India). Otherwise the shares
obtained by landlords (ranging usually from 50 to 75 per cent), the exploitation exercised
through usury and through the purchase of poor peasants’ products at low post-harvest
prices often as repayment of loans, and the control exercised by the gentry in the triple
capacities of landlord, moneylender and merchant were very similar in the two cases.
14 What Chu Teh said of the conservative reformers of 1898 would apply with minor
modifications to all the bourgeois reformers coming later: ‘they planned to modernize
the country on a capitalist basis while leaving the peasants in their old servitude under
the landlord. They spoke of agrarian reforms, but these meant nothing but the
introduction of such things as Egyptian or American long-staple cotton seeds which the
landlords could buy and sell to their tenants’ (Smedley, 1972, p. 52).
 Colonialism in Asia 109

The other characteristics associated with widespread and insecure

tenancy, domination of peasantry by landlords and merchants and
stagnating agricultural production (as evidenced most starkly by the
frequency and virulence of famines) were also found in China.
Peasants access to markets on their own was limited, the prices
obtained by them on their products were at the mercy of the merchants
who thrived on speculation, and the rates of interest charged on loans
to the peasantry were extortionately high (rates ranging from 36 to 60
per cent being quite common).15 Under the Kuomintang, co¬
operatives were sometimes organized to tackle some of these problems.
But these came again to be dominated by landlords and merchants
and acted as vehicles for channelling the banking capital to the
countryside and obtaining a share of the rural surplus in that fashion.
For example, in Wusih, cooperatives organized for instructing the
farmers in the use of improved silkworm eggs for producing better raw
silk remained under the control of merchants and had to compete with
landlords owning silk filatures, who set up their own egg-producing
stations (see ‘Silk filatures and silkworm cooperatives in Wusih’, and
‘Trade capital and silk farming in Wusih’, IPR, 1939).
The Kuomintang tried to bring all the forms of exploitation under
their control by organizing bureaucratic structures over which the four
ruling families (the three families of Chiang, Soong and Kung, and the
family of Chen brothers) presided. The apex of this structure of
‘bureaucratic capitalism’ was provided by their monopolistic control
of organized banking in China (except for the field left open for the
foreign banks). Usually, T. V. Soong or H. H. Kung was the finance
minister of the regime, and Chiang, Kung and Soong together
controlled the four government banks, the Bank of China and the
Central Bank of China. These banks were used to monopolize trade
and distribution of many goods, or to extract ‘commissions’ from those
who were allowed to conduct business on their own.16 Kung and his
wife also speculated on the foreign exchanges with full inside
knowledge. Corruption even extended to trade by top officials and
generals in Japanese goods across the border between free and
occupied China. The Chen brothers, who controlled the bureaucracy

15 Attempts have been made from time to time to depict the Communist revolution
as a ‘mistake’ and the Kuomintang or even Japanese controlled China as only mildly
exploitative, where things would have gone right if only marginal reforms had been
carried out in time. One such notable attempt is Myers, 1970. But both Myers’ data-base
and his analysis have been subjected to searching criticism by Payer, 1975, and Wiens,
1975-
16 They even exacted ‘squeeze’ from the industrial co-operatives organized by Rewi
Alley, Edgar Snow and Nym Wales to help restore the production of some basic
industrial products in free China after the Japanese had occupied most of the important
industrial centres, including Shanghai (see Snow, 1958, Part 2, chapters 23 and 24).
I 10 Colonialism in Asia

of the Kuomintang, were also later given charge of the Farmers’ Bank
of China, which enriched the gentry through the so-called ‘farmers’
cooperatives’ and contributed greatly to the sharpening of con¬
tradictions in the countryside. Education in foreign countries, which
became popular in China after 1900, helped to create the new class of
bureaucrats controlling the governmental apparatus of the warlords
and the Kuomintang (Chen, 1969).
The capitalist framework of international payments and trade in
this disintegrating society contributed greatly to its final break-up.
China continued to be on the silver standard both internally and
externally throughout the period up to 1934. Since silver depreciated
continually in value during this period, this was translated into a
persistent tendency towards inflation and the living standards of
workers and peasants fell. After the First World War, silver prices rose
for a time because of international shortage. This led to a crisis of
circulation because of the shortage of coin within the country, with
resulting depression in trade and production. Essentially the monetary
developments were completely at the mercy of movements in the
international market.
In the 1930s, China experienced a serious drain of silver, and the
country was again faced with a payments crisis. The solution was
found in 1935 by introducing currency notes inconvertible into silver,
and linking the international price of the inconvertible currency,fapi,
first to sterling and then to the US dollar, and keeping sterling and
dollars as reserves. The reform was carried out with the advice of
foreign experts and had the support of British banks (Chang, 1958).
The Kuomintang government, however, soon resorted to the printing
of notes as the major method of defraying its expenditures. The
inflation released by these policies has become one of the textbook
illustrations of hyperinflation in modern times: ‘100 fapi could buy two
oxen in 1937, one in 1938, a pig in 1939, a sack of flour in 1941, a
chicken in 1943, two eggs in 1945 . . . and not even one grain of rice in
1949’ (CR, 1975, p. 10).
The development of contradictions in China was analysed by Mao
Tse-tung from 1926 onwards; this analysis was the cornerstone of his
revolutionary strategy.17 The key features of this analysis are a clear
17 The articles and monographs we have in mind are the following in particular:
‘Analysis of the classes in Chinese society’ (March 1926), ‘Report on an investigation of
the peasant movement in Hunan’ (March 1927), ‘Why is it that Red political power
can exist in China?’ (5 October 1928), ‘A single spark can start a prairie fire’ (sJanuary
1930), ‘How to differentiate the classes in the rural areas’ (October 1933), ‘On tactics
against Japanese imperialism’ (27 December 1935) in Mao Tse-tung, 1967, vol. 1, and
‘The Chinese Revolution and the Chinese Communist Party’ (December 1939) and ‘On
New Democracy’ (January 1940) in Mao Tse-tung, 1967, vol. n.
Colonialism in Asia \ , x

delineation of the class structure in China at different points of time,

with a subtle perception of the shifting alignments between different
classes at different junctures of history. In his mature analysis of rural
classes in ‘How to differentiate classes in the rural areas’ written in
October 1933, for example, Mao distinguished between five rural
classes: the landlords, the rich peasants, the middle peasants, the poor
peasants and the workers. In defining a particular class he took into
account not only its direct ownership of land or lack of it, but also its
ability to use other means of exploitation than owned land, or its chief
source of livelihood. Thus Mao recognized that landlords could use
clan or school property for their own profit, and nominal owners of
land could be exploited through the market mechanism, particularly
when they had to sell part of their labour in order to make ends meet.
Mao distinguished between national bourgeoisie and comprador
bourgeoisie (that is, those who were agents of foreign capitalists) and
regarded comprador bourgeoisie and the big landlords as enemies of
the revolution. But he noted that because of conflicts of interest
between the imperialist powers, some sections of the comprador
bourgeoisie might be willing to further the anti-Japanese war to a
certain extent (Mao Tse-tung, ‘The Chinese Revolution and the
Chinese Communist Party’ in Mao, 1967, vol. 11). He knew that the
national bourgeoisie were a vacillating class, but he wanted to enlist
their support in a common struggle for national liberation. However,
he was quite firm that leadership in this struggle must be vested in the
working class in the towns and villages.
The disintegration of the Chinese bureaucratic feudalism started in
the nineteenth century. It was accelerated with the fall of the Ch’ing
empire. The weak bourgeoisie of China tried to control the re¬
volutionary forces for a time. But soon the rise of the warlords, the
continued strength of the landlords in the countryside and towns, and
the continued meddling by imperialist powers (whose recognition or
lack of it could make or unseat a particular ruler) sealed the prospects
of a bourgeois democratic society. Naked Japanese aggression on the
one hand strengthened Chinese nationalism and, on the other, helped
to break the social structure down at a rapid rate. The Chinese
Communists by joining the patriotic struggle of the people in a
wholehearted fashion and by showing themselves as the leaders of the
vast majority of the exploited people were able ultimately to topple the
corrupt, landlord- and warlord-dominated, regime of the Kuo-
mintang (for a graphic foreshadowing of the break-up of the semi-
feudal, semi-colonial society of China, see Mao Tse-tung, ‘A single
spark can start a prairie fire’, in Mao, 1967, vol. 1).
5

GROWTH AND FLUCTUATIONS IN

ECONOMICALLY RETARDED SOCIETIES

5-1 INTRODUCTION

In chapters 3 and 4, we recounted the experience of development of

some major underdeveloped regions of the world in the period up to
the Second World War. In the present chapter, we discuss certain
general features of the development of these economies in their colonial
and post-colonial phases. We start with an analysis of the real (as
against monetary) aspects of changes in production structures in these
societies in the phase of export-led exploitation. Then we turn to the
monetary and fiscal institutions that supported this mode of exploit¬
ation. Next we turn to the policy of import-substituting industrializ¬
ation in its different phases and describe the typical features of
fluctuations of retarded societies in the later phases of the import
substitution process. Then we follow the implications of typical
stabilization policies recommended and enforced by such agencies as
the International Monetary Fund and the World Bank in such
societies. Finally, we end up with a critique of the export-led growth
strategy often recommended by economists of orthodox persuasion for
the underdeveloped countries. Many of the earlier policies imposed on
the retarded societies are now again being recommended by apparent
well-wishers of such societies, and it is necessary to expose the
consequences of such recommendations. Furthermore, few under¬
developed societies have entirely sloughed off the modes of exploitation
that prevailed in the nineteenth century and thereafter; the modes of
exploitation of the most advanced among the retarded societies are
amalgams, in different proportions, of the different modes that we
discuss in this chapter and that we referred to in chapter 2.

5.2 THE IMPACT OF CAPITALISM ON THE STRUCTURE OF

PRODUCTION OF UNDERDEVELOPED COUNTRIES WITH
SETTLED AGRICULTURE IN THEIR PRE-COLONIAL PHASE

A typical third world economy with settled, rather than shifting,

cultivation, before contact with European capitalism would be almost
112
Growth and fluctuations 113

entirely agrarian. The development of productive forces in such an

economy would take the form primarily of acquisition of new skills and
use of new techniques for cultivation of crops or production of goods
without any great increase in the use of fixed capital. However, such an
economy would also be characterized by a centralized state, and by
long-distance trade within its borders. Most of these economies would
be endowed with a handicraft sector which would produce the simple
tools and consumer goods needed by the peasantry. This sector would
also produce luxuries for the landlords, the nobility, the bureaucracy
and the court. In some cases, such as China, India or the Ottoman
Empire, there was considerable development of foreign trade and of
monetary transactions within the country and with foreigners.
However, the basic structure of production would be dictated by the
internal needs (including the needs of the domestic exploiters) of the
country or the Empire, rather than by the dictates of foreign trade or
the requirements of rulers based in a foreign land.
Viewed from outside, such an economy may appear to have
considerable slack in it, with underutilized land and unemployed
labour. The fact that landlords or noblemen have a large number of
retainers, or that considerable resources are devoted to social cere¬
monies, or that vast amounts of land are used as pasture may be taken
as evidence of such a slack. But, in fact, in many cases, the ‘surplus’ of
labour or land turns out to be illusory: the employment of retainers is
essential to the maintenance and smooth functioning of a landlord-
dominated society, the expenditure of resources in social ceremonies is
often an essential part of redistribution within the society, and the
reservation of vast amounts of land as pasture or cultivable waste is
necessary to maintain the fertility of the soil and the productivity and
number of the domestic animals (cf. Allan, 1971; and Pearson, 1957).
When European capitalists burst on the scene as conquerors, or as
traders turned conquerors, the balance of this economy was upset. The
Europeans appeared with a demand - either paid for in money, at
least in the beginning, or exacted as tribute - for particular types of
goods; it had to be met by changing the structure of production. The
change in the structure of production could not be effected without
upsetting the existing social relationships, for (a) the economy was not
geared to the production of commodities for the market, except as a
subsidiary activity, and (b), where the demand was for tribute, it could
not be met without depriving some sections of the population of their
earlier earnings. Thus the impact was rarely, if ever, a costless
adjustment to an increased monetary demand.1
1 The ‘vent for surplus’ models of growth of international trade of the third world, of
which Myint, 1958, is an example, are thus fundamentally mistaken. For, they assume
114 Growth and fluctuations

When the structure of demand was forcibly changed, very often

open unemployment of labour or open underutilization of land or
particular types of capital appeared. Thus, in the case of India in the
nineteenth century, the fall in the demand for traditional handicraft
products led to the massive displacement of labour previously engaged
in such industries. There was no automatic redeployment of such
labour in agriculture. For such redeployment to take place, there had
to be adequate and compensating demand for the agriculture products
and there was no mechanism to guarantee this. Furthermore, such
redeployment would require massive investment in the agricultural
sector. With continuous drain of resources from underdeveloped
countries, with a stunted native capitalist class and with a government
which was run in the interest of the colonial power, neither of the
above-mentioned conditions were generally fulfilled.* 2 On the other
side, if the peasantry of a region are kept busy trying to grow the crops
that would enable them to meet the demands of the state and allow
them to subsist on their existing allotments of land, they would be
prevented from taking up new land for cultivation. Such ‘waste land’
could then be given away to foreign planters.
In the semi-colonial economies of nineteenth century Latin
America, and in non-white colonies, we notice two dominant types of
production organization, viz. centralized plantations directly run by
foreign capitalists, and peasant-cultivated holdings indirectly con¬
trolled by foreign capitalists and their subordinate collaborators.
There was a mixed type, such as the indigo estates of India, the sugar
estates of Indonesia, or the sugar engenhos of north-eastern Brazil,
where peasant agriculture was subordinated to the needs of the central
sugar mill.
The plantation economies were often created on the basis of slave
labour. In other cases, land was given away practically gratis to
plantation-owners (as in the case of Dutch-owned coffee-plantations in
Indonesia or tea plantations in India), who were helped in various
ways to keep the wages of labour low and labour itself as unfree as
possible.3 Restricting the peasants’ access to land was generally an

that the third world economies were already adapted to production for the market at the
time of European incursion and they ignore the costs that the European traders and
conquerors exacted in compelling such economies to throw up a surplus.
2 Hymer and Resnick, 1969, discuss the process of transfer of labour and other
resources from handicrafts to agriculture under the impact of capitalist colonialism. But
they make the mistake of assuming that full employment prevails throughout the
process.
3 Baldwin, 1956, offers a travesty of a theory to explain the low wages of labour in
plantations and blames its meagreness on the high degree of capital-intensity of processes
Growth and fluctuations 115

essential part of this policy package. Mining enterprises were organ¬

ized in very similar ways. However the plantations or mines
originated, most of the value-added in such enterprises was generally
concentrated in the hands of the foreign capitalists. The capital
invested in such enterprises was generally accumulated out of the
dominated economies, after remitting most of the profits abroad. The
techniques used there evolved in a capital-using direction, partly
because that was the way things were moving in metropolitan
countries, and partly because it was easier to control the various
branches of these enterprises (such as the growing of the crop, its
processing, the transport of the product, and its induction into the
trading channels) by using some sophisticated equipment and control
methods.* * * 4 Foreign capitalists, qua capitalists, had little regard for the
intrinsic needs of the countries in which they were operating.

5-3 THE MONETARY AND FISCAL MECHANISM

SUPPORTING EXPORTED-LED EXPLOITATION OF
PEASANT AGRICULTURE

When the plantations were mainly based on wage-labour or slave-

labour, surplus value from labour was directly extracted in the
production process. In the colonial economies of India or Indonesia,
most of the plantations were controlled by foreign capital and were
often vertically integrated from the stage of growing of the crop to the
marketing of the product, at least up to the point of shipping it abroad.
There were then buying organizations in the major consuming
countries which distributed the product. Such organizations them¬
selves often controlled plantations in the colonies. Fluctuations in the
market for the product were directly passed on to the workers in the
plantations in the shape of fluctuations in their employment and
wages. This sequence would apply also to such mineral products as
Chilean copper, after it came to be controlled by giant transnationals
such as Anaconda and Kennecott. When the fortunes of such
enterprises fluctuated, government revenues and other incomes
indirectly generated by them would also fluctuate, and this would
greatly affect the states of such essentially mono-export economies as
Chile or Peru (where guano played the role that mineral nitrate and

of production. The truth is the other way round: it is the forcible cheapening of labour
and land that enables the plantation-owner to accumulate capital and adopt capital-
intensive techniques.
4 The control functions of advanced production techniques have generally been
ignored in the literature. A notable exception is Braverman, 1974.
1x6 Growth and fluctuations

copper played in Chile) or Ceylon (where tea became the dominant

export).
Where the export crops were produced by peasants or by plan¬
tations which had a dependent peasant economy surrounding and
supporting them, the method of exploitation was more indirect. Here
the fiscal arm of the colonial state, and various devices for controlling
the process of circulation and exchange, played a more vital role than
in the case of pure plantation economies or mineral-based economies.
One major source of revenue was the land tax, and another was the
poll tax, or hut tax, particularly in African economies. These taxes
helped to break up or subordinate pre-capitalist formations where
they survived, and to compel the subject peoples to work in
plantations, quarries or public works (generally road- or railway¬
building).
The colonial powers generally introduced their own legal tender,
including bank notes, and drove out or subordinated any earlier
monetary mechanism that had developed. In the process many
indigenous bankers lost much of their business, including the highly
profitable business of lending to the state, to the foreign capitalists.
Usually at the level of small transactions many of the earlier types of
currency survived, for ordinary people were too poor to buy goods in
units of Spanish dollars, gold sovereigns, or even full silver rupees.
Examples of such survivals were cowries (a special type of sea-shells) in
India, and strings of copper cash in China (see Cooke, 1863).
However, tax payments or payments to foreigners had to be made in
the legal tender or an internationally accepted medium. Ordinary
people lost heavily in exchanging the medium of smaller denomi¬
nations for the medium of higher denominations; when there was a
drain of bullion, the exchange rate turned increasingly against those
using smaller denomination coin. When deposit banking was in¬
troduced by capitalists from advanced capitalist countries - often with
the patronage of the colonial government - the banks usually discrimi¬
nated in favour of capitalists from imperialist countries, and in favour
of operations involving export and import of goods.5
After the entry of European capital and colonialism, most com-

5 The following passage from the report of the directors of the European-controlled
Agra Bank for the year 1874 is most revealing about the role of ‘modern’ banks in
supporting the basic processes of exploitation in a colonial country. ‘The first portion of
the year, owing to the high value of money in India, consequent upon the famine which
then prevailed in that country, was favourable to profitable working; but the same
cannot be said of the latter half, when, from the reaction which generally follows upon
extreme prices, money was comparatively abundant, and more difficulty was experien¬
ced in employing it to advantage’ (See Agra Bank, 1875).
Growth and fluctuations 117

modities and instruments of production became saleable. Cultivators

and artisans were suddenly faced with the threat (often realized) of
losing control over their basic means of production because of failure to
fulfil obligations specified in terms of money. This was a radical
departure from the precapitalist regimes under which failure to fulfil
financial obligations did not normally lead to the loss of land or other
means of production.
With the coming of capitalist colonialism, then, peasants were
compelled to devote all their energy to the earning of money. This
usually meant the production of exportable crops. The peasants were
often tenants of a landlord who retained half or more of the crop. They
were indebted to moneylenders who held them in debt bondage in
return for the consumption loans extended to them year after year.
The moneylender (who was also the landlord in many cases) bought
up the produce of the peasants at abnormally low post-harvest prices.
The petty middlemen (themselves often moneylenders) who bought
the products from the peasants were generally indebted to wholesale
merchants in the towns. The wholesale merchants in their turn were
indebted to banks controlled by capitalists from advanced capitalist
countries. The exporters who bought the goods from wholesale
merchants were often indebted to banks and business houses in
London, Amsterdam, Lisbon or Paris. This kind of chain could be
observed both in direct colonies and in semi-colonial countries.
Any adverse movement in the demand for exportable products in
world markets (generally controlled from metropolitan countries)
could be passed back down the chain from business houses or banks in
the metropolitan countries to exporters and banks in the colonial or
semi-colonial countries, and then to the wholesale merchants in the
same group of countries. The wholesale merchants in their turn passed
the loss down to the middlemen, who in turn passed it to the peasants
directly or indirectly through the landlords. In the process some export
houses, wholesale merchants and many middlemen and landlords
would go to the wall. But most of the loss would be borne by the
ultimate producers, the peasants. Conversely, the gains resulting from
an improvement in the markets for exportable products of the third
world would be retained mostly by the operators near the final product
outlets, that is, by the banks and business houses in advanced capitalist
countries, by the export houses and exchange banks in the third world,
and, to a lesser extent, by the wholesale merchants, petty middlemen
and landlords, while the peasants would benefit only marginally if at
all.
The long-term factor underlying these transactions was the com-
118 Growth and fluctuations

pulsion exercised on the peasant to produce as much as possible of the

exportable product, so that the total surplus value extracted by the
ruling capitalist country and the capitalists from the dominating
metropolitan country could be maximized. The stick that was used
here was the tax obligation coupled with complete destruction of all
rights in means of production which were not protected as unen¬
cumbered private property. Thus the expansion of exports by most low
income countries in the period before 1914 must be seen as a response
not only to expanding demand from the industrializing nations of
Europe (part of this increased demand was itself pulled by the
exploitation of the colonies) but also to the pressure of the ruling power
for more revenue and of the businessmen from the advanced capitalist
countries for more profit. Capitalists from advanced countries in¬
stigated a huge investment in trasport, linking the ports to the interior,
and, in a few cases, some investment in perennial irrigation, in order to
facilitate the export. They also controlled the major trading and
financing organizations so that the flow of exports could be altered
according to their own convenience. The depression of home demand
caused by the continual drain of surplus value from the third world
and its failure to industrialize kept the domestic absorption of
exportable products low. Conversely, the sluggish growth of home
demand combined with the policy of free trade, enforced in most third
world countries, made it almost impossible for private investors to
build up manufacturing industries.
In the period up to 1914, the third world acted essentially as an
adjunct to the advanced capitalist countries, supplying them with raw
materials, food crops for industrial labour and a surplus for investment
in the frontier economies of the white-settled colonies. The latter also
produced and exported primary products to the west European
metropolis. But they differed from third world economies in several
respects: they were net receivers rather than net transferrers of capital,
they adopted deliberate policies facilitating industrialization and
other ancillary policies meant to insulate their economies against
fluctuations in the international economy as much as possible, and
they were guided by a developing capitalist class whose primary
interest lay in their host economies (even though many of the
capitalists originally were immigrants). Even the fates of the migrants
from third world countries and from Europe were different. The
former went first as slaves and then as indentured labourers and
became the most exploited part of the plantation economies of the
Caribbean, southern United States, Mauritius, Ceylon, Malaysia,
etc. The European migrants became either free wage labourers,
Growth and fluctuations 11 g

farmers, artisans or industrial white collar workers in the USA,

Canada, Australia, or Argentina. In South Africa they became the top
crust in a rigidly racist society.
The growth in exports of primary products from third world
countries was thus at the expense of industrialization of these countries
and also at the expense of other crops or products primarily meant for
domestic consumption. The majority of the inhabitants of the third
world gained but marginally from this growth, and many of them
actually lost out through unemployment, and through deteriorating
supply conditions of some of their staples (such as millets, maize or
paddy). Hence this phase should be characterized as that of export-led
exploitation of the third world, rather than as that of export-led growth.
The monetary and financial institutions in their international as
well as domestic aspects supported this pattern of exploitation. Most of
the western European countries and the USA adopted the gold
standard after the 1870s; but India, China and, to a lesser extent,
Indonesia continued to use silver as the primary medium of exchange.
During this crucial period, India and China effectively absorbed the
increasing outputs of silver mines controlled by capitalists based in
metropolitan countries, and helped to keep up their sagging pro¬
fitability. Since the price of silver dropped precipitously from the 1870s
to the 1890s, this meant that India surrendered any price advantages
she might have derived from increasing demands for her exports from
the European and American nations. Continual depreciation also
created an enormous uncertainty in the sphere of international trade,
and greatly increased the cost of servicing of foreign debts, generally
contracted for in terms of gold, and, in the case of India, also the cost of
payment of the tribute to Britain.
Ultimately, when the supply of gold from British-controlled gold
mines increased, India was forced to adopt the so-called gold exchange
standard, or rather, the sterling exchange standard, under which the
Government of India held sterling balances in London as ‘backing’
for rupee issues in India (see Keynes, 1913, chapter 2, for an
apologetic, and De Cecco, 1974, for a critical account of the gold
exchange standard). These balances were used (a) to counter any
pressure against the external value of sterling, and (b) to stabilize the
operations of the London money market. Not only India, but many
other underdeveloped countries, some of them nominally independent
(such as Argentina) accepted an arrangement under which the
external value of their currency and even the internal monetary policy
were geared to the interests of the financial centre of London. The
major European countries on the gold standard, such as Erance,
120
Growth and fluctuations

Germany or even Austria-Hungary, took measures to protect their

economies and their exchange rates against fluctuations in exports and
imports. But the exchange rates, the prices and the levels of economic
activities of non-white colonies and the semi-colonial economies of
Latin America remained fully vulnerable to changes in demands for
their exportables, or changes in the supplies of silver and gold, and
changes in the financial policies of the metropolitan countries. The
operations of the major financial institutions, which withdrew credit
from the third world countries whenever a panic or a stringency
occurred, aggravated the instability of the latter. In effect, the cost of
adjustment required by the gold standard (of which the sterling
exchange standard was an essential adjunct) was borne mainly by the
dominated countries (Ford, 1962, chapters 1-4; and Trilfin, 1969).

5.4 INDUSTRIAL INVESTMENT IN THIRD WORLD

COUNTRIES IN THE EARLIER PHASES OF

IMPORT SUBSTITUTION

Some modern manufacturing industry, particularly cotton textiles,

sugar, and other industries based on processing of primary products,
began to grow up in the larger-sized third world countries such as
Argentina, Brazil and India before the First World War. Increases
in money and real wages of workers in advanced capitalist coun¬
tries rendered some lines of industry there unremunerative and
helped the third world countries to start up their own production. In
countries with a large handicraft sector, the new industries grew partly
at the expense of handicrafts, so that the net addition to industrial
employment was generally meagre or even negative. Import sub¬
stitution in manufactures really started in the bigger third world
countries only in the interwar period and gathered strength during the
depression of the thirties. (For description of typical patterns, see
Helleiner, 1972, chapter 6.)
According to the conventional wisdom of economics, industrial
growth in these countries has in the past been limited by the shortage of
capital and entrepreneurship (see, for example, Lewis, 1956, or
Kindleberger, 1965). But close examination of the evidence relating to
India or China does not bear out the theory that shortage of finance
was a major constraint on growth of manufacturing industry in the
period up to the Second World War (Bagchi, 1972a; and Riskin,
1975). Even after the drain of a huge surplus abroad and the leakage of
potential savings into the conspicuous consumption associated with a
landlord-dominated society, there was enough finance in the hands of
Growth and fluctuations I2 I

indigenous capitalists and of foreign capitalists operating locally to

sustain a much higher rate of investment in industry than actually
occurred in these retarded societies.
The question of lack of entrepreneurship as a constraint on
industrial growth is more complex. One result of economic retardation
under capitalist colonialism was to thwart the growth of a native
capitalist class. But, for import substitution in the early phases, it was
often enough to imitate the successful and avoid the mistakes of the
failures, without possessing any outstanding pioneering qualities. In
many industries it turned out that knowledge of finance and marketing
possessed by the native traders was the crucial ingredient for success.
W hat deterred industrial investment was the possibility of making a
high rate of profit in money-lending, landownership and trading and
the relative lack ol profitability of manufacturing in the absence of
effective.state patronage.
The degree of profitability of the simple types of manufacturing was
in the long run largely a matter of the size of the market and its rate of
growth. Here the rate of exploitation of the workers and the peasantry
and the rate of reinvestment of the surplus in the domestic economy
were key variables. A high rate of exploitation would constrict the
market; a low rate of reinvestment of the surplus would slow down the
rate of growth of that constricted market. A high rate of growth of
population would have partly counteracted this growth. But given the
monopsonistic control over labour exercised by employers in the third
world and widespread underemployment and unemployment,
quickening population growth often merely tightened the employers’
control over labour - without noticeably widening the market for
industrial consumer goods. Where agriculture is dominated by
landlords, depending mainly on feudal methods of exploitation, the
demand for capital goods naturally varies directly with the rate of
growth of industrial consumer goods and the demand generated by the
need for replacement of worn-out capital goods. A rise in the rate of
growth of consumer goods output through import substitution could
be expected to stimulate the output of capital goods. But here
economies of scale, ‘learning by doing’ and start-up costs generally
afforded an enormous advantage to established producers. Without
some direct state patronage and protection, capital goods production
on any significant scale could start or survive in very few countries
indeed.
The immediate stimulus for substituting domestic manufacture for
imports was generally provided by the cutting off of the earlier source
of supply caused by the First World War, and by the imposition of
I 22 Growth and fluctuations

tariffs on imported manufactures by the government. The established

foreign businessmen or the foreign manufacturers supplying the
country before the imposition of import tariffs were often the first to
take advantage of the situation. Such manufacture often led to a larger
expenditure of foreign exchange in the form of components, royalties,
technical fees and remittance of profits than if the so-called import
substitution had not taken place. Apart from foreigners, the other
groups taking advantage of the increased opportunities for profitable
investment in manufacturing industry are generally indigenous
traders who have some connection with trade in the particular
products involved.
The typical response of aggregate investment to import substituting
opportunities can be approximated by some variant of the ‘capital
stock adjustment hypothesis’ (see Matthews, 1959 for a discussion of
this hypothesis). At the moment of introduction of tariff protection,
there is a certain aggregate demand at the post-tariff prices that can be
supplied either by internal production or by external trade. So long
as the investors in the aggregate are unable to build up capacity which
is equal to this internal demand, there is scope for entry by another
investor (assuming that the industry is not characterized by strong
economies of scale). Initially there is a large shortfall of domestic
capacity from domestic demand, so in industries where a viable unit
requires only a moderate amount of finance, investment is likely to be
quite brisk. Since investment decisions are decentralized, and initially
the demand prospects for a single firm appear rosy, there may in fact be
such a high rate of investment in the industry that actual capacity far
exceeds the capacity needed to supply the domestic market at the
initial post-tariff price (cf. the discussion of investment in the Indian
sugar industry in Bagchi, 1972a, chs. 1 and 12). Then, of course, there
will be a reaction, and potential investors will look for other avenues of
investment.
In a closed economy, if investment in several interrelated industries
occurs at the same time, at a sufficiently high rate, then their joint
impact may raise the rate of industrial growth sufficiently to create the
expectation of continued growth. However, in typical third world
economies between the two World Wars, investments in different
manufacturing industries were rarely sufficiently bunched, and in the
few cases in which they were, their stimulating effect was damped by
other factors. For one thing, if the per capita income is very low and
expenditure on basic consumer goods produced by industry (such as
cotton textiles, sugar or paper) forms only a small fraction (such as
10-15 per cent) of total national income, even a large percentage
Growth and fluctuations 123

increase in industrial production alone will mean a small percentage

increase in national income, and this may be swallowed up by the next
downturn in the harvest. Secondly, the multiplier effects of the
investment will be greatly damped because most of the equipment has
to be bought from abroad. In the case of large-scale participation by
foreign enterprises and the tying of equipment purchases to the
dominant metropolitan country, there also occur enormous leakages
of profits and other payments abroad.
To these general problems of stimulating industrial growth in third
world economies were added, during the interwar period, certain
difficulties that arose out of a continuation of the prewar framework of
international payments and finance and associated government
policies and other difficulties that were caused by the general crisis of
the capitalist economies. Although during the First World War the
gold standard mechanism broke down, in general, third world
economies continued to have their exchange rate and monetary
policies dictated by the metropolitan countries. Both India and China,
for example, had to go through a period when the external values of
their currencies appreciated, to their detriment, because they con¬
tinued to use silver as the medium of international circulation and
because US policies caused a scarcity of silver in the world market.
After the War also India’s fiscal policy continued to be governed by
considerations of her rating as a creditworthy country in the London
money market rather than by the requirements of domestic develop¬
ment. For the sake of maintaining this creditworthiness (which in effect
meant protecting existing British holders of Indian government
securities against any capital loss), the Government of India pursued a
policy of balanced budgets even when deficit financing would have
helped stimulate the economy. In an underdeveloped economy with
various precapitalist structures impeding smooth increases in pro¬
duction, and with large gaps in the supply lines of complementary
inputs, naturally, government expenditure cannot have as much of a
stimulating effect as in an advanced capitalist economy. But in most
large third world countries the slack was so great in the depth of the
depression that expansion of government expenditure or even its
maintenance at a steady level could have had a significant expansionary
effect on industrial output. This was illustrated by the experience of
Brazil which we have touched upon in chapter 3.
By contrast, in India during the depression the Government, in
pursuit of balanced budgets and preservation of its reputation abroad
for financial soundness, slashed its own expenditure and thus deepened
the contraction of money incomes in India. (Ironically enough, the
I2^ Growth and fluctuations

creditworthiness of the government was never tested again in the

London money market, for the government of British India never
again raised a loan abroad.) Furthermore, in order to support the
external value of sterling and generally the British balance of
payments, the Indian government repaid a large part of the public
debt of India held abroad, precisely during the worst years of the
depression, and thus aggravated the deflationary effect on India.
Other examples of similar monetary policies which had perverse effects
on the third world countries but which gave at least temporary succour
to the metropolitan countries could be cited from the experience of
other dependent countries during the same period. During the Second
World War, for example, the British government incurred enormous
expenditures in India simply on the promise of paying part of it back at
some future date. At the same time, in a short-sighted attempt to
conserve all the resources for the war effort, the British government
prevented the shipping of essential capital goods and construction
materials to India from Allied countries, in spite of American pleading
to the contrary (see Mitchell, 1942, and Sayers, 1956). India, and
many other countries situated similarly, paid the price in terms of
virtually unchecked inflation and unnecessarily thwarted industrial
growth during the War.
During the interwar period, the capitalist world went through a
series of crises which provided opportunities to the third world
countries to devise some policies in their own interest, but which also
rendered the economic environment generally unfavourable for
sustained growth. Most of the capitalist countries, except the USA,
really did not experience a strong boom even during the 1920s. This
led to cut-throat competition for markets for industrial products
among these countries, and made it doubly difficult for potential
investors in the third world to enter these fields. Then from 1926-27
onwards a world agricultural depression set in, and depressed money
incomes throughout the third world. The depression of the 1930s
followed, in which the outputs and prices of manufactures, minerals
and plantation products fell, and in which the prices of agricultural
products fell far more steeply than those of industrial products. This
meant that the money incomes of the majority of producers in the third
world fell - often by as much as 50 per cent. Since the terms of
exchange turned against agricultural products, their real incomes also
crashed, even when their agricultural outputs did not fall. But,
paradoxically enough, by concentrating incomes in the hands of fixed-
income (often urban) groups, this situation expanded the markets for
Growth and fluctuations 125

some of the more expensive types of industrial goods, such as fine cloth,
cement for urban housing, and sugar.
The confusion created by the crisis of the advanced capitalist
economies could have been overcome and in fact turned to the
advantage of third world economies if there had been proper planning
to correct the earlier pattern of growth, and to co-ordinate the
development of industry and agriculture, so as to really build a self-
reliant economy. But, outside the Soviet Union, planning in this epoch
primarily meant patronage of private enterprise. Left to itself, with the
stimulus of tariff protection and state patronage in other forms, private
investment took place in a haphazard fashion, and followed the
pattern of demand that had been imprinted by the earlier history of
export-led exploitation. Such a course doomed the third world
economies to be backward and inefficient imitators of advanced
capitalist countries, and, as we have seen in chapter 2, this type of
imitation would never allow the laggards to overtake the leaders and
will instead doom them to a condition of continual retardation.
Of course, there were differences between different third world
economies in the degree of success of the import substitution process.
The earlier the process could start in an economy, the higher the
incomes per head, the higher the levels of wages and earnings of the
general run of the peasantry, the more developed the indigenous
capitalist class and the larger the absolute size of market of a particular
economy, the greater would be the growth-stimulating effect of
import-substituting industrialization. Other things being equal, a
larger population would lead to a bigger market, which is why it was
generally the bigger economies which embarked earlier on the course
of import substitution. Given the same population size, and the
same degree of inequality of distribution of incomes, a higher income
per head would imply the existence of sizeable markets lor a larger
range of goods and hence the existence of opportunities for investment
in a wider spectrum ofindustries. A partial exception would seem to be
the development of luxury goods, for which, given the same income per
head, a more skewed distribution of incomes would create larger
markets. To the extent that the better types of cloth, sugar, cement,
newer types of domestic utensils (including bread-making equipment
in Latin America) can be considered luxuries, a decisive shift of income
distribution towards urban and fixed-income groups probably stimu¬
lated investment in such industries. But for precisely the same reason,
the growth-stimulating effect of such investment could not last long:
this range of goods could not be widely diffused among the majority of
126 Growth and fluctuations

the population and the market for the goods contracted again when
the terms of exchange shifted towards agriculture and rural income
groups.
The first stage of import substitution in the industrial consumer
goods sector was generally accompanied by domestic production of
some basic and capital goods such as iron and steel, non-ferrous metals,
ships, locomotives and the simpler types of machinery. The state often
actively helped this process (particularly from the Second World War
onwards) by subsidizing the setting up of plants in this sector, often
with an eye to military needs. But since the basic framework of
economic activities remained geared to private needs and private
profitability, the state could only partially control the pattern and
growth of expenditure in the economy, and thus could not fully
guarantee the necessary markets for capital goods industries.
Profitable investment in capital goods industries catering to the
consumer goods sector requires as a consistency condition the prospect
of a minimum steady demand for capital goods, and that in turn
requires (apart from the minimum replacement needs) a steady increase
in the demand for consumer goods supporting a steady rate of net
investment in consumer goods industries. There are capital goods
industries which cater to other capital goods industries, but if the
capital goods sector grows through the development of such industries
alone, then (barring the import of capital goods for the consumer goods
sector), the proportion of investment to national income will have to
rise continually, creating untenable imbalances in a private enterprise
economy. As it turned out, the growth of investment in capital goods
industries in third world economies was soon inhibited by (a) the
inability of the state to guarantee adequate growth in demand, (b) the
lack of experience of the capitalist and managerial class in producing
modern capital goods and the consequent rise in gestation lags and
costs, and (c) the ingrained prejudice against domestically produced
substitutes for imported machinery - a prejudice that was apparently
justified by their high costs, and by the inability of the domestic
producers to catch up with technical advances in related fields abroad.

5.5 THE LATE PHASE OF IMPORT SUBSTITUTION IN

THIRD WORLD ECONOMIES AND ITS DIFFICULTIES

The early period of import-substitution has often been identified as the

‘easy’ phase and the late import-substitution period as the ‘difficult’
phase of import-substituting industrialization (Felix, 1968, and
Hirschman, 1968). (The early phase lasted in the case of India until
the middle of the 1950s, in the case of major Latin American countries
Growth and fluctuations 127

such as Argentina, Brazil or Mexico until the end of the 1940s). The
development of capital goods industries, however, is a difficult
proposition in either phase. In fact, because the experience of making
capital goods is totally lacking in some cases in the early import
substitution phase, it may well be more difficult to undertake their
production successfully in the early than in the late phase - though in
other cases, the greater degree of sophistication of the capital goods
needed in the late phase may take it more difficult to substitute imports
by domestic manufacture. However, there is little doubt that import
substitution in the consumer goods sector in the late phase presents a
greater number of difficulties than in the early phase.
In the early phase, import substitution takes place in the production
of such goods as cotton and woollen textiles, construction materials,
sugar, leather goods, and so on. The markets for such goods are large
enough in many underdeveloped countries to support several firms
exploiting the available economies of scale to the full. Generally the
machines and knowhow can be procured from abroad without
large and continuing payments for patents, licences, etc., being in¬
volved. (The machinery-suppliers often act as consultants for setting
up the plants. This may involve ‘packaging’ of the technology, which
costs more and bequeaths less knowledge to the host country than if the
latter were entirely free to choose and to learn by making mistakes.)6
In the ‘difficult’ import substitution phase, the domestic markets for
the basic consumer goods having been more or less saturated, the
capitalists search for new products to produce. These happen to be
sophisticated consumer goods (mostly durables) developed for the
affluent societies. The economies of scale in the production of many
such durables, such as cars, are considerable, and a plant has to
produce on a scale which is often larger than the national markets of
most third world countries (cf. Pratten, 1971). They also involve the
use of more skilled manpower than is available in even large-sized
third world countries (cf. Vernon, 1970). Moreover, they are increas¬
ingly tied to the original developers of the products and techniques in
the advanced capitalist countries through patents, and through
unpatented knowhow and ‘software’ available only through the
network of the master firm. These problems are aggravated by the fast
development of transnational corporations which bring more and
more independent firms and product lines under their all-embracing
control. Since in the late stage of import substitution the product

6 For discussion of the problems of choice of techniques by third world economies see
Bagchi, 1978, and chapter 9 below.
128 Growth and fluctuations

frontier of the third world comes nearer that of the advanced capitalist
countries, the ability of firms based in the latter to keep control over as
many markets as possible is much greater.
One of the consequences of the iron grip of the firms in the advanced
capitalist countries on the products characteristically taken up in the
late stage of import substitution is that the overt payments to the
parent firms in the form of royalties, technical and consultancy fees,
dividend remittances and under-cover payments in the form of
inflated transfer prices for various components and materials are
rather large (cf. Vaitsos, 1974). Very often a rapid rate of import
substitution in such products leads to a rise in the ratio ol imported
intermediate imports to net value added in industry and aggravates
the balance of payments crisis instead of alleviating it.
In the current situation, most third world countries find that the
more they try to industrialize through import substitution, the more
they become dependent on advanced capitalist countries for tech¬
nology, product development and managerial expertise. Had these
countries been able, from the beginning of the import substitution
process, to adopt a policy akin to that of Japan, which rigidly excluded
the entry of foreign firms and foreign private capital while permitting
the purchase and imitation of foreign techniques in every field, they
might conceivably have avoided their present fate. But they were
unable for political reasons to introduce such a proviso, or to adopt
the other policies which led to a fast development of the technological
and educational base in Japan.
Most of the third world countries more or less stumbled into the late
import substitution phase. The capitalists in these countries were
unwilling to explore the possibility of developing the markets for the
older types of consumer goods by lowering their prices (this would
have required a cut in production costs through research and
development, and the lowering of profit margins). Instead, they
looked for new avenues where profit margins would be high and could
be easily protected against raiders. The production of consumer
durables proved ideal from this point of view, particularly since
governments in the third world could be easily persuaded to impose
stiff tariff and quota restrictions on the import of luxury consumer
goods. The multinationals wanted to protect their markets in the third
world, and the easiest method of doing that was to set up production
facilities in such counti'ies behind tariff walls. The willing col¬
laboration of native capitalists in the host countries afforded them the
necessary political protection.
What we have characterized as a state of dependence in the name of
Growth and fluctuations I2g

industrialization has been deliberately adopted as a model by Brazil

and has even been advocated as an exemplar to other countries. After a
fairly fast rate of industrialization along the path of import sub¬
stitution, Brazil entered a period of stagnation in the early 1960s. After
a military coup, the ruling Brazilian junta adopted a policy of turning
the income distribution against the workers and in favour of the rich.
Apart from encouraging the growth of capitalism, this authoritarian
policy also had the aim of increasing the demand for consumer
durables such as cars, refrigerators, air conditioners, and so on. Brazil’s
rulers enjoyed several advantages in pursuing their policy. Under
Vargas, Kubitschek and Goulart a large capital goods industry had
already been built up, partly under direct state ownership and partly
under the control of foreign capital. Brazil also contained a large
hinterland which was ripe for capitalist development (although such
'development' often meant absolute disaster from the point of view of
the Amerindian populations of the interior). After the ‘disciplining’ of
the economy under the deflationary policies pursued over the years
from 1964 to 1967, foreign private capital was responsive to the red
carpet spread out for it under the military regime. The consumer
durables which had already proved the fastest-growing subsector in
earlier cycles again became a pace-setter in the Brazilian ‘miracle’ of
1968-75. The price for this miracle has been an extreme degree of
inequality of income distribution, a very large foreign indebtedness,
effective denationalization of major sectors of the Brazilian economy,
and a rigorous suppression of civil and political liberties for the
people (see Bacha and Taylor, 1978, Bergsman, 1970, Furtado,
1973, and Wells, 1974, and 1977; and chapter 7 below). The
enthusiasm of foreign capital for Brazil and the resulting economic
growth helped to counter some of the demand-depressing effects of the
policies pursued by the military regime and diffuse the gains of growth
a little more widely than was thought probable at the beginning of the
T97os-
Other third world countries, however, even if they are prepared to
pursue unequalizing policies, cannot ensure large enough markets or
tempting enough frontiers for foreign capital. They are also likely to
fall foul of the difficulties inherent in relying on consumer durables as
the major generator of growth much earlier in the story than Brazil.
The most important consumer durable, the private motor car, is
subject to strong economies of scale, particularly for the standard
models. Because of the general effect of learning through production,
and because of such changes as standardization of equipment for
longer runs of production, replacement of batch production by
i go Growth and fluctuations

production in continuous runs, automation of processes, and so on, the

economies of scale also tend to increase through time. Furthermore,
the cost of model changes in the car industry are considerable, running
to several million pounds for each model change. The steeply rising
price of petroleum is another inhibiting factor. The economies of scale
are not as large in the case of other consumer durables nor are their
initial capital requirements as high as in the case of cars, but changes in
models and production processes are important and expensive (see
Pratten, 1971). Furthermore, the third world countries are greatly
dependent on the advanced capitalist countries for techniques and
knowhow; and they are increasingly faced by huge conglomerates
transcending national frontiers as sellers of the technology and
controllers of marketing outlets, so that their area of choice and
bargaining power are more restricted. To what extent they can use the
power of the national state and the alternative source of the Soviet bloc
for countering the monopoly power of the transnational firms is a
question that merits more general discussion, and we shall take it up in
chapter 7.
As a result of the factors mentioned above, although the outputs of
particular consumer durables in individual third world countries grow
very fast when they are first introduced as import substitutes, they also
tend to taper off quickly (cf. Felix, 1968, and Bagchi, 1975).
Furthermore, the model changes of consumer durables mostly orig¬
inate abroad, and most firms producing such durables in the third
world find it unprofitable to produce all the components of any model
at home. Most of them also have to pay either their parent firms or
their foreign collaborators, for the knowhow, patented processes and
so on. As a result, import substitution along these lines causes a drain
on foreign exchange earnings, and in fact aggravates balance of
payments crises.
As a remedy for recurrent balance of payments crises and for the
thwarting of growth resulting from import substitution, the policy of
‘export-led growth’ has often been advocated in recent years. We shall
take up an analysis of the implications of such a policy in the
concluding part of this chapter. Before that, we shall analyse the
typical cyclical patterns observed in a third world economy. Two of
the major sources of such fluctuations are fluctuations in agricul¬
tural output and balance of payments crises. These in turn are
related to the basic weaknesses of the industrial or ‘modern’ sector
of a third world economy in relation to the precapitalist relations and
models of exploitation prevailing in the agricultural and trading
Growth and fluctuations igi

sectors of the economy and the dominated character of the capitalist

and managerial class controlling the modern or industrial sector.

5-6 HARVEST FLUCTUATION AND CYCLES IN

A RETARDED ECONOMY

In pre-industrial economies, harvest fluctuations were major de¬

terminants of the ebb and flow of economic activity, and of prices (see
Braudel and Spooner, 1967). Third world countries in the phase of
import-substituting industrialization are not pre-industrial economies
in the sense in which, say, Austria was a pre-industrial economy in the
seventeenth century. They possess an industrial sector in which
employment is concentrated in factories, and for some of them (such as
Argentina, Brazil or Mexico), industrial income accounts for more
than 25 per cent of total national income. But most of these economies
are characterized by relative inelasticity of agricultural output in the
short run. What is as important is that the weather and other natural
factors remain the predominant influence conditioning potential
output, and man-made inputs as yet play a subsidiary role in the
agricultural sector. The relative inelasticity of agricultural output is
also due partly to the failure of internal accumulation which has
characterized the evolution of third world economies (see chapter 2
above) and partly to the survival of precapitalist modes of exploitation
in such economies — a survival ensured by the logic of working of the
weak capitalism of such economies (see section 5.2 above, and chapters
6 and 7 below). Furthermore, the per capita incomes of third world
economies being generally very low, a given percentage fluctuation in
the supplies of foodgrains in such economies has a much more
pronounced effect on relative expenditures on foodgrains and in¬
dustrial consumer goods than in the more affluent capitalist countries.
Hence harvest fluctuations deserve a separate treatment in the context
of the third world.
Changes in agricultural output can be expected to affect industrial
growth in several ways. First, agriculture is the source of major raw
materials such as cotton, sugarcane, jute, sisal, groundnuts, etc., and
any shortfall in their output adversely affects the output of agriculture-
based industries. Secondly, for most third world economies agricul¬
tural products are major earners of foreign exchange. A decline in
export earnings, unless it is offset by increased foreign credits or grants,
affects the availability of imported capital or intermediate goods, and
can lead to a major contraction of economic activity all round. We look
jr>2 Growth and fluctuations

at the general problem of balance of payments crises in the next

section. Thirdly, contraction in agricultural output will affect the
demand for industrial goods both because incomes of peasants,
landlords, etc. are affected directly, and because, through a rise in
prices of agricultural products, real incomes of other sections of the
people are affected. Fourthly, because expenditure on foodgrains
forms such an important part of the budgets of third world peoples,
and because landlords and merchants together generally exercise a
monopolistic hold over the supply of agricultural crops in the markets,
a decline in the output of such crops can act as a signal for speculative
price rises and start off a process of inflation, or can further feed an
inflationary spiral. In this section we shall largely be concerned with
analysing the impact of changes in incomes of different classes because
of harvest failures and of changes in prices brought about by the
actions of landlords in the context of harvest fluctuations.
In accord with Engel’s law, in typical underdeveloped economies,
the elasticity of demand for foodgrains with respect to expenditure has
been found to be less than unity. But, in the short run, the estimated
expenditure elasticity has often turned out to be unity or even larger
than unity (Rudra and Paul, 1964, Ramsunder, 1965 and Weisskoff,
1971). The elasticities of demand for foodgrains with respect to
changes in their own prices have been usually found to be negative, but
less than unity in absolute value. A fall in agricultural output,
particularly of foodgrains, ceteris paribus, leads to a rise in prices of
agricultural goods, and a rise in money incomes accruing to agricul¬
ture. In the urban areas (especially among poorer people), an
increase in expenditure on foodgrains leaves less income to be spent on
other consumer goods and generally leads to a lower fraction of income
being spent on industrial consumer goods. In the rural areas, the
poorer peasants and agricultural labourers who are net buyers of
foodgrains in the market are affected in the same way as the urban
poor, and their expenditure on non-agricultural consumer goods falls.
The money incomes of landlords and richer farmers who are net sellers
of foodgrains on a large scale go up. This may lead to an increase in
demand for industrial consumer goods on their part, especially for
luxuries or durables such as radio sets, refrigerators, or even cars (the
exact designation of‘luxuries’ will depend on the degree of affluence of
the particular economy). The net effect on marketed surplus of
foodgrains of a fall in the output of foodgrains will have an important
bearing on the demand of the urban sector for industrial consumer
goods. If the farmers’ expenditure elasticity of demand for foodgrains is
high, a fall in agricultural output that boosts their money income will
Growth and fluctuations 133

result in a steep fall in the marketed surplus, and this will in turn
adversely affect the demand for industrial consumer goods.
In theory, a fall in the output of foodgrains can lead either to a net
decline or a net increase in the demand for industrial consumer goods,
depending on the relative weights of the increases in demand by the
rich landlords and farmers (and possibly traders) benefiting from the
shortage and the decreases in demand by everybody else. The
necessities produced by industry can be predicted to suffer a con¬
traction in demand, but the demand for luxuries may go either way.
T. N. Krishnan found that in the case of India, sales of mill-made cloth
were inversely related both to own prices and to prices of foodgrains,
thus suggesting that the factors depressing industrial demand (in the
rank of necessities) as a result of increases in foodgrains prices were
stronger than those tending to boost demand for industrial consumer
goods (Krishnan, 1964, chapter 4).
How does this kind of inverse relationship affect industrial invest¬
ment and growth in the short run? Prabhat Patnaik, following
Kalecki, has built a model of investment behaviour in an attempt to
answer this question (Kalecki, 1972a and Patnaik, 1972b). Essentially,
in this model, the level of agricultural output determines the marketed
surplus available for supporting workers in industry, on the one hand,
and the demand for luxury consumer goods on the part of the
landlords and the rich farmers, on the other. As a first approximation,
it is assumed that workers spend a fixed proportion of their wage on
agricultural goods. However, every industrial or urban worker must
consume a minimum level of foodgrains in order to survive. If
government expenditure and the private investment induced by it
reach a level at which total urban employment is too high in relation to
the marketed surplus of foodgrains, the foodgrains component of
workers’ wages will fall below the acceptable minimum; this will then
cause urban and industrial unrest. In this situation, if we rule out
import of foodgrains to augment supplies, the government will try to
cut down its expenditure. This will result, with a lag, in a fall in private
investment, and the degree of capacity utilization in industry will also
fall, further depressing investment in the private sector.
In an economy in which private investment is at best sluggish (in the
sense that its response to increases in profitability or sales is limited),
the government can try to ensure a certain aggregate rate of growth by
allowing its own expenditure to grow at a given rate. But if the target
rate of growth is significantly different from the trend rate of growth of
agricultural output, then, as can be seen by a simple extension of the
argument in the preceding paragraph, fluctuations in aggregate
 Growth and fluctuations
•34
output can arise, even if agricultural output does not actually
fluctuate. Harvest fluctuations, of course, will aggravate such pro¬
blems. The mechanics of such fluctuations will be similar to those of
Hicks’ theory of the trade cycle, where the rate of investment is a
function of past changes in sales, but is subject to a ceiling imposed by
the rate of growth of the budgets of the ordinary people of the third
world (after any backlog of unemployment has been worked off)
(Hicks, 1950). Only by a fluke would changes in the rate of growth of
agricultural output, changes in private investment and changes in
capacity utilization in various subsectors of the economy be in balance
and be so synchronised as to avoid cyclical fluctuations. The market
does not provide a mechanism for such fine tuning - certainly not in a
retarded economy.
Two other possibilities that may conceivably ensure smoother
operation of the system are (a) that the government may try to
determine the rate of growth of agriculture itself and (b) that the
private sector should reallocate its investment to the same end.
Governments in most import-substituting economies have in fact tried
to do that, after realizing that sluggishness of agricultural output was a
major hurdle in the way of ensuring a steady and high rate of economic
growth. In the 1930s, third world governments reacted to the drastic
fall in exports of agricultural products and their prices by shifting
resources towards industry. This left a legacy of relative neglect of
agriculture in many economies. In those cases in which governments
tried to encourage agricultural growth, they came up against obstacles
posed by the landlord-dominated class structure, the nature of the
state and the history of retarded economies.
Many third world governments are greatly dependent on the output
of agricultural crops for their revenue, for a major part of their tax
revenues is derived from indirect taxes, such as excise duties, export
taxes, sales taxes, and so on. A decline in agricultural output, therefore,
often squeezes government resources precisely when such resources
are required for developing agriculture and stimulating the economy.
So long as this situation continues and the government is unable to tax
the rich, especially the rural rich, a fiscal crisis will stand in the way of
developing agriculture.
For most colonial governments, development of agriculture as a
whole had a low priority. Whatever research or building up of
irrigation facilities had taken place had been concentrated on export
crops - including plantation crops. The new governments were ill-
equipped by their general inheritance to build up infrastructure
facilities that would benefit the general run of the peasantry.
Growth and fluctuations 135

Attempting to introduce new methods or crop varieties from the top,

rather than motivating the peasantry to find their own solutions still
remained the dominant approach. The programme of introduction of
high-yielding varieties of seeds supported by intensive utilization of
fertilizers, was introduced under the initiative of the US government,
and the Ford and Rockefeller Foundations (see chapter 6 below). This
programme has remained confined to a few crops, such as wheat,
paddy and hybrid maize. Even for such crops the diffusion of the
programme among small peasants has been incomplete, because of
lack of access to credit, irrigation facilities, and the domination of
peasants by landlords, traders and moneylenders who deprive them of
the fruits of the new technology. Hence in many economies the
agricultural innovations have taken predominantly a form that
benefits the rich landowners, by making a saving of capital or labour,
without necessarily raising the rate of growth of agricultural
output - and, particularly, of staples predominantly consumed by the
poorer sections of the people (see Grunig, 1969 and Janvry, 1973).
We now turn to the question of the extent to which productive
investment by capitalists in agriculture is likely to be induced by a
shortage of agricultural output, raising its price in relation to that of
industrial output. Since the demand for foodgrains is inelastic with
respect to changes in price, traders can expect to increase their money
returns by restricting supplies and by raising prices. This course is
facilitated by the usual rules of extension of credit by the banking
system. Bank loans are granted on the basis of security of existing assets
(including stocks of commodities) valued at market prices. If prices
rise, the values of assets offered as security also rise, and hence the
amounts that can be borrowed by the holders of commodity stocks also
go up. Imposing restrictions on the types of commodities that can be
financed by bank loans (known as ‘selective credit control’), as has
been attempted in many underdeveloped countries, is not very
effective. The reason is that the trader is often also an industrialist and
landlord, or has strong connections with landlords, and simply
switches the activities which he finances out of his own funds and the
activities against which he takes bank loans (cf. Dehejia Committee,
i969)-
Whether the traders and landlords find it profitable also to invest in
assets increasing the productivity of agriculture depends on their
appreciation of future trends of relative prices of agriculture and
industry, on their access to land, on existing tenurial arrangements and
on their appreciation of effectiveness of government policy. In a poor
society, a sudden increase in the output of foodgrains is likely to result
 Growth and fluctuations
136

in a glut, and prices of farm products will fall drastically. If the

government operates a price stabilization programme or guarantees a
ratchet below farm prices by buying up any surplus at the minimum
guaranteed price, some landlords and traders may undeitake invest¬
ment in productive assets. But this will increase the money incomes of
groups which are recalcitrant to taxation, and will pose an inflationary
threat. Moreover, landlords and traders may try to blackmail the
government to raise farm prices, by threatening to curtail supplies. In
this case, the programme of price support will prove costly from a fiscal
point of view. It will also prove costly to the other classes, such as
industrialists with no interest in trade in agricultural products,
industrial workers, and small peasants and agricultural labourers from
whom incomes will be transferred to the landlords, rich farmers and
traders.7 Also, investment in land in underdeveloped countries is a
highly localized operation, and is hampered by local power exercised
by landlords, by tenurial arrangements peculiar to each locality, by
the need to adapt to the particular soil and water supply conditions,
and so on. Hence not everyone who is willing to invest in land can in
fact gain access to it. The restrictions surrounding land as a commodity
in typical retarded economies impede capitalist accumulation in
agriculture.

5.7 BALANCE OF PAYMENTS CRISES IN THIRD WORLD

ECONOMIES IN THE PHASE OF IMPORT

SUBSTITUTING INDUSTRIALIZATION

In the preceding section, we have largely ignored the relation of

agricultural growth and industrial investment in third world econ¬
omies to their balances of payments. When agricultural growth falters,
the supply of exportables falls, and the import demand for agricultural
commodities, especially foodgrains, goes up. On the other hand, a rise
in domestic investment and industrial output generally induces a rise
in demand for imports of consumer goods, intermediate goods and
capital goods. In the phase of late import-substituting industrializ¬
ation, direct imports of consumer goods and the simpler types of
capital goods are eliminated. Then a rise in domestic investment
induces a steep rise in imports of intermediate goods and more

7 Analogy with US price support programmes is inappropriate here: there is a major

difference between stabilizing at most 1 o per cent of GNP with transfers from the other
90 per cent (as in the US case), and stabilizing anywhere between 30 and 60 per cent of
GNP with transfers from the other income groups as in the case of underdeveloped
countries.
Growth and fluctuations

sophisticated capital goods. 1 hese two sets ol factors, acting together

or separately lead to frequent balance of payments crises. In the
present section, we shall deal with certain typical patterns of
adjustment in the face ol balance of payments crises and scrutinize
some of the policies that have been suggested for meeting them in third
world economies.
Most third world economies cope with balance of payments
problems by resorting to a variety ol controls — such as exchange
control, multiple exchange rates, quota restrictions, import tariffs,
subsidies on exports, and so on. One persistent lobby consisting of the
IMF, the World Bank, GATT, advanced capitalist governments and
economists of the neoclassical school has pressed the underdeveloped
countries to move towards greater free trade and, as a step towards
that, to devalue their currencies. The pressure for devaluation has
been particularly great when a third world country has had to seek
assistance from international agencies and from foreign governments
in order to meet its balance of payments deficits.
On orthodox reasoning, for the third world as a whole, de¬
valuation of their currencies is not normally a very sound procedure.
For, in the case of the typical products (barring perhaps petroleum
among the important commodities) exported by the third world, the
price elasticity of demand is taken to be generally low. But for a
particular third world country, the partial price elasticity of demand of
an exportable can still be high, if it is assumed that its competitors will
not fully match any slashing of the international price of its exportables
caused by the devaluation (for the orthodox theory, see Robinson,
1937, and Haberler, 1949). So for particular countries at particular
times devaluation could make sense, if, of course, exports responded
positively to the increase in domestic price caused by the devaluation.
But it is not enough to look at the exports alone in order to find out
the effects of devaluation. When we look at the characteristics of
import demand in a third world economy and the circumstances that
typically trigger off devaluation, it is found to result in a depression in
the economy (see Cooper, 1973). We assume that the demand for
importable is not very responsive to increases in costs in domestic
currency resulting from devaluation, at least in the short run. We also
assume that, at the moment of devaluation, at the going prices there
is a potential balance of payments deficit, part of which is met by an
inflow of foreign assistance, and part of which is repressed by exchange
control. If, after devaluation, all quantitative controls are removed,
the balance of payments deficit may well grow larger than the actual
deficit before devaluation. Hence often the bait of increased official
! ^8 Growth and fluctuations

‘aid’ (including loans) and increased inflow of private foreign capital is

dangled by the international agencies and the US bloc to entice an
underdeveloped country to devalue and to adopt more liberal trade
policies. But the actual granting of such aid is generally conditional not
simply on devaluation by the country in difficulties but also on its
continued good behaviour, particularly as regards the rights of private
property, foreign and national (see Hayter, 1971, Konig, 1973, and
Payer, 1974).
The elasticity of demand for imports in third world economies is
likely to be low when imports consist mainly of raw materials
(including oil), semi-processed products, and capital goods. This is the
general pattern in the stage of late import-substituting industrializ¬
ation. In those cases where a major part of foodstuffs is imported (as
was the case for Sri Lanka, for example) their substitution by domestic
products is also likely to take a long time. On the other hand, the
supply of exports - mostly consisting of primary products, processed
agricultural materials or semi-manufactures - is often rigid in the
short run. Hence devaluation may result in a worsening of the trade
balance, measured in the domestic currency. This will then have a
recessionary effect on domestic output, since the net leakage (i.e.
imports — exports), in the national income identity (when all quan¬
tities are measured in domestic prices),

National income =
consumption + investment + exports — imports,

will increase. If government expenditures are curtailed at the same

time (since excessive government expenditure leading to inflationary
pressures, which may be contained by direct control, is often blamed
for ‘overvaluation’ of the exchange rate), this will have a further
recessionary impact.
Paradoxically enough, this recessionary impact is often accom¬
panied by a price rise which starts an inflationary process, or which
aggravates an existing state of inflation. First, the prices of imports rise
more or less proportionately with the rise in the price of foreign
exchange, if originally imports were not repressed by quantitative
controls. If they were originally repressed by quantitative restrictions
and if these restrictions still operate, domestic prices may rise faster
than the price of foreign exchange. Only if imports rise substantially
after liberalization will import prices rise less than proportionately to
the price of foreign exchange. Monopolistic control over foreign trade
is generally an additional barrier against increased imports and lower
prices for foreign goods (cf. Amjad, 1977). As for exports, so long as the
Growth and fluctuations jgg

major exports of the country concerned form only a small part of the
world supply of the corresponding commodities, the foreign currency
prices of exported items will not be affected by devaluation. In that
case, domestic prices will rise in the same proportion as the price of
foreign exchange is raised by devaluation. In case the country does
export a significant fraction of the world supply of a particular
exportable, the exporters will normally try to reap a competitive
advantage by lowering the foreign currency prices concerned. But it is
unlikely that they will lower the foreign currency prices by the full
extent to which the currency is devalued. In that case, domestic prices
of exportables will also rise as a result of devaluation (Reddaway,
r963)-
The rise in prices of importables and exportables will affect all the
prices directly or indirectly linked with them. The costs of production
of all the commodities into which imported raw materials or
equipment enter will rise. The prices of goods which are substitutes for
exportables are likely to rise in sympathy. In fact, in those cases in
which exportables enter directly into the consumption baskets of
ordinary people, a rise in their prices will act as a major factor
redistributing income away from wage-earners and towards property-
owners (cf. Reddaway, 1963, Diaz Alejandro, 1965, 1970, chapter 7
and Zuvekas, Jr, 1966, 1968).
In the farming sector, while the prices of farm products rise as a
result of devaluation, the wages of farm workers rise only with a lag, if
at all. This is especially true in countries where there is a surplus of
labour in rural areas, and farm labour is not unionized. Thus there is a
redistribution of incomes in favour of property owners as against farm
workers and poor peasants (who have to earn at least part of their
living by selling their labour and who have to buy at least a part of
their foodgrains in the market). If the prices of farm products rise more
than those of domestic non-farm products as a result of devaluation,
there may be a redistribution of income away from industry towards
agriculture. But within the non-farm sector itself, prices of products
will rise first, and even if the cost of living of non-agricultural workers
rises, the wages of such workers will rise only with a lag. Thus in this
sector also, there will be a redistribution of income in favour of
property owners.
To the extent that, with an inelastic supply of exportable products as
a whole, the curtailment of the demand on the part of wage-earners
and other poor consumers leads to an increase in the net supply of
exports to the world market, it could be argued that in fact the purpose
of devaluation, viz. the elimination of the balance of payments deficit,
140 Growth and fluctuations

will be achieved by such regressive income redistribution (assuming

that an increase in exports does not lead to a precipitate fall in foreign
currency price). However, since there is a fall in the real incomes of the
poorer people all round, this may also lead to a decline in the degree of
utilization of capacity of those industries which cater primarily to
domestic mass consumption. These industries may, of course, then be
compelled to search for markets abroad, but it is precisely for such
products (such as cotton textiles) that price elasticity of world demand
is likely to be rather low and competition among third world countries
very stiff.
Even if devaluation succeeds temporarily in ameliorating the ba¬
lance of payments problem by creating a recessionary situation and re¬
distributing income in favour of property-owners, its beneficial effects
are unlikely to be long-lasting. For one thing, as a result of the spec¬
ulative activities of traders and of the price-wage spiral in organized
industry (which is characterized by various degrees of monopoly), the
inflationary process will soon erode the competitive advantage gained
through devaluation. But there are other factors working to widen the
balance of payments deficit. The property owners in underdeveloped
countries tend to spend a large part of their incomes on products (such
as consumer durables) which are normally more import-intensive than
the products consumed by the poorer sections of the people (we are
here neglecting those years in which foodgrains have to be imported on
a large scale). So when a redistribution takes place in their favour, the
import bill tends to go up again on consumption account (cf. Diaz
Alejandro, 1965, Hazari, 1967, and Zuvekas, Jr, 1968). Furthermore,
the expected new investment also tends to be more import-intensive
than the current production of wage-goods.
So a measure of devaluation or some equivalent measure re¬
distributing income in favour of pi'operty-owners is very likely
simultaneously to create a general recession in the economy and to
stimulate import demand so as to wipe out the gains of devaluation in
respect of the balance of payments. Then a further dose of deflation
may be necessary to close the widening deficit. The IMF policies (such
as devaluation accompanied by curtailment of bank lending and
curtailment of government expenditure) enforced in many countries of
Fatin America and in Turkey have been rightly criticized on the
ground that in trying to cure inflation and chronic balance of
payments problems, they strangled the growth of the economy itself.
But it is also clear that, given the typically low elasticities of supply of
exportables, and of demand for imports and the high propensity to
import on the part of property owners, an unstable growth process is
Growth and fluctuations 141

hard to avoid in retarded economies (cf. Zuvekas, Jr, 1968, and

Bagchi, 1977).
During import-substituting industrialization, much of the trouble
starts irorr. the fact that the capitalist classes of retarded economies
adjust to the gaps left by the shifting of the demand of the advanced
capitalist countries away from the agricultural exportables of these
countries, instead of restructuring their activities to the requirements
of the peoples working in them. The restructuring, of course, would
have run against the logic of domination implicit in international
capitalism. Only Japan was able to create a relatively autonomous
capitalist base in the era of industrial capitalism in Europe, and for
that she had rigidly to exclude foreign capitalists from domination of
any part of her economy and to try and carve out an overseas empire
for herself. The weak capitalist classes in third world countries suffered
from a profound ignorance of their own economies, and from the
failure to develop a base for technological or managerial innovation, or
for adaptation of techniques borrowed from other economies. Their
almost hereditary state of dependence on the capitalist classes of
advanced capitalist economies makes for a ‘tunnel vision’ on their part.
They look at the potential for development in their own economies
partly with the eyes of their masters, and their view of the outside world
and its opportunities is also limited by the continued presence of the
erstwhile imperialist power. Thus, for example, Indian firms continue
to have a larger number offoreign collaboration agreements with firms
based in the UK than with firms of any other country, long after the
UK has ceased to be a leader in any major field of technological
development (as distinct from scientific advance). Similarly, the
capitalist classes of retarded economies accentuate the rural-urban
differentials of colonial times by continuing to foster development of
enclaves of modern enterprise, while failing to develop the productive
forces in the countryside except in a very limited fashion. Their almost
blind imitation of the new products and technologies developed
abroad, combined with other growth-inhibiting factors, pauperize
vast numbers and leave a broad swath of population out in the cold.
Thus ‘import-substituting industrialization’ of this type means seg¬
mental development accompanied by devastation of new areas.
The third world capitalists fail (a) to develop production techniques
for their internal needs either in industry or in agriculture, (b) to
transform production relations in agriculture so as to get rid of
precapitalist types of bondage and usury, and (c) to use the state
apparatus to effectively counter the power offoreign capitalist classes
and their home governments. Hence they cannot determine their own
142 Growth and fluctuations

course except within very narrow limits. Capitalist accumulation in

such economies cannot raise itself by its own bootstraps.8 The capitalist
class and its mode of exploitation have to acquire a certain degree of
dominance both in relation to the economy and polity it operates in,
and in relation to advanced capitalist economies, for its rate of
accumulation to be at least approximately determined by its own
actions. The logic of dominance and the drive on the part of all
capitalist classes to acquire control over more capital funds and more
labour power are all the time establishing connections between the
rates and the patterns of accumulation of different capitalist economies
(see chapter 2 above). Hence the rate of accumulation of any single
capitalist economy can never be determined by internal factors alone.
But in the case of advanced capitalist countries, the capitalist class in a
particular economy is not simply reacting to impulses received from
abroad, but is also sending out impulses on its own. Indeed, the
capitalist class of a leading capitalist-imperialist nation (such as
Britain in the nineteenth century and the USA after the Second World
War) in effect directs the activities of a number of other economies.
The dependence of the capitalist classes of retarded economies on
advanced capitalist nations for techniques, products and modes of
organization and marketing, and their failure to develop the pro¬
ductive forces of any but selected segments of the population act as
severe constraints on their long-run growth. In some respects, the
growth of all capitalist economies is logically viewed as a series of short-
run investment booms which stay connected so long as capitalist
relations of production continue to be reproduced. However, in the
case of advanced capitalist economies these short-run movements do
help to shift the binding constraints by changing product types,
techniques, and modes of organization in the fields of management,
finance and marketing. In the case of the retarded economies there are
few internal factors acting to shift the constraints outward, impulses of
growth remain primarily exogenous in nature, and hence any upward
surge remains peculiarly vulnerable to any exogenous change such as
harvest failures, changes in the conditions of the export markets, or
changes in techniques of production abroad. Thus the cyclical
phenomena analysed above can be viewed as both corroborative

8 Cf. Robinson, 1971b, p. i3:‘The point of view embodied in the acceleration

principle suggests that investment keeps up with the expected rate of growth of sales. But
the rate of accumulation is itself the main determinant of the rate of growth of income,
and therefore of sales. Carrying itself by its own bootstraps is just what a capitalist
economy can do.’
Growth and fluctuations 143

evidence and consequences of the general phenomenon of retardation

with which we were concerned in earlier chapters.9

5.8 ADVOCACY OF EXPORT-LED GROWTH AND

EFFICIENT NEOCOLONIALISM

The difficulties faced by the third world in industrializing by the path

of import substitution have prompted many economists and policy
makers to advocate that the third world should abandon the vain hope
of changing its economic structure by trying to replace imports by
domestic production and should attempt to export as much as possible.
Since the major part of world trade originates as exports to and
imports from advanced capitalist countries, this would in effect mean
re-integrating the third world more fully into the international
economic order centred on advanced capitalism.
The ideological basis for this attack against policies fostering
import-substituting industrialization and against intervention in
economic life by the state through the use of direct controls has been
provided by neoclassical economics (see Bagchi, 1971b). The argu¬
ment runs roughly as follows: physical controls over allocation of
resources and quota restrictions on imports distort the effective relative
prices in an arbitrary way, and misdirect resources. In particular,
quota restrictions and tariffs on imports, without any corresponding
subsidies to exports, create an arbitrary advantage for products
primarily directed towards the internal market. While it is true that
some domestic industries might need encouragement in their early
phases, a regime of restricted trade turns these industries into

g The recurring balance of payments deficits of third world economies were financed,
until the end of the 1960s, largely by official grants, or, more frequently, loans from the
advanced capitalist countries, the World Bank and its associate, the International
Development Authority, and, to a lesser extent, by grants and loans from the socialist
countries. Latterly, particularly for such countries as Indonesia and Brazil, loans from
private banks and other private financial institutions have played a major role in
bridging balance of payments deficits. Much of the official grants and loans, such as aid
under PL480 of the USA, has been given as consumption grants. Where the grants and
loans have been given ostensibly to aid investment, governments of third world
economies have simply used them to support private and public consumption. Of course,
much of the aid was in the nature of military assistance, particularly to repressive
regimes, and was meant to be spent unproducdvely. The apparently low cost of official
‘aid’ has been very deceptive: the costs have been pushed up by various forms of tying
of aid, and repayment obligations have often eaten up the major part of export earnings,
so that new ‘aid’ has had to be given to repay the old, thus creating an international
phenomenon of debt bondage. On various aspects of aid policies, see Vanek, 1967,
Hayter, 1971, and Griffin, 1973, Newlyn, 1973, and Papanek, 1973.
j^ Growth and fluctuations

permanent ‘infants’. In this way, the country loses the advantages ol

specialization in the international market, and fails to reap the benefits
of developing those sectors in which it happens to have a comparative
advantage. One of the first requirements for getting the country out of
the regime of distorted price structures and thwarted growth is to
remove the disadvantages under which industries producing export¬
ables suffer and to let the bracing air of international competition blow
through the economy. The list of recommendations, of course, does not
stop here but often extends to the whole field of economic policy (see, as
an example, Little, Scitovsky and Scott, 1970). I will here deal only
with that part of the recommendations that concentrates on exports as
the leading sector in the growth of third world economies.
We have already examined (in section 5.2 above) the problems that
a strategy based on promotion of export of primary products has
created for third world economies in the past. In spite of a short
primary commodity boom in the early 1970s, most of the problems
facing agricultural exports are as they were in the nineteenth century.
Some of them have in fact been aggravated. Advanced capitalist
countries have become net exporters of foodgrains to the third world
and synthetic materials have partially or completely replaced such
products as indigo, cotton, jute and sisal. The demands for such
beverages as tea and coffee have reached saturation points in many
countries (see Helleiner, 1972, chapter 2). Thus the bargaining
positions of the third world countries exporting primary agricultural
products may have worsened over time. In fact, because of lack of
political organization among themselves, because of the power of
monopsonistic buying organizations in advanced capitalist countries,
and because of threats of retaliation by advanced capitalist countries,
the third world has been unable to develop any bargaining strength by
organizing international cartels in primary products10 (cf. Clairmonte,
1976). One result of this failure was a severe decline in the terms of
trade of third world countries after the Second World War — a decline
which persisted until the end of the 1960s (see Bairoch, 1975).
Even were these countries to try and export more primary and
manufactured products to their main markets, viz. the advanced
capitalist countries, they would come up against severe barriers in
the latter. Beet sugar is protected against cane sugar,
many agricultural and livestock products produced by advanc-

10 Petroleum remains the only case in which the price could be raised through
cartellization by third world countries. In its case, the collusion of giant oil companies
based mainly in the USA and one or two western European countries has been
suspected.
Growth and fluctuations Iz^

ed countries are heavily protected against imports of similar products

from third world countries. Not all the barriers against trade take the
explicit form of tariffs or quota restrictions, and it is much more
difficult to overcome informal but effective barriers against trade (see
Massel, 1973). The exports of such simple manufactures as textile
products, leather goods, labour-intensive engineering goods from the
third world come up against even more severe barriers to entry into the
affluent capitalist countries. In spite ol many pious resolutions adopted
at international conferences, particularly under the auspices of
UNCTAD, the progress achieved in opening the markets of advanced
capitalist countries to exports from the third world has been very
limited. With a major recession engulfing the capitalist world, further
progress in this direction seems unlikely. Under prodding from
UNCTAD, the developed capitalist countries adopted the so-called
Generalized System ot Preferences, under which there was a general
cut in tariffs or liberalization of quotas on imports from the third world.
However, the system is so hedged around with qualifications that in
1975 it was predicted that ‘the actual expansion of preferential trade in
the future might be negative’ (Iqbal, 1975, p. 37).
For some years past, transnational corporations and buying agen¬
cies based in countries such as Japan and the USA, have utilized the
low labour costs and favourable treatment accorded to capitalist
enterprises in such enclaves as Hong Kong or Singapore, or such semi¬
colonies as South Korea and Taiwan, to get part of their supplies
fabricated for export to the advanced capitalist countries. The practice
has also spread to such countries as Yugoslavia, Mexico, Brazil, the
Philippines and India. Such subcontracting on an international scale,
or such relocation of plants in low-wage economies for export to
advanced capitalist countries as well as other countries has been seen
by many economists as the vehicle for a new variety of export-led
growth. However, even the advocates of such growth point out the
severely limited scope for such subcontracting. ‘If one judges by
present-day Mexico, Taiwan and Korea, the countries where in¬
ternational subcontracting has the greatest importance, then the gross
value of international subcontracting exports will probably reach at
the most 5—15 per cent of the total value of exports’ (Sharpston, 1975,
p. 130). Moreover, in the cases of both subcontracting to nominally
independent concerns and production by subsidiaries or branches of
transnationals for export purposes, the proportion of value-added in
third world countries to total price of the product tends to be rather
low. For comparable products, the proportion is lower for third world
countries than for similar subcontracting or export production by
 Growth and fluctuations

subsidiaries in the developed capitalist countries themselves

(Sharpton, 1975 and Watanabe, 1976).
International subcontracting for export is unlikely to be a major
vehicle for development of skills and transfer of technology. For a start,
only the simplest operations are subcontracted out. Very often, the
subcontractors use only traditional skills and the lowest-paid
labour - the labour of young women in such activities as garment¬
making, for example (Kreye, 1977). Attempts to transfer more
sophisticated skills come up against diseconomies of small scale, and
the rapid obsolescence of production processes in advanced capitalist
countries. There is also increasing trade union resistance against the
attempt of transnational corporations to evade claims for higher wages
by actually shifting or threatening to shift production locations.
Advanced capitalist classes, in order to overcome the crisis of
worldwide inflation and stagnation, will definitely try to utilize low-
wage locations for some of their investment. Such investment will
tend to link the third world closely to the international capitalist
system. The problems of a low level of development of productivity of
the majority of the population, of growing unemployment and
underemployment in most countries, of the depression of demand
because of poor levels of living will not be solved by subjecting the third
world to an even more rigorous thraldom to advanced capitalism. It is
ironical that while advanced capitalist countries continue to use
massive state patronage for fostering both technology-intensive in¬
dustries such as nuclear power, electrical equipment, aircraft, petro¬
chemicals, motor vehicles and keeping alive such poor relations as
textiles, shoe-making, etc. (see for example, Burn and Epstein, 1972),
economists based in those countries should advocate the unhindered
development of comparative advantage in the third world. The third
world countries took a wrong turn, when, in trying to correct the
imbalances imposed on them by nineteenth-century colonialism, they
imitated the techniques, products and organizational methods of
advanced capitalist countries; such imitation, which came to be known
as the policy of import-substituting industrialization, for want of a
better name, produced its own contradictions. However, the re¬
solution does not lie in yet another dose of forced orientation towards
world capitalism; it lies in the development of economic structures,
techniques and organizations that will foster the growth of these
economies inward and will produce strong internal connections be¬
tween different sectors of the economy and different occupational
groups. The logic of capitalist exploitation and domination has
hindered such a development so far.
6

RURAL CLASSES, LAND REFORMS AND

AGRARIAN CHANGE

6.1 INTRODUCTION

In the third world, most people live in villages. In i960, only 16.7 per
cent of the third world population lived in towns with 20,000 persons
or more (Bairoch, 1975, table 44). By 1980 this percentage may be 23.
Most rural people derive their livelihood from land. But they do not
all derive this livelihood in the same way, and there are definite
conflicts of interest between different groups. We aim in this chapter to
analyse how rural people can be grouped into classes depending on
their relation to the means of production, such as land, farm animals,
and other agricultural implements and inputs.

6.2 THE LENIN-MAO SCHEME FOR ANALYSING

RURAL CLASSES AND LATENT CLASS CONFLICTS

In most third world countries, there is a class of people who do not

labour on the land and often do not even manage it, but nonetheless
derive an income from the land. These are the ‘landlords’. They may
or may not live in the villages. In most countries, there are also a class
of rural people who have nothing except their own labour to offer for
sale and who make a living thereby if the offer is accepted. These are
the landless labourers. In between the landlords and the landless
labourers, there are many other families who have some right to the
fruits of the land as owners, managers, tenants, etc. A scheme
propounded by Lenin (1920) and further developed by Mao Tse-tung
(1926, 1933) will help us in arranging these intermediate groups,
analysing their interrelations with one another and changes in their
relative positions with changes in state policy, market phenomena and
technology (for a comparative analysis of Lenin’s and Mao’s schemes
of classification, see Patnaik 1976).
In this scheme, the landlord derives his income from the rent of the
land which is cultivated by tenants. He is distinguished from the rich
peasant by the fact that the latter derives his income mainly from the

H7
1^8 Rural classes, land reforms, agrarian change

surplus produced by hired labour, although some part of the income of

the rich peasant may also accrue from the rent on the land leased out.
The rich peasant may work on his own land, but the major part of his
income is derived from the surplus of the output of hired labour over
the wages of such labour. After the rich peasant comes the middle
peasant who cultivates his own land mainly with family labour, but
may also hire supplementary labour, particularly for peak-season
operations. Then come the poor peasants who cultivate some land,
either owned or rented, but who have to sell part of their labour power
in order to earn a subsistence. Finally, there come the rural proletariat
who derive their livelihood entirely from the sale of their labour power.
Most of their working time is generally spent as agricultural labourers
on other people’s farms. We shall sometimes lump together the last two
categories simply as ‘poor peasants’, and the context will make it clear
when we have the more restricted definition of poor peasants in mind.
This scheme of classification is flexible enough to accommodate
various complexities. For example, landlords and rich peasants may
also earn income from moneylending or from commercial pursuits.
Whether they will be classified as moneylenders, traders or landlords
depends on whether land rent is their main source of income or not.
Furthermore, some absentee landlords may derive their income from
urban occupations such as trading, factory employment, etc. Whether
they will be regarded as landlords or workers will depend partly on
their relative incomes from their two roles (cf. Chandra, 1975) and
partly on their objective interest in retaining landlordism or abolishing
it. This last has to be judged in the context of the evolution of the whole
society and on the state of political struggle. If the society is undergoing
rapid development, so that opportunities outside rural areas are
opening up fast, then at least the smaller landlords may find it
convenient to sell their land and use the proceeds in other ways. On the
other hand, if a strong political movement poses a challenge to the
established interest in the towns as well as the villages, then the petty
absentee landlord too may be forced to agree to the curbing of powers
ol property even though it may harm his immediate interest in the
countryside. If neither of these developments takes place, the absentee
landlord may continue to be an exploiter in the countryside even while
he agitates for workers’ rights in the town.
There are many other cases in which the interests of the same group
of people in their different roles may be in conflict. For example, a
landlord may lease his land out to sharecroppers and at the same
time earn an income from consumption loans extended to them.
Suppose in this case, a productivity-increasing innovation is
Rural classes, land reforms, agrarian change
149
introduced. If the proportionate share obtained by the landlord
remains the same, then the rental income of the landlord will go up but
so will the income of the tenants who will now borrow less from the
landlord. It has been argued (Bhaduri, 1973) that, under certain
conditions, the consequent fall in the usury income of the landlord will
be greater than the rise in his income from rent and in that case the
landlord will not allow the innovation in question to be introduced on
the land rented out. Whether this will happen will depend on a
number of factors such as whether the landlord can alter the rental
share in his favour, whether the productivity-increasing innovation is
financed by public expenditure or by the landlord himself, at what rate
the market for the product is expected to develop and so on. The
Lenin-Mao classification scheme can be easily adapted to analyse
such problems of conflict within the same group or as between classes.
The Tenin—Mao scheme can be most easily applied where private
property in land is clearly defined, and where labour power is
extensively bought and sold in the market. Where these conditions do
not obtain, but the rural society is nonetheless undergoing a greater
degree of commercialization, the scheme can be easily modified. For
example, in early twentieth-century Russia, communal property in
land had not yet been abolished in all cases and some of the residual
claims of the feudal lords on peasants’ labour and land still remained.
In this situation, it was difficult to get an exact notion of how much
land a peasant operated or how much labour he actually hired in. To
meet this situation Lenin used a dual criterion, involving the land
operated by a peasant’s family and the number of horses - the main
implement of production apart from land and labour - owned by the
family (Lenin, 1899, 1900a and b, 1903, 1908a and b). In the same
way, the transition from precapitalist relations to capitalist relations of
production in other parts of the contemporary world can be handled
by identifying the emerging categories of rich peasants, middle
peasants and the agricultural proletariat.

6.3 TRANSITIONAL OR MIXED FORMS AND

STRATIFICATION SYSTEMS

The polarity between the landlords or rich peasants and the agricul¬
tural labourers is overlaid in most parts of the world by various kinds of
stratification systems. That is, groups of people are distinguished not by
their class positions as defined above, but by criteria derived from
ethnic, religious or other kinds of distinction (cf. Stavenhagen, 1975,
chapter 2). For example, in India, among the Hindus, people are
150 Rural classes, land reforms, agrarian change

stratified by caste. The system of caste distinctions differs from one part
of the country to another. But, in most parts, the priestly or warrior
castes are supposed to be at the top and the castes associated with
menial tasks such as scavenging, or even working in leather, are
supposed to be at the bottom. These latter castes were often regarded
as untouchable by the superior castes. From that degrading character¬
ization followed various other personal and social disabilities of these
‘low-caste’ people. The Government of India has legally abolished
untouchability and many of the social disabilities associated with it,
but the practice of denying many ordinary civil rights to these groups
(who are now called harijans) persists in many regions.
There have been many incidents of violent conflict between the
harijans and other castes in recent years and also between the
intermediate castes themselves. While not all these conflicts originate
in economic causes, underlying all of them there are conflicts about
access to land, to public resources and to political patronage over jobs,
credit and so on. The harijans in most cases are landless (this is true of
many tribal groups which have been incorporated into the larger
society), and their oppressors have generally been landlords belonging
to superior castes. In some cases, the up and coming rich peasants and
capitalist farmers have been in conflict with the earlier dominant
section of landlords over possession of land or possession of political
power and greater control over public resources. Since again the rich
peasants and erstwhile landlords often belong to different castes, these
class conflicts have taken the form of caste conflicts.
In a similar fashion, in many parts of Latin America, the landless or
poor peasants belong mostly to the ethnic group of Amerindians,
whereas the richer landowning employers either actually have or
claim to have predominantly European blood in their veins. The latter
are called ladinos in Mexico and Guatemala (Stavenhagen, 1975, part
hi) . These real or supposed ethnic distinctions correspond in most cases
to the distinction between the landless or poor peasants and the
employing landowners, between farmers mainly growing maize and
those growing more widely marketed crops, between groups with little
access to state patronage and those obtaining the lion’s share of it, and
so on.
We can see then that the stratification systems very often reinforce
the class relations brought about by the working of the market. As
between agricultural labourers and their employers or landlords, they
help to sustain relations of personal bondage and thus impede the
development of free wage labour. In a situation of chronic unemploy-
Rural classes, land reforms, agrarian change \ 51

ment in rural areas, since labour power cannot be sold at a given wage
in unlimited quantities, employers can keep the labourers’ wages low
and circumscribe their personal freedom in many ways (Bagchi,
x973b). Even when such chronic unemployment has not surfaced,
workers are often kept in a situation of bondage through chronic
indebtedness to the employers and through the use of extra-market,
and often extra-legal, coercion. Stratification systems can help the
employers to perpetuate the relations of personal bondage of the
workers or tenants who belong to particular castes, communities, or
ethnic groups.
Occasionally, the classes which feel that the existing structure does
not allow them to exploit their opportunities in full try to use the
stratification system to mobilize political support and fight other
classes which stand in the way. In India, many of the conflicts of the
castes which count rich peasants among their members with other
castes — either below them or above them in the hierarchy - can be
traced to such origins. These stratification systems partly blur the
distinctions between the different classes. But they can also be used to
sharpen the antagonism between the classes and clarify the class
relations further.
Such transitional phenomena can occur not only in countries which
have long been characterized by settled agriculture and pre¬
dominantly peasant populations, but also in countries where tribal
systems are even now in the process of being replaced by systems of
individual peasant proprietorship. Such is, for example, the case with
the Ivory Coast or Ghana (Stavenhagen, 1975, part 11), or such was the
case in Kenya at the time of independence (Leys, 1976, and Njonjo,
1975). In the Ivory Coast and many other parts ofWest Africa, before
the coming of European rule, while there were well-defined areas of
tribal occupation of land, the right of private property did not exist.
Gradually with the introduction of cash crops such as cocoa and coffee,
and immigration of foreigners into areas occupied by such tribal
groups as the Agni, rights of private property have develop¬
ed — sometimes alongside community rights (where there was abun¬
dant land) and sometimes in violation of such rights. Along with
this has gone the development of various categories of agricultural
labour and tenants who may have long-term or seasonal contracts with
the owners of land and who may share in the output produced in
different proportions. Where the ratio of labour to cultivable land is
small or where the labourers have organizations of their own, tenant
shares or wages tend to be high and where the situation is reversed, the
I52 Rural classes, land reforms, agrarian change

tenant shares or wages tend to be relatively low. A recognizable class

structure with rich, middle and poor peasants and agricultural
labourers is developing in such areas.
Similarly, in Kenya, alienation of millions of acres of land by
Europeans in the white highlands and the post-independence sale of
such land to favoured groups have laid the basis of a class structure
with rich farmers or plantation owners at the top and agricultural
labourers or squatters on the formerly white highlands at the bottom.
In many of these countries the polarization between rich farmers and
landless workers is yet incomplete. (On the general issues of conversion
of tribal people into class-differentiated peasantry, see Fallers, 1971
and Saul and Woods, 1971). In some countries, such as Tanzania, the
government has taken measures which seem to have arrested any such
potential polarization (see the article by Ghai and Green, in Ghai, et
ah, 1979). But as we shall see when we review the results of land
reforms in Mexico, in order to be effective, differentiation among the
rural classes cannot be permanently arrested by once-for-all measures
of redistribution or co-operativization, particularly when they are not
accompanied by other policies to support such measures. Hence in
judging the prospects for the success of the Tanzanian experiment and
other similar efforts in other parts of the world, it is necessary to study
the general influences acting on the evolution of rural class structures
in third world countries.

6.4 SOME INFLUENCES ACTING ON THE RURAL CLASS

STRUCTURES IN THE THIRD WORLD

We can approach the analysis of the evolution of the class structure by

studying the process of generation of a surplus and its mode of
utilization on the one hand, and the rate of increase of the numbers of
poor peasants and agricultural labourers, their prospects of employ¬
ment and the mode of such employment, on the other.
In the five-class scheme sketched in section 6.2, it is clear that the
poor peasants or agricultural labourers do not earn any surplus above
their normal subsistence needs. The middle peasants may or may not
earn a surplus in normal years. If they do earn a surplus in normal
years and have no means of employing it except in purchasing land,
then the degree of concentration of landholdings will go up, provided,
of course, the landlords and rich peasants do not lose the land sys¬
tematically. Even if the middle peasants can employ their surplus to
intensify cultivation on their land, or expand their non-agricultural
pursuits such as marketing, moneylending or transport business, their
Rural classes, land reforms, agrarian change *53

control over local resources may go up at the cost of poor peasants.

What applies to middle peasants applies a fortiori to rich peasants and
landlords, who earn a surplus and choose to employ at least part of it
in the purchase of land, intensification of farming or expansion of rural
non-agricultural enterprises. We can see at once the weakness of land
reform measures which aim at redistributing some land from the
landlords to the other groups, but which do not follow this up with
further policies to help the poor peasants and labourers and to arrest a
renewed process of concentration of landholdings.
Where the middle peasants generate surpluses in some years and get
into debt in bad years and where the prospects of profitable capital
formation in a real form are dim, we generally get traditional landlord-
dominated class structures. We then expect the concentration of land
ownership to be high, and many tenants and agricultural labourers to
be bound to the landlords or employers in some form of personal
bondage. This was, for example, the situation in most parts of pre¬
communist China and pre-independence South Asia.
The employment prospects of the poor peasants and rural workers
are determined by the rate at which the whole economy grows, the
way the technology evolves and the way control over labour is
exercised by the employers. When landlords or plantation companies
began producing for external markets, they often used precapitalist
methods of labour control (cf. section 2.2 above). Tribal people and
indigenous peasants were denied access to good, uncultivated land, as
in Spanish America or Indonesia, and were often corralled in ‘native
reserves’, ‘Indian communities’, etc. Their able-bodied people were
then made to work for sugar plantations, haciendas, or other such
enterprises by using fiscal devices or direct methods of coercion. Even
today in many parts of Latin America such as Guatemala, there are
Amerindians who migrate in times of peak activity to coffee plan¬
tations or other plantations and go back to their villages after the work
is over. Their wages remain low and their position insecure.
Subsistence farming in the Amerindian villages and capitalist agricul¬
ture can be said to have a symbiotic relation with each other.
There were other plantations (particularly sugar plantations) in the
nineteenth century which used slave labour, and which changed over
to the use of workers imported mainly from India when slavery was
abolished. However, these ‘indentured’ labourers were generally
treated practically as slaves, and it involved a long hard fight before
they could earn some minimal rights as free wage labourers (Adamson,
1972, Tinker, 1974). Similar systems of use of unfree labour were also
instituted in the tea plantations of India (Guha, 1977) requiring long
 Rural classes, land reforms, agrarian change
i54
trade union and political struggles before these plantation workers
were treated as free wage-earners. Although modern coffee, sugar or
tea plantations generally employ a core of permanent workers in the
factory and in the held, seasonal or casual workers are still important
to them. These seasonal workers often come from the surrounding
peasantry. Hence, in their case, the distinction between a proletariat
working for capitalistic enterprises and dependent peasantry attached
to estates becomes blurred. In the Brazilian North-east, plantation
work was predominantly carried on by various categories of
peasants - some landless workers working for wages and living on the
estate, some tenants working regularly in exchange for the use of a
piece of estate land, some other tenants owing casual labour service or
payments in kind (vegetables or food crops), and even some formally
independent peasantry providing the estate with some supplemental
goods and labour service (Riegelhaupt and Forman, 1970). So the
distinction of class structures on the basis of organizational forms of
enterprises is not always clear cut.
In other cases, where either traditional landlordism of the type
found in pre-communist China or pre-independence India prevailed,
or where there were haciendas with numerous dependent peasantry
having obligations of providing labour to the hacienda, the opening of
new opportunities of making profits through the growing of cash crops
led often to a greater degree of exploitation of the tenants or dependent
peasantry. Thus, in Chile, increased opportunities of exporting grain
after the 1860s apparently led the landlords to demand more labour
from inquilinos, who were tenants with labour service obligations and
also to restrict their access to the land on the hacienda (Bauer, 1975,
and ‘Introduction’ to Duncan and Rutledge, 1977). In China and
India also the poor peasants were often denied some of the customary
rights of use of what had earlier been common land, and the shares of
the tenants were effectively depressed.
If the economy grows fast enough and a tight labour market
develops, the conditions of agricultural labourers can be expected to
improve. But such improvement is not inevitable as is most
vividly shown by the case of the Union of South Africa, where the
ruling clique deprived black workers of many fundamental human
rights and kept their wages low. In fact, it has been claimed that
imposition of slavery or other institutions of unfree labour is a response
on the part of landlords or capitalists to a situation of labour shortage
(Domar, 1970). However, the degree of resistance of the peasantry or
labourers and their organization for self-defence may determine
whether the ruling classes succeed in their design to enslave or enserf
Rural classes, land reforms, agrarian change
J5 5
tree peasants or tribesmen, or to repress the struggle of unfree labour to
obtain their rights and improve their material conditions (cf. Brenner,
1976).
We have already referred to the way in which organizational forms
such as plantations or haciendas can influence the class structure. The
influence of the market on the class structure in the era of capitalism is
all-pervasive. But the particular way in which the market works
depends on the specific types of state intervention for controlling
labour, creating infrastructure, regulating the ownership and use of
land, providing information and inputs for the use of agriculturists and
arranging for special price support or subsidy schemes.

6.5 TYPICAL PATTERNS OF STATE INTERVENTION AND

PREDOMINANT FEATURES OF CLASS STRUCTURES IN

TODAY’S THIRD WORLD

We have already noticed some of the ways in which the state apparatus
acted in shaping the class structure in colonial times and after. It
legalized slavery, it restricted the movement of people, it alienated
land which had traditionally been used by tribal people for pasture of
shifting cultivation, it imposed taxes on particular groups with a view
to influencing their behaviour. In many countries, perhaps the most
important enactment was to render land a commodity for purchase
and sale. From the nineteenth century onwards, the state took
measures to create a more or less free labour and land market. It
abolished slavery and declared (in Latin America) communal land to
be partitionable and convertible into personal property. At the same
time, to retain control over labour, it often brought in new laws of
vagrancy which compelled poor people or particular ethnic groups to
work for others. In some authoritarian states, there are laws forbidding
workers’ organizations and strikes.
Besides such legislative acts, the colonial state apparatus or its
successors in Latin America created infrastructures to facilitate the
diffusion and marketing of cash crops. Railways and port facilities in
the third world were built primarily with these ends in view, although
strategic objectives could also be served thereby, as in north-west India
(see chapter 4 above). Besides railways, irrigation works were built in
many countries such as India, Egypt and Indonesia to facilitate
production of exportable crops. Such schemes were often financially
profitable. Irrigation schemes, in combination with other measures,
fostered plantation enterprises (as in Indonesia) or the growth of large
farms (as in the Punjab in British India), and raised productivity in
i^6 Rural classes, land reforms, agrarian change

favoured parts of the country (for discussion of adverse side-effects of

large scale irrigation works, see chapter 4).
In many colonial territories the state effectively subsidized the
creation of infrastructure facilities for the benefit ofdominant groups of
foreign businessmen. When ex-colonial countries gain independence,
naturally, the landlords and rich farmers use the state apparatus
to subsidize irrigation and transport facilities. In fact, much of
the productivity increase in such favoured regions as the Mexican
north-west, East and West Punjab, and the Nile valley can be attri¬
buted to the spread of irrigation schemes, but peasants continued
to use traditional techniques of cultivation. The later Green
Revolution - that is, production of high-yielding varieties of grain
with heavy doses of fertilizers — has mainly affected these irrigated
areas which were already favoured.
The state apparatus has also often helped the big landowners and
prosperous farmers with the provision of cheap credit. In Argentina,
for example, the control of credit given by the important banks was a
main source of power of the landowners before 1914. In Mexico, the
National Agricultural Credit Bank helped large landowners, combin¬
ing in credit unions, with loans on easy terms. At a later stage, it also
helped large landowners to take over the land of poor colonists (De
Alcantara, 1976, chapter iv). Similarly, in India, the state provided
large landowners with cheap credit through co-operative banks, and,
after 1968, through commercial banks as well. In fact, in most of the
countries of Asia seeking to diffuse high-yielding varieties of paddy or
wheat, the state has taken an initiative either in creating new
institutions providing agricultural credit or in stepping up its flow
through existing channels (Palmer, 1976).
Besides these infrastructure building activities, the state has increas¬
ingly intervened in the organization of production activities, and to
redistribute rights of landownership or land use. In Algeria, the state
has taken over farms which earlier belonged to foreigners (mainly
Frenchmen) and run them as state farms or co-operative enterprises.
In Tunisia also, Tunisians have taken over land that formerly
belonged to foreigners. In both cases, since land distribution was
already uneven under French rule, and few measures of drastic
redistribution of land among the indigenous people were taken, the
new distribution of income from, or property in, land among Algerians
and Tunisians has become highly skewed. A new group of privileged
owners and managers has come to occupy positions vacated by the
foreign colons (Amin, 1970). In Kenya, similarly after independence,
the state decided to sell the formerly European-owned (‘white’) high-
Rural classes, land reforms, agrarian change
'57
lands to Africans, instead of redistributing the land in an egalitarian
fashion (the British government helped with a loan to effect the sales).
Naturally only the more wealthy Africans, or those who were
politically well-connected, could buy the land. (Foreigners continued
to hold large estates even in 1971 ; see ILO, 1973, Technical Paper
No. 17). The majority of the people who had been dispossessed in
colonial times became poor peasants or landless workers (Leys, 1976).
In many countries, the state has tried to abolish absentee landlord¬
ism, redistribute land more equitably and organize co-operatives
among the peasantry, with very mixed and often disappointing results.
In independent India, for example, the Government abolished the
system of revenue farming through the zamindars and other in¬
termediary rights between the Government and the cultivators or legal
owners that had grown up under British rule. Compensation was paid
but at a diminishing rate in relation to net income. However, the
Government often allowed the zamindars or other intermediaries to
retain, or resume the possession of large amounts of land, under
various pretexts (Thorner, 1976).
Another step taken by the Government in India was to pass
legislation giving some security of tenure and better terms to tenants-
at-will (who often had only verbal agreements with the landlords and
were rack-rented). The government tried also to check concentration
of landownership and give the poor and landless peasants some land,
by putting a ceiling on landholdings (the ceiling varied from state to
state). However, both these measures were ineffective, because of
large-scale evasion. Tenants were evicted, or retained on condition
that they did not register themselves as tenants or sharecroppers. Land
above the ceiling was registered in the name of relatives, domestic
servants or even farm servants (Appu, 1971, 1975)- Only in a few states
such as Jammu and Kashmir, Kerala and West Bengal, where peasant
organizations are strong or where landlords belonged to a minority
community and could be isolated, have the land reforms been even
partially effective. In most other areas, taking advantage of the poor
and landless peasants’ illiteracy and their desperate poverty and lack
of organization, and often using illegal methods of coercion, the
landlords have been able to deny sharecroppers their legal rights and
aggrandize land in quantities above those permitted by law.
In Egypt, at the beginning of the 1950s, the landless families
constituted a majority among rural families. The major part of the
cultivated land was cultivated by tenants (Abdel-Fadil, 1975 and
Radwan, 1977). Major land reforms, carried out in 1952 and 1961,
led, at first, to a decline in land concentration, particularly at the top,
i58 Rural classes, land reforms, agrarian change

and to a fall in the proportion of landless families. However, private

property in land was retained and ceiling laws were widely evaded.
Between 1961 and 1972, the proportion of landless families to the total
number of agricultural families increased from 45.3 per cent to 50.0
per cent (Radwan, 1977, p. 22). Moreover, small landowners leased
out more than half of their land and the real wages of agricultural
workers remained stagnant or fell. All this happened, in spite ol the fact
that peasants were organized into co-operatives on a compulsory basis
and that major industries were all nationalized (Ghai et ah, 1979,
chapter 1). This apparent paradox will resolve itself when we discuss
the fate of Mexican land reforms in the next section.
There are now studies all over the world which bear on the evolution
of the rural class structure since colonial times. Although most of these
studies do not use the Lenin-Mao scheme of classification, the basic
features at the lower end of the class structures are clear. In the 1960s,
under the auspices of the CIDA (Spanish initials for Interamerican
Committee for Agricultural Development), studies of farm structure
were carried out in seven Latin American countries. Farms were
divided into large or medium multi-family units, employing wage
labour on a regular basis, family units which might be enough to
support an average family, or sub-family units which were too small to
provide enough employment and income to a typical family (Barra-
clough and Domike, 1966, Stavenhagen, 1975, chapter 7). It was
found that landless workers together with operators of subfamily farms
('poor peasants’ in the Lenin-Mao scheme) constituted a majority in
all the countries, ranging from 60.9 per cent of agricultural families
in Argentina to 88.4 per cent in Guatemala (Peru is excluded because
of non-comparability of data). Studies carried out for India, Pakistan
and Bangladesh (Ahmad, 1973, Chandra, 1972, 1975, Gough, 1977,
Khan, 1977, Mencher, 1974, Naseem, 1977 and Patnaik, 1976) have
found a tendency for the numbers of poor peasants and landless
workers to rise over time. In Pakistan and Bangladesh, in 1960/61, the
percentage of landless agricultural workers was low in comparison
with India. But in all three countries this percentage has risen over
time, and in many areas, if not most, real wages of agricultural labour
have tended to stagnate or decline. The Green Revoltution has often
had a contradictory impact on rural employment and wages. By
raising the productivity of land and making it possible to grow two or
even three crops on a piece of land, it has made it possible for rural
workers to obtain more employment for the year as a whole. In some
particularly prosperous parts, it has led to the replacement of
Rural classes, land reforms, agrarian change >59

paternalistic relations between employers and workers by formal

contracts (Bhalla, 1976). But, at the same time, mechanization and
migration of workers from less-favoured areas have depressed the
bargaining position of the original workers of the Green Revolution
areas.
From our discussion so far, it is clear that the position of the middle
peasant (who has often been taken as the archetypal peasant) in the
class structure is a rather precarious one. He might prosper and might
become a regular employer of labour; or bad harvests, low prices, or
growth in numbers uncompensated by rise in productivity, or
indebtedness might depress him to the position of a poor or landless
peasant. For analysing the behaviour of the peasantry, therefore, it is
necessary to analyse the relations between the different rural classes
and their relation with the larger world of national markets, state
patronage and international movements in markets, prices and
technology.
While, in most countries, capitalist relations between employers and
rural workers are becoming the norm, some of the precapitalist
features of the rural scene, such as subsistence farming and sharecrop¬
ping tenancy, have displayed a surprising degree of tenacity. One
reason for this is that, as capitalists acquire control over more
resources, they continue to utilize the older types of exploitation as
long as they can, so that vestiges of precapitalist bondage continue to
exist. Another reason is that by impoverishing whole masses of
peasantry in regions on the margin of capitalist development,
capitalism compels these peasants to cling to subsistence
farming - with little capital on impoverished land — for survival.
These marginal regions serve as labour reserves. But such regions need
not always be physically separated from the regions of capitalist
development. If capitalism develops in such a fashion as to create and
maintain a large volume of unemployed or underemployed labour in
the countryside, many landless labourers or poor peasants are
compelled to establish ties of bondage with their employers in the hope
of some security. Such bondage is the result of a retarded capitalism,
rather than precapitalist in origin. It can take the form of sharecrop¬
ping on onerous terms, and often in return for labour service on the
employer’s farm. We shall analyse the nature of socalled ‘subsistence
farming’ and tenancy in more detail in section 6.7. In the next
section, we use the history of land reforms in Mexico to discuss how
radical land reform measures are often nullified by later
developments.
i6o Rural classes, land reforms, agrarian change

6.6 THE FATE OF LAND REFORMS IN MEXICO

AND IN CHINA

A clear analysis of the conditions for success of land reform measures

which aim at redistributing land to the actual cultivators and speeding
up the development offorces of production in agriculture was provided
by Lenin. In the early twentieth century, in tsarist Russia, the left-
wing Narodniks wanted to redistribute all land to the cultivating
peasantry, without paying any compensation to the former owners,
whereas the right-wing party of the Cadets wanted only a limited
redistribution of land. When the tsar’s minister, Stolypin, carried out
land reforms (in 1910), peasants were allowed to buy up their
allotments or sell them and withdraw from the communes. Lenin
pointed out that only the left Narodniks’ programme of complete ex¬
propriation of landlords and thorough redistribution among peasants
could eliminate bondage and labour service (Lenin, 1912a, 1912b).
For, under the Stolypin reforms, many dispossessed peasants would
join the ranks of the proletariat. The landlords who obtained
compensation, could use their economic power to dominate the
peasantry. Moreover, if very large landholdings survived, the owners
of adjacent small holdings [minifundias, in Latin American usage)
would inevitably remain ‘paupers in bondage’, depending on the large
landholder for employment, credit and so on (Lenin, 1912b, p. 251).
In a capitalist setting, the sustainability of land reforms depends on
employment in the non-agricultural sector expanding at a sufficiently
high rate to prevent the emergence of a permanent reserve army of
labour in the rural areas.
In Mexico, the struggle for liberation from Spanish rule started with
a call to end exploitation of the Indians and the peasants. But power
was eventually captured by a coalition of landlords, merchants and
former public functionaries, as in other parts of Latin America. In the
late nineteenth century, under Porfirio Diaz, landlords and foreign
capitalists took complete control of the economy. The vestigial rights of
most of the Indian communities vanished, and, in province after
province, whole village populations came to be manorial serfs in all but
name. Despite the brave resistance put up by Indian communities in
the central region, 1 per cent of the population came to own 97 per
cent of the land by the beginning of the twentieth century
(Stavenhagen, 1970b, p. 227, and Wolf, 1973, pp. 17-18).
Then Diaz was overthrown and one of the fiercest peasant wars in
modern history started in Mexico. By 1917, most of the great peasant
leaders had been defeated by the so-called ‘constitutionalists’ (Pendle,
Rural classes, land reforms, agrarian change 161

19715 Womack, 1972, Wolf, 1973, chapter 1), who still had to appease
the peasantry. Article 27 of a new constitution drawn up in 1917 gave
the state the right to impose restrictions on private property in the
interest of ‘the conservation and equitable distribution of the public
wealth (Pendle, 1971, pp. 193-4). Since neither the peasantry nor the
proletariat were able to create a political party which would exercise
power on their behalf and in their interest, the actual implementation
of land reforms depended very much on the political will of the
president of the country selected by the ruling coalition. Up to 1934,
only about 3.5 per cent of the national territory had been distributed
to the peasants. In 1934, Lazaro Cardenas, a Zapotec Indian and a
participant in the peasant revolution, became president, and pro¬
ceeded vigorously to carry out land reforms - very often in the teeth of
opposition by ruling classes, including former revolutionaries who had
developed vested interests in land. Under Cardenas, 31.6 million
hectares of land were distributed and this came to almost a third of the
total amount distributed between 1915 and 1966 (Carr, 1974, p. 168).
The Mexican land reform measures created two sectors, the private
sector, in which only small-sized holdings were supposed to be
allowed; and the ejidos or the co-operative sector, where peasants were
allotted land as members of a community, and where the land was
inalienable. The Cardenas government tried to ensure the viability of
the ejidos by providing them with roads, irrigation works, schools and
medical services. Credit and technical assistance was to be provided to
the ejidos through the newly-established Banco Nacional de Credito
Ejidal(BNCE). A whole network of marketing and purchasing services
was also built to service producers’ and consumers’ co-operatives. As a
result of the redistributive measures adopted by the Cardenas
government, the percentage of landless labourers in Mexico dropped
from 68 to 36 per cent between 1930 and 1940 (De Alcantara, 1976,
PP- 4-5)-
However, even while Cardenas was effecting drastic redistribution,
in many areas the provisions of a law imposing a ceiling of 100 hectares
on private landholdings were being evaded. After the end of the
presidency of Cardenas, power passed back to an oligarchy which
wanted to halt the land reform process and channel resources to the big
landholders. Public investment was again directed to irrigation works
primarily benefiting big estates. The ceiling on private landholdings
was raised to 200 hectares of seasonally cultivated land or 100 hectares
of perennially cultivated land; in fact, for selected plantation crops the
ceiling was raised to 150 hectares of irrigated or 300 hectares of
seasonally cultivated land. However, these ceilings are widely and
I 62 Rural classes, land reforms, agrarian change

openly evaded by registering the landholdings in separate names but

keeping the operations under single control (Stavenhagen, 1970b, and
De Alcantara, 1976, parts 1 and 11).
Apart from such deliberate reversal and sabotage of land reform
measures, three other factors have contributed to the sharpening of
inequalities among the rural classes after 1940: first, structural
weaknesses of a co-operative sector which is surrounded by large
private landholdings and which is regarded as a sphere of bureaucratic
and political patronage; second, the deliberate channelling of the
benefits of public investment in agriculture to the latifundias in pre-
Green Revolution days; third, the aggravation of regional inequalities
as a result of pricing and other policies designed to support the
quickening of the Green Revolution.
At the time of expropriation of the latifundias, the estate-owners
were allowed to choose the land they would like to retain. Naturally
they chose the most fertile and best-irrigated land. Hence many ejidos
started with poorer endowments than the large-sized estates. Many
problems generally occur in creating a democratically run co¬
operative farming sector when peasants have been used to individual
farming and when many of them are illiterate. Such problems can be
successfully tackled only with continuing political support for co¬
operative ventures. After Cardenas, the ‘counter-reform’ presidents
and their associates deliberately set out to subvert ejidos and encourage
individual farming by members of ejidos. For, they were afraid of the
economic and political competition that might be posed by efficient co¬
operatives managed in the interest of the poor peasants (De Alcantara,
1976, pp. 192—200). When they tried to operate on their own, many
ejido farmers found that they could not obtain adequate credit or the
required inputs in competition with large farmers, and they leased out
their land to others. So even though individual ownership was not
conferred on the ejido farmers, many of them in effect became tenants of
their more energetic or more affluent neighbours.
Secondly, credit, public investment and research efforts of the
government and associated agencies were increasingly directed to¬
wards raising the productivity of irrigated, large farms. In 1943, after
considerable discussions between the Mexican and US governments
and the Rockefeller Foundation, an Office of Special Studies was
created within the Ministry of Agriculture in Mexico to give effect to a
programme of technical assistance by the Rockefeller Foundation to
Mexican agriculture. The head of the Office was at the same time the
held director of the Foundation in Mexico. The work carried out by
the Office was directed towards raising the productivity of the
Rural classes, land reforms, agrarian change 163

irrigated areas as rapidly as possible, for that seemed to provide the

most promising avenue for accelerating agricultural growth.
Simultaneously, the government and big farmers spent large amounts
on providing irrigation to hitherto unirrigated areas. However, the
extension of irrigation benefited only a few select states of the North
and North-west, and the major part of Mexico remained unirrigated.
The majority of poor farmers remained engaged in raising maize,
beans and such other crops on unirrigated land. Considering this
situation and considering the difficulty of reproducing hybrid maize
seeds except in special seed farms, the Institute for Agricultural
Investigation (IAI), which had come into existence before the Office of
Special Studies, tried to promote another approach. This approach
concentrated on popularizing better yielding varieties of maize which
could be reproduced through open pollination on farmers’ fields.
However, this approach did not get adequate government support. In
any case, for the strategy of the IAI to succeed, an extensive network of
extension and credit reaching into the remotest corners of the country
would have been needed. Such a network did not exist in Mexico in
those days.
The Office of Special Studies succeeded in producing higher
yielding varieties of wheat and maize which required assured irri¬
gation, and the large farmers obtained the major share of credit and at
a relatively low cost through official banks and private credit agencies.
Productivity growth was hence achieved through the increase in yields
of wheat and maize under irrigated conditions. The credit supplied by
the BNCE to the ejido sector failed to expand in the crucial years in step
with output or requirements. Also the ejido and small farmers obtaining
BNCE credit or credit through other official banks had to buy
approved inputs through selected agencies. In effect, they became
captive victims of private input-supplying organizations working
through official banks, whereas large farmers could obtain the same or
better inputs at a lower cost by working through their own purchasing
agencies or operating in the open market.
The government also subsidized a programme of mechanization,
mostly with imported tractors and other machinery, during the period
from the 1940s to 1960s. Apart from causing an unnecessary drain of
national resources, this programme primarily benefited the large
farmers, and speeded up the process of conversion of many small
peasants into landless labourers. Under Cardenas, central machinery
stations had been set up with a view to instructing ejido farmers in the
operation and maintenance of machinery. These later became
inefficient and stagnant organizations, often selling off their machinery
^4 Rural classes, land reforms, agrarian change

or allowing the machines to be scrapped for lack of adequate

maintenance.
The break-through to the ‘Green Revolution in Mexico (and
through diffusion, in other parts of the third world) came with the
finding of dwarf varieties of wheat which could absorb fertilizers in
heavy doses without the plants ‘lodging’ (falling over). However, the
basis of regional and classwise inequality in the distribution of gains of
agricultural productivity had already been laid in the earlier years
through the working out of the policies and processes sketched above.
In Mexico, a special problem was created by the fact that the poorer
peasantry generally cultivated maize for subsistence needs and (in
irrigated areas, especially) for supplementary income. While seeds of
high-yielding varieties of wheat can be reproduced for several years
through open pollination, hybrid maize seeds have to be reproduced
every year by combining the original genetic strains. Seeds of HYV
wheat came soon to be reproduced on seed farms controlled by large
farmers, but hybrid maize seeds were reproduced only by a centraliz¬
ed official agency with inadequate extension and distribution
facilities. Thus, the poorer peasants, mostly of Amerindian origin, in
the central region of Mexico missed out most of the putative benefits of
HYV maize (Myren, 1970).1
11 is not necessary here to discuss in detail the question of the relative
efficiency of co-operative ejidos and individual farming by large or
small farmers. It has been found that given similar credit, marketing
and transport facilities, co-operative ejidos can perform as well as
private farms (Mueller, 1970), but in most cases conditions have not
been the same. Co-operative ejidos have declined in number in most
areas, and ejido farmers are now highly differentiated among them¬
selves in respect of income and access to means of production (Ishii,
1973, and De Alcantara, 1976).
The upshot of all these processes has been a high degree of
differentiation among Mexican peasantry, completely reversing the
changes that were brought about by the Cardenas administration. In a
study of the rural class structure in Mexico around i960, Stavenhagen
(1970b) divided the farm units into five categories. First came the large
landowners possessing more than 200 hectares of land. They made up
3 per cent of all private farm units in number, but accounted for 84 per
cent of all the land in the private sector and well above 40 per cent of all
cultivated land. Then came the medium-sized farms, with between 25
*
1 A vivid contrast is provided by People’s China where diffusion is ensured by
organizing research and development in almost every commune (cf. Science for the
People, 1974, pp. 50-1).
Rural classes, land reforms, agrarian change 165

and 200 hectares of land-holding, which accounted for 13 per cent of

all private farm units and 10 per cent of all privately held land. The
owners of what Stavenhagen calls family farms (roughly correspond¬
ing to middle peasants) accounted for 7.8 per cent of all heads of farm
units and 3.6 per cent of the labour force, thus forming a tiny minority
of all peasants. Stavenhagen then grouped together the peasants on the
ejidos and holders of farm units less than five hectares in size (which
were too small to support a family or employ it fully). They together
formed 84 per cent of all farm units and held 49 per cent of the
cultivated area. Finally, there were 3.3 million landless labourers, who
formed over half of the active population in agriculture. There is no
indication that this process of polarization of the Mexican peasantry
into a small group of large farmers and the vast majority of poor
peasants and landless labourers has been arrested since.
The land reforms effected by Cardenas were reversed because while
they fulfilled one of the conditions laid down by Lenin, viz. that large
landowners must be expropriated without any compensation (Flores,
1970), they did not fulfil the other conditions. A very powerful sector
dominated by large farmers survived, and this sector was allowed to
aggrandize itself in later years. The political conditions for sustenance
of land reforms were, of course, upset as soon as Cardenas quitted the
presidency, for the ruling party did not want to continue his
programme.
In communist countries land reforms have succeeded under very
different political conditions. In China, for example, land tenure
policies pursued by the Communist Party changed with changes in the
political conditions in the country. In the early years of struggle
against the Kuomintang in the late 1920s and early 1930s there was a
tendency to attempt too radical a land reform programme, without
adequate political preparation. Later, as the Communist Party
acquired greater experience and as victory in the war against Japan
was given priority over any other objective, the policies pursued by the
Party became more flexible and also more moderate. An attempt was
made to win over the majority of the peasantry and even patriotic
landlords for conducting the struggle against the common enemy.
Hence the main stress was on rent reduction, debt moratoria or
interest reduction rather than on a drastic redistribution of land.
However, in the final stages of the war against Japan and the civil war
against the Kuomintang from 1946 onwards, the pace of land
redistribution away from landlords and rich peasants and towards the
poor and landless peasants accelerated. This was particularly true of
north and north-eastern China. This policy was given legal expression
166 Rural classes, land reforms, agrarian change

in the Chinese Agrarian Law promulgated on io October 1947. (Fora

classic account of land reform in a north Chinese village, see Hinton,
1968; the text of the Agrarian Law and supplementary measures are
reproduced in the appendix of the same book.)
An attempt was made to carry out land reform in China on the basis
of the Lenin-Mao scheme of class analysis (see Hinton, 1968,
Appendix C for Chinese Communist Party directives on how to
analyse class status in the countryside). While the party provided the
leadership and the policy guidelines, the actual execution was left to
peasants’ meetings and peasants’ organizations. This is a major
difference between land reforms in China (and many other socialist
countries) and land reforms carried out under bureaucratic fiat (often
of an occupying power, such as the US government in postwar Japan).
During the civil war in China, most of the landlords and many rich
peasants lost the major part of their land which was redistributed to
poor and landless peasants. However, after the triumph of the
Communist revolution, in the Land Reform Law of June 1950, an
attempt was made to halt the process of dispossession of the rich
peasants, in the interest of reconstruction and stimulation of agricul¬
tural growth. But the drive towards achieving a nearly egalitarian
distribution of land among the peasantry went on. By the end of 1952,
this process was practically completed. The movement for organizing
mutual aid teams and elementary agricultural co-operatives (which
gave some recognition still to individual ownership of land and other
means of production) had already made some headway in the older
liberated areas; this movement now spread all over the country, but
with variations in speed and form to suit local conditions (see
Shillinglaw, 1974, Moise, 1978). The final stage was the organization
of communes, each of which integrated production, administration
and political activity for group of villages together. To summarise, in
China, as in other communist countries, the power of the landlords and
rich peasants was destroyed by dispossessing them wholly or partially,
and by giving poor peasants and the proletariat overwhelming
political authority over the exploiting classes. Such conditions, of
course, are the very antithesis of the societies based on private property
in the third world countries we discussed earlier.2

2 It is reported that land distribution is South Korea is more even than in most other
third world countries. The Americans exerted pressure for land reforms in South Korea,
Taiwan, and other countries heavily dependent on them, in order to stem the tide of
communism in Asia bred by peasant revolt against centuries of exploitation. An initial
redistribution of land was sustained by government policies to curb land transfers, and
by a remarkably high rate of absorpdon of the labour force achieved by South Korea in
Rural classes, land reforms, agrarian change 167

6.7 SUBSISTENCE FARMING, SHARECROPPING

TENANCY AND CAPITALIST DEVELOPMENT

In spite of considerable development of production for the market in

most countries of the third world, there remain large sectors which
raise crops primarily for peasant subsistence. Similarly, although
employment of hired labour has become widely prevalent in these
countries, such institutions as sharecropping tenancy continue to
survive and even spread further in some cases. Both subsistence
farming and sharecropping tenancy are integrated with ‘advanced’
sectors of the economy, and their persistence is characteristic of
retarded capitalist development.
First, let us look at the nature of subsistence farming in the third
world. An analytical distinction can be made between subsistence
farming in a more or less closed tribal economy and what may be called
‘last-resort subsistence farming’. In the former case, the products
produced were directly used in consumption or in the mechanism of
redistribution through ritual presentations to chiefs (who in turn gave
them back to his tribal brethren) and gift exchange. They were not
generally determined by the dictates of the market or an external
tribute-raising authority. Many of the tribes might produce a surplus
above their physiological needs in normal years, but it was used up
within the tribe and did not enter a wider commercial nexus in any
major way. (For studies of tribal economies, see Allan, 1971, Conklin,
1969, and Sahlins, 1968, 1974.)
The second type of subsistence farming occurs directly or indirectly
in the wake of commercialization. This may be practised by the
dependent peasantry on or around a large estate (cf. sections 6.3 and
6.4 above and Pearse, 1975, pp. 44-50). Or this may be practised by
members of a tribe which has been driven out of its lands and confined
to reserves. The land on the reserves (which was often marginal to start
with) becomes less and less fertile since population grows and people
have no surplus to invest in it. Even when there are no tribal reserves or
shifting cultivation, the advance of commercial farming could induce
the growth of subsistence farming by the exploited tenantry and other
small peasants. Thus the Irish tenants of Anglo-Irish landlords in the
nineteenth century planted a patch of ground with potato for
subsistence while labouring on the landlord s land for raising com-

recent years (Lee, 1979). In these respects, South Korea and to a lesser extent, Taiwan,
remain exceptions in the third world. Their size and their positions favour them and
their experience is unlikely to be replicated in populous third world countries under
present socio-political conditions.
 68 Rural classes, land reforms, agrarian change

mercial crops most of the time. If exploitation by money-lenders,

traders or the state apparatus is excessive, even nominally independent
peasants are compelled to eat up their livestock, cut down the forests
and elfectively mine the land. So the standard of fertility may decline,
and peasants are compelled to reserve a large part of their land for
mere subsistence. Such eroded lands serve as cheap labour reserves for
mines and plantations. A regular pattern of migration of labour from
such areas to plantations, mines or factories emerges and is kept going
by the logic of exploitation (Arrighi, 1970a and Stavenhagen, 1975).
Within tribal reserves or outside them, the so-called subsistence
farmers are generally compelled to raise some cash crops in order to
pay taxes and dues to the landlord, tax-collector or money¬
lender - often to the detriment of their normal subsistence needs
(Holmberg and Dobyns, 1970, Bharadwaj, 1974, Stavenhagen, 1975).
The growing of poppy by Indian and Chinese peasants, or the growing
of jute by small peasants in India and Bangladesh is (or was) dictated
by such compulsions. Very often the capitalists in the advanced sector
use the poor peasants as experimental guineapigs, or, when they can
get away with it, reserve for themselves the more remunerative crops.
In colonial Indonesia, cultivators on Outer Islands grew pepper, coffee
and tobacco. When the latter two crops became sufficiently profitable,
European firms moved in; in the case of tobacco, the latter took over
the whole operation from the growing of the crop to its processing and
marketing overseas (Boeke, 1946, pp. 4-6). In pre-independence
Kenya, when the ‘advanced’ European farms could not compete on
equal terms with Kenyan subsistence farmers, they used their political
power to monopolize the supply offarm products to urban areas. What
distinguishes today’s ‘subsistence farmers’ is thus not their intrinsic
behaviour pattern, but the high degree of exploitation they are
subjected to and their low standard of living.
Not only has subsistence farming persisted alongside development of
capitalist farming in the third world ; a fully free labour or land market
has also failed to emerge. Share-cropping tenancy has been taken as a
sign of survival of precapitalist modes of exploitation in the country¬
side. However, it can be easily shown that so long as a large reserve
army of underemployed or fitfully-employed labour persists in the
countryside, under conditions of traditional agriculture, share-crop¬
ping tenancy can be a profitable mode of employment of labour by the
landowner. Hence its persistence is entirely consistent with com¬
mercial agriculture.
U nder conditions of traditional agriculture, with little investment of
capital in the land, the productivity per acre on land holdings tends to
Rural classes, land reforms, agrarian change 169

vary inversely with the size of such holdings (Bharadwaj, 1974). A

sufficient explanation of such a finding is that smallholdings are
typically owned and operated by families who cannot expect to find
full employment for all the working members outside the family farm,
and large holdings are operated by landowners who depend mainly on
hired labour. The small peasants operating family farms will try to
maximize total output on the farm, so that at the margin the
productivity of labour will be very nearly zero. But the landowner
employing hired labour will try to maximize the surplus above wage
costs, so that the marginal productivity of labour on these large
holding's will be equal to the wage, but for some uncertainty about
locating the point at which the surplus ceases to grow.
If the landowner now employs tenants on the understanding that
the latter will surrender half of the gross output to the landowner, what
happens to productivity? If the tenant can normally expect alternative
employment at the going market wage, he will work on the rented land
only up to the point where the marginal product of his labour is double
the market wage. Thus with a declining marginal product curve, he
will end up by employing less labour per unit of land than the landlord
who directly hires labour to work the land. Hence employing tenants
on a sharecropping basis is inefficient from the landlord’s point of view.
This is the traditional (Marshallian) answer.
However, if the tenant cannot expect full employment for members
of his family at the going market wage and has to struggle to survive by
getting as large a return from the land leased in as possible, then he will
again be compelled to stretch his labour per unit of land to the point
where the marginal productivity of labour is as near zero as possible.
Thus the labour-intensity and productivity of land per acre on
sharecropped land may be as high as that of small landholdings
operated mainly with family labour (some labour may be hired in at
peak seasons even by such farms).
If the marginal productivity of land declines very slowly as intensity
of work increases, if the share obtained from the tenant is high (say,
half or more of the crop) and if the market wage is high enough, the
landlord may even get a larger surplus with sharecropping than by
cultivating the land with hired labour.
The different possibilities are illustrated in figure 6.1, where labour
employed per unit of land is measured on the x axis, and marginal
product and wage (in terms of the crop) are measured on they axis.
In Figure 6.1, M]L] is the marginal product curve, M2L, is the
marginal product curve relevant to the tenant, who gets a £-th share of
the product (0 < k < 1), and W\ W2 is the market wage curve. Where
 Rural classes, land reforms, agrarian change
17°

Figure 6.1

family labour is spent so as maximize total output, 0LX is the

amount of labour spent on the land. If the landlord employs wage
labour to maximize the surplus, 0L2 is the amount of labour spent. If
the tenant takes the wage curve as the opportunity cost of his own (and
family) labour, 0L3 is the amount of labour used. Obviously,
01, > 0L2 > 0L3. However, if the tenant also has to maximize total
0L3 to 0LX,
output for survival, then he extends the labour spent from
whereby he gains the amount given by the area SL3LX. If the tenant
does not try to maximize total output, but discounts his prospects of
alternative employment sufficiently, then he will equate his share of
the marginal product to a ‘discounted wage’ well below Wx W2. It can
be seen that the labour employed in that case may well lie to the right
of L2, though to the left of Lx.
The surplus obtained by the landlord relying on hired labour is
given by the area Mx Wx T. In the case in which the tenant maximizes
output, the landlord’s surplus is given by the area M, M2LX. Again, it
can be seen that under some conditions, Mx M2LX may be larger than
M, Wx T.
The above is a rather schematic discussion of possibilities where
human labour is the main input, where the basic conditions of
production are the same on both owner-operated and leased land,
where the lessee generally has a smaller landholding than the typical
Rural classes, land reforms, agrarian change 171

landlord, and where the choices of modes of employment of labour and

land are not interdependent and where labourers and small peasants
are at least nominally free to choose between wage-employment and
tenancy (for further discussion, see Bagchi, 1976b).
Suppose we introduce non-labour inputs into the picture. In
traditional, non-irrigated agriculture, apart from seeds, draught
animals are the main capital employed. Landowners who also own
draught animals are expected to prefer own cultivation to sharecrop¬
ping tenancy. However, if human labour and draught animals are
strictly complementary inputs, and if landlords can recover the cost of
maintenance of the animals from the tenant, then again we may find
the same level of productivity on tenant-cultivated land and land
operated with family labour. (In fact, if middle peasants do not own
draught animals they may be at a disadvantage in relation to tenants
who have access to the draught animals owned by their landlords.)
In traditional agriculture, the choices of modes of employ¬
ment of labour and land are very often interdependent. Very often, the
landlord gives out a piece of land to a tenant on condition that the
latter labours on the landlord’s land for most of his time. In this way, he
may try to exploit not only the tenant but his whole family and seek to
attain maximum levels of output both on self-cultivated and on
tenant-cultivated land. Debt-bondage or traditional bondage gives
the landlord an additional lever of control on the tenant (cf. Bhaduri,
1973). Even with the introduction of modern techniques under
irrigated conditions, landlords seek to constrain the choice of the
labourers and tenants in various ways when they face the possibility of
labour shortage in peak seasons.
When cultivation is carried on with irrigation, water becomes a
crucial non-labour input. The introduction of new implements,
fertilizers and high-yielding varieties of seeds increase the importance
of non-labour inputs even further. Owners of small pieces of land may
then find it impossible to attain the levels of productivity reached by
large farmers because they cannot afford to buy the complementary
inputs on the same scale. In fact, a new type of tenancy (which may be
characterized as capitalist tenancy) now arises under which a landlord
or a capitalist leases in land from poor small owners and operates it
with the help of the new technology.
In irrigated areas of the third world, such as the Punjab, the Nile
valley or Java, intensification of non-labour inputs on peasants’ land
had started before the Second World War (cf. Palmer, 1976,
chapter 1). This intensification has accelerated in the post-1945
period. What we observe in typical third world countries is a series of
i y2 Rural classes, land reforms, agrarian change

systems of agriculture - extending from unirrigated, extensive agricul¬

ture, unirrigated, intensive agriculture, to extensive and intensive
agriculture with partial coverage by irrigation, and finally to fully
capital-intensive agriculture in areas with assured and controlled
water supply. Corresponding to these, the nature of tenancy varies
from semi-feudal exploitation of poor peasants (by means of usury and
rack-renting), to leasing in of land by rich peasants from others and its
cultivation according to best-practice methods.
As the importance of non-labour inputs increases and as peasants
struggle for liberation from traditional bondage, purely capitalist
relations between employers and landless labourers spread. But since
landlords dominate the rural areas, and landless labourers and poor
peasants do not have adequate opportunities for employment and
subsistence, the landlords continue to exploit them by using a variety
of institutions, particularly forms of share-tenancy. We have seen that
middle peasants, who form the archetype in much of the conventional
literature on peasant bahaviour, are a small minority in most countries
and occupy a precarious niche. The coming in of new inputs for which
cash has to be paid tends to make their position even more precarious.
If they have access to cheap credit and various types of state patronage,
they aggrandize themselves and become rich peasants, depending
greatly on hired labour for cultivation. If they do not have access to
credit or cheap sources of new inputs, they become impoverished and
are threatened with demotion to the position of poor peasants. Today’s
countryside in the third world rings with the struggle between the
different rural classes, even if it does not always express itself in a
violent form.

6.8 THE GREEN REVOLUTION, FARMERS’ LOBBIES

AND TECHNOLOGICAL DEPENDENCE IN THIRD

WORLD AGRICULTURE

The phrase, ‘Green Revolution’, has been used to indicate the

supposedly revolutionary increases in agricultural output in the third
world made possible by the discovery and diffusion of new high-
yielding varieties of seeds, particularly of wheat, rice and maize
primarily under the auspices of the International Rice Research
Institute in the Philippines and the Centro International de
Mejoramiento de Maiz y Trigo (CIMMYT) in Mexico. We have
already seen (in section 6.6) how the Rockefeller Foundation assisted
the Mexican government in its effort to raise the productivity of wheat
and maize. The interest of the Rockefeller Foundation and the US
Rural classes, land reforms, agrarian change '73

government in this programme probably sprang from their eagerness

to pacify Mexican nationalism (the Cardenas government had
nationalized the oil industry) and to keep Germany from acquiring a
foothold in the western hemisphere during the Second World War
(Cleaver, 1974). However it may be, after the success of the breeding
programme in Mexico, the Rockefeller Foundation helped set up the
CIMMYT, which became the nucleus for training agricultural
scientists from other third world countries and exporting the ‘Green
Revolution’ to those countries.
In the 1950s, the Ford Foundation moved into the field of
agricultural development and so-called community development in
India. In the 1960s, it sponsored the Intensive Agricultural Districts
Programme for a few selected districts — usually those which were well-
endowed with irrigation facilities. Along with this involvement came
US style agricultural universities, training of administrators and
agronomists in US-financed programmes and the thorough pene¬
tration of India’s agricultural sector by the USAID, World Bank
and other agencies affiliated to the western bloc (cf. Galbraith, 1969,
pp. 85-6, 139-40, 160-2, 190). In 1962, the Ford and Rockefeller
Foundations joined together to found the International Rice Research
Institute in the Philippines. This became the centre of diffusion of the
high-yielding IR varieties of paddy (higher-yielding varieties of paddy
were, however, already being developed independently in other parts
of south-east Asia).
Whether the ‘Green Revolution’ did raise the rate of agricultural
growth in the affected countries has been doubted. In Mexico, for
example, it has been noted that, over the period 1942-70, the highest
rate of crop output growth (6.9 per cent p.a.) was recorded for the
years 1945—56, well before the dwarf varieties had been diffused, and
that the lowest rate of growth (1.2 per cent p.a.) was recorded for the
years 1965-70, which have been hailed as the years of the Green
Revolution (De Alcantara, 1976, p. 103). In India, it has been found
(Reddy, 1978) that agricultural production grew at best at a constant
rate on an average over the period from 1950-51 to 1973-74; at best
the Green Revolution might have arrested a tendency towards decline
in the agricultural growth rate observed in the late 1950s.
The Green Revolution primarily stimulated the growth of those
regions which were well endowed with irrigation and those crops
which could be marketed on a wide scale through channels of large-
scale commerce. In these respects, irrigated areas of the third world
had already made considerable advances before the high-yielding
varieties came along. However, the proponents of the Green
 Rural classes, land reforms, agrarian change
174
Revolution strategy found a ready constituency among governments
which wanted to increase the marketable surplus of agriculture,
among agronomists who felt that not enough money was spent on
agricultural education, research and extension, among large farmers
who wanted more government subsidies and higher prices lor their
output, and among industrial firms (primarily multinationals, but also
domestic input-producing enterprises) which wanted wider markets
among farmers for producer and intermediate goods.
In most colonial countries of the third world, expenditure on
agricultural research had been very small and had been concentrated
on plantation crops which were of interest to capitalists of the ruling
country (cf. Hall, 1936). In the independent countries of Latin
America, the experience of the agricultural depression beginning in
the late 1920s had made governments very reluctant to spend money
on agricultural research. The productivity per acre of foodgrains in
many third world countries had remained stagnant for decades. So
when the US government and US Foundations wanted to promote
agricultural research in the concerned countries, they found an
enthusiastic response among the agricultural scientists and bureau¬
crats concerned with agricultural administration.
In the irrigated areas of the third world and in other areas
concentrating on cash crops, there had grown up a class of large
farmers who gradually organized themselves as farmers’ lobbies. They
demanded and obtained irrigation water at rates subsidized by the
government, and very often fertilizers and agricultural implements
were also supplied at cheap rates to them. Commercial banks and co¬
operative credit societies gave them loans on easy terms, and often
special financial institutions were set up for their benefit. In some
countries, with US and World Bank backing, they also extracted price
support programmes from the government.
It has been found in many country studies that farmers as a group in
the third world respond to relative price changes of farm products by
increasing the acreage under the crops which become more profitable
(Krishna, i963,Narain, 1965, and Behrman, 1970). However, they do
not switch over to the more profitable crops completely, for the
changes in prices may not last, and, moreover, the farmers generally
like to spread their risks. This could be particularly true of poor
peasants who would strive to ensure survival by growing subsistence
crops (cf. Lipton, 1968). If, nonetheless, a strong positive response to
increased profitability of cash crops is found, it is to be at least partly
explained by the pressure exerted on the poor peasants by the
landlords, moneylenders and traders who have the whole commercial
network and the tributary apparatus of the state backing them.
Rural classes, land reforms, agrarian change 1 75

Under the usual conditions of a highly unequal distribution ofland

and incomes, in fact, an increase in prices of food grains (particularly,
superior grains such as wheat and rice) can have very different
implications for the landlords or.rich peasants, and the poor peasants
or landless labourers. While the former would gain, the latter, who
have to buy a major part of their food on the market can lose badly.
However, under the pressure of rich farmers’ lobbies (backed by
the US-affiliated agencies and input-supplying farms), many govern¬
ments in the third world have instituted programmes of price support,
very often at higher prices than ruled in the market, and thus
transferred resources and incomes from the industrial sector and from
poor and landless peasants to the landlords and rich peasants. In
Mexico, for example, in the 1953/54 season, the government raised the
guaranteed price of wheat from 750 to 830 pesos a ton, and the next
season the price was raised further to 913 pesos a ton. This policy was in
operation for the next ten years (De Alcantara, 1976, chapter iv). In
India, the government began a policy of procuring wheat (and to a
much lesser extent, rice) at higher-than-market prices from the mid-
1960s onwards.
Farm price support policies for all major products combined with a
national system of distribution of essential commodities at fixed prices
can have a stabilizing effect on production and prices. However,
selective support for prices of commercial crops and systematic
increases in such support prices without a national system of distri¬
bution of essential commodities at stable prices can lead to, and have
resulted in, the enrichment of landlords, rich peasants and traders
connected with the trade in agricultural commodities at the cost of
industrial workers and poor peasants. Such policies have often fed the
forces of inflation, particularly since third world governments have
been unwilling or unable to tax rich farmers whom they have
subsidized so generously.
We have seen in the context of Mexico how government support for
cash crop cultivation under irrigated conditions has aggravated
intercrop (wheat vs. maize or beans), interregional (North and North¬
west vs. Central Mexico) and interclass inequality. Similarly, in India,
the farm policies pursued by the government from the 1960s onwards
have tended to increase the degree of inequality between perennially
irrigated regions and regions mainly depending on rainfall for
cultivation. This has been accompanied by unequal rates of growth of
favoured crops, particularly wheat, and so-called inferior grain crops
such as bajra, jowar or ragi, which are the staple diets of the poor in
many regions, or pulses, which are the main source of protein for the
poor. The processes serving to increase rural class differences have been
176 Rural classes, land reforms, agrarian change

quickened by the so-called Green Revolution. The number oflandless

labourers and their proportion to the rural population have grown in
most regions. Many tenants have lost their land. Landlords have been
able to defeat the purpose of legislation conferring security of tenure on
tenants (including sharecroppers) by evicting the tenants before they
could claim their rights under the law. In areas benefiting from the
new technology, landowners have also found it profitable to manage
the land on their own.The degree of inequality of rural incomes and
assets has also increased over the years (Rajaraman, 1975, Saini,
I976)-
While in the heartland of the Green Revolution, such as Haryana in
northern India, contractual employment on a year-long basis is
reported to be replacing attachment of labourers on the basis of verbal
contracts and traditional loyalty (Bhalla, 1976), in most other parts of
the country attached labourers are simply being thrown out and
converted into casual day labourers (cf. Gough, 1977). Cropsharing
tenancy is still continuing in most parts, but landlords often make the
terms more stringent than before, while helping the sharecroppers to
buy non-labour inputs to irrigate, fertilize and protect the crops. But in
many other areas, particularly in unirrigated regions, traditional
systems of cropsharing tenancy are continuing, with little change in
techniques.
In an attempt to spread the Green Revolution, credit agencies have
tended to spread their tentacles to the remotest villages. However, the
credit has been generally monopolized by the rural rich. The
Philippines illustrates the obstacles in the way of channelling credit to
poor peasants. Although serving as the home of the International Rice
Research Institute she has experienced the lowest rate of growth of her
staple food, rice, among her neighbours. Credit was channelled
through rural banks which were dominated by merchants and
landlords. 1 he rich landlords and farmers got easy credit on subsidized
terms and lack of credit for poor peasants was judged to be a major
bottleneck in the way of achieving a Green Revolution (Palmer, 1976,
chapter 11).
Credit institutions, nationwide marketing networks for procured
grains and extension services have cemented the alliance between the
rural and urban rich in most countries (even though generous farm
price support policies have bred the seeds of dissension between the
industrial bourgeoisie and landlords in some cases). Industrial capi¬
talism has now been able to penetrate the agricultural sector of the
third world to a degree formerly unknown. The importance of non¬
labour inputs that have to be purchased from the market for raising
Rural classes, land reforms, agrarian change 1 77
farm output or even maintaining it at current levels has greatly
increased. It has been estimated that in Mexico, for example, the index
of purchased inputs in agriculture (including chemical fertilizers,
seeds, insecticides and irrigation water) went up from 18 in 1940 to 143
in 1965 (De Alcantara, 1976, p. 50). The implicit rate of growth of
purchased inputs was several times higher than the rate of growth of
crop output. Similar trends are observable in many other third world
countries. Since, for producing purchased inputs such as fertilizers and
insecticides or farm implements, technology has to be borrowed from
advanced capitalist countries, this system of agriculture has brought
about a situation of technological dependence in third world agricul¬
ture and strengthened the technological dependence in industry (and
the military establishment). Alternatives in the form of increases in the
supply of organic fertilizers, production of fertilizers or other inputs
with indigenous technology, or the potential of native varieties of crops
which can yield higher levels of output under irrigated conditions have
been little explored in most countries. In many cases, attempts at
finding such alternatives have been deliberately sabotaged at the
instigation of multinationals or aid-giving agencies attached to the
western bloc in the name of modernity, progress or quick results.
Multinational companies are moving on a massive front into the
business of producing and processing various types of food products in
the third world for the rich people everywhere, but particularly for the
developed capitalist countries. They are being supported in the name
of progress and efficiency by the World Bank, USAID and related
organizations (Feder, 1976a, 1976b, and George, 1977). Many
national governments have subsidized the use of labour-saving
machinery - very often imported from abroad - by means of cheap
loans, facility of importing at official exchange rates (when the black
market price of foreign exchange is much higher), and outright
subventions. Labour-saving machinery has often served the interest of
large landowners and rich farmers (cf. Janvry, 1973) by increasing the
landowners’ control of workers, but it has aggravated the tendency
towards increasing landlessness among poor peasants in the third
world. All these developments are making inroads into the standard of
living of the poor in the third world, whose employment prospects are
being continually threatened, and whose staple foods are being
sacrificed to make room for the luxuries of the rich. They are also
helping to integrate third world agriculture in the network of
international capitalism with an intensity never observed before.
However, the further penetration of the market into the rural areas of
the third world has sharpened the contradictions among the rural
178 Rural classes, land reforms, agrarian change

classes. It is also threatening the labour reserves and the ‘subsistence

sector’ which have in the past acted as buffers for capitalism facing
sharp opposition in other regions. Thus the completion of the historic
tasks of capitalism in third world villages, while helping the capitalist
classes to acquire a firmer grip over the economy, is also sowing the
seeds of disintegration of the system, at least in its current form.
In the meantime, of course, the state apparatus in the third world,
with the help of exploiting classes in the rural and urban areas, keeps
the system running. In the next chapter, we briefly sketch some typical
modes of differentiation among the classes in urban areas and the way
the repressive apparatus helps to keep the different components of the
system articulated together.
7

LABOUR, CAPITAL AND THE STATE

7-1 INTRODUCTION

In the preceding chapter we considered how rural classes are

differentiated under the impact of colonialism and retarded capitalism
in the third world. The rural class structure provides the basis of power
of the ruling classes. But among the exploited classes besides the
peasantry there is the industrial proletariat, and the poorer traders
and artisans, mostly concentrated in urban areas. Among the ruling
classes figure landlords and capitalist farmers with their economic base
in rural areas (although they often have urban interests and an urban
domicile), industrial capitalists and big merchants, and finally the
bureaucracy running the state apparatus and public enterprises. In
this chapter, we propose briefly to describe some relevant character¬
istics of the industrial and urban proletariat and semi-proletariat, and
the industrial capitalists (see also chapter 2 above). We shall see how
colonialism, and later on dominant foreign capital, affect the political
configuration of the typical third world state, and how the attitudes of
the native capitalists are shaped by the relative balance of forces
between the indigenous exploiting classes, foreign capital and the
exploited classes.

7.2 THE RECRUITMENT OF LABOUR UNDER CAPITALISM

The peasantry of the third world are the source of labour for the mines,
plantations and factories of the indigenous and foreign bourgeoisie.
The rise and growth of chattel slavery under mercantile capitalism
may be seen as a response to problems posed by depopulation in
Spanish America, and by the inability of the Spaniards or the
Portuguese to convert Amerindians outside New Spain, Peru and
Gran Colombia into serfs or slaves. Before industrial capitalism raised
the productivity of labour and cut down transport costs, it would also
have been much too expensive to induce free wage labour to migrate to
the Americas.
•79
i8o Labour, capital and the state

Slavery ‘worked’ for the capitalists practising it, just as smuggling,

establishment of offices in tax-free havens, the running ol oil sheikh¬
doms by giant oil corporations, work for present-day capitalism. It
was forcibly abolished by Great Britain and the American North,
because it proved inconsistent with the political and economic
requirements of advanced, industrial capitalism represented by the
abolitionist powers.1
Outside the strict framework of slavery, Europeans often com¬
plained about their inability to recruit native labour for enterprises
such as road-building, working in mines, etc. They resorted to such
devices as poll taxes, hut taxes, compulsory requisitioning of labour,
etc., in order to get over the shortage of labour. The rationale of
regressive taxation for conquered populations was lucidly stated by
Lord Grey, a British Secretary of State for the Colonies in his despatch
dated 24 October 1848. Lord Grey complained about the ease with
which the natives (in this case, the people of Sri Lanka) could raise
their subsistence, their refusal to purchase luxuries or other benefits of
civilization, such as liquor, and their unwillingness to work for hire. If
they could not be taxed by levying imposts on articles of consumption,
or if they could not be induced to work for ‘the maintenance of civilized
society’, then a ‘direct impost must be laid upon them’ (in the form of a
poll tax or hut tax or some other such measure) and thus they must
uphold that ‘machinery of government and those institutions which
were essential to progress’ (Curtin, 1971, p. 168).
To other problems of moving labour out of a tribal organization was
added a strong disincentive against working in capitalist or colonial
enterprises. In the case of southern Africa, Miracle and Fetter have
shown that it was perfectly rational, on grounds of self-preservation
and income-maximization, for Africans to be reluctant to migrate to
European-controlled urban centres (Miracle and Fetter, 1970,
Miracle, 1976). Death from diseases and epidemics was frequent. For
example, ‘in 1911, one year after the beginning of Belgian rule, the
head of Katanga’s medical service estimated the annual death rate
among Africans in Elizabethville to be 24 per cent per year’ (Miracle
and Fetter, 1970, p. 247). The racist attitudes of white employers who
treated Africans (or for that matter, Indians in Assamese or
Caribbean plantations or on the Uganda railways) worse than animals,
the inability of the workers to bring families with them, the in-

1 The debate about the ‘efficiency’ and profitability of slavery sparked off by the work
of Conrad and Meyer in 1958, has shed a great deal of light on the lives of the plantation
slaves and on the working of the southern US plantation economy (see Conrad and
Meyer, 1973, Genovese, 1965, and David and Temin, 1974).
Labour, capital and the state 181

sufficiency of rations and the lack of supply of foods familiar to the

Africans, exploitation by shopkeepers, relatively high prices of agricul¬
tural goods in the mines or plantations or towns - all acted as
deterrents. (On the conditions of Indian plantation workers, see Das,
1931, and Guha, 1977.) In truth, the ‘civilizing’ mission of the
European powers proved to be as murderous as the wars let loose by
them in Africa and other continents (see Emil Faure’s statement
quoted by Hodgkin, 1972, p. 108).
As population grew and the tribal societies broke down, and as
Africans took to consuming western goods, the situation changed. The
working of the market, oligopolistically rigged in favour of the
employers, could be expected to push the workers into plantations,
mines and factories, not only in Latin America and Asia, but also in
Africa. Some regimes were not content with rigging the market. The
racist regime of South Africa, for example, deprived the Africans of
most of their land. The process, beginning in the nineteenth century,
was practically completed in 1913. The Native Land Act allotted only
13 per cent of all national land (generally less fertile than average) to
the Africans who then constituted over 90 per cent of the total
population (Moyana, 1975, and Wilson, 1972, chapter 1). The later
‘Bantustans’ were established in these overcrowded enclaves. A system
of indentured labour was organized to bring labour from India and
China. A migrant labour system was built to bring labour from the
neighbouring territories of Mozambique, Malawi, Lesotho, etc. The
advanced capitalist powers have supported a system which promises a
high rate of profit on invested capital by combining the technology of
space age and the repressive apparatus of the mercantile era (First,
Steele and Gurney, 1973)-
In countries where colonial powers overthrew established kingdoms
and empires with settled agriculture as their production base, they
found it easier to recruit labour for modern enterprises. (For the
Indian case, see Das, 1923, 1931, Buchanan, 1964, Mukherjee, 1951,
Morris, 1965, and Bagchi, 1972a, chapter 5). Policy-makers were often
aware that the ease of recruitment and cheapness of labour were
contingent upon the peasants’ or tribesmen’s habitat remaining poor,
and hence were not too eager to improve it (for evidence in the case of
India, see Bagchi, 1972a, p. i38n). But they also knew that a plot for
subsistence of the family left at home by the wage-earner was a
wonderful way of compelling the whole family to practise the
maximum degree of self-exploitation. This would then make it possible
for the ‘breadwinner’ to work at a wage which was really below the
level of subsistence of a family (see chapters 2 and 6 above). With
, 82 Labour, capital and the state

massive de-industrialization in many parts of the third world, growing

landlessness among the peasantry, and slow growth of employment
opportunities, in most countries, the potential labour force for
capitalistic enterprises has grown enormously. In spite of the low
probability of getting a job in towns and the extremely insanitary
conditions of housing and living, urban areas in most third world
countries act as a strong magnet for the rural labour force (see Knight
and Mabro, 1972, Turner and Jackson, 1972, and Todaro, 1973).

7.3 MAINTAINING CONTROL OVER WORKERS IN

CAPITALISTIC ENTERPRISES

Once the workers are brought into the plantations, mines or factories,
they are subjected to the concentrated and intense exploitation process
characteristic of capitalism. Where planters were reasonably sure of
obtaining cheap replacements for slaves, the labour process to which
slaves were subjected was extremely wasteful of their lives. They also
used punitive laws and regulations which literally permitted the
planters to get away with murder (see Dunn, 1973, chs. 6—9, for
descriptions of the labour process under slavery). Life for indentured
labour on and outside the plantations was very similar to that of slaves,
at least until the First World War. The labourers were often put under
the authority of the planters who exercised the right of private arrest,
imprisonment and chastisement of the workers (Adamson, 1972,
chapter 4, Kondapi, 1951, chapter 7, and Tinker, 1974, chapters 4—6).
When laws were changed to restore personal liberty to the workers,
they often remained ignorant of, or incapable of enforcing, their
newly-acquired rights. It generally took decades of struggle to acquire
even the rights that had been formally granted to them.
Where plantations were organized in the middle of a peasant
population, as in Assam or Sri Lanka, the planters imported
indentured labour and paid them a wage which was below the locally
prevalent one. The indentured labourers belonged to ethnic groups
different from those of the surrounding peasantry. This made it
relatively easy for the planters to deprive them of a share in any
improvement that might come about in the conditions of living of the
local peasantry or workers in other industries. Even today, for
example, the wages of Indian plantation labourers in Sri Lanka are a
fraction of the wages of even unskilled workers in other sectors of the
economy (ILO, 1971a, chapter 8, and ILO, 1971b, chapter 6).
With certain privileged exceptions, such as the workers in the
Copper Belt of Zambia, or workers in the oil industry in most
Labour, capital and the state 183

countries, the conditions of mine workers in the third world are usually
no better than those of plantation workers. Their hours of work are
long, the equipment they handle is primitive and safety precautions
are observed more in the breach than in the observance.2 Management
has often acted brutally to break up trade union organizations and
suppress workers’ resistance. Now, in most countries, mine-owners are
legally required to grant provident fund benefits, medical benefits,
compensation for injury, etc., to the workers. But the latter are often
cheated of such rights when the owners and managers hand the
job over to raising contractors (i.e. contractors responsible for raising
coal or other minerals from the mines) or labour contractors.
(Employment of contract labour is also practised by owners of
factories, for similar reasons). There are other devices used by mine-
owners to control the workers: the mine-owners also own the land and
houses on which workers’ families live, and run liquor shops and ‘tuck
shops’ where the workers spend their money. Because mines are often
located in inaccessible places, it is easier for mine-owners and
managers to evade their legal responsibility and to suppress workers’
movements.
We have seen that the survival of rural connections of labour,
though they can be a nuisance in increasing absenteeism among
workers, are useful to factory-owners in many other ways (see chapter
2). The capitalists can pay little more than the subsistence of the
worker. The workers tolerate inadequate housing facilities, when they
have a village home to return to. Also, it becomes more difficult to
organize workers with real rural moorings. During the course of a long
strike, the workers may simply disappear into the villages.
But, of course, in most third world countries, there are now
substantial sections of the working class with no rural roots. Factory
workers were often recruited through intermediaries who acted as
direct or indirect agents of the managers in keeping control over the
workers by fining them on the slightest pretext, dismissing them for
minor offences, lending them money at extortionate rates of interest,
and herding them into overcrowded and insanitary slums. Workers
have had to form trade unions and launch long-drawn-out strikes in
order to obtain a living wage or to protect whatever earnings they had.
In the early period of establishment of manufacturing industry,

2 In India, coal mines have proved a graveyard for miners, and several hundreds
have died every year even as late as 1975 and 1976. Ironically enough, the guilty
management in public sector mines have obtained more protection from the govern¬
ment than the owners of private collieries had. See in this connection, Subrahmanyam,
1977a and 1977b.
j84 Labour, capital and the state

capitalists tolerated a high degree of absenteeism and ‘slacking at

work’ which were the costs of maintaining abysmally low wages. With
the growing sophistication of techniques in many industries and with
the growth of technology-intensive industries, management finds it less
and less profitable to have semi-starved workers working at a desultory
pace. It has been suggested by Arrighi (1970b) that labour-intensive
techniques are associated with a pattern of employment in which
unskilled labour (not attuned to the discipline of wage employment)
and skilled labour (mechanics, carpenters, etc.) predominate, whereas
capital-intensive techniques are associated with a pattern of employ¬
ment in which semi-skilled labour3 and high-level man-power (with
formal training besides training on the job, for example, maintenance
and production engineers, designers, etc.) are predominantly
employed.
However, the pattern of employment of labour with different degrees
of skill or training is not dictated solely by the nature of technology.
Nor is technology in retarded societies chosen mainly with an eye to the
local supply of different types of labour. Techniques in modern
industries were evolved in advanced capitalist countries, and were
naturally adapted to their specific skill or capital endowments, and to
the needs of management of those countries to bring the labour process
under management control (Braverman, 1974, and Bagchi, 1978).
This process of dissociation of industrial techniques from local
conditions in the third world has been accelerated by the growth of
transnational corporations, which choose their techniques on the basis
of global considerations of profit and manageability. The presumed
skill or educational requirements for industrial employment in such
countries as India, Pakistan or Sri Lanka have generally been raised
over time in response to the emergence of excess supply of practically
all types of labour. Raising of educational qualifications without
reference to specific job requirements has been a device of job
rationing. The ILO study group on Kenya complained that, even in
that country, the paper qualification syndrome was being fostered
(ILO, 1973, p. 254).
The proportion of so-called supervisory personnel to ordinary
workers in a country such as India is raised over time by several other
factors. The importance of ‘technology-intensive’ industries has
increased, thus raising the proportion of supervisors to ordinary
workers. Also, padding the management with family members is a

3 Arrighi does not define this category properly. It may consist of people who have
just learned one or two narrowly specialized and easily acquired skills.
Labour, capital and the state 185

device both for ensuring family or group control and of taking out
some ol the company earnings in the shape of inflated salaries, tax-free
perquisites, etc. The recruitment pattern of employees in relatively
high-wage industries and firms tends to reinforce the existing structure
ot inequaiity, since the recruitment is based formally or informally on
the connections ol the recruits with the existing employees and
management (see, for example, Markensten, 1972, chapter 4). In
India, the share of wages and salaries in value added and the share of
production (as against clerical and administrative) workers in the
wages and salaries have declined since the 1950s (Sethuraman, 1971,
and Shetty, 1973).
The rise of some firms in some industries paying relatively good
wages hardly implies the growth of an aristocracy of labour in the third
world, however. The main beneficiaries of the high-wage enclaves are
supervisory personnel and non-production workers. Production wor¬
kers in most third world industries continue to receive a pittance by
international standards. In the next section we briefly sketch the role of
trade unions.

7.4 THE INFORMAL SECTOR, SMALL ENTERPRISES AND

TRADE UNIONS

Effective trade unions are generally found in industries characterized

by large units, or in the public sector. One of the major features of the
‘informal sector’ is the absence or ineffectiveness of workers’ organi¬
zations. There is a large degree of overlap between small enterprises
and the informal sector. Small enterprises vary greatly in origin and
function. Many are essentially one-man or family affairs, with few
hired workers. These are generally characterized - as in the case of
poor peasant farms - by a high degree of self-exploitation. Other units
often carry on because they pay the workers lower wages than those
prevailing in the large-scale sector. Some of these are organized
deliberately by large enterprises in order to evade labour laws and
other restrictive regulations, and to take advantage of privileges
extended by the governments in some countries to small-scale units
(see in this connection, Basu, 1977a, 1977b). Even those enterprises
which are not formally under the umbrella of a large business
organization have to become subservient to large capital in order to
obtain access to markets, credit, etc. Many transnational enterprises
have taken advantage of the fragmented nature of the labour markets
in the third world to subcontract their production to sweated-labour
enterprises, or to employ labour through the intermediary of con-
!86 Labour, capital and the state

tractors (see, for example, George, 1977, parts 2 and 3, and Kreye,
1977). Naturally, in the sweatshops, women, including young girls, get
the worst of the deal (see Banerjee, 1978).
Few self-employed artisans, craftsmen or small enterprises have
any chance of owning or growing into large enterprises. In the third
world, typical units in many branches of modern industry started out
as large units with considerable local monopoly power. So long as
workers’ political consciousness and trade union organization are
weak, the large units try to play off unorganized against organized
labour, and production in sweatshops under their control against
production in centralized factories, wherever possible.4
Trade unions in the third world grew out of workers’ resistance
against the employers’ attempt to cut down an already meagre
standard of living. For example, workers’ militancy in India reached
new peaks in the wake of the two World Wars which had witnessed a
drastic fall in the real wages of labour. Trade unions also got caught up
in political struggles against colonialism. This leads to problems in
disentangling the effects of unionism from the effects of political
movements on wages and working conditions of workers (see Warren,
1966, 1969, and Berg, 1969).
The relations of trade unions bosses with the rulers of the country are
strongly influenced by the balance of class forces and the nature of the
state apparatus which is used to control the workers. In Argentina, for
example, the urban workers enjoyed an increase in real wages and
even a rise in their share of national income under the early Peronist
regime. That memory provided the ground-work of trade union
loyalty to Peron, even after he had capitulated to the forces of
capitalism (see Epstein, 1975). However, in countries such as India or
Pakistan, trade unions have played a rather marginal role in bolstering
up the existing regime. Very often, they have had to fight the
government (as during the great railway strike of 1974 in India) in
order to protect the workers’ interests. In between there are many cases
in which political leaders have first used workers to attain ascendancy
and then tried to control them through recognized trade unions (see,
Amin, 1970, pp. 206-11, for developments in the Maghreb).
Trade unions have not been able to raise real wages of workers
generally in many third world countries. Nor has the intention of
authoritarian regimes to control trade unions been realized in many

4 See Bienefeld, 1975, for a study of the informal sector in Tanzania. Bienefeld found
that about 22 per cent of those employed in shops, bars, hotels or domestic service
received considerably less than the legal minimum, and that almost half of these low-
paid employees were treated as casual labour.
Labour, capital and the state 187

cases. Not only in South Asia, where a considerable volume ofsurplus

labour is generated by the existing system, but also in Argentina where
the level ot per capita income is much higher and where surplus rural
labour is not much in evidence, real wages of workers have hardly risen
since the 1950s (see Sau, 1977, and Epstein, 1975). This stagnation is
related to the slow growth or decline of employment in industry, and to
the existence of the so-called informal sector which acts as a labour
reservoir for the organized sector. In Kenya, where the regime ofjomo
Kenyatta tried to regiment all trade unions, individual unions were
lorced to defend their members’ rights in order to conserve their base
(Sandbrook, 1975). For total control of workers’ movements, we have
to look to the current right-wing military regimes of Brazil, Chile and
Argentina, which have used terror and violence to crush workers’
struggles.

7.5 GROWTH OF OLIGOPOLY AND BUSINESS

OLIGARCHY IN THE THIRD WORLD

At the top of the capitalist pyramid in trade, industry and finance in

the third world is native big bourgeoisie, but in many fields foreign
capital still rules the roost. In the late eighteenth or early nineteenth
century, in such countries as China and India, a hierarchy of
merchants and bankers could be found. The trade connections of the
biggest businessmen and bankers spanned several regions, and even
extended beyond the frontiers of the country. There were smaller
bankers and traders who conducted their operations within particular
regions. The conquering Europeans curtailed the operations of the big
merchants and drove many of them out altogether. Some relatively
independent bankers and merchants survived in areas where
European capital could not penetrate deeply. The Europeans initially
helped some collaborating native businessmen to prosper but later on
severely restricted their area of operation.
From the late nineteenth century onwards, some modern industry
began to grow up in the third world partly under the control of foreign
capital and partly under the ownership of native trading and banking
capital. By then the typical size of a factory and the capital required to
start one had increased enormously. Only indigenous businessmen
with command over relatively large amounts of capital could venture
in the field. Many of the modern capitalistic enterprises were large in
relation to the sector or area they operated in and commanded some
monopoly power. The organizational forms of modern capitalistic
enterprises (such as joint-stock companies) were imported from
j 88 Labour, capital and the state

abroad. The indigenous businessmen found that it was legally

convenient for them to adopt the recommended forms of organization.
But they carried on with the methods of traditional and famdial
control behind the facade, and resembled many industrial enterprises
in Britain and France in this regard (see Landes, 1965, and Payne,
1974; Hazari, 1965, and White, 1974).
In some cases, family ties were strengthened in response to the
challenge of capitalism, since the family provided a network of
communication and control which assisted in the competitive struggle
(Shoji Ito, 1966). In India, the British and Indian businessmen
together developed the managing agency system. Under this system,
the control of a business firm was vested in a managing agency, which
might or might not hold a controlling share in the company (Rungta,
1970, chapter 12). The reality of control of firms and industries by a
small group was not, however, contingent upon particular legal forms.
In post-independence India, despite the legal abolition of the manag¬
ing agency system, the conglomerate business combine, generally
controlled by a family or a group of families, continues to thrive
(Hazari, 1965). In Pakistan also, in spite of a vacuum left by the
migration of Hindu businessmen, within twenty-one years of inde¬
pendence, according to the Chief Economist for the Planning Com¬
mission, economic power came to be concentrated in the hands of 20
families (White, 1974, p. 43).
To some extent, the monopolization of business sought after by
indigenous business groups is a defensive reaction to the domination of
the held by large foreign firms. India was one of the few countries in
which indigenous businessmen had managed to wrest control over a
significant fraction of industry, trade and banking even before political
independence. The survival of some large-scale trade and finance in
western India under British rule, partly under the patronage of the so-
called native states, contributed to this success. In other parts of India,
indigenous businessmen, primarily from the ranks of traders, had to
struggle to compete in the organized sector with Europeans who
enjoyed open or implicit official backing. And they had to wait until
the crisis of the British Empire triggered off by the First World War, to
make any real headway (Bagchi, 1972a, chapter 6).
In Latin America too, large enterprises dominated the organized
sector from the beginning of the process of industrialization, and the
members of the industrial bourgeoisie were mainly recruited from the
ranks of the existing upper classes (Cardoso, 1965, 1966, 1973,
Johnson, 1967-1968, Derossi, 1971, and Polit, 1968). The so-called
‘entrepreneurial elites’ were formed in an environment in which all
Labour, capital and the state \ 89

profitable economic opportunities were directed outward, and which

brought about a cohesion among the members of the elites on the basis
of subordination to the dominant foreign capitalist groups or countries
of the time. The gateways into the ruling oligarchy were extremely
narrow. The state apparatus was run by a coalition of the landed
magnates, financiers and big traders. When it became profitable to
start industrial enterprises, they were organized by the established
members of the ruling coalition, or by immigrant groups which had
made money in trade and which became integrated into the oligarchy.
There is little evidence of any major conflict between the industrial
bourgeoisie and the other members of the coalition (except perhaps in
the case of the overthrow of President Balmaceda in Chile), for
generally the powerful families had a finger in every pie (cf. Cardoso,
1966, p. 150, and Polit, 1968, pp. 401-2).
In political dependencies and countries newly liberated from
colonial rule, native businessmen were discriminated against by the
foreign ruling power and foreign firms. A formal and informal network
(in the form of exclusive clubs, trade associations, religious societies,
chambers of commerce, etc.) could be found among the top Europeans
in officialdom, in railway companies, and in big foreign firms
dominating their respective fields of operation - be it shipping,
banking, insurance, inland transport, plantations, mining, or export-
oriented industries. This network was used before, say, 1939,
systematically to discriminate against the native in dependent India
or Indonesia or even China (see Bagchi, 1972a, chapter 6, Macken¬
zie, 1954, pp. 68-9, and chapter 4 above).
In newly independent Nigeria, Schatz found that large foreign firms
called the tune in the business world, and aspiring local businessmen
were at a disadvantage (Schatz, 1965, 1968 and 1972). The govern¬
ment might supply them with finance, but it would take time for them
to acquire the needed experience in production control, management
and marketing. With restricted markets dominated by big foreign
firms, demand limitation proved to be a major constraint for local
business. Even if some ancillary business resulted from the operations
of foreign enterprises, local entrepreneurs could not take advantage ol
it since they lacked experience and faced racial discrimination.
Schatz’s summary of their position is reminiscent of that of Indian
businessmen in pre-independence India. First, ‘African businessmen
miss out on opportunities because of lack of social contact.' Secondly,
Africans are subject to what is called probabilistic discrimination.

Foreign firms find it very difficult to differentiate - to distinguish among the

many Africans with business aspirations who may be inefficient, incapable of
190 Labour, capital and the state

turning out a product of uniform quality and making regular deliveries, less
than punctual in meeting business obligations, etc., and those indigenous
entrepreneurs who run their business capably and carefully. In these
circumstances, African businessmen (including the capable ones) tend to be
passed over in various business dealings simply on the basis of probabilities
(Schatz, 1972).

Apart from other factors, lack offamiliarity with the language in which
official work and business dealings are conducted also acts as a barrier
against the emergence of native business groups in political de¬
pendencies or the entry of members of large, repressed communities
into large-scale business. Thus English in former British colonies,
French in former French colonies, or Spanish in former Spanish
America acted and often continues to act as a filtering agent, keeping
most Asian, African or Amerindian businessmen out of the charmed
circle of business magnates.
Some of the state policies for encouraging industrialization, by the
logic of capitalism itself, favour the large capitalists at the expense of
the small (Weeks, 1973). These include, for example, the tariffs and
quotas restricting imports. The quotas favour the established traders,
or where the established traders do not belong to the politically
dominant community, the privileged few with the right political
connections (cf. Feys, 1976, chapter 5). Extension of cheap credit by
the state or state-managed institutions also favours established
business groups. Even where, as in India, explicit policies aimed at
curbing monopoly are pursued, the large business groups are able to
use those policies to their own advantage. For example, licences for
industrial investment above a certain limit were supposed to be used as
an instrument of planning and of curbing monopoly power. But
established business groups used to pre-empt industrial licences,
because they were much better-equipped than small businessmen with
project reports, credit supply guarantees, etc., and they used the
industrial licences as a means of restricting entry into various fields (see
GOI, 1969, for details). The attempt to encourage private entre¬
preneurship in the era of monopoly capital inevitably tends to
encourage monopolies in the retarded capitalist societies.

7.6 CONFLICT AND COLLABORATION BETWEEN

INDIGENOUS AND FOREIGN BOURGEOISIE

In chapter 2, we argued that, by the very logic of capitalism, late-

developing indigenous bourgeoisie in third world countries are
brought into a relation of subordination to the bourgeoisie of the
Labour, capital and the state igi

advanced capitalist countries. This happens both in the case where the
indigenous bourgeoisie originate as collaborating or ‘comprador’
bourgeoisie, and where pre-existing capitalist strata are overwhelmed
by the incursion of a colonial capitalist power. Because of the
competition for markets, raw materials and labour, however, conflict
between the foreign and indigenous bourgeoisie remains latent, and
erupts into an open struggle for control of the state apparatus in the era
of world capitalist crisis and world-wide movement for national
liberation.
In the post-Second-World-War period, after an initial phase in
which indigenous capital entered some of the areas such as internal
banking, wholesale trade, railway transport, plantations and mining,
in which foreign capital had been earlier dominant, a technological
dependence on foreign capital emerged. In many countries, this went
hand in hand with a dependence on the dominant capitalist countries
(and partly also the Soviet bloc) for loans and grants to tide over
balance of payments problems (see Patnaik, 1972a, and chapters 5 and
9)-
Technology in the newer fields of industry such as synthetic drugs,
inorganic fertilizers, electronics, electrical equipment, etc., in capi¬
talist countries has come to be the exclusive preserve of a few hundred
transnational corporations. Small companies continue to play a part
in making innovations, but they are usually absorbed by conglomerate
firms who ‘develop’ and market the innovations (see Kennedy and
Thirlwall, 1972, and Freeman, 1974, for surveys of the economics of
innovation in advanced capitalist countries). One consequence of the
increasing monopolization of techniques by a few transnationals is
that, in the third world, even those entrepreneurs who show some
capacity for initiative in the field of industrial technology and its
marketing are ultimately compelled to enter into (subordinate)
collaboration with foreign firms, or face the prospect of elimination.
Thus, for example, in Argentina, Torcuato Di Telia, an Italian
immigrant, started out as an innovator (in association with a fellow-
Italian, Guido Allegrucci), producing bread-making machines,
petrol pumps, and refrigerators (mainly domestic ones). He utilized
his personal friendship with the Director of the State oil monopoly,
YPF., to expand his petrol-pump producing business. Initially an
agent for Wayne Pump, with which he terminated his agreement in
1930 he got his own (and French) pump specifications recognized as
the only ones legally permissible. This, of course, antagonized
American interests selling pumps. The overthrow of the liberal
government of Yrigoyen through a coup and the depression of the
jg2 Labour, capital and the state

1930s, causing, among other things, the end of the automobile boom,
adversely affected Di T ella and his firm, SIAM (Di 1 ella was also the
retailing agent of the British oil company, Shell Mex). Di Telia then
changed both his product-mix, moving into the production ol ice
boxes and commercial refrigerators, and his strategy regarding foreign
collaboration. In the words of his biographers: ‘Two basic policies
came increasingly to govern Di Tella’s choice of new products: (1) to
make machines that required skilled engineers and workers, which
Avellaneda [the place at which SIAM’s plant was located ] possessed
and many competitors did not; and (2) to work on models licensed by
leading foreign companies rather than risk the costs and delays ol
experimentation’ (Cochran and Reina, 1971, p. 91).
Paradoxically enough, it was when Di Tella’s firm acquired some
technical expertise in technology-intensive fields and needed a larger
market to go on growing that it had to give in to transnational firms.
The latter could draw not only on their own large national and global
markets and organizations but also on the huge R & D effort massively
supported by their national governments. No third world country
could match such a research effort within the context of problems
defined by capitalism.5
In India, there is almost an exact parallel in the story of the house of
Kirloskar (Hazari, 1965, and Baldwin, 1959, pp. 284-303). The
founder of the house started in business with a bicycle shop at the end
of the nineteenth century. He soon added a small workshop which
fabricated crude agricultural implements such as ploughs and chaff-
cutters. In the interwar period, Kirloskar Brothers moved into the
production of oil engines and irrigation pumps, sugarcane crushers,
and other products ‘within the original company’s general field of
competence, not so much in the design sense as in the sense of using
basic metalworking process with which they had become familiar’
(Baldwin, 1959, p. 286). The Second World War affected the
production of pumps and engines, since certain imported items were
crucial for their manufacture. Near the end of the War, Kirloskar Oil
Engines was formed with the collaboration of British Oil Engines; soon
after, Kirloskar Electric Company was organized in collaboration
with Brush Electricals of Britain. Thereafter, the house of Kirloskar
has consistently followed a policy of diversifying their products with
the help of technical (and sometimes, financial) collaboration with

5 Di Tella’s firm moved into a relationship of subordinate collaboration with Wayne

Pump, Nash-Kelvinator, and Westinghouse. This collaboration proved crucial when
SIAM expanded into Brazil and Chile.
Labour, capital and the state
193
foreign companies. (The initial stage of their collaboration with
Cummins, in the field of manufacture of diesel engines, has been the
subject of a detailed study by Baranson, 1967.) The house of Kirloskar,
though critically dependent on foreign collaboration, had emerged by
1971 among the top twenty Indian business houses (see CMIE, 1977,
table 9.10). Contrariwise, there are many firms whose refusal or
inability to enter into foreign collaboration and diversify production
into new products has condemned them to stagnation or even
extinction in this capitalist world governed by relations of dominance
and subordination. (Old drug and pharmaceutical companies in India
such as Bengal Chemical and Bengal Immunity which had been
founded in a spirit of economic nationalism but then became sick
exemplify the destructive logic of capitalism.)
These and similar examples illustrate the limits of self-help in the
field of business in third world countries. The retardation of society in
the third world necessarily leads to the phenomenon of dependent
capitalism. But, of course, because of the inherent contradictions of the
system, individual capitalists or even the indigenous capitalist class as a
whole try to break away from such dependence at times of crisis (cf.
Lauterbach, 1966, chapter vn, and Derossi, 1971, pp. 76-80). In
politically independent countries, the manipulation of the state
apparatus does to some extent help particular indigenous entre¬
preneurs, but, as we shall see, transnationals in many countries have
successfully used the state apparatus to subordinate the indigenous
capitalists of the host country (cf. Evans, 1977).

7.7 NATION STATES, LOCAL BOURGEOISIE AND

TRANSNATIONAL CORPORATIONS

Even before the Second World War, major parts of the third world had
come to be dominated by transnational companies based in the USA
and western Europe. The United Fruit Company controlled the
economies and dictated the politics of the ‘banana republics’ of
Central America and the Caribbean; it also had a major stake in
Colombia (see Galeano, 1973, pp. 119-29). Unilever, based in Britain
and the Netherlands, accounted for a major share of the agricultural
exports of West Africa and owned huge plantations in the Belgian
Congo. It continues to have large interests in West Africa and Zaire
(see Nzimiro, 1975, and Kabala Kabinda, 1975). Oil companies had
already spread across several national frontiers long before 1945.
Standard Oil, Royal Dutch Shell, Caltex and other giants owned oil
fields in Venezuela at one end and Indonesia at the other. They
 Labour, capital and the state
194
regularly interfered in the internal politics of the oil-producing states,
and eliminated any threat to their own interests. In 1953, for example,
the Americans openly interfered in Iran, and toppled Mohammed
Mossadegh, the nationalist Prime Minister, who had nationalized the
Anglo-Iranian Oil Company. By this action, the Americans also stole a
march over the British, who were their main imperialist rivals in the
Middle East (for a treatment of modern imperialism, see Magdoff,
•968).
By and large, the transnational companies operating in the third
world before 1945 were active in mining, plantations, trading and
banking. However, manufacturing companies had by then gone
transnational in Europe and Canada, with production facilities in
many countries. After 1945, transnational manufacturing companies
also began to set up factories in the third world. Several factors were
decisive in this process. Economies of scale were continually increasing
in importance in communications, management, inventory control and
finance (Murray, 1972). Furthermore, the attaining of independence
by practically all the third world countries and the ushering in of
protectionist regimes committed to ‘development’ meant that trans¬
national companies had to jump tariff barriers and set up production
facilities in these countries in order to retain old markets and win new
ones.
Since large transnational firms numbered only a few hundred in the
world as a whole, the market structure became oligopolistic on a world
scale. Not only production but also technology and its development
came to be controlled by these few giants. A substantial share of
international trade came to consist of movements of raw materials and
capital goods between transnational firms or their subsidiaries and the
sales of the outputs of such firms to final consumers or other firms
constituted another major share. Movements of hot money and long¬
term capital in response to the global strategies of transnational firms
often upset the external balance of developed as well as retarded
capitalist countries. The ‘transfer prices’ used by transnational firms
for valuing goods and services flowing between their branches or
subsidiaries have no relation to costs, and are not market prices at
which any quantities can be bought by an outside buyer (Vaitsos,
1974, chapters 6 and 7).
Meanwhile, third world governments were engaged in various plans
and public expenditure programmes, which had the aim of accelerat¬
ing economic growth. Some states also invested in manufacturing
enterprises on a large scale. Such policies generally helped both
indigenous and foreign enterprises. In fact, in many cases such policies
Labour, capital and the state 195

ultimately helped the foreign firms more (see Galeano, 1969, and Baer,
Kerstenetzky and Villela, 1973).
Third world governments have tried in some cases to curb the power
of foreign enterprises by regulatory measures, such as industrial
licensing, monitoring of foreign collaboration agreements, etc. They
have also sought help from the Soviet bloc, particularly in setting up
public sector plants. But powerful international forces have operated
on the other side. The IMF and the World Bank from their inception
had supported private enterprise, including foreign enterprise, against
national governments whenever any major conflict arose. The World
Bank set up the International Finance Corporation in 1956, in order to
promote the development of private enterprise and the flow of foreign
private investment (cf. Konig, 1973). Many governments were
specifically penalized for nationalizing foreign enterprises without
'adequate compensation'. The United States government emerged as
the dominant capitalist world power and the biggest giver of aid and
loans to ‘friendly’ governments. It championed the cause of private
enterprise, channelled funds to American private capital operating
abroad, and used other instruments for furthering the ends of foreign
enterprise in other countries — generally with the support of the
countries organized in the OECD. Through official and unofficial
agencies, the advanced capitalist countries also sponsored moves
towards organizing regional common markets among the weak
capitalist classes of the countries involved, such moves have been seen
as part of the strategy of expanding the areas of operation and control
of transnational corporations, at the expense of the autonomy of the
governments concerned (Girvan and Jefferson, 1973, and Teubal,
ig6Q).
However, the ability of third world countries to fight the power of
transnational companies has been impaired not only by the explicit
pressure exerted by advanced capitalist countries and their agencies,
but also by the inherent contradictions of the dependent capitalism
that has grown up in those countries. Indigenous private firms have
been unable to set up viable units in industries such as iron and steel,
petroleum, etc., that require a great deal of finance. For that reason,
and also for strategic reasons, the state has set up steel-making or oil-
exploring and refining concerns in countries as diverse as India, Brazil,
and Indonesia. These public sector units have often had to depend on
foreign firms for technology, particularly because most third world
countries recognize international patent rights even though they
derive little benefit from patent protection. The transnational firms
also find that public sector units can raise resources on a scale which is
jg6 Labour, capital and the state

beyond the capacity of indigenous private firms. So in India, in the

‘joint sector’, and in Brazil, under the tri-p'e arrangements, we find the
state, private sector, and foreign firms collaborating in the same
project, with the transnationals often calling the tune. (For data on the
incidence of foreign collaboration in the public sector and the
restrictive clauses imposed by foreign firms in India, see RBI, 1974,
chapters 2 and 6; for tri-p'e arrangements in Brazilian petrochemicals
industry, see Evans, 1977).
In chapter 9, we shall see how, in Turkey, promotion of industry
through the public sector as such has failed to deliver the country from
the toils of retarded capitalism. In Brazil, under Getulio Vargas and
Juscelino Kubitschek, enormous amounts of public investment went
into the development of roads, public utilities, city-building, and into
basic and capital goods sectors supplying inputs to other industries,
such as iron and steel, and electricity generation. Such invest¬
ment, and state protection to industry, made Brazil a more
attractive field for foreign capital penetration. In the electricity
industry, a scheme of division of labour sprang up: the state bore the
brunt of the investments in production facilities and the foreign
countries assumed charge of distribution (Tendler, 1968).
When the military regime took over in 1964, the foreign enterprises
soon utilized their superior financial position and the special privileges
granted by the government to foreign capital — for example, allowing
foreign enterprises to have direct access to the international capital
market where local capital was denied such access - to gobble up
many Brazilian firms and industries. Thus a situation came about in
which many of the big industries were divided between foreign and
public sector enterprises, with the foreign enterprises controlling the
most profitable industries (Baer, Kerstenetzky and Villela 1973).
Foreign firms were also given fantastic concessions and American
financiers like Daniel Ludwig, bought up whole counties in the interior
of Amazonia, at the expense of the poor Brazilians, particularly the
Amerindians.

7-8 AUTHORITARIANISM AND UNSTABLE

REGIMES IN THE THIRD WORLD

The majority of third world countries are ruled by some variety of

authoritarian regimes. These authoritarian regimes are toppled at
irregular intervals by other authoritarian regimes. There have been
some countries (for example, Chile) which had long histories of
formally democratic regimes. But faced with a real threat to their own
power, the ruling classes conspired to overthrow the formal democracy
Labour, capital and the state *97

and replace it by an authoritarian regime generally ruled by the army.

In other cases, a formal democracy continues along with systematic or
sporadic repression of popular revolts (this would be true of Turkey,
Sri Lanka and India).
The so-called instability of governments in the third world arises
from several phenomena acting together or singly; (a) the weakness of
the ruling classes — particularly capitalists - in relation to advanced
capitalist countries, and foreign capital, (b) the lack of homogeneity
among the ruling classes and consequent intra-coalition conflicts, and
(c) the revolts of the ordinary people stemming from the inability of the
rulers to ensure the availability of the basic amenities of the people.
That foreign capital can cause instability of the local regimes, where
the native ruling classes are weak, has been long recognized (Kling,
1968, Lattimore, i960, Schmitt, 1970). Apart from the classic case of
China in the nineteenth century, there were the republics of Central
America where US marines toppled regimes that big US companies or
the US government disliked and installed more ‘loyal’ dictatorial
regimes. Even when foreign capital does not intervene directly, the
local contenders for power are often eager to show that they are more
sympathetic towards the claims of legitimate business and thus curry
favour with the foreigners. (On the influence exercised by British
capital on Argentine politics without explicit intervention by the
British government, see Rock, 1975).
In a world dominated by a few advanced capitalist countries,
naturally, big foreign powers with aid and military hardware at their
command act as the ultimate sanction of authority for many regimes.
These regimes tend to be authoritarian, because they are legitimized
by force rather than popular support, and because foreign powers and
capitalists seek to ensure the security of their own interests through the
centralization of the locus of authority in the client state.
But the ruling classes generally form a coalition, and hence, whether
in a formal democracy or in an authoritarian regime, there are latent
conflicts. The capitalists themselves may belong to different regional,
linguistic, religious or ethnic groupings, and each section contends for
supremacy in the national market. Then the capitalists with their
major base in industry may want to override landowners with their
major interest in high agricultural prices and rents. Such conflicts will
break out into open intra-coalition struggles and one section of the
coalition comes to control the apparatus of repression and gain certain
advantages at the expense of other sections of the coalition.6
Authoritarian regimes, as such, are not necessarily unpopular.

6 See, for example, Keyder’s explanation of the imposition of a military regime in

Turkey between March 1971 and October 1973 (Keyder, 1979).
[g8 Labour, capital and the state

Many authoritarian regimes have explicitly tried to build bases among

the people and have claimed to represent the popular will better than
earlier regimes. In Nasser’s Egypt, Peron s Argentina, or Sukarno s
Indonesia, the regime explicitly sought the support of the urban poor
and petty bourgeoisie including shopkeepers, professional classes, etc.,
and the general mass of the peasantry (VVorsley, 1973, Kalecki, 1972b).
Coming in the wake of excessively inefficient regimes or foreign rules
these governments tried to use the state apparatus to provide for the
unemployed, redistribute incomes towards the poor in rural and urban
areas, promote the growth of industry and education, and minimize
the influence of foreign capital.
But none of these regimes really tried to destroy the power of top
bureaucrats or propertied classes and take their countries out of the
network of dominance-dependence relationships inherent in world
capitalism. Soon they were caught up in the contradictions of
retardation, and were unable to meet the minimum needs of the poor
in respect of employment, education or even subsistence. Decision¬
making remained concentrated among the upper bureaucrats, army
officers, and businessmen who knew how to utilize the state apparatus
to their own advantage. These decision-makers continued to repress
trade unions or autonomous peasant organizations even when ‘Arab
socialism’ or ‘African socialism’ was the official regime.
After some initial successes, such as Nasser’s triumphant national¬
ization of the Suez Canal in 1956, or Sukarno’s eviction of the Dutch
capitalists of Indonesia, the populist regime inevitably runs into crisis.
Moreover, through its own policies it augments the power of
bureaucrats, military personnel and private businessmen. When these
elements fear that the whole system might be overturned by a genuine
popular revolt, they either overthrow the regime through an explicit
coup, as in Sukarno’s Indonesia, or stage a silent coup, as in the case of
the reversal of Nasser’s policies by his successor, President Sadat. Of
course, in the overthrow of the populist regimes, foreign abetting and
help has played an important role. But the ground for the coup was
laid by the failures of the populist regimes.
The military-authoritarian regimes succeeding populist and de¬
mocratic regimes have generally enjoyed the support of the educated
middle classes as well as that of capitalists or landowners threatened
with the loss of power (Nun, 1968). Technically qualified personnel
working for these regimes have not been able to solve problems whose
solution requires a drastic change in the social structure.7 However,

7 Hirschman, 1968, put forward the fallacious notion that, when the capitalists of the
third world failed to overcome the contradictions of import-substituting industrializ¬
ation, technocrats could somehow take their place and master the difficulties.
Labour, capital and the state 199

technocrats and social scientists trained in US universities have played

an important role in running the extremely repressive regimes of
Indonesia under General Suharto and Chile under General Pinochet
(see Ransom, 1974 and Frank, 1975).
The military-authoritarian regimes succeed in repressing popular
discontent and forcibly containing intra-coalition conflicts, at least for
a while. But do they succeed in much else, such as distributing incomes
more equitably, pushing up the rate of growth or fostering the
development of a more nationally-orientated capitalist class? In East
Asia, as we have discussed in chapter 5, Hong Kong, Singapore,
Taiwan and South Korea have become enclaves in which firms and
capitalists from many countries escape many of the regulations of their
home countries and utilize the cheap local labour. Their rates of
growth have been higher than those of most third world countries.
But their aggregate population in mid-1975 was only 59.1
million as against 71.3 million for Pakistan, or 135.2 million for
Indonesia, not to speak of 620.4 million for India (WB, 1978,
table 1.) Moreover, though there is a Chinese business community
linking most of these enclaves they remain greatly dependent for
technology, markets and to lesser extent, finance on Japan, the USA
and the European Common Market.
Among the Latin American countries on which mili¬
tary-authoritarian regimes have been imposed, only Brazil re¬
corded a fast rate of growth between 1968 and the early 1970s. Much of
this growth was triggered off by foreign investment. The foreign firms,
many of them transnational corporations, found in the under¬
populated interior provinces of Brazil a new frontier (they treated the
Amerindians in Brazil almost the same way as US frontiersmen had
treated the Amerindian peoples of the USA), and in the repressive
apparatus of the military junta an assurance that workers and peasants
would be kept on a tight leash. The massive investment in infrastructure
under the earlier, democratic regimes of Kubitschek and Goulart had
made private investment more profitable. Moreover, over the initial
years of the military regime, 1964-67, there was stagnation in the
economy. Later investment could also take account of this slack. The
wage-control policies of the military regime, combined with their
other policies for rewarding the private investor, led to income
concentration among the top ten per cent and created a potentially
large market for consumer durables. Besides, state enterprises proved
able and willing to collaborate with foreign capital and came to
replace domestic private enterprises as the major partner of trans¬
nationals (Evans, 1977). In fact, as far as private Brazilian capital was
concerned, there was substantial denationalization of Brazilian in-
200 Labour, capital and the state

dustry (Galeano, 1969, Baer, 1973, and Baer, Kerstenetzky and

Villela, 1973)- After 1975, Brazil has piled up a huge debt to financial
institutions abroad, and the rate of growth has come down to 4 per
cent or so. Very recently, there are signs that a limited degree of
liberalization of the regime is under way, probably under pressure
from some sections of technocrats who regard the extreme degree of
repression as counter-productive and fraught with dangers of
revolution.
The Brazilian case cannot be used either as an illustration of the
state apparatus for fostering a ‘national capitalism’ (see De Barros
and Graham, (1978) or as a replicable model for promoting econo¬
mic growth even within Latin America (O’Donnell, 1978). For, if
anything, it is foreign capital which has benefited most, in association
with domestic state enterprises which have played a major role in a
regime avowedly wedded to the principles of private enterprise. And
few other Latin American countries can off er the kind of attraction for
foreign capital that Brazil has offered. Pinochet’s Chile, for example,
has become a byword for extreme repression and stagnation.8
Many of these military-authoritarian regimes continue to depend
on the USA and the countries of the western bloc, and, much more
rarely, on countries of the Soviet bloc, for military hardware, aid,
advice and diplomatic relations. However, the current economic and
political crises in the countries of the Western bloc have rendered them
less willing to support these regimes. Furthermore, as the overthrow of
the Shah of Iran demonstrates, even apparently invulnerable power
structures can be destroyed like a cardboard box by popular anger.
Such possibilities have alerted the World Bank and other watchdog
agencies of advanced capitalism to the necessity of a greater degree of
diffusion of the results of growth among ordinary people. But even with
the Green Revolution, the rates of growth in the third world remain
very low. So redistribution cannot be effected in most countries
without hurting the interests of the entrenched rich. Nor can growth be
speeded up in all countries without demolishing the capitalist network
of dominance and dependence under which the mechanisms of growth
in some countries or regions create conditions of retardation in other
countries or regions.
The aid-giving agencies and their client governments are essential

8 Our concentration on openly repressive societies is not meant to suggest that in

parliamentary regimes open repression of the working class or peasantry is absent. Police
forces have used brutal violence and killed hundreds of persons, in such ‘democratic’
regimes as Sri Lanka, India and Pakistan under Bhutto (for examples of use of police and
upper class violence in India, see Sen, Panda and Lahiri, 1978). But in authoritarian
regimes, even the right of protest or organization in defence of the under-privileged is
taken away.
Labour, capital and the state 201

links in this chain of causation which can only be broken by a drastic

social change. The spread of the Green Revolution technology, and
the push by transnationals into third world agriculture, will aggravate
the contradictions in the third world and further proletarianize the
peasantry. The new ideology ot the World Bank emphasizing
agriculture and small-scale industries as a means of fighting poverty in
the third world will inhibit the nationalistic programmes of in¬
dustrialization in the third world, without either speeding up growth
or eradicating poverty. Meanwhile, third world governments de¬
pendent on the Western bloc for loans and aid are hamstrung in their
bargaining with transnationals for control of technology and vital
sectors of their national economies.
At one stage, aid from the Soviet bloc helped some third world
countries, such as India and Algeria, to withstand the more extreme
types of blackmail by the advanced capitalist countries. But the Soviet
bloc has become greatly dependent on the Western capitalist countries
for supply of technology in vital areas (such as petrochemicals and
electronics), and the ability of the socialist countries to aid the third
world countries has not kept in step with the needs of the latter.
Further problems have surfaced because of the suspicion of many third
world countries that the distribution of gains of direct and indirect
trade of the third world with the Soviet bloc may have been skewed in
favour of the Soviet bloc countries (Chandra, 1977). In any case, the
mode and the efficiency of utilization of aid, received from whatever
source, depend more on the internal socio-political structure of the
country than on the intentions of the aid-giver. Soviet aid given to
China in the 1950s was almost certainly more productive than it would
have been if the same aid had been given to a retarded society ruled by
a coalition of (andlords, dependent capitalists, bureaucrats and
military leaders. For the third world countries, the real significance of
the existence of socialist countries lies in the hope that they too can
change their destiny through revolution.
In the meantime, most people in the third world remain poor. Some
third world countries, with generally rather small populations, have
experienced a substantial rate of growth in recent years (WB, 1978).
But many of them have been caught up in the general crisis of the
world capitalist economy, and have piled up large external debts, and
their rates of growth are tending to slow down. In many fast-growing
countries, high rates of growth have been attained at the cost of the
misery of large masses of people, and in fast- or slow-growing countries
alike, benefits of development have been slow to trickle down to
substantial sections of the people. So far, reforms within the present
system have done little to overcome or ameliorate such contradictions.
8

POPULATION GROWTH AND THE QUALITY

OF LIFE IN THE THIRD WORLD

8.1 INTRODUCTION

Many politicians and publicists have long voiced their concern about
the harmful effects of population growth in poor countries, and many
have attributed their poverty either to a large absolute population or
to a high rate of population growth. This voicing of concern became a
chorus among many so-called development economists in the wake of
the-Second World War, when a noticeable acceleration in the rate of
growth of population was observed in almost all countries of the third
world. These development economists have been joined by those who
see the quality of life on this ‘spaceship earth’ threatened by the
consequences of unrestrained population growth (see, for example,
Ward and Dubos, 1973).
In this chapter we shall be concerned mainly with the issue of the
consequences of population growth for economic development in the
third world, and leave aside the issue of population growth and
quality of life in relatively affluent countries.1 We shall begin with a
very brief summary of the history of population growth in the third
world since the nineteenth century.

1 World population growth and attempts of the poor countries to imitate the
development patterns of the affluent countries have been viewed as grave threats to
scarce resources, and, particularly, to the very limited reserves of fossil fuels and other
currently exploitable energy sources of the world. In order to put the problem in proper
perspective and to underscore the primary responsibility of the affluent countries in
causing the present strain on energy resources, it is only necessary to point out that well
over half of the commercial energy consumption of the world is accounted for by the
minority of the population belonging to the OECD countries (see CMIE, 1979). The oil-
poor third world countries are in an extremely precarious position. Their access to oil is
severely limited by their poverty, and their ability to develop alternative sources of
energy is limited by their technological backwardness and by the propensity of their
ruling classes to adopt the production techniques and the consumption patterns of the
affluent countries.

202
Population growth
203

8.2 COMPARATIVE POPULATION GROWTH RATES

SINCE 1800

One very striking iact about nineteenth-century population growth is

that the people of European stock then increased at a faster rate than
during any other period in their history, whereas the native popu¬
lations of other continents remained practically constant in number.
Among the third world regions, only Latin America recorded a
sizeable growth in population. However, migration from southern
Europe to Argentina and Brazil accounted for much of this growth
(Glass and Grebenik, 1965). It is only since 1900, and more
particularly since 1930, that the rate of growth of the third world
population overtook that of the population in Europe and North
America (excluding Mexico) (Bairoch, 1975, chapter 1). Even so, the
rate of growth of people of European stock between 1750 and 1950 was
far higher than that of the rest of world population. In the words of
Kuznets,

people of European stock increased from about 150 million in 1750 to about
800 million in 1950, a rise of 433 per cent; whereas the rest of the world’s
population grew from about 580 million to about 1,600 million, or less than
200 per cent. An alternative calculation shows that the population of the
European countries that are now fully developed (Germany, France, the
United Kingdom excluding Ireland, the Scandinavian countries, Belgium,
and the Netherlands), combined with North America and Oceania, rose from
59 million in 1950 to about 372 million in 1950, or over 500 per cent; whereas
population in the rest of the world rose from 669 to 2,137 million, respectively,
or slightly over 200 per cent (Kuznets, 1966, p. 36).

However, it is true that after 1940 the population of the third world
as a whole has been growing at a faster rate than the population of
either the advanced capitalist or socialist countries. And in major
regions of the third world the rate of population growth seemed even to
be accelerating up to 1970. Demographers had modelled a ‘theory of
demographic transition’ on the basis of the experience of the advanced
capitalist countries. According to this theory, with the onset of
industrial revolution, the mortality rate falls as a result of improve¬
ments in diet, public health facilities and personal hygiene. With
constant fertility rates, the rate of population growth accelerates. After
a time, as a result of rapid industrialization and urbanization, the birth
rate begins to decline. When the gap between the mortality and
fertility rates narrows down, the population growth slows down. If the
fertility rate falls further, the net population growth rate may
approach zero or even become negative.
204
Population growth

There is controversy about the exact reasons for the first phase of
acceleration in population growth rates in western Europe. Further¬
more, the population growth rate has not shown a uniformly declining
trend in all affluent countries (see McKeown, Brown and Record,
1972, and Razzell, 1974). However that may be, this model does not fit
the experience of the third world in some major respects. Population
growth has not been accompanied by industrialization in most poor
countries. Fall in mortality in such countries was not caused by a rise in
private living standards nor even by an improvement in public health
facilities and sanitation. It seems rather to have been caused by
spectacular advances in the medical technology for controlling such
bacterial diseases as malaria, smallpox and cholera (Meegama, 1967
and Gray, 1974). What alarmed many publicists was that in most
third world countries, declines in mortality were not accompanied or
even followed by, declines in fertility. Thus transition to the final phase
of population growth rates seemed to be only a remote possibility. This
provided one of the most potent arguments for introducing govern-
mentally sponsored birth control programmes in all, or practically all,
third world countries (see, for example, Meier, 1971, pp. 589-93).
In fact, there are clear signs of transition to a phase of declining
fertility and population growth in many third world countries. In
several countries of east Asia, such as Taiwan, Hong Kong, Singapore,
and, most important of all, China, fertility has come down sub¬
stantially since the 1960s. In Argentina and Uruguay, the fertility
levels have been close to those of western Europe and the USA for some
years (Schultz, 1969). In some recent studies of Eatin American and
Caribbean countries, it has been found that, not only Argentina and
Uruguay, but also Chile, Cuba, Costa Rica, Barbados, Puerto Rico,
Trinidad and Tobago recorded relatively low birth rates (less than 30
per thousand) in recent years and that, moreover, the ‘demographic
transition’ seems to be occurring much more rapidly than in the
corresponding phase of the affluent countries (Oechsli and Kirk, 1975,
Stycos, 1978). Even the state of Kerala in India, whose income per
head was probably below the all-India average until recently, seems to
be experiencing a rapid fall in fertility levels (Panikar, Krishnan, and
Krishnaji, 1977). The crude birth rate in Kerala declined from well
above 40 in the 1940s to 28 in 1975. A World Bank study has found that
the rate of growth of the Indian population, which had reached a peak
level of 2.3 per cent in the 1960s has fallen below 2 per cent and is
expected to go down to 1.6 per cent in the late 1980s (Economic Times, 8
June 1980).
In general, a relatively long and unbroken period of decline in
Population growth 205

mortality rates seems to have preceded a sustained fall in birth rates.

For example, over the period 1900-60, death rates in Kerala were
consistently lower than in the rest of India. By 1972, the Keralan death
rate had come down to 9.20 per 1,000 as against the national average
of 16.09. The level of literacy - particularly among women - is far
higher in Kerala than in the other states of India. Kerala is
characterized by a high rate of literacy, a low per capita income but
apparently a low proportion of people below the poverty line.2 The
case of Costa Rica also pinpoints the importance of education and of
increased social contact between couples adopting family planning
measures and others in lowering fertility (Stycos, 1978). Her case
provides a clue as to why a rise in average per capita incomes as such
may not have a noticeable effect in reducing fertility rates in the third
world, if the conditions of the poor do not improve at the same time.
Without an improvement in the income prospects or life expectations
of the poor, the poor will have neither the incentive nor the means for
planning their family sizes.

8.3 FACTORS INFLUENCING FERTILITY

Decisions by individuals about the number of children they would like

to have are not all explicable in terms of narrowly economic factors.
The place of the parents in the class structure of the society concerned,
and the general level of health care would normally influence such
decisions (see Espenshade, 1972, for a survey of socio-economic
theories of fertility). In general, the lower the chances of the offspring
surviving to adulthood, the more reluctant the parents are likely to be
to adopt birth control measures. Contrariwise, a big drop in
mortality - particularly infant mortality - may lead to a fall in the net
rate of population growth, because of the stimulus it may provide for
family planning (see Rao, 1976). Thus poverty and associated
insecurity of health and life can be a direct cause of a high birth rate.
While the majority of the people in the third world are poor and
insecure, there are differences between classes regarding desired family
size. Professional persons with high levels of education and expecting
to incur high levels of expenditure on their children’s education will be
motivated to limit their families. Among the landless agricultural
labourers or the floating, casually employed labour force in urban
2 The poverty line is usually defined as the income which just allows an average
person to satisfy his basic nutritional needs. The conventional measures of poverty found
the proportion of the Keralan population below the poverty line to be as high as 80 per
cent or more in the 1960s, but a careful study of the economy of Kerala found less than 40
per cent of the people living in poverty (UN, 1975).
206 Population growth

areas, any addition to the family may be welcome or at least

costless - particularly from the father’s point of view. For, among
them, even a child of five may earn its keep by tending goats, cattle and
other livestock, by serving as domestic help, or as sweated labour in
shops and factories. Infant mortality is particularly high among these
classes, so that parents will be right to rate the chance of survival of an
individual child rather low. However, once the child reaches adult¬
hood, it has little economic reason (such as stems from property ties)
for keeping within the parents’ family. Thus, the effective size of the
family among the poor is generally smaller than among the propertied
classes.
Sizes of rural families are found to vary positively with land holding
sizes. If agriculture is labour-intensive, and shortage of labour
develops at peak periods, a farmer will gain from being head of a large
family (Mamdani, 1976). Again, where control over property and
people is important (as in the case of landlords, traders and
industrialists) and the family remains the basic network for gathering
information and transmitting decisions, a large-sized family confers an
advantage on the controlling group (Rao, 1976). In India, Pakistan
and many other underdeveloped countries, the family remains the
controlling thread for the concentration of economic power (cf.
Bagchi, 1972a and White, 1974).
There is some evidence that, among propertied people, family
partition takes place at a later stage of an individual’s life-cycle than in
the case of the propertyless. This also contributes to the positive
relation between landholdings and family size.
Where the preferences of different groups in a class society are so
different, how is a policy of strict family limitation, even if it is
considered socially desirable, to be enforced?
Some advocates of family planning would want state action and at
least indirect coercion. For, according to their way of looking at things,
population growth is one of the biggest impediments against develop¬
ment in the third world and the benefits conferred by birth control are
very great. It is necessary now to look more closely at the likely effects
of population growth on economic development.

8.4 RELATION OF POPULATION GROWTH AND

ECONOMIC DEVELOPMENT

The growth of population is part of the whole process of change in

society. It is difficult to separate out its effects from those of the existing
or changing relations of production, and we are not going to attempt
Population growth 207

that task. Instead, we shall critically evaluate some propositions about

what are considered to be the unambiguous effects of population
growth.
Much of the recent work emphasizing limits to economic growth
(see, for example, Meadows et al., 1972; and for critiques see Cole,
Freeman, Jahoda and Pavitt, 1972, and Nordhaus, 1973) and the
harmful effects of population growth in poor countries generally take
the total resources or the volume of investment to be given. Such
writings derive from the work ofT. R. Malthus’ Essay on the Principle of
Populations as it Affects the Future Improvement of Society, first published in
1798. This work was really based on the misleading truism that if
resources are given, the more people there are, the less there is to go
round for each person. Malthus’ work was also based on the
assumption that, wherever human beings obtain more than mere
subsistence, their numbers go up, until everybody is back at the level of
subsistence. From this followed a conclusion which has been very
comforting to the ruling classes of unequal societies, viz. that there is no
point in trying to improve the condition of ordinary people, for it will
only end up in more people being poor.
This second assumption has been already falsified in the affluent
countries (where wage rates have risen along with falling rates of
fertility and population growth) and is on its way to being falsified in
many third world countries (such as the East Asian countries, the
Caribbean and several Latin American countries and even parts of
India). Furthermore, man has found new resources (bronze in place of
stone, iron in place of bronze, coal in place of timber, water power in
place of human power) to suit his needs as numbers have gone on
increasing. Taking the restricted held of agriculture alone, it has been
found that increasing numbers stimulated a change from hunting to
slash-and-burn cultivation, then to long-fallow cultivation and finally
to short-fallow cultivation, increasing the output per unit of land, at
the cost of more labour spent on producing the crops. The sequence
might have varied from region to region but the picture of increasing
output with increasing numbers seems to be generally valid (Boserup,
1965; see also Simon, 1977, chapters 5 and 7).
We find that in recent years also food production has kept pace with
population growth in the third world as a whole. Even in densely
populated Kerala, with a high rate of population growth between
1900 and i960, there was no fall in the standard of living of the people
(Panikar, Krishnan and Krishnaji, 1977). There are countries plagued
by food shortages, and food imports of the third world are rising fast,
but the main problem here is that of maldistribution of purchasing
208 Population growth

power within, and between, countries. It has been argued that growth
in population stimulates innovations and permits economies of scale in
production over time (Simon, 1977, chapters 2 and 4). Even if we
discount the applicability of such general theories to the densely
populated regions of the third world, there are many countries in
Africa and Latin America where the sparseness of population
necessitates too much investment in social overhead facilities per head
and impedes development. For example, Tanzania’s programme of
‘villagization’ aims at concentrating people in villages and stimulating
their co-operative, or at least, mutually interrelated, activities.
Another favourite argument of proponents of population control as
the supreme developmental instrument in the third world is that a high
fertility rate leads to a high ratio of children below working age to the
total population (this ratio is called the dependency ratio). This puts a
pressure on current resources and results in a lower rate of saving since
more current income has to be spent on maintaining and educating the
children.
Such an argument might have some validity in a socialist economy
where existing resources are fully utilized, wasteful consumption is
minimized, and all savings are invested, and where roughly equal
amounts of private and social goods are supplied to all people (except
for age or sex differences). But it has little validity elsewhere. First, in
actual capitalist economies, available resources are not fully utilized
and there is avoidable excess capacity and unemployment. Secondly,
there is an enormous amount of wasteful consumption. In third world
economies, society does not provide enough schools and medical
facilities for the poor, so that it is difficult to argue that population
growth makes a large dent on social savings. (The evidence on the
relation of savings to dependency ratios is not at all clear-cut. In India,
for example, the savings rates and the dependency ratio rose together
in the 1960s and 1970s. For a summary of the debate on this issue, see
Mikesell and Zinser, 1973). Under the peculiarly contradictory
conditions of third world societies, it is possible that an abrupt slowing
down of population growth will worsen problems of shortage of
effective demand for mass consumption goods (such an effect, of course,
is more probable in the affluent capitalist countries).
If a more effective use is to be made of potential savings in the third
world with a view to population control, more expenditure on schools
and hospitals may well lead to a transition to lower fertility and a
slower population growth rate. For education, particularly women’s
education, has been found to lead to lower fertility in most cases and
decreased infant mortality may provide the parents with an incentive
for family limitation.
Population growth 209

8.5 SENSE AND NONSENSE IN THE CASE FOR

FAMILY PLANNING

It is easy to agree that, given the strictly limited resources of the world
as a whole, global population control is desirable, perhaps with some
large-scale migrations between the relatively densely and the re¬
latively sparsely populated regions. But when existing social arrange¬
ments lead to blatant misuse of available resources, in the absence of a
global population policy it is difficult to argue that, everywhere in the
third world, family planning should receive top priority to the
exclusion of measures for improving the standard of living of the
current generation (especially w hen many affluent countries pursue a
policy of subsidizing large families). This does not mean that all
governmental opposition to family planning programmes springs from
a concern for the people. It has been argued, for example, that in Brazil
a high rate of population growth is an instrument in the hands of the
ruling classes for keeping wages low, and this phenomenon may well
explain the lack of enthusiasm of the military junta for family planning
programmes (Daly, 1970). However, if the poor of the third world are
to control their numbers, they must be induced to do so through
education and a progressive improvement in their expectation of and
from life, and not through authoritarian solutions, rationalized by
apparently sophisticated cost-benefit analyses.
In one variant of the cost-benefit analysis (Enke, 1966), the present
value of the product expected from adding another member to the
labour force is compared with the present value of the expected
consumption of the new entrant over his lifetime. At the discount rates
used, the latter is found to far exceed the former (the consumption in
the years 1-15 gets a larger weight, the higher is the discount rate).
Hence, naturally, the ‘net benefit’ of a birth prevented ( = present
value of consumption of the marginal worker — the present value ol the
output of that worker) is found to be far above the cost of introducing
the usual birth control devices. The acceptance of such an analysis
would dictate spending most of the investible funds on family planning
programmes not only in the third world but also in developed
capitalist countries. Even if such a programme were feasible in a
perfectly controllable socialist economy, it would almost certainly lead
to severe dislocation of the actual capitalist (or even socialist)
economies of today’s world.
The argument has been alternatively cast in the form of macro-
economic projections, but they do not generally take account of the
kinds of objections against equating potential with actual saving
( = investment) we have raised earlier; nor do they admit the
210 Population growth

possibility of innovations resulting from the pressure of population

growth, even in the long run. Julian Simon, who was earlier a
practitioner of the art of cost-benefit analysis of family planning
programmes has recanted (Simon, 1977’ preface). Objections have
been raised against the rejection of private preferences and the neglect
of class differences in motives and effects of birth control implied in
these analysis (Leibenstein, 1969, and Blandy, 1974)- But aid-giving
agencies often give high priority to adoption of governmentally
sponsored family planning programmes and sometimes even insist on
them as a precondition for aid for other programmes.
Our arguments are not meant to support a blanket case against
family planning programmes. Rather, family planning programmes
should start from the felt needs of the people. And, for such a situation
to come about, it is necessary that people should be well nourished and
possess a reasonable chance of survival to an adult working life and
beyond. The success of family planning programmes is also vitally
dependent on improvement of women’s position in society. For women
to want to plan their families and to be able to do so it is necessary that
they should be educated and that they can take major decisions about
work and life without always being subject to the dictates of tradition
or a patriarchal family set-up. Thus family planning programmes need
to be embedded in a wider programme for education, health care and
liberation of women.
When governments try to introduce family planning programmes
cheaply by concentrating only on the spread of contraceptive devices,
their efforts are often met by the passive resistance of the people. There
have been some cases, as in India in 1975 and 1976, where the
government has adopted brutal methods for propagating birth
control. Not only has such a course of action meant repression of the
peasantry and the workers, it has often resulted in a major setback for
the family planning programme (cf. Banerji, 1977).

8.6 PLANNING FOR NUTRITION AND HEALTH

CARE IN THE THIRD WORLD

Any rational plan for limiting the rate of population growth must
include a plan for feeding the people adequately and taking care of
their health. A very large proportion of the people of the third world
are ill-nourished - in countries such as Bangladesh or India, a majority
of the people may be suffering from malnutrition. Malnutrition and ill-
health are the direct products of the system of inequality spawned by
international capitalism - an inequality which is both inter- and intra-
Population growth 2I I

national in character. While millions of people in the third world do

not get the root crops or cereals needed to supply their basic calorie
needs, millions of tons of good grain are used as fodder for the
production of animal foods consumed by the rich in affluent countries
(this would apply also to the livestock economy of the Soviet Union).
As we have seen in earlier chapters, the ‘commercialization’ of
agriculture geared towards export crops has diverted a major part of
the resources of the third world from the satisfaction of their own needs
to the meeting of the market demand emanating primarily from
advanced capitalist countries. (For an overview of world food
problems, see Poleman, 1977, and Barraclough, 1977).
In the area of nutrition, the basic deficiency in the third world is that
of calories, since the poor peasants and workers cannot buy the
minimum quantities needed of their staple foods. There are associated
deficiencies in respect of vitamins, proteins, etc. Such deficiencies
expose a major part of the children in these countries to debilitating
and killing diseases (see Ehrlich and Ehrlich, 1972, pp. 89-92). These
deficiencies may even permanently impair the intelligence of children
(Rose and Gyorgy, 1970, and Selowsky and Taylor, 1973). Elowever,
the solution to such problems is not to have transnationals produce
high-cost proteins at the expense of the daily food of the poor, but to
find locally producible foods that can be sold cheaply, and in adequate
quantities, to the poor (for the story of how soybean processing by
American transnationals in Brazil and fishing by Norwegian compan¬
ies in Kerala priced proteins out of the reach of the local consumers, see
George, 1977).
Inducing the poorer countries to produce more proteins or imple¬
menting special programmes for giving nutritious foods to selected
children or nursing mothers will be cosmetic remedies without changes
in income distribution and social customs that will permit the poor to
buy basic foods. As it is, in many Latin American countries (see
Dumont, 1965) thousands of hectares are devoted to ranches for
breeding livestock, while the poor peasants do not have enough land
to raise basic foods, and the country suffers from food shortage. Stress
on special types of food in this situation will merely help the big firms,
particularly transnationals, to push their particular products and
further damage the interests of the poor. (The promotion of babyfood
by transnationals in African countries is said to have damaged the
health of children and mothers since the latter stopped breastfeeding
their babies while depriving themselves of basic foods in order to buy
the costly babyfood sold by the transnationals.) A more sensible
solution can be found by producing the basic foods (mostly cereals,
2I2 Population growth

rootcrops and vegetable proteins) in adequate quantities and ensuring

that all the people can buy them (see Ramachandran, 1977).
What applies to the solution of food problems also applies, with only
minor modifications, to problems of protection against disease. The
decline in mortality in the third world countries since the Second
World War is widely attributed to the control of malaria through the
spraying of DDT and other pesticides, and to elimination of other
killer diseases through the widespread use of antibiotics (Meegama,
1967). However, a large proportion of the population of these
countries continues to suffer from various enfeebling diseases and the
infant mortality rates in many Asian and African countries continue to
be high (Cassen, 1976, Rado and Sinha, 1977). It is ironic that while
India and Pakistan continue to suffer from shortage of western-
educated doctors and nurses, they export trained doctors to the UK
and other advanced capitalist countries in large numbers. (This is part
of the wider problem of‘brain drain’ from the third world to western
Europe, the USA and Canada.) Most of the patents for the newer
drugs for controlling disease are held by transnationals based in the
USA, UK, Switzerland and Western Germany (Mansfield et ah, 1972,
chapter 8), and these transnationals exact high prices for selling the
drugs to the third world (cf. Vaitsos, 1974). Efforts to monitor the
pricing policies of these companies in such countries as India and
Argentina have at best met with limited success so far. The lack of faith
of the general run of western-trained doctors in alternative remedies or
courses of treatment and the need of the rich of the third world for the
remedies for obesity or stress-related diseases familiar in the affluent
countries are not the least of the obstacles against the adoption of
effective measures for controlling transnational corporations and for
finding more widely diffusible remedies.
Meanwhile, it has been found that the bacteria causing the spread of
killer diseases are becoming immune to pesticides and the malaria that
was supposed to have been eradicated earlier is re-appearing in an
epidemic form (FER, 1978). Whether or not one believes with Harry
Cleaver (1977) that the concern of the watchdog organizations of
capitalism for the crisis in healthcare systems in the third world just
now may be rather lukewarm because labour is abundant in
comparison with the needs of capitalism in crisis, there is little doubt
that third world countries will have to find more ecologically sound
and less costly remedies if the mortality and morbidity rates are to be
brought down to acceptable levels. What will be needed in these
countries is ever-vigilant control over the environment (including
water supply, the degree of air pollution etc.) and advances in medical
Population growth 213

technology and treatment procedures adapted to local needs. How¬

ever, the present social organization and the unholy alliance between
powerful drug companies, governmental health departments and
western-educated professional classes pose a serious obstacle to the
adoption of such sensible solutions for the health and nutrition
problems in the third world.

8.7 SOIL EROSION, SALINITY AND FLOODS

Both the quality of life in cities and villages and the productivity of
man and land are greatly influenced by the way the forests, rivers and
land are used and the way cities grow up. Under the prevalent system
of production for private profit, individuals, business firms and even
governments are allowed to pass on many of the ill-effects of their
activities to other people (what economists call ‘external diseco¬
nomies’). The result is all too frequently a ravaged landscape, a
cancerous growth of big, dirty, smoke-filled cities, and polluted rivers,
lakes and seas.
As far back as 1867, Marx had referred to the characteristic social
irrationality of agriculture under capitalism : ‘all progress in capitalis¬
tic agriculture is a progress in the art, not only of robbing the labourer,
but of robbing the soil; all progress in increasing the fertility of the soil
for a given time is a progress towards ruining the lasting sources of that
fertility’ (Marx, 1887, p. 506). Such behaviour has often resulted in
devastated landscapes both in developed capitalist countries (cf. the
‘dust bowls’ of the Midwest in the U SA) and in the retarded societies of
the third world. We shall be here concerned only with the latter.
Geographers, other scientists and colonial administrators have
commented upon the poverty of tropical soils, and the disastrous
consequences of allegedly irrational practices on the part of tropical
peasants for the fertility of the soil (see, for example, Dumont, 1966,
Gourou, 1973, and Hall, 1936). Even a cursory view of the marginal
lands on which tribal or semi-tribal people in Africa, Latin America,
or central India eke out a living conveys an impression of a rapidly
deteriorating environment.
Thus in the upper Damodar valley in India it was found around
1952 that deforestation, over-grazing by domestic livestock, and
cultivation ofsteep inclines had combined to render large areas (which
had been covered by forests in the nineteenth century) unfit for
cultivation. Forests in this region have been cut down on a large scale
for timber ever since it was penetrated by the British. Mica and coal
mines were opened up, driving the tribal people from their habitual
214
Population growth

grounds of food-gathering, hunting and cultivation, and increasing

the demand on the forest resources for timber and other products. The
original inhabitants were compelled to shorten the fallow periods in
their usual pattern of cultivation, and to over-graze the increasingly
restricted forest undergrowth and grass lands available to them. The
upshot was soil exhaustion and erosion, leaching of soluble nutrients
from the subsoil, and formation of gullies. Gullies then expanded at an
alarming rate, thus rendering increasing quantities of land uncultiv-
able, and denuding the soil of any cover other than some miserable
scrub (Gorrie, n.d.).
Soil erosion on hilly terrain not only damages the productivity of
that particular region but also causes havoc in the valley into which
streams of rivers from the hills flow. As, more and more silt is carried
downstream, the river bed rises over time - sometimes above the level
of the surrounding valley, and the whole valley is exposed to frequent
flooding. Reservoirs and dams can be built to control the regime of the
rivers downstream, but without control of soil erosion upstream,
reservoirs get silted up, so that their capacity to moderate floods
declines progressively.
The fundamental reason for these phenomena is not population
growth or the irrational practices of the tribal people, but irresponsible
exploitation of land resources by outsiders. Before Europeans or
plainspeople invaded the tribal regions, the local people had generally
maintained a system of low-density equilibrium. The European
conquerors and other exploiters such as mine-owners, traders and
moneylenders interfered with the traditional system of management of
land and livestock, took away some of the most valuable land and
water resources from the local people, and left them with little or no
surplus so that they were unable to make the investment necessary to
change over to a new, intensive system of cultivation without
damaging their own environment (cf. chapter 6 above).
As we have noted in chapter 6 already, most of the colonial rulers
put in little investment or research in agriculture anyway, and what
little there was went to serve the interests of European settlers and
businessmen and of export crops. In the 1930s, Hall, a British scientist
investigating agricultural conditions in Kenya and other British
colonies in east Africa found that there were only a few scientific officers
in the colonies, that they mostly either did pure research on problems
they had been trained to recognize back at home or applied research
on crops or methods that were likely to prove valuable for plantations
or growers of crops. Hall remarked : ‘Research has enabled wheat to be
grown in Kenya but I am not conscious of any systematic work on the
Population growth 215

native millets' (Hall, 1936, pp. 89-90). Similar comments could be

made regarding agricultural research in Nigeria or India before
independence (cf. Bagchi, 1972a, chapter 4).
After political independence, the focus of agricultural investment or
research shifted towards the interest of large farmers or landlords. The
people most affected by the invasion of the market, viz. the poor
peasants, and tribal people brought into the network of capitalist
relations, gained little from such investment or research. The govern¬
ment generally regarded the forests as commercial resources to be
exploited jointly by private contractors and the government. In these
circumstances, the rural and sylvan environment has often continued
to deteriorate through the dual action of the exploiting capitalists and
landlords and the desperate struggle of the poor peasants and the
landless workers to make their ends meet.3
Large-scale public works have often added to the damage caused by
individual action. Colonial railways often ran on wood fuel for which
vast forests were cut down. Their alignment took little notice of natural
drainage channels. This led to the blocking of drainage channels,
silting up of rivers and formation of swampy terrain. Frequent
flooding, breeding of mosquitoes and the spread of malaria - the
biggest killer disease in many parts of the world at one time — were
some of the consequences. Similarly, the construction of large-scale
irrigation works without adequate provision for drainage in
nineteenth-century Egypt led to widespread incidence of the snail-
borne disease, bilharzia or schistosomiasis, because snails bred in the
stagnant channels and their banks. Again, lack of adequate drainage
led to problems of waterlogging, salinity and alkalinity in vast tracts
irrigated by large-scale irrigation works in India (see Whitcombe,
1972, and Michel, 1973).
Similar experiences have been repeated in many countries in more
recent times. In Afghanistan, for example, peasants in the Helmand
valley had been using seasonal inundation canals for centuries. In
1946, it was decided to extend irrigation facilities in the valley and the
project was handed over to an American firm which would use
‘advanced technology’ in the form of‘heavy earth-moving equipment,
rock-fill dams and reinforced concrete barrages and canal structures’
(Michel, 1973, p. 263). The Boghra Canal was opened in 1949, and
the irrigation was extended to the hilly terraces. Within four years, the
water table rose by 16 feet, mainly because of the impenetrable

3 For the story of the change of the Brazilian North-east from a fertile region with a
diversified agriculture to one with monoculture of sugarcane, exhausted soils and a
perennially hungry population, see Castro, 1969, and Galloway, 1974.
2l6 Population growth

substratum of the irrigated area. This caused serious problems of

salinity, and expensive reclamation projects had to be undertaken for
restoring the cultivability of the soil (for other stories of a similar
nature, see Dasmann, Milton and Freeman, 1973, chapter 7 ; Dumont,
1966, chapter 3).
With the coming of the Green Revolution and the introduction of
new high-yielding varieties and their accompanying doses of fertilizers
and pesticides, many third world regions now suffer seriously from
water pollution, depletion of fish-breeding grounds, and lowering of
plant resistance to the disease owing to the introduction of plant
varieties which are not adapted to the local climate and pests (Cleaver,
1974, Dasmann, Milton and Freeman, 1973, chapter 6). Exotic
varieties often prove too delicate and native varieties are neglected;
this makes agriculture much riskier, particularly for the poor peasants.
Monoculture of the most profitable crops accentuates the evil.
Scientists and technologists are often puzzled by the endless
repetition of avoidable errors affecting such vital decisions (Michel,
1973, p. 265). The repetitions are not too difficult to explain if we
remember that in the case of the Helmand project, for example,
neither the American firm involved nor the Afghan bureaucrats and
technologists had to account for their actions to the peasants who were
most immediately affected by their decisions.

8.8 URBANIZATION, SLUMS AND POLLUTION

The third world is still largely rural. The percentage of people living in
urban areas (defined as agglomerations of 20,000 inhabitants or more)
of less-developed countries as late as i960 was 16.7 per cent whereas
the corresponding percentage for Europe was 47.1 (Bairoch, 1975,
chapter 8). The proportion of urban dwellers in some Latin American
countries such as Argentina and Chile was of the same order of
magnitude as in western Europe, so that in fact, in the majority of the
third world countries, the proportion of urban to total population
could be taken as less than 16 per cent.
Urbanization in the third world is a different type of phenomenon
from urbanization in the developed capitalist countries. First of all,
starting from a very low proportion of town-dwellers to the population
as a whole, urbanization in recent decades in many third world
countries has proceeded much faster than urbanization in the
industrialized countries when those countries were themselves ur¬
banizing. In contrast to the industrialised countries again, urbani-
Population growth 217

zation in the third world (that is, the rate of growth of the proportion of
urban to total population) has generally moved faster than
industrialization (as measured by the growth in the proportion of
workers in secondary industry to the total workforce). Indeed, many
countries which have not experienced any significant degree of
industrialization at all have still seen a rapid rise in the urban
population. This has meant, among other things, the formation of
large pools of underemployed or unemployed labour in urban areas,
and the swelling of the so-called informal sector. Finally, it is also
generally found that the gap between urban and rural earnings or
wages is generally considerably higher than the rural-urban earnings
or wage gap in North American or Western Europe at the time those
regions were in the initial phase of industrialization (Datta, 1952,
and Bagchi, 1972b).
The most extreme cases of urbanization are found in Latin America.
The percentages of urban population in large urban centres and the
rates of transfer of rural people to towns are very high in such countries
as Argentina, Chile, Brazil and Colombia (Blakemore and Smith,
1974, table 1. 1, and Barraclough, 1970, p. 936). These phenomena
have been explained in terms of the colonial heritage and ensuing
developments in the nineteenth century. The towns of Spanish
America were primarily centres of rule over the surrounding count¬
ryside, and wealth and power came to be centred on the towns (Morse,
1964). The Amerindian tribes were broken up and their communities
became atomized units isolated from one another. The settlements on
or around the haciendas or plantations had little of the solidarity of
villages proper.
In the nineteenth century, policies were pursued to break up the
surviving Amerindian communities, and the rural settlements became
orientated more towards ports and external commerce. The pro¬
letarian character of the rural poor was exposed through the
dissolution of semi-servile ties of dependence and the spread of
capitalist relations. While the growth of large towns exerted a pull on
this proletariat, the extremely uneven distribution of land and other
means of production acted as a factor pushing the rural poor to the
towns.
Many of these migrants have swollen the ranks of poorly re¬
munerated workers in the service sector. The growth of towns and the
growth of the tertiary sector have gone hand in hand in many third
world countries. Flowever, ‘tertiarization’ is not caused by the growth of
towns as such (More, 1971)- Even in rural Egypt, a large proportion ol
2l8 Population growth

the population is found to be working in the service sector; and in

India and Indonesia, while the rate of urbanization has been slow, the
tertiary sector has grown relatively to the other two sectors.
In the towns, two streams have contributed to the growth of the
services sector. The first is the growth of organized banking, trade, etc.,
and administration and defence services, which help the centralized
gathering of the surplus from the economy, and the second is the
inflation of the category of residual workers who eke out a living on the
margins of society.
The poorly-paid, often self-employed, workers who work in small
factories under sweatshop conditions or carry on as street vendors, rag¬
pickers, porters, casual construction workers, etc., naturally increase
the overcrowding of third world cities. Theirs are the shantytowns and
the slums that sprawl alongside palatial buildings. In Brasilia, the new,
architecturally innovative capital of Brazil, for example, large
numbers of people move continually from one squatment to another,
because they occupy unauthorized plots, and lack the money or the
qualifications to occupy houses in authorized settlements (Epstein,
1973)- ^ residents of the so-called Social Security Invasion either
work as sweated labour in factories and shops, or take in work at home
as seamstresses, carpenters and so on. The maladorous, overcrowded,
insanitary slums (Sen, i960) are as much part of the exploitation
system in the third world as the palaces and suburbs of the rich and the
comfortable. Slum clearance projects might beautify the cities and
remove the worst eyesores from the ken of the casual tourist, but a
radical change in the living conditions of the urban and rural poor will
require a radical redistribution of income and assets from the rich to
the poor.
The ruling classes of the third world who have so long sustained such
an unequal system and who are conscious of having to compete in both
international and internal markets with the ruling classes of the
affluent countries with their much vaster resources are unlikely to pay
much attention to a demand for less industrial pollution, since
measures for curbing industrial pollution are often expensive. Even a
relatively affluent country such as Japan allowed the Minimata Bay
disease to develop unchecked for a number of years, because the
alternative would have been costly for the firm responsible for the
disaster.4 Third world governments or public authorities have either

4 Near the tiny fishing village of Minimata, a chemical factory discharged its
untreated effluent into the sea. The result was a steep rise in the level of methyl mercury
in the sea-fish. People eating the fish were afflicted by a painful disease attacking the
nervous system and a quick, or slow, death. The managers of the factory apparently
knew of the danger but decided to ignore it because the cost of effluent treatment would
have been high (Haggett, 1975, chapter 7).
Population growth 219

not insisted on environmental (or even plant-level) safety measures or

have enforced them very loosely when these are in existence. In eastern
India, for example, the water of the river Damodar, which flows
through an industrial and mining belt was found in 1974 to be so
polluted as to be unfit for almost any kind of human use (see Statesman
(Calcutta), 20 December 1974 and 27 September 1975).
The destruction or degradation of the environment in cities or in
villages is attributed by economists to external diseconomies of
economic activity. It is often argued that such side effects of industrial
or agricultural growth can be controlled by regulatory or fiscal and
monetary measures, or even by passing laws that allow the people
adversely affected to sue the wrong-doers. Such a view has proved to be
too optimistic even in affluent countries which can afford large
expenditures for reclaiming the environment. In most third world
countries, little has actually been attempted in the way of controlling
environmental degradation. Environmental damage seems to be the
systematic result of the working of the capitalist system, and it can
hardly be regarded as an easily remediable side-effect of the working of
the market (cf. Hymer and Roosevelt, 1972, p. 652).
Even in normal times, transnationals have paid scant attention to
problems of environmental damage. In times of war, the concern of
governments of capitalist countries for the protection of enemy
territory has been on a par with their concern for the lives of the enemy
population - military or civilian. In Vietnam, for instance, the US
military authorities systematically set about to destroy the environ¬
ment by spraying forests and crops with defoliants, using herbicides to
kill growing crops and destroying mangrove forests, which play a vital
role in sustaining fisheries, and dropping millions of tons of 500 to 700
pound bombs to create a moon landscape, by obliterating villages,
forests, fields, dykes, dams, water supply and transport systems
(Ehrlich and Ehrlich, 1972; Kehl, 1977). The credibility of any
concern about the environment expressed by spokesmen from advan¬
ced capitalist countries naturally appears to be rather low to the
average citizen of the third world. The alternative is to build
environmental protection into a more egalitarian system as the
Chinese have sought to do in their planning.
9

PLANNING FOR CAPITALISM IN THE

THIRD WORLD

g.I INTRODUCTION

State intervention as a way of countering western European domi¬

nation and, if possible, of catching up with the West, has formed part of
the middle and upper class ideology of the third world since the days of
Mohammed Ali in Egypt. After the collapse of Mohammed Ali’s bid
for independence under the onslaught of British imperialism, the
examples, first of Prussia and then of Japan, acted as beacons to many
nationalist leaders of the colonial countries. In 1928, the Soviet Union
launched its first five-year plan and, from then on, the desire for state
intervention to stimulate economic development became clothed in
the demand for planning of economic activities. The desired content of
‘planning’ has varied from planner to planner; for some, it has simply
meant state action in support of private enterprise; for others, it has
meant the entry of the state into fields which private enterprise finds it
unprofitable to explore and develop; for yet a third segment, it has
meant the gradual replacement of private enterprise by collective
action and co-ordination of all economic activities according to
criteria of social welfare (for expositions of the ideology of state
intervention and planning, see Chandra, 1966, and Myrdal, 1970,
chapter 15).
The objectives of state intervention have rarely been explicity stated
in terms of class interests. It has been generally assumed that the
growth of private or public enterprises will benefit not only the
businessmen, top executives and others near the centre of power, but
also the workers and peasantry through some kind of percolation
process. Correspondingly, the apparatus of planning has escaped any
analysis in class terms. Planners have often been seen as wise men who
can somehow remain above class and political strife. Sometimes,
supporters of private enterprise, after watching the disappointing
performance of state-aided private enterprise systems, have seized on
supposedly supra-class technocrats to execute policies which will
advance the general welfare of the people rather than sectional
220
Planning for capitalism 22 I

interests (cf. Hirschman, 1968). The working of state intervention and

‘planning’ in third world economies has also belied these expectations.
In this chapter, we shall take three case studies and discuss the
problems which have bedevilled the planning efforts in these cases.
Some particular problems will be highlighted in the case of each
country. For example, in the case of Turkey, the focus will be on the
problem of stimulating private investment through state support in a
retarded economy. In the case of India, the problems of raising the
rates of saving and investment and, in that connection, the problem of
poverty on the one hand and of technological dependence on the other
will be brought into focus. In the case of Pakistan, the problems of
regional inequality and rapid growth of concentration in industry will
be the focus of our attention. This does not mean at all that the other
problems do not crop up in the cases mentioned; it is only that the
literature on certain particular problems is more abundant in the cases
of some countries than those of others - although the majority of the
countries are plagued by very similar problems.

9.2 ETATISM IN TURKEY AND ITS GYRATIONS

At the end of the First World War, the empire of Ottoman Turkey
broke up. Turkey was saved from complete western domination
through the heroism of the Turkish people (who threw out the Greek
invaders and the Caliphate). But the new Republic inherited a
desperately poor country. Anatolia, that is, Asiatic Turkey, was a
sparsely populated land of peasants and shepherds, and Istanbul was
the outpost of an empire that had vanished. For the first few years,
Kemal Ataturk’s government was engaged simply in reconstructing
the region ravaged by the Greek invaders. Many of the foreign
concessionaires tried to enforce the ‘rights’ they had obtained by
putting pressure on the previous regime. By a special commercial
treaty signed in 1924, Turkey had to agree that she would not change
customs tariffs or restrictions on imports or exports for five years. Only
from 1929 was she free to pursue an independent commercial policy.
However, she had to assume the burden of the Ottoman Debt,
repayment of which ate up as much as 13-18% of the budget in the
i930s-a proportion that gradually declined to 5%. The national¬
ization of foreign enterprises in railways, mining, banking, tobacco,
etc., involved further financial outlay (for a summary of economic
development in Republican Turkey up to 1939, see Hershlag, 1964,
part seven).
In the 1920s, very little industrial or agricultural growth took place,
222 Planning for capitalism

although Ataturk established the Is Bank, a private bank under

governmental patronage, specifically for the purpose of financing and
stimulating industrial growth. This bank established several new
industrial enterprises. In spite of the pronounced anti-communist
stance of the government, no major foreign investment took place in
Turkey either in the 1920s or in the 1930s (with the sole exception of a
loan of 10 million gold dollars raised from the Swedish-American
concern of Ivar Kreuger). A law was passed in 1927 for the
encouragement of industry. It stipulated, among other things, that
industrial enterprises above a certain size would enjoy a number of tax
concessions and concessions in public utility rates, a government
subsidy of up to 10% of annual output, and a guarantee of purchase of
their products by government departments and enterprises so long as
their price did not exceed that of foreign-made goods by more than
10%.
Despite all the encouragement given to private enterprise, there was
very little growth under private auspices, since the Turkish capitalist
class was tiny and weak. This class, moreover, had long been
habituated to control by the feudal-bureaucratic Caliphate. Turkey
was hit hard, in common with other primary producing countries, by
the depression of the thirties. On the other side of the Black Sea, the
Soviet Union was able to escape the effects of the general capitalist
crisis through her socialist planning. These factors induced the ruling
People’s Republican Party to go in for etatism. The first Five Year Plan
was announced in 1933, and Turkey received aid from the Soviet
Union, the only foreign country to offer her aid. This took the form of a
20-year loan of 8 million gold dollars without interest, training of
Turkish students in the Soviet Union, and the despatch of Soviet
experts to help establish industrial enterprises (Hershlag, 1964,
p. 179). In particular, the Russians helped in the construction of a
large textile mill at Kayseri (Hanson, 1959, p. 120). However, neither
the class character of the ruling party nor its objectives were changed
by its decision to embrace planning. Prime Minister (later President)
Inonu, emphasized in 1933 that nationalization of key industries
would ‘give considerable stimulus to private initiative and capital’
(Hanson, 1959, p. 116). The major instruments for state intervention
in industry were two government-controlled banks, the Sumerbank
and the Etibank (Hanson, 1955, and 1959). Characteristically
enough - and as a precursor of things to come - although Turkish
planning was inspired by the Soviet example, the plan was drawn up
by an American commission (Hershlag, 1964, p. 185). It gave priority
to the development of consumer goods industry. The Sumerbank had
Planning for capitalism 223

a wide range of planning and executive functions, and it came to own

iron and steel works at Karabuk, cement plants, textile mills, footwear
factories, and so on. It also controlled a buying and selling organi¬
zation for the inputs and products of its enterprises; and through
share-holding it controlled, among other enterprises, sugar factories, a
fertilizer factory, and a flour mill. The Etibank was primarily
concerned with mines. Most of the new industrial investment during
the first two five year plans was either directly undertaken by the
public sector or promoted by it.
The number and output of factories grew significantly. Factory
output doubled between 1929 and 1938. The number of factory
employees rose from about 27,000 in 1927 to about 90,000 in 1939.
The income per capita went up from 75 Turkish pounds in 1927 to 95
Turkish pounds in 1939 (both measured at constant, 1938 prices). The
share of industry and construction in national income rose from 1 3 per
cent in 1929 to 16 per cent in 1938 (Hanson, 1959, p. 124). It was the
public sector again which was mainly responsible for an increase of 80
per cent in factory output up to about 1948-49.
However, the failure of the Turkish state to effect any fundamental
change in production relations in agriculture, which sustained 80 per
cent of the people, the bureaucratic management of the state factories,
essentially in the interest of the ruling coterie, and the way the plans
were financed—all these ensured that planning would have little
impact in changing the economic or social structure of the nation. In
the period 1923-34, poor peasants obtained about 700,000 hectares of
land comprising farms and homes abandoned by the Greeks, waqf
lands (i.e. lands belonging to religious foundations), and surplus lands.
A further 200,000 hectares were distributed to them between 1934 and
1939. But there was little effort at destroying the landlordism
characterizing the Turkish countryside (Hershlag, 1964,9. 182). Even
the lands distributed were generally in units that were too small to
allow the poor peasants to become independent of their traditional
overlords. No attempt was made to introduce co-operation among the
peasants.
The major instrument for improving agricultural production was
extension of credit by the Agricultural Bank. Its operations were on a
modest scale, until the 1940s (Hanson, 1959, pp. 122-3), and> in anY
case, the benefits of its loan operations naturally accrued to the
landlords and rich farmers. Finally, the poor people, among whom the
poor peasants were naturally in a majority, bore the brunt of financing
industrial growth in Turkey. The income and property taxes began to
be of any importance in the state budget (from which much of the
224 Planning for capitalism

funds for industrial development came) only from the middle of the
ig30S onwards. Even then, they together amounted to no more than
15% of the state budget. The state ran several monopolies, which
provided 20-25 per cent of its total revenues. The remaining 60 per
cent of the revenue came from turnover and consumption taxes and
customs duties, all of which fell mainly on the common people. Even
then, the state budget had large deficits which were met by raising
loans (Hershlag, 1964).
A highly bureaucratic structure of management of state enterprises,
continued toleration and mild expansion of private enterprises, and a
class structure dominated by property-owners, naturally led to a
demand from the latter that private enterprise should be given its
head. It is with this demand spearheading its programme that the
Democratic Party came to power in 1950. It also thrived on American
encouragement in the Cold War period. The irony was that, in spite of
an apparently more benign attitude to private enterprise, the major
part of the growth in industry in the 1950s took place again in the
public sector (Land, 1971, Rockwell, 1971, and Fry, 1971). The
government tried to encourage private investment by using existing
laws which accorded special favour to private industry. But until the
mid-1950s at least, most industrial investment took place in joint
ventures in which state enterprises played the role of the entrepreneur
and major investor (Hanson, 1955).
During this period, the government vastly expanded the credit
institutions servicing agriculture. It also provided a ‘one-way bet’ to
landlords and rich farmers (cf. the experience in India from the 1960s
onwards) by buying up grain from them at guaranteed prices while
leaving them free to sell it at market prices. At the same time, it refused
to institute any land reforms, or tax the rich in urban or rural areas. It
was then forced to resort to deficit financing on a vast scale. And the
public sector mainly invested in slow-yielding infrastructure projects.
One result was a fast rate of inflation and balance of payments crises.
The Americans and western aid-giving agencies who were major
backers of the pro-private enterprise government of Adnan Menderes
put pressure on him to change his policies (although the government
also unreservedly welcomed foreign investment). A ‘free enterprise’
ideology as such could do little to stimulate private industrial
investment.
The slow rate of growth (with per capita income registering an
increase of about 1-2 per cent over the decade), the high rate of
inflation and social unrest led to a military coup in i960. When the
Planning for capitalism 225

military government restored civilian rule in 1962, the civilians

promptly restored many of the features of‘private enterprise first’. For
the growth of the bureaucratically controlled public sector had
also fostered the growth of entrenched private interests and the
upper-class civilians represented these interests. From 1963 onwards, a
new First Five Year Development plan was undertaken. The plan
perhaps made for a little more co-ordination in the development effort
than under the preceding regime. It seemed to be eminently successful.
Whereas the plan target was an annual rate of growth of GNP of 6.8%
per year over the period 1963-67, the actual rate was about 6.5%
(Fry, 1971, p. 314)- This was primarily import-substituting in¬
dustrialization, and the public sector was responsible for appro¬
ximately half the amount of investment between 1963 and 1971,
concentrating mainly on intermediate goods (Keyder, 1979, p. 27).
However, much of the growth was due to developments outside the
plan as such. While public investment fell short of the target, private
investment exceeded it. Agricultural output (growing at the rate of
only 2.2%) also fell short of target, whereas services grew at a
much faster rate than was planned for (Paine, 1972). Hence ‘structural
change’ in Turkey followed the parasitic pattern characteristic of other
third world economies except for the fact that the population
dependent on agriculture declined absolutely in the 1960s and 1970s
(Keyder, 1980). Furthermore, the Turkish government failed to
implement land reforms. It continued to rely for its major sources of
revenue on indirect taxes and foreign aid (it received an unlooked-for
relief by way of remittances from Turkish workers abroad). The
government also continued to put money in the pockets of landlords by
raising prices of grain. The unemployment situation worsened in spite
of migration of a large number of Turkish workers, and surplus labour
continued to remain a serious problem in the countryside (Hamurdan,
1971) -
By the beginning of the 1970s, the industrial and agricultural
growth rates had fallen to 2.5 and i.i respectively owing to the
multiple problems left unsolved by the 1963-67 plan (Paine, 1972).
Income distribution, which was already highly skewed in 1962 shifted
further against low income groups by 1966 (Griffin and Enos, i97°>
pp. 204-9). In order to resolve the balance of payments crisis, Turkey
had to devalue her official exchange rate by two thirds. Once the
possibilities of import-substitution were exhausted (at least tem¬
porarily), the advocates of an export-led growth strategy became more
vocal. However, the prospects of a fast expansion of exports were
226 Planning for capitalism

dimmed by the trade restrictions imposed by Turkey’s main trading

partners among the OECD countries (Keyder, 1979). Meanwhile, the
IMF dictated their usual package of deflationary policies, cities
continued to grow faster than villages, mechanization of agriculture
went forward at the expense of the poor peasants and workers, and
Turkish society was plagued by endemic violence originating from
neo-fascist groups.
The Turkish revolution seems to have gone back on its tracks. It
started with Kemal Ataturk’s determination to westernize the nation.
He outlawed traditional dress, abolished the Caliphate, introduced
the principle of secularism, the Roman script in place of Arabic, and
made an attempt to educate the masses (some of these efforts are
reminiscent of Sarmiento’s reform activities in Argentina in the 1860s).
But as the property structure and class relations changed but slowly,
this ‘modernization’ failed to trigger off autonomous growth. Her
experience demonstrates that expansion of the public sector by itself is
not a means of achieving or even advancing towards socialism of any
kind. Increased public expenditure and creating infrastructural
facilities at public expense while continuing to recognize the right of
private property led to private aggrandizement. Private interests then
resisted the expansion of the public sector into fields that were
privately profitable. At the same time, with a landlord-dominated
agriculture (in 1963, 3.7% of land-owning families owned 28% of the
land), and with the property-owners extremely reluctant to pay taxes
for development, the technological and the market base for
industrial growth remained insecure. However, agricultural pro¬
ductivity and output seem to have grown more rapidly in recent years.
This change has been partly stimulated by a migration of workers to
the towns and to western Europe, which has in its turn speeded up
(capital-intensive) technical change (Keyder, 1980).
The experience ol Turkey illustrates how in a retarded society the
public sector becomes a bastion of privilege. The pattern and timing of
its expansion is dictated by the needs of the narrow ruling class and is
financed either by raising the prices of consumer goods turned out by
the public sector, or through other inflationary policies. There is often
an alternation between the demand for expansion of the public sector
and the demand for unbridled expansion of the private sector. When
this alternation does not reflect the state of the Cold War and the
position of the particular country between the two super-powers (viz.
the Soviet Union and the USA), it reflects the shifting requirements of
the ruling clique and changes in its composition, rather than the
shifting fortunes of a battle for attaining socialism.
Planning for capitalism 227

9-3 PROBLEMS OF ENSURING CONSISTENCY IN

INDIAN PLANNING

Since the 1930s, Indian nationalists of various shades as well as Indian

capitalists had advocated planning in order to foster economic growth
and eradicate poverty. Even socialism had been talked about as a goal
to aim at. Rulers of independent India drew up economic plans soon
after coming to pow'er. The Indian first five year plan (dating officially
from April 1951) was simply the aggregate of programmes drawn up
by different departments well before the Planning Commission had
begun working. But economists attached to the Planning Commission
and other advisers to the government (among whom P. C.
Mahalanobis was the most important in the period 1953-62) tried to
provide a formal basis for the planning effort.

9.3.1 The plan models

Criticism of plan models as such or attempts to verify the plan

targets against actual developments often resemble the interpretation
of real life phenomena in terms of the quality of dreams dreamed the
night before. 11 is better to treat the announced plans only as a guide to
the rough direction of government policy or to the type of ideology the
government wanted the people to swallow.
The formalization provided for the Indian first five year plan was
rather rudimentary. Given certain conventional estimates of the ratio
of capital to output, the rates of saving required to support different
projected rates of growth were calculated (for a critique of the
conventional measurements of capital, see Robinson, 1956). If the
ratio of realized net saving to national income, the rate of growth of
national income, and the capital-output ratio are denoted by s,g, and
k, respectively, then
s

If planned rates of growth are derived from such considerations as the

necessity of doubling national income over a period of time, or
attaining a minimum average income in real terms within a specified
period, and k is taken to be constant, then the planned rate of saving
and investment is derived as s = gk. Variations on this simplistic
formula for exponential growth can be made by allowing k to change
on the basis of available information about likely changes in technique
or in the intersectoral composition of output, or by planning for
increases in r in a graduated sequence. (We are assuming that initially s
228 Planning for capitalism

is too low to attain the desired rate of growth —why plan in this way
otherwise?)
The next sophistication introduced into the Indian plan models (for
surveys of the models, see Chakravarty, 1959, Tendulkar, 1974, and
Blitzer, Clark and Taylor, 1975) was to distinguish between the
consumer goods and capital goods sectors and to consider the
allocation of investment between them. This model for the Indian
second five year plan was proposed by Mahalanobis and was formally
similar to that constructed by G. A. Feldman on the eve of the Soviet
first five year plan. Since the capital goods sector produces the goods
needed for investment, raising the rate of investment in that sector has
the effect of raising the long-run rate of growth of the economy.
However, while the rate of investment in the capital goods sector is
being raised, the investment devoted for the time being to the
consumer goods sector suffers, and in the short run, the rate of growth
of output of consumer goods remains low. This can raise problems
of excess demand for consumer goods (including necessities).
Mahalanobis proposed to deal with such problems (to the extent that
they were anticipated in 1955) by raising the output of the handicraft
sector and the sector producing services with only a small dose of
additional investment, since both these sectors were supposed to have
low capital-output ratios. This strategy ran soon into difficulties,
whose nature will be analysed presently.
The third five year plan (starting in April 1961) was drawn .up
primarily on the basis of a rough balancing of inputs and outputs in the
economy, after taking the exports, imports, and inflows of foreign aid
or loans into account. (A formal demonstration of the feasibility of the
plan was provided by Reddaway, 1962.) Later models can be taken to
be elaborations of the input-output framework. The basic
input—output balance equation for an economy with n sectors can be
written as follows:
n

Xt = (T atj Xj + Ci + / + Et — A/., z = 1
j-1
where Xt = output of the zth sector
C] = consumption of the zth sector output
/ = investment
Et = exports
AT = imports
fly = amount of X needed to produce a unit of X (these
coefficients are assumed to be constant)

Various further disaggregations may be effected in C, / etc.,

Planning for capitalism 229

distinguishing between public and private consumption, between

investment in fixed capital and inventory investment, imports that
compete with domestic output and non-competitive imports, etc.
These elements of final demand and imports are also estimated on
various assumptions. (The magnitudes are all flows over certain
specified periods.)
Manne and Rudra in 1965 published a consistency model of the
fourth five year plan—which was supposed to start in April 1966
(Manne and Rudra, 1965). Two notable features of the model were
(a) that it demonstrated that the flows of current inputs and outputs
within a broadly defined sector based on mining, metals and
fabrication of machinery were virtually independent of another broadly
defined sector utilizing mainly outputs of the agricultural sector, and
(b) that it derived an endogenous estimate of the gross fixed
investment on the basis of the planned growth of output over the five
year period, instead of leaving it to be determined exogenously by
factors not captured in the model. As it turned out, because of
serious economic and political difficulties, the fourth five year plan did
not begin in 1966; instead there was a ‘plan holiday’ of three years, and
the actual fourth five year plan officially began in April 1969. But the
Manne-Rudra model brought out into the open the issue of demand
generated by planned investment which model-makers have at best
dealt with in an imperfect fashion so far. If the virtual independence of
the two aggregative sectors of metals, mining and machinery on the
one hand and the agriculture-based industries on the other is taken at
its face value, then it would appear that the rates of growth of the two
sectors can be planned for separately. (In order to support the growth
of either sector, activities such as transport, power supply, etc., would
have to be expanded pari passu, but that is a different issue.) However, if
the demand generated by expansion of the metal and mineral-based
industries is to be satisfied, then the supply of consumer goods (which
directly or indirectly need agricultural inputs) has to be expanded.
The usual input-output models could not take account of such
demands, except in an ad hoc manner.
An input-output model was proposed for India’s fifth five year plan
(starting in 1974). The model was supplemented by an explicit
estimation of the demand for consumer goods after allowing for some
redistribution of incomes. It was assumed that logarithms of con¬
sumption expenditures of different expenditure classes conformed to a
normal distribution so that if the average consumption expenditure
and its variance were known, the absolute levels of consumption
expenditure of a particular expenditure class could be predicted. For
2 go Planning for capitalism

the exercise with redistribution of consumption an arbitrary increase

in the level of expenditure of the bottom 30 per cent of the population
(arranged according to levels of expenditure in both urban and rural
areas) was assumed. However, such redistribution was not organically
linked to the investment programmes proposed for the plan, nor were
any specific policy instruments proposed for effecting such re¬
distribution (Tendulkar, 1974). The Draft Plan 1978-83 and later
revisions did not fare better in formulating a strategy for generating
more employment for the poor and redistributing incomes towards
them. While they provided for some concrete rural works pro¬
grammes, the consistency of a vast increase in labour-intensive
activities catering to the poor with a stress on exports and on industrial
efficiency to be achieved through more foreign collaboration and
foreign investment was never demonstrated in a convincing manner.

9.3.2 Macroeconomic imbalances, administrative controls and aid

Now that we have provided a very rapid overview of the general

nature of the Indian plan models, what can we say about the actual
plan performance? There is first the question of macroeconomic
balance, and the degree of success of the planners in correcting imbal¬
ances. Secondly, there is the question of the use of policy instruments as
they are usually understood by economists - such as monetary and
fiscal policies, administrative controls, and foreign trade policies
adopted during the plan period. Thirdly, there is the question of the
social basis of planning in India, and, connected with that, the degree
of decentralization and devolution of the planning effort. We shall
concentrate mainly on the third aspect.
The basic failure in the macroeconomic field consisted in the
inability to match supplies with demands over short or long periods,
for consumer, as well as capital, goods. Excess demand for some goods
co-existed with excess supplies of others. There was a persistent deficit
in the Indian balance of payments up to about 1974-75. This does not
mean that excess demand predominated in most sectors, as it must
have done in the aggregate. Demand for mass consumer goods very
often fell short of supply. Even in the case of consumer durables, the
narrow internal market tended to be quickly saturated. The balance of
payments crises were largely caused by the failure of the government to
limit the import of intermediate goods entering into the production of
agricultural and industrial commodities, by its eagerness to receive
food and other kinds of aid as a means of budgetary support and by the
continual expansion of the civil and military establishment.
Planning for capitalism 231

In the input-output planning model for a single, short period, the

aim is to achieve consistency of supplies of intermediate goods with
demands for such goods thrown up by the production process. Final
demand (consisting of investment, public and private consumption,
exports) is also to be satisfied with the available supplies of
goods - either domestic or foreign. The input-output model as such
does not include the determination of final demands. In the more
ambitious input-output models, an attempt is made, plan targets
being given, to estimate the aggregate value and sectoral composition
of needed investment. The objective here is to match the supplies of
capital goods and the demands for those goods on the part of the user
sectors (cf. Tendulkar, 1974).
In the partially planned economies of the third world, the different
agents belonging to the private sector make their decisions in the light
of profit opportunities as perceived by them. Governmental directives
or inducement mechanisms can have but a confused and uncertain
impact on such decisions (Bagchi, 1970). We have seen in chapter 5
that in a retarded economy (such as that of India), the typical path of
evolution of consumption patterns creates problems of excess capacity
for both mass consumer goods and for newer types of consumer goods
which are invented in affluent capitalist economies. In South Asia,
planners failed to take account of the uncertainty of output, incomes
and employment of poor farmers and agricultural labourers, and
eliminate the problems of survival for the poorest strata of population
(cf. chapter 6 above). The supply of wage goods depends too much on
the vagaries of weather. The demand for wage goods fluctuates with
fluctuations in national economic activity. It is typical of these private
enterprise economies that in a year of good harvest an excess supply of
wage goods and people barely managing to stave off starvation exist
side by side. In a socialist economy, by contrast, the supply of, and
demand for, basic necessities are planned for simultaneously. In such
an economy an adequate supply of basic necessities in the aggregate
and the access of all the people to those necessities are sought to be
ensured simultaneously. In a market-dominated, retarded economy
such a dual guarantee is virtually ruled out.
The prediction or control of the course of private investment proves
even more intractable for the planners. In India, in a bid to guide
private investment, the bureaucrats in charge of planning used
controls on the setting up of industrial enterprises and their expansion,
on issues of fresh capital or of bonus shares by new or existing firms, on
the import of raw materials and capital goods from abroad, and on the
issue of foreign exchange for settling external obligations. From the
2g2 Planning for capitalism

middle 1960s onwards, when industrial growth in India entered into a

long phase of recession, these controls were blamed for all the ills that
beset the economy. (The Report of the Bell Mission sent by the World
Bank to evaluate the performance of the Indian economy set the tone
of such criticisms, although similar complaints had been voiced by
Indian economists also earlier on; see Bell, 1965). The major argument
against the administrative controls was that they were arbitrary in
operation and had little relation to the plan objectives. But the troubles
that beset planning in India are traceable to more fundamental causes
than administrative controls.
Looking at the post-independence history of private investment in
India, we find that industrial production and investment picked up
after the post-Korean War recession under the stimulus of massive
doses of public expenditure. The protection afforded by the com¬
bination of import tariffs and import quotas, regulation of investment
in specified fields and various subsidies in the form of low-interest loans
and tax exemptions for investment, also lured investors in search of
easy, monopolistic profits. Private industrial investment boomed over
the decade 1955-64 or so. Provisions for industrial licensing, control of
capital issues, etc., can be regarded as a way of rationing the scarce
resources when the private sector on its own was unable to generate
enough finance, or usable capital goods and import-saving technology
to sustain its own expansion (cf. Bagchi, 1971b). Private investment
and the partial planning process were soon caught up in their own
contradictions - contradictions that were brought sharply into focus
by the harvest failures of 1965-66 and 1966-67.
The fragility of planning in India had been revealed in the
continuous balance of payments deficits from 1957-58 onwards. The
Indian government sought and accepted massive doses of foreign ‘aid’
(mostly loans) as a means of overcoming the balance of payments
crisis, thus avoiding unpleasant decisions that would have been
otherwise needed to balance its own budget and to feed the politically
sensitive metropolitan areas. Most of the aid in these years came in the
shape of food imports from the United States. (This helped keep up the
world market price of US wheat exports, and sustained American
shipping, since the food had to be transported in US ships even though
American freight charges were higher than market rates.) The Indian
government used the counterpart funds of the food imports under
PL 480 to balance its budget. With these ‘easy’ supplies of foodgrains,
it could provide metropolitan areas with cheap food, without having
to mobilize the marketable surplus of agriculture through a procure-
Planning for capitalism 233

ment drive. (For the cost and impact of aid to India, see Chaudhuri,
1978, chapter 4.)

9-3-3 Demand limitations, industrial stagnation and planning in India

It was not only the government that became enmeshed in the toils of
imperialism in the process. Foreign business - primarily British-
controlled — had already been occupying a major position in manufac¬
turing, plantations, wholesale trade and finance - especially finance
involving foreign exchange transactions. With an upsurge in private
investment, and the inability of the Indian private sector to acquire
independently (through outright purchase or innovation) technology
for such industries as oil refining, drugs and pharmaceuticals, synthetic
fibres, and consumer durables of various kinds, foreign private capital
often came to dominate these technology-intensive fields. Many firms
which had been importing industrial goods from abroad entered into
collaboration agreements with their foreign majors, or the foreign
firms themselves set up subsidiaries. Meanwhile, many of the fore¬
igners in the more traditional industries sold their holdings to Indians.
Thus there was a change in the nature of foreign control on Indian
industry from the mid-1950s onwards. Foreign private capital was
supported by the obligatory use of a part of the PL 480 loan funds for
promoting American enterprise, and by the setting up of a new term¬
lending institution, the Industrial Credit and Investment Corporation
of India, with funds from foreign agencies, and with the specific
objective of extending credit to firms with foreign collaboration.
Contradictions between the interests of foreign capital and those of
Indian capital rarely induced the Indian bourgeoisie to make common
cause with ordinary people in fighting imperialist penetration (see
Bagchi, 1973a; and Patnaik, 1972a). The official reluctance of the
Western bloc countries and the World Bank to aid public sector
projects and the willingness of the Soviet Union in the atmosphere of
Cold War diplomacy to provide the assistance needed initially limited
penetration of the public sector by foreign capital. But, even in that
early stage, two steel plants were constructed for the public sector by
German and British steel-making firms. Public sector plants in
technology-intensive fields came more and more to depend on foreign
private capital (and in some fields, on Soviet bloc technical and
financial assistance) and accepted the restrictions imposed by their
foreign collaborators. (These restrictions included a limitation on the
area to which the outputs could be exported, a ban on licensing of the
 Planning for capitalism
234
technology to any third party, a reversion of all blueprints, designs,
etc., to the technology-supplying firm at the expiry of the agreement,
and a virtual ban on R & D by the Indian firm without explicit
permission from the collaborators).
From 1964 onwards, private companies producing consumer goods
suffered from a recession. At the same time, the capital goods industries
in the public and private sectors experienced a massive decline in sales,
because the demand emanating from agriculture or small-scale
industries was not nearly enough to compensate for the shortfall of
demand from large-scale industry and government. (By contrast, in
China, the growth of demand for capital goods by agriculture and
light industry has been so fast that industrialization of the villages has
been necessary in order to cope with it.)
In chapter 6, we have already touched upon some of the problems of
rural social transformation in third world countries, including India.
When the Rockefeller Foundation was trying to render Mexico safe for
the ‘free world’ by helping to breed high-yielding varieties of wheat,
the Ford Foundation was extending its influence in the Indian
countryside with the help of the so-called Community Development
programmes. (The latter were, in fact, programmes for further
commercialization of agriculture and for channelling funds to the
rural upper classes.) The Indian government’s eagerness to obtain
food aid gave the American government and its agencies a wonderful
opportunity to penetrate Indian agriculture and agricultural educ¬
ation in a massive way. It sent experts to agricultural colleges, to
agronomy departments of universities and helped set up new agricul¬
tural universities (see, for a vivid description of the activities of
American agencies in these directions in India, Galbraith, 1969; see
also George, 1977, chapters 3-5).'
The major thrust of American-inspired Indian policy in the field of
agriculture was ‘technology first’. Land reforms, which had been
already stalled by the resistance of landlords and big farmers, were
practically shelved in the 1960s. The spread of the ‘Green Revolution’
in wheat, and to a lesser extent in paddy, helped to raise outputs above
the disastrous levels of 1965-66 and 1966-67, but it is doubtful
whether it raised the trend rate of growth of output. In any case, in most
parts of India, the Green Revolution failed to raise the incomes of the
rural poor. In many parts real earnings of agricultural labourers and

1 Galbraith’s book also provides ample testimony to the extent to which American
diplomats and agency personnel, Indian civil servants, Indian businessmen, and Indian
technocrats were hand-in-glove to increase foreign influence in various fields.
Planning for capitalism
235
poor peasants may have been lower at the beginning of the 1970s than
in 1960-61 (see the studies of Punjab, Uttar Pradesh, Bihar and Tamil
Nadu by I. Rajaraman, R. Nayyar and C. T. Kurien, in 1LO, 1977).
Thus the Green Revolution tailed to resolve the market problem of
private industry (see also chapter 6 above).
The contradictions in the planning process revealed by the develop¬
ments in the mid-1960s, the growth of private enterprise under the
stimulus ol protected markets and massive public expenditure and
subsidy programmes, the further growth of monopoly houses dominat¬
ing the industrial sector and the dependence on foreign capital and
technology led, for a time, to a demand by the Indian ruling classes
that planning should be given a low priority. The officially declared
‘plan holiday’ for the three years of 1966-67 to 1968-69 was partly a
response to this demand.
1 he plan holiday plus the devaluation of the Indian rupee in 1966,
however, failed to resolve the crisis of the Indian economy. Reasonably
satisfactory harvests from 1967-68 onwards did not answer either.
Capital and basic goods industries such as engineering and iron and
steel - often owned by the state - had to seek markets abroad.
Recession in the economy helped in the growth of exports of some types
of manufactured goods. When the demand for capital goods produced
by public sector enterprises declined, they also had to try to export
their products (often at prices that were below world levels). Some of
them went into partnership with firms from advanced capitalist or
socialist countries for executing projects in other third world countries.
Recession accentuated the process of concentration of economic power
in private industry. The rate of private investment remained low, even
through huge subsidies in the form of low-interest loans from banks,
and various export incentives were made available to all types of
industrial enterprises. Foreign private capital in new industries came
out a clear winner during the pocess of recession, and transnational
corporations and their Indian collaborator made huge profits.
The crisis of the economy was deepened by an inflationary spiral
which reached its peak in 1974-75. After the adventure of Bangladesh
was over in 1971, there were no more spectacles to make the
Indian people forget their daily struggle for existence. A sense of
insecurity generated by repeated countrywide strikes of workers and
rural class struggles led Prime Minister Indira Gandhi to declare an
emergency in June 1975, and people’s freedoms were severely
curtailed. Although her government continued to pour out populist
slogans, foreign capital was made more welcome than it had been in
the early 1960s. In a reversal of fortune through a major miscal-
236 Planning for capitalism

culation by Mrs Gandhi, a regime which was more openly committed

to private enterprise and the Western bloc (although it also preached
nonalignment) came to power in 1977. But that regime also faced the
problem of sluggish growth in industrial production and investment. It
broke up through contradictions among the ruling partners and
Indira Gandhi came back to power.
These political changes have not altered the basic factors keeping
the rate of growth - particularly industrial growth - low and the mass
of the people abjectly poor. Private investment remains sluggish,
because of the narrowness of the home market, and because of the
inability of Indian industrialists to compete with transnationals and
their subsidiaries in the world market. The Indian government is now
deliberately encouraging a greater degree of involvement of Indian
capital with external markets and is making welcoming gestures to
foreign capital and technology. This is being done while retaining
slogans about removal of poverty. The more predatory sections of
capitalists who have done well in some new products or in speculative
activities are being given their head, and it is intended to diffuse
capitalist (and capital-intensive) agriculture, which was earlier con¬
fined to a few regions, throughout the country. Public sector
organizations are urged to make more profits, and this often means
making them more dependent on foreign technology. Artificial
expansion of the home market is sought through expansion of public
expenditure, and massive subsidies are provided to encourage exports.
Anti-monopoly measures have been practically shelved, and there are
few effective programmes for redistributing incomes. What is intended
through such measures is a boost for industrial growth on the basis of
more exports (including exports of foodgrains, if possible), without
removing the patronage enjoyed by Indian large-scale industry. This
kind of dynamism will almost certainly require more repressive
measures for keeping labour in line, and for checking any popular
unrest that might result from squeezing the living standards of the
ordinary people. In today’s world, such a two-pronged strategy
combining populism and authoritarianism and more state inter¬
vention and a greater degree of involvement in the world capitalist
network may be blessed by both the Soviet and the OECD blocs - the
former, for the sake of greater power for the Indian state (as a
balancing force against China) and the latter because of their
solicitude for private and, especially, transnational, enterprise.
Some problems in the fields of technology and product choices faced
by third world countries (including India) are dealt with in a later
section (see also Bagchi, 1978).
Planning for capitalism
237

9.4 PLANNING AND REGIONAL INEQUALITY

IN PAKISTAN

Capitalism has a tendency to produce uneven development between

regions within a country as well as between countries. Once growth
along capitalist lines begins to take place in particular regions and
particular locations, they tend to attract resources away from other
regions. Capital gravitates there and a local capital market springs up;
growth of certain industries creates demand for the outputs of ancillary
industries and also generates demand for consumer goods through the
familiar multiplier effects. Public funds —and, more rarely,
private — are devoted to the creation of various types of infrastructure
facilities such as roads, ports, railway lines, hospitals, power stations
and educational institutions. A skilled labour force springs up at the
nodes of growth. The growing regions tend to attract the capital, and
the young, skilled and enterprising persons from other regions. These
tend naturally to have adverse effects on the latter regions (Gunnar
Myrdal h as termed these ‘backwash effects’; see Myrdal, 1957).
It has been claimed that, in advanced capitalist countries, after
industrial growth has proceeded far enough, the ‘spread effects’ of
industrialization begin to overcome the backwash effects even in the
lagging regions. In the initially advanced regions, the cities and the
suburbs become overcrowded, the wages of skilled and unskilled
labour rise steeply, and the costs of urban renewal become astronomi¬
cal. As a result, the more backward regions eventually appear to be
new frontiers. The flows of capital and skilled labour begin to lap the
neglected shores again, and backwardness tends to get eradicated over
time (see Williamson, 1965). Doubts have been expressed as to
whether this is an adequate characterization of regional equalization
in advanced capitalist countries even today: Northern Ireland is only
a notorious, but not the lone, example of regional backwardness in an
advanced capitalist economy.
Be that as it may, as far as the third world is concerned, the story of
eventual equalization as between the ‘advanced’ and ‘backward’
regions still remains a fairy tale. The advance of the advanced regions
in such countries remains rather limited in most cases. The ports
remain advanced in relation to the vast hinterland but, compared with
the affluent capitalist countries, they develop slowly at best. For, much
of the investible resources of the littoral areas are drained away as
profits of foreign capital, and the non-investing rich squander a major
part of the residual in conspicuous consumption. In the advanced
agricultural regions of the third world also, capitalist farming grows
2g8 Planning for capitalism

only fitfully (cf. chapter 6 above). Nonetheless, a tendency to create

man-made deserts out of temporarily prosperous hinterlands is
noticeable in most large third world countries (witness the tragic case
of the Brazilian North-east).
In the Indian subcontinent before independence, the whole of
Pakistan could be regarded as industrially backward. In the West
wing of the new country, Punjab and Sind were agriculturally
advanced because of the large-scale irrigation works and because of
the relatively large-sized farms which produced wheat and
cotton - mainly for export or consumption in other parts of India.
This region had relatively widespread small-scale industries and
handicrafts, but few large-scale factories. When, in 1947, Pakistan was
carved out of British India, less than half of the population of the newly
created political entity lived in West Pakistan. However, the upper
stratum of the less populous West wing dominated the whole country
and effectively constituted its ruling class. Several factors combined to
increase the disparities between the two wings (see Lewis, 1970; Griffin
and Khan, 1972). First, it was at Karachi (in West Pakistan) that the
decisions about import control and investment allocation were
taken, and these decisions tended naturally to be biased in favour
of the West wing. Secondly, with the migration of the Hindu mer¬
chants and industrialists from Pakistan, and the influx of Muslim
trading communities primarily into West Pakistan, the West Pakistani
traders emerged as the dominant elements in Pakistan’s trade and,
later, in her industry. Thirdly, with an earlier base of large-scale
irrigation works and with lavish government subsidies for private
investment, agricultural output increased fast in the West while it
stagnated in the East. Fourthly, West Pakistan also received a dis¬
proportionately large share of public investment, including invest¬
ment in defence installations. Pakistan had a large balance of
payments deficit in the sixties, which was financed by an inflow of
foreign assistance. This in turn formed a large proportion of public
investment. Hence West Pakistan also appeared to receive the lion’s
share of foreign aid.2

2 Taking the balances of trade of the two wings separately, we find that East Pakistan
had a positive balance with the external world (excluding West Pakistan) throughout
the period from 1950/51 to 1964/65. Because the import-substituting consumer goods
industries (mainly textiles, footwear, etc.) grew up in West Pakistan under the umbrella
of protection, East Pakistan had a deficit in balance of trade with the west wing. She had
a net balance of trade surplus up to 1959/60, and even during the Second Plan period
(1960/61 — 1964/65) she had an overall deficit of only Rs. 383.4 million. As against that,
West Pakistan had net deficits in balance of trade in each of the three periods,
'95°/5' ~ 1954/55* '955/56 - '959/60 and 1960/61 - 1964/65 amounting to Rs. 200.3
Planning for capitalism
239

Pakistan's economic policy throughout had an explicit bias towards

private enterprise. This had the effect of rapidly enriching the trading
and landlord classes. The system of tariff protection, licences for import
of goods and for the use of foreign exchange, even the schedule of
approved investments (which was not rigorously adhered to) and the
links between the bureaucracy, army and the top businessmen all
favoured a siphoning of resources into the coffers of the established
business groups and of businessmen with connections. (The rise and
growth of Gandhara Industries, controlled by ex-President Ayub’s
family, is the most notorious - but by no means isolated - example of
the tie-up of business fortunes and careers in the army and the
bureaucracy.) The government floated the Pakistan Industrial
Development Corporation, whose task was to promote industrial
enterprises and then transfer them to the private sector, wherever
possible. Since Pakistan had started out with a weak capitalist class
(Bagchi, 1972a, chapter 14), that class had to seek a coalition with
landlords, bureaucrats and military top brass, in order to aggrandize
itself. Objectively speaking, the other ruling classes could not preserve
themselves without pursuing a basically capitalist goal either. (The
position of the Pakistani capitalist class is perceptively discussed in
MacEwan, 1971.)
Once the authoritarian coalition of the ruling classes was achieved,
the Pakistani capitalists, mainly based in West Pakistan, did not look
back. Since members of the upper classes of West Pakistan headed the
army and the bureaucracy, this concentration of effective power
ensured that there should be no business houses of any significance
based in East Pakistan. (On the concentration of economic power in
Pakistan’s trade and industry, see White, 1974, and Amjad, 1977.) For
very similar reasons, and because of a pre-existing infrastructure of
widespread canal irrigation, resources for development of agriculture
were also channelled primarily to the landlords of Punjab and Sind.
Because Flindus had been the main landlord class in East Pakistan,
their exodus had helped to alleviate the problems of landlordism there.
In West Pakistan, however, the landlords were mainly Muslims and
were virtually unaffected by the derisory land reforms decreed by the
government (see Naseem, 1977). Hence the expenditures incurred by
the government on irrigation, supply of fertilizers and other farm-
inputs at subsidized rates mainly benefited the large landlords and
farmers in the West wing.

million, Rs. 908.7 million and Rs. 1,915.5 million respectively (see Lewis, 1970, table
6.4). So, objectively speaking, East Pakistan received little foreign aid until 1964/65.
2^0 Planning for capitalism

The outcome of all this is reflected in the balance between saving

and investment in the two wings (Griffin and Khan, 1972). In order to
estimate the saving rates, and take care of the overvaluation of the
currency, the exports and inflows of capital have to be valued at a
premium. We have already indicated (see p. 238 n. 2) that, in the
period up to 1964/65, most of the aid was being used in West Pakistan,
and the more rural and poorer East Pakistan was in effect being forced
to subsidize the industrialization of the West wing. In the four-year
period 1964/65 to 1967/68, the picture did not change much. Again
West Pakistan ran up a large import surplus with the rest of the world
but a large export surplus with East Pakistan; whereas East Pakistan
had only a small import surplus with the rest of the world. Officially,
investment in East Pakistan was estimated at only 35 per cent of
national investment.
The nominal savings rate (as a percentage of regional product) and
the nominal ratio of capital inflow to regional investment in the two
wings over the period from 1964/65 to 1967/68 are indicated below
(Griffin and Khan, 1972, pp. 194-5):

East Pakistan West Pakistan

Nominal savings rate 10.2 9-4
Ratio of nominal capital
inflow from abroad to 17-i 48.8
nominal investment

After making several adjustments for currency depreciation, Griffin

and Khan arrived at the following figures:

East Pakistan West Pakistan

True savings rate 11.4 5-1
Ratio of true capital inflow 15-7 74-5
to true investment

These figures bring out the degree of dependence of West Pakistan

on the inflow of foreign (mostly official) capital, and the massive
proportions of the transfer of resources from East to West Pakistan.
Under the military - bureaucratic regime of Pakistan, this transfer led
to growing disparity between the two regions, whose per capita
Planning for capitalism 241

incomes were already different at the time of independence. And just

when, with the record of rapid industrialization through import
substitution in consumer goods, expanding exports of agricultural
goods and simple manufactured consumer goods and rapidly expand¬
ing agricultural output in West Pakistan, Pakistan was becoming the
favourite success story of the World Bank, USAID and the Harvard
Development Advisory Service, the country was involved in a popular
struggle which first led to the overthrow of President Ayub and then to
the secession of East Pakistan which emerged as the new country of
Bangladesh.
The overthrow of Ayub and the independence of Bangladesh did
not solve the basic social problems either of West Pakistan (now
Pakistan) or Bangladesh. In the West, the Green Revolution led to a
worsening of income distribution in the countryside, and growing
landlessness. In spite of ex-President Bhutto’s symbolic gesture in 1972
of nationalizing ten industries (where government ownership and
control was already significant) and arresting two top industrialists,
the degree of concentration of economic power in Pakistan remains
very great indeed. (Although comparisons are difficult, it is probably
greater than in India; see White, 1974, chapter 4.) Real wages in
Pakistan’s industry have hardly risen; the experience is very similar to
India’s where the rate of industrial growth was much lower in the
decade 1965—74. Within the new territorial limits of Pakistan, the
regional disparities between the conurbation of Karachi and the
province of Punjab on the one hand, and the rest of the country, on the
other, remain very great, and are believed to be even more extreme
than the disparity between East and West Pakistan before 1972
(Naseem, 1977). These regional tensions, and the class struggles in the
countryside and in the industrial areas have led repeatedly to the
suspension of civil liberties, culminating yet again in the imposition of
military rule in 1977.
In Bangladesh, things have developed in an even more cataclysmic
fashion, if that is possible. Under West Pakistani hegemony, local
bourgeoisie and managerial expertise had remained weak. Without
any socialist perspective and without any changes in the class structure
nationalization of enterprises belonging to West Pakistanis led to a fall
in the output and investment of those enterprises. In the villages, the
income distribution was already worsening in the late 1960s, and this
process probably continued thereafter. According to the calculations
of A. R. Khan (1977a), by 1975, 61.8 percent of the rural population
in Bangladesh could be classed as absolutely poor, and 41.0 per cent as
2^2 Planning for capitalism

extremely poor.3 Real wages in the countryside displayed a steady

downward trend. All these unfavourable developments in the eco¬
nomy and the heightened consciousness of the people who had recently
won independence led to repeated political struggles and the
ruling classes resorted to extreme measures of repression to con¬
tain these struggles. (For a moving testament of one of the leaders
of the struggle, see Lifschultz, 1977.) The identification of the first post¬
independence regime of Mujibur Rahman as being pro-Russian and
pro-Indian made it easy for the later military regime of Ziaur Rahman
to drag Bangladesh closer to the Western bloc. There has also
been an attempt to denationalize many of the industrial enterprises
and hand them over to the private sector. The experience of
Bangladesh again suggests that, in the absence of a social revolution,
creating a public sector from the top and adopting anti-capitalist
postures is no way of moving towards socialism and a planned
economy. In fact, the interest of retarded capitalism and neocol¬
onialism is well served by the debasement of socialist slogans in the
mouths of populist leaders.

9.5 A PAMPERED CAPITALIST CLASS, AN INADEQUATE

RATE OF INVESTMENT AND AN INAPPROPRIATE
TECHNOLOGY BASE

After two decades of planning in major third world countries, the rate
of growth of output remains low and that of employment is even lower.
In country after country, industrial employment has grown more
slowly than output, and sometimes more slowly than population. At
the same time, the Green Revolution has often aggravated the
problem of providing employment for the rural masses, since it has
converted disguised into open unemployment (see chapter 6 above).
One of the major obstacles to development has been the character of
the techniques of production that have been embodied in new
investment in agriculture and industry (see Sen, 1968, and Bagchi,
1978). These techniques have mostly been borrowed from advanced
capitalist countries and have demanded a very large amount of capital
per man employed. Moreover, the structure of employment generated
by the new investment has been characterized by a higher-than-

3 Khan considered the FAO norm of 2,150 calories per day per person as
unrealistically high. He took 90 per cent of this (i.e. 1,935 calories) as indicating a level of
intake below which people were ‘absolutely poor’, and 80 per cent of the recommended
intake (i.e. 1,720 calories) as indicating a level below which people were ‘extremely
poor’.
Planning for capitalism
243

average share of supervisory personnel to other manpower and by a

higher-than-average proportion of purely administrative and clerical
labour to productive labour. In India, for example, not only did the
share of wages in industrial value added tend to fall over time (Shetty,
1973) but the share of the wages ofproduction workers to the salaries of
non-production workers also fell (Sethuraman, 1971). These effects
were produced by a rise in the weight of industries with lower-than-
average shares of wages and salaries to net value added and of wages of
production workers to salaries of non-production workers, and by an
increase in the proportion of managerial salaries and capitalists’ profit
in almost all industries. There was also a steep rise in the
capital-labour ratios in industry.
In agriculture, the use of farm machinery (such as tractors,
mechanical harrows, harvesters, etc.) and of increased doses of
intermediate inputs, such as fertilizers and pesticides, has meant a rise
in the capital-labour ratios in the pockets undergoing Green
Revolution. Hence the employment generated by a given value of
investment (measured at constant prices) has steadily decreased over
time, so that greater and greater effort is needed to make a dent on the
unemployment situation.
The causes of these developments have been identified as: (a) the
low rate of interest at which large or medium industrial firms and
business houses have been able to borrow from banks and from term¬
leading institutions specially set up by the government; (b) the
specially favourable terms on which capital goods have been imported
from abroad in many countries; (c) the special treatment meted out to
investment in fixed capital for tax purposes (see Khan, 1970). For
example, in Pakistan, while the average profit rate was roughly 30 per
cent in the large-scale industrial sector (Haq, 1963, p. 41), the
weighted average of interest rates on bank advances during the years
1960-67 was between 5.28 and 7.34 per cent (Khan, 1970, p. 200).
Effective profit rates in large-scale industry and the rates of interest at
which loans could be raised by industry and large-scale commerce
differed greatly in India as well as in Pakistan. Capital goods were
imported into Pakistan at a specially low tariff rate (amounting to
about 15 per cent of value), and, since the currency was overvalued by
anything between 50 and 100 per cent, the import of capital goods at
official exchange rates was especially profitable. Finally, the system of
taxation in India and Pakistan was weighted in favour ofinvestment in
fixed capital because of a whole paraphernalia of tax exemptions on
new investment, investment allowances and so on.
In Turkey also, an overvalued exchange rate, tariff concessions on
244 Planning for capitalism

imported capital goods or spcial facilities for payment of import duties

on capital goods, income tax exemption for investment in fixed assets,
accelerated depreciation for industrial investments and concessional
terms for loan specified projects - all favoured the use of
capital-intensive techniques in industry. Ongut (1971) examined two
projects for the manufacture of matches. One would employ 600
workers and labour-intensive methods for producing a given number
of matches (Project 1). The other would employ automatic machinery,
and only 106 workers for producing about the same output, but the
cost of capital would be 50 per cent more (Project 11). With the existing
incentives, and at the official exchange rate, Project 11 had a higher
present value than Project 1. But if the incentives were withdrawn,
Project 1 would have considerably higher present value than
Project 11 (Ongut, 1971, p. 680).
While the factors mentioned definitely create a bias in favour of the
use of capital-intensive production methods, to regard them as
‘distortions’ in the factor market or in the foreign exchange market,
whose correction will lead to the adoption of more employment¬
generating techniques or products, is misleading. For a start, some of
those distortions are the very essence of planning for building up
capitalism in retarded economies with relatively weak capitalist
classes. Elimination of some of these distortions does not guarantee the
adoption of techniques or products generating enough employment.
For example, Argentina has not allowed the import of capital goods on
favoured terms. Yet, in that country, industrial employment actually
Jell steadily over the period 1955-64 (Epstein, 1975).
In a capitalist economy, controllers of large volumes of capital will
have access to credit on particularly easy terms. Again, capitalists will
divert capital somehow or other to uses which are highly profitable,
even if they are considered undesirable from a social point of view. In
India, under the assumption that easy terms of lending would lead to a
high rate of investment, a system of institutional credit was operated
practically throughout the 1950s which tended greatly to favour large
borrowers. Then it was found that a large fraction of the loans was
being used to support speculation and inventory build-up and feed the
forces of inflation. At first, the situation was sought to be controlled
primarily by curbing lending for avowedly commercial purposes.
However, this merely led to increased borrowing in the name of
financing industrial production and investment and to the build-up of
stocks in support of price-escalation. In the late 1960s, when
industrial production was stagnant or on the decline, bank loans to
industry were rising by large percentages (Dehejia Committee, 1969).
Planning for capitalism
245

Greater controls over bank lending and a steep rise in their lending
rates have not led to a reversal of the trend, and bank loans to industry
continue to rise faster than industrial output (Ghosh, 1979, chapter
!3)-
But apart from the feasibility of correcting the so-called distortions
of the market, it is erroneous to identify such distortions as the primary
causes of the capital-intensive nature of production techniques. The
primary causes have to do with the antinomies of capitalist develop¬
ment, of which the above-mentioned distortions are only symptoms or
offshoots (see chapter 2 above and Bagchi, 1978). When capitalist
colonialism invaded the third world, it caused de-industrialization and
destroyed traditional skills. No new skills developed on any scale to
replace the old ones. Other bases for the development of an indigenous
technology, or a technology that is imported from abroad but is
rapidly adapted to local conditions, were also lacking. Formal
education was woefully inadequate, capital goods industries, which
have often served as centres for diffusion of new equipment and skills
hardly developed, and links between different sectors of the economy
were weakened rather than strengthened. These sectors became
adjuncts of the world capitalist network. When attempts at in¬
dustrialization began, techniques were imported from abroad. And
the rich demanded the new luxuries which were developed in the
advanced capitalist countries. Naturally the new techniques were
highly capital-intensive, and the products absorbed on unduly large
proportion of the nation’s capital, skill and foreign exchange.
Attempts were made to provide the missing links in the process of
learning required skills, adaptation of imported techniques to local
needs and innovation of new skills. But the logic of dominance inherent
in capitalism and the inherited patterns of retardation continually
snapped these links.
For example, in the Punjab (Pakistan), an industry grew up on the
basis of repair of farm equipment and manufacture of the simpler kinds
of tool. However, the subsidized import of tractors and other farm
equipment threatened this industry (see Child and Kaneda, 1975).
Were the government to discontinue such a policy, even then,
Pakistani industrialists would probably have to seek the help of foreign
firms, when they wanted to manufacture more sophisticated types of
equipment. For the patents and knowhow in most cases are monopo¬
lized by transnational firms based in advanced capitalist countries. So
long as Pakistan adheres to private property rights nationally and
internationally, the scope for choice must remain very limited.
Would the development of a base for capital goods industries help
246 Planning for capitalism

overcome these problems of interrupted or truncated learning pro¬

cesses, and blockages in the diffusion of industrial skills and equip¬
ment? So long as the logic of capitalism operates, large firms would
generally enjoy an advantage over small firms struggling to develop
their skills and capital. In Brazil, the capital goods industry is
dominated by foreign enterprises. In India, in the manufacture ofiron
and steel, and electrical equipment, public and private sector firms
have sought the collaboration of either transnationals or of countries of
the Soviet bloc. India’s need for such help and her failure to provide
the conditions for a rapid growth of the basic and capital goods
industries (see section 9.3 above) have sapped her bargaining strength,
and many obstacles have impeded the processes of learning and
diffusion (for surveys of foreign collaboration agreements in the public
and private sectors in India, see RBI, 1968, 1974).
In advanced capitalist countries, the capital-intensive techniques
have had as their basic rationale not only the substitution of
(increasingly expensive) labour by capital but also the control of labour
by management and capital. Capital goods, industrial processes, and
managerial methods have been designed to increasingly eliminate the
participation of the workers in production as autonomous beings.
Craftsmanship or creative adaptation has been taken away from the
workers, and the functions of research and product development have
been concentrated in laboratories manned by specialized personnel
(Braverman, 1974)- When the manufacturing process is transplanted
from advanced capitalist countries to a third world country with
foreigners retaining control, the control of the workers by the
management is transformed into the dependence of the host country
on the transnationals (or in some cases, on Soviet bloc countries). Even
if foreigners are not in formal control, they can retain the design or
construction of the plant in their own hands, and they can arrange for
supply of intermediate inputs from their other installations and
associate enterprises abroad. Explicit restrictions on research and
development and independent product diversification by the third
world collaborators are also often imposed.
Of course, R & D efforts, with the existing product-mix and the
existing pattern of dominance of foreign enterprises, will often have
but a marginal significance. For the types of techniques and products
they have developed, the advanced capitalist countries, led by the
USA, enjoy a head start and stupendous economies of scale. Trying to
beat them along the same lines might be a Sisyphean task. Even if
genuine research is undertaken in order to build a base of national
information and adaptation generally, it gets caught up in the
Planning for capitalism 247

existing relations of dominance and their results are largely nullified.

Thus, in Turkey, a national research organization was set up to
promote scientific research. But it was found to be really subsidizing
university research that was simply an adjunct to research in similar
fields in advanced capitalist countries, or technological development
that subserved the transnationals dominating the technology¬
intensive fields (Cooper, 1974).
All this is not to say that even within the present structures of third
world countries there is no advantage to be reaped from well-directed
research or that no adaptation of techniques to local conditions ever
takes place. Where there is scope for economizing on costs by easy
substitution of cheap labour for capital, private entrepreneurs do
adopt labour-intensive methods. This is particularly true of ancillary
operations such as lifting, and transport of things from one part of the
factory to another. In some countries, such as Argentina or India,
some research is directed even towards the adaptation of techniques to
local conditions. It has been claimed in the case of Argentina that
‘local expenditure on research and development has a significant effect
at the margin upon the observed rate of technological change’ (Katz,
1973, p. 212). However, ‘most of what is presently going on in terms of
local “technological effort” takes the form of “adaptive” R & D
expenditure, whose major purpose is that of supporting a “product
differentiation” game typical of oligopolistic confrontations. The
larger part of these efforts are carried out, and their benefits
appropriated, by local subsidiaries of large multinational corpo¬
rations’ (Katz, 1973, p. 221).
In spite of all these caveats, some independent research either by
government financed laboratories or by public sector organizations
with a large enough base will be beneficial for finding out adaptations
that are less costly than foreign imports. Some R & D is necessary in
order even to know what to buy from foreign sources in the way of
technology and machinery, and in order to bargain effectively. The
research carried out by Constantine Vaitsos (1974) and his associates
into the real magnitude of the profits realized by foreign companies in
the form of transfer prices for imported materials has apparently been
used by Andean Pact countries to impose certain norms on payments
to foreign subsidiaries operating in such countries.
While a deliberate policy of encouraging research into relevant
technology may minimize foreign control of technology, the history
and structure of third world economies inhibit the widespread use and
development of appropriate technologies, that is, technologies that
generate employment and incomes for the poor people and can supply
248 Planning for capitalism

them with the bare necessities of food, clothing, medical treatment,

housing and education. Different sectors of a typical third world
economy are currently linked more with the world capitalist system
than with one another. When, sometimes, a link is established between
two sectors (such as agriculture and a local equipment-manufacturing
industry), it is again snapped by the entry of large firms buying many of
their inputs directly and indirectly from abroad. Imperialist organi¬
zations and transnational corporations are constantly on the look-out
for products and techniques that can be introduced into the third
world and used as profit-making and control instruments (see George,
1977, chapter 5-7, and chapter 6 above).
In the same way, world capitalist development renders many skills
obsolete and they are not automatically replaced by the development
of new skills. Advanced capitalist countries play a dominating role in
designing jobs and the workforce, and workers are rendered more and
more impotent in the face of techniques that dominate them. (In this
connection, the controversy as to whether foreign or local enterprises
are better at adapting techniques to local conditions seems to be of only
marginal significance, for both groups follow highly alienating
techniques, and adaptation takes place only in peripheral occu¬
pations.) The educational system is also generally geared towards the
production of a small group of rulers for the class-riven society, and of
scientists and technicians whose expertise can usually be utilized only
in operations and enterprises characterized by techniques developed
in advanced capitalist countries. Any new type of skill or innovation
developed by a minority cannot support a movement towards an
autonomous technological development, because the market-
dominated society cannot protect these innovations or skills against
take-over or subversion by large indigenous or foreign-controlled
capitalist organisations.
What applies to sectors, techniques, skills and innovations in the
way of risk of domination or subversion by the international capitalist
network, also applies to products. It has been said that the major
problem is not so much that the usual techniques are inappropriate to
the third world as that products themselves are inappropriate (Stewart
and Streeten, 1973). In particular, the products sold are over¬
sophisticated and cater essentially to rich men’s needs. While this is
true, recommending a change in the product-mix as such does not take
us very far. So long as there are rich men in the third world keen to
imitate the life-styles of their peers in affluent lands, there will be a
financial incentive for selling these products to them. These products
will then be produced, if necessary, behind tariff and quota barriers.
While foreign or indigenous firms can make a profit by producing
Planning for capitalism 249

white bread and are permitted to subvert the tastes of the poor (as well
as the rich) through costly sales campaigns, it will be difficult to
prevent the gradual elimination of brown bread, un-leavened home¬
made bread, or bread made with so-called ‘inferior cereals’ (which are
often more nutritious than high-yielding varieties of wheat). The only
way to change the product-mix ultimately is thus to change the social
structure and eliminate private profit-making at the cost of society as a
whole. This is, of course, something that planning for capitalism has no
use for.

9.6 EPILOGUE : PLANNING FOR CAPITALISM CAN ONLY

RE-PRODUCE THE CONTRADICTIONS OF CAPITALISM

That ‘planning’ as such has nothing to do with socialism or an

egalitarian order of society became clear when Turkey followed the
Soviet Union in formulating five year plans. One of the first
proponents of planning in India, M. Visvesvaraya, wanted planning
in order to encourage private enterprise. When the most influential
Pakistani economist in the authoritarian regime of President Ayub
wrote a book explaining the rationale of planning, he made it brutally
clear that reducing inequality was not the major objective (Haq,
1963, chapter 1). Maximizing the surplus and the rate of growth was
the main goal for him.
Maximizing the surplus in the hands of the rich in the third world is
not, however, necessarily a way of maximizing the rate of growth. For,
much of the surplus is consumed by the rich, some of it is invested in
enterprises which are too small by the standards of world capitalism,
some of it is wasted through cyclical movements, some of it is sent
abroad openly or clandestinely both by rich natives and by foreigners
and some gets hoarded or diverted to unproductive uses because the
capitalists do not have access to the technology that is profitable.
Besides those quoted already, other sophisticated models for planning
in third world countries have been constructed. For Pakistan, for
example, MacEwan (1970) explicitly tackled the problem of in¬
terregional allocation of investment over the period from 1964/65 to
1974/75. He postulated the objective of leading the economy to the
highest possible consumption path by 1974/75- ^he recognized
constraints were shortages of investment funds and foreign exchange
earnings, and limited agricultural growth possibilities. The optimal
solution was found to involve a reduction in disparity of per capita
consumption and a transfer of capital from West to East Pakistan.
Exactly the opposite happened, for the political and economic forces
operating in Pakistan ordained it that way. Thus MacEwan’s study
2^0 Planning for capitalism

remained a purely academic exercise, and for a more realistic

assessment of what was likely to happen we have to turn to his exercise
in political economy (MacEwan, 1971).
In yet other cases, planning studies have been aimed at rationalizing
aid programmes and policies pursued by various agencies of the
advanced capitalist countries. Thus a series of‘planning’ studies on the
Chilean economy were sponsored by the ODEPLAN of the Christian
Democratic Government of Frei and the Centre for International
Studies of MIT, and were published after Allende’s government had
been toppled by the military coup of General Pinochet (Eckaus and
Rosenstein-Rodan, 1973). Some of the studies take the aim of closely
integrating the third world economies with the major forces of world
trade and investment as an explicit goal. The method of cost — benefit
analysis propagated by Little and Mirrlees under the auspices of the
OECD and World Bank is best regarded in this light (see, Layard,
1972). The Little-Mirrlees method takes ‘border prices’ or world
prices as the norm for computing the costs and benefits. However, the
prices of products sold and bought by third world countries are greatly
influenced by such ‘non-competitive’ factors as virtual monopsony in
the sales outlets controlled by advanced capitalist countries, oligopoly
in most of the technology-intensive manufacturing industries, various
arrangements for tying of aid, and sheer lack of access of third world
buyers and sellers to relevant information. Moreover, a very large
amount of guesswork is needed to find the relevant prices for non¬
tradable goods and services, which account for about 50 per cent of
total costs. Thus the Little-Mirrlees method even loses the virtue of
definiteness (see for example, ICICI, 1975). The application of this
method and other similar methods to derive shadow wages which turn
out to be generally lower than market wages also serves the purpose of
rationalizing the extremely low wages paid to labour by highly
profitable enterprises including transnational corporations (for
examples see George, 1977, chapter 7).
The use of planning in third world countries to promote dependent
capitalism may also be seen in the scramble for aid on the part of most
countries apparently attempting to reach self-reliance, even though
‘aid’ generally inhibits efforts at gaining autonomy. Indeed, planning
exercises are often carried out to make out a case for more aid from the
World Bank and its soft-interest affiliate, IDA, the US government
and other members of the OECD. Planning aimed at reinforcing
capitalism in third world countries can only reinforce the tendency
towards retardation as analysed in the earlier chapters.
A GUIDE TO FURTHER READING

Many of the basic books and articles used in writing this book have been listed
in the relevant chapters and are collected in the list of references at the end of
the book. Students will benefit by consulting those references directly. The
following notes are meant to indicate to the students the kind of sources he has
to consult if he wants to go more deeply into particular questions that are dealt
with in a summary fashion in this book. The references cited here are
supplementary to, and not substitutes for, the references already listed. These
supplementary references cannot act as a full bibliography, and are no more
than a guide.
The appropriate framework for the study of societies in general and the
correct way of looking way at the history of human society and the history of
economic ideas, particularly in recent times, are generally debated together.
For Marxist, or, more generally, radical or unconventional, perspectives on
such problems, the following books will prove stimulating and informative to
students:
Althusser, L. 1969. For Marx, London, New Left Books.
Amin, S. 1979. Unequal Development, New Delhi, Oxford University Press.
Anderson, P. 1974. Passages from Antiquity to Feudalism, London, New Left
Books.
Berger, P. L. and Luckmann, T. 1971. The Social Construction of Reality,
Harmondsworth, Middlesex, Penguin Books.
Blackburn, R. (ed.) 1972. Ideology in the Social Sciences, Glasgow,
Fontana/Collins.
Deane, P. 1979. The Evolution of Economic Ideas, London, Cambridge University
Press.
Dobb, M. 1967. Papers on Capitalism, Development and Planning, New Delhi,
Allied Publishers.
Hilton, R. 1976. The Transition from Feudalism to Capitalism, London, New Left
Books.
Meek, R. L. 1967. Economics and Ideology and Other Essays, London, Chapman
and Hall.
Myrdal, G. 1953. The Political Element in the Development of Economic Theory,
London, Routledge & Kegan Paul.
Robinson, J. 1964. Economic Philosophy, Harmondsworth, Middlesex, Penguin
Books.
Wallerstein, I. 1974. The Modern World-System, New York, Academic Press.
Students are encouraged to compare the perspectives on economic thought in

251
252 A guide to further reading

Marx (1963), Dobb (1973) and the books of Deane, Meek, Myrdal and
Robinson listed above with the view propounded in Schumpeter, J. A.
1954. History oj Economic Analysis, London, Allen and Unwin.
For differing, but related views on the evolution of societies and their
organization, see
Dalton, G. 1968. Primitive, Archaic and Modern Economies: Essays of Karl Polanyi,
New York, Anchor Books.
Gerschenkron, A. 1965. Economic Backwardness in Historical Perspective, New
York, Praeger.
Hicks, J. 1969. A Theory of Economic History, London, Oxford University Press.
Work on the histories of third world countries, some of it of very fine quality,
is proceeding apace. On the state of knowledge up to the middle 1960s, the
relevant portions of the volumes of the New Cambridge Modern History are still
very useful. For detailed studies of Latin America, the volumes of the Latin
American Studies series published by the Cambridge University Press, many
of them written by Latin American scholars, are generally of a high quality.
The volumes in the South Asian Studies series of the same publishers (covering
India, Pakistan, Bangladesh and Sri Lanka) are perhaps less uniform in
standard, but most of them embody a considerable amount of new research.
Much of the new work on Indian economic and social history is appearing in
journals or proceedings published in India, such as the Proceedings of the Indian
History Congress, Indian Economic and Social Historical Review, Indian Historical
Review, Bengal Past and Present, Economic and Political Weekly and Social Scientist.
For coverage of work on various aspects of Latin American history and society,
the Latin American Research Review is an essential guide. New journals in the field
are coming out all the time. Two journals worth noticing are Journal of Latin
American Studies and Latin American Perspectives. In the field of African studies
also, several journals have made their mark: Journal of African History, Journal
oj South African Studies, African Economic History and African Social Research.
Some notable attempts have been made to write comprehensive histories of
Asian countries from a radical perspective. Three recent books in this genre are
noted below:
Caldwell, M. and Utrecht, E. 1979- Indonesia: An Alternative History, Sydney,
Alternative Publishing Company.
Chesnaux, J., Le Barbier, F. and Bergere, M. C. 1976. China from the Opium
Wars to the 1911 Revolution, Hassocks, Sussex, Harvester Press.
Chesneaux, J., Le Barbier, F. and Bergere, M. C. 1978. China from the
1911 Revolution to Liberation, Hassocks, Sussex, Harvester Press.
Sarkar Sumit. History of Modern India, Macmillan (forthcoming).
Two of the books on earlier epochs which have profoundly influenced the
writings on modern Indian history are:
Habib, I. 1963. The Agrarian System oj Mughal India, Bombay, Asia Publishing
House.
Kosambi, D. D. 1956- An Introduction to the Study of Indian History, Bombay,
Popular Prakashan.
For radical perspectives on political economy in general (with application
to particular situations and countries) the following journals are worth
consulting: Cambridge Journal of Economics, Capital and Class, Economy and Society,
A guide to further reading 253

Monthly Review, New Left Review, Race and Class, Review of Radical Political
Economics and Science and Society.
For following current economic developments in the third world
countries, there is no alternative to the study of current periodicals concerned
with them. But the following journals may perhaps be singled out as especially
valuable: Comercio Exterior (published in Mexico), CEPAL Review (formerly
Economic Bulletin of Latin America, United Nations), Economic and Political Weekly
(India) and Far Eastern Economic Review. In this book, we have concentrated on
developments in poor capitalist economies. For a good analysis of the
organization of economic life in socialist countries and references to the
literature, see
Ellman, M. 1979. Socialist Planning, London, Cambridge University Press.
The material on the People’s Republic of China, which is a poor socialist
country, and whose development path has often been considered to be a model
for other poor countries, is immense. The following English-language journals
are exclusively devoted to Chinese developments: China Quarterly, Modern
China, and Bulletin of the Society for Anglo-Chinese Understanding. The documen¬
tation section of China Quarterly and Far Eastern Economic Review together
provide an easily accessible base for keeping abreast of policy decisions and
current affairs. The papers compiled by the Joint Economic Committee of the
U.S. Congress and published by it from time to time generally contain a mass
of useful material and analyses on China. Besides, important articles on China
appear in the Bulletin of Concerned Asian Scholars. Journal of Contemporary Asia,
Economic and Political Weekly, and U.S.-China Business Review.
Attempts have been made from time to time to compare and contrast the
developments in India and China, the two biggest third world countries with
contrasting social systems. A useful book-length study of this genre is
Byres, T.J. and Nolan, P. 1976. Inequalities between Nations, Milton Keynes,
The Open University.
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(a) In cases where an old book or paper has been reprinted, the date, within
brackets, after the author’s name, refers to the original date of publication.

(b) Where the place of publication is London, it is not explicitly mentioned;

for all Penguin Books the place of publication is Harmondsworth,
Middlesex, UK.

(c) List of abbreviations used

CUP Cambridge University Press
HUP Harvard University Press
MRP Monthly Review Press
OUP Oxford University Press
PUP Princeton University Press
YUP Yale University Press
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EHR Economic History Review
EJ Economic Journal
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IAEA Inter-American Economic Affairs
JDS Journal of Development Studies
JEH Journal of Economic History
JPE Journal of Political Economy
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OEP Oxford Economic Papers
PS Population Studies
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RRPE Review of Radical Political Economics
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Agra Bank 1875. ^ he Agra Bank Limited, Bankers’ Magazine, vol. 35.

254
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INDEX

Afghanistan, 215-16 Brenner, R., 6-7

Africa, 31, 47-8, 180-1, 211, 213 Britain (and the British), 26, 30, 78-94,
agriculture, 9-10, 54-6, 72-3, 76-7, 86-7, 97-9, 102, 141, 142, 190
107-8, 112-19, 168-9, '71, 173= 175, British-American Tobacco Company, 108
223-5> 234—5; commercialization of, 18, British and Chinese Corporation, 104
85-7. 107-9, 1 34-6i 176-7= 225i 234, Bukharin, N., 29
239; fluctuations in, 131-6, 231. Bunyoro, 8
Algeria, 156, 201 bureaucratic feudalism, 95
Ali, Mohammed, 220
Allegrucci, G., 191 Caltex, 193
Allende, S., 62, 66-7, 250 Canada, 30, 33, 88
Alley, R., iogn. capital stock adjustment, 122
Amerindians, 41-2, 44, 48-52, 56, 59-60, capitalism, bureaucratic, 109-10; con¬
196, 199, 217 tradictions of, 38-40; dependent, 195;
Amherst, Lord, 96 defined, 12; industrial, 14-15; retarded,

Anaconda, 61, 66 '59-

Anstey, R., 44n capitalist classes, 26-31, 77, 87-8, 121, 146,
Argentina, 30, 33, 54-9, 65-6, 131, 186, 190-6, 201, 248; (see also ‘bourgeoisie’)

191-2, 204, 216-17 Cardenas, L., 161-5, '73

Arrighi, G., 184 Caribbean, 25, 44, 193, 204
Ataturk, K., 221-2, 226 Centro International de Mejoramiento de

Australia, 30, 33, 88 Maiz y Trigo (CIMMYT), 172—3

authoritarianism, 196-201, 236, 239 Chen brothers, 109-10

Ayub, President, 241, 249 Chen Han-seng, 107-8

Chiang Kai-shek, 104-5, 109

backwash effects, 237 Ch’ien-lung, Emperor, 95-6

balance of payments crises, 65, 130, Chile, 59-63, 66-7, 154, 189, 196, 204,
216-17
136-43, 224, 232
China, 27, 31, 69, 94-111, 154, 165-6, 187,
Baldwin, R., 114m
Balmaceda, President, 61, 189 189, 204

Bangladesh, 69, 158, 241—2 Chu Teh, 101, io8n

class analysis, 110-11; Lenin-Mao scheme
Baran, P., 20
Belgian Congo, 193 for, 147-9, '58, '66; and planning,

Bell, D. R., 232 220-1

classes, ruling (or upper), 55-6, 67-8,
Bienefeld, M., i86n.
196-201, 217-18; rural, 11, 147-9,
Bloch, M., 4-6
151-9, 164-5
Boeke, J., 77
transitional, 149-52
Borah, W. W., 42
bourgeoisie, comprador and national, 27-8, Cleaver, H., 212
99-100, 111; foreign and indigenous, Clive, R., 78

190-3; (see also ‘capitalist classes’) Coen, J. P., 70

Colebrooke, H. T., 79-80
Braverman, H., 115m
Colombia, 193, 217
Bray, J. F., 3
colonialism, 54-8, 63-4, 69-78, 78-94; and
Brazil, 25, 27, 44, 52-3, 63-6, 128-9, '3'>
semi-colonialism, 98— 111; capitalist,
145, 196, 199-200, 217; North-east, 53,
28-31, 117, 121; ‘voluntary’, 48, 53
154. 211

277
278
Index

colonies of exploitation, 45; of settlement, General Motors, 93

26,45 Ghana, 151
Communists in China, 69, 104-5, Girvan, N., 62
165-6 Gobineau, Count de, 43n
comparative costs, theory of, 16 Goulart, President, 129, 199
Conrad, A. H., i8on Green Revolution, 156, 158, 164, 172—8,
Cook, S. F., 42 200, 216, 234, 241-
Cornwallis, Lord, 81, 96 Greenberg, M., 97
Costa Rica, 204-5 Grey, Lord, 180
cost-benefit analysis, 209, 250 Griffin, K., 240
culture system, 71-2 Guatemala, 150, 153
Curtin, P., 44
Hall, A. D., 214—15
Darwin, C., 43n Hamilton, A., 17
debt bondage, 22, 37, 49, 56, 86-7 Hicks, J. R., 134
de-industrialization, 24, 31-5, 51-4, 82, Hidalgo, M., 51
101-2 Hirschman, A. O., ig8n
Dent & Co., 97 Hobson, J. A., 350
devaluation, 58, 137-41, 225, 235 Hodgskin, T., 3
Di Telia, T., 191-2 Hong Kong, 28, 98, 199, 204
Diaz, P., 160 Hong Kong and Shanghai Banking Cor¬
dual society, 77 poration, 102, 104
Humboldt, A. von, 5m
East India Company, British, 78-82, 96-7 Hymer, S., 1 i4n
East India Company, Dutch (VOC), 70-1,
75. 77-8
Imperial Chemical Industries, 93
Eatwell, J., 16
import-substituting industrialization, 58-9,
Egypt. 31. 34. t02, 155, 157-8, 215
65-6, 90-4, 126-43, 248-9
Elphinstone, M., 81
indentured labour, 48, 153-4, 182
Engels, F., 3
India (and the Indians), 10—11, 24, 26—7,
Enke, S., 209
Europe, 88, 141, 203-4
3'-2, 34. 69, 78-94, 96-7,. 123-4, 141.
exploitation, defined, 15-16; methods of, '49-5°, 155-6. 173. i84, 187-8, 192-3,
227-36
21-5
Indonesia, 27, 32-3, 69-78, 153, 193
export-led exploitation, 115—20; growth,
industrial capitalism, 21-2, 39, 102, 176,
112, 143-6
179; and the British in India, 84-91 and
export surplus, 33, 46-7, 58, 73-5,
81, 88-90 the Dutch in Indonesia, 71-2
Industrial Revolution, 14, 21, 96
exports, 34, 55-6, 58, 60-7, 70-1, 96-8,
industry (and industrial growth), 58-9, 62,
100-1, 144—6
77-8, 90-4, 106-7, 120-30, 223-5,
232-3
Fel’dman, G. A., 228
Fetter, B., 180 infrastructure, 32-4, 55-7, 60, 64, 85-7,

feudalism, 4-8, 13, 30, 95, in 156, 162-3, '99. 228

fiscal policy, 92-3, 115-19, 123-4, 235, 243 Indnii, President, 222

floods, 214-15 input—output models, 229—31

Ford Foundation, 135, 173-4, 234 International Monetary Fund (IMF), The
foreign aid, 105, 143m, 200-1, 222, 224, 112, 137, 140, 195, 226

232-3, 240-1, 250 International Rice Research Institute, 172

foreign capital, 25-31, 188-98, 233; (see international subcontracting, 146
also ‘transnational corporations’) irrigation works, 34, 86-7, 155, 163-4,
foreign investment, 30, 33, 58, 88, 106-7 171-2, 215-16

France (and the French), 26, 98-9, 102, Ivory Coast, 151
190
free trade, 17-18, 32, 60, 82, 88-90 Jajmani system, 11
Frei, E., 67, 250 Jamaica, 33, 44, 46-7, 72
Japan, 28, 99, 102-5, io9. m, 141, 145,
Galbraith, J. K., 2340 199, 218, 220
Gandhi, I., 235-6 Jardine Matheson & Co., 97, 102, 104
Geertz, C., 72, 76 Jefferson, M., 560
Index
279

Kalecki, M., 3, 2511., 133 monopoly, 26, 71-2, 80, 103, 109, 188-90,
Kennecott, 61, 66 232-6
Kenya, 24, 151-2, 156-7, 168, 187, 214 monopoly capital and imperialism, 35-6
Kenyatta, J., 187 Morelos, J. M., 51
Keynes, J. M., 3 Mossadegh, M., 194
Khan, A. R., 240, 241-2 Munro, T., 81
Kirloskar, The house of, 192—3 Myers, R., iogn
Kreuger, I., 222 Myint, H., 1130
Krishnan, T. N., 133 Myrdal, G., 237
Kubitschek, J., 126, 196, 199
Kung, H. H., 109 Nadel, S. F., 7
Kuomintang, 104—6, 109—10, 165 Nasser, G. A., 198
Kuznets, S., 203 Needham, J., 95
neoclassical economics, 18
neocolonialisms, defined, 78
labour, control over, 21-5, 76, 182-4, 246
Netherlands, the (and the Dutch), 26,
wages of, 8, 22-3, 61, 107, 182-3, 185-7,
69-78,
241. 243
Nigeria, i8q-qo
labour power, defined, 15
North, J. T., 6.
Lambert, A., 79-80
nutrition and health care, 210-13
Land reforms, 157-8, 160-7, 201-2, 234
Landes, D. S., 23n
Ongut, I., 244
landless labourers, 147-8, 157-8, 176,
opium, production and trade, 96-101
243-5 Opium War, 98, 102
landlords, 37, 48-51, 59, 61, 84-5, 87, 95,
101, 104, 106, 109, 111, 147-9, !53-4>
Pakistan, 69, 158, 184, 199, 237-41
201, 223, 234, 239
Panikkar, K. M., 9gn
Las Casas, B., 43
Patnaik, P., 133-4
Lattimore, O., 99
peasant revolts, 98—9, 160
Lenin, V. I., 3, 8, 29, 35-6, 147, 149, 158,
peasants, as suppliers of labour, 153, 179,
160, 166
181-2; differentiation among, 76—7,
Li Hung-chang, 103
147-9, 164—5; middle, 148, 172; poor,
linkages, 36—7
147-8. !57. 172, 174. 223, 234-5; rich.
Lin Tse-hsu, 98
147-8, 156, 174, 224; (see also ‘landlords’)
List, F., 17-18
Peron, J., 65-6, 186, 198
Little, 250
Peru, 41, 44
Long, E., 33, 46
Philippines, The, 145, 172-3
Luxemburg, R., 3, 23
Pinochet, General, 199, 250
Pirenne, FI., 6
Macartney, Lord, 95 plan models, 227-31
MacEwan, A., 249-50 plantations, 22, 43-6, 72, 87, 115, 153-4,
Mahalanobis, P.C., 228 182
Malthus, T. R . 3, 207 population, and its growth, 42, 203—6; and
Manne, A., 229 economic development, 206-8; and
Mao Tse-tung, 3, 8, 105, 110-11, 147, 149, family planning, 209—10
158, 166 Portugal (and the Portuguese), 26—7, 30,
Marx, K., 2-3, 10, 12, 15-16, 21-2, 85, 52-3
213 poverty, measurement of, 205n; in Kerala,
Maua, Baron, 64 204-5; in Bangladesh, 241-2
Menderes, A., 224 private investment, 34—5, 90—3, 122—3, 221,
mercantilism (and mercantile capitalism), 224-5, 231-6, 238-9
12-15, 3*. 38. 7°-'. 78“82, 179. i87 property, communal, 9—11, 149, 155;
Mexico, 41, 48-9, 131, 145, 150, 160-5, private, 81, 155, 231-2
234 public enterprises (and sector), 193—6,
Meyer, J. R., i8on 222-4, 226, 233-6, 242, 246-7
Minimata Bay, 218
Miracle, M. P., 180 Quesnay, F., 94
Mirrlees, J. A., 250
monetary policy, 57-8, 110, 119-20, 123-4, racialism and discrimination, 28, 43-4, 77,

233> 243-5 88-9, 150, 189-90

28o Index

Rahman, M., 242 Taiwan, 28, 145, i66n., 199, 204

Rahman, Z., 242 taxes, 23-4, 71-2, 76, 78-80, 83-4, 101-2,
railways, 29, 33, 56-7, 60, 64, 85-6, 103-6, 107, 180-1
2I5 Taylor, C., 56
regional inequality, 237-41 technology, 39-40, 127-8, 141, 146, 184-5,
Resnick, S., 114n. 191-5, 201, 233-5, 242-9
retardation and underdevelopment, defined, tenants and sharecroppers, 56, 59, 101,
20 107-8, 167-72, 148-9, 176
Rhodesia, 24 third world, defined, 4
Ricardo, D., 2-3, 16-17 Tod, J., 7
Robinson, J., 16, i42n trade unions, 183-4, 185-7
Roca-Runciman Pact, 59 transnational (or multinational) corpora¬
Rockefeller Foundation, 135, 172-4, 234 tions, 37, 127, 130, 145-6, 177-8, 185-6,
Rosas, J. M,, 54 ■93-6- 211-12, 235, 246, 248
Royal Dutch Shell, 193 tribesmen and tribal organizations, 8-10,
Rudra, A., 229 23, 153, 167-8, 180-1
Russia (and the Soviet Union), 149, 220, Tseng Kuo-fan, 103
222 Tunisia, 156
Turkey, 33, 140, 196-7, 221-6
Sadat, A., 198
salinity, 215-16 unemployment, 24-5, 35, 76, 85, 169-71
Sarmiento, D. F., 54, 226 Unilever, 193
Schatz, S. P., 189-90 Union of South Africa, The, 23, 30, 88, 154
semi-feudalism, defined, 8 United States of America (USA), The, 23,
Sharpston, M., 145 25> 3°. 33. 88, 135-6, 138, 142-3, 145,
Sheridan, R. B., 47 >73-4- 195. J99. 2I2, 219
Simon, J. L., 210 urbanization and slums, 216-19
Singapore, 28, 149, 199, 204
slave trade, 42-5, 63 Vaitsos, C., 247
slavery, 22, 25, 42-7, 52-3, 63, 85, 114, Van den Bosch, Governor, 247
i54-5> 179-80, 186 Vargas, G., 65, 129, 3196
Smith, A., 2, 16-17, 23m, 54n'> 71 Venezuela, 193"
Snow, E., I09n Vietnam, 219
soil erosion, 213—16 Visvesvaraya, M., 249
Soong, T. V., 109
Spain (and the Spanish), 26-7, 30, 41-5, Wales, Nym, iogn
48-53- >79. 190 West Indies, The, 23, 45-6, 47
Sri Lanka, 138, 182, 197 Wheelwright, W., 60
Standard Oil, 193 Williams, E., 47n
Stavenhagen, R., 164-5 World Bank (IBRD), The, 112, 137, 143m,
stratification systems, 149—52 '73-4. >77. 195. 200-1, 204, 232, 241,
subsistence farming, 113, 159, 167-8, 180 250
Suharto, General, 199
Sukarno, President, 198 Yrigoyen, President, 191—2
Sun Yat-sen, 104 Yuan Shih-kai, 104
surplus value, defined, 12 Yugoslavia, 145
 Modern Cambridge Economics
editors: Phyllis Deane, Gautam Mathur, Joan Ro

The division of the world into rich and poor nations, and
division within poor nations between a minority of rich people
and a majority of poor people living at a minimum subsistence
level have been obvious to careful observers for a long time. This
book provides an introduction to the problems of development
faced by poor third-world countries, making use of both Marxist
and neo-Kevnesian methods of analysis. It also makes clear the
historical origins of these contemporary problems, particularly
with reference to the major countries of Asia and Latin America,
and discusses the ways in which inequalities, both within and
between countries, are propagated and perpetuated.
Other problems analysed are the typical patterns of
fluctuating growth faced by third-world countries; the social
structures in both rural and urban areas and their influence on
the behaviour of governments and private investors in these
countries; and environmental control and population planning
issues faced by these countries. Finally, an introduction is
provided to the planning methods adopted by most third-world
countries and the hurdles such planning has encountered. The
illustrations are drawn widely from among third-world
countries.

Cover design by Ken Vail

Also issued in hard covers