Ernest Germain 1, THE THEORETICAL SETTING
"Poverty breeds poverty": this Simple formula which has become a platitude still summarizes all the wisdom of most economists on the subject, bourgeois and Marxist alike. What they mean, in Marxist terms, goes more or less like this. Backwardness means a low level of productivity, a low level of productivily stems in the last resort from a low level of fixed capital equipment and of industrialization, But industrialization means (under capitalism) capital accumulation, and in any case a larger social surplus product, The poorer a country, the greater the part of ils current production thal is necessary (and barely sufficient) to maintain the mass of the producers at a low level of subsistence. Hence, the poorer a country, the lower ils rate of capital accumulation, the lower its social surplus product. Hence, the poorer a country, the slower its industrialization: poverty breeds poverty.
We shall return ina moment to one of the main links in this chain of reasoning: "the poorer a country, the smaller its surplus product.’' This formula is correct only as a most sweeping historical generalization, i.e., if for example a purely feudal society is compared to modern industrial capitalism. It ceases lo be true if one compares the relative poverty of present-day societies, which are all more~ or less products of combined development. But in any case, the traditional emphasis of the reasoning lies on the supply side of fixed capital equipment, not on the demand side.
It has been the merit of Professor Nurkse, (1) whatever mistakes he also makes in the assumption of a low social surplus product in backward countries, decisively to change this emphasis, and to rediscover a truth long known lo Marxis{s (e.g. Lenin and Trotsky in their writings on Russi: before
1914), i.e. that the real vicious circle of poverty works the other way round.
It is not because a country is poor that it lacks financial resources for industrialization, it is because a country is poor that it lacks a market which makes industrialization a profitable business from the capitalist poinf of view. Because of the absence of this market, capital (he social SGrplus product) is invested in other fields than industry (trade, buying and speculation in real estate, hoarding, or, paradoxically, capital export). Therefore, the level of industrialization remains low, the level of productivity of labour remains low, and the country remains poor, which means that there is no stimulus for private industrial enterprise. "Poverty breeds poverty."
In his recently published and to a large extent very valuable book, Paul A. Baran, who is one of the rare American Marxists to teach at a university (Stanford) draws an impressive picture of the social surplus product in backward countries. (2) He mentions the huge part of the agriculture product appropriated by landlords and money-lenders (usually up to 50%. of the national agricultural product in many backward countries, and as agricultural production itself represents more than 50% of the national product of such countries, this reveals the existence of a social surplus product of the order of 25-30% of the total product!). He further mentions the income of the great number of intermediaries between the countryside and the city, and inside the city itself, whom he uptly describes as lumpenbourgeoisie, a group so numerous that. even if it is not composed of individually prosperous persons, it absorbs quite a fraction of the national product. He fimally mentions government income and nalive capitalist income, as well as income of foreign-owned plantations, mines and other enterprises, which in some countries (e.g. Rhodesia). represents a huge fraction of the national income.
We may therefore say thai the central problem is not that of creating resources which make industrialization possible, but one of reallocating existing resources in order tu industrialize the country. Or more correctly, the problem is that of creating social and economie conditions which make such a reallocation possible. Such conditions require the suppression of colonial rule, the expropriation of foreign capital (at least in cases where such capital already oceuptes an important place in the economy), and a radical agrarian revolution, which suppresses the income and even the very class of landowners - money-lenders - compradores. Asa general historical rule, one may add that the exestii weak native
industrial class also becomes an obstacle on the road to industrializalion, and has to be disposed of.
Once however this social revolution has been accomplished (as for example by the October Revolution in Russia, by the Jugoslav revolution of 1941-1946, or by bureaucratic- military means, with a limiled mobilization of the masses, in the "people's democracies" trom 1945-48), the problem of reallocating national resources to further rapid industrialization is still not solved at all. On the contrary, the obstacle now seems even more formidable than before.
For the revolution itself carries through a reallocation of resources of its own, and in a most peculiar manner. Asa backward country is a predominantly agrarian country, the fate of the revolution depends on the willingness of the peasant to accept the new order. The peasant, who, to quote Khrushchev, knows how to count, will accept the new order only if he is better off than belore. He will be better off only if he has to give, to the state and the city in the form of taxes and costs of industrial goods purchased, a smaller part of his income than he gave before to the landlord, the moneylender, and the merchant. In olhter words: the first economic result of the successful colonial revolution is to
diminish the social surplus product, or to hand part of it over to the agricultural petty commodity producers.
This fact has been empirically proved both in Russia under the NEP and in the “people's democracies" under various policies of slow collectivization, Everywhere, the peasantry appears as the main i! nol the only class of society which substantially imereased its standard of living after the revolution. This increase in its standard of living now creates of course a markel sutficently large to make rapid industrialization possibile. But at the same moment that the problem seems to be solved on the demand side, it pops up again on the supply side. Although the general standard of living of the peasantry (up to 80% of the population of a backward country!) has only been wioderately increased, this increase is enough to absorb not oniy the greater part of the former surplus product, bul also the greater part of the new potential surplus which results from a first substantial increase in the general level of production and productivity.
This is of course no parados: as the social product is composed of the income of the producers plus the surplus product, any increase in the former has for result a decrease of the latter.
For that reason, tradilionally, bourgeois and Marxist economists alike thought there were only two solutions to this problem: either massive foreign aid or "primitive socialist accumulation" (the phrase was coined by the Soviet economist Preobashensky, who was temporarily associated with the Left Opposition). Either an advanced industrial country would give the backward country an important part of the resources necessary for industrialization (in the form of massive cheap credit, or more directly in the form of capital equipment, railways, ships, airplanes, prefabricated houses, and, not to be forgotten, technicians and scientific personnel): or the backward country would have to cut back extensively the standard of living of its population, above all its peasant population, in order to free the resources necessary for industrialization. Apologists of the tragic Stalinist experience with industrialization of this kind even added the theorem: "The more backward the country and the quicker the industrialization, the greater must be the setback in general consumption, and the harsher must be the dictatorship which has to force people to work under those circumstances."
Of course, Trotsky and the main economic specialists of the Left Opposition (e.g. Rakovsky and Piatakov) never accepted these theorems. They always pointed out thata parallel and harmonious increase in production and popular consumption was a necessary condition for socialist industrialization. Today their their concept is widely accepted. Tito has made it his own. Polish economists like Lange have stated it in unmistakable terms. We have still, however, to try to find a theoretical foundation for this political advice. This is what we shall aitempt, as a first tentative sketch, in this article.
2. THE THEORETICAI. SOLUTION
OF THE _PROBLEM
In the framework of a workers' state, the problem of industrializing a backward country involves solutions for every element of the reproduction process; supply (production and import) of the fixed capital equipment necessary; supply of a regular flow of raw materials; increase of the number and qualifications of industrial workers; adequate distribution of the social product between industry and agriculture, and the two sectors of industry, in order to prevent disequilibriums, shortages, and bottlenecks, e.g. in the food supply, in the supply of agricultural raw materials, etc. All these problems are interrelated. Inadequate supply of industrial consumer goods to the village, for example, could become one of the main reasons for a slower rate of development of
agricultural production, especially of agricultural raw materials for industry, and thereby reduce the general rate of growth of industrial production,
We shall not go into all these problems here, but concentrate on the main field, that of the adequate distribution of social product (or income), i.e. that of the rate of accumulation.
The mistake commited by the Stalinist planners during the first Five-Year Plans, and even more - and with less excuse - by the apologists who try today to justify the wrong course followed, is a confusion between maximum and optimum rate of accumulation. Or rather: these planners started from the wrong assumption that the maximum rate of accumulation is also the oplimum rate, at least in the short run.
Even if we define the optimum rate of accumulation from a purely economic point of view, i.e. as the rate which enables the maximum increase in the social product {or income) in a given period, this identification is completely wrong. It is all the more wrong because no Marxist can give such a purely economic definition to that central notion, He cannot leave oul living class forces. He can never forget that. any rate of accumulation which creates demoralization of the proletariat through hunger, political apathy, tendency to flee from the factories and the city, etc., cannot be called "optimum" from the point of view of working-class revolutionists.
It is interesting however to beat the apologists of a maximum rate of accumulation even on their own field, i.e. the purely economic result, in tons of steel, cement, coal and cotton goods. The mistake made has its roots in the absurd assumption that the productivity of labour is independent of the level of consumption of the producer. We say that this assumption is absurd not only in the long run, but even and especially in the short run. The whole history of modern industry has shown that any sharp decrease of the standard of consumption of the workers results in a decrease of per capita productivity. And the poorer the country and the lower its initial level of consumption, the stronger this interrelation will be. One could of course point out that this decrease will translate itself into a decrease of production only if one assumes that the fixed capital on which the producers
operate remains unchanged, It is evident that the goal of a maximized rate of accumulation is precisely to increase the supply and quality of fixed equipment of industry. If the workers tend to make less efforts, because they eat less and live under worse conditions, then, so the argument will
continue, this decrease of per capita productivity will be ten times overcome by the increased productivity resulting from the introduction of better machinery.
e of accumu-
It is at this point that our concept of optim
lation becomes ill-important. Let us assume thal with a given quantity of fixed machinery, 1,000 workers produce over a given period a value of $1,000,000, when their real wage is $500 a year (we should not forget that we are concerned with workers in backward countries!). If we double the value of capital equipment in the course of three vears, the product of these workers could, for example, treble and be worth 3,000,000 (first hypothesis) on condition that their real wage is not changed or even that it increases. (3) If, however, in order to double the value of the capital equipment, we first cut the real wages of the workers to $250 a year, we might find that the final product will not be $3,000,000. but only
31, 500, 000 (second hypothesis). Production has, of course, still increased. But we have caused a terrible waste of wealth. For had we increased the value of capital equipment only by 50%, instead of by 100%, in order to leave real wages where they were before, or to increase them even by a given percentage, then the total final product would have been say $2,000,000, instead of $1,500,000 (third hypothesis).
The first hypothesis is the ideal one: it presupposes more or less unlimited resources freed for the given project. The second and the third hypothesis are both trying to divide limited resources ina given way. The second hypothesis, the one of the maximum rate of accumulation, does not lead to maximum expansion of production. The third hypothesis, with a lower rate of accumulation than the second one, teads to a bigger expansion of production under given conditions, and is therefore the optimum rate of accumulation (or the optimum division of the social product. of the social income, etc.).
In real fact, it is of course not very easy to delermine this optimum rate. It can be discovered only by trial and error. But what we should understand from the start is the fact that in a backward country, with a generally low standard of living of the workers, the maximum rate will never be the optimum rate, i.e. will always result in a level of productivity of labour below the level rendered possible by a given set of machinery anda given level of qualification and cultural background of a working class.
We may add that we have understated our point. Fora ‘purely economic" solution leaves oul a serious social consi-
deration, with important economic repercussions. Any attempt to impose a maximum rate of accumulation results in a lowering of an already low standard of living. As the workers do not accept this without resistance - even be it passive - it is necessary to drive them back to the production line by force and keep them there by constant Supervision, In order to achieve this result, a huge army of gendarmes, bureaucrats, and supervisors of all sorts must be built up and kept supported, generally at far above the subsistence level down to which the producers have been forced.
But this in turn means a large increase of unproductive consumption in society, lowering thereby the fraction of the social product ready to be used for productive accumulation. A "maximum rate of accumulation" is ‘'muximum" only if we "forget" the huge waste it involves: in fact, it may be lower, after a decade, than a level which would have allowed an increase in workers' consumption, would thereby have much more quickly increased the social average productivity, and would have enabled society vreatly to reduce the funds for unproductive consumption of policemen, uniformed or not. Just to show the reader that all these considerations are not purely theoretical, we shall limit ourselves to a single example, bul a decisively revealing one. There were in 1928 3.1 million workers and cmployees (technicians and engineers with university degrees not included) in Soviet industry In order to achieve lhe First Five-Year Plan, figures worked out at that moment estimated the manpower necessary for attaining the production goals at 4.1 million workers and employees (i.e. an increase of 1 million, or 33%). In fact, in 1932-3, without all the goals of the First Five-Year Pian having been achieved, 6.7 million workers and employees were working in Soviet factories, an increase of more than 110%. over the figure of 1928, and of 65% over the planned number of workers! What should have been produced by 4 million workers needed 6.7 millions to be manufactured, i.e. per capita productivity was more than 50% below the the planned level. The maximum rate of accumulation was far from being the optimum rate, far from maximizing the social product.
We now understand how wrong are those who excuse the Stalinist variant of industrialization by the argument that, anyway, as the war danger was growing, as the country was weak and surrounded by enemies, it was necessary to
industrialize as quickly as possible. (4) In realily, what we are trying to prove is that a "maximum" rate of accumulation
produces a slower overall rate of growth of the economy than the "optimum" rate. It was that point that Trotsky, Rakovsky, and other Marxist critics of Stalin's economic policy did not cease to make between 1928 and 1940, and the now existing factual material completely confirms the accuracy of their criticism,
It is interesting to note that Professor Baran is carried by his theoretical elan toa thesis quite similar to ours when he writes:
While the maximization of the rates of growth - if such be
the requirement of the concrete situation - is tantamount to a
minimization (?) of.current consumption (or, conversely,
maximization of the economic surplus), it would be erroneous
to equate such minimization of consumption conductive to
speediest growth with its reduclion lo some rock-bottom
levels. In view of the obvious relation between consumption
standards and the ability and willingness to work on the part
of the population, minimum consumption compatible with
maximum output (and growth) may, and in most under-deve-
loped countries will, require a more or less substantial
increase of the existing consumption standard. Given a small initial output and accordingly limited possibilities for
such an increase, it will have to be differentiated.(...) Accordingly, while it might be thought at first that maximization of the rates of growth calls for plowing back into the economy all increments in output resulting from current investment, in actual fact some splitting of these increments so as to increase both investment and consumption may be a more effective, or even the only possible, method of attaining the largest possible increase in production.
(Op cit, p 270.) 0 ~ :
However, in a passage describing concretely the Stalinist industrialization policy of the period 1928-1937, Professor Baran cannot shake off his old apologetic hide, and we are confronted with various platitudes like the “war danger" which made necessary a “rapid rhythm" of industrialization etc. Professor Baran even tries to make us believe that the "inconvenience" caused by the desperate attempt of maximization of the rate of accumulation was only of short duration, He therefore conveniently quotes the crop figures of 1937, without adding that those figures remain exceptional, nol only for the period 1928-1940, but even for the period 1928-1953, if we take inlo consideration the increased lterritory and population of the USSR! He also forgets to add that Soviet livestock for 25 years fell below the 1928 level, and that we had to wait till 1956() in order to find a number of milch-cows
equal to that of 1928 (which does not mean equal per capita of Soviet population, given the important increase during this quarter of a century). Tt is impossible to cover up the tremendous price Soviet economy had to pay lor Stalin's attempt to "maximize" the rate of nccumulation by brutally lowering the consumption levels of workers and peasants,
3, AN INTERESTING THEORETICAL
SIDELINE ,
Up till now, we have always considered economic growth and industrialization as a result of the increase in the real supply of fixed capital equipment, machinery, buildings, power works, ete, Professor Nurkse, however, has made another and interesting contribution to the theory of industrialization of backward countries, by concentrating sttention on one of the most striking characteristics of backwardness: rural overpopulation, i This phenomenon has, of course, long been known to economists and especially to Marxists, Mere than half a century ago, Lenin and Vrersk: a oraurab overpopulation, and the pressure io esxere: fosd hind pent. one of the main links in the chai of arguments explaining backwardness: the preference viven by eapitalisis to the buying of Land over industrial investment, the lind reat allowing a higher average return than industricl profits
rinide ot fh
eee
But whereas the probten: of car il overpopulation has aiwavs been considered from the potut of view of an easy supply at manpower for urban mdusory. once the industrializatwon process not Into mors Professor Nurkse now las stressed 2 new and strikisels onpertunt Spee ywothe problen: lhe aaa. mic growth, he says. is essentiatiy ap imierease ui the
average productivity of labomr. No Miarvist will quarrel with that definition. that a conmpiry with a heee popa-
lation of under: headed cccpeite Fit aeyp ghd fon Pee pred to say: village ieeniies cic :
with huge capital jnvestisent ay
tial increase in the averave produ:
Pare foape
sith tects
rder te webieveé a substun-
‘livity of labour,
For what else is undereiuploviment if not the fact that in such backward countries half or two Uiieds of the population, living in the village, are ontv reaiis working 150 or 200 days a year! (5) The rest of the year, they do nothine. Now if it were possible to ceive thera something to do during the rest of the year, some productive purpose which does not need huge fixed eampment. betp crash production ind thus their annual produc tii weand tremendausiv aierease., In dact,
while doing nothing, they continue to eat. It would be sufficient to give them a little bil more to eat, while getting them to work, in order to treat the largest part, if not the whole, of their increased production as social surplus product, as a social investment fund. And once this surplus product has been created, the basis is laid for large-scale industrialization, not by lowering bul by increasing the standard of living of the working population, at.least in real termes. (6).
At first sighl, there seems to be different “catches” in this line of reasoning, but Professor Nurkse deftly does away with them, one by one. How is it possible, we may ask, to give a huge amount of new jobs to the overpopulated countryside, if the land is already fully occupied’? ‘To this there are different answers. First of all there is no underdeveloped country in the world, not even Indonesia, in which the land is "fully occupied" from an economic point of view. Possiblitiess of increasing agricultural production by fertilization and irrigation operated with relative low-cost methods (rom shoveling the mud out of river beds for use as fertivizers to the digging of thousands of small canals, the drilling of thousands of cemented water pits, ctc.) are everywhere present. (7).
Professor Nurkse does noi arid, but this we may do in his place, that these jobs are not limited by natural but by social conditions, as long as landlordism, and capitalism are nol overcome. For opening up these tremendous and relatively "cheap" opportunities for the big mass of unemployed
peasants means must be found - means of concentrating the marketable food supplies in the hands of central authorities and/or of peasant cooperatives, teans of concentrating the peasants themselves, either by appeal or by coercion, means of planning these thousands of local projects ina way that their results are split up between the producers themselves and the community, and no! siphoned away hy landlords, money-lenders, usurers, black-marketeers, conipradores, or capitalists,
We shall see further on that these social preconditions are all-important for the success of these experiments.
A second question which crops up is the question of equipment. Professor Nurkse of course knows very well (hat millions of underfed underemployed peasants cannot start to "produce" a social surplus product with their bare hands, His solution is: a) to impert a laree mass of cheap simple tvols, and b) to have them produce these tools themselves:
The investment workers, before they start building a
piece of fixed capital such as a road, could, after all, sit
down and make the most necessary primitive tools with
their own hands, Slarting if need be from scratch. They
could make their own shovels, wheelbarrows, carts,
hoists, and other things to help them build the road.
(p 44)
But there remains a ciird, «nd tormidable, difficulty. An underdeveloped couniry is characterized by very low standards of living, especially of food supply, in the countryside. Underemployment means that the working peasants have to share their meagre pittance with practically unemployed sons, nephews, and uncles living wilh them. Now the whole theory of the "accumulation fund hidden in underemployment" hinges on the stability of peasant cousumption, If the working peasants increase their food consuimption from the moment their nephews sons, and uncles are mobilized to build irrigation trenches, water pits, and roads, then of course the problem of feeding Lhese newly occupied workers will appear. There will he a deficit of the food balance of the country, and the increase in real wealth created by the products of these workers might be wiped out eniirely by the need to import supplementary ood.
Professor Nurkse states the problem admirably. But he does not solve it adequately, for Somewhat Sinister formulae like "the saving has to be made" are not solutions, He tries to introduce a ditference between densely and sparsely occupied countries. {In tact the solution he indicates for sparsely occupied countries only, applies for all of them: the supplementary amount of workers must be occupied in such a way as to make possible, among other things, a substantial increase in agricultural production. Any other — solution would impose the process of growth on the peasantry through various forms of “‘torced savings" and then we should again be up against the old problem of estimating the negative results ul such a dectine in the standard of living.
Is il possible substantially to increase agricultural production in the backward countries? O1 course itis. And it is at this point that Prolessor Nurkse makes his most substantial mistake, when lie runimizes or even excludes this possibility in the densely populated countries. Asa matter of fact, two ot the most densely populated backward countries of (ha worki. dnaia and China, are most susceptible of mobiliziig Gee bigeest “accumulation fund" from a beavy increase of werieuliural production,
For if we look closer at those various “Low-cost local investment projects,” made possible by drawing on the underemployed village populations, we tind that nearty all of them tend io inerease eericultural productiviw. frrigation, regufation of local rieers. thao comteot, road buridiie, boeak won foundries . reaetachais of aeadeuliarad Givvleretts ofa more modern thoneh Still ssimphe type. forab oustiies laatstrres helping the pessants to build Getler Hodses for themseives and stables. or betier Siibles. tor dhe Givesseck = alb these prosectS tend to premire dasver barvests Wired is taore, they permit almost iimmediaie results in Cleviiine tivinc staundards in the countryside, “Phereby they enable be riotulization of a big - and erowing - purtice the tiereased ati plas product for purposes of national econgmic vrowth f ihev aie belter fed, betler clothed, and better housed, the sous. eephews, and uncles of the foiling peasanis will work without resistance the second year on province lil aad national roids. oad not just local ones, They will without resistance. build focal foundries in order to manutacture acl wst deri ullural implements but machinery of various sorts, i.e., meGdias of production, The inital impetus will have been given by. Cpuilding” Professor Nurkse's conception inte ovr eeneral theoretical solution, and corveeting foun that sense ®8e cebu clearer
ruiliziag a backpicture of the possibilities of inittaliy mies
ward country, without (surficienti toretpn hetp acd without pushing down the standard of living: of the working population.
We sheattd dike lo cuiplasize oO watuihe. the setting lo work of the villuge uneoiployed on local myvestnient projects is no ponacerea for solving the idustriatization of backward countries. 1tis only a relatively cheap means of giving that industrialization aninitial push, Ifa correct balance
between the local "low-cost" investment projects and the "high-cost" "modern" industrialization projects is not struck, the economy will rapidly run into the classic difficulties of Seviet Russia during the NEP.
Local industries, built with ancient technology and locally miawutactured equipment, are of low productivity. As long as they are an absolute addition to nalional wealth. anda school of industrial technique and habits which makes the transition of the peasant towards the modern factory easier, they arc of tremendous ituportiance, But tram the ooment productivity in aotiwiture stashs ov rise rapidty, the wellknow phenoiwetiii of be saisseis wilt te: Verieuttaral prices will hill be Qeeripeapinnt th the pikes ob os tree) indusiriad consurser woods ond teeins ew oarowueien. At the Same tins, (he ueccsantry welts vader co .eties and cry
for cheaper industrial goods. There will be a polilical risk of alienating the peasantry from the workers' regime: there will be the economic danger of an artificial withdrawal or even decrease of the agricultural surplus. The investment fund mobilized through the voluntary mobilization of the rural unemployed has to be transformed into modern fixed equipment, ready to deliver cheap industrial goods to the countryside. Modern steel works will progressively take over from the local foundries. Both processes, intertwined in the beginning, will become unraveled: the local low-productivily projects will wither away.
(1) Ragnar Nurkse: Problems of Capital Formation in
Underdeveloped Countries, pp 163, Oxford, Basil
Blackwell, 1953.
(2) Paul A. Baran: The Political Economy of Growth,
pp 308, New York, Monthly Review Press, 1957. (3) In order to leave out complicated calculations of value
production, we may assume that these workers produce
some very rare industrial equipment, for which the
social need remains unsatisfied even if production
increases ten-fold, so that a tripling of production
means a tripling of value produced, social average
productivity of labour remaining unchanged outside
this sector. The assumption is only apparently unreal:
in fact, in the initial stages of industrialization, most
heavy industrial plants operate precisely under such
conditions.
(4) These apologists of course also "forget" that Stalin
opposed a quick increase in the rate of accumulation
between 1924 and 1927, that thereby four years had
been lost; and that the division of the accumulation
fund of the First Five Year Plan over the timespan
1924-1932, instead of being concentrated in 4 years,
would have enabled to realize exactly the same
projects at a considerably lower expense of hard-
ship, sacrifice and... loss of productivity of the
workers and peasants.
(5) The First Five-Year Plan of India estimated the
number ct underemployed adult males in Indian
agriculture at the staggering figure of 70 million
people!
In money terms, of course, increased agricultural production could mean, under conditions of stable currency, lower agricultural prices, and even lower money income of the peasants. This would be of no consequence, if at the Same time a constant flow of industrial consumer goods, at falling prices,
would be directed towards the villages.
In India, only 15% of the arable land is irrigated: in China only 45%.