1. Introduction

In the neglected Haynes Lectures of 1964 (published as Postwar Economic Growth: Four Lectures), Simon Kuznets summarized some of the emerging results of his monumental work on Modern Economic Growth (MEG) and used them to speculate on diversity, interdependence, war, conflict and cooperation among nations. It was an unusual Kuznets study – speculative rather than precise and quantitative. The tone and the approach clearly reflect the horrors of World War II and the palpable threats of oppression and aggression of communist totalitarianism.

Modern Economic Growth, the epoch characterized by a widespread application of science-based technology to production dating back to the late eighteenth century, resulted in a sustained increase in income, population and productivity and in widespread structural changes. However, it was also the case that most of mankind had not yet tapped the potential of economic growth provided by modern technology – even though the per capita product of most was probably higher already than it had been in the nineteenth and early twentieth centuries. No one was more appreciative than Kuznets of the benefits brought about by MEG but he was also keenly aware of its potential for conflict and destruction. In these essays he appears cautiously pessimistic reflecting on the threat of communism to world peace and stability and on the limited spread of the process of Modern Economic Growth with the resulting increased divide among rich and poor nations.

In this chapter I summarize some of Kuznets' arguments in his 1964 lectures and then update the analysis, taking into account the changes in the geopolitical environment over the past fifty years, primarily the end of the Cold War, the spread of globalization, and the rise of China and other Asian economies. In a final section I review various projections of expected changes in the global economy to 2050 and the main challenges such changes pose for conflict and cooperation.

2. Highlights from Kuznets' 1964 study

Excluding the very small countries (Andorra, Monaco, etc.) there were more than 100 nation-states in the early 1960s. Kuznets began by pointing out the wide diversity among these countries with respect to size, natural endowments, performance (income per capita or labour productivity), economic structure, political organization and other aspects of their historical heritage (e.g. social institutions, conceptions of their role in the world, notions about relations of man to man and man to nature). Such diversity underlies the potential for conflict, a potential still painfully vivid in the experiences of only a few years earlier.

Looking back at the tumultuous previous half century Kuznets observed that diversity had widened while ties of interdependence strengthened, hence intensifying the potential for strain. The intensification of interdependence could be seen in an increase in accessibility (fall in transport costs), an increase in the dependence of underdeveloped on the developed countries, and in the intense hostility of communism that increased the (negative) interdependence between the United States and the USSR.

3. Changes since Kuznets wrote

Much has changed since Kuznets wrote his 1964 study. The main source of diversity and conflict disappeared or was drastically reduced with the end of the Cold War, even if the ‘end-of-history’ moment was to be a brief one.

4. The rise of Asia

Table 18.1 illustrates the shift in the centre of gravity of the global economy towards the East². The table also shows the earlier retreat of Asia in the nineteenth century and its rise over the past thirty years.

Western Europe and its offshoots were by 1820 already significantly wealthier (as measured by product per capita) than Asia (see Table 18.2).

The income gap between regions was relatively low and increased by a large amount during the next 180 years. The United States and other European offshoots were richer but given their relatively small population their combined share in global production was less than 2% in 1820. Western Europe's share was a much higher at 23% but the undisputed giant was Asia, its share of global output exceeding 56%. This pattern changes drastically over the nineteenth century – Asia's share plummets while both Europe and the United States advance steadily.

By the end of World War II the United States emerged as the largest industrial power. In the following fifty years the dominant trend was the rise of Asia, first with Japan's fast rise to the point of having been seen as a realistic challenger to the American primacy, and later with the emergence of the first and second tier East Asian ‘tigers’ (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand and Indonesia). Over the last twenty-five years, China and India have moved to centre stage, with the rise of the former eclipsing everything that came before.

5. Interconnectedness

Over the last fifty years the world has become significantly more interconnected.

Recent studies of the network of world trade have documented the significant increase in trade links and the changes in the structure of the network itself. (See for example IMF, 2011, and De Benedictis and Tajoli, Reference De Benedictis and Tajoli2011). Some of the salient results from these studies are: The World Trade Network has indeed changed in the past decades; in particular, the trading system has become more intensely interconnected. From 1960 to 2000 the increase in trade linkages has been fairly widespread, reducing the role of hubs in the network (De Benedictis and Tajoli, Reference De Benedictis and Tajoli2011). Table 18.3 shows the substantial increase in trade flows over the period.

A noteworthy development is the increase in South-South trade illustrated in Table 18.4.

Most of the South-South trade increase is due to the growing importance of Asian trade. First, the share of Asia in world merchandise exports went up from 15% in 1973 to 29% in 2009 (WTO, 2010, p. 11), and second, more than half of these higher exports are intra-Asia trade. No other region comes close to Asia in its weight in total trade and less so in its contribution to South-South trade (WTO, 2010, table I.4).

A further sign of the increase in interconnectedness and in the complexity of the globalization process are the longer global supply chains. The increase in the vertical specialization in production stretching across several countries was spurred by lower trade barriers, and by the declines in transportation and communication costs.

The recent expansion of global and regional trade has also been driven income convergence (see the next section). Contrary to the earlier pessimism of prominent British economists such as Robertson and Keynes (see Syrquin, Reference Syrquin2005a for references), much of the expansion in world trade took the form of intraindustry trade among countries with an increasingly similar composition of their factor endowments. The expansion of intraindustry trade between 1985 and 2009 was particularly noted in countries integrated in a supply chain, such as China, Thailand and Mexico⁴.

6. Implications of the reallocation

The large changes in the global economy among regions and countries since Kuznets wrote and especially in the last two to three decades have some immediate implications and some more remote and speculative ones for the prospects for conflict and cooperation that were the guiding point for the Kuznets lectures of 1964.

7. Shifts in the relative positions of nations

The rise of Asia, the end of the Cold War, and America's entanglement in wars in Asia has prodded a renewed thinking on overstretching and the decline of empires and on economic primacy. Two contradictory approaches interpret these events thus: The first one stresses the inevitability of the decline in the United States and predicts dire consequences for the world system unless the decline is graciously accepted, giving ample room to the emergent new number one whose identity has variously changed over the past three decades. A second approach sees also a potential for great distress in the global system unless the United States is willing to assert its still considerable economic and military preeminence.

The recent rise of China and other Asian countries suggests to many the imminent displacement of the United States as the leading, or sole, superpower. This echoes similar predictions in the not too distant past about the rise of Japan, of fortress Europe, etc. They proved to be more a wish to ascertain the decline of the United States than a realistic assessment.

During the Cold War it was the common view that the USSR was going to surpass the United States. The question was only when⁸. In the late twentieth century it was Japan's turn to be number one. When it stalled and the United States took off in the 1990s the search was on. Then it was ascertained that the twentieth century had been the US century and the twenty-first was going to be Europe's century⁹. It is now China's turn.

More important than who is number one might be the ability to cope with decline (Kindleberger, Reference Kindleberger1996). Differential economic growth implies that economic shares in world totals change, resulting at times in changes in economic leadership. Scholars of international affairs, ever since the classical statement of Jacob Viner in his ‘Power versus Plenty’ (1948), have argued against drawing too sharp a distinction between international economic and security affairs.

7.3 On most items the dominance of the United States is paramount

GDP: even when measured in PPP (less relevant for relative weight in the global economy) China is still years away from catching up with the United States in terms of total GDP and many decades away in terms of per capita GDP. China is and will remain a very poor country for quite some time. Figure 18.1 and Table 18.8 show comparative data on military expenditures and demography relevant for the assessment of relative power.

Figure 18.1 The world's top 7 largest military budgets in 2010

Data Source: Wikipedia, ‘List of countries by military expenditures’ http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures, (accessed 27 November 2011).

Table 18.8 Population in 2010 and UN projections to 2050

Country	2010	2050	2050/2010	2010	2050
World	6896	9306	1.35	100.0	100.0
China	1341	1296	0.97	19.5	13.9
India	1225	1692	1.38	17.8	18.2
United States	310	403	1.30	4.5	4.3
4 EU countriesa	268	279	1.04	3.9	3.0
Russian Federation	143	126	0.88	2.1	1.4
Japan	127	109	0.86	1.8	1.2
Latin America	590	751	1.27	8.6	8.1
Sub-Saharan Africa	856	1960	2.29	12.4	21.1
Western Asia	232	395	1.70	3.4	4.2

^a Germany, France, United Kingdom, and Italy

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat (2011) World Population Prospects: The 2010 Revision, 29 November, http://esa.un.org/unpd/wpp/index.htm.

Military: China is huge and the regime is still capable of commanding and deploying waves of soldiers, as they did in Korea in the early 1950s. But the superiority of the United States in military expenditures and the quality differential is still overwhelming. The EU countries are a shadow of their former self; even if the five largest EU countries were to pull and coordinate their military resources their combined spending would add up to less than 14 per cent of the world total.

Demography: The UN projections of population in Table 18.8 show that in 2050 India, China, the United States, Nigeria, Indonesia and Pakistan are each expected to be as large as the four largest EU countries combined. In Russia, Japan, Germany, Italy and China the population in 2050 is expected to be lower than today. The one-child policy succeeded in making China an outlier among less developed countries. India will become the most populous country in the world and the United States will evidence only a moderate decline in its share of the world's total. Large increases in population are expected in Africa and the Middle East – one the poorest region and the other a region sustained by oil wealth.

The US demographic composition between working-age people versus dependents is relatively favourable when compared to most developed economies and China (see Syrquin, Reference Syrquin2012).

Technology: A recent report on R&D and other technology indicators from the National Science Board (Science and Engineering Indicators 2010) documents a pattern of continued US leadership in technology, especially on patents, R&D expenditures and high-tech production. But there is also evidence of strong catching up on the part of China; its share of global high-tech goods exports more than tripled between 1995 and 2008 making China the single largest exporter of such products. It is still the case, however, that the United States remains the number one destination of foreign students worldwide (OECD, 2011).

Resources: Energy resources were for long the weak point in the US position since the 1970s. This, however, has been changing rapidly thanks to the exploitation of underground shale formations¹¹. Between 2006 and 2010 US shale gas production nearly quintupled, accounting for almost a quarter of US natural gas production. The reserves of the US Northeast's Marcellus Shale formation is likely the world's largest unconventional natural gas reserve. The prospects for the United States seem to be radically changing from large importer of natural gas from unsavory sources to a once improbable future as an energy exporter.

To sum up, the overall picture is far more complex than the simple one portrayed by declinists.¹²

8. The structure of the world economy: perspectives and prospects

The rise of China has come to dominate the discourse about the global economic and political systems. A key question then becomes whether the extraordinary fast growth of China is sustainable. After two decades of intense attention to the growth and transformation of the Chinese economy it is not easy anymore to appreciate the extent to which they were unprecedented and unexpected, putting into question many long-held beliefs. There is no precedent of sustained very fast growth for decades in a very large country.¹³ Large countries have low trade shares especially if they are not oil exporters. The share of exports in GDP in 2012 was 14% in the United States, 15% in Japan and 27% in China (World Development Indicators, table 4.8, http://wdi.worldbank.org/table/4.8). No totalitarian country has been able to sustain fast growth for decades without major turmoil or worse.

1. Introduction

Structural change in the dynamics of the World Economy can be analysed from many points of view. In this chapter we will combine two schemes of comparison across different areas and countries: that among GDPs, manufacturing outputs and products in international trade (Section 2); and that among industrial raw materials consumption (Section 3).

The core of this analysis is the second scheme, this being a field investigated at length by the present writer in the 1980s and 1990s. In fact previous works of mine have analysed the long-term trend of natural resources in global models (Fortis, Reference Fortis1981) and studied the raw materials consumption with reference to three broad situations: economic cycles (Fortis, Reference Fortis1988, Reference Fortis1990), different economic development stages (Fortis, Reference Fortis1993a, Reference Fortis1993b, Reference Fortis, Curzio, Fortis and Zoboli1993c) and single-commodity country (Fortis, Reference Fortis2006).

This is an applied research line strictly connected with the theoretical analysis of Alberto Quadrio Curzio¹, who worked for a long time on natural resources and raw materials (Quadrio Curzio Reference Quadrio Curzio1967, Reference Quadrio Curzio1975, Reference Quadrio Curzio and Pasinetti1980, Reference Quadrio Curzio, Baranzini and Scazzieri1986, Reference Quadrio Curzio1990, Reference Quadrio Curzio, Landesmann and Scazzieri1996; Quadrio Curzio and Pellizzari, Reference Quadrio Curzio and Pellizzari1996, Reference Quadrio Curzio and Pellizzari1999). Quadrio Curzio did research on structural theory, changes in technologies, technical progress, and what he called technological scarcities, composite technologies (Quadrio Curzio, Reference Quadrio Curzio, Baranzini and Scazzieri1986, Reference Quadrio Curzio1990) and global technologies (Quadrio Curzio, Reference Quadrio Curzio, Landesmann and Scazzieri1996), assigning a fundamental role to natural resources and raw materials both in comparative static (or better uniperiodal) and in dynamic schemes. He also made a remarkable contribution on the price-distribution relationship, with a central role of rent systems connected with the previous dynamics of productions and technologies (see previous quotations and Quadrio Curzio, Reference Quadrio Curzio, Kurz and Salvadori1998). On the whole his contribution has been pioneering because it was initially conceived when most theories of growth and distribution disregarded such aspects (for a sum up see Quadrio Curzio, Reference Quadrio Curzio2011).

Building on this theory much of my research has dealt with raw materials and commodities (see the works aforementioned) within a stylized scheme that is much closer to that of the ‘old political economy’ than to that of the ‘new rigorous’ one (which is often incapable of explaining the long-term dynamics of economies). On these issues I have also collaborated with Quadrio Curzio, starting with the Journal Materie prime founded in 1980 (Prodi, Quadrio Curzio, Fortis, Reference Prodi, Quadrio Curzio and Fortis1980),which was titled Innovazione e Materie prime from 1990 up to 1993 when the publication ceased (for this joint research program see Quadrio Curzio, Reference 361Quadrio Curzio1993). Among the collaborative works with Quadrio Curzio in these fields we mention the researches on industrial raw materials and the ones on innovation and resources (Quadrio Curzio and Fortis, Reference Quadrio Curzio, Fortis, Ferri and Ragazzi1986, Reference Quadrio Curzio, Fortis, Colombo, Demeny and Perutz1996; Quadrio Curzio, Fortis and Zoboli, 1993).

This explains the common interests and complementarity in the analysis of raw materials and of their utilization in industry between this research programme and the one initiated and developed by A. Quadrio Curzio over many years.

2. Traditional economic indicators of world development

This section is on the more traditional dynamics of GDPs, of manufacturing outputs and of international trade. This approach tells us that over the past few decades the world has been changing rapidly, with the fast growth of the Asian economies and especially of China. Up to twenty-five years ago most statistics provided details mainly on the economy of the ‘Western world’, which was a geo-politic, rather than a geographic concept. At that time the ‘Western world’ included West Europe, North and South America, as well as Australia and Japan. The statistics did sometimes go as far as to survey the economic situation of the former USSR and of its satellite countries (areas relatively closed to trade with the ‘Western world’), while the rest of the world was considered almost exclusively as a ‘residual area’, a scarcely significant and marginal reality of our planet.

Everything changed over quite a short time and that residual area is becoming overwhelming in the economic figures when compared with the ‘old advanced world’, even if Russia and the Central and Eastern European countries are added to the ‘Western’ countries. Asia, the new big emerging world area, has a larger population and records bigger consumptions of food and many industrial raw materials than the ‘old advanced world’. In two or three decades it is destined to overcome it also in global income and energy consumption.

3. The dynamics of industrial materials consumption: 1980–2010

This section deals with the consumption figures of the main industrial raw materials, which are used as indicators to measure the structural dynamic change. In particular, we will be analysing the consumption of eleven main industrial materials (six non-ferrous metals, steel, wood-based panels, rubber, packaging paper and paperboard as well as plastic materials) and will be comparing the figures with those covering the evolution of the world manufacturing output with a view to measuring the shifting of its centre of gravity from North America and Europe towards Asia. The period under examination spans from 1980 to 2010 and focuses especially on raw materials consumptions in the G-20 countries.

The world manufacturing output data at current prices probably underestimate the goods volumes really produced in many emerging countries. In order to better understand the extent of the change that occurred in world manufacturing output it is useful to analyse the consumption of eleven major industrial materials in the G-20 countries over the last few decades. The consumption figures were reconstructed with reference to four years: 1980, 1990, 2000 and 2010.

The utilization of the consumption data of raw materials and industrial materials as statistical indicators in the study of growth problems and economic cycles has a long tradition in economic analysis. Spiethoff, too, used the ‘iron consumption parameter’ as an analytical instrument (Spiethoff, Reference Spiethoff, Elster, Weber and Wieser1925). Tugan Baranovsky did the same in his Les crises industrielles en Angleterre (Tugan Baranovsky, Reference Tugan Baranovsky1913).

The basic industrial products selected for this analysis are the most representative in a number of manufacturing productions. Some of their consumption takes place in the construction industry (steel consumption, for example), not in the manufacturing industry. Therefore, when observing the basic product consumptions in the emerging countries, the actual manufacturing activity may be overestimated due to the effect of the building industry on the demand of materials. However, the wide range of materials considered allows this aspect to be toned down, thus avoiding excessive overestimates of the shares of the various countries in the world manufacturing output.

To start with, we consider the six main non-ferrous metals: copper, aluminium, lead, zinc, tin and nickel. The strategic role of these materials in the development processes is not less important than that of steel and was thoroughly analysed both with reference to the dynamics of economic cycles (Fortis Reference Fortis1988) and to the ‘stage of growth’ theories (Fortis Reference Fortis1993a, Reference Fortis1993b³, Reference Fortis, Curzio, Fortis and Zoboli1993c). Non-ferrous metals are suitable for a variety of uses in the various manufacturing industry sectors, in addition to the building industry. Some of them, like aluminium, are also tied to the household consumption cycles because of their utilization in packaging. For all these reasons the consumptions of non-ferrous metals are also extremely significant ‘real’ indicators of the trend in the most advanced economic systems. In addition, they make it possible to highlight particular manufacturing specializations in different countries or at particular historical stages of their development, while in some of our studies (e.g. Fortis, Reference Fortis1988) we also underlined the relationship between copper consumption, GDP and industrial output in a number of countries and in Italy.

The role of non-ferrous metals in the centuries-old process of economic development has been of major importance. It is almost impossible to imagine electrification and telephone communications between the end of the 1800s and the beginning of the 1900s without thinking of the essential role of copper as a conductor. Likewise we cannot imagine the development of ‘mass consumption’ in the United States in the 1920s and elsewhere in the following decades of the last century without thinking again of copper, with its increasing and widespread applications in the building industry, in the transportation industry and in consumer goods; or of lead and its usage in car batteries and as antiknock in gasoline; or of tin, as essential in welding as nickel is in the production of industrial steels and superalloys; or of zinc and its applications in the steel industry and in the production of brass (a copper-zinc alloy), the latter being another crucial material for its applications in mechanics and constructions (taps and valves). As regards aluminium, it is the non-ferrous metal with the largest consumption quantities at present, as it has become progressively fundamental in many sectors, from the building industry to packaging, from means of transportation to mechanics.

Another material considered in our analysis is crude steel. The same comments apply here as made in connection with non-ferrous metals. It is a material of major importance because of its use both in the manufacturing industry (automotive, machinery and mechanical products) and in the construction industry. Equally important in manufacturing processes are rubber (natural and synthetic), used in tyres and miscellaneous products, including piping, gaskets, shoe soles etc., as well as wood-based panels, available in a wide range of types with broadly diversified features and applications, used in the building and furniture industry and plastic materials.

In our analysis we consider the overall consumption of seven plastic materials: Low-Density Polyethylene (LDPE), Linear Low-Density Polyethylene (LLDPE), High Density Polyethylene (HDPE), Polypropylene (PP), Polyvinyl Chloride (PVC), Polystyrene (PS) and Polyethylene Terephthalate (PET).⁴ Finally, we consider the consumption of wooden panels, very important in a number of industries, as well that of packaging paper and cardboard, another significant indicator of the manufacturing activity levels in a country.

The analysis is focused on the major trends and on the structural changes that occurred in the G-20 countries in the last thirty years, with the rising importance of the emerging countries as basic product consumers in the industrial manufacturing processes.

The main results are set forth hereunder.

First of all it is observed that the United States, in 1980 the first world consumer of nine basic products out of eleven, preceded by the former USSR only in steel and zinc, lost the top place as user of industrial materials in 2010 and was replaced by China. The final overtaking by China took place between 2000 and 2010, but as early as in the year 2000 the Asian giant had surpassed the United States in the consumption of three materials (zinc, tin and steel) and held second place in the world consumption of as many as seven other basic products. By 2010 the overtaking had occurred in all the eleven materials examined. It should be emphasized that in the consumption of the seven single main plastic materials considered, in 2010 China recorded higher figures than the United States in six of them. Only in PET consumption was the top position still held by the United States, though by a small margin.

The structural change appears to be epoch-making also if the quantities used by China are examined. In 2000 China still used 64% copper, 75% rubber, 62% plastic materials and 55% packaging paper and paperboard compared with the United States. By 2010 China was already using four times as much copper as the United States, three times as much rubber, almost twice as much plastic materials and one-a-half times as much packaging paper and paperboard. All that took only ten years and gives a precise idea of the dramatic changes in world manufacturing output. China’s overtaking of the United States in manufacturing production is probably one of the major economic changes in the entire economic history of humankind and among the fastest ever occurring.

It is worth stressing Russia’s loss of importance, from the 1990s onwards, i.e. after the break-up of the USSR, in world consumption of raw materials, while Japan kept the second place in world consumption of industrial materials after the United States for a long time before the amazing rise of China as a new manufacturing power.

Japan’s overtaking by China in industrial materials consumption, instead, took place between 1990 and 2010. In addition, South Korea came considerably closer to Japan in the basic industrial products consumption list between 2000 and 2010. A remarkable performance was recorded also by Germany, which in 2010 preceded Japan in the consumption of copper, lead and wood-based panels. As regards the main plastic materials, it should be underlined that in 2010 Germany, though preceded by Japan in total plastics consumption, ranked higher than Japan in LDPE, HDPE and PVC.

It is interesting to notice that, in Europe, Italy is preceded only by Germany in the use of industrial materials, a place continually maintained from 1980 to 2010. Despite the rise of the emerging countries, Italy also kept over time a good position in basic product consumptions among the G-20 countries, while France declined remarkably. The distance between Germany and Italy did not grow much, while the gap between Germany and France grew visibly between 2000 and 2010.

Two large emerging countries recorded a growing importance in world consumption of basic products in the period under consideration: India and Brazil. While in 1980 and 1990 Brazil preceded India as a raw material consumer, the latter country made a big jump in the world ranking of industrial material consumption between 2000 and 2010, surpassing even Brazil. Also South Korea, thanks to a strong acceleration in the last two decades, has surpassed Brazil in industrial material consumption. So now India and South Korea come immediately after China, the United States, Japan and Germany in the world list of basic products consumers.

In 2010 South Korea jumped right after Germany in material consumption, and by 2010 was already using more nickel, zinc, lead and steel than Germany.

As regards Italy, South Korea overtook this country in industrial materials consumption between 2000 and 2010. In 2010 South Korea used more primary aluminium, copper, zinc, lead, nickel, tin, steel, paper and paperboard as well as rubber than Italy, while Italy preceded South Korea only in the consumption of wood-based panels and plastic materials.

Again in 2010 also Brazil surpassed Italy in basic product consumption. Brazil’s lead over France is even sharper, while it is worth remarking that Turkey is now more important even than Great Britain in industrial material consumptions.

In order to sum up the results of our analysis we built a rough consumption index for the eleven materials under examination. The index results from the average of the positions held by each economy in the consumption list of each basic product, always using the nineteen countries of G-20 as reference. The index is rather simple: if a country is the first consumer among G-20 for all eleven basic products, like China in 2010, its index is 1, i.e. equal to (1x11)/11. The index ranges between a maximum value of 1 (if a country is the most important consumer of all the eleven raw materials) and a minimum value of 19 (if a country is the least important consumer of all the eleven raw materials). The twentieth G-20 member, the European Union, is not included.

Table 19.4 shows the rankings of the major raw material consumer countries in 1980, 1990, 2000 and 2010 according to our indicator. The following comments can be made.

From 1980 to 2000 the United States was always the top world consumer of raw materials. By 2010 China jumped to the top position, with higher consumptions than the United States in all the materials considered. In 1980 the USSR ranked second after the United States and in 1990 was third after the United States and Japan. After the collapse of the Soviet Union, Russia did not hold any leading position in the list of world consumption of basic products any more, and ranked between the eleventh and the ninth positions. Japan, with the temporary exception of 1990, was always third in raw material utilization, Germany was fourth. In 2010 the United States was still more important than Japan in the consumption of nine basic products out of eleven, while Japan ranked before Germany in eight raw materials. After these countries, South Korea climbed from the fourteenth position in raw material consumption held in 1980 to the fifth place in 2010. In 2010 Germany still preceded South Korea in the consumption of seven raw materials, while South Korea preceded Italy in nine materials.

Over the three decades from 1980 to 2010 Italy, France and Great Britain lost some places, Italy, however, fewer than the other two countries. In 2010 India and Brazil preceded Italy, which went down to the eighth position as raw material consumer. In the same year India preceded Brazil in the consumption of eight basic products vs. three where Brazil was more important. In turn, Brazil has a slight lead over Italy as user of basic products: six raw materials vs. five.

A sharper drop appears in raw materials consumption by France, down to the eleventh place in 2010, and by Great Britain, down to the fourteenth position. In 2010 Italy preceded France in nine materials out of eleven. In 2010 France was surpassed also by Russia and Turkey: both countries precede France in seven materials out of eleven. Russia, however, is more important than Turkey, preceding it in seven materials out of eleven. Finally, in 2010 Great Britain was preceded also by Mexico and Canada.

4. Conclusions: raw material consumption as a fundamental indicator of dynamic structural change in the world economy

Raw material consumption shows clearly that the distribution of world manufacturing output has radically changed over the past ten to fifteen years, with the growth (beside the traditional developed countries) of new leaders such as China, South Korea, India and Brazil and with new outsiders such as Mexico and Turkey quickly moving up. Some substantial structural changes clearly appear both from the figures on manufacturing output value and from the consumption data of the main basic products used in the production processes. Both types of statistics show that the major world manufacturing producers in 2010 were, in decreasing order: China, United States, Japan, Germany and South Korea.

The figures analysed in this chapter undoubtedly prove China’s absolute record, South Korea’s rising role and the powerful growth of some emerging economies, such as India and Brazil, in world manufacturing output and primary commodity consumption. Over less than ten years the United States lost its manufacturing leadership, which was taken over by China. Japan maintains its prominent position in Asia, while Germany and Italy remain the two most important European manufacturing producers.

1. Introduction

This chapter seeks to situate the experiences of developing countries in the context of the structural relations as prevail within and across those nations, especially, in the age of globalization. Analysis of the changing structure in these economies relates to the interaction between the state, the shifting class alliances within and across nations, and the changing face as well as command of capital therein. The present chapter draws attention to the horizontal integration of agents as above in the context of developing economies, following studies of structural dynamics¹. It helps to unfold the circular flow as well as the mutually dependent relations between social groups that remain responsible for the pattern of accumulation as well as the related class alignments in these countries over time.

2. On regime changes in developing countries

Documenting the changes in the economic and the societal patterns of nations that gained political independence at end of World War II, one comes across some major structural breaks, especially as have taken place since the last decade of the previous century. These changes have unplugged the earlier pattern of governance in these nation states, which in effect has substituted the state directives accommodating the socially oriented developmental goals by a set of policies that facilitate the working of markets. These structural breaks incorporated a set of parallel changes in institutions, often with compliance of the state apparatus, thus smoothening the process of regime changes. The pattern, in our judgment, unfolds a story as to how the goal of development in these countries has been pushed to the backstage in the process.

Analyzing the similar changes in the advanced economies, it is possible to relate the systemic capitalist crisis, including the recent one, to the structural changes and the evolving institutional patterns under capitalism. The repercussions in the developing region connect, once again, to the changing economic and social parameters therein, with processes similarly led by finance and technological changes.

Discontinuities in the pattern of governance in the developing economies goes back to the ending of colonial subjugation and the formal surveillance and domination by the ruling imperial nations in the middle of the last century. The changes as followed comprised of some initial efforts in these newly independent states to pursue the multiple aspirations of their own people. This agenda included some degree of national control over their basic economic activities, in a bid to achieve economic sovereignty along with economic and social advances for domestic citizens in general. Within the newly independent countries, there also evolved an implicit social contract, which embodied the economic aspirations as well as the social norms and traditions of their own citizens. By and large these at least provided a platform for further action in the same direction.

As for India and similar other countries that had parliamentary democracy, a formal commitment as aforementioned soon became politically important to the ruling state. However, the modest growth and limited industrialization as was achieved turned out as inadequate in terms of delivering a pace of development that reached the majority. In absence of adequate purchasing power and jobs for the population at large, the scale economies that could be backed by an expanding home market failed to come into being. In the long-run these countries missed the opportunities to transform into a developmental state proper that would take care of distribution along with growth.

Despite the limited success in achieving their developmental goals, countries as aforementioned were able to achieve a certain degree of self-reliance in terms of the range of products manufactured within the country. With the public sector taking the initiative, as in India, to set up basic industries such as steel, cement and even pharmaceuticals, the country was enabled to initiate what came to be described as a ‘mixed economy’; one which also had, with limited state planning, the potential for shaping up as a developmental state that catered to all. In India the early attempts to attain the nationalist goal of industrialization were embedded in the Nehruvian vision to achieve self-reliance along with a socialistic pattern of society. This was reflected in a narrow but expanding role of the public sector in providing or subsidizing some basic facilities to people at large, a process which, however, got disrupted later, especially with the launching of major economic reforms in the country by the beginning of the 1990s.

The spate of economic nationalism with an urge for industrialization continued in India during the 1970s with policies initiating state-led regulations. Those included nationalization of banks and the insurance sector, state trading, controls over monopolistic practices, abolition of the managing agency system and privy purses in princely states, introduction of public distribution in food grains and limited measures of land redistribution in specific states, the last two in a bid to address the rising poverty as well as armed uprising among the masses in the countryside. In coming years exchange control in the external sector was consolidated with the Foreign Exchange Regulation Act (FERA), which was enforced to prevent leakages of foreign exchange and money laundering. A brief spell of the above regime, which can be labelled as a ‘regulationist’ one, continued with a populist pro-poor agenda and some degree of industrialization during the next few years.

The regulationist regime, in terms of a socialist or at best a developmental frame, of these countries came to an end by the mid-1980s. Interestingly, the shift coincided with the re-inventing, in advanced economies, of conservative neoliberal doctrines and its application, especially with the application of Monetarism to tackle the spiralling inflation that had emerged. The neoliberal doctrines also advocated an end to controls while championing the cause of free markets on grounds of economic rationality as well as efficiency. The end-results of these moves was the dismantling of the welfare state in the West and its replacement by a minimalist and conservative state.

There soon emerged a consensus on policies to be recommended to the developing nations which was in accordance with the leading multinational trading and financial institutions. These included the ‘Washington Consensus’, resonating in turn the paradigm shift as had already taken place in institutions and state policies of the advanced countries. Loans offered by these multilateral institutions such as the IMF or World Bank were inevitably beset with hard conditionality that compelled the developing countries to follow a contractionary monetary and fiscal policy and to open up and deregulate their respective economies, by scrapping controls in different markets. The changes signalled an incarnation, in the developing countries, of a new policy regime that by and large was consistent with the neoliberal macro-framework propounded by the advanced economies and the international financial institutions.

An explicit agenda with a neoliberal shift in economic policies was observable in India as the country accepted the conditional loan package from the IMF in 1981. Strict limits were imposed on fiscal deficits as a proportion of the GDP and several deregulatory measures followed in a few years, relating to trade, technology and finance. Policies facilitating liberalization continued during the successive years and were acceptable to different ruling parties that came to power, each bent in pushing further a market-oriented neoliberal policy.

Economic reform in 1991 became the main agenda of the ruling Congress Party in India that regained control of the central government during that year. Depleted official reserves, large deficits in balance of payments, and sharp declines in GDP growth all demanded urgent attention. Economic reforms were considered as the panacea and a cure-all to combat the economic crisis that had engulfed the country. Changes in economic policies scrapped the prevailing institutions relating to controls and regulations, on trade, technology, finance and even labour. By mid-1990s there was almost an implicit consensus or unanimity among the majority of political parties in India represented in the Parliament regarding the need to continue with the reforms process. As we pointed out earlier, these policies were backed by the neoliberal doctrines of growth via efficient market that were an accepted mainstream position.

The new strategy of opening up also changed the class alliances within the developing countries. Thus the national bourgeoisie that earlier was for industrialization in protected home markets was now more for alliances with foreign capital in activities dealing with finance and technology, often with a marked degree of dependence on imported inputs including technology. In general the local bourgeoisie was by this time in favour of a conciliatory move towards foreign capital.

One witnesses today, for India and other developing countries, a marked influence of the global financial and trading institutions in the making of national policies. The guiding principles as are followed by these institutions all originate from the neoliberal doctrines, as described earlier. Pressure also has mounted up from the powerful interest groups of external capital and technology to adopt policies that suit their interests. The measures include, among other things, cuts in fiscal spending (often at cost of social expenditure), privatization of the public sector enterprises even with profitability, deregulation of the domestic capital market, scrapping of industrial regulations, removal of trade barriers across countries, removal of labour market rigidities by reforms that push labour market flexibility, inflation targeting by means of monetary squeeze and fiscal cuts and also the lifting of controls on external payments and receipts. In general these measures are geared to strengthening the forces of the market while reducing the state machinery to a minimalist one.

The changing norms and policies in the developing countries went hand-in-hand with noticeable reorientations of their institutions. As it could be expected, privatization and a minimalist state were considered the prime harbingers of an efficient allocation and utilization of resources in these economies, which can also bring in the maximum possible growth. Based on the philosophical foundations of methodological individualism, the Benthamite logic of free markets provides the basis for the much-celebrated optimality principle formulated by Vilfredo Pareto back in the 1920s.

3. Dominant finance in overpowering markets

Contemporary capitalism in the advanced and the less developed regions today is identified with the opening up of markets, an institution that has over-powered the state or other public organizations in the majority of those countries. The new mantra of the market has pushed the state to the backstage, thus limiting state spending in the social sector, which includes aid to schools, hospitals, and subsidies on housing, fuel, transport, electricity and the like that remain important for the poorer sections of society. With markets pitching the prices as well as transforming the quality of goods and services, even when supplied by state enterprises, the developmental or social content of growth has been eroding very fast. Thus the ability of markets to instil the positive effects of globalization, as claimed in theories that relate to an efficient growth process, has failed to be fulfilled, especially in terms of the experiences of the majority of developing nations. The current crisis in advanced countries in terms of financial upheavals, real stagnation and unemployment narrates a parallel story, of market-led destitution for a sizeable population. A neoliberalist appeal to free markets, when it concerns finance, is laden with the class interest of those whose assets primarily consist of financial claims in the market. Sections of people as aforementioned are often described as rentiers who subsist on income from financial assets rather than on income generated by current productive activities.² Owners of these assets usually have a stake in the stock markets where shares are traded and also in the credit and foreign exchange markets. The standard manuals of trading tell us that stock traders can profit (or even make losses) only in uncertain markets with price volatility. Thus for markets that are stationary or even stable, chances for traders to win (or even lose) are at their minimum, leaving them no possibilities to fetch profits/losses as a consequence of stock-price movements. It thus works to the advantage of finance, and in particular for the rentiers (who live on income from financial assets), when controls are removed in the financial sector and markets are volatile with fluctuations in prices and volume traded. With the lifting of controls on capital flows, the rentiers of today include the foreign institutional investors (FII in short) as well, having a stake in the movements of stock markets in the emerging markets that are now an integral part of global finance.

Opportunities of fetching handsome returns in capital markets around the world lent an elevated status to finance capital in terms of an authority in the global economy. Thus started the push for deregulated finance with pro-finance economic policies, in a manner which often was passive and even detrimental to the interest of industry. The changed set up of global capital had its influence on economic policies in developing countries as well, especially with their close links to global capital flows. We have outlined later in this chapter how global dominance of finance has made it mandatory for the developing countries to chart out a path of finance-led regime, which has often been opposed to growth in the real economy and fair distribution.

Viewed from a classical Marxian perspective, the market as an institution can be seen as an instrument to promote the expansion of capitalist production processes. Thus capitalism is made possible as the free market enables production to be based on wage labour, commodity production, exchange and capital accumulation³. From this angle advances of the market are treated as a necessary pre-requisite to a capitalist expansionary process. Markets provide a run up to transformations to competitive capitalism by compulsions, on the part of capital to improve productivity and in the process to extract surplus (labour) value by employing labour who works at low wages (equivalent to necessary labour) for survival.

Differences, however, exist within the Marxist circle on the historic and institutional specificities of capitalism (as a form of production, exchange and distribution) and the role of markets as an adjunct to capitalism. For the school led by Immanuel Wallerstein and Gunder Frank, markets remain central in bringing about a world system of trade and exchange, as happened since a period as early as the sixteenth century. The process, according to them, also heralded the advent of capitalism.⁴ For other Marxist scholars such as Maurice Dobb, trade, exchange and markets, while necessary, are not sufficient to warrant a path of capitalist expansion via accumulation. Thus trade can be there even with serfdom or its variations that limit the accumulation and expansionary effects of the market. As pointed out, in absence of wage labour, commodity production for exchange and the ability of capitalists to accumulate by using surpluses from wage labour, it is not possible to have an expanded reproduction that makes for capitalism.⁵

However, these positions, while relevant in the context of the accumulation process under advanced capitalism, cannot be applied to the developing or the least developed countries where production and exchange are subject to several non-market relations. Interestingly the mainstream theorists often hold such aspects as responsible for the backwardness of these countries. The call for liberalization and opening of markets thus follows as a logical cure-all for low growth and underdevelopment.⁶

It may be relevant here to point out that to understand the dynamics of capitalist accumulation in market economies, which today include the developing countries, one has to rely beyond the standard tools of economics. As can be found in the classic work of Karl Polanyi⁷, there exist, in all societies, a set of protective as well as countervailing forces that regenerate and sustain the ‘mutually supportive relations’ within it. As capitalist expansion enlarges the sphere of the market, it tends to subordinate the society and destroy the social fabric with standardized ‘capitalist values, body and soul’ as embedded in the culture of the global market. This violates both the basic human nature as well as such requirements of indigenous people as are fundamental and intertwined with family, community and social relations. In terms of this position, unlimited expansions of the capitalist system and the market, while capable of generating growth and accumulation, also cause ‘dispossession, displacement and human degradation’.⁸ Markets (with their adjunct, which is capitalism) in this alternate view are sustainable only when ‘re-embedded’ in society with attempts on part of institutions including the state to act in a manner that conforms to the preferences of the society. It is usually done by regulating and stabilizing the market economy to achieve some degree of political legitimization. For Polanyi the ‘commodified’ land and labour goes against nature and generates ‘fictitious’ commodities that eventually bring a ‘countermovement’ to re-embed the market to the society.

Markets, as described earlier, have come up in a large number of countries today, often carrying the label of ‘emerging economies’. For the majority of these countries, and in particular, for the developing countries, the expanding market has often remained ‘dis-embedded’ from society. Often the process generates reactions (countermovements) from what is described as civil society (which may include political parties as well as non-governmental organizations outside the seat of power). These can take the form of social and political protest movements and even political struggles/resistances. Reactions as these, while impairing the pace of market orientation of the society, can also help the market itself by bringing up to the surface what all are acceptable to the society at large. Described by Polanyi as a ‘double movement’,⁹ the process is one that is but expected in a functioning democracy. The above, especially in its sequential arguments relating to ‘countermovements’ has been subject to questionings from different quarters.¹⁰ However, one cannot undermine the role of ‘civil societies’ as institutions in these economies, which has been assuming a major role in contesting the limitations of a market-led economy. Their role, as we mention later in this chapter, is no less in advanced countries.

There remain, however, considerable discrepancies between what all are sought after in terms of the social and political movements within a country and the realm of what are actually achieved. The mediating role provided by the state here assumes a great degree of significance in these liberal market economies, with the state subject to an ‘existentialist contradiction’, between unfettered competition and expansion of capitalism on the one hand and the political necessity of sustaining a minimalist façade of a mutually supportive and self-reinforcing society on the other. Rejecting this position, neoliberal mainstream policies continue to treat the market as the sole arbiter, using the narrow economics of supply and demand. Here it ignores the role of social institutions that shape up the civil society. Continuing with the impact of the market-led growth process in advanced, and especially in the developing countries, one can mention the changing composition of output, use of technology and the distributional pattern of output in these economies. The range of commodities offered by the market in this deregulated phase of capitalism have introduced, in developing countries, a variety of sophisticated goods that in terms of quality are comparable to those available in global markets. While these changes in the production pattern fulfil the much awaited and sought after changes in the consumption basket of the elite, these remain as unaffordable luxuries for the poor and those who are not so rich. These are the sections of population in these countries who are forced to opt out from these up-markets, not as voluntarily options but due to a lack of their purchasing power. Such actions cannot be classified as acts of ‘voluntary exchange’ and rational choice, as professed in the theory of the so-called free markets! Moreover these new products often need an upgrading of technology, which is usually labour displacing. Finally, a large and rising share is enjoyed as rentier income by those who hold stocks of equities, real estates and even commodities as sources of unearned income. Arguments as these put to serious doubts the claim, in mainstream theory and policy, that technology is a free public good that needs to be developed under patent protection.

4. The meltdown in global markets: the great recession of 2008

There erupted, by the third quarter of 2008, a serious upheaval in the global financial markets, leading to a crisis which, once again, brings to a disbelief the mythical content of precepts offered in mainstream economic doctrines. The dramatic turn of events was, however, preceded by rapid fluctuations and rising turnovers in financial markets, much of which can be related to the steady pace of deregulation in those markets.

Financial market opening had a big push in the advanced economies in 1999 when the prevailing segregation between the banking and security markets under the Glass-Steagall Act of Roosevelt administration (1933) was repealed in the United States. This was achieved with the passing of the Financial Services Modernisation (Gramm-Leach-Billy) Act, which abolished the earlier compartmentalization of the financial markets for securities for other banking activities. In UK a similar change, described as ‘big bang’, in the financial market removed in 1986 the prevailing barriers across the credit and security market.

Deregulation of the financial market suited the interest of agents in these markets who were already engaged in the all-encroaching global security market, accommodating the free flow of finance across countries. As it may be guessed, security transactions were closely linked to the operations of the Trans-national Corporations (TNCs), both originating from the same set of advanced countries. With the security market gaining prominence, banks by this time were in no position to continue with credit flows as major channels of business, especially after the near collapse of the financial market at end of the debt-crisis, affecting countries in South America during the early 1980s.

The financial market went through a transformation, especially in developing countries, which by now were faced with limited options to obtain flows of official aid. It may be mentioned here that till the 1970s the latter had served as the main conduit of external finance to these areas. Global finance in the direction of developing countries was, by now, mostly from private sources, financing long-term bonds, direct foreign investments and short-term portfolio capital. Flows as such were ready to come to these outlying territories as long as private investors considered these countries to have ‘financial viability’, anchored on a steady pace of deregulation of the financial sector to cover domestic banks, security markets, overseas finance and the exchange rate of domestic currency.

With uninterrupted transactions in the deregulated global financial markets, which generated considerable uncertainty, instruments were devised to ward off risks by providing hedges against the latter. New instruments, known as derivatives, were innovated in the financial markets, often with direct connivance from the authorities in power. In this both the market as well as the so-called regulators seem to have been continuing with a shared faith on what they considered as ‘modern financial theory’, which was grounded on the belief that ‘all available information is incorporated into market price, and that there exists complete arbitrage between the different financial instruments’.¹¹ As pointed out, this confidence in market finance ‘was converted into practices, routines and computer programs of portfolio management … using sophisticated statistical methods that are beyond the grasp of laymen’.¹² Thus, in the so-called modern financial theory, the source of profit was considered to lie in the skilful management of a set of assets and liabilities.¹³ In this one could witness what has been described as an unprecedented degree of ‘financial division of labour’, which accompanied the emergence of new institutions. Those included ‘the rise to power of credit rating agencies, pension funds and money managers, the creation of ever more complex financial instruments defining as many specializations of financial agents … and risk is spread to those who have the will and wherewithal to assume it’.¹⁴

Looking back at the evolving pattern of the crisis in the financial sector of the global economy and its growing intensity by end of the last decade, one can identify an underlying passive acceptance or at best, some inaction on part of the regulatory authorities on related matters. Examples include the role of the Comptroller of Currency in the United States in creating the notion of Too Big to Fail (TBTF) banks, making it nearly manadatory for the Federal Reserve to shoulder its responsibilities vis-à-vis the large banks as ‘a lender of last resort’.¹⁵ The move for creating the priviledged TBTF category of banks, initiated some thirty years back, was supported by the Federal Deposit Insurance Corporation of the country. One can also mention the Savings and Loan crisis and the protection offered to the relatively bigger units by monetary authorities. Responses as these clearly facilitated the pace for concentration as well as reckless investments, by large banks and other financial institutions that were favoured. Those institutions were increasingly involved in the markets for derivatives, entering into contracts such as forwards, futures, options and the like. Use of these hedging instruments worked to minimize risks as long as the market was stable and there was trust or confidence in these transactions. However, often the greed of making more money led agents to speculate in future markets of stocks, currencies or even commodities. And investments in the financial sector continued to be profitable as long as there was trust in the financial market, on operations that included Asset-backed Securities (ABS) and the Credit Default Swaps (CDS).

As for the CDS, those transactions were initiated in a limited scale by the Morgan Trust in 1997. The device soon assumed much bigger proportions in the derivative market over the next few years, especially with its attractive options in transferring (insuring) default risks. Those transactions entailed the sale of an ABS in the form of a CDS to a counterparty that insured the possible loss in asset value in the market on payment of regular insurance fees from the seller.¹⁶ The counterparty insurer (buyer of CDS), however, could be in trouble when a large number of those turned red, a situation that involves proportionate payment obligations.¹⁷ In fact the collapse of Lehman Brothers in September 2008 indicated such a situation, which in turn was followed by a massive bailout by the Fed of AIG, which was nearly insolvent with its large holdings of insured assets that carried little worth in the market. The large-scale bailing out of financial institutions as above indicates the weight of TBTF in the US financial market. It may be pointed out here that none of these ABSs including the swap deals under the CDSs were subject to any regulation by the monetary authorities. Sometimes deals were enforced indirectly, as for example, with US Secretary of the Treasury Paulson pushing Fannie May and Fredie Mac, two major financial firms, into holding toxic assets in the collapsing mortgage market of 2008.¹⁸ One may observe that the authorities in such cases were ready to put up with a consensual approach while shouldering the expenses (of course at cost to taxpayers) as were needed for emergency bailouts.

A scenario as above, with a passive acceptance of the ruling state authority of the on going financial engineering in search of higher short-term returns, has been identified in the literature as situations of a ‘predatory state’. This implies that the state uses ‘the existing institutions as devices for political patronage … [and is] aligned with financial de-regulation’.¹⁹ As is well-known, finance by the time of the sub-prime crisis was already dominated by aggressive practitioners in the financial markets who were familiar with the art of ‘originating and distributing mortgages that were plainly fraudulent’. By then the state had already sent clear signals to the financial sector that the deregulatory wave is going to continue. In such predatory states there was also an implicit alliance between the public and the private sector, with the state relinquishing its role in crucial sectors of the economy, including health and education. Arrangements such as these also provided added space for marketization of public goods.

The lull in the US property market and the related crash in financial markets in 2008 led to a contagion that spread to other parts of the advanced economies as well as to the developing region. The spate of uncertainty that was rising in deregulated markets also resulted in a massive increase in the use of derivatives, which made investments in the real sector unattractive in terms of relative profitability.

As for official policies, especially in the United States, which aimed to mitigate the impact of the crisis, one notices an underlying pattern that confirms the predator character of the state. One can here mention the quick responses by US President George Bush to the subprime crisis and the successive bankruptcies of major financial institutions in the country. The measures included the Troubled Assets Recovery Program (TARP) of October 2008, which offered purchases of tarnished assets from financial institutions. Later the monetary authorities tried to bail out several US financial institutions, especially after a failure to act led to the bankruptcy of Lehman Brothers, a major investment bank. The cumulative sum deployed to rescue the ailing financial system since the onset of the crisis has been around $11 trillion as committed funds by 2011, of which the rescue package to AIG alone amounted to $182 billion. Other categories of rescue packages included programs designed to revive the housing market and to prevent foreclosures by earmarking large sums of funds.²⁰ Responses to mitigate the financial crisis also included a series of regulatory proposals in the United States to address, among others, consumer protection, executive pay, financial cushions or capital requirements for banks. In January 2010, US President Obama proposed additional regulations that were to limit the ability of banks to engage in making speculative investments that fail to benefit the bank customers.²¹ The major legislation initiated by the Obama administration included the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which aimed at the elimination of the TBTF problems. In effect it also targeted an end to bailouts causing losses to taxpayers. The pattern of implementation, however, has evoked criticisms as to whether the Act will also eliminate the growth of large banking companies and thus the need for further bailouts in future.²²

While in the United States the bailout and related measures to protect the financial sector somehow worked in achieving temporarily what these measures sought to do, the real sector continued to be in disarray. After some early signs of recovery in the fall of 2009 and spring of 2010, economic growth in the United States started slowing down again. With jobs generated by the private sector negligible, US unemployment was at 5.9% in October 2014 as compared to 7.3% in October 2013 according to the US Bureau of Labor Statistics. Counting the number of unemployed who are outside the organized sector, the picture is even worse. The crisis spread to Europe with a similar impact on the real sector in terms of output growth and employment.

During the initial years after the onset of crisis, a package of spending along with tax cuts was introduced in the United States in early February 2009. Known as the American Recovery and Reinvestment Act (ARRA), it was expected to create or save approximately 3.5 million jobs by the end of 2010. The expenditure and tax cuts included in the legislation were expected to provide relief to low-income and vulnerable households, while at the same time supporting aggregate demand. It has been pointed out that the stimulus required per new job created was much higher than final outlay by those who got jobs. This was because consumption spending was already constrained by the large outstanding household debt and, also, a part of additional consumption could be absorbed by cheaper imports from abroad. The recent plans to directly inject liquidity in the credit market as a measure of Quantitative Easing also may be subject to the same limitations, viz., of potential leakages via imports and the deflationary impact of outstanding debt.

In a number of countries in Southern Europe and in Ireland the crisis in the financial and the real economy took a serious turn by 2010 with credit rating agencies downgrading a number of countries below investment grade. To avoid bankruptcy those countries accepted loans with hard conditionality from public sources such as IMF and the European Union. The mandatory fiscal discipline and the related austerity have been reducing further the output and employment growth rates in those indebted countries, as happened with the Latin American debtors in the early 1980s. The impact on developing countries this time was naturally even more deleterious with the squeezed export earnings and related consequences.

5. Analysing the sequences in the crisis

Analyzing the functioning of the financial sector in recent years, which include the changing institutions in advanced as well as in the developing economies, the pattern can be explained by relying on economist Hyman Minsky’s characterization of deregulated financial markets and its built-in tendencies towards an ‘unstable economy’. The outcome has evolved around these sources of new-fangled credit, especially, with involvement of banks in the security market under universal banking, and the rise of what has been described as ‘shadow banking’. Minsky drew attention to the fact that in the new institutional setting, banks and non-bank financial entities can follow an ‘originate and distribute’ model, which involves a re-packaging of assets and their sales. In this the shifting of risks to counterparties generates more profits than is possible from the simple ‘commitment models’ that rely on the rate spread at the loan officer’s desk.²³ These practices, according to Minsky, make for higher profitability in market-based funding, as compared to bank-based leveraging of projects. In the changing scene banks got increasingly involved in the security markets. Thus there prevails, as pointed out, a ‘symbiotic relation’ between the universalized financial structures (which contrasts the earlier pattern of segregated banking) and the related securitization of financial instruments.²⁴

Elaborating further, the easy access to credit, which made the recent financial boom, was needed to cover leverages for hedging as long as the expected income on assets was adequate to cover (hedge) the mandated interest and repayment liabilities. However, hedging often gave way to speculation when the realized income from the assets fell short of the payment liabilities. Attempts were then made to ‘roll-over’ past debt and continue speculating. Finally a state arose, as in the recent crisis, when payment liabilities could only be met by additional borrowing, a typical case of ‘Ponzi finance’ as described by Minsky.²⁵ With a declining state of confidence in the market on value of assets held by lenders, dealings in the financial markets came to a grinding halt, leading to big holes in the balance sheets of the concerned counterparties and heralding the onset of a typical ponzi situation. It may be relevant at this point to highlight the point that ponzi finance is another name for fraudulent behaviour on part of financial agents, as can be seen in the various scams and related acts in recent times.²⁶ The alternative position offered here in line with Minskian analysis is to look at the uncertainty-ridden trail of financial markets, the route of which often deviates from the predictions of the private ‘market makers’. Such a state clearly plagued financial markets in the United States in the fall of 2008. By this time the real economy in most advanced economies, including the United States, were already going through a phase of low growth and unemployment. A crash in the financial sector gave an added jolt to the stagnating economy, which plunged into a deeper recession as a consequence.

Looking at the transformed pattern of institutions in the context of securitization, one needs to draw attention to the changing character of money and credit as has taken place in the meantime, especially with credit flows from banks and non-bank financial intermediaries no longer constrained by the value of reserves and capital held under a fractional reserve system. The changes considerably lowered the weight of central banks in the credit market to protect credit, as was evident in the recent financial crisis with credit flows under ‘shadow banking’ no longer under the surveillance of the monetary authorities. This is because such credit flows by and large drive the leveraging of the ABSs, which in turn is made possible by the expanding derivative markets. In such situations the traditional devices used by the monetary authorities, which include a raise in interest rates to control inflation, might even lead to a collapse of stock prices and hence to a financial crisis rather than to a state of financial stability.

We may add here that with innovations in the financial markets providing lucrative returns on short-term financial transactions, equities bought and sold in the primary market as Initial Primary Offers (IPOs) fetch much lower rates. These assets, sold earlier as IPOs, are usually transacted later in the secondary market where these are no longer backed by physical assets.²⁷ Looking back at the boom-bust cycles, finance in its upswing, while creating myriads of financial claims and liabilities, thus becomes increasingly distant from the real economy. An expansionary financial market thus does not necessarily generate corresponding expansions in real terms, while the growing disparity between the two may finally disrupt the financial boom itself, as happened of late in the world economy.²⁸ The financial boom never imparted proportionate growth in the remaining part of these economies, as was evident in the low average growth rates of GDP in the OECD nations all through those years when the financial sector was performing at its peak.

Efforts on part of monetary authorities to rejuvenate their respective ailing economies have generated rather limited results in advanced countries. Beyond helping to temporarily arrest further downslides in the financial sector in terms of bankruptcies and closures of financial institutions, the measures have not remedied the structural weaknesses of the system as are related to tendencies that relate to short-termism and speculation. Rather it has become clear that no amount of financial bailouts and monetary injections can bring back the system to a stable and sustainable order unless the caveats within the system are addressed squarely. Even policy measures like the American Recovery andand Reinvestment Act (ARRA) to create employment in the United States failed to address the cutbacks in levels of consumption of households as a result of their state of indebtedness in the financial markets. The large injection of credit via recent Quantitative Easings (QEs) in the United States may also not be effective if those lead to capital outflows in response to the higher interest rates overseas, and more so, with domestic rates in the United States falling as a consequence of the credit injection.

Developing countries, experiencing similar contractions in home demand as a result of the squeeze in wage share (of GDP) under labour flexibility, have often relied on export-oriented policies, which in turn did demand further disciplining of labour in a bid to save on labour costs. However, the shortfall in domestic demand could hardly be compensated by rising values of exports to the crisis-stricken advanced countries, which, as pointed out earlier, were experiencing low growth rates even before the onset of the recent crisis. Not much space was thus left for expansions in the real sphere of the developing countries by relying on the domestic or the export market, with the latter already subject to contractions as a result of the crisis. As for the financial sector, financial reforms and liberalization, which preceded the crisis in advanced countries, also hit hard the developing countries. The impact included the abrupt changes in the flow of capital, and especially those with short-term duration. Major changes that resulted included the additional responsibility of the monetary authorities in the management of their exchange rates in the floating rate regime. In addition their stock markets were subject to added degrees of volatility, largely with the uncontrolled flows of short-term capital. Problems such as these were linked to the liberalization of the capital account, a measure that continues to be questioned from different circles.

With the opening of their capital markets the developing countries attracted large flows of short-term capital, which entered these markets under high profit expectations. Much of these flows were deployed in the secondary markets of equities and also in the property as well as commodity future markets. Uncertainty and rising prices in real estate as well as in the commodity market attracted investments by fund managers in search of high profits. As a consequence there have been sharp increases in prices, both in property markets as well as in commodities, especially in fuel and food, in recent times.

State policies in the developing countries often actively encouraged these transactions, by providing tax reliefs, say on capital gains and on dividends, as in India. The high returns on those transactions generally were a drag on incentives to lock in funds as long-term investments in the slow-growing real sector. Incentives to invest in the secondary markets, however, were strong with fluctuations in stock prices and their returns, which was common in markets with capital account opening. As we have mentioned earlier, speculation by nature is rife in markets only when it is fluid.

In India, which is one of the foremost emerging markets after China, frequent upheavals were witnessed in the secondary markets for stocks, especially since the country opened its capital market to Foreign Institutional Investors (FIIs) in 1993. The turnover in the main stock markets located in Mumbai is today quite large as compared to what it used to be earlier. With uncertainty much higher than before in financial markets, trading as well as returns in the derivative market have naturally gone up. Even transactions in the secondary spot market are today at least ten times the volume transacted as Initial Public Offerings (IPOs) or private placements in the primary market for capital, a picture that tells us a story of slow-growth rates in the real sector.

For India and for a few other emerging economies, inflows of short-term capital from FII sources along with other sources of capital including FDIs have contributed to steady increases in the country’s official exchange reserves. The stock, at around $300 billion at present, covers more than six months of average monthly imports of the country. With both non-factor income (mainly due to software exports) and remittances from abroad (mostly from workers in the Middle East) adequate to cover the payments due for interest and royalties etc. on foreign assets in India since some time, there has not been a major drag on exchange reserves in the recent past to meet the current deficits on trade. However, the reserves have been occasionally utilized to support the rupee rate from time to time, due to sudden outflows of short-term capital. On the whole India’s central bank has so far been able to steer clear of a currency crisis by managing the real exchange rate of the rupee (for trade competitiveness) and a stable nominal value (for stability of financial assets in Indian currency held by foreigners). This, along with the rising level of exchange reserves, has lent credence to the image of India as a fast growing ‘emerging economy’. A picture as above, however, excludes the very recent turn in India’s balance of payments, with widening current account deficits, which are due to the continuing global slump and with the sudden outflows of FII held capital in the country, much of which is due to instability of global finance.

Accumulation of large official reserves in the high-growth economies of China and India have caused some spill-over effects which tend to constrain the management of their monetary policies. This happens when excess capital account inflows, as remain after financing the respective current account deficits, contribute to the rising reserves that provide sources of expansions in M2. To counter the inflationary effects, the monetary authorities often initiate inflation targeting by using monetary-fiscal measures, which may conflict with goals set for domestic growth and distribution, especially while curbing credit for investment and consumption in the domestic economy.²⁹ Monetary stabilization also puts pressure on governments to finance fiscal deficits through marketized borrowing, which in turn expands the internally held debt obligations with a rise in interest earnings by those who lend against the government bonds. The distributional implications of above include higher earnings of rentiers’ capital on the one hand and an imbalance in the budgetary provisions on the other, with expenditure on interest liabilities taking over other items such as social sector spending.

Financial opening in developing countries has thus led to a restructuring of financial flows both within and across national territories. Transactions in the external sector have been dominated by spurts in private capital inflows with a considerable volume of short-term investments in the secondary stock market. Developments as above are beset with possibilities of sudden withdrawals of those funds and also with the frequent fluctuations in stock prices and volume traded, both of which have become endemic to the system. A run in the stock market, leading to a fast depletion of official reserves and a concurrent depreciation of the local currency, are some of the likely hazards. While the deregulated financial market makes it easy and lucrative to buy financial assets in the up-market of hot money in the stock market (or real estates and commodities market) the process, as we point out, does not generate real assets in the first round. Incentives to make quick money by toeing the line of the Keynesian ‘animal spirit’ may thus dampen the prospects of productive investments in the economy as may generate growth.

One more aspect of freeing the financial market by developing countries relates to the distribution of credit within their respective economies. As we mentioned earlier, opening up of the financial market along with a compliance to the norms set by the international financial institutions such as the Bank for International Settlements (BIS) has made it customary for banks in India to advance credit to profitable channels of investments. Often this is due to the exclusion of large sections of borrowers who do not qualify in terms of the BIS risk-adjusted credit ratings followed by banks.³⁰ This has continued to widen the economic disparities in countries such as Brazil and India while at the same time retarding the prospects of higher growth in sectors that are no less relevant.

It will be useful at this point of our analysis to distinguish the short-term factors that explain the flare-up of the recent financial crisis (with its spill over to the real sector) from the long-term structural changes that relate to policies, institutions, and the composition of output as well as the pattern of distribution in these economies. In our judgment those long-term changes can also be held partially responsible for the financial boom followed by the recent mayhem in the financial markets.

A major source of the long-term structural changes as have taken place since the 1970s relates to a rising gap between labour productivity and real wages in most countries. Use of labour-displacing technology as well as labour-market flexibility in these countries since the mid-1980s explain a large part of the gap. Competitive pressures consequent on globalization of commodity and financial flows led to further compressions of labour costs, which could be easily accommodated within the norms of the flexible labour-market policy. Similar pressures also led to an upgrading of technology with rising capital-labour ratios, which considerably reduced the wage share in aggregate output. It thus remained a vicious circle with cuts in wage bill and the related shortfalls in aggregate demand preventing expansions in output and employment, which further squeezed such demand.

6. Conclusions

Looking back, one notices a systematic transformation in the power structure currently prevailing in the world economy with ‘new capital’ aligned to finance in its various forms. Such a change has replaced the authority of the state and the related regulations by liberalized markets in different spheres of these economies. This change has gone in with a meteoric rise in the weight of finance, both as an activity and as a commanding power over the economy, which includes the state apparatus. Market-led economies, in advanced as well as in developing regions, have in the process generated the new genre, ‘new capital’ that deviates sharply from the earlier patterns of Fordist capital accumulation in advanced nations or even from the state-led developmental perspective of the post-colonial nations in the periphery.

These changes have gone in with marked transformations in institutions that promote this new avatar of finance-led capitalism in different parts of the world, which include the developing countries. In advanced countries the state has, in a relinquishing mood vis-à-vis markets, demonstrated a benign oversight of the negatives inflicted by big corporations on the wider public. Such as this has been the case in what has been described earlier as ‘predator states’,³¹ in terms of the collusive arrangements of the state with corporate regimes controlled by ‘new capital’. Changes in institutions relating to the financial sector has initiated, in addition to the steady dismantling of regulations, innovation of new products in the financial industry by agents operating in the sphere of ‘high finance’. A parallel process has progressed in developing countries with dominance of finance and the growing authority of the market. As for monetary authorities in the new regime, the primary goal in policies has hovered around inflation targeting, which often demands sales of ‘marketized’ government securities. Between gains via stock markets in equities and commodity futures, and the rising interest income for those holding government bonds, there has been a rise in the share of what is described as ‘unearned’ or ‘rentier’ income in these economies. The rising share for the new class of non-wage earners has been matched by the squeeze in wage shares of GDP that followed wide-ranging deregulation in labour markets. It led to the dissolution of institutions such as labour laws and trade unions, which previously protected some of the labour rights including wages. While distribution of income has been predominantly in favour of those in command of financial and real assets deployed in brisk trading, stagnation in employment and wages have reflected the dismal state of people beyond the charm circle.

The long-term stagnation in living standards and employment of people was subject to further shocks as the world economy, including the developing area, was hit by crises of serious magnitude by 2007–08. Waves of protests, organized by the civil society against big capital and international financial and trading institutions, confirm a Polanyi-type ‘double-movement’ process. These are echoed in the demonstrations against WTO policies of free trade in Seattle (1999) and the ‘Occupy Wall Street’ movements in crisis-torn economies of the United States and Europe as well as the rise of new parties like the Aam Admi Party (AAP) in India, which seeks to fight corruption. These reflect the transformations in the structure of the economy and society, mirroring the aspirations from people who never shared the gains of high finance during its good times and who bear the increasing misery and destitution as a result of the crisis emanating from dominant finance.

These transformations have touched the social and economic fabric of developing countries. Rise of finance as the relatively dominant form of activity in terms of profitability has reduced the weight of the real sectors including agriculture and industry, both of which still provide the main source of jobs and income. Speculation on financial assets has even spread to the realm of commodities and property markets, offering quick returns to those who are active in handling such activities including future trade in commodity markets. Sharp increases in prices of food in particular have hit hard the poor who include masses of unemployed and semi-employed in the vast unorganized economy of the rural and urban areas. Monetary policy, geared to ‘inflation targeting’, has sometimes resulted in credit squeeze with high interest rates, which has proved unaffordable in terms of industrial expansion.

As it has been the case with the advanced economies, state directives in the developing countries have been guided by almost a blind faith on the efficacy of neoliberal policies. Sometimes the moves have been influenced by pressures from outside, as for example, with the conditional loan packages of the IMF or even in its absence (as in India) by unofficial dictates from credit-rating institutions (e.g. S&P or Moody’s) or the Bank for International Settlement, trying to ensure what is reckoned as ‘financial stability’. In effect such stability caters to the balance sheet of private financial institutions and corporates, many of which are staked by capital from global markets. While markets in these developing economies are usually shared between local and global capital, it is usual for the national bourgeoisie as well as the ruling state to share the enthusiasm for the ‘order’ approved by global capital and by the multinational trading as well as by the financial institutions.

On the whole, the dynamics of the structural transformations have rendered development as well as welfare of people less of a priority relative to other goals that have been prioritized in the prevailing regimes led by ‘new capital’ all over the world economy.

1. Introduction

The interplay between technical progress, investment in human and physical capital and institutions generates structural transformations along time and geographical lines (Quadrio Curzio et al. Reference Quadrio Curzio, Fortis and Zoboli1994).¹ In this chapter we examine a crucial policy issue associated with the governance of long-term structural change. At the centre of the on going recomposition of the global economy stands the changing ecology of large global companies (Goldstein, Reference Goldstein and Mikler2013). Data presented in this chapter show that ‘the periphery’ accounts for a rising share of the world’s largest companies, in fact its weight in this universe is even larger than for global GDP or trade. An interesting feature of big business in the periphery – and more specifically in the BRICK economies of Brazil, Russia, India, China and Korea that are the focus of our chapter – is that there has been amazingly little convergence towards the Western model. The public company with dispersed ownership, separation of ownership and control, and contestable control that dominates in the United States and most of Europe is largely absent in the BRICKs. The 109 companies that constitute the pinnacle of BRICK corporate power in 2012, and henceforth a potent symbol of their economic and political success, are owned either by governments or families. Furthermore, the overwhelming majority of them are organized as diversified groups, with a core business and a myriad of more or less connected secondary activities. And this is also true for Korea, which we consider to be the catch-up country par excellence, in fact the only emerging economy to ‘graduate’ to high-income OECD status.²

The article examines this transformation in contrast to two extreme literature strands: dependency theory that expected local private entrepreneurship and state-owned enterprises (SOEs) to play an ancillary role to multinationals and neoliberal thinking that expected globalization to result in an absolute convergence of business models towards the Anglo-American paradigm of the focused company with widespread ownership and little, if any, state involvement. We argue for the relevance of a ‘capability-based view’ in explaining the BRICKs’ catching-up development process, going beyond the sometime-sterile controversy on the respective role of governments and markets in economic development and focusing instead on the mechanisms that allowed countries to strengthen the capability of (large) firms, induce (differently sustained) growth and promote development. The analysis of this ‘hybrid model of late capitalism’ pays attention to the relationship between institutions, society and the economy, i.e. the dimensions of structural tranformation that we have discussed many times with Alberto Quadrio Curzio.

We proceed as follows. In Section 2, we first sketch the arguments that made dependency theorists pessimistic about the prospects of autonomous development in the periphery and neoliberals adamant that the forces of globalization would eliminate distinctive national models of capitalism. We then present a glimpse of an alternative view. Section 3 presents basic data on big business in the BRICKs to show its ring share in the global economy, as well as its main ownership, organizational and strategy traits. This allows us to highlight that there is much greater continuity than could be expected in view of the major changes that have interested the BRICKs in the 1990s–2010s period – from privatization and trade and financial liberalization, to the emergence of new industries and customers. That BRICK capitalism nowadays takes a variety of forms shows an institutional and organizational adaptability that contrasts with most expectations. In Section 4, we propose an explanation for these developments that links ownership and organizational strategy of big business, on the one hand, with the needs of fast upgrading and catch-up that are central in the current phase of BRICK development. We conclude with some policy observations, focusing on the need to rapidly adapt the hitherto successful model of big business, state- and family-led industrialization with the emerging reality of globalization, start-up entrepreneurship and open innovation.

2. What place for large companies in economic development? Left, right and centre

Firms as such have never enjoyed pride of place in traditional accounts of economic development. Most scholars have shown greater interest in macroeconomic ‘framework conditions’, including high-end institutions, than in the nuts and bolts of turning scarce resources into goods and services that can serve local and foreign customers. As a result, most models treat firms as largely identical in terms of size, ownership and control, with the important caveat that over time private came to be preferred to state.

However, there also exists a tradition of scholarship, especially Schumpeterian economics, that emphasizes firm heterogeneity as one of the essential features of capitalism (Nelson, Reference Nelson1991, Reference Nelson2009). One aspect of heterogeneity is size differences, and this chapter focuses on big businesses, following Schumpeters’ earlier insight on their importance. From the literature, we can list several reasons for the new importance of big businesses, at least for middle- and high-income countries.

First, economic history has provided evidence that when economies take off, the number of big businesses also increases to exploit economies of scale and scope (Chandler, Reference Chandler, Tedlow and John1959, Reference Chandler1977, Reference Chandler1990). Second, big business contributes to and accelerates innovation in several ways. Large companies can incur high fixed costs for R&D, which may result in innovations and productivity growth (Pagano and Schivardi, Reference Pagano and Schivardi2003). For emerging economies, most technological change is closely related to the rise of big businesses, as shown by Pack and Westphal (Reference Pack and Westphal1986) for Korea and Lee et al. (Reference Lee, Jeeb and Eun2011) for China. Jung and Lee (Reference Jung and Lee2010) also found that Korean firms have caught up with Japanese ones (in terms of total factor productivity) more quickly in sectors that are dominated by large firms and are more exposed to world market competition. This size–innovation link is consistent with the early insight of Schumpeter (Reference Schumpeter1934, Reference Schumpeter1942), who stated that big businesses tend to put more resources towards generating innovation, consequently spurring national economic growth.

Third, globalization has reinforced the importance of big businesses. With very few exceptions, the world’s largest companies have become multinational or transnational firms and now play a central role in global value chains (Gereffi et al., Reference Gereffi, Humphrey and Sturgeon2005). Notably, global value chains governed by large firms have improved inventory management and made production processes more efficient (Iacoviello et al., Reference Iacoviello, Schiantarelli and Schuh2011). This improvement, in turn, has reduced GDP volatility and resulted in greater macroeconomic stability. Such theoretical expectations are confirmed by econometric testing – big businesses have a significant and positive effect on both economic growth and stability in economic growth (Lee et al., Reference Lee, Kim and Lee2013).

The next step in our argument is that ownership of large enterprises counts (Amsden, Reference 403Amsden2009). We don’t live in a world of perfectly competitive markets, where access to inputs, technology and marketing channels is the same for all firms. The real world is made of oligopolistic markets in which firms compete on the basis of hard-to-acquire proprietary assets and competencies. In this regard, the success of entrepreneurial and dynamic domestically owned enterprises in the periphery challenges the pessimism with which local business was still seen two or three decades ago.

Let us first start with introducing two different views on the big businesses in the periphery.

On the ‘left’ side, imperialism theories, originating in the works of Lenin and Hilferding, saw ‘comprador capitalists’ in Third World countries as corporate lackeys serving the interests of an international capitalist class and henceforth considered very unlikely the emergence of genuine, independent entrepreneurs committed to national transformation. In the words of dos Santos (Reference dos Santos1970) ‘industrial development is strongly conditioned by the technological monopoly exercised by imperialist centers’ (p. 233) and ‘the industrial and technological structure responds more closely to the interests of the multinational corporations than to internal developmental needs (conceived of not only in terms of the overall interests of the population, but also from the point of view of the interests of a national capitalist development)’ (p. 234).

Other dependency scholars took a less dim view in general, but yet their ‘recognition of the strengths of local capital … does not revive the national bourgeoisie as the hero of industrialization’ (Evans, Reference Evans1979, p. 281). In the periphery³, nations remain in a stage of dependent development because ‘they are recipient rather than source countries of foreign investment [and] are on the receiving rather than the originating end of product innovation and new production techniques’ (Gereffi and Evans, Reference Gereffi and Evans1981, p. 31).

On the ‘right’ side, another strand of the literature characterized indigenous capitalism in the periphery, state- or family-owned, as rent-seeking, but was open to the possibility that they could develop, if only they converged to a Western ideal–type of the firm and the business system. Two decades ago, the victorious end of the Cold War seemed to some to herald the emergence of a pleasant global economy, in which heterogeneity and differences were on the way out, homogeneity and convergence towards the Washington Consensus and laissez faire capitalism on the way in. Yoshihiro Francis Fukuyama wrote that ‘the century … seems at its close to be returning full circle to where it started … an unabashed victory of economic and political liberalism’.⁴ Privatization and the demise of the entrepreneurial state figured highly in John Williamson’s Washington Consensus catalogue, in particular insofar as promoting state enterprises to countenance the lack of a strong indigenous private sector ‘is again a nationalistic motivation and hence commands little respect in Washington’.

The view that there is only one way to organize economic activity extended in fact also to private business. It was Paul Krugman, of all people, who reminisced: ‘I am (just) old enough to remember the conglomerate-building era of the 1960s, an era that ended so badly that many thought the word ‘synergy’ would be permanently banned from the business lexicon’ (Krugman, Reference Krugman2000). In sum, the destiny of the world of global business seemed to belong to public companies combining limited liability, professional management, and ‘corporate personhood’.⁵ Intriguingly, proponents of the global system theory, such as Leslie Skair who accepted that the national bourgeoisie in the countries of the Third World was growing fast, still expected ‘national, regional and First World–Third World differences between transnational corporations [to] diminish over time’ (Sklair and Robbins, Reference Sklair and Robbins2002, p. 97).

As will be shown in the next section, two forms of corporate organization have been successful, and thus dominated business systems in the periphery: family conglomerates and state-owned enterprises. This fact is a strong challenge against both the rightist convergence view and leftist dependency view. First, regarding the covergence view, an important countervailing evidence is the survival of conglomerates or business groups in emerging economies despite globalization and market reforms. Thus, the ‘rightists’ fail to acknowledge that firms are and continue to be heterogeneous in their structure, strategy and ownership (Nelson, Reference Nelson1991, Reference Nelson2009), and what matters most is not necessarily the development of market institutions but the co-evoluton of market institutions and firms.

Second, regarding the dependency view, an important countervailing evidence is the success of several periphery countries, such as Korea as well as China, India and Brazil, in nurturing globally successful companies despite increasing integration with the world economy. The dependency view downplayed the ability of governments in association with SOEs in implementing activist policies that use and manage rents in a productive way and prevent them from leaking out of national boundaries. Markets are never perfect and thus allow activist governments and their agents room for maneuvering.

In what follows, we first turn to the situation of big business in the BRICKs (Section 3), before we attempt a fuller theoretical interpretation of their main characteristics in Section 4.

3. Big business in the BRICKs

3.1 The combined share

From only 23 in 1994 and 38 in 2005, the number of BRICK entries in Fortune Global 500 has skyrocketed to 109 in 2012. This increase is much more spectacular for China, which had 73 companies in 2011, compared to only 3 in 1994. At this stage, China has more entries than any other country except the United States, as it surpassed Japan in 2011. Russia, India and Brazil had only zero, 1 and 2 companies respectively in 1994. These days each of them has more or less than 10, similar to Italy or Canada although still lower than the number for the three largest European countries (Germany, France and the UK), which have 30 to 40 entries each. In addition, the largest firm in each BRICK – always the same and invariably an oil company – has constantly climbed the global rankings. As far as headquarters are concerned, only Tokyo and Paris host more Global 500 companies than Beijing. (See Table 21.1.)

Table 21.1 BRICK companies in Fortune Global 500 (number of companies and global ranking of the largest company)

	Brazil		Russia		India		China		Korea
	Number of entries	Global ranking of largest	Number of entries	Global ranking of largest	Number of entries	Global ranking of largest	Number of entries	Global ranking of largest	Number of entries	Global ranking of largest
1994	2		0		1		3		8
2005	3	125	3	139	5	170	16	31	11	39
2006	4	86	5	102	6	153	20	23	12	46
2007	5	65	4	52	6	135	24	17	14	46
2008	5	63	5	47	7	116	29	16	15	38
2009	6	34	8	22	7	105	37	9	14	40
2010	7	54	6	50	8	125	46	7	10	32
2011	7	34	7	35	8	98	61	5	14	22
2012	8	23	7	15	8	83	73	5	13	20
2013	8	25	7	21	8	88	89	4	2	14

Source: Fortune (various years)

The combined share of BRICK countries in Fortune Global 500 has increased from a mere 3% of all entries in 1994 to 23% in 2013 (Figure 21.1). The slope of the graph shows that the trend is accelerating; the increase was more pronounced in the 2000s than in the 1990s.

Figure 21.1 Combined share of BRICK entries in Fortune Global 500, 1994–2010.

Source: Fortune (various years).

4. Explaining big business in the BRICKs: co-evolution of firms and the environment

As documented in the previous section, big business in the BRICKs have grown dramatically over the past three decades, but not necessarily in the way that scholars and pundits expected. Companies have responded vigourously to the challenges and opportunities of globalization – as the dependency theory did not anticipate. But they have done so in their own terms, maintaining tight control and ownership arrangements, persisting with diversification and developing new forms of interaction with governments. While the traditional view focuses on market institutions acting as a force for selection and thus homogenization, reality shows that SOEs and business groups continued to thrive as they adapted to the changing business environment (Choo et al. Reference Choo, Lee, Ryu and Yoon2009). Even when SOEs and conglomerates list on the stockmarket, they do little to constrain the power of controlling shareholders (the state or the family). The current shape and state of big businesses in the BRICKs can be used to re-assess the two prevailing views from the left and the right and to suggest alternative interpretations.

First, the survival, when not further growth, of conglomerates or business groups in emerging economies despite globalization and market reform challenges the convergence view. Business groups (some of which can be state-owned) are defined as collections of firms bound together in some formal and/or informal way and by an intermediate level of binding; that is, they are neither bound merely by short-term strategic alliances nor legally consolidated into a single entity (Granovetter, Reference Granovetter1995). They are considered to be responses to market failures in emerging economies: business groups internalize market functions to overcome imperfections in capital, labour, raw materials, components, and technology markets (Goto, Reference Goto1982). This view predicts that, once market institutions mature, business groups eventually disappear. Consequently, a world of more homogenous firms is conceived. This view was very powerful during the Asian financial crisis as it was able to explain the collapse of many family-owned conglomerates in a region that was seen as a hub of crony capitalism.

However, this theory is insufficient to explain the evolution since the early 2000s and the continuing prosperity of business groups across emerging Asia. For example, Korean business groups, or Chaebols, showed serious problems in the 1990s, with declining and worsening performance due to excessive investment. During the crisis-and-restructuring period they improved financial management, diverted money from cash cows to new industries that might take a long time to produce results, and thus were born again in the 2000s as successful global players. Choo et al. (Reference Choo, Lee, Ryu and Yoon2009) and Lee et al. (Reference Lee, Kim and Lee2010) argue that enhanced technological capabilities and the correction of previous mistakes, such as over-investment, allowed the turnaround in the post-crisis period.

The improving performance of Korean business groups is also a puzzle to the agency cost view from the finance literature, because of the variance of their behaviour despite all sharing the same ownership and governance structure. Their cases show that the change in the surrounding market mechanism alone cannot explain fully the destiny of the firms, as these keep evolving and responding to changes in the environment. A study of state-owned business groups in China (Seo et al. Reference 406Seo, Lee and Wang2010) also finds firm-level factors to have a stronger explanatory power than market-level ones in explaining the dynamic shift of relative performance of business groups in China.

Second, the emergence of companies from the periphery capable of joining the ranks of global big business counters the scepticism of the dependency theory regarding the role of the state. As highlighted in the previous section, state ownership remains an important feature of large corporations in the periphery. When the private sector was probably too weak to compete against foreign MNCs, governments implemented activist policies and supported SOEs through rents (over natural resources but also over promising markets). While in general such rents are regarded as bad or inefficient for economic growth, in most emerging economies governments have preferred to distribute them to domestic firms, rather than allowing MNCs to acquire them and leak them out of national borders. In a productive setting with some discipline device in force, rents could play the role of effective incentives and source for investment funds.

In this sense, we argue that an evolutionary, new Schumpeterian approach that emphasizes capability formation and co-evolution of firms and market is more relevant to the study of big business than either the convergence thesis predicted by the market-primacy view or the dependency view. What the business systems in emerging economies have in common is that they have proven efficient from a ‘capability-based view’ of national catch-up development (Lee, Reference Lee and Fosu2012). The idea of development of firm capability over time should be quite relevant in understanding the growth of firms in emerging economies.⁹ Kock and Guillen (Reference Kock and Guillen2001) consider the diversification of business groups from developing economies as a way of using their own unique capability or resources, which Amsden and Hikino (Reference Amsden and Hikino1994) defined as ‘project execution capability’. This capability refers to the skills required to establish or expand operating and other corporate facilities, which can later lead to the eventual accumulation of sector-specific know-how, especially when the projects tend to fall more within the same areas.

Lee and He (Reference Lee and He2009, pp. 280–1) describe a dynamic path of capability development by business groups in such terms:

Building firm-level capability has been the crucial factor in the economy-wide technological catch-up in the dynamic emerging economies over the past two decades (and possibly for a longer period in the case of Korea, which has combined continuous upgrading within the same industries and successive entries into new promising industries). The strategies for learning and developing a knowledge base (i.e. technology and brands) have been numerous, ranging from reverse and forward engineering (e.g. through university spin-off firms) and learning from foreign direct investment, to the promotiong of in-house Research and Development (R&D), public and private R&D consortium, and international mergers and acquisitions (M&A) (Goldstein, Reference Goldstein2007; Lee and Mathews, 2012). Firm growth in peripheries has depended on the ability to acquire such diverse resources – basic ones such as financial, physical and human capital and higher-level resources such as managerial skills and R&D – and SOEs and business groups have been particularly successful in this. Samsung Electronics and the Samsung group more broadly is a good example of the four-stage evolution (Lee and He, Reference Lee and He2009).

It is the very rise of the BRICKs that can be explained by the strong growth and presence of big businesses (Lee et al., Reference Lee, Kim and Lee2013). Other middle-income emerging economies may be registering slower growth performance because they do not have a sufficient number of Fortune 500 companies, and in fact have fewer of them than the size of their economy would predict.

5. Policy implications

The BRICK economies have recorded impressive growth rates over the past decade and the role of big business has been crucial in this regard. The process of economic development, however, is inherently dynamic and unstable and new challenges continuously emerge. In this section we consider whether the BRICK model, and in particular its reliance on state activism (arguably much greater in the BRICs than in Korea), is acceptable, or at least compatible, in today’s global environment. With no pretence of being exhaustive, nor of ranking such challenges in importance, some of them are discussed in the following paragraphs.

First, the quantitative and qualitative role of the state in the economy remains a source of contention. This is especially true in the case of China, where many reformers have asserted that ‘the state [sector] is advancing and the private retreating’. Weakening the grip of SOEs is needed in order to prevent the country from eventually falling into a ‘middle-income trap’ of much slower growth. Control over SOEs should be taken over by new independent bodies that would hand over dividends to the state budget and gradually reduce the level of state ownership. Of course tackling economic reforms would affect powerful vested interests, such as SASAC.¹⁰ But it is made all the more necessary by the expansion by China’s SOEs into international markets and higher-profit areas, where they benefit from privileged conditions, jeopardize the principle of ‘competitive neutrality’ and generate recurring friction.

More broadly, in systems where lines between Party, state and business are blurred, a second and related challenge has to do with opacity in private-public interactions, bad corporate governance and lack of competition. In China and Russia there have been numerous episodes where prominent business people have accused political leaders of trampling on the law and property and human rights, attacking their competitors and taking whatever they want in order to enhance their power.¹¹ A few recent Brazilian cases are also illustrative. In 2009 president Lula accused the management of Vale of laying off workers during the global crisis and purchasing large vessels to ship iron ore to Asia, instead of investing in integrated steel mills in Brazil. The government eventually removed Roger Agnelli from his post as CEO of Vale despite his outstanding record and is trying to force Petrobras to use expensive local equipment suppliers despite doubts about their competence.

Third, the strategy of making huge strategic investments, even to the point of losing money for the sake of creating national champions and entire new industries, may be necessary to solve a market failure and substitute for financial intermediaries that are not doing their job properly, but it puts private companies at a severe disadvantage. The big question is whether this structure is less useful, and even counterproductive, when the country becomes more integrated into the world economy. If all countries were to implement state capitalism to accumulate a foreign currency surplus, this would result in a ‘fallacy of composition’; another danger is that the big groups will rig the market in their favour and inhibit the emergence of specialized players.¹² To prevent such an outcome, a financial system that gives start-ups easy access to capital is essential, as well as a vigorous competition policy. In fact it is not sufficient to uphold competition, it is necessary to understand the implications of business groups, cross-shareholdings and interlocked directors in this regard (Kogut, Reference Kogut2012).

In this context, making the case that big business is essential for economic growth should not mean ignoring the role of small and medium enterprises (SMEs). National competitiveness critically hinges on the successful functional and territorial integration between SMEs and large enterprises (Fortis and Quadrio Curzio, Reference Fortis and Quadrio Curzio2006). Too much dependence on (few) very large firms may be counterproductive for economic growth. If these big firms come to monopolize the markets in which they operate, their managers might not feel sufficient pressure to innovate contrary to Schumpeter’s expectations. Large powerful companies can also lead to the adoption of policies that hinder growth (Grossman and Helpman, Reference Grossman and Helpman1994). In addition, market dominance by big businesses and their absorption of excessive resources might become a barrier against entry by new SMEs.

Fourth, even with substantial concentrated (State or family) ownership, corporate governance has been improving (especially in terms of disclosure and investor protection) in each BRICK. Reforms were initially mostly a formal-legalistic process, which with time have become more substantial as institutions (Stock Exchanges and government regulators) showed stronger commitment. Allocation of control, however, remains less dynamic than in more advanced market economies and the enforcement of rights is not always sufficient to protect minory shareholders and indeed other stakeholders. Diversification may also be motivated by expropriation – in Indian groups affiliates are found to engage in activities away from their core business to serve as destination points for funds tunneled from a group’s core activity. This should be a cause of concern insofar as dispersed shareholder firms are typically better managed (Bloom et al., Reference Bloom, Genakos, Sadun and Van Reenen2011).

A note of cautious realism is needed here. There is a great deal of path dependence of corporate structure – the one that an economy has at any point in time depends in part on those that it had at earlier times (Bebchuk and Roe, Reference Bebchuk and Roe1999). In the case of China and Russia, their corporate ownership structures after fifty (pre-WTO era) and seventy-five years of socialism gave some stakeholders both the incentives and the power to impede changes, i.e. de facto privatization. In Brazil and India, corporate rules that favoured the formation of business groups also reinforced the latter’s power to resist pressures to converge.

Fifth, the rapid globalization of BRICK firms through take-overs may well have thrilled cheerleaders and corporate patriots, but the rate of success has not been equally spectacular. The Economist has examined the four largest Indian deals for which enough information is available.¹³ Gross operating profits (EBITDA) have risen in one case only, while in the others earnings have failed to generate an adequate return on capital. Most Indian dominant shareholders dislike issuing equity and firms have fiddly holding chains, thus raising the risk of being too convoluted and puny to handle large foreign deals. The problems of Chinese overseas investment have been documented in many studies. Even Samsung, which came almost from nowhere to become the world’s largest electronics company, has had a poor track record in M&As.¹⁴

The learning curve in overcoming the liability of foreignness has always been very steep and the growing importance of M&A as entry mode adds post-merger integrations issues to the equation. Psychic distance between Russia, India and China, on one hand, and OECD economies, on the other, is rather high and generates reciprocal bafflement at practices such as taking long holidays or making ‘facilitation’ payments. In fact the greater success of Brazilian and Korean MNEs is explained by the greater role of foreign MNEs in the domestic economies and managers’ greater experience with cross-cultural deals.

6. Conclusions

The findings of this chapter, combined with the recent literature on business groups and state capitalism, suggest that diverse factors are involved in determining the ecology of large firms and the performance of diverse forms of firms in different countries. Moreover, these diverse forces that keep firms heterogeneous are as strong as the forces promoting homogeneity. By doing this they also challenge the rigid determinism that would always confine corporations in the periphery to occupy a secondary position, while in reality it is their success, very often made possible by pro-active state policies, that have changed the geography of the world economy.

We argue that it is time to upgrade or restate the market imperfection thesis in predicting the performance of business groups and SOEs over a longer period. Without sustained and policy-induced capability-building, standard liberalization measures (capital and trade liberalization, privatization etc.) alone cannot bring sustained catch-up as these often result in short-run, but ultimately temporary, export booms. While the maturing of market institutions must have affected the performance of business groups, some business groups have built up new capabilities to adapt to the new environment and have become freed from the ‘law’ of long-term decline. In a sense, these results can be considered consistent with the thesis of market failure as it shows that difference factors (e.g., technological capability) have been important in different institutional settings.

A business system dominated by SOEs and business groups can play a crucial role in generating the world-class big businesses that are fundamental in the catching-up stages, but their role should change and in fact decrease as economies move closer to the frontier. The best BRICK example is clearly Korea, which used to have a large number of SOEs until the mid-1980s, at which point the private sector had grown enough to take over the commanding heights of the economy and SOEs could be privatized. Against this background and in view of the practical difficulty of generating world-class big business in the periphery, we can suggest that establishing SOEs can be an effective strategy at the early stage of development, while at later stages privatization is a more effective strategy. China seems to provide a good case for this observation.

Of course, once business groups become so powerful new policy challenges emerge. It is important to avoid abuses of marker power, without constraining the actions of big businesses so much as to weaken their ability to generate innovation in the oligopolistic sectors that dominate the global economy. This will undoubtedly be one of the crucial dilemmas to keep policymakers in China and other large emerging economies awake in coming years.

1. Introduction

Manufacturing development and resources constraints are linked by a complex array of structural relationships which have been unfolding in a variety of ways in different countries since the Industrial Revolution. Resource constraints are sector specific and affect production tasks within each sector in more or less deep ways according to the production units involved and relative levels of aggregation at which economic systems are operating. This implies that, at each stage of structural change and according to the countries’ different patterns of specialization, resources constraints (or abundance) will affect economic systems differently. Ultimately problems of resource scarcity tend also to acquire an international character and, as such, become a geopolitical and multi-polar issue, to the extent countries become integral parts of the increasingly modularized global manufacturing system.

Within this complex and inherently dynamic architecture, interdependencies across sectoral value chains are the main channels through which resource constraints affect countries’ manufacturing development trajectories. The aim of this chapter is to show firstly how multi-sectoral models of production in which resource constraints are structurally integrated offer critical analytical tools to unpack such complexity. In disentangling the relationships between manufacturing development and resource constraints, the chapter then focuses on the way in which the ‘manufacturing apparatus’ transforms the nature of scarcity by making it a ‘relative’ phenomenon functionally linked to incremental as well as disruptive technological changes. Building on an analytical-historical reconstruction of countries’ structural learning trajectories, the chapter points out the inter-sectoral nature of ‘technological scarcity’ but also how scarcity-induced technological innovations may trigger cumulative technological transformations across sectors.

An understanding of these resource-led structural dynamics provides fresh lenses to investigate the political economy of resource constraints at the national and international level. Going beyond the dominant ‘resource curse’ debate, the chapter concludes by sketching a number of specific policy implications. In particular, the lack of alignment of manufacturing, technology and resource policies (and, thus, the missed opportunity of creating and capturing value through resource-triggered complementarities over time) is identified as the main constraining factor for countries at both initial and more advanced stages of manufacturing development.

2. Unfolding interdependencies in manufacturing development: opening the black box of resource constraints

Manufacturing development is the most dramatic and pervasive structural transformation that countries experience along their economic growth path. It consists of the creation and sustained expansion of production activities across different industrial subsectors, from resource based manufacturing activities towards increasingly technologically complex ones. Not only does manufacturing development trigger a process of industrial structural change, it also induces an increasing interconnectedness of the manufacturing base with the economic activities in other sectors such as agriculture, mining, construction and services (Ames and Rosenberg, Reference Ames and Rosenberg1965; Baranzini and Scazzieri, Reference Baranzini and Scazzieri1990; Andreoni, Reference Andreoni2013).

Throughout this manufacturing development process, production interdependencies take different forms. They involve input–output multi-sectoral relationships, but also a variety of linkages among the technologies adopted in different sectors and manufacturing subsectors. In their unfolding, these interdependencies and linkages are shaped by a number of structural tensions such as rigidities, bottlenecks and indivisibilities in production structures (Kalecki, Reference Kalecki1976; Kaldor Reference Kaldor1985; Landesmann and Scazzieri, Reference Landesmann and Scazzieri1996; Andreoni, Reference Andreoni2014); complementarities, horizontal and vertical externalities (Scitovsky, Reference Scitovsky1954; Hirschman, Reference Hirschman1981; Dahmen, Reference Dahmen1988); and disproportional variations in technological coefficients and natural resource constraints (Quadrio Curzio, Reference Quadrio Curzio1967; Pasinetti Reference Pasinetti1981). As a result of these structural tensions, manufacturing development is intrinsically characterized by disproportional dynamics and various forms of dualism, that is, dynamic processes of cumulative differentiation within and across countries (Spaventa, Reference Spaventa1959).

The way in which natural resource scarcities constrain national manufacturing development was at the core of the classical economic debate. The dialectic between ‘almost unlimited producibility’ à la Smith and ‘scarcity’ à la Malthus and Ricardo (in its absolute and relative forms respectively) defined the two main axes along which economists have disentangled the structural dynamics of manufacturing development.

Building on the Smithian idea of ‘absolute dynamic producibility’, a number of structural economists developed multi-sectoral models in which the constraining role played by natural resources on increasing production scale remain mostly unexplored (Leontief, Reference Leontief1953; Pasinetti, Reference Pasinetti1981). Even in those cases in which natural resources were factored in (Leontief et al., Reference Leontief, Carter and Petri1977; Kuznets Reference Kuznets1965), there was a tendency to stress the idea that technologies are able to neutralize scarcity problems by shifting them to an ‘indefinite’ long term. In other words, these contributions underestimated the fact that resource constraints unfold throughout the manufacturing development process. Thus, the fact that technological change will neutralize resource constraints in the future does not guarantee that it will be able to do it over time along specific manufacturing development trajectories.

This overall attitude towards the problem of resource scarcity can be also found in classical development economists (e.g. Singer, Reference Singer1950; Prebish, Reference Prebisch1950; Hirschman, Reference Hirschman1981). Although the manufacturing development process was at the core of their investigation, the relationship with the commodity sector was mainly explored in terms of whether resources were beneficial (or detrimental) to the process of industrial structural change. The commodity sector (especially hard commodities) was perceived as an enclave activity, that is, a sector relatively detached from the rest of the economic system and characterized by low technological development and relatively few linkages and spillovers. This is why, in contrast to classical economists, the early development economists formulated the hypothesis according to which the commodities-manufacturing terms of trade would have moved in favour of manufacturing (Harvey et al., Reference 422Harvey, Kellard, Madsen and Wohar2010).

The idea of ‘relative scarcity’ originally conceptualized in Ricardo opened a different line of investigation of manufacturing development under resources constraints. In particular the work started by Alberto Quadrio Curzio (Reference Quadrio Curzio1967 and Reference Quadrio Curzio, Baranzini and Scazzieri1986) was developed in a number of different ways (Quadrio Curzio and Pellizzari, Reference Quadrio Curzio and Pellizzari1999). These developments offered an open-structural framework to disentangle the way in which natural resources direct and shape different manufacturing development trajectories. With respect to the specific relationship linking multi-sectoral structural change dynamics, technologies and natural resources constraints, this framework introduced a critical distinction between techniques and technologies.

Within a multi-sectoral model, each technique relies on a certain natural resource and produces one raw material adopted in the production of all other commodities, both directly and indirectly. Technologies are the n techniques that have been activated, at whatever production scale is feasible given the constraints imposed by natural resource scarcity. Each technology is thus linked to the others through scarce natural resources at each point in time. More importantly, each technique is ‘connected dynamically in the process of accumulation to other techniques. The dynamic process, therefore, occurs at variable rates over time and is uneven across commodities. This raises complex problems of structural compatibility between techniques and it generates some residuals, that is, net products that cannot be utilized in the process of accumulation’ (Quadrio Curzio and Pellizzari, Reference Quadrio Curzio and Pellizzari1999, p.33).

From a manufacturing development perspective, this compound technologies scheme opens the black box of resource scarcity by pointing out the possibility that different compositions of techniques are bounded in scale and structure by resource constraints. In other words resource constraints become an integral part of the manufacturing apparatus, that is, the set of manufacturing production processes that rely on natural resources as factor inputs. Not only does resource scarcity become a structural problem, its dynamic character is also revealed. Resources are constraining forces involving all sectors at the same time and over time in both direct and indirect forms. This is why the activation of different orders of techniques along different countries’ structural trajectories is no longer a simple matter of production and technological capabilities transformations.

3. The resources-manufacturing matrix: compound production units, resources sector-specificity and shifting constraints

The adoption of a compound technologies scheme as the critical analytical core of a multi-sectoral model of manufacturing development is a powerful focusing device with respect to a specific set of complex dynamics.

The first of these is related to the relationship between production units, resources constraints and the time required for their renewability. Production processes take place within production units that may be identified at different levels of aggregation, such as the productive establishment, the constellation of establishments, the sub-sector, the sector and, finally, the production system as a whole (Andreoni and Scazzieri, Reference Andreoni and Scazzieri2013). Depending on the active production units and relative levels of aggregation at which the economic system is operating, a given natural resource may or may not be a constraint. For example, a certain endowment of natural resources may not constitute a constraint for a given sector while it can become a binding constraint as soon as more than one sector relies, both directly and indirectly, on the same type of natural resources. In fact, given a number of active production units operating at a certain level of aggregation, a relative scarcity problem may become absolute scarcity. Thus, resource bottlenecks may unfold at a certain point in time and along a certain country structural trajectory. Even when these natural resources are renewable, the time required for restoring them – i.e. time renewability – might be too long to satisfy the pressure that fast manufacturing subsectors may impose on a certain natural resource. This means that given fixed time renewability, production units may be affected by resource availability misalignments over time.

These resource-triggered structural tensions may hinder the pattern of structural change an economy is undergoing and, ultimately, it might force a shift towards a different structural trajectory. The new structural trajectory will be characterized by different ‘compound technologies’, that is, a different set of active techniques. Moreover as these new techniques will reshape the relationship between manufacturing production and scarcity, a new ‘compound production units scheme’ will also have to emerge. What we call here a compound production units scheme identifies the n active production units and relative levels of aggregation characterizing a multi-sectoral model of manufacturing development under resource constraints.

The complexity introduced by the consideration of different production units can be also extended to an open economy system. In this specific case it was observed how ‘[w]hat appears a relative scarcity for a single economic system could become historically an absolute scarcity for the planet as whole’ (Quadrio-Curzio and Pellizzari, Reference Quadrio Curzio and Pellizzari1999, p. 6). In fact, even those countries that have been lagging behind in terms of their manufacturing development might indirectly face resource constraints in their early stages of industrialization. To the extent developing countries provide industrial value chains and networks at the regional and global levels with intermediate resource inputs, the relevant level of aggregation at which scarcity problems unfold in these countries becomes difficult to identify and delineate geographically. This implies that the political economy of resource constraints involves the domestic structural change and relative institutional-power dynamics as well as linkages among countries along different manufacturing development trajectories.

The second issue that emerges from opening the black box of resource scarcity is that there are different types of natural resources and that the relationships they have with each sector is not a linear one. In fact, it implies a complex set of direct and indirect relationships. Table 22.1 addresses this challenge by proposing a simple resources-manufacturing matrix whose architecture is defined by a taxonomy of natural resources (related to certain commodity sectors) and by a standard list of manufacturing subsectors.

Natural resources have been clustered here in three main groups, namely: soft commodities (mainly related to different agriculture products and industrial crops), hard commodities (including a number of materials coming from mining and quarrying) and, finally, energy commodities (both traditional sources such as coal, gas and crude oil, but also nuclear and renewables). Of course, some soft commodities such as palm oil may be used as energy sources and vice versa an energy-related resource such as crude oil is also used as a raw material (substituting industrial crops or livestock) in the wearing apparel and footwear subsector. Thus, there is a certain degree of substitutability among different types of resources.

Manufacturing subsectors have been grouped according to standard industrial codes (ISIC rev. 3) and by adopting a standard technological classification distinguishing Resource Based (RB), Low Tech (LT) and Medium-High Tech (MHT) manufacturing industries. Industries have been then listed along the horizontal axis following a specific sequence, that is, the one that is possible to obtain by tracking the ‘normal structural change pattern’ experienced by countries in their manufacturing development process. The GDP per capita levels at which the share of the individual manufacturing subsectors peaks in terms of share of total GDP was extracted from a number of empirical studies (Chenery and Syrquin, Reference Chenery and Syrquin1975; Alcorta, Haraguchi and Rezonja, Reference Alcorta, Haraguchi, Rezonja, Stiglitz, Lin and Patel2013; UNIDO, 2013). The construction and electricity, gas and water supplies industries have been added as part of the secondary sector.

At each intersection of the matrix, a relationship between certain specific natural resources and certain industry subsectors is identified and highlighted in grey in Table 22.1 The manufacturing apparatus is constituted of two kinds of manufacturing subsectors. There are transformative industries that process, combine and modify the properties (and, thus, functions) of different kinds of natural resource commodities to obtain a number of raw industrial materials. These materials are then used by manufacturing industries to produce an array of intermediate and final products of different kinds (e.g. more or less resource dense). Finally there are a number of natural resources that are consumed with very little (almost no) processing or beneficiation.

This matrix does not pretend to show a full set of input–output flows. Instead it is aimed at considering the different unfolding interdependencies between manufacturing subsectors development and different types of resource constraints. Firstly, resource constraints are sector specific. Moreover, each resource may constraint sectors in more or less direct or indirect ways. For example, materials such as sand are used for producing semiconductors in a certain transformative industry (direct resource constraint); semiconductors are then used in the electronics sector to produce basic components such as transistors, cells and integrated circuits (indirect resource constraint). Of course, all sectors tend to be more or less directly dependent on energy commodities, although the type of energy source they rely upon may be different according to the technology adopted in the subsectors as well as the stage of economic development of the overall economic system.

The fact that certain sectors that are relatively more important at certain stages of economic development are also relatively more dependent (either directly or indirectly) on specific subsets of natural resources introduces three orders of complexity.

First of all, countries at different stages of structural change will be constrained by different combinations of direct and indirect resource constraints. The resource-manufacturing matrix shows how, at advanced stages of development, countries tend to become directly dependent on a number of natural resources such as rare earths and metals that are critical for the production of subsystems’ components or technologies underpinning complex system products. The second problem is that these resources represent a binding constraint since an increasing number of countries enter certain subsectors and increase the production volume of certain complex system products to capture greater manufacturing value and increase their manufacturing resilience. With the exception of two subsectors (Food and Beverages, and Chemicals – including Pharmaceutical) the only manufacturing industries that maintain a contribution to GDP above 1 per cent (from their peak point until highest stages of economic development) are those with the highest scope for technological innovation. Finally, to the extent sectors become vertically disintegrated and modularized production tasks are undertaken by specialized production units in different regions and nations, resource constraints tend to affect countries in more direct or indirect ways according to their specialization patterns. In sum, countries are affected by shifting resource constraints along their manufacturing development and specialization patterns.

The last order of complexity is represented by the fact that resources constraints will be shifting also as a result of technical change. In fact, throughout its development, the manufacturing apparatus becomes increasingly able to develop techniques and activate technologies that do not simply shift resource constraints away but also reshape the frontier of production possibilities determined by them. In other words, the manufacturing apparatus changes the nature of resources constraints.

4. The manufacturing apparatus: turning resources constraints into technological opportunities

The compound technologies scheme on which the previous section's analysis is grounded stresses the need for a truly structural understanding of the relationship linking ‘resource scarcity’ and ‘technological scarcity’ within a multi-sectoral production framework. This relationship is described as follows:

Given that the definition of techniques incorporates ‘scarce natural resources’ (this is what is meant by ‘non-produced means of production’), resources constraints are structurally embedded in the multi-sectoral technical change dynamics described by this model. This means that technical change is triggered by material structural components of production. These are the constraining natural resources used as factor inputs in the manufacturing apparatus. In this sense, this approach is distinctively ‘more structural’ with respect to technical change than those multi-sectoral models in which technical change is triggered simply by exogenous production or consumer learning dynamics (e.g. Pasinetti, Reference Pasinetti1993).

Building on the original idea of ‘induced invention’ (Hicks, Reference Hicks1932) this model incorporates an idea of ‘innovation scarcity’, namely the possibility that innovations may be triggered by the scarcity of natural resources (Quadrio Curzio and Pellizzari, Reference Quadrio Curzio and Pellizzari1999). Models of induced innovation like the ones adopted to explain agricultural change (Ruttan and Binswanger, Reference Ruttan and Binswanger1978; Quadrio Curzio and Antonelli, Reference Quadrio Curzio and Antonelli1998; Andreoni, Reference Andreoni2011) focus on the changes in relative prices of factors inputs. These alter the signals that the market sends to producers regarding their choice of techniques. Similarly, within a multi-sectoral model of production under resources constraints, the focus is on market prices and rents as specific signals of relative scarcity.

The learning dynamics that have historically led to scarcity-induced technological innovations, as well as broader disruptive technological changes, have been only partially analysed within this framework. Specifically, three main stylized mechanisms have been identified. Firstly, the extension of the boundaries of the locations where the natural resources are exploited often requires the development of new technologies (e.g. deep water oil drilling). Secondly, technological change allows the substitution of scarce resources with relatively more abundant natural resources. Finally, the reduction in the use of natural resources and primary commodities per unit of production is the result of the introduction of more efficient techniques that increase resource productivity.

However, in order to go beyond these stylized technical change mechanisms, the concept of structural learning appears useful as it allows us to understand in which specific ways, and along which learning trajectories, the manufacturing apparatus is able to turn resources constraints into technological opportunities. The concept of structural learning has been introduced to characterize the continuous process of structural adjustment triggered and orientated by existing productive structures at each point in time (Andreoni, Reference Andreoni2014). In particular, the transformation of structural constraints such as resource bottlenecks and technical imbalances into technological opportunities is made possible by the existence of complementarities, similarities and indivisibilities acting as focusing devices within and across sectors.

The process of structural learning in any given sector may in fact develop an inter-sectoral character. In other words, complementarities (as well as innovations that can be applied to similar tasks performed in other productive activities) may spread from one sector or subsector to others, triggering a specific form of structural learning called inter-sectoral learning. The latter expression identifies a dynamic process of interlocking and mutual reinforcing technological developments that link the innovative patterns of two or more sectors in a relationship of complementarity and/or similarity. Given that many resources are intermediate inputs in many different manufacturing industries, scarcity-induced technological innovations may transform production activities across sectors. This also implies that one scarcity-induced technological innovation in one sector may be responsible of compulsive sequences of technological transformations across sectors. For example, during the last decade, a number of technical developments in multistage hydraulic fracturing and extended-reach horizontal drilling in a number of manufacturing industries have made the production of shale gas viable and revolutionized the energy sector in the United States. These complex technological systems were only partially triggered by market prices signalling the need to identify new energy commodities.

Economic historians have documented a number of cases of such structural learning dynamics, especially of the inter-sectoral type (Innis, Reference Innis1957; Rosenberg, Reference Rosenberg1976, Reference 423Rosenberg1982, Reference Rosenberg, Curzio, Fortis and Zoboli1994, Reference Rosenberg, Colombo, Demeny and Perutz1996; Wright, Reference Wright1990; David and Wright, Reference David and Wright1997). The analytical discussion of these cases is beyond the scope of this short chapter. However, a number of analytical points can be highlighted to show the complexities underpinning scarcity-induced structural learning trajectories and, thus, the relationship between resource scarcity and technological scarcity.

Let's take the structural learning trajectory of the United States as an example (Barnett and Morse, Reference Barnett and Morse1963; for more country examples see Wright and Czelusta, Reference Wright and Czelusta2004; Best, Reference Best2001; Bianchi, Reference Bianchi2013). In that case the development of the manufacturing apparatus did not merely allow for scarce resource substitutability. In fact, what is even more crucial is the fact that the range of substitutability among materials kept expanding over time (Rosenberg, Reference Rosenberg1976, p. 240). This phenomenon is responsible for an expansion of the range of compound technologies that the economic system can activate. The range of possibilities also tends to expand because manufacturing industries are not bound to specific resources as such, but rather to their specific properties and functions. If materials available in greater abundance can substitute the functions performed by other scarce resources, manufacturing industries will substitute them (Scott, Reference Scott1962).

However, substitution processes require increasing rounds of fixed capital investments and equipment replacement. Without them the manufacturing apparatus is not able to use certain new materials or resources as inputs. Also, since ‘[t]oday's factor substitution possibilities are made possible by yesterday's technological innovations’ (Rosenberg, Reference Rosenberg1976, p. 253), the substitution process made feasible by certain technical advancements might not be viable in historical time or might require a prolonged adjustment period. The possibility that certain feasible techniques are not activated as they do not satisfy conditions of contextual viability is strictly related to the distinction between techniques and technologies (see earlier). Structurally feasible trajectories (development patterns made possible by technological changes or because of resource scarcity) may never unfold in reality if they do not find a viable historical and institutional context (Andreoni and Scazzieri, Reference Andreoni and Scazzieri2013).

Manufacturing development is a process transforming the structural-technological production system as well as the set of social technologies – i.e. institutions – in which it is embedded. That institutions might be the ultimate constraint in manufacturing development was a point stressed by Simon Kuznets (Reference Kuznets1965, p. 208) when he said, ‘It is the social and political obstacles that are likely to be more serious than our technological capacity’, and then restated by Wassily Leontief et al. (Reference Leontief, Carter and Petri1977, p. 6): ‘The principal limits to sustained growth and accelerated development are political, social and institutional in character rather than physical’. The last concluding section of this chapter addresses the political economy of resources constraints and, thus, deals with the possibility to develop policies beyond resource, technological and institutional scarcity.

5. Beyond resource, technological and institutional scarcity: the political economy of resources constraints

Today's political economy debate around natural resources constraints is built on a quite simplistic, linear and static understanding of the relationship between resource, technology and institutions. For example, in the context of developing countries, the ‘resource curse’ thesis has pointed out how natural resource abundance has adverse consequences for economic growth. Alongside various explanations (e.g. Dutch Disease), this thesis builds on the idea that natural resources (especially minerals) tend to be concentrated in ‘point resources’. As a result, it is relatively easy to loot them (high risk of ‘lootability’ and rent capture).

This influential thesis has been recently challenged (Lederman and Maloney, Reference Lederman and Maloney2007; Morris et al., Reference Morris, Kaplinsky and Kaplan2012). The reason why resource-abundant developing countries do not exhibit strong and sustained economic growth has to be found in their condition of ‘technological and institutional scarcity’, more than in their inescapable resource curse (Chang Reference Chang2007, Reference Chang2011). The structural trajectories followed by today's industrialized countries provide very clear historical evidence in support of this argument. In many country cases (e.g. the United States between 1870 and 1910) natural resource abundance was a ‘socially constructed’ condition (achieved through purposefully designed institutions and policies) more than a geologically preordained one (David and Wright, Reference David and Wright1997, p. 203). In the opposite scenario, as stressed by Simon Kuznets (Reference Kuznets1953, p. 230), ‘the have-not societies are poor because they have not succeeded in overcoming scarcity of natural resources by appropriate changes in technology, not because the scarcity of resources is an inexorable factor for which there is no remedy … this is a matter of social organisation and not of bountifulness or niggardliness of nature’. Despite their different trajectories, these countries stylizations raise the same three fundamental challenges underlying the political economy of resource constraints and developmental policies (Chang et al., Reference Chang, Andreoni, Kuan and Hughes2013; O'Sullivan et al., Reference O'Sullivan, Andreoni, Lopez-Gomez and Gregory2013). Let us look at them through the analytical lenses developed earlier in this chapter.

Countries who successfully developed their manufacturing apparatus (under resources constraints) adopted integrated policy packages combining manufacturing, technology (including institutional) and resource policies. Given the sector specificity of resources and the existence of technological interdependencies across sectors, policy packages have to match and, at the same time, transform the country's specific structural sets of compound technologies, institutions and natural resource constraints. Within a multi-sectoral system, this transformative matching can operate in different ways. By targeting different levels of aggregation of production activities, policies can change the compound production units scheme and, thus, the relative conditions of resource scarcity. The intensity as well as selectivity of these policies may vary substantially and can operate both along and across sectoral value chains. While some of the policies may simply introduce scarcity signals to induce market-driven technological innovation, others may change the rents appropriation mechanism and channel resources towards targeted sectors and technologies (both related and unrelated). The redistribution of resource rents across sectors changes power relationships across (but also within) the same interest groups (Khan and Jomo, 2001). At the same time, it may offer different economic actors a focal point of coordination that sets the conditions for a certain manufacturing development trajectory.

If the integration of manufacturing, technology and resource policies (given certain resources constraints) allows the full exploitation of complementarities among interdependent economic activities in time, the possibility of shifting natural resource constraints will depend upon the coordination of complementary activities over time. This is why the synchronization of resource, manufacturing and technological policies is even more critical than their integration at each point in time. Policy synchronization is not trivial as policymakers have to consider a plurality of policy targets and relative trade-offs among them over time. The composition of these trade-offs also generates structural tensions in the form of conflicts among and within interest groups. Moreover, with the expansion of the manufacturing apparatus and the unfolding of new interdependencies, policy synchronization becomes extremely complex as policies can affect both different resources types and manufacturing sub-sectors (Table 22.1). At the same time, a number of new value creation and value capture opportunities associated with shifting resource constraints may emerge. For example, a new technology today may allow the substitution of a certain scarce material in a product system (and complementary products or activities) tomorrow.

With the increasing interconnectedness of different countries’ manufacturing apparatuses, specific sectoral trajectories of one country are increasingly intertwined with other countries’ same (or different) sectoral trajectory. The same manufacturing sectors in different countries may be more or less directly competing for the same set of scarce resources and being affected by the same set of resource-related risks (Farooki and Kaplinsky, Reference Farooki and Kaplinsky2011). Because of the increasing dependence of many product systems on scarce resource-based platform technologies, even apparently unrelated sectors in different countries may be constrained more or less directly by the same natural resources. Recent technical studies identify a number of resource-related global risks, such as the increasing scarcity of minerals and metals and the consequent supply instability in specific sectoral value chains; the emergence of a number of disruption processes; the concentration of critical resources in a limited number of countries; finally, the fact that energy critical elements (ECEs) such as Tellurium, Germanium, Platinum and Lithium are now part of a myriad of high tech and environmental equipment, from smart phones, to solar panels to jet engine parts, wind turbines and hybrid cars (DOE, 2010; APS, 2011; EU 2011; Heck and Rogers, Reference Heck and Rogers2014).

Within this new complex and multi-polar resource scenario, the possibility of designing and implementing effective developmental policies increasingly depends on the availability of appropriate structural heuristics (Andreoni and Scazzieri, Reference Andreoni and Scazzieri2013). Among them, the multi-sectoral models of manufacturing development under resources constraints discussed in this chapter have pointed out the analytical and policy challenges posed by various forms of scarcity and the critical importance of embedding resources within structural dynamics frameworks. Not only do multi-sectoral production models allow unpacking structural dynamics of realized manufacturing development trajectories, they also point to the existence of alternative ‘still-to-come’ patterns. Without such form of structurally grounded virtuality, developmental ways of managing scarcity would remain unexplored.