Unemployment (Center) and Unequal Exchange (Center-Periphery)
 

Gernot  Köhler

School of Computing and Information Management
Sheridan College
Oakville, Ontario, Canada L6H 2L1
e-mail:  gernot.kohler@sheridanc.on.ca

January 2000
 

1. ABSTRACT

The article examines the relationship between unemployment in  the First World (center, OECD countries) and unequal exchange between global center and periphery and observes a correlation between unemployment in the First World and unequal exchange in the world-system. Some arguments are presented in support of the hypothesis that unequal exchange in the world causes unemployment in the First World.
 

2.  TRENDS OF UNEMPLOYMENT AND UNEQUAL EXCHANGE, 1965 - 1995

Here are some statistical data as reference material for the subsequent theoretical discussion. I am looking at a thirty-year period from the mid-1960s to the mid-1990s. Unemployment in the OECD countries was about 7 millions in 1964-65 and increased to 34 millions in 1993. Unequal exchange was 1.4% of OECD GDP in 1965 and increased to 8% of OECD GDP in 1995.  Figure 1 shows this situation in the form of a diagram:

Figure 1. Unemployment (OECD) and Unequal Exchange (T-value), 1965 - 1995

                                              Sources:  SEF(1996: 228) for "7 mln"; UNDP (1997: 210)
                                                              for "34 mln"; Köhler (1998a,b) for T-values

Figure 1 shows a simultaneous increase of unemployment in the core of the world-system (OECD countries) and unequal exchange (transfer value T) over a period of thirty years from the mid-1960s to the mid-1990s. The increases are of approximately the same proportion (factors 4.7 and 5.7, respectively). [For a comprehensive documentation of the unequal exchange data, see Köhler (1998a,b)]

What explains this simultaneous increase of unemployment in the First World and of unequal exchange in the whole world (Figure 1)? Is it a coincidence? Or is there a causal connection? A possible explanation could be in terms of inadequate global demand, namely, that: (1) unemployment in the First World (OECD) would not exist if there was sufficient global demand for OECD goods and services; (2) there would be  more global demand if the Second and Third Worlds (non-OECD) had more purchasing power; (3) the Second and Third Worlds would have more purchasing power if they were less exploited by the First World (if there was less "unequal exchange", less "global transfer value T"); (4)  in other words, the cause of unemployment in OECD countries is world-systemic, rather than national in nature;  unequal exchange in the world leads to unemployment in the First World. I will try to support this hypothesis in two ways -- namely, (a) with expert opinion found in the literature, (b) empirically.
 

3.  LITERATURE

The  relationship between unemployment and global demand has been discussed, for example, by Singh and Zammit (1995) who analyze unemployment and underemployment in the North and South of the world and conclude that these are caused by inadequate global demand.  They describe the global "demand constraint" as "deeply institutional in nature" (Singh/Zammit 1995: 109-110). Numerous economists have been warning against "beggar thy neighbour" policies -- namely, economic policies  which have the effect of weakening one's trading partners in an  attempt to strengthen the own position; such policies may be counterproductive and may, ultimately, lead to a weakening of the own position  as well. In 1931 Keynes was working with a MacMillan Committee (Britain) in order to develop a policy response to the "existing international slump". Keynes viewed world demand and domestic crisis as closely related. That is apparent from the following quotations. Keynes wrote (quoted from Moggridge 1981: 291-194; my emphasis):

"It is not easy to see how we can expect a revival in our foreign trade ... by any other means than through revival of world demand. To meet the immediate problems, arising out of the world slump, a policy intended to direct increased purchasing power into the right channels, both at home and abroad, ... would ... be much wiser ... than a policy of trying to cut our costs faster than the rest of the world can cut theirs." (p. 291) Further, he speaks of "the efforts recommended in the Report of the Committee for raising the international price level by increasing, through investment and otherwise, the effective volume of purchasing power throughout the world." (p. 292) Further: "We have ... postulated some rise of international prices as a necessary condition of the maintenance of the present level of British money incomes." (p. 293) Further: "Thus the problem ... is one of disequilibrium rather than of excessively high standards; and the task upon which we should concentrate is that of remedying the disequilibrium so as to bring our productive resources into full play, rather than of attempting to lower standards." (p. 293-4) He mentions that "nearly a quarter of our industrial resources" were "idle" at the time of writing. (p.293)

In the early 1990s some Western media discussed a so-called "locomotive theory". The question  was debated which country (or countries) would be able to generate additional demand which could serve as a "locomotive" for the world economy. Some economists spoke of a "global paradox of thrift" (Allen / Vines 1993).

The theoretical notion that additional world demand may generate additional national employment is thus fairly well established.
 

4.  ESTIMATE OF  DEMAND REQUIREMENTS

Next, is there any empirical support for my hypothesis? In my view, there is. I will consider three questions, namely: (1) How much additional global demand would be required in order to effectively combat unemployment in the First World (OECD) and (2) could the Second and Third Worlds possibly be the source of such additional global demand? and (3) how is that related to global center-periphery exploitation?

Let us examine the first problem: How much additional global demand would be required in order to effectively combat unemployment in the First World (OECD) via additional global demand?
 

IN GENERAL

Let L stand for "number of employed workers" (="employed labour"), then it is true that:

EQUATION 1

GDPL  =  L * (GDP /  L)

in words, the GDP produced by a given number of employed workers ( GDPL) equals the number of employed workers (L) times average labour productivity (GDP/L) .

Next, let UL stand for "number of unemployed workers" (= volume of unemployment), then it is true that:

EQUATION 2

GDPUL  =  UL * (GDP /  L)

in words, the amount of GDP which could be produced by the unemployed workers (  GDPUL ) , if they had work, is equal to the number of unemployed workers (UL) times average labour productivity prevailing at that time in that country (GDP/L).
If there were customers who could buy this extra output in the amount of  GDPUL  , all unemployed workers (UL) could be employed; UL would disappear ( UL --> 0); and L would  increase by the amount of UL to full employment.
 

EXAMPLE

Here are some calculations for  the year 1994. The data source is UNDP, Human Development Report 1997. [The page numbers in brackets refer to pages of the  Human Development Report 1997]

(a) OECD population (1994)                                                          =     992 million persons                     [p.218]
(b) OECD labour force as percent of population (1990)                  =       48 %                                        [p.209]

(c) OECD labour force (1994) [ = (a) * (b) ]                                  =     476 million persons
The labour force is composed of L and UL, namely:
(d) OECD unemployed people (1993) [ = my "UL"]                       =        34 million persons                      [p.210]
(e) OECD employed labour (1994), [=my "L"]                                =      442 million persons
                 [ = (c) - (d) ]

(f)  OECD gross national product GNP (1994)                                =        21 trillion US dollars                  [p.203]
(g) OECD aggregate labour productivity (1994) [=my (GDP/L)]      =  47511 US dollars per worker per year
                 [ = (f) / (e) ]

GDPUL  (potential GDP lost due to OECD unemployment = additional global demand required to achieve OECD full employment)

FORMULA:          GDPUL  =  UL * (GDP /  L)

(h) OECD GDPUL  (1994)  =  34 million persons * 47511 US dollars per worker  =   1.6 trillion US dollars

In words, the First World (OECD) could have produced an additional 1.6 trillion dollars worth of GDP in 1994 by using its reserve army of the unemployed if that output could have been sold to somebody. In other words, OECD countries were short by 1.6 trillion US dollars of  global demand for their goods and services.
 

5.  POTENTIAL SOURCE OF ADDITIONAL GLOBAL DEMAND

Let us examine the second problem -- namely, where could additional demand of sufficient magnitude come from?

OECD countries have not been able to generate this demand internally for some time. Worldwide there are many people who would like to buy this potential  GDPUL  from the First World. However, they have a cash flow problem because the First World does not pay fair prices for Second and Third World goods and services. The rest of the world is thus short by some transfer value T. In a socially responsible world (the way I imagine it, anyway), the First World would pay the rest of the world at fair prices, so that the rest of the world would gain additional income in the amount of T. This T could then be used by the rest of the world to buy additional output from the First World. From the perspective of world-systems theory, a possibility is suggesting itself -- namely, the elimination of global center-periphery exploitation would lead to a surge in global effective demand of considerable magnitude.

A measure of the magnitude of global center-periphery exploitation is the "transfer value" which is an estimate of the amount of value lost by  the Second and Third Worlds (non-OECD countries) due to unfair prices and exchange rates (unequal exchange).  An  estimate is available for the year 1995 , namely:

Global Transfer Value T (1995) 1.8 trillion US dollars

(For an extensive documentation of this estimate, see, Köhler 1998a; 162-163 in "World Table 1A") [The "1.8 trillion dollars of transfer value" are the same quantity as the "T-value of 8% of OECD GDP" mentioned in Figure 1 above.]  This 1.8 trillion figure means that NON-OECD countries were effectively underpaid for their exports (in 1995) by 1.8 trillion US dollars due to biased exchange rates. Amin describes this kind of situation as "superexploitation of labor in the periphery ... which is largely hidden in the structure of prices" (Amin 1980: 19) As a consequence, international trading demand originating from the Second and Third worlds was reduced by 1.8 trillion US dollars from what it could have been in a world with fair trade and fair exchange rates (i.e., no unequal exchange, no center-periphery exploitation).
 

6.  COMPARISON OF ESTIMATES

My two estimates of  GDPUL  (1994)  =   1.6 trillion US dollars  and global  "Transfer Value T" (1995)  =  1.8 trillion US dollars are very similar. The 1.8 trillion US dollars of purchasing power which the Second and Third Worlds lost  because of unfair trade and unfair exchange rates (unequal exchange) are approximately the same amount of global purchasing power (global demand) that the First World needed (namely, 1.6 trillion) in order to productively employ all its unemployed people, all 34 million of them. This evidence supports the claim that (a) the Second and Third Worlds lose purchasing power due to unequal exchange (global center-periphery exploitation); that (b) this situation creates a shortfall of global demand for OECD output; and that (c) this shortage of global demand causes substantial unemployment in the First World (OECD). Based on the above, it is not unreasonable to conclude that unemployment in the First World (OECD countries) is caused by unequal exchange in the world-system (unfair trade, unfair exchange rates, exploitation of the Second and Third Worlds by the First World).
 

7.  SUMMARY AND CONCLUSION

The article examines the relationship between unemployment in  the First World (OECD countries) and unequal exchange between global center and periphery and observes a correlation between unemployment in the First World and unequal exchange in the world-system. Some arguments are presented in support of the hypothesis that unequal exchange in the world causes unemployment in the First World. Assuming that this hypothesis is valid, it can be further observed that global center-periphery exploitation (unequal exchange) has two contradictory effects on labour in the center ("global labour aristocracy"), namely, (a) gains in consumption due to relatively low prices of imports from the rest of the world and (b) losses in employment due to the mentioned world-systemic causation of First World unemployment. These job losses are frequently perceived as "job exports" (from the West to the rest), but much of the disappearance of First World jobs may be due to the fact that neoliberal globalization leads to a comparative destruction of jobs on a world scale --  in the sense, that a world economy with unequal exchange generates fewer jobs than a world economy with fair exchange (fair trade, fair exchange rates). Rather than looking at non-OECD workers as "scabs" who "steal jobs" from OECD workers, First World labour  should pay attention to the fact that they and labour in the Second and Third Worlds get hit by the same world-system in different ways (unemployment, superexploitation) -- some grounds for labour solidarity across continents. With respect to governments of the First World who are serious about fighting unemployment, my observations suggest that the governments of the First World (OECD) could reduce unemployment in their respective countries if they cooperated with other like-minded governments toward abolishing the global architecture of unequal exchange and organizing a system of fair exchange between center and periphery. The job-creation effect for First Worlders would come about through an expansion of global demand resulting from a transition to fair trade and fair exchange rates.
 

8.  REFERENCES

Allen, C. and D. Vines (1993) "Should Clinton Cut the Deficit or is there a Global Paradox of Thrift?" The World Economy, no. 2, vol. 16 (March 1993), pp. 133-158

Amin, Samir (1980)  "The Class Structure of the Contemporary Imperialist System", Monthly Review (USA), 31 (1980), 8: 9-26

Moggridge, Donald (ed.) (1981) The Collected Writings of John Maynard Keynes. London, UK: MacMillan Press. Volume XX (1981)

Köhler, Gernot (1998a), "The Structure of Global Money and World Tables of Unequal Exchange." Journal of World-Systems Research 4: 145-168

Köhler, Gernot (1998b), "Unequal Exchange 1965 - 1995: World Trend and World Tables", World-Systems Archive, Working Papers, /archive/papers/kohlertoc.htm

SEF (Stiftung Entwicklung und Frieden) (1996)  Globale Trends 1996. Frankfurt, Germany: Fischer

Singh, A. and A. Zammit (1995) "Employment and Unemployment, North and South", in J.Mitchie and J. Grieve Smith, eds. Managing the Global Economy. New York, USA: Oxford University Press, p. 93-110

UNDP (United Nations Development Program) (1997)  Human Development Report 1997
 

9.  RELATED ARTICLE

Köhler, Gernot (1999)  "Global Keynesianism and Beyond", Journal of World-Systems Research, 5:225-241 (online at:  http://jwsr.ucr.edu/ )

*end