Unequal exchange

Sorry for my brevity in my recent postings (you people are asked to realize
that all this is just a by-product of my ongoing bureaucratic work here, so
to speak in-between postings at 5 before 5) - so my apologies to Andre
Gunder Frank and Charlie Stevens.

You find the explanations for all this in the excellent paper by Gernot
Kohler on our wsn site:

http://csf.colorado.edu/wsystems/archive/papers/kohler/kohler3.htm
<http://csf.colorado.edu/wsystems/archive/papers/kohler/kohler3.htm> 

and - hopefully - in our joint book which should be out this spring.

The concept is easily explained in plain language: wherever Gross National
Product per capita valued at current exchange rates is much higher than
Gross National product valued in real purchasing power parity, a country
enjoys the benefits of unequal exchange; while for the underdogs in the
world system it's the other way around. 

It was shown by Dr. Gernot Köhler, that unequal exchange is the determining
process of the mechanisms of the world economy today. It is calculated
according to the formula 

T = d*X - X

d = ERDI (exchange rate deviation index)

ERDI = GNP per capita at current exchange rates in $/GNP per capita at real
purchasing power parity rates in $

X exports of a country to the high-icnome countries in the world economy
T gain or loss in value as a result of unequal exchange

The international rank scale of unequal exchange according to the ERDI
concept is dominated by countries like Switzerland, Luxemburg, Scandinavia,
and Japan, while nations like Nicaragua, China and Mozambique come at the
bottom. 

It would be wrong to start from the assumption - as conventional economics
is inclined to do that the ERDI or 1/ERDI phenomenon - or call it unequal
exchange - is an autonomous consequence of a relatively high price level in
the non-tradable sector. If it were it only so, there would be, among
others, a high correlation between state sector expenditures (influencing
the amount of non-tradables per total GDP) and the ERDI, which is not the
case.


However, market imperfections - especially in terms of land tenure,
monopolistic conditions on the capital markets etc. certainly will influence
ERDI and hence 1/ERDI. 

Monopolistic competition - and this is known ever since the early writings
of Kurt Rothschild - are clearly interlinked with the structures of
dependency. Unequal exchange is the constant feature of center-periphery
relationships. Applied to the realities of European integration, it is the
status quo, a Europe without enlargement of the European union and of the
European Monetary Union. It increases over space and time, it blocs
development in the periphery, and it creates unemployment in the center
countries. Left to its design, it will ruin social stability in the world,
and it will ruin European integration. The calculation of its losses
indicate to European decision makers what price non-enlargement would have. 

World system theories, that picture the capitalist world economy as a
single, conflict-producing mechanism that evolved in cycles of economics and
war since around 1450, and that is characterized by a relative stability of
a division of the world into centers, semi-peripheries and peripheries,
necessarily start from the assumption, that there is an unequal exchange
between the centers, and the peripheries, that transfers in some fashion or
another the surplus of the labor in the peripheries to the centers. 

So, the central question is: how does this unequal exchange come about? How
is it measured? And what effects does it have, in comparison to other
operationalizations of that vital concept of world system theories and
dependency theory, especially on a cross-national level? And what
consequences does this unequal exchange have for world wide and European
development?

Compared to the mysticism that surrounds, with the healthy exception of the
contributions of Amin and Raffer, much of the earlier writing on unequal
exchange, our approach (chiefly Gernot's; I did some extra number crunching
on that) might turn out to appear simple-minded or empiricist by some. But
the unease about the fact, that a politically highly relevant and even
explosive issue is hardly recognized in its existence by many main-stream
scholars, especially from the economic profession, while the few political
economists, that take the issue seriously, never arrived at a
cross-nationally testable data series about which country is affected in
which measure by the process.

Needless to say, that the centers draw the benefits from such an
exploitation, while the peripheries and semi-peripheries stagnate, at least
relatively and in relation to the fortunate few who could 'make it'.

It is essential to understand the polarizing nature of the world economy.
Gernot and my approach re-discovers assumptions of John Maynard Keynes and
Raul Prebisch, whose contribution to the theory of periphery capitalism a
recent contribution by the German economist, Steffen Flechsig described as
follows:

'Contrary to the equalizing and harmonious predictions of neo-classical
international trade theory, the prevailing international division of labor
and trade were not of mutual benefit for all participants. Peripheral
countries were not able to realize the "comparative advantage" of its
participation nor the benefits of an increased productivity in primary
production could be enjoyed by them (...) Prebisch's explanation consistent
- operated on two levels. First, the main argument dealt with the different
income elasticity of demand for imports by the Center and periphery (Engel's
law, technical progress et cetera) (...) Secondly, the different impact of
the business cycle on prices, profits and wages in the industrial Center and
primary producing periphery due to internal differences in the structure of
productive factors and the nature of the Center-periphery relationship (viz.
bargaining power of well organized entrepreneurs and trade unions in the
Center which defended profits and wages from falling; segmented capital and
unorganized and surplus labor in the periphery, lagging international
mobility of labor, protectionist trade policy in the centers et cetera).
Productivity gains in the centers are not appropriately transferred to the
periphery by lower prices and vice versa, because there are no real
conditions for a free competition and a market economy. Relying on
"imperfect markets" or "oligopolistic competition" and power relationships
within and between countries, Prebisch blames the centers and the
international economy for the unfair operation, for "unfair prices" or for
monopolistic pricing.' (Flechsig in Andreas Muller OFM et al., 2000)

And in view of EU-enlargement, let us again recall what Flechsig said about
Prebisch's theory:

'Due to the fragmentation of the periphery, changing hegemony of the centers
and changing patterns of international trade, the terms of trade analysis
cannot be sustained in the same way as in Prebisch's times. New factors come
in the picture such as the new role of the TNC and of financial capital, the
debt burden, scientific and technological dependence, neo-protectionist
policies of the centers, capital flight, selective migration and brain drain
et cetera. But all of them contribute to deepen the periphery's external
imbalance with the centers, their vulnerability and foreign exchange
constraint. And - as the recent financial crisis shows - it will force them
to counteract the foreign exchange problem beyond neo-monetarist cures and
to substitute domestic production for imports from the centers (...) But the
nucleus of Prebisch's terms of trade analysis which focuses on imperfect
markets, monopoly power and its consequences retains validity: unequal
distribution of the gains and incomes, polarization and uneven development
in the world. The labor values, surplus or income "siphoned off" (in
Prebisch's terms) from the periphery to the centers through different
channels - according to calculations of the UNDP - amount to more than 500
billion dollars a year in the 1990s. 
Prevailing international trade is no positive-sum game, as neo-classical
theory tells us. It rather produced such global asymmetries and imbalances
which are challenging the world's stability and future. In today's
globalized world the center's "triad" (European Union, NAFTA and Asian
APEC), which makes for 20 percent of the world population, concentrates 85 -
90 percent of the world trade and the huge periphery - with 80 percent of
human beings - makes only for 10 - 15 percent of the world trade. There is a
deep "structural break" in the world economy, a new Limes particularly
between North and South which tends to marginalize or to make redundant the
great majority of humanity in the periphery. The time is ripe to put the
economy in the service of the human beings worldwide (World Forum for
Alternatives, 1997, 4).' (Flechsig, op. cit.)

The issues dealt with in our joint studies, that Gernot and I did over the
last months, not only have a theoretical, but also a practical importance
for the issues of continental integration and the extension and deepening of
such entities as the European Union or NAFTA. In Europe, especially to
continue the process of Eastern enlargement without tackling the fundamental
consequences of unequal exchange would be paramount to risk the failure of
the whole process. Wages in the East melt like the snow of winter in the
spring sunshine under the impact of currency fluctuations.


        Latest  Year ago        absolute change in US $ over 1 year
relative change (in %)  today's wages relative to Portugal (777$=100)
number of years, in which at the current speed of change the level of
Portugal today would be reached
        
Bulgaria        111     112     -1      -0,9    14,3    never   
Croatia 624     673     -49     -7,3    80,3    never   
Czech Republic  356     374     -18     -4,8    45,8    never   
Estonia 286,9   265,5   21,4    8,1     36,9    61 years        
Hungary 324     322     2       0,6     41,7    755 years       
Latvia  238     211,8   26,2    12,4    30,6    43 years        
Lithuania       270,5   n.d.                    34,8            
Poland  459     421     38      9       59,1    35 years        
Romania 125     157     -32     -20,4   16,1    never   
Russia  67      71      -4      -5,6    8,6     never   
Slovakia        273     293     -20     -6,8    35,1    never   
Slovenia        953     1024    -71     -6,9    122,7   level of Portugal
reached, but wages are falling again    

Source: our own calculations from Business Central Europe,
http://www.bcemag.com/

Wage earners from the non-export-oriented sectors in the West of the
continent, confronted by increased social polarization, third-worldization
become opposed to the European extension project, just as the export sector
workers and farmers in the European Eastern semi-periphery, confronted by
falling earnings for their labor, measured in current world market exchange
rates. Exchange rates and internal buying power at purchasing power parity
rates drift apart, and the differences increase, instead of decreasing.

Kind regards

Arno Tausch