COMMERCE AND COALITIONS

COMMERCE AND COALITIONS: HOW TRADE AFFECTS DOMESTIC POLITICAL ALIGNMENTS

R. Rogowski

Excerpts

A Summary 

In a Nutshell

Rogowski created a framework where he categorises countries into one of 4 broad categories based on the relative abundance of the factors of production, and whether the country is an advanced economy or a backward economy based on how capital rich they are. He assumes that beneficiaries of change try to perpetuate that change, and at the same time those who gain extra wealth will seek to expand their political influence and in fact they will be able to overcome the specific collective action problems they face.

 The Stolper-Samuelson theory that owners of factors of production who exist in societies where that factor is relatively sparse (i.e. the society is poorly endowed with that factor), will benefit from protectionist trade policies. So freer trade in a society rich in labour and poor in capital will benefit the labour and hurt the capital. He uses this theory and the framework of countries to predict what political cleavages will emerge in domestic politics as a result of either trade policy or exogenous events that act like trade policy (the lowering of transport costs reduced the cost of trade in the same way a tariff reduction might).

 What seems important about this piece is that it starts from a position that there are winners and loser from globalisation, so the story is not as simple as Martin Wolf makes out. In some societies the losers (at least in the short term) could even be a majority of the population.

 The Framework

3 Factor model: land, labour, capital, and the land/labour ration tells us about the distribution of those two factors. An economy is advanced if capital is abundant.

 

High Land/Labour Ratio

Low Land/Labour Ratio

Economy

Advanced

ABUNDANT:

Capital

Land

 

SCARCE:

Labour

ABUNDANT:

Capital

Labour

 

SCARCE:

Land

Economy

Backward

ABUNDANT:

Land

 

SCARCE:

Labour

Capital

ABUNDANT:

Labour

 

SCARCE:

Capital

Land

Political Effects of Increasing Trade

Upper right

Advanced capital rich country endowed with labour not land. Increasing trade results in urban-rural conflict, as trade benefits capitalists and workers but not landowners. Workers and capitalists will argue for free trade and will seek to expand their political influence. They will most likely want a diminution of the gentry based elite.

Bottom left

Backward land rich economies. Land is abundant so will gain from trade. Capital and labour both lose. So farmers etc. will expand their influence in some anti-urban populist movement.

 Bottom right

Backward labour rich economies. He we see class conflict as labour pursues free trade and seeks more power including a possible workers’ revolution. Landowners/capitalists etc. unite to support protection, imperialism and politics of exclusion [LA! Especially with reference to ISI].

 Top left

Advanced land rich economy. Capitalist and landowners support free trade. Labour will resist.

 Political Effects of Declining Trade

Upper right

Renewed urban-rural conflict. Agriculture is the only winner so will seek to expand its influence.

 Bottom left

Agriculture is on the defensive. Labour and capital benefit from trade contraction. Urban sectors unite to demand more political control.

 Bottom right

Labour suffers and is threatened politically.

 Top left

Class conflict due to newly aggressive working class as they are the ones who benefit from contracting access to international trade.

 Two Other Cases

Land and labour abundant, economy backward

Labour and agriculture unite as trade benefits farmers and workers but harms capitalists and gentry. The masses will look for free trade, disempowerment of capital. If trade were to contract this would only benefit the capitalist and as such it would either end in capitalist dictatorship or an anti-capitalist revolution.

 Land and labour scarce, economy advanced

Green and Red once again unite but this time in support of protectionism as free trade only benefits capitalists. We see either capitalist dictatorship or a more participatory but economically retrograde government.

 Possible Objections

  • The results of this investigation vary with the dependence of foreign trade as a percentage of GDP. E.g. Belgium where trade accounts for 1*GDP will be much more affected than the USA in the 60s where trade accounted for 0.1*GDP. This seems logical but in fact the Stolper-Samuelson result holds at any margin claims the author.
  • Given that comparative advantage always arises from trade the gainers could compensate the losers and trade will still be Pareto superior. This is perfectly possible but does it ever really happen. Yes in places like Sweden where the state is compassionate and honest.
  • Why should cleavages persist where factors of production are mobile? People would simply disinvest from losing factors e.g. farming in Britain. This is true, but trade can expand/contract rapidly thus frustrating rational expectations.  Also elite capture can mean that privileged access to politics makes easily won protection easier than adaption. However, as technology transfers more rapidly making factors more mobile, this theory will become less useful.
  • A worker who lives 50% on income from work and 50% from investments will react differently to one who only relies on 10% investment income. Same for capitalists that employ mostly labour relative to machinery.

 Renewed Expansion of Trade, 1948 to Present

  • Peace time boom post 1945. Best decade 1963-73, trade grew at 9.1% p.a. Trade grew more rapidly than output. Transportation improved, Bretton Woods made multilateralism easier, GATT introduced etc.
  • Different regions were affected differently. Manufactures traded rose by 93% but primary products only 34%, so more advanced economies benefitted more probably due to their growing wealth and shift away from primaries to luxuries and consumer durables.

 Factor Endowments

Land

Taking world average in the period Asia, Europe (except Ireland) the Caribbean and the Levant were all poorly endowed in land. USSR, Southwest Asia and North/South America are land rich. Africa and Central America are divided by region.

Capital

US, Canada, Oz, NZ and Northern Europe (after war recovery) all abundant in capital. All Asia, Africa, Caribbean and Central America are capital poor. South Am and other parts of Asia were divided by region.

 Labour

Areas abundant in land are poor in labour (Americas, Oceania, most of Africa) and ones scarce in land are abundant in labour (East and South Asia, Europe, Caribbean etc.)

 Abundance of Labour and Capital;

Scarcity of Land

  • What we expect: Northern and central Europe and soon after 60s Japan and Italy too.
  • We expect to see and ‘end to ideology’ as the free trading alliance between labour and capital puts age old tensions between classes to rest. Further reduction in transport costs may give this effect even greater momentum.
  • What we see: a “far-reaching reconciliation of labour and capital”.

Abundance only of Labour;

Scarcity of Capital and Land

  • Southeast EU, continental East and South Asia and parts of Africa.
  • We expect: growing militancy of labour, possible peasant revolutions. Trade benefits labour, but elites will capture the initial gains until the labour has begun to gain political influence.
  • What we see: e.g. Vietnam. Vietnam had been inserted into world economy in colonial time particularly for rubber and rice crops. A trade increased benefits accrued toward farmers but the elite landlords captured the gains for themselves. Peasant associations formed to defend property rights and permit legal defenses that would allow peasants to produce independently of the landlords. So much collectivism was needed to break the old ties of dependence in gaining access to the markets. The author tells a similar story for China.
  • What about India where similar inequalities exist, but peasant movements are much weaker? The author says British rule set limits on the elites removing their monopolies on credit and marketing, and the postcolonial legal system was better allowing for execution of contracts. I.e. things were not as bad as in china/Vietnam.

 Abundance only of Land;

Scarcity of Labour and Capital

  • Virtually all of South America, mex, much of Africa, Ireland.
  • What we expect: trade ignites urban-rural conflict, leading free trade landowners to oppose a protectionist coalition of labour and capital. So in Latin America we expect resumption of free trade to break down populist alliances of labour and capital.
  • What we see: in the LA economies there were populist experiments during the depression and war years but landowner power was re-asserted crushing capital and labour once exports were once again pursued. So this would explain how ISI came into being during the years of depression and was maintained in the inter-war years. Once peace came to the world in 1945 and trade resumed the ISI model broke down, and the capital-labour alliances were broken. The Rogowski model does not explain Raul Prebisch and the genesis of his thought as he was not producing with the land. However, it might well go some way to explaining how his ideas came to prominence in the ISI period.
  • Populists still preferred protection and they accepted inflation and poor products as the price of this policy. Wealth was transferred from the landowners to the capital and the labour, especially urban labour. To agriculture and resources this policy was anathema – the overvalued currency made exports uncompetitive and capital imports expensive.
  • Since 1945 we see Latin American countries turn to military dictatorships that imposed “anti-populist” measures to halt inflation, curb wages and unions and reduce tariffs and quotas. However, they were not merely tools of the abundant factor (land). Indeed they often pursued once again export lead growth models thus allying themselves with capital, which is something the model does not necessarily predict and thus makes the authoritarianism unique in being “bureaucratic-authoritarianism”.
  • How does Rogowski explain this difference? Countries near the threshold of capital abundance may try to “jump” a stage of development by suppressing wages and borrowing heavily from abroad to act as though they were rich in capital. This scheme would collapse if the credit dried up. As it did.
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