March 23, 2015

Book Review: Adam Tooze, “The Deluge”

Posted in Book Review, Economics, Europe, Fascism, History, Imperialism, Int'l Trade tagged , , , , , , , , , at 01:33 by Matthijs Krul

“Liberalism is the only thing that can save civilization from chaos – from a flood of ultra-radicalism that will swamp the world…” These are the words of Woodrow Wilson aboard the SS George Washington in December 1918, reflecting on the tasks confronted by the United States and her allies after their victory in the First World War. It is also the fundamental thesis of Adam Tooze’s The Deluge, the long-awaited followup to his brilliant discussion of the political economy of Nazi Germany (for a discussion of which, see here and following). Applying his profound talent for combining political economy with international relations, Tooze’s central subject is the aftermath of World War I and the challenge of creating a new world order amidst the ruins of the old European powers. This challenge, as he presents it, was a dual one. On the one hand it involved the recognition by all European powers, victors or vanquished, that the United States was now the pre-eminent economic power in the world, with the potential of translating this tremendous advantage into equivalent military and political power on the world stage; and on the other hand it involved the attempts by Woodrow Wilson as American President to effect this transformation of the world balance of powers while simultaneously disentangling the United States from a war alliance that he had never wanted in the first place, and which threatened to perpetually constrain the freedom of action the Americans needed to make this potential a reality.

The main dynamic through which this contest was fought out, in Tooze’s economic historical telling, is the question of debt and credit. While Tooze emphasizes that the American contribution to the Entente victory in the military sphere was modest at best, the main American contribution lay not in manpower or materiel, but in the financing of the war effort. The Entente victors ended the war owing the United States a vast sum in inter-Allied debts, and the Americans – Democrats and Republicans alike – were intent on making good on these claims and in so doing subjugate the British and French permanently to a world order of American dominance. However, what complicated the picture was the demand for reparations established by the Entente powers against (especially) Germany, which was perpetually unable to actually pay these. The efforts of international diplomacy and politics in the period 1916-1930 therefore became a veritable pyramid scheme with the United States on top, and each debtor below attempting to recoup their own losses before the whole collapsed under its contradictions. In order to forestall such a collapse and to obtain the necessary leverage combined with the equally necessary flexibility, the Entente powers attempted various means of political institutionalization of the debt and credit relations, from the League of Nations to the series of international agreements between Versailles (1919) and the Young Plan (1930).

Tooze’s narrative, while complex and providing a wealth of substantive detail on everything from the Soviet-Polish War to the internal dynamics of Japanese interwar parliaments, can roughly be summarized as follows. Wilson’s politics, Tooze argues, have wrongly been portrayed as a naive or ‘idealist’ internationalism. Instead, what Wilson recognized was that the only possibility to prevent another such political crisis as 1914 was the establishment of a new liberal order. This order must be based on the fact of American hegemony (which naturally Wilson favored), and in order to achieve this, it was necessary to avoid permanent alliances between the US and European powers, instead favoring ‘peace without victory’ in World War I. When this failed, Wilson shifted to a strategy of using the inter-Allied debt leverage to enforce his vision, seeking to use this constraint on the freedom of the victorious European powers to prevent them from any further 19th century style inter-imperialist rivalry. Instead of the old balance and rivalry of powers, there was now to be a world based on the ‘Open Door’, the freedom of the seas, and the liberal international institutions like the League of Nations. This would guarantee a world where liberal-democratic principles could slowly embed themselves in all the major states and where American economic superiority could be peacefully translated into political dominance without the need for further intercontinental entanglement.

Tooze’s tale, however, is not one of success but of failure. The two central theses he develops out of his narrative are the observations that 1) this liberal-democratic new order was the only possibility to prevent the twin radicalisms of Communism and fascism from taking hold in a serious way, and 2) that it failed to come about due to the incompatibility of the demands of the winners and losers of the post-WWI settlement and due to the repeated failure of American diplomacy to effectively cajole the main powers into a ‘peace without victory’. The result was the ‘second Thirty Years War’, as some historians are now describing it, that we are all familiar with. This approach involves a convincing reinterpretation and rehabilitation of many aspects of the period often dismissed in later years: Wilson’s internationalist vision, both less naive and less successful than often portrayed; the Versailles Treaty, a necessary step in institutionalizing the “chain gang” that bound the losing powers to the winning powers and the winning powers to the United States; and even the much-condemned Clemenceau and French foreign policy, whose supposed revanchism against Germany appears very defensible in light of the damaged and exposed position of the postwar French state.

The strength of Tooze’s narrative, besides his admirable command of source materials and the logic of international macroeconomics, is to replace the usual psychologizing narratives of WWI and its aftermath (Clemenceau’s revenge, Lloyd George’s deceit, Wilson’s naivete, Lenin’s devilishness, etc) with a plausible model that explains the diplomatic continuities across parties of the period in terms of economic and political interests. In that sense this work definitely represents the ‘realist’ approach in international relations at its best. But it is not wholly shorn of discussions of ideology and the domestic conflicts of parties and factions either: an important part of Tooze’s discussion of the would-be liberal global dispensation is the domestic opposition between the liberal-internationalist politicians, oriented towards the United States, and the radicals of left and right, seeking to prevent the former from bringing about this order. In this model it therefore makes less difference what individuals or even political ideologies were involved, but mainly what position they took vis-a-vis this “remaking of global order”, as the book’s subtitle puts it – hence the convergence between a bourgeois radical like Clemenceau and a rightwing nationalist like Stresemann. Yet both the oppositionalism of left and right radicals and the opportunism of this expansive ‘center’ meant that those in the “chain gang” failed to come to terms with the new order sufficiently to make its institutions work. The result, Tooze suggests, was the stillbirth of democracy in much of the world and the victory of the radical forces over the liberals, so that another world war became inevitable.

The obvious strengths of this explanation are also its weaknesses. Much more than in his rightly lauded previous work, The Wages of Destruction, the worldview expressed in the book seems that of a contemporary ‘muscular liberalism’. Tooze truly believes in the liberal hierarchy of nations supervised by the United States, and wishes it could have been established earlier. This necessitates some political judgements that are, to say the least, debatable. He does not hide the fundamentally imperialist nature of Britain or France after WWI or their futile efforts to combine the new internationalism with a stronger grip on their colonies. But he never quite reconciles the enduring imperialist adventures he describes – from the colonization of Egypt in 1919 to the Japanese efforts to divide and rule in China or the Franco-British schemes in the Middle East – with his repeated assertion that the new world order was based on the recognition that the ‘old imperialism’ (which Tooze argues only really started in the 1880s anyway) was no longer possible in an era of mass mobilization, and that the era of global competition was over (287). He is therefore unjustifiably sanguine about the “liberal imperialism” and its supposed moral advances over the previous era.

Tooze is honest enough to report the contradictions: “Liberal visions”, he writes in a discussion of the British suppression of Indian national liberation between the wars, “were necessary to sustain empire in the sense that they offered fundamental justifications. But they were always likely to be reduced to painful hypocrisy by the real practices of imperial power…” (391). Very true. But how are we to reconcile this hypocrisy with the seemingly self-evident desirability of the liberal order over that of the ‘radicals’? A similar problem appears in the omission of any discussion of the racial dimension. Again, Tooze honestly reports on Wilson’s white supremacist views, and how the latter’s politics were founded on his hatred of the Reconstruction period. He regularly mentions the usage of racial categories and language by the diplomats of the Entente nations, and the hasty rejection of Japan’s motion for racial equality in the Treaty of Versailles. But the connection between these views of racial hierarchy and the content of what he sometimes calls the “liberal imperial order” – even had it succeeded – is not made explicit.

This stands in strange contradiction to the importance he attaches to the racial-colonial dynamic of Nazi Germany’s war strategy in The Wages of Destruction, where precisely the importance attached to this dimension gives his narrative such an added explanatory power. Japan’s defection from the liberal order towards fascist military adventurism is portrayed as a consequence of the Great Depression, which there as elsewhere robbed the liberals of their main (economic) arguments to hold the revanchists at bay. This is true enough as it goes; but might it not also have something to do with the statement by Victor Wellesley of the Foreign Office on Chinese policy, which was founded on the observation that “the prestige of the European races has been steadily declining in the Far East… and it has suffered a severe blow as a result of the Great War” (406)? Do not the repeated expressions of racial contempt for Slavic peoples, for the ‘Jewish degenerate’ Bolsheviks, and the horror stories about the Senegalese forces in French service, combined with the white supremacist policies of the Americans, perhaps matter more than incidentally for the shape the postwar order took and the inspiration of fascism? In his previous book Tooze was clear about this; in the present it seems much more muddled.

Radicalism, for Tooze’s liberal IR realism, is all of one kind and necessarily leads to war and destruction without clear advantages. The book throughout equates Communists, fascists, anarchists and other radicals in the political sphere, making it a matter of diplomatic indifference whom one is dealing with; he equally applauds Gustav Noske’s repression of the Spartakusbund as the failure of the Beer Hall Putsch. The Soviet Union is treated with nothing but scorn and contempt, and Lenin appears as nothing but a deluded adventurer who destroyed Russian democracy (the Constituent Assembly, which gets a great deal of space) and became a puppet of German interests. (Given Tooze’s main sources on the Russian Revolution and its aftermath appear to be the works of Richard Pipes and Orlando Figes, his lopsided and absurd judgements are perhaps not so surprising.) The repeated repression of the workers’ movement, from the French miners to the revolutionary moment of 1919-1920 all the way to the UK General Strike of 1926, is virtually without fail applauded by Tooze. For him, Noske is a responsible statesman, Clemenceau a “pragmatic reformer” who was “demonised” for repressing the miners’ strikes with armed force by the “doctrinaires” of the French Socialist Party, and the Entente intervention against the October Revolution a defense of democracy. The ‘Red Scare’ and Palmer raids in the US after WWI, often seen as precursors to McCarthyism, are a mere “carnivalesque distraction” (354). The minor welfare programmes and high taxes of the Lib-Lab policies in Western Europe after the war, however, represent “immense new burdens” (250), and the pensions and compensations for war veterans a dubious “new notion of entitlement” (359).

Although Tooze repeatedly admits that the liberal imperial order he favors did not really – beyond the persona of Wilson – have the support of the great majority, he sticks to defending it without fail as “progressive” or the “progressive center”, even putting ‘imperialist’ between scare quotes when applied to its protagonists, despite his own descriptions of the fundamental accuracy of that term. In distinction to this progressivity, the radicals can never be right – that Weimar Germany or Soviet Russia attempted to come to understandings with defeated or colonized powers like China, or indeed each other, is depicted as “self-indulgent nationalist fantasy” (436). Sinn Fein’s independence movement was an expression of “apocalyptic radicalism” (377), and the repeated “political concessions to nationalism” forced upon the British empire (the only one examined in detail) are discussed with more than a hint of regret. One will find little patience with national liberation ideas or radical politics of whatever stripe in Tooze’s book: it’s the American way or the highway as far as the peace of nations is concerned.

This also generates difficulties for him in describing the deflationary policies that have become so notorious in retrospect. Whereas an economic historian like Barry Eichengreen represents mainstream opinion in (probably overly simply) seeing the crisis caused by the deflationary policy and the subsequent dissolution of the liberal-imperialist interwar order as the result of bad economic theory, Tooze is more ambivalent. He explains the virtual universality of the deflationary attachment to the gold standard as the expression of the desire to be part of the new American-led order of ‘Open Door’ international relations, surely a much more plausible explanation than simple error. However, the difficulty is that this deflationary economics undeniably was a major factor in the crisis of 1920-1921 as well as that of 1929; and these crises, in turn, destroyed the world order Tooze so favors. It therefore appears both as the necessary result of liberal internationalism and its destruction, which raises the question whether – just as with the notion of ‘liberal imperialism’ in India and elsewhere – the strategy was not too internally contradictory to have ever been a plausible historical outcome to begin with.

On that note, one final aspect of the work should be noted. It does not escape Tooze, of course, that parallels can be found between the institutionalization of international debt and credit relations between the wars and the construction of the European Economic Community after them; nor the significance of the League of Nations, the Kellogg-Briand Pact and other treaty forms of American-led international pacification for the United Nations of today. Indeed, Tooze emphasizes such continuities, suggesting that he seems to regard the present order and its problems as comparable to those of the internationalist liberalism of the Wilsonian vision. Even the role of (Soviet) Russia is perceived in this way, where German policy is portrayed as a necessary response to its inherent threat after WWII as much as before the Great War: it was the “very real threat of a Soviet takeover”, we are told, “that drove West Germany willy-nilly into the arms of the West and kept it there” (276). (In fact, Stalin repeatedly offered the possibility of a neutral and united Germany, which the West, including West Germans, declined.) For Tooze, the ad hoc alliance between the Entente nations presages NATO and the Marshall Plan, equally defined by the opposition between liberal democratic internationalism and the violent revanchism of radicals. But as the present Eurozone crisis demonstrates, the straitjacket or “chain gang” such ‘internationalism’ of debt and credit represents can do at least as much harm as the radicals, and moreover helps to bring radicalism about – a similar contradiction today to that that frustrated the Wilsonian order.

These political considerations aside, one is unlikely to find a better treatment of the intersection of global economics and diplomacy between the wars than Adam Tooze’s The Deluge. As with his previous work, it certainly helps to have a basic grasp of macroeconomics and international trade, as monetary policy, trade deficits, and budgetary constraints carry a lot of explanatory weight and the author does not pause to explain their basic mechanics. The great virtue of this work is to make reason out of folly: to make sense from the perspectives of the participants of what is often simply portrayed as naive errors of economics and politics. That is to say, at least from the perspectives of the supporters of the Wilsonian order. The tale of the rise and fall of ‘liberal imperialism’ and ‘liberal internationalism’, frustrated by the incompetence of Wilson himself, the opportunism and economic weakness of the postwar European powers, and the opposition of radical political factions, is fundamentally strong and merits a serious reading. However, Tooze’s political perspective does not allow him to tease out the inherent contradictions in these concepts and the reality of what such an order actually did and does entail, not least for those at the bottom end of the “chain gang” hierarchy. And that limits the explanatory scope of the work compared to his deeper perception in his previous book.

February 19, 2009

On the Present War in Afghanistan

Posted in Imperialism, Int'l Trade, Middle East, War tagged , , , , , , at 14:21 by Matthijs Krul

The multinational, NATO-led invasion and occupation of Afghanistan, undertaken in response to the terrorist attack by the islamist organization Al-Qaeda who were said to have been harbored in Afghanistan by the Taliban government, has developed into a disastrous quagmire. Not only has it proven impossible for the imperialist powers of NATO to actually control events in Afghanistan and prevent continuous attacks on their soldiers as well as on the institutions of the newly planted government of Hamid Karzai, but the presence of NATO forces has greatly strengthened both the force and popularity of the Taliban.

The Taliban itself was mostly a Pakistan-based Pashtun organization, appealing to religious sentiment to form a coherent force, which drove out the extortionist warlords of Gulbuddin Hekmatyar, Burhanuddin Rabbani and others from the Afghan lands. However, their religious and anti-modernist inventions of tradition with regard to the demands of islam in Afghanistan itself quickly made them not only a byword for deepest obscurantism and religious fanaticism internationally, but also made them intolerable for the Afghan population themselves. Various warlords continued to combat them, while the Afghan people were waiting for an opportunity to rid themselves of all the different forces attempting to subjugate them altogether. However, all experience has shown that all peoples prefer the devil they know to any foreign invader, even if the latter operates under the flag of supposed liberation of the people involved, and Afghanistan also proves this rule true. The Taliban are now stronger than ever, since the devastation wrought by the imperialist forces has caused many an Afghan villager to join the forces of religious illusion, which at least provides the benefits of suggesting a kind of heavenly justice where no earthly order or control can be found. It has also strongly repudiated the foreign occupation of the country, unlike the few imported Afghan liberals which mostly appear as collaborators to a harrassed population seeking peace. The Taliban moreover have a reputation for resisting corruption, as many islamist movements do, and Karzai’s government has been nothing if not corrupt.

What then is the purpose of occupation? Richard Holbrooke, the American envoy in Afghanistan and Pakistan himself has stated the following: “First of all, the victory, as defined in purely military terms, is not achievable, and I cannot stress that too highly. (…) What we’re looking for is the definition of our vital national security interests”.1 Holbrooke recognizes the impossibility of victory even as thousands more soldiers are sent into the country, many pulled out of the other failed American adventure in ‘nation-building’, Iraq. But what then are these national security interests Holbrooke speaks of? Indeed the American government feels aggrieved because the spectacle of the terrorist attacks on New York City itself, heart of the empire of capital, was according to them planned and undertaken from the borderlands of Afghanistan and Pakistan, one of the least developed areas on earth, where old feudal ties and religious barbarism are still strong. The weakest of all attacking the strongest of all in their own base is an example to the world of a kind that the American empire cannot afford.

Yet that is not all. For although enthousiastic American military press articles would have us believe that the fight against their shadowy enemy of Al-Qaeda has achieved major victories with the elimination of some of their top leaders, this is of itself a sideshow. Indeed, the US shows little interest in even bothering with finding Osama Bin Laden, despite this renegade son of the Saudi elite having been depicted as the veritable puppetmaster of ‘international terror’ and the anti-Christ of Western morality for years; by which is meant that prolongation of his very existence after his attack on New York City would be a continuous loss of prestige on the part of the United States and the wealthy nations in general. If they are willing to accept that loss now, what then keeps them in these barren lands?

There are several considerations. The first here is the fact that Afghanistan is the primary producer in the world of opium. That addictive soporific that British imperialism used to destroy the Chinese empire has now turned against its manipulators: the highly addictive drug heroin is produced by means of opium, and heroin is considered a serious blight and instability problem in the Western nations, where great wealth allowing purchase of exotic drugs goes together with great despair and alienation making that purchase desirable. The Taliban, who do not desire any illusions other than their own brand of religious fanaticism, had actually succesfully wiped out much of the opium production in 2001.2 The newly installed pro-Western government in Afghanistan however has not been so successful, since the warfare in Afghanistan has destroyed most opportunities for growing regular crops – indeed, Afghanistan now again produces 92% of the world’s opium, representing half the annual product of the country.3 The Taliban of course have recognized this situation, and are now supporting the opium growers, whom they ‘tax’, providing their main source of income for warfare against the occupiers. Since they no longer attempt to repress the only viable crop in the drought and war-ridden countryside of Afghanistan, this has greatly increased the fervor for islamism on the part of the Afghan farmers. Of course, the effects of opium on Afghanistan’s own institutions can be foreseen: if mighty China’s celestial bureaucracy, the oldest and strongest on earth, could be torn apart by the corruption due to opium within the span of a few decades, what resistance then could former warlords, now government officials, offer to the bribery of the drug trade? The imperialists’ weapon of old is now undermining their very efforts at providing a modern and capital-friendly structure to Afghanistan’s institutions. Yet they dare not give up on it, not just because of the great amount of government and police officials in the United States who are parasitic upon the drug trade and depend on its continued yet ever-failing ‘war on drugs’, but also because if they cannot even determine what crops Afghan farmers shall sow, then this is truly an admission of total defeat in the effort to control Afghanistan’s economy. Indeed, the various invading powers have even had to resort to the ignominious weapon of counter-bribery, but this has mostly failed. This should come as no surprise since local production prices come to about thirty-three dollars from an acre of wheat, and between five hundred and seven hundred dollars from an acre of poppies.3

Karzai’s weakness has also left Afghanistan as wracked by class and ethnic differences as it ever was, meaning that any attempt at ‘nation-building’ by the NATO forces is going to be an exercise in futility, comparable to the game of whack-a-mole. The corruption inherent in the newly installed government has mostly benefited the local landlords, who exploit the share-cropping opium farmers and at the same time take bribes for normal government functions. Many of these landlords are the same people who operated as warlords in the pre-Taliban phase of recent Afghan history. Moreover, the forces from the north, many of ethnic Uzbek and Tajik descent, are angry about the weakness of the resistance against the Pashtun Taliban, who are their old enemies in the struggle over Afghanistan’s agricultural land as well as smuggling routes. Karzai himself is a Pashtun, but few of his ethnicity support him, and it is likely that the old Northern Alliance will reform – an alliance of northern forces that combated the Taliban in the days of their reign. This alliance will challenge Karzai, whose loyalty to their interests they doubt. This year new elections for the presidency of Afghanistan are to be held, and if the northern candidate wins, this means the internal strife in Afghanistan will come even closer to a boiling point, which neither bodes well for the peace of the area and its supposed defenders nor for the Afghan people.

Then there are as ever the considerations of the ‘cash nexus’. Under the Taliban, Afghanistan had a very differentiated and high import tariff system, which used high valuations of the currency to determine its quantity in a given case. The Taliban’s hold over the country was not strong enough to fully enforce this, and indeed effective tariff rates were significantly lower. Nonetheless this formed  a significant source of non-drug income, in particular since many smugglers used Afghanistan to import goods which were subsequently re-exported illegally to Pakistan, a country which also has significant protectionist measures and is very reliant on income from its foreign trade.4 Under the current regime, these tariffs have been significantly lowered, accession to the World Trade Organization is pursued, and further attempts are planned at reducing transport costs and indirect taxes on exporters, mainly in the hope of attracting foreign investment. The importance of export from a poor country like Afghanistan is easy to underestimate: the warlord Achmad Shah Massoud, who led the Northern Alliance against the Taliban, received his main income from taxing the production and export of gems from the mines of the Panjsher Valley in northern Afghanistan, which produce among other things valuables such as lapis lazuli and emeralds.5 Massoud was killed by the Taliban shortly before the attack on New York City of September 11, 2001.

Also of importance concerning trade is the strategic location of Afghanistan: oil and gas-rich countries of Central Asia suffer from poor location and lack of connections to world ports, and Pakistan in particular has aimed at causing a pipeline to be created through Afghanistan, which would connect the Central Asian states with its own ports in Beluchistan by means of Herat. Both the Pakistani and American government as well as such companies as UNOCAL had in fact been negotiating this pipeline just before the events following the Taliban occupation and the Al-Qaeda attacks disrupted the plans. At the same time, the Pakistan-supported Taliban had greatly reduced the costs of transport and security in Afghanistan, which enhanced trade, particularly the above-mentioned smuggling into Pakistan itself. This undermining of Pakistan’s own financial basis, as mentioned very dependent on its transit location, is an activity of Pakistan’s own security forces, which consider their own government to be pro-imperialist and wish to replace it by a religiously inspired resistance regime.5 In the case of both Afghanistan and Pakistan, such neo-Mahdist regimes garner much legitimacy from the lack of legitimacy of the alternatives, in particular the existing and prior state bureaucracies, which have mostly been predators on the extremely poor peasant populations of both countries. The removal of the Taliban by the Western forces has destroyed the safety of the roads that prevailed in most of Afghanistan, which in turn drives local farmers even more towards opium production. Marketing of wheat on the international market legally is now much more difficult than marketing of opium is illegally, even if little of the market price in the West of heroin is captured by the Afghan farmer. Foreign capital, including Chinese mining interests, has however certainly expressed interest in developing Afghanistan’s own gas fields as well as the significant resources of iron ore and coal the country possesses. The USSR had spent hundreds of millions on exploration of these resources when they occupied the country, and if only safety could be guaranteed for capital movements in and out of Afghanistan, it is quite likely that American and other foreign companies shall endeavour to absorb Afghanistan into the world market as well.6

A deal with the Taliban, therefore, seems the most beneficial option for the Western interests. If the Taliban can be appeased and counted on to provide, or at least not disturb, the ‘security’ needed for foreign investment, and in turn the Taliban do not hinder the development of capitalism in that country, then imperialism shall have cleared the way once again for capital’s adventures in foreign shores. The degree of foreign capital’s vulnerability to extortion by the many local landowners, warlords and so forth does not make this likely, however. More likely, the NATO forces shall be forced to withdraw sooner or later after having to deal with the Taliban on the latter’s terms, and much shall be as it was before in Afghanistan. The tens of thousands of dead Afghans and the loss of men and prestige on the part of the Western empires will be the only ‘result’ of the Afghan expedition.

1.Associated Press article, Feb. 18, 2009.->
2.“Opioids in Afghanistan”. http://www.opioids.com/afghanistan/index.html. ->
3.Anderson, J.L. “The Taliban’s Opium War”. The New Yorker (July 9, 2007).->
4.“Afghanistan: Trade Policy and Integration”. World Bank report. http://go.worldbank.org/ORI5Y663A0. ->
5.Rubin, B. The Political Economy of War and Peace in Afghanistan. Council on Foreign Relations, 1999.->
6.Daly, J.C.K. “Analysis: Afghanistan’s untapped energy riches”. UPI article, Oct. 24, 2008. Also: “Ahadi: Afghanistan’s Economic Fortunes”, interview by Greg Bruno. Council on Foreign Relations, Apr. 15, 2008.->

January 17, 2009

On the Living Costs in the Third World

Posted in Economics, Int'l Trade, Theory tagged , , , , , , at 18:27 by Matthijs Krul

It is considered an intuitively self-evident idea among most people in the developed nations, whether they are intellectuals or otherwise, that the difference in income between those nations and the underdeveloped ones can be explained away by noting that the costs of living in the Third World are lower than in the First. This is generally seen as a truism, supported by the experiences of many a tourist from the developed world when visiting popular destinations in the underdeveloped parts, such as Egypt and Mexico, and then noting the extraordinarily low prices for basic products in these countries. Surely then with such low prices, the lower incomes must have been compensated for, so that the common people in such nations are not in terms of living standards that much poorer, according to the norms they are used to?

Yet this idea is wholly false, as can be demonstrated by some simple calculations. Indeed of course the relative costs of living vary much by nation and also within nations, and incomes vary much as well; yet it is possible to give some examples that will indicate how strong in fact the difference in incomes also translates into differences in living standards, because the living costs in the underdeveloped world are in fact higher than in the developed world.

The price of bread in Ghana is 0.6 Cedi (this is the minimum price guaranteed by the state), which is $0.46. The American price of bread is $1.28 (given as average price in an article in the Boston Globe, dated 09-03-2008.). The average daily wage in Ghana is $1. The minimum hourly wage in the United States is $6.55 (federal minimum); assuming eight hours of work, we get $52.40.

Now all you need to do is calculate how many local loaves of bread one local day of work is worth, to compare. We see that one day of work buys the American minimum income worker $52.40/$1.28 = almost 41 loaves of bread (40.94). One day of work for a Ghanaian average worker buys him $1/$0.46 = a little over 2 loaves of bread (2.17). Therefore, the cost of living (expressed in bread) is much higher in Ghana than in the US.

But, it will be objected, there is more to living costs than merely food prices. Bread may in the parts of the world where this is the common staple food serve as an acceptable proxy for the costs of food, but another major expense is the costs of housing. What of this? It must first off be noted that in terms of housing comparisons are much more difficult to fairly make. Bread is bread everywhere and everywhere essentially the same, but housing costs vary enormously. Not just because of the differences in amenities common in the housing units, but also because of the differences in land prices, due to the influence of land rent. This in turn is affected by a great many variables, from effects of crime to proximity to work and urban areas, as well as environmental factors and so on.

Yet we need not despair for our analysis entirely. The LA Times fortunately has some information in their article of 26-03-2007 on the slum living of illegal immigrants near Los Angeles. They give the example of a family which earns $10.000 a year and pays $360 a month in rent. I’m not sure if this is household income, but I think so. Rent then is 43.2% of their income, monthly and yearly, for the equivalent of an illegal hovel. From Kenya we have info on slum living, assuming the source is accurate, from a Pambazuka News article of 03-07-2007 by Humphrey Sipalla. The cost of rent is here given as KES 2,693 monthly, which is at current exchange rates $34.26 (this just to give an idea). According to the article, this represents 22% of their income, I assume also applies to households. If this is accurate then, the housing cost in a Kenya slum is just under half of what it is for illegal immigrants in California (22% versus 43%). But it would have to be 1/20th, i.e. ten times as cheap, to remove the difference in living costs altogether. Of course rents account for differences in costs as mentioned, but comparing Nairobi to the Los Angeles area seems to me not so unfair as to undo that entirely.

We may conclude then from this example, comparing the expenses in major cities in the United States (for average people and poor people respectively) with the living costs in food and housing in Ghana and Kenya respectively, that the common idea of the living costs being much lower in the underdeveloped world is wholly false. Indeed it makes that appearance because the prices, when valuta are calculated according to exchange values on the market, are indeed significantly lower in the Third World – the bread in Ghana costs one-third of what it does in Boston. However, our naive friends in the developed world forget that the incomes in the underdeveloped world are so much lower than theirs, that 1/3rd of the price is for them over 20 times the relative cost.

On a final scientific note, it must be taken into account that there is good evidence that the currencies of underdeveloped nations are undervalued by exchange rates in comparison to their value in terms of purchasing power. The nominal exchange rate of 16-01-2009, which is the one that I have used, is likely (as any nominal exchange rate) to undervalue the currencies of underdeveloped nations compared to their purchasing power. This has no particular implications for the living cost comparison I have undertaken, but it does affect international trade between, say, Ghana and the United States, because it means Ghanaian wages as well as prices are undervalued compared to American ones in the exchange rate, causing the terms of trade to tilt strongly in favor of the United States. Gernot Köhler’s research, described in “The Structure of Global Money and World Tables of Unequal Exchange”, in: Journal of World-Systems Research 4:2 (Fall 1998), p. 145-168, indicates in the appendix that the estimated loss as percentage of GNP (PPP) on the part of Ghana and Kenya is respectively 30% and 35%. If currencies were equalized according to PPP, the relative value of the Cedi would be much greater, increasing the relative price of food in Ghana compared to the United States, but also increasing the relative value of the wage. This would not of itself necessarily alter the proportion between wage and food costs within Ghana (aside from changes in the market caused by changes in international trade in the longer run, which are outside the purview of this article), but it would to a significant degree remove the false impression on the part of citizens of developed nations about the low costs of living, because they would experience the local prices as much higher.

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