For any two economic growth/development models, briefly describe the model, and carefully compare and contrast its application to any one developing country.
Marxism is an economic ideology produced by German philosopher and journalist Karl Marx during the 19th Century. Marx held labour (as a force) with the highest regard, and his belief that workers should be prioritised underpinned the majority of his views. Whilst Marx’s works and publications often had a clear philosophical undertone (especially in his earlier works), his basic belief was that all value generated within an economy could be accredited to labour. These views placed Marx in direct opposition to capitalism, and whilst he spent much of his life developing his communist manifesto, he also published extensive works outlining the faults within capitalism. This peaked with the production of Marx’s famous ‘Das Kapital’ – an extensive analysis and critique of capitalism.
‘The history of all hitherto existing society, is the history of class struggles’ (Marx and Engles, 1848). Marx saw labourers and capitalists as being two very different sides of the same coin and it’s these distinct differences in class (within one society) that, when contrasted with history, enabled Marx’ Stage theory. This highlighted class struggles throughout the history of society; from Greco-Roman patrician/plebian/slavery divides, to medieval feudalism, right up to the final stage, which he believed should be/would be communism. The economy at the time that Marx was writing defined his third stage; he called it the ‘modern bourgeois society’ (Marx and Engles, 1848). This was capitalism. Marx does credit capitalism with simplifying the class structure to just two distinct groups; bourgeois (capitalist) and proletariat (worker) but this is more a statement of change than any level compliment (Marx and Engles, 1848).
At this point, Marx's views of labour have to be reintroduced. Society had become those that work, and those who own those that work, but Marx believed that the value that the workers gave the capitalists was worth much more than the workers ever saw in return. He called this difference ‘Surplus value’. Marx took issue with this as he saw that it could only ever increase the gap in society; the rich would get richer, but the subsistence wage received by the workers meant they had no choice but to keep working, and whilst they couldn’t get poorer, they’d get increasingly miserable (Freedman, 1961).
Finally, Marx also had an issue with the development of technology. Technology displaces labour, and Marx saw this as a catalyst. Workers build machines that then reduce demand for workers, and the cycle continues, leaving more workers without jobs, and the potential for further reductions in an already poor wage rate as the labour surplus slowly increases. Machines/Capital are dead labour (Marx, Capital Volume 1, chapter 10 page 2016)
So all value stems from labour, but labour sees no benefit. This is the fundamental problem that forms the basis of Marxism.
In 1848, Marx' development of communism peaked with his production of the ‘Communist Manifesto'. Within this, he finalised his anti-capitalism pitch and outlined 10 basic rules of communism that he believed were viable to most developed countries. I’ll be considering these 10 rules as a basis for comparison between Marxism and China’s economy.
At the same time, I am going to consider Lewis's 2-sector growth model (as well as Ranis and Fei’s adjustments) and see how it compares and contrasts with the patterns we have seen in China throughout their period of impressive economic growth. The Lewis model was produced by Arthur Lewis in 1954 and essentially secured him a Nobel prize in 1979 (Nobelprize.org, 1979). The model aims to outline how an economy that is less developed and focused on agriculture should set about achieving economic growth. Lewis's model featured two stages; a labour-surplus stage, followed by a ‘labour shortage' stage (Ercolani and Wei, 2010)). The diagram below essentially depicts the Lewis model in action. He argued that an economy starts with a labour surplus, all-working at a subsistence wage within the agricultural sector. This is characterised by ‘Ws’ and at this point, there is a marginal product of labour equal to zero. Capitalists in cities would then lure these workers out of agriculture with a wage that covered their previous wage rate plus an incentive for travelling to work in the city (or moving). This new rate is depicted as Wk and at this initial rate, MRPL moves from Zero (A) to B. The capitalist would still keep all profits but an amount would be reinvested. The higher the amount reinvested, the faster the move from stage one to stage two in Lewis’s theory. This reinvestment would enable more workers to be taken on and moves the diagram from MRPL1 to MRPL2. This would continue until the entire labour surplus was exhausted, at which point there would be a labour shortage – this would occur in both sectors, and result in the wage rate being pushed up. This occurs between MRPL3 and MRPL4 where the diagram shows the shortage taking effect (Nafzinger, 2006).
Ranis and Fei essentially further developed Lewis’ model, and in doing so,
took the two stages Lewis had outlined and split them into three. They essentially factor in population growth as a barrier to the effectiveness of Lewis’ model. The argument is that Lewis’ model of industrialisation is ok, providing that population is stagnant, and so demand for agricultural produce is not expanding. However, if the population is growing (which is highly likely) and agricultural production doesn’t increase, the amount of food per capita will fall (Perkins, 2001). Fei and Ranis identified this as a key issue, as a reduction in food allocations is almost certain to lead to famine, which could lead to reduction in the labour force (deaths) and therefore reduction in productivity. They saw investment in agriculture throughout the growth process, as the answer to this.
Looking at China’s economy, they have experienced massive levels of GDP growth in recent years; with their annual GDP (%) peaking at 14.2% in 2007 (Data.workbank.org, 2018). This maintained growth has caused huge changes in the economic landscape of the country; China has experienced mass rural-urban migration, steadily increasing levels of development and a large increase in their overall population. China today is considered a relatively communist country, and many argue that the stabilisation of China’s growth is attributable to their ‘communist’ reforms (Cao and Birchenall, 2013). But still, many of these reforms can at a glance be seen to completely contradict Marxism.
In Marx’s communist manifesto, his fourth rule was the ‘confiscation of the property of all emigrants’ (Marx and Engles, 1848). At the time Marx was writing, foreign direct investment (FDI) simply didn't exist and in fact, it took till the late 20th century for it to really take off (Data.worldbank.org, 2017). It’s easy to interpret that whilst Marx was not exposed to the concept of FDI, the principle behind it – foreign countries investing in and owning part of domestic businesses, completely contradicts this fourth rule. Prior to China's 1979 economic reforms, their response to FDI very much aligned with Marx's rules -at this point FDI in China was nil because it was completely illegal. Today, however, China is the 3rd highest receiver of inward FDI in the world, with $168bn dollars being invested in 2017 (Data.worldbank.org, 2017). It could be argued that China has not completely turned against Marxist strategies in enabling FDI: they still have a range of strict rules and regulations any foreign investor has to adhere too, as well as strategic incentives to ensure China gets what it wants out of FDI. Some of these include reduced corporation tax for new High-Tech enterprises, a restriction on the percentage share available to foreign enterprises within some industries and in some cases full restriction on foreign enterprises entering the market (LehmanBrown, 2017). It’s a tricky situation to analyse. For example, Marx’s manifesto specially requested a state-owned national bank with an exclusive monopoly (Marx and Engles, 1848), but China now has many privately owned banks (Ft.com, n.d.). Also, Foreign investors are allowed to hold shares worth up to 20%. Whilst we can assume it's impossible to know how Marx himself would have responded given the conditions of today's globalised market.
It could be considered that FDI is a key catalyst in China being able to produce the benefits outlined in the Lewis-Ranis-Fei model. Whilst FDI was legalised in China in 1979, it didn’t really start to pick up until the mid-1990s. FDI grew significantly in China between 1990 and 1995, but between 1995 and 2013, it went from $35bn to $290bn. This has happened at the same time as mass rural-urban migration in China. In 1990 the United Nations estimated that 74% of people could be described as living in ‘rural population’ in China, but by 2013 the image had completely reversed, with more than half of people (52%) living in urban areas (China Immigration Profiles, n.d.). This can reliably be attributed to the growth of huge commercial cities along the eastern coast, and it’s an economic certainty that the significant levels of FDI in China have contributed to this.
This entire idea is then reinforced when considering the percentage of the population working in agriculture. In 2017 only 28.3% of people were working in agriculture, a stark contrast to the 81% that was reported in 1970. This is all relative to the global stage, which suggests that China still has a long way to go; in well-developed economies like the UK and Germany, less than 1% of people are reported to work in the agricultural sector (Ourworldindata.org, n.d.)
At a basic level, Marxism and the Lewis-Ranis-Fei model completely disagree on this issue. Marx’s 9th rule in his Communist manifesto outlines an “abolition of the distinction between town and country by a more equable distribution of the populace over the country” (Marx and Engles, 1848) as a key part in his ideal economy, and we’ve already established he would disagree with FDI (Marx and Engles, 1848). But the Lewis model requires that people working in rural agriculture based areas must move to industrial cities to find higher paid work in order for the Marginal product of labour to increase growth to start. With the emergence of the western cities on China’s seaboard, largely aided by FDI, the Lewis model has worked perfectly: people have migrated to cities to find higher paid work. Also, China appears to have learnt from Ranis and Fei’s addition, by encouraging funding into the agricultural and technology markets – any foreign investor interesting in China’s Farming sectors is entitled to a 50% reduction in corporation tax (LehmanBrown, 2017). This demonstrates the contrast between Marx’ growth ideologies and the Lewis model: what serves to completely satisfy one model, simultaneously rejects the other.
In reality, Lewis’ 2-sector growth model is very different in purpose to Marx’s theories. Lewis served to explain how an undeveloped economy with surplus labour could achieve economic growth whereas Marx produced entire economic and political guidelines that he believed wouldn't only achieve growth, but ensure an economy was run in the way he believed was ideal for the people living in it.
China’s development seems to mirror the Lewis-Ranis-Fei model quite nicely, but without a doubt, modern-day China has some stark contrasts between its policies and Marx's ideal strategy. China certainly used to be significantly more ‘Marxist’, especially prior to 1979 when even private property rights and private enterprise was extremely restricted. But undoubtedly in recent history, China seems to have stepped away from ‘Marxism’ and towards what is in my opinion, a mixed economy: neither capitalist nor communist, but somewhere in the middle. The economy clearly values private enterprise, relatively open markets and FDI, and the distribution of population and income certainly doesn’t mirror communism. However, the level of regulation on private enterprise and day-to-day markets doesn’t depict pure capitalism either. But to evaluate further, I don’t think any economy today could be expected to mirror Marxian ideologies because his theories were written at a time when many economic forces we see today (primarily the effects of globalisation) weren’t present.
Whilst I feel economic theories like Marxism, and Models like the Lewis-Ranis-Fei one are useful in considering how to plan and manage an economy, I don’t think it would be beneficial or even feasible to try and replicate them in today's economies. I think each economy needs it's own economic theory based on its own assets, skillsets, global positioning within markets, etc and therefore tend not to believe that any economic model/theory could ever fit all. Rather than a one size fits all, I think all economic theories are most useful when used as building blocks in producing an individual economies growth and development targets and the way China has stepped away from Marxism as it’s arrived on the world stage shows that even in one economy, what’s right at one time in their development process may not be right later, emphasising the need for a custom approach.