Unit-16 Colonial Financing-19th Cent, Theories of Capitalism & Underdevelopment

7/27/2019 Unit-16 Colonial Financing-19th Cent, Theories of Capitalism & Underdevelopment

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UNIT 16 THE COLONIAL FINANCING O FCAPITAL EXPORTS IN THE 19THCENTURY AND SOMETHEORIES OF CAPITALISMAND UNDERDEVELOPMENT

16.0 Objectives16.1 Introduction16.2 The Railway Boom and Capital Exports16.2.1 Importance of the Railway Boom for Brita~n16.2.2 The Country Destination of Capital Exports

16.3 The Era of Imperialism and Overseas Investment16.3.1 Imperialism and its Link with Investment16.3.2 The Colonial Financing of Overseas Investment

16.4 Some Theories of Capitalism and Underdevelopment16.4.1 Linear Development Theories : Rostow and Hicks16.4.2 Colonies viewed as a Capitalist 'Periphery'16.4.3 Colonies viewed as Markets

16.5 Let Us Sum Up16.6 Key W ords .16.7 Som e Useful Books16.8 Answers/Hints to Check Your Progress Exercises16.0 OBJECTIVESAfter going through this unit, you will be able to :

discuss the continuing importance of colonies in the era of heavy overseasinvestment by B ritain in the 19th century;explain the balancing role played by colonial transfer in the internationalpayments system; andanalyse the main differences in some theoretical a pproac hes to colonialunderdevelopment.

Sections 16.2 an d 16.3 are based o n some classic writings on 'Imperialism' like thebook of that title by J.A. Hobso n, and o n the researches of present-day scholars likeS.B. Saul, Studies in British Overseas Trade. You may wonder why since we havealready discussed about imperialism in Unit 3. This is because the question offinancing imperialist investment abroad had not been taken up there and will bediscussed n this Unit. Section 16.4 is a brief overview of some contrasting theoreticalapproaches to the question of the relation between today's industrially advancedcountries like Britain, and their colonies like India, in particular with respect to theanalysis of underdevelopment.


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Tbe Cokinial Financing16.2 THE RAILWAYBOOM AND CAPITAL-EXPORTS or Capital Experts in.- the 19thCmtwy nad someI Theorlea of Capitallsuna d ~nderdevelo~mentThe Ra~lway oom started In the 1830's but got seriously under way only in the mid-1840's. During the two decades preceding the railway boom, the British economywas marked by two features. Firstly, although the Industrial Revolution had beenbarely consolidated by the 1830's. 'investors in Britain were already facing fallingreturns within the economy. Secondly, there were acute social and political tensionsbetween the capitalists and the working class. These two features were in fact related,as is explained below.16.2.1 Importance of the Railway Boom for BritainBy the late 1830's in Britain, the relation between labour and capital was perhaps atits most antagonistic compared to any previous period. As you know from Unit 2,the workers in the factories who were mainly children and women, had to workkhumanly long hours including doing night work, for low wages. Whenevermachinery was introduced a number of workers were thrown out of jobs, and it took'time for growing production to reabsorb them. The miners lost on average over1,000 of their workers to fatal accidents every year.The workers as a whole had initially joined with the manufacturers in the agitationfor the reform of Bariiament (which was dominated by the landlords) and for therepeal of the Corn Laws which kept bread prices i.:* Thcv had hoped to get somerepresentation in Parliament, but when the Reform Blll of i83k .vas passed they wereexcluded because this Bill had a stiff clause requiring the possession of property for aman to be eligible to vote. Moreover the New Boor Law of 1834 passed by themanufacturtrs, made it compulsory for unemployed workers to work in the statework-houses which were like prisons, and they were separated from their families.All this angered the workers and they now agitated separately under the banner of

, Chartism. This working-class movement (Chartism) was named after the People'sCharter drawn up in 1835 by the Workingmen's 4ssobiatio;l The Chartists organiseddabour and there were a series of strikes culminat~ngn an insurrection in 1842,which was militarily suppressed by the Government.The low wages pa~do workers for long hours of work meant high profits for theindrv~dualmanufacturers, but at the same tlme created a problem for the economy asa whole, namely the inadequate growth of the home market for manufactures owingto the inadequate growth of the purchasing power of the ordinary workers whomade up most of the population. There was after all a limit to the number of suits ofclothing the well-to40 minority of people could wear, or the number of houses andcamageathey required, or the number of town halls which could be built. Theprospects for profitable investment within Britain, of the capitalist's rapidly .accumulating surplus funds, were declining at the same time. According to EricHobsbawm, by 1840 every year there were '40 million pounds crying out forinvestment in Britain', more than the entire value of the cotton textile factories andtheir machinery. Government could borrow money from the public against issue ofbonds at only 3.5% rate of interest. It almost seemed as though the fears of theclassical economists regarding a falling rate of profit eventually leading to astationary state, were justified.It was at this juncture of falling profitability and social unrest, that the Railwayboom amved to life the British economy onto a new trajectory. Hence its greateconomic and even political importance. The steam engine had been invented byl ~ a t t ss long ago as 1795, and had been applied since then to the transporting ofcoal, from, the mine pit-heads to canals pnd ports. But the idea of applying the steamengine to general freight and passengel rr .nspDrt, which we take for granted today,was put into effect only in 1835 with the construction of an experimental line fromDarlington to Stockton in England. With the success of the experiment, a veritableboom of railway construction started. There was a small boom during 1835-37 and alarge boom from 1845, which by generation employment and fuelling strong growth,took the steam out of the militant workers' movement.


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urgulE- From the viewpoint of absorbing surplus investible funds railway in vestpen t wascdolw~&ul ideal. It wan a great guzzler of capital, requiring the laying down of steel rails for the- m dI d r M d Rmd* tracks and the m anu factu q of the locomotives and the rolling stock. And it openedr l l h W E @ up prospects for increased profitable production not dream ed of by the initialinvestors, because of its strong an d extensive 'backward' as well as 'forward'linkages. By 'backward linkages' we mean the demand for the goods required ibrailway construction a nd operation, which grew fast: pig iron, steel, an d coal, andthe o utput of the engineering industries. C oal mining was highly lab our intensive and

the ten-fold growth of coal ou tput in Britain between the 1790's and 1850 for 1 m.tons to 10 m. tons meant a five-fold rise in the number of mineworkers to over onemillion by 1850.By 'forward linkages* s meant the open ing up throygh the laying of raillines, ofhitherto inaccessible hinterlands of co ntinents and therefore access to their resourcesof minerals, forests and raw materials, and the opening up of new markets amongcolonised peoples so far insulated from western trade by their remoteness. SinceBritain was both the capital-surplus country and the 'workshop of the world' at thistime, these many thousands of miles of railways in three continents were financed byBritbb capital lent to governments usually only at a guaranteed rate o f return, builtby British engineers and contractors who mad e a lot of m oney out of theirmono poly, an d using British-manufactured steel rails, rolling stock a nd locomotives,which gave aiSlassured outlet for the British capital good s an d engineering industries.Given th at world railway mileage rose more than twenty times between the decade ofthe forties and th at of the seventies, the stimu lus to the British econom y may beimagined.The increase in British investment abro ad u p to the 1870's. thus br ough t in its'train,owing to the linkage effects, increase in the exp orts of capital goods, access tocheaper raw m aterials, and wider access to markets.

Table 16.1 : htcroase in World R dw n y MUeap. -~-

UK Continent USA ~S kw o r l d '

16.23 The Country Destination of Capital ExportsMost of the capital exports from Britain in the 19th century went either to theEuropean Continent, to the 1 USA. and Canada, or to the developing temperateareas of the world where European emigrants had appropriated land and other .resources from the o riginal inhabitants, an d settled themselves. These included bothpolitically independent regions like N. A merica, Argentina an d B razil, and thedependent white kt tl er d ominions like South Africa and A ustralia. Very little ofBritish capital exports went to the tropical colonies like India, M alaya o r theW. Indies where there were no permanent settlers from B ritain. This f a g h a s misledsome economists and historians into thinking that the tropical colonies had little rolein capital exports from B ritain. Actually while they did not receive British capital inany quantity, the tropical colonies did have a very im portant role in earning foreignexchange through their export surpluses, which ~ r i t a i nook for its own use to avoidbalana of payments vis a vis the countries to which it was exporting-capital. This is the mechanism we will examine below in Sub-section 16.3.3.On the eve of the First World W ar, of the total holdings by Britain of capital abroadamounting to 3,780 m. pounds, only 380 m. pounds or just over 1Wo was invested inIndia an d Ceylon. The w hite settler countries within the Empire (Can ada, Australiaand N. Zealand, S. Africa) accounted for 1,400 m. pounds while the remaining 2,000m. pounds which made up over half of the total h oldings, were invested in the no n-empire regions (the Continent, USA, and S. America). This led Ragner Nurkse toargue in-an influential article (Intet'national Investment today in the ~ i g h tfHistorical Experience) that the predom inance of the independent temperate regionsin total capital holcings shbwed that the colonies were no longer importa nt in theage of capital exports. ' ~ h i srgument however is a somew hat fallacious one as wewill see.


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Cbeck Your Progrejr 1 TLc CdodrlmdqdClllt.lEw-h1) Why could not effective demand increase a t a fast pacqifl the 19th century Britain? CqmT L c a h d C a p b U Eud U ~ e l o p m M t.........................................................................

2) Explain the terms 'backward linkage' and 'forward linkage'.' .

) Mention the countries which witnessed an inflow of British capital.

16.3 T H E E R A O F I M P ER IA L IS M A N D O V ER SE A SINVESTMENTIn this section , we will discuss how it was po ssible for co lonising countries like UK.to com bine negative current account balance with a negative capital account b alace -(i.e. net capital expo rts) to the develo ping areas of the world. Th is question will berelatpd t o the continuation of transfers from the colonies.

16.3.1 Imperialism and its Link with InvestmentBy the secon d half of the 19th century, Britain was facing the emerging challenge ofthe later industrialisers in Europ e a nd N. America. Particularly importan t was hecompetition froin the USA and from Germany, both forging ahead rapidly behindprotective tariff barriers in building up their own m anufacturing capacity. In boththese countries there was a rapid growth of mo nopolies and of cartels. This tookplace partly through the faster growth of the larger firms and partly throug h take-overs and mergers especially at times of recession. In Britain as well, the earlier eraof competition between large numbers of firms was giving way over time tooligop olistic cond itions in man y industries, w ith a few finns dominating eachindustry. The mono polies and the association of finn s known as cartels, fmed pricesand restricted outpu t when necessary to m aintain profits. Fro m the 1870'9 to theFitst World W ar, there was a veritable race among the wh ite nations fo r the seizureof the remaining uncolonised parts of the tropical an d semi-tropical world. Britainas the first industrial nation an d the m ost vigorous coloniser, had an unbeatable leadover the others. The m ore recent industrialising nations, each scrambled to g rabterritory w here it could, before their rivals got there. By 1913 the follow ing coun trieshad s bstantial colonial poss.essions whereas they had none in 1870: Germany,USA, and Japan.While the colonies of all the industrial powers taken together accounted fo r a to talcotonised population of 273.8 m. in 1874, this had increased to 523.4 m. by 1913.Over the same period the area in colonised territories had risen from 40.4 m. sq. km.to 65.0 m. sq. km. We will not go into the complex motives bhind this rush to


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partition the world, except to note that while the economic motive was certainlypredominant, there were some cases-such as the grabbing of deserts of both the;hot and cold varieties (as in the Sahara and in Alaska) where no immediateeconomic gain was visible, and the main idea seemed to be to get there, beforesomeone else got there first. Of course, some of these acquisitions later turned but tobe very valuable.There was a long period of relative depression in Europe from 1873 to 1895 which isreferred to as the 'great depression'. Prices showed a downward trend (despitecartelisation) and there was a profits-squeeze, although no persktently high levels ofunemployment were observed, unlike the other later great depression -of the 20thcentury inter-war period. The frenetic scramble to acquire new colonial territoriesand to complete the partitioning of the world was reb ted to this fall in profitabilityin domestic markets. Liberal English analysts like J.A. Hobson, author of the well-known bpok Imperialism, were opposed to Britain's overseas expansion and saw it tobe the result of a highly inegalitarian social structure at home, which limited theconsumption of workers and made overseas investment attractive.16.3.2 The Colonial Financing of Overseas InvestmentBetween 1870 and 1914, the two largest single areas of British capital exports wereContinental Eurdpe and the USA.?ountries were on fixed exchange rates at thattime, with the external value of the major currencies being denominated in gold andhence bearing a fmed relationship to each other. (Most European countries weremoving out of the silver standard and formally onto the gold standard in the 1870's.)Under such a sysiem, if the balance of payments of a country is in deficit, the deficithad to be settled through the outflow of gold. Since no country could keep unlimitedreserves of gold, persistent deficits in the overall balance of payments of a countrywould cause serious problems.The peculiar feature of the destination of British capital export3 was that it wasflowing to precisely those developing, industrialisbg regions o the world where ratesof return to investment were high, but where Britain had no sllrplus on the currentaccount of its balance of payments to finance these capital flows. To understandwhat this means you should be first clear about the fact that 'capital exports' are adebit item on the balance of payments accounts of the country exporting capital. (Itis helpful to think of investment abroad, that is capital exports, as the 'import of.IOU's' as Samuelson puts it.) So net capital exports, that is a deficit on the capitalaccount, to a region like the Continent from Britain was possible without causingpayments imbalance only if Britain had an offsetting surplus on the current accountwith these regions to the same extent (remember that the current account is thebalance of trade in goods plus in services, plus net transfers). But far from havinga current account surplus, Britain in fact had large and increasing current accountdeficits vis a vis both the Continent arid the USA, owing to the fact that Britain'simports of primary products from these regions was rising fast while its exports facedtariff barriers. (Britain's net invisibles earnings balance was positive but not enoughto offset its negative trade balance vis a vis these regions, so the deficit on currentaccount tended to widen.)So, the question arises, given its rising current account deficits, how did Britain carryon investing capital ,in these regions (that is incurring additionally capital accountdeficits), and thus increasing the overall deficit on its balance of payments, withoutbeing drained of its gold reserves? This is a question that standard textbooks ofBritish economic history never ask.Thus, in 1880, Britain had a trade plus bullion deficit with Ellrope of 40.5 m.pounds, and a similar deficit with USA of 64.9 m. pounds. Net invisibles earnlngsfrom these regions are. estimated at 35 m. pounds a t most, giving an overall balanceof payments deficit of 70.4 m. pounds, amounting to 16% of GDP.


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Table 16.2: UK balance of payments in 1880 The Colonial Financingof Capital Experts inTrade plus Bullion Balance of UK in 1880 million the 19th century and someTheories of Capitalismpound s and UnderdevelopmentContinent - 40.5USA - 64.9TotalLess lnvisibles balance

The source of these estimates is S.B. Saul, Studies in British Overseas Trade. Theauthor points out that Britian had positive balance of payments position vis a vis anumber cif colonial territories, the most important being India which alone earned 25m. pounds through its export surplus earnings mainly to the Continent and USA.These export earnings could be taken over by Britain by imposing charges on theIndian revenues to roughly the same amount under various heads of invisibles,charges which were payable in sterling and which derived directly from India'scolonial position. In short India's export surplus earnings were used to offsetBritain's own deficits and a similar procedure was followed with other colonies. AsSaul puts it, 'the position was that Britain settled more than one-third of her deficitswith ~ u r o ~ end USA through.'India'. It suited Britain that India should export toother countries because the exchange earnings were under Britain's control anyway,and Indian goods along with other colonial countries' goods were relatively free oftariff barriers whereas British goods were 'not. Thus in 1905, India could exportwithout her goods being subject to duty in foreign markets, to the extent of all herexports to Belgium, three fifths of her exports to Germany, over half to the US and70 per cent to Australia. Colonial exports were a way of Britain jumping tariffbarriers. This mechanism was of course far from clear to contemporary governments,or they might have put tariff bamers against more Indian goods; on the other hand,they might not have done so, because these were mainly industrial raw materialswhich they needed and which could not be produced in temperate areas.This situation continued for decades. The charges imposed by Britain on the tropicalcolonies usually somewhat exceeded what they earned by way of their large exportsurplus, so the colonies were obliged to borrow capital to balance their payments. Inthe modern world of independent nation-states, it would be unthinkable for acountry with as large an export surplus compared to its G DP as India had, to beunable to either build up reserves or invest abroad, but be on the contrary obliged toimport capital itself. Japan today has a large trade surplus and invests abroad whilethe USA has a large trade deficit and is obliged to borrow. In the looking-glassworld of colonial trade involving transfers, however, it was the colonised countrywith the large trade surplus which was obliged to borrow capital, and themetropolitan country with the large trade deficit which invested profitably abroad.This is because the export surplus earnings of the colonies were transferred t oBritain. Of course, it is not theoretically recognised as a transfer by the historians ofthe colonising countries to this day.By 1910-11, Britain's deficit on trade plus bullion plus invisibles account hadwidened to between 90 and 95 m. pounds with the Continent and US combined andthere was another 32 m. pounds total deficit on merchandise plus bullion accountwith a number of other countries taken together (Argentina, Australia, Brazil andCanada being the main ones). Yet these were all developing regions where Britainwas investing capital, thus moving her overall balance of payments with thesecountries into even larger deficit. India by its transfer vla export surplus, continuedto be the largest single earner of foreign exchange for Britain, with a trade surplus in1911 totalling over 70 m. pounds of which over 30 m. pounds was with theContinent. As regards the U.S., 'India contributed to Britain's dollar settlements byexporting jute and jute goods to the U.S. to a value of over IOm. pounds, somethingDundee hv its own admission could not have done .... It was mainly through Indiathat Bri ta~n's alance of payments found the flexibility essential to a great capitalexporting nation' (Saul).


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Unequal Exchange,Cobaial T r a d e r a dThe F l n a r i l g ofl d a t r h l Revolmtbnand Capltal Exports

In fact, it is arguable that the question is not simply one of flexibility; that withoutihe colonial transfer to finance her capital exports to areas where she had currentaocount deficits, Britain could not have.emerged as a 'great capital exporting nation'at all. At the very least she would have been forced to abandon the gold standardfifty yean before she actually did, because she would have faced the alternatives ofeither not investing in these profitable regions, or being drained of her gold reservesin order to pay for her increasing deficits.

- -check Your Progress 2I) How did Britain respond to the falling rate of profit in her domestic production? 'Why?

2) How could Britain invest abroad, in other words, be a net exporter of capital inspiteof having a deficit in her current account of balance of payments?

3) Do you consider that the 'transfer' from colonies to Britain.constituted a drainof wealth for the colonies? How do the historians of colonising countries look atthe question of 'transfer?

16.4 SO ME THEORIES OF CAPITALISM ANDUNDERDEVELOPMENTThere is a vast literature on the problem of the historical evolution of the relationbetween today's industrially advanced coiuntries and today's backward orunderdeveloped countries. The latter have emerged into political independence fromcolonised subordinate status, only two to four decades ago.The question for discussion is, whether their underdevelopment is independent of thehistorical developmem of Europe, or a consequence of that development. Theadherents of either viewpoint differ in turn on the specific nature of the interaction.In the short space available here we cannot go into the details and complexities of


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. .different theories, but only pick up the salient ideas of some alternative approachesto the as represented by selected authors.16.4.1 Linear Development Theories: Rostow and Hicksa) W.W. Rostow The Stages of Economic Growthb) J.R. Hicks . 4 Theory of Economic HistoryrIn this sub-section we will briefly consider the theories o f tw o au tho rs wh o whilethey differ in details, broadly shar e the perspective of w hat might be called 'lineardevelopment'. Dy this term we mean the idea tha t all countries follow a mor e or lesssimilar sequence of development over time, but-differ only in that at any given pointof time, some are higher up on the ladder while others are lower down. The re is alsoan implicit assumption, that the fact some countries are very much lower down theladder, is not related in any way to the fact that others are very much higher up. (Byan 'implicit assumption', is meant an assumption that is not openly stated but seemsto underlie other statements.)W.W. Rostow put forward these ideas in The Slages of Economic Growth, where heargued that there are five stages of development that every country follows. Themost im portant s tage in his five-stage scheme is the middle one, the third stagedefined as on e of 'take-off into sustained growth'. Althoug h it is given a differentname, in substance it does not seem to be different from Industrial Revolution.There are two stages preceding this stage of 'take -OF, an d tw o stages succeeding it.The tw o preceding stages are: the stage of traditional economy an d the stag e ofprecoditicam to the take-off. The very first stage of traditional economy, refers to thevarious types of premodern econom ic and social structures which are not conduciveto m odern growth. The stage of preconditions is defined as one of variable duratioowhen the institutional and political changes essential for modernisation take placesuch as the formation of a nation state an d laying down of minimum infrastructure.Rostow specifies the foliowing features of the 'take-off stage: a ) 'a rise in theproportion of net investment to national income from say 5% to over 10%.definitely; outstripping the likely populati on pressure a nd yielding a distinct rise inoutput per capita', b) the development o f 'one or m ore substantial manufacturingsectors with a high rate of growth, which might be called 'leading sector/sl, c) th eexistence or rapid emergence of a political, social and institutional framework whichpromotes growth.Certain tentative dates or rather periods are identified by Rostow when the 'take-offtook place in different countries:

Table 16.3: Country take-off periods as identified by RostowCountry Period Country PeriodUK 1783-1802 CA NA DA 1896-1914FRAN CE 1830-1 860 RUS SIA 1900-1914USA 1843-1860 ARG ENT INA 1935-GERMANY 1850-1873 TURKEY 1937-JAPAN 1878-1900 CH INA 1952-INDIA 1952-

The criticism of Rostow's theory has been a t two levels: the first at a fundam entallevel of methodology, put forward in a review article on the book, by P. Baran andP. Swe ey. These authors argued th at the theory specified n o mechanism o ftransition from on e stage to anoth er, an d therefore did not contain a ny genuinetheory of dynamics in history. The 'preconditions' stage for example could only beidentified negatively. as contrasted with that of industrialisation; the latter, the stageof 'take-off similarly cou ld only be identified ex post after industridisation hadtaken place but could not be predicted on the basis of anything in the theory. Thetheory was thus not a theory a t all but mere description, an d no t accurate even asdescription.Other economic historians have criticised Rostow on the basis of non-fulfilment of

The Colo~lial ina~ciogof Capital Experts 11the 19th Century aad m rTheoriesof ~api ta l leh 'and UndPrdevelopment


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J-l ExrLuge.Cobda l Tmrkr and'[he FIweiq ofl nd l r vw Irrolmtb.ud Caplhl Exports

the empirical criteria he had laid down. Habakkuk and Deane argued that the stageidentified as the 'take -off in Britain did not see a do.ubling of the rate of netinvestment to national income even over a much longer period than the o ne specified,and this was endorsed by K. Berrill. You will be able to add another important ifobvio us criticism y ourself: the theory ignores the historical reality of colonialism an dimperialism comp letely. It assum es away the interaction which existed over manycenturies between the advanced industrial countries and today's ex-colonialunderdeveloped countries. As a result of this Rostow puts forward a unilinearconcep tion of historical development in which all countries pass through the samefive stages and differ only in that some do so later than others.Althou gh writing from a somew hat different perspective J.R. Hicks in a shortmonograph, A Theory of Economic History also adheres to the samevnilinear conception for the same reason, a complete ignoring of colonialiemand imperialiem. Hicb uses the term 'revenue economy' to denote the systemspreceding capitalism. He argues that the 'rise of the Market' namely thegrowth of trade leads to a transition to Capitalism, and since certain countriesby their location - uch as those bordering the Mediterranean - werepartidularly well placed to develop trade, they saw an earlier growth ofCapitalism. Thus, there is a stro ng 'geograp hical element to the theory. H icksassumes that the countries which saw the 'rk f the Market' went on toindustrialise.However, economic historians like Maurice Dobb have pointed out that thegrowth of trade, was not synonymous with the growth of capitalist production.It could be equally compatible with the growth of slave-based export orientedproduction as happened in Antiquity, or with the intensification of labourservices as happened in the 16th century in E. Europe. In the 17th and 18thcentury the highly market-oriented colonising, industrialising nations in factrevived slavebased plantations. Thus, the 'rise of the Market' by itself canexplain very little regarding capitalist production. Secondly, the countries inEurope which were foremost in trade in the 16th and 17th centuries such asItaly. Spain and Portugal, were not the first to pioneer Industrial Revolution.16.4.2 Colonies Viewed as a Capitalist PeripheryHere we will consider the ideas of A. G und er Fran k, as the representative ofa large school of writers in the L. American context. Unlike the authorsconsidered earlier, Frank puts the historical relation between the colonies anddependent countries on the one hand, and the industrialising countries of~ u r o b , t the cen tre of his analysis. The latter is called the 'metropolis' inrelation to the form er, which make up th e 'sattelite' countries of the'periphery'. He is categorical in stating that from the beginning of thisrelation there was the promotion of exports and through this avenue thetransfer of economic surplus took place from the sattelite countries to themetropolitan countries. Development in the metropolitan countries producedunderdevelopment in the sattelite countries, and Frank is at pains to stress thatunderdevelopment is to be looked upon not as a state, but as a process wbichis historically related to industrialisation in the metropolis.So far you might find little to disagree with in this theory. However, Frankand his school (which include Samir Amin and rem ma nue l Wallerstein) go on tosay also that from the beginning of th e metrop olis-sattelite relation, the system;of productior! in the sattelite countries was capitalist in character. E ithercapitalist relations wen instituted by the colonisers wherever they settled, as inL. America; or, existing relations were altered in the direction of capitalism as,he argues, in India when the British instituted in zamindari system. Nowsystems like zamindari are in fact identified by us in India with feudal relationssince they involved extraction of high rates of rent from a mass of smallproducers. In Frank's view however the colonised and dependent countries lackall claim to any economic and social structure which is in any wayautonomous of the structure of the metropolis; further, there is a certainsimilarity with Hicks's view in that Frank explicitly states that production for


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the export market necessarily implies that production is capitalist. He thereforecharacterises every export-oriented colony or sattelite as being capitalist and asconstituting the periphery of the world capitalist system.Particularly for Asian countries like India or China with their long socialhistory and highly articulated class systems at the time of the Europeanimpact, this view clearly constituted a severe oversimplification. It represents aEuro-centric view which sees the economy of the underdeveloped countriesentirely as the creations of the Europeans. Further, we find that the samefamiliar fallacy is repeated, of identifying production for the market withcapitalist production. In reality the European impact of promotingcommercialisation had to operate necessarily through the existing soci~economicsectures. And it did not necessarily require the reproduction of capitalistrelations in the colonies to ensure the transfer of surplus.16.4.3 Colonies Viewed as MarketsOne of the most interesting and complex theories of colonialism is thatadvanced by Rosa Luxemburg, in The Accumularion'of Capital. This book isthe only attempt to argue at the level of economic theory, that withoutexternal markets including colonial markets, industrialisation under capitalismcannot take place. While many authors had described the working ofcolonialism, none ,had integrated colonial exploitation into the theory ofcapitalist accumulation itself.Rosa Luxemburg argued that there was a logical contradiction in saying thataccumulation (that is, continuous reinvestment of capital, and output growth)could take place within a closed capitalist system consisting only of the twoclasses of capitalists and workers. This was because the total social product insuch a system consisted of wages and profits. (It is useful to remember thatabout half of the social product was wages going to perhaps 90% of thepopulation while the remaining half was profits and rents going to perhaps10% of the population.) While the workers consumed what they got as wages,the capitalists could consume only a tiny part of their profits, and had toreinvest the rest. However, the problem was, who was to consume theincreased product arising from reinvestment? And why should there be anyincentive for capitalists to reinvest at all unless they could be assured of amarket for their products?Thus the argument Luxemburg advanced was that external markets were alogical necessity for the capitalist production system to be able to exist andfunction as a capitalist system: that accumulation within a closed capitalisteconomy was a logical impossibility. Her conception of 'external markets'included all the strata of small produc,ers like peasants and artisans who wereinitially outside the framework of capitalist production. At first the capitalistsector converted these strata within the boundaries of the 'national economy,into its labour force and at the same time its markets, by destroying the basisof independent small production through measures like the 'enclosures' inagriculture. Once this source was exhausted the same process was extended topeasants and artisans in subordinate countries outside the national economicboundaries: their petty production was destroyed through unrestricted inflow offactory produced goods ,and the petty producers were converted over time tohired workers constituting a market for the capitalist sector of the industrialcountry. Colonialism was thus seen by Luxemburg as a necessity for thefunctioning of the advanced capitalist economies, and she was able to integratecolonial exploitation into the analysis of capitalism. In her concept o 'externalmarkets' Rosa Luxemburg also included such modern ideas as unproductivemilitary spending.Check Your Progress 3I) Why'can you not consider Rostow's linear developmc~i~heory as atheory?

Tbe Colaid FI.sri.pof CapItaiExperts inthe 19th Century a d m eTheories of Cnpits l l~~a d Uulerdeve-t


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UoequdExchange.Cok.iaI T y d & a dTLFi.anelllg ofI d s t r l a l Rerohtbna d C!pltsl Exports

.....................................................................................................................................................................................................................2) Why is Rostow's 'theory' described as a 'linear" development theory?.....................................................................................................................................................................................................................3) Provide a brief critique of Hicks's. theory of economic history...........................................................................................................................................................................................................................................................................................................................................................................................................................................4) Distinguish between a satellite and a metropolis.............................................................................................................................................................................................................................................................................................5) Was the colonial Indian economy a capitalist one? Justify your answer..............................................................................................................................................................................................................................................................................................6) Why according to Luxemburg, do the industrialised countries coloniseunderdeveloped economies?..............................................................................................................................................

--16.5 LET US SU M UP

In this Unit you have obtained some idea of the importance of the export ofcapital for the British economy in the second half of the 19th century. Thepeculiar feature of this export of capital was that it flowed to the developingareas of the world such as the European Continent, N. America and the whitesettler dominions where returns were good, but where Britain had increasingcurrent account deficits in most cases. Under the gold standard which involvedfmed exchange rates, increasing deficits on her balance of payments would havemeant that Britain would have been either drained of its gold reserves or


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forced to cease her profitable investments abroad. Neither of these thlngshappened because the large transfer from the tropical colonies in the form ofincreasing export surplus earnings from these areas, could be utilised by Britainto settle a major part of her own deficits, by imposing various invisiblecharges on the colonies. It is very doabtful whether profitable capital exportsfrom Britain could have continued without the 'colonial safety valve'.In the second part of this Unit you have gained some idea of the widedifferences in the theoretical approaches to the question of the historicalrelation between today's advanced industrialising countries and today's ex-colonial developing countries.

16.6 KEY WORDSChartism: Workers' movement deriving its name after the People's Charterdrawn up in 1835 by the Working Men's ~ ssoc ia ti on .Corn Law: Law passed to ban import of corn by imposing prohibitive tariff sothat the farmers and the landed aristocracy benefit at the expense of the urbanworking class and the industrialists by keeping bread prices high. This law wasrepealed in 1846 and is seen as a victory for the industrialists.Metropolis: Term used by Frank to describe the industrialising countries ofEurope.Periphery: Colonies of the 'metropolis'. Their economies were directed accordingto the interests of the metropolis:

16.7 SOME U SEFU L. BOOKSHicks J.R., 1969. A Theory of Economic History, Oxford University Press,

London.Hobsbawm E.J., 1969. Industry and Empire, Pelican London.Hobson J.A., Imperialism. George Allen and Unwin, London..Floud & McCloskey (ed.). The Economic History of Britain.Frank A.G., 1969. Ca ~i ta lis m nd U nderdevelopment in Lutin America,

~ o n t h l v eview Press, New York.Luxemburg R. 195 1. The Accumulation of Capital (Routledge); London.Rostow W.W., 1969. ne Stages of Economic Growth A non-Comm unistManifesto. London; cambridge University Press.

16.8 ANSWERWH INTS TO CHECK YOUR PROGRESSEXERCISES

Check Your Progress11) Read Sub-Section 16.2.1 and answer.2) Read Sub-section 16.2.1 and answer.3) Read Sub-section 16.2.2 and answer.Check Your Progress 21) Read Sub-Section 16.3.1 and answer.2) Read Sub-section 16.3.2 and answer.3) Read Sub-section 16.3.2 and answer.


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UrlulE=-lmC l b J l l T d a dI d e f b l R a o k hIl.rCICtbrl-

Cbedr Your Progress 31) Read Sub-section 16.4.1 and answer.2) Read SubS ection 16.4.1 and answer.3) Read Sub-section 16.4.1 and answer.4) Read Sub-sec tion 16.4.2 and answer.5) Read Sub-section 16.4.2 and answer.6) Read Sub-Section 1 6.4.3 and answer.

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Unit-16 Colonial Financing-19th Cent, Theories of Capitalism & Underdevelopment