production processes.” This raises the “risk that the simultaneous drive in a great number of developing countries … to export such dynamic products may cause the benefits of any increased volume of exports to be more than offset by losses due to lower export prices.73 In other words, what has become known as “the race to the bottom.”
William Cline was one of the first to warn of the danger that “first mover” advantage would not be available to latecomers:
Other developing countries would be … ill-advised to expect free-market policies to yield the same results that were achieved by the East Asian economies, which took advantage of the open economy strategy before the export field became crowded by competition from other developing countries, and did so when the world economy was in a phase of prolonged buoyancy…. Elevator salesmen must attach a warning label that their product is safe only if not overloaded with too many passengers at one time: advocates of the East Asian model would do well to attach a similar caveat to their prescription.74
The success of the “first movers,” especially South Korea, Taiwan, and Singapore (often termed the Newly Industrializing Countries), seemed to show the path for other poor and underdeveloped to follow, but, as Raphael Kaplinsky and many others have noted, “the so-called gains from outward-oriented manufacturing may reflect a fallacy of composition. In other words, it may make sense for an individual country such as China to expand massively its exports of manufactures, but if the same path is adopted by all low-income economies, everyone will lose.”75 Kaplinsky bleakly concludes that for every winner there will inevitably be many losers, and that firms occupying lower links in the chain can only escape the race to the bottom if they succeed in erecting some form of barrier to competition, that is, some degree of monopoly. “When barriers to entry are eroded … the best option may be to vacate the chain altogether” and find something else to do.76
Intense competition between Southern producers, combined with what Kaplinsky has called a “fierce oligopsony”77 of global buyers, drains wealth from Southern producers and supports profits and asset values of firms in imperialist countries. Gary Gereffi identifies the root cause of these unequal outcomes to lie in “the fundamental asymmetry in the organisation of the global economy between more and less developed nations. To a great extent, the concentrated higher-value-added portion of the value chain is located in developed countries, while the lower-value-added portion of the value chain is in developing economies.”78 Robert Feenstra and Gordon Hanson, two other leading lights of value-chain research, give a similar description of asymmetry:
The asymmetry of market structures in global production networks, with oligopoly firms in lead positions and competition among first- and certainly second-tier suppliers, has meant intense pressure on suppliers who, in seeking to maintain markups, must keep wages low and resist improvements in labor standards that might lead to a shift … to another firm or country.79
The acknowledgment by these researchers that the promised level playing field is in fact steeply sloping leads them to pessimistic conclusions. In particular, Southern suppliers “have no rents to share with employees, and can survive only if wages are kept at a minimum. The increased use of sweatshop labor today, which has come with the rise in arm’s-length outsourcing, can be seen as tied to global production sharing.”80
There is a high degree of unanimity among these researchers about the pernicious combination of oligopolistic global buyers and unbridled competition among Southern producers. They accurately describe some important facts in plain view about the unequal relations between the Northern and Southern links of the value chains, but their explanatory power is limited, because, in line with the value-chain literature in general, “asymmetry in market structures in global production networks” includes product and capital markets in its gaze, but ignores the role of asymmetry in labor market structures, including the suppression of labor mobility, the vast reserve army of unemployed workers, repressive labor regimes, etc., in determining the distribution of value added. To explain anything about real relationships and actual outcomes—superprofits, swollen asset values, and high(er) wages at one end of the chain; sweatshops and starvation wages at the other—our concept of asymmetry must be extended far beyond product market structures to include all asymmetries of wealth and power.
UPGRADING, OR “MOVING UP THE VALUE CHAIN”
Export-oriented industrialization was presented as the route out of the impoverishment resulting from dependence on the export of primary commodities suffering chronically declining terms of trade vis-à-vis manufactured goods. However, as UNCTAD reported in 1999:
Terms-of-trade losses are no longer confined to commodity exporters. Many manufactures exported by developing countries are now beginning to behave more like primary commodities as a growing number of countries simultaneously attempt to raise their exports in the relatively stagnant and protected markets of industrial countries. For example, the prices of manufactures exported by developing countries fell relative to those exported by the European Union by 2.2 percent per annum from 1979 to 1994.81
Three years later, UNCTAD delivered a damning verdict on the results of two decades of export-oriented industrialization: “Of the economies examined here, none of those which pursued rapid liberalization of trade and investment over the past two decades achieved a significant increase in its share in world manufacturing income, although some of them experienced a rapid growth in manufacturing exports.”82 Faced with this harsh reality, “upgrading,” which means capturing a bigger share of the total value of the finished commodity by moving into higher value-added activities, has become the mantra of development economics, or as Milberg and Winkler put it, “Economic development has increasingly become synonymous with ‘economic upgrading’ within global production networks.”83 In other words, adoption of the export-oriented industrialization strategy is an insufficient condition for the attainment of development. But if overcrowding has stranded the EOI elevator in the basement, the upgrading elevator, which has a much smaller capacity, suffers even bigger problems. Before we examine the evidence for this and consider its implications, we should note the major problem that the upgrading imperative poses for mainstream economic theory: upgrading contradicts dominant models of international trade, which stress that, rather than trying to do things that they presently cannot do, countries should concentrate on what they are able to do best and employ the resources they are most generously endowed with, that is, they should exercise their “comparative advantage.” Milberg and Winkler add,
The general perspective of upgrading is anathema to traditional theories of trade based on comparative advantage. The notion of economic upgrading is largely about gaining competitiveness in higher value-added processes, a strategy that may conflict with the dictates of the principle of comparative advantage in which an “optimal” pattern of trade may call for countries remaining specialized in low value-added goods.84
The implication is that “traditional theories of trade”, that is, the modern variants of the theory of comparative advantage that occupy a sacrosanct place in mainstream economic theory, are useless as a guide to nations seeking development. (Mainstream trade theory will be discussed in later chapters.) Milberg and Winkler propose that “absolute upgrading” occurs when “value added per worker engaged” rises faster than the value of exports; “weak upgrading” when it rises, but more slowly than exports, and if value added per worker rose less than a quarter as fast as exports, no upgrading is taking place. The logic of this approach is that there are two possible conditions that might cause the value of exports to rise faster than domestic value added per worker: a rise in the import composition of those exports, or an increase in the size of the workforce producing them. In the first case, the shrinking domestic contribution to the value of exports is symptomatic of race-to-the-bottom competition; in the second case the developing country is doing more of the same thing but with diminishing returns. In their sample of thirty developing countries drawn from three continents, not one achieved
