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INEQUALITY & DEVELOPMENT IN THE WORLD SYSTEM I Lindsey King Junpeng Li.

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1 INEQUALITY & DEVELOPMENT IN THE WORLD SYSTEM I Lindsey King Junpeng Li

2 The World-System Approach World-system theory: a perspective on the origins and development of capitalism as a global economic system (Wallerstein, 1974)

3 The World-System Approach 1. The economic organization of modern capitalism is on a global, not national, basis 2. World-system is composed of core regions, which are economically and politically dominant, and peripheries which are economically dependent on the core 3. Core regions are developed as industrial systems of production, whereas the peripheries provide raw materials, being thereby dependent on prices set in the core regions (cont.)

4 The World-System Approach 4. There are also semi-peripheries which have a mixture of social and economic characteristics from both core and periphery 5. This modern world system originated in Europe in the “long” 16 th century (1450-1640) with the slow evolution of capitalist agriculture

5 The World-System Approach “The singular feature of this world economy was the discontinuity between economic and political institutions. This discontinuity made possible and was made possible by the creation of capitalist forms of production, not only in commerce and industry, but most important of all, in agriculture.” (Wallerstein, 1972, p95)

6 Core, Periphery, and Semiperiphery “The core areas were the location of a complex variety of economic activities” The peripheral areas “were monocultural, with the cash crops being produced on large estates by coerced labor” “The semiperipheral areas were in the process of deindustrializing” (Wallerstein, 1972, p96)

7 The World-System Approach In the world economy, the various areas came to be dependent on each other for their specialized roles Profitability: the world system tried to increase its overall productivity

8 The World-System Approach A multitude of political entities of varying forms In the core states there evolved relatively strong State systems The periphery lacked strong State systems The semiperiphery was in-between

9 The World-System Approach Three particular areas – Poland (periphery) – Venice (semiperiphery) – England (core)

10 Transnational Corporations and Underdevelopment (Bornschier and Chase-Dunn, 1985) Dependent Industrialization and Underdevelopment The stratification of average income among nations and the internal distribution of income around the national average are mainly determined by nations’ positions in the world system

11 National and International Income Inequality “The average income possibilities and the internal distribution of income that are consequences of a country’s position in the spatioeconomic hierarchy interact with the process of the transnational corporation’s organizational imperialism to produce greater personal and sectoral income inequality and higher levels of social marginality within countries on lower levels of hierarchy.” (Bornschier and Chase-Dunn, 1985, p23)

12 National and International Income Inequality There is a harmony of interests between the ruling classes of core and peripheral countries to be the main social stabilization mechanism of the spatioeconomic hierarchy “…an alliance between core ruling classes and peripheral ruling classes will tend to produce greater inequalities within peripheral countries because the peripheral elite will be able to use the resource of core support to garner income and other advantages to itself. It will also be more able to successfully resist demands for redistribution.” (Bornschier and Chase-Dunn, 1985, p23)

13 National and International Income Inequality “…it is not a low level of development that creates high inequality, but rather peripherality in the world division of labor and its associated class structure.” (Bornschier and Chase-Dunn, 1985, p23)

14 National and International Income Inequality Transnational corporations affect the international structure of income directly by their transfers of profits, goods and services By means of administered prices for intermediates the customers of transnational corporations in peripheral countries pay for the organizational superstructure of corporate activities

15 National and International Income Inequality Export of proletariat: “These flows of resources to the core countries contribute to their further development of technological innovations, and expansion of clean and well-paid jobs, whereas routinized and standardized, dirty and simple tasks with low incomes are increasingly transferred to the periphery.” (Bornschier and Chase-Dunn, 1985, p24)

16 National and International Income Inequality Superimposed stratification: in many peripheral countries the subsidiaries of transnational corporations constitute the majority of the largest industrial enterprises “The extent of the superimposed stratification by transnational corporations is generally greater the less developed a country is.” (Bornschier and Chase-Dunn, 1985, p24)

17 National and International Income Inequality Zero-sum game: The expansion is not necessarily diminished by reaching the limits of market demand. “Rather, competition causes aggressive, innovative, and powerful firms to continue to grow at the expense of other firms and many of the latter are either driven from the market or absorbed.” (Bornschier and Chase-Dunn, 1985, p24)

18 Capitalist Economic Growth in the Core Development of trade unions → Increases in real wages → Replacement of labor with capital → unemployment

19 Capitalist Economic Growth in the Core Leading companies implement various strategies to overcome these growth limitations 1. The institutionalization of technological change which continually devaluates existing capital and induce demand for new capital goods 2. Leading firms tend to spread the risks by diversifying their activities, often by takeovers or mergers 3. The market might be expanded by an intensification of exports 4. Going transnational (exporting capital) in order to circumvent stagnation tendencies in the home market by taking advantage of investment opportunities in other countries (Bornschier and Chase-Dunn, 1985, p26)

20 Obstacles to Growth in the Periphery In contrast to what happens in core capitalism, the effects of monopolization are much more destructive in peripheral capitalism “…the mechanisms by which the advanced country can counteract or stave off such stagnation tendencies, are in the underdeveloped economy, both fewer and less effective” (Merhav, 1969, p6)

21 Obstacles to Growth in the Periphery “The small size of domestic markets in peripheral countries, even in those with large populations, produces a situation in which the stagnation tendencies that show up in core countries only at a late stage of industrialization are present practically from the beginning.” In addition to the small size of the domestic market, it is also related to the scale of technology and limited possibilities to produce for export markets “Shares of the world market are already distributed among industrial producers and are relatively closed to late industrializers.” “...what was possible 150 years ago for a small country like Switzerland is no longer possible in the industrialized world of today” (Bornschier and Chase-Dunn, 1985, p27)

22 Transnational Firms and Inequality in the Periphery The “trickle-down” effects are few: the basic needs of the majority of the population in peripheral countries are not satisfied Income inequality becomes a necessary condition and a consequence “…given a particular peripheral country in which average income is low and world market prices for transnational corporate products prevail, the effective demand…is larger and of more interest to transnational corporations the greater the income inequality” (Bornschier and Chase-Dunn, 1985, p28)

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24 Transnational Penetration and Income Inequality Causes of National Income Inequality “The spatioeconomic hierarchy…creates a corresponding stratification of socioeconomic structures that have different income possibilities and profiles.” (Bornschier and Chase-Dunn, 1985, p119) The political regime of a dependent country is likely not to be willing or able to act in favor of income equilibration via redistribution “The sociopolitical basis of such inability of the state is a specific type of class structure, that is, a class coalition within the integrated segment against the marginalized majority.” (Bornschier and Chase-Dunn, 1985, p119)

25 Causes of National Income Inequality The striving for participation in the bourgeois lifestyle produces privileges relative to the average life situation in peripheral countries “The integrated population tries to increase its consumption in order to keep up with core standards.” (Bornschier and Chase-Dunn, 1985, p120) These lead to a larger income gap and more intense marginalization in poorer countries than in richer ones

26 Causes of National Income Inequality “Transnational corporations are less opposed to greater income inequality within core countries.” (Bornschier and Chase-Dunn, 1985, p120) Their market chances are larger the higher are the incomes of the masses of the people

27 Causes of National Income Inequality Types of activity of transnational corporations in the periphery 1. Transnational firms active in agricultural, mineral and oil extraction 2. Those active in manufacturing for the world-market (“world-commodities”) 3. Transnational firms active in manufacturing for the domestic market

28 Causes of National Income Inequality Lenski (1966) finds that the magnitude of inequality increases as we move from hunter/gatherer through to advanced agrarian societies. When industrial society appears, inequalities decrease due to changes in the power of the producing class

29 Causes of National Income Inequality “These industrialized national societies are not themselves whole systems, but are instead parts of a larger world-economy. Thus, the unit which should be considered in a discussion of the relative magnitude of inequalities in social evolution is the modern world-system itself.” (Bornschier and Chase-Dunn, 1985, p127)

30 Causes of National Income Inequality The rank order of production systems in the modern world regarding productivity and surplus · horticultural production systems · simple agrarian production systems · advanced agrarian production systems · industrial production system: periphery and semiperiphery · industrial production system: core

31 Causes of National Income Inequality “…inequality in the industrial system is still greater than in advanced agrarian systems” (Bornschier and Chase-Dunn, 1985, p127)

32 Causes of National Income Inequality “Productivity in the core is much higher and the organizational forms of production are much more complex, reflecting a more even distribution of power, whereas in the periphery standardized and routinized production prevails within the world division of labor, and this is accompanied by a larger marginalized segment of the population.” (Bornschier and Chase-Dunn, 1985, p127-8) “…the strength of the state as an institution reflecting group and class alliances structured by the world-economy is greater in the core than in the periphery” (Bornschier and Chase-Dunn, 1985, p128)

33 Causes of National Income Inequality “…the coexistence of different production systems with different levels of productivity, surplus and power structures, that is, horticultural, agrarian and industrial systems – the latter differentiated according to peripheral, semiperipheral and core position – explain the observed pattern between level of economic development and income inequality within countries” (Bornschier and Chase-Dunn, 1985, p128)

34 Inverted U-Shaped Relationship between Inequality and Level of Economic Development Legend: I: Horticultural systems II: Simple and advanced systems III: Industrial system. a=Peripheral position with still dominant agrarian system; b=Peripheral position with small importance of agrarian system; c=Core position.

35 Empirics of World Income Inequality (Firebaugh, 1999) Different rates of population growth among nations played the predominant role in determining change in the distribution of per capita income across nations The centuries-old trend of rising inequality leveled off from 1960 to 1989

36 Convergence Theory National economies will tend to converge because of the principle of diminishing returns to capital and labor (Solow, 1956) “As rich industrial nations begin to experience diminishing returns, poorer nations (who are farther from the point of diminishing returns) will tend to catch up as they industrialize.” (Firebaugh, 1999)

37 Convergence Theory The new growth theory (endogenous growth theory) (Romer, 1986; Lucas, 1988) challenges the convergence thesis by arguing that the principle of diminishing returns can be overcome by specialized inputs made possible by research Conditional convergence (Barro, 1991: Barro and Sala-i-Martin, 1992: Mankiw, Romer, and Weil, 1992) Unconditional convergence

38 The Polarization Thesis World-system and dependency perspectives “If rich nations benefit more from international exchange, and if this exchange is the primary source of national income differences…then so long as rich and poor nations continue to engage economically we can expect national incomes to continue to diverge.” (Firebaugh, 1999)

39 Cross-national Evidence Berry et al., 1983; Peacock et al., 1988; Schultz, 1998: there has been little or no change in intercountry inequality in recent decades Jackman, 1982; Sheehey, 1996; Jones, 1997; Korzeniewicz and morgan, 1997): national incomes have continued to diverge

40 Cross-national Evidence Making sense of these findings ­ weighting: studies that do not weight generally find divergence, whereas studies that weight generally find little change in intercountry inequality over recent decades ­ purchasing power parity (PPP) ­ China: weighted studies that exclude China are suspect

41 Cross-national Evidence When each national economy is given the same weight, the data indicate national divergence Weighted studies find stability Do we want to give nations or individuals equal weight?

42 Weighted versus Unweighted Convergence Economists: each nation represents one unit (one economy); economic trends in Luxembourg count just as much as economic trends in China, even though China has nearly 3,000 times more people Sociologists: whether there is intercountry convergence in the case where individuals, not nations, are given equal weight

43 Changing Income Ratios versus Changing Population Shares The income ratios are in fact diverging, yet change in population shares across countries offsets that divergence, so weighted intercountry income inequality does not increase “…all the important dimensions of the 1960-89 trend in intercountry income inequality are related to differences in the population growth rates of richer and poorer nations” (Firebaugh, 1999)

44 Theories of Inequality Within Countries Kuznets, Nielsen, and friends

45 The Kuznets Curve Kuznets theorized about long-term changes in the distribution of income Examined changes in inequality within countries –Each country treated as an insulated unit –Development trajectory of a given country unrelated to that of other countries Hi, I’m Simon Kuznets, the man behind the curve.

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47 Two Primary Forces Leading to Increased Intracountry Inequality 1) “Concentration of savings in the upper-income brackets” (p. 7) –Kuznets found that most savings in the United States were possessed by individuals in the upper income brackets –Saving has a cumulative effect; over time, the upper income groups would come to control increasing shares of assets 2) Shift in income distribution from agricultural to nonagricultural sectors Differences in structure of income distribution (p. 7): –“(a) the average per capita income of the rural population is usually lower than that of the urban” –“(b) inequality in the percentage shares within the distribution for the rural population is somewhat narrower than in that for the urban population”

48 Shift from Agricultural to Nonagricultural Sectors Kuznets focused on inequality resulting from population shifts from sector A (agricultural) to sector B (nonagricultural) As the population shifts from rural to urban, inequality increases The nonagricultural sector is characterized by higher levels of within-sector inequality. The greater income inequality in the nonagricultural sector, as compared to the agricultural, increasingly affects overall income inequality as greater proportions of the population become urbanized Inequality between agricultural and nonagricultural will widen over time as urban productivity outpaces rural productivity

49 Level of Inequality According to the Interaction of (1) Proportion of Population in Sectors A and B, and (2) Income Disparity between Sectors When income inequality is low, the range is widest at a proportion of A to B of 0.6 At high levels of per capita income disparity, inequality peaks at a higher proportion of A to B Level of income disparity Level of Inequality Proportion of Population in Sector A Income Disparity Between Sectors

50 Kuznets’ Konclusions Assuming that inequality in sector B is greater than sector A, lower- income groups should have commanded an ever-decreasing share of income –However, overall income inequality in developed countries narrowed The narrowing of inequality can be attributed to an increase in shares of income within low-income groups –Specifically, the lessening of inequality is attributable to sector B –Sector A may also have experienced decreased inequality, but the effect would be minimal when compared to sector B, which commanded a far larger share of the income distribution “Hence, we may conclude that the major offset to the widening of income inequality associated with the shift from agriculture…must have been a rise in the income share of the lower groups within the nonagricultural sector of the population” (p. 17)

51 Longitudinal, Within-Country Explanations for the Curve Kuznets explains differences in inequality at various stages in industrial development through the relative position of low-income groups “the dislocating effects of the agricultural and industrial revolutions, combined with the “swarming” of population incident upon a rapid decline in death rates and the maintenance or even rise of birth rates, would be unfavorable to the relative economic position of lower- income groups” (p. 18) Thus, inequality steadily rises during the early stages of industrialization; the trend stabilizes and then reverses in later stages

52 Nielsen: Elaboration of Kuznets Main argument: “The inverted- U shaped relationship between income inequality and development (Kuznets curve) is largely accounted for by transitional development processes related to the dualism (both economic and generalized) of traditional and modern sectors of developing societies. Whereas Kuznets identified the central role of sector dualism in the evolution of income inequality, [Nielsen] identif[ies] generalized sociocultural dualism as a second critical factor

53 Application of the Kuznets Curve Kuznets hypothesized (and tested with limited data) that the curvilinear trajectory of income inequality could be applied to both currently developed and underdeveloped countries –As a country becomes industrialized, inequality increases, stabilizes, and declines over the course of development –Due to a dearth of longitudinal data, the Kuznets curve is usually displayed as a cross-sectional analysis of countries at varying levels of development

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55 Sociological and Economic Explanations of Changes in Inequality Sociological: “focuses on long-term structural and institutional changes brought about by industrial development, such as the spread of education, the rise of democratic systems of government, or the specialized position of a country within the world system” (p. 655) Economic: focuses on dualism “Dualistic explanations emphasize the inequality implications of aspects of development that are inherently transitional. Inequality is viewed as being generated by social heterogeneity related to a specific stage of the development process, rather than as an equilibrium” (p. 655) Sector dualism: population shifts from agricultural to nonagricultural sectors affect levels of inequality

56 Partial and Selective Diffusion (Lenski) Aspects of industrial development diffuse at an uneven rate throughout the population –The differential spread of variables such as education, urbanization, and democracy lead to a form of dualism that Nielsen terms generalized sociocultural dualism (to distinguish the concept from sector dualism) –“different subsets of items from the set are adopted by different people in the traditional society at different times” (p. 662)

57 Measures of Partial and Selective Diffusion Nielsen uses the natural rate of population increase (birth rate minus death rate) as a proxy for partial and selective diffusion This substitution is appropriate because the rate of population increase is directly affected by technology that reduces mortality Reproduction is also reduced, but only after a slight lag, thereby creating a temporary upswing in natural rate of population increase The rise in rate of population increase contributes to greater inequality by: –Elevating the number of young, unskilled laborers –Lowering the wages of all unskilled laborers This parallels the “swarming” of the population predicted by Kuznets: the inequality gap widens during periods of rapid growth because the relative standing of low-income groups (such as those listed above) is diminished

58 The Demographic Transition

59 Inequality a la Lenski: Exogenous Influences Inequality is determined by a society’s level of subsistence technology Inequality rises as one moves from hunting/gathering to horticultural to agrarian societies –Agrarian societies represent the apex of inequality –High levels of inequality persist into the early stages of industrialization After the early phases of industrialization, inequality then begins to decline For Lenski, this reversal results from increases in the value of human capital (elites become increasingly dependent on the higher levels of human capital necessary for advanced technological production) and increases in political democracy However, since exogenous explanations of inequality should theoretical follow a monotonic pattern, what could account for the reversal in inequality as a society shifts from agricultural to industrial? –Hmmm…..

60 Kuznets and Lenski Resolved “The transitory increase in inequality due to the industrialization process itself (and its inherent dualism) is…superimposed on the long-term decline in inequality that industrial technology brings forth” (p. 673) As a society begins the shift from an agrarian to industrial mode of production, economic inequality increases Income inequality grows “as a modern economic sector with vastly greater productivity emerges, as a small educated elite is paid a premium for its skills, as some regions take off economically and others are left behind, and as the contrasts between the cities and the countryside increase” (p. 673) Thus, inequality does not peak in the agrarian stage and gradually decrease and industrialization emerges; rather, sector and generalized sociocultural dualism interact with the transition to temporarily inflate inequality in the beginning phases of industrialization After the transition (from agricultural to nonagricultural predominance) is well underway, levels of inequality begin to decline

61 World-Systems Theory and the Kuznets Curve Reconciled (Alderson and Nielsen)

62 Internal-developmental Model of Inequality The “baseline model of the relationship of income inequality with development that incorporates three major processes: labor force shifts and sector dualism; the demographic transition; and the spread of education” (p. 5) (1)Labor force shifts and sector dualism –Labor force shifts: Movement from agricultural to nonagricultural sectors causes inequality over time to plot as an inverted-U shape –Sector dualism: the level of inequality brought about by labor force shifts –Measured by level of sector dualism (positive effect) and percentage of the labor force in agriculture (negative effect)

63 Internal-developmental Model of Inequality (cont.) (2) Demographic transition: –“Rapid population growth produces a large cohort of young and typically lower-paid workers. This influx is expected to increase income inequality by inflating the bottom of the income distribution and by contributing to excess labor supply, further…widening wage differentials” (p. 6) –Measured by the natural rate of population increase (birth rate minus death rate; positive effect)

64 Internal-developmental Model of Inequality (cont.) (3) Spread of education: –As the availability of education rises, the earnings of skilled workers relative to unskilled workers declines –Measured by the ratio of secondary school enrollment (negative effect)

65 Foreign Penetration School Based on world-systems theory As posited by Bornschier and Chase-Dunn (1985), income inequality within a developing nation rises with increasing levels of as transnational corporate penetration (positive effect) “dependence on foreign capital increases income inequality by distorting the occupational structure of Third World countries, ‘bloating’ the tertiary sector and producing both a highly paid elite and large groups of marginalized workers” (p. 7)

66 Test of Bornschier and Chase- Dunn (1985) The baseline model (labor force shifts and sector dualism, the demographic transition, and the spread of education) is significant in the predicted directions –Sector dualism (between-sector inequality) positively effects inequality –Labor force in agriculture (within-sector inequality) negatively affects inequality –Natural rate of population increase raises levels inequality –Secondary school enrollment reduces inequality Foreign capital penetration positively affects inequality –However, “the overall positive effect of foreign capital penetration on inequality is cancelled out for core countries” (p. 15) –These findings support those of Bornschier and Chase-Dunn

67 Interpretation of Findings Using Investment-development Model As accumulation (stock) of foreign investment increases from low to intermediate levels, dependence of foreign investment simultaneously increases Moving from intermediate to high levels of foreign investment stock, levels of dependence on foreign investment decline

68 (Measure of Inequality) (Measure of Foreign Penetration)

69 Accounting for the Findings A possible explanation: the findings of world-systems theorists may be “less the effect of foreign capital penetration…and more the effect of a nation’s net foreign investment position” (p. 20) At low to intermediate levels of foreign investment: transnational firms pay above the current rate in less developed countries, thereby increasing inequality As amount of foreign investment moves from intermediate to high levels, indigenous firms begin to adhere to international standards and invest on their own, thereby decreasing dependence on transnational corporations “In sum, [Nielsen] conclude[s] that it is relative dependence on foreign investment that is associated with greater inequality” (p. 22)

70 Characteristics of the Industrialization Process (Kerr et al.) (1)The industrial work force The development of industrialization creates the need for a highly skilled work force Requisite skills are constantly changing (2) Mobility and the open society Emphasis on continual training Extended families decrease in prevalence: Nuclear families more conducive to mobility (3) Education The educational system functions to impart skills necessary to industrialization Education serves as a means of social mobility (4) Structure of the labor force Highly differentiated; classified by occupation Hierarchy and specialization  heterogeneity (as opposed to the homogeneity of traditional societies)

71 Pluralistic Individualism “This term is used to refer to an industrial society which is governed neither by one all powerful elite…nor by the impersonal interaction of innumerable small groups with relatively equal and fractionalized power (the atomistic model)” (p. 799) Some characteristics of pluralistic individualism Increased state responsibility: mediator of conflict between various combinations of management, labor, and consumers; regulator of organizations and their memberships Productive enterprises will play a key role Rise in influence and prevalence of occupational or professional associations Proliferation of rules Conflict will be less between classes than between bureaucratic groups

72 Beyond Industrialism: Esping- Andersen Declining demand for unskilled workers can be explained by technological change –“Employment lost due to trade competition from [Asia or the Third World] is rather trivial in comparison with the volume of job loss due to ‘structural change’” (p. 831) –Thus, inequality is caused primarily by within country variables With the decline in manufacturing jobs in developed nations comes an attendant rise in service jobs –Jobs become increasingly polarized: highly skilled jobs requiring high levels of education creates a mass of “lousy jobs” occupied by those unable to obtain educational credentials

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