INTRODUCTION

In international circles the topic of the day is the demand of the Third World for a new international economic order. My topic is the evolution of the existing economic order: how it came into existence not much more than a century ago, and how it has been changing.

The phrase "international economic order" is vague, but nothing would be gained by trying to define it precisely. I will discuss certain elements of the relationship between the developing and the developed countries that the developing countries find particularly irksome. These are:

First, the division of the world into exporters of primary products and exporters of manufactures.

Second, the adverse factoral terms of trade for the products of the developing countries.

Third, the dependence of the developing countries on the developed for finance.

Fourth, the dependence of the developing countries on the developed for their engine of growth.

My purpose in treating these topics is not to make recommendations, but to try to understand how we come to be where we are.

THE DIVISION OF THE WORLD

How did the world come to be divided into industrial countries and agricultural countries? Did this result from geographical resources, economic forces, military forces, some international conspiracy, or what?

In talking about industrialization, we are talking about very recent times. England has seen many industrial revolutions since the thirteenth century, but the one that changed the world began at the end of the eighteenth century. It crossed rapidly to North America and to Western Europe, but even as late as 1850 it had not matured all that much. In 1850 Britain was the only country in the world where the agricultural population had fallen below 50 percent of the labor force. Today some 30 Third World countries already have agricultural populations equal to less than 50 percent of the labor force — 17 in Latin America, 8 in Asia not including Japan, and 5 in Africa not counting South Africa. Thus, except for Britain, even the oldest of the industrial countries were in only the early stages of structural transformation in 1850.

At the end of the eighteenth century, trade between what are now the industrial countries and what is now the Third World was based on geography rather than on structure; indeed India was the leading exporter of fine cotton fabrics. The trade was also trivially small in volume. It consisted of sugar, a few spices, precious metals, and luxury goods. It was then cloaked in much romance, and had caused much bloodshed, but it simply did not amount to much.

In the course of the first half of the nineteenth century industrialization changed the composition of the trade, since Britain captured world trade in iron and in cotton fabrics; but the volume of trade with the Third World continued to be small. Even as late as 1883, the first year for which we have a calculation, total imports into the United States and Western Europe from Asia, Africa, and tropical Latin America came only to about a dollar per head of the population of the exporting countries.

There are two reasons for this low volume of trade. One is that the leading industrial countries — Britain, the United States, France, and Germany — were, taken together, virtually self-sufficient. The raw materials of the industrial revolution were coal, iron ore, cotton, and wool, and the foodstuff was wheat. Between them, these core countries had all they needed except for wool. Although many writers have stated that the industrial revolution depended on the raw materials of the Third World, this is quite untrue. Not until what is sometimes called the second industrial revolution, at the end of the nineteenth century (Schumpeter's Third Kondratiev upswing based on electricity, the motor car and so on), did a big demand for rubber, copper, oil, bauxite, and such materials occur. The Third World's contribution to the industrial revolution of the first half of the nineteenth century was negligible.

The second reason why trade was so small is that the expansion of world trade, which created the international economic order that we are considering, is necessarily an offshoot of the transport revolutions. In this case, the railway was the major element. Before the railway the external trade of Africa or Asia or Latin America was virtually though not completely confined to the seacoasts and rivers; the railway altered this. Although the industrial countries were building railways from 1830 on, the railway did not reach the Third World until the 1860s. The principal reason for this was that, in most countries, railways were financed by borrowing in London — even the North American railways were financed in London — and the Third World did not begin to borrow substantially in London until after 1860. The other revolution in transport was the decline in ocean freights, which followed the substitution of iron for wooden hulls and of steam for sails. Freights began to fall after the middle of the century, but their spectacular downturn came after 1870, when they fell by two-thirds over thirty years.

For all these reasons, the phenomenon we are Exploring — the entry of the tropical countries significantly into world trade — really belongs only to the last quarter of the nineteenth century. It is then that tropical trade began to grow significantly — at about four percent a year in volume. And it is then that the international order that we know today established itself.

Now it is not obvious why the tropics reacted to the industrial revolution by becoming exporters of agricultural products.

As the industrial revolution developed in the leading countries in the first half of the nineteenth century it challenged the rest of the world in two ways. One challenge was to imitate it. The other challenge was to trade. As we have just seen, the trade opportunity was small and was delayed until late in the nineteenth century. But the challenge to imitate and have one's own industrial revolution was immediate. In North America and in Western Europe, a number of countries reacted immediately. Most countries, however, did not, even in Central Europe. This was the point at which the world began to divide into industrial and non-industrial countries.

Why did it happen this way? The example of industrialization would have been easy to follow. The industrial revolution started with the introduction of new technologies in making textiles, mining coal, smelting pig iron, and using steam. The new ideas were ingenious but simple and easy to apply. The capital requirement was remarkably small, except for the cost of building railways, which could be had on loan. There were no great economies of scale, so the skills required for managing a factory or workshop were well within the competence and experience of what we now call the Third World. The technology was available to any country that wanted it, despite...