THIRD WORLD ATTITUDES TOWARD CAPITALISM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R002004490048-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: June 29, 2011
• Sequence Number: 48
• Publication Date: October 22, 1986
• Content Type: MEMO

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EXECUTIVE SEC'TARIAT
ROUTING. JP
DDCI
EXDIR
Compt
OG11DI
p/Exec st4ff
ALA
Amb Dai,16
STAT
xecutive Secretary
22 OCT 86
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SE RET
The L...cto of Central Intelligence
inglon. D. C. 2050
FJICI i ReIstly
4887
22 October 1986
MEMORANDUM FOR: DDI
FROM: DCI
SUBJECT: Third World Attitudes
Toward Capitalism
I agree with your evaluation of the
Pat Kennon paper on Third World Attitudes
Toward Capitalism. I would distribute it
to a wide audience of senior officials who
are involved in US econ I
would have someone like or 25X1
take a look at it for sug!25X1 ons
as to now some detailed and operational
thrust of value might be put into it.
Also, I would have Pete Dailey take a look
at it with that in mind.
William J. Casey
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DDI #04550X/86/1
2 October 1986
NOTE TO: Director of Central Intelligence
Deputy Director of Central Intelligence
SUBJECT: Third World Attitudes Toward Capitalism
first reaction to this paper by ~ 25X1
as that it did not provide enough- 25X1
eta on how we might take advantage of changes
in Third World attitudes toward capitalism.
But I think Pat has developed a useful framework
for thinking about actions that we might take.
I would be inclined to distribute this paper
to a fairly wide audience of senior officials
who are involved in US economic policy. I am
uncertain whether it would be more useful in
its current form or as a finished document.
Ma-rd J. Kerr
Deputy Director for Intelligence
Attachment:
DDI #04550X/86, dtd 30 Sep 1986
Central Intelligence Agency
Office of the Deputy Director for Intelligence
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DDI? L20*
3 0 SEP 1986
MEMORANDUM FOR: Director of Central Intelligence
Deputy Director of Central Intelligence
Deputy Director for Intelligence
Associate Deputy Director for Inte igenc~
SUBJECT: Third World Attitudes Toward Capitalism
1. Action: Request that you review the attached think
piece on ci-Fang ng Third World attitudes toward capitalism and
determine whether you would like to send it to anyone.
25X1
25X1
2. Background: The report was prepared by in 25X1
response to your interest in the issue of how the Wes can best
compete with the Soviets in the Third World. The report is more
of a think piece along the lines of the one 0 did on structural 25X1
change about a year ago. We will be integrating many of his
ideas into the Third World opportunities study which we expect to
have ready in early December. 25X1
Attachment:
As stated
All portions Secret
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2 9 SEP 1986
NEW ATTITUDES TOWARD CAPITALISM: A WINDOW OF OPPORTUNITY
IN THE THIRD WORLD AND A STRATEGY FOR TAKING ADVANTAGE OF IT
The world intellectual climate is more favorable today for
capitalism, free enterprise, and the market system than at any
time during the past fifty years. The new popularity of
capitalism, however, will not automatically result in gains for
the United States nor in losses for the Communist Bloc. Unless
policymakers have a clear understanding of what the new climate
is--and, equally important, what is not--why it arose and why it
will eventually weaken, a unique opportunity may be lost. This
loss is all the more probable because taking advantage of the
opportunity to its fullest could entail serious short-term costs
for some sectors of the US economy. Opposition from vested
interests, both here and abroad, will be strong. Moreover,
despite a growing rejection of Marxist economics that has now
become almost total, the Communist system will continue to
provide powerful political and military attractions for the less
stable countries of the Third World.
This paper, frankly speculative, is based on a study of
Third World attitudes as revealed in: (1) USIA and other polls;
(2) publications assessing business conditions in foreign
countries for international investors; and (3) a wide range of
Third World newspapers and magazines. The information so
obtained is sketchy, sometimes inconsistent, and flavored by the
biases of the original writers. Nevertheless, we believe that
this body of information, taken as a whole, indicates a sharp and
continuing change in popular and elite attitudes towards economic
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organization.
A Sea Change in Attitudes
In the middle of the last century, Karl Marx elaborated a
"historical law" whereby socialism would "inevitably" replace
capitalism. Until recently, both advocates and opponents of
economic statism suspected that Marx might have been at least
half right. Although rigid Soviet-style collectivism was already
beginning to lose its luster, democratic socialism, the welfare
state, and Third-World variants of all of these seemed to be the
wave of the future. Even in Third World countries where the
market system was firmly entrenched, leaders found it expedient
to give lipservice to socialism. Public opinion polls indicated
that both elites and masses found capitalism and free enterprise
distasteful if not actually evil. Nationalization and evermore
extensive government control were the preferred answers to all
economic problems.
The picture is very different today. State-owned firms are
being "privatized" from Brazil to Bangladesh, from Mexico to
Malasia, from Turkey to Tanzania. The few polls we have indicate
that privatization is generally popular and that the private
sector is being seen with increasing respect. Public leaders who
once pretended that their countries were more socialist than was
actually the case now pretend that their countries are more
capitalist. India, for many the premier nation of the Third
World, and China, the world's largest Communist state, are both
seen as increasingly enthusiastic converts to the market
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system. Even the Organization of African unity has agreed that
"the positive role of the private sector is to be encouraged.'
In Western Europe Socialists are pushing deregulation, and in
Eastern Europe Communist leaders are speaking up for "market
solutions." "Structural reform", a code-word for drastic cutback
in the economic influence of the state, has replaced statism as
the panacea for economic and social ills.
Characteristics of the Change
It would be a mistake, however, to assume that the new
attitude towards capitalism--especially in the Third World--is a
blanket endorsement of the US economic system or of US economic
policies. Based on limited polling data and a reading of the
Third World press, it appears that Japan is more favored as an
economic model than the United States. (Apparently, no one
favors the USSR as an economic model, including those elements of
the Third World press that defend it in all other realms.) It
may be that the experience of Japan--which was an LDC within the
memory of many living Third World policymakers--seems more
relevant because of the level from which Japan started and the
speed with which it progressed. South Korea is also cited as a
model, though less frequently.
Perhaps because of the Japanese example, government is not
considered an enemy of capitalism. Although much Third World
opinion supports privatization and is scornful of the corruption
and inefficiency associated with state enterprises, there is a
general feeling that the state should "direct" the economy and
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"work with" the private sector. Indeed, government-private
sector cooperation is often cited as the key to the economic
success of Japan, South Korea, Taiwan, and Singapore as well as
the earlier and now faded "miracles" of Brazil and Mexico.
A variety of sources indicate that Third World public
opinion increasingly supports foreign investment. (In this
respect, the people may be ahead of the leadership in many
countries.) At the same time, many apparently feel that foreign
investment should operate within a framework set by the state or
negotiated between states. Moreover, most believe that certain
sectors of the economy should be set aside for domestic
investors. Although some potential foreign investors are favored
over others--Japan, the United States, and France being among the
favorites--the idea of "balancing" investors appears to be more
popular with governments than with the public as a whole. Public
opinion often seems to favor a "partnership" with a single more
powerful country.
In summary, a worldwide shift in popular attitudes in favor
of capitalism and against statism is under way. In the Third
World, the shift is characterized by:
o An admiration for Japan and the other East Asian success
o A belief that most parastatals are inefficient and
corrupt and drags on the economy.
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o A concern that some "strategic" industries should remain
under government control and probably under government
ownership.
o A belief that private enterprise is most successful when
it works with and is directed in a general way by a wise
government (such as that of Japan).
o A belief that foreign investment works best when it is
in the context of an agreement between governments.
The characteristics of the shift differ from country to country
and from group to group and are still evolving.
Reasons for the Change
Why did this shift in attitudes happen? Not because the
world suddenly studied the problem, marshalled the facts, and
became intellectually convinced of capitalism's superiority. All
of the arguments for capitalism and against statism had been
known--and rejected--for decades. Nor was it from an objective
comparison of the records of capitalist and socialist
economies. Such comparisons have long been commonplace, but
whereas once public opinion explained away the successes of the
United States and made excuses for the failures of the Soviet
Union, now public opinion ignores the continuing problems of such
aggressively capitalist nations as the United Kingdom and Chile
and focusses on US and East Asian successes. At present, the new
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attitudes are based on faith and fad. If the new attitudes are
to become permanent, the faith must be justified before the fad
dies.
The Influence of the "Future"
Just as the Nineteenth Century was the age of laissez-faire
capitalism, so the Twentieth Century is an age of social
revolution. The first twentyfive years of this century--which
saw profound revolutions not only in Russia but also in China,
Mexico, Persia, and Turkey as well as attempted revolutions from
India to Morocco, from Brazil to Berlin to Budapest--set the tone
for the years to follow. Not that revolutions were always
successful--usually they were not--but they defined the
questions, the hopes, the fears, and the philosophies of several
generations. From student cafes to government ministries talk
centered around such questions as: Revolution or reform? Stalin
or Trotsky? Communism or Fascism? Has the working class been
coopted? Is the New Deal too late? Will Marx be proven right in
the Third World? Can capitalism survive?
These questions now seem as "old Hat," as far from present-
day reality as the theological disputes of the Middle Ages. They
are increasingly the domain of aging professors, tired hacks from
major parties, and crazed ideologues from minor parties. These
questions, and their answers, are not so much right or wrong as
uninteresting, out of style. What does Lenin have to do with
microchips? Or Revolution with the rise of Japan? The feeling
is that the Twentyfirst Century is almost here--and whatever it
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turns out to be, it will not be the age of social revolution!
Like many other intellectual trends, the new popularity of
capitalism seems to have begun in Paris. Possibly it started
with jean Jacques Servan-Schreiber, whose book The American
Challenge, published in 1967, told Frenchmen that the forces that
were changing the world had nothing to do with revolution and
everything to do with capitalist economics. This was followed in
1970 by Jean-Francois Revel's Without Marx or Jesus and the works
of the French "New Philosophers". The hidden message of all
these works was that statism, Marxism, and revolution were "the
wave of the past." And no Third World intellectual wants to
concern himself with what the Paris intelligencia considers
passe.
The Influence of Hard Times
It is significant that the turn toward capitalism came just
as much of the world was suffering recession. Part of this is
easily explicable. Countries seeking foreign loans have every
incentive to take some steps toward limiting the government role
and to promise still more. When dealing with bankers and the
IMF, it pays to talk like a born-again capitalist. The leaders
of the major Third World debtor nations know this and act
accordingly. What is less obviously explicable is the public
approbation that generally meets these moves. In country after
country, organized labor makes only token protests as real wages
plummet and even the leftist press speaks in terms of "austerity"
and "responsibility." Cuts in food and transportation subsidies,
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which often create riots even in times of prosperity, seem to
have become less sensitive. The big story in many LDCs is "the
riot that didn't happen."
All of this bespeaks a certain sobriety that hard times
bring to ordinary people. It appears that, when times are good,
those who do not share the general prosperity feel cheated and
look to the state to redress the balance and those who prosper
feel uneasy and assuage their guilt by upholding leftist
causes. Populists appeal to both groups. When times are bad,
however, there is a growing realization that hard measures must
be taken. The workers, already suffering, want to assure
themselves that their suffering will have a payoff. The not-so-
poor, feeling that they may be the next victims of the economic
decline, want something done before it is too late. Populist
rhetoric does not ring true and soon dies down, while leaders who
promise work and sacrifice--for a purpose, of course--are
applauded as realistic.*
In most Third world countries there is a basic stratum of
free enterprise "penny capitalism" that is submerged in times of
prosperity and comes to the forefront in times of hardship. This
stratum constitutes the family background of almost all Third
World urbanites, except the highest political and commercial
elites. Small merchants, market women, shoeshine boys, cab
wte-spite conventional wisdom to the con rary, the Historical
record shows both popular agitation and the appeal of extreme
left-wing movements tend to die down during times of economic
hardship. Communism's greatest popularity in the developed
countries, for example, came during the booming 1920s, not during
the depressed 1930s.
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drivers, free-lance artisans, self-taught carpenters and
plumbers, these are the people who remain when factories are
closing and bureaucrats are losing their jobs. These people,
from their own experience, have an intuitive understanding of the
connection between hard work and prosperity, between saving and
wealth, between spending and saving. When times are good, they
are quite willing to take whatever "magical" benefits the free-
spending state has to give. When times are bad, however, they
are realistic enough to know why.
A First Step
The first step in taking advantage of the new attitude
towards capitalism should be an appeal to the penny capitalist
sector. These people are attuned to local needs and are used to
making a buck under local conditions. They are hard working,
ingenious, and have a thoroughgoing respect for the profit
motive. They are also undereducated and sometimes dishonest by
developed world standards. Though forced by circumstances to
think small, they are capable of thinking big--many of the Third
World's most dynamic businessmen had their origins in the penny
capitalist sector.
Reaching these people with the proper proposals will be
difficult. US businessmen have no dealings with them. They
belong to no local Chamber of Commerce. They are not on the list
of contacts of the Commercial Attache. Perhaps it would be esier
to-attract them than to seek them out. If the proper combination
of financing and technology to fit a local need were known to be
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available, these people would probably come forth with their own
proposals. These proposals should be carefully studied--the
penny capitalist sector is the source of con-men as well as
entrepreneurs--and only those accepted that use local knowledge
to take the concept farther than originally envisioned by its US
sponsors. The local entrepreneur must bring his own ideas to the
project if it is to be truly successful.
Neither the US government nor US businessmen are used to
working in this environment, and the natural tendency to rely on
old patterns of thought must be avoided. This is not a Peace
Corps-type exercise to better people's lives by introducing new
seeds or hoes with longer handles, nor is it a typical business
operation to set up a local plant to take advantage of a local
market. It is not intended to garner good will for the United
States or profits for US businesses. It is intended to
stregnthen indigenous capitalism in the Third World by combining
US technology and financing with local knowledge and ambition,
thereby raising local living standards and helping to counter
extremist ideologies.
The End of the Era of Materials
A second, more ambitious, step is also possible. The world
economy is changing rapidly and in ways that are often
unpredictable, and in these circumstances the capitalist nations-
-or at least some of them--are in a better position to ride the
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wave of the future than are the rigid, unresponsive command
economies of the Communist Bloc. This change, which promises to
be as profound as the Industrial Revolution, will wreak havoc not
only among Communist and Third World nations but also in many
capitalist countries. Changes of this magnitude cannot be tamed
just by mouthing the right slogans or passing the right laws. In
the Twentyfirst Century, capitalism will be a necessary but not
sufficient condition for economic wellbeing; a country must also
have intelligence, adaptability, and luck. Some Third World
countries may make the grade; some developed nations may not.
Larson, Ross, and Williams, in their epochal article "Beyond
the Era of Materials" (Scientific American; June 1986), establish
that the industrial countries "are now leaving the Era of
Materials, which spanned the two centuries following the advent
of the Industrial Revolution, and are moving into a new era in
which the level of materials will no longer be an important
indicator of economic progress." They give four reasons for
this: (1) substitution of common for rare materials; (2)
increased efficiency of materials use; (3) saturation of markets;
and (4) the low materials content of evolving new markets. They
believe that market saturation is the most important of these
reasons and argue persuasively that replacement and maintenance
of established networks of housing, factories, roads, etc--even
on a massive scale as in Europe and Japan after World War II--
cannot provide the kind of long-term economic stimulus that was
provided by their initial creation.
The implications of the end of the era of materials are
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profound and far-reaching:
o The real value of most commodities will continue to
decline, with predictable results for those countries
and regions that depend on commodity exports. This
affects everything from Russian oil to Zambian copper to
Kansas wheat.
o Countries without strong resource bases, such as Japan
and Taiwan, are no longer at a disadvantage to other
nations.
o The remaining unsaturated markets for the broad range of
material goods are all in the Third World or the
Communist Bloc--and effective demand from these
countries is reduced because of the low earnings of
their commodity exports.
o In a saturated market, protectionism and export
subsidies can at best slow the decline of a materials-
based industry. This is equally true of Japanese
shipyards, European farms, and American auto plants.
o As the cost of materials in any given product declines
relative to that of labor, the tendency for basic
industry to relocate in low-cost countries will
intensify.
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o Those developed nations that continue to emphasize basic
industry will stagnate or decline. This will even be
true of countries such as the United Kingdom and West
Germany--whether ruled by socialists or free-enterprise
conservatives--to the extent that they continue to rely
upon steel, oil, automobiles, and basic chemicals.
Taking The Second Step
Some benefits for the West will accrue from the first
step. Still others will come automatically from the current
shift in attitudes, but these benefits may not be profound or
long lasting.* Indeed, they may not survive the next development
of French philosophy or the next round of "easy" prosperity. If
permanent benefits are to be derived, the Western powers must
actively take advantage of this limited window of opportunity.
Luckily, the West--and especially the United States--is well
equipped to take such advantage.
In our opinion, the best results with regard to any
particular Third World country can be obtained by following a
four-point strategy. First, work with the trend, not against
it. Second, create new elites because the old elites, with few
exceptions, are too enmeshed in the old way of doing things to be
Although the shift to a post-industrial world that favors the
market system and capitalist organization is probably unstopable,
the recent popularity of capitalism depends in large part on
changeable intellectual currents that have only a loose
connection with real-world economic life.
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part of a new capitalist revolution. Third, tame the many and f1P
varied vested interests against the change. Finally, coopt artfd
masses by bringing them a level of benefits clearly not
obtainable under the old system. This strategy will depend
heavily on the cooperation of the private sector in the developed
countries and on the large multinational corporations in
particular. Putting such a strategy into effect will not be
easy, but it does offer great prospects for success.
Working With the Trend
The most important trend to take advantage of is the shift
of basic industry from the developed countries to selected
countries of the Third World. Despite developed nation policies--
based on job concern, strategic concern, or simple fear of
"deindustrialization"--intended to stop this shift, the transfer
of smokestack industry is accelerating. Manufacturing in the
United States, for example, which provided 30 percent of national
income in 1960, provides only 21 percent today. Many Western
firms have little choice; they can shift a part of their
production to the Third World, they can go bankrupt, or they can
hide behind ever more expensive tariffs and quotas. As there is
little or no possibility of successfully bucking this trend,
Western governments should attempt to guide and use the trend to
facilitate a wide range of political and economic objectives.
The development of a new capitalist basic industry sector in
selected LDCs would be profitable for both sides. What the
United States should offer Mexico and Brazil (or France should
offer Algeria, or Germany Turkey, or Japan India) is the
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opportunity to become major industrial powers, supplying the bulk
of basic industrial goods not only to the saturated markets of
the developed world but also to still unsaturated regional
markets in the Third World. What the United States (or France,
or Germany, or Japan) should demand in return are: (1) a degree
of control through private-sector joint ventures and other
relationships sufficient to insure acceptable levels of quality
and security of supply; (2) an understanding, such as the United
States has with Panama concerning the Canal, that in times of war
or other emergency a new set of rules would come into play; (3)
political stability and compatability; and (4) a commitment on
the part of the host country to promote a similar shift of some
of its own low-tech industry (i.e. textiles, etc.) to its less-
advanced neighbors so that these neighbors can earn foreign
currency to buy basic industrial goods from the more advanced
LDCs.
Obviously, the creation of the new capitalist sector will
require decades to accomplish. Within the context of agreed-upon
goals, progress would have to be piecemeal. Infrastructure would
have to be developed, workers trained, technology adapted in the
developing country. In the developed country, workers would have
to be retrained and factories retooled for higher-technology
applications. In most cases, the pace of the shift could
probably be left to the economic decisions of the private firms
involved and their Third World partners. As subsidies and other
protective measures are removed, each country would produce at
its most efficient (and profitable) level of technology. Most
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very high tech production would remain in the developed countries
for the foreseeable future.
Although the effort would be primarily directed and financed
by the private sector, Third World governments would have to be
brought on board for several reasons. First and foremost, public
opinion in the Third World believes that government should have a
say in economic matters. Second, governments must provide the
political stability and compatability needed to gain the trust of
the developed nations and the private firms involved. Finally,
an antagonistic government--even if weak--could effectively
prevent the shift from taking place. In dealing with Third World
governments, the developed country government should concern
itself only with what is most important--honesty, efficiency,
predictability, stability--and not worry about historical and
philosophical differences.
Creating New Elites
Typically, in the Third World the public sector is used to
huge losses and the private sector is equally used to huge--if
insecure--profits. The one has no real deadlines for "building
the nation," and the other requires a 100 percent gain in twelve
months or it won't risk its money. Both sectors are more skilled
at working around problems than solving them, more skilled at
taking advantage of government policies than of economic
opportunities, more inclined to rely on contacts and influence
than on good ideas and hard work. If a viable new capitalist
sector is to be created, a new elite is needed. Without such a
new elite, the new sector will remain nothing more than a
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developed-country "colony" in an otherwise underdeveloped
country.
We believe that the required new elite, given the proper
incentives, will be self-selecting; One source of the new elite
will be the penny capitalist sector. Another source may be the
lower and middle management--down to shop foremen--of the
relocated industry. It is only necessary to promote rapidly and
reward lavishly those employees who consistently solve problems
and come up with effective ideas. Small promotions and piddling
rewards will not do the job; the right man should have the
opportunity to rise from the shopfloor to the board room in ten
years. Any slower pace will not serve to create an elite. It is
equally important not to make token promotions, even token
promotions to the board room, of people whose only attributes are
English language ability, company loyalty, or family connections.
Another source of recruits for the new elite may be the
relocated industry's local suppliers. Here again, results should
be rewarded. Local suppliers who consistently supply high-
quality goods and services within fixed deadlines should not only
get the relocated company's business, they should get loans and
technical advice that will allow them to expand. The owners of
these firms should have at least as good an opportunity to get
rich as the influence peddlers and political fixers of the old
elite.
For the new elite to function as an elite, it must have a
certain critical mass. The group must be large enough so that
members can support each other, maintain their status against
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other elites, and recruit new members. Although too much
visibility can be counterproductive, even dangerous in some
countries, the new elite must have enough visibility to influence
on non-elite thinking. The entrepeneur should become as
acceptable to a role-model as the politician or the narcotics
kingpin. Public opinion, as we have shown, is increasingly
accepting capitalism as the wave of the future; it should be more
than ready to accept the new elite as the bearers of that future.
Taming Vested Interests
The creation of new elites is a difficult, but necessary
part of the strategy, because vested interests on every side will
be trying to limit the new capitalist sector. Leaving aside
vested interests in developed nations--which are many and
powerful--there are at least four groups of vested interests in
the developing nations: the political authorities; the management
and workers of the state sector; the nationalists, often
including the armed forces; and the private businessmen and their
employees. Given the change in attitudes towards capitalism, all
of these groups except the nationalists will probably give a
degree of lipservice to privatization and economic freedom; all,
however, will also fear rapid moves in that direction.
It is important to allay the fears of the political
authorities. Most Third World governments are extremely weak,
and their primary political task--from the point of view of the
leadership--is not to diffuse power to the people but to amass
enough power in the state to avoid anarchy. Thus, the political
leadership, even if it does not have a statist economic ideology,
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will fear the creation of a strong private sector that could
become a rival center of political power. To allay these fears,
it may be advisable initially to establish the relocated
industries in enclaves or free-trade zones well away from the
capital or other politically sensitive areas of the country. In
any event, it should be made clear that the new capitalist sector
has no intention of mounting a political challenge to the
government.
The parastatals fall into three groups: those companies that
the state is highly unlikely to give up, i.e. communications,
perhaps oil and mining; those companies that the private sector
does not want, i.e. antiquated steel mills and the like; and
those companies that are profitable under government management
but have no strategic importance, i.e. hotel chains, perhaps
airlines. Going with the trend, the state should be encouraged
to maintain its control over the first category of parastatals--
it is going to do this anyway--while making them more efficient
and divesting some ancillary operations. If properly handled,
the divestment could give profitable opportunities to part of the
management and workforce of the parastatal--and thereby create
supporters of privatization. The government should also be
encouraged to close the clearly failed parastatals, with the new
capitalist sector offering to create new industry in the same
geographic area. The profitable non-strategic parastatals could
become a part of the new capitalist sector, perhaps through debt-
equity swaps, with the original management and workforce
remaining in place for a period of time.
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The nationalists, whose interest in the issue is patriotic
or ideological rather than material, cannot be completely
tamed. In time, if the new capitalist sector is successful in
bringing prosperity to the nation and creating a domesttic elite,
the nationalism issue may take care of itself. In the interval,
the new capitalist sector can lower its profile by publicly
stating that it has no interest in taking over strategic
industries--however defined--nor in influencing the course of
domestic politics.
The domestic private sector, which may be nearly as corrupt
and inefficient as the state sector, is in many respects the
natural enemy of the new capitalist sector. These high-markup,
low-volume firms often exist only by virtue of protective
measures (if producing for the domestic market) or by direct or
indirect subsidies (if producing for export). They could not
survive in the regulatory climate necessary for the new
capitalist sector. Often the loudest proponests of laissez-faire
capitalism in the abstract, these domestic big businessmen will
use all their influence to keep it from happening in practice.
Some few may have the attitudes and talent to join or even to
lead, the new capitalist sector, but others will continue to block
economic progress until they go under. In most Third World
countries, however,they are an isolated group and unlikely to
find allies among other elements of the domestic elite.
Coopting the Masses
Many years will have to pass before relocated basic industry
and its suppliers will be in a position to supply jobs for the
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masses of people in the Third World. Indeed, an early effect of
industrial relocation may be the worsening of unemployment in the
immediate area, because of the internal migration of job-
seekers. In order to maintain and enlarge the consensus for the
opening of capitalism, visible benefits must accrue both to
workers in the new capitalist sector and to those left outside.
Within the new capitalist sector, the support of the
workforce can generally be obtained through good wages, decent
working conditions, and exceptional opportunity for advancement
for talented workers. In some countries unions can be helpful in
this regard; in others the union mentality would be so adverse to
the new initiatives that a union-free workplace would be worth
fighting for. There are a number of mistakes to be avoided:
o Do not try to gain favor by featherbedding or using
excessivly labor-intensive methods. More points can be
gained by creating a profitable, state-of-the-art
industry than by sopping up unskilled labor.
o Be very selective in the use of profit-sharing or
employee-ownership programs. In many Third World
countries, such plans are regarded as "dodges" to avoid
paying "just" wages.
o Do not insist on cultural norms that have nothing to do
with getting the job done. Mexican workers, for
example, have rebelled against exercise groups and
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common worker-manager mess halls that Japanese firms
have tried to institute.
In general, local customs should be followed--but not to the
point where they interfere with productivity.
The bulk of the population outside the new capitalist sector
can still benefit. The increase in local national prosperity
created by the industrial shift will increase jobs in.
construction, retailing, and personal services. Government
infrastructure projects--better education, roads, airports, power
grid expansions--that the new capitalist sector will demand and
pay for through its taxes, will benefit the population as a
whole. Perhaps most important in coopting the masses will be a
new sense of pride that their country is now "one of the big
boys," exporting high-quality products around the world.
The Rest of the Third-World
It is only to be expected that the industrial shift will
intensify divisions that already exist within the Third World.
The initial industrial shift will benefit those countries on the
Pacific rim and in parts of Latin America, South Asia, and North
Africa where the process is already under way. Most of the other
Third World countries, lacking suitable workforce or
infrastructure, will initially have little to offer the developed
world. As the process progresses, however, commodity producers
should profit from increased raw-material demand as the new
capitalist sector takes hold in the NICs. Over the longer run,
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some of these countries will be able to take over the low-tech
assembly and other manufacturing now being done in the more
advanced LDCs.
Unfortunately, some LDCs probably will not benefit from the
industrial shift in any way. Some will prove inhospitable to the
new capitalist sector because of nationalism, ideology, or simple
fear of losing control. In others, problems of infrastructure
and workforce will inhibit the transfer of even low-tech
assembly-type industry from the more advanced LDCs. Both of
these groups may find themselves falling out of the world
economy. They may be forced into a kind of primitive autarky,
ameliorated only by tourism, some handicrafts, and limited
exports of raw materials. Even in their autarky, however, these
countries can benefit from the transfer of appropriate technology
to their penny capitalist sectors from the West. Such technology
will not relink them with the world economy but will aid their
domestic economies and improve the lives of their people.
The Continuing Soviet Challenge
The new attitude towards capitalism--reflecting as it does a
major structural change that is under way in the world economy--
will provide political opportunities for the capitalist
countries. It will not, however, undermine one of the greatest
attractions of the Communist system--the promise of political
control. The Soviets have long since ceased to compete with the
West in terms of economic progress or quality of life. What they
and their East German intelligence advisors and Cuban
presidential guards offer the Third World is a defense against
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anarchy. The closer anarchy lies below the national surface, the
more appeal the Communist system will have. In this respect,
Ethiopia--a state of rebellion pretending to be a nation--
provides greater opportunities for the Soviets than, say,
Venezuela or Thailand.
To the extent that establishment of the new economic sector
demands--or appears to demand--increased political liberalization
relative to the norm of the country involved, we can expect that
its establishment will be resisted. Some countries may attempt
to combine capitalist economics with Communist politics in an
effort to achieve prosperity with control. We see elements of
this approach from Hungary and China to Mozambique. Others may
seek non-Communist authoritation solutions similar to those of
the East Asian and Latin American NICs. Still others may
deliberately choose control over prosperity. We should not
underestimate the appeal of the Communist police-state to
political and military elites who fear being swept away by a tide
of tribalism, regionalism, class conflict, and intra-elite
rivalries.
Conclusion
Recent world-wide intellectual currents favoring capitalism,
though shallow, reflect important structural changes that are
taking place in the world economy. While these more favorable
attitudes will fade as intellectual fashions change, we expect
the structural changes to continue and intensify. At present,
the developed capitalist countries are in a position to use the
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window provided by new attitudes to direct the change in a way
that will: (1) protect the strategic interests of the developed
countries; (2) create a firm base for prosperity and capitalist
organization in selected Third World countries, thereby firmly
linking these countries to the capitalist world; (3) spread
lesser but still important benefits to other, less-advanced LDCs;
and (4) counter, to some extent at least, the attraction
Communist police-state methods hold for fearful Third World
governments. The first step would be to strengthen local
capitalism by providing suitable technology and financing to
entrepreneurs from the penny capitalist sector.
The second step consists of a four-point strategy of going
with the trend, creating new elites, taming vested interests, and
coopting the masses. We believe this strategy is well based,
considering the following facts:
o A shift of basic industry to the Third World is taking
place. Those countries, developed and developing alike,
that adapt to the shift will prosper; those that fight
it will suffer. Just as New England's present high tech
prosperity is in part the result of the migration of its
textile industry to the South and overseas, so too will
the developed countries prosper in the post-industrial
world to the extent that they cede basic industry to the
Third World. MITI has already suggested that it should
be official Japanese policy to cede steel, aluminum, and
textiles to other countries.
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o Previous manufacturing ventures in the Third World have
been largely aimed at the internal market. To the
extent that these firms were foreign-owned and directed,
they did little to foster capitalist growth and were
often resented as examples of "neocolonialism." To the
extent that the firms were locally owned and directed,
they often produced inferior goods at high prices and
gave "import substitution" the bad reputation that it has
among economists in the developed and (increasingly) the
developing worlds. This type of industrial transfer has
few advocates today.
o The present industrial shift--while it retains elements
of the earlier pattern--aims at creating export-oriented
basic industry producing world-class goods through
state-of-the-art techniques. Unlike the situation in
the past, there is no place in the new capitalist sector
for the transfer of antiquated capital equipment that is
no longer suitable for modern industry in the developed
countries.
o Although close connections exist with developed-country
firms, the new capitalist sector is characterized by the
creation of new local elites. This process is most
advanced in the East Asian NICs. Japanese capital and
technology, for example, were necessary for the
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establishment of South Korea's steel industry, but
ownership, management, and industrial strategy quickly
passed into Korean hands. While the speed and
completeness of this process will differ from country to
country, it must eventually take place if the new
capitalist sector is to become a viable force.
0 Given that in the Twentyfirst Century most US steel,
aluminum, basic chemicals, and automobiles will almost
certainly be coming from the Third World, it is to the
US advantage to have a say in the location of relocated
industry and the structure and ownership of the new
industrial firms. Japan's increasing interest in the
Mexican steel industry--obviously aimed at the US
market--is an example of the possible dangers of
unguided structural change.
Governments in both developed and developing nations have
important roles to play in the industrial shift. The developed
country government must be willing to facilitate the shift of
much of its industrial base as part of a long-term plan that
includes non-discriminatory acceptance of the developing
country's production. The developing country must be willing to
create the physical and social infrastructure and the legal
environment in which the new capitalist sector can prosper.
Initially, neither country will be able to fulfill its role
completely because of domestic pressures; in time, however, the
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advantages of the shift should be apparent to both sides and
additional steps less difficult.
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