by Utsa Patnaik
Our example is meant to show how the colonial relationship provided markets for metropolitan products, took away primary commodities (food or other commodities that could be grown on the land used for food production) for the requirements of the metropolitan economy, took away primary commodities to a substantial extent gratis, without any quid pro quo, and even while doing so kept completely in abeyance any effect of increasing supply price, that would normally be associated with meeting larger metropolitan requirements of such commodities, and that would normally pose a serious threat to the value of money in the metropolis.
Of the two instruments we have discussed, deindustrialization caused by imports from the metropolis is easier to comprehend, though mainstream economic theory steadfastly refuses to do so to this day, proclaiming instead the virtues of free trade. The siphoning off of the economic surplus, however, the “drain of surplus,” is less appreciated and less comprehensible. Let us therefore examine it in greater detail.
The Drain of Surplus
The reason why the drain of surplus is not easily comprehended is that the balance of payments must always balance. Hence, if any commodities are taken out of a country, then there must be a matching import into that country of some other commodities or services, or alternatively, of IOUs. How then can we talk of “unrequited exports” from the colony?
The simple answer to this question is that there were a whole range of items shown on the debit side of the current account that were either arbitrarily imposed, such as the metropolitan economy making the colony pay for its wars of conquest in some other part of the world, or arose from the colony’s being governed by the metropolitan country. In the food example in the last section, when 100 units of food that had originally gone to the emperor were taken out of the colony, its new ruler, the metropolitan country, would offset it in the balance of payments by showing that the colony was importing administrative services from it for its own governance, in which case the colony’s balance of payments would be balanced despite its economic surplus being siphoned off.
Conventional accounting obfuscates the drain for two distinct reasons. First, it is incapable of capturing the concept of an economic surplus. Even for the pre-colonial case in the example, conventional accounting would say that taking away 100 units is against the service of governing that the emperor is providing. By conventional national income estimation, the Gross Domestic Product of the country in the pre-colonial situation will be 600 units (including 100 of service rendered by the emperor). And the greater the taxation by the emperor, the greater will be the GDP.
Second, conventional accounting is incapable of grasping that the purpose of colonialism is to extract this surplus; hence, to offset the surplus against the services rendered in the process of extracting it constitutes supreme irony. It is like refusing to recognize the existence of an extortion racket on the grounds that the extortion money that is paid constitutes only the payment for the services of those who have come to collect the extortion money.
There is, as this second point suggests, a fundamental difference between a country’s experience after being colonized and all preceding experience. Not only is the surplus not spent on domestic goods as was the case earlier, thus giving rise to economic retrogression in the colonial economy, in the sense of a shrinking of the level of macroeconomic activity, but the colonial regime’s raison d’être lies in extracting the maximum amount of surplus. It does not simply take away some pre-set magnitude of surplus but adjusts its demands to whatever is available for it to take. As we discuss in subsequent chapters, on the basis of the Indian experience, it was not that some given amount was taken away by the colonial regime in the form of an export surplus (as our example suggested). Rather, the amount taken away adjusted to the export surplus that the country was earning, so that it got no credit whatsoever even when its exports surged relative to imports.
The “drain of surplus,” in other words, did not just mean a replacement of the old set of surplus extractors by a new set, namely the old imperial regime by the new regime of metropolitan capitalism. It also meant the substitution of capitalist rapacity (rationality) for feudal traditionalism and conventionality. The colony did not witness a continuation of surplus appropriation as it had earlier. Rather, it became an appendage to another economy, the metropolitan economy, which was never the case earlier. It is not surprising that modern mass poverty, as we shall see later, arose for the first time in third world economies only after they were colonized.
The Triangular Relationship
The role of colonial markets during the “long nineteenth century,” which stretches until the outbreak of the First World War, was more complex than what the simple example above would suggest. Britain, as the leading capitalist country, allowed the other newly industrializing countries of the time to enter the British market freely and run current surpluses vis-à-vis itself. This was essential for the preservation of the gold standard, for otherwise countries thwarted in their ambition to industrialize would have withdrawn from it, undermining the arrangement that underlay the long Victorian and Edwardian boom. Because of its colonial possessions Britain could do this, however, and even make capital exports to countries such as the United States, with which it had current deficits.
Britain’s colonies such as India had substantial export surpluses with Continental Europe and the United States, and Britain used these export surpluses to settle its own current account deficits with them. and even make capital exports offsetting these with its “drain of surplus” from these colonial countries and also with its sale of goods to these colonial markets.
There are two separate issues to be distinguished here: one is the question of Britain’s balance of payments, and the other is the question of the demand for British goods. Let us take the second issue first. The newly industrializing countries, not surprisingly, were lower-cost producers and could outcompete Britain in most industries by the late nineteenth century. (Some economic historians refer to this phenomenon as the “penalty of the early start”: Britain, having started early now had equipment that was older and gave lower labor productivity.) For Britain, which was losing its home market to these newly industrializing powers, it was necessary to find alternative markets to maintain its level of aggregate demand without resorting to protectionism—which would have started a spate of “beggar-thy-neighbor” policies and undermined the “long boom.” It found these alternative markets in the colonial economies. Hobsbawm describes British exports in the late nineteenth century as being engaged in a “flight to the colonies.” Indeed, India and China were absorbing more than half of total British textile exports by the end of the nineteenth century.2
The colonized economies (or semi-colonized in the case of China) could not protect themselves. On the contrary, when the colonial government in India, purely for revenue reasons, imposed an import duty on cotton cloth at the end of the century, it simultaneously imposed an equivalent excise duty on domestically produced cloth so as to ensure that the domestic producers did not get any “undue advantage.” The colonial and semi-colonial markets were “markets on tap.” Thus British goods unable to hold their own in other markets sought increasing refuge in colonial and semi-colonial markets.
Colonies not only absorbed British goods and settled the British balance of payments, but they also provided the commodity form in which Britain could make its capital exports. Since Britain’s own goods were not much in demand in the newly-industrializing countries, whereas primary commodities from countries like India were, Britain could use goods obtained from the colonies, through the “drain” and also against British exports to their totally unprotected markets, to make its capital exports to the new industrializers. Or putting it differently, Britain appropriated the export surplus that countries like India were earning vis-à-vis the United States and Continental Europe for financing its capital exports to these regions. India, the biggest British colony, had a key role in this triangular arrangement, which we
will examine in subsequent chapters.
The triangular arrangement we have been discussing relates to the heyday of industrial capitalism. But it was not the first triangular arrangement. In the late eighteenth and early nineteenth centuries, Britain was importing a variety of goods from China and had a trade deficit with that country. It had, however, conquered Bengal after the Battle of Plassey, and had started the drain of surplus from that province. It used this drain to finance its deficit with China. For that it was essential that China should be made to have a trade deficit with India. How was this to be ensured?
The solution was found in opium. India was encouraged to produce opium and China was encouraged to consume opium so that Britain’s twin problems of the commodity form in which the surplus could be drained out of Bengal and settling the trade deficit with China could be satisfactorily resolved. When the Chinese emperor objected to this, the Opium Wars were started to open China to opium trade. The colonial relationship in short was not a simple binary relationship between the metropolis and the colony. It was mediated in complex ways, through triangular relationships. We return to these issues in a later chapter.
Two Contrasting Trajectories
The fact that under capitalism some countries moved ahead in terms of per capita income and standard of living while others not only lagged behind but retrogressed can be explained by this dichotomy between the colonies of settlement and the colonies of conquest. Arthur Lewis mentions a figure of 50 million migrants in the massive emigration of population from Europe to the colonies of settlement in the temperate regions in the “long nineteenth century.” This may be on the high side, but there is no doubting that the scale of migration was huge relative to the size of the European population. For Britain, it has been estimated that between the end of the Napoleonic Wars and the First World War, the emigration each year was approximately half the increase in the size of its population.3
Emigration on this scale kept the size of the reserve army of labor restricted, that is, it kept the labor market relatively tight, which permitted real wage increases alongside the increase in labor productivity. Since those who emigrated occupied land at the expense of the original inhabitants and set themselves up as farmers with reasonably high per capita incomes, this raised the “reservation wage” in Europe. It is this, rather than the so-called agricultural revolution, that explains why this migration was a “high-wage migration” (on this more later).
Together with the emigration of European labor, there was also a complementary migration of capital from Europe, above all from England, the largest capital exporter of the time. But such capital exports were largely extracted from the tropical colonies and took the commodity form of tropical goods.4 The surplus extracted from the tropical and semi-tropical colonies was used for capital exports, which led to a diffusion of capitalism into the new settlements. This explains why the colonies retrogressed (via deindustrialization), and the new settlements industrialized (behind tariff walls and by investing beyond their own savings).5
This dichotomy between the two segments of the world would have disappeared if—even though capital did not come from the metropolis to the colonies of conquest, except in the spheres of mines, plantations and trade, that is, except to buttress the colonial pattern of international division of labor—labor had been free to move to the metropolis or to the temperate regions where labor from the metropolis was moving. In fact, the nineteenth century witnessed another major stream of labor migration, which was of Indian indentured labor and Chinese “coolie” labor (we are talking here of the post-slavery labor migration).
Here too according to Lewis,6 about 50 million persons migrated in the “long nineteenth century,” but they migrated to tropical or semi-tropical regions. The two streams of migration, one involving a movement from one temperate region (Europe) to other temperate regions (Canada, United States, Australia), and the other involving a movement from one tropical or sub-tropical region (India, China) to other tropical or sub-tropical regions (Fiji, the West Indies), were kept strictly separate. Tropical labor was not allowed to migrate freely to Europe or to the temperate regions where European labor was migrating. Interestingly, that is still the case, and the effort of labor to break the existing restrictions upon such migration has created a veritable crisis and tragedy, the refugee crisis in Europe, with many migrants dying in the process.
Of the two distinct streams of migration, one was a stream of high-wage migration, and the other a stream of low-wage migration. Lewis, while recognizing that a wage difference existed because the two streams were kept strictly separate, attributes it to the fact that there had been an agricultural revolution in England but not in India or elsewhere in the tropics. This, he argues, raised per capita incomes and hence the “reservation wage” in the former compared to the latter.
Quite apart from the fact that there had been hardly any perceptible increase in per capita food-grain or agricultural output in England that could have raised the “reservation wage,” Lewis’s comparison between the tropics and the temperate regions is fraught with a logical fallacy. If the output produced on an acre of land by an English farmer is to be compared with the output produced on an acre of land by an Indian farmer (to establish that the former’s output was higher and hence the “reservation wage” was correspondingly higher), then the comparison must be for a complete period of production time. But the English farmer’s land would remain fallow during the long winter months, while the Indian farmer would be growing several crops on his land all year-round. Thus, one has to compare not the wheat productivity, nor the productivity of a particular crop, on an identical plot of land by the Indian and the English farmer, but the per capita incomes of the two over the year as a whole.7
Lewis’s argument that the reservation wage of the English emigrant worker was higher than that of the Indian emigrant worker because the productivity of wheat per acre of land of an English farmer was higher than that of the Indian farmer is therefore logically invalid. The Indian farmer did not get any lower income over the year as a whole from an identical plot of land than an English farmer. The annual income is the relevant comparison and on this comparison, the higher wages of the English emigrant workers cannot be explained in the manner that Lewis does.
The reason for the wage difference between the two streams of migration lies elsewhere. Temperate migration was high-wage migration because of the snatching away of land from the indigenous population in the regions to which migration occurred, not because of the high incomes in the regions from which migration occurred. On the other hand, tropical migration was low-wage migration because a vast, destitute reserve army of labor had been created within the tropical colonies on account of the deindustrialization perpetrated on these colonies, owing to the drain of surplus from them, and the displacement of artisans by imports from the metropolis.
Deindustrialization had additional second-order effects on the incomes of the agricultural population, which were already squeezed because of the shift from a tax on produce under the old pre-colonial system to a tax on land under colonialism, making this population come under the grip of money-lenders for paying taxes in bad crop years, money-lenders that gradually acquired land rights. Deindustrialization also raised the pressure of population on land, resulting in a rise in rents and a fall in real wages in the course of the nineteenth century.8
The divergent trajectories between the two parts of the world, one experiencing a diffusion of capitalism and higher wages alongside such diffusion, and the other experiencing deindustrialization, an absolute shrinkage of output, and pauperization of vast segments of the pre-capitalist working population, dates back to the nineteenth century, which saw a divergent impact of metropolitan capitalism upon these two parts.
The Roots of Modern Mass Poverty
The roots of modern mass poverty in the third world go back to the impact of metropolitan capitalism on the tropical and semi-tropical colonies and dependencies. There is a common miscon
ception that the third world has always been afflicted by poverty, because of its low labor productivity that has continued to this day because it has not benefited from the Industrial Revolution as the advanced capitalist world has done. According to this conception, all countries started from a more or less similar situation of economic backwardness, but some, belonging to the metropolis, forged ahead because of their industrial revolution; others belonging to the third world stayed where they were because they could not experience such an industrial revolution.
This conception is flawed in at least three important senses. The first, which has been much discussed following Paul Baran’s pioneering work, The Political Economy of Growth,9 is that though it is true that the West first developed capitalism and forged ahead with an Industrial Revolution, countries that did not develop capitalism could nonetheless have done so in emulation of the West, and ushered in an industrial revolution of their own as did Japan, the only major Asian country that escaped the tentacles of colonialism. What stood in the way of the backward economies developing their own “capitalism from above” through state initiatives, as in Japan, was colonialism itself, which imposed on them both a pattern of international division of labor in which they remained primary wage goods and raw material producers, and a massive drain of surplus from their economies.10
Second, the impact of colonialism was actually to reduce the per capita incomes in the colonized countries and dependencies. This immediately followed from deindustrialization, which marked all these countries, from India to China to Indonesia and others. Indeed, an interesting empirical estimate for India by Shireen Moosvi using the conventional definition of national income, where the colonial government’s “services,” as indeed of the pre-colonial Mughal emperor Akbar, are counted as part of national income, shows that the real per capita income between 1576 and 1910, underwent an actual decline.11 Hence the picture of all countries starting from a more or less similar situation and some forging ahead while others stayed where they were is wrong: those who forged ahead gave the others a kick backwards.