The commodity supercycle of the 2000s and 2010s gave rise to a rich debate in the academic literature about the potential for resource-rich countries to take advantage of the primary commodity price bonanza to support their development. As in past debates on the rise of Asia as the “world’s factory,” industrial policy was at the forefront of this discussion.
Author
Franco Galdini
Franco Galdini is an ESRC postdoctoral fellow in the Department of Politics at The University of Manchester.
On the one hand, orthodox scholars insisted that the use of market distortions to channel resources toward industrialization would be a risky gamble with little guarantee of success. Instead, they argued, developing countries—like the Asian “tigers” and China before them—would do well to use the market to identify their comparative advantages. In this view, industrial policy continues to be inefficient and wasteful, especially as it creates plenty of opportunities for corruption rather than development.
On the other hand, heterodox researchers argued that state intervention was crucial to divert resource rents to specific nascent industries that would never be able to withstand international competition without sustained support. Just as both the Asian “tigers” and China had more recently used robust industrial policy to develop globally competitive industries, developing countries should use targeted policy interventions to “upgrade” to higher-value-added manufacturing for export.
Still, one question that both the orthodox and the heterodox literature cannot answer is why, for decades, multinational corporations (MNCs) consistently invested in manufacturing in such resource-rich countries as Argentina, Brazil, and Egypt. This remained true despite the small scale and high costs of production in these markets (making them inefficient, per orthodox scholars), whose output is mostly sold domestically rather than exported (pace heterodox scholars).
In a recently published open access article in Competition & Change, I applied Argentinian scholar Juan Iñigo Carrera’s original elaboration on Marx to the under-researched case study of the car industry in Uzbekistan to answer precisely this question. I found that this orthodox-heterodox binary also dominated the literature on “transition” from the command economy to a market economy in Uzbekistan. Orthodox researchers averred that state-owned auto company UzAvtoSanoat had failed to develop due to inefficiency and corruption, particularly the distortions of the government’s industrial policy. Heterodox scholars instead found industrial policy to be the very reason for the creation of a successful export-oriented car industry, in particular during the commodity supercycle, when some output was exported mostly to Russia. Neither, however, could explain why the Korean Daewoo Motor Company (DMC) and the American General Motors (GM) entered into joint ventures with UzAvtoSanoat despite the small domestic scale (hence high costs) of automobile production in the country, which is mostly purchased domestically.
One of Iñigo Carrera’s crucial discoveries is that resource-rich countries—that is, countries such as his native Argentina that mainly participate in the global economy as exporters of raw materials—are sources of appropriation of ground-rent. Although the latter concept may sound arcane to the contemporary ear, it used to be a staple of classical political economy. While extremely complex, Marx’s elegant solution to “the shitty rent business” consisted in understanding that, instead of being regulated by “normal” competitive conditions, whereby the most productive capitalist firms establish the prices of commodities, the prices of raw materials are regulated by marginal conditions, as prices must rise to encapsulate a ground—i.e., land—rent for the worst (“marginal”) land whose production is justified by solvent demand. After all, not even the landlords of the worst land in production would allow raw materials to be extracted from their land without being paid a rent for this.
Consequently, the sale of primary commodities on the world market results in social wealth—ground-rent—flowing into the resource-rich countries exporting these commodities. Crucially, Iñigo Carrera identified a number of specific policies put in place by the national state of resource-rich countries in order to appropriate and allocate this flow of ground-rent. For example, the state often purchases raw materials at below-market prices domestically in order to sell them at international prices on the world market. The difference—i.e., ground-rent—is then used to (in)directly subsidize manufacturing firms operating in the domestic market, including via the provision of cheap credit by state-owned and commercial banks. Simultaneously, state enterprises in these economies can provide cheap inputs—including energy—to industrial firms and the general population, lowering the cost of living and thus increasing the purchasing power of the labor force, which is therefore able to buy relatively expensive goods manufactured domestically. Finally, the overvaluation of the national currency allows industrial firms to import parts, components, and machinery at subsidized rates.
Industrial manufacturing firms in resource-rich countries tend to be small in size and to use what is, by world-market standards, obsolete technology. Following Iñigo Carrera, I call this “backward” industrialization.
These multiple forms of (ground-rent) subsidization as mediated by the national state enable manufacturing firms in resource-rich countries to stay in business. As a result, they tend to operate and sell most of their output within the limited scale of the protected domestic market. This is equally true of MNCs and their subsidiaries, which can take advantage of this barrage of benefits and subsidies to valorize small-scale investments (by world-market standards) in these countries. Specifically, the overvalued currencies in these countries enable MNCs to subsidize the import of machinery obsolete for world-market production in order to manufacture relatively old and expensive goods for domestic consumption rather than export. This explains their sustained involvement in resource-rich countries, an answer that has eluded orthodox and heterodox scholars alike. As such, industrial manufacturing firms in these countries, regardless of “nationality,” tend to be small in size and to use what is, by world-market standards, obsolete technology. Following Iñigo Carrera, I call this “backward” industrialization.
The car industry in Uzbekistan epitomizes this “backward” form of industrialization. As a cotton and, increasingly, gold and natural gas exporter, the Uzbek state has mediated the inflow of ground-rent to its territory using many of the same policies found in other resource-rich countries. As a result, manufacturing firms in Uzbekistan have also been small and used obsolete technology, as the car industry’s joint venture (JV) with leading MNCs clearly demonstrates. The authorized capital for UzDaewooAvto—the JV between UzAvtoSanoat and the Korean DMC—was only US$200 million, a small sum considering the industry’s multi-billion-dollar norms on the world market. The same can be said of the US$266.7 million that established GM Uzbekistan, the JV between UzAvtoSanoat and the U.S. firm GM, which took over following DMC’s bankruptcy in 2000. Despite their small size and scale, these firms were able to remain profitable because they were subsidized by a range of policies—including the provision of cheap credit via, among others, Asaka commercial bank—as well as cheap inputs such as gas-fired electricity and gas-derived chemical intermediates used in the production of plastic parts like bumper sets and dashboards. In parallel, subsidized energy lowered the cost of living of the labor force, whose purchasing power was thus enhanced, enabling them to buy relatively expensive Uzbek-made cars.
Moreover, the overvaluation of the national currency, the soum, allowed the industry to import parts, components, and machinery to Uzbekistan at subsidized rates. Crucially, DMC and GM were able to subsidize the import of technological platforms, which had by then been superseded by new technology, to manufacture old car models for the Uzbek domestic market. For example, while DMC launched six new car models in Korea between 1996 and 2000, during the same period UzDaewooAvto began manufacturing old Daewoo models like the LeMan in Uzbekistan, where it was rebranded as the Nexia a decade after first going on sale in Korea. Similarly, in 2014, GM Uzbekistan invested more than US$100 million to import the T250 platform, enabling it to start production in 2016 of another Nexia model for the Uzbek domestic market, which would also be exported to Russia as the Ravon Nexia R3. This was the same T250 platform that American GM had developed in the mid-2000s—that is, more than a decade before it was recycled for production in Uzbekistan.
This explains why, while these JVs can profitably stay in business, “[t]he current range of car models are outdated [by an] average of 10-11 years,” as the government of Uzbekistan recently admitted. In particular, the marked uptick in production and exports, especially to Russia, during the commodity supercycle was the result not of the successful creation of an export-oriented car industry, as heterodox scholars posited, but of a sharp increase in the ground-rent available on the Uzbek market to subsidize “backward” industries thanks to rising cotton, natural gas, and gold prices (see Figure 1). Even during this period, more than half of total output was still consumed domestically. Once the ruble’s overvaluation against the soum was cancelled out by recession in Russia in the mid-2010s, Uzbek car exports to the country quickly ground to a halt, as Figure 1 clearly illustrates.
In short, “backward” industrialization is not the result of inefficient or developmental policies, but the concrete form that manufacturing takes in resource-rich countries integrated into the global economy as exporters of raw materials. MNCs and their affiliates, like all other manufacturing firms operating in these national spaces, invest in these countries to appropriate ground-rent.
With this article, I aimed to bring the literature on “transition” in the former Soviet Union into dialogue with broader debates on development, showing how Iñigo Carrera’s original take on the Marxian critique of political economy offers valuable insights for both sets of scholarly work. My hope is that more scholars will apply this approach conceived in the Global South to other resource-rich countries of the Global South, including those of the former Soviet Union.
This article is an expanded version of a blog post that appeared at Developing Economics. This work was supported by the Economic and Social Research Council (ESRC) [grant number ES/X006069/1].
