The Periphery of the Center

The Periphery of the Center

8th Semester Project. 2013

Supervisor: Henrik Plaschke

Mario Chaparro Vera (DIR)

Alex Rodríguez Toscano (DIR, LAS)

Aalborg University

Table of Contents

Contents

1.Introduction……………………………………………………….…………………….. 1

1.1Project formulation………………………………….…………………………… 1

2.Methodology…………………………………………………………………...... ……. 2

2.1Project……………………………………………………………….…..……… 2

2.2Considerations on the theoretical approach……………………………..……… 3

2.3Considerations on the analysis………………………………………………….. 4

2.3.1. Study Case: Spain…………………………………………………...……. 4

2.3.2. Macroeconomic variables………………………………………………… 4

2.4Validities…………………………………………………………………..…….. 5

3.Theoretical Section…………………………………………………………………….. 5

3.1Historical background, C-P dynamics & the Prebisch-Singer Thesis…….. 5

3.1.1Historical background…………………………………….………… 6

3.1.2C-P dynamics……………………..…………………... 7

3.1.2.1Technical Changes………………………………………… 8

3.1.2.2Specialization & Structural Heterogeneity……………..… 8

3.1.3Prebisch-Singer Thesis……..…………………………..…………... 9

3.2The role of the different macroeconomic variables…………………………….. 10

3.2.1Economic growth and Structural Changes…………………………. 10

3.2.2Balance of Payments & Access to financing………………………. 11

3.2.3Labor Market dualism……………………………………………… 12

3.3Related theories and critics……………………………………………………... 13

3.3.1Related theories………………………………….…………………. 13

3.3.2Critics………………………………………………………………. 14

4.Analytical Section………………………………………………….…………………….. 16

4.1.Economic growth………………………………………….……………………. 17

4.2Economic Structure………………………………………….………………….. 23

4.2.1Agriculture……………………………………….…………………. 24

4.2.2Industry & Construction……………………………………………. 25

4.2.3Services…………………………………………….……………….. 27

4.2.4Technology……………………………………….………………… 31

4.3Balance of Payments……………………………………………………………. 33

4.4Labor market……………………………………………………………………. 44

4.4.1Characteristics……………………………………………………… 45

4.4.2Employment by sector……………………………………………… 47

4.4.3Temporality………………………………………………………… 49

4.4.4Labor productivity…………………………………………………. 50

4.4.5Earnings……………………………………………………………. 53

5.Conclusion………………………………………………………………………………. 55

6.List of references…………………………………………………………………………. 57

1.  Introduction

“Nothing is as powerful as an idea whose time has come”

Victor Hugo

The economic development around the globe has always been uneven, making some nations become wealthier than others. Historically, these economic differences and, therefore, power disparities, have determined the relationships among the countries, where the most powerful had a clear advantage compared to the others in the terms on which they were going to trade. These disparities among regions had a divergent tendency, increasing the economic gap and modifying the power relations and, therefore, the terms of trade.

Furthermore, the globalization phenomenon that has been expanding throughout the world has mainly been the enlargement of the free market system ideology, where the countries’ activities were based on the comparative advantage that they possessed on certain products. More precisely, this specialization consisted on raw materials, minerals and low-industry goods, that is, labor-intense products for the developing countries, and in the developed countries high-technological, other industrial products and services, which are capital-intense products.

In recent times, the situation has improved in some of the economies in which the implementation of these ideas occurred, through the Industrialization for the Substitution of Imports. But the N-S dualism still exists and, in the recent economic crisis, in general, and the consequences of it within European Union (EU), in particular, hold features of N-S relation, which will be our focus in this project, through Spain as a case study.

1.1.  Project formulation:

There are enough evidences, based on the differences of economic growth rhythms, the disparities of economic structures, the deficit or surplus on the balance of payments and the labor and capital markets, to suppose that it exist a certain North-South division inside the EU. Considering the existent bipolarity within the EU we would like to investigate, relying on the structuralist concepts of C-P, whether Spain can be categorized as one or the other.

2.  Methodology

In this section we will state the foundations of the project. Firstly, it will be shown the aim of the project and the connexion between the different sections and concepts within them, in order to have a general view of the extent of the project and the aim of it. Secondly, we develop an explanation about the unit of analysis, that is, the Spanish economy through certain macroeconomic variables; and finally, it will be explained the limitations that the project design has.

2.1.  The project.

The aim of this project is the observation of the Spanish economic reality within the European context through the concepts and understandings generated by the Structuralist Theory of economics. This examination has been carried out through the analysis of a certain number of specific macroeconomic variables, which were studied in the LA context by the structuralist defenders, especially by ECLAC authors. These theoreticians established the basic concepts on the first half of the XX century and developed them in the following decades. Their purpose was to portray in an unprecedented way the relations between the LA countries and the industrialized nations. The output was a development theory based on the concepts of the separation of the world through a bipolar perspective, the Core and the Periphery. This dualist division is due to specific features, along with the dynamics which underlies between these two spheres, the dependency relations. In this article we relate these two main concepts, bipolarity and dependency, to Spanish reality, which is our case study. This is due to our belief that the certain features of that pattern highlighted by structuralism keeps on existing worldwide, in general, and in the EU, in particular

2.2. Considerations on the theoretical approach: structuralism

The structuralist theory of economics generated a certain number of concepts that we think are highly valuable as theoretical tools in order to categorize economic phenomena, specifically in our case. We have accepted the ideas from the structuralist thoughts after having put them into question, that is, when we comprehend that they were an appropriate approach to our study case.

The arguments for choosing this theoretical approach are numerous. Firstly, structuralism was focused on economic aspects, leaving out other considerations in terms of military, culture or environment, among others, which can be misleading when searching for causes. Moreover, there are a number of concepts that were born from the theory and which can play a key role when explaining dynamics between countries, such as: the core-periphery division and dependency, and additionally the model of economic growth, the structural and technological gaps, the dualism in the labour markets and the impact of economic cycles in a country.

On the contrary, it has to be said that the theory has some specificities that can imply distortions due to a number of facts. Firstly, as every theory, it was developed in a specific time and space context, and consequently it could be problematic to extract it for another context. In addition, new processes have appeared during the last 60 years such as the improvement of technology and the reduction of its costs, the end of the capitalist-communist cleavage and the predominance of a neoliberal globalization, the increase of the financial capital flows and the gain of its importance worldwide, and the emergence and strengthen of new actors beyond the state that shaped the socio-economic reality such as civil society organizations (Non-Governmental Organizations, consumer groups, lobbies, etc).

The differences among the LA countries that were analysed in the first part of the XX century, and the empirical case that we have chosen, Spain in the last decades, are significant. Therefore, some of the ideas originated in that context are not applicable, or at least they would explain in a lower degree the economic situation of Spain. An example of that is the deterioration of the terms of trade because Spanish trade with other European states is based on products that are similar in characteristics, that is, capital intense, human capital and technical progress.

2.3. Consideration about the analysis

2.3.1. Study case: Spain.

Nowadays it is well known the controversy about the European cohesion in economic and political matters. Emerging debates, as the two-speeds in Europe, the N-S cleavage, or the need of two different Euro currencies, are being discussed in different forums. The EU and the integration of its institutions has been frequently defended in the less wealthy countries as a path to converge with the more affluent ones, but this idea can be questioned in the light of the latest facts with reference to the consequences of the recent crisis within the EU countries.

In order to study the possible N-S dualism and, therefore, the divergent path among the country members, it has been established the relation between Spain regarding the EU. We consider the EU as the appropriate context due to the substantial connexion in economic, political, and historical aspects, and the degree of integration. Moreover, within this framework, Spain can be labelled as a Center country regarding the world structure but as a peripheral one considering the Center countries of Europe.

2.3.2. Macroeconomic variables

In the empirical section our objective has been to check systematically a number of variables for the Spanish economy. Those factors have been (i) the economic growth, (ii) the productive structure, (iii) the balance of payments and (iv) the labour market. The choice of these variables has been mainly because they were basic for the development of structuralist ideas; consequently our objective has been to analyse the evolution and features of these variables in order to make the linkage between the theory and the empirical case.

Within every variable it has been chosen the most relevant indicators regarding the main international statistical sources, observing the trends of the last decade (from 1999 till nowadays) in an attempt of reaching the most veridical portrait of the situation. Furthermore, the comparisons were made between Spain and the country’s most important trade partners, which are the main economies of the EU: Germany, France and Italy. It can be assume that these countries embodied the ‘north’ side of the so called cleavage in Europe.

To sum up, the results of the analysis will allow us to obtain valuable information through the comparison, and to state certain correlations but not direct causality relations due to the complexity of the variables.

2.4. Validities

Focusing on construct validities, the project concludes by answering the main question, which was proposed in the problem formulation. For that purpose, we have chosen the theories that better approached our case of study, and within the analysis we selected the variables that were most relevant in order to answer the question and make the linkage with the theoretical section (Bryman, 2012).

Considering the external validity, it is important to be aware of two issues: if the theory could explain the N-S dualism in other regions of the world, and if the findings, based on the Spanish case, could explicate the situation in other regions. In the first case, our belief is that the N-S bipolarization exists throughout the globe and within different regions and countries. Therefore, the theory used could partially enlighten the situations that other economies are passing through. Secondly, the results grounded in the Spanish economy, would be in serious troubles when describing the situation in other regions due to the great differences that the countries possess in the different variables analysed.

Furthermore, the statistical validity for this project is satisfactory. That is, we consider that the statistics as well as the sources used are appropriate for the subject, and the results extracted from them are suitable, leading us to significant conclusions.

Finally, we consider that the linkage among the variables, in causality matters, is reasonable and adequate. The selected variables possesses correlation between them and complements each other in order to have a better understanding of the subject and respond in a more appropriate way to the question posed.

3.  Theoretical Section

3.1.  Historical Background, C-P dynamics & the Prebisch-Singer Thesis

3.1.1.  Historical Background

In the first part of this section we are going to describe the socio-economic framework of the context in which the structuralist thoughts emerged. This is done in order to have a better understanding of the situation that partially contributed on their creation.

The historical context was of a great importance on the development of structuralism. This was due to the fact that there were some events that changed the course of the socio-economic history, as for example the two World Wars and the Crisis of 1929. This last fact was even more crucial than the wars in the development of structuralist ideas. This is due to the fact that, before the Great Depression, LA countries grew economically because of the constant increment of the exports to the industrialized nations, but during the recession period imports from the Core states decreased vastly, making obvious the fact that industrialization was a key aspect of development, that is, growing internally without that much dependence on external economic linkages.

Another factor that can partially explain the development of structuralism was the two World Wars. In both cases the LA economies grew persistently due to the increase demand of primary products in which these nations had comparative advantages that was the element that determine the international division of labor. The reason why this fact was so crucial in the development of the structuralist theories was that exports from these states augmented rapidly making the nation’s economy grow. Although this increment was a positive aspect, it was linked to another issue that played a central role in the deterioration of these economies in the long-run. This factor was the specialization on the production of primary products, which deteriorated the terms of trade in the long-run, as it will be explained further in this section.

The free market ideology is based the international division of labor and the comparative advantages among regions. In this sense, Latin-American countries had comparative advantage on the production of primary products and natural resources, which were labor-intense, and the industrialized countries had comparative advantage on industrial commodities, high-tech products and other commodities that require great amounts of capital (Prebisch, 1948).

3.1.2.  The C-P dynamics

The structuralist theoreticians made the difference between the industrialized nations, that they called Center, and the developing ones, the Periphery, in order to analyze the diverse development of the economies throughout the world and, therefore, improve their understanding of the economic linkages amongst them.

The Center countries are those where the technical improvements are developed or, at least, where these progresses penetrate first. Moreover, the expansion throughout the different sectors of the economic structure is quite rapid, producing a homogenous economic structure. These changes imply an augmentation of the productivity, which increases wages and, therefore, the internal aggregate demand. These technical changes also diversify the production structure of the economy.