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The Theory of Sectoral Clashes

Published online by Cambridge University Press:  24 October 2022

Markos J. Mamalakis
Markos J. Mamalakis*
Affiliation:
The University of Wisconsin—Milwaukee
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Economic development in Latin America has been explained largely in terms of the Economic Commission for Latin America school (ECLA) dominated by Raúl Prebisch. According to this school, “outward orientation” of the periphery, was the key characteristic of Latin America before 1930. The growth pattern was determined by the fortunes of the export sector (including the terms of trade) and its linkages with the developed Center. Since 1930, the massive import substitution policies undertaken by the periphery has led to a new phase of “inward orientation” where the strategic role of promoting growth has been played by the linkage-rich industry. Both growth and inflation have been explained in terms of the institutionalist “structuralist” school which has emphasized bottlenecks related to the land tenure system, market imperfections and deficiencies (both domestic and external), and to a lesser degree to the savings patterns of people (where the demonstration effect, income distribution and the taxation system play pivotal roles).

Type
Topical Review
Information
Latin American Research Review , Volume 4 , Issue 3 , Fall 1969 , pp. 9 - 46
Copyright
Copyright © 1969, by Latin American Research Review

References

NOTES

1. The writings of Raúl Prebisch and his followers are well known but too massive to be listed here. Selected references to special aspects of the interrelated hypotheses of this school of thought appear in the various sections of this paper. Raúl Prebisch is the chief exponent of both the Center-Periphery hypothesis and the Structuralist School.

2. One of the clearest but hardly accurate analyses of growth and inflation in Latin America that relies exclusively on the “class model” can be found in Nicholas Kaldor, “Problemas económicos de Chile,” El Trimestre Económico, Vol. 26(2), No. 102, Mexico City April-June, 1959, pp. 170-221. Kaldor's article has earned him a place in the literature as a staunch structuralist. Although Celso Furtado relies on the class struggle concept and is also a structuralist, he belongs to those few who have argued that the Western class-struggle model has to be modified substantially before it can be applied to Latin America. See Celso Furtado, Development and Underdevelopment (Berkeley: University of California Press, 1964), pp. 115-171. The class struggle approach is analyzed in ibid., pp. 5-44.

3. The literature on this topic is too massive to be cited here. Selected references will, however, be given in subsequent sections of this essay.

4. This competition will be referred to as vertical for reasons that will be explained in Part III of this essay.

5. This type of competition will be referred to as horizontal.

6. In this framework the notion of “class solidarity” would be deemphasized in favor of the motion of “sectoral solidarity.” The common interest stems from belonging to the same sector rather than from belonging to the same income class.

7. A sector is defined as a group of factors of production producing one or a series of similar products. A class or an income group is defined as an entity receiving payment for contributing a factor of production.

8. The theory of sectoral clashes was first developed in analyzing sectoral growth and inflation in Chile in Markos Mamalakis, “Public Policy and Sectoral Development. A Case Study of Chile; 1940-1958,” pp. 1-200, Essays on Chilean Economy (Homewood, Ill.: Richard D. Irwin, 1965) by Markos Mamalakis and Clark W. Reynolds. Although the basic elements of the theory were present in this early study, the first complete version was published a year later both in a monograph, and in article form in Spanish. For this early version see Markos Mamalakis, La teoría de los choques entre sectores (Santiago, Chile: Instituto de Economía, Universidad de Chile, March 1966), pp. 1-64; and ibid., “La teoría de los choques entre sectores,” El Trimestre Económico, Vol. XXXIII (2), Abril-Junio de 1966, Num. 130, pp. 187-222. The revisions and extensions leading to the present essay were largely induced by the comment of Rolando Castañeda and Jorge Sakamoto, “La teoría de los choques de los sectores: un comentario,” El Trimestre Económico, Vol. XXXIII (4), Octubre-Diciembre de 1966, Num. 132, pp. 709-714.

9. The sectoral clashes theory, the sector-class framework and their role in explaning Latin American phenomena will be understood better by a reader who is familiar with the insightful typological analysis of Kalman H. Silvert, The Conflict Society, Reaction and Revolution in Latin America, (Rev. ed., New York: American Universities Field Staff, 1966), pp. 3-34. In this distinct but related analysis of political behavior, Silvert came rather close to developing or suggesting some of the ideas of the present essay.

10. An early but incomplete attempt to move away from, or at least modify, the narrow class approach was made in the pioneering work of John J. Johnson, Political Change in Latin America, The Emergence of the Middle Sectors (Stanford, Calif.: Stanford University Press, 1958). Johnson's use of the term “sector” is in lieu of the term “group” or “class” and has no relation to the notion of “sector” used in the present essay.

11. One of the primary functions of money in this framework is to serve the dominant sector and if “private money” does not do, public money is created through a controlled Central Bank and a government-owned banking complex.

12. Sectoral clashes can be a direct assault on the market mechanism by a “non-neutral” government and can reflect an effort to transform it. There is a basic similarity between post-Marshallian neoclassical value theory and the theory of sectoral clashes. The former stresses deviations from the norm of pure competition caused by non-governmental action, while the latter stresses the implications of government intervention wherein a particular sector is promoted far beyond the limits set for allocation of resources in conformity with the existing market structure.

13. This principle is reinforced by the belief that relative prices, as determined by the market mechanism, are not necessarily optimum from the development point of view. The post-World War II spurt and proliferation of attempts, especially in developing nations, to promote a sector by using the government apparatus, have coincided with an expansion in government's roles, spreading of the belief that some sectors are particularly growth prone, and introduction of long-run growth as a primary policy objective.

14. Victor Alba, “The Latin American Style and the New Social Forces,” Latin American Issues: Essays and Comments, Albert O. Hirschman, ed. (New York: The Twentieth Century Fund, 1961), p. 45.

15. Sectoral dominance is often justified by the “leading sector” or “growth pole” argument. But there exists a fundamental difference between dominant and leading sectors. The latter functions as a signaling device, as an avant garde sector, that leads and pulls the rest of the economy as it follows the path to full development, while the dominant sector suppresses and occasionally seeks to destroy the signaling devices that transmit its state of euphoria and establish balanced growth. The transmission of euphoria is objected to because it can slow down the resource release to the dominant sector.

16. The outstanding, if not the first, event that follows the emergence of modern sectoral clashes is the artificial rise in the rate of return of the dominant sector. This is achieved by raising its income share above its natural level. Since this can be accomplished in different ways, the degree of dominance can be measured with a number of criteria. Thus, the ratio of domestic to international prices, that is Pd/Pi, where Pd stands for the domestic, and Pi for the international price, for the output of a particular sector is one measure. If dominance is established through granting of subsidies, tax concessions, and similar instruments, this criterion would fail. Another criterion would be the ratio of real wage rates in two distinct points of time, that is Wa/Wb, where Wa stands for wages after dominance, and Wb for wages before dominance. If the wage differential overtime exceeds any normal productivity gains, there would exist a supposition of dominance. Instead of using wages only, it would be more proper to use total factor payments to measure dominance of an economic sector since this criterion would bypass problems created by an intrasectoral redistribution of income. This latter criterion is recommended here, unless ad hoc evidence suggests use of a different one.

The terms artificial and natural are defined in greater detail in Markos Mamalakis, “Growth as a Cause of Inflation,” Journal of Economic Studies, November 1965, pp. 1-29.

Market imperfections in the labor market can also cause differences in income. What is, however, being argued here is that the wage differential cannot increase over time unless market imperfections also rise with time, these being directly related to sectoral clashes. The degree of monopoly is likely to be positively related to the unwillingness of government to expose the particular sector to international competition.

17. “Natural” means that which basic supply and demand conditions would produce without government intervention.

18. The resource transfer is achieved either directly, through governmental revenue-expenditure policy, or indirectly by transforming the constellation of private sectoral rates of return. In either case, this resource reallocation can change the existing pattern of domestic intersectoral flows as well as the volume and distribution of intercountry factor payments.

19. Usually overlooked is the agriculture suppression paradox which arises when domestic agriculture is suppressed while foreign agriculture is favored or elevated to dominance. Many Latin American nations indirectly subsidize agricultural imports while they have imposed price controls on their own. With agricultural production lagging behind population and income increases, and imported food prices kept at artificially low levels, the economy increases its share of resources to import foodstuffs. Industrial expansion can, as a result, be handicapped as domestic agriculture stagnates and valuable resources are syphoned off by consumer goods imports.

20. Suppression of a sector reflects interference with the market mechanism as a signalling device. It is not to be confused with a government policy of extracting unequal amounts of revenue from sectors, in an effort to reallocate resources, whenever this acts as a stimulant rather than a check on the market mechanism. Taxation of agricultural income accompanied by government sponsored social overhead investment and stable or rising agricultural prices by no means suggests suppression.

21. The sectoral stratification developed in the present theory can be used as a complement or substitute to the standard class stratification.

22. See Albert O. Hirschman, “Models of Reformmongering,” Journeys Toward Progress (Garden City, N.Y.: Doubleday and Company, 1965), pp. 358-384, 360.

23. A very detailed analysis of classical and Marxist growth theory is found in Celso Furtado, Development and Underdevelopment (Berkeley: University of California Press, 1964), especially Chapter 1, pp. 1-56.

24. During this period it is commonly found that powerful labor unions develop in the prospering mining sector. As long as the sector receives preferential government treatment and is prospering, only a mild clash is likely to erupt between capitalists and workers in the mining sector.

25. See Enrique Kaempffer, La industria del salitre i del yodo, 1907-1914 (Santiago, Chile: Imprenta Cervantes, 1914), pp. 1-1233.

26. See also Nicolás Palacios, Nacionalización de la industria salitrera (Santiago, Chile: Salón Central de la Universidad, 1908), pp. 1-7.

27. Santiago Macchiavello Varas, Política económica nacional (Santiago, Chile: Establecimientos Gráficos “Balcells y Co.,” 1931), pp. 3-376.

28. Miguel Cruchaga, Estudio sobre la organización económica y la hacienda pública de Chile (Madrid: Editorial Reus, 1929), pp. 1-658.

29. See Julio César Jobet, Ensayo crítico del desarrollo económico-social de Chile (Santiago, Chile: Editorial Universitaria, 1951), pp. 1-233.

30. See Aníbal Pinto S.C., Chile, un caso de desarrollo frustrado (Santiago, Chile: Editorial Universitaria, 1958), pp. 1-198.

31. See Osvaldo Sunkel, “El marco histórico del proceso de desarrollo y de subdesarrollo” in Cuadernos del Instituto Latinoamericano de Planificación Económica y Social, Serie II, No. 1, 1967, pp. 1-64.

32. United Nations, Economic Commission for Latin America, Economic Survey of Latin Ameria, 1949 (E/CN. 12/165/Rev. 1, 11 January 1951), New York 1951, pp. 263-390, in particular the last paragraph on p. 390.

33. This clash, which is invisible to the uninitiated observer because it has little or nothing in common with barricades and battles, can be diagnosed from its unmistakable symptoms and deep effects. This silent and invisible clash can be as effective and strong as any “overt” class struggle and can enable a sector to achieve an “improper” objective. The choice of this “invisible” clash can exist and decide upon or develop as the outgrowth of strong “underground” forces. It can be said to be an instrument of those sectors or classes which know that the goal of a higher relative income share could not be achieved through more effort, better education, more savings and so forth.

Without the sectoral clash framework such undesirable phenomena as declining income, inelastic output, bottlenecks, and so forth can be attributed to a third and completely irrelevant cause. Thus, the low income level of unskilled workers can be attributed to their unwillingness to learn, lack of discipline or backward values, rather than to the active resistance of some middle and higher income groups towards universal education systems, or towards the use of taxes for public education. Stagnation of the export sector can be explained by blaming those foreigners that control it for lacking patriotism rather than by looking at the unfavorable exchange rates, profit rates and so forth.

34. Roberto de Oliveira Campos, “Two Views on Inflation in Latin America,” Latin American Issues, p. 75.

35. J. Grunwald, “The ‘Structuralist’ School of Price Stabilization and Economic Development: The Chilean Case,” Latin American Issues, pp. 110-111; Sunkel, “Inflation in Chile: An Unorthodox Approach,” International Economic Papers, No. 10 (London: Macmillan, 1960), pp. 111-115; Raúl Prebisch, “Economic Development or Monetary Stability: The False Dilemma,” Economic Bulletin for Latin America, 6, March 1961, p. 15.

36. Price controls are often imposed in an effort to control inflation and their inflationary impact in uncontrolled sectors is normally ignored. Since numerous price adjustments are linked to the cost-of-living index during inflation, price controls are often imposed in order to diminish the officially registered price increases and the related automatic wage and salary increases. This, nevertheless, only leads to further discrimination of the agricultural sector, since its products have an important weight in the cost-of-living index, while it favors the industrial sector and services.

37. In a study by José Luis Federici, Tarifas, entradas y gastos de la empresa de ferrocarriles del Estado de Chile (Santiago, Chile: Instituto de Economía, Universidad de Chile, 1965, No. 76), it is reported that a gross misallocation and waste of government resources is evidently taking place in the Chilean government's railroad system. The deficit of the Chilean government's railroads amounted to 58.5 million escudos in 1961, in prices of the same year, or to 1.1 percent of gross domestic product. The deficit rose to 75.2 million in 1962, 62.3 million in 1963, 65.6 million in 1964, always in 1961 prices. This amounted to 1.3, 1.0, and 1.1 percent of gross domestic product in the respective years. The percent importance of government subsidies to these railroads in gross domestic product amounted to 1.2 percent in 1961, 1.3 percent in 1962, 1.2 percent in 1963, and 1.1 percent in 1964. Federici's study blames mainly rising costs and inefficiency and to a lesser extent a deterioration in the railroads, tariff structure for the huge deficit and government subsidies.

38. Thus, in agriculture, unskilled labor is likely to emerge as the ultimate sufferer, while salaried employees, even in this sector, generally prove themselves a powerful class.

39. E. M. Bernstein and I. G. Patel, “Inflation in Relation to Economic Development,” International Monetary Fund Staff Papers, November 1952, pp. 363-398, reprinted in Studies in Economic Development, B. Okun and R. W. Richardson, eds. (New York: Holt, Reinhart and Winston, 1962), pp. 437-438. The clash-of-income-groups hypothesis is presented as a model of inflation by Franklyn D. Holzman, in “Income Determination in Open Inflation,” The Review of Economics and Statistics, May 1950, pp. 150-158.

40. Grunwald, “The ‘Structuralist’ School of Price Stability and Development: The Chilean Case,” in Latin American Issues, pp. 115-116; Sunkel, “Inflation in Chile: An Unorthodox Approach,” International Economic Papers, No. 10, pp. 111, 112.

41. Power groups are being created on the basis of association or affiliation with an economic sector without ownership of wealth as a common link and even without explicit political power. The very dependence upon sectoral affiliation as the source of power leads to a high willingness of income groups pertaining to “one sector” to cooperate rather than compete or struggle against each other. Sectoral affiliation as a source of power creates the very conditions that reinforce the structure. Thus, once a “sector-based” power structure has been created, specific income groups within the sector will not attempt or be prevented from seeking income gains at the expense of other classes, since such an attempt might shake up the very foundations of the sector-based power structure.

42. Both agriculture and industrial consumer goods production require investment in order to grow. Their respective capital-output ratios will determine the magnitude of investment associated with a unit of output increase. The statement that one consumer goods sector contributes more to investment than another makes little sense unless additional factors are introduced into the discussion.

43. It is difficult to say whether the expansion of services is a growth-promoting or a growth-impeding force. The problem of balance between the supply of goods and the supply of services will always exist but in different forms in the various stages of economic development. A service-sector product-sector balance can be said to exist if the flow of services acts as a stimulant rather than as a constraint on growth. “Overservicing” describes the phenomenon of excessive employment and overpricing of services in specific branches such as railroads, planning institutes, or among longshoremen.

44. It should be admitted here that the demarcation line between corollaries and effects of sectoral clashes is not always very clear.

45. The growth problem often plays a lesser role than the distribution problem because the benefits derived from a change in the sectoral distribution of income can exceed in the short-run the benefits from overall income growth by a substantial margin. This explains in part why individuals, sectors and subsectors in Latin America consider growth primarily in terms of their own short-run benefits, whatever overall growth is.

46. A detailed geometric analysis of the effects of sectoral clashes on the employment of the dominant and suppressed sectors and the sectoral distribution of income can be found in Markos Mamalakis, “La teoría de los choques sectoriales: un segundo ensayo,” El Trimestre Económico, Abril-Junio 1969.

47. The effects of sectoral clashes on capital formation can be analyzed within two frameworks relevant to Latin America. One framework involves an open economy which is largely self-sufficient in capital goods production; the other involves an open economy that is heavily dependent on capital goods imports. The first type of an economy has been elsewhere referred to as a complete economic system, and the second type as an incomplete economic system. In an incomplete economic system the export sector makes available to the economy the foreign exchange needed to import capital goods and has therefore been called a quasi-capital goods sector. For a detailed analysis of the role of the export sector as a quasi-capital goods sector in Latin America see Markos Mamalakis, “El sector exportador, etapas de desarrollo económico, y el proceso ahorro-inversión en America Latina,” El Trimestre Económico, Vol. XXXIV (2), México, Abril-Junio 1967, pp. 319-341.

48. See Markos Mamalakis, Essays on the Chilean Economy, pp. 33-54, 71-82, and 149-168.

49. Carlos Díaz-Alejandro, “Essays on the Economic History of the Argentine Republic,” forthcoming publication of Yale Economic Growth Center.

50. See U.N. Economic Commission for Latin America, Economic Survey of Latin America, 1964 (E/CN. 12/498/Rev. 1, 1964) Table 23, p. 36.

51. All this information is derived from ibid., Table 23, p. 36. The service-income-share in Colombia was 34.4 percent in 1950, and 33.3 percent in 1964.

52. See ibid., Table 29, p. 42. Services in Table 29 include trade and finance, government, miscellaneous services and unspecified activities. They do not include what the Economic Commission for Latin America calls basic services, such as gas, electricity, water, transportation and communications.

53. Ibid., Table 25, p. 39.

54. For example, if income (value added) in, and employment by, services, are fifty percent of their respective totals, the balance ratio equals one. If the income share exceeds the employment share the balance ratio is greater than one and if the income share falls short of the employment share the balance ratio is less than one.

55. The service balance ratios were calculated by using information given in Economic Survey of Latin America, 1964, Tables 23 and 29, pp. 36 and 42.

56. It was 23.1 percent in 1950, 25.1 percent in 1955, 27.1 percent in 1960, and 28.8 percent in 1962.