The diffusion of activities from the “metropolitan core” to the underdeveloped economies of the “periphery” can occur under a variety of circumstances. The import- substituting development strategy that many economies of the “periphery” had followed in the post-war period had led to a diffusion of activities from the “core” to these economies, but that instance of diffusion constituted what one may call “forced diffusion”, as distinct from the“spontaneous diffusion” that is occurring more recently within a regime of “economic liberalization”
[¹]. In what follows I shall use the term “diffusion” to refer exclusively to“spontaneous diffusion”.One of the striking features of the recent period has been the diffusion, in this sense, of manufacturing activities from the metropolitan capitalist economies, notably the United States, to China, and of a range of IT-related services to India. But these instances of diffusion are only the “leading species of a large genus”. Such diffusion has been going on for sometime, initially to the East Asian countries, subsequently to the South- East Asian countries, and more recently to China and India.It may be instructive to look at this process of diffusion in “Lewisian” terms, i.e. as an application to the world economy of Arthur Lewis’ (1954) perception of economic development “with unlimited supplies of labour”. The third world to which the Asian economies belong is the repository of substantial labour reserves in the world economy. Just as, in the Lewisian perception, labour was drawn from existing reserves in an underdeveloped economy to the “modern” sector of that economy, likewise in the world economy the diffusion of activities that is taking place is akin to a spatial expansion of the modern sector from the “core”, by making use of the existing labour reserves, at least those that happen to be located in the Asian economies.The main difference between the current reality and the “Lewisian” perception consists in the fact that this “spread” of the modern sector does not actually lead to a using up of, or a reduction in the magnitude of, world labour reserves, whether in absolute terms or even relative to the world population. In fact the labour reserves relative to the work-force are not even declining in the economies to which such diffusion is currently taking place. This is because the rate of technological change in the diffusion-receiving economies, entailing both the shift in frontier technologies at the “core” which in turn are transplanted to such economies, and the “catching up” with the frontier technologies in a number of spheres within such economies, is extremely rapid. The rate of growth of labour productivity therefore is also extremely rapid. It severely truncates the labour absorbing capacity of the growth process which emerges in the diffusion-receiving economies on account of this diffusion, and hence prevents the labour reserves from diminishing.
One implication of this fact, in Lewisian terms, is that the wage rate in the “modern” sector in the diffusion-receiving economies continues to remain at the “subsistence” level. Of course the “modern sector” in these economies employs skilled labour which is paid much higher wages than what the unskilled labour surrounding it gets. But what the statement, about the wage rate being tied to the “subsistence” level despite the occurrence of the diffusion of activities to these economies, means is the following.
Skills are a produced good. Skilled labour may be seen as the outcome of a production process where unskilled labour is an input. Its price of production, or what comes to the same thing, its wages, may therefore be seen as a multiple, independent of demand, of the “subsistence wage” of “simple labour”. This multiple, and the level of the “subsistence wage”, are assumed to be more or less the same in all diffusion-receiving economies because of competition among them. And this “subsistence” level remains unchanged as long as the labour reserves remain undiminished. (The assumption that “simple labour” used in the “modern sector” obtains some “subsistence wage”, and more skilled labour, or what may be called “complex labour”, obtains some independently-determined multiple of it, was employed by Marx in his value theory. Keynes, though he was talking of money wages in a single period, made a similar assumption of skilled labour getting a wage rate that was some independently-determined multiple of the wage rate of unskilled labour, in putting forward his concept of the “wage unit”.)
The second implication is that there is a rise in the share of surplus in the “modern” sector, in the diffusion-receiving economies, and hence by implication in the entire “modern sector” of the world, i.e. taking both the “core” and the diffusion- receiving economies together. This is because as labour productivity rises, the wage rate remains stubbornly stuck at the subsistence level. It follows that an increase in income inequalities is built into the dynamics of the growth process in diffusion-receiving economies.
