Theories of Unequal Exchange: Emmanuel and Kay

 Arghiri
Emmanuel’s theory of unequal exchange, dating from the late 1960s, was in
certain respects in extension of Prebisch’s and Singer’s analyses of the
deteriorating terms of trade for the less developed countries, although
Emmanuel himself claimed that his mode of reasoning was different. Emmanuel tried to explain the deteriorating term of trade with reference
to Karl Marx’s labour theory of value. This made his theory somewhat
complicated and difficult to review in a few words. The aim here is therefore
just highlight a few main points.

According
to Emmanuel, tie industrial countries could buy goods from the peripheral
countries at prices below the costs involved in producing the same goods in the
industrialized countries – due to the very low wages in the peripheral
countries. Emmanuel argued that wages were so low that the workers there were
paid the equivalent of only a tiny fraction of the value of the work they
performed and the goods they produced. 

This fraction was considerably smaller
than that paid to workers within the same branches of industry in the centre
countries. In this sense, a kind of over-exploitation prevailed in the poor and
dependent countries. This over-exploitation, according to Emmanuel, was a more
important mechanism of surplus extraction than monopoly control over trade (as
suggested by Frank). It resulted in a significant transfer of value to the
industrialised countries. This transfer of value was at the same time the main
explanation of the perpetuation of underdevelopment.

Emmanuel’s
original theory has since been strongly criticized and reworked in several
versions. Doubt has been raised about the theory’s general validity. On the
other hand, his theory of unequal exchange has sown more seeds of doubt about
the blessings of international trade for the underdeveloped countries, thus
reinforcing the criticism put forward by the structuralist economists and
others. The theory has pointed out some further weaknesses embodied in the
neo-classical theory of comparative advantages and its basic thesis that trade
under all circumstances will be advantageous for all parties involved.

It
may be added here that in the mid-1970s an attempt was made to incorporate a
special version of the theory of unequal exchange into Geoffrey Kay’s analyses
of the causes of underdevelopment (Kay, 1975). Kay argued that unequal exchange
was the preferred mechanism for extracting economic surplus of a particular
social class, which he termed the pre-capitalist commercial bourgeoisie. 

This
bourgeoisie, which also existed in Europe prior to the Industrial Revolution,
did not acquire its revenue (as did the industrial and capitalist commercial
bourgeoisies) by appropriating the surplus value produced by labour, but on the
contrary by exploiting the distortion of prices — a distortion that enabled
this class of merchants to buy goods at a costs below their real value and sell
them at prices above their real value. 

This was possible because of an
exceptional position in the buyer’s market, for example as a monopsonist, and a
corresponding exceptional position in the seller’s market, for example as a
monopolis. The British East India Company and other similar transnational
trading companies which operated during the colonial period could be seen as
organized representatives of this particular pre-capitalist commercial
bourgeoisie.

The
emphasis on market position distinguished Kay’s theory from Emmanuel’s. In
certain respects, it resembled instead the mode of reasoning proposed by Frank.
The most interesting aspect of Kay’s approach, however, is that he took a first
decisive step towards a systematic differentiation and, hence, a limitation of
the validity of the theory of unequal exchange. 

It thus followed from his
consideration that he establishment of industrial capitalism in the peripheral
countries would pave the way for the growth of a ‘normal’ capitalist commercial
bourgeoisie which would not be dependent on price distortions, but would
receive its revenue from the surplus value produced by labour in the production
processes. As a result, unequal exchange would no longer be necessary.

More specifically,
this implied that peripheral societies which experienced considerable
industrial development — such a South Korea and Taiwan, but also India, Brazil
and Mexico — at the same time would experience a reduction of the value
transfers through unequal exchange. Conversely, countries like the small
African ones, with very limited industrial production, would continue to be
subject to the special mechanisms of surplus extraction referred to as unequal
exchange.