Ernest Germain

The Industrialization of Backward Countries

(October 1958)

From Fourth International (Paris), No. 4, Autumn 1958, pp. 14–22.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

1. The Theoretical Setting of the Problem

“Poverty breeds poverty”: this simple formula which has become a platitude still summarizes all the wisdom of most economists on the subject, bourgeois and Marxist alike. What they mean, in Marxist terms, goes more or less like this. Backwardness means a low level of productivity, a low level of productivity stems in the last resort from a low level of fixed capital equipment and of industrialization. But industrialization means (under capitalism) capital accumulation, and in any case a larger social surplus product. The poorer a country, the greater the part of its current production that is necessary (and barely sufficient) to maintain the mass of the producers at a low level of subsistence. Hence, the poorer a country, the lower its rate of capital accumulation, the lower its social surplus product. Hence, the poorer a country, the slower its industrialization: poverty breeds poverty.

We shall return in a moment to one of the main links in this chain of reasoning: “the poorer a country, the smaller its surplus product.” This formula is correct only as a most sweeping historical generalization, i.e., if for example a purely feudal society is compared to modern industrial capitalism. It ceases to be true if one compares the relative poverty of present-day societies, which are all more or less products of combined development. But in any case, the traditional emphasis of the reasoning lies on the supply side of fixed capital equipment, not on the demand side.

It has been the merit of Professor Nurkse [1], whatever mistakes he also makes in the assumption of a low social surplus product in backward countries, decisively to change this emphasis, and to rediscover a truth long known to Marxists (e.g., Lenin and Trotsky in their writings on Russia before 1914), i.e., that the real vicious circle of poverty works the other way round.

It is not because a country is poor that it lacks financial resources for industrialization; it is because a country is poor that it lacks a market which makes industrialization a profitable business from the capitalist point of view. Because of the absence of this market, capital (the social surplus product) is invested in other fields than industry (trade, buying and speculation in real estate, hoarding, or, paradoxically, capital export). Therefore, the level of industrialization remains low, the level of productivity of labor remains low, and the country remains poor, which means that there is no stimulus for private industrial enterprise. “Poverty breeds poverty.”

In his recently published and to a large extent very valuable book, Paul A. Baran, who is one of the rare American Marxists to teach at a university (Stanford) draws an impressive picture of the social surplus product in backward countries. [2] He mentions the huge part of the agricultural product appropriated by landlords and money-lenders (usually up to 50% of the national agricultural product in many backward countries, and as agricultural production itself represents more than 50% of the national product of such countries, this reveals the existence of a social surplus product on the order of 25–30% of the total product!). He further mentions the income of the great number of intermediaries between the countryside and the city, and inside the city itself, whom he aptly describes as lumpenbourgeoisie, a group so numerous that, even if it is not composed of individually prosperous persons, it absorbs quite a fraction of the national product. He finally mentions government income and native capitalist income, as well as income of foreign-owned plantations, mines, and other enterprises, which in some countries (e.g., Rhodesia), represents a huge fraction of the national income.

We may therefore say that the central problem is not that of creating resources which make industrialization possible, but one of reallocating existing resources in order to industrialize the country. Or more correctly, the problem is that of creating social and economic conditions which make such a reallocation possible. Such conditions require the suppression of colonial rule, the expropriation of foreign capital (at least in cases where such capital already occupies an important place in the economy), and a radical agrarian revolution, which suppresses the income and even the very class of landowners–money-lenders–compradores. As a general historical rule, one may add that the existing weak native industrial class also becomes an obstacle on the road to industrialization, and has to be disposed of.

Once however this social revolution has been accomplished (as for example by the October Revolution in Russia, by the Jugoslav revolution of 1941–1946, or by bureaucratic-military means, with a limited mobilization of the masses, in the “people’s democracies” from 1945–48), the problem of reallocating national resources to further rapid industrialization is still not solved at all. On the contrary, the obstacle now seems even more formidable than before.

For the revolution itself carries through a reallocation of resources of its own, and in a most peculiar -manner. As a backward country is a predominantly agrarian country, the fate of the revolution depends on the willingness of the peasant to accept the new order. The peasant, who, to quote Khrushchev, knows how to count, will accept the new order only if he is better off than before. He will be better off only if he has to give, to the state and the city in the form of taxes and costs of industrial goods purchased, a smaller part of his income than he gave before to the landlord, the money-lender, and the merchant. In other words: the first, economic result of the successful colonial revolution is to diminish the social surplus product, or to hand part of it over to the agricultural petty commodity producers.

This fact has been empirically proved both in Russia under the NEP and in the “people’s democracies” under various policies of slow collectivization. Everywhere, the peasantry appears as the main if not the only class of society which substantially increased its standard of living after the revolution. This increase in its standard of living now creates of course a market sufficiently large to make rapid industrialization possible. But at the same moment that the problem seems to be solved on the demand side, it pops up again on the supply side. Although the general standard of living of the peasantry (up to 80% of the population of a backward country!) has only been moderately increased, this increase is enough to absorb not only the greater part of the former surplus product, but also the greater part of the new potential surplus which results from a first substantial increase in the general level of production and productivity.

This is of course no paradox: as the social product is composed of the income of the producers plus the surplus product, any increase in the former has for result a decrease of the latter.

For that reason, traditionally, bourgeois and Marxist economists alike thought there were only two solutions to this problem: either massive foreign aid or “primitive socialist accumulation” (the phrase was coined by the Soviet economist Preobashensky, who was temporarily associated with the Left Opposition). Either an advanced industrial country would give the backward country an important part of the resources necessary for industrialization (in the form of massive cheap credit, or more directly in the form of capital equipment, railways, ships, airplanes, prefabricated houses, and, not to be forgotten, technicians and scientific personnel); or the backward country would have to cut back extensively the standard of living of its population, above all its peasant population, in order to free the resources necessary for industrialization. Apologists of the tragic Stalinist experience with industrialization of this kind even added the theorem: “The more backward the country and the quicker the industrialization, the greater must be the setback in general consumption, and the harsher must be the dictatorship which has to force people to work under those circumstances.”

Of course, Trotsky and the main economic specialists of the Left Opposition (e.g., Rakovsky and Piatakov) never accepted these theorems. They always pointed out that a parallel and harmonious increase in production and popular consumption was a necessary condition for socialist industrialization. Today their concept is widely accepted. Tito has made it his own. Polish economists like Lange have stated it in unmistakable terms. We have still, however, to try to find a theoretical foundation for this political advice. This is what we shall attempt, as a first tentative sketch, in this article.

2. The Theoretical Solution of the Problem

In the framework of a workers’ state, the problem of industrializing a backward country involves solutions for every element of the reproduction process: supply (production and import) of the fixed capital equipment necessary; supply of a regular flow of raw materials; increase of the number and qualifications of industrial workers; adequate distribution of the social product between industry and agriculture, and the two sectors of industry, in order to prevent disequilibriums, shortages, and bottlenecks, e.g., in the food supply, in the supply of agricultural raw materials, etc. All these problems are interrelated. Inadequate supply of industrial consumer goods to the village, for example, could become one of the main reasons for a slower rate of development of agricultural production, especially of agricultural raw materials for industry, and thereby reduce the general rate of growth of industrial production.

We shall not go into all these problems here, but concentrate on the main field, that of the adequate distribution of social product (or income), i.e., that of the rate of accumulation.

The mistake committed by the Stalinist planners during the first Five-Year Plans, and even more – and with less excuse – by the apologists who try today to justify the wrong course followed, is a confusion between maximum and optimum rate of accumulation. Or rather: these planners started from the wrong assumption that the maximum rate of accumulation is also the optimum rate, at least in the short run.

Even if we define the optimum rate of accumulation from a purely economic point of view, i.e., as the rate which enables the maximum increase in the social product (or income) in a given period, this identification is completely wrong. It is all the more wrong because no Marxist can give such a purely economic definition to that central notion. He cannot leave out living class forces. He can never forget that any rate of accumulation which creates demoralization of the proletariat through hunger, political apathy, tendency to flee from the factories and the city, etc., cannot be called “optimum” from the point of view of working-class revolutionists.

It is interesting however to beat the apologists of a maximum rate of accumulation even on their own field, i.e., the purely economic result, in tons of steel, cement, coal, and cotton goods. The mistake made has its roots in the absurd assumption that the productivity of labor is independent of the level of consumption of the producer. We say that this assumption is absurd not only in the long run, but even and especially in the short run. The whole history of modern industry has shown that any sharp decrease of the standard of consumption of the workers results in a decrease of per capita productivity. And the poorer the country and the lower its initial level of consumption, the stronger this interrelation will be.

One could of course point out that this decrease will translate itself into a decrease of production only if one assumes that the fixed capital on which the producers operate remains unchanged. It is evident that the goal of a maximized rate of accumulation is precisely to increase the supply and quality of fixed equipment of industry. If the workers tend to make less efforts, because they eat less and live under worse conditions, then, so the argument will continue, this decrease of per capita productivity will be ten times overcome by the increased productivity resulting from the introduction of better machinery.

It is at this point that our concept of optimum rate of accumulation becomes all-important. Let us assume that with a given quantity of fixed machinery, 1,000 workers produce over a given period a value of $ 1,000,000, when their real wage is $ 500 a year (we should not forget that we are concerned with workers in backward countries!). If we double the value of capital equipment in the course of three years, the product of these workers could, for example, treble and be worth $3,000,000 (first hypothesis) on condition that their real wage is not changed or even that it increases. [3] If, however, in order to double the value of the capital equipment, we first cut the real wages of the workers to $250 a year, we might find that the final product will not be $3,000,000, but only $1,500,000 (second hypothesis). Production has, of course, still increased. But we have caused a terrible waste of wealth. For had we increased the value of capital equipment only by 50%, instead of by 100%, in order to leave real wages where they were before, or to increase them even by a given percentage, then the total final product would have been say $2,000,000, instead of $1,500,000 (third hypothesis).

The first hypothesis is the ideal one; it presupposes more or less unlimited resources freed for the given project. The second and the third hypothesis are both trying to divide limited resources in a given way. The second hypothesis, the one of the maximum rate of accumulation, does not lead to maximum expansion of production. The third hypothesis, with a lower rate of accumulation than the second one, leads to a bigger expansion of production under given conditions, and is therefore the optimum rate of, accumulation (or the optimum division of the social product, of the social income, etc.).

In real fact, it is of course not very easy to determine this optimum rate. It can be discovered only by trial and error. But what we should understand from the start is the fact that in a backward country, with a generally low standard of living of the workers, the maximum rate will never be the optimum rate, i.e., will always result in a level of productivity of labor below the level rendered possible by a given set of machinery and a given level of qualification and cultural background of a working class.

We may add that we have understated our point. For a “purely economic” solution leaves out a serious social consideration, with important economic repercussions. Any attempt to impose a maximum rate of accumulation results in a lowering of an already low standard of living. As the workers do not accept this without resistance – even be it passive – it is necessary to drive them back to the production line by force and keep them there by constant supervision. In order to achieve this result, a huge army of gendarmes, bureaucrats, and supervisors of all sorts must be built up and kept supported, generally at far above the subsistence level down to which the producers have been forced.

But this in turn means a large increase of unproductive consumption in society, lowering thereby the fraction of the social product ready to be used for productive accumulation.

A “maximum rate of accumulation” is “maximum” only if we “forget” the huge waste it involves; in fact, it may be lower, after a decade, than a level which would have allowed an increase in workers’ consumption, would thereby have much more quickly increased the social average productivity, and would have enabled society greatly to reduce the funds for unproductive consumption of policemen, uniformed or not.

Just to show the reader that all these considerations are not purely theoretical, we shall limit ourselves to a single example, but a decisively) revealing one. There were in 1928 3.1 million workers and employees (technicians and engineers with university degrees not included) in Soviet industry. In order to achieve the First Five-Year Plan, figures worked out at that moment estimated the manpower necessary for attaining the production goals at 4.1 million workers and employees (i.e., an increase of 1 million, or 33%). In fact, in 1932–3, without all the goals of the First Five-Year Plan having been achieved, 6.7 million workers and employees were working in Soviet factories, an increase of more than 110% over the figure of 1928, and of 65% over the planned number of workers! What should have been produced by 4 million workers needed 6.7 millions to be manufactured, i.e., per capita productivity was more than 50% below the planned level. The maximum rate of accumulation was far from being the optimum rate, far from maximizing the social product.

We now understand how wrong are those who excuse the Stalinist variant of industrialization by the argument that, anyway, as the war danger was growing, as the country was weak and surrounded by enemies, it was necessary to industrialize as quickly as possible. [4] In reality, what we are trying to prove is that a “maximum” rate of accumulation produces a slower overall rate of growth of the economy than the “optimum” rate. It was that point that Trotsky, Rakovsky, and other Marxist critics of Stalin’s economic policy did not cease to make between 1928 and 1940, and the now existing factual material completely confirms the accuracy of their criticism. It is interesting to note that Professor Baran is carried by his theoretical élan to a thesis quite similar to ours when he writes:

While the maximization of the rates of growth – if such be the requirement of the concrete situation – is tantamount to a minimization [?] of current consumption (or, conversely, maximization of the economic surplus), it would be erroneous to equate such minimization of consumption conductive to speediest growth with its reduction to some rock-bottom levels. In view of the obvious relation between consumption standards and the ability and willingness to work on the part of the population, minimum consumption compatible with maximum output (and growth) may, and in most underdeveloped countries will, require a more or less substantial increase of the existing consumption standard. Given a small initial output and accordingly limited possibilities for such an increase, it will have to be differentiated. [...] Accordingly, while it might be thought at first that maximization of the rates of growth calls for plowing back into the economy all increments in output resulting from current investment, in actual fact some splitting of these increments so as to increase both investment and consumption may be a more effective, or even the only possible, method of attaining the largest possible increase in production. [Op. cit., p. 270]

However, in a passage describing concretely the Stalinist industrialization policy of the period 1928–1937, Professor Baran cannot shake off his old apologetic hide, and we are confronted with various platitudes like the “war danger” which made necessary a “rapid rhythm” of industrialization etc. Professor Baran even tries to make us believe that the “inconvenience” caused by the desperate attempt of maximization of the rate of accumulation was only of short duration. He therefore conveniently quotes the crop figures of 1937, without adding that those figures remain exceptional, not only for the period 1928–1940, but even for the period 1928–1953, if we take into consideration the increased territory and population of the USSR! He also forgets to add that Soviet livestock for 25 years fell below the 1928 level, and that we had to wait till 1956 (!) in order to find a number of milch-cows equal to that of 1928 (which does not mean equal per capita of Soviet population, given the important increase during this quarter of a century). It is impossible to cover up the tremendous price Soviet economy had to pay for Stalin’s attempt to “maximize” the rate of accumulation by brutally lowering the consumption levels of workers and peasants.

3. An Interesting Theoretical Sideline

Up till now, we have always considered economic growth and industrialization as a result of the increase in the real supply of fixed capital equipment, machinery, buildings, power works, etc. Professor Nurkse, however, has made another and interesting contribution to the theory of industrialization of backward countries, by concentrating attention on one of the most striking characteristics of backwardness: rural overpopulation.

This phenomenon has, of course, long been known to economists and especially to Marxists. More than half a century ago, Lenin and Trotsky made of that rural overpopulation, and the pressure it exercises on land and land rent, one of the main links in the chain of arguments explaining backwardness: the preference given by capitalists to the buying of land over industrial investment, the land rent allowing a higher average return than industrial profits.

But whereas the problem of rural overpopulation has always been considered from the point of view of an easy supply of manpower for urban industry, once the industrialization process got into motion, Professor Nurkse now has stressed a new and strikingly important aspect of the problem. Economic growth, he says, is essentially an increase in the average productivity of labor. No Marxist will quarrel with that definition. But in a country with a huge population of underemployed peasants (it would be more correct to say: village inhabitants), it is not necessary to start with huge capital investment in order to achieve a substantial increase in the average productivity of labor.

For what else is underemployment if not the fact that in such backward countries half or two-thirds of the population, living in the village, are only really working 150 or 200 days a year! [5] The rest of the year, they do nothing. Now if it were possible to give them something to do during the rest of the year, some productive purpose which does not need huge fixed equipment, their annual production, and thus their annual productivity, would tremendously increase. In fact, while doing nothing, they continue to eat. It would be sufficient to give them a little bit more to eat, while getting them to work, in order to treat the largest part, if not the whole, of their increased production as social surplus product, as a social investment fund. And once this surplus product has been created, the basis is laid for large-scale industrialization, not by lowering but by increasing the standard of living of the working population, at least in real terms. [6]

At first sight, there seem to be different “catches” in this line of reasoning, but Professor Nurkse deftly does away with them, one by one. How is it possible, we may ask, to give a huge amount of new jobs to the overpopulated countryside, if the land is already fully occupied? To this there are different answers. First of all there is no underdeveloped country in the world, not even Indonesia, in which the land is “fully occupied” from an economic point of view. Possibilities of increasing agricultural production by fertilization and irrigation operated with relative low-cost methods (from shoveling the mud out of river beds for use as fertilizers to the digging of thousands of small canals, the drilling of thousands of cemented water pits, etc.) are everywhere present. [7]

Professor Nurkse does not add, but this we may do in his place, that these jobs are not limited by natural but by social conditions, as long as landlordism and capitalism are not overcome. For opening up these tremendous and relatively “cheap” opportunities for the big mass of unemployed peasants means must be found – means of concentrating the marketable food supplies in the hands of central authorities and/or of peasant cooperatives, means of concentrating the peasants themselves, either by appeal or by coercion, means of planning these thousands of local projects in a way that their results are split up between the producers themselves and the community, and not siphoned away by landlords, money-lenders, usurers, black-marketeers, compradores, or capitalists.

We shall see further on that these social preconditions are all-important for the success of these experiments.

A second question which crops up is the question of equipment. Professor Nurkse of course knows very well that millions of underfed underemployed peasants cannot start to “produce” a social surplus product with their bare hands. His solution is: a) to import a large mass of cheap simple tools, and b) to have them produce these tools themselves:

The investment workers, before they start building a piece of fixed capital such as a road, could, after all, sit down and make the most necessary primitive tools with their own hands, starting if need be from scratch. They could make their own shovels, wheelbarrows, carts, hoists, and other things to help them build the road.

As we shall see, this is precisely the way the Chinese Communists have conceived the “acceleration” of their “uninterrupted revolution” in 1957–8!

But there remains a third, and formidable, difficulty. An underdeveloped country is characterized by very low standards of living, especially of food supply, in the countryside. Underemployment means that the working peasants have to share their meagre pittance with practically unemployed sons, nephews, and uncles living with them. Now the whole theory of the “accumulation fund hidden in underemployment” hinges on the stability of peasant consumption. If the working peasants increase their food consumption from the moment their nephews, sons, and uncles are mobilized to build irrigation trenches, water pits, and roads, then of course the problem of feeding these newly occupied workers will appear. There will be a deficit of the food balance of the country, and the increase in real wealth created by the products of these workers might be wiped out entirely by the need to import supplementary food.

Professor Nurkse states the problem admirably. But he does not solve it adequately, for somewhat sinister formulae like “the saving has to be made” are not solutions. He tries to introduce a difference between densely and sparsely occupied countries. In fact the solution he indicates for sparsely occupied countries only, applies for all of them: the supplementary amount of workers must be occupied in such a way as to make possible, among other things, a substantial increase in agricultural production. Any other solution would impose the process of growth on the peasantry through various forms of “forced savings,” and then we should again be up against the old problem of estimating the negative results of such a decline in the standard of living.

Is it possible substantially to increase agricultural production in the backward countries? Of course it is. And it is at this point that Professor Nurkse makes his most substantial mistake, when he minimizes or even excludes this possibility in the densely populated countries. As a matter of fact, two of the most densely populated backward countries of the world, India and China, are most susceptible of mobilizing the biggest “accumulation fund” from a heavy increase of agricultural production.

For if we look closer at those various “low-cost local investment projects,” made possible by drawing on the underemployed village populations, we find that nearly all of them tend to increase agricultural productivity. Irrigation, regulation of local rivers, flood control, road building, local iron foundries, manufacture of agricultural implements of a more modern though still simple type, local building industries helping the peasants to build better houses for themselves and stables, or better stables, for their livestock – all these projects tend to prepare larger harvests. What is more, they permit almost immediate results in elevating living standards in the countryside. Thereby they enable the mobilization of a big – and growing – part of the increased surplus product for purposes of national economic growth. If they are better fed, better clothed, and better housed, the sons, nephews, and uncles of the toiling peasants will work without resistance the second year on provincial and national roads, and not just local ones. They will without resistance build local foundries in order to manufacture not just agricultural implements but machinery of various sorts, i.e., means of production. The initial impetus will have been given. By “building” Professor Nurkse’s conception into our general theoretical solution, and correcting it in that sense, we get a clearer picture of the possibilities of initially industrializing a backward country, without (sufficient) foreign help and without pushing down the standard of living of the working population.

We should like to emphasize a warning: the setting to work of the village unemployed on local investment projects is no panacea for solving the industrialization of backward countries. It is only a relatively cheap means of giving that industrialization an initial push. If a correct balance between the local “low-cost” investment projects and the “high-cost” “modern” industrialization projects is not struck, the economy will rapidly run into the classic difficulties of Soviet Russia during the NEP.

Local industries, built with ancient technology and locally manufactured equipment, are of low productivity. As long as they are an absolute addition to national wealth, and a school of industrial technique and habits which makes the transition of the peasant towards the modern factory easier, they are of tremendous importance. But from the moment productivity in agriculture starts to rise rapidly, the well-known phenomenon of the scissors will appear. Agricultural prices will fall in comparison with the prices of (scarce) industrial consumer goods and means of production. At the same time, the peasantry will accumulate money and cry for cheaper industrial goods.

There will be a political risk of alienating the peasantry from the workers’ regime; there will be the economic danger of an artificial withdrawal or even decrease of the agricultural surplus. The investment fund mobilized through the voluntary mobilization of the rural unemployed has to be transformed into modern fixed equipment, ready to deliver cheap industrial goods to the countryside. Modern steel works will progressively take over from the local foundries. Both processes, intertwined in the beginning, will become unraveled: the local low-productivity projects will wither away.

4. The Pragmatic Approach: India

Did the authors of India’s First Five-Year Plan know and understand Professor Nurkse’s theory? If they did, they did not show any sign of it. But it is a fact that, following a theory of long standing, very dear to bourgeois economists, they concentrated the effort of their plan on agriculture, and introduced the novel feature of thousands of “local community-development” projects. Dr D.K. Rangnekar, in a recently published general appraisal of the problems of India’s economic growth, writes on the subject:

“Community project” is a comprehensive description for several aspects of rural development with the broad objective of transforming the agriculturist and initiating a social revolution [?] in the 560,000 villages. With the help of a Rural Extension Service of trained village workers, the community projects seek to bring new methods, new ideas, and new knowledge to almost every aspect of the peasant’s life. The impact of the programme is expected to be felt in road communications, school education, housing and sanitation, community recreation and entertainment, farming methods and techniques, supplementary or fuller employment (in village crafts and other commercial and professional services). The villagers themselves are to build and construct, change and improve, as a community. The object is to galvanize the whole of the rural population into activity on a voluntary basis under state guidance and assistance. [p. 70] [8]

Our Indian comrades will soon show us their final estimate of the First Five-Year Plan. But there is no doubt that it was a complete failure. On the industrial field, development was very slow, in fact slower than in colonial countries like Rhodesia or the Belgian Congo. The problem of rural unemployment was not even scratched. As for agriculture, although there was a certain increase in the production of food-grains, it barely kept up with the population increase. Per capita food production fell, from a pre-war average index-figure of 100, to 87 in 1947–8, 85 in 1948–9, 84 in 1950–1 and 82 in 1951–2, and remained at approximately these levels in 1954. With regard to average yields per acre and agricultural productivity, the low pre-war level was barely maintained, notwithstanding huge and extremely costly multiple-purpose irrigation schemes. As for the “social revolution” in the village, it is sufficient to state that the planned expenditure on social services

worked out at less than 1 rupee [! a rupee is worth something like 1 sh 6d or 20 US cents] per head [and per five years!] of the population. And this incredibly meagre sum of less than 1 rupee per head was expected to provide for education, hospitals, dispensaries, community services, etc., all of which were woefully lacking. In the base year of the Plan, 1950–1, there was, for example, 1 rural dispensary for about 105 villages and 56,400 persons; at the end of the Plan there would be only a slight change: 1 dispensary will serve about 95 villages and 54,000 persons. [id, pp. 82–3]

What are the reasons for this dismal failure? They should not be sought in the fact that a large part of the accumulation fund went into agriculture, although the balance for a healthy development seems to have been upset at the expense of industry in that First Plan (the Second Plan upsets the balance at the expense of agriculture; but that is another story). The real keys for the failure are twofold: an inadequate accumulation fund on the one hand; social conditions in town and especially countryside which make an adequate use of even that inadequate accumulation fund impossible.

During the First Five-Year Plan, “investment” (in the bourgeois economic sense of the word, i.e., including stock formation) was only 7% of the national income, and fixed capital formation only between 4 and 5.5% of the national income. (op. cit., p. 31)

As Dr Rangnekar himself states, a net domestic capital formation rate of 15–16% of the national income is considered the necessary minimum for a rapid economic development. (op. cit., p. 281) Not only was this rate not approached, but the relatively small increase in the national income over the five-year period, which he estimates at 18% (or 3.5% per annum), was wiped out by population growth and increase of consumption (of the better-off social classes, we should add). There was no perceptible increase of the rate of accumulation during the five-year period itself.

This low level of accumulation has, of course, essentially social roots. It is not so much a question of lacking resources, as of lacking mobilization and reallocation of existing resources. Dr Rangnekar carefully avoids making this point, but he himself gives all the facts which point in that direction. He indicates for instance (p. 224) that at least 500 million rupees a year are spent for importing and hoarding gold. This, he says, is “only” 0.5% of the national income, which gives the percentage by which investment would increase if social control would do away with that habit. The true figure, however, should be that of the total private gold hoard of India, which is estimated at 50 or 60 times that figure. It would have enabled thereby at least doubling the accumulation fund (total net investment during the five year period being estimated at 30 billion rupees). And China’s quick economic growth was made possible precisely by a rate of accumulation double that of India.

Gold hoards are only one example. The skimming off the increased cream of agricultural productivity by landlords and money-lenders is another.

The same class of agriculturists which has benefited from the recent turn in prices appears to have started or increased money-lending operations, presumably as a sequel to the new legislative curbs on professional money-lenders. [...] The yield from such operations is known to be incredibly high, probably ranging from 12 to 40%, and in some cases perhaps 100% or more. [id, p. 55]

It is difficult to evaluate the part of the agricultural product which is appropriated by the landlord–money-lender class, and siphoned away from the accumulation fund. But this percentage can be considered very high.

Cash rents were not very common, but where the practice existed the rents were extremely high. Division of crop was the most common practice, and the landowner would get about half of the yield for providing land and seed, and sometimes even more. [...] Where the landlord provided cattle and implements as well as land and seed, the landowners would receive 40–60% and even 80% [!] of the yield. [id, p. 59]

And there is no doubt in our mind that this problem of the scarcely initiated agrarian reform is the key to the deficiency of both the accumulation fund and of agricultural productivity:

The unsatisfactory forms of agrarian structure, reflected in maldistribution of land ownership, insecurity of tenure and high rents, uneconomic size of farms and fragmentation of holdings, tend in a variety of ways to impede investment. The existing system reduces living standards below the level which might be attained even with prevailing farm methods. It holds back investment both by reducing farmers’ funds for investment and by reducing incentives to develop production. [ibid.]

Needless to say, this “vicious circle of poverty” is closed by stating that this extreme misery of the great mass of the peasants removes any incentive for the development of a strong class of industrial capitalists, catering to a broad internal market for mass production goods. Poverty not only breeds poverty; it also breeds backwardness!

The problem can be reduced to a single formula: the First Five-Year Plan failed not because priority was given to agricultural development but because the landlord – money-lender – compradore system makes the mobilization of a great accumulation fund and the voluntary mobilization of the rural underemployed (conditioned by a quick increase in their standard of living) impossible. India is losing its struggle for industrialization because it has not yet accomplished its basic social revolution. And when the Second Five-Year Plan tried to increase substantially the rate of accumulation, this became completely dependent on foreign credits, led to a rapid exhaustion of sterling reserves built up during the war, and made the Indian government scale down its ambitious objectives as soon as it became evident that foreign assistance would be less than expected.

5. The Pragmatic Approach: China

In a comparison between India’s and China’s industrialization, Wilfred Malenbaum, writing in The Journal of Political Economy (February 1956), stated that China’s accumulation fund was more or less double that of India ($14,000 million for the First Five-Year Plan in China, against $7,000 million for the Indian First Five-Year Plan). The two figures are not completely comparable, but they give a rough idea of the difference. Malenbaum immediately adds that the per capita fiscal charge in China is also double that of China. Quite an impressive difference, says the author; he just forgets a trifle: the fact that more than 70% of the Indian population is composed of peasants, that a huge proportion of these is composed of tenants, and that these tenants pay a tremendous average land rent of nearly 50% of their crops. It is this percentage that must be compared with the fiscal charge of 15–20% in the net product of Chinese agriculture, quoted by Malenbaum, and not, of course, the barely 1% of the net agrarian product of the average Indian peasant “taxed.”

The lowness of Indian taxes is of no benefit to the peasants, living at subsistence level. They are of benefit to the landowners – money-lenders who are the only large property-owning class in the world which pays practically no income tax. This again explains why the accumulation fund in China can be double what it is in India.

It is the thorough social revolution accomplished in China which creates the favorable conditions for a rapid economic growth and industrialization. But in China as in India, the Stalinist leaders approached the problem in a pragmatic way. And pragmatism, in China, was largely determined by the Soviet example. The First Five-Year Plan, in its first version, with its strong stress on “priority to heavy industry,” unquestionably imposed serious sacrifices on the working masses. Official Chinese statistics (Peking Review, no. 6, April 8, 1958) states that per capita consumption rose by 18% from 1952 to 1956, i.e., by 4.4% per year. This is, however, in money, not in real terms, and the increase is unevenly divided among different regions and different social layers in that great country. The total accumulation fund was rapidly increased, and rose (in official Chinese calculation) from 18.2% to 22.5% of the national income (this includes unproductive accumulation).

The crucial year 1956, under the burden of this mistaken attempt at “maximization” of the accumulation fund and under the influence of floods and a very bad harvest, led to well-known phenomena of economic distortion. [9] In order to achieve the goals of the plan, no less than 2.2 million supplementary wage-earners had to be employed by industry. The nominal wage fund rose by 29%, creating inflationary tendencies and actual reductions in the purchasing power of the workers. The outbreak of criticism of the government’s economic policy, during the short “hundred flowers” period of Autumn 1956, was general.

The regime than made a turn. It clamped the lid down politically, but made the year 1957 a transitional year of slowed-down accumulation. The rate of increase in accumulation was sharply checked; in fact, total investment in 1957 was less than in 1956. At the same time, the first big industrial projects started to give results. Attention was concentrated on agriculture. At this point, and in a pragmatic way, the Mao Tse-Tung regime started to draw heavily on the “reserve accumulation fund hidden in rural underemployment.” It mobilized the peasantry during the Winter of 1957–58 in thousands of local and provincial irrigation projects. In all, no less than 11 million hectares of dry land were opened up to wet agriculture. From 1957 till 1962, the percentage of irrigated land in China should climb from 46 to 66%.

Some authors have valued the importance of this irrigation work – “financed” nearly exclusively by the food the peasants were fed with – at 6,000 million yuan, i.e., an increase of 35% on an estimated productive accumulation fund of 18 billion yuan for 1958. But of course the productive results of that investment, directly through constant increased agricultural production, and indirectly through the Chinese peasant’s increased living standards, productivity, and willingness to work, will be tremendous.

In the Spring of 1958, this first mobilization of rural underemployed was followed by a new and gigantic application of Professor Nurkse’s theory: the “acceleration” movement of the Chinese revolution. In thousands of villages, small local industries were built up almost without cost to the central accumulation fund. The peasants “sat down and made their tools with their own hands.” This tremendous movement was accompanied by the creation of the so-called “people’s communes.” The results seem to have been staggering: doubling of steel production within one year; even doubling of the food-grain harvest in a like time.

The results of this movement are subjected to a critical appraisal elsewhere in this issue. It is a monstrously criminal distortion to call this equal sharing-out of poverty “communism”; it is, of course, nearer to war-communism than to the final commune, the goal Marx and Engels gave to the final stage of the socialist society, amidst plenty and by the disappearance of the “administration of men.” The “people’s commune,” on the contrary, pushes the “administration of men” to the highest conceivable level: it establishes a complete militarization of labor [10], The workers and intellectuals of the towns included in the people’s communes, who now have to share their lodgings and even some of their durable consumer goods (like bicycles, sewing machines, etc.) with the population of the countryside, will not show great enthusiasm for this movement.

But on the other hand, it would be completely wrong to compare this “acceleration movement” to Stalin’s forced collectivization. There is a tremendous difference between the two. When going into the kolkhoz, the Russian peasant of 1932–3 was worse off than before; when adhering to the “people’s commune” the Chinese peasant immediately reaps the dividend (or at least part of it) of the huge “low cost” investment projects of the last 12 months in the form of more and better food, more and better clothes, and more and better lodgings. The “acceleration” movement was possible only because it included a big and immediate increase in agricultural production, an immediate albeit moderate increase in the standard of living of the peasantry. Where Stalin experienced his biggest failure, Mao seems to be winning success, moderate or sensational according to the credit one gives to the current harvest figures. [11]

Will this success last? All will depend on the rate of growth of productivity in agricultural labor. Already today, complaints are appearing in the Chinese press that peasants are deserting the fields in order to work in the local industrial projects. The irrigation and land-reclamation projects must yield such an increase in labor productivity as to free a considerable part of the village population for the “investment projects.” Otherwise, the underemployed peasantry could become overemployed, i.e., crushed by a dangerous lengthening of the working day. Already today, one hears stories that only one Sunday a month (!) is a rest day in the new “accelerated” factories. The negative results of such practices on the productivity of labor would be terrible, especially if they are “normalized” and last for several years. And any decline in agricultural production would have disastrous effects on overall economic growth, as was the case in Russia during the First and part of the Second Five-Year Plan.

It will be necessary for the Chinese planners to restrain themselves after the big feat of 1958. Will they be able to do this, and to listen to the grumblings of discontent among the workers? We shall soon know. But whatever may be the distasteful aspects of the “accelerated” revolution in China, the comparison between China and India shows the decisive influence which the social revolution in city and countryside has upon the possibilities of a quick rate of growth of industry, without supplementary hardships for the mass of the people.

20 October 1958


1. Ragnar Nurkse: Problems of Capital Formation in Under-Developed Countries, pp. 163, Oxford, Basil Blackwell, 1953.

2. Paul A. Baran: The Political Economy of Growth, pp. 308, New York, Monthly Review Press, 1957.

3. In order to leave out complicated calculations of value production, we may assume that these workers produce some very rare industrial equipment, for which the social need remains unsatisfied even if production increases ten-fold, so that a tripling of production means a tripling of value produced, social average productivity of labor remaining unchanged outside this sector. The assumption is only apparently unreal; in fact, in the initial stages of industrialization, most heavy industrial plants operate precisely under such conditions.

4. These apologists of course also “forget” that Stalin opposed a quick increase in the rate of accumulation between 1924 and 1927; that thereby four years had been lost; and that the division of the accumulation fund of the First Five Year plan over the timespan 1924–1932, instead of being concentrated in 4 years, would have enabled to realize exactly the same projects at a considerably lower expense of hardship, sacrifice and ... loss of productivity of the workers and peasants.

5. The First Five-Year Plan of India estimated the number of underemployed adult males in Indian agriculture at the staggering figure of 70 million people!

6. In money terms, of course, increased agricultural production could mean, under conditions of stable currency, lower agricultural prices, and even lower money income of the peasants. This would be of no consequence, if at the same time a constant flow of industrial consumer goods, at falling prices, would be directed towards the villages.

7. In India, only 15% of the arable land is irrigated; in China only 45%.

8. D.K. Rangnekar: Poverty and Capital Development in India, pp. 316, Oxford University Press, 1958.

9. The exhaustion of Russian credits may also have some~ thing to do with this.

10. Victor Zorza has seen fit to state in the Manchester Guardian that “Mao takes the mantle of Trotsky” by militarizing labor. We have already explained at length the historical distortion of facts concerning Trotsky’s labor conceptions in 1920–21, in a polemic with Isaac Deutscher that appeared in Quatrième Internationale.

11. It is probable that the real increase in agricultural production has not been 100%, but only 50–60%. But even this increase is staggering.

Last updated on 9 October 2015