Theory of Wealth Accumulation

Why is there a wealth gap between the northern countries and the southern countries? Theories such as economic liberalism, world system theory, and dependency theory, have emerged to explain the North-South Gap. A clear understanding of these distinct theories is essential to drawing the similarities and differences between how Northern and Southern countries earn their wealth. MORE?

Reiterating the previous sentence, a comprehensive understanding of economic liberalism theory is crucial. Coming from the latin root, liber, meaning free, the notion of economic liberalism was developed by Adam Smith who contended that the power of free markets was unprecedented and would be the most ideal system. He advocated for the idea of free trade in conjunction with the reduction of government controls and regulations, as this efficiency of trade, coming from greater lending and investments, would stimulate the economy, thus growing it. This concept was laissez-faire (let it be), the precursor to economic liberalism theory. Now, economic liberalism holds that free trade makes everyone richer through positive sum gains. The most common example used is a pie. From a mercantilist perspective, states would merely compete amongst one another to gain a larger slice of the pie; in contrast, liberalists argue that free trade would allow the pie to enlarge, increasing everyone’ share. How exactly does this play in reality? Essentially, liberalized economies empower investors and corporations to make enormous sums of money, including countries in the “North”, as those states would gain revenue through taxation. Likewise, while this also reduces power of governments in the “South” to shape economic policies domestically and to respond to problems when they occur, neoliberalist policies, theoretically, also empower LDCs, as salaries can be taxed on by the government for those working in corporations, providing the government with another financial stream.

The global system of regional class divisions has been seen by some IR scholars as a world-system or a capital world economy. This view is Marxist in orientation ( focusing on economic classes) and relies on a global level of analysis. In the world system, class division are regionalized. Region in the global South mostly extract raw materials.- work that use much labor and little capital and pays low wages. Industrialized regions mostly manufacture goods- work that uses more capital, requires more skilled labor and pays worker higher wages. The manufacturing regions are called the core of the world system. This constantly reinforces the dominance of the core countries

Marxist IR scholars have developed this theory to explain the lack of accumulation in the third world. It is define as a situation in which accumulation of capital cannot sustain itself internally. A dependent country must borrow capital goods; its debt payments then reduce the accumulation of surplus. Dependency is a form of international interdependence- rich regions need to loan out their money just as poor ones need to borrow it. Foreign capital invested in a third world country to extract a particular raw material in a particular place, it only leaves the the country with some jobs for few local workers. Over time, the resource depleted. Another pattern is that national controlled production, a local capitalist control the cycle of accumulation based on production. The profit goes to the local capitalist mostly and that builds up a powerful class of rich owners within the countries.