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Dependency theory or dependencia theory' is essentially a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. It is a central contention of dependency theory that poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world system".

The theory arose around 1950 as a reaction to some earlier theories of development which held that all societies progress through similar stages of development, that today's underdeveloped areas are thus in a similar situation to that of today's developed areas at some time in the past, and that therefore the task in helping the underdeveloped areas out of poverty is to accelerate them along this supposed common path of development, by various means such as investment, technology transfers, and closer integration into the world market. Dependency theory rejected this theory, arguing that underdeveloped countries are not merely primitive versions of developed countries, but have unique features and structures of their own; and, importantly, are in the situation of being the weaker members in a world market economy, whereas the developed nations were never in an analogous position; they never had to exist in relation to a bloc of more powerful countries than themselves. Dependency theorists argued, in opposition to free market economists, that underdeveloped countries needed to reduce their connectedness with the world market so that they could pursue a path more in keeping with their own needs, less dictated by external pressures.

Basics

The premises of dependency theory are that:

  1. Poor nations provide natural resources, cheap labor, a destination for obsolete technology, and markets to the wealthy nations, without which the latter could not have the standard of living they enjoy.
  2. Wealthy nations actively perpetuate a state of dependence by various means. This influence may be multifaceted, involving economics, media control, politics, banking and finance, education, culture, sport, and all aspects of human resource development (including recruitment and training of workers).
  3. Wealthy nations actively counter attempts by dependent nations to resist their influences by means of economic sanctions and/or the use of military force.


Dependency theory states that the poverty of the countries in the periphery is not because they are not integrated into the world system, or not 'fully' integrated as is often argued by free market economists, but because of how they are integrated into the system.

Dependency theory originates with two papers published in 1949 – one by Hans Singer, one by Raúl Prebisch – in which the authors observe that the terms of trade for underdeveloped countries relative to the developed countries had deteriorated over time: the underdeveloped countries were able to purchase fewer and fewer manufactured goods from the developed countries in exchange for a given quantity of their raw materials exports. This idea is known as the Singer-Prebisch thesis. Prebisch, an Argentinian economist at the United Nations Commission for Latin America (UNCLA), went on to conclude that the underdeveloped nations must employ some degree of protectionism in trade if they were to enter a self-sustaining development path. He argued that Import-substitution industrialisation (ISI), not a trade-and-export orientation, was the best strategy for underdeveloped countries. The theory was developed from a Marxian perspective by Paul A. Baran in 1957 with the publication of his The Political Economy of Growth. Dependency theory shares many points with earlier, Marxist, theories of imperialism by Rosa Luxemburg and V.I. Lenin, and has attracted continued interest from Marxists. Mattias Vernengo, a University of Utah economist, identifies two main streams in dependency theory: the Latin American Structuralist, typified by the work of Prebisch, Celso Furtado and Anibal Pinto at the United Nations Economic Commission for Latin America (ECLAC, or, in Spanish, CEPAL); and the American Marxist, developed by Paul A. Baran, Paul Sweezy, and Andre Gunder Frank.

The theory was popular in the 1960s and 1970s as a criticism of modernization theory (the "stages" hypothesis mentioned above), which was falling increasingly out of favor due to continued widespread poverty in much of the world.

Many dependency theorists advocate social revolution as an effective means to the reduction of economic disparities in the world system.

Poor nations are at a disadvantage in their market interactions with wealthy nations. There are several aspects to this. One is that a high proportion of the developing nations' economic activity consists of exports and imports from the developed nations—in many cases with only one or a few developed nations. By contrast, only a small proportion of the economic activity of the developed nations consists of trade with the developing nations; a developed nation's trade consists mostly of internal trade and trade with other developed nations. This asymmetry puts a poor nation in a weak bargaining position vis a vis a developed nation. There are also historical aspects: the poor nations are almost all former colonies of the developed nations; their economies were built to serve the developed nations in a two-fold capacity: as sources of cheap raw materials and as highly populous markets for the absorption of the developed nations' manufactured output.

According to Vernengo, the Latin American Structuralist and the American Marxist schools had significant differences but agreed on some basic points:

Baran and others frequently spoke of the international division of labour – skilled workers in the center, unskilled in the periphery – when discussing key features of dependency.

Baran placed surplus extraction and capital accumulation at the center of his analysis. Development depends on a population's producing more than it needs for bare subsistence (a surplus). Further, some of that surplus must be used for capital accumulation - the purchase of new means of production - if development is to occur; spending the surplus on things like luxury consumption does not produce development. Baran noted two predominant kinds of economic activity in poor countries. In the older of the two, plantation agriculture, which originated in colonial times, most of the surplus goes to the landowners, who use it to emulate the consumption patterns of wealthy people in the developed world; much of it thus goes to purchase foreign produced luxury items—automobiles, clothes, etc. -- and little is accumulated for investing in development. The more recent kind of economic activity in the periphery is industry—but of a particular kind. It is usually carried out by foreigners, although often in conjunction with local interests. It is often under special tariff protection or other government concessions. The surplus from this production mostly goes to two places: part of it is sent back to the foreign shareholders as profit; the other part is spent on conspicuous consumption in a similar fashion to that of the plantation aristocracy. Again, little is used for development. Baran thought that political revolution was necessary to break this pattern.

In the 1960s, members of the Latin American Structuralist school argued that there is more latitude in the system than the Marxists believed. They argued that it allows for partial development or "dependent development" – development, but still under the control of outside decision makers. They cited the partly-successful attempts at industrialisation in Latin America around that time (Argentina, Brazil, Mexico) as evidence for this hypothesis. They were led to the position that dependency is not a relation between commodity exporters and industrialised countries, but between countries with different degrees of industrialisation. In their approach there is a distinction made between the economic and political spheres: economically, one may be developed or underdeveloped; but even if (somewhat) economically developed, one may be politically autonomous or dependent. More recently, Guillermo O'Donnell has argued that constraints placed on development by neoliberalism were lifted by "the military coups in Latin America that came to promote development in authoritarian guise" (Vernengo's words, summarising O'Donnell, 1982).

The importance of technology, multinational corporations, and State promotion of technology were emphasised by the Latin American Structuralists.

Fajnzybler has made a distinction between systemic or authentic competitiveness, which is the ability to compete based on higher productivity, and spurious competitiveness, which is based on low wages.

The third-world debt crisis of the 1980s and continued stagnation in Africa and Latin America in the 1990s caused some doubt as to the feasibility or desirability of "dependent development".

Vernengo (2004) has suggested that the sine qua non of the dependency relationship is not the difference in technological sophistication, as traditional dependency theorists believe, but rather the difference in financial strength between core and peripheral countries – particularly the inability of peripheral countries to borrow in their own currency. He believes that the hegemonic position of the United States is very strong because of the importance of its financial markets and because it controls the international reserve currency – the US dollar. He believes that the end of the Bretton Woods international financial agreements in the early 1970s considerably strengthened the United States' position because it removed some constraints on their financial actions.

"Standard" dependency theory differs from Marxism, in arguing against internationalism and any hope of progress in less developed nations towards industrialization and a liberating revolution. Theotonio dos Santos described a 'new dependency', which focused on both the internal and external relations of less-developed countries of the periphery, derived from a Marxian analysis. Former Brazilian President Fernando Henrique Cardoso wrote extensively on dependency theory while in political exile, arguing that it was an approach to studying the economic disparities between the centre and periphery. The American sociologist Immanuel Wallerstein refined the Marxist aspect of the theory, and called it the "World-system." It has also been associated with Galtung's Structural Theory of Imperialism.

With the economic growth of India and some East Asian economies, dependency theory has lost some of its former influence. It is more widely accepted in disciplines such as history and anthropology . It also underpins some NGO campaigns, such as Make Poverty History and the Fair Trade movement.

Dependency was said to be created with the industrial revolution and the expansion of European empires around the world, due to their superior military power and accumulated wealth. Some argue that before this expansion, the exploitation was internal, with the major economic centres dominating the rest of the country (for example: Southeast England dominating Britain, or the Northeast United States dominating the South and West). The establishment of global trade patterns in the nineteenth century allowed capitalism to spread globally . The wealthy became more isolated from the poor, because they gained disproportionately from imperialistic practices . This minimized the dangers of domestic peasant revolts and rebellions by the poor . Rather than turn on their oppressors as in the French Revolution or in various communist revolutions, the poor could no longer reach the wealthy and thus the less developed nations became engulfed in regular civil wars . Once the imperialist rich nations established formal control, it could not be easily removed . This control ensures that all profits in less developed countries are remitted to the developed nations , preventing domestic reinvestment, causing capital flight and thus hindering growth .

Other dependency theorists

Two other early writers relevant to dependency theory were François Perroux and Kurt Rothschild. Other leading dependency theorists include Herb Addo, Walden Bello, Fernando Henrique Cardoso, Armando Cordova, Ernest Feder, Andre Gunder Frank, Walter Rodney, Pablo Gonzales Casanova, Keith Griffin, Kunibert Raffer, Paul Israel Singer, and Osvaldo Sunkel. Many of these authors focused their attention on Latin America; the leading dependaency theorist in the Islamic world is the Egyptian economist Samir Amin .

Later, world systems theory expanded on dependency arguments. It postulates a third category of countries, the semi-periphery, intermediate between the core and periphery. The semi-periphery is industrialised, but with less sophistication of technology than in the core; and it does not control finances.Capitalism in the periphery, like in the center, is characterized by strong cyclical fluctuations.

The rise of one group of semi-peripheries tends to be at the cost of another group, but the unequal structure of the world economy based on unequal exchange tends to remain stable .

Tausch (2003) traces the beginnings of World systems theory to the writings of the Austro-Hungarian socialist Karl Polanyi after the First World War. In its present form it is usually associated with the work of Immanuel Wallerstein.

Ever since the capitalist world system evolved, there is a stark distinction between the nations of the center and the nations of the periphery.

Former Brazilian President Fernando Henrique Cardoso, when he was still a social scientist, summarized his version of dependency theory as follows:

  • there is a financial and technological penetration by the developed capitalist centers of the countries of the periphery and semi-periphery;


  • this produces an unbalanced economic structure both within the peripheral societies and between them and the centers;


  • this leads to limitations on self-sustained growth in the periphery;


  • this favors the appearance of specific patterns of class relations;


  • these require modifications in the role of the state to guarantee both the functioning of the economy and the political articulation of a society, which contains, within itself, foci of inarticulateness and structural imbalance.


Tausch (2003), based on works of Amin from 1973 - 1997, lists the following main characteristics of periphery capitalism:

  1. Regression in both agriculture and small scale industry characterizes the period after the onslaught of foreign domination and colonialism
  2. Unequal international specialization of the periphery leads to the concentration of activities in export oriented agriculture and or mining. Some industrialization of the periphery is possible under the condition of low wages, which, together with rising productivity, determine that unequal exchange sets in (double factorial terms of trade 1.0; see Raffer, 1987)
  3. These structures determine in the long run a rapidly growing tertiary sector with hidden unemployment and the rising importance of rent in the overall social and economic system
  4. Chronic current account balance deficits, re-exported profits of foreign investments, and deficient business cycles at the periphery that provide important markets for the centers during world economic upswings
  5. Structural imbalances in the political and social relationships, inter alia a strong 'compradore' element and the rising importance of state capitalism and an indebted state class


The analysis of development patterns in the 1990s and beyond is complicated by the fact that capitalism develops not smoothly, but with very strong and self-repeating ups and downs, called cycles. Relevant results are given in studies by Joshua Goldstein, Volker Bornschier, and Luigi Scandella .

Dependency theorists hold that short-term spurts of growth notwithstanding, long-term growth in the periphery will be imbalanced and unequal, and will tend towards high negative current accountbalances (Tausch 2003). Cyclical fluctuations also have a profound effect on cross-national comparisons of economic growth and societal development in the medium and long run. What seemed like spectacular long-run growth, may in the end turn out to be just a short run cyclical spurt after a long recession. Cycle time plays an important role. Giovanni Arrighi believed that the logic of accumulation on a world scale shifts along time, and that we again witness during the 1980s and beyond a deregulated phase of world capitalism with a logic, characterized - in contrast to earlier regulatory cycles - by the dominance of financial capital .

At this stage, the role of unequal exchange in the entire relationship of dependency cannot be underestimated. Unequal exchange is given, if double factorial terms of trade of the respective country are 1.0 (Raffer, 1987, Amin, 1975). Labor in the export sectors of the periphery is being exploited, while monopolistic structures of international trade let the centers profit from the high prices of their exports to the world markets in comparison to their labor productivity.

Implications

While there are many different and conflicting ideas on how developing countries can alleviate the effects of the world system, several of the following protectionist/nationalist practices were adopted at one time or another by such countries:

  • Promotion of domestic industry and manufactured goods. By imposing subsidies to protect domestic industries, poor countries can be enabled to sell their own products rather than simply exporting raw materials.


  • Import limitations. By limiting the importation of luxury goods and manufactured goods that can be produced within the country, the country can reduce its loss of capital and resources.


  • Forbidding foreign investment. Some governments took steps to keep foreign companies and individuals from owning or operating property that draws on the resources of the country.


  • Nationalization. Some governments have forcibly taken over foreign-owned companies on behalf of the state, in order to keep profits within the country.


Criticism

Some free-market economists, such as Peter Bauer and Martin Wolf, writing primarily for non-economists, have argued that dependency theory leads to:

  • Corruption. Free-market economists hold that state-owned companies have higher rates of corruption than privately owned companies.


  • Lack of competition. By subsidizing in-country industries and preventing outside imports, these companies may have less incentive to improve their products, to try to become more efficient in their processes, to please customers, or to research new innovations.


  • Unsustainability. Reliance of industries on government support may not be sustainable for very long, particularly in poorer countries and countries which largely budget out of foreign aid.


  • Domestic opportunity costs. Subsidies on domestic industries come out of state coffers and therefore represent money not spent in other ways, like development of domestic infrastructure, seed capital or need-based social welfare programs. At the same time, the higher prices caused by tariffs and restrictions on imports require the people either to forgo these goods altogether or buy them at higher prices, forgoing other goods.


Proponents of dependency theory claim that the theory of comparative advantage breaks down when capital (including both physical capital, like machines, as well as financial capital) is highly mobile, as it is under the conditions of globalization. For this reason, it is claimed that dependency theory can offer new insights into a world of highly mobile multinational corporations.

This has been countered by the argument that the conditions of globalization actually make comparative advantage more sound. The theory of comparative advantage suggests that the gains from trade will be greater when transportation costs and information/communication costs are lower. Globalization has lowered these costs.

Market economists cite a number of examples in their arguments against dependency theory. The improvement of Indiamarker's economy after it moved from state-controlled business to open trade is one of the most often cited (see also economy of India, Commanding Heights). India's example seems to contradict dependency theorists' claims concerning comparative advantage and mobility, as much as its economic growth originated from movements such as outsourcing - one of the most mobile forms of capital transfer.

Further reading

The voluminous literature on the subject is surveyed and documented in (among others):

Amin S. (1976), 'Unequal Development: An Essay on the Social Formations of Peripheral Capitalism' New York: Monthly Review Press.

Amin S. (1994c), 'Re-reading the postwar period: an intellectual itinerary' Translated by Michael Wolfers. New York: Monthly Review Press.

Amin S. (1997b), 'Die Zukunft des Weltsystems. Herausforderungen der Globalisierung. Herausgegeben und aus dem Franzoesischen uebersetzt von Joachim Wilke' Hamburg: VSA.

Bornschier V. (1976), 'Wachstum, Konzentration und Multinationalisierung von Industrieunternehmen' Frauenfeld and Stuttgart: Huber.

Bornschier V. (1996), 'Western society in transition' New Brunswick, N.J.: Transaction Publishers.

Bornschier V. and Chase - Dunn Ch. K (1985), 'Transnational Corporations and Underdevelopment' N.Y., N.Y.: Praeger.

Köhler G. and Tausch A. (2002) Global Keynesianism: Unequal exchange and global exploitation. Huntington NY, Nova Science.

Sunkel O. (1966), 'The Structural Background of Development Problems in Latin America' Weltwirtschaftliches Archiv, 97, 1: pp. 22 ff.

Sunkel O. (1973), 'El subdesarrollo latinoamericano y la teoria del desarrollo' Mexico: Siglo Veintiuno Editores, 6a edicion.

Tausch A. (1993, with Fred Prager as co-author), 'Towards a Socio - Liberal Theory of World Development' Basingstoke and New York: Macmillan/St. Martin's Press.

Tausch A. and Peter Herrmann (2002) Globalization and European Integration. Huntington NY, Nova Science.

Tausch A., Social Cohesion, Sustainable Development and Turkey's Accession to the European Union: Implications from a Global Model, Alternatives: Turkish Journal of International Relations, '2(1) Spring 2003.

Yotopoulos P. and Sawada Y. (1999), FREE CURRENCY MARKETS, FINANCIAL CRISES AND THE GROWTH DEBACLE: IS THERE A CAUSAL RELATIONSHIP?, Revised November 1999, Stanford University, USA, and University of Tokyo.

Yotopoulos P. and Sawada Y. (2005), Exchange Rate Misalignment: A New test of Long-Run PPP Based on Cross-Country Data (CIRJE Discussion Paper CIRJE-F-318), February 2005, Faculty of Economics, University of Tokyo.

See also

colonial situation as a social process

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