Dependency Theory

In brief

In the years after 1945, the dominant view of poverty held that poor countries were simply at an earlier stage of the same road every rich country had traveled: they lagged, and with time, capital, and the right institutions they would catch up. Dependency theory, forged in Latin America, denied this. Its claim was that the world economy is a single structure divided into a wealthy "center" and a poor "periphery," and that the periphery is not merely behind but is actively held back by the relationship itself. Raul Prebisch (1901 to 1986), working at the United Nations Economic Commission for Latin America, argued that countries specializing in primary exports (coffee, copper, wheat, oil) face a long, structural decline in what their exports buy: the prices of raw materials fall relative to the prices of manufactured goods, so the same ton of copper buys fewer machines each decade. Trade, far from lifting everyone as the textbooks promised, drained the periphery. The remedy was to stop exporting one's future and to build industry at home behind tariff walls, a strategy called import substitution.

The full treatment

The problem it answers

The reigning doctrine of trade, David Ricardo's theory of comparative advantage, said that each country should specialize in whatever it produces relatively best and trade for the rest, and that all parties gain. On this logic Latin America should grow coffee, mine tin, and buy its manufactures from Europe and the United States. Prebisch and his colleagues looked at a century of data and saw the opposite of shared gains. The industrial countries got richer; the primary exporters ran to stand still. The question dependency theory set out to answer was: why does trade, which is supposed to lift both sides, leave the periphery poorer relative to the center, decade after decade?

How it works

The engine of the theory is the Prebisch-Singer hypothesis, named for Prebisch and the economist Hans Singer (1910 to 2006), who reached a similar conclusion independently in 1950. It holds that the terms of trade for primary producers tend to deteriorate over the long run. Two mechanisms drive this. On the demand side, as people grow richer they spend a smaller share of their income on food and raw materials and a larger share on manufactures and services, so demand for primary goods grows slowly (an application of what economists call Engel's law). On the supply and bargaining side, gains from rising productivity are captured differently at the two poles: in the industrial center, strong firms and organized labor absorb productivity gains as higher profits and wages, keeping prices up; in the periphery, weak labor and abundant land push productivity gains out as lower prices. The result is a structural transfer: the fruits of the periphery's own efficiency flow to the consumers of the center.

For the structuralists, this was not an accident to be corrected by better policy within the existing pattern. It was built into the position of being a primary exporter. Andre Gunder Frank (1929 to 2005) pushed the argument to its sharpest edge in "The Development of Underdevelopment" (1966). Underdevelopment, he insisted, is not an original state, like a plant that has not yet grown. It is produced. Through a chain he called metropolis and satellite, each metropolis extracts surplus from its satellites, from the world city down to the provincial town down to the landless laborer, so that the same process that develops the center underdevelops the edge. The periphery is poor because the center is rich, and by the same act.

The prescription: import substitution

If exporting raw materials is a trap, the exit is to make at home what you used to import. Import substitution industrialization (ISI) meant raising tariffs and quotas against foreign manufactures, subsidizing and protecting infant domestic industries, and often having the state itself build steel mills, oil companies, and utilities. The point was to move a country up the value chain, from selling cheap commodities to making its own manufactures, and so to keep the productivity gains inside its own borders. Across the 1950s and 1960s most of Latin America, and later much of the newly independent world, adopted some version of this program. Prebisch, as the intellectual leader of the UN commission and later the first head of the UN Conference on Trade and Development, carried the argument onto the world stage as a demand for a fairer international order.

Distinctions that matter

Dependency theory came in more than one temperature. Frank's version was stark and near-total: the periphery could not develop within the capitalist world system, only by breaking from it, a conclusion that pointed toward revolution and delinking. The version of Fernando Henrique Cardoso (born 1931) and Enzo Faletto (1935 to 2003), in "Dependency and Development in Latin America" (1969), was subtler. They allowed that a dependent country could grow, even industrialize, but in a distorted, "associated" way that served foreign capital and a narrow local elite rather than the broad population. Their emphasis was less on iron laws than on the specific history and internal class alliances of each country. It is a mark of the theory's reach, and its later reversal, that Cardoso went on to serve as president of Brazil from 1995 to 2003, presiding over market reforms his younger self had criticized.

Lineage

The theory has two roots. The first is Latin American structuralism, the school around Prebisch and the UN commission, which insisted that developing economies are structurally different from mature ones and cannot be understood with models built for the latter. The second is the Marxist tradition of imperialism, the writings of Lenin, Rosa Luxemburg, and Paul Baran, which read the poverty of the colonized world as the direct product of extraction by the industrial powers. Dependency theory fused a technical thesis about prices with a political thesis about power. It fed forward, in turn, into Immanuel Wallerstein's world-systems theory, which took the center-periphery relation and scaled it into a single account of a global capitalist system with a semi-periphery in between. Where dependency theory analyzed nations caught in a relationship, world-systems theory analyzed the whole system as the primary unit.

The strongest case for it

Dependency theory named something the optimistic development economics of its day could not explain: the persistence, over generations, of a global gap that trade was supposed to close. It was right that a country's position in the world economy shapes its prospects, and that the composition of what you export, not just how much, matters enormously. An economy that only digs and grows things is exposed in ways an economy that also builds and designs things is not. The terms-of-trade worry was not paranoia: commodity prices are volatile and, over long stretches, many have indeed weakened against manufactures, leaving commodity-dependent states hostage to booms and busts they do not control. The theory also punctured the comfortable assumption that the rich world's path was open to all, and it put the history of colonial extraction, which the modernization story quietly omitted, back at the center of the explanation. Import substitution, whatever its later failures, did midwife real industrial bases in Brazil, Mexico, and elsewhere that had not existed before.

The strongest case against it

The sharpest blow came from history. The East Asian economies (South Korea, Taiwan, Singapore, Hong Kong) were peripheral primary exporters in the 1950s, exactly the countries dependency theory said could not develop within the world system. They grew explosively from the 1960s onward, precisely by plunging into world trade as exporters of manufactures rather than by delinking from it. Meanwhile the Latin American economies that stayed longest with import substitution ran into stagnation, chronic inflation, balance-of-payments crises, and the debt disaster of the 1980s, as protected industries never became efficient enough to compete and states borrowed to cover the gap. The prediction and the prescription both appeared to fail on their home ground.

The theory also drew fire from within Marxism. Bill Warren (1935 to 1978), in "Imperialism: Pioneer of Capitalism" (1980), argued that Marx himself had expected capitalism to develop the colonized world, however brutally, and that the evidence showed capitalist penetration raising output, life expectancy, and industrialization across the poor world, not freezing it. Robert Brenner attacked the theory for locating exploitation in exchange and trade rather than in production and class relations, which he held to be the real motor, calling the result a "neo-Smithian Marxism" that had drifted from its own foundations. Economists disputed the empirics too: the long-run decline in the terms of trade is real for some commodities and periods but far from the universal law the theory needed, and much of Prebisch's original data was later shown to be sensitive to how manufactured prices were measured. Critics added that dependency theory often treated the periphery as a passive victim, saying little about how domestic institutions, corruption, and policy choices shaped who developed and who did not.

Where it stands now

As a program of government, dependency theory is over. The debt crises of the 1980s and the East Asian counterexample discredited import substitution, and the market reforms of the 1990s, the so-called Washington Consensus, swept the other way toward open trade and export orientation. But the theory did not simply vanish; it decomposed into more durable pieces. Its core insight, that where a country sits in the global division of labor shapes what it can become, is now common ground even among economists who reject the rest of it. Its concern with the composition of exports survives in the modern literature on economic complexity and industrial policy, which again asks how countries move from making simple things to making sophisticated ones. And its moral charge, that the wealth of the center and the poverty of the periphery are two faces of one history, still animates debates over global inequality, trade rules, and reparations. The specific machinery, declining terms of trade as an iron law, delinking as a cure, has been retired. The question it asked, whether the game is rigged by structure rather than merely lost by latecomers, has not.

Test yourself

Two poor countries in 1960, both selling raw materials to the rich world. One raises tariffs and builds its own factories for the home market; the other stays open and pushes to export manufactures. Dependency theory bet on the first and the record favored the second. Before you conclude the theory was simply wrong, ask a harder question: was the winning country's success available to everyone at once, or did it depend on rich markets willing to buy its exports, markets that could not absorb the same strategy from every poor country simultaneously? Notice whether your answer rescues the theory's structural intuition even as it buries its prescription.