Dependency theory

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Dependency theory is a body of social science theories, both from developed and developing nations, which are 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." This is based on the Marxist analysis of inequalities within the world system, but contrasts with the view of free market economists who argue that free trade advances poor states along an enriching path to full economic integration. As such, dependency theory figures prominently in the debate over how poor countries can best be enriched or developed.

Contents

[edit] Basics

The premises of dependency theory are as follows:

  • Poor nations provide market access to wealthy nations (e.g., by allowing their people to buy manufactured goods and obsolete or used goods from wealthy nations), permitting the wealthy nations to enjoy a higher standard of living.
  • Wealthy nations actively (though perhaps unconsciously) 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).
  • Wealthy nations actively counter attempts by dependent nations to resist their influences by means of economic sanctions and/or the use of military force.

Consistent with these assumptions, many dependency theorists advocate social revolution as an effective means to the reduction of economic disparities in the world system.

Dependency theory first emerged as a reaction to liberal free trade theories in the 1950s, advocated by Raúl Prebisch, whose research with the Economic Commission on Latin America (ECLA) suggested that decreases in the wealth of poor nations coincided with increases in the wealth of rich nations. Paul A. Baran developed dependency theory from Marxian analysis. The theory quickly divided into diverse schools. Some, like Andre Gunder Frank, adapted it to Marxism. "Standard" dependency theory differs from Marxism, however, 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.

[edit] Spread of theory

The theory became popular in the 1960s and 1970s as a criticism of modernization theory (also known as development theory), which was falling increasingly out of favor due to continued widespread poverty in much of the world. As such, dependency theory stands in sharp contrast with views of development tied to classical and free-market economics. With the economic growth of India and some East Asian economies, however, dependency theory has itself lost some of its former influence. It is more widely accepted in disciplines such as history and anthropology[citation needed]. 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[citation needed]. The wealthy became more isolated from the poor, because they gained disproportionately from imperialistic practices[citation needed]. This minimized the dangers of domestic peasant revolts and rebellions by the poor[citation needed]. Rather than turn on their oppressors as in the American Civil War or in communist revolutions, the poor could no longer reach the wealthy and thus the less developed nations became engulfed in regular civil wars[citation needed]. Once the imperialist rich nations established formal control, it could not be easily removed[citation needed]. This control ensures that all profits in less developed countries are remitted to the developed nations[citation needed], preventing domestic reinvestment, causing capital flight and thus hindering growth[citation needed].

[edit] Quantitative dependency theory and the globalization of the dependency argument

Dependency authors explain backwardness and stagnation by the insertion of these countries as dependents in the world economy. Starting with the writings of Perroux, Prebisch and Rothschild in the 1930s, leading spokespersons for dependency theory (Herb Addo, Paul A. Baran, Walden Bello, Fernando Henrique Cardoso, Armando Cordova, Ernest Feder, Andre Gunder Frank, Pablo Gonzales Casanova, Keith Griffin, Kunibert Raffer, Paul Israel Singer, Osvaldo Sunkel, et al.) stressed the unequal and socially imbalanced nature of development in regions that are highly dependent on investment from the highly developed countries. Short-term spurts of growth notwithstanding, long-term growth will be imbalanced and unequal[citation needed], and will tend towards high negative current account balances[citation needed]. Many of these authors focused their attention on Latin America; their leading spokesperson in the Islamic world is the Egyptian economist Samir Amin.

Later world systems theory - that started with the writings of the Austro-Hungarian socialist Karl Polanyi after the First World War - was offered as support and expansion of dependency arguments. Capitalism in the periphery, like in the center, is characterized by strong cyclical fluctuations[citation needed], and there are centers, semi-peripheries and peripheries. 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[citation needed]


Dependency and world system theory generally hold that poverty and backwardness in poor countries - like the Islamic world - are caused by the peripheral position that these nations hold in the international division of labor. Ever since the capitalist world system evolved, there is a stark distinction between the nations of the center and the nations of the periphery[citation needed]. Former Brazilian President Fernando Henrique Cardoso, when he was still a social scientist, summarized the quantifiable essence of dependency theories 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 (Cardoso, 1979).

The large number of empirical studies on peripheral capitalism and development on a world level in the B-phase of the Kondratieff cycle from 1965 onwards go back, in a way, to the classic essay published by Johan Galtung in the Journal of Peace Research (Galtung, 1971). For Galtung, income inequality, and hence, relative poverty in the nations of the world system is linked to trade partner concentration of the peripheral country and a trade structure that relies on the exports of raw materials and the imports of finished products. Volker Bornschier, Christopher Chase-Dunn, and their school later reformulated the argument: not only income inequality, but also long term economic growth are being negatively determined by dependency from transnational capital, to be measured by a weighted share of transnational investment penetration per the economic and demographic size of a nation. Later essays extended the argument to other indicators of human well-being, the environment as well as democratic stability. Macroquantitative analyses modeled around the dependency/world system school have generally been consistent with dependency arguments, showing that powerful influences cause inequality and external imbalances in the periphery[citation needed].

There has been a tendency in more recent cross-national research to focus not only on such variables as economic growth, income inequality and a few other indicators of social well-being, but to interpret "well-being" more widely to include also democracy, the environment, gender inequality and human development. Research results were published in the leading peer-reviewed international journals of the social sciences, like the American Sociological Review, the American Journal of Sociology, Social Forces and many others. In a recent review on the subject, Tausch (2006) counted far more than 240 quantitative articles in major peer-reviewed journals on "dependency" and "development".

What are the negative social and ecological consequences of the dependent insertion into the world economy on a global scale and in the Southern and Southeastern neighborhood of Europe?

A rising degree of monopolization in the leading center countries over time[citation needed] determines that, in order to keep the share of wages at least constant, a rising exploitation of the raw material producers sets in to offset the balance[citation needed]. A great deal of evidence has been adduced to support dependency theory[citation needed]. However, it would be wrong to portray dependency simply in terms of MNC penetration, and to neglect other aspects of that relationship. Such authors as Paul Israel Singer and Arno Tausch have put emphasis on the resource balance as an indicator of the weight of foreign saving. Other formulations of dependency insisted on unequal exchange which, according to one such formulation, hampers development (i.e. double factorial terms of trade of the respective country are < 1.0; see Raffer, 1987, Amin, 1975, Kohler/Tausch, 2002).

Labor in the export sectors of the periphery is being exploited[citation needed], 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[citation needed].

Neo-dependency and world system schools (see Tausch and Prager, 1993) fear in addition that the most recent tendencies of world capitalism will strongly work against high female employment and create female unemployment, and they would especially expect two hypotheses to hold:

(i) that transnational capital marginalizes female labor power

(ii) that the dynamics of growth turn away from those countries, where women still have a strong position on the labor market.

Countries as far apart as Africa and Asia, just as Poland from 1795 - 1918, did not constitute national states during the formative Industrial Revolution. Their economies were geared to the needs of colonial powers. The structural heterogeneity between the different economic sectors on the one hand and the 'modern', export oriented sector, the medium sector and the 'traditional sector' in agriculture, industry and services, became the main reason for the unequal income distribution in the countries of the periphery. Colonial trade, foreign investment in the 19th Century, import substitution in the first half of the 20th Century, and the new international division of labor that we observe from the middle of the 1960s onwards did not really change the structures of inequality in the world system[citation needed]. While mass demand and agricultural structures (Elsenhans, 1983) were responsible for the transition from the tributary mode of production in Western Europe to capitalism from the Long 16th Century onwards, periphery capitalism was and is characterized by the following main tendencies (Amin, 1973 - 1997):

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. the development blocks of peripheral capitalism (chronic current account balance deficits, re-exported profits of foreign investments, deficient business cycles of 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

For this reason, most concept of dependence at least includes three dimensions:

  • unequal exchange or low comparative price levels, which are measured as the ratio between GDP at purchasing power parity rates and GDP at international exchange rates
  • MNC penetration
  • the resource balance.

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.

Cyclical fluctuations have also a profound effect on cross-national comparisons of economic growth and societal development in the medium and long run. What could have been 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. Since double factorial terms of trade are simply net barter terms of trade weighted by productivities (F) of X, exports, and M, imports, the formula

(1) ((PX * FX)/(PM*FM)) = 1

denotes the conditions of ‘equal’ exchange as opposed to unequal exchange:

(2) ((PX * FX)/(PM*FM)) = < 1.0

while nations with

(3) ((PX * FX)/(PM*FM)) = > 1.0

are the countries that benefited from unequal exchange.

Losses or gains from unequal transfer are calculated as the difference between a "fair value" of exports/imports and the "actual (unfair) value" of exports/imports. The estimation formula according to Kohler/Tausch is:

(4) T = d*X - X

where

(5) d = the exchange rate deviation index (also designated as "ERD" or “ERDI” in the literature)

X = the volume of exports from a low- or middle-income country to high-income countries (valued at the actual exchange rate)

T = the unrecorded transfer of value (gain or loss) resulting from unequal transfer

The transfer of value from the peripheries to the center, according to the reasoning put forward by Gernot Kohler, is gigantic, and amounts to 24% of Periphery GDP in 1995. (Number of countries: OECD N=19 (1965) and N=22 (1995); NON-OECD N=88 (1965) and N=97 (1995)) [See Kohler/Tausch, 2002]

[edit] 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.

[edit] Criticism by Neo-liberal Economists

Dependency theory has been criticized by free-market economists such as Peter Bauer and Martin Wolf, who believe that the promulgation of the 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.
  • Sustainability. 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. Two of the key assumptions of comparative advantage - zero transportation costs and zero communication cost - are arguably more realistic in the contemporary global marketplace than in earlier times. While zero communication costs are supported by the internet, it would appear, however, that the theory of the tendency to zero transport costs is dependent on the costs of energy. Furthermore, the assumptions of free trade models only ever includes two factors of production - namely the globalisation of capital and resources, but not labour. Currently the free movement of labour is being restricted world-wide with various forms of immigration control.

Market economists cite a number of examples in their arguments against dependency theory. The improvement of India'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. However, South Korea was able to rise out of poverty while using many tenets which Dependency theory advises[citation needed].

Free market theorists see dependency theorists' complaints as legitimate, but their policy prescriptions as self-fulfilling prophecies, in that the policies only aggravate the disparity between the developed nations and the underdeveloped countries.

[edit] Towards a Neo-classical/Dependency Theory Synthesis?

Future interesting debates could touch upon the so-called Balassa-Samuelson effect, especially in the new member countries of the European Union in Eastern Europe, and the problem of the asymmetrical reputation of currencies.

Established economics teaches us that for income gaps to be bridged, a process of convergence sets in that was described by Bela Balassa and Paul Samuelson, independently from each other, more than 4 decades ago, and which is called ever since the Balassa-Samuelson effect. For dependency theory, this effect is as important as for standard economics. Components of, say, electricity plants in rich and poor countries will be traded on the world market at about the same, high world market prices, while a haircut in a rich country will be much more expensive than a haircut in a poor country. For economists, these huge differences of price levels in the non-tradable sectors are usually interpreted as the real reason of the welfare differences between the rich and the poor countries. Under these conditions, Balassa and Samuelson observed, the poor country has one main possibility: raising the level of wages in the non-tradable sector. Since a large part of the non-tradables depend in one way or the other on the government (social services etc.), a rising budget deficit will be one of the main negative consequences of the catching-up process. The real appreciation of the currency of the poor country will indeed take place, but the real appreciation of the currency will be confronted by a general macro-economic constraint in the economy, i.e. the worsening budget situation.

This Keynesian observation by Balassa and Samuelson (that catching up is possible, but at the price of a rising budget deficit in the periphery and semi-periphery country) is of course familiar to the economics departments of Central Banks all over the world. The Balassa/Samuelson effect is often debated today, in the context of the Euro-accession of the new EU-member countries.

It is surprising that European policymaking has completely changed the roadmaps of what should be achieved under the Balassa-Samuelson effect. By demanding that EU member states have a low international price level (as purportedly indicated by the Lisbon structural indicators) and hence also low price levels in the non-tradable sectors, European economic policy completely reverses Balassa/Samuelson.

Largely unnoticed in the European political debate, this constitutes a 180 degree reversal of the direction of European economic policy since the postwar period in the name of “economic reform” (low comparative price levels, the Eurostat Lisbon list of indicators informs us, are an indicator of “economic reform”). The Keynesian argument, proposed by Balassa and Samuelson, corresponded to the basic consensus of the structuralist and mildly state interventionist economic policies of the early postwar years. Balassa/Samuelson always implied that the periphery and semi-periphery country will catch up with richer regions, and will become a high-price country itself one day.

One of the political absurdities of the price level indicator is that countries suffering from currency crises are performing well on the price level indicator, while countries with a sound real appreciation of their currency – in the tradition of Balassa/Samuelson – are performing badly according to Eurostat.

A country, following the European Commission’s price reform strategy, is a country with a low international price level. Thus, the new member countries of the EU are being pushed into the direction of countries, suffering from unequal exchange and low comparative price levels.

Structuralist economists, like Stanford Professor emeritus Pan Yotopoulos, usually warn the weaker countries of the periphery that

“Currency substitution represents an asymmetric demand from Mexicans to hold dollars as a store of value, a demand that is not reciprocated by Americans holding pesos as a hedge against the devaluation of the dollar!” (Yotopoulos and Sawada, 2005)

Their argument, which they established in a 1999 paper, refined in their 2005 analysis, was the so-called Y-Proposition, but this Y-position is very relevant today:

“in free currency markets hard currencies fluctuate, while soft currencies depreciate systematically (...) The alternative scenario deprives devaluation of any of its remedial properties that in the conventional view lead to a process of stable interactions and equilibrium....”

Their argument might be relevant for the continuing low international price level of countries like Turkey after the currency crisis of recent years. They think that the basic problem of international currency markets is asymmetric reputation. This process of asymmetric reputation of the periphery deepens the cycle of underdevelopment:

“Mexico cannot service its foreign debt from the proceeds of producing nontradables. These are traded in pesos. It has instead to shift resources away from the nontradable sector to produce tradable output in order to procure the dollars for servicing the debt (...) The process (...) can create a negative feedback loop that leads to resource misallocation in soft-currency countries (...) This shift of resources represents misallocation and produces inefficiency and output losses (...) Distortions inherent in free currency markets lead to a systematic devaluation of soft currencies – to „high“ nominal exchange rates. Devaluation of the exchange rate means increasing prices of tradables and leads to increased exports. But not all exports are a bargain to produce compared to the alternative of producing nontradables (...) Countries graduate from being exporters of sugar and copra to exporting their teak forests, and on to systematically exporting nurses and doctors, while they remain underdeveloped all the same. If this happens, it may represent competitive devaluation trade as opposed to comparative advantage trade.“

The authors further explain their ideas by an econometric analysis of economic growth rates in 62 countries from 1970 onwards that shows how this process of competitive devaluation trade leads to stagnation. They also present an economic model in the tradition of Paul Krugman that shows how currency substitution triggers financial crises. In their 2005 paper, the authors show the relevance of their theories with time series data from 153 countries. Thus, if they are correct, a high ratio between purchasing power and GDP at exchange rates, i.e. an under-valued currency, will lead to stagnation. The countries with the strongest currencies, like Denmark, the UK, Sweden, are typical centers of the capitalist world economy with a favorable ratio of tradables to non-tradables, while the countries with a Eurostat “good” low price level, like Turkey, are countries with an unfavorable relation between tradables and non-tradables, suffering from what neo-Marxists like to call “unequal transfer” or “unequal exchange” (price reform/low international price level).

According to this argument, countries like Poland should always remain as soft currency zones; and, to keep international price levels low, the real appreciation of their currencies against the Euro (as evident in the Polish Zloty since 2004) should be stopped or even reversed.

[edit] Literature

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.

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, available at: http://www.e.u-tokyo.ac.jp/cirje/research/dp/2005/2005cf318.pdf

[edit] See also

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