Dependency and Economic Development

7/27/2019 Dependency and Economic Development

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Dependency and Economic Development

by Robert Gilpin

POVERTY

- Most members of the human race dwell in poverty resulting to the intense

desire to escape it and join the developed world.- Once thought as natural, either punishment from God or ones Karma but

now became unacceptable, because mankind creates it.

- Attention was given to the immense gap between the rich Northern half of theglobe and the largely impoverished Southern half.

- Less tolerable than in the past (due to instant communications now)

the rise of peoples expectation outpaces the capacity of society to meet them.

demand for equality have been internationalized.

Dividing line between wealth and poverty:1. in the past between elite and mass

2. late 20th century separates nations, races and hemispheres; the poor Southagainst the affluent North; 3rd World vs. 2nd vs. 1st World countries.

3. today political boundaries

North vs. South

1. operation of world market economy

2. evil practices of capitalism

3. objective economic factors or the misguided policies of the poor countriesthemselves

Theories explaining development:

1. economic liberalism

2. classical Marxism

3. underdevelopment position

Liberal Perspective on Economic Development

- the world economy is a beneficial factor in economic development

o trade (engine of growth)

o international aid

o foreign investment

- economic development requires the removal of political and social obstaclesto the functioning and effectiveness of a market system BUT how will this be

accomplished?

- interdependent World economy:

o free trade

o specialization

o international division of labor

- to increase optimum efficiency in resource allocation:


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o flow of goods

o capital

o technology

- mutual relationship: less-developed economies gain capital, technology and

access to world markets while the developed economies can obtain cheaper

raw materials and outlets for their capital and manufactured goods.- is believed to benefit the less-developed economies more relatively than it

does the developed country (accelerated growth due to the infusions of foreign

capital)

- believes that factors required for economic development are diffused(transferred) from the advanced economies to the less developed ones. The

rate and direction of this spread effect are dependent on many factors:

o international migration of economic factors (capital, labor, knowledge)

o volume, terms and composition of foreign trade

o mechanics of international monetary system

- contrast the amazing economic success of export-led growth strategies of

Asian NICs with the failure of import substitution strategy of most Latincountries

- basic obstacles to be removed for the economy to begin its escape from

economic bacwardness:

o preponderance of subsistence agriculture

o lack of technical education

o low propensity to save

o weak financial system

o inefficient government policies

- the key is the capacity of the economy to transform itself in response tochanging conditions; failure is usually rooted in their social and political

systems, NOT in the operation of the international market system

- Arthur Lewis gave his own three simple ingredients: adequate rainfall, asystem of secondary education and sensible government

- not why the poor are poor but why the rich have overcome the obstacles to

development, transformed themselves and adapted to changing economic

conditions; answer is the permission of these societies for the market todevelop unimpeded by political interference

- failure to develop is ascribed to:

o domestic market imperfections

o economic inefficiencies

o social rigidities

o political corruption

o a parasitic social and bureaucratic structure

o failure to make appropriate investments in education, agriculture and

other prerequisites

o high tariff barriers and overvalued currencies

NOTE: Advanced economies can hinder development by restrictive practices oraccelerate it through foreign aid.


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development accelerated capital accumulation increase on domestic rate of saving

Lewis argued no nation is so poor that it could not save 12% of its national income if it

wanted to.

Liberal development theories differ on the appropriate strategy for a less developedcountry.

- They disagree on the role of (and the extent to which) the advanced countries

can or should assist the less developed ones (massive and helpful assistance orwasteful and counterproductive efforts?).

- They also differ on the question if stages exists on an economic progress

(balanced vs. unbalanced growth)- Agriculture vs. industrial development

- Efficiency vs. equity and the role of the state in achieving one or the other

- Offers strategic choices and alternative routes to economic development

Liberal development theories however share some convictions.- Two foremost causes of international poverty are: (1) inadequate integration

of the less developed countries into the world economy and (2) irrational statepolicies that impede the development of a well-functioning market

- the poor are poor because they are inefficient.

Liberal theory:

- tends to neglect the political framework within which economic development

takes place- it is not wrong in neglecting the framework but it is incomplete

The Classical Marxist Perspective on Economic Development

Marx

- bulk of their (along with Engels) work was the transition of European society:

feudalism capitalism socialism; and- the elaboration of the laws of capitalist development

- formulated a theory of economic development applicable to less developed

economies (19th-century Marxists like Lenin extended these ideas andformulated the Marxist theory of capitalist imperialism)

- viewed capitalism as a world-wide dynamic and expansive economic process

and believed it would eventually incorporate the entire world through

imperialist expansion and bring all societies under its mode of commodityproduction

- historical mission of capitalism was to develop the forces of production

throughout the world, then give way to socialism and communism- his theory works only in the European continent, other parts of the world, as

he believed, would be stuck historically and unable to move ahead

Asiatic Mode of Production:


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- characterized by:

o unity and relative autarky of agricultural and manufacturing

production at the village level

o existence at the top of society of an autonomous and parasitic state

separated from the rest of society

- responsible for the millennia of social and economic stagnation suffered by

non-Western societies- requires external force of Western imperialism to move these societies

forward historically

- was to be smashed by the bourgeoisie and imperialism so it would not hold

back the modernization of 3rd world economies

Imperialism

- destabilizes the status quo through the introduction of modern technology- creates a set of opposed classes in the colonized area and in that way

implanting the mechanism that will move the society toward economicdevelopment

- immoral yet was a progressive force

Lenin

- regarded colonialism and neo-colonialism as progressive and necessary formodernization

- capitalism develops rather than underdevelops the world. Dominant capitalist

plants the seed of its own destruction by helping promote foreign competitorsthat can outcompete them in world markets

The Underdevelopment Theory

- the international capitalist economy operates systematically to underdevelop

and distort the less developed economies.- the nature of the system is DETRIMENTAL to the interests of the poorer

countries

- unequal exchange (Arghiri Emmanuel)

- the terms of trade are said to be biased AGAINST the less developedcountries

- less developed economies should industrialize rapidly and produce for

themselves products formerly imported from the more advanced economies

Structuralism

- argues that a liberal capitalist world economy tends to preserve or actuallyincrease inequalities between developed and less developed economies

- free trade cannot become the engine of growth because of:

o overpopulation and subsistence agriculture

o rising expectations causing a low propensity to save

o excessive dependence on unstable commodity exports


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o political domination by feudal elites

- these structures TRAP less developed countries in a self-perpetuating state of

underdevelopment equilibrium which they cant escape without outside

assistance- international market imperfections increase inequalities as developed

countries tend to benefit disproportionately from international trade- late developing countries enjoyed the advantages of backwardness, learning

from the experiences of the more advanced economies BUT how about late

late developing countries who have to face insurmountable obstacles:

o widening technological gap

o long experience of marginalization

o lack of social discipline

o conservative social structures

o inherited population problems

o harsh climatic and geographic conditions

escape is nearly impossible for these states and free trade only makes

their situation worse- Singer-Prebisch theory:

o The world economy is composed of a core or center of highly

industrialized countries and a large underdeveloped periphery.

o Technical progress is the driving force but it has different

consequences for the developed and the underdeveloped economies

o Commodity exports prices going down while imported manufactured

goods prices are going up.

o Monopolistic corporations maintains price level despite productivity

increases and the decreasing cost of production

o Increase of national unemployment due to:

Increased productivity in the primary sector

Shortage of capital (due to a low rate of savings)

Elite consumption pattern imitative of advanced countries- peripheral economies are forced to export larger quantities of food and

commodities to finance the import of manufactured goods

- several policies to deal with these problems:

o creation of international organizations to promote the interests of less

developed countries

o enactment of international policies and regulations

o rapid industrialization to overcome the peripherys declining terms of

trade and to absorb its labor pluso peripheral economies should pursue an import-substitution strategy

through:

policies of economic protectionism

encouragement of foreign investment in manufacturing

creation of common markets

- national planning and industrialization policies should decrease the

dependence of the less developed countries on the world market and weaken


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the power of those conservative elites in the commodity and export sectors

that have opposed the expansion of industry

- different conceptions/definitions of the terms of trade are employed and eachdefinition can lead to different conclusions, and considered unreliable at best

- the notable feature of the terms of trade among countries is that they fluctuate

over both short and long periods, no secular trend over the long term onlyrather cyclical fluctuations

- the less developed countries do suffer from unfavorable terms of trade but the

most important causes are internal to their own economies rather than in thestructure of the world economy:

o failure to adjust and transform its economy by shifting out surplus

products into new exports

o failure to move away from commodity exports

- Arthur Lewis argued the terms of trade of many LDCs are unfavorable

because of their failure to develop their agriculture

o Rapid population growth and low productivity in food grains causes

export prices and real wages to lag behindo Until their basic internal problems are solved, they will continue to

exchange CHEAP manufactured exports for more expensive imports

from developed countries

- Solutions must be found in domestic reforms and not through changes in thestructure of the world economy

- the most important item on the agenda of development is to transform the

food sector, create agricultural surpluses to feed the urban population, andthereby create the domestic basis for industry and modern services. If we can

make this domestic change, we shall automatically have a new international

economic order. Arthur Lewis

- one variation of the structuralist argument argues that an initial discrepancyin capital-labor ratios between [North and South] will cumulate over time,

leading to the division of the world into a capital-rich, industrial, region andcapital-poor, agricultural region.. But this theory begs the question.

o Labor surplus of the South or the backwardness of its technology?

o Why did the North industrialize first?

Based on some prior rapid improvements in agriculture

North must continue to innovate, to maintain its relative

position and its real income in absolute terms

Dependecy Position

- By dependence we mean a situation in which the economy of certaincountries is conditioned by the development and expansion of another

economy to which the former is subjected. The relation of interdependence

between two or more economies, and between these and world trade, assumesthe form of dependence when some countries can expand and be self-

sustaining, while other countries can do this only as a reflection of that

expansion, which can have either a positive or a negative effect on their

immediate development. Theotonio Dos Santos


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- combination of traditional Marxism (concern with the domestic distribution of

wealth) with economic nationalism (political program of state building and the

distribution of wealth among nations). This basically means that in contrast toclassical Marxism is that there are no calls for the workers to unite and throw

off their chains.

- it is capitalism, both world and national, which produced underdevelopmentin the past and which still generates underdevelopment in the present.

Andre Gunder Frank

- Thomas Weisskoff has said the most fundamental causal proposition[associated] with the dependency literature is that dependence causes

underdevelopment.

- Underdevelopment condition in which most nations find themselvesbecause they have not kept up with the frontrunners (for liberals); a process in

which LDCs are caught because of the inherent relationship between

developed and underdeveloped nations (for dependency theorists).

- Development and underdevelopment constitutes a system that generates

economic wealth for the new and poverty for many- There is only ONE functional integrated whole in which the underdeveloped

periphery is necessarily backward and underdeveloped because it issystematically exploited and prevented from developing by international

capitalism

- Created by colonialism and remains even after the achievement of formalpolitical freedom

- Underdevelopment is caused by the functioning of the world capitalist

economy

- The import-substitution industrialization strategy by the structuralists failedbecause the traditional social and economic conditions of the LDCs remained

intact resulting to:o Maldistibution of income

o Domestic demand too weak to sustain continued industrialization

o Ever-greater dependence on those multinational corporations of

developed economists

- Major components of dependency theory (explanation will follow):

o Analysis of the nature and dynamics of the capitalist world system

The Marxist critique of capitalism set forth by Lenin and others

The laws of motion of capitalism and the contradictions

existing in a capitalist economy force capitalism to expand intoless developed periphery of the world economy

Capitalist economies must dominate and exploit the lessdeveloped countries leading to a hierarchical structure ofdomination between the industrial core and the dependent

periphery of the world capitalist economy

The differences of dependency theory and the traditionalMarxist:

Dependency theorists substitute economic for political

means of subordination


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They also reject the view that imperialism develops the

colonized economy to the point where it can cast off

its bonds

They also consider the multinational corporation to be

the principal instrument of capitalist domination and

exploitationo Analysis of the relationship or linkage between the advanced capitalist

countries and less developed countries

Exploitation theory

maintains that the 3rd world is poor because it has been

systematically exploited

the modern world system has permitted the advanced

core to drain the periphery of its economic surplus,

transferring wealth throught trade and investment

dependency immiserizes the less developed economies

and makes them even less successful than they wouldhave been if they had been allowed to develop

independently

imperial neglect position

the problem is that the forces of capitalist imperialism

have deliberately bypassed the less developed

economies while favoring others

the world capitalist economy is ultimately responsible

for underdevelopment because the patterns of trade and

investment it fosters have had a differential impact on

the periphery

dependent or associated development school the most recent interpretation

dependency relations under certain conditions can lead

to rapid economic growth although this type of growth

is not true development because it does not lead tonational independence and can have detrimental effects

on the economy of the less developed country.

Continued economic dependencys evil consequences:

Overdependence upon raw material exports which

causes domestic economic instability

A maldistribution of national income continuing social

inequalities and reinforcing domination by externalcapitalism

Manufacturing investments by MNCs and dependent

industrialization, destroying local entrepreneurship and

technological innovation

Foreign firms gain control of key industrial sectors

crowding out local firms in capital markets


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Introduction of inappropriate technology

An international division of labor is created between

high technology of the core and the low technology of

the periphery

Prevention of autonomous or self-sustaining

development Distortion of local labor market

Reliance on foreign capital

o Analysis of the internal characteristics of the dependent countries

themselves

The dependent country is fastened to the world economy by a

transnational class linkage (an alliance of convenience and

common interests)- Solution is the destruction of the linkage between international capitalism and

the domestic economy through the political triumph of a revolutionary

national leadership that will overthrow the clientele elite and replace it withone dedicated to autonomous development. They would dedicate themselves

to:

o the industrialization of the economy

o the prompt eradication of feudal privileges

o the achievement of social and economic equity

o the creation of a just and strong state

- not only the economic growth of the economy but also the development of the

society in a particular social and political direction and create an independent,equitable and industrialized nation-state

- they have changed the emphasis of the theory from an explanation of

underdevelopment to an explanation of dependent development

A critique of dependency theory

- the general argument that the LDCs as a group have remained commodity

exporters, have been exploited, and have been kept undeveloped is simplyNOT TRUE

- the charge that the world market economy has neglected and bypassed many

countries in the 3rd world is CORRECT.- The claim that the dependent or associated development exemplified by the

newly industrializing countries is not true development is LARGELY

NORMATIVE.

- Available evidence suggests that NEITHER integration into the worldeconomy nor economic isolation can guarantee economic development

- What is important for economic development and escape from dependence is

the capacity of the economy to transform itself

An evaluation of LDC strategies

- every theory can be reduced to one or a combination of the followingformulations:


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o the poor are poor because they are inefficient and therefore must create

an efficient economy

o the poor are poor because they are powerless or exploited and

therefore must acquire national power

o the poor are poor because they are poor and caught in a vicious cycle

of poverty from which they cannot escape and therefore somehow thiscycle must be broken

- evaluation is extremely difficult because:

o the theories are imprecise and more prescriptive than scientific

statements

o the time span is insufficient to support judgement

o they have different objectives and definition of economic development

and must be judged by a unique set of criteria- Autonomous or Self-Reliant Development

o For structuralists and dependency theorists who based their

development strategy based on national self-reliance

Structuralists emphasized on the import-substitution strategy,rapid industrialization behind high tariff walls and a reform of

international institutions.

Reasons of failure of import-substitution strategy:

o Relatively small size of national markets leading

to uneconomic plants

o Excessive protectionalism weakened incentives

to improve quality of production

o The need to import industrial technology and

capital goods caused massive balance-of-

payments and debt problems

Dependency theorists (via a domestic social transformation)has been chosen by Cuba, Tanzania and China

This strategy has failed to achieve the desired social

and economic success

o The level of economic success can only be described as disappointing

o no country can now develop by closing its door Isolation landed

China in poverty, backwardness and ignorance Deng Xiaoping- Economic Regionalism

o A group of countries in a geographically restricted area tries to

improve its overall position relative to more advanced economies

o Cooperation may take several forms: Formation of a free trade area or customs union

Enactment of investment codes

Development of regional industrial policies

o Efforts have produced mixed results

o Each nation has tried to advance its own national interests leading to

its own destruction


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o Two successful examples, the European Economic Community and

the COMECON in Eastern Europe

One or another of the superpowers has played a significant role

Security motives have been of paramount importance

o Creation of special trading relations between developed countries and

particular groupings of less developed countrieso delinking of trade between developed and less developed economies

and the forging of trade links and a division of labor among all the less

developed countries

suffers from the general weakness of economic regionalism

- Formation of Commodity Cartelso Emulation of OPEC due to its success

o A threat from 3rd world countries

o A cartel has a powerful tendency to undermine itself and its

maintenance requires the existence of a large producer with excess

capacity

o No other commodity is similar to that of petroleum

o Cartels may benefit certain less developed countries but at the expense

of most other LDCs

- Demand for a New International Economic Order

o The Group of 77, a group of less developed countries, adopted a

Declaration and Action Programme on the Establishment of a New

International Economic Order that included:

The right of LDCs to form producer associations

Linkage of commodity export prices to the prices of

manufactured exports from developed countries

The right of LDCs to nationalize foreign enterprises and gainsovereignty over their natural resources

The formulation of rules to regulate the multinationalcorporations

o The most important demands for changing the terms on which the

LDCs participated in the world economy were the following:

Measures that would increase 3rd world control over their own

economies

Agreements to maintain and increase their purchasing power

and to improve the terms of trade for their raw material exports

Enactment of a code of conduct increasing their control over

the MNCs within their own borders Reductions in the cost of Western technology and increases in

its availability

Increases in the flow and liberalization of foreign aid

Alleviation of the LDC debt problems

Preferential treatment and greater access for LDCmanufactured goods in developed markets


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Greater power in decision making in the IMF, World Bank,

UN, and other international organizations making theseinstitutions more responsive to LDC needs

o The operations of the world economy should be made subordinate to

the perceived development needs of less developed economies

o The failure to implement the NIEO include the following: None of the developed economies, who thinks of it as

unworkable or as contrary to its commitment to a free marketeconomy, has been willing to make any significant concessions

OPEC members have been unwilling to put their power and

wealth at the service of other 3 rd world states

The rise in world petroleum prices had a devastating impact on

non-oil-producing countries, burdening them with high import

bills, triggering a global recession that reduced the rising world

demand for their commodity exports

o The dilemma is that the same nationalistic spirit frequently undermines

their efforts to cooperate with one another and to form an economicalliance against the developed countries

The Process of Uneven Growth

- the process of growth has been concentrated mainly in the newly

industrializing countries of East Asia and in a few of the larger developing

countries- 3 prerequisites for economic development:

o there must be a strong state and economic bureaucracy that can set

priorities, implement a coherent economic policy and carry out needed

reforms

o Public and private economic managers must work together in theformulation of a depoliticized industrial policy. These societies

should make substantial and continuing investments in education and

human capital, and have carried out programs of land reform, income

redistribution and rural development

o They should work WITH and not against the market

CONCLUSION

- the fact of dependency can hardly be denied but it is wrong to assume that itprovides the explanation of economic underdevelopment. Every less

developed economy is certainly dependent upon fluctuating world market

conditions.- The less developed countries have a high degree of dependence and continue

to be vulnerable precisely because they are underdeveloped rather than vice

versa.

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Dependency and Economic Development