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Dependency theory is 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 as a reaction to modernization theory, an earlier theory 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 of 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 view, 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.
Dependency theory no longer has many proponents as an overall theory, but some writers have argued for its continuing relevance as a conceptual orientation to the global division of wealth.
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 Prebisch–Singer thesis. Prebisch, an Argentine 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 Vladimir Lenin, and has attracted continued interest from Marxists. Matias Vernengo, a Bucknell University economist, identifies two main streams in dependency theory: the Latin American Structuralist, typified by the work of Prebisch, Celso Furtado, and Aníbal 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.
Using the Latin American dependency model, the Guyanese Marxist historian Walter Rodney, in his book How Europe Underdeveloped Africa, described in 1972 an Africa that had been consciously exploited by European imperialists, leading directly to the modern underdevelopment of most of the continent.
The theory was popular in the 1960s and 1970s as a criticism of modernization theory, which was falling increasingly out of favor because of continued widespread poverty in much of the world. It was used to explain the causes of overurbanization, a theory that urbanization rates outpaced industrial growth in several developing countries.
According to Vernengo, the Latin American Structuralist and the American Marxist schools had significant differences but agreed on some basic points:
[B]oth groups would agree that at the core of the dependency relation between center and periphery lays [lies] the inability of the periphery to develop an autonomous and dynamic process of technological innovation. Technology – the Promethean force unleashed by the Industrial Revolution – is at the center of stage. The Center countries controlled the technology and the systems for generating technology. Foreign capital could not solve the problem, since it only led to limited transmission of technology, but not the process of innovation itself.
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 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.
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 (in office 1995–2002) wrote extensively on dependency theory while in political exile during the 1960s, arguing that it was an approach to studying the economic disparities between the centre and periphery. Cardoso 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.
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.
With the economic growth of India and some East Asian economies, dependency theory has lost some of its former influence. It still influences some NGO campaigns, such as Make Poverty History and the fair trade movement.
Two other early writers relevant to dependency theory were François Perroux and Kurt Rothschild. Other leading dependency theorists include Herb Addo, Walden Bello, Ruy Mauro Marini, Enzo Faletto, Armando Cordova, Ernest Feder, Pablo González Casanova, Keith Griffin, Kunibert Raffer, Paul Israel Singer, and Osvaldo Sunkel. Many of these authors focused their attention on Latin America; the leading dependency theorist in the Islamic world is the Egyptian economist Samir Amin.
Tausch, based on works of Amin from 1973 to 1997, lists the following main characteristics of periphery capitalism:
- Regression in both agriculture and small scale industry characterizes the period after the onslaught of foreign domination and colonialism
- 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)
- 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
- 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
- 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 American sociologist Immanuel Wallerstein refined the Marxist aspect of the theory and expanded on it, to form world-systems theory. This postulates a third category of countries, the semi-periphery, intermediate between the core and periphery. Wallerstein believed in a tri-modal rather than a bi-modal system because he viewed the world-systems as more complicated than a simplistic classification as either core or periphery nations. To Wallerstein, many nations do not fit into one of these two categories, so he proposed the idea of a semi-periphery as an in between state within his model. In this model, the semi-periphery is industrialized, but with less sophistication of technology than in the core; and it does not control finances. 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 traces the beginnings of world-systems theory to the writings of the Austro-Hungarian socialist Karl Polanyi after the First World War, but its present form is usually associated with the work of Wallerstein.
Dependency theory has also been associated with Johan Galtung's structural theory of imperialism.
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 account balances. 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 over time, and that the 1980s and beyond once more showed a deregulated phase of world capitalism with a logic, characterized - in contrast to earlier regulatory cycles - by the dominance of financial capital.
It is argued that, at this stage, the role of unequal exchange in the entire relationship of dependency cannot be underestimated.[clarification needed] Unequal exchange is given if double factorial terms of trade of the respective country are < 1.0 (Raffer, 1987, Amin, 1975).
- 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. Industries reliant on government support may not be sustainable for very long, particularly in poorer countries and countries which largely depend on foreign aid from more developed countries.
- 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.
- 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, The 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. South Korea and North Korea provide another example of trade-based development vs autocratic self-sufficiency. When the two states were divided at the end of the Korean War, they possessed roughly identical populations, resources and infrastructure and were at similar levels of development. North Korea pursued a policy of import substitution industrialization as suggested by dependency theory, while South Korea pursued a policy of export-oriented industrialization as suggested by comparative advantage theory. In 2013, South Korea's per capita GDP was 18 times that of North Korea. In Africa, states which have emphasized import-substitution development, such as Zimbabwe, have typically been among the worst performers, while the continent's most successful non-oil based economies, such as Egypt, South Africa, and Tunisia, have pursued trade-based development.
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