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 the globe 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 South against 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 countries themselves 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 obstacles to 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:

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 Latin countries - 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 to changing 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, a system 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 to develop 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 or accelerate it through foreign aid.

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 developed country. - 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 or wasteful 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 state policies 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 and formulated 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 commodity production 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:

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 economic development - immoral yet was a progressive force Lenin regarded colonialism and neo-colonialism as progressive and necessary for modernization capitalism develops rather than underdevelops the world. Dominant capitalist plants the seed of its own destruction by helping promote foreign competitors that 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 developed countries - 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 actually increase 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

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 plus o 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

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 each definition 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 only rather 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 the structure 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 behind o 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 the structure 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, and thereby 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 discrepancy in capital-labor ratios between [North and South] will cumulate over time, leading to the division of the world into a capital-rich, industrial, region and capital-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 certain countries 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, assumes the form of dependence when some countries can expand and be selfsustaining, 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

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 to classical 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 underdevelopment in 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 themselves because 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 is systematically exploited and prevented from developing by international capitalism Created by colonialism and remains even after the achievement of formal political freedom Underdevelopment is caused by the functioning of the world capitalist economy The import-substitution industrialization strategy by the structuralists failed because 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 into less developed periphery of the world economy Capitalist economies must dominate and exploit the less developed countries leading to a hierarchical structure of domination between the industrial core and the dependent periphery of the world capitalist economy The differences of dependency theory and the traditional Marxist: Dependency theorists substitute economic for political means of subordination

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 exploitation o 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 would have 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 to national 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 external capitalism 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

o Analysis of 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 with one 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

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 the internal characteristics of the dependent countries

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 simply NOT 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 world economy 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 following formulations:

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 this cycle 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-ofpayments 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

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 countries o 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 Cartels o 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 gain sovereignty over their natural resources The formulation of rules to regulate the multinational corporations 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 LDC manufactured goods in developed markets

Greater power in decision making in the IMF, World Bank, UN, and other international organizations making these institutions 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 market economy, has been willing to make any significant concessions OPEC members have been unwilling to put their power and wealth at the service of other 3rd 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 economic alliance 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 the formulation 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 it provides 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.