Chapter No.31

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INTRODUCTION INTRODUCTION

The dependency theory states that the dependence of less developed countries (LDCs) on

developed countries (DCs) is the main cause for the underdevelopment of the former. This

theory of underdevelopment originated in the writings of a few Latin American economists

whose translations began to appear in English in the mid-1960s

whose translations began to appear in English in the mid-1960s and early 1970s. The prominentand early 1970s. The prominent

among them are Frank, Sunkel, Furtardo, Santos, Emmanuel and Amin.

among them are Frank, Sunkel, Furtardo, Santos, Emmanuel and Amin.11 _{The explanations of}_{The explanations of}

dependencia

dependenciagiven by the various writers given by the various writers differ in degree onlydiffer in degree only. Each tries to . Each tries to pinpoint and specifypinpoint and specify

certain factors which have been responsible for the underdevelopment of LDCs by DCs. So

“there is a plurality of dependency views; different meanings are accorded the concept of

dependence,

dependence, and different analyses are offered to explain underdevelopment as a result of theand different analyses are offered to explain underdevelopment as a result of the

1. A.G. Frank,

1. A.G. Frank, Capitalism and Underdevelopment in Latin AmericaCapitalism and Underdevelopment in Latin America , , 1976,1976, Dependent, Accumulation andDependent, Accumulation and

Underdevelopment

Underdevelopment , 1979; , 1979; O. Sunkel, “National DeveloO. Sunkel, “National Development Policpment Policy and y and ExternaExternal l DepenDependence in dence in LatinLatin

America”,

America”, Journal Journal of of Development StudiesDevelopment Studies , , Oct. Oct. 1969; C. 1969; C. Furtardo,Furtardo,Development and UnderdevelopmentDevelopment and Underdevelopment , ,

1964; Dos Santos, T., “The Structure of Dependence,

1964; Dos Santos, T., “The Structure of Dependence, A.E.R., A.E.R.,May 1970; A Emmanuel,May 1970; A Emmanuel,Unequal Exchange,Unequal Exchange,

1972; Samir Amin, “Underdevelopment and Dependency”,

1972; Samir Amin, “Underdevelopment and Dependency”, Journal of Modern Africa Journal of Modern African Studiesn Studies(10), 1972;(10), 1972;

Accumulat

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22244 TThhe e EEccoonnoommiiccs s oof f DDeevveellooppmmeennt t aannd d PPllaannnniinng g

interplay between internal and

interplay between internal and external structures.” As there are external structures.” As there are varieties of dependency theoryvarieties of dependency theory,,

we shall briefly discuss the views of the main writers in the form of certain characteristics.

MEANING OF DEPENDENCY

According to the dependency economists, the whole world is divided between two sets of

countries: DCs (developed countries) and LDCs (less developed countries). The former are in

the

thecentrecentre (Western Europe, Britain and the United States) and the latter are in the(Western Europe, Britain and the United States) and the latter are in the peripher peripheryy

(backward countries of Asia, Africa and Latin America). Frank calls the DCs as

(backward countries of Asia, Africa and Latin America). Frank calls the DCs as metropolismetropolis andand

LDCs as

LDCs assatellitesatellitecountries. Others call the former ascountries. Others call the former asdominantdominantand the latter asand the latter asdependentdependentcountries.countries.

There are unequal centre periphery

There are unequal centre periphery relationships whereby LDCs are dependent on DCs in trade,relationships whereby LDCs are dependent on DCs in trade,

investment, technology, etc. This dependence results in underdevelopment of the periphery

becaus

because the ce the centre entre is domis dominated inated by the by the powerpowerful capitful capitalist coalist countrieuntries that es that exploit txploit the forhe former fomer forr

their benefit.

There is only one specific definition of dependency to be found in the literature on

There is only one specific definition of dependency to be found in the literature on dependencia.dependencia.

This is by Dos Santos. According

This is by Dos Santos. According to him, dependency is “a situation in which the ecoto him, dependency is “a situation in which the economy nomy ofof

certain countries is conditioned by the development and expansion of another economy to

which the former is subjected.” A dependent relationship between two or more economies is

one “when some countries (the dominant ones) can expand and be self-sustaining, while other

countries (the dependent ones) can do this only as reflection of that expansion, which can have

either a positive or a negative effect on their immediate development.”

But there is no unanimity among economists about the meaning of

But there is no unanimity among economists about the meaning of dependenciadependencia because of because of

differences among them about the relative role of various features of dependence which have

caused underdevelopment of LDCs. Sanjay Lall

caused underdevelopment of LDCs. Sanjay Lall22 _{points out in this context : “One sometimes}_{points out in this context : “One sometimes}

gets the impression on reading the literature that ‘dependence’ is defined in a circular manner:

LDCs are poor because they are dependent, and any characteristics that they display signify

dependence.” Thus, according to Lall, “in the usage of the

dependence.” Thus, according to Lall, “in the usage of the dependenciadependencia school, ‘dependence’ isschool, ‘dependence’ is

meant to describe certain characteristics (economic as well as social and politi

meant to describe certain characteristics (economic as well as social and political) of the economycal) of the economy

as a whole

as a wholeand is intended toand is intended totrace certain processes which are causallytrace certain processes which are causallylinked to itslinked to itsunderdevelopmentunderdevelopment

and which are

and which areexpected to adversely affect its development in the futureexpected to adversely affect its development in the future.”.”

THE DEPENDENCY THEORY

Dependency economists belong to different schools of thought and are classified as Marxists,

neo-Marxists and structuralists. Todaro classifies them under the Neo-colonial Dependence

Model, the False-Paradigm Model and the Dualistic-Development Thesis.

Model, the False-Paradigm Model and the Dualistic-Development Thesis.33 _{But Todaro’s}_{But Todaro’s}

categorisation of dependency streams of thought does not include all that is contained in the

writings of dependency theorists. Bath and James identity four unifying elements in the views

of dependency economists : “(1) Identification of underdevelopment with the expansion of

industrial capitalist countries; (2) the view that development and underdevelopment are parts

of a unified system; (3) the view that underdevelopment is a persistent natural condition, not a

temporary

temporary, precapitalist , precapitalist stage; and (4) stage; and (4) agreement that dependence affects internal politics, agreement that dependence affects internal politics, societysociety

and culture.” Economists have, therefore, tried to explain a single dependency theory, which

contains the main views of all the dependency economists in the form of features or

2. Sanjaya Lall, “Is ‘Dependence’ a Useful Concept in Analysing Underdevelopment?”,

2. Sanjaya Lall, “Is ‘Dependence’ a Useful Concept in Analysing Underdevelopment?”,World DevelopmentWorld Development , ,

Vol. 3, 1975.

3. M.P. Todaro,

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Thhe e DDeeppeennddeennccy y TThheeoorry y of of UUnnddeerrddeevveellooppmmeenntt 222255

characteristics. As such, the dependency theory is explained below in terms of the following

characteristics:

1. DEPENDENCY : A HISTORICAL INTERNATIONAL PROCESS

Dependency theorists like Frank, Santos, Sunkel, Amin and Furtardo hold that the present

economic and socio-political conditions prevailing in the periphery are the result of a historical

international process. According to Dos Santos, development emerged as global historical

phenomenon as a consequence of the formation, expansion and consolidation of the capitalist

system, known as dependent capitalism. Both the DCs (developed countries) and LDCs (less

developed countries) are integral parts of the capitalist system. But the global system is such

that the development of the centre

that the development of the centre occurs at the expense of underdevelopment of the occurs at the expense of underdevelopment of the peripheryperiphery..

Meier, therefore, characterises underdevelopment of the periphery as the “Siamese twin” of

development at the centre. According to Frank, it is t

development at the centre. According to Frank, it is the world capitalist system which producedhe world capitalist system which produced

underdevelopment in the past and generated underdevelopment in the present. This has led to

what Frank calls “

what Frank calls “the development of underdevelopment.”the development of underdevelopment.”Frank traces the process of developmentFrank traces the process of development

of underdevelopment at three levels.

At the

At the FirstFirst level, many countries in the periphery have been incorporated into the worldlevel, many countries in the periphery have been incorporated into the world

economy since the early days of colonia

economy since the early days of colonialism. At thelism. At thesecondsecondlevel, such peripheral countries havelevel, such peripheral countries have

becom

become capitalise capitalist economt economies throuies through incogh incorporatiorporation into the won into the world econrld economyomy. At the. At thethirdthirdlevel,level,

the incorporation of the peripheral countries in the world economy has led to

“metropolis-satellite chain” in which the surplus generated at each level in the periphery is successively

satellite chain” in which the surplus generated at each level in the periphery is successively

drawn off the centre. As a result, the periphery is impoverished and the centre is enriched.

According to Sanjay Lall, “The development of underdevelopment may be viewed as leading

to

toimmiserationimmiseration i.e. the growing poverty of the mass of the population in the periphery.”i.e. the growing poverty of the mass of the population in the periphery.”

According to Amin, capitalist relations are introduced in the periphery by the centre. It leads to

dependent development

dependent development which is an inappropriate pattern of development imposed upon thewhich is an inappropriate pattern of development imposed upon the

periphery by the centre. In such a system, the peripheral economies are without any internal

dynamism of their own and are dominated by absentee capitalists of the periphery. “The

peripheral country is a mere appendage of the central economy. The development of the centre

causes underdevelopment of the periphery and its dependence on the centre.”

Todaro calls this the

Todaro calls this theneo-classical dependenceneo-classical dependencemodelmodelwhich “attributes the existence and continuancewhich “attributes the existence and continuance

of third world underdevelopment primarily to the historical evolution of a highly unequal

international capitalist system of rich country-poor country relationships.”

2. FOREIGN CAPITAL

The peripheral LDCs are heavily dependent on the centre for foreign capital. Foreign capital

leads to “external orientation” of LDCs by exporting primary commodities, importing

manufactures and making them dependent for industrialisation of their economies. According

to Sunkel, it is the stagnation of agriculture, high concentration of primary commodities for

exports, high foreign exchange content of industrialisation and growing fiscal deficit in the

peripheral countries which necessitate foreign financing for them. In Sunkel’s words: “It is this

aspect.... which finally sums up the situation of dependence; this is the crucial point in the

mechanism of dependence.” The foreign investors exploit LDCs by insisting on the choice of

projects, making decisions on pricing, supply of equipments, knowhow and personnel. etc. In

fact, they impose a development pattern that is not compatible with local needs. Further, the

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dependence on foreign capital leads to a much higher outflow in the form of declared profits,

royalties, transfer pricing, payment of principal and interest to foreign investors of the centre.

Debt service and repayments drain third world wealth. According to Amin, foreign aid stunts

agriculture, encourages trade and investment dependencies and reinforces the dominance of

exploitative elites of

exploitative elites of LDCs. Thus foreign investment and aid signify dependence and as a LDCs. Thus foreign investment and aid signify dependence and as a meansmeans

of exploitation of the periphery by the centre.

3. TECHNOLOGICAL DEPENDENCE

The peripheral countries use excessively capital-intensive technologies imported from the

developed countries of the centre. These technologies are inappropriate to the production and

consumption needs of LDCs and are sold by multinational corporations (MNCs) of developed

countries. The technological dependence of LDCs on DCs arises because of the urgency of

importing technologies as they cannot innovate them. They lack information about the

availability of appropriate technologies which leads to exploitation of LDCs due to their weak

bargain

bargaining powering power. MNCs lead to econom. MNCs lead to economic and political distoic and political distortions in LDCsrtions in LDCs..

Some of the economic distortions created by MNCs are transfer of technologies to LDCs by

restricting their right to use or change or transfer according to their discretion or requirements.

This leads to their total technological dependence on MNCs. Capital-intensive technologies

have limited labour absorption capacity and thus add to unemployment in LDCs. They create

social tensions by worsening the distribution of income. There are large wage differentials

betwe

between wen workers orkers employemployed in ed in the the branchbranches es of Mof MNCs NCs and and those those engagengaged in ed in local local firms firms in Lin LDCs.DCs.

Such wage differentials increase income inequalities and create social tensions which retard

the development of LDCs.

Both Frank and Santos explain technological development perpetrated my MNCs. The centre

has spread its monopoly to the peripheral countries through technological transfer. For this,

LDCs have to borrow from the centre. This leads to the repatriation of profits, royalties etc. by

MNCs to the centre. This worsens BOP of LDCs. They resort to devaluation and increase in

money supply thereby leading to inflation with its resultant adverse effects on the economy.

Thus the peripheral countries are caught in a web of dependence structure.

MNCs also create political distortions in the peripheral countries by influencing their internal

politics by bribing legislators not only directly but also indirectly. They offer high posts in their

local branches to the friends and relatives of the local politicians, bureaucrats and economic

oligarchies. They influence laws, politics and foreign pol

oligarchies. They influence laws, politics and foreign policy of LDCs. They also subvert domesticicy of LDCs. They also subvert domestic

fiscal and monetary policies of host countries.

4. TRADE AND UNEQUAL EXCHANGE

Dependency economists contend that DCs at the centre exploit LDCs

Dependency economists contend that DCs at the centre exploit LDCs of the periphery by forcingof the periphery by forcing

them to specialise in the export of primary products with inelastic demand with respect to both

price and income. So LDCs “continue to face stagnant export earnings often coupled with

disruptive short-term fluctuations in prices.” This has created shortage of foreign exchange

and BOP deficit in LDCs.

Santos gives two reasons for BOP deficit :

(

(aa) DCs keep the prices of their exports to LDCs very high and that of their imports from LDCs) DCs keep the prices of their exports to LDCs very high and that of their imports from LDCs

very low.

(

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outflows of profit, interest and principal.

Further, trade between the centre (DCs) and the periphery (LDCs) is characterised by

Further, trade between the centre (DCs) and the periphery (LDCs) is characterised by unequalunequal

exchange.

exchange.Dependency economists attach different meanings to unequal exchange. Neo-MarxistsDependency economists attach different meanings to unequal exchange. Neo-Marxists

mean by it deterioration in the terms of trade of peripheral countries. The reason is that “in the

centre the incomes of entrepreneurs and productive factors increase more than productivity,

whereas in the periphery the increase in income is less than t

whereas in the periphery the increase in income is less than that in productivity.” This is becausehat in productivity.” This is because

monopolistic elements in product and factor markets of the centre have allowed them to keep

rising factor incomes, whereas the gains in productivity have been distributed in price reductions

in the periphery. According to Sutcliffe, unequal exchange means that “exporters in industrialised

countries possess more monopoly power than the exporters of underdeveloped countries”

thereby leading to unfavourable terms of trade for the latter.

To Emmanuel, it is the differences in techniques of production and differences in wages which

lead to unequal exchange in trade between DCs and LDCs. Since wages are low in LDCs, the

cost of production of the commodity is also low and so is its price. On the other hand, wages

being

being high in high in DCs, thDCs, the cost e cost of prodof production uction of the of the commcommodity iodity is high s high and so and so is its pis its price. Thrice. Thus theus the

commodity of an LDC being cheaper than that of a DC, there is unequal exchange in trade

betw

between theen the two. e two. This is This is becausbecause an e an LDC exLDC exports ports more more of its of its commocommodity idity in orden order to gr to get a get a giveniven

quantity of imports from a DC.

According to Amin, unequal exchange between the periphery and the centre is due to differences

in wages between the two. The wages are higher in the centre due to higher productivity and

lower in the periphery due to lower productivity. Since real wages are lower in the periphery

(LDCs), the rate of surplus value is higher there. The absentee capitalists of the centre that

dominate the periphery’

dominate the periphery’s exporting sector find it profitable s exporting sector find it profitable to produce and export commoditiesto produce and export commodities

becaus

because of highee of higher rate of surplus valr rate of surplus value in the periphue in the peripheryery. To A. To Amin, depmin, dependenendency is necescy is necessary tosary to

generate surplus value in the periphery even though it leads to unequal exchange.

5. DUALISM

The notion of dualism is explicit in the views of the dependency theorists. Internationally, the

countries are divided into DCs and

countries are divided into DCs and LDCs (or metropolitan and satellites or centre LDCs (or metropolitan and satellites or centre and periphery).and periphery).

There is also domestic dualism with the coexistence of an advanced imported capitalist system

and an indigenous pre-capitalist backward system. The interrelationships between the two

systems are such that the developed region pushes down the underdeveloped region with the

result that there is

result that there isdevelopment of underdevelopment.development of underdevelopment.

Dualism at the

Dualism at theinternational planeinternational planeleads to the dominance of the centre and dependence of theleads to the dominance of the centre and dependence of the

periphery in the following ways : (

periphery in the following ways : (aa) by encouraging the flow of foreign investment and capital) by encouraging the flow of foreign investment and capital-

-intensive techniques into LDCs through MNCs; (

intensive techniques into LDCs through MNCs; (bb) by controlling scarce raw materials and) by controlling scarce raw materials and

natural resources in LDCs; (

natural resources in LDCs; (cc) by encouraging exports of primary products of LDCs and) by encouraging exports of primary products of LDCs and

manipulating their prices to DCs own advantage; (

manipulating their prices to DCs own advantage; (dd) by adopting trade and aid policies against) by adopting trade and aid policies against

the interests of LDCs and increasing t

the interests of LDCs and increasing their dependence on DCs; (heir dependence on DCs; (ee) by ) by encouraging encouraging consumerismconsumerism

through widespread advertisement and exporting; (

through widespread advertisement and exporting; ( f f ) by encouraging the elite and rich to study) by encouraging the elite and rich to study

for professional courses in DCs and luring the skilled and professional people to migrate in

DCs by offering them high salaries, thus leading to brain drain from LDCs; and (

DCs by offering them high salaries, thus leading to brain drain from LDCs; and ( g g) ) byby

perpetuating international dependence of LDCs by “

perpetuating international dependence of LDCs by “often uninformed, biased, and ethnocentricoften uninformed, biased, and ethnocentric

international expert advisers” from international agencies located in DCs that render “faulty

and inappropriate advice” to LDCs. Further, by training university intellectuals, future

high-level government economists and other civil servants in developed-country institutions where

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they are taught “unhealthy alien concept” and “i

they are taught “unhealthy alien concept” and “inappropriate theoretical models.” Todaro callsnappropriate theoretical models.” Todaro calls

this the

this theFalse-Paradigm ModelFalse-Paradigm Model of international dependence.of international dependence.

Within the dependent LDCs, domestic dualism occurs. According to Cardoso, this dualism is

due to “an internal structural fragmentation connecting the most advanced parts of their

economies to the international capitalist system. Separate although subordinated to these

advanced sectors, the backward economic and social sectors of the dependent countries then

play the role of internal colonies.” Sunkel calls it “internal polarisation”. Domestic dualism is

characterised by the existence of a modern, capitalist and relatively developed sector producing

primary products for export with relatively advance technology on the one side; and isolated,

subsistence-based, feudal, or precapitalist and more underdeveloped sector comprising the

vast majority of the population on the other side. The modern sector has been importantly

affected by intimate economic relations with the centre. Petroleum, mining, plantation and

manufacturing industries are controlled and run by MNCs. They exploit the

manufacturing industries are controlled and run by MNCs. They exploit the backward, marginalbackward, marginal

and dependent groups in LDCs. They derive high incomes from their links with the parent

MNCs. The consumption patterns in the advanced urban centres and in foreign-directed enclaves

are based on those of DCs. Local elites and some workers in high-income groups are integrated

socially and culturally with that of DCs. This reflects social and cultural dependence, besides

economic dependence, of LDCs on DCs.

Frank calls this dual society thesis as a

Frank calls this dual society thesis as a false hypothesis. false hypothesis.According to him, historically the twoAccording to him, historically the two

different sectors of LDCs have been linked closely to the world capitalist system over the past

centuries. Capitalism influences the entir

centuries. Capitalism influences the entire economy of an LDC by making its backward regionse economy of an LDC by making its backward regions

“internal colonial satellites” of international capitalism and its domestic allies in LDC. It is,

therefore, not a fact that the backward rural sector is underdeveloped because it has not been

touched and influenced by the capitalist system. In reality, “the capitalist system over the past

centuries has effectively and entirely penetrated even the apparently most isolated sectors of

the underdeveloped world,” according to Frank. Thus underdevelopment is not due to the

existence of precapitalist institutions and capital shortage in isolated regions but the result of

the very same historical process which generated the development of capitalism itself. Despite

the participation of satellite countries in world trade and division of labour, capitalism has led

to their underdevelopment.

POLICY IMPLICATIONS OF DEPENDENCY THEORY

Dependency economists have given divergent views to overcome dependency and

underdevelopment of peripheral countries.

To overcome dependency, they suggest internal

To overcome dependency, they suggest internal structural and institutional changesstructural and institutional changes. Sunkel, in. Sunkel, in

particular, advocates structural changes in all sectors of the economy. Increase in agricultural

production through agrarian reforms is necessary to supply farm products at lower prices to

other sectors. This will create substantial export surplus when cheap agricultural goods are

exported. This will reduce foreign dependence. He suggests diversification and increase in

exports, and import substitution. To increase productivity, reduce costs and utilise existing

capacity adequately, he advocates industrial concentration of large specialised production units.

To reduce dependence on DCs, Sunkel favours mutual cooperation among per

To reduce dependence on DCs, Sunkel favours mutual cooperation among peripheral countriesipheral countries

in the fields of trade, aid, technical assistance and production agreements. Similarly, Santos

suggests a qualitative change in the internal production structures and external relations of

LDCs.

All dependency economists lay emphasis on the development of capitalism in the peripheral

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countries as the main cause for their underdevelopment. So the remedy to overcome

underdevelopment is to

underdevelopment is toadopt a socialist systemadopt a socialist systemin such countries or toin such countries or to delink or snap tiesdelink or snap tieswith thewith the

world capitalist system, according to Fr

world capitalist system, according to Frank and Amin. Santos alsoank and Amin. Santos also favours favours a popa popular ular revolurevolutionarytionary

government

government..

Other dependency economists advocate

Other dependency economists advocatemutual cooperationmutual cooperationamong LDCs in the form of regionalamong LDCs in the form of regional

economic cooperation and international commodity agreements.

Amin, in particular, suggests a

Amin, in particular, suggests a new development strategynew development strategy for peripheral countries based on thefor peripheral countries based on the

following : (

following : (aa) a self-reliant development strategy based on one’s own resources; () a self-reliant development strategy based on one’s own resources; (bb) collective) collective

integration of LDCs; and (

integration of LDCs; and (cc) the demand for a New International Economic Order based on the) the demand for a New International Economic Order based on the

transfer of technologies to LDCs, the control of natural resources by LDCs, higher prices for

raw materials of LDCs, and access to the markets of DCs for the manufactures of LDCs.

CRITICAL APPRAISAL

The dependency theory focuses on the centre-periphery relationship whereby dependence of

the periphery on the centre has resulted in the

the periphery on the centre has resulted in the development of underdevelopmentdevelopment of underdevelopmentof the periphery.of the periphery.

It has good explanatory value in explaining the historical causes of their underdevelopment

based on the

based on the world capitalist systemworld capitalist system. . It highlights how internal socio-eIt highlights how internal socio-economconomic and ic and politicapoliticall

structures of LDCs are influenced by external forces of domination by DCs and perpetuate

their underdevelopment.

However, the main views of different dependency economists have been criticised on the

following grounds:

1. Not a

1. Not a Complete Theory.Complete Theory.There are varieties of dependency theory with a pluraliThere are varieties of dependency theory with a plurality of differentty of different

views which explain the underdevelopment of the peripheral countries. Thus it is

views which explain the underdevelopment of the peripheral countries. Thus it is not a coherent,not a coherent,

systematic, and complete theory.

2. Does not Explain Development and Underdevelopment.

2. Does not Explain Development and Underdevelopment. A common feature of all theA common feature of all the

dependency economists is that they hold the domination of external forces generated by the

centre as the main cause of the underdevelopment of the peripheral countries. But it fails to

explain fully how the same external forces generated by capitalism can lead to development of

DCs and underdevelopment of LDCs.

3. Ignores Production Relations.

3. Ignores Production Relations.Dependency economists explain underdevelopment in termsDependency economists explain underdevelopment in terms

of exchange or trade relations between the centre and the periphery. But they ignore the problems

of forces of production and relations of production in LDCs. Thus their explanation of

underdevelopment is one-sided and incomplete.

4. Surplus Product

4. Surplus Product not Explained Fully.not Explained Fully.According to this theory, it is the exchange of surplusAccording to this theory, it is the exchange of surplus

product of LDCs and its appropriation by DCs which causes both development and

underdevelopment of the periphery. But it does not throw light on how it is produced and

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led to development rather than underdevelopment of many LDCs. For instance, China was

underdeveloped due to political factors, internal disorder, etc. rather than the spread of

capitalism. On the other hand, Shanghai, Manchuria and Hong Kong developed due to capitalist

penetration. Cuba and East European countries remained underdeveloped due to their political

relations with the Soviet Union.

8. Unequal Exchange not the Cause of Underdevelopment.

8. Unequal Exchange not the Cause of Underdevelopment. The argument that unequalThe argument that unequal

exchange between DCs and LDCs leads to underdevelopment of the latter is also weak. Wage

differentials as the basis of unequal exchange is not peculiar to trade relations between only

DCs and LDCs. They are also found between many DCs which may lead to unequal exchange

but not to their underd

but not to their underdevelopmevelopment.ent.

9. Characteristics of Dependence not Clear.

9. Characteristics of Dependence not Clear. According to Sanjay Lall, characteristics ofAccording to Sanjay Lall, characteristics of

dependence are not clear. He argues that the charact

dependence are not clear. He argues that the characteristics of dependence to be found in LDCseristics of dependence to be found in LDCs

are also to be found in non-dependent economies. They are characteristics of capitalist

development in general, not of dependent economies alone. For instance, the dominance of

foreign capital does not provide a criterion of dependence because Canada and Belgium are

more dependent on it than India or Pakistan, yet they are not in the category of dependent

countries.

10. Neglects Market Forces.

10. Neglects Market Forces. Griffin and Gurley have criticised the dependency theory for itsGriffin and Gurley have criticised the dependency theory for its

failure to explain the relationship between the centre and the periphery in terms of the market

forces.

forces.44

11. Weak Empiricially.

11. Weak Empiricially. The dependency theory is weak empirically even through Frank andThe dependency theory is weak empirically even through Frank and

other dependency economists have tried to base their analyses on the experiences of Latin

American countries. But they have not provided data

American countries. But they have not provided data to test the theoryto test the theory. In fact, the theory cannot. In fact, the theory cannot

be teste

be tested because it ded because it deals with genals with generalitieeralities which are ofts which are often vague.en vague.

12. Dependence

12. Dependence not not Defined ClDefined Clearly.early.Sanjay Lall has criticised the dependency economistsSanjay Lall has criticised the dependency economists

for not defining the word dependence clearly. According to him, dependence is defined in a

circular manner: LDCs are poor because they are dependent and any characteristics that they

display signify dependence. In such tautologous definiti

display signify dependence. In such tautologous definitions, dependency economists are tryingons, dependency economists are trying

to pick off some salient features of modern capitalism as it affects and puts them in a distinct

category of dependence. Sanjay Lall concludes that “the concept of dependence as applied to

LDCs is impossible to define and cannot be related to a continuance of underdevelopment”.

13. Does not Satisfy Two Criteria.

13. Does not Satisfy Two Criteria. Sanjay Lall further opines that a concept of dependence toSanjay Lall further opines that a concept of dependence to

be useful as

be useful as a theory must satisfy two a theory must satisfy two criteria : (criteria : (ii) It must lay down certain characteristics of) It must lay down certain characteristics of

dependent economies not found in non-dependent economies; and (

dependent economies not found in non-dependent economies; and (iiii) these characteristic affect) these characteristic affect

adversely the course and pattern of development of such economies. If crucial features of

dependence are found in both dependent and non-dependent economies, the first criterion is

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EMMANUEL’S THEORY OF UNEQUAL EXCHANGE

Emmanuel in his book

Emmanuel in his bookUnequal Exchange: A Study in Unequal Exchange: A Study in the Imperialism of Tradethe Imperialism of Trade(1970) has propounded(1970) has propounded

the theory of unequal exchange in international trade between the centre (DCs) and the

the theory of unequal exchange in international trade between the centre (DCs) and the peripheryperiphery

(LDCs) which has led to the exploitation of the latter by the former.

Emmanuel’s theory is based on Marx’s theory of prices of production for the determination of

international process and technological changes in pr

international process and technological changes in production. He believes that the main reasonoduction. He believes that the main reason

for economic inequality between DCs and LDCs is the differences in techniques of production

and differences in wages which lead to unequal exchange in trade. The product of an hour’s

labour in a DC is exchanged for the product of more labour hours of an LDC. This unequal

exchange brings gain to DC and loss to LDC.

Its Assumptions.

Its Assumptions. Emmanuel’s theory is based on the following assumptions :Emmanuel’s theory is based on the following assumptions :

1.

1. There There are two are two countcountries: a ries: a develdeveloped coped countrountryy A A , and , andBBan LDC.an LDC.

2.

2. TheThere are tre are two difwo differferent gent goodoodss XXandandY Y which are exchanged.which are exchanged.

3.

3. Capital Capital is mis mobile obile interninternationalationallyly..

4.

4. LabouLabour is nr is not moot mobile bbile between etween countcountries.ries.

5.

5. Prices Prices are hare high in igh in DC and DC and lower lower in LDCin LDC..

6.

6. Rates Rates of proof profit are fit are equal iequal in the n the two ctwo countrieountries.s.

7.

7. WWages arages are highe higher in Der in DC and loC and lower iwer in LDC.n LDC.

8.

8. WWages arages are givee given inden independependent of nt of prices.prices.

9.

9. GooGoods ads are fre freereely tly tradraded.ed.

10.Transport costs are zero.

11.There is a predetermined pattern of international specialisation so that each country

specialises in a particular commodity.

Explanation of the

Explanation of the TheoryTheory..Given these assumptions, Emmanuel believes that LDCs have Given these assumptions, Emmanuel believes that LDCs have failedfailed

to take advantage of the technological changes for their development. On the others hand, DCs

have raised the organic composition of capital through labour-saving technologies. This has

led to unequal exchange in trade between them. But the main reason for unequal exchange is

the difference between the wage rates of the centre (DCs) and the periphery (LCDs). According

to Emmanuel, “Inequality of wages, as such, all other things being equal, is alone the cause of

the inequality of exchange.”

Unequal exchange occurs when two unequal countries produce two different commodities so

that they are not in direct competition with each other. Since wages are low in LDC, the cost of

production of the commodity is also low and so is its price. On the other hand, wages being

high in DC, the cost of production of the commodity is high and so is its price. Thus the

commodity of LDC being cheaper and that of DC being dearer, there is unequal exchange in

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Start Free Trial Cancel Anytime. 2 23322 TThhe e EEccoonnoommiiccs s oof f DDeevveellooppmmeennt t aannd d PPllaannnniinng g P P_By_By==(1 +(1 +rr) (2) (2PP_x_x+ 2+ 2PP_y_y)) where

wherePP A AandandPPBBare the two countries,are the two countries, PPxxis the price of goodis the price of good XXandandPPyyis the price of goodis the price of good Y Y ..

The relative prices of the countries are

The relative prices of the countries are PP AX AX = = 22 PPByBy. The less developed low-wage country. The less developed low-wage country BB

exports 2 units of the export good

exports 2 units of the export goodY Y in order to buy 1 unit of iin order to buy 1 unit of its import goodts import goodXXfrom countryfrom country A A..

Its terms of trade have worsened by 50 per cent. Thus there is unequal exchange whereby the

developed country

developed country A Agains at the expense of the less developed countrygains at the expense of the less developed country BB..

The theory of unequal exchange is explained in Figure 1 where prices in the two countries are

taken on the vertical axis and the terms of trade on the horizontal axis. The price of commodity

Y

Y in less developed countryin less developed countryBBis taken asis taken asPPBB= 1 which= 1 which

is shown as the horizontal line

is shown as the horizontal line PPBBPPBB. The price of. The price of

commodity

commodityXXin countryin country A Ais shown by the curveis shown by the curvePP_A1_A1

so that the equilibrium terms of trade is given by

so that the equilibrium terms of trade is given byOT OT 11..

An increase in wages and costs leads to the rise in

price in country

price in country A Awhich shifts its price curve to thewhich shifts its price curve to the

left as

left asPP A A22. As a result, the terms of trade of country. As a result, the terms of trade of country BB

are reduced to

are reduced to OT OT 22. Unequal exchange is measured. Unequal exchange is measured

as the difference between the actual terms of trade,

OT

OT 11 , , and and the the changchanged ed terms of terms of trade,trade, OT OT 22.Thus the.Thus the

terms of trade of country

terms of trade of countryBBhave worsened byhave worsened byT T 11T T 22..

Its Criticisms.

Its Criticisms. Emmanuel’s theory of unequalEmmanuel’s theory of unequal

exchange has been severely criticised by economists

on the following grounds :

1. The theory assumes that unequal exchange is the

result of wage differences between DCs and LDCs.

But it does not explain many factors that affect wage differences between the two types of

countries.

2. Even if it is a

2. Even if it is accepted that wage differences lead to unequal exchange, there can be unequalccepted that wage differences lead to unequal exchange, there can be unequal

exchange between DCs because differences in wages are al

exchange between DCs because differences in wages are also found among them. So the theoryso found among them. So the theory

breaks d

breaks down as it is equown as it is equally applicaally applicable on DCs anble on DCs and not on LDCs ald not on LDCs alone.one.

3. If wage differences are in money wages and they are due to differences in labour

productivity, the terms of trade of LDCs may not be very bad. If differences in money wages

equal differences in productivity in LDCs and DCs, there would be no differences in costs and

prices per unit of output. It is only when real wages do not rise as fast as productivity in LDCs

as compared to DCs that the terms of trade of LDCs become unfavourable.

4. The theory assumes that the rate of profit is equal in LDCs and DCs. This is an unrealistic

assumption because the rate of profit in DCs is always higher because of the capitalist mode of