Dependency Theory

Theorists from all works of life have been trying their best to find the remedy in addressing the problems of third world countries. Despite all these efforts, these countries, (third world) which are characterized with poverty, poor medical facilities, and poor road networks seem to be experiencing more of underdevelopment unlike the so many sorts of development. Developed nations on the contrary seem to be benefiting from this continuances lack of development in these countries.

The main objective of this essay is to discuss the main tenets of the dependency theory and analyze its analytical relevancy to developing countries. This will be done by first defining the key terms to be used in the essay. It will then give a brief history of the origins of dependency theory. Then it will go on to analyze the relevancy of dependency theory to developing countries. Lastly it will give a brief overview of the paper. Developing countries in this case will be used to refer to countries that are technologically less advanced, or developing nations of Asia, Africa and Latin America.

They are generally typified as low income, having economies dependent on the export of major products to the developed countries in return for finished products. These nations also tend to have high rates of illiteracy, disease and population growth, unstable governments. Many are at the bottom of the league in terms of human development, such as they find themselves depending on developed nations for their well being. Dependency is a conditioning situation in which the economies of one group of countries are conditioned by the development and expansion of others (H.Bernstein, 1973, P.76)

Dependency theory is a body of social science theories, both from developed and developing nations, which are predicated on the notion that resources flow from a “periphery” of poor and underdeveloped states to a “centre” of wealthy states, enriching the latter at the expense of the former. Dependency Theory developed in the late 1950s under the guidance of the Director of the United Nations Economic Commission for Latin America, Raul Prebisch. Prebisch and his colleagues were troubled by the fact that economic growth in the advanced industrialized countries did not necessarily lead to growth in the poorer countries. Indeed, their studies suggested that economic activity in the richer countries often led to serious economic problems in the poorer countries. Such a possibility was not predicated by neoclassical theory, which assumed that economic growth was beneficial to all (Pareto optimal) even if the benefits were not always equally shared.

Prebisch’s initial explanation for the phenomenon was very straightforward: poor countries exported primary commodities to the rich countries who then manufacturing products out of those commodities and sold them back to the poorer countries. The “Value Added” by manufacturing a usable product always cost more than the primary products used to create those products. Therefore, poorer countries would never be earning enough from their export earnings to pay for their imports. Prebisch’s solution was similarly straightforward: poorer countries should embark on programs of import substitution so that they need not purchase the manufactured products from the richer countries. The poorer countries would still sell their primary products on the world market, but their foreign exchange reserves would not be used to purchase their manufactures from abroad.

This policy was difficult to follow due to the three issues. The first is the internal markets of the poorer countries were not large enough to support the economies of scale used by the richer countries to keep their prices low. The second issue concerned the political will of the poorer countries as to whether a transformation from being primary products producers was possible or desirable. The final issue revolved around the extent to which developing nations actually had control of their primary products, particularly in the area of selling those products abroad. These obstacles to the import substitution policy led others to think a little more creatively and historically at the relationship between rich and poor countries.

At this point dependency theory was viewed as a possible way of explaining the persistent poverty of the developing countries. The traditional neoclassical approach said virtually nothing on this question except to assert that the poorer countries were late in coming to solid economic practices and that as soon as they learned the techniques of modern economics, then the poverty would begin to subside. However, Marxists theorists viewed the persistent poverty as a consequence of capitalist exploitation. The theory quickly divided into diverse schools. Some, like Andre Gunder Frank, adapted it to Marxism. “Standard” dependency theory differs from Marxism, however, in arguing against internationalism and any hope of progress in less developed nations towards industrialization and a liberating revolution.

Theotonio dos Santos described a ‘new dependency’, which focused on both the internal and external relations of less developed countries of the periphery, derived from a Marxian analysis. And a new body of thought, called the world systems approach, refined from the Marxist aspect of theory by the American sociologist Immanuel Wallerstein, argued that the poverty was a direct consequence of the evolution of the international political economy into fairly rigid division of labour which favoured the rich and penalized the poor. It has also been associated with Galtung’s Structural Theory of Imperialism. Former Brazilian President Fernando Henrique Cardozo (1979) also wrote extensively on dependency theory while in political exile, arguing that it was an approach to studying the economic disparities between the centre and periphery. (V.Ferraro, July 1996, P, 1)

THE ARGUMENT FOR DEPENDENCY THEORY
Dependency authors explain backwardness and stagnation of Third World countries by the insertion of these countries as dependents in the world economy. Starting with the writings of Perroux, Prebisch and Rothschild in the 1930s, leading spokesperson for dependency theory stressed the unequal and socially imbalanced nature of development in regions that are highly dependent on investment from the highly developed countries. Short term spurts of growth notwithstanding, long term growth will be imbalanced and unequal and will tend towards high negative current account balances. Many of these authors focused their attention on Latin America (Tausch, 2002). Most dependency theorists generally hold that poverty and backwardness in developing countries are caused by the peripheral position that these countries hold in the international division of labour. Ever since the capitalist world system evolved, there is an absolute distinction between the nations of the centre and the nations of the periphery.

Former Brazilian President Fernando Henrique Cardozo (1979), when he was still a social scientist, summarized the quantifiable essence of dependency theories as follows: • There is a financial and technological penetration by the developed capitalist centres 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 centres; • This leads to limitations on self-sustained growth in the periphery; • This favours 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. (Cardozo, 1979) Periphery Capitalism, according to dependency theory, is characterized by the following main tendencies. The deterioration in both agriculture and small scale industry characterizes the period after the ambush of foreign domination and colonialism.

The capitalist system has enforced a rigid international division of labour which is responsible for the underdevelopment of many areas of the world. The dependent states supply cheap minerals, agricultural commodities, and cheap labour and also serve as the repositories of surplus capital, obsolescent technologies, and manufactured goods. These functions orient the economies of the dependent states toward the outside: money, goods, and services do flow into dependent states, but the allocations of these resources are determined by the economic interests of the dominant state, and not by the economic interests of the dependent state. This division of labour is ultimately the explanation for poverty and there is little question but that capitalism regards the division of labour as a necessary condition for the efficient allocation of resources. The most explicit manifestation of this characteristic is in the doctrine of comparative advantage.

The capitalist 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. The development blocks of periphery capitalism (chronic current account balance deficits, re-exported profits of foreign investments, deficient business cycles of the periphery that provide important markets for the centres during world economic upswings). Structural imbalances in the political and social relationships, inter alia a strong ‘comprador’ element and the rising importance of state capitalism and an indebted state class.

The dependency theorist argues that for developing countries to attain any form of development there have to come up with measures that must be followed. There are many different and conflicting ideas on how developing countries can alleviate the effects of this world system, several of the following protectionist/nationalist practices were adopted at one time or another by such countries: • Promotion of domestics industry and manufactured goods. By imposing subsidies to protect domestic industries, poor countries can be enabled to sell their own products rather than simply exporting raw materials. • Import limitation. By limiting the importation of luxury goods and manufactured goods that can be produced within the country, the country can reduce its loss of capital and resources. • Forbidding foreign investment. Some governments took steps to keep foreign companies and individuals from owning or operating property that draws on the resources of the country. • Nationalization. Some governments have forcibly taken over foreign-owned companies on behalf of the state, in order to keep profits within the country.

CRITICISM OF THE DEPENDENCY THEORY
Dependency theory has been criticized by free-market economists such as Peter Bauer and Martin Wolf, who believe that the spread of the theory leads to: • Corruption. Free-market economists hold that state-owned companies have higher rates of corruption than privately owned companies. • Lack of Competition. By subsidizing in-country industries and preventing outside imports, these companies may have fewer incentives to improve their products, to try to become more efficient in their processes, to please customers, or to research new innovations. • Sustainability. Reliance of industries on government support may not be sustainable for very long, particularly in poorer countries and countries which largely budget out of foreign aid. • Domestic opportunity costs. Subsidies on domestic industries come out of state coffers and therefore, represent money not spent in other ways, like development of domestic infrastructure, seed capital or need-based social welfare programs. At the same time, the higher prices caused by tariffs and restrictions on imports require the people either to forgo these goods altogether or buy them at higher prices, forgoing other goods.

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. India’s example seems to contradict dependency theorist’s claims concerning comparative advantage and mobility, as much as its economic growth originated from movements such as outsourcing- one of the most mobile forms of capital transfer. However, South Korea was able to rise out of poverty while using tenets which dependency theory advises.

The theory of dependency would therefore be seen as relevant theory in trying to understand the development process of most developing countries. Clearly the relation that exist between Zambian and the donor community leaves much to be desired, this relationship is characterized by exploration of the workers through the use of causal workers, over use of local raw materials without consideration the impact of their actions on the environment and the lack further investments of profits in the local market. The profits amassed are then sent to the periphery countries for investment and development activities.

Dependency theorist suggest that the only way to mitigate the problems caused by such kind of dependence relations is for the developing countries to take control of their countries and run everything in their own way cutting the strong links with those developed nations. This is the vision of Libyan President Muamar Gadaffi for African states to cut out the Western World in order to attain economic emancipation by forming the Untied States of Africa. Such a move would mean that countries like Zambia would have to work extra hard and develop a strong base of local investment so that the countries can be able to produce most of the basic goods within the country. As a way of maintaining such a stand there would for certain sectors such as, agriculture to be highly subsidized.

There would also be need to ensure that the local industry is protected from the unfair competition of imported subsidized goods from developed countries. It must be understood from the very beginning that as much as this theory provides what may seem to be the way for developing countries to develop, its complete implementation and following by the book would plunge a country into economic, social and political crisis. One such country is Zimbabwe which in trying to acquire complete independence from the international community has ended up bring living conditions in that country lower and worse for the majority population.

In conclusion therefore, it can be said that, it is important for developing countries to seek economic, social and political independence from the developed countries, this must however, be done carefully and systemically to avoid conflicts with these donor nations. This can be done by firstly developing a strong base for local investment, increase the country’s export chances, after then re-negotiate the terms of international trade. It would be important also for national budgets of developing countries to be mostly locally financed to avoid continuous dependence on the donor community for these finances. This would then lead to the removal of conditionality that comes along with international foreign aid. The existing relations between the developed and the developing countries should therefore be that of fair treatment that would led to both parties benefiting. It is important to mention here that while developing countries need the input and help of the developed nations in their continuous existence as these developing nations have most of the raw materials that these developed nations so much need.