In my Global Economics class, we have been studying about the Dependency Theory, and it has really made me rethink the way the global economy works. I mean, ever since colonialism, developing nations have had a very rough time of "growing up" and industrializing to the state that larger, more powerful nations such as China and the United States have. The only problem I have with this theory is the assumption that substituting imports is a magical solution, when the substitution of imports is very difficult due to the nature of dependent and dominant countries/economies. The world would definitely be a better place if a) a concise body of companies/agencies began to standardize and regulate the interactions between developing and developed economies and b) a practical solution to resource slavery is found.
For those that don't know, the dependency theory essentially states that developing countries are chained to developed countries to survive. In most developing economies, the country focuses on its pure advantage raw goods, such as agriculture and minerals, instead of manufacturing. Since they do not have the infrastructure in place to manufacture goods to sell at a profit, they are forced to sell these goods to a richer company, and buy back the finished goods at a loss. Substitution of imports is the proposed process to end this, in which the developing country stops exporting and instead focuses on infrastructure to get themselves out of the export/loss rut, and instead begin to make finished goods themselves. As I've said, I have a problem with this. Without charitable donation, the countries will not be able to furnish the funds the begin improving infrastructure, let alone rely on manufactured goods.
The International Monetary Fund and World Bank seem to help combat this problem, but the WTO and other pro-capitalist global entities seem to do everything in their power to keep the poor poor and make the rich richer. I am not anti-capitalist, but capitalism is definitely not helping in this case.
[URL=http://www.columbia.edu/~lnp3/mydocs/economics/dependency_theory.htm]Read More[/url]
[URL=http://www.umich.edu/~econdev/importsub]Import Substitution[/url]
I'm an economics student myself and I haven't encountered this theory before, but I gave it a read anyways. Interesting stuff.
Sure, on the surface it seems like the developed nations are benefiting at the expense of the third world but I don't believe this to be the case. There are reasons why Africans are asking for trade and not aid such as [url]http://www.goodafrican.com/index.php/our-story/trade-not-aid.html[/url]. There has also been commentaries on the matter like [url]http://www.cato.org/publications/commentary/trade-not-aid[/url]. In short, it is argued that aid does not improve living standards and that the only way to do so is to make the people able to support themselves.
I suppose it could be argued that western nations could benefit from the expense of African ones, like some kind of wage slavery applied on a national level but is it really that bad? The embracing of the market economy by China in the 70's created a new source of low cost products for western markets, but as a result the standard of living increased dramatically in perhaps one of the greatest economic miracles of all time. Shouldn't all undeveloped nations aim to be like this?
I'd say in the short run that the dependency theory is fact... but is it really that bad? We hear horror stories from places like Foxconn but when you realise that western markets have created the opportunity for job growth in China, and that their relatively low wages are only because of differences in purchasing power, it isn't that bad. If there was no demand for those jobs, what would those men and women be doing instead?
Dependency Theory is true to an extent, as has been stated. The theory is correct in showing the different ways in which Western Nations have and do exploit other Nations. I do know that in the last decade, inequality between the North and the South has actually increased, even with China's extreme economic growth.
The Theory falls apart when Import Substitution is called a solution. Import Substitution Industrialization was an initial success in post war Latin America, but soon became a disaster, leading to economic, fiscal, and political crisis. Granted, there was a lot more wrong with Latin American countries than just economic and trade policy, such as corruption and lack of faith in rule of law, but ISI really messed up Latin America prospects for growth until very recently.
True solutions to dependency include going along South Korea's model of growth: build up a wealthy agricultural system, erect huge trade barriers, invest in and manage specific industries and then privatize them, create an export economy, and slowly begin to open up to the world market once enough strong corporations are set up. Companies like Kia, Samsung and LG were all products of pinpointed government intervention with the aim of exporting to other nations, while blocking competing imports so that companies could safely invest in research using profits from dominating domestic markets, etc.
[QUOTE=person11;40387222]Dependency Theory is true to an extent, as has been stated. The theory is correct in showing the different ways in which Western Nations have and do exploit other Nations. I do know that in the last decade, inequality between the North and the South has actually increased, even with China's extreme economic growth.
The Theory falls apart when Import Substitution is called a solution. Import Substitution Industrialization was an initial success in post war Latin America, but soon became a disaster, leading to economic, fiscal, and political crisis. Granted, there was a lot more wrong with Latin American countries than just economic and trade policy, such as corruption and lack of faith in rule of law, but ISI really messed up Latin America prospects for growth until very recently.
True solutions to dependency include going along South Korea's model of growth: build up a wealthy agricultural system, erect huge trade barriers, invest in and manage specific industries and then privatize them, create an export economy, and slowly begin to open up to the world market once enough strong corporations are set up. Companies like Kia, Samsung and LG were all products of pinpointed government intervention with the aim of exporting to other nations, while blocking competing imports so that companies could safely invest in research using profits from dominating domestic markets, etc.[/QUOTE]
Does this actually work for smaller developing countries and smaller domestic markets?
The Korean method of growth has worked in Singapore, Hong Kong, South Korea (duh), and Taiwan. It is not the only way to achieve growth (Chile is a good example of growth through simple liberalization of the economy), and it is not a guaranteed method for developing countries to grow, but it seems like the most balanced set of policies.
The problem with dependency theory is that it assumes these countries are worse off than before for engaging in this unequal trade, and that self-sufficiency is the answer.
This isn't actually true. Up until markets for all this new labour appeared, most people in developing countries lived in agricultural or semi-agricultural self-sufficiency. They were subject to famines and poor markets for their goods, along with a whole host of other problems.
With the arrival of liberalizing the economy, it allowed these farmers to either move to the cities to work in manufacturing (which, whilst paid badly, was better off than being on a farm, hence why people historically flock to cities for work). Other farmers, were able to consolidate the land and introduce new machinery, accrue some debt to pay for needed improvements, and collectively use their powers to push for local interests such as infrastructure or sanitation improvements.
The best example of a country which profited immensely from exporting raw materials would be 19th century Argentina. At the expense of European agriculture (especially Britain from 1870 onwards, as it became difficult to compete), Argentina exported beef, wheat, wool, etc, aided by improvements in steamship and locomotive technology (plus colonization).
Despite not really developing a powerful industrial base like Britain, Argentina managed to develop a powerful and prosperous economy based primarily on agriculture (even though it needed to import machinery for instance).
And then Argentina's economy crashed as the price of those goods went down, leading to the formulation of Dependency theory by Raul Prebisch. I am not sure if Argentina is the best example, siècle it's economic stagnation over the 20th century is usually used as proof of dependency theory.
[QUOTE=person11;40391938]And then Argentina's economy crashed as the price of those goods went down, leading to the formulation of Dependency theory by Raul Prebisch. I am not sure if Argentina is the best example, siècle it's economic stagnation over the 20th century is usually used as proof of dependency theory.[/QUOTE]
Another part of the problem is that a lot of countries adopted protectionist policies for agriculture in an attempt to protect their own countries agriculture, and also the internal political situation in Argentina becoming unstable.
Also the opening of the Panama canal, and decline in world trade in the aftermath of WW1 (plus some countries trying to experiment with self-sufficiency, protectionist policies, etc) led to further problems in Argentina, coupled with a lack of foreign investment.
Import-substitution actually made it worse, because it cost more to import capital goods than before.
Remember that many western countries are dependent on the raw material producers as well. Britain was importing 80% of its beef by 1914, and after seeing the problems that food shortages would bring in war, there was a big move towards trying to support British agriculture.
I think we can all agree that ISI is a shitty idea, basically.
[QUOTE=person11;40403217]I think we can all agree that ISI is a shitty idea, basically.[/QUOTE]
Yeah, same here.
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