. 7
( 21)


able but which generate observable social and economic phenomena.
(Palma 1989: 316)

The structuralism of Raúl Prebisch
Perhaps the best-known Latin American structuralist economist was Raúl Prebisch (1901“86).
As a young man finishing his MA degree in economics at the University of Buenos Aires, he
had already published six articles on economics, and his views and analysis were impeccably
mainstream, orthodox, and neoclassical. During Prebisch™s formative years, at least to the
early 1920s, Argentina seemed to symbolize an outstanding example of the validity of the
theory of comparative advantage, with producers having a cost advantage in producing beef
170 The Process of Economic Development
and wheat for the world market. From the 1860s through to the second decade of the twentieth
century, the Argentine economy grew at a rate that can only be described as spectacular,
and the country™s standard of living rivalled that of the great European powers. It certainly
seemed that specializing in the export of a limited range of primary products to the world
market was successfully contributing to the overall development of the country.
In the 1920s, Argentina began to experience difficulties with its primary trade partner,
Britain, as the prices for its main exports began to fall. As the country incurred a growing
foreign debt burden, trained observers, including Prebisch, viewed Argentina™s troubles as
transitory. By the 1930s, however, Argentina faced both the adverse effects of the Great
Depression and the growing dominance of the world economy by the United States. In the
late nineteenth century Britain™s thirst for Argentina™s exports had seemed unquenchable;
now Argentina had to confront the troubling reality that the United States had a relatively
modest propensity to import, compared to Britain. Even worse, the United States had a surfeit
of domestically produced beef and wheat and did not want or need Argentinian exports to the
same degree that Britain had.3
Like most Argentinians who had experienced the favorable conditions of the late nine-
teenth and early twentieth century, Prebisch was extremely reluctant to revise his views on
the Ricardian doctrine of comparative advantage (see Chapter 4). Nonetheless, he eventually
did so, with consequences which were particularly far-reaching. Much of Prebisch™s work
on questions of development policy pivoted on his willingness to draw a distinction between
the timeless constructs of neoclassical economic theory and what he saw as the dynamic
effects of real economic forces, particularly those existing between the already-developed
center nations, such as the European powers and the United States, and the less-developed
periphery nations of Latin America, Asia, and Africa. Prebisch began to learn and grapple
with the fact that behind the laws of demand and supply there often lurked power relations
and quite dissimilar forms of production between nations.
In particular, Prebisch noted that during the Great Depression, the export prices of agri-
cultural and other primary products fell much further and faster than did the prices of manu-
factured, or secondary, products. At that point, in 1934, Prebisch did not as yet have a theory
as to why this asymmetry in the behavior of the export prices of primary and secondary
products might be occurring, but he did begin to develop a critical perspective on neoclassical
economic theory. According to Prebisch™s calculations, in 1933, Argentina had to sell 73
percent more of its primary agricultural products into the world market in order to import the
same amount of imported manufactured products as it had in the mid to late 1920s, as a result
of the asymmetric behavior of world export prices.
By 1937, Prebisch and his colleagues at the Argentine central bank had begun to develop a
theory which would explain the relative collapse of the agricultural markets. In manufacturing,
they reasoned, the supply of output was relatively price elastic; thus as demand decreased
(from D0 to D1), so did the quantity supplied. The equilibrium price would fall, of course,
but in a somewhat more limited manner, depending on the value of the supply elasticity, as
shown in Figure 6.1, along supply curve SM. In the extreme case, as with supply curve SE,
which is perfectly elastic, the decrease in demand has no effect on price, but only on the
quantity traded in the market.
On the other hand, in the agricultural markets, supply conditions are dramatically different;
suppliers, many of whom were small farmers with limited land, tended to plant or grow
as much as possible, year-in and year-out. Supply was therefore relatively price inelastic.
When demand decreased, the quantity supplied did not fall by much, but prices quickly and
dramatically decreased, as along supply curve SA in Figure 6.1. In the extreme case, which
Heterodox theories of economic development 171
Price S




0 Output

Figure 6.1 elasticity of supply and equilibrium price adjustment.

might be somewhat more common in agriculture than in manufacturing, the momentary
supply curve would be perfectly inelastic, as for supply curve SI , and all the decrease in
demand would be transmitted as a lower equilibrium price for the agricultural good.
What might account for these differences in the supply response of primary product
prices and for manufacturing good prices? Prebisch™s early explanation was somewhat
vague. Industrial producers of manufacturing goods could control supply, at least to some
degree, whereas in agriculture, producers had failed to organize their production and
control their output. In 1933, Prebisch became active in the attempt to form an agreement
among the major wheat-growing nations of Argentina, Australia, Canada, and the United
States to try to stabilize the world market price. Unfortunately, all the participants had
violated the terms of the agreement by late 1933. This experience undoubtedly helped
form Prebisch™s perspective on the meager possibilities of coordinated actions undertaken
among nations with the goal of controlling global agricultural output. But, at this point in
time, Prebisch™s explanation for the differences in the supply behavior of primary agricul-
tural products and secondary manufactured goods in the face of changes in demand was
mostly incipient.

The terms of trade
In 1949 Prebisch joined ECLA, and in 1950 he was appointed its executive director. At
ECLA, Prebisch made a major and lasting impact with his study The Economic Development
of Latin America and its Principal Problems (Prebisch 1950). This study was largely made
possible by a UN report entitled Relative Prices of Exports and Imports of Underdeveloped
Countries (UN 1949), which provided an empirical basis for a thesis that soon would become
172 The Process of Economic Development
associated with Prebisch: given the existing international division of labor, in which the
developed center countries produced manufactured goods for export to the periphery and the
less-developed peripheral countries produced primary products for export to the center, all
the benefits of trade would accrue to the center and none to the periphery.
The periphery would have to produce more and more agricultural or raw material products
simply to obtain the same quantity of imported manufactured products. Technically, this
result was the outcome of a long-term deterioration of the terms of trade for the primary
exporting peripheral countries.4 Based on the years from the late nineteenth century to the
late 1930s, the UN study had concluded that “On the average, a given quantity of primary
exports would pay, at the end of this period, for only 60 per cent of the quantity of manufac-
tured goods which it could buy at the beginning of the period” (UN 1949: 7), and it was this
data Prebisch used in reaching his conclusion on the detrimental effect of the existing trade
patterns on the periphery.
Prebisch was soon to be the target of a number of attacks by those who argued that the
methodology of the UN study was flawed. Unfortunately, the study was flawed, particularly
in the sense that the prices used were not really comparable. The study measured British
manufactured exports in terms of “freight on board” (FOB) values, while British raw mate-
rial imports were measured in terms of “cost including freight” (CIF) values. The prices of
exports at FOB prices did not include shipping charges, while those of imports did. During
the late nineteenth century, rail and steamship charges dropped rapidly thanks to improve-
ments in technology. Thus, by capturing the price benefits of technological change on only
one side of the equation, British imports of raw materials, and excluding such changes on
the other side, British exports of manufactured goods, the method utilized by the UN biased
the results.
Was the conclusion Prebisch reached therefore incorrect? Controversy has stirred over
this matter for almost sixty years. Correcting for changes in both shipping costs and the
changing quality of traded goods, studies conducted by J. Spraos have continued to support
the basic hypothesis of Prebisch, as has research conducted by Prabijit Sarkar (Spraos 1983;
Sarkar 1986). Spraos, for example, found that from 1950 to 1970, the terms of trade for
primary products (in relation to manufactured products) decreased by 25 percent (Spraos
1980: 121“6). In a more recent study, D. Sapsford found a 1.2 percent decline per year in the
net barter terms of trade (NBTT) from 1900 to 1982 (Sapsford 1985). Perhaps most startling
is the recent confirmation of Prebisch™s view by A. Maizels, T. Palaskas, and T. Crowe, who
show a decline of the NBTT of roughly 4 percent per year from 1979 through 1993 (Maizels,
Palaskas, and Crowe 1998: 74). Even the IMF found support for the Prebisch-Singer
hypothesis (IMF 1994: 350“2, based on Borensztein et al. 1994); More generally, Sapsford
and J. Chen demonstrate that since Prebisch™s ECLA study none of the ten major published
empirical studies has refuted the Prebisch finding “ although two found no trend, perhaps
on account of the time period under analysis (Sapsford and Chen 1998: 28“9). Recently,
Jos© Antonio Ocampo and María Angela Parra examined twenty-four studies published from
1985 to 2005. Only five found no significant trend, but this research did reveal long-term
deterioration of the terms of trade: the remaining nineteen showed a significant negative
trend (Ocampo and Parra 2007: 163“5). When we examine the contribution to this debate
made by Hans Singer, below, we shall elaborate on the mechanisms by which such a deterio-
ration in international purchasing power might be explained.
If Prebisch was correct in believing that the terms of trade would move against the
developing nations, then a successful development program would, of necessity, force a
nation to either:
Heterodox theories of economic development 173
• adopt a programme that emphasized internal changes which would restructure the
peripheral economies more toward the domestic market and away from exports, or
• develop a new export strategy which would emphasize manufacturing and processing
and other secondary production activities, rather than the export of raw materials, food-
stuffs, and other primary products.

Abandoning raw materials exports, or de-emphasizing them, was viewed as a radical and
theoretically unfounded step by the more orthodox within the economics profession, who
continued to insist that it was in these goods that the less-developed nations had comparative

Import substitution industrialization as a response to declining terms of trade
At ECLA, Prebisch became known as the chief advocate of the “development from within”
approach, a strategy that is often associated with import substitution industrialization, or
ISI.6 With ISI, a country begins to manufacture the simple, consumer non-durable goods that
are being imported. As we shall examine in more detail in Chapter 9, this stage of industri-
alization involves relatively simple production and does not require either large physical or
financial capital outlays or the use of sophisticated technology. If, in fact, the terms of trade
were tending to shift against the periphery because of the structure of export production, an
argument could be made for industrializing the peripheral economy so that it became more
like the center nations in terms of its productive and export structure.7
Furthermore, even if the declining terms of trade argument proved to have no validity or
was weaker than Prebisch had supposed, no one contested the fact that over the course of a
normal business cycle, primary product prices tended to rise much faster during an expansion
and to fall to a much greater degree during a contraction. Thus, there was a second argument
for industrialization: greater overall economic stability could be maintained if the degree of
industrialization were increased. Third, an industrial base might facilitate the transmission of
technological advances from industry to agriculture “ that is, a growing manufacturing base
could create technological externalities in agriculture which would increase productivity and
The success of ISI required that governments restrict imports of goods that might compete
with the new ISI industries through the imposition of effective tariff barriers. ISI also entailed
an activist governmental policy in providing and allocating public expenditures to those
areas where the highest rate of return could be anticipated. In Prebisch™s words:

The structural changes inherent in industrialization require rationality and foresight
in government policy and investment in infrastructure to accelerate growth, to obtain
the proper relation of industry with agriculture and other activities, and to reduce the
external vulnerability of the economy. These [are] strong reasons for planning. ¦ Inter-
national financial resources [are] to complement and enhance a country™s capacity to
save, while changes in the structure of trade [are] necessary to use these savings for
capital goods imports. Planning should help obtain these resources and accomplish the
latter objective. Planning [is] compatible with the market and private initiative. It [is]
needed to establish certain basic conditions for the adequate functioning of the market in
the context of a dynamic economy. But it [does] not necessarily require state investment,
except in infrastructure and development promotion.
(Prebisch 1984: 180)
174 The Process of Economic Development
Prebisch did have some reservations regarding ISI. First, in order to promote industri-
alization, it would be necessary to import a considerable amount of technology embedded
in machinery and equipment, or to obtain it under licensing agreements. Thus a new drain
on already scarce foreign exchange earnings would be created. Furthermore, some of this
technology would be more capital-intensive than previous production methods, meaning that
expansion in the industrial sector would absorb a relatively modest amount of labor unless
the level of investment increased substantially. There was thus a danger of structural unem-
ployment, as young workers entered the labor force and migrants from rural areas entered
the cities in search of industrial jobs at a rate faster than they could be absorbed. Finally,
the domestic market was too narrow to permit the most efficient use of imported machinery
and equipment. The economies of scale to be anticipated from large-scale industry would
be achieved only if equipment was utilized at its peak rate, and given the relatively low
incomes of much of the population, the demand for industrial output would quite likely fall
short of what was required to move to the most efficient level of production. In spite of such
reservations, Prebisch maintained that the anticipated benefits of leaving the treadmill of the
agro-mineral peripheral export economy clearly outweighed the costs of industrialization.
Prebisch™s advocacy of ISI did not initiate such policies in Latin America. ISI had been
adopted in a number of Latin American nations since the 1920s, and in some as far back
as the 1890s. For the most part, these ISI programmes were extremely successful in their
initial or “easy” stage in spurring growth in the Latin American economies. By the 1960s,
however, the easy ISI stage had ended. As Prebisch moved on to head the UN Conference on
Trade and Development (UNCTAD) in 1963, ECLA itself became the source of increasingly
strident attacks on ISI, as the optimism for what such a strategy might achieve, which ECLA
had projected in the early 1950s, disappeared. ECLA™s structuralist critique of ECLA™s ISI
concluded that these policies had resulted in:

1 a failure to diversify exports and a continued reliance on one or a few raw materials or
agricultural products for export;
2 a shortage of foreign exchange earnings;
3 an increase in foreign debt;
4 a weak domestic agricultural sector, leading to major food imports; and
5 increasing foreign ownership of the economy by transnational corporations, leading to a
drain on scarce foreign exchange as profits were repatriated.
(Kay 1989: 39“46; Sunkel 1990: 137“9)

Thus ECLA, originally the crucible for initiatives which were based upon optimistic
projections, became one source of critical analysis known as dependency theory. Dependency
theory, to be discussed below, nearly inverted the early optimism of ECLA; development
came to be viewed either as an impossible task, or one that demanded a major reorientation of
the policies originally pursued by ECLA. We will argue in Chapter 10 that what was neces-
sary was to go beyond ISI, something ECLA had promoted, but which governments in their
policies failed to do, in Latin America at any rate. It was not so much ISI which had failed,
but the deficiency of policy follow-up.

The contribution of Hans Singer to the terms of trade debate
Hans Singer (1911“2006), a German-born economist, received a PhD from the University of
Cambridge in 1936, precisely during the period when J.M. Keynes™s influence was reaching
Heterodox theories of economic development 175
its zenith. In 1947 Singer, an ardent Keynesian, went to the United Nations as one of the first
three economists to be employed in the newly created economics Department. He remained
there until 1969, when he became associated with the influential Institute for Development
Studies at the University of Sussex in England.
Singer is perhaps best known for a widely cited research paper, the research of which
preceded and provided the basis for Prebisch™s theory of the tendency of the terms of trade
to fall for the periphery (Toye 2004: 113). Thus, in development economics, the theory that
the terms of trade tend to move against raw materials, agricultural and primary producers is
known as the Prebisch-Singer (P-S) hypothesis.

The Prebisch-Singer hypothesis
Prebisch had analyzed the relations between nations at unequal levels of development using
the spatial imagery of the center and periphery. In this perspective, the more advanced center
countries tend to reap the gains from international trade and investment at the expense
of the less-developed periphery. Indeed, trade relations between the center and periphery
reinforce higher levels of development in the center countries, while maintaining a rela-
tively lower level of development and poverty in the periphery. In Prebisch™s and Singer™s
analysis, then, free trade can actually be harmful to the peripheral, less-developed nations.
This view, of course, is in diametric opposition to the very basic orthodox economic conten-
tion, from the time of David Ricardo at least, that the pursuit of comparative advantage
in international trade will benefit all participating nations and that, in time, income levels
between different regions of the world should tend toward equality as a consequence of the
equalizing tendencies set in motion by the movement of goods and factors of production
with free trade.
The reasoning behind the Prebisch-Singer hypothesis, that the relations between the
center and the periphery are antagonistic and detrimental, rather than complementary and
harmonious, is derived from three bases. In essence, the existing economic, productive, and
labor market structures of the center and the periphery are sufficiently different to the degree
that engaging in trade can be detrimental to the periphery, for the following reasons.
The application of technology to traded goods, predominantly manufactured goods for
the center and primary products from the periphery, has quite different consequences. The
advanced center countries are dominated by oligopolistic industries with a substantial degree
of control over the prices of their final products; in other words, they are “price-makers.”
Further, unions and widely accepted social convention dictate that rising worker productivity
from technological change be rewarded with higher incomes. In the periphery, on the other
hand, most primary products, that is, agricultural goods and many minerals, face substan-
tial domestic and, especially, international competition in trade, so the supply price is diffi-
cult to control by individual producers, who are classic, competitive “price-takers.” Labor,
particularly unskilled labor, is generally in some degree of surplus in the periphery, and this
puts downward pressure on wages. Unions and pro-labor social attitudes, particularly in the
primary sector, are not as strong in the periphery, so the institutional mechanism present in
the center for raising wages with increased productivity as a result of advances in technology
is lacking.
Given these structural differences, the application of new, cost-saving technology in the
center would contribute to greater worker productivity and hence higher wages. However,
there would be little tendency for output prices to reflect falling unit costs, because of
oligopolistic pricing by firms. Corporations would thus see their profits rise, as they shared
176 The Process of Economic Development
with workers the fruits of technological progress in higher incomes. In the periphery,
however, where something closer to the competitive “ideal” is common in many primary
product lines, the introduction of new technology results in falling output prices, as the
industry supply curve shifts out and downward with technological progress. Stagnant and
perhaps even declining wages for workers are the result, given the labor surplus conditions
characteristic of the rural sector and the lack of social mechanisms for demanding higher
incomes with greater productivity.
Thus, according to the P-S hypothesis, the center nations gain doubly from new technology
and trade with the periphery, while the periphery becomes worse off as a result of a dete-
rioration in their terms of trade that results from the price movements on center exports and
periphery exports. In effect, with the constant spread of new production technologies in the
world economy, the P-S hypothesis predicts that the prices of what the periphery sells on the
world market will decline, while the import prices of what the periphery purchases from the
center remain about the same. Just the reverse is true for the center nations, which find their
terms of trade, and hence the purchasing power of their exports, rising.
As a result, the center nations are able to buy the periphery™s cheaper imported primary
products with their own higher-profit manufacturing exports and with higher wages for
workers, while the periphery nations find that new technology only forces the prices of their
exports down on the world market, thus requiring more to be exported just to be able to
purchase the same quantity of manufactured imports from the center. All the benefits of new
technology, which is constantly advancing, thus accrue to the already-developed nations, as
their incomes rise and the prices of what is imported from the periphery fall.
The center realizes all the benefits from trade over time; the periphery gains nothing. Any
benefits from comparative advantage were realized long in the past in the first period of
specialization, when a shift of production in the direction of the lowest relative opportunity
cost (as discussed in Chapter 4) result in a one-time gain in world efficiency. Since that
one-time gain, however, the P-S hypothesis argues that the declining terms of trade for the
particular goods in which the periphery has specialized have made primary product special-
ization by those nations a source of impoverishment, rather than a means to increase income
and welfare.
embedded in this critique of trade is an obvious policy recommendation. To avoid declining
terms of trade for its exports, the periphery should become more like the center, particularly
through greater industrialization. With time, imports of manufactured goods would become
less necessary. Basically, the escape from the Prebisch-Singer dilemma requires the periphery
to follow a path of structural change similar to that traced by the center nations before them;
as we shall see in Chapter 9, that is what import substitution industrialization as an initial
strategy for development was at least partly about.
According to the P-S hypothesis, then, less-developed countries that continue to follow
traditional comparative advantage by persisting with primary products exports will not
benefit from trade, because of the tendency for their terms of trade to deteriorate. The theory
of comparative advantage may provide a one-off boost to world production such that all
countries gain, but over time, primary product exporters will not profit from staying with that
static comparative advantage. Singer believed that he and Prebisch had been quite successful
in alerting the developing countries to their dilemma, and that these countries had, in many
instances, responded correctly by either diversifying their exports or developing their own
internal markets via ISI policies. “We do not know what the data would have been without
such action “ the deterioration in terms of trade would presumably have been even sharper
than it was” (Singer 1984: 283).
Heterodox theories of economic development 177
Additional factors contributing to declining terms of trade
Besides the tendency for the ever-changing impact of technology to result in declining terms
of trade for the primary product, given the existing domestic and international structures of
production and trade, Prebisch and Singer identified two additional forces at work in the
world economy that tend to move in the same direction and which reinforced the Prebisch-
Singer effect.
First, differences in the income elasticities of manufactured versus primary commodities,
especially agricultural goods, work over time to the detriment of the periphery.8 In essence,
as world income grows, the demand for manufactured goods, which have an income elas-
ticity > 1, rises faster than the demand for agricultural products, with an income elasticity
that is positive, but < 1 (this is the essence of Engel™s Law), thus contributing to the
secular, or long-term, deterioration of the terms of trade for the periphery. The differences
in income elasticities for the exports of the center and periphery simply reinforces the need
for peripheral industrialization, as suggested by the P-S hypothesis, along with the need
for international commodity agreements to stabilize primary product prices, and regional
integration to expand existing markets and increase competitive pressures on firms.
The second contributing factor to declining terms of trade for many peripheral countries,
and certainly those in Latin America, was the lower level of the import coefficient in the
United States than in Great Britain, already mentioned. As the United States replaced Great
Britain as the world™s major economic power, it became more difficult for some countries to
expand traditional exports to be able to earn the foreign exchange required to purchase the
desired manufactured imports, again supporting the argument for expanded industrialization
in the periphery.
There is by now a substantial body of research into the P-S hypothesis, evidence that
generally supports the P-S prediction of the long-term evolution of primary product export



Developing countries


Sub-Saharan Africa
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Figure 6.2 Declining real commodity prices: 1980“2001a (1980 = 100).
Source: World Bank Economic Policy and Prospects Group, World Bank, Global Development Finance,
a excluding petroleum products.
178 The Process of Economic Development
prices and the deterioration of the terms of trade facing nations that specialize in the export
of these commodities. Oil, of course, has been a partial exception to this tendency in some
decades, and a limited number of other primary-based goods (e.g. tropical drinks) show a
long-run tendency toward rising prices. And a few countries in the region, at least since the
Second World War, have even had rising terms of trade over some periods, but the overall
trend would seem to be downward for primary product exports (as shown in Figure 6.2).

Structural characteristics and the terms of trade
Singer has taken pains to clarify a point that neither he nor Prebisch had adequately empha-
sized in their early work; it may be more important to analyze the structure of a nation than
it is to simply distinguish between the nature of exports. That is, economic structure may be
a more important explanation of the direction of the terms of trade than whether a country is
a raw materials or manufactured goods exporter.

It will be noted that some of the ¦ explanations for a deteriorating trend in terms of trade
of developing countries relate as much or more to the characteristics of different types of
countries “ their different level of technological capacity, different organization of labor
markets, presence or absence of surplus labor, etc. “ as to the characteristics of different
commodities. This indicates a general shift in the terms of trade discussion away from
primary commodities versus manufactures and more towards exports of developing
countries “ whether primary commodities or simpler manufactures “ versus the export
products of industrial countries “ largely sophisticated manufactures and capital goods
as well as skill-intensive services including technological know-how itself.
(Singer 1989: 326)

There is a growing body of evidence that supports this insight that declining terms of trade
may be associated not so much with the structure of exports, as with the institutional and
economic structure of the less-developed countries per se. Thus, even as the periphery diver-
sifies exports and adds manufactured exports to its tradables, the deterioration in the terms
of trade may still be observed.
Not only did relative price conditions continue to move against the poorest nations in
recent years, Singer also emphasized that relative changes in the volume of trade had also
cast the poorest nations in a disadvantageous position:

in overall terms, and in spite of the group of fast-growing LDC [less-developed countries]
exporters of manufactures, the volume lag of LDCs is clear. Between 1948 and 1970,
world trade volume (excluding the socialist countries) increased by 7.3 per cent a year,
but the export volume of LDCs by only 5.3 per cent. In the decade 1970“80, the figures
are 5.8 per cent and 3.1 per cent respectively. For the least developed countries, typically
primary exporters, the respective growth rates were only 4.4 per cent [for the 1948“70
period] and a dismal ’0.4 per cent for 1960“70. At least in this relative sense, volume
changes have increased any gap created by the worsening terms of trade and in that
sense trade pessimism has not been proven wrong.
(Singer 1984: 295)

Like Prebisch, Singer remained a strident critic of neoclassical policy-making and of the
effects which unmediated market forces tend to impose on the poor nations. Nonetheless,
Heterodox theories of economic development 179
Jos© Antonio Ocampo and María Angela Parra maintain that too much attention has been
given to the terms of trade debate, displacing attention from more relevant factors that
Singer had noted. For them, the main argument for industrialization arises from the exter-
nalities and dynamic economies of scale to be realized from industrialization (Ocampo and
Parra 2007).
Indeed, in his original article on the subject Singer had urged industrialization because it
generated strong technological externalities and other indirect benefits such as “its general
effect on education, skill, way of life, inventiveness, habits, store of technology, creation of
new demand, etc.” (Singer 1950: 476). In other words, the terms of trade debate can at best

Using official International Monetary Fund and United Nations data, the results on manu-
facturing terms of trade are conflicting. For the period 1960“80, UN data show a 0.77
percent per year increase in the terms of trade of manufactured exports from less-devel-
oped countries. Covering a slightly different period, IMF data reveal a ’0.88 percent per
annum decrease in less-developed country manufactured goods terms of trade.
If the latter figure is correct, it may suggest that, at this point in time, less-developed coun-
tries tend to produce and export manufactured products in highly competitive international
markets, for example, for textiles, shoes, and toys. The same pressures on prices when there
is technological change would be likely to be working on these commodities as on primary
products and agricultural products, just as the Prebisch-Singer hypothesis suggested.
This downward tendency of the terms of trade for manufactured exports would fit Singer™s
concern that it is not the products, per se, being exported by the less-developed economies,
as it is the structural characteristics of the countries (surplus labor) and of the markets where
the exports are sold (highly competitive) that is important. In a study of the terms of trade
for manufactured products between developing nations and the EU, Maizels, Palaskas, and
Crowe found an annual decline of ’0.30 1960“94, with the decline accelerating after 1980.
They note that the volume of manufactured products exported to the EU has risen faster than
the fall in prices. East Asian high-technology exports fared better in terms of their terms of
trade than did any other region. Ocampo and Parra found that a price index of manufactures
exported by developing countries versus manufactures exported from developed nations
(2000 = 100) fell from 125 in the 1980“5 period to 80 in 2004.
If Singer and other observers are correct, then countries need to look to produce
commodities, be they agricultural or manufactured, for which the demand is more income
elastic and for which competition is perhaps not so fierce. For example, one agricul-
tural export that has been successful for Chile has been wine. Wine is a non-traditional
primary product export, and it is one for which demand is quite income elastic. Further,
competition is not perfect, so countries with outstanding or niche products have a chance
to experience increasing terms of trade. This should be taken as a warning that passive
nations that do not engage in continual upgrading of the technological content of their
exports can face declining terms of trade for manufactures vis-à-vis more dynamic manu-
factured products. Nations also have to build deep supplier bases where national firms are
able to share in technological innovations and applications even when they are exporting
intermediate to high-tech products. Otherwise there will be no significant spread effects
from industrialization if their nation has a shallow and dependent relationship with foreign-
owned manufacturing export firms.
Sources: Delgado, Wise, and Cypher 2007; Ocampo 1995; Ocampo and Parra 2007;
Maizels, Palaskas, and Crowe 1998: 75“83
180 The Process of Economic Development
provide an argument for avoiding a structural quagmire. Singer felt that it is a more powerful
argument that “ terms of trade issues notwithstanding “ a nation will still have a higher
long-run rate of growth if it builds its own diversified industrial base. And in some instances
nations can further their advance by adopting learning policies that lead to technological
upgrading of its manufactured export products.

The role of foreign aid
Convinced as he clearly was of the unequal effects of market outcomes for the poor relative
to the advanced nations, it is hardly surprising that Singer advocated non-market offsets to
compensate for the effects of laissez-faire. Singer was, indeed, perhaps the most outspoken
and relentless advocate of foreign aid among the heterodox economists. He maintained that
aid could take many forms, such as buffer stock purchasing programmes for primary products
to temporarily offset falling raw materials prices, and “soft loans,” that is, lending made at
below the market rate of interest to the poorer nations to permit them to build up their infra-
structure and/or make other long-term social investments. Such projects, Singer believed,
would very rarely, if ever, find private-sector backing. Singer devoted much of a decade to
an attempt to create a soft-loan fund at the UN to be known as SUNFED, the Special United
Nations Fund for Economic Development. Because the UN expected to control this fund and
to distribute much-needed credits on a multilateral basis, and without regard to the foreign
policy priorities of either the United States or the United Kingdom, these nations systemati-
cally blocked attempts led by Singer to operationalize this fund. Instead, a similar fund was
created, the International Development Agency in 1960 at the World Bank, where the US and
Britain could exercise overwhelming influence in soft lending patterns to the most impover-
ished nations (Toye 2004: 172“4).

The institutionalists
Institutionalists believe that the institutions of an economy, that is, the forms of production,
ownership, work processes, and ideologies which combine to create an economy and society,
are the proper subjects for economic analysis. Since, furthermore, such institutions are subject
to evolutionary change, the process of studying economics should also properly be evolu-
tionary. This is clearly not the case for those who postulate that economics is the science of
choice and that the function of economics is to discover the laws of the economy, just as a
physicist might attempt to understand the laws of physics. While institutionalists have not
made development economics their primary focus, there have been notable contributions.
We shall consider but two, the American economist Clarence Ayres and the Swedish Nobel
Prize winner in economics, Gunnar Myrdal.9

The Ayresian view of development
Clarence Ayres (1891“1972) was one of the leading proponents of an American school of
institutional economics, centered from the 1930s to the 1960s at the University of Texas,
Austin. Ayres was dismissive of much of mainstream economics, and his references to
development economics occur within a much broader framework. Ayres was interested in a
“megatheory” of development, which would have application to the advanced and the poor
nations alike. At the center of Ayres™s theoretical structure on the “how” of economic devel-
opment are two fundamental forces: technology and ceremonialism.
Heterodox theories of economic development 181
Ayres placed more emphasis on technology than on any other factor which contributed to
economic development. Technology, to Ayres, arose from a combination of tools and human
beings, with the latter actually defined as “tool-users.” Past tools lead to future tools, because
human beings are so constituted as to be endowed with “the inveterate restlessness of human
hands and brains” (Ayres 1991/5):

the technological process can be understood only by recognizing that human skills and
the tools by which and on which they are exercised are logically inseparable. Skills
always employ tools, and tools are such always by virtue of being employed in acts of
skill by human beings. Once the dual character of the technological process is under-
stood, the explanation of its dynamism is obvious. Technology advances by virtue of
inventions and discoveries being made. ¦ But all inventions and discoveries result
from the combining of hitherto separate tools, instruments, materials, and the like.
These are capable of combination by virtue of their physical existence. ¦ no one ever
made a combination without there being something to combine. Furthermore, the more
there is to combine in any given situation the more likely inventions and discoveries
(Ibid.: 90“1)

For Ayres, technological progress and economic development were virtually synonymous.

Unfortunately, this “restlessness” which speeds forward the technological process can be
curbed or limited by ceremonialism, the dichotomous opposite of technological dynamism.
Ceremonialism imposes a curb on human creativity; in its essence, it is any past-binding
behavior that tends to thwart the forward progress that technology imparts. There are five
ways in which ceremonialism intrudes on any society, according to Ayres: (1) the nature
of social stratification or class structures; (2) via social mores or conventions of what is
acceptable behavior; (3) ideology which justifies the existing social stratification and mores
and which further attempts to emphasize the negative consequences of changing either the
social strata or the mores; (4) a social system of indoctrination which emotionally conditions
individuals to accept the dominant ideology, mores, and class and social stratification; and
(5) social patterns of ceremonial behavior designed to reinforce the first four factors.
Which of the two elements “ past-binding ceremonialism that tends to retard the pace of
change, or technological dynamism which expands human potentiality “ is dominant at any
point in time is the determining factor in establishing a country™s pace and level of develop-
ment. For Ayres, all societies, developed and less-developed, have ceremonial and techno-
logical forces at work in them at the same time, often within the same organizations and
institutions. Ayres insisted that economic development is the consequence of the successful
triumph of technology over ceremonial behavior. Ceremonial structures assign privileges
to some classes, while they condition the population to resist social and economic change.
Successful development, in the Ayresian view, thus requires a revamping of those institu-
tions, and the behavioral patterns that accompany them, which continue to be detrimental
to the creation of an indigenous technological capacity (this need is discussed more fully in
Chapter 13).
182 The Process of Economic Development
The central role of education
In Ayres™s view, the way to diminish the negative effects of ceremonialism on technological
progress was via expanded education, which he defined as the diffusion of knowledge and
skills. Of course, organized educational institutions can be hostile to “educating” and be a
determined element in society™s efforts to inculcate and perpetuate the prevailing ceremonial
structures. Indeed, this is often the case with educational institutions in poorer nations, even
through the university level. Still, Ayres felt strongly that expanded educational opportuni-
ties for larger numbers, or what we will later call human capital accumulation, was the
surest means for any society to promote economic and social progress: “[T]he most impor-
tant factor in the economic life of any people is the educational level ¦ of the community.
A technically sophisticated community can and will equip itself with the instrumentalities of
an industrial economy. There is no instance of any such community having failed to do so”
(ibid.: 94).
Economic development in the Ayresian perspective is thus indistinguishable from tech-
nological progress, and without continuing technological change economic development
Technological change is the result of scientific discovery, experiment, and innovation. The
successful introduction of technology into the domestic production process in any country,
what can be called domestic innovation, requires a scientific establishment capable first of
adopting and adapting foreign-produced technological knowledge to local conditions and,
later, of conducting its own research, designing its own experiments, and recognizing the
potential and sometimes actual dangers of its own discoveries when applied to the domestic
economy. In short, a developing nation must attain an independent technology learning
capacity. This is the first step toward greater technological self-sufficiency.
While Ayres™s work does not address the particularities of any developing society, and
while it is difficult to link his unique form of analysis to that of the other heterodox thinkers,
he addressed issues of crucial importance which complement the other perspectives presented
in this chapter. And while Ayres had no major influence on mainstream thinking, his views on
the importance of technology, the significance of education and other human capital creation,
and the need for creating an appropriate institutional structure that is supportive of sustain-
able economic and human progress is one that is quite compatible with the viewpoint of the
endogenous growth theories to be examined in Chapter 8. Thus, by isolating issues stressed
by Ayres, one can explain a very significant proportion of the successes of the East Asian
economies in recent decades (We consider such matters directly in Chapters 8, 9, 10, and
elsewhere in the remainder of this text.) So although Ayres™s own writings perhaps exerted
little influence at the time, the thrust of his approach and his insights into the sources of
growth and of the barriers to progress are substantially the same as the perspective behind
much of the recent scholarship on the growth process.

The institutionalism of Gunnar Myrdal
Gunnar Myrdal™s contribution to the social sciences has been remarkable, particularly for
its breadth. A Swedish-educated economist, Myrdal (1898“1987) won the Nobel award in
economics in 1974, ironically sharing it that year with one of the most fervent supporters
of the free market, Frederick von Hayek. G.L.S. Shackle, a noted Cambridge economist,
maintained that had Keynes not achieved renown for his revolutionary innovations in macro-
economic theory, the early work of Myrdal indicated that he would have supplied the same
Heterodox theories of economic development 183
theory. Myrdal and his wife, Alva, made fundamental contributions to the development of
the welfare state in Sweden, and Myrdal™s study of American racism (1944) has remained a
classic study of race relations. His massive Asian Drama (1968) established his reputation
as a development specialist, which began in earnest in 1957 with his Economic Theory and
Underdeveloped Regions.
In this latter book, Myrdal drew three main conclusions which he sought to further support
and demonstrate in his subsequent research.

1 “In the absence of counteracting policies inequalities would tend to increase, both inter-
nationally and within a country” (Myrdal 1984: 152).
2 International trade theory was biased against the poor regions, particularly in the
contention that trade in commodities would tend to equalize factor prices, especially
3 Greater income equality, rather than inequality, was the correct basis on which to achieve
enhanced economic growth.

We shall examine briefly the significance of each of these three propositions.

Cumulative causation and backwash effects
Each of these three propositions was, in Myrdal™s view, directly linked to the others, and all
could be understood through an appreciation of what Myrdal termed cumulative causation.
This concept sought to account for dynamic economic effects which progressively moved a
society away from equilibrium. Myrdal assumed that there were notable inequalities between
the regions of poor nations “ that is, there was “dualism,” as discussed earlier. What happens
when a less-developed nation receives a stimulus to growth? If, as is likely, this stimulus
is experienced in the more prosperous region of the economy, then that region will surge
even further ahead, leaving the more economically deprived regions of the economy lagging
This cumulative causation will occur for many reasons, only a few of which can be
summarized here, but all of the reasons lead to a movement in society away from equaliza-
tion among regions and sectors and toward increasing inequality. First, more ambitious
and better-trained workers will migrate from the poorer regions to the growing regions.
This will leave behind a bifurcated population of the young and the old in the poorer areas,
a population largely composed of dependants and low-productivity workers compared to
those who leave. At the same time, in backward rural areas, there is likely to be a higher rate
of fertility, leading to a more rapid rate of population growth that puts increasing demand on
a smaller number of the least productive workers, pushing down income per person in these
poorer rural regions. Thus movements in any one direction tend to be cumulative, exacer-
bating poverty and sustaining low levels of development where they exist and favoring and
expanding upon economic development and progress where they already exist. The cumu-
lative movements which tend to economically weaken a region were termed backwash
Secondary backwash effect also might be anticipated. If the economic stimulus took the
form of the expansion of industry in the economically more advanced region of a country,
the output of the new firms might well compete with the peasant and artisan production
methods prevalent in the poorest region. Artisan production might then be undercut by the
economies of scale realized by manufacturers in the more advanced region of the country,
184 The Process of Economic Development
slowly disrupting and then displacing artisan and small manufacturing industry in poor, rural
regions. Such effects could be accelerated if the more economically advanced region of the
country became more involved in international markets.
The spread effects, or positive externalities, of such a new growth stimulus might induce
other, linked domestic manufacturing needed to support an expanded export sector, à la
Nurkse™s “balanced growth” or Hirschman™s “linkage” models considered in the previous
chapter. One might think that such effects would be a plus for development. Myrdal,
however, cautioned that proper analysis demanded an understanding of both the positive
impact of spread effects and the negative impact of backwash effects. Benjamin Higgins
neatly summarized this aspect of Myrdal™s thinking:

The spread effects could outweigh the backwash effects only if income and employment
in the leading sectors grew relative to that of the laggard sectors, as they did in the
now advanced countries. In underdeveloped countries, however, the historical pattern
of growth has been weak. The rural sector did not produce the raw materials for the
expanding industrial sector, nor did the expanding industrial sector rely heavily on the
rural sector for foodstuffs. Thus the growth of the industrial sector did not much expand
the market for cash crops of the rural sector.
(Higgins 1959: 351)

The pattern of production in most less-developed countries reflected the legacy of coloni-
alism and neocolonialism. The structure of the economy was one wherein a predominance
of backwash effects arose because of past institutional arrangements, rather than through
the workings of the laws of comparative advantage. The failure of investments in the export
sector to generate multiplier effects sufficient to swamp the backwash effects arose from the
lingering effects of colonial policies and adverse path dependence. In the advanced nations,
investments in the raw material sector created new opportunities for manufacturing and
processing, as well as for banking and shipping. But Myrdal argued that in most Asian
and African countries, colonial policy was concerned only with advancing the key sectors
owned or controlled by the advanced nations. Therefore, the stimulus to banking and
insurance, shipping, processing, and manufacturing occurred primarily in the advanced
nations, rather than in the colonial or post-colonial regions. The very weakness of the
spread effects, coupled with the strong backwash effects, virtually guaranteed that the latter
would dominate the former in the poor nations.

The state
For Myrdal, a crucial difference between the advanced nations and the poor nations was to
be found in the strong state in the former and the weak (or soft) state in the latter (Myrdal:
1970 Chapter 7). With a strong state, the advanced nations could develop a coherent
national policy which could address the question of the manner in which the benefits of
economic growth might be spread through the economy. This was due to the fact that, to
some degree, the state has some power to influence and direct the growth process. On the
other hand, in the poor nations the state lacks effective policies to either ensure that there
is a movement toward national economic integration or to address the impact of backwash
Myrdal noted that one of the major weaknesses of the state in the less-developed nation
is that it is an institution of, and for, the top social strata. He did not believe it likely that
Heterodox theories of economic development 185
redistribution of wealth and income could be achieved via income and wealth taxes. The rich
would only evade these, since they effectively controlled the taxing authorities through their
political power. The elites thus did not fear state power. On this point, Myrdal noted that in
Singapore, economic development proceeded to a certain degree, because it was “one of the
few States in the underdeveloped world which actively fought against corruption” (Myrdal
1984: 158).

Myrdal™s institutionalism
Myrdal utilized an institutional approach, but in a manner largely distinct from Ayres.
Myrdal believed that one could not understand the sources of economic underdevelopment
nor address the problems of underdevelopment as long as analysis was restricted to the intel-
lectual constructs of orthodox economics, such as the theory of comparative advantage.

The institutional approach meant enlarging the study to include what in a summary way
I referred to as “attitudes and institutions”. They were found to be largely responsible
for those countries™ underdevelopment and would have to be changed in order to speed
up development.
(Myrdal 1984: 153)

Only radical institutional reforms would allow for development. Some examples of such
changes needed might be land reform, a campaign against corruption, and displacement of the
elite from the commanding heights of state policy. In short, the causes of underdevelopment
and the cure for poverty were to be found in the study of and changes in the “attitudes and
institutions” of the less-developed nations. Economic theories about saving and investment,
“big push,” “balanced” or “unbalanced” strategies were hardly enough.

Dependency analysis
Dependency analysis became extremely fashionable, particularly in Latin America, and later
in Africa, in the late 1960s. Dependency analysis built on the ideas of the structuralists, specif-
ically Prebisch™s distinction between the center and the periphery. The center was viewed
as cause and the periphery as effect. According to dependency writers, the less-developed
nations had to be understood as part of a global process. Their fate was merely to provide
the inputs to the advanced nations or to receive their cast-off, low-wage manufacturing
processes under trading conditions which were likely to worsen. Dependency theory found
the causes for the lack of development to be external to the socio-economic formations of
the less-developed nations (see Figure 6.3). Thus, alleged internal backward or dysfunctional
institutions of the less-developed nations were not treated seriously by dependency writers as
a subject of analysis, or were seen as extensions of external domination. Internal institutional
structures, such as the role of state corruption, large and unproductive land holdings, the
extreme concentration of wealth, unresponsive political institutions, and so on, were played
down. Instead, the negative influence of transnational corporations, multilateral institutions
like the World Bank and the International Monetary Fund, and the extensive influence of
foreign governments in the internal affairs of less-developed nations were highlighted.
Several factors contributed to the rise of dependency analysis. Of utmost importance was
the influence of “modernization” theory on social science analysis and policy, which promised
quick and sweeping development, as suggested in the developmentalist theories considered
186 The Process of Economic Development

Underlying conditions:
1 The export sector dominates the economy, imports are large in relation to the GDP
2 Exports are dominated by one, or a few commodities
3 Export firms are primarily foreign-owned
4 Mineral/petroleum commodities are produced under conditions of vertical integration
5 Foreign ownership dominates the financial sector and the industrial sector

Structural results:
1 Income, employment, and growth are determined by:
a prices and demand conditions in international markets
b the willingness of transnational corporations to invest
2 Income, employment, and growth are conditioned by:
a economic fluctuations abroad
b changes in taste and fashion or technologically created substitutes
c changes in the price and type of imports
3 Foreign capital, foreign technology, and management are dominant economic actors
4 Profits are normally repatriated, not re-invested
5 Production for the export industries is dependent on imported inputs
6 Backward and forward linkages in export activities are rare
7 Economic growth is not self-activating

Figure 6.3 Characteristics of economic dependency.
Source: Authors, adapted from Girvan (2006: 334).

in Chapter 5. As was noted there, Rosenstein-Rodan, Nurkse, Hirschman, Rostow, and others
had maintained that the attainment of development for the less-developed countries was
only a matter of time. Since most nations had already reached the “pre-take-off” stage, using
Rostow™s stage categorization, spectacular results were to be anticipated in little more than
a decade.
Yet in the 1950s and 1960s in most of the less-developed nations, growth was only
modest. Population growth had slowed gains in per capita income. Furthermore, confirming
Myrdal™s work, a process of cumulative causation leading to greater dualism could be
observed. economic growth had created poles of prosperity in a sea of despair. Shanty-
towns and slums ringed the new and fashionable city centers. Water quality was abysmal,
state schools were pathetically incapable of offering an adequate education, for most people
health care remained either non-existent or minimal, transportation was a daily nightmare,
and the average diet remained rudimentary and inadequate. New woes arose, or were first
analyzed, in these decades: environmental pollution and degradation accelerated, while
workplace hazards mounted, as new chemicals and substances were introduced into the
production process.
True, a new techno-bureaucracy of government functionaries, applied scientists and engi-
neers, financial operatives, and managerial cadres now shared some of the income with the
agro-export elite in some nations. A skilled middle class had formed, and they had experi-
enced tangible social mobility. But for the working classes and small farmers who made up
the bulk of the population, the changes wrought in the 1940s through to the 1960s were both
traumatic and cruel.
Heterodox theories of economic development 187

Celso Furtado was one of the few young Brazilians to serve in Europe during the Second
World War. After the war Furtado remained in Europe to complete a doctorate in economics
from the elite Sorbonne, University of Paris. His life (1920“2004) spanned a period when
Brazil™s economy was united under the Estado Novo in the 1930s and started to grow at a
rapid pace under import substitution policies (ISI) until the debt crisis of the 1980s.
When Furtado returned to Latin America in 1949 he went to work at the Economic
Commission for Latin America (ECLA), the UN™s new research center in Santiago, Chile.
Shortly thereafter Raúl Prebisch made him Director of the Economic Development Divi-
sion. From that date through 1957 Furtado worked at ECLA with the many talented econ-
omists who had clustered there, including Aníbal Pinto and Osvaldo Sunkel, who would
soon become famous as the Latin American structuralists.
Leaving ECLA Furtado spent a year at the University of Cambridge, where he became
acquainted with some of the most creative Keynesian economists, including Joan Robinson
and Nicolas Kaldor, both towering figures in economics in the 1950“1970 period.
Returning to Brazil in 1959 he published one of his many classic studies of development,
The Economic Growth of Brazil, which retains its great usefulness today. Unlike Prebisch,
Furtado sought to analyze economic underdevelopment through the unfolding of long-
term historical periods, such as the colonial era, when Brazil was “outward oriented,” and
the ISI period, when Brazil was “inward oriented.”
Rather than using Prebisch™s term “periphery” Furtado preferred “colonial structure” to
describe Latin American nations and to emphasize the conditioning legacy of the colo-
nial period. Eventually Furtado wrote thirty books, which have been translated into fifteen
languages, with over two million copies sold. Furtado gave relative weight in his analysis
of development issues to the pre-capitalist, mainly agrarian, sector.
Unlike Lewis (see Chapter 5), Furtado did not argue that agrarian surplus labor would
be absorbed through the process of industrialization. Dualism, far from dissolving, would
be perpetuated because only modest amounts of labor are needed from the pre-capitalist
sector as developing nations apply inappropriate capital-intensive technologies (techno-
logical dependence) to expand the industrial base.
The new industrial part of the economy is marked by increasing concentration of income
received by foreign and domestic owners and the professionals and financial specialists
who manage and operate the manufacturing firms. With wages low, with the agrarian pre-
capitalist sector enduring, and with only a small number of upper-middle-class families
(about 9 percent of the population) enjoying the rising incomes flowing from the industriali-
zation process, firms cannot sell much and so they also are unable to achieve economies
of scale. Operating at low levels of production to supply the restricted local market, profit
levels remain low, as does the level of investment, so the economy fails to grow as fast as
it could without its endemic structural problems.
Demand plays a major role in the structure of the economy “ demand is defined by
“cultural colonialization”: the elite and the upper middle class (the top 10 percent that
receive well over one-half of national income) avidly buy goods that are consumed by the
affluent in the advanced industrial nations.
Brazil was very dependent upon Foreign Direct Investment (FDI) in its efforts to utilize ISI
to speed-up economic growth.

[There was an] ironic heavy dependence of new industries on foreign investors “ ironic
because the strategy of [ISI] was often justified in terms of building national industrial-
188 The Process of Economic Development
capacity. It would seem that the real reason for pursuing import substitution was some
what different: The ruling elite, with only a shallow sense of nationalism, sought a
growing economy and growing incomes via industrialization. Given the limited capital
and technology readily available within Brazil ¦ elites invited foreigners to handle the
industrialization, which otherwise would not have been possible. State and foreign
investors cooperated to develop chemicals, machinery, transportation equipment,
shipbuilding, electrical equipment, and engineering goods, all rapidly growing indus-
tries [from 1947“64].

Furtado maintained that there was a necessary link between FDI-led growth and rising
internal inequality. He was one of the first economists to use the term “dependency” and
to argue that development and underdevelopment were two aspects of one economic
structure. To overcome dependence the underdeveloped nations would have to create
their own economic analysis “ the tradition of Smith, Ricardo, and the other European
classical economists was not suitable to an analysis of the dualistic, dependent structure
of nations such as Brazil.
Returning from England, Furtado took charge of Brazil™s most illustrious development
institution “ the national development bank or BNDES (see Focus 9.3 for further comment
on BNDES). At BNDES Furtado focused on the north-east, Brazil™s poorest region, where
the income gap between the poor subsistence farmers and that of São Paulo was greater
than the gap between average income in São Paulo and Europe in the 1950s.
Furtado soon created SUDENE, designed to promote industrial development and land
reform (see Chapter 11) in the north-east to counteract “internal colonialism” as mani-
fested in the exclusion of the north-east from the benefits of Brazil™s economic growth. The
north-east was in a double bind according to Furtado™s research: it faced falling terms of
trade for its commodity exports, and falling terms of trade in relation to its income earnings
on the industrial goods the region bought from Brazil™s industrial core in São Paulo and
Río. Development and underdevelopment were one totality, constantly reproduced within
the structure of the economy.
Furtado™s direction of SUDENE continued until the military coup of 1964, after which
(in exile) he returned to the Sorbonne as a professor from 1965“85, becoming the first
foreigner to attain such an appointment. With the return to democracy in 1985 Furtado
became Brazil™s ambassador to the EU, and then served as the Minister of Culture. In
short, Furtado was always a “public intellectual.” But he also formed part of a cadre of
highly competent and reliable state operatives at BNDES, while constantly advancing his
own research and economic analysis of development issues. Furtado supported the elec-
tion efforts of Lula, Brazil™s President since 2002, and Lula responded by re-establishing
SUDENE in 2003.
Furtado stated that both Keynes and Myrdal had greatly influenced his thinking
concerning the link between the economy and power, the crucial role of the state and
the ways in which the international economy influenced or constrained national econo-
mies. The latter found expression through the domination of the US over Latin America, in
Furtado™s view. Nonetheless, before the military coup of 1964, Furtado took the position
that industrialization in Brazil would not be difficult. His focus was then on the necessity of
incorporating Brazil™s vast population of poor workers, farmers, and marginalized people
into a process of inclusive social development.
In his view at that time, industrialization would unleash new social forces and pressures
which would drive Brazil toward a process of inclusive social development reaching far
beyond the question of industrialization per se. But with the military coup “the essence of
Brazil™s political economic strategy became strictly that of industrialization thereby inten-
sifying the process of social exclusion. This created a profound divide: development could
no longer be a social project.”
Heterodox theories of economic development 189
The coup demonstrated Brazil™s dependence: US corporations funded Brazilian insti-
tutes that were active in funneling money to those plotting the downfall of the elected
government. The US State Department and the CIA also significantly facilitated the under-
mining of the government. In dispute was the new policy of limiting the amount of profits
which foreign corporations (overwhelmingly US) could take out of the country in a year and
SUDENE™s project for land reform in the lower Amazon region. In addition, the government
decided to buy out a number of petroleum refineries, primarily owned by US transna-
tionals, converting them into part of the state-owned petroleum firm Petrobas.
With the coup everything changed. The civilian government had been starved for aid
funds and had faced a drop in FDI, but within weeks of the coup the military government
had received $650 million in aid from the US government, which also arranged an addi-
tional $450 million in loans. The military government dutifully responded with new mining
laws, an end to land reform, and to the idea of putting the oil refineries under the control
of the state. As Furtado moved into exile the term “dependency” now resonated as never
before in Brazil.
Until the coup Furtado had been a great optimist, believing that Brazil was a nation that
would surely advance, a nation that had a national social project. But the coup “Produced
a form of development that was completely perverse having no other objective but to
accumulate and concentrate.”
After the coup Furtado put much emphasis on the fact that a successful ISI policy would
pass through phases of greater and greater complexity wherein the creation of a balanced
economy would necessitate the production of durable goods and later machinery and
equipment (see Chapters 9 and 10 for further analysis). Yet when Brazil attempted to push
its productive system into these higher phases the structural weaknesses and imbalances
of the economy would be ever more critical.
In the absence of state intervention (see Chapter 7 for a discussion) to provide for social
development, the economy would be limited by the small internal market combined with
production processes that were ever-more capital-intensive, and an unbalanced and
imitative pattern of consumption would drive the production process. Brazil could not
overcome the narrowness of the domestic market via manufactured exports because
of the absence of an export mentality among its industrialists, and because the trans-
nationals had set up their Brazilian branch plants only to have privileged access to the
Brazilian market.
Lacking any agency for endogenous development and change, Brazil would face a
constant drain on its production system to make external payments in the form of debt
payments, charges for the use of foreign technology, and transference of a large portion of
profits to the external powers that ultimately determined the rhythms of the economy. All
this, in fact, would seem at least partly to explain the unbalanced debt-led growth of the
1970s and the very low growth Brazil achieved in the 1981“2005 period.
Sources: Colby and Dennett 1995: 440“55; Kay 2005; Kohli 2004: 188;
Love 1999; Mallorquín 1998: 96“7

It is not possible to find one dependency writer who could serve as an exemplar of this
school of thought. Indeed, in what may well stand as the classic attempt to summarize and
detail the ideas of the Latin American dependency writers, Cristóbal Kay referred to their
works as a “Tower of Babel” (Kay 1989). While the gradations and subtleties of positions
defy condensation, we have, following Kay, utilized a logical division: Marxist dependency
analysis and non-Marxist dependency thought. even this distinction, unfortunately, is less
crisp than might appear at first glance. The dependency writers were nothing if not eclectic,
and borrowing from Marxism and employing Marx™s categories and concepts was never
treated as “trespassing,” even by the non-Marxist theorists.
190 The Process of Economic Development
Marxist dependency analysis
Paul Baran was, at the high-water mark of McCarthyism in the 1950s, the only known
Marxist economist to hold a tenured professorship at a major US university, Stanford. Unlike
Marx, who believed that capitalism had a dual role of “destruction and regeneration” to play
in the colonial regions, Baran emphasized the destructive side of capitalism in less-developed
regions, but could find scarce evidence of “regeneration.” Rather, twentieth-century monopoly
capitalism, unlike the earlier form of competitive capitalism which Marx had scrutinized,
had, according to Baran, a vested interest in maintaining backwardness and dependence in
the periphery.
It might be argued that Baran initiated the analytical process which later led to the flow-
ering of the pessimistic and stagnationist dependency school in Latin America and Africa.
Baran™s favorite example of the destructive effects of capitalism was that of India. He found
that many Indian social scientists had discussed and developed concepts very similar to those
employed by the dependency writers, but that they had done so as early as the late nineteenth
century, having experienced the full force of British imperialism (see Chapter 3).
Baran™s theoretical point of departure was an analysis of what he termed the economic
surplus. This is defined as the mass of resources, actual and potential, which a society could
have at its disposal in order to facilitate economic growth; it is the amount that might be
reinvested in productive ways to increase the future level of social output. This “surplus”
is that residual left over out of total income after a society™s basic needs have been met for
food, clothing, shelter, and human companionship. But this surplus may be grossly misused.
It may be utilized to erect sumptuous and multiple residences for the rich, or it may be wasted
through a variety of other forms of conspicuous consumption. The military or the church
may make tremendous demands on the surplus, or it may be drained away by a foreign power
via plunder or simple profit repatriation, as a result of foreign control over a less-developed
economy™s most important industries. Baran™s study of the history of the less-developed
regions under colonialism led him to argue that the source of their poverty was to be found in
the extraction of this surplus. Had this surplus, or a large portion of it, been used for invest-
ment rather than for waste, then the poor regions would have been transformed.
Colonialism, however, blocked the potential for change. Baran summarized in one short
paragraph the broad history of colonialism, condensing in the process a tremendous amount
of material, striking at the very essence of the colonial legacy:

To oppression by their feudal lords, ruthless but tempered by tradition, was added domi-
nation by foreign and domestic capitalists, callous and limited only by what the traffic
would bear. The obscurantism and arbitrary violence inherited from their feudal past was
combined with the rationality and sharply calculating rapacity of their capitalist present.
Their exploitation was multiplied, yet its fruits were not to increase their productive
wealth; these went abroad or served to support a parasitic bourgeoisie at home. They
lived in abysmal misery, yet they had no prospect of a better tomorrow. They existed
under capitalism, yet there was no accumulation of capital. They lost their time-honored
means of livelihood, their arts and crafts, yet there was no modern industry to provide
new ones in their place. They were thrust into extensive contact with the advanced
science of the West, yet remained in a state of the darkest backwardness.
(Baran 1957: 144)

Reviewing the history of colonialism, Baran drew an extremely powerful conclusion.
Heterodox theories of economic development 191
Thus the peoples who came into the orbit of Western capitalist expansion found themselves
in the twilight of feudalism and capitalism, enduring the worst features of both worlds.

National capital, foreign capital, and the state
Potentially, Baran argued, there were three forces which could both increase the economic
surplus and harness it for economic development. These three potential sources for socio-
economic change were national capital, foreign capital, and the state.
Regarding the first, Baran acknowledged that in some of the poor nations import substitu-
tion industrialization (ISI) had changed the structure of the economy. But he also maintained
that ISI had failed to go far enough, and that, in fact, the end result of ISI would be the
perpetuation of a fragmented and disarticulated national economy dominated by pervasive
monopoly and oligopoly firms.

The new firms, rapidly attaining exclusive control over their markets and fencing
them in by protective tariffs and/or government concessions of all kinds, blocked
further industrial growth while their monopolistic price and output policies minimized
the expansion of their own enterprises. Completing swiftly the entire journey from
a progressive to a regressive role in the economic system, they became at an early
stage barriers to economic development rather similar in their effect to the semi-
feudal landownership prevailing in underdeveloped countries. Not only not promoting
further division of labor and growth of productivity, they actually cause a movement
in the opposite direction. Monopolistic industry on one hand extends the merchant
phase of capitalism by obstructing the transition of capital and men from the sphere of
circulation to the sphere of industrial production. On the other hand, providing neither
a market for agricultural produce nor outlets for agricultural surplus labor and not
supplying agriculture with cheap manufactured consumer goods and implements, it
forces agriculture back towards self-sufficiency, perpetuates the idleness of the structur-
ally unemployed, and fosters further mushrooming of petty traders, cottage industries,
and the like.
(Baran 1957: 176)10

As to the second potential source of change, Baran agreed with Hans Singer, whom he
cited in this regard, that foreign investment, while clearly a potential source of development,
actually failed to have an impact on more than a narrow, isolated portion of the national
economy. Not only did he emphasize the enclave effect of foreign investment, Baran took
the analysis one step deeper, arguing that foreign capital diminished the possibilities of
economic development.
This was so, Baran argued, because in order for the foreign mining and agro-export capi-
talists to gain a foothold in the less-developed areas, it was necessary to form an alliance with
the merchant capitalists who dominated politically and economically within these regions.
These relatively backward elements, with semi-feudal and semi-capitalist ideologies and
behavioral traits at one and the same time, were actually strengthened by foreign investment.
And, in turn, the institutions which they sought to perpetuate, Ayresian-type ceremonial or
retarding institutions, also were bolstered by the enhanced revenues which flowed into the
possession of the national strata of bankers, speculators, semi-feudal landlords, and political
192 The Process of Economic Development
In Baran™s view, foreign investors in mining, oil and gas, and agro-export firms learned
quickly to become hostile to genuine economic development as promoted through ISI. He
listed four reasons for such opposition.

1 higher wages and tolerance of unionization meant lower profit margins;
2 foreign capital would become a targeted source for increasing state revenues, meaning
that higher taxes and royalty payments would be imposed;
3 foreign exchange controls limiting the amount of funds which could be taken out of the
country as repatriated profits would be imposed; and
4 tariffs on imported wage goods would be utilized to protect domestic manufacturing,
thereby raising the likelihood that workers would demand higher wages to maintain
their living standard, thus cutting into profits.

As to the third potential source of the surplus, in theory the state could break this deadlock
by opting for new programs which would make ISI ever more dynamic and successful. In
fact, however, the state in the less-developed regions seemed incapable of performing the
crucial role or making the decisions needed to move forward on any front that would advance
For Baran, following the capitalist road in the less-developed regions was to steer a course
which would eventually lead not to Rostow™s society based on mass consumption, but rather
to an economic and social graveyard. Only by turning to socialism could the less-developed
countries reasonably expect any relief from their poverty.11

Associated dependent development: non-Marxist dependency theory
One of the most noted non-Marxist dependency writers was Fernando Henrique Cardoso,
who has had an active career as a Brazilian sociologist/economist with a worldwide repu-
tation, and also as a powerful Brazilian politician, rising to be President of Brazil from
1994“2002. While most dependency economists argued that the nations of the periphery
were capitalist, they suggested it was a particular kind of peripheral capitalism. One of the
defining characteristics of this mutation was economic stagnation, or “the development of
underdevelopment,” in the catchy rhetoric of Andre Gunder Frank, another of the eminent
dependency writers.
Cardoso, however, did not embrace this stagnationist perspective. Rather, he maintained
that the economies and societies of the periphery had evolved and could continue to do so
(Cardoso and Faletto 1979). There had been three major stages in the economic history of
the less-developed countries. First was the agro-export stage of the colonial period, when
economic dualism was prevalent. During this stage, the pre-capitalist sector of artisans, petty
producers, and peasant producers had accounted for the bulk of all economic activity. Some
sectors of the economy were integrated into the world economy, particularly the produc-
tion of precious metals, minerals, and tropical products which were exported to the world
markets. Production of these export products often took place in a modern semi-capitalist
Secondly, after the First World War, a major transformation in some of the less-devel-
oped economies, especially those of Latin America, had occurred with the creation of what
Cardoso called the “developmentalist alliance.” The strategic locus of this transformation
was import substitution industrialization (ISI). A new social structure of accumulation
had been formed on the basis of common or cooperating interests of industrial workers,
Heterodox theories of economic development 193
industrialists, governmental workers, and some powerful individuals in shipping, banking, and
the agro-export sector who had made the change from the agro-export model of accumulation
to that of ISI.
eventually, however, the developmentalist alliance had been replaced by an authoritarian-
corporatist regime. In this third stage, the populist orientation of the state, which had been
characteristic of much of the ISI stage, had given way to drastic curbs on democracy, unions,
the universities, and other areas of society where dissent might be encountered and tolerated.
The weak welfare state developed in the ISI stage, in which social security and minimum
wage legislation, public health care, and public education had been expanded for at least
some part of the population, gave way to drastic cuts in the public service aspect of the state™s
budget. Above all, in this stage, the transnational corporations (TNCs) were welcomed and
accommodated in the less-developed nations. In fact, the TNCs became pivotal in the new
process of accumulation and were central to the growth process.
Although this new capitalist model was extremely accommodating to the interests of the
TNCs, Cardoso argued, the TNCs were not all-powerful. The nations of the periphery needed
the TNCs because of their ability to control and reproduce technology and complex capital
goods. But the TNCs also needed the nations of the periphery, as their middle- and upper-
income consumers had become an important source for final TNC sales. The peripheral labor
force, kept docile and cheap by the authoritarian state, was necessary to keep costs down in
an era of global competition.
Under this new regime, in which the authoritarian state and TNCs cooperate, some
economic growth and development does occur. GDP rises; even the standard of living for the
masses may improve. The continued stagnation that some dependency writers, like Frank,
argued was the fate of the less-developed nations was neither theoretically plausible, nor,
even more importantly, argued Cardoso, was it empirically founded. One should not antici-
pate economic stagnation, or be surprised at a certain degree of economic progress in less-
developed nations. Nor should one view the peripheral nations as powerless to shape their
destiny, simply buffeted about by outside forces. Rather, a new form of capitalist accumula-
tion was at work, which Cardoso termed associated dependent development.
Cardoso did not view this new stage, or its particular characteristics, as immutable. The
poor nations had a certain capacity to bargain with the TNCs and the advanced nations, and
they had certain, but limited, opportunities to develop their own technological capabilities.
The question was how, within this new structure, the poor nations were to respond. Innova-
tion could have certain rewards. On the other hand, Cardoso found that the yearnings for a
revolutionary rupture with the world system, as voiced by many dependency writers, was
By attempting to portray a situation of submissive dependency and stagnation, many intel-
lectuals had hoped to stimulate a political shift toward revolution. Cardoso disagreed with
the thrust of this analysis; the economic situation of most less-developed nations no doubt
was difficult, the state had ceased to attempt to combat some of the most noxious problems
in their nations, but the growth created by the new alliance between domestic capital and the
transnationals under dependent development opened up some new possibilities for elements
of the working class, the techno-bureaucracy, and the state to progress.
At least for some less-developed nations, there was reasonable hope for modest reform
and some limited autonomy, within the context of a new, more globalized, system of
production. Less-developed nations may “depend” upon outside technology and finance
via TNCs, but Cardoso believed that good state policy would permit less-developed nations
to take advantage of the reciprocal needs of the TNCs in the less-developed countries, so
194 The Process of Economic Development
that the poorer countries could obtain some of the positive effects of TNC investment and
some of the benefits of economic growth would be shared within the poorer countries (see
Focus 6.3).
Dependency analysis lost much of its following in the late 1970s. Yet, as Norman Girvan
noted, this turned out to be one of the great ironies of development economics. In the Carib-
bean, but also in most other regions, a new dependency has flourished:

The paradox is that the actual dependence of Caribbean economies became much more
acute in ¦ the 1980s and 1990s. Heightened foreign indebtedness ¦ [has] increased
the economic vulnerability of Caribbean countries, exposing them to pervasive external
intrusions into domestic policy-making in the form of conditionalities imposed by the
Washington-based international financial institutions and bilateral donors. The agree-
ment establishing the World Trade Organization in 1994 ¦significantly constrict[s] the
“policy space” previously available to developing countries. National development of
the kind that was the accepted objective in the era of decolonization has been replaced
by the mantra of “integration into the global economy.” The new dependency associated
with globalization is presented as interdependence in the effort to obfuscate the asym-
metries. The wheel has come full circle from the 1960s, and there is a new orthodoxy
that calls for a renewed critical analysis from an updated dependency perspective.
(Girvan 2006: 345)

Classical Marxism
While the dependency and other heterodox perspectives discussed in this chapter were under
heavy attack from more orthodox development economists, an attack was also mounted from
the political left.
Bill Warren, a former lecturer in Economics at the University of London, provided a
cutting and intelligent critique of both non-Marxist and Marxist dependency analyses. His
ideas were extremely controversial, and his untimely death in 1978 foreclosed the possibility
of a meaningful dialogue with his many critics.
Warren™s position was that capitalism continued to be a progressive force for change wher-
ever it operated. The capitalism sweeping into the less-developed regions of the world at a
rapid rate may manifest signs of social pathology, but they were of a transitory nature, similar
to the problems of early capitalism in england after the Industrial Revolution. Capitalism,
Warren argued, had brought trauma and social dislocation in its wake wherever it had been
established. But, he maintained, it had also brought an incomparably higher standard of
living to the masses than any previous socio-economic system (you will recognize this, from
Chapters 3 and 4, as Marx™s view, too). Furthermore, as the less-developed regions indus-
trialized at a rapid rate, their industrial working force expanded. This social class would
eventually bring socialism to those countries, but only after the initial triumph of capitalism,
which was a necessary stage of social and economic development.
Leaving aside Warren™s prediction of a shift toward socialism somewhere in the undefined
future of the less-developed regions, what is one to make of Warren™s claims of the progres-
siveness of capitalism in the periphery? He made use of statistical data to show that in the
1950s and 1960s overall annual per capita growth in the poor regions had been relatively
high: 2.4 percent in the 1950s and 2.6 percent in the 1960s. He implied that the pace was
improving over time, noting that in the early 1970s, the average rate of growth of per capita
income reached 3.8 percent.
Heterodox theories of economic development 195

By the late 1970s a chorus of voices dissented from the simple center“periphery dichotomy
of many dependency writers. The periphery, as destined to stagnation without a break
with the world capitalist system, was increasingly seen as an incomplete, and inaccurate,
description of the socio-economic conditions and the dynamic of change at work in some
parts of the less-developed world, as Cardoso also argued.
It was true that some nations seemed caught in a post-colonial torpor, continuing to
specialize in one or a few raw material exports. These non-industrializing nations, it was
suggested, could best be described by what did not exist, but needed to be in place, if
they were to develop. These nations were thus described as the dependent economies,
stuck on the periphery of progress. They seemed incapable of autonomously altering their
economic structures, stuck with adverse path dependence born of colonial structures
carried over into independence.
Some less-developed nations, however, were growing and industrializing rapidly. For
these economies, the term dependent development was applied by those who accepted
this new way of looking at center“periphery relations. These were countries in the
periphery, but which seemed to be changing their economic structures. Economic growth,
often quite rapid growth, was taking place. These countries (Mexico and Brazil were often
singled out) did not fit the stagnationist perspective of the original dependency analysis,
but neither did they fit the pattern of independently developing nations.
In another path-breaking attempt to present an alternative to the stagnationist depend-
ency perspective, Peter Evans defined “dependent development” as a situation which

both the accumulation of capital and some degree of industrialization on the periphery.
Dependent development is a special instance of dependency, characterized by the
association or alliance of international and local capital. The state also joins the alli-
ance as an active partner, and the resulting triple alliance is a fundamental factor in
the emergence of dependent development.

Although economic growth is achieved, countries engaged in a process of dependent
development suffer a variety of ills:

a regressive profile of income distribution, [an emphasis on] luxury consumer goods
as opposed to basic necessities ¦ underutilization and exploitation of manpower
resources ¦ [and the] frequent reliance of foreign firms on capital-intensive technolo-
gies [which] increases rather than solves the unemployment problem.

Politically, a nation at the stage of dependent development is categorized as being
on the semi-periphery, neither in the periphery nor the center. Could nations undergoing
dependent development ever graduate to the status of “core” nations? Dependent devel-
opment theorists, such as Evans and Cardoso, did not rule out the possibility.
Cardoso did not see dependency as necessarily a “zero-sum” game, in which the
periphery lost and the center nations gained, as the stagnationist dependency writers
believed. Rather, the current world economy provided opportunities for “positive-sum”
games in which both the developed and less-developed nations could “exploit” each
other. Growth in the periphery was possible, but achieving it depended on having the
appropriate internal policies to gain advantage vis-à-vis the TNCs.
Sources: Evans 1979: 32; Evans and Gereffi 1982: 113
196 The Process of Economic Development
Warren maintained that overcrowding, slums, and chronic unemployment arose from
population growth, but that this growth itself was a fundamental indicator of an improvement
in living standards. For Warren, all institutions within the less-developed nations which were
ceremonial or dysfunctional from the standpoint of economic development were by-products
of the colonial era and earlier modes of production. That era had ended after the Second
World War, according to Warren, and a new era had dawned with political independence.
And this, he argued, was sufficient to thwart whatever impediments to social and economic
progress could be attributed to either the policies of transnational corporations, the multi-
lateral institutions, or the governments of the advanced nations. The spread of capitalist
methods of production would sweep away outmoded institutions and structures, and the now
less-developed nations would be brought into the modern era, just as Britain was, by the
imperative forces of capitalist progress.
In the heady days of the early 1970s, Warren™s thesis had a ring of plausibility; there can
be no doubt that, like the developmentalists with whom he quarreled, he shared a funda-
mental optimism about the possibility, even inevitability, of progress. However, the aggre-
gate data utilized by Warren need to be carefully analyzed in terms of their representative
nature. Warren™s results were strongly influenced by the performance of the East Asian
miracle economies. Without detracting from the great strides made in these nations, which
are discussed in Chapter 8, it should be noted that there has been a significant decline in their
rate of growth in recent years. Thus, the Asian miracle economies had a tendency to skew
the aggregate data after the 1950s and through the early 1970s. Warren, and others who use
similar forms of analysis, should have presented disaggregated data, showing the overall
growth of less-developed nations both with and without the miracle Asian economies. This
would have been a more reasonable basis for attempting to evaluate the thesis that “capi-
talism has struck deep roots [in the less-developed regions] and developed its own increas-
ingly vigorous dynamic” (Warren 1980: 9).
Events would seem to have overtaken Warren™s brash analysis. The durability of the
retarding factors which disturbed the heterodox development economists became, if anything,
more significant for most developing nations in the 1990s, as noted by Girvan, above. Ayres,
Baran, Myrdal, Prebisch, and Singer would not, we suspect, have been surprised by the
difficult conditions faced by many less-developed nations since 1980, nor by the anemic
responses to these conditions from so many of these economies. It is not that progress is
impossible; it is just that, contrary to Warren, it is unlikely that it is inevitable. Becoming
developed requires the right decisions and the proper policies; it does not just happen to all
countries like manna from heaven, just as a consequence of the spread of capitalism.

Questions and exercises
1 Using the definition in note 4 for the terms of trade:
a calculate what happens to the terms of trade index for some country between 1995
and 1997, if, in 1995, the price index for its exports was 110 and the price index for
its imports was 108; and in 1997, the price index of exports was 105 and the price
index of imports was 112. Has there been an increase or a decrease in this country™s
terms of trade? If the country wishes to buy exactly the same physical quantity of
imports in 1997 which it purchased in 1995, how much more, or how much less,
will it have to export, in physical terms, in 1997 compared to 1995?
b examine what has happened to the terms of trade for two countries of your choice
Heterodox theories of economic development 197
over a period of at least five years, using data in either the World Development
Report or the Human Development Report. Does the trend you discover tend to
support or refute the Prebisch-Singer hypothesis? Explain.
2 What is meant by the “international division of labor”? What function does the periphery
play vis-à-vis the center countries in this division of labor? Who benefits from it?
3 Why do you think Raúl Prebisch™s use of the terms “center” and “periphery,” and the
idea that relations between them were antagonistic, was such a challenge to orthodox
4 Imagine you are an adviser to your government and that your economy faces a problem
of declining terms of trade for its exports. Discuss the possible policy changes for the
economy and any other strategies you would recommend to avoid declining terms of
trade in the future.
5 What are the problems faced by primary product exporters? Are there primary products
that countries might export which would, perhaps, not be subject to the same difficul-
ties? Can you give some examples of so-called non-traditional primary products which
it might be desirable to export? In general, what makes one export a “good” export and
another less desirable?
6 Distinguish between backwash effects and spread effects. Are these the same as vicious
circles and virtuous circles? How do these two ideas of Myrdal™s relate to the concept of
cumulative causation?
7 What similarities are there between the classical Marxist view of Bill Warren and the views
of the developmentalist economists reviewed in Chapter 5? What differences are there?
8 Contrast the institutionalist approach to development with the dependency approach.
Are there strong similarities, as well as differences?

1 As we shall see in Chapter 8, however, the ideas of the institutionalists concerning the central role
of education, technology, institutions, and path dependency have been “rediscovered” by the new
development theorists, though without attribution.
2 The basic needs (BN) approach to development issues was a retreat from the optimism of the 1950s
and 1960s, which had anticipated that within a decade or two the poor nations, or many of them,
could achieve sustained growth and development. By the 1970s, such optimism had been shaken.
Among the reasons for this was the unexpected durability of social institutions which were to have
been swept away by the forces unleashed via the developmentalist path. In lieu of the high hopes
projected by the developmentalist perspective, the basic needs approach substituted a more modest
and immediate agenda: some significant part of development funds was to be expended on projects
that had a direct and tangible effect on the well-being of the poor, for example, self-help housing
projects, water treatment projects, health clinics, schools, and so on. Much of the BN approach
attempted to address an uncontrolled result of economic change in the less-developed world: the
phenomenal growth of urban slums and blighted mega-urban areas.
3 The propensity to import, m, is equal to the share of total national income spent on imports, thus
m = M/GNP. For the United States, this ratio was much smaller than was true for Britain, meaning
that imports were less important for the United States economy and that exporters to the United
States would have less bargaining leverage on prices as a consequence.
4 Specialists in the area of international trade have used at least four separate concepts under the
heading of “terms of trade.” We will utilize the most basic concept, which is the ratio of the price
of exports to the price of imports in a given period compared to some earlier (base year) period.
The terms of trade is an index number. Thus (Px,i/Pm,i) — 100 where Px,i is an average price index of
exports in year i and Pm,i is the average price index of imports in year i. This measure of the terms
of trade is sometimes referred to as the net barter terms of trade.
198 The Process of Economic Development
Another measure of the terms of trade that captures changes in productivity between nations is
called the double factorial terms of trade. We will not attempt to consider this or any of the other
terms of trade measures which might be used. Students wishing to do so should turn to any text in
international trade.
Both the annual World Development Report and the Human Development Report include data on
the terms of trade for all countries covered.
5 In 1996“2000 the share of primary commodities and resource-based manufactures dropped to
roughly 40 percent of all exports for Latin America, the Middle East, North Africa, and South
Asia, but in Sub-Saharan Africa and for the poorest of developing nations reliance on the export of
commodities remained.
6 The “development from within” approach, correctly understood, encompasses more than ISI,
however. It is an evolutionary strategy of development that depends upon domestic sources of
finance, domestic entrepreneurship, and domestic innovation to produce for both export and the
domestic market. However, in practice, “development from within” has sometimes been too
focused on the domestic market only, so that it has become “inward-oriented” development. This,
however, was not Prebisch™s own view, though it has incorrectly been attributed to him (see Sunkel
1993 for a finely detailed look at development from within).
7 Certainly, complete industrialization in all sectors would not be urged on all of the national econo-
mies of the periphery. Prebisch™s experience with industrialization programmes was primarily with
relatively large economies, like Argentina, Brazil, Chile, Mexico, Peru, and Venezuela. The smaller
economies, such as Costa Rica, Sri Lanka, the Caribbean countries, and some African countries,
could not hope to have large and diversified industrial sectors. For smaller economies, Prebisch
advocated enhanced common market-type arrangements so that sharing of markets could accom-
plish what was possible internally in large economies. The development problems facing small
nations may sometimes be a bit more difficult, but, as the successes of Singapore and Hong Kong
in recent decades suggest, the situation is far from hopeless. Size, per se, does not seem to be a
particularly powerful explanatory variable.
8 Income elasticity measures the change in consumption resulting from a change in income. Techni-
cally, it may be written as

EY =

Where EY is the income elasticity, Q is the level of consumption of some good or service, and Y is
9 There are two newer branches of institutionalism besides the dominant strain discussed in this
section. One is European institutionalism, organized around the efforts of the European Evolu-
tionary Economics Association. The other, grounded in the work of another Nobel Prize winner in
economics, Douglass North, is called the “new institutional economics.” For recent applications of
the latter view, and a number of critical evaluations, see Harriss et al. (1995).
10 In Marx™s writings, a major distinction was made between economic activities which took place in
the “sphere of circulation” and those which took place in the “sphere of industrial production.” In
the former, activities such as banking, insurance, stock, and bond markets, were to be found “circu-
lating” funds from various groups within a social stratum, for example, savers and investors. In the
sphere of production were to be found workers and capitalists, investment activity, production of
manufactures and raw materials, and, most importantly, technological development. The sphere
of circulation was viewed as unproductive, although to some degree necessary for the economy
to function, while the sphere of production was viewed as productive. Hence, an expansion of the
sphere of circulation indicated that the surplus was being diverted and development opportunities
11 Recall that when Baran died, in the mid-1960s, the Cuban revolution was viewed quite positively by
many, and China seemed to be making forward strides in many areas as well. We will not attempt to
speculate on how Baran might have viewed the issue of capitalism versus socialism from the perspec-
tive of the 1990s. He greatly admired the Cuban revolution and seemingly agreed with his close
associate Paul Sweezy that the Soviet Union had became a “state-capitalist” society dominated by a
bureaucratic stratum of state-managers, and that progress would be only for a narrow elite.
Heterodox theories of economic development 199
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James Dietz (ed.), Latin America™s Economic Development, 2nd edn. London and Boulder, CO:
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