Dependency Theory

(International Dependence Model]

An Alternative View about
Development
• Various theories and arguments have been
forwarded to EXPLAIN the Poverty and
Underdevelopment of LDCs
• Dependency theory represents an ALTERNATIVE
view about development largely developed
within the neo-Marxist framework of analysis
• During the 1970s dependency models gained
increasing support, especially among LDCs
intellectuals
• Dependency Theory largely originated in Latin
America and the Caribbean
• It contains TWO strands of thought:
a) the Structuralist Tradition of the Economic
Commission for Latin America
• This emphasised the failure of exports to
stimulate growth because of the alleged long-
term deterioration of the TOT between
primary products and manufactured articles
b) The Marxist or Neo-Marxist Perspective
deriving from the works of:
– Andre Gunder Frank (1967): “Capitalism
and Underdevelopment in Latin America”
– Paul Baran (1957), “The Political Economy
of Growth”
– Dos Santos (1973), “The Crisis of
Development Theory and the Problem of
Dependence in Latin America”
• The dependency model views that developing
countries are caught up in dependence (LDCs) and
dominance (DCs) relationship with rich
countries= Not equal relationship
• LDCs are completely tied in that relationship which
both EXPLAIN the causes and persistence of Poverty
in these countries.
• It is an alternative perspective about development.
• It is a view of the radical school of thought
• NB: Dependency theory mainly looks at the
EXTERNAL Problem rather than the internal
factors of underdevelopment within
countries
• Dependency Theory, also referred to as the Neo-
Colonial Dependency Model,
• It attributes the existence and continuance of
UNDERDEVELOPMENT primarily to the
historical evolution of a highly unequal
international capitalist system of rich country-
poor country relationships.
• It is the co-existence of the rich and poor
nations in an international system dominated by
such unequal power relationships between the
Centre and the Periphery. Exploitative
Relationship!!!
• Centre- DCS; Periphery- LDCS
• Dependence results in the
Underdevelopment of the Periphery
(LDCs)
• Accordingly, the development problems
of the periphery are to be understood in
terms of their insertion into the
International Capitalist System, rather
than in terms of domestic
considerations
The Concept of Dependence:
• Dependence, according to the leading
dependency theorist, Dos Santos, is therefore,
a conditioning situation
• i.e. a conditioning situation in which the
economies of one group of countries (Brazil,
Mexico, Kenya) are conditioned (shaped) by
the development and expansion of others!
(Portugal, Spain, UK);
• That is, dependence is based on the
international division of labour
• This division of labour which allows industrial
development to take place in one country while
restricting in others whose growth is
conditioned by and subject to the power centres
of the world.
• LDCs groups are restricted to producing and
exporting primary commodities while the
dominant Western countries to produce
industrial commodities
The Concept of Underdevelopment:
• The BASIC starting point of the ANALYSIS of
Underdevelopment and Dependence is:
 the recognition that underdevelopment is NOT that ALL
Countries experience, or a stage that all countries pass
through before development
• Rather, Development AND Underdevelopment are
Opposite sides of the same coin (go together)>> (A.G.
Frank).
• The Development of some countries ACTIVELY LED to the
underdevelopment (or distorted development) of others,
 and that underdevelopment is a “normal” part of the
development of the world capitalist system.
• The Global System is such that the development of Part of
the System OCCURS at the expense of other parts
• UNDERDEVELOPMENT, according to Frank, NOT
simply non-development:
• It is rather a unique type of socio-economic
STRUCTURE that results from the dependency of an
underdeveloped country on the advanced capitalist
country.
• This dependency results from foreign capital removing
a surplus from a dependent economy to the
advanced country by structuring the
underdeveloped economy in an “external
orientation” that is characterised by export of
primary commodities, the import of
manufactures, and dependent
industrialisation. (technological dependence)
Dependent Development:
• Thus much of the literature on economic
development in the 1960s and 1970s described
LDCs as Dependent Economies.
• The condition of dependence encompassed all or
most of the following:
a) Unfavourable International division of labour
• Historically, LDCs inherited particular structure
of PRODUCTION and TRADE, which included the
production of primary commodities (raw
materials and foodstuffs) for EXPORT to the
developed capitalist economies
• Therefore, the centre exploits the periphery
by i) biasing the structure of production,
towards the supply of raw materials, ii)
through profit repatriation, and iii) by
thwarting (restricting) autonomous national
development,
• The colonial governments and foreign
enterprises suppressed the skill formation of
national workers to preserve the source of
cheap labour
b) Dependent Industrialisation
• LDCs were initially dependent on the imports
of their manufactured goods requirements.
• Also, with the gradual establishment of
import-substitution consumer goods
Industries, they still became dependent on
Imports of intermediate & capital goods
c) Dependence on Foreign Technology
• Partly as a result of industrial development, LDCs
became heavily dependent on Imports of foreign
technology
and this technological dependence covered many
other spheres of activities. >> including agriculture,
communication, education, medicine, etc.
• Loss of indigenous technologies:
• Colonialism & capitalist penetration destroyed
indigenous structures with establishment of “alien”
forms of economic, social/political organisations of
LDCs economies
• This led to the pattern of development very different
from that which would have been occurred if their
development had been based mainly on internal
socio-economic forces.
d) Penetration by foreign capital and economic
distortions
• The LDCs were in general deeply penetrated by foreign
capital largely in the guise of DFI and MNCs with its
associated patterns of Production, technology,
marketing and expertise
• Some of the alleged economic distortions are that
MNCs USE inappropriate capital intensive
technology that:
– adds to host country’s unemployment
– worsen the income distribution (use of more skilled
labour)
– that they centralise research and entrepreneurial
decision making in the home country (DCs).
– Profit repatriation
e) Dependence and dominant interests in the
periphery
• The concept of dependence must take into
account the articulation of dominant interests of
the metropolitan centres & dependent societies
• Dominance is possible ONLY when it is
supported by local groups which Profit from it.
External dominance in a pure sense is in
principle impracticable
• Political alliance may thus emerge between
foreign interests and the upper strata within the
dependent country
• A. G. Frank indicated that the Latin American
bourgeoisie (elite) cannot adopt the historical
task of independent nationalist policies
leading to independent national
development
• What exists is a lumpen bourgeoisie,
a class which is PASSIVE or active tool of
foreign industry and commerce and whose
interests are identical.
>>Thus cultural, psychological, social and
political dependence.
(f) Structural bottlenecks as mechanism of
dependence
• Structural bottlenecks within the
underdeveloped country may also act as
“mechanism of dependence”
agricultural stagnation in the periphery
its high primary commodity concentration
of exports
its growing fiscal deficit
• All these need foreign financing and thus
produce dependence
 Criticisms
• Dependency theorists view that capitalist
development in LDCs is either impossible OR of
“distorted” or dependent nature
• Emphasis is placed on external forces
• It is a view that emphasises the exploitation of
LDCs by the rich DCs
• The prime contradiction is thus between
countries (DCs and LDCs) rather than classes,
contrary to classical Marxism.
• Dependency theory has provided many
important insights into the characteristics of
LDCs and the interaction between them and the
developed economies.
• HOWEVER, dependency theories have some
weaknesses:
1) On the theoretical Front:
• They offer an appealing explanation of why
many poor countries remain underdeveloped.
• They, however, offer little formal or informal
explanations how countries initiate and
sustain development.
2) Development is possible in LDCs
• Dependency theory in some sense implies that
capitalist development in LDCs is NOT possible.
• Classical Marxists put emphasis on the
INTERNAL Factors in the emergence and growth
of capitalism in LDCs, with the state playing a
strategic role:
•  Example: NICS: Taiwan, South Korea,
Singapore and Hong Kong, gives some indications
that capitalist development is still possible in
LDCs.
3) The Issue of Self-Reliance
• Dependency theorists RAISED the issue of self-
reliance and the whole argument tends to imply the
policy of autarky OR inward looking development OR
only trade with LDCs.
• HOWEVER, large countries such as China and India
that embarked on autarkic policies experienced
stagnant growth and ultimately decided to
substantially open their economies. China began the
process in 1978 and India after 1990s.
• At the opposite extreme, economies such as Taiwan
and South Korea that have emphasised exporting, at
least, to DCs have grown very strongly.
The Neoclassical Approach to
development
• The neo-classical approach dominated western
development writings during the 1980s and
1990s
• The neo-classical school (orthodox school)
assets that welfare and economic growth is
maximised by adopting free trade POLICIES
and promoting economic competition
• [The classical school: especially Adam Smith
believes in economic freedom and free
competition]
• The neo-classical school argues that unnecessary
government intervention through planning gives
rise to resource misallocation and inefficiency
• Government intervention through planning is
believed to distort prices & leads to resource
misallocation
• The IMF and the World Bank policy
recommendations are based on these views of
FREE MARKET POLICIES of Orthodox economic
thinking
• They recommend that by “getting the prices
right” markets lead to more efficient resource
allocation.
• Thus government institutions should be
confined to:
– provision of macroeconomic stability
– security to owners of property
– infrastructural development
• The World Bank SAP POLICIES of the 1980s
illustrate the APPLICATION of orthodox micro and
macro policies,
which are based on the Principles of
Competitive and Free functioning markets or
Orthodox Economics
• Development economists maintain an entirely
contrary position by firmly identifying structural
barriers to smooth functioning of the MARKET
MECHANISM to guide the policies of POOR
COUNTRIES
• Market failure in LDcs
• Development economists suggest the need for
government intervention..
to remove these structural obstacles
or to mitigate the negative consequences
of free market operation (e.g. equity)
Institutional approach to
development
The importance of institutions
• Institutions as critical determinants long-
term economic growth [Fundamental cause)
• This is an important recent view which puts
central emphasis on the role of institutional
changes as a critical determinant of long-run
economic growth
• Institutional theories emphasize the
importance of man-made factors in shaping
incentives than natural geographic
factors
• The argument is that economies cannot function
in an institutional vacuum; i.e. they cannot
function without institutions (institutions
matter)
• Otherwise there is economic and political chaos.
• If individuals are to be entrepreneurial, & to
take risk and invest. at the very minimum there
has to be:
– There has to be rule of law
– Protection of property rights
– Constraints on power and corruption (power
abuse and corruption control),
• Many economists have recently argued that it
is weak institutional structure is the
fundamental cause of underdevelopment
• This is because the character of institutions
is the determinant of all the proximate
causes (immediate causes) of progress such as
investment, education, trade and so on. [i.e.
key to capital accumulation & technological
innovation)
 Introduction
What are institutions
• Different & often confusing definitions exist.
• The well known definition is given by the
leading new institutional economist, Douglas
North:
• “Institutions are rules of the game in a
society,
• “or, more formally, are humanly devised
constraints that shape human interactions”
 Introduction
• North listed different categories of constraints:
• Formal constraints: Rules, written laws &
constitutions
• Informal constraints: Norms of behavior,
conventions & self-imposed codes of conduct
• Informal rules are part of heritage & culture
They have their origins in experience,
traditional values, beliefs & ethnicity & other
factors
They are transmitted from generation to
another through teaching & imitation
 Introduction
• Institutions Vs organizations
• Are organizations part of institution or not?
• D. North makes a clear distinction:
• Institutions are rules of the game while
organizations are players
• Organizations are group of individuals bound
together for a common purpose to achieve
a certain aim:
– Government bodies
– Cooperatives
– Religious bodies – churches etc
But organizations are guided by rules
• Note again that organizations are made up of
groups held together by some common
objectives.
– Economic organizations are firms, trade
unions, cooperatives, etc.;
– political organizations are political parties,
legislatures, regulatory bodies;
– educational organizations are universities,
schools, vocational training centers.
• Generally, broadly defined, according to
North, institutions are formal and informal
RULES governing human interactions.
• Narrow definitions focus on specific formal
organizational entities
• At the intermediate level, institutions are
defined in terms of:
the degree of property rights protection
the degree to which laws and regulations
are fairly applied
the extent of corruption
• Much of the recent research into the
determinants of economic development has
adopted this intermediate definition.
• The NIE holds that most effective institutions for
development are:
those which safeguard property rights,
guarantee the fulfillment of contracts, and
minimize transaction costs (e.g. corrupt
bureaucratic bottlenecks
• The failure of good policies recommended to
developing economies thus is equivalent to an
weak or absence of clearly defined and
enforceable property rights
 But how are institutions measured?
Measurement of Institutions
• A common statement that is often associated with the
importance of measuring institutions is that which
says:
“institutions matter for economic development”.
• Institutions should therefore be identified and reliably
measured to show whether institutions matter – or
that they do not [See Voigt, 2012]
• However, this is often very challenging and an evolving
effort
• In summary, institutional economists generally
argue that a country’s growth performance is
strongly linked to its political and economic
institutions.
• An important empirical challenge of this thesis
how to objectively operationalize through
reliable measurement of instructions
• Different indicators have been created by
different global institutions based on such
understanding.
• May not be universal agreement among scholars
on different sets of measurements.
• Recent empirical analyses have typically adopted
three relatively broad measures of institutions:
(a) the quality of governance
– political rights
– public sector efficiency
– regulatory burden (i.e. burden on freedom of
actions of the private sector)
(b) the extent of legal protection of private
property
how well such laws are enforced..
c) the limits placed on political leaders
• Therefore, there are various institutional
indicators that are associated to prominent
databases by global think-thanks (Epistemic
networks so to say)
• E.g.
• Property right indicators (Fraser Institute
(Canada) & Heritage foundation(US)
• Political freedom indicators (Freedom house, US)
• Governance quality indicators (World Bank, etc)
• Etc.