Dependence Theory

At a Glance

Dependency Theory is an economic idea that seeks to explain why countries might become 'stuck' at a low level of income and wealth, and essentially argues that trade with the Global North and with large global corporations is to blame for this stagnation. The core idea is that richer countries extract resources and labour at very low costs from the Global South by exploiting their extensive market power, using these resources to create higher-value products that they then sell back to the Global South at much higher prices – and therefore maximising the value that is 'captured' in the Global North.

Source: Down to Earth Institute, https://downtoearth.institute/dependency-theory
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Definitions

Global North & Global South

A perspective on the global divide in wealth and power between broadly North American and European states in the Global North, and Asian, African, and Latin American countries in the Global South.

The Origins of Dependency Theory

Dependency theory, and its successor, world-systems theory, primarily came about as a result of the failure of its predecessor, modernisation theory, to enable poorer countries to develop in an economic sense – in other words, to grow, and improve the quality of life of their citizens.

Modernisation theory essentially states that all countries will follow a common path of development, and thus that all countries should be encouraged to adopt policies and trends that have proven successful in the Global North: trends like urbanisation, industrialisation, and trade liberalisation. Its demise as a ruling theory began in 1949, when two papers by Hans Singer and Raúl Prebisch observed declines in the 'terms of trade' of countries in the Global South: over time, these countries had become able to purchase fewer and fewer of the manufactured goods produced by the Global North for the same value of their primary sector economic exports.

Noting this trend, critics of modernisation theory pointed out that this decline in the terms of trade could be associated with the continuing impacts of imperialism and colonialism: that the institutions that European settlers had installed in many of these countries led to these countries lacking a fundamental driver of growth in the Global North – technological innovation. The result, they argued, these countries were stuck producing raw materials to sell to the Global North for use in manufacturing processes which they could not themselves develop.

Dependency theory developed out of this idea: because countries in the Global South could not develop the economic processes required to produce much higher-value manufactured products from the raw materials they extract, they were forced to sell these materials to richer countries, from whom they had to buy back manufactured goods – meaning that the value added in this process of specialisation and trade all occurred in the Global North, and that as such richer countries retained all of the benefits of the liberalised global economic system. Dependency theory thus coined the idea of ‘'underdeveloped countries': countries whose institutions had been so malformed by colonial practices that they became stuck in a low-growth state, focused on primary sector economic activity, and transferring resources to richer, developed countries, who they depend upon to continue buying their resources.

Dependency Theory Goes Global: World-systems Theory

In 1979, Immanuel Wallerstein published 'The Capitalist World-Economy', building on a number of theories running counter to prevailing liberal ideas, including Marxism and development theory. The book describes what came to be known as world-systems theory, which transforms dependency theory from something that can be applied to individual countries into a perspective on how the world as a single social and economic system functions. Wallerstein broke down the world into two main zones broadly aligned to the Global North and Global South – the core and the periphery. Wallerstein argues that core nations force periphery nations to sell their natural resources to the core by exploiting market power as a kind of neocolonialism; as dependency theory describes, the core than adds economic value by manufacturing higher-value goods to sell back to the periphery. Because colonialism has robbed the periphery of its ability to innovate and develop secondary sector economic activity independent of the core, this system perpetuates poverty in the periphery, while inequality between the two global zones grows ever-wider.

Implications for Policymaking

The key implication of these theories for policymaking is for governments to seek to reverse liberalisation of trade, with the aim of supporting home-grown industry to develop without competition from global firms based in the core – a set of policies known as import substitution. This requires policy measures on two fronts: firstly, to reduce the flow of manufactured goods from the core to the periphery by introducing protectionist trade policy, and secondly to incentivise firms to manufacture high-value goods within the country, rather than sell resources for others to do so. This depends both on the ability of the periphery to develop, or purchase, machinery and skills, and on the amount of short-term pain the economy, and the people, are willing to sustain: the shift from primary to secondary sectors could not occur overnight, while protectionism may lead to short-term shortages and substantial increases in the price of manufactured goods.

World-systems theory in particular also has implications for the international political arena, by recognising that periphery nations are not able to wield the same power as core nations in governance arrangements like the United Nations, despite supposedly having an equal seat at the table. This state of affairs thus prevents meaningful progress on issues like climate justice or international inequality.

Criticisms

Criticism of dependency theory comes primarily – and perhaps unsurprisingly – from free-market economists. They point out that the development of manufacturing industries within the periphery, which both theories require as a policy solution, will require extensive subsidies for these industries, which may destroy any incentive to innovate and improve their products and processes, and is unlikely to be sustainable in the mid- or long-term, particularly if a country relies on foreign aid. Secondly, and perhaps with greater validity, they note that these subsidies have a hidden cost: in many cases, they will divert investment from infrastructure like broadband, electricity, or water networks, or from health and welfare programs. Daniel Yergin, Joseph Stanislaw, and Mike Allen all also point out that a number of countries – most notably Japan, South Korea, India, and China – have, despite starting from a point of underdevelopment in the mid-19th Century, caught up with developed core economies like the US and Western Europe.