Why the Singer-Prebisch hypothesis holds today. 

Dependency theory, championed even today by development economists, had Marxist beginnings. In 1949, Hans Singer published Economic Progress In Underdeveloped Countries where he laid the groundwork for the theory. He and Raul Prebisch share credit for the aptly named Singer-Prebisch hypothesis, which sits at the core of dependency theory. This hypothesis argued that developing economies would be perpetually subject to declining terms of trade. The reason for this Singer argued, was because developing economies tend to produce primary goods and natural resources. While infant industries need capital, developing economies struggle to generate it. Foreign capital is mostly directed toward productive, primary good industries where risk is relatively low as long as governments remain stable. Capital does not usually flow into secondary good production in developing economies. Singer suggests several striking implications, first that,

“…. lack of division of labor, and premonetary arrangements prevail in underdeveloped countries for lack of supply of incentive goods; and the low output and absence of specialization,”

preventing them from developing productive manufacturing industries. It follows then that developing countries would become continuously reliant on imports from developed countries that can produce those goods at lower cost and without large upfront investment. He goes further arguing,

“A private entrepreneur class either does not exist at all or finds conditions in the underdeveloped countries generally unfavorable for its assumption of the major role in determining the course of economic development.”

Growing middle classes in many of these countries import luxury goods, extracting domestic capital from the economy. Ultimately, this arrangement leads to prolonged periods of stagnation and a Sisyphus-like experience escaping underdevelopment.

67 years later, does the hypothesis hold up? While we can look at examples of economies rapidly growing into advanced industrial economies (Aided by favorable trade relationship with the US), i.e. South Korea, Taiwan, Africa and South America had experiences closer to what Singer is describing. Singer did not foresee China becoming a major industrial power, or Eastern Europe entering the EU. Despite that, we do still see some African countries running trade deficits with European countries. Countries like Côte D’Ivoire, Angola, the DRC, and Nigeria have trade deficits with countries like the United States, France, and the UK. This begs the question, have we seen growth in manufacturing and secondary goods production in developing economies (excluding east Asia)? In 2013, Africa commanded 1.5% of the world’s total manufacturing, South America, about 5%. Growth in South American manufacturing has slowed in recent years. Africa has seen modest growth, growing on average about 2% annually. Still both continents have been eclipsed by growth in Asia. Lastly, have we seen growth in middle classes or a rise in entrepreneurship in those developing economies? The Economist and World Bank found that yes, some African and the South American countries have seen an expanding middle class but unlike growth of the middle class elsewhere, particularly in Europe and North America, it has not happened on the same scale. Moreover, we find that income growth in developing economies tends to disproportionately favor higher incomes. Other wage improvements are borne by the lowest income brackets in these countries but have improved the welfare of large populations of poverty stricken people but have not lifted them into the middle class.

Today, the world is a very different place. With transportation cost reduction and widespread access to telecommunications, the developing world seems to some to be on the cusp of industrialization. The Singer-Prebisch hypothesis nonetheless seems to hold up in today’s development status of African and most of South American countries.We should recognize that developing economies have benefited from free trade policies and limited barriers to foreign capital which have also been instrumental in the electrification of urban and rural areas in developing economies.

 

Hans Singer and Modern Underdevelopment