government. Prebisch argued that these demand-and-supply factors caused the
terms of trade (see below) to move against the periphery: the price of agricul-
tural goods would fall relative to manufactured goods. Rigid domestic wages
in core countries (protected by tight labour markets, regulations and trade
unions) would prevent export prices falling as productivity increased in export-
oriented manufacturing industries. This would cause developed countries to
absorb productivity gains in industry as higher wages and profits. Competitive
markets, the unlimited supply of labour and flexible wages in periphery coun-
tries would lead to productivity gains in agriculture being reflected in lower
export prices which would benefit importers in core countries. Prebisch further
argued that due to the low-income elasticity of demand for agricultural goods
on world markets (Engel’s Law), developing countries are likely to experience
a slow growth of export revenue over time. Technical innovations such as fibre
optics replacing copper in telephone communication or artificial rubber
replacing natural rubber may even generate absolute declines in the demand
for some raw materials. At the same time developing countries tend to be heav-
ily dependent on imports of capital goods and inputs for industry and agricul-
ture,and luxury branded consumer goods.
The ratio of prices of primary to manufactured products is known as the
‘terms of trade’. Many scholars have argued that the terms of trade declined
between the 1950s and 1990s (Thirlwall and Bergevin, 1985; Sapsford and
Balasubramanyam, 1999; Mayer, 2002). Not all agricultural products have
been subject to declining relative prices. Jamaican Blue Mountain coffee for
example costs up to $20 per cup in Japan and in early 2002 was being priced at
$6,000–8,000 per tonne in London markets compared with $1,200 per tonne
for Arabica coffee (Kaplinsky, 2005). More recent evidence suggests that this
‘terms of trade pessimism’may have been fundamentally altered as a result of
the ‘China effect’ (Box 8.3).
Nicholas Kaldor (1967, 1968) formalized many of the arguments of early
structuralists like Prebisch and added to them the concept of ‘dynamic
economies of scale’to make an influential case for the ‘superiority of manufac-
turing’. Dynamic economies of scale are a particular form of increasing returns
to scale. Here,as producers accumulate experience in production they improve
in skills and capabilities so learn to produce with more efficiency. Over time
average costs will decline and productivity increase.
The relationship between the rates of growth of industrial output and GDP
is captured in Kaldor’s First Law. This states that the faster the rate of growth
of industrial output in the economy, the faster will be its GDP growth. Data for
nearly 50 countries and across 29 Indian states for the 1990s support the First
Law (Dasgupta and Singh, 2005, 2006). Kaldor’s Second Law states that
there is a strong positive correlation between the growth of industrial output
and the growth of productivity in the industrial sector. Evidence for this can
be seen in Chapter 1 where it was shown that rapid industrial growth after
around1960 in Japan, South Korea and Taiwan was associated with rapid
growth of productivity. The slowdown in industrial and GDP growth after
Economic Growth and Economic Structure since 1750 177