The Economics Book

POST-WAR ECONOMICS 243

Many Nigerian oil workers work

for foreign firms. These firms have

poured investment into Nigeria but

may benefit disproportionately from low

local wages and valuable raw materials.

produce raw materials, which are
bought by richer countries, who
then produce manufactured goods
that are sold internally or between
developed countries. This leads to
an unbalanced trading system
where the majority of the poor
countries’ trade is with richer,
developed countries, while the
richer countries’ trade is mainly
internal or with other developed
nations. Only a small proportion is
with the developing countries. As
a result poorer countries find
themselves in a weak bargaining
position—they are trading with
larger, richer powers—and they are
denied the favorable trading terms
they need to progress.
It is argued that these forces
lead to a separation of the global
economy into a “core” of rich
countries to which wealth flows
from a “periphery” of marginalized
poor countries. The economies
of poor countries also tend to be
organized in such a way that they
discourage investment, which is
a key driver of growth in the
economy of any country.

When richer countries bring

industry and investment to poorer

countries, they claim that they

will help grow the poor countries’

economies. The dependency

theorists claim that in reality local

resources are often exploited,

workers are poorly paid, and the

profits are distributed to foreign

shareholders rather than being

reinvested into the local economy.

An alternative route

To avoid the kinds of dangers

outlined by the dependency

theorists, some poor countries have

taken a different route. Far from

opening themselves up to world

trade, globalization, and foreign

investment, they have decided

to do the opposite and insulate

themselves. Some argue that the

rise of the Asian Tigers—Hong

Kong, Singapore, Taiwan, and South

See also: Protectionism and trade 34–35 ■ Comparative advantage 80–85 ■ Development economics 188–93 ■ Economic
growth theories 224–25 ■ Market integration 226–31 ■ Asian Tiger economies 282–87 ■ International debt relief 314–15

Unequal export: raw and manufactured goods

In 1949 and 1950, economists

Hans Singer of Germany and

Raúl Prebisch of Argentina

independently published

papers illustrating the

disadvantage faced by

developing countries when

trading with the developed

world. They observed that the

terms of trade (the amount of

imports a nation can buy with

a given amount of exports) is

worse for countries whose

primary export is a raw

material or commodity than for

countries whose main export is

manufactured goods. This can

be explained by the fact that,

as incomes rise, demand for

food and commodities tend

to remain steady.

On the other hand higher

incomes provoke stronger

demand for manufactured and

luxury goods. This leads to price

rises and results in the poorer

country being able to afford

fewer imported manufactured

goods in return for the money

it receives from exports.

Underdevelopment is not

due to the survival of archaic

institutions and... capital

shortage... it is generated

by... the development

of capitalism itself.

Andre Gunder Frank

Korea—and the extraordinary

economic growth of China expose

flaws in the dependency view.

Here were a group of developing

economies for whom international

trade was an engine of rapid growth

and industrialization. Most recently,

dependency theory has found

echoes in the anti-globalization

movements, which continue to

question the classical approach. ■