Term Paper

On ‘Distinction between Strucuralist and Dependency Theory

on the Issue of Development and their Critical Analysis’

Submitted To:

Dr. Rohit

Assistant Professor,

Jawaharlal Nehru University

Submitted By:

Ahmad Shah Mobariz

Second Year, MA (Development Economics)

Subject: Growth and Development

Date: 27-10-2013

Comparison and Distinction of Structuralism and Dependency Theories on

the Issues of Development and their Respective Critical Analysis

Introduction:

Development and Underdevelopment have been the two major debates among the various

schools of thoughts since its inception. Starting from the classical economists to neoclassical

economists and the newly born sub discipline, that is Development Economics, there have

been various and often conflicting entry points of analysis for development and policy

recommendations. It was after World War II, in the statement of President Truman of US,

which is famous as “Truman’s Point Four”, when development was introduced as a

transitive phenomena and underdevelopment as non transitive phenomena. In this

understanding of development, the developed world has the mission of developing the Third

World; it is the obligation of the developed world to benefit them from the fruits of their

technological and scientific achievements, by assisting them to build up their institutions. To

Marxists on the other hand, development is equal to capital accumulation and capital

accumulation is in turn development of capitalism. Capitalism is the chain of exploitation and

extraction of surplus of labor. So proletariat revolution to establish socialism is the only

savior from the evil of capitalism.

These two conflicting debates have been the reference points of scholars from both right and

left schools to address the problem of development of underdevelopment. Structuralism,

Monopoly Capital, Dependency Theories and Unequal Exchange are among the post

Keynesian theories, which were developed mostly in Latin America to explain the problem of

underdevelopment in that part of the world. All these newly born theories have tried to

explain capitalism and its implication for development of underdevelopment not in context of

industrialized countries, as Marx did, but they have tried explaining the system and its failure

or rather its role in underdevelopment across borders, and inter and intra regions.

Structuralism and Dependency Theory were born in a particular juncture of history in Latin

America in response to the failure of market driven policies to address the grounding realities

of that region and was generalized to all developing countries. Dependency theories, though

take the arguments of structuralists as their inspiration to build up their own theory, but when

it comes to causality in development of underdevelopment and policy recommendations the

two diverges from each other. To understand the similarities and distinction between the two

theories let us have a brief overview of these theories.

Structuralism:

The pioneer of this theory was Raul Prebish, a Latin American economist. In his formulation,

due to heritage of colonialism where an exploitative socio-economic relation was imposed on

certain regions, the world economy today is dual in nature, where the production structures

are different in the core (centre) and the periphery. Core countries are the developed

economies (mainly the previous colonizers) where productivity of labor is high in industry,

labor unions are strong and markets function properly. Periphery economies (mainly the ex

colonies) are the developing economies with small primary export sector with high

productivity, an inefficient agriculture sector, and dysfunctional or rather malfunctioning

markets due to peculiar structural problems.

‘Terms of Trade’ is the main entry point of analysis of underdevelopment for structuralists.

‘Terms of trade’ by definition is the ratio of prices between two countries. To understand this

argument let us formulate the argument. To do so let us denote the export price of the

periphery by and the import prices from the core by . Terns of trade then can be defined

as following:

‘e’ is the exchange rate.

Price is a function of wages, mark up and labor coefficient:

In this formulation ‘l’ is the labor coefficient and is the labor cost of one unit of the

exported (imported) good, so the should be greater than one so that it covers both cost and

an added mark up over cost.

Wage rate in turn is a function of unemployment rate:

In the core an increase in productivity (

results to an increase in the real wage (

. As we

see in the centre since the unemployment rate is low and the labor unions are strong, a rise in

productivity will lead to fall in unit cost and the share of productivity gain goes to both the

capitalist and workers through increase in wages and higher profits, as a result of which the

prices in the core does not fall.

In the periphery since the unemployment is large, the wages remain unchanged, an increase

in productivity brings the unit cost down which results in lower prices.

To put these arguments in ‘Terms of Trade’ formulation we will get:

When there is a fall in the prices it means that the numerator will fall, since the denominator

does not fall, so the whole ratio (ToT) will fall.

From the demand perspective it is argued that, since the elasticity of demand for the luxury

goods imported from the core is more than one and the elasticity of demand for primary

goods exported by the periphery is less than one, the periphery faces a trade deficit. To

understand and argue this impact lets formulate the trade account for the periphery.

This is an ideal situation where the export and import mach with each other in the same

magnitude. To get the value of the export and import volumes we have to multiply it to

prices, which takes the following form:

As we see in the above equation volume of exports depends on the prices of exported goods

and income in the core, same is the case with volume of imports which depend on prices of

imported goods and income in the periphery. As argued before income elasticity of demand

for primary goods does not rise in the same proportion with that of luxury goods imported

from the core so the export to import ratio (

falls. Taking factor of the above equation

we will get:

The terms in the bracket is less than one from the above arguments, which implies both the

core and periphery are growing but growth in developing countries always falls short of

developed countries.

For the growth to equalize, the periphery trade gap should be such that export exceeds

imports or at least balanced (trade gap equal to zero), and this can happen if export rises. A

developing economy’s export is bound by the demand for its products in the core markets. On

one hand, since elasticity of demand for its products is less than one its exports fall short of

imports, and on the other hand its prices continue to fall so the revenue from export cannot be

controlled in its favor as it is not in the command of the exporting periphery. So one can say

export cannot be an option to reduce the gap. The other mechanism with which a developing

economy can manage its trade balance is through imports management. Import should be

constrained so that the trade deficit diminishes. According to strucuralists this can happen

only if import is replaced by producing the same industrial products in the periphery itself.

This argument gave birth to ‘Import Substitution Industrialization’ (ISI) policies.

So the core of structuralist argument is that the periphery remains underdeveloped as longs

the terms of trade between core and periphery continues to move against the periphery. This

problem is created because lack of capacity to produce industrial goods in the periphery itself

which gives rise to expensive imports and imbalanced trade. The way out of the problem is

capitalist development in the periphery to produce its industrial goods requirements. Since

markets do not function well in developing countries (This fact contrast them from the

neoclassical economists who believe markets work everywhere), state should take hold of

industrial development and promote manufacturing growth at the expense of primary goods

they used to produce (against their comparative advantage according to neoclassical

economists). Rapid long term growth is more important to structurlists and state should invest

in manufacturing industries, which contrast them from demand driven Keynesians. In short

underdevelopment in the periphery is caused by lack of capitalist development.

Critical Analysis of Structuralist School:

1. The Structuralist scholars on one hand argue that the primary goods of the periphery

enters the production function of the core, but while considering the terms of trade,

ignore the price of raw material from the preview of their analysis. To understand

this fact let us include cost of raw material in price function and see what happens

with terms of trade.

Where is the price of goods produced in the core, is the nominal wage, is

the price of primary goods which enters into industrial production as raw materials.

is the per unit raw material requirement for the production of manufactured goods.

Since the wage of workers in the periphery is indexed with prices, they bargain for an

ex ante wage which would match the expected increase in prices of primary goods

(mainly food) , is the amount of primary commodity which the money wage

obtained by the workers is supposed to give them command over the expected price of

primary commodities (real wage), then we will have the following:

The expected price of primary commodities is defined as following:

And since the wage is a function of unemployment ( , then we will have:

Now as usual we can define the terms of trade as following (for simplicity reverse of

the previous one):

Where, is the NAIRU rate of unemployment. If there is growth in the core its

demand for raw material ( should increase. When there is a rise in demand for

primary goods its price will not fall, which in turn implies that the terms of trade does

not necessarily be continuously falling against the periphery. Thus this formulation

breaks the Prebisch-Singer Hypothesis of continuous deterioration of terms of trade

against the periphery.

2. Another argument that significantly challenges the basic argument of Structuralists

is ISI as solution. By sticking to ISI, on one hand the periphery’s export primary

goods will fall for the reason that attention will be focused on production of

industrial commodities, and on other hand due to consumption behavior of the elite

in the periphery imports does not fall (at least it didn’t fall in context of Latin

America after implementation of ISI policies), so the trade balance further

deteriorates. One can argue that the negative effect of ISI on trade gap is twofold.

3. When Structuralists claim that ISI policies will reduce its trade deficit, it does not

consider that to install capital intensive industries it has to import capital from the

developed countries. It will raise the question of financing the industrialization for

which the state is not capable of. This critical argument is given by the neoclassical

economists against structuralism, which according to me is not important to

contradict the theory itself, but what is worth mentioning here, is the fact that state

expenditure is inflationary in nature. Since populist funding requires fiscal deficit,

and excess printing of money will lead to huge inflation. One can argue that since

we are looking at the economy as a whole so what would be the benefit if decline in

trade deficit which leads to increase in fiscal deficit and hence generation of

inflation, and worsening off of the welfare of the citizens.

From the arguments made above it is clear that Structuralist school faces theoretical fallacy

from its own assumptions. Despite of these shortcomings in the theoretical formulation of

structuralism, Dependency Theory scholars took the basic unequal exchange arguments of

structuralists to justify their pro Marxist theory. Now let us have a discussion of the

Dependency Theory.

Dependency Theory:

Dependency Theory was born out of the arguments of Structuralism and Monopoly Capital.

Monopoly Capital is the product of two American scholars, Paul Baran and Paul Sweezy.

According to them capitalism will lead to dismantling of small firms by large firms as a

result, few monopolists will operate in the market. Monopolization leads to increase in

potential surplus (difference between total output and necessary consumption) due to fall in

consumption caused by monopolization itself. As there is transfer of share of profits to the

capitalists and fall of real wages, consumption will reduce as a result of fall in demand and

hence the ex post investment will fall. This implies that given that wages do not change with

an increase in prices, with inflexibilities in mark up, the burden of adjustment is born by

capacity. Fall in capacity will in turn lead to the stagnation of the system, which has been

experienced several times in history of capitalism. Keynes’s solution for this dilemma is state

expenditure on infrastructure and other facilities which creates demand, but according the

monopoly capital theorist’s capitalists do not want the surplus to be transferred to the state

via imposition of taxes. According to them wasteful expenditures in military armaments and

wars that creates demand and absorbs shortage of capacity will be induced by the capitalists.

This in turn leads to imperialist aggression and uneven development internationally.

Dependency theorists expand the idea of core-periphery relation to metropolis-satellite,

continuous and one-to-many exploitative relation. According to them the whole world is

grappled with the evil of capitalist system. Not only one country dominates and exploits other

countries, but also in underdeveloped economy itself powerful groups exploit subsections

(local satellites) of the society. Capitalism has evolved at the cost of underdevelopment of

periphery through continuous transfer of surplus. In fact development of capitalism is

dependent on underdevelopment of the satellites. Or in short development of the metropolis is

a function of underdevelopment of satellites, or in other words capitalist development is the

cause of underdevelopment.

The question of what is dependence and what is the extent of international interdependence

and how to measure dependence created different sub theories and arguments within the

Dependency School.

According to Andre Gunder Frank “because each metropolis has monopolistic

position of over satellites and each satellite confronts only one metropolis an unequal

exchange relationship is created. This monopolistic and unequal exchange

relationship leads to transfer of surplus from the satellites to the metropolis”. As

explained in the Strucuralist argument the unequal exchange of export and imports is

incorporated in Dependency Theory as well. The continuation of the unequal

exchange relation between metropolis and satellites where growth of satellites always

falls short of the metropolis leads to development of underdevelopment. But

according to frank this unequal exchange relation is general and goes beyond

international unequal exchange relations. Landlords monopolize access to land,

capitalists monopolize the means of production, so does other classes and exploit the

sub classes. So in Frank’s world view of dependent, hierarchical and exploitative

relations, the means of production and scale of production determines the extent of

dependence, not merely international core-periphery interaction.

Immanuel sticks to the idea of unequal terms of trade and argues that division of labor

is the main cause of unequal exchange between core and periphery. The unequal

exchange caused by differed characteristics of labor and labor markets between the

two sets of countries coupled with political dominance of one state over the other and

the protectionist policies of developed countries lead to transfer of gains from the

periphery and hence their underdevelopment. According to him everything including

capital is mobile, but labor is immobile, hence rate of profit equalizes, while wages

remain unequal. To understand this unequal relation caused by labor differentials let

us formulate this argument.

First, let us assume that in ideal situations there is no difference in wages and core and

periphery exchange Q units at P prices:

Core: m

Periphery: m

When wages remain constant in the periphery and increase by in the core, while

each country is producing the same Q amount of good, we will have:

Core: m+

Periphery: m

Now due to increase in wages in the core, periphery should pay

units more to

exchange with one unit of good produced at the core.

In Samir Amin’s view capitalism creates different social orders in the core and

periphery. The core is self-centered and self reliant whereas the periphery dependent

and bound by the core-periphery relations. The different social formulation produces

specialization of labor. In the core because of capitalist development productivity is

far ahead of that of periphery which leads to different cost of labor and hence unequal

exchange in specialization. The specialization of labor in the core and the increased

productivity thereof has led to the drive out of core from the pre-capitalist modes of

production, whereas in the periphery due to lagging productivity and huge reserve of

labor specialized in resource-based and primary activities. As stated in the stracturalist

argument with productivity increase in the core wages increases sin-qua-non, whereas

in the periphery it remains constant, hence the unit cost and price of goods produced

in the periphery falls in relation to imported goods from the core. This difference is

the source of unequal exchange.

According to Dependency Theory underdevelopment continue to exist as long as the

exploitative dependence relation continues and the backward regions will remain in a

subordinate position. Capitalism as system will fail if there is no twin peaks of core and

periphery. The periphery acts as stabilizer of the core and there is a tendency for the

underdevelopment of periphery. The only solution for the periphery to go out of the trap is to

break from the system of dependence created by capitalism and institute Socialism.

From the above arguments one can come to a clear understanding of the distinction between

the Structuralist and Dependency Theory arguments on the issue of development. Both the

theories understand the unequal exchange between the two sets of countries, the core and the

periphery as the source of underdevelopment.

The main differences between the two theories are as following:

The Structuralist School of thought view underdevelopment as being driven by the

lack of capitalist development in the backward countries, whereas the dependency

school view capitalist as the source of underdevelopment itself. For the strucutrulists

in order to get rid of unequal international relations focus should be made on

nurturing capitalist units in the periphery via Export Substitution Industrialization,

while from the Dependency School point of view the periphery should break from the

system and institute socialism as the savior of their backwardness and to free

themselves from the trap of Capitalism.

The structuralists do not focus on the extraction of surplus, rather they believe it is the

structural constraints arising from the dialectics of interaction between the advanced

capitalist world and the Third World, an interaction that involves the terrains of both

technology and consumer demand that restrict the pace of Third World development.

It is the total characteristics of the twin peaked system (Dualism) that has created the

unequal scenario, and not merely the fact of surplus transfer as such that the

Dependency theorists emphasize. While the Dependency school emphasis on the fact

that the system is one and there is no twin peaks (there is no dual system) and all

countries are in trap of Capitalism. According to them to delink is to get rid of the

system and introduce socialism.

So in Strucutralist world view on development underdevelopment is a result of lack of

capitalist development, whereas for the Dependency school Capitalism is the cause of

underdevelopment.

Critical analysis of Dependency School:

1. Dependency theories mainly rely on the concept of unequal exchange, and the base

for their unequal exchange analysis is labor and hence wages. From this we can infer

that if the wages in both core and periphery equalize the problem will be resolved and

the development path will equalize. On the other hand it is assumed that there is no

free mobility of labor en masse from periphery to the core so this way wages cannot

equalize, but since capital is assumed to be mobile one can argue that competition

among Multi National Corporations (MNCs) is cost reduction based and they look for

cost-effective venues, so they can choose to establish their production in developing

economies, as it actually happens today, so the wages can equalize this way.

2. Emmanuel argues that rate of profit of the capitalist are equal. When we talk of

divergence, mainly we mean divergence in terms of rate of growth of the economies.

On the other hand we know the fact that growth is a function of rate of profit and

savings.

If the rate of profit as it is assumed, is same in both core and periphery, so the mark

up of the capitalist ( will increase and hence the ex post savings will also increase as

well. Hence both the countries will grow at the same rate. It is in sheer contradiction

with the argument of Emmanuel that because there is divergence in the rate of growth

so there is underdevelopment.

3. If the unequal exchange argument of Dependency School among the twin peaks is

based on the wage differential, then one can argue that wage differential not only

exists internationally, but within the periphery itself the larger satellites exploit the

smaller ones, as their wages are different. This can argument then cannot become a

proper theoretical and systematic judgment, but rather it will be a moral justification.

Furthermore the one-to-many relation does not hold as there is a net of many-to-many

relation in reality. Since international socialism is vague the solution to delink from

the system will leave a nation in isolation.

Conclusion:

No theory in the social sciences can be completely true and each area of social theories tries

to reflect the realities of time and space. Theories of development are not an exception in this

context. Structuralism and Dependency theories in Development Economics have tried to

capture realities of the time. Of course having seen the critics of both, that even contradicts

the theories’ logical arguments one cannot choose to rely on any of them exclusively. I do

confirm the historical evolution of Imperialism and believe that underdevelopment today is

the legacy of historical endowments of colonialism, which has left the core at a better off

position and the satellites at a disadvantaged position.

Dependency theories are so much Marxists in nature and as history have witnessed socialism

failed to persist and failed in largest socialist state (USSR). Structuralism, whose argument,

despite facing clear contradictions theoretically, but I believe in practice it is what actually

happens. I do not deny the comparative advantage of an economy and do not confirm leaving

the developing economies to hands of the market either. Third world economies are having

their structural problems and their too much linkage with the global economy will leave them

at a vulnerable position. I do take the side of the structutalists in the sense that

underdevelopment in the periphery is due to lack of capitalist development, but do not

believe in the growth being an indicator of development. Once we relax long term growth as

the main objective of development some of the problems raised by the trade deficit versus

fiscal deficit will be resolved. I think the economies should concentrate on the welfare of

their citizens in terms of capability rather than ambitious rates of growth. If for the welfare of

the society it is necessary to break from the system and create local and regional sub systems

of Capitalism, moderated by state intervention, which suits the characteristics of that

particular economy, there should not be any hesitation to do so.