Ingrid Kvangraven, Farwa Sial and Carolina Alves explore the relevance of dependency theory today.
Why are some countries rich and some poor? Why is it difficult – seemingly impossible – for poor countries to catch-up? What is it that is particular to developing countries and their position in the global system that makes economic development difficult? These questions are at the core of an approach to development that came to be known as dependency theory.
Dependency theory is a family of theories that attempt to explain the uneven development across the globe. There is much disagreement within the dependency theory tradition regarding why inequality between countries seems to be increasing, ranging from the way that capitalism has spread to the periphery, to dependence on technology and finance.
While dependency theory was once considered to be serious academic scholarship, analysis within the tradition died down in the late 1970s and has been relatively dormant since, at least in the West.
The critique of dependency theory can be summed up under three points:
- production ownership;
- the core and periphery view; and
- development in developing countries.
Dependency theory’s focus on the extraction of wealth and resources by developed countries (the core) from developing countries (the periphery) has been criticised for missing the broader context of how labour is a source of exploitation globally, and how, and where profits are reinvested. The argument is against the focus on the extraction by multinational corporations – which are a part of the core.
“There is much disagreement within the dependency theory tradition regarding why inequality between countries seems to be increasing.”
Critics assert that the emphasis of analysis should be on how developing countries fail to gain from: the relationship between those who own of the means of production and those who do not; and variations in incentives provided by different economic environments.1
The core and periphery view
Dependency theory’s ambitious goal of describing world capitalism in binary terms of core and periphery has been criticised for being outdated. For example, what about the UK’s living standards falling to unprecedented levels?
Development in developing countries
Dependency theory originally did not explore the reasons for why some developing countries did manage to develop. Amsden2 makes the case, based on the successful developers such as South Korea and Taiwan, that an increase in manufacturing capabilities of developing countries can lead to strong economic growth, even if they are not at the levels of the developed nations.
Counter critique and relevance
Relations of production The analysis of class formations and relations of production varies between the different theories of dependency. Within the tradition there are clashes regarding whether to look first at the relations of production within specific localities before moving to an analysis based on international trade. The focus on trade raised many questions including:
- how does the surplus extraction occur via trade and investment relations between rich and poor countries;
- how may multinational corporations make decisions to invest in developing countries or repatriate profits; and
- is cheap labour in poor countries the source of unequal exchange?
“Dependency theory originally did not explore the reasons for why some developing countries did manage to develop.”
While the answers to these questions vary within the dependency theory tradition, analysing the interaction between a specific organisation of economic production and the relations of production is at the core of most dependency theories.
Is the core-periphery binary obsolete? The fact that there is rising poverty in core countries such as the UK does not undermine the so-called binary of core and periphery. Dependency theorists did not split the world by outcomes such as poverty, but rather by the causes of underdevelopment, such as low productivity, extractive economic environments, colonial structures, and technological dependency. The financial, technological and economic constraints the UK faces are much less severe than those of Malawi or Peru, or other peripheral countries, despite the fact that poverty in the UK is rising. Seeing the world through a core-periphery lens highlights the persistence of geographical asymmetries that other perspectives might gloss over.
What about the successful developers? Let’s take South Korea as an example. The Korean government managed the economy’s trade largely following the policy prescriptions of dependency theorists. This included setting up trade barriers to protect local industry and the promotion of exports. Korea also had unique support from the US during the Cold War, which helped alleviate the financial constraints many peripheral economies face.
“Many dependency theorists certainly saw lots of potential in manufacturing because of the greater scope for productivity increases and technological development.”
But to fully understand the development of the Korean economy, the dependency tradition takes us back to the historical development of capitalist production structures, which laid the foundations for industry that later emerged as a part of the developmental state. Under Japanese colonisation, Korean businessmen were “not so much subordinated by the political structure as incorporated into it.3” This is in stark contradiction to how capitalism developed in other peripheral economies – shaping local industry in a much more extractive manner.
Many dependency theorists certainly saw lots of potential in manufacturing because of the greater scope for productivity increases and technological development. But they also recognised that low value-added manufacturing would be unlikely to lead to economic development. What we are seeing now with the extension of global value chains to developing economies, for example by allowing developing countries to produce clothes for big clothing chains, may therefore not be enough to propel these economies into the core, the way the development of industry in the East Asian countries did.
Latin American countries represent an explicit example of dependent positions in the global financial markets, with visible losses in terms of competitiveness, de-industrialisation and increasing dependency on external capital to avoid exchange rate debacles.
The contemporary global economy is marked by a substantial increase in cross-border capital flows, which are highly volatile. For this reason, authors such as Vernengo4 argue that “the ‘new’ dependency seems to be financial in nature” even though the issue of an autonomous and dynamic process of technological innovation is still relevant.
After the collapse in 1971 of the Bretton Woods, gold-based monetary relations system, Tavares5 was one of the few analysts within the dependency theory umbrella to place “international money” and the “dollar hegemony” at the centre. That is, she highlighted the fact that developing countries across the world are subject to domination by a single currency. With the liberalisation of trade and finance, the discussion of financial dependency and the risks of financial globalisation have become more central.
In Brazil, for example, liberalisation reforms of the 1990s, that followed the changes in the post-Bretton Woods international monetary order, gave rise to a macroeconomics arrangement that relied on exchange rate management, inflation control and a strong government bond market to guarantee financial stability. For dependency theorists, such an arrangement has required economic policies from the Brazilian government that led not only to high-interest rates but also to short-term and volatile capital inflows. The weak position of the Brazilian Real in the world currency ranking and the need to keep the exchange rate stable have led to speculative attacks by foreign investors, which, in turn, have increased the vulnerability and volatility of the economy.
“Not even Taiwan, and India even less so, can catch up with the advanced economies technologically.”
Others yet point to the harmful effects quantitative easing (QE) – the central bank purchase of government bonds or other financial assets to inject cash into the economy – had on many developing countries. Essentially, QE encourages financial inflows to these economies, while they are encouraged to borrow in foreign currency. Although this means abundant credit during the surge, these capital inflows have a tendency to leave debt unpayable when flows reverse, as these economies have small and underdeveloped financial markets, and weak currencies that cannot be used as a means of payment or collateral.
Beyond Latin America, Shie & Meer6 look at two successful cases of high-tech industrialisation within the so-called Third World: India and Taiwan. In their work, data showing a widening knowledge gap between these two Asian developing countries and advanced Western economies expose how Taiwan and India depend greatly on technology transfers from developed countries. They conclude: “Not even Taiwan, and India even less so, can catch up with the advanced economies technologically. We doubt that other developing countries can escape from the cruel fate to which they seem doomed”.
An important aspect of dependency theory scholarship is that it rejects the idea that globalisation is inevitable and largely beneficial. Whether defined in social, cultural, economic, financial or spatial terms, it offers a critical framework to analyse the impacts of globalisation. That is, it allows for a structural engagement with inequality on a global level emphasising how the linkages that are celebrated as sources of wealth under mainstream globalisation narratives are actually uneven in nature. Equally important, it explicitly addresses subordination, recolonisation and the need for resistance and transformation.
1.Brewer, Anthony. 1990. Marxist Theories of Imperialism – A Critical Survey. London & New York: Routledge
2. Amsden, Alice. 2001. The Rise of the Rest: Challenges to the West from Late-Industrializing Economies. New York: Oxford University Press.
3. Eckert, Carter. 2014. Offspring of Empire: The Koch’ang Kims and the Colonial Origins of Korean Capitalism, 1876-1945. Seattle: University of Washington Press
4. Matias Vernengo. 2006. “Technology, Finance, and Dependency: Latin American Radical Political Economy in Retrospect,” Review of Radical Political Economics 38(4):551-568.
5. Tavares, Maria da Conceicao. 1985. “A retomada de hegemonia norte-americana,” Revista de Economia Politica 5(2): 5-15
6. Shie, Vincent H. an Craig D. Meer. 2010. “The Rise of Knowledge in Dependency Theory: The Experience of India and Taiwan,” Review of Radical Political Economics 42(1):81-89.