Rethinking Dependency

arton428There is no better time than the present crisis to dust off the old theory of dependency and draw from it those points that remain relevant. We need to think about which ties to sever and which to strengthen. Crisis and Criteria

The fate of thought is a curious thing, above all in times of crisis. As the current crisis continues along its destructive path, some regions have been more affected then others, oftentimes in defiance of prevailing wisdom. This represents something new. Until recently, neoliberal thinkers maintained that those places without “good economic foundations” (as defined by their theories) engendered or would engender financial crises (Krugman, 1979; Obstfeld, 1986). Nonetheless, this crisis was unleashed among the “good” teachers before it affected the “bad” pupils. In Latin America, many of the countries that earned high marks during the neoliberal era or that benefited from global economic growth now find themselves in dire straits and risk losing the gains of the past 10 years. The current crisis has put “good” and “bad” countries on the same footing and even inverted traditional hierarchies. Just like it says in the tango Cambalache, “dale que va, todo es igual . . . .”

To what factors can we attribute Latin America’s economic performance over the last decade? Answering this question requires keeping in mind not only the productive capacity of the economic system but also – and more importantly – the system’s structure and those factors that determine that structure. To this end, we need to revisit the “made in Latin America” theories, which date back 30 to 50 years and are widely considered obsolete, when not forgotten altogether. This global crisis has led many people to turn to economists both aged and already dead for guidance. For our purposes, it is useful to look back on two currents of Latin American thought: structuralism and the dependency theory. A careful look reveals good guidelines for interpreting our current situation. We will take the following approach: 1) Review the main ideas from these old theories and see if they remain valid; 2) Evaluate the current global crisis from the perspective of the original proponents of these theories; and 3) From this perspective, speculate on how the crisis may play out.

Life and death of dependency theory

Dependency and development: Do you remember that catchphrase? It was the name given to a theory with both empirical and normative components.

The ultimate decline of this theory, it seems to me, had a lot to do with certain ill-advised public policies that were derived from it. Nonetheless, it also had a positive side, including the Singer and Prebisch hypothesis, which still provides a valuable analytical framework. Without getting into the evolution of the dependency theory (for that see Ferraro, 1996), let’s consider its principal propositions:

_- The structure of the world economy is divided into central countries (the metropoles) and peripheral countries (the satellites). Economic development in peripheral countries is “structured” by processes and policies in the central countries. In other words, some countries have the option of choosing and controlling their development path while others are compelled to follow suit. In Theotonio dos Santos’ formulation, “The interdependency between two or more economies, and between these economies and global commerce, takes the form of dependency when some countries – the dominant ones – can grow in a self-sustained fashion, while other countries – the dependent ones – can only grow in response to expansion in the former countries, which has both positive and negative effects on immediate development in these dependent countries”(dos Santos, 1970: 231).

_- Underdevelopment is a completely different phenomenon from non-development. At some point in time, the currently developed countries were undeveloped. In other words, their economic potential was not exploited. Nonetheless, they had a high degree of autonomy and a possibility of “choosing” or “falling into” a course of sustained economic growth. Underdeveloped countries, however, found themselves in a distinct position. Even if they fully exploited their productive capacity, these countries found the direction of development predetermined by the characteristics of the international exchange system. To cite Machado, the developed countries “made the path by walking it.” The underdeveloped countries, in turn, had to follow the path laid by the developed countries. In one respect, dependency theory is a reflection on the power of timing in global economic history. Another way of expressing this idea would be to say that the developed countries found the right structure for their system, while the underdeveloped countries became trapped in a system created by someone else. The necessities of the first-developed countries speed up or delay, promote or repress, the development of distinct sectors (countries, regions) on the periphery. The issue is not so much deliberately imposed obstacles or impediments to development, since at times the needs of the most developed countries facilitate the growth of the least developed, but of exogenous necessities (Frank, 1967).

_- The structural dependency scheme condemns underdeveloped countries to follow the economic ups and downs of the central countries. A recession in the metropole logically affects the satellites, slowing their growth.

_- Dependency is perpetuated and reproduced on distinct levels. It is not merely a rigid division between center and periphery but also an asymmetry of power, which constitutes dependency’s political dimension. The system depends, for instance, on the existence of local elites with strong ties to the center. As Ferraro says, “These elites have trained in the dominant states and share cultural values with the elites in the dominant countries. In this way, the dependency relation is to a certain degree ‘voluntary.’ There is no need to argue that the elites of a dependent state intentionally betray the interests of the poor; the elites sincerely believe that the key to development lies in following the liberal economic doctrine” (Ferraro, 1996). In this way, dependency exists throughout the social web.

_ – The perpetuation of the dependency relationship favors the interests of the central countries. They can sell their products in peripheral markets and, at the same time, access natural resources on the periphery. The relation is maintained through a complex network of political, cultural and economic means and military measures, when the need exists. Realities and perceptions mingle in this relation.

_- When the dependency relation lessens, the peripheral countries have a better shot at development (Frank, 1967). This opening happens when a disturbance occurs in the metropole – financial, economic or political crisis. The best-known examples are severe economic depression and war. However, the ties of dependency generally tighten once again once these emergencies are over. Peripheral development slows and the peripheral countries return to the track laid by the stronger countries.

_- All of these propositions have a strong normative charge, which is why they have given rise to resistance movements and the “anti-imperial” offensive. But it is important to focus on the thesis itself and test it empirically. If underdevelopment is inevitable in a system of dependency, then it follows that relative economic isolation is a prerequisite to sustainable development. The following represent the practical recommendations that grow out of dependency theory:

_- Development should accord with national interest, which varies from country to country. Given that underdeveloped countries have an initial disadvantage in their markets (above all, in terms of industrial production) the state should address this weakness through aggressive and extensive intervention. The market, left to itself, tends to perpetuate relations of dependency and prevent these underdeveloped economies from reaching their industrial potential.

_- Among the most important concrete initiatives is state-sponsored stimulus for strategic industries. This is not a matter of exploiting “natural” comparative advantages but of creating new enterprises with comparative advantages.

_- One important strategy is the development of the domestic market by substituting imported manufactured goods with domestic ones. The strategy embraces both import restrictions and credit and other incentives awarded to national industry.

_- The nationalization of key sectors of the economy is also recommended, particularly those sectors in foreign hands. For dependency theorists, foreign investment drains away added value and moves resources out of Latin America.

The development of many Latin American countries over the last 40 years tends to discredit the principles of the dependency theory. Such has been the case in Brazil, the most important country in the region. Ironically, however, the performance of the so-called Asian Tigers (South Korea, Taiwan and others) seems to offer empirical proof of the dependency theory. In these countries, the state adopted strategies that accord closely with the prescriptions of dependency theorists.

In Latin America, however, there was no shortage of cases that disproved the predictions of dependency theorists. Furthermore, critical backlash was resounding, above all with respect to the flawed import substitution model of industrialization (ISI). It is hard to deny the importance of free trade to the growth of all of Latin America.

While it is tempting to weigh in on the debates between dependency theorists and neoliberal economists (Raffern, 1987; Tausch, 2003), it is more important to consider empirical data on the economic evolution of Latin America during recent decades. It is here where we can evaluate the contribution that dependency theory has made to understanding the economic dynamic in Latin America.

In focusing their criticism on certain practical recommendations of dependency theory, neoliberal economists have avoided having to discuss the theory’s positive contributions. Neoliberals have not been able to explain the structural problems noted by dependency theorists, nor the leaps in development that occur in Southern countries when Northern countries are in crisis. On the other hand, within dependency theory there are a number of distinct positions. The “softest” have strong explanatory power . . . In media res. All the way back in 1978, Fernando Henrique Cardoso was talking about “associated-dependent development” as a model that conferred many benefits. In spite of the fact that when Cardoso assumed the presidency of Brazil he said to his intellectual friends, “Forget everything I have written,” his policies and those of his successor Lula have supported an associated-dependent development model that has raised Brazil to the threshold of world power.

Today, in the midst of severe global crisis, the arguments of neoliberal economists are losing strength and the old theory of dependency is once again attracting interest.

A brief history of the crises

Throughout the seventies, the growth rate in many Latin American countries was quite high. Many had applied some of the recommendations derived from dependency theory, in particular the important substitution model. It looked at the time like this was an effective strategy for escaping the vicious cycle of dependency.

However, these recommendations ignored changes happening in the global economy. They represented solutions to problems from other eras. While the big ideas behind dependency theory were not flawed, the practical corollaries were. In other words, there had been a good diagnosis but a bad treatment plan. The main error was trying to isolate from the rest of the world in a bubble of auto-sufficiency in place of creatively adapting to a changing world. In other words, the way to break the cycle of dependence is not through independence but interdependence. This was the secret behind the success of many Asian economies. Latin America, on the other hand, became mired in short-term economic nationalism. And, for this reason, Latin America was ultimately betrayed by two important changes in the world economy: the abandonment of the gold standard and the amassing of Middle Eastern oil profits, which were subsequently turned into loans for Latin America. The abandonment of the gold standard enabled the U.S. to dominate the global economy without worrying about its own reserves. Instead, the U.S. became everyone else’s reserve. The South American countries used the dollar as a reference currency. They contracted huge debts in dollars, which the U.S., in turn, happily injected all over the planet. At the same time, massive profits earned by petroleum exporting countries were – rather than being earmarked for local development – being converted to loans for other countries. All of this affected Latin American countries in two ways. First Latin America became the principal target of lenders (the Western banks). Capital flowed into South America in enormous quantities. And a capital injection like that could only lead to indigestion. The cycle of indebtedness began and would ultimately conclude with huge crises, bankruptcies and laments. Rather than achieving interdependence, the Latin American countries had fallen into a new kind of dependence to international financial capital.

[Chart 1: Growth of GDP in various countries from 1968 to 1979
Chart 2. Foreign debt in various countries (in today’s dollars)*->http://www.opinionsur.org.ar/chapterrethinkingdependency.pdf]

This new dependency was very similar to what in the Northern Hemisphere is known as a Ponzi scheme and in the Southern Hemisphere a “chain,” that is, a serial fraud: New loans pay off old loans until the chain breaks leaving a long line of victims behind. Initially, gains are spectacular, but the wealth quickly tumbles like a house of cards. This easy access to financial capital undermined the bases of development in Latin America. Corruption, moral jeopardy and bankruptcy were the final results. The system of financial dependency entered its terminal phase in 1982. The ensuing crisis was followed by the infamous “lost decade.” The fallen economies recovered by following “neoliberal” guidelines, generally poorly applied, which brought about another enormous crisis at the beginning of the 21st century. Multilateral organizations, instead of mitigating the crisis, exacerbated it, which explains the ill-repute of these bodies in the region today en DIA.

This brief review of Latin American crises has had a particular aim. It is necessary to contemplate these earlier crises in order to understand the possibilities opened by the current crisis and to avoid repeating the mistakes of the past. With this aim in mind, it is also important to consider the underlying causes of the earlier crises. The first underlying cause is the weakness of financial markets in the region, which fail to attract the capital needed to stimulate healthy and sustained development. The second cause is the volatility of the resources, or commodities, that Latin America exports. Our countries are at the mercy of the ups and downs of these famous commodities, both “hard” and “soft.” We have only volatile capital coming in, and that capital leaves with the same speculative ease that characterized its predatory entry. Fluctuations in the prices of exportable resources, in turn, make our economies vulnerable. We move with astonishing alacrity from party mode, when prices rise, to regret and insolvency with prices fall.

How do we break this vicious cycle of multiple dependencies? The current crisis, on account of its global reach, represents a perfect opportunity. The absence of volatile capital requires our countries to seek new forms of regional collaboration and a new outlook that favors development that is local, integrated and sustained.

New opportunities

It would be ingenuous to pretend that the global crisis, all by itself, will lead to a new era of economic interdependence. But in some respects, certain threads of dependence have already been severed. The influence of international financial capital has weakened. Combine this with the power now accessible to new political forces, and we can look forward to a new period of pragmatic experimentation – provided that old ideologies do not resurface. It is also clear that the crisis will drain capital from Latin America. But at the same time the dominance of capital from Northern countries will be weakened. The prognosis remains unsettled, but there is no reason to rule out positive possibilities. The financing deficit may oblige our countries to once again go knocking at the door of multilateral bodies for assistance, with the ensuing conditions and dependency that we all know too well. However, there are ways to avoid the dependency trap.

One of them is to secure lines of credit but not use them, an approach already taken by several countries. This produces confidence in capital markets but does not generate dependency. Furthermore, developing countries are currently in a position to negotiate the conditions imposed by Northern lenders. Another option is to create regional capital poles to stimulate local development. The objective here is to break the North’s monopoly on financial capital. Third, the role of the state promises to be very important during the exit from the crisis, and state intervention (if intelligent) will encounter less resistance than before, as all global economies have had to recur state assistance. Intelligent fiscal policies will prove decisive in this area. Taxation policies, incentives for local investment and other development-oriented mechanisms will pave the way for reform.

Other alternatives include the creation of local and regional capital funds, with specific financial strategies, to stimulate local investment.

In our current interdependent times, to pursue a course of self-sufficiency would be disastrous. I will even dare to say that dependent development is preferable economic isolation. “vivir con lo nuestro” is neither possible nor desirable. We must instead learn to distinguish between the various degrees and distinct types of dependency.

There is no doubt that our current reality has rendered obsolete the old propositions of Singer and Prebisch, which were based on a very simple model of international division of labor, terms of exchange and comparative advantages. The distinction between primary products (or natural resources) and manufactured products has been blurred. The primary products of yesteryear are now subject to an industrial production and processing. Comparative advantages are created and do not just “happen.” And, with good strategy, the terms of exchange can be reversed. All of this was understood by the Asian countries. But this wisdom was slow to reach Latin American coasts. The real distinction is between specific products (which can yield comparative advantages) and substitutable products, which will forever be at the mercy of demand and require the support of protectionist policies, which produce negative results in the long run.

This “modernization” of strategic thought has also been absent from the views of Latin American critics of dependency. We know that a strategy influenced by dependency theory is not conceivable in a neoliberal framework, but it is also difficult to imagine within the so-called economic nationalism currently espoused by some of Latin America’s more “progressive” governments. There is something worse than dependence: poorly-conceived independence. In other words, the loosening of the bonds of dependency that the international crisis has initiated is merely an opportunity and not a guarantee for the Southern countries. As in all crises, the margin of error is large.

The current crisis will have serious repercussions (many of them negative) on Latin America. It promises to break old ties, split elites and produce severe social pressures. But at the same time it will weaken old and stubborn obstacles to change. A lot will depend on the shrewdness and foresight of those in power. Neither populism, nationalism nor anti-imperialism offer viable courses: They are no more than fleeting celebrations that quickly turn sour. Prudent policies for independent development are far less flashy: They are based on long-term vision, serious regional collaboration and a broad consensus regarding state policy. Countries such as Chile and Brazil are already headed down this wise path.

Conclusion

There is much that is useful and salvageable from dependency theory, provided that the policy errors of the past are avoided. There is no better time than the present crisis to dust off the old theory, draw from it what is valuable and disregard what is obsolete. This exercise will help us determine which ties have been severed in the current crisis and which new ties need to be formed in the financial and productive order and, above all, what type of regional integration is viable and desirable.

References

Krugman, Paul. 1979. “A Model of Balance of Payments Crisis”, Journal of Money Credit and Banking 11: 311-332.

Obstfeld, Maurice. 1986. “Rational and Self Fulfilling Balance of Payments Crises,” American Economic Review 76: 72-81.

[Frank, André Gunder. 1989. “The Development of Underdevelopment,” Online Article,->http://findarticles.com/p/articles/mi_m1132/is_n2_v41/ai_7659725/.]

Cardoso, Fernando Henrique and Enzo Faletto. 1978. Dependency and development in Latin America. California: University of California Press.

[Tausch, Arno. 2003. “Social Cohesion, Sustainable Development and Turkey’s Accession to the European Union: Implications from a Global Model,” Alternatives: Turkish Journal of International Relations 2.->http://www.alternativesjournal.net/volume2/number1/tausch.htm]

Ferraro, Vincent. 1996. “Dependency Theory: An Introduction,” Working Paper, http://www.mtholyoke.edu/acad/intrel/depend.htm.

Dos Santos, Teotonio. 1970. “The Structure of Dependence,” The American Economic Review 60: 231-236.

Raffer, Kunibert. 1987. Unequal Exchange and the Evolution of the World System, Reconsidering the Impact of Trade on North-South Relations. Macmillan/ St. Martin’s Press, London & New York.

Leave a comment

Your email address will not be published. Required fields are marked *