What is Dependency Theory?

What is Dependency Theory?

Definition

The dependency theory states that rich nations have benefitted tremendously over the years by importing raw materials and commodities from poor countries. But the increase in wealth in the developed world has been at the expense of the poor nations.

What does dependency theory mean?

The dependency theory was proposed by Raul Prebisch, an Argentine who was responsible for setting up his country’s statistics office and central bank. This theory, which is now widely regarded as being influenced by Marx, states that industrialized countries derived greater benefit from trade than the poor countries from which they imported raw materials and commodities.

Prebisch said that the price of primary products tended to decline in comparison to the price of manufactured goods. This implied that the developed Western countries bought commodities from the developing countries at low prices. These raw materials were then converted into manufactured goods. There was a high degree of value addition at this stage, a factor that gave the West a great economic advantage.

What was the solution that Prebisch proposed to this problem? He said that there should be a “new international economic order.” This required the countries of Latin America, Asia, and Africa to make a structural economic change and undergo a process of industrialization.

Example of dependency theory

In the period from 1650 to 1900, the European nations and especially Britain used their military power and naval strength to colonize large parts of the world. They introduced an economic system that resulted in their colonies in America, Asia, and Africa exporting raw materials to Britain and Europe where the manufacturing activity took place.

The manufactured goods were then shipped back to the colonies where they were sold. This resulted in a transfer of wealth from the colonies to Europe.

Summary

According to the dependency theory, the industrialized and advanced countries of the Western world rely on poor countries in Asia, Africa, and South America for commodities and raw materials. The poor nations, in turn, are dependent upon the advanced countries for finished goods. But this exchange is to the disadvantage of the poor countries.