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What is Dependency Theory of International Political Economy?


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 Like Wallerstein, Dependency Theory emerged in Latin America which argued that world trading system benefited only advanced capitalists' economies. Often the Terms of Trade favored these countries over the least developing countries (LDCs). 

Terms of Trade = Export Prices / Import Prices

LDC economies depend upon export of raw materials and agricultural commodities. And they import finished products from developed countries. 

As the commodity prices rise slowly but manufactured product prices rise sharply, the terms of trade would deteriorate for LDCs unless their exports rise faster than the imports. The global trade is done mostly by corporate subsidiaries thus commodity prices are not exposed to market. These giant corporations often secure the deal with long term agreements, thus even though commodity prices might have rose but they would pay what was agreed in the agreement. They also have sophisticated accounting devices which enable them to avoid paying taxes. They often artificially overprice the products in high-tax countries and underprice where taxes are low. 

Many LDCs depend upon export of single commodity or raw materials. If the international prices of commodities decline, they often resort to international creditors which increases the national debt for LDCs. 

It creates a vicious cycle of rich getting richer and poor becoming poorer. 

How to incorporate favorable Terms of Trade for LDCs?

  • Reduce imports
  • Become self-reliant
  • State control over the economy

Failure of Dependency Policies

Initially, Latin American countries enjoyed some success by adopting Dependency theory recommendations in 1980s. 

But developing own industries and investing in agriculture required capital, but capital was available through only foreign loans. A country couldn't print as much as currency as they want as it would cause hyperinflation. So LDCs borrowed heavily for development from international creditors such as US, European Union, World Bank and IMF. But when the commodity prices fell, their ability to pay the debt was reduced. The Latin American debt reached to a new height and quadrupled between 1975 and 1982. 

The failure of Marxian economic analysis, renewed the interest in free market, and countries started to compete for Foreign Direct Investments (FDI). But FDIs reached only to those countries which de-regularized their economies, reducing the state capabilities to continue welfare measures. 

Currently, despite the rise of economic nationalism, free market model is the most dominating system of International Political Economy.

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