If we want to tackle global inequality, we need better economic theories
Dependency theory, though dismissed by mainstream economics, can help us find deeper solutions to global economic problems.
This article is part of ourEconomy's 'Decolonising the economy' series.
At a time when the COVID-19 pandemic and the murder of George Floyd have drawn attention to stark injustices and inequalities within the United States, but also globally, the inadequacy of mainstream economics for explaining structural inequalities is becoming increasingly obvious. My recent research demonstrates that a dependency theory research agenda is crucial for understanding contemporary global inequalities and for coming up with sustainable solutions.
Global imbalances are not new. Indeed, they have been well known for centuries and famously pointed out by the dependency theorists of the 1960s and 1970s. Although global production and finance have transformed since then, the core tenets of dependency theory remain relevant. Furthermore, important strands within dependency theory refer specifically to racial inequalities – although this is often forgotten (see Chapter 3 of Kay 1989).
A situation of “dependence” is one where “the economy of certain countries is conditioned by” development processes elsewhere. While dependency theory is often associated with Latin America, you can find ideas associated with such an approach across the world and spanning centuries, such as theories of colonial drain from India, Japanese scholarship on the power relations between centre and periphery, radical African scholarship and the Caribbean dependency school.
A dependency research program involves taking a global historical approach to development, taking the polarizing tendencies of global capitalism as a starting point, and focusing on structures of production as well as on the specific constraints faced by peripheral economies.
While taking such an approach may come naturally to some radical economists, it stands in stark contrast to the micro-oriented view that characterizes much of contemporary development economics, which abstracts from global, political and structural problems (see e.g. the recent policy proposal for a COVID-19 response for developing countries by the Nobel Prize winning economists Esther Duflo and Abhijit Banerjee).
How is dependency theory particularly relevant now?
First of all, how industry is structured globally still reproduces relations of dependence and leaves workers in developing countries especially exposed during the pandemic. While we have seen a deepening of global economic integration since the 1970s, which has been associated with an increase in efficiency and ‘flattening’ of the world, the spread of global value chains involves rigid power imbalances and deep vulnerabilities for those at the bottom of the hierarchy.
Many developing countries have been able to move into just-in-time manufacturing, but this production is still characterized by relatively low-skilled and low-tech work and a heavy reliance on companies concentrated in the centre. Therefore, as global demand grinds to a halt, manufacturing workers in the periphery are seeing their jobs disappear as multinational corporations cancel their orders (an issue raised by the ILO recently). In light of this, Duflo and Banerjee’s proposal to provide basic universal basic income is an important policy to mitigate income loss for these workers, but it shies away from addressing the underlying problem of how global production is structured in the first place. While basic income can provide temporary relief, to drive the revival of the economy we need to think creatively about how we can allow for a rebalancing of production so that industry in the developing world can be more sustainable, secure and more oriented towards domestic needs.
Secondly, developing countries continue to be vulnerable to financial cycles generated by the center – which was a key insight by dependency theorists. As investors flock to ‘safe’ assets (read: assets in the centre) in the wake of the COVID-19 pandemic, there have been dramatic reversals of capital flows – indeed the largest outflow ever recorded. Furthermore, many developing countries have experienced currency depreciations as well as severe debt and liquidity problems. As the much needed fiscal space of developing countries is constrained by these external factors, activists, academics, and policy-makers have called for debt moratoria, IMF support, and debt relief as necessary policies.
Not only does the structure of the global financial system make developing countries more vulnerable to shocks and capital flight, but it also makes it particularly difficult to organize an effective response. This has prompted UNCTAD – a UN organization established by one of the forefathers of dependency theory, Raúl Prebisch – to propose the establishment of an international body to oversee developing country debt relief programmes in the wake of COVID-19. Taking such a global and structural view of the world economy will be necessary to make sure the pandemic does not drastically exacerbate existing inequalities.
Why was dependency theory dismissed?
Dependency theory lost influence in the 1980s. There are two oft-cited reasons for this demise. The first is that the theory is weak. Dependency theory has been critiqued for being tautological, for denying Southern actors of agency, for lacking in rigor, and for economic reductionism. However, most of this critique is based on an incomplete, superficial and often incorrect understanding of what dependency theory is. This led dependency theorist and former President of Brazil, Fernando Henrique Cardoso, to argue that the common simplification of dependency theory in the US had made it into “a straw man easy to destroy”.
The second common explanation is about the empirical changes in the world economy that render dependency theory outdated. These include the transition from periphery to centre by some traditionally peripheral countries and the development of an integrated global production system. However, I argue that these new developments can actually be most fruitfully understood precisely through a dependency research program.
It is true that a new international division of labor has emerged, characterized by the restructuring of global production networks, which has allowed many developing economies to move into manufacturing through participation in far-flung global value chains (GVCs). This development has been used as an argument against the relevance of dependency theory, which was developed during a time when global production systems were less integrated.
However, by looking at industrialization through GVCs in Indonesia, for example, it becomes clear that the diffusion of industrial activities was conducted within hierarchical structures of corporate control. Because of this, development within Indonesia was not determined according to the industrial needs of the economy, but rather in line with the interests of foreign capital. Therefore, the manufacturing sector of Indonesia is characterized by limited technological capability and the country remains a net importer of advanced technologies. As recognized by scholars in the dependency tradition, the development of such technologies is crucial to generate and sustain industrialization and growth. Even for China, a country that has made significant advances in terms of upgrading and massively expanding its manufacturing exports based on its integration into GVCs, this expansion has involved a strong dependence on foreign direct investment (FDI), rapid denationalisation of the export-oriented manufacturing sector and relatively low levels of domestic innovation incorporated into exports.
Given that neither of the above explanations – dependency theory lacking rigor and being empirically ‘outdated’ – hold, it is more likely that the dependency research program was marginalized for political and ideological reasons. This is in line with Thomas Kuhn’s observations that science does not necessarily move forward based on an objective measure of what the best scientific program or paradigm is. Indeed, the Economics discipline has infamously excluded a range of heterodox economic theories since the 1970s, including Keynesians, Marxists and Institutionalists. In short, it seems that dependency theory did not go out of date, but rather fell out of fashion.
A dependency revival for a responsible response
COVID-19 exacerbates these constraints that developing countries already face. While domestic policies remain important to tackle the crisis, especially with regards to provisioning of health services and to compensate for incomes lost, the dependency perspective highlights how a domestic response is completely inadequate.
Dependency theory holds important lessons for understanding and combating the global hierarchies of forms of production, innovation and finance that constrain developing countries’ policy space to address the crisis effectively. This leads us to discussions about how to change the global economic architecture, for example through a global green new deal, reform of the international monetary system, reform of global systems of food production, and reform of governance of international trade and intellectual property rights. Racial and gender inequalities also need to be an important part of this discussion, and of the dependency research programme more broadly.
As Jayati Ghosh recently put it, “Covid-19 pandemic is driving home the urgency of internationalism”. Indeed, it is highlighting the need to ‘fix the system’. It’s therefore time we leave the ideological battles over knowledge production aside so that we can acknowledge the hierarchies and dependencies in our global economy, and support bold steps towards global structural solutions.
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