Dependency theory explains the global economic system by describing how developing countries depend on developed countries for economic growth.
At the same time, the wealth of developed countries is built on the exploitation of developing countries, portraying this through a model of “peripheral” and “core” economies.
Resources flow from poor “peripheral” states to a “core” of wealthy states in the form of cheap labor and raw material.
This movement enriches the latter while exploiting the former. It forces the poor countries to become dependent on exports to wealthier countries, hindering their industrial growth and not allowing them to become self-sufficient.
In short, dependency theory argues that the global economic system works in a way that benefits wealthy countries at the expense of poor ones. Dependency can take various forms, such as the transfer of technology, financial aid, trade policies, etc.
Definition of Dependency Theory
Lustig defines dependency theory as a:
“body of thought that explains the persistent poverty of most developing countries by the fact that they are dependent on advanced countries for trade, investment, and technological progress” (Lustig, 1977)
Lustig’s definition emphasizes how poor states depend on wealthy ones for the three crucial necessities of growth—trade, investment, and technology.
This dependency perpetuates a cycle of poverty and underdevelopment among the poor states.
Origins of Dependency Theory
Dependency theory originated in 1949 in the work of Hans Singer and Raúl Prebisch.
The two economists described how the terms of trade for developing countries had deteriorated over time: they were able to buy lesser and lesser manufactured goods from developed countries in exchange for their raw materials.
The dependency theory grew as a reaction to modernization theory, which stated that all societies progress through similar stages of development; developing countries are in a stage similar to that of developed countries from an earlier period.
So, by accelerating the (supposed) common path of development through investment & technology, poor countries can develop. Dependency theory rejected this view by stating that poor countries are not simply primitive versions of wealthy ones.
Instead, they have their own unique structures and features. Moreover, the theorists highlighted how developing countries are exploited in the global economic system, which is responsible for their poverty.
10 Dependency Theory Examples
- Colonial exploitation and imperialism: The earliest example of dependency is colonization when European nations made colonies through their superior military technology. They exported natural resources from other places to Europe. They then manufactured these materials and sold them back into colonies, creating an economic system of exploitation.
- Developing world debt traps: Dependency makes poor nations accumulate large amounts of debt and interest. For example, Africa has received massive loans from wealthy nations in the past few decades. The huge debt and interest repayment make it difficult for the nations to invest in their own economy and development.
- Lack of technology: Developed countries usually have a monopoly on advanced technology. Their MNCs often establish operations in developing countries, and while these provide some benefits (like jobs) to the hosts, it also forces them to be dependent on the technology and expertise of the developed nation.
- Reliance on natural resource exports: Since poor countries lack the technology to fully utilize their resources, they are forced to export their natural resources. This creates a “resource curse”, as the economy becomes too dependent on it and is unable to diversify. Plus, the benefits of resource exports are often not distributed equally.
- Imbalanced growth: In periphery countries, despite some short-term spurts of growth, the long-term growth is imbalanced and unequal. This is because they are stuck in producing a narrow range of goods for exports, while other areas of the economy are underdeveloped. They also have high negative current account balances.
- Aid dependency: Aid dependency refers to the reliance of a country on foreign aid, which reinforces economic dependency on developed nations. It often creates a dependency mentality, in which the developing nations become reliant on external aid instead of developing their domestic resources. Aid dependency is prominent in Africa.
- Political dependency: Economic dependency often comes with political dependency, as developed nations are able to use their assistance to influence the political landscape. This is especially worse in countries suffering from corruption and lack of civil rights, like Zimbabwe and the Democratic Republic of Congo.
- Economic shocks: Dependency makes developing countries more vulnerable to economic shocks. They are often dependent on exports in a narrow range of industries. This lack of diversity, along with weaker institutions, makes them vulnerable to sudden changes, like a trading partner going through a recession or natural disasters.
- Manipulation of trade policies: Dependency allows developed nations to shape the terms of trade in their favor. They may employ protectionism to limit developing countries from accessing their markets and making it difficult for them to compete. They can also use their power to influence international organizations like WTO in their favor.
- Lack of autonomy: Ultimately, economic dependency never allows developing nations to become self-sufficient. They are forced to depend on developed nations for financial assistance, technology, infrastructure, etc. This creates a perpetual cycle of poverty & underdevelopment, making poor countries poorer & rich countries richer.
1. Technology at the center of dependency
While schools within dependency theory differ in some ways, they all agree that technology lies at the crux of dependency.
As Matias Vernengo says, the “inability of the periphery to develop an autonomous and dynamic process of technological innovation” is the chief cause of dependency (2004).
He adds that foreign capital only leads to a limited transmission of technology, not the process of innovation itself.
For example, Armenia is rich in mineral ores but lacks the technology to turn these into high-value consumer goods. As such, it has to export these to other nations, like Russia.
2. Europe underdeveloping Africa
In his book How Europe Underdeveloped Africa (1972), Walter Rodney describes how Europe (and the global economic system) exploited and underdeveloped Africa.
The process began with the transatlantic slave trade, which forcefully removed millions of Africans from their continent, disrupting their society and economy. Then came European colonization, which exploited Africa’s natural resources.
Even after the end of colonialism, exploitation continued because Africa remained dependent on Europe and the global economic system for financial aid, trade, and other forms of support.
3. Surplus extraction & capital accumulation
Paul A. Baran considered surplus extraction and capital accumulation as the two key components in understanding dependency.
These two are essential for development. The country needs to produce more than it needs for subsistence, that is, a surplus.
Plus, some of this surplus needs to be used for capital accumulation—the purchase of new means of production.
The problem with poor countries is that they are unable to undertake these two. In earlier times, they relied on agriculture, where the surplus went to landowners. These landowners spent it on luxury items, so very little was invested in capital accumulation.
In recent times, poor countries do have industries, but these often rely on foreigners. The surplus now goes to foreign shareholders as profit or is spent on consumption like in earlier times. So, there is again no capital for investment.
Baran argued that a political revolution is needed to break this cycle.
Critiques and Criticisms of Dependency Theory
Dependency theory has had a significant impact on the way economists and policymakers approach the issue of development, but it has also faced criticism, especially from free-market economists.
- Oversimplification: Petras & Veltmeyer point out that the theory oversimplifies the complex factors that contribute to economic development (2001). While it takes into account external factors like trade and investment, it downplays internal factors such as cultural values, domestic policies, etc.
- Determinism: Other scholars like Gindis consider the theory deterministic (and pessimistic) because it suggests that poor countries are doomed to depend on wealthy ones, which does not take into account their agency & potential in shaping their economy.
- Its Economics is Questionable: Free-market economists like Peter Bauer and Martin Wolf also criticize economic policies based on the dependency theory. They argue that such measures (like subsidizing domestic industries) cause a lack of competition, unsustainability, and wastage of government money. Robert C. Allen substantiates this with the example of Latin America, where protectionism failed badly, leading the economist to call dependency theory “debatable” (2010). On the other hand, India’s economy improved significantly after it shifted from a state-controlled to an open market.
Overall, these criticisms emphasize the need to consider a range of factors (both internal and external) in understanding and addressing economic development.
Dependency theory portrays the world economy in terms of the flow of resources from “periphery” to “core” economies, which exploits the former and enriches the latter.
The theory highlights the importance of the global economic system in shaping a country’s economic development, emphasizing how poor countries must break out of their dependency on wealthier ones to achieve growth. It has also been a subject of much debate and criticism.
Allen, R. C. (2010). Global economic history: A very short introduction. Oxford University Press.
Baran, P. (1957). The Political Economy of Growth. Monthly Review Press.
Gindis, D. (2000). “Dependency theory revisited”. Journal of Economic Issues. Wiley.
Lustig, N. (1977). Dependency theory: An introduction. Columbia University Press.
Petras, J. & Veltmeyer, H. (2001). Globalization unmasked: Imperialism in the 21st century. Zed Books.
Vernengo, Matias (2004). “Technology, Finance and Dependency: Latin American Radical Political Economy in Retrospect”. The University of Utah.