Contribution of Raul Prebisch on Economic Development | Free Essay Example

Contribution of Raul Prebisch on Economic Development

Words: 1683
Topic: Business & Economics


Structuralism theories propounded on the role of the state and the market in promoting development in an economy. It advocated for state activism in trying to solve problems of underdevelopment and especially in developing countries. It opposed to the idea that international or free trade helped in development by eradicating poverty. Structuralism theorists tried to seek reform on the structure of the world economy through international agreements. They also argued that for the poor countries to develop they had to decrease their reliance on trade with the industrialized countries through regional integration.

Raul Prebisch’s contribution

Raul Prebisch was an Argentinean economist who contributed greatly to the international debates on economic development in the period between the 1940s and the 1970s. He was the most influential Latin American structuralism theorist and he emerged during re-assessment after the Great Depression of the 1930s. As a result, his ideas derived from his understanding of how the Great Depression affected Argentine influenced his writing.

His work was further influenced by the aftermath of the Second World War and the works of Hans Singer who was a UN economist. Though he was a theorist, he appeared more as an economic diplomat who contributed greatly to debates on development and international trade and especially on the effect of International Trade on the developing countries (Cardoso and Faletto, 1979). He was mainly concerned with issues to do with internal development, import substitution, industrialization, and regional integration.

His appointment as the head of the United Nations Economic Commission on Latin America (ECLA) was from 1948 until 1962 and he used this place to develop his structuralism views.

Prebisch’s theory had two underlying themes. Firstly, he believed that the world had a deep structure and that this structure had a ‘center’ and a ‘periphery. The ‘center’ consisted of the developed countries while the ‘periphery’ consisted of the poor countries who were producers of agricultural products and raw materials. Countries in the center composed of the developed and rich countries like the United States of America and Europe while those at the periphery consisted of the developing and poorer countries like Latin America and African countries His theories tried to explain why poor countries continued to become poor and why developed countries continued to develop.

Prebisch’s theory of economic development contended that poverty among the poor countries of the world is as an of them exporting primary commodities to the rich countries who then manufacture products out of the raw materials then sell them back to them expensively. According to him, this was a result of the developed countries cheaply purchasing the exports from developing countries hence making hem worse off than they were original.

For Prebisch, the solution to this was very simple. Instead of purchasing manufactured goods from the rich countries, countries in the periphery should embark on programs of import substitution so that even if they still take part in international trade they would not have to use their foreign exchange reserves to buy their manufactured goods from abroad (Sen, 1999).

He argued that this was because the structure of the international system operated in a way that boosted the economy of countries in the ‘center’ hence leading to the poor countries’ underdevelopment in the ‘periphery’. To him, the center and the periphery were always closely linked by international trade. However, in the international markets, exchanges were always unequal since the developed countries produced manufactured products which were always of a higher value compared with the primary products from the poorer countries.

To him, the terms of trade in the international markets were always unfair to develop countries since the import prices of goods were always constant while the prices of export products were always on the decline. This meant that poor countries like those in Latin America would in the long-term have o export more products so that they can buy the same amount of manufactured products. This, as a result, led to the poor countries becoming poorer as free trade cannot benefit them in any way.

The other theme that Raul Prebisch talked about was the surplus-labor. According to him, the structure of the international system resulted in the economic situation in the peripheral countries where there is a surplus of labor. This situation arises from the workers being sacked or retrenched as a result of the declining terms of trade in international markets. Furthermore, the unequal exchanges led to reduced wages for workers and to Prebisch this resulted in underdevelopment unto which low wages were a feature.

Prebisch further argued that the only way for countries in the periphery was to reform the structures of their economies by building industries hence reducing primary exports’ dependence. Prebisch, therefore, suggested that instead of the developing countries exporting commodities to the developed countries and importing finished goods from them, they should adopt what was known as, “import-substituting” industrialization (ISI). This was a situation where the countries at the periphery broke away from the unfair policies of international trade and established their trade by imposing high tariffs and other forms of protectionism to develop their markets.

Prebisch theory was however very difficult to apply to real-world experiences. This was because the economies of the developing countries were not strong enough to keep prices of their goods low such as the subsidies used in developed countries. Secondly, countries in the periphery lacked the political will to move from being primary product producers to manufacturers (Prasad 2006). Lastly, the development theories of Prebisch got undermined by the fact that poorer countries had no control of their primary products in the international markets.

In conclusion, Prebisch proposed that for Latin American countries to develop and therefore escape their disadvantaged position, they had to reform their structures by building industries and moving away from the primary production of commodities.

His ideas later came to influence the coming up of regional groups across Latin America together with multilateral corporations that came up. His structuralism theories helped in shaping the economic policies adopted by many countries in Latin America.

The Economic Commission for Latin America (ECLA)

The Economic Commission for Latin America (ECLA) established by the United Nations in 1948 had the mandate to help improve the economic development of countries in Latin America and carry out projects to the end and help regional integration in the area. Economists from ECLA did a substantive analysis of the dependency theory and the most substantial of them all was an analysis done by a Chilean called Oswaldo Sunkel in 1969.

When appointed as the Director of the United Nations Economic Commission for Latin America (ECLA), Raul Prebisch together with his colleagues did analyses on the dependency theory. Their researches pointed to the fact that economic development in developed countries resulted in serious economic problems in developing countries that further complicated matters in these countries.

They argued that there were inequalities in international trade since it favored richer countries while it disadvantaged peripheral countries. The developed countries always exploited the poor countries who were the producers of raw materials and international trade was a way through which rich countries could become richer and poorer countries would become poorer (Myrdal, 1970). They argued that the terms of trade in the international arena were always unfair and as a result, the center consistently continued to exploit countries at the periphery who are the producers of raw materials. As a result, developed countries used international trade to exploit and further rob the poorer countries.

They argued that international agreements were a means through which the developed countries could further exploit the countries in the periphery. They adopted agreements to protect the prices of primary commodities from the developing countries so that they can continue exploiting them. Furthermore, they subsidized their farmers and this has led to unfair competition in the international markets hence making the poor countries poorer. They advocated for policies that would help protect the effect of International Trade agreements on the developing countries (Amin 1976).

ECLA theorists believed that for countries to create the right conditions necessary for economic development, they had to change the structure of the country’s economy. Furthermore, they argued that states had to re-distribute the incomes from trade so that it could help raise the living standards of the people. They adopted a state versus market debate that has continued to influence decision-making among policymakers in the world today. This debate proposed that state direction was essential in creating industries that are highly competitive and technologically advanced.

Raul Prebisch headed The Economic Commission for Latin America (ECLA) from 1948 to 1962.ECLA theories and approaches ere coined by Prebisch and his colleagues and they adopted what was known as ‘historical structuralism’. This theory has continued to influence economic and development issues to the present day (Samir 1976).

The approach adopted by The Economic Commission for Latin America (ECLA) focused on the analysis of how Latin America’s institutions inherited from the colonial times influenced their economic development.

It identified five phases through which countries went through before becoming developed. The first phase involves the use of import substitution on industrialization; the second phase involves the use of reforms in easing industrialization. The third phase dealt with export promotion and the fifth phase involved settling o the external debts through adjustment programs. The last phase involved social equity that would bring about development.

The ECLA has continued to try to show how the international economy has affected developing countries like those in Latin America. It has also supported and encouraged integration efforts in Latin America, for example, The Latin American Free Trade Area (LAFTA), The Central American Common Market (CACM), and many others.

Works cited

Amin, Samir. Unequal Development: An Essay on the Social Formations of Peripheral Capitalism, New York: Monthly Review Press. 1976. Print

Cardoso, Fernando.H. and Enzo Faletto , Dependency and Development in Latin America, Berkeley CA, California University Press. 1979. Print.

Myrdal, Gunnar, Challenges of World Poverty, New York, Vintage Books 1970. Print.

Prasad, Monica., The Politics of Free Markets: The Rise of Neoliberal economic Policies, Chicago: University of Chicago Press. 2006. Print

Sen, Amartya. Development as Freedom, Oxford, Oxford University Press. 1999. Print