The Global Political Economy of Raúl Prebisch

Matias E. Margulis, Matias E. Margulis

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781315414591
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Politica

• Offers GPE studies a transhistorical analysis that is also an intergenerational conversation among senior and emerging GPE scholars.
• A timely intervention that deepens and widens reflection on the intellectual roots of and approaches to GPE.
• Contributes to our understanding of the geographical and temporal origins of GPE as a field.
• Shows how Southern ideas have shaped the material world and economy we now take for granted.
• Interdisciplinary and demonstrates the value of pluralism in approaches to the study of GPE.
• Benefits from contributions by leading figures in GPE such as Robert Wade and Eric Helleiner but also by other high profile contributors such as Olivier De Schutter, the former UN Special Rapporteur on the right to food and Ed Dosman, the world's leading authority on Prebisch, who provides the foreword.

Part I
Prebisch as architect and theorist of the global political economy

1 Development through tighter economic integration

How might Prebisch size up some trends and issues thus far into the twenty-first century?

P. Sai-wing Ho

The idea of speeding up development through tighter international economic integration is one that is essentially as old as Economics is as a discipline. Over the course of the discipline’s history, that idea has been sliced and diced by proponents and opponents alike, from many different angles. Prebisch entered the debate in the English-speaking world in the late 1940s. It was the provocative opening sentence in what Hirschman (1968) dubbed Prebisch’s ‘Manifesto’ – ‘In Latin America, reality is undermining the out-dated schema of the international division of labour’ (Prebisch 1950a: 1) – that started to earn Prebisch ire from mainstream, neoclassical economists. In debate about big ideas, some opponents typically zero in on certain elements in the arguments of the party under attack, to the neglect of other elements, and thus effectively distort and misrepresent that party’s original reasoning. This is certainly true in Prebisch’s case. Instead of distilling from a rich and larger body of his work a more complete picture of his arguments, mainstream economists’ attention has almost entirely focused on the statement that appears several pages into the Manifesto, that ‘the price relation turned steadily against primary production from the 1870’s until the Second World War’ (Prebisch 1950: 8).¹ As is well known, this statement, and the post-war terms-of-trade movements that it is said to have predicted, were subsequently called the Prebisch–Singer Thesis (PST).² Mainstream economists then boiled Prebisch’s policy recommendations down to nothing but import substitution industrialization (ISI), that is, the employment of protectionist trade measures to induce a diversification away from primary to industrial production, largely to serve the domestic market.

Beginning in the 1970s, the economics mainstream staged a neoclassical resurgence (Myint 1987). Oftentimes operating under the banner of export promotion (EP), which entails relatively liberalized trade policies under which practising countries would trade more with each other, became a key component of neoliberalism or the Washington Consensus and that would take the debate to a new phase, frequently called the globalization debate, that has extended into the present millennium.

Close to three decades since his death, just how might Prebisch size up this latest phase of the ongoing debate, especially with reference to certain trends and issues thus far into the twenty-first century? To attempt to address this, perhaps it is only reasonable to start with the very basic, yet obvious, question of what his utmost concerns were regarding the underdeveloped countries and what his recommendations for them were, and then to consider their present relevance. Clearly, if one subscribes to his portrayal by his neoclassical critics, then one would simply expect him to adhere to the PST and continue to champion ISI. This chapter argues that Prebisch’s concerns about developing countries were much broader, and his recommendations for them far more nuanced, than the mainstream representation. These concerns raise some substantive analytical and policy questions, and put the contents of his work in ready position to link up with some important strands of current research and policy discussions.

This chapter is organized as follows. Based on a re-interpretation of his work, the next section outlines Prebisch’s conceptualization of the development process. It explicitly spells out how that is based on a departure from three major assumptions that are otherwise regarded as standard in mainstream trade theories. The second section relates his departure from these assumptions to his support of ISI, which is interwoven with EP, and where both would be accompanied by efforts to enhance indigenous ‘technological densities’. The third section describes his campaign for a tiered system of differential treatments in favour of underdeveloped countries in the multilateral trading system that supposedly would facilitate their pursuit of policies that are implied in the third section. It is shown that Prebisch argued that, for underdeveloped countries that had not acquired sufficient technological densities to establish their own capital-goods sector, capital accumulation in the course of development translated into a need to import such goods. That is why he attached much importance to their capacity to import and why he put heavy emphasis on avoiding or limiting the ‘persistent tendency toward disequilibrium’ in the primary exporting countries’ balance of payments. While the commodity terms of trade (CTT) for these countries is part of the equation, it is far from its entirety, and in that sense the mainstream focus on the PST is obfuscating Prebisch’s broader concerns. These clarifications are laid out in the fourth section. By way of selectively focusing on certain developments and changes in the global economy that have occurred since his death, the final section considers how Prebisch might have sized them up, based on the elements of his work highlighted earlier in the chapter.

Development challenges facing the underdeveloped countries

In Problems of Economic Growth, Prebisch (1950b: 16) loosely characterizes underdeveloped countries as those with a large proportion of the gainfully employed population working ‘under conditions of a shortage of capital, low productivity levels in primary production and other activities in which labour costs are low’. For mainstream trade theorists, nothing is wrong with this picture if one maintains that these countries are simply specializing in accordance with their comparative advantage. Prebisch challenged this conclusion and declared it outdated.

But as mainstream economists have succeeded in only focusing attention on the PST, their reactions naturally fall into one of the following two categories. Empirically, many have questioned whether the CTT has indeed deteriorated against the primary exporting countries over time, although due to space limitations this chapter will stay out of this ‘statistical debate’ (see also Kaplinsky and Farooki, this volume).³ Analytically, there have been attempts to interpret Prebisch’s analysis as nothing more than an argument for ISI or some sort of trade protection (Bhagwati 1984: 202, note 11). This kind of interpretation trivializes Prebisch’s conceptualization of the process of development. There is a lot in Prebisch’s challenge that mainstream theorists have glossed over. In particular, their attack can be regarded as based upon his departure from three assumptions that underlie mainstream theories, as follows:

1 Where those theories typically make no distinction between different products with regard to their income elasticity of demand and/or the different prospects for technological development that arise from them, Prebisch did.

2 Where those theories assume perfect domestic mobility of factor(s) of production between sectors, and thus full employment pre- and post-trade, Prebisch did not.

3 Where, in the Heckscher–Ohlin model, technology is assumed to be identical across countries, Prebisch recognized the presence of a persistent, and even widening, technological gap between the centre and peripheral countries – though to him this gap is by no means as immutable as in the textbook Ricardian model, because technology can be acquired by the underdeveloped countries.

Given Prebisch’s recognition of the substantive developmental implications that depend on what a country produces and exports (departure relating to assumption 1), but also given that many developing countries of his time were relatively dependent on primary exports, he emphasized that by broadly achieving technical progress and productivity improvements to pursue development, the average per capita income in those countries would increase. However, one must carefully distinguish whether he meant progress and improvements in the primary or manufacturing sectors, or both. When Prebisch employed the terms in a broad sense, development would entail diversification away from primary production.

But diversification is far from an automatic process, because factors of production are not perfectly mobile between sectors (departure from assumption 2). In particular, starting out with specialization in primary production, these countries would have to go through a tremendous amount of technological learning – that is, assimilation of modern techniques – before they could enjoy sustained progress and improvements in the industrial sector (departure from assumption 3). To that characterization of underdeveloped countries quoted above, Prebisch thus added that the prevailing pattern of underdevelopment would remain until ‘modern technique’ could be extended to modify the nature of occupations and decrease the disparities of productivity and income between the underdeveloped and developed countries, arguing that ‘[o]nce this stage of development is reached and modern technique is assimilated in the various branches of economic activity, development may acquire the intensive characteristics of the great industrial countries’ (Prebisch 1950b: 16, italics added). It is noteworthy that in his summary of his stages of thinking about development, he recalls that ‘In formulating my point of view I mentioned from the beginning the role of technological progress. In particular, my interest was attracted by the question of the international dissemination of technology and the distribution of its fruits’ (Prebisch 1984: 176, italics added).⁴

But industrialization should not be pursued to the neglect of the primary sector. For Prebisch, investment should also be undertaken in the latter to reap productivity improvements and technical progress. But to the extent that such are indeed reaped, they would surely add to unemployment (departure from assumption 2 again). In that case, if the development process lacks ‘dynamism’ and the industrial sector (and various accompanying service activities) cannot grow fast enough to absorb a good number of such unemployed, then there would be some serious uneven distributional outcomes. In short, investments should be undertaken in both sectors, but in manners that would hopefully enhance ‘technological densities’ so as to raise productivity but reduce unemployment.

Pursue ISI-cum-EP, but enhance ‘technological density’

Advocating ISI with increasing caution

ISI was already being implemented in Latin America when Prebisch started to provide theoretical justifications for it in the late 1940s. Many in the economics mainstream are not aware that he was quite critical of the manner in which it was carried out and the problems that it had engendered. For those who have paid attention, it would seem that his criticism began in the late 1950s. However, a careful re-examination of his work indicates that he was alert to some of these problems much earlier. For instance, in Problems of Economic Growth he draws attention to ‘cases in which exaggerated emphasis has been placed on certain domestic activities, whilst disregarding the possible margin of profitable development in exports’ (Prebisch 1950b: 21; also 1950a: 53; 1951: 84).⁵ The increasing seriousness of these problems through the 1950s enabled Prebisch to better understand their nature, to sharpen his critique, and to come up with recommendations on how industrialization should proceed beyond the initial phase. Heading into the 1960s and early 1970s he repeatedly issued warnings that the initial stage of easy and simple ISI had reached its limits in those countries where industrialization had progressed most (Prebisch 1963: 69; 1968: 8; 1971: 46). However, the move to the next stage was by no means spontaneous. This is when imports of intermediate products and capital goods should begin to be substituted. That necessitates heavier investments and the use of technologies that are more complex. Prebisch (1959b: 143) fully understood that the further ISI should proceed, ‘the greater will be the attendant difficulties, if the process continues to develop within the twenty watertight compartments represented by the individual [Latin American] country markets’. Besides, these countries had compressed their import requirements to a series of goods absolutely essential for the maintenance and growth of their economy and had lost the margin for further reduction in imports which they had when they imported consumer goods. Consequently, they had paradoxically become more ‘externally vulnerable’ (1959a: 268).

Prebisch realized that a policy was needed ‘to encourage these changes in composition in order to accelerate the rate of economic growth, so that imports are adapted to the need for greater technical progress in primary production and for more intense industrial development’ (1959a: 265). And that prompted him to put more emphasis on EP than before.⁶

Supporting EP, though not abandoning ISI

There are strong early indications that Prebisch was quite aware of the importance of expanding exports to accelerate peripheral development (1950a: 2, 46). But it was not until the late 1950s that he started to more explicitly advocate manufactured exports.⁷ Thus, referring to the external disequilibrium problem (see the fourth section of this chapter), he considers in his 1959 American Economic Review article a situation in which both the centre and periphery in a two-region model are growing at the same rate, but the latter has a higher income elasticity of demand for the former’s products than vice versa. He concludes that in the periphery, ‘either the rate of increase of demand for imports would have to fall … by means of import substitution, or industrial exports would have to be added to the primary ones, or a combination of the two’ (1959a: 254, italics added). He continued with this promotion effort in his capacity as the Secretary-General for the United Nations Conference on Trade and Development (UNCTAD). After leaving UNCTAD and refocusing his attention on Latin America, he returned to the limitations of ISI in Change and Development (1971: 193–4): ‘[A] new type of development in Latin America’, he declares, ‘cannot be based solely on import substitution, but must entail a major effort to promote exports to the rest of the world and, in particular, intraregional exports’ (ibid.: 48, also pp. 18, 173).⁸

Prebisch had entertained the idea of promoting intraregional trade within Latin America since the early 1950s, if not before (see for instance Prebisch 1951: 84; Briceño Ruiz, this volume). But in the late 1950s, with his deeper appreciation of ISI’s problems and the need for the promotion of industrial exports, this began to crystallize into something more concrete. Thus, referring to the ‘costliness of the substitution process’, he argued that

[t]he only basic solution … is to break up the out-dated mould [where inter-Latin American trade was very slight] … by means of the gradual and progressive establishment of the common market and the consequent diversification of imports and exports.

(1959b: 144)

In advocating a Latin American Common Market, or South–South trade in general, Prebisch understood that such efforts ‘can help considerably to achieve more efficient production by expanding markets, encouraging specialization and facilitating competition’, and ‘[t]he resulting reduction in industrial costs will have an important bearing … in the [world] export mark...