Dependency Theory In Developing Countries Economics Essay

DEPENDENCY THEORY IN DEVELOPING COUNTRY

Dependency theory is a theory of how developing and developed nations interact. Dependency perspective focuses on reform efforts on inequalities in the international system rather than on domestic policy. It is an opposition theory to the popular free market theory of interaction. Rudiger Dornbusch (1992) lists “improved resource allocation” due to the price mechanism, “access to better technologies, inputs and intermediate goods”, “economies of scale and scope” and “greater domestic competition” as benefits of a free and open market place.

Dependency theory, in contrast, holds that there are a small number of established nations that are continually fed by developing nations, at the expense of the developing nations’ own health. The developing nations are essentially acting as colonial dependencies, sending their wealth to the developed nations with minimal compensation. In dependency theory, the developed nations actively keep developing nations in a subservient position, often through economic force by instituting sanctions, or by proscribing free trade policies.

Dependency theory also posits that the degree of dependency increases as time goes on. Wealthy countries are able to use their wealth to further influence developing nations into adopting policies that increase the wealth of the wealthy nations, even at their own expense. At the same time, they are able to protect themselves from being turned on by the developing nations, making their system more and more secure as time passes. Capital continues to migrate from the developing nations to the developed nations, causing the developing nations to experience a lack of wealth, which forces them to take out larger loans from the developed nations, further indebting them.

The dependency perspective explains why the periphery remains trapped in a backward agrarian state. In the dependency view, incorporation on the developing areas/countries into the markets is a source of marginalization which perpetuates rather than erodes dualism (Hayami and Ruttan, 1985).

The failure of many counties of the periphery to make the investment in physical and institutional infrastructure needed to expand the volume of agricultural and raw materials exports is a more significant source of lag in development than overdependence on exports.(Hayami and Ruttan,1985).

There have been many different and conflicting ideas on how developing countries can alleviate the effects of the world system, several of the following protectionist/nationalist practices have been adopted at one time or another by such countries:

Promotion of domestic industry and manufactured goods. By imposing subsidies to protect domestic industries, poor countries can be enabled to sell their own products rather than simply exporting raw materials.

Import limitations. By limiting the importation of luxury goods and manufactured goods that can be produced within the country, the country can reduce its loss of capital and resources.

Forbidding foreign investment. Some governments took steps to keep foreign companies and individuals from owning or operating property that draws on the resources of the country.

Nationalization. Some governments have forcibly taken over foreign-owned companies on behalf of the state, in order to keep profits within the country.

Today Dependency Theory still applies to a certain degree. Lowering trade barriers does not necessarily mean that developing countries will progress or that there will not be trade imbalances because of the value of products and services that are being exchanged. The values of products from developed country are often higher in value than raw materials coming from developed countries thus trade may not be equal. Although labour is cheaper in developing countries due to lack of resources it does not mean that the local labour pool can respond to the needs of a global economy. Also government subsidies on agriculture products by developed countries forces developing countries that are often agriculture based to lower their prices further or risk being unable to compete in the global market.

Developing countries, are so used to grants that they budget for what they don’t have, hoping to get funds to further development projects. Developing countries must budget and allocate resources from its own basket as opposed to that of the donor’s. No matter what approaches can be devised, what the developing countries needs is hard work and to plan centrally for the resources they do have. Adopt the approaches Chile, South Korea, china, Taiwan used. Strong institutions and independent anti-corruption agencies coupled with developing traditional industries is what will save developing countries.

‘POOR BUT EFFICIENT’ AGRICULTURE OF DEVELOPING COUNTRIES TRADITIONAL SYSTEM BY T.W. SCHULTZ

During the 1950s and early 1960s, it was widely accepted among economists and policymakers that the marginal product of labour in agriculture in developing countries was zero, so that labour could be withdrawn from agriculture for industrialization at no cost to agricultural production. It was also widely argued that farmers in developing countries were guided by tradition or culture and did not respond to economic incentives.

In Transforming Traditional Agriculture, Schultz demolished these arguments. A central thesis of Schultz’s work was that farmers in developing countries are “poor but efficient” meaning that they make efficient use of their few resources. In other words, farm households made good allocation decisions with regard to the meager resources and traditional technologies available, but were poor due to lack of sufficient resources. He “firmly rejected the notion that small farmers were poor due to cultural characteristics” and stated that these farmers “needed new knowledge and skills to adopt new technologies, but also to cope with changing economic environments…” (AJAE, April 2010, p. 454).

From Schultz’s perspective, traditional agriculture is characterized by subsistence, labor intensive activities, reliance on human or animal power, low levels of mechanization, minimal use of commercial inputs, and low output per person. Even today, most farmers in developing nations are engaged in traditional agriculture, although the majority of global agricultural production is from modern commercial farming systems.

He was optimistic that global agriculture has the potential capacity to produce more food for the world’s growing population and could greatly improve the income and welfare of poor people in both rural and urban areas.

Since agriculture is the main livelihood in most developing nations, transforming traditional agriculture to a modern commercial enterprise is an essential ingredient of long-term economic growth and development. Agricultural modernization requires considerable investment in: (1) new scientific and technical knowledge which requires both public and private sector funding of agricultural research, (2) industrial capacity to produce new inputs and the institutions (market or governmental) to make the inputs accessible to farm households, and (3) education of farm people to increase their capacity to invest and make management decisions for proper use of new technology.

Schultz recognized that modernizing agriculture creates a lot of uncertainty and requires making rapid adjustments on the farm and throughout the agri-food sector. In his view, entrepreneurial talent was required to constructively handle rapid change.

Recently, some development economists have questioned the efficient but poor hypothesis, arguing that aspects of agricultural household decisions and land tenancy arrangements in developing countries seemingly defy efficient economic behaviour.