Singer-Prebisch thesis
Encyclopedia
The Singer–Prebisch thesis (also Prebisch–Singer thesis and Prebisch–Singer hypothesis) postulates that terms of trade
, between primary products
and manufactured goods, deteriorate in time. In 1950, the economists Raúl Prebisch
and Hans Singer
independently developed the thesis that countries that export commodities
(developing countries
) in time would import fewer manufactured goods relative to a given level of exports.
However, during the 2000s commodities boom
, the terms of trade of most developing countries improved while east Asia (with much of its export to be manufactured goods) has deteriorated terms of trade.
The theory implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein
's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality (However, the Singer-Prebisch thesis also works with different bargaining positions of labour in developed and developing countries). As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing
(ISI) policies and even an expansion of the role of the commodity futures exchange
as a tool for development.
Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.
The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa
. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.
In 1998, Singer argued that the thesis he pioneered has joined the mainstream:
(ECLA) at that time, Gonzalo Martinez-Cabañas, to write a text for the second annual meeting of ECLA, that was going to take place in Havana, Cuba on May 14, 1949. Initially, Prebisch wrote a long text, but after having written the first draft, and on repeated suggestion, he came to read Hans Singer
's paper: Post-War Relations between Under-developed and Industrialized Countries (Feb. 1949), about the deterioration of the terms of trade, which became decisive for him. Prebisch asked to change his first version, and in only three days and three nights, he wrote his book, quoting Singer's paper and his basic conclusion, and later discussed it at the meeting.
The discovery of the long-term deterioration in the terms of trade for underdeveloped countries must be attributed to Hans W. Singer. His explanation, however, stressing that the terms of trade moved against the 'borrowing' (i.e., underdeveloped) and in favour of the 'investing' (i.e., developed) countries, was similar to Prebisch's and published slightly later in early 1950. Singer, like Prebisch, was a United Nations functionary but at the New York headquarters. He believed himself to have reached his conclusions independently from Prebisch and around the same time (Love, 1980: 58; H. W. Singer, 1982: 13), but seems not then to have known that Prebisch had in fact seen his trade statistics beforehand.
Thus the thesis on the deterioration in the terms of trade is known in the economic Literature as 'Prebisch-Singer Thesis'. However, Prebisch specifically deals with the economic cycle and highlights to a greater extent than Singer the reasons for the different behaviour of wages in developed and underdeveloped countries.
Terms of trade
In international economics and international trade, terms of trade or TOT is /. In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports...
, between primary products
Primary sector of industry
The sector of an economy making direct use of natural resources. This includes agriculture, forestry and fishing, mining, and extraction of oil and gas. This is contrasted with the secondary sector, producing manufactures and other processed goods, and the tertiary sector, producing services...
and manufactured goods, deteriorate in time. In 1950, the economists Raúl Prebisch
Raúl Prebisch
Raúl Prebisch was an Argentine economist known for his contribution to structuralist economics, in particular the Singer–Prebisch thesis that formed the basis of economic dependency theory. He is sometimes considered to be a neo-Marxist though this label is misleading...
and Hans Singer
Hans Singer
Sir Hans Wolfgang Singer was a development economist best known for the Singer-Prebisch thesis, which states that the terms of trade move against producers of primary products. He is one of the primary figures of heterodox economics.-Biography:Singer was born in Elberfeld, Germany in 1910...
independently developed the thesis that countries that export commodities
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
(developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
) in time would import fewer manufactured goods relative to a given level of exports.
However, during the 2000s commodities boom
2000s commodities boom
The 2000s commodities boom is the rise in many physical commodity prices which occurred during the decade of the 2000s , following the Great Commodities Depression of the 1980s and 1990s...
, the terms of trade of most developing countries improved while east Asia (with much of its export to be manufactured goods) has deteriorated terms of trade.
Thesis
Singer and Prebisch examined data over a long period of time suggesting that the terms of trade for primary commodity exporters did have a tendency to decline. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.The theory implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein
Wallerstein
Wallerstein is a surname, which can refer to:* Immanuel Wallerstein , U.S. sociologist* Jim Wallerstein , guitarist and vocalist* Michael Wallerstein , political scientist* Robert S...
's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality (However, the Singer-Prebisch thesis also works with different bargaining positions of labour in developed and developing countries). As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing
Import substitution
Import substitution industrialization or "Import-substituting Industrialization" is a trade and economic policy that advocates replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of...
(ISI) policies and even an expansion of the role of the commodity futures exchange
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
as a tool for development.
Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.
The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa
Africa
Africa is the world's second largest and second most populous continent, after Asia. At about 30.2 million km² including adjacent islands, it covers 6% of the Earth's total surface area and 20.4% of the total land area...
. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.
In 1998, Singer argued that the thesis he pioneered has joined the mainstream:
"One indication of this is that the Prebisch-Singer Thesis (PST) is now incorporated, both implicitly and explicitly, in the advice given by the Bretton Woods Institutions to developing countries. They are warned to be prudent even when export prices are temporarily favourable and to guard against currency overvaluation and Dutch DiseaseDutch diseaseIn economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector...
, with all the unfavourable impact on the rest of the economy and all the dangers of macroeconomic instability which a sudden boom in a major exportExportThe term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
sector could imply. They are warned to remember that the outlook for commodity prices is not favourable and that windfalls will tend to be temporary, with the subsequent relapse likely to be greater than the temporary windfall. This is exactly the warning which the PST would give."
History
Raul Prebisch's analysis of the deterioration of the terms of trade were first introduced in his paper The Economic Development of Latin America (1950; orig. in Spanish 1949). Prebisch was asked by the executive secretary of the United Nations Economic Commission for Latin America and the CaribbeanUnited Nations Economic Commission for Latin America and the Caribbean
The United Nations Economic Commission for Latin America and the Caribbean was established in 1948 to encourage economic cooperation among its member states. In 1984, a resolution was passed to include the countries of the Caribbean in the name...
(ECLA) at that time, Gonzalo Martinez-Cabañas, to write a text for the second annual meeting of ECLA, that was going to take place in Havana, Cuba on May 14, 1949. Initially, Prebisch wrote a long text, but after having written the first draft, and on repeated suggestion, he came to read Hans Singer
Hans Singer
Sir Hans Wolfgang Singer was a development economist best known for the Singer-Prebisch thesis, which states that the terms of trade move against producers of primary products. He is one of the primary figures of heterodox economics.-Biography:Singer was born in Elberfeld, Germany in 1910...
's paper: Post-War Relations between Under-developed and Industrialized Countries (Feb. 1949), about the deterioration of the terms of trade, which became decisive for him. Prebisch asked to change his first version, and in only three days and three nights, he wrote his book, quoting Singer's paper and his basic conclusion, and later discussed it at the meeting.
The discovery of the long-term deterioration in the terms of trade for underdeveloped countries must be attributed to Hans W. Singer. His explanation, however, stressing that the terms of trade moved against the 'borrowing' (i.e., underdeveloped) and in favour of the 'investing' (i.e., developed) countries, was similar to Prebisch's and published slightly later in early 1950. Singer, like Prebisch, was a United Nations functionary but at the New York headquarters. He believed himself to have reached his conclusions independently from Prebisch and around the same time (Love, 1980: 58; H. W. Singer, 1982: 13), but seems not then to have known that Prebisch had in fact seen his trade statistics beforehand.
Thus the thesis on the deterioration in the terms of trade is known in the economic Literature as 'Prebisch-Singer Thesis'. However, Prebisch specifically deals with the economic cycle and highlights to a greater extent than Singer the reasons for the different behaviour of wages in developed and underdeveloped countries.
See also
- Celso FurtadoCelso FurtadoCelso Monteiro Furtado was an important Brazilian economist and one of the most distinguished intellectuals of his country during the 20th century. His work focuses on development and underdevelopment and on the persistence of poverty in peripheral countries throughout the world...
- Developmental economics
- Group of 77Group of 77The Group of 77 at the United Nations is a loose coalition of developing nations, designed to promote its members' collective economic interests and create an enhanced joint negotiating capacity in the United Nations. There were 77 founding members of the organization, but the organization has...
- import substitutionImport substitutionImport substitution industrialization or "Import-substituting Industrialization" is a trade and economic policy that advocates replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of...
industrialization (ISI) - Price elasticity of demandPrice elasticity of demandPrice elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
- Structuralist economicsStructuralist economicsStructuralist economics originated with the work of the Economic Commission for Latin America and is primarily associated with its director Raul Prebisch and Brazilian economist Celso Furtado. Key to structuralist analysis is the idea that the structural features of developing economies need to be...
- United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and DevelopmentThe United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues....
(UNCTAD) - Unequal exchangeUnequal exchangeUnequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...