Development Economics:“Structuralism” by Komilla Chadha
- Structuralism arose from the “Economic Commission for Latin America (ECLA)” which set out to find the major obstacles to development in Latin America (LA) and propose policy prescriptions.
- This was as a result of the balance of payments and exchange rate crisis suffered by Argentina in the 1920s. Economist questioned the orthodox trade theory [comparative advantage].
Development and underdevelopment are not stages in a process but rather structural conditions which are reinforced time and time again by international trade.
Following this proposition, countries are classified as “centre”and “periphery” countries. Centre countries are those who have the structural condition of being developed and exporting non-primary products. Conversely, periphery countries are those who are underdeveloped and whose economies revolve around primary product exportation.
These conditions are not new, they are historical but have been unable to change because of the repeated reinforcement of these condition via international trade.
How did the “structure”(i.e. centre/periphery) form? - A historical perspective
- Industrial Revolution in the centre - perhaps centre countries had this first because of their colonial pasts?
- The industrial revolution lead to dramatic increase in the productivity of factors of production
- Centre countries internalised the new technology new technical progress attained from industrial revolution and spread it all economic sectors.
- This resulted in a homogeneous and integrated economy
- Periphery countries not having attained the industrial revolution and more importantly same level of technology became import dependent for their modern sector.
- The periphery’s reliance on imports meant that exports remained primary products
- A dualist economy formed in the periphery: the traditional agrarian sector and the modern sector which exported these primary commodities using technology imported from the centre.
- Up till today periphery cannot develop because they are stuck in this negative circle of being reliant on imports for technical progress and international trade reinforces the structural conditions of development and underdevelopment time and time again.
What point is the historical perspective trying to get at?
Essentially what it is trying to demonstrate is that actually because of all these historical events, trade is not equally beneficial to both parties as suggested by neo-classists. This is why there is a structure in the first place. The implication is that to develop a new strategy must be sought to eradicate this trade asymmetry which would allow countries to equally trade and lead to that wonderful global Pareto efficiency of production.
Q: Explanation provided by structuralist: What mechanism explains the formation of trade asymmetries ?
A: By deteriorating “Terms of Trade”
The Prebisch-Singer Hypothesis (PSH)
The PSH refers to the idea that there are deteriorating terms of trade and this is locks countries into the conditions of development and underdevelopment.
The PSH suggests that there are declining terms of trade because:
- The income elasticity of demand (YED) of primary products is much less than that of manufactured products. I was going to give an example here but I think it is more confusing than helpful so I will just say it how it is. When incomes go up, there is only a defined/limited amount of extra, better quality food you can eat, whereas your non-essential spending (for example on clothes, shoes, going out etc) will never stop increasing - it is an unlimited want. So what happens is when the world becomes richer, the demand for primary products does not rise as fast as the rise for manufactured which means again the centre has an advantage, an opportunity to grow (technologically as well as GDP) faster than underdeveloped countries. This cycle perpetuates until the underdeveloped countries can compete on manufactured goods.
- Political Reasons - For instance the existence of sophisticated trade unions in the centre meant that there were trade rigidities and in down times, the centre did not suffer as much as the periphery. Assuming the Lewis model, the excess supply in periphery countries also goes some way in suggesting the wage discrepancy and thus the crucial reason why trade is unequal. Furthermore, some economist such as Nurske argue that centre countries develop synthetic substitutes for primary products and this enhances the asymmetries in trade
So now that we established why there may exist trade asymmetries, we need to question why are they so important, particularly from a purely economic stance?
- Balance of Payments Crisis - demand for primary goods is not rising as much as the demand for manufactured goods, this leads to a BoP deficit for primary goods exporting countries i.e. periphery countries
- Domestic Inflation - inflation is structural issue and is caused in two ways for periphery countries. The first is the Dusenberry Effect, this is when incomes are low so when they rise, rises in consumption are disproportionate to the rises in savings thus spurring demand-pull inflation. The second is cost-push inflation caused by supply inelasticities of agricultural/primary goods.
Now that we know why there are declining terms of trade and economically why we should care, let us have a look at how this model develops.
- In order to stop this trade asymmetry, periphery countries have to industrialise just as centre countries did.
- This industrialisation will not follow the same pattern as centre countries as periphery countries are already a trading actor, this is called structural sequencing.
- The industrialisation need then, is Import Substituting Industrialisation (ISI), which requires government intervention.
- A government is required to put in place key policies such as tariffs and quotas.
- The centre can also help through trade benefits and financial benefits.
A key to this growth then is Import Substituting Industrialisation, but what does that mean...
- ISI is a type of growth which increases exports and in the long run leads to greater openness. It is a stage on the way to export led growth.
- Periphery should start by focusing on manufacturing consumer goods (different to the Soviet approach) as a market for them already exists.
- Then with the surplus created from there you move to intermediate goods and then capital goods. “Structural Sequencing” becomes important here.
- ISI is different to autarky, because even though some protectionist measures are put in place by the state, you are internalising import production but still conducting some extent of trade.
So what are the stages of ISI that led to Export Led Growth
- At least, one prototype of the goods the country wishes to species in are imported.
- Primary products are this stage continue to be exported.
- Technology is now imported so that periphery can learn to make them
- Primary goods are still exported except in addition to some of the consumer goods that were made to a high standard.
Stage Three - Export Orientated Growth
- Technology continue to be imported but are limited now
- C + I + K can now be exported and the unequal terms of trade have gone some way in being rectified.
What was the government policy that structuralist prescribed?
- Continued wage and productivity in the agricultural sector.
- Following monetarist, control of money through the money supply
- Reducing non-essential imports and reducing BoP deficit
- Picking the right sectors based on elasticities of what to import and what to export
- The centre should be encouraged to reduce their protectionist measures and increase FDI