Dependency Theory

Dependency theory appeared in the 1950s as a critical reaction to the conventional
approaches to economic development that emerged in the aftermath of World War II.
There are two dependency theory traditions (Dos Santos, 2002). The first is the Marxist
influenced by Paul Baran and Paul Sweezy, and developed by André Gunder Frank with
important ramifications in the works of Samir Amin, Theotônio dos Santos, Arghiri
Emmanuel, and Aníbal Quijano. The second dependency tradition is associated to the
Structuralist school that builds on the work of Raúl Prebisch, Celso Furtado and Aníbal
Pinto at the Economic Commission for Latin America and the Caribbean (ECLAC). This
Structuralist approach is best represented by Fernando Henrique Cardoso and Enzo
Faletto and by the subsequent contributions from Peter Evans, Osvaldo Sunkel and Maria
da Conceição Tavares. Other schools of thought were heavily influenced by dependency
theory and expose, in some respects, very similar views, in particular, the so-called
world-systems theory of Immanuel Wallerstein and his followers (Topik, 1998).

Both groups would agree that at the core of the dependency relation between center and
periphery lays the inability of the periphery to develop an autonomous and dynamic
process of technological innovation. The lack of technological dynamism, and the
difficulties associated with the transfer of technological knowledge are the main cause of
the underdevelopment of the periphery with respect to the center. The main contention
between the two groups was ultimately related to the possibilities of economic
development in the periphery. Marxists would argue that development in the periphery –
meaning fundamentally catching up with the center – was impossible, while Structuralists would argue that dependent development was feasible. The vigorous process of growth in
some parts of the developing world in the 1950s and 60s seemed to justify the views of
the latter group. However, the enduring process of stagnation after the 1980s Debt Crisis
has led to a reconsideration of the relevance of dependency situations.
In particular, some authors argue that a new situation of dependency has emerged, one in
which technological backwarderness and the international division of labor are of
secondary importance, and financial dependency or the original sin hypothesis, reflected
in the inability of peripheral countries to borrow in international markets in its own
currency, is the real obstacle to development (Vernengo, 2006). The following section
discusses the main differences and similarities between the two dependency traditions,
and the last one analyzes the financial dependency literature.

External versus Internal Limits to Development
For Baran and other Marxists the origins of the center-periphery relation were strictly
technological and determined by the international division of labor. In other words, the
center produced manufactured goods for itself and the periphery while the latter produced
commodities mainly for the center, as well as maintaining a relatively large subsistence
sector. Marxist ‘dependencistas’ explained the lack of dynamism in the underdeveloped
world as being the result of its particular insertion in the world economy. In this view, the
process of development depended on capital accumulation, which, in turn, hinged on
surplus extraction. A larger surplus led to more accumulation of capital and a higher
growth rate. Further, for Marxists it was in the uses of the surplus that the differences

between developed and underdeveloped regions were most evident. In the most backward
countries, where the process of industrialization did not take hold, and agriculture was
still dominant, underdevelopment resulted from the patterns of land tenure.
The predominance of large estates in plantation societies implied that a great part of the
surplus remained in the hands of landowners, which emulated the consumption patterns
of developed countries. Excessive and superfluous consumption on luxuries would then
reduce the potential for investment and capital accumulation. Hence, conspicuous
consumption would be the cause of stagnation in the periphery. The international division
of labor that promoted the export oriented plantation system in a good part of the
developing world reinforced the need for luxury imports, then, was at the core of the
dependency relation.


If industrial development took place, then a new pattern of dependency would emerge.
Industrialization would take place with participation of foreign capital, which would tend
to control domestic markets. The periphery then would jump into the monopolistic phase
of capitalistic development. However, the surplus extracted by monopolistic capital
would not be reinvested in productive activities in the host country. Part of it would
simply be sent abroad as profit remittances, while the other part would be spent on
conspicuous consumption. Gunder Frank (1967) concluded then that the only way to
break with the circle of dependency would be a political revolutioCardoso and Faletto (1967), argued that not only was capitalist development in the
periphery possible, but also foreign capital had a tendency to be re-invested in the host
country so that foreign investment might in fact ‘crowd-in’ domestic investment. Hence,
the nature of dependency was such that partial or dependent associate development was
viable. As a result, dependency was not a relationship between commodity exporters and
industrialized countries, but one between countries with different degrees of
industrialization. Furthermore, Cardoso and Faletto distinguished between political and
economic variables in explaining dependent development.
Development and underdevelopment were economic categories related to the degree of
development of the productive structure, and to its level of technological development.
On the other hand, dependency and autonomy referred to the degree of development of
the political structure, and the ability or not of local political elites to take economic
decision-making into their own hands. As a result, dependent development in association
with foreign capital was possible and occurred in countries like Argentina, Brazil and
Mexico, and in parts of East Asia, one might add. These were the countries that
corresponded to what world-systems’ authors refer to as the semi-periphery.
Cardoso and Faletto emphasized the importance of domestic internal developments, in
contrast to the external forces of the world economy, as the main determinant of the
situation of dependency. It was the internal political process that led to outcomes that
favored foreign actors in the process of development. Further, national capitalist
development was not incompatible with the absorption of technological knowledge from multinational firms. Arguably if the goal was to achieve development, dependent
development was a reasonable road to it, even if autonomous development was politically
more interesting.
However, the Structuralist version of dependency, in refuting the Marxist emphasis on
the relevance of external factors, went to the other extreme and claimed that internal
forces were the almost exclusive determinant of development. The inability to generate a
domestic dynamic of technical progress incorporation, the domestic patterns of
consumption, and the limitations of the domestic elites that opted for political
dependency were to blame. If the successful industrialization of some parts of the
periphery showed the weakness of the Marxist tradition, then the debt crisis and the
failure to renovate the process of development in the 1990s proved that the optimism of
the Structuralist approach was not guaranteed.