Financial Dependency and the Original Sin

Tavares (2000) argues that the technological division of labor in which the periphery
concentrates in the production of commodities for the center, while the latter produces
manufacturing goods for the former is of very limited historical relevance.
Industrialization and technical progress in the periphery was not sufficient to break the
dependency ties with the center. Financial dependency is reflected in the inability of
peripheral countries to borrow in international markets in its own currency, and
constitutes the real obstacle to development. The new interpretation of dependency
situations puts “international money – and not technical progress – as the expression of financial capital domination over the periphery in the last 150 years,” (Tavares, 2000, pp.
131-132)

The inability to borrow in international markets in its own currency reflects the inability
of the domestic currencies of peripheral countries to acquire all the functions of money,
as reserve of value, unit of account, and medium of exchange. The ability to function as
international money is a question of degree. Benjamin Cohen (1998) suggests that there is
a pyramid that reflects the geography of money, with internationalized currencies at the
top and fragile currencies, on the verge of currency substitution at the bottom. The main
problem associated with the inability to provide all the monetary functions is that
financial markets remain under-developed in peripheral countries, and the process of
capitalist accumulation is hindered.
Interestingly enough mainstream economists have also dealt with financial dependency.
Barry Eichengreen, Ricardo Hausmann and Ugo Panizza (2003), following previous
contributions by Hausmann, argue that in part under-development results from the socalled original sin, that is, the fact that the currencies of developing countries are
inconvertible in international markets. In this view, the external instabbility of domestic currencies in the periphery hinders the process of capital accumulation. While
mainstream and the dependency authors agree on the importance of currency
inconvertibility they would disagree on the solutions. Mainstream authors would
emphasize the importance of sound fiscal policies, and monetary rules that promote credibility, while dependency authors would emphasize the need for capital controls and
reduced integration with international financial markets.