Perpetuation of Underdeveloped Countries (Dependency Model) | Economics

Let us explain the dependency model of the perpetuation of underdeveloped countries based on Marxist thinking. These models are based on colonial exploitation and dependence of poor underdeveloped countries on the colonial powers that ruled them. These models, like Prebisch-Singer models, involve unequal exchange between the rich developed countries and their underdeveloped and backward colonies which remain poor. Dos Santos, a prominent exponent of this viewpoint, writes, “Development far from constituting a state of backward prior to capitalism is rather a consequence and a particular form of capitalist development known as dependency capitalism”.

Furthermore, explaining this dependence of underdeveloped countries on their colonial capitalist power countries be writes “Dependence is a conditioning situation in which the economies of one group of countries are conditioned by the development and expansion of others. A relationship of interdependence between one or more economies or between such economies and the world trading system becomes a dependent relationship when some countries expand through self-impulsion while others being in a dependent position can only expand as a reflection of the dominant countries which may have positive or negative effects on their immediate development. In either case basic situation of dependence causes these countries to be both backward and exploited”.

It is evident from above that in this viewpoint the development gap between the developed and underdeveloped countries widened as a result colonialism. The colonial powers which were endowed with technological and commercial abilities along with possession of large amount of capital exploited the poor and underdeveloped countries under their dominance and extracted a part of their produce.

Development, then, was based on international division of labour which allowed industrial development to take place in some countries white preventing it in others. It thus follows that the emergence of colonialism led to a pattern of development different from that which would have occurred if their growth had occurred based mainly on their internal socioeconomic forces. According to this school of thought perpetuation of underdevelopment in the poor developed countries cannot be fully understood without analysing how they came to be conditioned and dominated by colonialism which emerged on world scene as a product of world capitalism.

According to Marxist thinking, colonialism is essentially an economic phenomenon under which capitalist development in the Western Europe changed the entire world resulting in the existence of two groups of countries; the colonial power countries and their dependent colonies which they exploited to promote further industrial development in their own countries. With this a particular international division of labour came to prevail under which the poor underdeveloped countries became the suppliers of minerals and agricultural raw materials to their colonial powers that ruled them.

The poor and backward countries were also used as markets for industrial products of the colonial powers. Besides, the industrialists of these colonial powers started investment in mines and plantations of the poor underdeveloped countries and repatriated profits to their home countries.

These industrialists of colonial powers got cheap minerals and agricultural raw materials from their dependent colonies and sold them the industrial products at higher prices. This represents what has come to be called unequal exchange through which the industrial powers exploited the people of poor countries. They invested in those lines of production i.e., minerals and plantations which they exported. They made little investment in the industrial development of the poor underdeveloped countries.

In fact, as has been emphasized by Gunaer Myrdal, the industrial growth of the rich countries had a ‘backwash effect’ on the growth of the underdeveloped countries. The emergence of colonialism and their exploitation of the poor underdeveloped countries led to their ‘de-industrialisation’. Thus India’s famous handloom industries declined due to their being unable to compete with the products of industrial powers which rendered millions of people unemployed.

The Neocolonial Dependence Model:

It is worth mentioning that even after many years of independence, there has been a revival of colonial dependence in the new form called ‘neocolonial dependency model’. According to this, there has been emergence of small elite class consisting of big industrialists enjoying vast political power and social status, the ruling political class consisting of political leaders, landlords whose principal interest, according to Todaro and Smith, “knowingly or not, is in the perpetuation of inequality and inconformity in which they are rewarded”.

Elaborating this, Todaro and Smith write, “These special interest groups including multinational corporations, national bilateral agencies and multinational assistance organisations like the World Bank or the International Monetary Fund (IMF) which are tied by allegiance or funding to the wealthy capitalist countries. The elite activities and viewpoints often serve to inhibit any genuine reform efforts that benefit the wider population and in some cases actually lead to even lower levels of living and to the perpetuation of underdevelopment”.

In the case of India at present, the reference may be made to some economists and spokesmen of the Indian capitalist class who advocate acceleration of economic growth through increasing the role of private sector, both Indian and foreign investment class and oppose even merit or necessary subsidies to the poor (some of them even oppose food security system meant to ensure minimum amount of food to the poor and special employment guarantee schemes to provide some employment to the poor).

They advocate tax concessions by the government and lower interest rates by banks to accelerate investment to generate higher rate of economic growth. Furthermore, they advocate for flexible labour laws so that the industrialists can retrench workers when it is desired by them. These economists believe that the acceleration of economic growth would automatically remove poverty and unemployment through what has been called trickle-down effect.

Importantly, these elite groups also advocate for wooing foreign investment, both direct and portfolio, (which happen to be investment by multinational corporations (MNCs) to promote growth forgetting that the main interest of these foreign investors are to make profits and repatriate them to their home countries rather than promoting inclusive economic growth. Thus, according to Dos Santos, it has become difficult for breaking out of the dependence on the advanced industrialised countries if one wishes so as they will be opposed by vested interests within the poor underdeveloped countries themselves.

It may be noted, in the neoclassical dependence model, the multinational corporations (MNCs) are seen as the modern form or instrument for expropriation of the surplus generated by the cheap labour of underdeveloped countries. So in one form or another, the poor countries despite having achieved formal political independence remain locked in a system of economic dependence that perpetuates underdevelopment.

A Critical Evaluation of Dependency Theory:

The concept of dependency has provided us a very important insight into the problem of developing countries and their relationship with the developed countries. The relationship in these two types of countries represents dualism of the world. While the developed countries such as US and EU which dominate the world bodies such as UN, IMF, World Bank, WTO still meant that for them trade should be faciliated by reduction of Tariffs on their industrial and agricultural products by the developing countries and reduce subsidies and other support to their farmers.

However subsidies to farmers and provision of food security to the poor are necessary for elimination of poverty. Thus, the tragedy is that poor countries are still dependent on the developed countries for financial capital and technology of various kinds. Thus while the advocates of dependency theory explain the shortcomings of dependence on the advanced industrialised countries, they offer little explanation why poverty and underdevelopment still persist even after several years of gaining independence from colonial rule. They offer no explanation how to initiate and sustain rapid growth without assistance in one form or the other from the developed countries.

Second, actual experience of developing countries which started development process without the help of much foreign capital and in which public sector played an important role and pursued strategy of import substitution also did not achieve a higher rate of economic growth due to the flaws in their economic policies. Both India and China are examples of such countries.

China having failed in their earlier experience of Marxist and Mao’s approach to development had to give up this approach and since 1979 not only switched to the free market economy but also invited foreign investment by multinational corporations to set up industries there and mainly export the industrial products. What is important to note is that this free-market approach and with the help of foreign capital it has been able to become the fastest growing economy of the world. With the achievement of high rate of economic growth, China has been able to reduce significantly its poverty problem. This is due to the fact that its growth has been due to the expansion of labour-intensive manufacturing industries.

Furthermore, when in the early 1990s India faced problems serious balance of payments crisis and high inflation, it also switched over not only to the predominantly free-market economy by adopting IMF directed structural adjustment economic reforms but also opened up the Indian economy to foreign trade and foreign investment, both direct foreign investment and portfolio investment, by foreign institutional investors (FIIs).

These policies were adopted to achieve economic stabilisation and higher rate of economic growth. Though since 1991, India, like China, has also achieved a higher rate of economic growth and has become the second fastest growing economy of the world next only to China. The growth of China and India with the help of foreign investment goes against the main thrust of neocolonial theory of dependence.

However, while in the present circumstances foreign direct investment is welcome, the dependence on foreign portfolio investment is not desirable. The portfolio investment by FIIs may help to meet current account deficit in the short run but from long-run viewpoint of healthy growth it is not good. This is because there is always uncertainty about capital flows by FIIs and creates a lot of volatility in Indian stock market and foreign exchange rate of rupee.