Modernization theorists hold that trade is “the engine of economic growth.” Accordingly, they call for free trade and open markets (Spiegel 1995: 347). According to this theory, by specializing and exporting goods with which a state has a comparative advantage, each state enjoys mutual benefits from international trade. To facilitate international trade, it is important to have open markets with less control by government.
However, there are dangers in practice. Although most Southern countries have comparative advantage in exporting primary products such as oil, coffee, or bananas, their prices tend to fluctuate compared to manufactured goods. To make matters worse, the exports of many Southern countries are dominated by a single commodity. This lack of diversity in export products, dependency theorists argue, makes these states “very vulnerable to fluctuation in the demand for or price of their main export” (ibid., 356). Comparative advantage does not bring about benefits for every state; it works the opposite, thus perpetuating an unequal relation between the North and the South.
Proponents of dependency theory also argue that unequal terms of trade, the widening gap between prices for raw materials and manufactured goods, further impoverished the South. The Southern states export mainly primary products, and import manufactured goods from the North. In most of the industrialized countries in the North, however, the power of labor unions and other pressures push up wages, and manufacturers raise prices to compensate. As a result, “exports from the periphery remain comparatively cheap, while imports from the center become increasingly expensive” (Lewellen 1995: 60), thus creating a disadvantageous terms of trade for the South. Referring to the statistics of average annual percentage change in terms of trade between 1956 and 1986, Spiegel also mentions that “the terms of trade for developing countries generally tend to fluctuate more than those of the developed North” (Spiegel 1995: 361).
In sum, the South will remain dependant of the North unless it becomes a manufacture-producing state out of primary-producing one. According to Kegley, “losers” in the world economy are those who failed to produce high-technology goods, which are critical for global market (Kegley 1997: 265). This leads to a hypothesis; to become a “winner” in the world economy, it is necessary to obtain technology, and capital to produce manufactures.
According to modernizatoinist, it is foreign direct investment (FDI) and multinational corporations (MNCs) that can bring the technology and capital to the South. They argue that the impact of FDI extends beyond money; “with it comes technology, managerial expertise, and employment opportunities” (ibid., 269). Therefore, it is no wonder that states in the South often actively seek MNC investment capital and other perquisites. Foreign capital is critical to the process (ibid., 270).
This positive views of FDI and MNCs are reflected in Rostow’s stages of growth theory. Rostow categorizes five stages of economic growth that states may trace: the traditional society, the preconditions for take-off, the drive to maturity, and the age of high mass-consumption. His theories were influential in the government in developing countries because of the encouraging policy implications; “if U.S. allies in the Third World could be brought to the take-off stage, then their development would become self-sustaining” (Lewellen 1995: 56). Take-off was largely a matter of technology and capital, which the U.S. had in abundance and was quite capable of transferring to the Third World.
These are not just theories; they strongly argue that the some of the Southern countries were actually successful in developing under modernization theory. Newly industrializing countries (NICs) in East Asia, such as South Korea, Singapore, Taiwan, Hong Kong, “have managed to industrialize, and have done so with the help of Northern investment and trade with developed states” (Spiegel 1995: 360). Rather than isolating themselves from global economic system, they chose to use trade as a means of growth; and as we see today, they succeeded in doing so as known as “miracle of Asia.” Thus, proponents of modernization theory conclude that the success of the Asian economies demonstrate the poor states can be transformed into rich ones with the help of FDI and MNCs.
Modernization theory’s argument sounds quite compelling with the success of NICs, however, proponents of dependency theory argue that “few countries were achieving anything resembling Rostow’s “take-off,” and even for those few, growth was often unbalance and erratic” (Lewellen 1995: 59). Some say that some countries’ economic success was due to the U.S. strategy during the Cold War. Policy makers in the United States became convinced that the Soviet Union was trying to take over the world through the newly independent countries, which were attracted by communism because of their poor economic situations, and thus “development in the Third World became perceived as a matter of national security” (ibid., 54). Therefore, certain states enjoyed the US’s economic assistance and managed to grow successfully. Even in those successful states, there remained a problem of dual economies, in which a state is split into two sectors: the modern sector and the traditional sector. In the modern sector, there are capitalists and educated elites who have the money for investment in new production; therefore, they would be the engine for development. On the other hand, in the traditional sector, the system remains feudal or semifuedal, and peasants with low level of technology tied to inefficient forms of agriculture and anarchic systems of land tenure; therefore, they would be closed to new ideals and technique. After all, the modern sector would be dynamic and growing, whereas the traditional sector would be stagnant; as a consequence, the gap between the two would widen (ibid., 69).
Epstein, Crotty and Kelly also argue about the negative effect of FDI and MNCs, based on two major concepts: “race to the bottom” and “climb to the top.” The “race to the bottom” perspective, which shares a similar idea with dependency theory, holds that capital will increasingly be able to play workers, communities, and nations off one another as it demands tax, regulatory, and wage concessions while threatening to move. Moreover, the increased mobility of MNCs benefits capital while workers and communities lose. The winner in the race to the bottom will include highly educated or skilled workers, along with the capitalists, most of whom we find in the North (Spiegel 1995: 377-378).
On the other hand, “the climb to the top” offers quite different views from the former. Its idea is more of modernization theory, and it suggests that multinational corporations are attracted less by low wages and taxes than by highly educated workers, good infrastructure, high levels of demand; therefore, competition for foreign direct investment will lead countries in the North and the South to try to provide well-educated labor and hi-quality infrastructure. After all, the mobility of multinational corporations, made possible by deregulation and free trade, will produce increased living standards in all countries” (ibid., 377).
Comparing both arguments above, “race to the bottom” is the one that we’re witnessing in global world economy. First of all, the “highly educated workers, good infrastructure, high levels of demand” that “the climb to the top” argument holds as essential to attract MNCs are found mostly in the Northern industrialized countries; therefore, a chance to attract MNCs and FDI is relatively less. Moreover, since profits are MNCs’ primary motivations, they invest in the North where their returns are likely to be greatest and “a combination of affluence and political stability reduces investment risks” (ibid., 269). These arguments reinforce the dependency theorists’ claim that “the existing international economic system is inherently biased against the South” (ibid., 353).
Besides, there is a question over the meaning of the race to call in FDI and MNCs. Since in order to attract foreign investment, countries must spend domestic fund to build up a supportive infrastructure, resulting in barely disguised public subsidies. This is not the case only with the South; it is also occurring within the developed countries, most prominent example of which is the United States. However, the problem is worse because most developing countries are receiving little FDI while they are making large and costly changes in their economics and government policies to attract it (Epstein, Crotty and Kelly 1997: 380). The fact that “most developing states remain nearly shut out of international financial markets” (ibid.) even makes the situation worse.
Realizing those flaws in trade and foreign investments, some argue that foreign aid is necessary for “breaking the vicious circle by an infusion of investment capital from outside” (Lewellen 1995: 54). Due to the success of Marshall plan after the World War, modernizationist believed that foreign aid might be critical means by which development could be achieved in many developing countries.
However, the studies that have attempted to consider the Third World as a whole show “little relations between foreign aid and development, except for the lowest income countries, where aid may be a substantial percentage of all revenues” (ibid., 117). It often seems that the more foreign aid a country receives, the worse it does. Overall, it turned out to have bad effect both on economy and politics of developing countries; in terms of economy, such a huge amount of aid made “recipient states come to depend on foreign assistance” and reduce “incentives to develop local production.” (Spiegel 1995: 368). In politics, too much aid allowed developing countries to “delay necessary reforms by subsidizing bureaucracies or elites who look after their own narrow interests” (ibid.).
Most of the criticism can be especially attribute to bilateral aid, one of the types of foreign aid. There are at least three main problems concerning bilateral aid. First, it is almost always driven more by political concerns than by any humanitarian or economic criteria. We recall the assistance by both the U.S. and the Soviet Union for the Third World, often characterized by a weapon transfer. Second, bilateral aid is often tied to the purchase of products from the donor country, even in instances where aid takes the form of loan. It is said that over one-third of bilateral aid is tied; that is, most of the profits of “aid” given or lent to the developing countries come back to the developed countries. Third, there is a preference for big projects over smaller ones among the donor countries. Who needs a study highway in a country where most of the population suffer from hunger, and of course, have no means to afford cars? Maybe the elites do, but for the rest of the population, food aid is more urgent than a highway or a dam.
As these flows in a bilateral aid are revealed, there has been an increasing awareness in fulfilling basic human needs (BHN) in the Third World. The advocates of BHN are international organizations such as United Nations Development Programme (UNDP), which provide multinational aid. World Bank and International Monetary Fund are among most prominent donors of multinational aid, however, there are both advantages and disadvantages. While these international organizations are relatively less political and the process of giving and receiving aid is much more clear than bilateral aid, their conditionally and structural adjustments are often criticized for their unawareness of various domestic factors, such as politics and economic system in the Third World.
Although we have discussed the flaws of modernization theories and thus advantages of dependency theories, its alternatives do not seem to be promising. It is evident in the failure of Import-substitution industrialization (ISI) policies taken by the developing countries in the 1960s and 70s. At that time, many developing countries, especially in Latin America, believed in dependency theories claimed by the United Nations’ Economic Commission for Latin America (ECLA), thus stepped in to implement ECLA-recommended “import substitution” policies in order to protect domestic infant industries and to diversify commodity, so that they can achieve greater economic self-sufficiency. However, following its short success, it became evident that it had flaws within as we see the case of Brazil’s debt crisis. The trouble with ISI is that “it typically requires a great deal of foreign capital to create and subsidize domestic industries” (Spiegel 1995: 369). Since ISI undermines the profitable export sector, it tends to lead to a balance-of-payments deficit, and consequently, resulting in even greater dependence upon Northern states for capital. Such experiences finally led to disenchantment with the ECLA model, and most of the former ISI states shifted to export-led states again.
Spiegel，“North-South Economic Relations: The Challenge of Development,” World Politics in a New Era (1995).
Kegley & Wittkopf, World Politics: Trend and Transformation, 6th ed. (1997).
Epstein, Crotty,&Kelly, “Winners and Losers in the Global Economics Game, “Current History (November 1996).
Ted C. Lewellen “Dependency and Development”(1995)
