Dependency Theory developed in the late 1950s under the guidance of the Director of the United
Nations Economic Commission for Latin America, Raul Prebisch. Prebisch and his colleagues
were troubled by the fact that economic growth in the advanced industrialized countries did not
necessarily lead to growth in the poorer countries. Indeed, their studies suggested that economic
activity in the richer countries often led to serious economic problems in the poorer countries.
Such a possibility was not predicted by neoclassical theory, which had assumed that economic
growth was beneficial to all (Pareto optimal) even if the benefits were not always equally shared.
Prebisch's initial explanation for the phenomenon was very straightforward: poor countries
exported primary commodities to the rich countries who then manufactured products out of those
commodities and sold them back to the poorer countries. The "Value Added" by manufacturing a
usable product always cost more than the primary products used to create those products.
Therefore, poorer countries would never be earning enough from their export earnings to pay for
their imports.
Prebisch's solution was similarly straightforward: poorer countries should embark on programs of
import substitution so that they need not purchase the manufactured products from the richer
countries. The poorer countries would still sell their primary products on the world market, but
their foreign exchange reserves would not be used to purchase their manufactures from abroad.
Three issues made this policy difficult to follow. The first is that the internal markets of the
poorer countries were not large enough to support the economies of scale used by the richer
countries to keep their prices low. The second issue concerned the political will of the poorer
countries as to whether a transformation from being primary products producers was possible or
desirable. The final issue revolved around the extent to which the poorer countries actually had
control of their primary products, particularly in the area of selling those products abroad. These
obstacles to the import substitution policy led others to think a little more creatively and
historically at the relationship between rich and poor countries.
At this point dependency theory was viewed as a possible way of explaining the persistent
poverty of the poorer countries. The traditional neoclassical approach said virtually nothing on
this question except to assert that the poorer countries were late in coming to solid economic
practices and that as soon as they learned the techniques of modern economics, then the poverty
would begin to subside. However, Marxists theorists viewed the persistent poverty as a
consequence of capitalist exploitation. And a new body of thought, called the world systems
approach, argued that the poverty was a direct consequence of the evolution of the international
political economy into a fairly rigid division of labor which favored the rich and penalized the
poor.