Beyond the Stereotype: How Dependency Theory Remains Relevant

The COVID-19 pandemic has plunged countries across the world into crises, but the challenges are particularly dire for developing countries. My recent research demonstrates that a dependency theory research agenda is crucial for understanding these contemporary global inequalities and for coming up with sustainable solutions.

These global imbalances have been well known for decades and perhaps most famously pointed out by the dependency theorists of the 1960s and 1970s. Although global production and finance have transformed since then, the core tenets of dependency theory remain relevant. 

A situation of “dependence” is one where  “the economy of certain countries is conditioned by” development processes elsewhere. While dependency theory is often associated with Latin America, you can find ideas associated with such an approach across the world and spanning centuries, such as theories of colonial drain from India, Japanese scholarship on the power relations between centre and periphery, radical African scholarship and the Caribbean dependency school. A dependency research program involves taking a global historical approach to the issue, taking the polarizing tendencies of global capitalism as a starting point, and focusing on structures of production as well as on the specific constraints faced by peripheral economies. 

While taking such an approach may come naturally to some radical economists, it stands in stark contrast to the micro-oriented view that characterizes much of contemporary development economics, which abstracts from global, political and structural problems (see e.g. the recent policy proposal for developing countries by the Nobel Prize winning economists Duflo and Banerjee). This post lays out how the dependency approach is particularly relevant now, how dependency theory came to be marginalized in economics despite its enduring relevance, and finally, how such an approach leads us to think bigger and more structurally about possible solutions. 

How is Dependency Theory Particularly Relevant Now?

First of all, how industry is structured globally still reproduces relations of dependence and leaves workers in developing countries especially exposed during the pandemic. While we have seen a deepening of global economic integration since the 1970s, which has been associated with an increase in efficiency and ‘flattening’ of the world, the spread of global value chains involves rigid power imbalances and deep vulnerabilities for those at the bottom of the hierarchy. Many developing countries have been able to move into just-in-time manufacturing, but this production is still characterized by relatively low-skilled and low-tech work and a heavy reliance on companies concentrated in the centre. Therefore, as global demand grinds to a halt, manufacturing workers in the periphery are seeing their jobs disappear as the multinational corporations cancel their orders (an issue raised by the ILO recently). In light of this, Duflo and Banerjee’s proposal to provide basic universal basic income is an important policy to mitigate income loss for these workers, but it shies away from addressing the underlying problem of how global production is structured in the first place. While basic income can provide temporary relief,  to drive the revival of the economy we need to think creatively about how we can allow for a rebalancing of production so that industry in the developing world can be more sustainable, secure and more oriented towards domestic needs. 

Secondly, developing countries continue to be vulnerable to financial cycles generated by the center – which was a key insight by dependency theorists. As investors flock to ‘safe’ assets (read: assets in the centre) in the wake of the COVID-19 pandemic, there have been dramatic reversals of capital flows – indeed the largest outflow ever recorded. Furthermore, many developing countries have experienced currency depreciations as well as severe debt and liquidity problems. As the much needed fiscal space of developing countries is constrained by these external factors,  activists, academics, and policy-makers have called for debt moratoria, IMF support, and debt relief as necessary policies. 

Not only does the structure of the global financial system make developing countries more vulnerable to shocks and capital flight, but it also makes it particularly difficult to organize an effective response. This has prompted UNCTAD – a UN organization established by one of the forefathers of dependency theory, Raúl Prebisch – to propose the  establishment of an international body to oversee developing country debt relief programmes in the wake of COVID-19. Taking such a global and structural view of the world economy will be necessary to make sure the pandemic does not drastically exacerbate existing inequalities.

Why Was Dependency Theory Dismissed?

Dependency theory lost influence in the 1980s. There are two oft-cited reasons for this demise. The first is that the theory is weak. Dependency theory has been critiqued for being tautological, for denying Southern actors of agency, for lacking in rigor, and for economic reductionism. However, most of this critique is based on an incomplete, superficial and often incorrect understanding of what dependency theory is. This led dependency theorist and former President of Brazil, Fernando Henrique Cardoso, to argue that the common simplification of dependency theory in the US had made it into “a straw man easy to destroy”. 

The second common explanation is about the empirical changes in the world economy that render dependency theory outdated. These include the transition from periphery to centre by some traditionally peripheral countries and the development of an integrated global production system. However, I argue that these new developments can actually be most  fruitfully understood precisely through a dependency research program. For example, taking a global historical approach to understanding how capitalism and colonialism shaped South Korea’s economy gives a richer explanation of how industrialization and the establishment of a developmental state later became possible. Furthermore, the constraints often prevalent in peripheral industrialization that tend to lead to uneven development were mitigated in the case of Korea in part because of geopolitical factors. While this helped alleviate the challenge of mounting balance of payments deficits that many peripheral economies face, it was also essential that Korea was allowed to protect its markets from the global economy and strategically manage them. 

It is true that a new international division of labor has emerged, characterized by the restructuring of global production networks, which has allowed many developing economies to move into manufacturing through participation in far-flung global value chains. This development has been used as an argument against the relevance of dependency theory, which was developed during a time when global production systems were less integrated. However, by looking at industrialization through GVCs in Indonesia, for example, it becomes clear that the diffusion of industrial activities were conducted within hierarchical structures of corporate control. Because of this, development within Indonesia was not determined according to the industrial needs of the economy, but rather in line with the interests of foreign capital. Therefore, the manufacturing sector of Indonesia is characterized by limited technological capability and the country remains a net importer of advanced technologies. As recognized by scholars in the dependency tradition, the development of such technologies is crucial to generate and sustain industrialization and growth. Because Indonesia and other peripheral economies’ lack of relative technological capabilities, the transformations of global production networks are perhaps more in line with Giovanni Arrighi’s (1990:24) observation that the spread of industrialization ‘appears not as development of the semiperiphery but as peripheralization of industrial activities.’ Even for China, a country that has made significant advances in terms of upgrading and massively expanding its manufacturing exports based on its integration into GVCs, this expansion has involved a strong dependence on FDI, rapid denationalisation of the export-oriented manufacturing sector and relatively low levels of domestic innovation incorporated into exports.

Given that neither of the above explanations – dependency theory lacking rigor and being empirically ‘outdated’ – hold, it is more likely that the dependency research program was marginalized for political and ideological reasons. This is in line with Thomas Kuhn’s observations that science does not necessarily move forward based on an objective measure of what the best scientific program or paradigm is. Indeed, the Economics discipline has infamously excluded a range of heterodox economic theories since the 1970s, including Keynesians, Marxists and Institutionalists. In short, it seems that dependency theory did not go out of date, but rather fell out of fashion.

A Dependency Revival for a Responsible Response

COVID-19 exacerbates these constraints that developing countries already face. While domestic policies remain important to tackle the crisis, especially with regards to provisioning of health services and to compensate for incomes lost, the dependency perspective highlights how a domestic response is completely inadequate. 

Dependency theory holds important lessons for understanding and combating the global hierarchies of forms of production, innovation and finance that constrain developing countries’ policy space to address the crisis effectively. This leads us to discussions about how to change the global economic architecture, for example through a global green new deal, reform of the international monetary system, reform of global systems of food production, and reform of governance of international trade and intellectual property rights. 

As Jayati Ghosh recently put it, “Covid-19 pandemic is driving home the urgency of internationalism”. Indeed, it is highlighting the need to ‘fix the system’. It’s therefore time we leave the ideological battles over knowledge production aside so that we can acknowledge the hierarchies and dependencies in our global economy, and support bold steps towards global structural solutions.

A shorter version of this post was published on Open Democracy under the title If we want to tackle global inequality, we need better economic theories.