What are the solutions of dependency theory by ECLA?

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teachsuccess | High School Teacher | (Level 1) Educator Emeritus

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Hello!  You asked about dependency theory by ECLA, which stands for the United Nations Economic Commission on Latin America. ECLA was notably headed by an Argentinian economist, Raul Prebisch from 1948 to 1962. Although initially an enthusiastic proponent of neo-classical economic theories of free trade, he came to see great disadvantages in these theories. He was a great proponent of the dependency theory.

Prebisch stressed that international trade benefited the industrialized countries (industrial centers of United States and Western Europe) on the backs of commodity-rich countries like Latin America, which he refers to as 'periphery nations.' He asserts that imperialistic Western nations have structured the world economy to increase their own wealth and power - with periphery nations exporting cheap commodities to the industrialized nations, and then buying manufactured products back from those same industrialized countries at higher prices, the former are always going to get the shorter end of the stick.

So, dependency theory is essentially the periphery nations going their own way. In dependency theory, solutions to the disparity in wealth between industrialized countries and peripheral countries include:

1) Import Substituting Industrialization (ISI) - instead of exporting their commodities and importing finished products back from industrialized countries, periphery nations would become their own industrialized center. High tariffs and other types of protectionism would discourage foreign competition. A tariff is a tax on imported goods. Therefore, it follows that if the imported good becomes more expensive than a domestic good due to a high tax, consumers would be less likely to buy these imported goods. Countries sometimes impose high tariffs on certain imports in order to shield their own domestic products from outside competition. In a nutshell, periphery nations want to use their own previously exported commodities to power the making of their own finished products. Tariffs will fit in nicely to 'encourage' their own citizens to buy the finished domestic products.

2) Overvaluing domestic currency (currency manipulation) cheapens necessary equipment imports for the purposes of industrialization within periphery nations. Import quotas are also enforced.

3) Overvaluing domestic currency also discourages commodity and agricultural exports to industrialized countries by making them more expensive, and therefore, less competitive on the international market.

4) A controlling authority within each periphery nation would maintain strict price controls; in other words, nationalized industries would become the norm. The state becomes the final authority for all business decisions.

5) The economy in these countries would be guided through political and bureaucratic decisions rather than market movements of supply and demand.

Hope this helps. Thanks for the question! Relevant links are below.

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