Prebisch After ECLAC and UNCTAD

My talk at the Universidad Nacional de Colombia last Friday, in Spanish of course. Part of the argument is that Prebisch, contrary to what is often assumed, moved from an argument that emphasized the role of the external constraint in leading to underdevelopment during his United Nations years, to one that put the emphasis on the patterns of domestic consumption, and its negative impact on the surplus, following the literature on stagnation, in his last book on peripheral capitalism. I suggest that the change is problematic.

On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:

"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."

In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:

"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."

They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:

"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."

In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?

The super-cycle of commodities is NOT over, it's just not super anymore

Or at least is what The Economist says (here). Graph below shows a very long series for commodity prices.

Note that the cycle (super or not) is less visible than the trend (hints of Prebisch-Singer). At any rate, the fall in 2009 and the recovery and then slow fall after 2011 imply that the overall index is now higher than at the lowest point in the series, the late 1990s, and around the same place it was in the early 1950s.

John and Richard Toye on the Prebisch-Singer hypothesis: or did Prebisch wholly rely on Singer's work?

Prebisch (center) presiding over an early meeting at ECLA

(Furtado second from the right)

John and Richard Toye paper (subscription required) on Prebisch's contribution to the Prebisch-Singer Hypothesis has had a significant impact on the accepted view about the development their theory. They argue that in their view:

“of the events surrounding the United Nations Economic Commission for Latin America (ECLA) conference in Havana in May 1949 reveals that Prebisch did not discover independently that the terms of trade of primary products were secularly declining, but relied wholly on the previous work of Singer” [italics added].

In other words, they argue that while Prebisch is more well-known in many respects it was the work of Singer that was essential and original in determining the eponym hypothesis. Toye and Toye (2003, p. 443) do NOT argue that Prebisch was unaware of falling commodity prices, but they do suggest that he thought of this as being merely short run phenomena. In their words:

“He [Prebisch] published an article in 1934 arguing that "it is a well-known fact that agricultural prices have fallen more profoundly than those of manufactured articles," and that Argentina had to export 73 percent more than before the depression to obtain the same quantity of manufactured imports (Prebisch [1934] 1991, 341). However, Prebisch was merely noting a fact, and did not provide any theoretical analysis of it (Magariños 1991, 63-64). He saw it as a feature of depression economics, that is, as a short-run cyclical problem. He believed that the remedy was to be found in expansionist economic policies, not, as the Prebisch-Singer thesis would later imply, in major changes in the structure of the international economy” [italics added].

In other words, Prebisch's notion of a structural problem that required a radical change, industrialization, rather than just anti-cyclical macroeconomic policy, basically "wholly relied" on Singer. This is why they believe the first draft of Prebisch's famous Development Manifesto was changed, as accounted by Celso Furtado in his memoirs.

Note, however, that Prebisch was from the early 1930s starting a long trajectory of rethinking his orthodox (somewhat eclectic, but essentially marginalist) views of the functioning of the economy, one in which the fluctuations in the periphery where for the most part accounted by an connected to the oscillations on the central economies. He was also keenly aware of the changes in the hegemonic positions of the US and the UK, and the tribulations of the international financial system.

In a series of papers with Esteban Pérez Caldentey, I have argued that Prebisch was developing a dynamic theory, that would be developed fully in his classes at the University of Buenos Aires, before his Manifesto was conceived in 1949, in which cycle and trend are seen as parts of the same economic impulses. In Prebisch's discussion of the cycle in Argentina, as early as 1934, Prebisch does show awareness of the consequence of a fall in the trend of commodity prices. In the paper we note that:

“The events of the year 1929 were viewed as a further extension of the 1927-1928 cycle. Initially he dated the ascending phase of the cycle between May 1927 and September 1928 (RP, Vol, I. p. 587). Later on however, once the effects of the year 1929 were visible in the Argentine economy he states that the descending phase of the cycle started during 1929 with some symptoms appearing by the middle of 1928 (Ibid. p.613). This point is also emphasized in his 1934 article 'The Present Moment of Our Economy.' He states (RP, Vol. II., p. 158): 'If we were to judge the year 1933…by the evolution of our agricultural exports, we would only be able to say that it was an additional year of contraction adding to those that have …the Argentine economy since 1929.' Prebisch came to realize the distinct character of the Great Depression when he became aware of the profound contraction in agricultural prices. The contraction was so sharp that the agricultural price index reached levels that it had not witnessed since the nineteenth century. As he put it (Ibid., p.346-347 and also 135): 'The collapse in prices…does not constitute the usual phenomenon of cyclical reaction…rather an intense and pertinent decline to positions each time farther away from the level on which developed the relations of production and credit.' And (p. 135) 'It [the decline in agricultural prices] is not a simple return to a previous situation, but of an accentuated and progressive contraction of values, that violently upsets the economic structure of the country'” [italics added].

In other words, it is a matter of trend not cycle, and hence an antecedent of the Prebisch-Singer hypothesis, which is in fact based on his theoretical development of a type of dynamic foreign trade-multiplier story of the cycle.

Also, a careful reading of Furtado's discussion of the writing of the Manifesto suggests that what the Singer paper provided was NOT the empirical basis for a new and radical theory, but the incentive for a more militant and pro-industrialization version of the report. A change in political tone, rather than a significantly different understanding of the problems of development in Latin America, which as we have argued with Esteban, where quite solidified by this time.* As result, I would suggest that Prebisch's fame as the key thinker behind the famous hypothesis is well-deserved, and that the notion that he wholly relied on Singer is hyperbolic at best.

* However, as noted by Mallorquín, Prebisch would put on hold his more radical ideas during his long sojourn in the United Nations system, at ECLAC and then UNCTAD.

PS: For more on Prebisch go to ECLAC's website about him and his legacy here.

The IMF and The Economist (re)discover the Prebisch-Singer Hypothesis

Free Exchange, one of the The Economist's blogs, had a post recently on the secular declining prices of commodities. The post suggest that there is significant evidence in favor of the Prebisch-Singer Hypothesis (PSH), based on an IMF paper (available here).

Note that the notion that there is something correct about the Prebisch-Singer Hypothesis is not really news. José Antonio Ocampo has written several papers recently (see here and here) showing that overall terms of trade for commodity producers did not go well, particularly in two periods the 1930s, and the 1980s, which drive the negative long-term trend. But it is true, as we noted with Esteban Perez (see here), that many respectable authors still suggest that PSH must be wrong.

Note that while Prebisch did read Marx, and early in his life he considered himself a Socialist, it is far from clear that he can be referred to as Marxist, or suggest that PSH is a Marxist theory (for more on Prebisch see this review of his recently published biography). In fact, many interpretations are compatible and sometimes based in neoclassical suppositions.

Prebisch actually defended the idea of declining terms of trade in a way that is really compatible with classical (meaning surplus approach and Marx) views on long-term price determination. He suggested in his famous 1949 paper that the cause of tendency of commodity prices to fall with respect to manufactured goods prices was related to wage setting in the center and periphery.

In the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. In the recession, in turn, while wages fell in the periphery, they did not in the center. It was the fall in wages in the periphery, associated to the weak labor force that led to lower prices of commodities. Class conflict, and not just technological change (or patterns of demand, as in some explanations of PSH), was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery. [For more on Prebisch's views go here]. Note that the classical explanation for long-term prices can be used to explain periods in which the trend for commodity prices was positive too [see for example this video of a talk by Franklin Serrano here].

Funny thing is that Free Exchange, after noting that PHS might be correct, published another post here in which they argue that Free Trade is still the best policy, because:

"the persistence in economic history of the idea that free trade provides the optimal long-run conditions for growth may be a better reason than any other why The Economist still supports free trade today— just as it did 170 years ago."

I will not get again into the problems with Free Trade (you can go here and here), but obviously if in the long-term specialization in commodities does not tend to be a good idea, a trade policy that leads to that pattern of specialization cannot be defended. At least not in a coherent fashion!

A Brief Note on the Sociology of Development

Within the vast literature on the sociology of development, it has been theorized that recent reorganizations of capitalist development, specifically concerning a ‘new international division of labor,’ have reconstituted the global social cartography. What are the contours? & how should the be measured? These questions are difficult, especially given that ever-increasing cross-border linkages and exchanges-a time-space compression, so to speak-, seemingly represent a juggernaut for countries to achieve socially equitable economic path-dependencies.

Given the dynamic connective relationships of complex interdependency, specifically concerning the proliferation of financial capital mobility and the aggrandizement of transnational corporations (TNC’s), the capability for the developing world to achieve, to some degree, relative mobility that transcends the center-periphery divide is perceived to be implausible. As such, global capitalism proliferates ‘third worldization’ through the constant oppressive force of ‘primitive-accumulation', what Myrdal (1957) defined as international ‘backwash’ effects. Hence, the capitalist world economy is reproduced as a world-system (Wallerstein, 1979) of ‘unequal exchange’ (Emmanuel, 1972), in which ‘underdevelopment’ (Frank, 1969), namely, the inability to generate complex domestic patterns of effective demand, ensues peripheral long-run stagnation and monopoly rents, or competitive advantages, for the center; in the final instance, the terms of trade for the periphery fall precipitously - the Prebisch-Singer hypothesis.

Per Cardoso and Faletto ([1967] 1970), however, development in the periphery is possible if foreign capital creates spillover effects. Partial economic growth is viable through what Evans (1995) describes as ’dependent development’, in which there is a relatively strong tripartite relationship between the state, the local bourgeoisie, and foreing capital - an ‘embedded autonomy’ (Evans, 2002). Whether or not this is manifested is the extent to which, as Vernengo (2006) argues, a country does not suffer the inability to borrow in its own currency, especially in which the world economy is structured by the globalization of financial liberalization.

 For more on the topic see here.

Industrialization, Wages and the Terms of Trade

The quote above is from Raúl Prebisch's classic paper "The Economic Development of Latin America and Its Principal Problems," the so-called Development Manifesto (available in Spanish here), published in Spanish and Portuguese in 1949, and the following year in English.

Note that his explanation for the tendency of terms of trade of commodities to fall over time (the so-called Prebisch-Singer hypothesis) was based on the fact that in the boom wages went up in the center, but not so much in the periphery, since industrial workers in the center were organized and could demand higher salaries, while that was not possible for the agricultural and mining workers in the periphery. So in the recession, while prices of commodities and wages fell in the periphery, they didn't in the center. Class conflict, and not just technological change, was at the heart of the asymmetries between the center and the periphery.

Hence, industrialization in the periphery, and the re-organization of the labor force, would imply that more workers in the periphery would be able to keep part of the benefits of higher productivity. Industrialization would be good for the production of the commodity sector, since prices of commodities would go up, with higher wages in the periphery.

Also, note that this explanation of terms of trade suggests that if wages in the periphery fall, then the prices of commodities fall too. And it is worth remembering that a depreciation of the currencies of peripheral countries implies lower wages.