Prebisch-Singer thesis

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The Prebisch-Singer thesis (also thesis of the secular deterioration of the terms of trade ) is a thesis of foreign trade . It deals with the effects of world trade on the terms of trade of primary goods exporters.

History of the development of the theory

The main proponents of the "thesis of the secular deterioration of the terms of trade" were Hans Wolfgang Singer and Raúl Prebisch . In February 1949, Singer, who at the time was working for the United Nations in the Economic Affairs department, published a paper entitled Post-War Price Relations between Underdeveloped and Industrialized Countries , which deals with the effects of trade between developing countries - and industrialized countries. Inspired by this work, Raúl Prebisch wrote his own essay entitled The Economic Development of Latin America and its principal problems , which he presented to the UN Economic Commission for Latin America and the Caribbean in 1949. Through this publication, the development of real exchange relationships (“ terms of trade ”) became part of the international discussion.

Both authors independently developed similar arguments and explanations, which are dealt with in the following sections.

Statement of the thesis

According to the Prebisch-Singer thesis, there are two large economic areas. On the one hand there are the industrialized countries, which mainly produce industrially manufactured products, such as B. automobiles, machines, computers. On the other hand, there are developing countries, whose economies are largely based on the production of primary products, such as B. raw materials, fruit, coffee. These two economic areas operate a division of labor from which everyone should benefit. According to the Ricardo model , this is the case when each country trades in the goods for which it has a comparative cost advantage over other countries. The studies by Prebisch and Singer, however, lead to the conclusion that both sides do not benefit from foreign trade.

The Prebisch-Singer thesis says that the real terms of trade of the developing countries, when they are integrated into the world economic system, deteriorates in the long term, whereas the terms of trade of the industrialized countries improve. As a result, the economic prosperity of these countries is impaired. This thesis thus supports the demand of the developing countries for a “fairer” world economic order.

Justifications

In his justification, Prebisch assumes that the developing countries mainly offer food and raw materials and demand industrial products, while the opposite direction of specialization applies to the industrialized countries. Since there were hardly any figures at that time with which one could check the thesis, the English foreign trade from the years 1876–1938 and 1947 was viewed as representative of trade between industrialized and developing countries. British exports at that time consisted mostly of finished goods and imports of food and raw materials.

The development of the English net exchange ratios (N) from 1876/80 - 1946/47

period

1876

to

1880

1881

to

1885

1886

to

1890

1891

to

1895

1896

to

1900

1901

to

1905

1906

to

1910

1911

to

1913

1921

to

1925

1926

to

1930

1931

to

1935

1936

to

1938

1946

to

1947

N

100

102.4

96.3

90.1

87.1

84.6

85.8

85.8

67.3

73.3

62.0

64.1

68.7

Source: Prebisch, Raul: The Economic Development of Latin America and its principal problems (1950), p. 9

From this table a decrease in the N for England can in fact be determined, which is equivalent to a deterioration in the N for the British foreign trade partners. Prebisch justifies this deterioration as follows:

The low income elasticity of demand for primary goods
Primary goods are usually relatively inferior goods . This means that with rising incomes, the demand for primary goods increases disproportionately.
The high income elasticity of the demand for industrially manufactured goods
Industrially manufactured goods, on the other hand, are superior goods . With rising incomes, these goods are in disproportionately high demand. This means that with growing incomes, the consumption of industrial finished goods increases, while the consumption of primary goods remains almost constant. Wage increases in developing countries mean that only the demand for industrially manufactured products increases significantly.
The different competitive situation on the primary goods and industrial goods markets
The primary goods markets are characterized by intense competition between the exporting countries. This is due, on the one hand, to the homogeneity and the associated substitutability of these goods and, on the other hand, to the specialization or restriction of developing countries to a few exportable primary goods. On the other hand, there is less competition in the industrial goods markets, since these products are usually sufficiently diversified and therefore more difficult to substitute.
The high price elasticity of the demand for primary goods
Due to the interchangeability and a large number of suppliers, it is difficult to enforce price increases for exportable primary goods on the world market. Let us assume that a drought rises the price of an export good in a developing country. As a result, the demand from abroad for this good will collapse because other exporters can offer and sell the good at a lower market price.
The low price elasticity of the demand for manufactured goods
The demand for industrially manufactured goods hardly drops when prices rise, since consumers can only fall back on a few equivalent alternatives.
The different effects of productivity advances
In the case of primary goods, it is often a question of quantitative advances in productivity (e.g. new cultivation methods or mining techniques). The result is an increase in supply when demand stagnates, which in turn leads to falling prices. Furthermore, advances in labor productivity are passed on directly to the industrialized countries in the form of price reductions in order to assert themselves in the face of strong competition. In the industrial goods sector, productivity advances are accompanied by an improvement in products (qualitative productivity advances), which leads to rising market prices and wages.

Overall, this leads to a deterioration in international trade conditions for the developing countries, as these have to export proportionally more and more primary goods in order to meet their demand for industrially manufactured products.

Fictional example

Assume that Germany produces and exports a car worth 15,000 euros to Brazil in 2010. At the same time, Brazil is growing 15,000 kg of coffee and exporting it to Germany for a price of € 1 / kg. This creates the real exchange relationship:

It follows that Germany receives 15,000 kg of coffee for an exported car. In return, Brazil has to sell 15,000 kg of coffee to import a car from Germany.

Since Germany receives more imported units (kilograms of coffee) for an exported unit of measure (car), one speaks of an improvement in the terms of trade (ToT).

If one considers this assumption of the exchange relationship at different points in time, the effect of the Prebisch-Singer thesis becomes all the more clear. In 2015, Brazil can only sell the same amount of the coffee substitute to Germany for € 0.9 / kg. As research and further development of the industrial good is flourishing, Germany can sell a car to Brazil for € 20,000. So Brazil has to produce and export 22,222 kg of coffee to get a car from Germany. The exchange ratio is therefore (22,222 kg coffee) / (1 car) and thus leads to a significant deterioration in the terms of trade from the perspective of the developing country.

Brazil:

year 2000 2015
Export goods price level 1 € / kg of coffee 0.9 € / kg of coffee
Import goods price level 15,000 € / car € 20,000 / car
Terms of Trade F (x) = E / I = 15,000 / 1 F (x) = E / I = 20,000 / 0.9
result 15,000 kg of coffee = 1 car 22,222 kg of coffee = 1 car
Example development of the Terms of Trade (ToT); Brazil-Germany

consequences

The Prebisch and Singer theory has several consequences for developing countries. The first effect is that the import capacity of the developing countries is weakened, as they can obtain fewer and fewer imported goods from the industrialized countries for their exported primary goods.

The increased competition in the primary goods markets also means that the underdeveloped countries transfer part of their productivity gains to the industrialized countries in the form of price reductions, because a larger supply of a commodity leads to a lower price of this commodity if demand remains the same.

This decline in primary goods prices, in turn, means that factor incomes, especially wages, do not increase in line with the productivity gains of the sector. As a result, the export sector in developing countries does not contribute to increasing the prosperity of the population as it does in industrialized countries.

Solution approach

Instead of spending the generated export surpluses on imports, the developing countries should push ahead with the industrialization of their country and promote diversification in production. This means that they have to invest in technological capacities, entrepreneurial skills and human capital (skilled workers) in order to be able to produce competitive export goods.

Criticism of the static evidence

The main criticism of the Prebsich-Singer thesis is the statistical evidence. First of all, in the price index series used by Prebisch, the services that are related to the international movement of goods were not properly taken into account. While the import prices included from a British perspective consisted of the prices for the primary goods plus the transport costs and the ancillary transport costs (cif prices) , only the prices of the exported goods were included in the calculation for the export prices (fob prices) . Under these conditions, however, a comparison of the exchange conditions is not permissible, since at the end of the nineteenth century with the development of the steam engine, transport costs fell considerably.

Furthermore, a detailed breakdown of the British foreign trade statistics showed that they were by no means representative of trade between developed and developing countries. At that time, England's food imports consisted largely of grain and dairy products. The developing countries actually exported no dairy products and grain, with the exception of rice, was only exported in large quantities from Argentina. The most important tropical export commodity was coffee, which was less imported in England due to consumer habits.

It is also criticized that developing countries are only referred to as exporters of primary goods and industrialized countries only as exporters of industrially manufactured goods. Just as there are some countries that have achieved a high level of development despite their specialization in agricultural products (e.g. Denmark, Australia, New Zealand), there are also countries that have made little progress in development despite industrialization (e.g. Spain, Italy).

The Grilli and Yang Study

The two scientists Enzo Grilli and Maw Cheng Yang took on the problem of statistical evidence in 1988. They created a price index for the period from 1900 to 1986, which included 24 internationally traded goods (oil was not taken into account). They got their data from the World Bank. Second, you modified the United Nations (UN) Manufactures Unit Value Index, which shows the value of exported, industrially manufactured goods from industrialized countries. They came to the conclusion that the terms of trade in developing countries are deteriorating by 0.6% annually. Consequently, their investigation supports the Prebisch-Singer thesis.

reception

The Prebisch-Singer thesis was used in numerous countries as a justification for import-substituting industrialization (ISI) and a structuralist economic policy . It was also very well received in neo-Marxist circles, as it was viewed as a confirmation of the dependency theory . Although it was temporarily forgotten, recent studies, including a. by José Antonio Ocampo , confirmed its empirical validity in the 20th century. However, the effect is not constant, but rather marked by strong fluctuations. More recent research on the Prebisch-Singer thesis is based on the assumption that a similar effect as with primary goods also arises with industrial goods with low added value , which today dominate the exports of most developing countries.

In 1998, Singer stated that the thesis was already part of the mainstream of development theory, since the recommendations of the international economic institutions (e.g. the IMF) to developing countries, which warn, for example, not to rely on rising raw material prices, were based on the same assumptions.

literature

  • Willi Albers et al .: Concise Dictionary of Economics (HdWW) - paragraph to balance sheet theories, Gustav Fischer / JCB Mohr (Paul Siebeck) / Vandenhoeck & Ruprecht, Stuttgart et al. 1977, ISBN 3-525-10252-6
  • Enzo R. Grilli / Maw Cheng Yang: Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries - What the Long Run Shows, Oxford University Press, Oxford 1988, ISSN  0258-6770
  • José Antonio Ocampo / María Angela Parra: Returning to an eternal debate - the terms of trade for commodities in the twentieth century, United Nations Publication, Santiago 2003, ISBN 92-1-121383-5

Individual evidence

  1. ^ Hans Singer: The South Letter (30): The Terms of Trade Fifty Years Later - Convergence and Divergence (PDF), South Center, 1998

Web links