Prebisch Singer thesis (1960S)

Named after Argentine economist Raul Prebisch (1901-1986) and German-born British economist Hans Singer (1910- ); Prebisch-Singer thesis asserts that, given the permanent tendency for the terms of trade to go against agricultural products, it is in the interest of developing countries to erect protective tariffs behind which they can industrialize.

Source:
R Prebisch, The Economic Development of Latin America and its Principle Problem (New York, 1960);
H W Singer, ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, vol. XL (May, 1950), 473-85c

Theory

A common explanation for this supposed phenomenon is that manufactured goods have a greater income elasticity of demand than primary products, especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

In addition, primary products have a low price elasticity of demand, so a decline in their prices tends to reduce revenue rather than increase it.

This theory implies that the very structure of the global market is responsible for the persistent inequality within the world system. This provides an interesting twist on Wallerstein’s neo-Marxist interpretation of the international order which faults differences in power relations between ‘core’ and ‘periphery’ states as the chief cause for economic and political inequality (However, the Singer–Prebisch thesis also works with different bargaining positions of labour in developed and developing countries). As a result, the hypothesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-Marxist developmental economists and even provided a justification for an expansion of the role of the commodity futures exchange as a tool for development.

Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry.

The hypothesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. For this reason, much of the recent research focuses less on the relative prices of primary products and manufactured goods, and more on the relationship between the prices of simple manufactures produced by developing countries and of complex manufactures produced by advanced economies.

In 1998, Singer argued that the thesis he pioneered has joined the mainstream:

One indication of this is that the PST is now incorporated, both implicitly and explicitly, in the advice given by the Bretton Woods Institutions to developing countries. They are warned to be prudent even when export prices are temporarily favourable and to guard against currency overvaluation and Dutch Disease, with all the unfavourable impact on the rest of the economy and all the dangers of macroeconomic instability which a sudden boom in a major export sector could imply. They are warned to remember that the outlook for commodity prices is not favourable and that windfalls will tend to be temporary, with the subsequent relapse likely to be greater than the temporary windfall. This is exactly the warning which the PST would give.^[3]

Recent statistical research has given the idea qualified support.^[1][2]

Criticism

During the 2000s commodities boom, the terms of trade of most developing countries improved, while east Asia (which exports mostly manufactured goods) saw deteriorating terms of trade—the opposite of what the hypothesis generally predicts.^[4]

Critics argue that it is not possible to compare the prices of manufactured goods over time because they change rapidly. The price relationship of Prebisch–Singer does not take into account technological change. The important thing is not the price of the goods but the service provided by said goods. For example, in 1800 an American worker could buy a candle that provided one hour of light for six hours of work. But in 1997 an American worker could buy an hour of light provided by a light bulb with barely half a second of work. That is to say, the invention of Edison improved by other North Americans managed to reduce the price drastically. Another case that we can see are personal computers that provide the service of calculations per second. Since the 1970s computers doubled their capacity of calculations per second every two years for the same amount of constant dollars. The fall in price is so rapid, that it has been necessary to invent new words because of the immense growth in the capacity of computers. First they were measured in bytes, then, kilobytes, megabytes, terabytes, yottabytes, etc … Today’s harvesters harvest many more hectares per hour than they did half a century ago, but they also have a geo-satellite system, combined with a chip that allows to improve productivity; plus air-conditioned, hermetic cabinets, which prevent dust intake and improve the quality of life of the operator, as well as radio and DVD player to improve his comfort. These examples suffice to show that if we correct the imports/exports price relationships by technological change, we will obtain a conclusion opposite to that of Prebisch–Singer. It is therefore argued that the peripheral countries that export commodities benefit from trade with the central powers to a greater extent than they do, because by incorporating the new technologies incorporated into manufactures they multiply their productivity. In fact, if we could easily find examples of the gap reduction of GDP per capita between rich and poor countries when they open to free trade. Such is the case of Argentina and England between 1875 and 1930. Or China and USA between 1980 and 2018, or many other countries.^[5]

History

Prebisch’s lectures from 1945 to 1949 revealed the development of the theoretical strands of his argument.^[6] What he did not have was a statistical argument. In February 1949, Hans Singer, then working in the United Nations Department of Economic Affairs in New York City, published a paper titled “Post-war Price Relations between Under-developed and Industrialized Countries”, which suggested that the terms of trade of underdeveloped countries had declined significantly between 1876 and 1948. Inspired by this, Raúl Prebisch presented a paper of his own discussing the decline at the United Nations Economic Commission for Latin America and the Caribbeans second annual meeting, in Havana in May 1949.^[7]

Therefore, the statistical argument about the long-term trend in terms of trade of underdeveloped countries must be attributed to Singer. However, both seem to have independently invented similar explanations, stressing that the terms of trade moved against the ‘borrowing’ (i.e., underdeveloped) and in favour of the ‘investing’ (i.e., developed) countries. However, Prebisch specifically deals with the economic cycle and highlights to a greater extent than Singer the reasons for the different behaviour of wages in developed and underdeveloped countries, and received much greater recognition for his work, in part because of efforts by industrialized countries like the United States to distance themselves from his work.