Prebisch–Singer Hypothesis
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economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...
, the Prebisch–Singer hypothesis (also called the Prebisch–Singer thesis) argues that the price of
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declines relative to the price of manufactured goods over the long term, which causes the
terms of trade The terms of trade (TOT) is the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An ...
of primary-product-based economies to deteriorate. , recent statistical studies have given support for the idea. The idea was developed by Raúl Prebisch and Hans Singer in the late 1940s; since that time, it has served as a major pillar of
dependency theory Dependency theory is the idea that resources flow from a " periphery" of poor and exploited states to a " core" of wealthy states, enriching the latter at the expense of the former. A central contention of dependency theory is that poor states ...
and policies such as
import substitution industrialization Import substitution industrialization (ISI) is a protectionist trade and economics, economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign ...
(ISI).


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 A good's price elasticity of demand (E_d, PED) is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good ( law of demand), but it falls more for some than for others. Th ...
, 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 Neo-Marxism is a collection of Marxist schools of thought originating from 20th-century approaches to amend or extend Marxism and Marxist theory, typically by incorporating elements from other intellectual traditions such as critical theory, ps ...
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 Prebisch-Singer thesis also works with different bargaining positions of labour in developed and developing countries). 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 Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of the secondary sector of the economy. The term may refer to a ...
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
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. 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 An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is a ...
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.
Recent statistical research has given the idea qualified support.


History

Prebisch's lectures from 1945 to 1949 revealed the development of the theoretical strands of his argument. 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
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, 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
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s second annual meeting, in
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* Structuralist economics *
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(UNCTAD) *
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References


Other sources

* Ocampo, José Antonio, and Parra, María Angela. (2003)
The Terms of Trade for Commodities in the Twentieth Century
'. *
United Nations Conference on Trade and Development UN Trade and Development (UNCTAD) is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade. It was established in 1964 by the United Nations General Assembl ...
(2005)
Trade and Development Report Chapter 3: Evolution of the Terms of Trade and its Impact on Developing Countries
'. {{DEFAULTSORT:Singer-Prebisch thesis Development economics International trade theory Imperialism studies