The Prebisch Singer Hypothesis

This study note for A Level and IB economics considers the Prebisch Singer Hypothesis

The Prebisch-Singer Hypothesis, formulated in the mid-20th century by Raúl Prebisch and Hans Singer, posits that the terms of trade for primary commodities relative to manufactured goods tend to deteriorate over time. This hypothesis has significant implications for the economic development of countries reliant on primary commodity exports.

Key Components of the Prebisch-Singer Hypothesis

1. Terms of Trade
   • Terms of trade refer to the ratio of export prices to import prices. A deterioration means that a country has to export more to import the same amount of goods.
   • According to the hypothesis, the terms of trade of primary commodities decline relative to manufactured goods over time.
2. Causes of Deterioration
   • Technological Progress: Technological advancements in manufacturing lead to productivity gains that are not mirrored in the primary commodities sector.
   • Income Elasticity of Demand: Demand for manufactured goods grows more rapidly than for primary commodities as incomes rise.
   • Market Structure: Primary commodity markets tend to be more competitive, while manufacturing markets can be more oligopolistic, allowing firms to retain more benefits from productivity improvements.
3. Implications for Developing Countries
   • Countries that rely heavily on exporting primary commodities face declining terms of trade, reducing their ability to import necessary goods for development.
   • This can lead to persistent trade deficits and hinder economic growth.

Application of the Prebisch-Singer Hypothesis

• Real-World Example: Latin America
  • In the mid-20th century, many Latin American countries experienced declining terms of trade, validating Prebisch's observations and leading to policy shifts towards industrialization and import substitution.
• Modern Context: Sub-Saharan Africa
  • Many Sub-Saharan African countries still rely on primary commodities and face similar issues with terms of trade deterioration, affecting their economic stability and growth prospects.

Contributions of Key Economists

• Raúl Prebisch
  • An Argentine economist who observed the adverse effects of declining terms of trade on Latin American economies and advocated for structural economic changes.
• Hans Singer
  • A German-born British economist who independently reached similar conclusions about the long-term decline in commodity terms of trade and its impact on developing countries.
• Celso Furtado
  • Contributed to structuralist economic thought, emphasizing the need for industrialization in developing countries to overcome dependency on primary commodities.
• Joan Robinson
  • Critiqued neoclassical economics and contributed to the understanding of economic development issues, supporting the need for diverse economic strategies in developing countries.

Timeline of Key Economic Events and Policy Responses

• 1950: Publication of Prebisch's and Singer's seminal works on the declining terms of trade.
• 1950s-1960s: Latin American countries adopt import substitution industrialization (ISI) policies.
• 1970s: OPEC oil embargo highlights the vulnerability of primary commodity-dependent countries to terms of trade shocks.
• 1980s-1990s: Shift towards neoliberal policies and structural adjustment programs in many developing countries.
• 2000s: Rising commodity prices temporarily reverse terms of trade trends, but concerns about long-term sustainability persist.

Critique of the Model

• Empirical Validity: Some studies have shown periods where the terms of trade for primary commodities improved, challenging the hypothesis.
• Policy Implications: Import substitution industrialization (ISI) policies inspired by the hypothesis often led to inefficiencies and economic distortions.
• Simplistic Dichotomy: The model's focus on primary commodities vs. manufactured goods oversimplifies the complexity of global trade.
• Neglect of Services: The rise of the services sector in both developed and developing countries is not addressed by the hypothesis.

Glossary

• Import Substitution Industrialization (ISI): A trade and economic policy which advocates replacing foreign imports with domestic production.
• Income Elasticity of Demand: The responsiveness of the demand for a good to a change in income.
• Oligopolistic Market: A market structure in which a few firms dominate the market.
• Primary Commodities: Raw materials and agricultural products that are typically exported by developing countries.
• Terms of Trade: The ratio of export prices to import prices.

Essay-Style Questions

1. Discuss the main arguments of the Prebisch-Singer Hypothesis and its implications for developing countries.
2. Evaluate the empirical evidence for and against the Prebisch-Singer Hypothesis.
3. How did the Prebisch-Singer Hypothesis influence economic policies in Latin America in the mid-20th century?
4. Analyze the relevance of the Prebisch-Singer Hypothesis in the context of the modern global economy.
5. Compare and contrast the Prebisch-Singer Hypothesis with the Dependency Theory of economic development.

Recommended Articles and Papers

1. Prebisch, R. (1950). "The Economic Development of Latin America and its Principal Problems." United Nations.https://repositorio.cepal.org/...
2. Singer, H. W. (1950). "The Distribution of Gains between Investing and Borrowing Countries." American Economic Review, 40(2), 473-485.http://www.jstor.org/stable/18...
3. Furtado, C. (1970). "Economic Development of Latin America: A Survey from Colonial Times to the Cuban Revolution." Cambridge University Press.https://www.cambridge.org/core...
4. Thirlwall, A. P. (2011). "Economics of Development: Theory and Evidence." Palgrave Macmillan.https://www.palgrave.com/gp/bo...
5. Ghosh, J. (2003). "Economic Globalization and Developing Countries: Which Way Now?" Economic and Political Weekly, 38(35), 3709-3711.http://www.jstor.org/stable/44...

These notes provide a comprehensive overview of the Prebisch-Singer Hypothesis, its key components, applications, critiques, and contributions from notable economists. They also offer additional resources, potential essay questions, and a glossary to deepen students' understanding of the topic.