Paul.A.Baran Dependency Theory | Study notes Development Economics

Dependency School of Development

BARAN’S DEPENDENCY THEORY

P.A. Baren looks at underdevelopment from a global perspective. Two building blocks of his theory

are monopoly capitalism and imperialism. In his view, underdevelopment is the natural process of

capitalist development. Baran is one of the critics of the theories of vicious circle of poverty

(underdevelopment) formulated by orthodox economists. Instead underdevelopment or backwardness

of any country is an externally induced phenomenon in its entirety. Internal constraints are not of much

in explaining underdevelopment. In this context Baran cites the example of India and Japan. While

India’s underdevelopment is attributed to its integration with the highly unequal capitalist system of

the world. Japan’s success is ascribed to its age-long isolation of the West.

The first and subsequently highly influential articulation of the neo-Marxists perspective on

underdevelopment is contained in Paul Baran’s Political Economy of Growth (PEG) which was

published in 1957. PEG is an important shift in Marxist theory, both in problems to which it was

addressed and in its theoretical contents.

Central to Baran’s analysis, there are four concepts. They are:

1. Monopoly capitalism

2. Imperialism

3. Class dynamics

4. Surplus

Baran adopted Marxist interpretation of capitalism and monopoly capitalism. Baran’s significant

contribution to Neo-Marxist-paradigm lies in his definition and the elaboration of the concept of

surplus -- the actual surplus, the potential surplus and the planned surplus.

The actual surplus is difference between the current new output and current consumption. The potential

surplus is defined as the difference between the output that can be produced in a given natural and

technological environment and what might be regarded as the essential investment. Planned surplus is

the difference between the optimum level of output and the consumption being obtained by very

conscious techniques of planning presumably in a socialist society.

Origins of Underdevelopment

Baran divided the world economy into two (polar) interacting parts-Advanced capitalist countries and

less developed countries. The interaction between these two sets of countries can be explained with

reference to trade flows, surplus flows and potential military influence. Trade flows serve to provide

cheap sources of primary products to the advanced countries while the development of industries in

LDCs is discouraged by the cooperation of manufactured products imported from advanced countries.

Persistence of Underdevelopment

Underdevelopment persists as a sequel to the process of actual surplus falling persistently short of

potential surplus and the actual surplus being disposed off in a manner so as to affect perversely the

capital accumulation.

We will consider each particular class and its contribution to economic development.

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Dependency School of Development BARAN’S DEPENDENCY THEORY P.A. Baren looks at underdevelopment from a global perspective. Two building blocks of his theory are monopoly capitalism and imperialism. In his view, underdevelopment is the natural process of capitalist development. Baran is one of the critics of the theories of vicious circle of poverty (underdevelopment) formulated by orthodox economists. Instead underdevelopment or backwardness of any country is an externally induced phenomenon in its entirety. Internal constraints are not of much in explaining underdevelopment. In this context Baran cites the example of India and Japan. While India’s underdevelopment is attributed to its integration with the highly unequal capitalist system of the world. Japan’s success is ascribed to its age-long isolation of the West. The first and subsequently highly influential articulation of the neo-Marxists perspective on underdevelopment is contained in Paul Baran’s Political Economy of Growth (PEG) which was published in 1957. PEG is an important shift in Marxist theory, both in problems to which it was addressed and in its theoretical contents. Central to Baran’s analysis, there are four concepts. They are:

Monopoly capitalism
Imperialism
Class dynamics
Surplus Baran adopted Marxist interpretation of capitalism and monopoly capitalism. Baran’s significant contribution to Neo-Marxist-paradigm lies in his definition and the elaboration of the concept of surplus -- the actual surplus, the potential surplus and the planned surplus. The actual surplus is difference between the current new output and current consumption. The potential surplus is defined as the difference between the output that can be produced in a given natural and technological environment and what might be regarded as the essential investment. Planned surplus is the difference between the optimum level of output and the consumption being obtained by very conscious techniques of planning presumably in a socialist society. Origins of Underdevelopment Baran divided the world economy into two (polar) interacting parts-Advanced capitalist countries and less developed countries. The interaction between these two sets of countries can be explained with reference to trade flows, surplus flows and potential military influence. Trade flows serve to provide cheap sources of primary products to the advanced countries while the development of industries in LDCs is discouraged by the cooperation of manufactured products imported from advanced countries. Persistence of Underdevelopment Underdevelopment persists as a sequel to the process of actual surplus falling persistently short of potential surplus and the actual surplus being disposed off in a manner so as to affect perversely the capital accumulation. We will consider each particular class and its contribution to economic development.

Land owing gentry and unproductive use of surplus- an analysis traced on interlocking of markets.
Merchants and commercial speculation.
Foreign capital and drainage of local surplus. These three points may now be discussed in detail:
In most LDCs much of the surplus is generated in agriculture where production is organized in two forms, subsistence agriculture and commercial plantation.
The merchant class like the landowners is not outraged from moving into agricultural producer capitalism by relatively risky and low return on such investment. Instead it uses its revenue both for reinvestment in trade and commercial speculation in a similar manner to the landowners.
In the periphery, foreign capital is invested first in primary resource extraction in mining and plantation agriculture. (i) Initial Investment outlays have their expansionary effects in the countries at the centre rather at the periphery, equipment is imported while local expenditure is low. (ii) Investments in infrastructure are planned and located to serve the interest of foreign enterprises and not the development of the productive capacity of the economy as a whole. (iii) Reinvestment of profits is determined by conditions in the world market and the over all interests of the foreign enterprise. In the aggregate, only a fraction of foreign enterprise profits in the periphery are reinvested. (iv) While a fraction of the profits are paid in tax to local government, the significance of these payments for local development depends upon the manner in which they are used by the state. ANDRE GUNDER FRANK’S THESIS The dependency theory was first promoted by Paul A. Baran in 1957. His followers are A. G. Frank (1967), Das Santos (1970), S. Amin (1974). For dependency theorists, the development process is driven by a developed capitalist country that, resting on military superiority, shape the developing country to suit its needs for raw materials and labour power. Gunder Frank referred to this process as the “development of underdevelopment”. The center countries drain resources from the periphery, although within each peripheral region there are local centers, together with their own peripheries. The general study of Frank’s study of third world realities is the development of Latin American capitalism. Frank’s position clearly depends on his conceptualisation of capitalism. Frank identified capitalism as two systems, characterized by monopoly and exploitation. Thus for Frank the problem if the origins of capitalism comes down to the origins of expanding world market and not the emergence of a system of three wage labour. To explore the process we will take cognizance of the features of capitalism, which jointly constitute the dominant causes of underdevelopment. These are as follows:
The incorporation of the Latin American countries into the world economy since the early stages of their colonial periods: The colonization of the subcontinent by Spain and Portugal was

widening gap. This is mainly due to the operation of MNCs. The control of the market in the periphery by MNCs leads to ‘unequal exchange’. Criticisms (1) Unless we known the causes of wage differences between the advanced country and the backward economy we cannot explain the phenomenon called ‘unequal exchange’. While in Emmanuel’s model, wage differences are institutionally (exogenously) determined, in reality various other factors impinge on wage differences. (2) Normal wage differences alone cannot lead to unequal exchange. Criticism of Baran’s Theory

Trade aid and investment : Baran’s most important point is that aid, investment and trade are interdependent in the way they allow the surplus to be extracted from the under developed countries (UDCs). Via aid-tying the advanced countries find the markets for UDCs as a dumping ground for their sub-standard products. Consequently, aid-tying gives the producers of capital goods in the advanced countries a strong monopoly position and, UDCs remain dependent on advanced capitalist countries forever. There is need for continuations of imports from donor countries in the long run. Thus, aid is not a form of assistance for development as it apparently seems. Rather it is a form of disguised redistribution of income to the capitalists of the advanced countries.
The exploitation of workers: The working classes in both the developed and underdeveloped parts of the capitalist system largely participate in trade, aid, investment and other types of economic relationships. In both parts of the capitalist world the workers are exploited because they produce more value than they receive in wages. An obvious symptom of this is the persistence of the vastly unequal levels of wages in different parts of the world.
The question of surplus: The notion of economic surplus is central to Baran’s analysis of capitalism. The actual economic surplus in a country is the difference between what is produced and what is consumed. It is equal to investment, as opposed to the consumption of workers, capitalists and the government. Thus, while Marx’s surplus value is defined in relation to the ownership of property, Baran’s surplus is defined more in relation to consumption needs. So it is something which exists in all societies, i.e. Baran’s concept of surplus value is universally applicable. Actual versus potential surplus value: To Baran, the really important concept, however, is not the actual surplus but the potential surplus, a concept very close to Marx’s concept of surplus value. The difference is that Baran’s potential surplus includes the consumption spending of the state (military expenditure), as well as all ‘unnecessary’ consumption-by the both workers and capitalists-and the value of wages of unproductive labour. Alternatively stated, potential surplus is what could be available for capital accumulation and economic development with a different organization of society from the present one. 4. Baran had not sufficiently related the facts of exploitation in the advanced and underdeveloped countries to the aid, trade and exchange relationships. In truth, he did not really have a theory of exploitation at all. This omission is perhaps the most serious defect of his conceptual framework in the context of the theory of capitalist development. Criticism of Frank’s Theory

The main points of Frank’s theory are the following;

1. Development of underdevelopment: One basic proposition of Frank’s theory is that the mechanism which triggers off and maintains, a process of underdevelopment in the periphery is a precondition for the accumulation of capital- or, more generally, development-in the centre. The most important mechanism in the mutual and simultaneous process of development and underdevelopment, according to Frank, is the centre’s or the metropolis’s exploitation of economic surplus from its satellites, i.e. from the periphery. However, the forms of the metropolis’s exploitation of its satellite’s has changed over time. After the Second World War this exploitative relationship increasingly dominated by transnational corporations with their headquarters in the metropolis. 2. Neo-imperialism and transnational corporations: Frank specifically argues that the rapidly increasing foreign investments made by US-based transnational corporations in the post-war period, has extinguished the Latin-American national industrial bourgeoisie and replaced it by a dependent ‘lumpen-bourgeoisie’ in, at least, two ways. Firstly, the mounting foreign investments increased the intensity of competition so much that most national investors went bankrupt. Secondly, most ‘foreign’ investments were not financed by foreign capital flows, but through local borrowing by transnational firms. This drastically reduced the national industrial bourgeoisie’s access to domestic credit. 3. Surplus transfer: Another aspect of the process of development of underdevelopment is that the transnational firms will transfer a surplus from the satellite to the metropolis through repartriation of their profits. Thus, the neo-dependent integration under neo-imperialist development has created a lumpen bourgeoisie and this ‘lumpen-bourgeoisie’ has also seized control of the state and used it as an instrument for promoting its own interests, as also that of foreign capital. 4. The omnipresence of capitalism: The most important point that emerges from Frank’s dependency theory is that economic dependence creates a class structure and gives rise to a neo-policy of lumpen development, which proves that the bourgeoisie as a whole cannot formulate a genuine policy of development because its own vested interests would be jeopardized. Points of Difference between the Two Theories a) In Paul Baran’s writings we find the term ‘economic surplus’. But in Frank’s writings we find a reiteration and elaboration of Baran’s central dictum that. “It existed under capitalism, but there was no accumulation of capital.” b) Root of Backwardness: Baran argues that it was the alliance between foreign capital and the domestic pre-capitalistic classes that thwarted the formation of a national capitalist class, which could carry out the historic task of industrialization and the development of the productive forces of social labour, in general. c) Meaning of capitalism: By contrast, Frank does not explain exactly what he means by

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