Dependency Theory

Dependency Theory


Dependency Theory, theory of economic development that emerged in the 1960s. Dependency theory addresses the problems of poverty and economic underdevelopment throughout the world. Dependency theorists argue that dependence upon foreign capital, technology, and expertise impedes economic development in developing countries.


Until the 1960s, the prevailing theory of economic development, known as modernization theory, maintained that industrialization, the introduction of mass media, and the diffusion of Western ideas would transform traditional economies and societies. These influences would place poor countries on a path of development similar to that experienced by Western industrialized nations during the Industrial Revolution.

Dependency theory rejects the central assumptions of modernization theory. In the 1960s advocates of dependency theory—mostly social scientists from the developing world, particularly Latin America, such as Andre Gunder Frank—argued that former colonial nations were underdeveloped because of their dependence on Western industrialized nations in the areas of foreign trade and investment. Rather than benefiting developing nations, these relationships stunted their development. Drawing upon various Marxist ideas, dependency theorists observed that economic development and underdevelopment were not simply different stages in the same linear march toward progress. They argued that, on the contrary, colonial domination had produced relationships between the developed and the developing world that were inherently unequal. Dependency theorists believed that without a major restructuring of the international economy, the former colonial countries would find it virtually impossible to escape from their subordinate position and experience true growth and development.

In the 1960s, dependency theorists emphasized that developing nations were adversely affected by unequal trade, especially in the exchange of cheap raw materials from developing nations for the expensive, finished products manufactured by advanced industrial nations. They argued that modernization theory did not foresee the damaging effect of this exploitation on developing nations. Even the achievement of political independence had not enhanced the ability of former colonial nations to demand better prices for their primary exports.

Some developing countries attempted to counter the inequalities in trade by adopting import-substitution industrialization (ISI) policies. ISI strategies involve the use of tariff barriers and government subsidies to companies in order to build domestic industry. Advocates of ISI view industrialization as the precondition of economic and social progress. However, many developing nations that managed to manufacture their own consumer products continued to remain dependent on imports of capital goods. ISI also encouraged multinational companies with headquarters in the industrialized world to establish manufacturing subsidiaries in the developing world.

Dependency theorists have also focused on how foreign direct investments of multinational corporations distort developing nation economies. These distortions include the crowding out of national firms, rising unemployment related to the use of capital-intensive technology, and a marked loss of political sovereignty.

From the perspective of dependency theory, the relationship between developing nations and foreign lending institutions, such as the World Bank and the International Monetary Fund (IMF), also undermines the sovereignty of developing nations. These countries must often agree to harsh conditions—such as budget cuts and interest rate increases—to obtain loans from international agencies. During the 1980s, for example, the foreign debt of many Latin American countries soared. In response to pressure from multilateral lending agencies such as the World Bank and the IMF, these nations enacted financial austerity measures known as Structural Adjustment Programmes in order to qualify for new loans. These economic policies led to a decrease in the amount of money spent on health care and education, higher levels of unemployment, and slower economic growth.


The impressive rise of some newly industrializing countries of Latin America and East Asia since the 1960s defied the bleak prognosis of dependency theorists. Both Mexico and Brazil, for example, exporters of raw materials that turned to ISI and encouraged direct foreign investment and external loans, have experienced substantial industrial growth. South Korea and Taiwan successfully implemented ISI policies and became global exporters of manufactured goods. Dependency theorists considered that these apparent exceptions were in fact replications of the same system with the more successful developing nations succeeding at the cost of other, even poorer, nations. However, some of these economic success stories resulted in a re-evaluation of the central premises of dependency theory.

In the 1970s, sociologist Fernando Henrique Cardoso (now president of Brazil) addressed weaknesses in dependency theory. Cardoso asserted that developing countries could achieve substantial development despite their dependence on foreign businesses, banks, and governments for capital, technology, and trade. He believed that developing nations could defend national interests and oversee a process of steady economic growth by bargaining with foreign governments, multinational corporations, and international lending agencies.

Other scholars have gone even further than Cardoso in recognizing the importance of negotiations between governments in developing countries and governments and firms from industrialized nations. These analysts believe the way nations respond to dependence on foreign capital can be as important as the dependence itself. These refinements to dependency theory suggest the promise of new approaches to the problem of development, approaches that seriously take into account the role of politics and government-level negotiations in determining economic outcomes.