‘Dependency theory’ was based on the spatial variation that the underdeveloped and less developed nations were at the periphery and its resources were extracted for the development of the advanced economies which were at the center of the system.
The theory has its roots in the Marxian analysis of development in urban region at the cost of the rural country side. Theories of Imperialism by Rosa Luxemburg and Vladimir Lenin also studied and analyzed how raw materials were taken for low cost from nations and finished/manufactured goods were sold to them at higher cost. The less developed nations were made exporters of raw materials and importers of finished goods. Thus, their resources were drained for the benefit of advanced economics. The center-periphery development modal deduces that the less-advanced economies continue to be dependent on the more advanced and industrial nations. They conclude this based on several observations and analysis. Economic underdevelopment and dependency are based on forces of production, modes of production, distribution of the produce, capital investment and capital allocation.
The theory traces the cause of unequal distribution and continued poverty as unequal exchange between nations. The technologically advanced economies have benefited disproportionately in their interactions with the less developed nations. It states the competition is unequal between the nations and in favor of developed countries. They demand equalizing of the differences so as to enable equal exchange.
Cheap labor in less developed countries has shifted some industries and production process from developed countries to these nations. The wages, being less in comparison to advanced nations help in profit maximization of corporations. This profit is shifted back to the developed nations. They contribute very little as a means to development in the country due to which the profit could be made. This outsourcing of labor intensive work to low wage countries has benefited them very little and increased their dependency on developed nations for subsistence.
Though cheap labor is available in third world countries, there is a deficit of skilled labor. Lack of sufficient resources has resulted in little investment for education and skill development. Thus, high wage skilled work continues to be performed by advanced nations while cheap unskilled labor is outsourced to less developed nations. They have also led to over urbanization in less developed nations, the pace of urbanization greater than development.
The control of capital has rested with the advanced developed economies. The inability of the third world countries to borrow in their own currency has been detrimental to their growth and development. The dependence on US dollar and Western dominated financial markets (controlled by developed nations) has increased the dependence. Moreover, the profit shifting by corporations has resulted in capital accumulation in western developed nations. Less resources with the less developed nations has meant less developmental investments. Capital accumulated in developed nations has been often deployed for luxury goods and consumption. This has affected the manufacturing pattern and economic priorities of not only developed nations but underdeveloped nations too.
Technology, which was the driving force of industrial revolution, continues to be monopolized by developed nations. Patents and complex Intellectual Property regimes have effectively kept the technological advancements out of reach of most less developed nations. Thus, primary industries in third world countries produce to meet the demands of advanced developed nations.
Market forces which determine the supply demand cycle in advanced economies manifest in a distorted form in less developed nations. Traditional distribution networks such as kinships and patron-client relationships continue to exist alongside the market forces.
All these factors have decreased the autonomy of less developed nations and caused dependency on advanced developed nations. The integration of the less developed economies into the “world system” in this manner is the base for center-periphery modal of development. The dependency theory arose as a criticism to modernization theory. Latin American Structuralists and American Marxists looked at underdevelopment in Latin America and Africa and put forward this theory. The economic growth of India and East Asian economies highlight the complex forces at play. These national economies have gained from integrating into the world system.
Prebisch Singer hypothesis proposed protectionism and import substitution to safeguard and develop the national industries. In this case, the comparison between North and South Korea is telling. While South Korea integrated with the global economy, North by its policy of import substitution and protectionism has suffered from poverty and underdevelopment. Few still champion the dependency theory. NGOs such as Make Poverty History and fair trade movements have based their straggle on the assumptions and implications of the dependency theory.