Centre-Periphery Models:

Centre-Periphery Models:

DEPENDENCY THEORIES:

Dependence refers to a situation in which the economy of a country is conditioned by the development and expansion of another economy to which the former is subjected to.

Basically, dependence takes place when some countries, i.e. the DCs, can expand and sustain on its own while the other countries, i.e. the LDCs, can expand and sustain as a reflection of the DCs. The expansion of the former might have a positive or a Negative effect on the latter.

The factors responsible for determining the historic forms of dependence were:

1. Basic forms of world economy
2. The type of economic relations between the dominants and the dependents that will result in expansion.
3. Economic relations existing within the peripheries.

CENTRE - PERIPHERY CONCEPTS:

Basis:

In the mid-1960s, the neo-marxist economists had spread the idea that development of the core (dominant) and underdevelopment of the periphery (dependent) are the 2 sides of global capitalism.

Historical View:

Historically, the dependent countries of Asia and Africa were the colonies of European capitalist and imperialist economies.

They occur in an asymmetrical power relationship between these countries. Consequently, autonomous development of the Periphery is not possible.

Dependency and underdevelopment:

Since peripheries are connected to DCs through trade and investment, dependency creeps in. This results in underdevelopment of the LDCs. Thus, development somewhere requires exploitation and under development elsewhere.

Dependency School believes that imperialism is the basis of perpetuating dependency and hence underdevelopment.

Different forms of dependence between periphery and centre:

• Colonial dependence:

It is based on Trade and exploitation of natural resources.

Here, the commercial and financial capital in Alliance with the colonialist state dominated the economic relations and the colonies.

• Technological-Industrial dependence:

This kind of dependence developed in the post war period.

It is based on MNCs which began to invest in industries that were internal to the LDCs. Thus, emerged the TI DEPENDENCE.

It was a new form of dependence.

Such dependency was based on the possibilities of generating new investments which in turn was dependent on the existence of financial resources.

• Financial-Industrial dependence:

It started at the end of the 19th century.

It was characterized by domination of big capital of the DCs and its expansion in the LDCs through investment production of raw materials and agriculture products. These goods were used for consumption purposes in the DCs.

THE PERBISCH MODEL:

Consider a two-country, two-commodity model with advanced centre produces and exports manufactured goods with an income elasticity of demand greater than unity and the backward periphery produces and exports primary commodities with an income elasticity of demand less than unity.

Let us suppose that:

The income elasticity of demand for manufactures (Em) = 1.3,

The income elasticity of demand for primary commodities (Ep) is 0.8.

The growth rates of income of both centre and periphery are equal to 3 per cent,

Gc = Gp = 3.0.

For centre:

Xc = Gp × Em = 3 × 1.3 = 3.9%

Mc = Gc × Ep = 3 × 0.8 = 2.4%

For periphery:

Xp = Gc × Ep= 2.4%

Mp = Gp × Em = 3.9%

Observations:

For periphery,

Imports(Mp) is growing faster than exports (Xp). This is not a sustainable position unless the periphery can finance an evergrowing balance-of-payments deficit on the current account by capital inflows.

If it can not, and balance-of-payments equilibrium on the current account is a requirement, there must be some adjustment to raise the rate of growth of exports or reduce the rate of growth of imports.

Adjustment:

We rule out the possibility that relative prices measured in a common currency can change as an adjustment mechanism.

The only adjustment mechanism left (barring protection) is a reduction in the periphery's growth rate to reduce the rate of growth of imports in line with the rate of growth of exports.

Mp = Xp

=> Gp.Em = Xp

=>Gp =Xp/Em = 2.4/3.9 = 1.846

Thus the growth rate of the periphery is constrained to 1.846 per cent, compared with 3 per cent in the centre. In these circumstances both the relative and the absolute gap in income between periphery and centre will widen.

Gp = (Gc × Ep) / Em

By dividing through by gc, we reach the interesting result that the relative growth rates of the periphery and centre will equal the ratio of the income elasticity of demand for the two countries' commodities:.

This result will hold as long as current account equilibrium on the balance of payments is a requirement, and relative price adjustment in international trade is either ruled out as an adjustment mechanism to rectify balance-of payments disequilibrium or does not work.

Valid for protectionism policy.