Chapter No.31

CHAPTER

31 T he  y T heory  he De pendenc  pendenc  heory  of   Under de  of  Under  de v  velopment   elopment 

INTRODUCTION

The dependency theory states that the dependence of less developed countries (LDCs) on developed countries (DCs) is the main cause for the underdevelopment of the former. This theory of underdevelopment originated in the writings of a few Latin American economists whose translations began to appear in English in the mid-1960s and early 1970s. The prominent among them are Frank, Sunkel, Furtardo, Santos, Emmanuel and Amin. 1 The explanations of dependencia given by the various writers differ in degree only. only. Each tries to pinpoint and specify certain factors which have been responsible for the underdevelopment of LDCs by DCs. So “there is a plurality of dependency views; different meanings are accorded the concept of dependence, and different analyses are offered to explain underdevelopment as a result of the 1. A.G. Frank, Capitalism and Underdevelopment in Latin America , 1976, Dependent, Accumulation and Underdevelopment , 1979; O. Sunkel, “National Development Development Policy Policy and Externa Externall Depen Dependence dence in Latin America”,  Journal of Development Studies , Oct. 1969; C. Furtardo, Development and Underdevelopment , , 1964; Dos Santos, T., “The Structure of Dependence, A.E.R., May 1970; A Emmanuel, Unequal Exchange, African Studies (10), 1972; 1972; Samir Amin, “Underdevelopment and Dependency”, Journal of Modern African  , 1975; Unequal Development , , 1976.  Accumulation  Accumulat ion on a World Scale ,

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interplay between internal and external structures.” As there are varieties of dependency theory, theory, we shall briefly discuss the views of the main writers in the form of certain characteristics. MEANING OF DEPENDENCY According to the dependency economists, the whole world is divided between two sets of countries: DCs (developed countries) and LDCs (less developed countries). The former are in the centre (Western Europe, Britain and the United States) and the latter are in the  peripher  peripheryy (backward countries of Asia, Africa and Latin America). Frank calls the DCs as metropolis and LDCs as satellite countries. Others call the former as dominant and the latter as dependent countries. There are unequal centre periphery relationships whereby LDCs are dependent on DCs in trade, investment, technology, etc. This dependence results in underdevelopment of the periphery  becausee the centre  becaus centre is dominated dominated by the power powerful ful capitalist capitalist countrie countriess that exploit exploit the the former former for for their benefit. There is only one specific definition of dependency to be found in the literature on dependencia. This is by Dos Santos. According to him, dependency is “a situation in which the economy economy of certain countries is conditioned by the development and expansion of another economy to which the former is subjected.” A dependent relationship between two or more economies is one “when some countries (the dominant ones) can expand and be self-sustaining, while other countries (the dependent ones) can do this only as reflection of that expansion, which can have either a positive or a negative effect on their immediate development.” But there is no unanimity among economists about the meaning of dependencia dependencia because  because of differences among them about the relative role of various features of dependence which have caused underdevelopment of LDCs. Sanjay Lall 2 points out in this context : “One sometimes gets the impression on reading the literature that ‘dependence’ is defined in a circular manner: LDCs are poor because they are dependent, and any characteristics that they display signify dependence.” Thus, according to Lall, “in the usage of the dependencia school, ‘dependence’ is meant to describe certain characteristics (economic as well as social and political) politi cal) of the economy as a whole and is intended to trace certain processes which are causally linked to its underdevelopment and which are expected to adversely affect its development in the future.” future.” THE DEPENDENCY THEORY Dependency economists belong to different schools of thought and are classified as Marxists, neo-Marxists and structuralists. Todaro classifies them under the Neo-colonial Dependence Model, the False-Paradigm Model and the Dualistic-Development Thesis. 3 But Todaro’s categorisation of dependency streams of thought does not include all that is contained in the writings of dependency theorists. Bath and James identity four unifying elements in the views of dependency economists : “(1) Identification of underdevelopment with the expansion of industrial capitalist countries; (2) the view that development and underdevelopment are parts of a unified system; (3) the view that underdevelopment is a persistent natural condition, not a temporary,, precapitalist stage; and (4) agreement that dependence affects internal politics, society temporary and culture.” Economists have, therefore, tried to explain a single dependency theory, which contains the main views of all the dependency economists in the form of features or 2. Sanjaya Lall, “Is ‘Dependence’ a Useful Concept in Analysing Underdevelopment?”, World Development , , Vol. 3, 1975. 3. M.P. Todaro, Economic Development , , 5/e, 1994.

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The Dependency Theory of Underdevelopment

225

characteristics. As such, the dependency theory is explained below in terms of the following characteristics: 1. DEPENDENCY : A HISTORICAL INTERNATIONAL PROCESS Dependency theorists like Frank, Santos, Sunkel, Amin and Furtardo hold that the present economic and socio-political conditions prevailing in the periphery are the result of a historical international process. According to Dos Santos, development emerged as global historical phenomenon as a consequence of the formation, expansion and consolidation of the capitalist system, known as dependent capitalism. Both the DCs (developed countries) and LDCs (less developed countries) are integral parts of the capitalist system. But the global system is such that the development of the centre occurs at the expense of underdevelopment of the periphery periphery.. Meier, therefore, characterises underdevelopment of the periphery as the “Siamese twin” of development at the centre. According to Frank, it is the t he world capitalist system which produced underdevelopment in the past and generated underdevelopment in the present. This has led to what Frank calls “the “the development of underdevelopment.” Frank traces the process of development of underdevelopment at three levels. At the First level, many countries in the periphery have been incorporated into the world economy since the early days of colonialism. colonia lism. At the second level, such peripheral countries have  becomee capitalist  becom capitalist economies economies through through incorporatio incorporation n into the world world economy economy.. At the third level, the incorporation of the peripheral countries in the world economy has led to “metropolissatellite chain” in which the surplus generated at each level in the periphery is successively drawn off the centre. As a result, the periphery is impoverished and the centre is enriched. According to Sanjay Lall, “The development of underdevelopment may be viewed as leading to immiseration i.e. the growing poverty of the mass of the population in the periphery.” According to Amin, capitalist relations are introduced in the periphery by the centre. It leads to dependent development which is an inappropriate pattern of development imposed upon the periphery by the centre. In such a system, the peripheral economies are without any internal dynamism of their own and are dominated by absentee capitalists of the periphery. “The peripheral country is a mere appendage of the central economy. The development of the centre causes underdevelopment of the periphery and its dependence on the centre.” Todaro calls this the neo-classical dependence model which “attributes the existence and continuance of third world underdevelopment primarily to the historical evolution of a highly unequal international capitalist system of rich country-poor country relationships.” 2. FOREIGN CAPITAL The peripheral LDCs are heavily dependent on the centre for foreign capital. Foreign capital leads to “external orientation” of LDCs by exporting primary commodities, importing manufactures and making them dependent for industrialisation of their economies. According to Sunkel, it is the stagnation of agriculture, high concentration of primary commodities for exports, high foreign exchange content of industrialisation and growing fiscal deficit in the peripheral countries which necessitate foreign financing for them. In Sunkel’s words: “It is this aspect.... which finally sums up the situation of dependence; this is the crucial point in the mechanism of dependence.” The foreign investors exploit LDCs by insisting on the choice of projects, making decisions on pricing, supply of equipments, knowhow and personnel. etc. In fact, they impose a development pattern that is not compatible with local needs. Further, the

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226

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dependence on foreign capital leads to a much higher outflow in the form of declared profits, royalties, transfer pricing, payment of principal and interest to foreign investors of the centre. Debt service and repayments drain third world wealth. According to Amin, foreign aid stunts agriculture, encourages trade and investment dependencies and reinforces the dominance of exploitative elites of LDCs. Thus foreign investment and aid signify dependence and as a means of exploitation of the periphery by the centre. 3. TECHNOLOGICAL DEPENDENCE The peripheral countries use excessively capital-intensive technologies imported from the developed countries of the centre. These technologies are inappropriate to the production and consumption needs of LDCs and are sold by multinational corporations (MNCs) of developed countries. The technological dependence of LDCs on DCs arises because of the urgency of importing technologies as they cannot innovate them. They lack information about the availability of appropriate technologies which leads to exploitation of LDCs due to their weak  bargaining  bargain ing power. power. MNCs lead to economic economic and political distortions distortions in LDCs. LDCs. Some of the economic distortions created by MNCs are transfer of technologies to LDCs by restricting their right to use or change or transfer according to their discretion or requirements. This leads to their total technological dependence on MNCs. Capital-intensive technologies have limited labour absorption capacity and thus add to unemployment in LDCs. They create social tensions by worsening the distribution of income. There are large wage differentials  between  betwe en workers workers employ employed ed in the branch branches es of MNCs MNCs and those engag engaged ed in local firms in LDCs. LDCs. Such wage differentials increase income inequalities and create social tensions which retard the development of LDCs. Both Frank and Santos explain technological development perpetrated my MNCs. The centre has spread its monopoly to the peripheral countries through technological transfer. For this, LDCs have to borrow from the centre. This leads to the repatriation of profits, royalties etc. by MNCs to the centre. This worsens BOP of LDCs. They resort to devaluation and increase in money supply thereby leading to inflation with its resultant adverse effects on the economy. Thus the peripheral countries are caught in a web of dependence structure. MNCs also create political distortions in the peripheral countries by influencing their internal politics by bribing legislators not only directly but also indirectly. They offer high posts in their local branches to the friends and relatives of the local politicians, bureaucrats and economic oligarchies. They influence laws, politics and foreign policy pol icy of LDCs. They also subvert domestic fiscal and monetary policies of host countries. 4. TRADE AND UNEQUAL EXCHANGE Dependency economists contend that DCs at the centre exploit LDCs of the periphery by forcing them to specialise in the export of primary products with inelastic demand with respect to both price and income. So LDCs “continue to face stagnant export earnings often coupled with disruptive short-term fluctuations in prices.” This has created shortage of foreign exchange and BOP deficit in LDCs. Santos gives two reasons for BOP deficit : (a) DCs keep the prices of their exports to LDCs very high and that of their imports from LDCs very low. (b) Foreign capital from DCs controls major sectors of LDCs with the result that there are large

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The Dependency Theory of Underdevelopment

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outflows of profit, interest and principal. Further, trade between the centre (DCs) and the periphery (LDCs) is characterised by unequal exchange. Dependency economists attach different meanings to unequal exchange. Neo-Marxists mean by it deterioration in the terms of trade of peripheral countries. The reason is that “in the centre the incomes of entrepreneurs and productive factors increase more than productivity, whereas in the periphery the increase in income is less than that t hat in productivity.” This is because monopolistic elements in product and factor markets of the centre have allowed them to keep rising factor incomes, whereas the gains in productivity have been distributed in price reductions in the periphery. According to Sutcliffe, unequal exchange means that “exporters in industrialised countries possess more monopoly power than the exporters of underdeveloped countries” thereby leading to unfavourable terms of trade for the latter. To Emmanuel, it is the differences in techniques of production and differences in wages which lead to unequal exchange in trade between DCs and LDCs. Since wages are low in LDCs, the cost of production of the commodity is also low and so is its price. On the other hand, wages  being high in DCs, the the cost of production production of the comm commodity odity is is high and so is its price. price. Thus Thus the commodity of an LDC being cheaper than that of a DC, there is unequal exchange in trade  between  betw een the the two. This is becaus becausee an LDC exports exports more of its commo commodity dity in in order order to get get a given given quantity of imports from a DC. According to Amin, unequal exchange between the periphery and the centre is due to differences in wages between the two. The wages are higher in the centre due to higher productivity and lower in the periphery due to lower productivity. Since real wages are lower in the periphery (LDCs), the rate of surplus value is higher there. The absentee capitalists of the centre that dominate the periphery’s periphery’s exporting sector find it profitable to produce and export commodities  becausee of higher  becaus higher rate of surplus value value in the periphery periphery.. To Amin, Amin, dependen dependency cy is necessary necessary to generate surplus value in the periphery even though it leads to unequal exchange. 5. DUALISM The notion of dualism is explicit in the views of the dependency theorists. Internationally, the countries are divided into DCs and LDCs (or metropolitan and satellites or centre and periphery). There is also domestic dualism with the coexistence of an advanced imported capitalist system and an indigenous pre-capitalist backward system. The interrelationships between the two systems are such that the developed region pushes down the underdeveloped region with the result that there is development of underdevelopment. Dualism at the international plane leads to the dominance of the centre and dependence of the periphery in the following ways : (a ( a) by encouraging the flow of foreign investment and capitalcapital intensive techniques into LDCs through MNCs; (b ( b) by controlling scarce raw materials and natural resources in LDCs; (c ( c) by encouraging exports of primary products of LDCs and manipulating their prices to DCs own advantage; (d (d) by adopting trade and aid policies against the interests of LDCs and increasing their t heir dependence on DCs; (e ( e) by encouraging consumerism through widespread advertisement and exporting; ( f ) by encouraging the elite and rich to study for professional courses in DCs and luring the skilled and professional people to migrate in DCs by offering them high salaries, thus leading to brain drain from LDCs; and ( g ( g)) by perpetuating international dependence of LDCs by “often “ often uninformed, biased, and ethnocentric international expert advisers” from international agencies located in DCs that render “faulty and inappropriate advice” to LDCs. Further, by training university intellectuals, future highlevel government economists and other civil servants in developed-country institutions where

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they are taught “unhealthy alien concept” and “inappropriate “i nappropriate theoretical models.” Todaro calls this the False-Paradigm Model of international dependence. Within the dependent LDCs, domestic dualism occurs. According to Cardoso, this dualism is due to “an internal structural fragmentation connecting the most advanced parts of their economies to the international capitalist system. Separate although subordinated to these advanced sectors, the backward economic and social sectors of the dependent countries then play the role of internal colonies.” Sunkel calls it “internal polarisation”. Domestic dualism is characterised by the existence of a modern, capitalist and relatively developed sector producing primary products for export with relatively advance technology on the one side; and isolated, subsistence-based, feudal, or precapitalist and more underdeveloped sector comprising the vast majority of the population on the other side. The modern sector has been importantly affected by intimate economic relations with the centre. Petroleum, mining, plantation and manufacturing industries are controlled and run by MNCs. They exploit the backward, marginal and dependent groups in LDCs. They derive high incomes from their links with the parent MNCs. The consumption patterns in the advanced urban centres and in foreign-directed enclaves are based on those of DCs. Local elites and some workers in high-income groups are integrated socially and culturally with that of DCs. This reflects social and cultural dependence, besides economic dependence, of LDCs on DCs. Frank calls this dual society thesis as a false a  false hypothesis. According to him, historically the two different sectors of LDCs have been linked closely to the world capitalist system over the past centuries. Capitalism influences the entire entir e economy of an LDC by making its backward regions “internal colonial satellites” of international capitalism and its domestic allies in LDC. It is, therefore, not a fact that the backward rural sector is underdeveloped because it has not been touched and influenced by the capitalist system. In reality, “the capitalist system over the past centuries has effectively and entirely penetrated even the apparently most isolated sectors of the underdeveloped world,” according to Frank. Thus underdevelopment is not due to the existence of precapitalist institutions and capital shortage in isolated regions but the result of the very same historical process which generated the development of capitalism itself. Despite the participation of satellite countries in world trade and division of labour, capitalism has led to their underdevelopment. POLICY IMPLICATIONS OF DEPENDENCY THEORY Dependency economists have given divergent views to overcome dependency and underdevelopment of peripheral countries. To overcome dependency, they suggest internal structural and institutional changes. changes . Sunkel, in particular, advocates structural changes in all sectors of the economy. Increase in agricultural production through agrarian reforms is necessary to supply farm products at lower prices to other sectors. This will create substantial export surplus when cheap agricultural goods are exported. This will reduce foreign dependence. He suggests diversification and increase in exports, and import substitution. To increase productivity, reduce costs and utilise existing capacity adequately, he advocates industrial concentration of large specialised production units. To reduce dependence on DCs, Sunkel favours mutual cooperation among peripheral per ipheral countries in the fields of trade, aid, technical assistance and production agreements. Similarly, Santos suggests a qualitative change in the internal production structures and external relations of LDCs. All dependency economists lay emphasis on the development of capitalism in the peripheral

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countries as the main cause for their underdevelopment. So the remedy to overcome underdevelopment is to adopt a socialist system in such countries or to delink or snap ties with the world capitalist system, according to Frank Fr ank and Amin. Santos also favours also favours a popular popular revolu revolutionary tionary  government..  government Other dependency economists advocate mutual cooperation among LDCs in the form of regional economic cooperation and international commodity agreements. Amin, in particular, suggests a new development strategy for peripheral countries based on the following : (a (a) a self-reliant development strategy based on one’s own resources; ( b) collective integration of LDCs; and (c (c) the demand for a New International Economic Order based on the transfer of technologies to LDCs, the control of natural resources by LDCs, higher prices for raw materials of LDCs, and access to the markets of DCs for the manufactures of LDCs. CRITICAL APPRAISAL The dependency theory focuses on the centre-periphery relationship whereby dependence of the periphery on the centre has resulted in the development of underdevelopment of the periphery. It has good explanatory value in explaining the historical causes of their underdevelopment  based on the world capitalist system. system. It highlights how internal socio-econom socio-economic ic and politica politicall structures of LDCs are influenced by external forces of domination by DCs and perpetuate their underdevelopment. However, the main views of different dependency economists have been criticised on the following grounds: plurali ty of different 1. Not a Complete Theory. There are varieties of dependency theory with a plurality views which explain the underdevelopment of the peripheral countries. Thus it is not a coherent, systematic, and complete theory. 2. Does not Explain Development and Underdevelopment. A common feature of all the dependency economists is that they hold the domination of external forces generated by the centre as the main cause of the underdevelopment of the peripheral countries. But it fails to explain fully how the same external forces generated by capitalism can lead to development of DCs and underdevelopment of LDCs. 3. Ignores Production Relations. Dependency economists explain underdevelopment in terms of exchange or trade relations between the centre and the periphery. But they ignore the problems of forces of production and relations of production in LDCs. Thus their explanation of underdevelopment is one-sided and incomplete. 4. Surplus Product not Explained Fully. According to this theory, it is the exchange of surplus product of LDCs and its appropriation by DCs which causes both development and underdevelopment of the periphery. But it does not throw light on how it is produced and

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led to development rather than underdevelopment of many LDCs. For instance, China was underdeveloped due to political factors, internal disorder, etc. rather than the spread of capitalism. On the other hand, Shanghai, Manchuria and Hong Kong developed due to capitalist penetration. Cuba and East European countries remained underdeveloped due to their political relations with the Soviet Union. 8. Unequal Exchange not the Cause of Underdevelopment. The argument that unequal exchange between DCs and LDCs leads to underdevelopment of the latter is also weak. Wage differentials as the basis of unequal exchange is not peculiar to trade relations between only DCs and LDCs. They are also found between many DCs which may lead to unequal exchange  but not to their underdevelopm underdevelopment. ent. 9. Characteristics of Dependence not Clear. According to Sanjay Lall, characteristics of dependence are not clear. He argues that the characteristics charact eristics of dependence to be found in LDCs are also to be found in non-dependent economies. They are characteristics of capitalist development in general, not of dependent economies alone. For instance, the dominance of foreign capital does not provide a criterion of dependence because Canada and Belgium are more dependent on it than India or Pakistan, yet they are not in the category of dependent countries. 10. Neglects Market Forces. Griffin and Gurley have criticised the dependency theory for its failure to explain the relationship between the centre and the periphery in terms of the market forces.4 11. Weak Empiricially. The dependency theory is weak empirically even through Frank and other dependency economists have tried to base their analyses on the experiences of Latin American countries. But they have not provided data to test the theory. theory. In fact, the theory cannot  be tested tested because it deals deals with generalitie generalitiess which are often often vague. 12. Dependence not Defined Clearly. Clearly. Sanjay Lall has criticised the dependency economists for not defining the word dependence clearly. According to him, dependence is defined in a circular manner: LDCs are poor because they are dependent and any characteristics that they display signify dependence. In such tautologous definitions, definiti ons, dependency economists are trying to pick off some salient features of modern capitalism as it affects and puts them in a distinct category of dependence. Sanjay Lall concludes that “the concept of dependence as applied to LDCs is impossible to define and cannot be related to a continuance of underdevelopment”. 13. Does not Satisfy Two Criteria. Sanjay Lall further opines that a concept of dependence to  be useful as a theory must satisfy two criteria : (i ( i) It must lay down certain characteristics of dependent economies not found in non-dependent economies; and ( ii ii)) these characteristic affect adversely the course and pattern of development of such economies. If crucial features of dependence are found in both dependent and non-dependent economies, the first criterion is

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EMMANUEL’S THEORY OF UNEQUAL EXCHANGE Emmanuel in his book Unequal Exchange: A Study in the Imperialism of Trade(1970) Trade (1970) has propounded the theory of unequal exchange in international trade between the centre (DCs) and the periphery (LDCs) which has led to the exploitation of the latter by the former. Emmanuel’s theory is based on Marx’s theory of prices of production for the determination of international process and technological changes in production. pr oduction. He believes that the main reason for economic inequality between DCs and LDCs is the differences in techniques of production and differences in wages which lead to unequal exchange in trade. The product of an hour’s labour in a DC is exchanged for the product of more labour hours of an LDC. This unequal exchange brings gain to DC and loss to LDC. Its Assumptions. Emmanuel’s theory is based on the following assumptions : 1. There are two count countries: ries: a devel developed oped countr country y  A , and B an LDC. 2. The There re are two two differ different ent good goodss X and Y  Y which which are exchanged. 3. Capital is mobile mobile intern international ationally ly.. 4. Labou Labourr is not not mobile mobile between between count countries. ries. 5. Prices are high high in DC and lower in LDC. LDC. 6. Rates of profit profit are equal in in the two countrie countries. s. 7. Wages are are higher higher in DC DC and lower lower in in LDC. 8. Wages are are given given independe independent nt of prices. 9. Goo Goods ds are are free freely ly trad traded. ed. 10.Transport costs are zero. 11.There is a predetermined pattern of international specialisation so that each country specialises in a particular commodity. Explanation of the Theory Theory.. Given these assumptions, Emmanuel believes that LDCs have failed to take advantage of the technological changes for their development. On the others hand, DCs have raised the organic composition of capital through labour-saving technologies. This has led to unequal exchange in trade between them. But the main reason for unequal exchange is the difference between the wage rates of the centre (DCs) and the periphery (LCDs). According to Emmanuel, “Inequality of wages, as such, all other things being equal, is alone the cause of the inequality of exchange.” Unequal exchange occurs when two unequal countries produce two different commodities so that they are not in direct competition with each other. Since wages are low in LDC, the cost of production of the commodity is also low and so is its price. On the other hand, wages being high in DC, the cost of production of the commodity is high and so is its price. Thus the commodity of LDC being cheaper and that of DC being dearer, there is unequal exchange in

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PBy = (1 + r) (2P (2Px + 2P 2P y) where P A and PB are the two countries, Px is the price of good X and Py is the price of good Y . The relative prices of the countries are P AX = 2 PBy. The less developed low-wage country B exports 2 units of the export good Y  in order to buy 1 unit of its i ts import good X from country A country A.. Its terms of trade have worsened by 50 per cent. Thus there is unequal exchange whereby the developed country A country  A gains at the expense of the less developed country B. The theory of unequal exchange is explained in Figure 1 where prices in the two countries are taken on the vertical axis and the terms of trade on the horizontal axis. The price of commodity Y in Y  in less developed country B is taken as PB = 1 which is shown as the horizontal line PBPB. The price of commodity X in country A country A is shown by the curve P A1 so that the equilibrium terms of trade is given by OT 1. An increase in wages and costs leads to the rise in price in country A country  A which shifts its price curve to the left as P A  A2 2. As a result, the terms of trade of country B are reduced to OT 2. Unequal exchange is measured as the difference between the actual terms of trade, OT 1 , and the chang changed ed terms of trade, OT 2.Thus the terms of trade of country B have worsened by T 1T 2. Its Criticisms. Emmanuel’s theory of unequal exchange has been severely criticised by economists on the following grounds : 1. The theory assumes that unequal exchange is the result of wage differences between DCs and LDCs. But it does not explain many factors that affect wage differences between the two types of countries. 2. Even if it is accepted a ccepted that wage differences lead to unequal exchange, there can be unequal exchange between DCs because differences in wages are also al so found among them. So the theory  breaks down down as it is equally equally applicable applicable on DCs and and not on LDCs alone. alone. 3. If wage differences are in money wages and they are due to differences in labour productivity, the terms of trade of LDCs may not be very bad. If differences in money wages equal differences in productivity in LDCs and DCs, there would be no differences in costs and prices per unit of output. It is only when real wages do not rise as fast as productivity in LDCs as compared to DCs that the terms of trade of LDCs become unfavourable. 4. The theory assumes that the rate of profit is equal in LDCs and DCs. This is an unrealistic assumption because the rate of profit in DCs is always higher because of the capitalist mode of