Singer-Prebisch thesis

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The Singer-Prebisch thesis (often referred to as the Prebisch-Singer thesis or sometimes the Prebisch-Singer hypothesis) is the observation that the terms of trade between primary products and manufactured goods tend to deteriorate over time. Developed independently by economists Raul Prebisch and Hans Singer in 1950, the thesis suggests that countries that export commodities (such as most developing countries) would be able to import less and less manufactured goods for a given level of exports.

Singer and Prebisch examined data over a long period of time suggesting that the terms of trade for primary commodity exporters did have a tendency to decline. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

Some regard the Singer-Prebisch thesis as important because it implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality. As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing (ISI) policies and an expansion of the role of the commodity futures exchange as a tool for development.

Though out of intellectual fashion these days, some recent research has found empirical support for the Singer-Prebisch thesis. José Antonio Ocampo, the under-secretary-general in charge of the Department of Economic and Social Affairs of the United Nations and the leading scholar in this field, has noted that the deterioration in the barter terms of trade for primary products is discontinuous rather than gradual, with sharp deteriorations in the 1920s and 1980s followed by periods of stability.

Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.

The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.

In 1998, Singer argued that the thesis he pioneered has joined the mainstream:

"One indication of this is that the Prebisch-Singer Thesis (PST) is now incorporated, both implicitly and explicitly, in the advice given by the Bretton Woods Institutions to developing countries. They are warned to be prudent even when export prices are temporarily favourable and to guard against currency overvaluation and Dutch Disease, with all the unfavourable impact on the rest of the economy and all the dangers of macroeconomic instability which a sudden boom in a major export sector could imply. They are warned to remember that the outlook for commodity prices is not favourable and that windfalls will tend to be temporary, with the subsequent relapse likely to be greater than the temporary windfall. This is exactly the warning which the PST would give."

[edit] History of the Thesis

Raul Prebisch's analysis of the deterioration of the terms of trade were first introduced on his book The Economic Development of Latin America (1950; orig. in Spanish 1949). Prebisch was asked by ECLA's executive secretary at that time, Gonzalo Martinez-Cabañas, to write a text for the second annual meeting of ECLA, that was going to take place on La Habana, Cuba on May 14, 1949. Initially, Prebisch wrote a long text, but after having written the first draft, and on repeated suggestion, he came to read Hans Singer's paper: Post-War Relations between Under-developed and Industrialized Countries (Feb. 1949), about the deterioration of the terms of trade, which became decisive for him. Prebisch asked to change his first version, and in only three days and three nights, he wrote his book, quoting Singer's paper and his basic conclusion, and later discoursed it to the meeting.

The discovery of the long-term deterioration in the terms of trade for underdeveloped countries must be attributed to Hans W. Singer. His explanation, however, stressing that the terms of trade moved against the 'borrowing' (i.e. underdeveloped) and in favour of the 'investing' (i.e. developed) countries, was similar to Prebisch's and published slightly later in early 1950. Singer, like Prebisch, was a United Nations functionary but at the New York headquarters. He believed himself to have reached his conclusions independently from Prebisch and around the same time (Love, 1980: 58; H. W. Singer, 1982: 13), but seems not then to have known that Prebisch had in fact seen his trade statistics beforehand.

Thus the thesis on the deterioration in the terms of trade is known in the economic Literature as 'Prebisch-Singer Thesis'. However, Prebisch specifically deals with the economic cycle and highlights to a greater extent than Singer the reasons for the different behaviour of wages in developed and underdeveloped countries.