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Raul Prebisch and His Similarities to John Maynard Keynes in the World Economic Strategy

Sunday, March 22, 2009

Ironically, recently after writing my post on John Maynard Keynes, I was recommended a story from the March 7th-13th edition of the Economist by my father. The article is a book preview/review of "The Life and Times of Raúl Prebisch". Born in 1901, Prebisch was an Argentine economist known for his contributions to what is known as structuralist economics, the most famous of these being his collaborative creation of the Prebisch-Singer hypothesis that outlines the basis of economic dependency theory. The idea behind the theory is that the price of primary products tends to decline relative to those of higher productivity, manufactured goods. Therefore, industrialized nations derived more benefit from trade that developing countries. How is the developing nation supposed to be able to compete in a global market? I had been exposed to some of Prebisch work during my studies, particularly in my Latin American economies course, but I personally had never really followed up on the life of the Argentine policy-maker.

From what I have read, Prebisch experienced a similar cycle of popularity to that John Maynard Keynes. His work initially was received as new and insightful, but then temporarily disregarded after the real-life existence of economies that disproved his theories. Now, he is making a comeback given the capricious conditions the world is facing today. Volatile markets and environments have motivated theorists and one-time critics to the once ridiculed ideas of Raul Prebisch. Professionals have been called upon to recommend macroeconomic decisions as it relates to the national and global economic strategies, and they are willing to consider all options.

Obviously conditions worldwide change exponentially with any news, advancements, predictions, estimates, statistics, and other influential occurrences. The relatively recent integration of the world system lacks the regulation and understanding to effectively function, and the end result is the current crisis whose pressure has built up over the last 30 years or so. Transparency, morality, and knowledge are just some of the many themes to the transition to a new economic future.

As it relates to developing nations and the ideas of Raul Prebisch, to truly understand the dependency theory, one has to apply reforms on a case-by-case basis. Strategies for the improvement of economies obviously differ depending on the advantages, relationships, politics, and a number of other factors that contribute to the growth and success of a nation. Regardless, if an economy lacks domestic, competitive industries, it is going to have to rely on the already developed technologies and industries of the industrialized world based on the trading agreements between the countries. Reliance on this arrangement will not enhance the health of an economy in an ever-increasingly competitive and expansive global market.

The world economy will always need raw materials and other primary products. Nations that are able provide these goods have tremendous advantage. That still does not remove the responsibility to create forms of employment, establish efficient and productive domestic industries, and diversify the methods of national output, especially as population and competition increase worldwide. Regardless, the modern globalization of world trade and relations has re-stimulated interest in dependency theory as economists try to apply thoughtful generalizations to the relationship between developing and industrialized nations.

The reason I like Prebisch is because of his ability to change his opinion, to be flexible. Some even consider him a dangerous radical. At times people thought he was too politically naive. I see that as realism. Politics is tremendously important to the pursuit of effective economics, but does not necessarily have to be considered in every economic analysis. I also admire his preference for reform rather than revolution. There are obviously times for when revolution is necessary, but there is also much more at stake in these cases and when it is all said and done, there is more work that needs to be done to clean up, sometimes even more than when the situation originally arose. Lastly, his stance that a mixed economy is the most ideal, one in which the private sector would play a leading role is critical, especially today. It cannot be the decisions of policy-makers and government to always lead nations through times of crisis or ones of stability. It is up to the individual, to the community, to members of the private sector to outgrow dependence of macro-economic forces.

Raúl Prebisch was an advocate of structural and industrial change in Latin America, but this concept can certainly be applied to other developing nations. He was invited by the United Nations in 1948 to direct the newly formed Economic Commission for Latin America (ECLA), which gave him the chance to preach inward development via what is known as import substitution industrialization as well as regional integration. I personally have always been supportive of cooperative economic theory, but unfortunately politics and other real world factors tend to get in the way of efficient integration.

The Argentine called for "new international economic order," which is very fitting considering the circumstances. He stressed independence of the central bank and fiscal stability, both important policies for any economy. What was forgotten from his formula is that is it the responsibility of economies to cultivate both a domestic market as well as an autonomous generation of technology and industries for independently creating employment and sustainable growth, rather than relying on the relationships with other economies.


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