Frankenhoff 1962 - The Prebisch Thesis

The Prebisch Thesis: A Theory of Industrialism for Latin America
Author(s): Charles A. Frankenhoff

Source: Journal of Inter-American Studies, Vol. 4, No. 2 (Apr., 1962), pp. 185-206
Published by: Cambridge University Press
Stable URL: http://www.jstor.org/stable/165226
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THE PREBISCH THESIS:
A THEORY OF INDUSTRIALISM
FOR LATIN AMERICA*
Charles A. Frankenhoff, S. J.
"Historically the spread of technical progress has been uneven

declared Dr. Raul Prebisch, Executive Secretary of the United Natio
Economic Commission for Latin America, "and this has contributed to
the division of the World economy into industrial centers and peripher
countries engaged in primary production, with differences in inco
growth." 1 This division of the family of nations into relatively-develop
"centers" and the developing "periphery" lies at the core of the Prebis
theory of industrialism for Latin America.
The Prebisch "thesis", already twelve years old, has grown out of th
Latin-American experience and is gaining an increasing acceptanc
among Latin-American economists. The effort of this paper will b
to lay open the elements of the Prebisch analysis uncritically at it
several stages of development. But first it will be useful to revie
briefly the earlier development of economic growth theory in Lat
America.
In the nineteenth century, the "laissez-faire" approach to economic

development received popular support in Latin America.2 The notion
of economic liberty fitted in nicely with the region's rupture of its
ties to Spain and Spanish (and Portuguese) mercantilism. The impli-
cations of this theory for infant economies struggling for political exist-
ence were, however, generally ignored, even among the leaders of the
several revolutions.
"Laissez-faire" soon lost its appeal in the face of political and eco-
nomic vicissitudes, and the more "protectionist" view of Friedrich List's
* The author is especially indebted to David H. Pollock, chief of the Washing-

ton Office of the Economic Commission for Latin America (ECLA) for his encourage-
ment and helpful comments.
1Raul Prebisch, "Commercial Policy in the Underdeveloped Countries", Amer-
ican Economic Review (May, 1959): 251.
aCf. Pedro C. M. Teichert, Economic Policy Revolution and Industrialization
in Latin America, 1959. Especially Chapters 15-17.
185
186 JOURNAL OF INTER-AMERICAN STUDIES
National System of Political Economy (first published in 1841) became

popular. List declared that not by free trade alone was Latin America
to achieve economic salvation. A judicious combination of free trade
and protection was required. He did not defend protectionism as a
good in se but felt that it was needed by the weaker countries to
bring themselves up to the productive level where they might engage
in free trade under more equal conditions. A country needs both agri-
culture and manufacture just as a man needs two arms, List reasoned.
"A nation which only carries on agriculture is an individual who in his
material production lacks one arm." 3 Countries which lack manufac-
tures may use foreign trade as a substitute limb.
The indirect effects of World War One and the direct impact of
the Depression proved unsettling for the none too stable economies
of Latin America. The prices of their primary product exports, e. g.,
coffee, bananas, beef, dropped; they had to forfeit payments on their
debt. At the same time, the prices of their imports changed relatively
little.
Latin America now entered into a second stage of economic develop-

ment in which "laissez-faire" economics was jettisoned completely and
the Keynesian doctrine of economic management - especially mone-
tary management - was embraced. J. M. Keynes' Treatise of Money was
read and reflected upon and furnished a rationale for increased gov-
ernment control.4 He pointed out, for example, that English econom-
ists and others often made the mistake of crediting "laissez-faire" poli-
cies with Great Britain's economic successes and rapid development in
the nineteenth century, instead of realizing that it was its unique credit
position in the world (in a rare metaphor Keynes refers to England as
"the conductor of the international orchestra") which permitted Great
Britain to indulge in foreign lending policies which other countries
could not imitate.5
The Treatise, written by Keynes in 1930, was the prelude to the more
famous General Theory of Employment, Interest and Money. In the
Treatise (Chapter 10) Keynes developed the "Fundamental Equation"
in which the price-level of output is seen to be governed by the volume
of earnings of the factors of production, the volume of current output,
and the relation between the volume of savings and the value of invest-
ment. The Keynesian analysis, completed and specified in the General
Theory, found general acceptance among the new generation of Latin
American intellectuals. Investment was seen as the key to develop-
8 List, National System, 129-30.

4Especially Book VII, "The Management of Money."
Keynes, Treatise On Money, Book IV, Chapter 20, p. 307.
PREBISCH TESIS: THEORY OF INDUSTRIALISM FOR LATIN AMERICA 187
ment; the multiplier effects of foreign trade were recognized. Central

banks and development banks came into fashion.
World War Two built up the foreign-exchange holdings of Latin

America. Their primary products were in heavy demand, but they could
not import capital goods. After the war, foreign exchange was rapidly
depleted as upper-income Latin Americans imported consumer durables
at high prices. Inflation took hold, and capital formation became the
crucial problem. Social overhead capital of roads, railroads, electric
power, etc., was being consumed in the process. Meanwhile, Latin
American dependence on a few primary products for foreign exchange
remained. As other economies came back into the world market with
primary goods, the prices of Latin-American products, e. g., Chilean
copper and Brazilian coffee, dropped, and their balance of payments
ran a persistent deficit.
Under the circumstances, the naive application of Keynesian money

and credit policies only abetted the inflationary process. Credit ex-
pansion under the aegis of government-controlled central banks and
development banks did not produce the much-needed economic infra-
structure but only domestic unrest and a higher propensity to consume
among the wealthy. Savings could not accumulate in the inflationary
milieu; neither was foreign capital attracted.
Introduction to the Prebisch Thesis
The first complete theory of development specifically for Latin

America was presented under United Nations auspices by Dr. Raul
Prebisch of Argentina. Prebisch had been removed from his position
as director of the central bank of Argentina by the government of Juan
D. Per6n. During the Per6n regime he taught at the University of
Buenos Aires. It was at this time that he studied and reworked the
Keynesian analysis in terms of the experience of the Latin-America
economies.
In 1948, Prebisch accepted the post of adviser to the United Nations

Economic Commission for Latin America (ECLA). In 1950, at the re-
quest of a number of Latin-American delegates, Trygve Lie appointed
Prebisch the Executive Secretary of ECLA (or CEPAL in Spanish).
Using as his point of departure (in a manner reminiscent of the
General Theory) the classical economic theory on international trade,
Prebisch presented an essay to the Secretary-General of the United
Nations, Trygve Lie, in October, 1949.6 It was entitled "The Economic
6 Raul Prebisch, "The Economic Development of Latin America and its Principal
Problems" for the Economic Commission of Latin America, United Nations, Depart-
188 JOmUNAL OF INTE-AMEICAN STUDIES
Development of Latin America and its Principal Problems" and began

its argument for industrialization in these terms:7
In Latin America reality is undermining the outdated schema of the inter-

national division of labor which achieved great importance in the 19th
century. Under that schema the specific task that fell to Latin America,
as part of the periphery of the world economic system, was that of produc-
ing food and raw materials for the great industrial centers. Two world
wars in a single generation, and a great economic crisis between them,
have shown the Latin American countries their opportunities, clearly pointing
the way to industrial activity.
The Prebisch thesis is based upon the specific differences in struc-

ture and function between the countries of the periphery and the more
developed industrial centers. The dynamism for growth is furnished
by technical progress.8 The problem for the periphery country is two-
fold: how to achieve greater technical progress per capita; how to
retain the benefits of increased productivity for a balanced economic
development The periphery is undergoing its own unique industrial
revolution and, using W. W. Rostow's well-known term, wishes to
achieve "the take-off" into sustained economic growth.9
The primary goal of this paper is to grasp the Prebisch thesis in its
own terms, without distorting it. This goal is less easy than it appears
because the Prebisch analysis is in terms of relationships rather than indi-
vidual elements. Critics of his theory of development often lose their
way by ignoring this distinction.l0
ment of Economic Affairs (Lake Success, New York, 1950), 59 pp. Original text
in Spanish.
7Ibid., 1.
While Prebisch himself is not a Schumpeterian, he would probably accept
Celso Furtado's definition of economic development (i. e. changing the form and
proportions in which factors of production are combined) without difficulty. Cf.
"Formaqao de Capital e Desenvolvimento Econ6mico" in Revista Brasileira de
Economia (Sept., 1952): 7:40.
W. W. Rostow, "The Take-Off into Self-Sustained Growth", The Economic
Journal Volume LXVI (March, 1956): 25-48. Rostow defines the "take-off' as "an
industrial revolution, tied directly to radical changes in methods of production, having
their decisive consequence over a relatively short period of time (p. 47)."
In this same stimulating article, Rostow quotes W. Arthur Lewis to the effect
that the central problem of the theory of development is "to understand the process
by which a community which was previously saving and investing 5% or less of
its national income converts itself into an economy where voluntary saving is run-
ning at about 12-15% of the national income (p. 82)."
10Cf. William H. Fink, "Trends in Latin America's capacity to import and
gains from trade", Inter-American Economic Affairs (Summer, 1955): 61-67. Fink
indulges in a statistical critique of the export-import price ratio (i. e., the net barter
terms of trade) in the 1949 United Nations Economic Survey of Latin America in
which the Prebisch thesis was first adumbrated.
PREBISCH THESIS: THEORY OF INDUSTRIALISM FOR LATIN AMERICA 189
We may begin by examining briefly some criticisms of the Prebisch

"theory of the periphery." Then we will turn to a more detailed look
at the theory itself. Finally we shall present a brief evaluation of the
Prebisch thesis from the perspective of economic development in Latin
America.
Some Adversaries of the Prebisch Thesis
Jacob Viner delivered six lectures relating the economics of interna-
tional trade to the problem of economic development at the National
University of Brazil in July and August, 1950. The subject of his
third lecture was "Gains From Foreign Trade," and in the course of it
the Prebisch position received a brief but vigorous pummeling.'1
Viner declared tartly,l2
I have become aware that there has been flowing from distinguished sour-
ces, and especially from the technical staff of the United Nations, new
or partially new light on these matters, especially as they bear on "under-
developed" countries. The doctrine that international division of labour in
accordance with comparative costs is beneficial does not hold true, we are
told, as far at least as concerns the trade relations between "developed"
and "underdeveloped" countries. The relation of productivity to prices is
such in "underdeveloped" countries that the exchange by such countries
of primary products for the manufactures of developed countries, while
especially profitable for the latter, is positively injurious to the former.
Viner then refers specifically to Prebisch's 1949 essay on "The Economic

Development of Latin America" and notes that it declares the mutual
profitability of international division of labour to be "an obsolete
dogma."
Viner immediately rejects that the English economists of the clas-
sical school would deny to Latin America "full right and justification
to establish any kind of industry which gave genuine prospects of be-
coming an economically healthy industry. There was no place in their
schema for the settling of economic issues by the invocation of terri-
torial jealousies, either by giving exercise to national superiority-com-
plexes or by making concessions to national inferiority-complexes." 13
Viner's fundamental criticism of Prebisch's study and of "other
literature along similar lines emanating from the United Nations and
elsewhere" is what he terms "the dogmatic identification of agriculture
with poverty." If one looks at Australia, Denmark or Iowa, he argues,
it becomes clear that agriculture may prosper. On the other hand,
industrialization does not guarantee prosperity. There is no natural
law, reflects Viner, by virtue of which,
uJacob Viner, International Trade and Economic Development (Oxford, 1953),

41-45.
12 Ibid., 42-43.
l" Ibid., 44.
190 JOURNAL OF INTEB-AMEMICAN STUDIES
agricultural products tend to exchange on ever-deteriorating terms for

manufactures; technological progress tends to confine its blessings to manu-
facturing industry; and agricultural populations do not get the benefit of
technological progress in manufactures even as purchasers because the
prices of manufactured products do not fall with the decline in their real
costs.
Finally, Viner compares the Prebisch analysis with that of the Ru-
manian economist, Mihail Manoilesco, who reasoned that,
because in all countries per capita incomes are higher in manufactures

than in agriculture, predominantly agricultural countries will raise their per
capita incomes if by establishing tariff protection for manufactures they
increase the proportion of the labour force engaged in manufactures.1
Viner denies that the causal relationship in favor of manufactures over

agriculture is that clear. He also (and quite properly, in the author
opinion) questions the statistics involved, their comparability and inclus-
iveness. "The real problem in poor countries," he insists,1'
is not agriculture as such, or the absence of manufactures as such, but

poverty and backwardness, poor agriculture, or poor agriculture and poor
manufacturing . . . misallocation of resources as between agriculture and
manufactures is probably rarely a major cause of poverty and backward-
ness, except where government, through tariffs, discriminatory taxation
and expenditure policies, and failure to provide on a regionally non-discrim-
inatory pattern, facilities for education, health promotion, and technical
training, is itself responsible for this misallocation.
Benjamin A. Rogge, in a 1956 article agreed with Viner generally

and stressed the political aspects of the economic disparities betwee
the industrial center and the periphery.16. The domestic and foreig
policies of the periphery governments play no small part in discouraging
capital investment in their countries. He admits that no small part of
the political instability is a legacy of past colonialism; he denies tha
free trade is responsible for the condition of the periphery.
The import coefficient argument in the Prebisch thesis, i. e., rising in

come in the periphery leads to an increased demand for imports which
must be damped down because the industrial center's import coeff
cient remains low, is agreed to be valid, but Rogge suggests that there
are other significant factors which explain the plight of the periphery
14 Ibid., 46.
15 Ibid., 52.
6 Benjamin A. Rogge, "Economic Development in Latin America: The Prebisch
Thesis", Inter-American Economic Affairs (Spring, 1956): 24-49. Analyzes ECLA's
1949 Economic Survey of Latin America, especially the section on economic develop-
ment which raised the issue, Why has not the industrial revolution improved living
conditions in the periphery?
There is domestic inflation abetted by the government's deficit spend-

ing; there is the multiple exchange rate and hight export duties; there
is the imbalanced tax structure and unreal social security legislation.
All of these factors suggest that the periphery lacks the kind of climate
for industry needed to expand its production in an efficient manner.
The objections of Viner and Rogge are answered in the analysis of

the Prebisch thesis which follows. Their value here is to introduce
the problem.
The Prebisch Thesis in Three Stages

We will begin by accepting Prebisch's presentation of his own theo
of development in three important papers. The first paper, written f
the United Nations in 1949, is primarily an analysis of the problem o
development. The second paper, written in 1951 for the economists of
Brazil, is an interpretation of the process of development in Latin-Ame
ican countries. The third paper, presented before the economists
the American Economic Association in 1958, is concerned with t
solution of the problem of economic growth in the periphery. A cert
amount of overlapping will be retained for the purpose of permitting
the Prebisch thesis to express itself fully.
1-The Economic Development of Latin America

and its Principal Problems17
The immediate purpose of this essay, written by Prebisch in 19
was to furnish direction to the United Nations' ECLA research into the
economic problems of Latin America. In laying the groundwork for
such research, Prebisch presented for the first time a theory of economic
development geared to the unique economic position of Latin America
in the world trade and production schema.
As we have seen, Prebisch divided the world community into two
parts: the community of industrial economies who are self-sustained in
their technological progress, and the community of the periphery whose
traditional role has been to supply food and raw materials to the great
industrial centers. The problem basically is that the periphery has not
shared in the fruits of the technical progress made at the center. In
fact, increased productivity in the periphery itself has been lost to the
centers. The masses living in the periphery consequently find themselves
in a vicious circle of low productivity and low savings.
The solution to this condition of persistent disequilibrium at the

periphery is the development of industry. "Industrialization," wrote
7 Cf. Note 6 above.
Prebisch, "is not an end in itself, but the principal means at the disposal
of those countries of obtaining a share of the benefits of technical pro-
gress and of progressively raising the standard of living of the masses." 18
For those who are concerned with an overemphasis on industrializa-
tion at the expense of agricultural development, Prebisch stresses that
"the industrialization of Latin America is not incompatible with the
efficient development of primary production." On the contrary, he
declared,l9
the availability of the best capital equipment and the prompt adoption of
new techniques are essential if the development of industry is to fulfill the
social objective of raising the standard of living. The same is true of the
mechanization of agriculture.
Primary products must be exported to allow for the importation of the

considerable quantity of capital goods needed. The export of primary
products (e. g., Brazilian coffee, Argentine wheat, Chilean copper) is
the dynamic element in the countries' ability to accumulate capital for
growth. In Keynesian terms, exports from the countries of the peri-
phery play a vital role similar to that of capital investment in the
industrial center.
We have seen enough to suggest some of the significant factors in

the Prebisch thesis; export-import relations between the periphery and
the industrial center, the equitable distribution of technical progress,
differing price elasticities between agricultural and industrial goods.
A closer look at the significant variables in the Prebisch analysis is now
in order:
Industrial Center vs. Periphery: Here is the key distinction lying

at the heart of the Prebisch thesis. The distinction is not decisive but
presumes the interdependence of the center and the periphery in the
world community. The industrial center is characterized by its ability
to retain its own productivity increases and to distribute these among
all classes in terms of increased wages and profits. The center saves 10-15
per cent of its national income which is used to generate new capital
formation. Other benefits accrue to the center from its increased pro-
ductivity, e. g., shorter working hours, ability to support greater public
expenditures. The periphery, on the contrary, consumes most of what
it produces, saving no more than 4-5 per cent. It is subject to extreme
price fluctuations subject to competitive conditions in the world market.
The inevitable instability of the periphery country tends to drive abroad
the little capital it has accumulated in the hands of a small class.
'Prebisch, Economic Development, 2.

Ibid., 2.
PREBSCH THESIS: THEORY OF INDUSTRIALISM FOR LATIN AMERICA 193
Technical Progress: This almost independent variable sparking econ-

omic development is greatly influenced by its environment. Historical-
ly, the great inventions and new production functions have spread out
slowly and irregularly from the great centers to the periphery. Within
the periphery, technical progress favored only those sectors which
supplied low-priced foodstuffs and raw materials to the industrial
countries.20
Price Elasticities: Prices at the industrial center are relatively in-

flexible downwards. Unions and corporations are sufficiently in control
of prices to prevent them from falling even in times of crisis. Prices of
products exported from the periphery, on the other hand, are highly
sensitive to world market conditions. They are readily elastic to changes
in demand (due, let us say, to recessions) or supply. So far as technical
progress in the periphery is concerned, its lack of control over the prices
of its primary products means that it cannot retain the fruits of increased
productivity for its own development. It is also true that the production
of primary goods has a momentum and inelasticity in the short run
which is in sharp contrast with the relative adjustability of industrial
production.
Prebisch uses a 1949 United Nations study, "Post-War Price Relations
in Trade between Under-Developed and Industrialized Countries," to
conclude that there has been a steady deterioration in price parity
against the periphery from the 1870's to World War Two. William
Fink has criticized the statistics involved in that study.2 Granting the
statistical difficulties, Prebisch's distinction between the relative price
stabilities of industrial and agricultural products still retains its signi-
ficance. Moreover, the American experience with farm parity price
ratios indicates that economic development alone does not solve these
differences.
Import Coefficients: The import coefficient is the ratio of a country's

imports to its national income. Traditionally, the import coefficient
has been low for the United States (around 3 per cent) and high for
the countries of Latin America - around 16 per cent in 1956.22 The im-
port coefficient of the United States - now the principal cyclical center
2Rail Prebisch, "Interpretagao do Processo de Desenvolvimento Econ6mico,"

Revista Brasileira de Economia (March, 1951): 117.
1 Cf. Note 10 above. Recall the U. S. farm price parity situation. Cf. also H.
W. Singer, "The Distribution of Gains between Investing and Borrowing Countries"
in American Economic Review (May, 1950): 473-485. In this pioneer article,
Hans Singer stresses the importance of the deteriorating terms of trade in the long
run between developed and underdeveloped economies. Singer has been with the
United Nations for many years.
2 Cf. F. Benham and H. A. Holley, A Short Introduction To The Economy of
Latin America, London, 1960. Chapter 8 on foreign trade and Chapter 7 on manu-
facturing both show the imprint of the Prebisch thesis.
of the world - vis-A-vis the import coefficient of the periphery is of

the greatest significance in the transmission of credit cycle fluctuations.
When the cycle contracts in the industrial center (e. g., the United States
in 1929-32), the import coefficient drops, almost automatically throwing
the dependent periphery into disequilibrium. In fact, "the greater the
decline of the principal cyclical center, the more must the income of the
rest of the world (dependent on dollars for exchange) fall below the
level of that center" 28
When a cyclical contraction takes place at the center, what can the
periphery do but try to reduce artificially its own import coefficient?
It still needs imports, but the decreased demand for its exports leaves
it without the necessary foreign exchange. From 1928 to 1932, the
gold reserves of seven Latin-American countries dropped from $1.5
billions to $.6 billion. The means used by the various governments to
reduce their import coefficient were import quotas, exchange controls,
higher tariffs, and depreciation of the currency. On the other hand,
full employment at the principal cyclical center increases its demand
for imports and contributes greatly to the economic welfare of the
periphery.24
Savings in the Vicious Circle: Prebisch does not give the emphasis
to the "vicious circle" aspect of economic underdevelopment that Ragnar
Nurkse and Gunnar Myrdal do.* Like them, however, he finds low
savings at the root of poverty in the periphery. "Productivity in these
countries is very low," reasons Prebisch,25
owing to the lack of capital; and the lack of capital is due to the narrow
margin of savings resulting from this low productivity ... Throughout most
of Latin America the characteristic lack of savings is the result, not only of
this narrow margin, but in many cases, of its improper use. Saving means
refraining from consumption and is thus incompatible with certain types of
consumption peculiar to relatively high income groups.5
Foreign capital, i. e.,:foreign savings, is needed to break the low pro-

ductivity-low savings circle, but it must be used effectively. Consi-
derable opportunities for saving and effectively employing monetary
reserves for productive imports have already been sacrificed to a type
of conspicuous consumption by high-income groups in the periphery.26
m Prebisch, Economic Development, 24.

24 Cf. Ibid., 35. Prebisch recalls Lord Keynes' dictum in the General Theory
that with full employment the economist finds himself safely ensconced in a Ricardian
world.
* Cf. Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Coun-
tries (New York, 1956). Nurkse defines the concept of the "vicious circle of
poverty" as implying a "circular constellation of forces tending to act and react
upon one another in such a way as to keep a poor country poor" (p. 4).
5 Ibid., 37.
" Ibid., 37.
PREBLSCH THESIS: THEORY OF INDUSTRIALISM FOR LATIN AMNERCA 195
Inflation: Even though economic disequilibrium and inflation are

not synonymous in Prebisch's view, the presence of the former due to
deterioration in the terms of trade between the center and the peri-
phery does tend to stimulate inflationary activity. Rising price levels,
by creating exceptional profits, place "in the hands of a comparatively
small group great opportunities for saving." If a substantial part of
these profits had been used to contribute to capital formation, those
who would defend inflation in an underdeveloped economy might
have a better argument. The facts are otherwise. High-income groups
have a high import coefficient, so "it is not surprising that a large part
of the foreign exchange accumulated should have been spent on pro-
ducts not essential to economic development."27
Neither has the State attempted seriously to stimulate investment of
incomes large with the profits of inflation by progressive taxation.
All this redistribution of income brought about by inflation creates in the

sectors that benefit the illusion that the total wealth of the community is
increasing, even though real income ceased to rise to any extent, once the
initial stage of moderate expansion was passed. It is an illusion peculiar
to the state of euphoria and prodigality; during that time capital equipment
is not renewed, as in the case of transport and other public and private
investments, and a large part of the previous increase in monetary reserves
is spent in a short while. This means the consumption of accumulated
capital and so must not be mistaken for a real increase in income.28
Not only does the continued rhythm of inflation interfere with a ba-
lanced capital formation, it also has the effect of obscuring the hard
reality of capital being used up without replacement. Inflation in
Latin America has tended toward decapitalization, rather than to net
capital formation.
The Need for Industrialization: Here is Prebisch's theme and his

conclusion - the need to industrialize. It is a conclusion reached
after an economic evaluation of the double need of increasing pro-
ductivity in the periphery and of retaining the fruits of productivity
in the periphery. Modem techniques applied to agriculture will free
workers for employment in areas offering even greater promise of
productivity returns. Primary product production and export are re-
quired, but in the final analysis primary product prices are a function
Ibid., 40. Prebisch's analysis of inflation is especially significant now when

not a few Latin American economists defend inflation as necessary and even good.
E. g., The Survey of the Brazilian Economy, 1960, p. 63-65, published by the Brazil-
ian Embassy in Washington, takes a kindly view of inflation. For a recent Prebisch
contribution to an understanding of inflation in the periphery see "Economic Develop-
ment or Monetary Stability: The False Dilemma" in Economic Bulletin for Latin
America (March, 1961): 1-25.
28 Ibid., 40-41.
196 JOURNAL OF INTER-AMERICAN STUDES
of the world market demand which is highly elastic for the products
of any particular country in the periphery.
Industry is the arm which agriculture needs in order to contribute
steadily to domestic growth. True, there is no reason to expect that
industrial productivity will always yield greater returns at the margin,
but at the present stage of Latin-American development "the man-
power available as a result of increased productivity is still amply suf-
ficient for industrial growth."29 A more immediate limiting factor in
industrializing is the size of the market. We will see later that as the
need to industrialize grows in Latin America, Prebisch will direct his
analysis and the efforts of ECLA toward regionalism rather than nation-
alism in industry.
An important gain from industrialization is the "import substitution
effect."i This ability of a country to substitute domestic industrial pro-
duction for imports is of particular significance in insulating the periphery
from the unstabilizing influence of a cyclical contraction in the principal
cyclical center, e. g., the United States. "When exports are at a cyclical
minimum, a peripheral country can pay for only a comparatively small
quantity of imports. That quantity is not sufficient to cover the im-
ports required to maintain maximum employment."39 Import substi-
tution is a simple concept in itself, but its implementation leads to a
number of complications. Usually the domestic costs of production are
high in the periphery; therefore tariffs must be raised. Also, capital
goods must be imported according to the greater need to produce, and
this involves changing the composition of imports, i. e., eliminating the
less essential imports.
Import substitution belongs to anti-cyclical policy. Its effective-
ness is limited to the ability of the economy to shift its resources into
new production areas. In an economy which is in the initial stages of
industrial development and still finds itself with great domestic imbal-
ances and bottlenecks, the process of regrouping factors of production
is accomplished with great difficulty.
2-An Interpretation of the Process of

Economic Developments3
Prebisch began his 1951 article on economic development for the
economists of Brazil with a genetic approach to technical progress.
"From the centers whence it sprang," he wrote,32
2 Ibid., 45.
80 Ibid., 53.
HRaal Prebisch, "Interpretacao do Processo de Desenvolvimento Econ6mico"
in Revista Brasileira de Economia (March, 1951): 7-117. (Summary in English,
117-127.)
Ibid., 117.
PREBmSCH THESI: TORY OF INDUSTRIALISM FOR LATIN AMERICA 197
technical progress has been disseminated to the rest of the world at a

comparatively slow and irregular rate. Spreading outwards from Great
Britain, in varying degrees of intensity, it encompassed the European con-
tinent, developed extraordinarily in the United States and finally reached
Japan. Thus were established the great industrial centers and, clustering
around them, appeared an extensive periphery which profited little from
the new productivity levels.
Within the periphery, Prebisch went on to say, technical progress pene-

trated only those sectors which were in position to supply the industrial
areas with food and raw materials. In contrast to his earlier essay under
United Nations auspices, Prebisch illustrates his thesis with statistics
from Mexico and Argentina.
Disequilibrium is inherent in the process of economic development.
Why? In all the Latin-American countries the growth in the export
coefficient is insufficient to supply the needs of domestic development.
Import requirements will increase in response to rising per capita in-
come, but there is little likelihood that the world market demand for
the countries' primary products will keep pace. A persistent disequili-
brium, therefore, in the balance of payments is to be expected. Dis-
equilibrium, however, is not the same as inflation. The imbalance in
the balance of payments provokes monetary repercussions which may
or may not be inflationary.83
In his Brazilian article, Prebisch sees the fundamental economic
problem of Latin America as consisting in increasing real per capita
income by means of a rising productivity. Productivity increases are
effected most readily in the production of primary products, and this
increase in product without a concomitant increase in world market
demand provokes unemployment. Technical progress in agriculture
(in postwar Brazil two-thirds of the working force was agricultural)
contributes to unemployment by releasing workers and contributes to
a deterioration in the terms of trade because of lower prices received
for the primary product exports. The solution for these problems of
unemployment and lowering prices for primary product exports is a
slowly growing industrial complex which will absorb the new flows
of workers and help to retain the benefits of increased productivity
within the country.
The periphery would not be at a disadvantage in foreign trade if
the prices of the goods imported from the industrial centers reflected
their own productivity increases, but they do not. The fruits of tech-
nical progress are retained in the center through the ability of powerful
unions to achieve wage increases and of the great corporations to raise
their prices or at least maintain their profits.
Ibid., 19s.
Against those who would compare the present state of the peri-
phery with the international situation in the latter part of the nineteenth
century, Prebisch stresses certain fundamental differences.34 The present
gap between the highly-developed centers and the pre-capitalistic or
semi-capitalistic economies of Latin America is considerably greater than
was the gap between Great Britain and the less-developed economies in-
fluenced by Great Britain in the nineteenth century. Also, these coun-
tries had a solid group of skilled workers. It is true that the under-
developed economies of today can gain from the technology earned
by earlier sacrifices in the centers, but the capital goods of today re-
quire greater savings than in the past. The low productivity and low
level of savings of the periphery (plus the narrow markets) only in-
crease the gap between the under-developed economy and the center.
One other important point: England of the nineteenth century increased
her own need for imports as she developed. This has been much less
true of the United States in the twentieth century.
The central problem of the periphery may now be put more specifi-
cally: it is the assimilation of modern teclmology, a technology which
requires wide markets and a high propensity to save. We shall see
that in the latter part of the Fifties Prebisch would seek to solve this
problem by advocating the development of a Latin American common
market. Now he pointed up the need for protectionism. Nowhere in
the world, he insisted, including the United States, has the assimilation
of technical progress into the economic life of a country been a spon-
taneous event. It requires nurturing. In the United States, for example,
the tariff is still employed and domestic subsidies to certain industries
are quite common.35
3-Commercial Policy in the Underdeveloped Countries36

Prebisch presented a paper for discussion at the 1958 meeting of
the American Economic Association. It is interesting to see now, after
almost a decade of presenting his "thesis," what points he selects for
discussion with his fellow economists.
The paper presents in order three closely-related factors in the

Prebisch analysis. In his earlier papers, the stress was on the ingre-
dients of the problem and its genesis. Now Prebisch is primarily con-
cerned with the solution of the problem. The three elements he se-
34 Ibid., Chapter IV, especially p. 85.

Ibid., Chapter V ("Consequences of International Inequalities in National
Income and Productivity").
3 Raul Prebisch, American Economic Review (May, 1959): 251-273.
lects for analysis are 1) industrialization, 2) protectionism, and 3) the

common market. Industrialization is proposed as the needed comple-
ment to technical progress in the area of primary product production;
protectionism should be geared to economic growth; and the common
market corollary puts growth in a regional rather than in a national
perspective.
Industrialization: The reasons for industrialization in the periphery
have already been seen. The very spread of technical progress into
the periphery brings with it the need to industrialize. Those who argue
in favor of limiting technical progress to the primary product sector
in order to expand exports are only partially right. Industry and tech-
nical advance in primary production are complementary aspects of the
same process. "Technical progress," 3 declared Prebisch,
in export activities of these peripheral countries has undoubtedly been a
great stimulus to their growth. But if this process is extended to other
primary activities for internal consumption, where productivity is usually
very low, and industry is not developed to absorb redundant manpower, then
the inevitable outcome will be more disguised unemployment or downright
unemployment.
In addition to the domestic argument for industrialization based on

employment and the population growth, there is the foreign trade ar-
gument based on disparities in income elasticity between the periphery
and the center. "It is a well-established fact,' comments Prebisch,:
"that the income elasticity of demand for imports of Latin American
primary commodities by the centers is generally lower than the income
elasticity of demand for Latin American imports of industrial pro-
ducts from these centers."38 We have already seen "import substitu-
tion" with reference to an anti-cyclical policy in the periphery. Now
Prebisch finds that import substitution, i. e., an increase in the propor-
tion of goods that is supplied from domestic sources and not neces-
sarily as a reduction in the ratio of imports to total income, is."the only
way to correct the effects on peripheral growthof disparities in foreign
trade elasticity."39
Protectionism: Prebisch maintains his attack against the relevance
of the classical economic argument of comparative advantage; to the
Latin-American situation. Industrialization in the periphery is not
just a matter of comparative costs. Neither do industrial costs which
are higher than import prices prove that a given industry is not econ-
omic for a country. "The problem has to be considered,40
37 Ibid., 252.
8 Ibid.
" Ibid., 253.
40 Ibid., 255. (Cf. Sidney S. Dell, Problemas de un Mercado Com4n en America
Latina (Mexico, 1959), especially the First Conference.)
200 JOURNAL OF INTER-AMEICAN STUDIES
from another angle. It is not really a question of comparing industrial

costs with import prices but of comparing the increment of income obtained
in the expansion of industry with that which could have been obtained in
export activities had the same productive resources been employed there.
The classical mechanism of free play among the market forces whether
in terms of wage adjustments or the more contemporary approach to
price adjustments through the movement of exchange rates does not
provide an optimum solution. Indeed the optimum solution for the
periphery will tend to fall short of the equilibrium point where mar-
ginal costs and marginal revenues are equal.41
There are those who suggest that the observed disparities in foreign
trade elasticities be corrected by the imposition of an export tax. Pre-
bisch rejects this as an unwarranted interference with market forces.
He also rejects currency depreciation as a solution because it "forces
the adjustment of the whole- price system." "Protection (or subsidies),"
he concludes, "seems a more direct and simple solution as it limits the
adjustment to those new branches of industries that should be developed
within a given period of time."
Prebisch sums up his argument for a policy of protection in terms

of the high cost of "spontaneous industrialization," i. e., the unrestricted
play of market forces through exchange depreciation. Unfettered in-
dustrialization would involve "a transfer abroad of part of the incre-
ment in real income derived from the employment of the surplus man-
power." This transfer needs to be reduced by protection, subsidies, an
export tax, or other forms of government interference. Precisely be-
cause there is a marked tendency for the terms of trade at the periphery
to deteriorate in a process of spontaneous growth, compensatory forces
are needed to inhibit the free play of the market. In brief, Prebisch
sees protection as the instrument for correcting the effects of the dis-
parity in income, elasticity of demand for exports by the industrial cen-
ter, and for imports by the periphery.
Ibid., 255-256. Prebisch's argument here is not easy to follow. As I under-

stand it, he reasons this way: Competitive equilibrium would be reached in the
periphery at a point where returns for export producers equalize those for newly-
formed industries. This is not an optimum point for the periphery because the
marginal increment of income, arising out of successive increments of employment
in export activities, has been falling faster than prices. The marginal increment
of income in export activities could even be negative if elasticity is low enough.
It will help to remember the key facts on which Prebisch's argument is based:
Disparities in elasticities cause the demand for imports to grow faster than the
demand for exports. The income and price elasticity of export demand is generally
low. Therefore only a small part of the surplus manpower released by productivity
increases and expanded by population growth can be employed in export activities
at given prices.
.PRmISCEH THESIS: THEORY OF INDUSTRIALISM FOR LATIN AMERICA 201
The Common Market. From the Prebisch analysis emerges the rec-
ognized need of Latin America for industrialization on a regional basis.
The common market is described by Prebisch as "a rational policy of
restricted multilateralism, with intense trade between its members and
a coefficient of imports from the principal center geared to the capacity
to import generated by it." 42 Even more than the countries of Europe,
Latin America needs to enlarge its national markets through the gradual
establishments of a common market. "Preferential treatment is needed
inside the area to promote specialization in industrial products and
primary commodities. European countries need preferences between
them mainly to restore a pattern of very intensive mutual trade . ..,
whereas Latin America needs preferences to develop new forms of
reciprocal trade, mainly in industrial products, that practically did
not exist before.43
It is tempting to spend more time on the possibilities of the com-

mon market for Latin America and the developments which have al-
ready taken place in terms of establishing a free trade area. The United
Nations ECLA under the aegis of Ra61 Prebisch has been most active
in this area. In fact, in the latter part of the Fifties it was determined
to make the development of the common market in Latin America the
major ECLA policy.44
This new policy of regional development in Latin America is not
merely economic. Primarily it is the expression of a new spirit of in-
ternational cooperation among the American States. Dag Hammer-
skjold, the late Secretary-General of the United Nations, stressed the
growing spirit of Latin-American cooperation in terms of the regional
market. "For such an idea," Hammerskjold declared,45
4Ibid., 266-269. Prebisch develops briefly his analysis of multilateral trade.

See Allyn A. Young's pioneer article, "Increasing Returns and Economic Progress" in
Economic Journal (December, 1928); 527s.
"Ibid., 268.
4 In November, 1956, the Latin-American governments requested ECLA to
set up two groups of experts, one to work on the gradual establishments of a multi-
lateral payments system and the other to define the characteristics of the regional
market. Cf. United Nations ECLA, The Latin American Common Market, 1959.
(Sales No. 59.II.G.4)), especially Sections A & B.
An earlier report by ECLA entitled "International Cooperation in a Latin
American Development Policy" (New York, 1954) should also be noted. Chapter
One begins: "In the final analysis, economic development is an urgent social need.
The desire for new consumption patterns and for the higher standards of material
existence which more advanced countries could only attain through a steady rise in
productivity and per capita income, is spreading rapidly among underdeveloped
countries."
46ECLA, The Latin American Common Market, 189. Cf. Statement by Rail
Prebisch, Ibid., 141-46. He states (p. 144): "The only basic solution I can see for
has not sprung from a sudden and visionary inspiration. Rather it derives
from a decade of study and reflection, from the systematic investigation and
analysis made in ECLA, with a remarkable continuity of purpose, under
the able guidance of Dr. Prebisch, of the conditions under which this con-
tinent is developing . . In this process of elucidation, which has led you
from country studies to the discussion of a common market, there is an
inherent logic and rationality ...
Prebisch's insistence that the twenty countries of Latin America to-

day practically form twenty watertight compartments is clear enough.
What has not always been clear is the position and mood of Latin
America's principal center, the U.S.A., (i. e., that the development of
industry in Latin America would hurt business). In this connection it
is both interesting and significant to see a recent United State Depart-
ment of Commerce bulletin quote President John F. Kennedy in sup-
port of Latin-American industrialization. "The fragmentation of Latin
American economies," said the President, "is a serious barrier to indus-
trial growth. We must support all economic integration which is a
genuine step toward larger markets and greater competitive opportunity."
The Prebisch Thesis in Perspective
Like all great pieces of analysis the Prebisch thesis suffers in transla-
tion. It is not yet completely formed; it is still in process. To criticize
Prebisch's analysis of development piecemeal is to reduce the theory to
a mechanism. Prebisch himself falls into the trap of mechanizing his
thesis when he attempts to simplify it. Generally speaking, his mode
of reasoning might be criticized as belonging to the classical tradition
of rationalism.
As we have seen, the social awareness of Prebisch as expressed in

his economic analysis grows more clear over the years. The original
essay in 1949 certainly implied a deep realization of social as well as
economic imbalances. The flowering of the analysis into a regional
rather than merely national emphasis shows the Prebisch thesis to be
in reality a Latin-American theory of development.
In a short paper written for the Committee for Economic Develop-
ment (CED) in 1957, Prebisch makes a provocative comparison between
capitalism and communism as expressing different methods of develop-
ment. "According to the Marxist theory of the evolution of capitalism,"
he wrote,46
this serious problem (i. e., the economic vulnerability of Latin America) and for that
of the costliness of the substitution process is to break up the outdated mould
referred to by means of the gradual and progressive establishment of the common
market and the consequent diversification of imports and exports."
40CED, Problems of United States Economic Development, New York, 1958,
communism was bound to assert itself as a logical consequence of the con-

centration of economic power in the more highly-industrialized countries;
but in practice it has become, in essence, a method of development for the
primary or under-industrialized economies.
Communism in theory and in fact offers a strong challenge to the free

enterprise system in those countries in which the latter has not already
proven itself. Prebisch himself believes that the system of private
enterprise has a great deal to offer Latin America, but the time factor
is of vital importance.
It is unrealistic to wait for the free inter-play of economic forces alone to

provide a solution; they cannot spontaneously generate the far-reaching
changes that will have to take place in the patterns of production and the
structure of the Latin American economy, or create the conditions and incen-
tives that private enterprise requires if it is to enact its primary role in
economic development."
The Prebisch thesis is, of course, presented along strongly economic

lines. At points it seems almost closed to the social and political reali-
ties which are uniquely present in each of the Latin-American countries,
realities which forbid the isolation of the merely economic in any real-
istic evaluation of the forces at work. Saving, for example, is a great
problem, but it is a problem bred by a social structure in which small
relatively high income groups run a country in a personal way with
little social consciousness. Inflation is a problem, if not a way of life,
for many of the countries. It breeds continually greater inequalities
and unrest, but government policy is often found favoring it.
The present writer's opinion is that the Prebisch position as it has

developed in the past decade is not so closed as it seems, but that it
easily becomes so when used for special pleading. Part by part the
thesis is eminently quotable either for or against free enterprise. Preb-
isch himself points out that the countries generally are not sufficiently
Volume I, p. 47. Prebisch's is one of the 48 papers written in response to the

question: What is the most important economic problem to be faced by the United
States in the next twenty years?
47bid., 48. Cf. Virgil Salera "Prebisch on America's Development Role" in
Inter-American Economic Affairs (Spring, 1958): 61-70. Salera quotes the sentence
"it is unrealistic . . ." and criticizes Prebisch for emphasizing development by the
state rather than by private enterprise. Salera advocates that corporation law in
Latin America be modernized. This article with its criticism is a good example
of what happens when only part of the Prebisch analysis is reviewed. See also
H. W. Singer, "The Distribution of Gains . . " in American Economic Review (May,
1950): 474-5. Singer makes the important point in this article that in many cases
foreign industries in the under-developed economies are really outposts of the
industrial centers. Their link to the developing economy is geographical but not
structural. Thus the underdeveloped country finds itself with a dual economy.
204 JOURNAL OF INTER-AMEICAN SmTUES
developed to be able to assimilate foreign private enterprise. "Foreign

private enterprise is obviously better equipped for the performance of
the tasks concerned; but here again an enlightened policy might do
much to foster the private enterprise of the Latin American countries." 48
There is one notable lacuna in the Prebisch analysis which should
be noted. Understandably he has spent most of his efforts in connection
with the relationships between the periphery and the great industrial
centers. He appears to have overlooked the fact that the relationships
and imbalances which he notes between the center and the under-
developed state also exist between the great city areas of Latin Amer-
ica and the rural areas. Prebisch's reasoning often assumes a unity
in the underdeveloped economy which is by no means present in the
Latin-American countries, Colombia excepted. It is this very imbalance
in the country itself - in Mexico, for example, between Mexico City
and the 55 per cent of the population in the rural areas - that makes
its development so difficult and uneven.
A recent article in the well-known Brazilian magazine, Visdo, illus-
trates this point nicely. The article is entitled "Imperialismo Paulista"
and underlines the resentment of other sections of Brazil at the state of
Sao Paulo's economic power and prosperity.49 One-third of the national
product derives from Sao Paulo, which has 17 per cent of the total
population. Its per capita income is double that of Brazil as a whole.
The mortality rate in Sao Paulo is much below the rest of Brazil; many
more of its children are provided with schools. The State of Sao Paulo
is well provided with capital from its coffee crops, and the growth of in-
dustry in the City of Sao Paulo in recent years has made it a Brazilian
Chicago. The article goes on to note the "capitalist mentality" in the
city, helped, of course, by a number of Italian and German immigrants.
The writer of this article feels that Sao Paulo has made its progress
somewhat at the expense of the rest of Brazil and should now help res-
tore the balance, to distribute the fruits of its technical progress to
other less-developed sections of Brazil. Even the impact of inflation,
he points out, was ameliorated in Sao Paulo by its high rate of pro-
ductivity.
" Ibid., 51. Prebisch reminds us that from the point of view of the masses
in Latin America the private enterprise policy of the United States is seen not in
terms of freedom and democracy but in terms of profits and improving investment
yields (p. 55). He admits that investment yields are a perfectly legitimate preoccupa-
tion, "but not one calculated to inspire faith in a system or fire the imagination of
new generations." For an excellent non-technical summary of the present Prebisch
position, see Raiul Prebisch, "Joint Responsibilities for Latin American Progress," in
Foreign Affairs (July, 1961): 622-634.
0"'Imperialismo Paulista" in Visao (27 Jan. 1961): 22-25. (Visao is a weekly
review similar to Time in the United States.)
PmEBSCH THESIS: THEORY OF INDUSTRIALISM FOR LATIN AMERICA 205
The article emphasizes that people in other regions are beginning to

resent more and more the prosperous development of Sao Paulo which
is making them consumers of Paulista products and preventing the de-
velopment of local industry.50 As one reads this article one understands
the facts on which it rests, the analogy with the periphery-center relation-
ship developed by Prebsich becomes quite striking. Prebisch himself
may be unwilling to develop this consequence of his own thesis because
it involves highly sensitive domestic problems in the periphery. An
analysis of the problems of economic development in the periphery,
however, which fails to give proper consideration to the domestic rela-
tionships (and imbalance) between the urban center and the primary
product areas in each country is surely incomplete.
Conclusion
"E urgente que os responsaveis pela lideranga occidental compreendam

que a America Latina esta diante de um dilema: ou se industrializa ou re-
nuncia a sua sobrevivencia dentro da democracia; ou resolve os problemas
basicos de seu desenvolvimento ou se tornara um campo aberto is incurs6es
revolucionirias mais violentas."
-President Juscelino Kubitschek of Brazil
in his 1961 New Year's message.
Economic development for Latin America has a climate of urgency

which is unprecedented in history. Economic theories which seek first
to understand and then to guide development cannot remain oblivious
to this felt need for growth.
Rooted in the Latin-American experience, the Prebisch thesis is
unique among the theories of economic growth in taking for its bench-
mark the underdeveloped economy and its relationships with the highly-
developed industrial centers. The difficulty of the Prebisch analysis
lies in establishing the dynamics of these relationships. One test of
the excellence of this analysis is that it has shown itself flexible to
the developing needs of the Latin-American economies. The most re-
cent expression of this flexibility is the common market approach to in-
dustrialization.
Another important measure of the relevance of the Prebisch thesis

has been its impact on the thinking of economists who are in touch with
the problems of Latin-American economic development. Influential
oIbid., 24. Under the title "E hora de distribuir," the writer points out that
the very industrialization of the other states of Brazil will open new perspectives for
the industrial complex in Sao Paulo. The alternative is domestic strife: "AliAs, a
consciencia revelada pelas elites de outros Estados acerca do problema de seu atraso
em relagao a Sao Paulo 6 bem um indicio da sua acertada disposicao de combate."
Cf. also Ernest Feder, "Land Reform in Latin America" in Social Order, (Jan. 1961):
29-36. Writes of imbalances in the Chilean economy.
Brazilian economists such as Octavio Gouvea de Bulhoes and Celso

Furtado have recognized his leadership.61 Of course, Prebisch's act
direction of the United Nations' ECLA has been a contributing fact
Finally, the Prebisch thesis is attractive because it is open-ende
The problem and process of economic development in the periphe
still requires definition. The Prebisch analysis, if handled sensitiv
and not mechanically, provides a good instrument for this work.
Cf. Octavio Gouvea de Bulhoes, "Inflation and Industrialization: A Brazilia

Viewpoint" in Tennessee Institute For Brazilian Studies, Four Papers, 1951, 35-
Also confer Celso Furtado, A Economia Brasileira (Rio de Janeiro, 1954). Fur-
tado dedicates this work on economic development to Rail Prebisch.

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The Prebisch Thesis: A Theory of Industrialism for Latin America

Author(s): Charles A. Frankenhoff

"Historically the spread of technical progress has been uneven

In the nineteenth century, the "laissez-faire" approach to economic

* The author is especially indebted to David H. Pollock, chief of the Washing-

National System of Political Economy (first published in 1841) became

Latin America now entered into a second stage of economic develop-

8 List, National System, 129-30.

ment; the multiplier effects of foreign trade were recognized. Central

World War Two built up the foreign-exchange holdings of Latin

Under the circumstances, the naive application of Keynesian money

Introduction to the Prebisch Thesis

The first complete theory of development specifically for Latin

In 1948, Prebisch accepted the post of adviser to the United Nations

Development of Latin America and its Principal Problems" and began

In Latin America reality is undermining the outdated schema of the inter-

The Prebisch thesis is based upon the specific differences in struc-

We may begin by examining briefly some criticisms of the Prebisch

Viner then refers specifically to Prebisch's 1949 essay on "The Economic

uJacob Viner, International Trade and Economic Development (Oxford, 1953),

agricultural products tend to exchange on ever-deteriorating terms for

because in all countries per capita incomes are higher in manufactures

Viner denies that the causal relationship in favor of manufactures over

is not agriculture as such, or the absence of manufactures as such, but

Benjamin A. Rogge, in a 1956 article agreed with Viner generally

The import coefficient argument in the Prebisch thesis, i. e., rising in

There is domestic inflation abetted by the government's deficit spend-

The objections of Viner and Rogge are answered in the analysis of

The Prebisch Thesis in Three Stages

1-The Economic Development of Latin America

The solution to this condition of persistent disequilibrium at the

Primary products must be exported to allow for the importation of the

We have seen enough to suggest some of the significant factors in

Industrial Center vs. Periphery: Here is the key distinction lying

'Prebisch, Economic Development, 2.

Technical Progress: This almost independent variable sparking econ-

Price Elasticities: Prices at the industrial center are relatively in-

Import Coefficients: The import coefficient is the ratio of a country's

2Rail Prebisch, "Interpretagao do Processo de Desenvolvimento Econ6mico,"

of the world - vis-A-vis the import coefficient of the periphery is of

Foreign capital, i. e.,:foreign savings, is needed to break the low pro-

m Prebisch, Economic Development, 24.

Inflation: Even though economic disequilibrium and inflation are

All this redistribution of income brought about by inflation creates in the

The Need for Industrialization: Here is Prebisch's theme and his

Ibid., 40. Prebisch's analysis of inflation is especially significant now when

2-An Interpretation of the Process of

technical progress has been disseminated to the rest of the world at a

Within the periphery, Prebisch went on to say, technical progress pene-

3-Commercial Policy in the Underdeveloped Countries36

The paper presents in order three closely-related factors in the

34 Ibid., Chapter IV, especially p. 85.

lects for analysis are 1) industrialization, 2) protectionism, and 3) the

In addition to the domestic argument for industrialization based on

from another angle. It is not really a question of comparing industrial

Prebisch sums up his argument for a policy of protection in terms

Ibid., 255-256. Prebisch's argument here is not easy to follow. As I under-

It is tempting to spend more time on the possibilities of the com-

4Ibid., 266-269. Prebisch develops briefly his analysis of multilateral trade.

Prebisch's insistence that the twenty countries of Latin America to-

The Prebisch Thesis in Perspective

As we have seen, the social awareness of Prebisch as expressed in

communism was bound to assert itself as a logical consequence of the con-