Professional Documents
Culture Documents
Review
Director
RAUL PREBISCH
Technical Editor
ADOLFO GURRIERI
Editor
GREGORIO WEINBERG
m
UNITED NATIONS
ECONOMIC COMMISSION FOR LATIN AMERICA
SANTIAGO, CHILE / APRIL 1979
CONTENTS
Reiventing development: utopias devised by committees and seeds of
change in the real world
Marshall Wolfe 7
The Latin American regional market: the project and the reality
Germnico Salgado 85
youth these theories seduced me by their of its eminent exponents overseas. But the
precision and mathematical elegance; and position is very different when an attempt is
also by their persuasive cogency. They made in these peripheral countries to ex-
showed that the free play of economic forces, plain development without taking account of
subject to no interference whatever, led to the social structure, of the time-lag in
the most efficient utilization of the factors of peripheral development, of the surplus, and
production for the benefit of the entire of all the characteristics of peripheral capi-
community, both in the international field talism with which I have dealt in the articles
and in internal development. Moreover, cited. For it then becomes convincingly
they incorporated an underlying ethical evident that the spontaneous play of eco-
element which has undoubtedly contributed nomic forces cannot conduce to equilibrium.
to their intellectual prestige. The neoclassical theories' capacity for
But in their striving after rigorous intellectual survival is explicable enough,
consistency, in the contempt with which especially when their rigorous logic is
their adherents looked down upon what in demonstrated by means of the system of
those bygone days were styled literary equations which Walras and Pareto intro-
economists, these theories shelved impor- duced in their day, and which was the point
tant aspects of social, political and cultural of departure for the subsequent evolution of
reality, as well as of the historical back- these theories. It is worth while to recall this
ground of collectivities. at the present time, when such vigorous
In making a tenacious effort at doctrinal offshoots are springing up in some of the
asepsis, they evolved their arguments in the Latin American countries.
void, outside time and space. If at the I sincerely regret that we cannot avail
moment when these arguments were formu- ourselves of these doctrines. It would be
lated they seemed to represent a significant wonderful to allow the forces of the economy
scientific advance, viewed in the light of the to lead spontaneously to the efficiency and
evolution of capitalism they involve a verita- equity of the system, without bothering
ble scientific aberration, especially when about the highly complex task of deliber-
they endeavour to interpret the phenomena ately influencing them. What is more, I
of the periphery. Nevertheless, they contain confess that I should be prepared to justify,
positive elements which should on no for the time being, certain collective sacri-
account be despised. fices, if by their means we could definitively
I am not surprised that neoclassicism clear away the obstacles to development.
has bedazzled a pleiad of Latin American However, this is not the case; and I feel
economist who, having been indoctrinated that to give the reasons that have induced me
in certain schools in the centres, are now to abjure orthodoxy is an intellectual need
trying to apply their teachings to the praxis of and a moral responsibility.2 But I am always
peripheral development. And I also under- willing and indeed anxious to engage in
stand their repudiation of interventions dialogue. And I should not hesitate to
which, far from correcting the system's recognize that I was at fault, capitulate and
faults, are liable to make them even more mend my ways, if through dialogue I found
disruptive, and often lead to bureaucratic good cause to do so.
perversion of the system itself. The reasons why I have long been in
If the neoclassical economists were to
confine themselves to building their castles
2
in the air, without claiming that they This volte face should not be taken to be of recent
represent reality, that would be a respect- date, as is sometimes believed. In reality my emanci-
pation began during the great world depression, when I
able intellectual pastime, apt at times to had to throw overboard much of what I had learned and
arouse admiration for the virtuosity of some had also taught as a young university professor.
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 169
character is ascribed to profits, in contrast means of production, whether or not they are
with the persistent nature of the surplus in combined in practice. From the conceptual
our argument. standpoint this distinction is very important,
The profit incentive leads enterprises since in the position of general equilibrium,
that have made gains to expand production, the owners of capital do not obtain profits but
and similarly induces other enterprises to interest on their capital. This is a point to
follow in their footsteps by introducing the which we shall revert later.
new layers of technology. This competition The reasoning is accurate, but it over-
between enterprises is reflected, of course, looks two phenomena: the surplus, and
in an increase in overall demand for labour; power relations.
and in so far as the supply is comparatively
plentiful and precludes the correlative rise 3. Neoclassical theories and the surplus
in earnings, the expansion of production will
mean that prices fall until the marginal It seems needless to dwell on the structural
product and the income paid out break even phenomenon of the surplus, which has been
at the point of equilibrium. Profits will then analysed in detail in the articles mentioned
have disappeared, and all that will remain above. All that is appropriate at the moment
will be remuneration for entrepreneurial is to recall a few essential points of funda-
activities. mental divergence from neoclassical rea-
This is a conclusion of maximum impor- soning.
tance in neoclassical theory, since it implies First and foremost, the fruits of increased
that the productivity increment is trans- productivity are not reflected in a fall in
ferred either through a rise in pay in prices in so far as they have not been
accordance with each individual's contribu- transferred to the earnings of the labour
tion to production as determined by his force, but remain in the hands of the owners
skills or, in so far as this does not occur, of the means of production in the shape of a
through a fall in prices, so that in this way the surplus.
fruits of development are disseminated No such downward trend in prices has
throughout the whole community. made its appearance in peripheral develop-
This explains what was said elsewhere, ment, despite the steady rise in productivity.
i.e., that in neoclassical theories there was an The surplus is left in the hands of the owners
underlying content of equity, except in the and tends to stay there, because, on account
special case of land rent. Even so, in this of the actual dynamics of the production pro-
latter instance equity could be achieved cess, the additional employment required
through taxation, without upsetting the to expand tomorrow's production gener-
equilibrium of the system. ates a rise in income today, which is the
An essential aspect of this ethic is the source of the increase in demand that allows
concept of the temporary nature of profits, the productivity increment to be absorbed.
which is different from the concept of Otherwise, inter-enterprise competition
remuneration for entrepreneurial activities. would bring prices down as the neoclassical
This remuneration too is subject to the economists assume.
principle of marginal productivity under a The successive increases in demand
competitive system. Even when, as noted which accompany productivity increments
above, profit had disappeared at the point of ceaselessly accumulate and circulate within
equilibrium, entrepreneurial remuneration the system. They do not vanish into thin air.
would still be left. Only part of them is transferred to the labour
The neoclassicists, of course, draw a force, and the rest goes to swell the global
clear-cut distinction between the entrepre- surplus.
neurial function and the ownership of the Hence follows a conclusion of the
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 171
5. The tendency of the system is not level of the skills necessitated by the pen-
towards equilibrium etration of technique, the smaller was the
difference between demand and supply, and
But as far as the periphery is concerned all the greater the capacity of the labour force to
this is remote from reality. Not only because share in the fruits of technical progress.
the capitalism of the privileged-consumer But a little thought will show that this is
society is anything rather than austere, but not an entirely spontaneous phenomenon,
for another reason of transcendent signifi- since the acquisition ofsuch skills is strongly
cance in the dynamics of the system, which influenced by the social power that enables
we will go on to recall. those who are best-situated in the socio-
The tendency of the surplus is not to economic structure to obtain effective access
peter out but to grow faster than the product. to training opportunities, which are also
This growth makes it possible to imitate affected by political power.
more and more closely the consumption It is true that as far as equality of training
patterns of the centres and at the same time opportunities is concerned, great disparities
to continue accumulating enough capital for can be seen, in keeping with the differences
the process in question to be kept up under in individual ability and dynamism, and,
the rule of market laws. therefore, aptitude for social mobility like-
As this happens, however, changes in wise varies widely.
the social structure are accompanied by an In earnings, at all events, there is an
increasing capacity to obtain a share in the element of privilege. Unquestionably, too,
fruits of productivity on the part of the labour the pay incentive is a powerful spur to
force disadvantaged by market laws. This undertaking the effort that training repre-
power of participation counters the power of sents. Consequently there is also a certain
the upper strata, to the detriment of the ethical significance in the neoclassical argu-
global surplus. And a point is thus reached at ment which attributes earnings to the contri-
which the latter tends to grow more slowly bution made by the individual to the
than the global product. It is the point at production process. Ultimately, the market
which, of course, entrepreneurs react by is the arbiter of his merits; but in the real
raising prices to recoup their losses. Thus possibility of making this training effort
inflation becomes inherent in the system in there is an element of social privilege.
the course of structural change, and sooner As regards earnings, the labour force
or later leads to the use of force to restore the whose capacity to share in the fruits of higher
dynamics of the surplus. productivity is weak, under market laws, has
The system does not function properly no means of improving matters other than its
unless the growth rate of the surplus is at trade-union and political power. That this
least equal to that of the product; it does not, leads to arbitrary attitudes there can be not
therefore, tend towards dynamic equilib- doubt; but the appropriation of the surplus is
rium, as might be deduced from the abstract arbitrary too.
arguments of neoclassical reasoning. True, this redistributive power of the
labour force means that its earnings may be
6. Distribution and power relations higher than its marginal productivity, al-
though not its average productivity, except
In the appropriation of the surplus is to be when the above-mentioned limit in the
found the source of the great distribution dynamics of the surplus is overstepped. But
disparities of peripheral capitalism. Let us ' the surplus too is higher, and in very great
now extend our critique to neoclassical measure.
distribution theory. The responsibility for the evils of the
We said elsewhere that the higher the system is often laid, at least in part, upon
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 173
II
The significance of neoclassical theories
on the international plane
1. General considerations reached that the advantages of the price
decline in the aforesaid export activities
To understand neoclassical arguments on would be diffused throughout the interna-
the international plane, a point which must tional community. For the reasoning to be
always be borne in mind is the significance correct, however, it would have to be shown
of the price-equilibrating mechanism under that the price mechanism also spread
a rgime of free competition. Let us recall, throughout the international community the
therefore, the basic assumption that the fruits of increasing productivity in the
fruits of technical progress are distributed centres, in so far as they had not been
either through an increase in earnings or reflected in a correlative rise in earnings. But
through a fall in prices. It does not matter this does not happen.
that owing to the regressive competition of In any event, if the periphery's manufac-
the labour force in lower layers of technolo- tures were to become competitive this
gy, earnings do not rise correlatively with would not be enough to correct the tendency
productivity, for in so far as this does not to a bottleneck, since it is also essential that
happen, competition between enterprises the centres should open their doors to such
will bring down prices until the residual competition. But this does not happen
fruits of progress are transferred to the entire either. The power of the enterprises and the
collectivity. power of the labour force combine to pre-
If this argument were applied to centre- vent it.
periphery relations, we should see that the The fact that the periphery may resort to
problem of the effects of the considerable the well-known laws of the market in its
differences in productivity resulting from endeavours to resolve this problem would
the great structural disparities would also be certainly not have the merit of ensuring that
resolved through the price mechanism. The the centres will do the same.
periphery's external bottleneck would dis- As will be remembered, the centres set
appear of its own accord if market laws were up serious obstacles to imports of those
left to operate. If the lower level of produc- manufactures in which the periphery has
tivity in the periphery prevents its exports of attained or may attain competitive capacity.
manufactures from competing in the centres, They are usually manufactures for which
it is because earnings are higher than demand grows relatively slowly and which
productivity. Consequently, if they are al- trade liberalization policy seldom covers.
lowed to fall to their point of equilibrium, This policy, on the contrary, has been
industries which were not competitive will applied to the technically advanced indus-
become so. Nor is this all. For the drop in trial goods in which technical innovations
salaries and wages will also reduce prices in are incessantly embodied. The centres' for-
those export activities that were already eign trade in these goods has expanded to an
competitive. Herein would lie the efficacy of exceptional extent, and here the participa-
devaluation of the currency as an equilibrat- tion of the periphery has been relatively
ing instrument, according to neoclassical slight, notwithstanding liberalization. The
reasoning. transnational s prefer to invest in the centres
If this argument were carried to an themselves in order to secure these innova-
extreme, the conclusion might also be tions and put them into effect, although it is
176 CEPAL REVIEW N. 7 / April 1979
true that they do also invest in those the supremely important role of the transna-
peripheral countries which attract them by tionals in the internationalization of periph-
offering them various facilities. But, general- eral production.
ly speaking, they do so in order to produce It is with deep concern that I underline
goods which in the centres are giving way to these facts, for they indicate that the centres,
other more advanced products resulting with very few exceptions, are still viewing
from further innovations. For that very the great problems of the periphery in the
reason, the transnational s have no interest in light of immediate and circumstantial inter-
exporting peripheral manufactures to the ests. They show no signs of a long-term
centres, inasmuch as it suits them better to outlook, a conception at once bold and
broaden the market for the newer goods by realistic of their world responsibilities. All
exporting them to the periphery. they do is to take spasmodic action during
Clearly, then, even if the periphery crises in the periphery!
reduces its prices by means of currency This state of affairs is very serious,
devaluations or subsidies, the positive ef- although more explicable today than a few
fects will be very limited as far as the centres years ago, since their own problems have
are concerned. now become so complicated. But on the
Furthermore, the opposition put up by other hand it is not so easily understandable
entrepreneurs and workers alike to the that in the periphery itself the dogmas of
importing of such goods is notorious, and neoclassicism should have distorted the
this undoubtedly constitutes an additional interpretation of a reality which so greatly
reason why in this respect the transnational s affects its fundamental interests. Import
do not display the drive by which they are substitution is reviled, as if in order to export
characterized. manufactures the mere intention of doing so
Here again we encounter the effects of were enough, and as if the industrial centres
the structural disparity. Neither are the were panting to receive them.
transnational s interested in internationaliz- There can be no doubt that in some
ing the production in which the dynamics of cases protection has been excessive, and that
innovation is most manifest, nor is the many mistakes have been made. But a
periphery, technically and economically distinction must be drawn between the
speaking, in a position to do so. And when it irrationality of protection and the rationality
has acquired this capacity in the case of less of import substitution. Substitution was in
technically advanced goods, the centres reality a necessity imposed by the crises in
obstruct the corresponding imports. the centres, and I greatly fear that the
I am trying to expound these facts as difficulties which the periphery is at present
objectively as possible. I think, however, experiencing will again necessitate further
that despite everything the centres could substitution when, in contradistinction to
have launched an industrial redeployment what happened formerly, a considerable
policy which would progressively open their industrial export potential is now available.
markets to those imports in which the The effort to persuade the centres must be
periphery had attained satisfactory technical perseveringly pursued. But we must also
capacity. Such a policy might have been convince ourselves that in the use of that
hoped for during those long years of prosper- potential under new systems of reciprocal
ity which preceded the crisis of 1973. But no trade among peripheral countries a basic
such steps were taken. solution of the problem of the external
In contrast, it is by no-means uncommon bottleneck is to be found.
for the centres to continue criticizing the Two different motivations underlie
very concept of import substitution in the economic theories: on the one hand, the
periphery, and to lay insistent emphasis on zealous wish to find a scientific interpreta-
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 177
tion for real phenomena; and on the other correlatively with the increase in productivi-
hand, the quest and observance of certain ty. Thus the internal terms of trade deterio-
principles which are in line with specific rate, and so do the international terms of
economic or political interests. It is not trade, in the case of exportable goods. This is
always easy to disentangle these motiva- bound to be the outcome of the play of
tions, which are often inextricably bound market laws when they are not subjected to
up with one another. Thus, the classical intervention in one way or another.
theory of international trade has scientific Generally speaking, the centres have
validity given certain assumptions, but it opposed such intervention when it concerns
also served to formulate that outdated pre- goods of special interest to the periphery,
scription for the international division of although their attitude in this respect has
labour which accomodated dominating in- been less negative during recent times. But
terests both in the centre and the periphery. when their own products are affected they
And thus it has long provided grounds for do not hesitate to violate market laws; thus,
opposing, in the name of market laws, the we have witnessed what has sometimes
deliberate industrialization of the periphery. been the deliberate restriction of production
We have already alluded, in other in order to force up the world market prices
studies, to the way in which market laws are of certain goods, while in other cases
invoked to justify the present constellation internal prices were protected against an
of interests in the new centre-periphery international slump by recourse to various
relations, particularly with respect to trans- types of manipulation or compensation.
nationals. Even so, we cannot omit a brief In reality, the centres invoke market
comment on market laws with regard to laws when a price decline does not affect
primary commodities. their own production. Then they accept with
From the time of CEPAL's earliest approval the deterioration of the terms of
studies we have made efforts to explain trade for certain goods in which productivity
these commodities' weak capacity for retain- is increasing. Moreover, to bring it about
ing the fruits of their increases in productivi- they advise the introduction of new tech-
ty. What is involved is not a natural law niques, just as they counsel devaluation as a
intrinsically affecting the commodities in means of achieving external equilibrium.
question, a law immanent in their future Only their reaction to the effects of this
evolution, but the social structure of the measure is to reap the benefits of the fall in
periphery and its relation to the structure of prices in respect of exportable goods where
the centres. Let us summarize the position. no devaluation was necessary, while with-
Primary commodities are generally charac- standing imports of those goods which by
terized by a low income-elasticity of de- virtue of devaluation become competitive.
mand, so that when their productivity in- The centres are well able to defend their
creases and the supply expands beyond own interests. They cannot be blamed for
certain limits, prices tend to fall. If the such an attitude as long as there is no world
earnings of the labour force could appropri- development policy. But at all events it is a
ate the productivity increment (as it is flagrant contradiction to invoke market laws
appropriated by the landowners when land in one instance and to forget all about them
is in relatively short supply), there would be in another: a contradiction, however, which
no such price decline, albeit other factors does not fail to do them useful service in
may exert influence in the same direction. practice, as long as believers in the efficacy
But this does not happen, because of the of market laws for regulation purposes still
large proportion of manpower in lower exist in the periphery. Only fidelity to
layers of technology whose regressive market laws is not usually compatible with
competition prevents earnings from rising the interests of peripheral development.
178 CEPAL REVIEW N. 7 / April 1979
In the light of what has been said above To follow up these assertions, the effects
it is justifiable to take a closer look at the of the disparities must be examined on a
problems mentioned. We will begin with the theoretical plane. Let us first do so with
persistent trend towards external disequilib- reference to the periphery as a whole in its
rium. relations with the centres.
Allusion must first be made to the well-
2. The trend towards an external known phenomenon of the differences in
bottleneck and its spontaneous correction income-elasticity of demand, to which we
shall continue to attach great importance.
Needless to say, the growth of total income The relatively low income-elasticity of pri-
which goes hand in hand with development mary commodities in general, in comparison
gradually modifies the composition of de- with that of the continually-diversified
mand in favour of manufactured goods industrial goods, constitutes one of the
which are continually diversified in the elements in the congenital weakness of the
centres. Thus a highly important alternative periphery.
presents itself: either to obtain such goods If primary exports expand dispropor-
by increasing exports of primary commodi- tionately to the growth of income in the
ties so as to be able to import them, or to centres, their prices tend to fall, and this
produce them at home. decline offsets, wholly or in part, the effect of
For neoclassical theory the problem is the increase in volume on the total value of
very simple: a matter of trusting market laws exports, or, worse still, actually reduces this
to resolve it. It is true that domestic total value.
production is at a disadvantage in relation
to the centres because of the time-lag in 3. Devaluation and protection
development. Well then, it should be left to This idea underlies the argument in favour
market laws to depress wages until produc- of protection. For while it is true that
tion achieves economic efficiency. The fall protection means producing at higher costs
in wages will also encourage the growth of what could be obtained more cheaply by
exports, and in this way the market will buying abroad, it is equally undeniable that
determine of its own accord how far the to encourage primary exports beyond a
increase in demand will be satisfied by certain point causes a price decline which
expanding imports and how far by expand- may be greater than the loss due to the cost
ing domestic production through spontane- difference.
ous industrialization. All this depends upon the relation
From the standpoint of development between elasticities. On the one hand the
praxis, the problem might be posed in the price-elasticity of demand for exports be-
following simple terms. How is industriali- yond the limit set by the growth of income in
zation to be tackled? Are market forces to be the centres; and, on the other, the cost-
left to offset by the reduction of wages the elasticity of the supply of import-substitut-
differences between the cost of manufac- ing production. Let us look at one or two
tured goods in the centres and in the concrete examples to illustrate this point.
periphery, or is protection to be invoked to Be it assumed that there is an increase
achieve this end? Protection, of course, in productive resources which makes it
contravenes the conventional theories of possible to expand exports or import-substi-
international trade, not, however, because tuting production.3 Let it also be assumed
the latter are not strictly logical, but because
they overlook the consequences of the 3
To simplify the argument, the proportion repre-
structural disparity in the centre-periphery sented by the import component in each case has not
system. been taken into account.
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 179
that the cost of the import-substituting so that the effects of the increase in volume
production is 40% higher than the price of would be cancelled out or a still bigger loss
the corresponding imported goods. To offset would be suffered. This would happen in all
this greater cost the currency is then devalu- cases where the drop in prices was sharper
ated to the extent necessary to make import than the fall that would have been caused by
substitution possible and at the same time the aforesaid 40% reduction.
promote exports. To state this argument in general terms,
The upholders of the conventional it might be said that substitution would be
theories usually consider that devaluation4 desirable whenever the cost-elasticity of
is the instrument used by market laws to import-substituting production were less
fulfil their purposes ; an instrument which, to than the price-elasticity of exports.
be sure, does not derive from the spontane- There is, of course, no selective princi-
ous play of market forces but from a ple in devaluation. All exports are encour-
deliberate decision on the part of those aged by devaluation and the correlative rise
responsible for economic policy. But let us in domestic prices, whatever the difference
not dwell on these subtle issues. It should, in elasticities. Thus if the price-elasticity
however, be noted that devaluation causes a of exports were higher than the cost-elastici-
drop in real earnings, and to prevent them ty of import substitution, the reduction in the
from rising again, is a requisite for the value of the former would be greater than the
efficiency pursued. loss that would be incurred through import-
A 40% increase in the value of foreign substituting production.
currencies, besides encouraging import- It should be noted in passing that the
substituting activities, will push up the loss or the reduction are not net, but relate to
domestic prices of exports, thus encouraging the increment in production exported or in
an expansion of primary production for import-substituting production.
export. Strictly speaking, this is the loss that the
Now, if the latter's elasticity was such periphery must incur in order to step up its
that for every 1% increase in volume the global product faster than the product of its
decrease in prices caused a loss of 0.4%, the exports and thus gradually absorb the labour
value of exports would also be reduced by force which export activities do not employ.
40%. From the standpoint of collective The resulting increase in manufactured
rationality, therefore, it would be a matter of goods thus makes it possible to satisfy the
indifference whether the increase in produc- growing demand for these which accompa-
tive resources were devoted to exports or to nies development.
import-substituting activity, or were distrib- The net advantage for the periphery
uted between the two. But this would be an consists in reducing to the minimum the loss
accidental coincidence. in question as against the increase in the
In reality, the downward trend of prices total product which industrialization brings
is usually much more marked than in the about.
example given. It not infrequently happens Hence the advantages of a form of
that for every 1% increase in the volume protection which is established only in the
exported over and above the limits set by the degree required to cover the differences in
growth of income in the centres, prices tend costs. Nor would there be any reason for it to
to fall in a similar or even greater proportion, be accompanied by a deterioration in the
terms of trade for exports. But the neoclas-
sical economists cannot resign themselves to
A distinction should be drawn between this acknowledging the defects of market laws,
devaluation and the devaluation imposed by inflation
when domestic prices exceed those quoted on the and in order to ward off the negative effects
world market. of devaluation on exports, advocate taxation
1 CEPAL REVIEW N. 7 / April 1979
to tap the increase in the prices of primary another; there are some countries whose
exports, since otherwise it would be lost exports carry considerable weight in the
through a price decline. Herein lies an world market and others whose influence is
astonishing inconsistency. They repudiate insignificant. The former are very much
protection because it interferes with market exposed to deterioration of their terms of
laws, while at the same time they postulate a trade, which is not the case with the latter,
tax which is another way of violating them I whose exports could undergo relatively
If we follow up the thread of the intense expansion without ill-effects on their
neoclassical arguments a further highly prices; although of course these countries
suggestive aspect presents itself. Devalua- cannot escape the adverse consequences of
tion, apart from its external effects, increases the deterioration affecting the first group.
the surplus in all production for the home Between these extreme cases there is a
market. This should give no cause for whole range of intermediate situations.
concern, in the light of neoclassical reason- These differences, however, do not
ing, since competition will bring down mean that industrialization is any less an
prices. No such decrease would occur, indispensable requirement of peripheral
however, in the case of goods where devalu- development in the case just mentioned.
ation had offset the differences in costs Rather do they affect the scope and pattern of
between domestic production and imports; industrialization.
which means that in the last analysis the Thus, for countries whose importance in
impact would be exactly the same as that of the world market is slight the possibilities of
protection equivalent in effect to devalua- expanding primary exports are greater than
tion. Why, then, upset the whole internal for the rest. But though great they are not
system of costs and prices? boundless, since the countries' natural
The hard facts, however, do not work out resources have their limits, however much
as these arguments suggest, since the sur- technical progress may increase productivi-
plus, thus increased by devaluation and the ty. There comes a time when the expansion
rise in prices, is not transferred to the of production encounters the obstacle of
collectivity, but remains in the hands of the rising costs which weaken the economic
owners of the means ofproduction and of the advantages of exports as against those of
strata that are gradually acquiring trade- industrialization.
union and political power. But there is a further powerful justifica-
In any event, what happens to the tion for industrial development. Export
surplus when export prices fall? It is trans- activities generally absorb a relatively small
ferred abroad either through an increase in proportion of the labour force, especially
the proportion of it that goes to the enter- when technical progress is propagated.
prises using the primary commodities in Even though there may be no sign of a trend
question, or through price reductions, towards deterioration, industrialization is a
according to the respective income-elastici- necessity in order to absorb progressively,
ty of demand. through the superimposition of new and
higher-productivity layers of technology,
4. Diversity of peripheral situations labour from technological layers where
productivity is much lower, with the conse-
Hitherto we have considered the periphery quent increase in the economy's global
as a whole in order to explain the unfavour- product.
able effects on trade relations produced by If this is to be achieved in conditions of
the structural disparity between it and the economic efficiency, it is essential that the
centres. But naturally the situation varies rate of capital accumulation be speeded up
greatly from one peripheral country to in order not to divert resources from the
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 181
expansion of export activities, as long as ous play of economic forces. This is what has
these can continue to develop without rising happened in certain periods in the case of
costs or losses which exceed the cost of some temperate-zone products; but the same
import-substituting industrialization. But is not true of tropical products, to which we
so far we have said nothing of the penetra- will refer a little later.
tion of technical progress in export activities. When land is in short supply in relation
The increase in productivity which it im- to demand, an increase in productivity tends
plies strengthens the tendency to deteriora- to raise land rent rather than transfer it
tion of the terms of trade; and this is due to through the deterioration of the terms of
the regressive competition of the large trade.
proportion of the labour force employed in It may also happen that part of the
lower layers of technology, under the rule of productivity increment is internally or
market laws, as has already been explained. externally absorbed in transport and market-
To enable the producer countries to retain ing activities, especially when trade-union
the fruits of higher productivity, it would be power is also vigorously operative in these,
necessary to get rid of this regressive in contrast with its weakness in productive
competition, which could be done only after activities.
a more or less lengthy period, through more But another and very important pos-
intense capital accumulation whereby the sibility is that technical progress may be so
manpower in question could be employed in intense that despite the shortage of land the
industry and other labour-absorbing activi- tendency to deterioration of the terms of
ties. But as long as this does not occur in a trade reappears.
sufficient degree, the fruits of technical One aspect of the centres' experience
progress in export activities will tend to be may be highly significant in this connexion.
transferred abroad, in accordance with The old United States policy of parity of
market laws, always provided that demand agricultural and industrial prices was in-
has not increased enough to absorb the tended to offset deterioration; as were also,
production increment. later on, the measures adopted to restrict
The most important conclusion to be production through the deliberate reduction
drawn in this deterioration thesis, which of the land under cultivation. Moreover, the
CEPAL expounded in its earliest years of first International Wheat Agreement, during
activity, consists in the inescapable need for the great depression of the 1930s, was also
industrial development. Industrialization supported by the United States as a means of
would gradually absorb, at rising levels of counteracting the spontaneous play of
productivity and income, labour from the market forces.
lower strata, while at the same time it would Familiar, too, is the European Econom-
progressively correct the structural weak- ic Community's policy of opposition to the
ness of the periphery. And as this was deterioration of the terms of trade occasion-
achieved, the periphery would be able to ed by the considerable increase in agricul-
retain a steadily increasing proportion of the tural productivity. In reality, the intense
fruits of technical progress, instead of their absorption of redundant labour from the
being transferred through deterioration of agricultural sector did not suffice to counter-
the terms of trade under the rule of market act the trend towards deterioration.
laws. The case of tropical agricultural com-
The shortage of land, in relation to the modities merits special mention. From the
expansion of world demand, is also a highly very earliest days of their large-scale expor-
important factor which in some cases helps tation the abundance of labour and the
to counteract the trend towards the deterio- plentiful supply of land made for unfavour-
ration of the terms of trade in the spontane- able income relations with the centres. Even
182 CEPAL BEVIEW N. 7 / April 1979
As a matter of fact, it is natural that the to remedy the consequences of inflation, but
centres should almost invariably look at as a means of achieving industrialization
these questions from the standpoint of their without impairing market laws: a line of
own interests: interests of the moment rather policy which, besides apparently respecting
than inspired by long-term criteria. For orthodoxy, has for the centres the virtue of
market laws, as we have already said, are lowering the prices of their primary imports.
lacking both in a time horizon and in a social
All this is very understandable from the
horizon. It is true that in the academic world centres* standpoint, as is likewise that other
deep-rooted convictions are still cherished; thesis of the internationalization of produc-
but neither is there room for doubt that the tion by grace and favour of the transnation-
prestige of certain theories is largely based als. Demand is quickly internationalized,
on their congruity with dominant interests. but production with much less ease.
We have already mentioned that the
centres have had to face their own deteriora- In any event, the periphery has not yet
tion problems, and have had to counteract learnt to evade the seduction of certain
the spontaneous play of market laws. But in ideologies whose intellectual irradiation
doing so perhaps they were not aware of from the centres is still potent: spontaneous
violating those laws; nor do the powerful irradiation, and also propagation by deliber-
show any such awareness in respect of ate action. Reflections of both are to be seen
certain economic principles which they in the case of the neoclassical theories.
proclaim: when these principles do not suit I trust that these pages will at least help
their convenience, they create other new to sow a few seeds of doubt as to the validity
ones! of these theories in the periphery. It would
I have also said elsewhere that some perhaps be one way of taking the first steps
economists in the centres advocate devalua- on a long and difficult road: the road to
tion in the periphery, not in this instance authenticity of development.
Ill
The contradictions of liberalism
1. The conceptions of liberalism vicissitudes has this process been, and
sometimes sanguinary, like the battle for
Political and economic liberalisms flow from human rights that is inseparable from it. And
the same philosophical source. They reflect however much progress democratic institu-
human feelings and aspirations which for tions still need to make in the centres, what
centuries have manifested themselves has been achieved is of such great human
throughout the course of history, struggling significance that it would seem to be
ahead against enormous difficulties, surging definitive or irreversible, although always
forward and then ebbing back again. Full of exposed to setbacks.
The ideas of political liberalism, which
have so greatly influenced the constitutional
ests harmonized on equitable bases. For that very
reason I could not help feeling disconcerted by a de- organization of our countries, represent
claration on the part of Dr. Kissinger himself, when he another of the valuable contributions made
no longer held office as Secretary of State, to the effect by the centres to the development of the
that his idea would enable the centres to obtain at low
prices the mineral products they needed for their Latin American region of the periphery.
development. In other words, technical progress and The struggle waged by political liberal-
deterioration of prices! ism throughout history reacts against the
184 CEPAL REVIEW N. 7 / April 1979
concentration of power and its abuses and that finds expression in electoral campaign-
arbitrary practices, in defence of the freedom ing or in the use of force, either by those who
of the individual and of respect and firm wield it, or by others who make use of these
support for his basic rights. latter to fulfill their aspirations or gratify
The essence of economic liberalism too their interests and ambitions.
is the freedom of the individuala freedom There are important features in this
which, under the guidance of personal historical background which are still projec-
interest, would make it possible, according ted into our own time. I have to stress this for
to the theorists, to attain definite objectives the very reason that I am trying to show here
relating to the good of the community: the emergence of new structural phenomena
productive efficiency and distributional which had not appeared in earlier days. And
equity on the one hand; and, on the other I think that until relatively recent times it has
hand, the dispersion of economic power not been possible to form a clear picture of
through competition among innumerable the contradiction between the advance of
enterprises. democracy and the accumulation and distri-
As they were originally conceived, the bution patterns which characterize periph-
philosophical correspondence between the eral capitalism in the course of the changes
two currents of liberalism was in reality in the social structure.
perfect. Some of the features perceptible in the
Hence the fundamental importance of historical background may possibly be at-
the concept of economic freedom and its tenuated, while others lurk beneath the
political significance. The State did not need surface of events. Butthe aforesaid structural
to intervene to regulate production or in- changes play a dominant role; and when the
come distribution, since free enterprise and system reaches a crisis they end by render-
competition continually made for the most ing democratic liberalism incompatible with
appropriate solution from the collective economic liberalism.
point of view. Undeniably, in the periphery democrat-
Exempt from all responsibility in eco- ic liberalism has still a very long way to go.
nomic life, unless it were that of preventing But it does not consist in the mere text of a
the restriction or elimination of competition, constitution; it is something more. Its full
the laissez-faire State could devote itself to realization calls for institutional changes,
the full discharge of the essential functions education of the masses and of leaders, and
attributed to it by the political theory of new attitudes as well. But a risk a great
liberalism. risk of succumbing to new illusions is
But in the Latin American region of the incurred, if, in undertaking such reforms, we
periphery too political liberalism and its still shirk acknowledging the great flaws
democratic evolution have had a long road to and contradictions in peripheral develop-
travel over very rough ground. There too ment. And we hardly could acknowledge
liberal ideas had to overcome formidable them as long as we go on looking at the
obstacles and were and still are exposed to system in the light of economic liberalism;
severe and painful vicissitudes. In all this for in the reflorescence of neoclassical
there have been both illusions and realism, theories the original concept has been
but also frequent and striking proofs of adulterated in its very essence, and does not
immaturity: anarchy and popular ferment, reflect the real conditions of the periphery.
and repressive authoritarianism; a struggle Nor do I think, moreover, that it ever has
for power in which lofty designs have been reflected them, although in other structural
combined with eagerness to grasp at the phases it has been possible to believe in
advantages that power can give; a contest some degree of consonance with reality.
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 185
2. The adulteration of economic liberalism consumer society, and not downwards, to the
level whence they came.
Economic liberalism has been adulterated In this context a distinction must be
in respect of three main issues, which are drawn between those fundamental human
worth noting here, even though very briefly. rights and the way in which their observance
I refer to the concentration of power and its has been endangered or distorted owing to
serious consequences; to the regulatory role the social structure. And this cannot be
of the market; and to social mobility. divorced from the transcendent problem of
The concentration of economic power is freedom: freedom for people to do what they
imputable not so much to deliberate inten- like so long as it does not affect the freedom
tion as to the actual operation of the system. of the rest. This is a time-honoured principle
It is a consequence of the penetration of the of inestimable human value; and when I say
technique of the centres into the social human value I am already defining its true
structure of the periphery. significance self-determination. Free de-
Hence emerge the surplus and the great termination of one's own line of conduct, not
distributional disparities which, in the obedience to the orders of a superior or
framework of structural change, deprive the supreme authority.
market of the regulatory role it is held to Herein lies the great intellectual and
fulfill for the benefit of the whole collectivi- moral tragedy of economic liberalism; not to
ty. It does not regulate capital accumulation have perceived that the economic freedom
or income distribution; and these serious of the individual could not function as its
flaws are responsible for the exclusiveness theorists had assumed. One of the gravest
of peripheral capitalism, as well as for its mistakes of these theories indeed, the
conflictive tendencies when, over against gravest of all consisted in accepting eco-
economic power, the trade-union and politi- nomic freedom in the abstract instead of in
cal power of the labour force rears its head. It relation to the concrete system in which it
is exclusive, above all, of the lower strata, evolves. A change is conceivable in which
which development bypasses. There eco- economic freedom acquires a completely
nomic freedom signifies freedom to be poor. different significance; a significance ap-
Political freedom-is nothing but freedom to proaching the connotation ascribed to it in
decide without possessing effective means theory.
of discernment. And freedom of thought and
speech, like other basic rights, are still a 3. Democratic liberalism in the centres and
conventional flourish of rhetoric while there in the periphery
are social strata sunk in ignorance and
penury, just as the vital concepts of equality In the centres the democratization process,
of opportunities and social mobility are a in the light of experience, has been finding
chimera. expression in institutional and juridical
Social mobility, as liberalism conceives changes which attempt to make good unde-
it, carries the most capable and efficient to niable deficiencies. But perhaps the most
the top of the system. This undoubtedly may striking flaw in the process is to be found in
happen; but a great mass of human beings the direct and indirect consequences of the
are left on the sidelines, since economic and interplay of power relations. There can be no
social power favours some to the detriment doubt that the mechanisms of representative
of others. There is no such thing as equality democracy operate with perfect regularity
of opportunities. And those who surmount and that human rights are effectively re-
obstacles and strata, and find a niche in the spected. But equally unquestionable are the
system, look upwards, towards the advan- concentration of capital and the consider-
tages offered to them by the privileged- able influence on the formation of public
186 CEPAL REVIEW N/> 7 / April 1979
consciousness exerted by vast and complex distribution struggle, and as time goes by
interests, through their ascendency over the gives rise to increasingly crucial political
press and other mass media, through subsi- problems. What is more, the struggle is much
dies to political parties and through the close grimmer in the periphery in view of the great
liaison between these interests and the disparities and the notorious insufficiency of
political leaders. material for distribution. And thus, the
In the periphery, the concentration of chronic inflation to which the conflictive
capital, over and above that of land, gives tendency is leading breaks out in these
considerable political power to the upper latitudes with exceptional intensity. Indeed,
strata. This, as we have seen, is a phenome- in this respect we are ahead of the centres. So
non closely linked to the social structure and to Latin America falls the doubtful merit of
the changes therein. During the phases of being the forerunner!
outward-directed growth politics were a Thus a very serious problem is posed
matter for the various groups of the upper which representative democracy has not yet
strata, with some intervention by the nascent been able to resolve. Those who regard
middle classes, combined with intermittent democratization as the source of the distribu-
appeals by the rival factions to the relegated tion struggle in the middle strata and the
masses. In the subsequent course of devel- social and political ferment in the lower
opment, structural changes have increasing- strata are undoubtedly grievously mistaken.
ly made for the sharing of political power The source lies in the great flaws of the
with the lower and especially the middle system. I would say rather that the march of
strata. The upper strata will do everything representative democracy shows up these
they can to contain, manipulate and influ- flaws, but has neither been able to correct
ence the political power of the middle strata them, nor given any sign of ability to tackle
and to co-opt their leaders. Nevertheless, the the accumulation problem. But at all events,
expansion of these middle strata, their let us beware in time of inferring that the
increasing concentration in the towns and trouble is due to defects in the democratic
the development of the mass communication process, although they undoubtedly do exist.
media will end by flinging wide the gates for
the advance of democracy. 4. The use of force, and options in face
Through this gateway are released the of the crisis of the system
feelings, aspirations and interests of the
disadvantaged strata. All this gives impetus And now we come to an aspect of the ques-
to the political dynamics of these strata and tion which it is of paramount importance to
their aspiration to elect their representatives understand in order to interpret the dynam-
freely and to be elected. Nor does that ics of peripheral capitalism. The distribu-
impetus take long to acquire redistributive tion struggle cannot go on indefinitely, since
significance, with the development of the the desire to share in the surplus can be
trade-union and political power of the labour satisfied only as long as its total amount
force by which it is accompanied. And thus, increases at least as fast as the global
essentially owing to structural changes, the product.
institutions of democratic liberalism irra- If this limit is overstepped, enterprises
diated from the centres take on a new will try to raise prices in order to restore the
meaning, unfurl along a new social horizon. surplus, with the result that the inflationary
In this, as in other respects, peripheral spiral will be triggered off, or accentuated if
capitalism acquires some of the characteris- older forms of inflation were already devel-
tics of the centres, notwithstanding the great oping; all this we know already from
structural disparities. experience. And we also know that beyond
This process is apparent mainly in the that limit the surplus cannot be further
THE NEOCLASSICAL THEORIES OF ECONOMIC LIBERALISM / Ral Prebisch 187
compromised, not because there is insuffi- dependence which precisely by its doctri-
cient room to do so, but because the upper naire fervour helps to discourage the search
strata are not prepared to accept the disrup- for authenticity in the major decisions of
tion of the privileged-consumer society. In development.
such circumstances the rules of the monetary This is not merely an understandable
game become inapplicable, for inevitably phenomenon of intellectual irradiation, but
the monetary authority has to resign itself to also one of deliberate propagation, since in
the inflationary spiral, with all its increasing- the periphery the broad field of the Latin
ly disturbing effects, whatever attempts American region lies wide open to the
may be made to repress some of its more persistent effort made by both the hegemo-
acute manifestations. nic powers although motivated by dif-
Sooner or later the use of force super- ferent interests to disseminate their ideol-
venes. Later, perhaps, rather than sooner, ogies. That is, ideologies and information
when the distribution struggle is mitigated selected to bear them out. It is therefore very
by the availability of abundant funds deriv- difficult to gain an objective understanding
ing from the exploitation of natural re- of the course of events and to comprehend
sources. Only two major options are open to their significance. At the international level
the use of force: to stifle the trade-union and we are witnessing the strengthening of the
political power of the masses in order to curb efficacy of the mass communication media, a
and eventually eliminate the inflationary process which once again brings to light the
spiral; or to concentrate the means of ambivalence of technique, its capacity to
production in the hands of the State so that achieve not only positive results but others
decisions as to the new system and the that are negative and disruptive.
destiny of the surplus may come from the It is by no means easy to overcome this
summit. Needless to say, both options are and the other forms of dependence in the
incompatible with the advance of democra- praxis of development. But let us also
tization. acknowledge that on the intellectual plane
The two options are diametrically op- there are vast possibilities of seeking au-
posed, since the first draws its inspiration thentic options.
from the idea of re-establishing, if not The use of force cannot be kept up
exalting, the consumer society, and to that indefinitely. What is to be done afterwards?
end has recourse to economic liberalism, Will institutional reforms in the political
sacrificing political liberalism. Whereas the field be enough? As I have said before,
second option sacrifices both forms of liber- institutional reforms are useless if they are
alism, under the guidance of ideas which are founded on the system's basic flaws. It is
essentially divergent from the philosophical essential to get at the bottom of the system,
source whence they sprang, since the con- but invariably under the guidance of those
centration of economic and political power major values without which development
in the hands of the State necessarily means would be devoid of human significance.
the abandonment of the very principles of Such is now the complexity of develop-
political liberalism and the democratic con- ment and the interdependence of its com-
ceptions that stem from them. Accordingly, ponents. What is needed is the transforma-
fundamentally different notions of democra- tion of the system. And the starting-point
tization become inevitable. must be a synthesis in which, beyond the
Whatever their intrinsic value, how- tide of ideologies, certain essential princi-
ever, the influence of these ideologies on the ples of political liberalism are combined
periphery clearly exemplifies the persistent with genuine forms of that economic free-
historical phenomenon of ideological de- dom which is an integral and inseparable
pendence upon the centres: a form of element in the fundamental concept of
IHH CEPAL REVIEW N. 7 / April 1979
liberty. Economic freedom for individuals justification for sacrificing all it means in
and for enterprises for great enterprises terms of human comity. In contrast and
emancipated alike from the power of the this I have no hesitation in asserting such
owners of capital and from the power of the lofty ends cannot be attained under a system
State, in accordance with new norms of of imitative capitalism which, as it seeks to
community life. The fact that liberalism has develop in the image and likeness of the
been adulterated in the course of the centres, can survive in the long run only by
development of peripheral capitalism must throwing human rights overboard and giving
not on any account be taken as a valid its blessing to social inequity.