Trade Strategy and the Dependency Hypothesis: A Comparison of Policy, Foreign Investment, and Economic Growth in Latin America and East Asia

Abstract

The role of state policy in the industrialization of Third World nations has become the subject of increasing interest in recent years. In the past, the debate over economic development has either focused on the traditional modernization approach' or the dependency theory of underdevelopment.2 Dependency theorists base their model of development on the belief that foreign investment from core countries is harmful to developing nations' long-term economic growth. Economic relationships between the core and the periphery are structurally detrimental for the latter because of the inherent dynamics of international capitalism. Yet, despite the claims of dependency theory, the recent experience of the East Asian newly industrialized countries suggests a wider range of development possibilities which include government policies specifically designed to attract foreign investment. These countries appear to have structured their domestic economies in order to mitigate the pernicious effects of dependent relationships with core countries. This raises new questions about the development process and the role of policy and foreign investment in the economic transactions between core and peripheral countries. Dependency theory, a neo-Marxist predecessor of world-systems research, claims that First World nations become wealthy by extracting surplus labor and resources from the Third World. Capitalism perpetuates a global division of labor which causes the distortion of developing countries' domestic economies, declining growth, and increased income inequality.3 Those countries on the periphery cannot become fully modernized as long as they remain in the capitalist world