Prebisch-Singer Thesis

Does the recent rise in primary commodity prices invalidate the Prebisch-Singer-Thesis?


Essay, 2008

9 Pages, Grade: 2,0


Excerpt

Content of Table

1. Introduction

2. Prebisch-Singer thesis

3. Commodity Boom

4. Validity of the Prebisch-Singer thesis

5. Conclusion

6. Sources

1. Introduction

Today we have two major approaches when it comes to trade policies. The first block is promoting a free-trade policy. The main argument here is, that everyone is better off, if they were specialise in products in which they have a comparative advantage (Ricardian thinking). Against Ricardo’s basic idea of free trade and comparative advantages argues the Prebisch-Singer thesis. The Prebisch-Singer thesis (referred to hereafter as P-S thesis) argues that especially developing countries are not better off by specialisation in that what they can do best. This thesis has shown that developing countries rather suffer from it specialisation of producing primary commodities than benefit from, at least when we talk about a time period of the last century. But this long-term deterioration in the commodity prices came to an end by the year 2002, where we have seen a tremendous comeback of the commodity markets. The prices of primary commodities such as wheat, cooper and crude-oil etc. have risen very sharply in the last years. The effect for many developing countries, which mainly produces such primary commodities benefits extremely from this recent development.

Does this commodity boom means that the P-S thesis is not valid anymore or can we compare this recent boom in the primary commodity sector with the situation in the early 1970, where we could also see a sharp increase in commodity prices and after a while the primary commodity prices continues its long-term downward trend?

2. Prebisch-Singer thesis

Paul Prebisch and Hans Singer started almost simultaneously to challenge the Ricardian thinking of free trade and described at the first time a negative development in the net barter terms of trade between the price of primary commodities and the price of manufactured goods. Terms of trade can we define as the ratio of the price of primary commodities to the price of manufactured goods.

As I said in the beginning the developing countries are highly depends on the production of primary commodities, which means that this countries suffer most from long-term deterioration in this sector. Compare to the developing countries, we can consider that developed countries basically the USA, EU and Japan benefit from producing high-end manufactured goods.

The first main common explanation for the long-term deteriorate in the primary commodity sector is the fact that the demand for primary products raises more slowly, than the demand for manufactures goods. This is due to the fact, that humans simply can consume just a certain quantity of food a day. A further increase in income will not lead to an increase of demand for food in the same proportion. But the demand for consumer goods (manufactured goods) will increase more rapidly if the income is increasing.

The next important argument for declining terms of trade between primary commodity and manufactured goods is the „lower price elasticity of demand“[1]. That developed countries can produce their manufactured goods, they need a certain amount of primary products as input. Do we have now a given percentage change in the price of a primary input, this will result in a lesser percentage change in the price of the finished product, with the consequence that no great influence in quantity demand can be expected[2], according to Singer.

The third argument is called the technological superiority of developed countries and concerned mostly the multinational company (MNC), which are mainly located in the developed countries. Those MNC used to have a very strong position on the world market with monopolistic or at least oligopolistic market structure and generate therefore very high profits. Those high profits are not only caused by a great market position and the benefits of economics of scale. Also the high level of innovation and resultant rents makes the different between the developed and developing countries.

The last argument is based on the difference in market structure. While the companies in developed countries face a much lower level of competition (i. e. aircraft industry) must developing countries produce its primary commodities under a much higher level of competition. This is due to the fact, that it is much easier to harvest wheat than developing and manufacturing an aeroplane.

Therefore we can say that there was not much doubt against the P-S thesis. Ten of the top twelve studies in the last century provided support for the P-S thesis[3]. Nevertheless the recent commodity boom and the great change in the world economy seems to challenge this thesis of declining terms of trade between the developing and developed countries and we have to ask if the P-S thesis is no longer valid?

3. Commodity Boom

Prebisch and Singer described in their publications the long-term trend of deteriorating commodity prices. This deteriorating came to an end by the year 2002. In this part of my term paper I will analyse the reason for this strong upward development on the commodity markets.

[...]


[1] Source: D. Sapsford, The debate over trends in the terms of trade, in: Economic development and international trade, edited by: D. Greenaway

[2] Source: D. Sapsford, The debate over trends in the terms of trade

[3] Source: D. Sapsford and J. Chen, Development Economics and Policy, Page 29

Excerpt out of 9 pages

Details

Title
Prebisch-Singer Thesis
Subtitle
Does the recent rise in primary commodity prices invalidate the Prebisch-Singer-Thesis?
College
Berlin School of Economics
Grade
2,0
Author
Year
2008
Pages
9
Catalog Number
V126014
ISBN (eBook)
9783640314409
ISBN (Book)
9783640317936
File size
368 KB
Language
English
Notes
Terms of Trade, Long Term Deterioration, Commodity Boom, Prebisch-Singer Thesis
Keywords
Prebisch-Singer, Thesis, Does, Prebisch-Singer-Thesis
Quote paper
Thomas Ihrke (Author), 2008, Prebisch-Singer Thesis, Munich, GRIN Verlag, https://www.grin.com/document/126014

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