THE Prebisch-Singer hypothesis (PSH) was a staple of leftist economics during the second half of the 20th century. Raúl Prebisch and Hans Singer, working independently, showed that the “terms of trade” between primary products and manufactured goods tended to decline over time. In other words, producers of crops and raw materials gradually became poorer relative to producers of cars and household appliances. If true, the theory would have important implications for world trade; it would suggest that commodity-focused economies must diversify into other sectors or risk falling ever further behind richer countries.
A new paper* by the International Monetary Fund discusses the PSH. The authors examine 25 commodities, from sugar to silver, with some data going back to 1650. Since 1900, around 50% of the commodities show clear downward relative price slopes. About 25% show a clear upward slope. You will have to forgive the confusing labelling of the graphs, but you get the idea:
These graphs show prices relative to manufactured goods; in dollar terms many commodity prices have trended upward over the past century. So countries that produce high levels of primary products have, over time, done worse than economies which rely on manufactured goods. The authors cautiously conclude that "in the majority of cases the PSH is not rejected".
What can primary producers do about this? In a recent conference at the IMF in Washington, one of the authors, Kaddour Hadri, suggested that commodity-dependent economies should take advantage of short periods of price spikes to invest in alternative industries. But many commodity-dependent economies fail to do this. William Sawyer, of Texas Christian University, argues that South America has failed to take advantage of high commodity prices over the past decade. As a result, their economies are not well-equipped to deal with the current price declines.
But according to Javier Blas, a journalist for the Financial Times who spoke at the IMF conference, commodity producers have been fighting against the Prebisch-Singer hypothesis for the last century. Many have shifted production away from commodities which do relatively badly against manufactured goods. The development of the soybean market, as well as shifts towards farming of chicken and pork, are some examples of this. None of these commodities appears in the IMF paper, so it does not tell a complete story. Still, and oddly enough, the IMF seems to have turned up some evidence support a bit of Marxist economic theory.
*Rabah Arezki, Kaddour Hadri, Prakash Loungani and Yao Rao (2013) 'Testing the Prebisch-Singer Hypothesis since 1650: Evidence from Panel Techniques that Allow for Multiple Breaks' Working Paper No. 13/180
James O. Gibson
Unfortunately, the IMF embracing this 'marxist' thinking isn't going to do anybody any good. If anything, it's going to cause a great deal of suffering onto those people living in agrarian economies.
While they certainly don't live 'good' lives when compared to Westeners, farmers in developing countries can often say that their basic needs are met and that they are fairly content with their lives - as they have been for generations before. When the government of such an agrarian economy gets itself into a debt crisis, the IMF takes over and enforces adjustments within the economy.
These adjustments, now even likelier with type of thinking described in the article, will force rural populations into urban ones. Relatively clean and safe farming jobs will be exchanged for work in factories with much worse working conditions, longer hours and a disproportionate salary. The issue is though, the country doesn't get richer as a result of this - as more often than not, the profits from these factories are being pumped straight into the pockets of developed countries and corrupt oligarchs.
I recommend reading 'Bad Samaritans; by Ha-Joon Chang if anybody hasn't already.