Forthcoming in L.-P. Rochon and S. Rossi (eds), Encyclopedia of Post-Keynesian
Economics. Edward Elgar
David M. Fields
According to Rostow (1960), all societies can be placed on a linear continuum, that is, a
‘stages of economic growth’ path, from undeveloped to developed. The assumption is that
capitalism is a historically progressive system, which is transmitted from the privileged
economically advanced countries to the rest of the world by a continual process of
destruction and replacement of ‘primitive’ social structures (Palma, 1978). This
modernization theory is a ‘blame the victim’ approach to problems affecting the ‘Third
World’. It ignores external influences, like colonialism (and neo-colonialism).
Dependency theory, on the other hand, highlights the extent to which global dialectical
forces of motion and contradiction generate vast disparities of wealth and power. The world
economy is reproduced as a ‘world-system’ (Wallerstein, 1979) of ‘unequal exchange’
(Emmanuel, 1972; Amin, 1974, 1976). If economic growth is not reached, it is not because
within the Third World there exists obstacles as a result of innate poverty arising from
some form of ‘backwardness’ but owing to the net outflow of vital resources.
Baran and Sweezy (1960), in Monopoly Capital, assess the degree to which monopoly, as
measured by the market concentration ratio of large capitalist firms (corporations), in
economically advanced countries, ensues a fundamental division between advanced
countries and impoverished ones. The result is that weaker countries suffer the retardation
of the requisite forces to spawn autonomous and dynamic processes of self-governance of
the conditions that engender independent social/political/economic coordination, planning
and control. This constitutes a “hierarchical [world] system with one or more leading
metropolises, completely dependent colonies [even if not name, certainly in practice] at the
bottom, and many degrees of superordinate and subordination in between” (Baran and
Sweezy, 1966, pp. 178–9).
Nevertheless, economic growth in the Third World, while controlling for socioeconomic
income differentials, is viable (Cardoso and Faletto, 1970) if there is an “embedded
autonomy” (Evans, 1995) to engage in Keynesian aggregate demand management. This is
measured by the extent to which a country does not suffer the inability to borrow in its own
The essence of ‘monetary sovereignty’ is the cartalist (or chartalist) (Goodhart, 1998)
conception that emphasizes State power to fully establish a national currency. From this
perspective, ‘underdevelopment’, or ‘dependency’, is the powerlessness of a country in
setting its own unit of account, which forces it to peg its currency to a reference currency of
an economically advanced country. This results in a dearth of flexibility to use monetary
policy and fiscal policy for domestic economic needs. Since the central bank is forced to
maintain a certain level of reserves of the foreign reference currency such that the price of
the domestic currency, in terms of the reference currency, does not change, this produces a
negative money-multiplier that sets in motion an inherent deflationary bias, which, if not
counteracted by capital inflows to spur aggregate demand, can lead to abrupt contraction of
the monetary base, stinting any supposed progress towards economic supremacy (see
Vernengo, 2006; Fields and Vernengo, 2012; Vernengo and Fields, 2016).
In this sense, if any form of government spending is to be engaged, an ‘underdeveloped’
country has to issue bonds that are not denominated in its own currency. This is a balance-
of-payments constraint (Thirwall, 2011). It amounts to the attraction of external
commercial loans with the faith of the country’s financial markets by foreign investors used
as collateral. If confidence is lost in the strength of the country’s financial markets, leading
to a spread over bonds like US Treasury securities, if the foreign reference currency is the
US dollar, interest rates on domestic foreign-currency-denominated bonds are likely to rise.
Government spending would become very costly, removing the domestic capacity to spur
public investment as an effective countercyclical policy in the face of economic stagnation.
If development fails to occur, it is not because of “the survival of archaic institutions”, or
some inability to contract some “modern man” (Inkles, 1969) syndrome. On the contrary, it
is generated by the same capitalist development that led to the domination by economically
advanced countries, that is, “the development of capitalism itself” (Frank, 1969, p. 23). It is
an operation of what Myrdal (1957) referred to as international “backwash” effect that
produces falling terms of trade for economically weaker countries (Prebisch, 1950). Since
the imbalance of international trade defines the mechanisms by which capital is drained
from former colonized countries, there is no way for a Third World economy to ‘catch up’
in Rostowian fashion (Amin, 1976, p. 383).
Aggregate demand; Balance-of-payments constrained growth; Capitalism; Monopoly
Capital; Monopoly power.
Amin, S. (1974), “Accumulation and development: a theoretical model”, Review of African
Political Economy, 1 (1), 9–26.
Amin, S. (1976), Unequal Development, Brighton, UK: Harvester.
Baran, P. and P. Sweezy (1966), Monopoly Capital: An Essay on the American Economic
and Social Order, New York: Monthly Review Press.
Cardoso, F.H. and E. Faletto (1970), Dependência e desenvolvimento na América Latina,
Rio de Janeiro: Zahar.
Emmanuel, A. (1972), Unequal Exchange: An Essay on the Imperialism of Trade, New
York: Monthly Review Press.
Evans, P. (1995), Embedded Autonomy: States and Industrial Transformation, Princeton:
Princeton University Press.
Fields, D. and M. Vernengo (2012), “Hegemonic currencies during the crisis: the dollar
versus the euro in a Cartalist perspective”, Review of International Political Economy, 20
Frank, A.G. (1969), “The development of underdevelopment”, Monthly Review, 18 (4), 17–
Goodhart, C.A.E. (1998), “The two concepts of money”, European Journal of Political
Economy, 14 (3), 407–32.
Inkles, A. (1969), “Making men modern: on the causes and consequences of individual
change in six developing countries”, American Journal of Sociology, 75 (1), 208–24.
Myrdal, G. (1957), Economic Theory and Underdeveloped Countries, London: Duckworth.
Palma, G. (1978), “Dependency: a formal theory of underdevelopment or a methodology
for the analysis of concrete situations of underdevelopment?”, World Development, 6 (7),
Prebisch, R. (1950), “El desarrollo económico de la América Latina y sus principales
problemas”, Revista de Economía Argentina, 48 (379–80), 211–66.
Rostow, W.W. (1960), The Stages of Economic Growth: A Non-Communist Manifesto,
Cambridge, UK: Cambridge University Press.
Thirwall, A.P. (2011), “Balance of payments constrained growth models: history and
overview”, PSL Quarterly Review, 64 (259), 307–51
Vernengo, M. (2006), “Technology, finance, and dependency: Latin American radical
political economy in retrospect”, Review of Radical Political Economics, 38 (4), 551–68.
Vernengo, M. and D. Fields (2016), “DisORIENT: money, technological development and
the rise of the West”, Review of Radical Political Economics, 48 (4), 562–8.
Wallerstein, I. (1979), The Capitalist World-Economy, Volume 2, Cambridge: Cambridge