Chapter 2: Beyond Terms of Trade: Convergence, Divergence, and (Un)Creative Destruction
CHAPTER 2 4/7/01 1:52 pm Page 1 2. Beyond terms of trade: convergence, divergence and (un)creative destruction The purpose of this chapter is to set the theory of the long-run tendency for prices of primary products to decline in relation to manufactured products into the more general context for which it was originally intended. The simplest version on which the discussion has perhaps unduly concentrated is the simple proposition regarding net barter terms of trade as quoted in the previous sentence. In this sense it has become known as the Prebisch-Singer Thesis (PST). With given and mutually agreed definitions of what constitutes primary commodities and what constitutes manufactures, this proposition can be statistically tested. This has been widely done, with the evidence generally pointing (especially when the analysis includes the recent period since 1980) to the thesis being verified and supported, or at least not refuted. For this it does not matter very much whether the data are interpreted as a persistent declining trend or as essentially stationary with intermittent downward breaks. The general policy conclusion would be to emphasize the importance for SCs of diversification of exports into manufactures as intensively and rapidly as possible - in other words, industrialization. In this the PST fitted into the mainstream of development thinking at the time of its publication and the period immediately afterwards. By showing that all available empirical evidence contradicted the orthodox view that net barter terms of trade would move in favour of SCs - a...
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