Raúl Prebisch

Raúl Prebisch (1901-1986) was known primarily for his work as a scholar specializing in international and development economics and for his leadership as an executive in various agencies of the United Nations. His greatest contribution to economics is known as the Prebisch thesis.

Raúl Prebisch was born on April 17, 1901, in Tucumán, Argentina. After studying economics at the University of Buenos Aires he joined the faculty of its School of Economics and was professor of political economy from 1925 to 1948. During this period he also held several important positions in the Argentine public sector. These included deputy director of the Argentine Department of Statistics (1925 to 1927), director of economic research for the National Bank of Argentina (1927 to 1930), under-secretary of finance (1930 to 1932), and first director-general of the Argentine Central Bank (1935 to 1948). In 1948 he joined the United Nations Economic Commission for Latin America (ECLA) and was appointed its executive secretary, a position he held until 1963. From 1965 to 1969 he was secretary-general of the United Nations Conference on Trade and Development (UNCTAD). After 1969 he was director-general of the United Nations Latin American Institute for Economic and Social Planning.

Prebisch achieved his greatest fame as an economist while serving with the Economic Commission for Latin America. There he began to formulate and publish his views on international trade and development, which were to have a significant impact on future Latin American policy making. Prebisch's views on international trade were a direct attack on classical-orthodox trade policy based on the theory of comparative advantage which was developed by British economist David Ricardo (1772-1823). Under comparative advantage a country was suppose to specialize in the production of those goods in which the country's efficiency was greatest. Thus, Latin America and other lesser developed regions would specialize in the production of primary products such as foodstuffs (e.g., tropical fruits, sugar, and coffee) and raw materials (e.g., copper, tin, and bauxite), while the United States and other advanced countries would specialize in the production of manufactured goods (e.g., capital goods and machinery). Trade between nations would distribute these goods and also the benefits of international specialization and division of labor.

Prebisch challenged this view of the world and set forth what has become known as the Prebisch thesis. This theory asserts that the gains of international trade and specialization have not been equitably distributed and that the advanced, industrialized countries have reaped far greater benefits than have the lesser developed regions of the world. This was due to the fact that the relative price of manufactured exports from industrialized countries was increasing, while the relative price of primary exports from lesser developed countries was decreasing. As a result, the commodity terms of trade (a country's export prices divided by its import prices) had been moving against Latin America and other lesser developed regions for several decades.

Prebisch reached this conclusion after examining various export and import price indices for the 1876-1947 period. He explained that this secular decline in the Latin American terms of trade was due to unique demand factors and the uneven impact of technological change. Lesser developed countries exported primary products, the demand for which grows at a slow rate, while advanced countries exported manufactured goods, the demand for which grows at a rapid rate. The net results of such a relationship will be export prices of manufactured goods (Latin American imports) increasing at a more rapid rate than export prices of primary products (Latin American exports).

Prebisch also argued that technological change was more favorable to the advanced countries of the world. Primary products were sold in competitive markets so that productivity increases caused the price of raw materials and foodstuffs to decline. Industrial products, however, were produced in oligopolistic markets, typified by administered prices and price rigidity. Productivity gains in such non-competitive markets did not result in a decline in the price of manufactured goods but were instead used to augment the incomes of capital and labor.

The Prebisch thesis had significant policy implications for Latin America. Since the price of manufactured goods was rising relative to the price of primary products, Prebisch argued that Latin America should embark upon its own process of industrialization. This process, known as import substituting industrialization, involves producing domestically manufactured goods that were previously imported. Prebisch and the Economic Commission for Latin America repeatedly stressed the need for Latin American countries to utilize industrialization as an instrument of economic growth. Latin American policy makers responded enthusiastically, and industrialization became the primary means of growth for most Latin American nations during the post World War II period.

In order to achieve industrialization Prebisch and the Economic Commission for Latin America advocated policies that were in sharp conflict with prevailing Western economic orthodoxy. They urged government to take an active role in fostering the process of industrialization. Governments were urged to implement high tariffs and restrictive import quotas in order to severely limit, and often eliminate, the importation of those manufactured goods that Latin American nations were beginning to produce themselves. Such high levels of protection would remove the threat of international competition and would provide a highly favorable environment for the profitable local production of manufactured goods.

The most critical role that the government was to perform was that of allocating foreign exchange. Large amounts of foreign exchange are required to import the machinery and capital goods necessary for the establishment of new industries. Since foreign exchange is extremely scarce in almost all lesser developed countries, Prebisch argued that the government must implement exchange controls in order to allocate foreign exchange only to those industries that it considers to be of high priority to the growth and development of the country. Thus it is by its foreign exchange policies that a government decides which industries to encourage. This decision can only be made in a rational manner if the government first engages in economic planning to determine priority sectors of the economy. This emphasis on government planning is diametrically opposed to the Western orthodox view that free market forces should determine what goods will be produced. Nevertheless, most Latin American governments have adopted policies of protection, exchange controls, economic planning, and growth strategies based upon industrialization.

Prebisch was in Santiago, Chile, advising ECLA when he died of a heart attack in 1986. He was survived by his wife Liliana and son Raul.

Many scholars believe that Raäl Prebisch has had greater influence than any other single individual in focusing and shaping Latin American development policy.

Further Reading

• To appreciate fully the breadth of Prebisch's work the reader should consult Towards a Dynamic Development Policy for Latin America (United Nations) and Change and Development: Latin America's Great Task (Inter-American Development Bank). Two excellent summaries of Prebisch's work are to be found in International Economics and Development, Luis Eugenio Di Marco (editor). See "The Evolution of Prebisch's Economic Thought" by Luis Eugenio Di Marco and "The Impact of Prebisch's Ideas on Modern Economic Analysis" by Aldo Antonio Dadone and Luis Eugenio Di Marco. The views of the Economic Commission for Latin America are summarized in Development Problems in Latin America (ECLA).