Dependency

The dependency challenge grew out of historical and economic analyses grounded in Latin America's colonial and postcolonial experiences. The historical work of Latin American scholars such as Eric Williams highlighted the links between the colonial plantations and Western economic development, particularly the use of plantation profits to bankroll European industrial development. The plantations were not precapitalist remnants of indigenous economies, they argued, but the result of capitalist penetration. This historical work undermined modernization theory's dual conception of Third World economies, arguing instead for a more integrated approach, one that paid attention to global inequalities and their link to uneven development. This argument greatly influenced the thinking of key dependency theorists, most notably Andre Gunder Frank.

The dependency approach was also influenced by a group of Latin American economists working for the Economic Commission for Latin America (ECLA), a United Nations agency established in Santiago, Chile, in 1948. Led by Raul Prebisch, these economists sought to understand why, after years of applying modernization and growth "solutions" to Latin American economies, so little progress had been made. They began to see the world as divided into an industrial core and an agrarian periphery. Rather than accepting modernization theory's premise that "backward" economies would gradually move through stages to mass consumption and industrial development, with help from northern capital and development experts (Rostow), the ECLA economists insisted that the core–periphery gap was produced (and reproduced) through patterns of unequal world trade. The very system that was supposed to develop the Third World was leading to its underdevelopment.

Prebisch and the ECLA economists thus challenged neoclassical theories of international trade, called for attention to distribution, and warned that the gap between the core/metropole and the periphery would continue unless there were explicit interventions to challenge structures of international capitalism. Yet, they still believed Latin America's development depended on industrialization and that the domestic capitalist class was the natural leader for that development. Hence, they argued for policies that would nurture this class, encourage import substitution industrialization, and put up protective tariffs until local manufacturers were ready to compete in the global economy.