The purpose of this note is to set the theory of a long-run tendency for prices of primary products to decline in relation to manufactured products into the more general context for which Ð this note argues Ð it was originally intended.
The simplest version on which the discussion has perhaps unduly concentrated is the simple proposition regarding 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 de®nitions 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 veri®ed and supported, or at least not refuted. For this it does not matter very much whether the data are interpreted as a persistent decline trend or as essentially stationary with intermittent downward breaks. The general policy conclusion would be to emphasize the importance for developing countries of diversi®cation of exports into manufactures as intensively and rapidly as possible Ð in other words industrialization. In this the PST ®tted into the mainstream of development thinking at the time of its publication (1950) and the period immediately afterwards. Development and industrialization were treated as virtually synonymous. Signi®cantly, the seminal paper by Rosenstein-Rodan in 1943 was entitled `Problems of industrialization of East and South East Europe'.
The PST itself does not involve any view on whether the shift towards industrialization should be by way of export promotion for manufactures or by way of import substitution for previously imported manufactures. In the conditions of 1950s and 1960s a tendency to give preference to import substitution was natural since (i) developing countries had to build up a domestic production capacity in order to export manufactures and (ii) they would ®nd it initially easier to produce for an existing and known domestic market than for an unknown global market.
A ®rst and simple extension of the PST was to move from a proposition related to dierent kinds of commodities to a proposition related to dierent kinds of countries.