Journal of Development Economics 5 (1978) 319-330.

@ North-Holland Publishing Company

AN INTERPRETATION OF UNEQUAL EXCHANGE

FROM PREBISCH-SINGER TO EMMANUEL

Edmar L. BACHA*
Universidade de Brasilia, Brasilia, Bmzil

Received January 19’77,final version received October 1477

Emmanuel’s view of th: Center-Periphery trade relation is linked tc, a classical literature in
trade and development theory which starts from the wulDrkof Prebisch, Singer and Lewis. A very
simple general equilibrium Ricardian trade model is formulate1 tu deal with terms of trade
determination in the context of class conllict both i:l the Cenier and the Periphery. The model
focuses attention on the effects of technical progress and changes in income distribution on
employment levels in the Periphery, where labor surplus conditions are assumed to prevail.

1. Introduction

Under the ideological impulse of the New International Economic Order,

the ‘unequal: exchange’ literature has been expanding rapidly and in diKeren;
directions in the last few years.
This apt expression was first proposed by Emmanuel (1?69), as a synthetic
representation of the Center-Periphery trade relation. Currently, under the
generous umbrella of unequal exchange at least three separate mtellec’rual
currents can be identified.
Among Marxists, unequal exchange is part of a broad critique of thz
socic-economic dynamics of capitalist accumulation 0’1 a world wide scale
[see, for example, Amin (1970), Palloix (1971), Emmanuel et al. (1971 I], The
purely logical aspects of this literature concern the extension of the Marxist
transformation problem to the sphere of international rrade [Gibson (E977)].
The arguments are couched in Marxian value theory terms but they have a
neoclassical counterpart which can be expressed as follcws: tinequal ex-
change arises from the fact that real wages are higher in the developed PJorth
&an in .Fle developing South, Trade under these conditions is unequal to the
South. in the nor;native sense that its terms of trade nd Income levc~s) arc
iower than they would be under a Pareto-efficieni tr;& arrangcmenc
a!lowinp for perfect inter.llational labor mobility.
*I am indebted for comments to Michael Bruno, Guillermo Calve, Carlos Diaz -AWndro,
c.lrlos Rodriguez and Lance Taylor. Research support from CAPES: Bra711 IS gr atefull)
a: knowledged.
320 IX,. Bacha. Umrqutal exchange

In the realm of positive economics, unequal exchange can bc identified

with the Metcalfe and Steedman (1973) extension to international tradle of
the neo-Ricardian critique to orthodox capital theory. Problems raised in
this literature relate to the effect that the existence of positive profits may
have on the patterns of trade specialization and efficient resource allocaJi.on.
The issues are important but not exclusively relevant to the Cenler-
Periphery trade relation. l Last but not least, unequal exchange can be
assimilated to a long tradition in development economics, which is concerned
with terms of trade determination and distribution of gains of tradt: between
t.he Center and the Periphery of the ca.pitalist system. In fa.ct, Emm&uel
(1977) makes it clear that his book deals with two independent is:;ues. The
first is the interaction of profit rates and the international division of labor,
which concerns the neo-Ricardians. The second is the terms of trade effect of
international equalization of profit rates.
In this P;?per, Emmanuel’s firs! problem is avoided by the assumption of
complete specialization, which seems appropriate in *he context of a dis-
cussion of Center-Periphery trade ibsuc:s. We proceed to link the Emmamel
view of terms of trade determination with the classical literature ii1 develop-
ment economics, which starts from 11;~pio:ieering work of Prebisch (1950),
Singer (1950), and Lewis (1954). It is this unequal exchange tradition that is
the subject of the paper.
In the next section, a very simple general equilibrium model is formulated,
to deal with terms of trade determination in the context of rlass conflict both
in the Cetlter and in the l%r*iphery. In order to model the inferior bargaining
position of the working, class in the Periphery, Lewisian labor surplus
conditions are assumed tr, prevail there, whereas full employment rules in the
Center. Section 3 closes Ihis mode: using an extreme Prebi:sch,/Singer type of
policy recommendat& to fix the profit rate in th.e Periphery. The
Emmanuelian assumption of perfect international capital(ist) mobility is
introduced in section 4. In bcth sections 3 and 4, comparati;ve static exercises
are performed to analyze the general equilibrium consequences of exogenous
changes in technological and ‘class conflict’ variables. Results are sum-
marized in section 5.2

2. Surplus labor mode!

The point of departure is a Ricardian two-country, two-product, complete
spezlalirration trade rn#el. ‘Our’ country is identified as the Periphery, the
r>lher one as the Cent&.
Labor is the only factor of production in processes involving only final

‘For an ortha&?x synthesis, see Samuelson (1975). Ev.ans (1976) evaluates Emmannel’s
ctrntribution from a nco-Ricardian perspective.
*Mathematical workings are collected in the appendix.
 EL. Bac:;u, Unequal exchange 3.21

goods. The labor input is required one period before output is produced;
wages are ad:Janced to the laborers by a class of czpitalasts, who control all
market related activities in the economy. Profits are earned as a uniform
mar’k-up rz’i: over the wage fund advanced for the duration of the
production yrocess.3
EytcriRbrium prices are defined as follows :

P=Rw/q, (1)
: = R”w*/q*, (2)

Pz=Price of Periphery export good in lerms of Center export good or

Periphery terms of trade;
R = 1 +rate of profit in the Periphery:
rw=Peripbery wa,ge rate in terms of the Center export gcod;
ty=CoetTicient of labor productivity in the Periphery (a physical
Iconsrant);
I =Price of the Center export good in terms of i&elf (price Numeralrej;
R* = ‘D-t profit rate in the Cen!:er;
w* = Wage rate in the Center ir: terms of its cxporh good;
4’ =Coeficient of labor productivity in the Center (a physical constant];.
Each country is specialized in its own export good but consumes ol’ both
go3ds. FAI empioyment is assumed in the Center. The Periphery has surplus
Iatior, but those left out of the labor market consume only a. subsistence crop
which they cultivate for themselves. Household consumplion patterns are
such as to allow the existence of well-behaved per capita consumption
funlctions for both goods. We need to specify the per capita demand function
for only one of the goods, since per capita output (which constrains the sum
of the value of the two de,mands) Is given. We choose to Jpecify the demhiid
for the import good its each country, since this leads naturally to the
cor!sideration of the balance of tra& equilibrium conaition:

“These restrictive assumptions are adopted only to simplify the argument. They could be
comiderably relaxed without. affecting the results. For example. thr: pro.duction functions could
be of the neoclassical type: Q:=F(A.L,KJ=L.F(.~, K/L), where ,4 is a time dependent labor
augmenting technical factor, atld the capital stock, K, is made of the sz:me substance as final
output, Q. The price equations wou!d have to be changed to accommodate the fact that prflfitb
w4ld be earned as a proportion not of tie wage bi!l b;:: ,-f the capital stock. With net savings
equal to zero, the results of the text would hold with only Jne qualmcation, i:amely. lai>or
productivit,y, Q/L., would n,ot bl: a cmstant but a negative function of employment ievels. H’i:h
positive net savings, condi:io% for equilibrium growth paths wculd have to be investigated
before performing the exerlcisl: ~3 the text. These conditions might be 01’:;ome imeresl but tbley
are n.ot directly relevar,lt to the problems analyzed in this paper.
,322 E.L. Bacha, Uaequal exchange

l_ * W(q, l/P) - 1 - x(q*, P) *P = 0, ,(3)

K,==Employment in the Periphery;

M=Per capita import demand in the Periphery;
1 =Employment in the Center (unit of measurement of !abor);
X = Per capita demand in the Center for the Periphery export good.
Eq. (3) in valves Periphery employment, terms of trade and labor pro
ductivities. From it, u&r usual assumptions, the following eyuilibrium Iabor
demcltzdfunction can be derived:

L=L(P,q,tf% (4)

with partial derivatives

The signs of the partial derivatives of L with respect to q and q* are

immediate. If per capita product, q, in the Periphery goes up per-capita
imports increase, while exports are constant. To reestablish equilibrium in
the balance of payments, employment, L, has to decrease in order to reduce
imports. If productivity, q*, goes up in the Center, the demand for Periphery
exports increases, creating a trade balance surplus; to reestablish equilibrium,
total imports need to incrlease and this requires an expansion of employment,
1A.
The negative slope of the price-employment relationship can be obtained
as follows. Suppose that P is raised , starting from an equilibrium position,,
The Periphery import demand goes up because the relative price of imports
goes down. The value of exports, XP, will decrease if exports are price
elestic. I-Iencc, the LHS cl (3) goes up with P. To reestablish equilibrium, L
has to decrease. Thus, larger P means smaller L. Suppose that export
demand is price inelastic but the Marshall-Lerner condition q+q* - 1~0
obtains (where the q’s ;xre the absolute values of the price elasticities of
demand for imports). In this case also, the price-employment relationship is
negatively inclined. Under usual assumptions about adjustment processes, the
Marshall-Lerner condition is required for the stability of the trade: balance
equilibrium position. In rhe following, :;tability will be assumed and,, hence, L
will fall when P rises.
Eq!;. (l), (2) and (4) hre three independent relations in six variables: P, w,
R, w”l, R* and L. Surp’rus labor goes with institutionally set wage levels.
Since wage--goods are absent from the model, as a first approximation we
assume that the wage rclt* c v in the Periphery is fixed in terms of the import
 EL Bacha, Unequal exchrmge 323

good, our chosen numeraire.” This leaves us with five variables in three
equations. Note that eq. (2) establishes a unique relationship between w* and
R*; once one is given the other one i:; known. In the following we will
explore the consequences for the Periphery of fixing one or other ‘factor
price’ in the Center. One of w* or i?*, plus 1’eriphery employment, t, and
the terms of trade, P, exhaust the number of pg3ssible dependent vari’ables in
the system. We need an additional equation for R, the profit facto: in the
Periphery. We consider two cases. In the first one, R is determined by 52
profit maximization process in the Periphery. This opposes the interests of
the capitalist class in the Periphery to those of the consumers in the Center.
Ws: baptize this as the .Prebisch-S&zer case, since the specification follows
frc#m the consideration emphasized in the Center-Pciiphery literature: of the
nmeteen-fifties.5 In the second case, perfect zapital(ist) mobility is assumed
and the profit rate in the ‘:‘eriphery is equated to that of the Center.
Naturally, this is the Em,nanu~i case..

3. Prebisch-Singer m’odel
Consider the determination of a profit-maximizing value for R in the
Periphery export industr;/. Treat L as the decision variable and rewrite (4)
with P as a function of L, for given q, 4 *. Total revenue is P(L, q, q*)Lq and
total cost is wL. Take the derivatives <ofthese functions with respect to L and
Izquate marginal revenue to marginal cost to obtain

P = R (c)w/q, (5)

where

R(e)=&+
- /

and where e is minus the price elasticity of the equiilibrium labor demand
function. It can easily be stiown ;Jlat e-r1 +q* - 1 >O (by assumption).
Naturally, at the profit maximizing position, cz 1.
From eqs. (2), (4), (5) and (fj), the v.blues of R* (or \v*), L, P and R can be
cletermined, given w* (or R* ), w, q and q* (see fig. 1).

4This assumption is comister t with an asymmetric view of the Center-Periphery trade relation
in which cultural domination b.r the Center enhances the psychosocial value for the Peri )hzrjl of
the Center exiport good. For a two-sector Center-Periphery trade mode! where Periphery wa_:es
ae set in terms of the sLbs”strraee good, see Brunt (1977).
jThe classica: references are Prebisch (1950. 1959) and Smger (1350. 1975). An 111portant
historical exarnple is the Brazilian coffee valorization scheme which dates back to 1906 _ ;urtado
(1?63)].
X4 EL. &cha, Unequalexchange

(a)

_--

1 w

(W
Fig. 1

In fig. la the ‘factor price frontier’ (2) relates w* to R*. The outcome of the
distribution process in the Center is irrelevant for the determination of the
variables of interest for the Periphery (under the strong assumption that
income distribution shifts do not affect per capita goods demand). The
marginal cost ratio w/q is plotted in fig. lb. Given w, we can read, m fig. lc,
the level of emplloyment at which marginal cost equates the marginal reT:enue
-vhich is associated to the ‘average revenue’ price-employment relation. The
maximizing terms of trade is that which corresponds to such employment
level. Given this relative price, we can construct a curve corresponding to (5),
in fig. b, showing R as the value of its slope.
 E. L. Bacha, Unequal exchange 325

The: equilibrium configuration can be disturbed by shifts in the Periphery

wage or the labor prod.uct.ivities. For given q*, shifts in W* (or R*y only
affect the value of R* (or w*) in (2) and, hence, need not be considered.”
An upward shift of the Periphery wage rate raises the terms of trade from
(S), and consequently reduces employment, from (4). Since the profit ma-
ximizing value of the labor demand elasticity is, by necessity, larger than one,
the wage bjll goes down when w increases.
A prodkrivity improvement in the Periphery reduces the terms of trade,
from (5), and has a direct negative impact 0.0 employment, from (4). But the
reduction of P tends to increase employme:lt, from (4) also. T:he net effect
will be employment reducing if the Johnson tsnpoverishment condition: o >e is
met, where IT is the Periphery income elasticity of demand for the Center
export goamd [Johnson (1955)]. The economics of this effect are easy to
understand; a productivity improvement raises incomes in the Periphery and,
hence, the demand for the import good. It also reduces export prices and,
hence, increases export ttaluet-,. If the income effect is stronger than the price
effect, empll~~yment levels have to go down in order to keep the balance of
payments in equilibrium. The Prebisch-Singer presumption is that the
income elasticity of the Periphery demand for the Center export good is
sufficiently lhigh and that the price elasticities of imlport demand are
sutlkiently low to Imeet the Johnson impoverishment condition.
Ccj?sequentl,y, technical progress in the Periphery export industry is against
the Merests of its working class.’
An incrcsaI;e in labor productivity in the Center (which raises either w* or
R*, or both:, raises employment, from (4). The maximizing value of thr 1erms
of trade wilt’ remain the same if the price elasticity, e, is not affected by the
demand shift, Technical progress in the Center does benefit the workers in
the Periphery, by increslsing demand for their export product through an
upward shifi in Center income.

4. EmmaauceI model
Part of the argument in Emmanuel (1969) concerns the ::ffects on the
Periphery of Center *capital mobility’, which gives rise to an elq.~alization of
profit rates across c’ountries. The equation system of section 2 now is
completed with the rule:

1: =k . . (7)
61n al] fo~lo\~ingcompararivestatic exercises, the labor demand elasricity. c. is ‘I :ated as a
constant, I 3 simplify the argument.
‘Notice that immiserization oc:curs in spite of the fact that the Periphery j; practicing an
‘optimum trade polncy’ (since profits are maximized at all times). On hodox trade policies are of
little help when the intern;atiorual divisioriof labor condemns the Periphery to ?pccialize in the
production of tb,e ‘wrong’ type of good
326 EL. &&a, Unequal exchange

Eqs. (1j, (2), (4)vand (7) are sufficient ‘to determine the values of P, R* (or
w*j, L and R, for given values of q, q*, w and w*’(or R*) (see fig. 2).
In fig. 2a, the factor price frontier (2) determines the value of w* (or R*)
for given values of R’ (or w*) rrnd q*. Fig. 2b is a 45degree line reflecting
assuxrption (7). Given the profit factor R, and an institutionally determined
w, P is fixed in fig. 2c, in accordance to eq. (1). Once P is known,, L is
obta.ined in fig. 2d, for gi,ven TV,
q*. This corresponds to eq. (4).

I
R
I
(b)

I
!
I
P P
I

I
I
I

I\
I

1;’
I

L=i.(p,q,cp

___----_-_ I
L
P= Rwfq

1 pl L
/
-
R
(d) @)
Fig. 2
 EL. Bachu, Unequal exchange 327

Comparative static results for changes in q are exactly as before. The

Periphery will be worse off after a technical improvement if t,he Johnson
impoveris’irment condition obtains. Raising the Periphery wage rate reduces
employmerlt but may increase the value of the wage bill, since e is not
restricted to be larger than one.
Interestir,;; new results relate to distributional changes in the Center An
increase in the Center real wage rate (for given y*) reduces the profir. faclor
there and, cznsequectly, the profit rate in the Periphery as well. For a given
Periphery iwage rate, this implies lower terms of trade and higher employ-
ment lel,el’,.” In the Emmanuel model, there is international solidarit:l of the
working C~PSSmovement. Both Emmanuel and Bettelheim [see the preface
and the al:peadicr:s to Emmanuel (1969)] miss this point because of thei]
focus or’ yO:enegative effects of an increase of’ the Center wage rate on the
Peripher:;, terms of trade. A proper specification shows that this terms 0;
trade deterioration is a necessary intermediate step lead,ing to an improve-
ment in the living conditions of the working class in the Periphery (on ,&:
neoclassical presumption that they really are better off as proletarians than
in the subsistence sector).
Parallel results are obtained for increa:;es in labor productivity in the
Center. Suppose the benefits of technicai progress are entirely appropriated
by capitalists in the Center: the wage rate remaiins constant, the profit facto.-
goes up. By the perfect capital mobility assumption underlying (7), the profit
factor increases in the. Periphery in the same proportion as in the Center,
and tht; terms of trade adjust upwards. Employment in the Periphery will
tend to cecrease on account of the higher export price,but to incrl:asr: on
account of the higher Center productivity generating more demand via the
income effect. If the cronchtion o*<e is met, where O* is the Center income
elasticity of demand for the Periphery export good, employment will be less
than before. Under this empirically plausible condition, appropriation by the
capitalists of technical progress in tV.e Center goes against thle interests of the
working class in the Periphery.
If wages in the Center rise proportionally with the technical change, the
profit factor remains constant boih in the Center and the Periphery. The
terms of trade are unchanged: the only effect on employment is thfoui:h the
income effect. of the prodcctivity increase, which is positike. The Jkebisch--
Sin,ger conclusion of a favorable effect on Pel.:iphery workers of CLtcohnical
charlge in the Centier obklins in the Emmanue!iarl framework crnl:uiif the

Hi’C‘otethat the global wa,_;e fund \v* + WL (directly linanced by capitalists in a Ricardian
world) goes up when w* inPrI:ases. # background story would have the capit::listu dividing their
wealth between idle balances (nor appearing in the model) and the wage fund. ldlc ha!ances are
a residual item, moving in and Ol;i VIA the produ&e process according to the needs of finance,
in turn a function of the wagf: hargam rind the cmploymcnt determination procl:ss I am
indebted to an anonymous referee for poantirLg out that this ciew of the financial process is not
consistent with modern pxtfolio mxiagemcnt theory.
328 EL Bacha, Unequal exchange

working class in the Center fully shares in the benefits of rhe productivity
increase.

5. conclusion
This paper has produced a simple general equilibrium model to explore
certain aspects of the ‘unequial exchange’ literature pertaining to the Center-
Periphery trade relation.
The model focuses attention on the expansion of wage-labor employment
as the strategically relevant variabk liar the working class in the Feriphery,
on the theory that under instituti,yrally fixed wage rates, terms of trade
determination is the concern of ttlt dominant class in the Periphery. The
latter, in the Emmanuel version of the model, is the saye class that rules in
the Center.
A we%known result of orthodox terms of trade literature is rediscovered
in the sense that technical progress in the ;Periphery is found to be against
the interests of the working class there, if the Johnson impoverishment
condition obtains. Technical progress in the Center, with an independent
ruling class in the Periphery, benefits the Periphery workers, Under a single
wo:ld ruling class, technical progress in the Center is certain to favor
Periphery workers only if the Center working class manages to fully share in
the benefits of increased productivity.
Class conflict leadiag to an increase in the real wage of Center workers
does not afTect the Periphery w2a1 the two capitalist systeins are ‘delinked’.
When a single profit rate rules everywhere, the interests of the proletariat in
the Periphery are enhanced by the economic conquests of the workers in the
Center.

Appendix: Mathematical workings

1. Partial derivatives of the equilibrium labor demand function

Log differentiate (3) totally to obtain

where, for any variable x, i=d~/x.

Rearranging terms:

L= -(yI+tj* - 1 p--mji-o*ij*,
 E.L. Bacha, Ilnrqucl exchanp 329

where

q+q*-l>O, (by assumption),

a>O, 0*>0.

(Clearly, the signs of the partial derivatives are the same as ehe signs of the
corresponding partial log derivatives. j

2. Price elasticity of the equilibrium labor demand function

e=q+q*- 1, from the previous item and the definition of e.
(9)
3. Johnson impoverishment condition
On the assumption of a constant labor demand elasticity, e, log differen-
tiate (1) for given R and w, to obtain

P= -4’. 1 (10)

Substitute (10) in (8), with G*=O, and observe (9) to gt%

L= - (a-e)tj.

If 6>e, e<O.

4. Impoverishment condition for technical prcjgress in the C”rnter

Log differentiate (2) for given w* to obtak

(111

Log differentiate (7):

(12)

Log differentiate (l), for given ,w and q:

b=R. (13)

Substitute p=i* from (ll)-(13) in (81, with G=O, and obseru’e (9) to get

If c7*<e, e<O.
330 E.L. Bacha, Unequal exchange

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