Beyond Terms of Trade: Convergence/Divergence and Creative/Uncreative Destruction

The paper describes the various ways in which the Prebisch-Singer thesis of tendency to deteriorating terms of trade of poorer countries went against a prevailing trend of optimistic expectations of convergence in per capita income levels among countries. The actual evidence in the context of a globalising world economy is one of divergence rather than convergence although a number of exceptions to this general tendency are also noted. The paper then discusses debt pressures as a new factor strengthening the original Prebisch thesis. The ‘fallacy of composition’ involved in countries simultaneously trying to be more outward-oriented is discussed. It can only be avoided by the creation of new technological capacity creating new dynamic comparative advantages. The discussion concludes by relating the argument to Schumpeter’s concept of ‘creative destruction’ and notes some neglected welfare aspects of innovation and increasing the variety of available goods.