The Prebisch-Singer thesis was an idea about the development of lesser developed countries (LDCs) which was independently developed by two economists shortly after World War II, Hans Singer and Raul Prebisch.
The thesis was an early idea about why it was hard for LDCs to get off the ground, and it became the basis of much of what was later called dependency theory. The idea was that the world was split into two parts, the core and the periphery. The core was characterized by a high level of industrial development, well-organized labour and a high rate of technical progress. Meanwhile, the periphery was mostly engaged in producing primary products (agriculture and raw materials) and had poor labour organization.
According to neoclassical economics, the periphery had a comparative advantage in the production of primary products. It should continue to specialize in them, and would be able to benefit from the fruits of industrialization in the core countries by importing manufactured goods as technical progress led their prices to drop.
However, the Prebisch-Singer thesis argued that this would not happen. It was essentially a pessimistic view of the terms of trade between primary and manufactured goods. They said that what was essentially happening was that while the prices of primary products were falling, the prices of manufactured goods were falling at a lesser rate. This meant that with each passing year the less developed countries were able to purchase fewer manufactures with their exports of raw materials and food. The core, they claimed, was exploiting the periphery and keeping the gains of industrialization for itself.
There were a number of reasons why this was happening. The main one was the difference between core and periphery regarding where the gains of technical progress were going. In the core, the cost of manufacturing goods was being decreased by technical progress. However, due to the good organization of labour in the developed countries, wages were going up as well. Between wage increases and increased profits for entrepreneurs (which was plowed back into technical progress), the prices of manufactured goods were not falling at a high rate. During periods of growth, competition between entrepreneurs was pushing wages up, and during recessions trade union activity meant workers were tending to retain their wage increases.
Meanwhile in the periphery, upswings in the business cycle did not have the same effect. Manpower was plentiful in the developing world, so there was little pressure on wages to increase. Rather, there was competition between exporters of primary products to find buyers for their commodities. Higher incomes don't tend to much increase people's demand for food or raw materials, meaning it was hard to find buyers even in periods when the world economy was doing well. Hence, there was a race to the bottom - food producers passed all of their technical gains onto buyers by lowering prices. Hence, the core was benefitting from technical progress in the developing world through decreased prices, whereas the workers themselves received nothing.
It was neo-Marxists and depedency theorists who later elevated this fact of life into an idea of conscious "exploitation" by the leaders of the core countries. For Prebisch in the late 1940s, it posed a technical problem. Prebisch was an Argentinian economist who had helped his country battle the Great Depression in the 1930s. Working under various military governments, he had pioneered a policy of state-led industrialization.
Using his idea about the terms of trade between primary and manufactured products as a starting point, he said the only solution was for countries in Latin America to industrialize by protecting their domestic markets from imports. Restrictions would be put on people inside Latin American countries importing manufactured products from the core, and then the state would invest in industry and infrastructure to stimulate development. This was seen as the only way to break out of the dependence on primary production. This was seen as a highly persuasive paradigm for development until the East Asian miracle cast some doubt on its claim to be the holy grail of developmental economics.