The Prebisch-Singer hypothesis suggests that the relative price between primary products (such as raw materials) and manufactured goods tend to deteriorate in the long run such that the relative prices of primary products fall.

The hypothesis was first proposed by the Argentine economist Raúl Prebisch in the 1950s and later developed by the British economist Hans Singer. They argued that the prices of primary commodities tend to be more volatile and subject to fluctuations in supply and demand, while the prices of manufactured goods are more stable and tend to rise over time because of technological progress and productivity gains.

This posited phenomenon was seen as a major obstacle to the economic development of primary-commodity-exporting countries. According to the hypothesis, this asymmetry in price trends leads to a decline in the terms of trade for primary-product exporters, which makes it harder for them to purchase manufactured goods from developed countries.

This hypothesis sparked much debate among economists.[1] Some argued that it was flawed because it failed to account for technological advances and productivity growth in primary-commodity-exporting countries, which could lead to increased efficiency and competitiveness. Others suggested that the hypothesis was still relevant, as such countries continued to face structural constraints that prevented them from fully benefiting from technological advances.

In the 1950s, in developing countries, market prices could not always be relied on and thus extensive government intervention was required during industrialization. Coupled with the Prebisch-Singer hypothesis, this pushed India and other emerging economies to adopt import-substitution trade policies. As a result, such countries became trapped in a cycle of low commodity prices, limited economic growth, and dependence on developed countries for manufactured goods.

Notes:

[1] Spraos, J. (1980) “The Statistical Debate on the Net Barter Terms of Trade Between Primary Products and Manufactures,” Economic Journal, vol. 90, no. 357 (Jan.) pp. 107–28. ; Ho, P. Sai-wing. “Revisiting Prebisch and Singer: Beyond the Declining Terms of Trade Thesis and on to Technological Capability Development.” Cambridge Journal of Economics 36, no. 4 (2012): 869–93. [object Object],. ; Sapsford, D., Chen, Jr. (1998). The Prebisch-Singer Terms of Trade Hypothesis: Some (Very) New Evidence. In: Sapsford, David and Chen, John-ren (eds). Development Economics and Policy. Palgrave Macmillan, London. ,[object Object],–1-349–26769–9_3