Modernization theory claimed that once developing societies came into contact with western European and North American societies, they would be impelled toward modernization and, eventually, would achieve the economic, political, and social features characteristic of the nations of western Europe and the United States. However, by the 1960s it was apparent that the Third World was not passing through a stage of underdevelopment, as envisioned by modernization theory, but remaining underdeveloped. Thus, a counterclaim was advanced—that developing countries today are structurally different from the advanced countries and so will have to develop along different lines. This claim became the core of the structuralist thesis developed by intellectuals from Chile, Argentina, Brazil, and Peru brought together by the United Nations Economic Commission for Latin America (ECLA; today known as Economic Commission for Latin America and the Caribbean, ECLAC).

The main theoretical tenet of ECLA’s approach was that former colonies and nonindustrialized nations were structurally different from industrialized countries and, therefore, needed different recipes for modernization. ECLA argued that colonization restructured former colonies’ economies so that they specialized in producing raw materials, cash crops, and foodstuff for export at low prices to the colonizers’ home countries. These structures created a dynamic that was continuing to impoverish former colonies and to thwart their modernization. According to ECLA, the international division of labour created by colonization had separated the international economy into a centre, consisting of the industrialized countries, and a periphery, which included all the rest of the countries around the world outside of the socialist camp. Because the prices of manufactured goods bought by the periphery were rising faster than those of raw materials, cash crops, and foodstuffs sold by the periphery to the centre, international trade ensured the persistence of an unbalanced process of development. Thus, in contrast to modernization theory, which emphasized the benefits of free trade, foreign investment, and foreign aid, these theorists argued that free trade and international market relations occur in a framework of uneven relations between developed and underdeveloped countries and work to reinforce and reproduce these relations.

This perspective formed the basis of what came to be known as dependency theory. Dependency theory rejects the limited national focus of modernization theory and emphasizes the importance of understanding the complexity of imperialism and its role in shaping postcolonial states. Its main tenet is that the periphery of the international economy is being economically exploited (drained) by the centre. Building on ECLA’s perspective, dependency theorists argued that colonialism recast economies in the Third World in a highly specialized export-producing mold, creating fundamental and interrelated structural distortions that have continued to thwart development. Once this reshaping was accomplished, market forces worked to perpetuate the relationship of dominance and exploitation between centre and periphery.

During the 1970s there also emerged a perspective that elaborated an account of capitalist exploitation of the periphery from the perspective of the system’s core. This theoretical enterprise became known as world systems theory. It typically treats the entire world, at least since the 16th century, as a single capitalist world economy based on an international division of labour among a core that developed originally in northwestern Europe (England, France, Holland), a periphery, and a semiperiphery consisting of core regions in decline (e.g., Portugal and Spain) or peripheries attempting to improve their relative position in the world economy (e.g., Italy, southern Germany, and southern France). The division of labour among these regions determined their relationship to each other as well as their type of labour conditions and political system. In the core, strong central governments, extensive bureaucracies, and large mercenary armies enabled the local bourgeoisies to obtain control of international commerce and accumulate capital surpluses from this trade. The periphery, which lacked strong central governments or was controlled by other states, exported raw materials to the core and relied on coercive labour practices. Much of the capital surplus generated by the periphery was expropriated by the core through unequal trade relations. The semiperiphery had limited access to international banking and the production of high-cost, high-quality manufactured goods but did not benefit from international trade to the same extent as the core.

Dependency and world systems theories share a common emphasis on global analysis and similar assumptions about the nature of the international system and its impact on national development in different parts of the world, but they tend to emphasize different political dynamics. Dependency theorists tend to focus on the power of transnational classes and class structures in sustaining the global economy, whereas world systems analysts tended to focus on the role of powerful states and the interstate system.

Initially, the logic of these perspectives supported a strategy that came to be known as import-substitution industrialization (ISI). The ISI strategy was to produce internally manufactured goods for the national market instead of importing them from industrialized countries. Its long-run objective was to first achieve greater domestic industrial diversification and then to export previously protected manufactured goods as economies of scale and low labour costs make domestic costs more competitive in the world market. In the 1950s, 1960s, and 1970s, ISI strategies were pursued by countries such as Chile, Peru, Brazil, Mexico, Argentina, Ecuador, India, Pakistan, the Philippines, Indonesia, Nigeria, Ethiopia, Ghana, Zambia, South Korea, Taiwan, and Japan. The strategy ultimately foundered because of the smallness of the domestic market and, according to many structuralist theorists, the role of transnational corporations in this system. These theorists concluded that ISI, carried out in conditions of capitalist relations of production dominated by the economic empires led by the United States, was a recipe for further colonization, domination, and dependency.

Thus, beginning in the 1970s, theorists and practitioners heralded an export-oriented strategy as the way out of dependency. This strategy gives priority to the growth of manufacturing production aimed at world markets and the development of a particular comparative advantage as a basis for success in world trade. The strategy is based on lower wages and levels of domestic consumption (at least initially) to foster competitiveness in world markets, as well as to provide better conditions for foreign investment and foreign financing of domestic investment. By the 1980s, however, many countries that pursued this strategy ended up with huge foreign indebtedness, causing a dramatic decrease in economic growth. Though the theorization of types of peripheral development and their connection with the international system continued to undergo refinement in the 1980s and 1990s, structural theorists were not able to agree about what would end dependence and how a nondependent growth could be achieved.