This problem of elasticities is compounded by the impact of technological progress on the replacement of natural goods by artificial and synthetic goods, which was one of the factors in the demand for goods such as textiles, nitrates, natural rubber, etc. The basic idea was that when the world economy is booming, the demand for raw materials and food soars, pushing up prices sharply in the short term, whereas in the downswing, prices for these goods plummet; owing to the social reasons referred to above, no institutional mechanisms existed for stemming this decline.
The last argument is based on the difference in market structure.
The hypothesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. The Prebisch-Singer thesis referred to hereafter as P-S thesis argues that especially developing countries are not better off by specialisation in that what they can do best.
This thesis has shown that developing countries rather suffer from it specialisation of producing primary commodities than benefit from, at least when we talk about a time period of the last century. It is, therefore, not proper to draw a firm inference about terms of trade just on the basis of primary versus manufactured exports.
Does this commodity boom means that the P-S thesis is not valid anymore or can we compare this recent boom in the primary commodity sector with the situation in the earlywhere we could also see a sharp increase in commodity prices and after a while the primary commodity prices continues its long-term downward trend?
In FebruaryHans Singerthen working in the United Nations Department of Economic Affairs in New York Citypublished a paper titled "Post-war Price Relations between Under-developed and Industrialized Countries", which suggested that the terms of trade of underdeveloped countries had declined significantly between and According to South Commission, compared withthe terms of trade of developing countries had deteriorated by 29 percent in Also the high level of innovation and resultant rents makes the different between the developed and developing countries.
There should be rather greater recourse to export promotion, import substitution, favourable trade agreements and adoption of appropriate monetary and fiscal action for improving the terms of trade in the developing countries.
Firstly, a high proportion of proceeds from exports are not available for imports.