“Why are we so rich and they so poor?” …most answers to the question … fall into one of two lines of explanation. One says that we are so rich and they so poor because we are so good and they so bad; that is, we are hardworking, knowledgable, educated, well-governed, efficacious, and productive, and they are the reverse. The other says that we are so rich and they so poor because we are so bad and they so good: we are greedy, ruthless, exploitative, aggressive, while they are weak, innocent, virtuous, abused, and vulnerable. It is not clear to me that one line of argument necessarily precludes the other, although most observers and commentators have a strong preference in the matter.
This year I discovered that Bluffton University has had a long tradition of teaching about dependency theory as a paradigm for economic development. This was surprising to me because I’m a PhD economist and I had never heard of the term. It is simply not used in mainstream economics.
Dependency theory is the idea that rich nations have mainly gotten rich by stealing resources from poor nations and the global economy is basically a zero-sum game. Although it is true that some parts of the economy are zero-sum, many parts of the economy are positive-sum and can benefit everyone. In the big picture of economic development since 1800, most of the dynamics that made rich people rich have been positive-sum interactions because that is the only way to explain the fact that the world has about 9 times more people now than in 1800 and yet about 90% of the world’s population today is richer than the richest people in the world in 1800. Plus, every nation in the world has a much longer life expectancy than the longest-lived nation in the world in 1800. These economic miracles cannot be explained by a zero-sum game.
Below is a bubble chart showing every nation in the world in the year 1800 and you can see that the maximum life expectancy in the world was about 40 and the average income of the rich nations of Europe and North America was about $2500 per person.
Compared with the year 2020 (below), every nation in the world was much less healthier and all nations grew much richer. Today, the poorest nations in the world are almost as rich as the richest nations in the world in 1800 despite the fact that the populations of the poorest nations today are well over ten times larger than they had in 1800.
The reason that the whole world has grown richer and healthier is mainly the growth in technologies that have made us a lot more efficient at producing wealth and health for everyone. Plus, voluntary trade between any two partners always has a strong positive-sum dimension because it always makes both parties better off (or they wouldn’t voluntarily do it) and trade has exploded over the past two centuries.
But the zero-sum world of dependency theory can also be a useful concept IF we apply it carefully. For example, the concept originated in 1949 which happened to be near the end of a long colonial era. One of the incentives of colonial economics was for rich countries to extract resources from native peoples. That was not voluntary trade, so there is no reason to think that it was positive sum.
Unfortunately, dependency theorists extrapolated from colonialism to claim that the only reason poor nations are poor is because rich nations have stolen their resources. Thus, rich nations are rich because their income is dependent upon stealing from poor nations. This is mostly not the case. If all of the populations of poor countries completely disappeared, the economies of rich countries would suffer only slightly because rich nations only trade a small amount with poor nations and mostly trade with other rich nations.
For example, only 1.5 percent of U.S. exports went to sub-Saharan Africa in 2015. If Africa refused to buy American exports, 98.5% of the income America makes from selling exports would still remain. America trades more with tiny Switzerland (and is more dependent upon Switzerland) than with all of sub-Saharan Africa. In 2019, the US imported less than 1% of total imports from Africa which is about a tenth of one percent of total annual US income. About 90% of imports from Africa is crude oil which is much easier to substitute than the kinds of medicines, computers, and machinery that Africa imports from the US.
Thus if the populations of rich nations disappeared, poor nations would suffer more than vice versa because it is harder to replace the high-tech manufacturing that rich nations export than to replace the commodities that poor nations export. If all trade with all of Africa completely ceased, the US would get along without noticing much difference because the US is much more dependent upon rich nations as trading partners. And US trade with Africa is disproportionately heavy with the relatively rich African nations like South Africa and Egypt.
Both rich nations and poor nations benefit from trade with each other.
Stealing cannot account for two centuries of economic growth because stealing destroys productive capacity and reduces long-run economic growth. As Dierdre McCloskey explains:
Nearly forever, from the caves until about two centuries ago, the average human, …dragged along in today’s prices on less than $2 a day. Try living on $2 a day. Some people still do: South Sudan. Then, from 1800… to the present, a Great Enrichment, …made the average human 25 times richer. The number nowadays in the same prices is about $50 a day. Think China, Brazil, and Botswana. And Finland, Ireland, and Iceland, once miserable and colonized, stand well above $100 a day. At $50 or $100 a day, people get food instead of famine, long lives instead of parasites, Ph.D.s instead of illiteracy, high-rises instead of hovels.
Every nasty jerk in history has stolen, and usually gotten away with it. As Gibbon said in 1776, “history is little more than the register of the crimes, follies, and misfortunes of mankind.” So stealing by imperialism and enslavement caused the Great Enrichment, yes?
No. Do the numbers. If you seized your neighbor’s house and her stuff and enslaved her husband, you might get 20 percent richer. Maybe 50%. Call it 100%. Great for you. “Foreigners shall rebuild your walls,” said the Lord to Jerusalem through His prophet Isaiah, “and their kings shall be your servants. . . . Your gates shall be open continuously . . . that through them may be brought the wealth of nations and their kings under escort.” Good for Jerusalem. In the zero-sum world before 1800, stealing and enslaving got the jerks 20, 50, even 100 percent richer. Hallelujah.
But the Great Enrichment has been two-and-a-half thousand percent. …Blimey. Stealing can’t come remotely close to accounting for it. Stealing from the wretched of the earth doesn’t even sound like a good criminal plan. And anyway, stealing from Peter to pay Paul can’t enrich both, and certainly not by 2,500 percent.
…After all, the historical problem with the hypothesis of stealing for enrichment is that stealing is historically commonplace [for thousands of years], yet it never resulted in a Great Enrichment.
…If stealing from colonies explained the Great Enrichment, then Sweden, which had a trivial overseas empire, would be poorer than Britain, which had the largest one in history. If slave-stealing did, then Canada, which had no slaves, would be radically poorer than the U.S… If Jim Crow had been good for the U.S. South, it too would be richer. The countless conquering and enslaving societies following on the Sumerians, the Olmecs, and the Shang Dynasty would have produced a Great Enrichment before the Great Enrichment.
Some of colonialism was stealing which is inexcusable, but there was also considerable trade which is completely different from stealing. For example, consider Uzbekistan, a poor nation whose total exports in 2012 were about $15b. That is nothing by rich-world standards. For comparison, Boston alone had a total GDP that was 20 times bigger than Uzbekistan’s total exports. If Uzbekistan stopped exporting, rich nations would hardly notice. But if rich nations stopped trading with Uzbekistan, Uzbekistan would suffer tremendously because Uzbekistan is very dependent upon rich nations who supply most medicines, electronics, and machines in exchange for Uzbekistan’s exports (mostly commodities). Uzbekistan clearly benefits from trade with rich nations and the benefits are mutual.
Dependency theory doesn’t work at all to explain the inequality between, say the US and Uzbekistan, but it does work pretty well for explaining much of the inequality within nations. For example, it helps explain the inequality within colonialism in which a single government encouraged the extraction of resources from poor colonies to enrich the motherland.
Dependency theory also explains inequality within modern countries like Uzbekistan. The elite of Uzbekistan really are dependent upon the average workers of Uzbekistan. If the elite of Uzbekistan disappeared, the Uzbekistani people would probably be much better off materially, whereas if the common workers of Uzbekistan disappeared, the elite of Uzbekistan would suddenly become very poor. The elites would suddenly have to pick their own cotton and wash their own laundry. The wealth of Uzbekistani elites is entirely dependent upon the work of their poor citizens. As the Bible says in Proverbs 14:28, “without subjects a prince is ruined.”
Daron Acemoglu and James Robinson’s recent book, Why Nations Fail, explains:
…take Uzbekistan. Why does it have 1/15 of the US income per capita? Perhaps it is because of “human capital” — Uzbekis having less education and education and skills? Well there’s a surprise, Uzbekistan has close to complete primary and secondary school enrollment, and close to 100% literacy. But look a bit deeper, and you’ll see something a little unusual going on in Uzbeki schools.
The basis of Uzbekistan’s economy is cotton which makes up 45% of exports. The cotton bolls start to ripen and are ready to be picked in early September, at about the same time that children return to school. But as soon as the children arrive, the schools are emptied of 2.7 million children (2006 figures) who are sent by the government to pick the cotton. Teachers, instead of being instructors, became labor recruiters. In the words of Gulnaz, a mother of two of these children:
At the beginning of each school year, approximately at the beginning of September, the classes in school are suspended, and instead of classes children are sent to the cotton harvest. Nobody asks for the consent of parents. They don’t have weekend holidays [during the harvesting season]. If a child is for any reason left at home, his teacher or class curator comes over and denounces the parents. They assign a plan to each child, from 20 to 60 kg per day depending on the child’s age. If a child fails to fulfill this plan then next morning he is lambasted in front of the whole class.
The harvest lasts for two months. Rural children lucky enough to be assigned to farms close to home can walk or are bused to work. Children farther away or from urban areas have to sleep in the sheds or storehouses with the machinery and animals. There are no toilets or kitchens. Children have to bring their own food for lunch. In the spring, school is closed for compulsory hoeing, weeding, and transplanting (see here).
So …children aren’t learning all that much in Uzbeki schools. They are instead being coerced to work. This type of coercion is actually all too common, and is indicative of the sorts of institutions that not only fail to impart human capital to children, but are at the root of much more widespread economic and social failure.
Why Nations Fail, Uzbekistan Part 2:
So why are millions of Uzbek schoolchildren out in the fields picking cotton?
Uzbekistan gained its independence when the Soviet Union collapsed in 1991. Ismail Karimov, …became, and since then has remained, president through fraudulent elections and repression.
After independence, farmland that was previously under the control of state-owned firms was distributed to farmers. But they weren’t suddenly free to plant and sell what they wished. The government introduced regulations that determined what they should plant and how much they should sell it for. For cotton, that meant they would receive a tiny fraction of the world market price. For many, it wouldn’t make sense to grow cotton at these prices. But the government dictated that they had to. Before independence, much of the cotton was picked by combine harvesters. Yet given these rewards, farmers stopped investing in or maintaining farm machinery. So coerced child labor was Karimov’s cost-effective method of picking cotton.
Part of Uzbekistan is also ideal for growing tea. Interspan, a US company, invested heavily. But by 2006, Karimov’s daughter, Harvard graduate and international jet setter, Gulnora Karimova, had taken an interest in this market. Gulnora is a woman of many talents as you can see from her web page… For example she hangs out with rock stars like Sting and even duets with Julio Iglesias… Gulnora’s interest meant taking over Interspan’s assets and business. And …not …by making an attractive offer. The company reports that men with machine guns, allegedly working for the Uzbek intelligence services, entered its offices and warehouses, and seized its assets… Its personnel were arrested and tortured. By August 2006, the company pulled out of Uzbekistan, and tea was now a Karimov family monopoly. The tea market is not the only one which Gulnora Karimova is said to have used coercion and expropriation to have taken control of. She has allegedly acquired shares in the Coca-Cola bottling franchise and in the oil sector through similar means, …controls the largest mobile phone operator, and has major interests in several other sectors, including cement and nightclubs. (Ironically, one of Karimov’s other daughters, Lola, is a “campaigner for the rights of children”!).
Government-imposed prices at which you’re forced to sell; coerced labor; expropriation of assets by the intelligence services and the president’s family. These are just some of the examples of what we call extractive economic institutions — economic institutions designed to extract resources from the population …for the benefit of a narrow elite.
Like almost all nations that are poor, Uzbekistan fails because its people [live] under extractive economic institutions, which provide few incentives for investment or technological ingenuity, and force people to engage in [unproductive] activities …such as farmers being forced to grow crops that they don’t want and children being forced to pick cotton rather than learn in school…
And the important point is this: these extractive economic institutions are not there by mistake. They have been designed this way for the benefit of the elite. There was no coerced child labor in Uzbekistan when cotton was produced by state-owned firms. This economic institution was introduced when Karimov and his cronies realized that at the prices they were imposing on farmers, cotton production was going to plummet.
The moral dilemma for rich countries is whether we help perpetuate this unjust situation by doing business with Uzbekistan. If we embargoed trade with Uzbekistan, it probably would hurt the median (and poor) more than the elites. A way to encourage change without hurting the poor would be to publicize the moral shame of Uzbekistan’s elites. In particular, Sting, Harvard University and Julio Iglesias have social connections with Gulnora Karimov and so they have a special responsibility to use their social influence to expose her moral failings and help her become a better person. Selfish elites like her tend to be narcissists who crave social prestige more than money, so perhaps if her social circles realized that her money is morally tainted, Karimov would change her ways.
Curtailing the corrupt dependency of elites will require a change in developed nations’ culture too. We will need to adulate the selfish accumulation of wealth and opulence less and adulate people more who selflessly give of their gifts to help others. Karimov is admired for her wealth and power, but she should be shamed for using it to further enrich herself and her inner circle by harming the people of her country.
Dependency theory also helps explain inequality within corporations. Walmart has much higher inequality between workers than Costco because different corporate governance policies distribute company profits differently. In any company, every worker is dependent upon every other worker, so the only way one worker at a company can get extremely rich is by depending upon everyone they do business with and they are primarily dependent on the work of other people in the company.
One of the reasons why the US has higher inequality than any other rich nation is because the US has higher inequality within our corporations than in any other rich nation. In Germany and Japan, profits are distributed more equally among workers within companies than in America.
But dependency theory fails when people try to argue that the wealth of rich nations is dependent on exploiting poor countries through international trade.
Countries that trade more tend to be richer. Even within a nation, the places that trade more tend to be richer. Landlocked nations are cursed because being landlocked makes it harder to trade. All the biggest economic development success stories of the past half century achieved their success largely through a strategy of export-oriented growth, not developing internally. The modern era of maximum globalization has also been the era of convergence.
One big caveat is the resource curse. Countries that are dependent upon a single natural resource like oil do not benefit from trade nearly as much as countries that have no natural resources. A big part of the resource curse is that local governments are corrupted by foreign oil companies. There are certainly examples of multinational companies taking advantage of poor nations, but the local elites always have to be complicit too. Local government elites have a lot of power over multinationals as can be seen in the case of China which requires government approval for any foreign direct investment or even North Korea which dramatically curtailed multinational involvement.
The best case for how foreign corporations (and their governments) have exploited foreign countries is by putting corrupt governments in power and enriching corrupt local elites. The responsibility for the exploitation is then shared between local and foreign elites.
Another caveat is colonialism, but that wasn’t really international trade. Colonialism mostly promoted intranational trade because colonial powers tried to restrict trade from colonies so that they mostly traded within the empire and colonies were not autonomous in being allowed to trade equally with everywhere on the globe.
Finally, there is a strong case to be made that the colonialism of the Americas helped boost European income and science which gave a boost to the industrial revolution and the Europeans really did steal vast amounts of resources from the Americas, so again there is some truth in the idea that the modern world owes a debt to the American conquest, but that is a completely different story than the naïve story of dependency theory.
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