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 had never heard of the term. It is not used in mainstream economics. But it is 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. The whole point of colonial economics was for rich countries to extract resources from poor countries. The point was to enrich the powerful with little concern for the native peoples.
The problem is that dependency theorists extrapolated from this to claim that the only reason poor nations are poor is because rich nations have extracted their resources. They also claim that the principle reason some nations are rich is because their income is dependent upon stealing from poor nations. This is usually not the case. If all of the populations of poor countries completely disappeared, the economies of rich countries would suffer only slightly. And if the populations of rich nations disappeared, poor nations would suffer more.
For example, Uzbekistan’s total exports in 2012 were about $15b. That is nothing. 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 greatly because Uzbekistan is very dependent upon rich nations who supply most medicines, electronics, and machines in exchange for Uzbekistani exports.
Dependency theory doesn’t work at all to explain the inequality between, say the US and Uzbekistan, but it works well for explaining much of the inequality within corporations and even withing nations. For example, it explains the inequality within colonialism in which a single government encouraged the extraction of resources from poor colonies to enrich the motherland. It 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 dependent upon the work of their poor citizens. Daron Acemoglu and James Robinson’s recent book is all about this: Why Nations Fail, Part 1:
…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.
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 more of their social circles exposed their money as morally tainted, people like Karimov would change their ways.
But that will require a change in our culture too. We will need to adulate wealth and selfish opulence less and do more to adulate people who selflessly give of their gifts to their needier neighbors.
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.