The Poverty of Dependency Theory: The Times They Are A-changin'

In his well-known essay, Isaiah Berlin quotes the Greek poet Archilochus’ dictum that “a fox knows many things, but a hedgehog one important thing”. More recently, psychologists and commentators have confirmed this insight. The point is that when one commits to just one grand theory, one is often going to miss important information, and thus get many things wrong. Of course, the other danger with grand theories is that they might not stand the ‘test of time’. And if one has an emotional attachment to the theory, it will be difficult to face reality (cf. the confirmation bias).

Academia is replete with grand theories that are no longer applicable, but live on in the minds of a small group of academics. Economics is no exception to this phenomenon. Two such ‘theories’ (n.b. I use the term loosely) are neo-liberal theories of development (a.k.a. the Washington Consensus) and the more critical Dependency Theory. That the principles behind the Washington Consensus rarely have their desired effect is well-known – President Obama help bring attention to the fact that there was no consensus about ‘the consensus’. So best to focus on an alterative theory that is equally erroneous, i.e. Dependency Theory.

Of course, orthodox economists have already critiqued dependency theory - and many debates have followed, to the point that even the left-wing The Guardian newspaper admits that :

Classical dependency theory, which focuses on the relationship between rich and poor countries, probably needs substantial restructuring for the present era.

So I will focus here on a few facts that relate to recent changes in global economics. Indeed, it is the fact that many things have changed since the theory was developed that make it less correct and less applicable.

A first major problem is the fact is the poverty is decreasing worldwide. Although one can note a global increase in relative poverty, one can also note a decrease in absolute poverty, notably in Asia (see chart above).  

The second major problem is that many so-called 'dependent' states are also getting richer. I wonder how dependency theory could be used to explain economic growth in, for example, the BRICS (i.e. Brazil, Russia, India, etc.). Combined with this development, is the increased influence these states’ governments have obtained in international institutions and organisations, such as the International Monetary Fund (IMF), the World Bank (WB), and most of all the G20, which when Dependency Theory was written did not exist. India, for example, is an increasingly important actor in the IMF and the WB.  Or as Robert Wade puts it:

Many developing and transitional countries have grown faster than advanced countries in the past decade, resulting in a shift in the distribution of world income in their favor. China is now the second largest economy in the world, behind the United States and ahead of Japan. As the relative economic weight of China and several others has come to match or exceed that of the middle-ranking G7 economies, the world economy has shifted from “unipolar” toward “multipolar,” less dominated by the G7. How is this change being translated into changes in authority and influence within multilateral organizations like the G20, the World Bank, and the International Monetary Fund (IMF)? Alarm bells are ringing in G7 capitals about G7 loss of influence. According to a WikiLeaks cable from the senior U.S. official for the G20 process, from January 2010, “It is remarkable how closely coordinated the BASIC group of countries [Brazil, South Africa, India, China] have become in international fora, taking turns to impede US/EU initiatives and playing the US and EU off against each other.”

The third problem with Dependency theory is the argument that “core” states can afford to be liberal democracies. With the rise of illiberal parties and illiberal policies and laws throughout Europe and North America, surely this assumption must be questioned. In the richest states we have not ‘healthy’ liberal democracies, but rather nascent illiberal nation-states.

Today, it must be said, Dependency Theory seems most applicable to small postcolonial states, such as Haiti, Madagascar and Papua New Guinea. But the list of rich small post-colonial states is quite long now. In fact, most small states are rich, especially measured by GDP per capita (e.g. Qatar, Singapore, Ireland, Iceland, Malta, etc.). Dependency Theory does not seem to be able to explain this, if only to point out that these riches go to local elites. But if one looks at the GINI coefficient, which measures inequality, one notices that 1) inequality is in the rise in so-called ‘core’ states (e.g. the United States the United Kingdom); and 2) although most poor states do have high inequality, several small postcolonial states are quite equal (e.g. Iceland, Moldova, Malta, Montenegro).

Finally, Dependency Theory argues that it is the global economy, and especially free trade, that renders poor states poor, but with the rise of trade wars between the largest markets, it is likely that poor states will only get poorer – it is well-known that small states are especially exposed to market volatility. And if one wonders whether autarchy might be the solution for small states, then one should study the case of Albania.

Overall, greater openness has had “a positive net payoff for growth”.

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