9 Dependency

A situation of “dependence” is one where “the economy of certain countries is conditioned by” development processes elsewhere.

Kvangraven

Global imbalances have been well known for decades and perhaps most famously pointed out by the dependency theorists of the 1960s and 1970s. Although global production and finance have transformed since then, the core tenets of dependency theory remain relevant.

While dependency theory is often associated with Latin America, you can find ideas associated with such an approach across the world and spanning centuries, such as theories of colonial drain from India, Japanese scholarship on the power relations between centre and periphery, radical African scholarship and the Caribbean dependency school. A dependency research program involves taking a global historical approach to the issue, taking the polarizing tendencies of global capitalism as a starting point, and focusing on structures of production as well as on the specific constraints faced by peripheral economies.

While taking such an approach may come naturally to some radical economists, it stands in stark contrast to the micro-oriented view that characterizes much of contemporary development economics, which abstracts from global, political and structural problems (see e.g. the recent policy proposal for developing countries by the Nobel Prize winning economists Duflo and Banerjee). This post lays out how the dependency approach is particularly relevant now, how dependency theory came to be marginalized in economics despite its enduring relevance, and finally, how such an approach leads us to think bigger and more structurally about possible solutions.

While we have seen a deepening of global economic integration since the 1970s, which has been associated with an increase in efficiency and ‘flattening’ of the world, the spread of global value chains involves rigid power imbalances and deep vulnerabilities for those at the bottom of the hierarchy.

Many developing countries have been able to move into just-in-time manufacturing, but this production is still characterized by relatively low-skilled and low-tech work and a heavy reliance on companies concentrated in the centre.

To drive the revival of the economy we need to think creatively about how we can allow for a rebalancing of production so that industry in the developing world can be more sustainable, secure and more oriented towards domestic needs.

Developing countries continue to be vulnerable to financial cycles generated by the center – which was a key insight by dependency theorists. As investors flock to ‘safe’ assets (read: assets in the centre) in the wake of the COVID-19 pandemic, there have been dramatic reversals of capital flows – indeed the largest outflow ever recorded. Furthermore, many developing countries have experienced currency depreciations as well as severe debt and liquidity problems.

Development within Indonesia was not determined according to the industrial needs of the economy, but rather in line with the interests of foreign capital. Therefore, the manufacturing sector of Indonesia is characterized by limited technological capability and the country remains a net importer of advanced technologies.

Even for China, a country that has made significant advances in terms of upgrading and massively expanding its manufacturing exports based on its integration into GVCs, this expansion has involved a strong dependence on FDI, rapid denationalisation of the export-oriented manufacturing sector and relatively low levels of domestic innovation incorporated into exports.

The dependency research program was marginalized for political and ideological reasons.

Dependency theory holds important lessons for understanding and combating the global hierarchies of forms of production, innovation and finance that constrain developing countries’ policy space to address the crisis effectively. This leads us to discussions about how to change the global economic architecture, for example through a global green new deal, reform of the international monetary system, reform of global systems of food production, and reform of governance of international trade and intellectual property rights.

Kvangraven (2020) How Dependency Theory Remains Relevant Article

9.1 Financial Statecraft

Karas

Over the past decade, two, intertwined research agendas on international financial subordination (IFS) and subordinate financialization (SF) have proposed to identify how an increasingly finance-dominated global capitalism incorporates the (Semi-)Peripheries.

The IFS research agenda recognizes that a “subordinate” national currency comes with a risk premium increasing the costs of financing public debt – in other words, the current, US dollar-based currency hierarchy acts as a structural fiscal constraint in the Global South, limiting the scope for badly needed public investments. Foreign capital – in the form of foreign currency-denominated sovereign and private debt-, foreign aid, and foreign direct investment – is then touted as a solution to this artificial and unfair developmental constraint.

The SF agenda examines how this straightjacket on fiscal space has been further compounded with the liberalization of global capital mobility over the past forty years, diffusing credit-based accumulation strategies from the Core to the Peripheries: the financialization of (semi-)peripheral economies radically misallocates financial resources from socially and environmentally vital public goods and transformative industrial policies towards developmentally regressive strategies of accumulation driven by speculation and asset-price inflation.

We study the politics governing the management of money in Hungary and Turkey, two semi-peripheral economies where the executive has built a vast array of direct and indirect tools to intervene in monetary policy, retail banking and credit allocation to manage financial subordination.

It would be tempting to equate (semi-) peripheral economies with passive states dispossessed by global capital mobility and financialization. Contra this narrative, we observe that over the past decades, governments in many developing countries have developed new forms of political control over money not despite, but because of their exposure to- and previous experience with- debt crises, capital flight and foreign exchange volatility.

An expansion in public control over finance should not be confused with de-financialization: credit-based accumulation strategies are often economically attractive for incumbents to boost GDP, while they also enable new forms of political control over the social allocation of credit, which stabilize patron-client relationships between state and particular social groups while further deepening capitalist social relations and the exploitation of subordinated classes.

We call financial statecraft these emerging forms of state power, and we distinguish between two forms: defensive financial statecraft groups political interventions which aim to regovern finance, limit the macro-economic destabilizing effects of exposure to financial risk and subordinate the process of finance-based accumulation to domestic political imperatives. By contrast, offensive financial statecraft describes policy interventions to govern society through finance by strategically deepening financialization: centralized executive control over credit conditions, interest rates and the social allocation of credit enables incumbents to establish rentier social contracts between state and society to stabilize their political regimes. Since the 1997 Asian financial crisis, many (semi-) peripheral economies have engineered both defensive and offensive forms of financial statecraft to regovern finance and govern society through finance.

Our two cases, Hungary and Turkey, represent a particular form of semi-peripheral financial statecraft we call statist authoritarian financialization (AF). Under AF, the executive directly shapes monetary and macro-financial policy by imposing its prefered interest rates and macroprudential regulations to Central Banks. Simultaneously, the executive also uses moral suasion, or simply nationalizes private banks to monetize government debt, and force banks to lend at preferential rates to discrete groups of households and firms. Under AF, the executive develops a “financial vertical” which blends formal and informal instruments in an attempt to politically control the entire domestic circuit of credit from the Central Bank down to retail banks.

However, without provisions for democratic accountability and under the conditions of capitalist accumulation and exploitation, such an expansion of governmental control doesn’t democratize money as a public good: Similarly to natural resource rents, unaccountable, centralized political control over money merely cements a political economy of rent-based (in this case subsidized credit-based) social contracts between incumbents and discrete, politically salient social groups to stabilize anti-democratic, authoritarian regimes.

The Hungarian and Turkish pathways contain multiple lessons which resonate in the wider Global South.

A first lesson is that without radically new political institutions and policies ensuring democratic accountability, an expansion of centralized state control over money ensures no progressive alternative to neoliberal forms of credit-based accumulation and only deepens finance-based accumulation strategies elaborated under neoliberal capitalism. Instead of using money for socially and environmentally progressive causes, incumbents in the Global South may find the developmentally regressive logic of using subsidized credit for boosting a finance-insurance-real estate-construction nexus difficult to resist given the promises of short-term economic and political dividends.

A second significant lesson lies with the limits of strictly national strategies to manage the constraints of the global currency hierarchy and the risks of global capital mobility in the Global South. Hungary and Turkey illustrate that no matter the expansion of direct executive control over the domestic management of money, the financial statecraft of (semi-) peripheral economies remains structurally incapable of mitigating the effects of global financial cycles driven by Core Central Banks such as the FED. Without international collaboration and new international institutions, the constraints posed by the current dollar-based global currency hierarchy and global capital mobility will continue to restrict fiscal space in the Global South, and instead of opening financial means to invest in essential public goods, will incentivize developmentally regressive finance-based accumulation strategies.

A radical alternative to de-risking private capital investments in the Global South would be to derisk public finance instead: letting states invest in essential social and environmental public goods under a novel progressive paradigm that firmly departs from prioritising profit-maximisation. In Europe, the COVID19 crisis showed that Core Central Banks have the means to derisk the public debt of emerging economies: it is a purely (geo)political decision if this dormant capacity is not leveraged to build a more just international financial architecture.

Karas (2023) Financial Statecraft and its Limits in the Semi-Periphery