Foreign Dependency

Global power structure in which weaker states are economically reliant on stronger states.

Some experts regard foreign dependency as a new form of colonialism in which capitalism actually feeds underdevelopment and dependency. In this view, advanced industrial nations directly shape and exploit the economies of less-developed countries. Many of these less-developed nations are former colonies whose economies were once geared to produce raw materials to benefit the industries of their colonial owners.

Upon achieving independence, few colonies had modern industrial economies or trained workforces [Page 272]that could compete in the global marketplace. They continued to export cheap raw materials to former colonial powers, which used the materials to make manufactured goods. The industrial countries then sold the finished goods back to their former colonies at a profit. This system has remained largely unchanged.

Dependency is a complex phenomenon that implies that one country can exercise significant control over economic behaviors in another country. Trade is one way to exercise such control, but there are other ways that less-developed economies come to depend on wealthier nations, including financial aid, capital, and policy formulation. Dependency not only influences the shape of state-to-state relations, but also the growth, stability, and autonomy of developing nations.

Dependency on foreign aid plays a significant role in shaping the economy of the recipient nation. Foreign aid can have positive economic and political impacts, such as increasing political participation and local public expenditures on social programs in developing countries. However, donor nations often use promises of aid (or threats of stopping aid) to pressure recipient nations into adopting political or economic policies that are favorable to the donor. In addition, significant amounts of foreign aid may undermine local financial responsibility in recipient countries. It also may diminish the power of the recipient country to make independent economic decisions.

The latter problem is particularly important with regard to loan acceptance. A country that obtains loans from the World Bank, for example, must agree to adjust its economic structure, liberalize its economy, and increase its international financial accountability. Moreover, paying off the debt from loans often leads to balance-of-payments difficulties for the recipient, further sustaining and deepening its economic dependency.

Much of the financial capital available in a developing country arrives from outside its borders. Capital inflows from other countries' lending institutions may be substantial, but these nations carry the obligations to please the lenders. This capital may take the form of foreign aid or foreign direct investment (FDI), which includes activities such as hosting foreign firms that provide jobs, increase domestic capital flows, and generate tax dollars. However, FDI also may generate problems. Foreign firms from developed nations typically dominate the local market, preventing or discouraging the development of local industries. Moreover, the administration of the host country may be asked to provide tax incentives to keep the foreign company in the country.

Economic dependency may emerge when the economic policies of a developing nation are substantially influenced by decision makers in advanced industrial countries. Policies that favor industrialized nations may include agreeing to sell products at lower prices to ensure a market for them. Developing countries also may relax workplace or environmental regulations to induce foreign multinational corporations to establish or maintain businesses there. Power dependency may take a more subtle form. Decision makers in developing nations are often educated in the West, and thus inclined to adopt capitalist economic policies such as encouraging free trade.

...