Garett Jones  

Why So Little Exploitation of Developing Countries?

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The internet tells me that people in rich countries exploit people in poor countries.  If that's true--a claim I don't deny, since humans are routinely awful to each other--then people in rich countries are really bad at it.  

Just like in high school debate, let's start by defining terms.  The OED's first two definitions of exploitation, emphasis mine:

The action of exploiting or turning to account; productive working or profitable management (of mines, cattle, etc.)...

The action of turning to account for selfish purposes, using for one's own profit.

These definitions lack the moral punch that people seem to have in mind when they talk about exploitation, but since I'm making an a fortiori argument these minimalist definitions will work just fine.  

My big claim: to exploit somebody a lot you've got to take away a lot of stuff from them.  A little math to emphasize this point:

Production = What the producer keeps + What the producer doesn't keep

You can see where we're going here: The countries we call "poor" are countries where the average person doesn't produce that much.  Formally, gross domestic product per person is low in these places.  But if the average person isn't producing that much then there isn't much to take--there isn't much to exploit.  There are a lot of reasons why you wouldn't keep the stuff you make (the glories of voluntary exchange for instance) but if you're keeping almost all the stuff you make then your exploiters are doing a bad job of exploiting you.  

How would exploitation (or a lack thereof) show up in the data?  One place is net exports: If exploiters were running the exploited countries in a "productive" and "profitable" manner we'd expect exploited countries to have massive quantities of net exports to the exploiting countries.  Again there might be other reasons a nation would run massive net exports but the absence of net exports is evidence of an absence of successful exploitation.  

Let's see which countries have the most net exports per person.  Penn World Tables: 
quantifiedexploitation.jpg
[Notes: That's 2005 real GDP per capita on the x-axis, real net exports per person on the y-axis. You're welcome to check whether the picture looks different with long run averages; Wiki table here.]

The countries that make the "possibly massively exploited" short list are in the top part of the chart.  Brunei, Luxembourg, Kuwait, Norway, Singapore, a few others.  I would venture that there might be other explanations for what's going on in those particular countries, but more importantly let's note the obvious point that few poor countries are in the running--Equatorial Guinea and Libya and some judgment calls.  

This is similar to the puzzle of imperialism: A successful colonizer would make the colony productive and then export enormous quantities of stuff back home.  But instead colonies--real direct rule colonies, not places with pro forma allegiances to a distant queen--weren't that productive so there usually wasn't much to export.  

Billions of people endure wretched poverty in unproductive countries.  But all that suffering isn't paying off that well for people in the productive countries.  

Yes, you should start using the term "unproductive" instead of "poor."  The first term keeps the attention on the supply side--where, in the long run, it surely belongs.  Focusing on the supply side might encourage the creation of solutions; at the least it will encourage better thinking.  

I'll settle for "less productive".  


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COMMENTS (14 to date)
Steve Sailer writes:

Britain profited nicely from:

India: a place with at least a global average level of wealth-production and an above average level of docility toward outside conquerors, allowing low cost rent extraction.

Sugar islands

Owning various trade chokepoints like Singapore.

But, it likely profited more from the steam engine alone.

Nick Rowe writes:

Trouble is, when you subtract imports from exports to calculate net exports, you need to put prices on imports and exports. The "exploitation" people are going to say that poor countries' export prices are too low and import prices are too high.

kebko writes:

Another framing I'd like to see changed is to say that production moves to where wages are rising, instead of the current notion that production is moving to where wages are low.
I'm not hopeful that this would ever be the convention, since even the CEO's moving the production think that it's because of low wages.

Ghost of Christmas Past writes:

Your definition of exploitation is very good, but I think there is one dynamic it doesn't capture. The imperialists who actually move to the less-productive countries in the empire may get a lot of utils from bossing the natives around, making concubines of their most beautiful women, etc. Or to put that another way, some imperial rents are simply consumed as luxuries by imperialists present in the less-productive parts of an empire instead of getting physically-transferred to the imperial capital. Although those fruits of empire may seem small against the overall economy, they may be very important at the margin, especially to imperial decision-makers who need some place to send their younger sons to be viceregal bureaucrats, officers of sepoy armies, etc., and enjoy a high status in the local society which is unavailable to them in the capital. (Better to rule in Hell than serve in Heaven.)

One reason imperialism declined after the Great War was that the military aristocracy of Europe was quite swept away by that conflict and its aftershocks. It took another several decades and another monstrous war ( in part against the late-bloomer attempt by the Japanese military aristocracy to acquire an empire of less productive countries to swank around in) to wind down the European imperial system's 500-year run, but it might have taken much longer if the fading-imperialism countries had still possessed powerful aristocrats unwilling to "demean" themselves or their families by doing something economically useful yet still having power to

Ignoto Fiorentino writes:

I am also skeptical of claims that developed countries exploit underdeveloped ones, but your argument is a very poor one for the reason that Nick Rowe and Steve Sailer indicate -- your measure of exploitation makes it impossible to detect exploitation that takes the form of mispricing and rent extraction. That is, you confuse "stuff" with value.

John David Galt writes:

Poor countries get and stay that way for two reasons. (1) Their systems of law and/or custom don't protect property rights very well, so investing money there amounts to throwing it away. (2) They are dictatorships whose leader(s)' only interest in the country is to get rich personally at the masses' expense.

In either case, so long as they stay that way, they will never get the kind of investment from abroad that leads to economic development, nor can any of their people (except the leadership, who aren't interested in doing it well) accumulate the money to invest that way from within the borders.

The only way to "exploit" countries like that is to colonize them. But unfortunately, today's military technologies are spread evenly enough around the world that nobody can afford to create another Pax Britannica.

I just hope that when the cycle turns and someone does have the ability again, that group is as much in favor of everyone becoming wealthy as the British were then. Otherwise, there will continue to be poor countries and suffering.

[H/T Davidson and Rees-Mogg, "Blood in the Streets"]

Bostonian writes:

If a big Western corporation hires people in a Third World country and makes them slightly better off, activists will compare the situation of those workers not to their prior situation but to First World conditions and criticize the company for exploitation. Western companies mitigate this by farming out work to local companies. China may be better able to do business in Africa than the West since Chinese companies are less worried about such charges.

Grieve Chelwa writes:

@Steve Sailer: your point about Britain prospering at the expense of India has been thoroughly confronted by the economic historian Deirdre McCloskey in Bourgeois Dignity and found to be wanting across many dimensions (not just the one highlighted here by Garett's post). In particular see Chapter 26 titled "The effects on Europe of the Slave Trade and British Imperialism Were Smaller Still" and Chapter 27 titled "And Other Exploitations, External and Internal, Were Equally Profitless to Ordinary Europeans". Through out she makes the argument that one or two aristocrats might have benefited from the exploitation of the colonies (think of Belgium's King Leopold in the Congo) but the average Briton, Belgian or French national got nothing out of his country's adventures abroad. As a matter of fact, the average citizen was probably worse off on a net basis because he had to pay additional taxes to run the colonies.

mobile writes:

I'm not following this line of reasoning.

Let's say Nike is exploiting its laborers in Indonesia. Nike sends $2 worth of raw materials to an Indonesian factory, pays $2 to convert the material into a shoe, then exports the shoe to the U.S. where it sells for $59.99.

Does this show up on the Indonesian trade stats as a net export of $2 or of $58? If it's $2, then isn't a high value of net exports really a signal of low exploitation?

Garett Jones writes:

@mobile:

Your example is perfect: If the exported value of the product is low, that means there's prima facie not much exploitation going on. It's just another version of the natural resource extraction story--low price means there were ready replacements available, the marginal output isn't worth too much.

Consider the opportunity cost with an extreme example: If Nike had to make the shoes stateside for $10, they'd lose $8 in value, not $58.

Maybe there's some export that's being underpriced due to coercion or culture or some hand-waving explanation. But the usual suspects don't pass that test. The so-called exploited countries haven't been productive enough to be quality targets for exploitation.

Paul writes:

Acemoglu and Robinson argue that extractive economies will be poor, both because elite wil perceive development as politically destabilizing, and because exploitation discourages investment by the masses. At least from their point of view, the existence of unproductive economies that also have slow growth rates is evidence that exploitation is very effective in those economies.

Essen writes:

This argument is really over the top. If the British were losing money even while they were exploiting India they must have been positively mad to stick around for 400 years.
Are economic theories totally devoid of common sense?
During the British Raj cheap Indian cotton went to Manchester, was converted into miles of cloth. The cloth came back to India and was sold at rates that were unthinkable.
Gandhi took the Dandi march to the sea side to protest the British tax on salt produced in India. The salt was produced in India and was sold in India but the tax went to Britain.
This is like the exploiter telling the exploited: I will loot you and rape you but still I am doing a favor to you.

stickrouse writes:

If exploitation is just the ratio of consumer surplus over total surplus, then top tier collegiate football and basketball players are probably the most exploited people in the world. A great player at a big school creates millions of dollars of value for the university, networks, merchandisers and fans. Yet he only earns a few dozen thousand in "scholarship," room and board.

Ken B writes:

To the powers that be: keep this guy! Data driven contrarians are great.

I hope in other words that Econlib will exploit the heck out of Garett Jones.

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