Extractive institutions in action: Uzbekistan 
Friday, February 24, 2012
Daron Acemoglu and James Robinson

So why are millions of Uzbek schoolchildren out in the fields picking cotton?

Uzbekistan gained its independence when the Soviet Union collapsed in 1991. Islam Karimov, previously first secretary for Uzbekistan of the Soviet Communist Party, declared himself an Uzbek nationalist and 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, Gulnara Karimova, had taken an interest in this market. Gulnara is a woman of many talents as you can see from her web page: http:\http://gulnarakarimova.com/en/. For example she hangs out with rock stars like Sting

 and even duets with Julio Iglesias: http://www.youtube.com/watch?v=oFDVWJ0N89U

Gulnara’s interest meant taking over Interspan’s assets and business. And this was not going to be 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 and inventory. 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 Gulnara 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, and 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 and businesses for the benefit of a narrow elite.

Like almost all nations that are poor, Uzbekistan fails because its people operate under extractive economic institutions, which provide few incentives for investment or technological ingenuity, and force people to engage in activities that they do not wish or are not well-suited to (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.

Article originally appeared on Why Nations Fail by Daron Acemoglu and James Robinson (http://whynationsfail.com/).
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