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Friday
Feb242012

Extractive institutions in action: Uzbekistan 

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.

Wednesday
Feb222012

Welcome … to the world of failed nations

Failure is all around us. When you hear of failed nations, you may immediately think or Somalia or Afghanistan, where state institutions have all but completely collapsed. But failed nations are much more ubiquitous. In this globalized and integrated world of ours, there are huge differences in economic prosperity across nations. According to the latest World Bank data, income per-capita in the US, at $47,360 is about 50 times that of Sierra Leone, of 40 times that of Nepal, or about 15 times that of El Salvador or Uzbekistan. These countries have not experienced the sort of state collapse that Somalia or Afghanistan did. They have nonetheless failed in reaching anything close to the sort of prosperity that countries like the US, Switzerland or Germany have. This is a failure no less consequential than that experienced by Somalia and Afghanistan. And it is every bit as much a result of the choices that these countries — or to be more exact, their elites and leaders — have made.

This blog is devoted to understanding why nations fail and to shed light on current economic, political, and social events through the lenses of the theory we have developed in our book Why Nations Fail.

Welcome to the sad world of failed nations.

For starters, take Uzbekistan. Why does it have 1/15 of the US income per capita? Perhaps it is because of “human capital” — Uzbekis having less education and skills? Well there’s a surprise, Uzbekistan has close to complete primary and secondary school enrollment, and close to 100% literacy. But look a bit deeper, and you’ll see something a little unusual going on in Uzbeki schools.

The basis of Uzbekistan’s economy is cotton, which makes up 45% of exports. The cotton bolls start to ripen and are ready to be picked in early September, at about the same time that children return to school. But as soon as the children arrive the schools are emptied of 2.7 million children (2006 figures) who are sent by the government to pick the cotton. Teachers, instead of being instructors, became labor recruiters. In the words of Gulnaz, a mother of two of these children:

At the beginning of each school year, approximately at the beginning of September, the classes in school are suspended, and instead of classes children are sent to the cotton harvest. Nobody asks for the consent of parents. They don’t have weekend holidays [during the harvesting season]. If a child is for any reason left at home, his teacher or class curator comes over and denounces the parents. They assign a plan to each child, from 20 to 60 kg per day depending on the child’s age. If a child fails to fulfill this plan then next morning he is lambasted in front of the whole class.

Children in Uzbekistan bringing in their cotton quota (from WHY NATIONS FAIL, original from EJ Foundation).

The harvest lasts for two months. Rural children lucky enough to be assigned to farms close to home can walk or are bused to work. Children farther away or from urban areas have to sleep in the sheds or storehouses with the machinery and animals. There are no toilets or kitchens. Children have to bring their own food for lunch. In the spring, school is closed for compulsory hoeing, weeding, and transplanting (see here).

So school or no school, children aren’t learning all that much in Uzbeki schools. They are instead being coerced to work. This type of coercion is actually all too common, and is indicative of the sorts of institutions that not only fail to impart human capital to children, but are at the root of much more widespread economic and social failure. And it is not in place by accident or as an inevitable remnant of some past practices as we will see in our next post.

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