The New Dependency Theory

The New Dependency Theory
by Ronen Palan

The crisis that began in late 2007, and which seems to be continuing for the foreseeable future, has highlighted the role of global wholesale financial markets in creating what may be described as new dependency relationships. Old dependency theory was a structural-Marxist theory. It hypothesised that the world capitalist economy is structurally arranged to facilitate massive transfers of capital from developing countries to the developed world. The new dependency theory agrees that net outflows of capital from developing countries have been continuing unabated for the past three decades. But—and this is a key difference between new and old dependency theory—these illicit flows are a problem not only for developing countries but also for developed ones.

This is so for two reasons. First, the net flow of capital is not necessarily transferred to or invested in the developed world. Rather, the transfer of financial resources from developing countries joins a large pool of capital registered in offshore locations. Second, there is evidence that developed countries are subject to net external outflow of capital as well. In contrast to old dependency theory, the new theory suggests that capital transfers do not necessarily operate on a regional or intra-national basis; rather, wholesale global financial markets have emerged as gigantic re-distributive machines that play a key role in the continuing and growing gap between rich and poor world-wide.

In developed countries, the main detrimental impacts of illicit flows are growing income inequalities and a weakening and narrowing of the tax base, as effective (as opposed to nominal) tax rates by corporations and rich individuals decreases continuously. For developing countries these problems are compounded further: they include poor governance structure, a large black economy, lack of capital for basic infrastructural projects, and over-reliance on foreign aid money that generates harmful political-economic dynamics. More fundamentally:

• Alternative sources of elite revenue made possible by illicit capital flows reduce the need for negotiated settlements between government and society, which lie at the heart of the development of the European democratic state model, and undermines the development of efficient and accountable state institutions
• Proximity of large offshore financial centres damages capacity for an endogenous financial system

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In the first such analysis ever conducted, Swiss economic researchers
have conducted a global network analysis of the most powerful
transnational corporations (TNCs). Their results have revealed a core of
787 firms with control of 80% of this network, and a “super entity”
comprised of 147 corporations that have a controlling interest in 40% of
the network's TNCs.