Wandering Thoughts

August 30, 2009

The Wealth and Poverty of Nations (3 schools of thought)

Filed under: Ramblings and Musings — terence @ 4:24 pm

I’m just jotting notes. One of these days I’d like to turn this into a talk. Remember, these are just my musings – I could be wrong.

The Wealth and Poverty of Nations – three schools of thought and a bunch of also-rans

Most of the world is very, very poor, small pockets of it are very, very rich – what gives? What follows is an explanation of three of the main forms of answer to this question, as well as a brief note on some also-rans – theories that have had their days in the sun but which aren’t so compelling now.

Lets start with the also-rans:

1. Poor countries are poor because they’re poor (capital starved version).

This theory comes in a number of stripes: there were the old school development economists who argued that by virtue of being poor, poor countries didn’t have the money necessary for investments to make them un-poor; and, more recently, there were the capital market liberalisers who argued that capital market liberalisation would bring in money for investment. The old-school development economists are out of favour for a number of reasons including the fact that aid injections and increased FDI flows haven’t had a clear, unambiguous impact on economic growth. The capital market liberalisation types never really recovered from the East Asian economic crash – when freed, capital, it turns out, prefers speculation to productive work.

2. Poor countries are poor because they’re cut off from the global economy (the free traders).

The free traders haven’t been completely vanquished; trade must play a role in development, it’s just that trade liberalistion alone hasn’t led to huge leaps in economic development. Countries have liberalised and done terribly; countries have maintained some protections and done well. Something else is afoot.

3. Poor countries are poor because they’re integrated into the global economy (literal anti-globalisation).

Four words and a comma: North Korea, South Korea.

4. Poor countries are poor because they follow poor policies.

Which is quite possibly partially true, but some countries got wealth despite not following the Washington Consensus suite of supposedly good policies while some countries stayed poor when they did follow these policies. So at the very least, there’s still an active debate on what good policies actually are. Above and beyond this debate though, the policy explanation is out of favour simply because even when we know poor countries have followed poor policies we don’t know why or how to stop them. Surely governments will follow sensible policies once these become clear? Um, no – as a matter of fact, they haven’t. Poor policies are a proximate determinant of economic development, not a deep determinant.

And so, with the also-ran’s covered, who are the contenders? Three camps: it’s our fault, it’s their fault, it’s nature’s fault.

1. It’s our fault

This is the camp of people who blame the poverty of the developing world on the actions of the developed. Often the WTO is blamed (unfair trade rules) or the IMF or World Bank (liberalisation). Trade rules, through, while definitely hurting some people in some countries can’t really explain all the gaps between the rich and poor. Similarly, while much structural adjustment was poorly thought out, pro-cyclical and anti-poor – it doesn’t explain the vast gaps in wealth between the developed and developing worlds. Developing countries were poor, and wealthy countries wealthy(ish), long before neo-liberalism.

More plausible – albeit partial (that is, don’t explain the totality of first world/third world disparities) – versions of the ‘it’s our fault’ hypothesis include: tax havens (which deprive developing country governments of a lot of money); the arms trade; direct political or military interference (think Latin America for the former and the Middle East for both former and latter); and the role of developed country companies (and increasingly East and SE Asian companies) in fostering corruption in developing countries through paying bribes.

2. It’s their fault

This is the argument that poor countries are poor because of poor governance or poor institutions. In truth this isn’t quite a ‘it’s their fault argument’ as many of the countries which had poor institutions got them from us via colonialism. So one can still believe institutions are the problem and that it is, at least in part, our fault. Anyhow, poor governance and poor institutions are blamed for poor economic performance because they raise the costs both of doing business and of providing public goods, making market economies deeply dysfunctional.

One partial problem for adherents to this argument is that some countries have done pretty well, despite having institutions which, on paper at least, are very poor.

3. It’s nature’s fault

This is the Sach’s argument. Countries are prevented from developing by the health burden of disease, by being landlocked or in other ways isolated from international markets, and by having climates that weary infrastructure and vex temperate zone farming technologies. Nature can similarly curse countries by leaving them over abundant in resources (so-called resource curse) which leads to rent-seeking political and economic elites, and an over-valued currency.

In terms of problems for the nature camp – almost any paper by Acemoglu and Johnson provides econometric reasons for worry. More simply, it just seems counter intuitive to blame the majority of the woes of, say, the DRC on the Malaria parasites as opposed to people. (Note that disease environments can impact institutional environments and through them economic development, but this isn’t the main argument of the “nature’s fault” camp).

So which school of through do I adhere to? I’m not sure, and good fence sitter that I am, I’m inclined to think that it’s a mixture of the above, the exact mix varying by country. If you’re an oil rich state in the Third World, or a Banana Republic, it’s likely to be more ‘it’s our (i.e. it’s the West’s) fault. Other countries not so much.

Ok – enough for now. Will revise and clarify, I hope.


1 Comment »

  1. […] Noam Chomsky Over at my health and hillsides blog a while ago I jotted down what I think is a pretty reasonably typology of explanations for global poverty. If you live in a developed country and have even a vaguely international outlook, global poverty […]

    Pingback by The Econometrics of Imperialism « Waylaid Dialectic — June 27, 2010 @ 10:09 am

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