6-1-03
I AM A GRADUATING SENIOR
Why Poor Countries Are
Poor:
The
question of why poor countries are poor may seem simple and one dimensional at
first glance. However, the answer to
this question is actually quite intricate, as many interweaving aspects must be
observed. Although it is impossible to
explain why many countries remain in poverty within just a few pages, I will attempt
to touch upon some of the broader factors.
A poor country or a low-income economy is defined as a country with a
Gross National Product per capita of $765 dollars or less. In 1995, the World Bank claimed that 49
countries fell into this category. Geography, colonialism, industrialization,
resources, education, overpopulation, infrastructure, government, investment,
and debt are only a few of the many interrelated factors that have caused many
countries to remain in poverty.
One of the biggest reasons for such a low
GNP is a country’s geographic location.
Historically, the regions that have flourished have been those rich in
primary resources such as water, irrigation, agriculture, fertile soil,
etc. Water is perhaps the most
essential of these resources. It has been a means for transportation,
agriculture, and plays a key role in health.
Nations without rivers and proper irrigation have had many problems
developing. Countries in Europe (especially Northern Europe) have thrived
because of its geographic location in relation to water. On the other hand, a
country like Mexico lacks rivers and thus is not very fertile, resulting in
problems with health. We can also see
that poverty is stricken throughout countries in Africa (in particular the
Sahara), because of its lack of water and its deserts. Although a country’s geographic location
plays a huge role in its ability to prosper, some of the most successfully
developed countries do not have the best geographic location. For example, England is very wealthy and
does not have the best land. Its riches
come from colonization.
Colonialism is one of the biggest reasons
many countries are poor. The richest countries in the world all colonized. With the exception of the United States, we
can see that all nine nations that make up the G-9 had colonies. Countries that have been colonized centuries
ago are still poor to this day because of oppression. Without getting too far in-depth we can see that countries in Africa
and Latin America may have had the chance of being very prosperous, but because
they were colonized, the few resources that they had were taken. For example,
Peru could be a wealthy nation today if it had not been for the Spanish taking
their silver. Many countries like Peru
are now poor in relation to others because they were not able to benefit from
their resources. Most of these
countries thrive off of primary goods (i.e. wood, potatoes, wheat, etc.)
instead of processed goods (i.e. clothing, plastics, cars, etc.). We can see that Argentina and parts of
Brazil are still poor because they export primary goods such as trees instead
of processing their resources into processed goods such as paper.
Countries that
have not been able to industrialize at a fast pace have not been able to
prosper. This idea is called Import Substitution Industrialization. Even though most countries are no longer
oppressed, colonization has allowed other markets to take over. McDonald’s, or
Nike, are good examples of post-colonial relations. A more advanced country tends to impose its market into poorer
countries extracting profits for themselves.
Instead of Mexico creating its own “McDonald’s,” the U.S. has already
imposed upon the fast food market extracting profits that could be going to
Mexico. A country like Mexico who has
not industrialized as quickly as the wealthier and more developed countries has
lost the race and thus cannot benefit from its own markets. The more influence that a developed country
has within an underdeveloped country’s market, the more dependent the
underdeveloped country becomes. Poorer
countries thus become less self-sufficient and eventually are forced to become
indebted to other countries. I will
return to this topic a little later in this paper.
Along with geography and colonialism
another huge reason poor countries are poor is overpopulation. In fact, in the next hour 19,000 babies will
be born, 90% of which will be born into a country with a low-income
economy. According to the American Heritage Dictionary,
overpopulation is defined as, “excessive population of an area to the point of
overcrowding, depletion of natural resources, or environmental
deterioration.” Mexico is a good
example of a country that suffers from overpopulation. Mexico went from a population of 60,000,000
to 90,000,000 in the last 20 years!
Within countries like Mexico the population is increasing at a greater
rate than its needed labor force. Thus,
many people are left in poverty without work.
When a country is overpopulated it also does not have enough resources
to go around. Overpopulation is due to
many factors including lack of education, lack of resources such as
contraceptives, and religious and cultural beliefs. Successful countries such as France, Canada, Switzerland, etc.
are relatively under-populated. These countries tend to be more efficient with
their work force. Citizens in
overpopulated countries become a burden because they cannot contribute as much
as they are taking from the economy.
Also, overpopulated countries are not as technologically developed as
lower-populated countries.
Technological development within a country
is the source of sustained per capita growth.
One of the biggest reasons impoverished nations have poor economic
growth is due to their lack of technological progression. Poor countries invest
a small fraction of their GDP and time in accumulating capital and skills. They choose economic policies that do not
encourage long-run growth and promote unchanged long-run savings preferences. There are some poor countries that invest a
large percentage of their GDP toward education and future growth; however,
these countries are just not as productive as wealthy nations. Their economy’s
laws, government, and institutions all play a key role in their low
productivity. Thus, nations with less
stable governments do not utilize their resources and capital as well as more
stable countries. These countries also
fail to encourage invention because entrepreneurs tend to have less incentive
to create new technology and ideas.
Here we see that government can play a detrimental role in countries’
economic growth.
A country’s infrastructure shapes their
economic environment in which individuals produce and transact. Poor countries have poor infrastructures and
thus have poor markets. Their
infrastructures do not encourage production and investment and thus they do not
prosper. Furthermore, many poor countries’ infrastructures encourage diversions
such as corruption, bribery, expropriation, and theft. These qualities deter
investment, which of course has devastating effects on income and does not
encourage economic growth. If an
investor cannot be assured of earning a return on his or her investment,
whether it is a capital, skills, or technology investment, he or she will not
invest. Taxation, regulation, lobbying,
and litigation are also forms of diversion that effect investment. As a result
of insufficient investment, poor countries tend to borrow and depend on other
nations, which leads to debt.
In order for poor countries to
transcend to greater wealth development in some way must be made. Development is not only a process in which a
country has economic growth, but also a structural transformation. Part of the structural transformation comes
with forming a strategic trade policy.
A trade policy for developing countries must be made with one of two
goals in mind, import substitution industrialization or export promotion, both
of which focus on the long term. Both
import substitution industrialization and export promotion have positive and
negative impacts on developing countries.
Although both import substitution industrialization and export promotion
can be successful policies for developing countries, export promotion seems to
be a more substantial and efficient approach.
Import substitution industrialization
takes an inward economic development approach.
Since the end of World War II, with the exception of Hong Kong and Great
Britain, all current developing countries have protected their industries by
imposing high import tariffs. The
purpose of this policy is to make domestic production look more desirable than
highly taxed imports. Ideally, this may
be a good approach to build a strong economy in developing countries; however,
the protection of domestic industries leads to inefficient production because
these countries are not using their comparative advantage. They are trying to produce products that
other countries already produce more efficiently. Import Substitution also does not encourage efficient future
production because high tariffs on imports from other countries provides little
competition. Without competition there
is little incentive for developing countries to create more cost-efficient
production. This can be detrimental to
countries using the import substitution policy because while other countries
are becoming more technologically advanced and efficient, these countries are
still producing at inefficient rates.
In the short-run import substitution is a desirable policy, however, the
long run will prove to have a less innovative entrepreneurial class which will
sustain lower economic growth.
Unlike import substitution, export
promotion allows for trade with low tariffs.
Thus, exporting firms in developing countries with this policy must face
price and quality competition in international markets. In the short-run, these developing countries
struggle due to their lack of expertise in global trading and insufficient
production. However, in the long run,
the competition from within the international market provides incentive for
creating more efficient industries within developing countries. In contrast to the import substitution
regime, export promotion provides an infinite demand for its products in the
international markets. With an infinite
demand on production, employment rates have the potential to be very high. According to Dr. Gerald Meier of the
Stanford Graduate School of Business specializing in developing countries,
higher employment leads to a higher per capita income, which is ultimately the
key to economic development.
Furthermore, another advantage of export promotion is that
import substitution can still be applied by raising import tariffs in order to
protect particular infant industries, yet the reverse does not apply. For example, if a country is competing in
the international market but chooses to substitute imports by imposing a
tariff, it can do so and still succeed.
However, if a country is only using a particular domestically produced
product it cannot change its policy and then export on the international level
because of its inefficiencies.
I have determined that export promotion is a better trade
policy for developing countries because it forces the idea of comparative
advantage. Countries will produce their
most cost-effective products at their most efficient rate. Import substitution simply does not promote
competition, resulting in mediocre industries and little technological
advancement. Many studies have shown
that greater economic freedom within a country leads to economic growth and
increased per capita income. We can
clearly see the impact economic freedom has by observing the economic growth
between Venezuela and Chile. Since
1975, Venezuela has decreased its economic freedom, meaning it has increased
tariffs on imports, while Chile has steadily increased its economic
freedom. As a result, Chile has had an
enormous increase in GDP per person whereas Venezuela has had only a slight
increase. This is surely an indicator
that import substitution impedes countries potential growth.
It is important that other developing
countries learn from Chile’s success and develop at its highest potential. Implementing inefficient policies causes
developing countries to fall further and further behind the world powers. Although it may seem that economic freedom
hurts the developing countries in the short run because other countries are
more cost-effective with their products, it actually helps these countries by
providing incentive for more efficient production through competition.
Expanding on what I touched on earlier,
debt is a major contributor to an impoverished nation. As debt is amassed within a country,
dependency upon other countries is established. When this happens the country in debt is in many ways dictated by
the country it owes money to. The debt
acts as a roadblock in a country’s development, halting economic advancements
and becoming victim to the domination of its dictating country. When the country is at the mercy of another,
it cannot perform at its highest level. Instead of investing in long-run growth
it focuses on the short-term so that it does not fall deeper in debt due to
interest. As we can see, debt is just
another factor that makes economic development difficult in poor countries.
What was presented in this paper makes
up only a tiny portion of some of the aspects leading to a poor country’s
fate. However, I have shown that the
answer to the seemingly simple question to why a poor country is poor is in
fact quite complicated. While researching this topic I learned that one can spend
years trying to understand all the interdependent factors that play a role in
this problem. I also learned that in
order to understand the problem with poor countries’ economic growth we cannot
just look from an economic, political, or historical standpoint. If there were an easy answer to the question
posed than perhaps poor countries would not exist.
References
Amsden, Alice. Trade
in Manufacturing Between Developing
Countries. The Economic Journal. 1996.
Khatkhate,
Deena. Debt-Servicing as an Aid to Promotion of
Trade of Developing Countries. Oxford Economic Papers. 1996.
Kleiman,
Ephraim. Trade and the Decline of
Colonialism.
The Economic Journal.
1996.
Solomon,
Robert. A Perspective on Debt in
Developing
Countries. Brookings
Papers on Economic Activity. 1977.
World
Bank. Trends in Developing Countries.
http://www.ciesin.org/IC/wbank/tde-home.html
World
Bank. Prospects For Development.
http://www.worldbank.org/prospects/gep2001/