Why Are Poor Countries Poor?
Over at Slate, Tim Harford has an interesting discussion on a rather intriguing economic question: Why Are Poor Countries Poor?
The answer is less obvious than you might imagine. The usual explanation goes something like this:
"One very plausible account of why at least some poor countries are poor is that there is no smooth progression from where they are to where they would be when rich. For instance, to move from drilling oil to making silicon chips might require simultaneous investments in education, transport infrastructure, electricity, and many other things. The gap may be too far for private enterprise to bridge without some sort of coordinating effort from government—a "big push."
However, a new line of thinking has bled over into Economics from Physics. It turns out that:
"Rich countries have larger, more diversified economies, and so produce lots of products—especially products close to the densely connected heart of the network. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing, and—contrary to the hype—not much activity in the products produced by rich countries. African countries tend to produce a few products with no great similarity to any others."
Anyway, by thinking about this in network terms, the physicists have created a map (infoporn!) of the relationships between different products in an abstract economic space:
Pretty fascinating thinking that has ramifications for what sort of might want to emphasize to poorer countries . . .
>
Sources:
The Product Space and the Wealth of Nations
http://www.nd.edu/~networks/productspace/index.htm
Milton Friedman, Meet Richard Feynman
How physics can explain why some countries are rich and others are poor
Tim Harford
Slate, Saturday, Aug. 18, 2007, at 7:07 AM
http://www.slate.com/id/2171898
Wednesday, September 05, 2007 | 02:30 PM | Permalink
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Tracked on Sep 5, 2007 4:18:11 PM
» Another interesting post on BigPicture from CharlEngels.com
A question that has been raised numerous times in the media, but never successfully answered is: Why do poor countries stay poor?
Is it inept government practices, bad capital asset allocation or just plain bad luck?
Tim Harford at Slate, has an intere... [Read More]
Tracked on Sep 7, 2007 6:36:01 AM
Comments
One of the fundamental reasons why most poor countries are poor is that they have unstable governments which are either unable or unwilling to protect private property rights.
Nobody would be willing to innovate/produce/risk capital when what they produce can simply be confiscated by fellow citizens (or even the government itself).
Africa is a varitable cornucopia of natural resources, yet it produces very little due to political instability.
Zimbabwe was actually making a bit of progress until Mr. Mugabe decided to start seizing private assets from the few productive farmers (mostly white westerners). Now he is discovering that nobody wants to play in a game where he can simply declare himself the winner and abscond with all the money.
Posted by: Pool Shark | Sep 5, 2007 2:43:21 PM
Barry.
Hernando de Soto argued that wealth is inherently defined by the presence and strengths of property rights.(assuming that you have not read the book) The argument is compelling, utilizing the development of US property rights and contrasting that with various third world countries. A well diversified economy at it's very core comes down to property rights to a large extent; and we have Mugubes policies in Africa to assist in providing a contrast to confirm that view.
Posted by: tw | Sep 5, 2007 2:43:45 PM
This line of questioning I think should always begin with:
Why are any countries rich?
A maintained assumption in a lot of work outside of economics is that the progression towards wealth was natural or steady. Neither of these things is true.
There is a clear, sharp breakpoint in the economic history of the world that begin in England in the 1700s.
The real question is why did it happen and how did it spread.
Right now most "rich countries" are rich because they are culturally or geographically close to Great Britain. There are a few outliers in the East Asian Tigers, but even there the post war Anglophilic governments explain a lot.
So what is this Britishness that produces growth. Is it parliaments? An independent judiciary? Banking laws? Simple Property Rights? Free Trade?
Posted by: Karl Smith | Sep 5, 2007 3:17:41 PM
Funny, the first two comments got me thinking. Lately I have been scared to invest because of drastic swings that will come when the inevitable goverment intervention happens. Capricious governments interfering with the rules of trading are definitely a reason that business can't thrive in poor and corrupt countries.
Posted by: philip | Sep 5, 2007 3:19:35 PM
Why don't these retarded countries just borrow $9 trillion and buy themselves everything they need?
Bunch of morons. That's why we're so damn rich up in here.
Posted by: ari5000 | Sep 5, 2007 3:25:22 PM
www.physorg.com (http://www.physorg.com/news107595499.html) had this image and a short piece back on the 29th that I tried to send along but your mail server has been complaining saying that my host has no DNS record.
Glad to see you picked up the image none the less as I know how you like the info-porn.
Posted by: Denis Pitcher | Sep 5, 2007 3:33:54 PM
They are poor because they are savers.
Posted by: KP | Sep 5, 2007 3:37:08 PM
Karl Smith,
I was about to use England as an excellent example of how aggressively-enforced private property rights foster the production and accumulation of wealth.
In common-law England, all felonies were punishable by 'death' and 'forfeiture' (i.e., the convicted criminal forfeit both his life and all his property to the crown).
Simple theft (i.e., 'larceny') was a felony unless the loss was less than 12-pence; in which case it was merely 'petit larceny' (which was punishable merely by 'forfeiture' and 'whipping').
Therefore, ANY theft of over 12-pence was a capital offense.
Given the rigorous enforcement of its laws, there is no wonder that English citizens could feel secure in their homes, businesses and personal property. A shop-keeper, for instance, could feel assured that his investment in his premises and stock would be safe from criminals at the cost of the taxes he paid to the crown.
A little off-topic, but I am convinced (given my line of work) that a main cause of the increasing lawlessness we now see in America is a disregard of the laws brought on by the general consensus that there is little to be feared in the way of punishment by those caught in committing property crimes.
For instance, in Los Angeles County, defendants who are convicted of felony welfare fraud, (except in very rare cases) are placed on probation and made to pay back the money; NO jail time!
So, if you are caught stealing money, the punishment is to pay it back (without interest). How much of a disincentive is that?
Posted by: Pool Shark | Sep 5, 2007 3:44:06 PM
Three things must work together to promote development: 1)stable environment to protect long term investment, 2)a fair dispute resolution system and 3)reasonably cheap credit for consumers.
Posted by: mhm | Sep 5, 2007 3:54:05 PM
Pool Shark, does the existence of harsh laws in defense of property in common-law England necessarily equate to "rigorous enforcement" of said laws?
Posted by: David | Sep 5, 2007 3:57:17 PM
David,
In the case of England between the reigns of Henry VIII and George III, the answer is a resounding 'yes.'
Posted by: Pool Shark | Sep 5, 2007 4:06:15 PM
In this case, I think a picture's worth a thousand words, because that's probably how many words it would really take to give the real story and make you forget the pretty (inaccurate) picture :)
There are obviously many causes, and a country has to get many things right to be prosperous and have a largely prosperous society. And the answer may differ depending on what you call "poor". But when I think of "destitute" the answers seem pretty obvious. Take Africa, or example (please!). They are awash in natural resources, and yet have some of the most God-forsaken people on the planet and have for decades. Why?
Even if they were too stupid to dig gold, diamonds, emeralds, oils etc. out of the ground (and they aren't), the West is there to teach them. No. They are destitute because almost always there is some dominant thug screwing everyone over (by force), totally upsetting the natural laws of economics all the while. There is chaos throughout the land and although anything but optimal, the only real commerce going on is the work for the thug. I don't care if it is Idi Amin or Mugabe or the Janjaweed or Kim Jong Il (to pick another country) or Castro or any given politburo, something interferes with "normal" commerce and hence normal societal development and prosperousness and THAT is usually why they are poor. In short, "The Man" is keeping them down! Physics shmisics. Nice diagram though! :)
Posted by: Mike G. | Sep 5, 2007 4:29:09 PM
In this case, I think a picture's worth a thousand words, because that's probably how many words it would really take to give the real story and make you forget the pretty (inaccurate) picture :)
There are obviously many causes, and a country has to get many things right to be prosperous and have a largely prosperous society. And the answer may differ depending on what you call "poor". But when I think of "destitute" the answers seem pretty obvious. Take Africa, or example (please!). They are awash in natural resources, and yet have some of the most God-forsaken people on the planet and have for decades. Why?
Even if they were too stupid to dig gold, diamonds, emeralds, oils etc. out of the ground (and they aren't), the West is there to teach them. No. They are destitute because almost always there is some dominant thug screwing everyone over (by force), totally upsetting the natural laws of economics all the while. There is chaos throughout the land and although anything but optimal, the only real commerce going on is the work for the thug. I don't care if it is Idi Amin or Mugabe or the Janjaweed or Kim Jong Il (to pick another country) or Castro or any given politburo, something interferes with "normal" commerce and hence normal societal development and prosperousness and THAT is usually why they are poor. In short, "The Man" is keeping them down! Physics shmisics. Nice diagram though! :)
Posted by: Mike G. | Sep 5, 2007 4:30:50 PM
The 'dominant thug' in Africa was the European and American empires. They also enslaved or destroyed India and China 100 years ago. Not to mention, stealing absolutely everything in North and South America.
Any discussion of rich and poor countries that leaves out 1,000 years of imperialist history is pure garbage.
Posted by: Elaine Meinel Supkis | Sep 5, 2007 4:45:58 PM
Pretty bad explanations, except the last one of course.
Read Guns, Germs, and Steel.
Posted by: adam | Sep 5, 2007 5:08:36 PM
This is utter nonsense! Poor countries are poor because they have little private ownership. Hong Kong has little natural resources yet is a relatively rich country. Large, socialistic governments make all citizens poorer.
Posted by: Mike M | Sep 5, 2007 5:27:32 PM
Blame the imperialists all you want, but that is also garbage.
Why 1000 years? There were empires before and Europe (or its parts) broke free of it, and went on to dominate others.
To keep the focus in Europe, WWII did more damage than you can blame on a 1500's empire. But it managed to rise again in a few decades. Why/How? Could it be done again today?
I'm not defending the imperialism, but to blame underdevelopment of a country on a generic empire of old is almost a straw man argument.
Posted by: mhm | Sep 5, 2007 5:30:57 PM
adam has it spot on. GGS explains it perfectly. For a summary it has to do with available resources to progress civilization in that area of the world. Richer countries have developed faster due to a diverse amount of natural resource in their region that vaulted them ahead in technology versus their less lucky counterparts. Once technology advanced to levels where energy was a major resource it was all to easy to just secure it from their poorer counterparts.
On an economic level its supply and demand vs diversity of supply. One an island with only one resource the one who controls that resource is king. He can regulate the resource, ration it, and gain favor with it. He can sue it for leverage, and manipulate the other islanders.
However if the island had not 1 but 12 resources then it is much more difficult for a single person to secure and control all of them. Other residents may secure some of those resource. You have a community where there are a small group of power brokers that have to deal and trade with each other in order to maintain the society. When the cost of gaining pigs from one power broker is too high then a resident may find that bananas may be more acceptable because the residents value it less. The Pig broker now looses some of his power.
The middle east is an example of this. Even in this modern age and the wealth of some of those countries why are the citizens still poor. Because one of the single most powerful resource in the world is controlled by a select few power brokers than are in collusion. The residents of their countries have very few alternatives. Isolated regions of China and India are in the same boat. Their distance from higher civilization prevents them from seeking alternative resource from other brokers. They are forced to use their local ones.
Diversity in Supply and Demand by Value.
Posted by: anderl | Sep 5, 2007 5:32:20 PM
EMS,
Isn't it interesting that most of the countries comprising the former British empire are among the most prosperous of emerging economies (i.e., United States, India, Australia, New Zealand, South Africa, Hong Kong...)
Whereas most colonies of other European nations (especially France and Spain), have not faired so well?
Third world countries which were either colonized by non-British nations or never colonized at all, remain among the poorest countries in the world.
Posted by: Pool Shark | Sep 5, 2007 5:33:51 PM
Oh, I get it. Poor countries are poor because they don't produce that much.
Talk about circular reasoning.
Posted by: don | Sep 5, 2007 6:22:36 PM
There's a lot above to respond to. But I would like to provide a different kind of example. Botswana. This is a unique example where a country was able to secure a large chunk of the profits from natural resources (in this case mostly diamonds, but also copper and coal to name a few), and a significant chunk of that money was reinvested in the economic development of the country. Where things got complicated was when they attempted to compete with South Africa, and they have been repeatedly shut down. And these were initiatives that could have brought significant industry into the country. So while the will, the plan, and the funds were available for significant economic development, Botswana was hampered by other geopolitical realities (in particular being a land-locked country whose trade routes, i.e., access to ocean-going shipping, are controlled by another not-so-friendly country). For more details, take a look at "Very Brave or Very Foolish", the memoirs of former president Quett Masire. Full disclosure, I'm related to the editor of the book.
Posted by: MarkJohnsonLewis | Sep 5, 2007 6:44:20 PM
Pool Shark, I'd hardly call South Africa a British colony - the history there doesn't quite bear that out. However, Zimbabwe WAS a British colony. While Brazil was a Portuguese colony. So I'm not sure I'm seeing your point. Furthermore, how many "developing" (i.e., poor) countries are there out there that weren't colonized? To use the example of Africa, that entire continent was sliced up according to the whims of the Europeans.
Posted by: MarkJohnsonLewis | Sep 5, 2007 6:50:23 PM
Pool Shark is kind of right. Except for the part in why England became rich. Property Rights and the sort is ancillary to technological progresses and the industrial revolution. In other words, property rights (as we know them now) are the effect of technological progress, not the cause.
We are now in a transitional phase. We call it globalization. What will we transition to though?
Oh yeah the most important resource of them all is energy. Richard Heinberg's The Party is Over is a good book to start on that subject.
Posted by: adam | Sep 5, 2007 7:04:50 PM
One significant factor has been the loss of faith in the local culture (the nearest thing in most poor countries to the concept of the nation state) by the elites. The elites get rich, they move out -- businesses are run as cash cows to support the "international" lifestyle.
Posted by: hidebound | Sep 5, 2007 7:28:18 PM
One significant factor has been the loss of faith in the local culture (the nearest thing in most poor countries to the concept of the nation state) by the elites. The elites get rich, they move out -- businesses are run as cash cows to support the "international" lifestyle.
Posted by: hidebound | Sep 5, 2007 7:28:38 PM
