Why Are Poor Countries Poor?

By Tanya Kumbhat

A typical economist believes that wealth is made of a combination of man-made resources (roads, factories, machines, and telephone systems), human resources (hard work and education) and technological resources (technical know-how, or simply hi-tech machinery). There are two standard methods of measuring the wealth of countries and how rich or poor its population is. The measure most often used is Gross Domestic Product (GDP), which represents the size of a country’s economy. A modification of this is per-capita GDP, which is a measure of the average welfare and affluence, or poverty, of residents of a country. The realism is that the world has been divided for a long time among three groups: (i) the association of rich nations, with income per capita above $12,000, according to the World Bank, using 2007 data; (ii) a very large group of poor countries with income per capita below $1,000; and (iii) a group of countries that falls in between these two.

The  World Bank defines poverty as survival on less than $1.25 per day and the Third World as, the technologically less advanced, or developing, nations of Asia, Africa, and Latin America, generally characterized as poor, having economies distorted by their dependence on the export of primary products to the developed countries in return for finished products. These nations also tend to have high rates of illiteracy, disease, and population growth and unstable governments. These countries seem to move forward, but slowly, with the consequence that very few graduate and make it to the club of rich countries. Some of these nations are Brazil, Mexico, Argentina, Malaysia, or Thailand. They are referred to as being in a “middle income trap”.

We can attach three major reasons for the failure of many economies to remain ‘poor’ or have comparatively less growth:

• In many poor countries, leaders are incapable of overcoming the collective action problem: they lack the means for creating vital public goods, which are necessary to building the foundation for national economic development in this sense, leaders of poor countries often face serious constraints beyond a simple lack of (material) resources: they lack authority, expertise, coercive capacity, organizational power, and so on.
• The savings and economic growth are closely related with each other mostly people put their investments in banks use them in taking saving certificates and use their savings in buying properties. All this money helps to benefit the country. If a person works hard, saves money, invests wisely, has a decent education, and so on, he or she can achieve economic success; and what is true for the individual, is true for the larger group and for whole countries. In short, the only signi?cant barrier to success to economic prosperity is the failure to do the “right” things.
• Because of the way the economic system is organized, there will always be rich and poor people in the world. However, the reason for this division is not because the poor have less talent, less impetus, or a lesser desire to work hard, but because the economic system is intrinsically exploitative. In other words, the rich are rich just because there are a lot of poor people; the wealth of the rich, in fact, depends on the poverty of the poor. This relationship, unfortunately, cannot be changed unless the system itself is destroyed.

N. G. Mankiw, David Romer, and David Weil (1992) modified the neoclassical model by adding human capital as another input into the production of national income. In this so-called augmented Solow model, equilibrium income depends on the rate of investment in education as well as the physical capital investment rate. This opens another avenue for policy to affect wealth, as policies that increase educational investments will also make a country permanently richer and will temporarily raise its growth rate in the transition period to the new equilibrium.

Obviously, then, poor countries grew into rich countries by investing money in physical resources and by improving human and technological resources with education and technology transfer programs. Investment money is clearly not the issue—either the investments are not being made, or they are not delivering the returns the traditional models predict.

Even the “increasing returns” model suggests that it should be possible for poor countries to grow richer as long as they can make a number of complementary investments all at once, such as factories, roads, electricity, and ports, to allow goods to be manufactured and exported.

Education, factories, infrastructure, and technical know-how are indeed in abundance in rich countries and severely lacking in poor ones. The first clue that something is amiss with the traditional story is its implication that poor countries should have been catching up with rich ones for the past century or so, and the farther behind they are, the faster the catch-up should be. The poorer countries should catch up quickly because in a country, which has very little in the way of infrastructure or education, new investments have the biggest rewards. Rich countries don’t gain much from further investment: this is called “diminishing returns.” For instance, a few roads in a poor country can open up whole new areas for trade; in a rich country, a few more roads just relieve a little congestion. The first few telephones in a poor country are of huge importance; in a rich country, phones are used by school kids to send text messages in class. But there are some simple reforms, which—with a modicum of political will—would move poor countries like Cameroon in the right direction. One simple reform is to cut red tape, allowing small businesses to be legally established, which makes it easier for their entrepreneurs to expand and borrow money. Another option, and a vital one, is to enlist the world economy for help.

She is currently in her second year at Christ University pursuing a B.A degree in Economics, Political Science and Sociology. The biggest dream of her life is to learn something new every day so that at the end of her journey ,she can look back at a colourful and knowledgeable life. She is a voracious reader and is interested in current events. To start an interesting conversation, she can be contacted at tanyakumbhat123@gmail.com