Assignment - Wealth of Nations

7/28/2019 Assignment - Wealth of Nations

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Assignment 3

What does the study of the history of economic development over the past250 years tells us about why poor countries remain poor? Illustrate youranswer using examples from at least two different historical phases or usingthe experiences of at least two different countries or region.

Introduction

According to some economic historians, the main reason why countriesremain poor is to be found in its poor institutions. According to thisexplanation, poor institutions are an impediment to economic growth as itleads to corruption, social and political instability while discouraging foreigninvestments. This is an inadequate answer and a multi-casual explanation will

more likely provide us with a better picture. As each state is different, due toits history, politics, culture, and geography e.t.c., the reasons why somecountries remain poor are more likely to be specific, rather than particular. Toillustrate this point, India and the Haiti are being discussed to show how andwhy a significant proportion of its citizens remain under the poverty line.

Some general theories

According to the standard neoclassical theory, capital moves from rich to poor

countries because lower workers wages in the latter meant an accompanyingreduced overall cost of production for making the same goods. This explainswhy poorer countries are therefore a more attractive destination for foreigninvestments1. This model has however not borne out in real situations andscholars have since sought to explain the discrepancy with two types ofexplanation. The first category focus on fundamentals that affect theproduction structure of the economy, such as technological differences,missing factors of production, government policies, and institutional structurewhile the second concentrates on international capital market imperfections,

mainly sovereign risk and asymmetric information2

. Most scholars howeverbelieve the fundamental distinction that separates poor from rich countriesare its institutions. As one scholar says, poor countries on average havepoorer economic policies and institutions that rich countries... But any poorercountries that adopt relatively good economic policies and institutions enjoyrapid catch-up growth3. This means that if poor countries build up good

1 L Alfaro et al. Why doesnt capital flow from rich to poor countries? an empirical investigation, Weatherhead Centre forInternational Affairs Harvard University, Working paper, April 2006, p. 1. Available for download at .

2ibid. p. 1 - 2.

3 M O Jr, Distinguished lecture on economics in government: big bills left on the sidewalk: why some nations are rich,and others poor, The Journal of Economic Perspectives, Vol.10, No. 2, Spring 1996, p. 20.


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institutions, economic growth is definite. Many also believe that poorinstitutions leads to the lack of property rights which could be seen from: a) itsinadequate laws to protect property or ensure the proper functioning of themarket b) a partial court which does not enforce violations. This would have adetrimental effect on the countrys economy.4

While these explanations are viable to some extent, it fails to consider thatevery state is different. The progress of each countrys economicdevelopment is thus likely to be multi- causal5. This means that besides itsinstitutions, other factors such as geography, culture, links to the globalmarket place, demography e.t.c. could significantly explain why it remainspoor6.

Case Study - India

According to the latest Human Development Index report, India is rankedwithin the Medium Human Development group with a GNI per capita of 3285US dollars. In the same report, a 2005/2006 survey shows that 16.4 % and28.6% of the population is vulnerable to poverty and in severe povertyrespectively. Furthermore, 32.7% and 29.8% of the population lives under theinternational poverty line (earning $1.25 per day) and the national poverty linerespectively7. While India has seen accelerating growth in recent years aswell as a visible rising middle class, statistics indicate that a significantproportion ofthe population is still considered poor. As such, it proves to be

an interesting case study.

According to Kotwal and colleagues, India is an exception to standardeconomic explanations. For instance, its recent outstanding performance isneither linked to increasing entrepreneurship nor similar to the Asian miracle.Unlike other developing countries, its growth was not driven by manufacturingexports nor has it attracted much foreign investment. Furthermore, unlikeother states which underwent industrialisation, its agricultural workforce hasincreased rather than decreased since the 1980s8.

Indias poverty statistics is also incongruous with received wisdom. Forinstance, while the number of rural poor has decreased by about 40 million

4 S Knack, Why dont poor countries catch up? a cross-national test of an institutional explanation, Economic Inquiry,Vol. XXXV, July 1997, p. 591.

5 Bringing it all together, Section 1b: What do we learn from the history of economic development, Generating theWealth of Nations, Week 8 Lecture 11 Section 1b.

6ibid.

7

UNDP, Human Development Report 2013, p 146; 161. Available for download at .

8 A Kotwal, B Ramaswami & W Wadhwa, Economic liberalization and Indian economic growth: whats the evidence?,Journal of Economic Literature, vol. 49, No. 4, 2011, p. 1153.
http://hdr.undp.org/en/media/HDR2013_EN_Statistics.pdfhttp://hdr.undp.org/en/media/HDR2013_EN_Statistics.pdfhttp://hdr.undp.org/en/media/HDR2013_EN_Statistics.pdfhttp://hdr.undp.org/en/media/HDR2013_EN_Statistics.pdfhttp://hdr.undp.org/en/media/HDR2013_EN_Statistics.pdf


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between 1973 and 2004, this was accompanied by an increase of the urbanpoor by 20 million9. Unexpectedly, while the urban and rural poor gained fromgrowth in rural output, industrialisation has not however benefited the latter.

As such, rural to urban migration has not been a major driver of povertyeradication10. This is in contrast to the oft-held assumption that as a societys

economy grows, the rural poor benefits from rural to urban migrations.

While the governments 1990s trade liberalisation policies broke upgovernment monopolies and allowed more market competition, thesubsequent growth within the IT sector, which has been its leading driver,could not have happened without the coincidence of the readily availability ofnew technologies and the essential manpower skills11. This suggests thatwhile institutions are important for economic planning, timing is also crucial.Furthermore, and more importantly, Indias institutions such as its legal andeducational system has not caught up with its current economic growth12.This puts a hole in the argument that institutions are crucial for pooreconomies to catch up with richer states.

All these developments has meant the creation of two Indias. The first isoccupied by the educated skilled working class who have benefitted fromtrade liberalisation and economic globalisation. The other, comprised of asignificant proportion of the population, are under-educated and trapped inlow productivity jobs in the informal sector, usually within the agriculturalsector13.

Case Study - Haiti

Haiti belongs to the group of states with low human development in the latestHDI index with a GNI per capita of 1070 US dollars. 18.8 % and 32.3% of thepopulation are respectively vulnerable to poverty and in severe poverty 14 .

According to the World Bank, more than half its population lives on less than1 US dollar per day and about 80% on less than 2 US dollars15.

Its slow economic growth is not only the result of poorinstitutions. The WorldBank has recognised that investment within the country is obstructed not onlyby institutional factors such as ownership rights, logistics and financial

9ibid. p. 1185.

10ibid.

11ibid. p. 1194.

12ibid. p. 1196.

13

ibid. p. 1196.14 UNDP op. cit., p. 146; 161

15 Haiti Overview, World Bank, viewed on 24 June 2013, .


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services, but also other non-institutional reasons such as land availability andaccess to skills16.

Others have sought to blame Haitis crippled economy as a legacy ofcolonialism and slavery. During the 18th century, it was a rich outpost of

France and the worlds largest exporter of sugar. This economic success washowever based on the exploitation of slaves which needed to be replaced at50,000 annually. Even after it fought for and gained independence, Francedemanded 150 million gold francs as a form of compensation - equivalent to5 times its annual export revenue. To pay off its debt, successivegovernments took out loans from US, German and French banks atexcessive interest rates. By 1900, 75 years after independence, 80% of itsbudget was still used to pay off its debts. They would not be paid off until194717. In recent times, Haiti has fallen into more debts and continues to bepunished by the punitive policies of financial institutions and states. After a1991 military coup, US and the Organization of American States (OAS)imposed a sanction which included freezing government assets in the US,prohibits foreign aid, bans most imports and exports amongst other drasticmeasures. This has had an immediate and long-lasting economic impact. Forinstance, by early January 1994, only 44 out of 145 Haitis garment factoriescontinued to operate. It was estimated that close to 1/4 of a million Haitianslost their basic source of income18. Within the 3 years of sanctions in force, itsGNP per capita was reduced by 30%. 4 years after the end of sanctions, itsGNP per capita has neither recovered nor has employment recovered. The

health and human rights impact were equally shocking. Amongst otherissues, the sanctions has led to increases in malnutrition, number of streetchildren, and maternal mortality rate while access to safe drinking water wasreduced19. While there has been some debt-cancellation as a result ofhumanitarian NGO lobbying, Haiti continues to owe 1.3 billion US dollars as aresult of new loans after a deadly earthquake struck in January 201020.

Conclusion

It is important to study why poor countries remain poor as there are clearlyhuman implications. As helpful as economic indicators are, scholars need toexpand their analyses to understand the causes of poverty. Inevitably, the

16ibid.

17 B Macintyre, The fault line in Haiti runs straight to France, The Sunday Times, 21 January 2010, viewed on 24 June2013, .

18 E Gibbons & R Garfield, The impact of economic sanctions on health and human rights in Haiti, 1991 - 1994,American Journal of Public Health, October 1999, vol. 89, No. 10, p. 1499.

19 ibid., p. 1500 - 1501; 1503.

20 Jubilee Debt Campaign, Haiti, last updated March 2011, viewed on 24 June 2013, .


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reasons are likely to be multi-causal and more than just inadequateinstitutions. Furthermore, using inadequate institutions as the main reasonoften depoliticises and quarantines economics from the moral realm. Thecase study of India shows that textbook theories cannot account for its recentrapid economic growth. Its two track economy - one rich and the other poor

also suggests that the government would have a political social time bomb inits hands. On the other hand, Haiti demonstrates clearly that a history ofcolonialism, slavery and foreign debt are the main factors to explain itscurrent predicament. Its economic dependence on foreign aid has also meantthat its citizens human rights violations can be easily violated by externalparties. These examples clearly show that the poor, as in developing andleast developed countries, are often poor, as a result of interlocking multi-causal factors, that are also unique to their own situation.


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Bibliography

Alfaro L et al. Why doesnt capital flow from rich to poor countries? anempirical investigation. Weatherhead Centre for International Affairs HarvardUniversity, Working paper, April 2006, Available for download at .

Bringing it all together, Section 1b: What do we learn from the history ofeconomic development, Generating the Wealth of Nations, Week 8 Lecture11 Section 1b.

Gibbons E & Garfield R, The impact of economic sanctions on health andhuman rights in Haiti, 1991 - 1994. American Journal of Public Health,October 1999, vol. 89, No. 10, p. 1499 - 1504.

Haiti Overview, World Bank, viewed on 24 June 2013, .

Jr, M O Distinguished lecture on economics in government: big bills left onthe sidewalk: why some nations are rich, and others poor. The Journal ofEconomic Perspectives, Vol.10, No. 2, Spring 1996, p. 3 - 24.

Knack, S Why dont poor countries catch up? a cross-national test of aninstitutional explanation. Economic Inquiry, Vol. XXXV, July 1997, p. 590 -

602.

Kotwal, A Ramaswami B & Wadhwa, W Economic liberalization and Indianeconomic growth: whats the evidence?. Journal of Economic Literature, vol.49, No. 4, 2011, p. 1152 - 1199.

Macintyre, B The fault line in Haiti runs straight to France, The SundayTimes , 21 January 2010, viewed on 24 June 2013, < http: / /www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdf>.

UNDP, Human Development Report 2013 - Statistical Annex, p 146; 161.Av a i l a b l e f o r d o w n l o a d a t < h t t p : / / h d r . u n d p . o r g / e n / m e d i a /HDR2013_EN_Statistics.pdf>.
http://hdr.undp.org/en/reports/global/hdr2013/http://hdr.undp.org/en/reports/global/hdr2013/http://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.worldbank.org/en/country/haiti/overviewhttp://hdr.undp.org/en/reports/global/hdr2013/http://hdr.undp.org/en/reports/global/hdr2013/http://hdr.undp.org/en/reports/global/hdr2013/http://hdr.undp.org/en/reports/global/hdr2013/http://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdfhttp://www.worldbank.org/en/country/haiti/overviewhttp://www.worldbank.org/en/country/haiti/overviewhttp://www.worldbank.org/en/country/haiti/overviewhttp://www.worldbank.org/en/country/haiti/overviewhttp://dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdfhttp://dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdfhttp://dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdfhttp://dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdf

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Assignment - Wealth of Nations