Assignment 3

What does the study of the history of economic development over the past 250 years tells us about why poor countries remain poor? Illustrate your answer using examples from at least two different historical phases or using the experiences of at least two different countries or region. Introduction According to some economic historians, the main reason why countries remain poor is to be found in its poor institutions. According to this explanation, poor institutions are an impediment to economic growth as it leads to corruption, social and political instability while discouraging foreign investments. 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 to its history, politics, culture, and geography e.t.c., the reasons why some countries remain poor are more likely to be specific, rather than particular. To illustrate this point, India and the Haiti are being discussed to show how and why 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 accompanying reduced overall cost of production for making the same goods. This explains why poorer countries are therefore a more attractive destination for foreign investments1. This model has however not borne out in real situations and scholars have since sought to explain the discrepancy with two types of explanation. The first category focus on fundamentals that affect the production structure of the economy, such as technological differences, missing factors of production, government policies, and institutional structure while the second concentrates on international capital market imperfections, mainly sovereign risk and asymmetric information2 . Most scholars however believe the fundamental distinction that separates poor from rich countries are its institutions. As one scholar says, poor countries on average have poorer economic policies and institutions that rich countries... But any poorer countries that adopt relatively good economic policies and institutions enjoy rapid catch-up growth3. This means that if poor countries build up good
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L Alfaro et al. Why doesnt capital flow from rich to poor countries? an empirical investigation, Weatherhead Centre for International Affairs Harvard University, Working paper, April 2006, p. 1. Available for download at <http:// dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdf>.
2 3

ibid. p. 1 - 2.

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.

institutions, economic growth is definite. Many also believe that poor institutions leads to the lack of property rights which could be seen from: a) its inadequate laws to protect property or ensure the proper functioning of the market b) a partial court which does not enforce violations. This would have a detrimental effect on the countrys economy.4 While these explanations are viable to some extent, it fails to consider that every state is different. The progress of each countrys economic development is thus likely to be multi- causal5. This means that besides its institutions, other factors such as geography, culture, links to the global market place, demography e.t.c. could significantly explain why it remains poor6. Case Study - India According to the latest Human Development Index report, India is ranked within the Medium Human Development group with a GNI per capita of 3285 US dollars. In the same report, a 2005/2006 survey shows that 16.4 % and 28.6% of the population is vulnerable to poverty and in severe poverty respectively. Furthermore, 32.7% and 29.8% of the population lives under the international poverty line (earning $1.25 per day) and the national poverty line respectively7. While India has seen accelerating growth in recent years as well as a visible rising middle class, statistics indicate that a significant proportion of the 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 standard economic explanations. For instance, its recent outstanding performance is neither linked to increasing entrepreneurship nor similar to the Asian miracle. Unlike other developing countries, its growth was not driven by manufacturing exports nor has it attracted much foreign investment. Furthermore, unlike other states which underwent industrialisation, its agricultural workforce has increased rather than decreased since the 1980s 8. Indias poverty statistics is also incongruous with received wisdom. For instance, while the number of rural poor has decreased by about 40 million
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S Knack, Why dont poor countries catch up? a cross-national test of an institutional explanation, Economic Inquiry, Vol. XXXV, July 1997, p. 591.
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Bringing it all together, Section 1b: What do we learn from the history of economic development, Generating the Wealth of Nations, Week 8 Lecture 11 Section 1b.
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ibid.

UNDP, Human Development Report 2013, p 146; 161. Available for download at <http://hdr.undp.org/en/media/ HDR2013_EN_Statistics.pdf>.
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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.

between 1973 and 2004, this was accompanied by an increase of the urban poor by 20 million9. Unexpectedly, while the urban and rural poor gained from growth in rural output, industrialisation has not however benefited the latter. As such, rural to urban migration has not been a major driver of poverty eradication 10. 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 up government monopolies and allowed more market competition, the subsequent growth within the IT sector, which has been its leading driver, could not have happened without the coincidence of the readily availability of new technologies and the essential manpower skills11 . This suggests that while institutions are important for economic planning, timing is also crucial. Furthermore, and more importantly, Indias institutions such as its legal and educational system has not caught up with its current economic growth12. This puts a hole in the argument that institutions are crucial for poor economies to catch up with richer states. All these developments has meant the creation of two Indias. The first is occupied by the educated skilled working class who have benefitted from trade liberalisation and economic globalisation. The other, comprised of a significant proportion of the population, are under-educated and trapped in low productivity jobs in the informal sector, usually within the agricultural sector13. Case Study - Haiti Haiti belongs to the group of states with low human development in the latest HDI index with a GNI per capita of 1070 US dollars. 18.8 % and 32.3% of the population are respectively vulnerable to poverty and in severe poverty 14 . According to the World Bank, more than half its population lives on less than 1 US dollar per day and about 80% on less than 2 US dollars15 . Its slow economic growth is not only the result of poor institutions. The World Bank has recognised that investment within the country is obstructed not only by institutional factors such as ownership rights, logistics and financial
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ibid. p. 1185. ibid. ibid. p. 1194. ibid. p. 1196. ibid. p. 1196. UNDP op. cit., p. 146; 161 Haiti Overview, World Bank, viewed on 24 June 2013, <http://www.worldbank.org/en/country/haiti/overview>.

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services, but also other non-institutional reasons such as land availability and access to skills16. Others have sought to blame Haitis crippled economy as a legacy of colonialism and slavery. During the 18th century, it was a rich outpost of France and the worlds largest exporter of sugar. This economic success was however based on the exploitation of slaves which needed to be replaced at 50,000 annually. Even after it fought for and gained independence, France demanded 150 million gold francs as a form of compensation - equivalent to 5 times its annual export revenue. To pay off its debt, successive governments took out loans from US, German and French banks at excessive interest rates. By 1900, 75 years after independence, 80% of its budget was still used to pay off its debts. They would not be paid off until 194717. In recent times, Haiti has fallen into more debts and continues to be punished by the punitive policies of financial institutions and states. After a 1991 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 drastic measures. This has had an immediate and long-lasting economic impact. For instance, by early January 1994, only 44 out of 145 Haitis garment factories continued to operate. It was estimated that close to 1/4 of a million Haitians lost their basic source of income 18. Within the 3 years of sanctions in force, its GNP per capita was reduced by 30%. 4 years after the end of sanctions, its GNP per capita has neither recovered nor has employment recovered. The health and human rights impact were equally shocking. Amongst other issues, the sanctions has led to increases in malnutrition, number of street children, and maternal mortality rate while access to safe drinking water was reduced19. While there has been some debt-cancellation as a result of humanitarian NGO lobbying, Haiti continues to owe 1.3 billion US dollars as a result 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 clearly human implications. As helpful as economic indicators are, scholars need to expand their analyses to understand the causes of poverty. Inevitably, the
16 17

ibid.

B Macintyre, The fault line in Haiti runs straight to France, The Sunday Times, 21 January 2010, viewed on 24 June 2013, <http://www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdf>.
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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 20

ibid., p. 1500 - 1501; 1503.

Jubilee Debt Campaign, Haiti, last updated March 2011, viewed on 24 June 2013, <http:// www.jubileedebtcampaign.org.uk/Haiti+3113.twl>.

reasons are likely to be multi-causal and more than just inadequate institutions. Furthermore, using inadequate institutions as the main reason often depoliticises and quarantines economics from the moral realm. The case study of India shows that textbook theories cannot account for its recent rapid economic growth. Its two track economy - one rich and the other poor also suggests that the government would have a political social time bomb in its hands. On the other hand, Haiti demonstrates clearly that a history of colonialism, slavery and foreign debt are the main factors to explain its current predicament. Its economic dependence on foreign aid has also meant that its citizens human rights violations can be easily violated by external parties. These examples clearly show that the poor, as in developing and least developed countries, are often poor, as a result of interlocking multicausal factors, that are also unique to their own situation.

Bibliography Alfaro L et al. Why doesnt capital flow from rich to poor countries? an empirical investigation. Weatherhead Centre for International Affairs Harvard University, Working paper, April 2006, Available for download at <http:// dev.wcfia.harvard.edu/sites/default/files/1083__LA_PoorCountries.pdf>. Bringing it all together, Section 1b: What do we learn from the history of economic development, Generating the Wealth of Nations, Week 8 Lecture 11 Section 1b. Gibbons E & Garfield R, 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 - 1504. Haiti Overview, World Bank , viewed on 24 June 2013, <http:// www.worldbank.org/en/country/haiti/overview>. Jr, M O 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. 3 - 24. Knack, S Why dont poor countries catch up? a cross-national test of an institutional explanation. Economic Inquiry, Vol. XXXV, July 1997, p. 590 602. Kotwal, A Ramaswami B & Wadhwa, W Economic liberalization and Indian economic 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 Sunday Times , 2 1 Ja n u a ry 2 0 1 0 , vi e w e d o n 2 4 Ju n e 2 0 1 3 , <h ttp:// www.sahayaselvam.org/wp-content/uploads/2012/05/Haiti.pdf>. UNDP, Human Development Report 2013 - Statistical Annex, p 146; 161. A v 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>.