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Thursday, January 11, 2007

Why Aren't Poor Countries Catching Up Faster?

David Wessel of the WSJ looks at why some developing countries have had trouble reducing poverty:

Why Economists Are Still Grasping For Cure to Global Poverty, by David Wessel, WSJ [Free]: ...[MIT's Sloan School of Management profoeeor] Simon Johnson ... wonders: "Do we really know how to help the poor people...? Do we really know how to help them out of poverty?"

Such questions haunt academics, governments, international institutions and global do-gooders. They are impressed with China's rapid modernization, though puzzled that it has done so well without following standard precepts. They are disappointed and puzzled that Latin America nations haven't done better, especially because so many did take the advice of the experts. They are depressed and puzzled by the continued widespread misery in Africa. ...

The U.S. and Europe pulled ahead of the rest of the world in the 19th century, the result of the Industrial Revolution, the evolution of financial markets and the discovery of new drugs and chemicals. With a few remarkable exceptions -- South Korea, for one -- the gap between rich and poor nations persists. ... Says Anne Krueger..: "It was natural that a major objective of...the 'modernizing elite' was to achieve economies and living standards similar to those in the 'developed,' as they were then called, economies." Poor countries had rice patties or coffee plantations; rich ones had factories. The trick, it was believed, was to hasten the industrialization of poor countries, and government had to lead the way.

The prescriptions didn't work out as well as optimistic postwar poverty fighters hoped. ... Why is that? Why aren't more poor countries catching up faster?

One view, articulated by Ms. Krueger, is that so-called Third World governments and their First World advisers applied sound economic principles incorrectly or without sufficient attention to the reality. Policies to encourage exports and shield embryonic industries from imports until they got rolling sounded good, for instance, but bred corruption, infantilized industries and created politically powerful vested interests that blocked needed change.

Another view is that poor countries got bad advice and paid the price, but that today's experts know much more than their predecessors. "We don't have recipes, or a checklist," [UCLA's Sebastian] Edwards says. But, he says, we do know the ingredients: educating workers, accumulating capital and investing it widely, improving productivity. ...

A third view is that earlier economists focused on the wrong thing. Mr. Johnson, among others, argues that what really matters is having solid political, legal and economic institutions -- courts, central banks, honest bureaucrats, private-property rights -- that allow entrepreneurs to flourish. Imposing what seem to be sound economic policies on corrupt, incompetent or myopic governments is doomed. Building strong institutions is a necessary prerequisite. In this camp, there is a running side argument about which comes first: the institutions or the educated people who create them. ...

Technological advances and the spread of markets likely will boost the overall income of the world significantly over the next 25 to 50 years. "But," Mr. Johnson warns, "at least half the world's population will likely not participate fully" -- unless his crowd finds better ways to spread prosperity along with better health to poor countries.

I don't think the role of institutions receives enough attention.

    Posted by on Thursday, January 11, 2007 at 12:09 AM in Economics | Permalink  TrackBack (0)  Comments (23)


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