- 1 Physical geography
- 2 Fiscal trap
- 3 Governance failures
- 4 Cultural Barriers
- 5 International Politics
- 6 Lack of Innovation
Throughout this article, it is helpful to keep in mind that extreme poverty is a state of subsistence living in which most, if not all, efforts are directed towards survival. There are a number of common fallacies about poverty that you may wish to familiarize yourself with before continuing.
Extreme poverty is caused by a multitude of factors. What we are discussing here are the cultural and national issues that make economic development more difficult. Many of these effects apply to all nations, regardless of wealth. It is important to keep in mind that the same factor is likely to affect poor nations much more intensely than rich nations. Our thoughts on these subjects were heavily inspired by a number of books as well as our subsequent readings on the subject. Jeffrey Sachs’s excellent book “The End of Poverty” laid the foundation for our investigation of these topics. We also have more information on why the rich world should end poverty.
A country’s geography can have a tremendous effect on development. Geography describes a great number of things that can affect national and regional economics. None of these factors are a death sentence for economic development, just problems that need to be overcome. Doing this incurs costs; costs that a poor nation often cannot afford on its own.
- Water-based transportation. Water transportation is generally very cheap. It also requires little in the way of advanced or expensive technology to provide basic transportation. Navigable rivers, coastlines, and natural harbors are all important factors for the development of water-based trade. Landlocked countries face additional problems because they have to negotiate directly with their neighbors in order to access external markets. This difficulty can be overcome by building roads and rail, which can be expensive. It can also be advantageous to orient (if possible) export production towards products that are of high value for relatively small volume and mass. This eases the cost constraints of transportation somewhat because it would only be a small part of the overall cost of the good.
- Soils, sunshine, and rainfall are all crucial factors for the development of domestic agriculture. Agriculture is the foundation on which a poor nation depends. Without food, no other human endeavor is possible. Richer nations can trade other products for their food need be. This is not an option for those caught in extreme poverty. In our earlier post on the factors that create the extreme poverty trap, we discussed how the extremely impoverished can damage their agricultural resources, putting their nation in an even worse position for food.
- Inclement weather, storms, and flooding all make shelter and infrastructure more expensive and important to construct and maintain. They also tend to exacerbate problems such as soil erosion.
- Natural capital such as mineral wealth, stone, oil, and forests are useful in many ways. These natural resources are necessary for constructing shelter and infrastructure. They also make possible some forms of modern industry which may be useful once the country gets onto its feet and begins climbing the ladder of development. Natural capital may also serve as a potential export resource as well.
- Favourable conditions for malaria or other diseases. In the case of malaria for instance, high temperatures, lots of rainfall, and populations of the Anopheles mosquito make Sub-Saharan Africa particularly vulnerable to malaria infection. Different conditions can foster other forms of disease.
- Animals suitable for domestication. In Jared Diamond’s excellent book “Guns, Germs, and Steel“, the importance of animals suitable for domestication is elaborated on extensively. We will mention here only that domesticated animals can: help with utilizing and improving marginal land, reducing the labour required from humans, and improve the variety and nutrition of human diets.
- Native crop species vary around the world. In short, native crops generally grow better than non-native ones, but it may be difficult to find a combination that can provide a sufficiently complete set of nutrients for humans to thrive on. This is assuming of course that this sort of knowledge is available to the populace. Michael Pollan, in his book “In Defense of Food” claims that traditional diets around the world evolved towards relatively nutritious and healthy combinations of food.
If a government cannot raise enough tax revenue to pay for the things it needs, it either goes further into debt, or prints money. This can lead to a rapid devaluing of the currency, and even hyperinflation.
When countries can’t afford basic services, they often go into debt in order to pay for them. Once enough debt has accumulated, they end up spending a significant fraction of what money they do have on servicing the debt. ‘Servicing a debt’ is another way of saying ‘paying it back’. It is important to keep in mind that when paying back a debt, both the principal amount and the accumulated interest must be paid back. At a minimum, servicing a debt requires paying interest as it accumulates.
This must be dealt with by pursuing comprehensive debt cancelling programs for nations suffering from the fiscal trap of extreme poverty. Cancelling debt is a necessary part of the aid that the extremely poor areas of the world need. Grants are preferable to loans in the case of poor nations. Grants do not have to be paid back. The best source that we are aware of on this subject says that the rich world only needs to give about 0.7% of GDP (or 70 cents on every 100 dollars of income) towards ending poverty in order to end extreme poverty completely in 10-20 years.1 Wealthy countries can easily afford to provide this foreign aid. The influx of capital, expertise and political support from the rich world would help the poor world rapidly climb out of poverty.
Furthermore, countries that can’t afford basic services also may not be able to afford strong safeguards within the government. Corruption and poverty are correlated.2 People often assume that corruption is the most major factor responsible for the cycles of deepening poverty in poor countries.3 According to at least two major experts on the field of ending poverty, this is not as substantial a problem as it is often assumed to be.4 5
Corruption exacerbates the problems of extreme poverty. One major reason it happens is because government officials, like the rest of the population, are quite poor. They try to protect their families and themselves from the ravages of poverty by leveraging their government position to acquire more wealth. When government officials can be paid reasonable wages, the problem of corruption is drastically reduced.
Exploitation by the wealthy
Wealthy people and corporations can often negotiate accommodations from government. They are able to do so because the effect of their actions on an economy or government can be quite severe. In some ways the wealthiest local people and corporations can hold a country hostage because they command so much power. This is a problem that exists in all societies, but its effects can be particularly acute in countries that suffer from extreme poverty.
Corporations and the wealthy can use their tremendous economic leverage to lobby for subsidies, legal exceptions, and tax breaks from governments. In the poorest places in the world, this often contributes directly to the country going into debt. Poor countries desperately want to attract external investment. Since there are many such poor nations competing for the foreign investment, it is the place with the most extreme subsidies that is most likely to capture the foreign investment.
This leads to a competition among poor nations to provide greater and greater incentives to attract foreign capital. The problem is that once past a certain point, the incentives are costing more money than the foreign investment is bringing into the country. Wealthy people and corporations continue to use their political and economic clout to keep this situation the way it is. Naomi Klein, in her book “No Logo” goes into great detail on how multinational corporations can contribute directly to the impoverishment of poor nations.
Many mistakes are possible when running a country. Incomplete understanding of economics can lead to monetary and fiscal chaos. Poorly thought out laws can hamper trade and cause a decline in investment. In extreme cases this can cause significant capital flight, where wealthy people and corporations take their businesses elsewhere. Poor policy can hurt all members of a society, such as Zimbabwe land reforms that have been ongoing since 1979, while providing few of the intended benefits. Here are some of the major problem areas we have identified:
Government price controls can also hamper trade. A price control means that market forces are being ignored, and the state defines what price a good will be bought at. This set price will almost certainly be quite different than the equilibrium price. Compared to the equilibrium price, a price control can have the following effects: If the price is too low, it means the supply will be limited because fewer suppliers will be interested in producing the good. If the price is too high, fewer people will buy the good.
In short, price controls can seriously damage the economic prosperity of the area by making some transactions illegal. Basic economic theory strongly suggests that if these transactions are allowed to take place, they would be to the benefit of those involved.
Private property rights
Private property is a prerequisite for economic development through markets. This is one of the foundations of capitalism. Without strong private property rights, and the enforcement of these laws, capital accumulation is extremely risky. Someone (including the government) may come along and take what you have accumulated. Weak property rights make it very risky to accumulate wealth or quality goods. This is true whether the appropriation is done by criminals, rebels, or the government.
Role of women
Most gender inequality in the world is oriented against women. In some traditional cultures, women are given extremely few freedoms. They may be unable to own businesses, work certain jobs, vote in elections, or hold public office. They may not have equal access to health care, or equal legal status. They may not be offered a chance at schooling. Their roles as educators and caregivers for their children may also be significantly curtailed. Societies that do this are cutting out half of their population from participating actively in the development of a more prosperous nation.
Educating women has been shown to be a strong causal factor for reduced fertility rates.6 As we elaborated in our post on the factors that lock communities in extreme poverty, high fertility rates can be devastating to the economic prosperity of a region in extreme poverty.
Religious or ethnic minorities
Some places in the world have ethnic discrimination written into their laws. Some others merely have cultural divisions that hamper economic transactions. Many of these places are harmed by interracial or sectarian violence. Segregating society along ethnic or religious lines tends to lead toward more discrimination and cycles of violence. These cultural tendencies tend to create economic costs and reduce innovation.
Minorities often get the short end of the stick, economically. They may be refused education, public office, and equal access to health care. As with discrimination against women, these tendencies contribute to the creation of uneducated and poorer segments of society. These cultural barriers hamper people’s attempts to accumulate wealth, education, and expertise with which to and contribute to their society.
Social mobility is the degree to which a person has the freedom to change their position in social hierarchy during their lifetime. High social mobility means that people are equal before the law, and that cultural limitations do not overly hamper people’s progress through society.
An example of a cultural tendency that reduces social mobility is India’s Caste System. In general, social stratification tends to reduce social mobility, even in affluent nations. Nations must have the goal of enabling high social mobility if they wish to maximize their economic development.
Wealthy nations may use their political and economic clout to drain wealth and resources from poverty-stricken nations. One way this can happen is when rich governments leverage poor nations into signing ‘free trade agreements’ with the threat of limiting trade with the wealthier nation. Some of these agreements are designed with the intent of forcing the markets of poor nations open without opening the corresponding markets in the rich countries to the products of the poor nations.
Even among rich nations this effect can be seen. An excellent example close to home for us is the Canadian-American softwood lumber dispute under NAFTA. Essentially the United States has refuses to honor its end of NAFTA while using political pressure to make sure Canada doesn’t impose similar tariffs. In this situation however, Canada is a very wealthy nation that carries its own substantial international clout. The difference in power and wealth between poor nations and wealthy nations is vastly greater than the difference between Canada and the United States.
Trade barriers in rich world
Trade barriers in the rich world, such as tariffs on products imported from poorer nations, can severely limit the economic growth of developing nations. It is difficult enough for poor nations to compete with the rich world on the basis of price for similar products due to their limited access to capital and expertise. Trade tariffs exacerbate the problem. Jeffrey Sachs in The End of Poverty makes it clear that part of ending poverty will involve ending trade barriers in the rich world that are hampering the development of industry in poor nations.
Unstable or belligerent neighboring nations can have a deleterious effect on development. Instead of investing in infrastructure and education, a nation may have to pour money into security forces and a standing army.
Internal strife can also cause similar problems. It appears that internal strife can create broiling conflict that drags on for decades or generations. An example of internal strife would be Palestine and Israel. This conflict continues to harm their region.
Cooperation with neighboring countries
On the other end of the spectrum, neighboring countries may be stable and willing to cooperate on infrastructure projects. On the extreme end of things, countries who get along well may form a union in order to cut down on the costs due to their bureaucracy, foreign policy negotiations, police, and military. Cooperation with neighboring countries can be very lucrative, and is often a win-win situation for both parties.
For example, the European Union has developed substantial policies for assisting their neighbours. The EU good neighbour policy, with its goal of “strengthening the prosperity, stability, and security of all”, serves as an excellent model for regional cooperation.
Lack of Innovation
Rich countries can afford to invest 2-3% of their gross domestic product (GDP) into research. This may not sound like much, but when the total rich world GDP is in the tens of trillions of USD, even 2-3% is a giant number. Why is investment in research so important?
- Rich nations have a vastly greater ability to identify problems that might pose a threat to their prosperity and to engage in long-term planning.
- Innovation allows countries to find solutions to the problems that they identify. It also allows them to investigate how they can refine their systems and solutions for increased prosperity.
- Accumulated capital allows them to implement innovations.
Poor countries have a vastly reduced ability to do any of these three things.
Poor countries lack the money to invest in this sort of research. This makes them susceptible to problems that require innovative solutions. Many of the problems of extremely poor societies can be solved through innovation and knowledge. A major problem is that poor nations lack the wealth to support innovators who can help solve their society’s problems.
Human resources are at a minimum in poor nations, but they are fundamentally necessary for the advancement of a civilization. Helping poor nations develop their human resources is an important step towards prosperity. Also, human capital can be considered an end unto itself from a humanist perspective. The more knowledgeable, skilled, and free people are, the happier and wealthier they are likely to be, and the greater their potential for future development.
- The End of Poverty. Jeffrey Sachs. [↩]
- See this gapminder graph of corruption perception index (CPI) vs wealth. Higher values of CPI mean less corruption. [↩]
- For example, it is true that governments often take aid products and re-sell them to make money from their people. An example of this is donated UNICEF drugs and mosquito nets being re-sold in Sierra Leone. It has been proposed that a better way to deal with this problem it to not push all aid through governments if possible. They are fallible and can only handle so much aid. NGOs working with the government’s blessing should be able to effectively deliver aid. [↩]
- Hans Rosling’s new insights on poverty. TED. [↩]
- This is discussed at some length in the excellent book “The End of Poverty” by Jeffrey Sachs. [↩]
- See this Gapminder graph showing children per woman vs # of years in school for women of reproductive age. Gapminder. Accessed October 23rd, 2010. [↩]