This is part 3 of a series on why some countries remain poor.
There are often political factors involved in why some countries remain poor, and one of those is bad government. Governments need to do lots of things to encourage development – they need to build and maintain infrastructure, and raise and spend finance wisely, on the right projects. When governments are inept at managing infrastructure, development is impossible. Nobody wants to build a factory in a city where the power could go out at any time. They also need to set up their laws and business practices in a way that encourages investment and initiative, that protect businesses and individuals legally, and that honour property rights, contracts and copyrights.
To give you one example, in Madagascar I used to visit street-side music shops as a child. You could go up to the booth, tell them what you want, and then come back in an hour to pick up the audio tape they’d quickly dubbed for you from their catalogue of crackly Michael Jackson, Elton John, and Bob Marley tapes. This worked fine up to a point, but there was no incentive for investment in music studios or record labels, because the absence of intellectual property laws meant nobody ever paid you for what you created. It would be much harder to develop a local music industry of any kind under these conditions, or for Madagascar to participate in the global culture industries.
If you have ever lived in a country where corruption is rife, you will know how frustrating, dis-heartening and fundamentally dis-empowering corruption can be. Tim Harford describes corruption in Cameroon, in his book The Undercover Economist. While the most obvious perpetrators are crooked policemen or customs officials, which everyone knows about, these are the tip of the iceberg. Red tape is where real endemic corruption happens – a slowing and over-complicating of simple processes, from starting businesses, buying or selling property, to the law courts, all require ridiculous amounts of paperwork, interviews, visits to ministry offices. Harford describes how chasing an unpaid invoice in Cameroon took 58 separate procedures . Says Harford: ‘Every procedure is an opportunity to extract a bribe. The slower the standard processes, the greater the temptation to pay ‘speed money’.’
Imagine having to bribe your telephone company and all your utility companies, paying an aside for your driver’s license and to pass your exams. Imagine having to bribe the post office every time you bought something by mail order, bribing the bank clerk to let you take money out of your own account, paying your doctor to give you a prescription, and then the chemist to give it to you. That’s the reality of endemic corruption, the abuse of power at every level. It takes strong leadership to fight it, but it can be done.
Visit Transparency International for more on corruption.
I’m putting trade law in here because it is largely a political matter. Sir Walter Raleigh famously said ‘whosoever commands the trade of the world commands the riches of the world and hence the world itself.’ Well, the World Trade Organisation commands world trade, and proves this to be true. The WTO is controlled by the US and Europe, and quite shamelessly looks out for the welfare of richer nations first. They have more power in trading rules than individual governments, and demand that LEDCs open up their markets. Open markets are not necessarily a bad thing. Economist David Smith points out that developing countries who have opened their markets have average growth rates of 4.5% a year, while economically closed countries grow at an average of 0.7% a year.
However, the WTO applies different rules for different countries. ‘When developing countries export to rich country markets, they face tariff barriers that are four times higher than those encountered by rich countries’, states Oxfam. ‘Those barriers cost them $100bn a year – twice as much as they receive in aid.’ Wealthy countries often act to protect their own industries, as Donald Trump did when applying tariffs to goods from China and the EU. Less powerful countries are often unable to take similar steps – and with cheap imports coming in, it is very difficult to grow domestic markets.
To use Madagascar as an example again, the country had its own soap company in the 1990s. It was pretty bad soap, but the profits returned to the Malagasy economy. As part of loan conditions, the government was forced to remove its tariffs on soap and many other things. Immediately the markets and shops were full of cheap bars of soap from elsewhere. Everyone got better soap, but the profits went to South Africa, China, and other countries importing to Madagascar. As the South Korean economist Ha-Joon Chang explains, most rich countries used tariffs to support their own industries at early stages of their development, but they have then denied those tools to poorer countries that were further down the development ladder.
Another problem is subsidies. David Smith again, in his book Free Lunch: ‘Perhaps the worst examples of where trade acts against the interests of poor countries are in agriculture, where rich countries spend $1 billion a day on farm subsidies, exporting surpluses on world markets in a way that drives down prices for farmers in developing countries.’ It is illegal for poor countries to block the import of such surpluses, and illegal for them to set up subsidies of their own, even if they could afford them. One rule for the rich, one rule for the poor. This is the heart of the fair trade issue.
Finally, political instability plays a role in why some countries remain poor. This could be ethnic tension, tribalism, or all out war. Needless to say, countries with long-term conflicts such as the ones in Somalia or Afghanistan, have little chance of developing. Other nations such as Sri Lanka, have simmering ethnic divides that are a constant distraction, de-stabilising the region and discouraging investment. Syria is an example of a country that was doing well, until conflict pushed its development sharply into reverse.
Conflict and tension harms people directly, and it damages the infrastructure that people rely on. It drains away spending into the military or into repairing what has been damaged. The uncertainty alone is a problem, becauser it stops people from planning ahead and investing.
There are a lot more political factors in why countries remain poor, from the health of institutions, to the role of inequality and the distribution of wealth. But that’s an introduction to some of the main political reasons for persistent poverty.