Why Some Country Rich but Others Poor

Why are some countries rich while others remain poor? How does globalization contribute to the wealth or poverty of nations? To tackle these questions we have to recognize that both are very open and it is probably very hard to have a definite answer. My purpose with this essay is to analyze what I consider to be the most important aspects of these questions taking into account my research, background and experiences. I will try first to address both questions and at the end present conclusions that interrelate the answers to both of them. Why are some countries rich while others remain poor?

The fact is that we live in a world of inequality, and the gap between rich countries and poor countries is growing as measured by some statistics. According to a recent World Bank study, the average income in the 20 richest countries is 37 times the average income in the 20 poorest countries – and that gap has doubled in the past 20 years. Why is it that some countries have grown spectacularly rich while others remain miserably poor? The reasons include, but are not limited to, history, geography, culture, politics, and probably random facts. David Landes notes that historically, hot countries have been poorer than cold countries.

Tropical climates breed diseases such as malaria, leprosy, African river blindness, and parasites that invade and weaken bodies. Heat itself saps energy. Cold, is conducive to greater human productivity and therefore prosperity. However, the climate effect on the wealth of nations may be diminishing as the “knowledge economy” becomes more important, and as medical technology eradicates diseases. Singapore, with a hot, tropical climate, today has a higher per capita income than Britain. War and corruption cause poverty, as governments redirect resources from health care and education towards the war machine, or to lining their own pockets.

So does using the talents and productivity of only half the population: countries in which women are badly oppressed are nearly always poor. Today, a combination of AIDS, which kills millions of people in their most productive years, the burden of debt (some countries spend up to half of their national budgets in servicing old loans), falling commodity prices (coffee prices alone have fallen by more than 60 percent since 1997), global trade rules that are skewed against developing countries, as well as drought and other natural disasters, are preventing millions of people from escaping poverty.

One billion people are hungry most of the time. Around the world 113 million children, two-thirds of them girls, do not go to school. In the wake of last year’s September 11 attacks on the United States there is a growing recognition by world leaders that the gap between rich and poor is unsustainable. Poverty and inequality provide fertile ground for the rise of fundamentalism. Failed states threaten global stability. But what can be done? In the last half-century developed countries have given the equivalent of a trillion US dollars in economic assistance to poor countries, yet many of the recipients remain desperately poor.

Corrupt and incompetent governments have frittered away money meant to provide health and education to their people, or spent it on weaponry. Well-intentioned development projects have sometimes done more harm than good. However, there have also been many cases where aid has worked. Since the 1960s countries as diverse as Korea, Botswana, Thailand and Chile have used aid and expertise from overseas to help them industrialize. I have no doubt that trade, rather than aid, is the most efficient means of achieving economic growth.

But to benefit everyone, trade needs to be fair as well as free. The US, Europe and Japan spend $350 billion a year on subsidies for their farmers, which is seven times more than they give in overseas aid. Oxfam Community Aid Abroad estimates that if Africa had just one per cent more of the global export market, it would receive an extra $US70 billion in income a year, five times as much as it now receives in aid and debt relief combined. Aid does need to be better directed and monitored. It also needs to focus on such basics as health and education, and to make use of local knowledge.

Recent studies show aid works better when given to countries that already have reasonable governance and economic policies. Yet there is little use in lecturing countries in which the population is dying of hunger or AIDS on the need to open their markets and become more competitive. Chronic hunger stunts brains as well as bodies, ensuring children will never reach their full potential. People who are sick and weak from lack of food do not march in the streets demanding the overthrow of undemocratic governments. Some countries need aid, and a great deal of it, before they can even begin the process of development.

While birth rates are declining in rich countries, the populations of the world’s least developed nations are expected to triple over the next 50 years. Global stability is one important reason why rich countries should strive to raise the living standards of people in the most poverty-stricken countries. An even more important reason is our shared humanity. How does globalization contribute to the wealth or poverty of nations? Clearly, globalization is a fact that can be seen almost everywhere, and this process has a very powerful impact in every aspect of current societies.

How can Less Developed Countries (LDCs) take advantage of globalization? There is extensive research that backs up that the way to eliminate poverty and develop countries’ economies and societies is through economic growth. Both in the short and long-term living standards rise and poverty is reduced through the expansion of a nation’s economy. The question then is how can growth be achieved? Ian Vasquez clearly states that “sustained growth over long periods of time took place in an environment that generally encouraged free enterprise and the protection of property rights”.

There are a number of studies and institutions that measure the level of economic freedom such as The Fraser Institute or the Index of Economic Freedom of the Heritage Foundation/Wall Street Journal. These studies analyze the evolution of the different components of economic freedom which include regulatory burdens on business, size and bureaucracy of governments, tariff and non-tariff barriers to trade, levels of corruption in the judiciary and custom services, taxation, rule of law, restriction on banks, labor market regulations and black market activities to name just a few of the most important ones.

These studies show a strong relationship between economic freedom and prosperity. It can be noted that LDCs are still way behind in putting to work a consistent set of policies towards economic freedom. Countries like Argentina had even destroyed in recent time most of the advancement that had been done in this respect and that are going to take a while to restore. Daniel Griswold articles’ “The Blessing and Challenges of Globalization” provides some important reasons why countries may benefit from globalization.

Summaries of the most important points are: 1. Access to larger markets, both for imports and exports. Consumers and companies have more choices and competition often leads to lower prices thus raising the living standards. Domestic industries can serve global markets reaching economies of scales that enhance their competitiveness. 2. LDCs that open themselves to international trade and investment gain access to a much higher level of technology. 3. Engagement in the global economy provides capital to fuel future growth.

When the domestic pool of savings in a LDC is inadequate, global capital markets can fill that gap allowing poorer nations to accelerate their pace of growth. 4. Openness to the global economy can provide the infrastructure a developing economy needs for growth. A protected and inefficient service sector weighs down an entire economy, retarding the development of manufacturing and other industries, thus liberalizing the service sector by opening them to foreign competition is a favor LDCs can do for themselves, always if this is correctly managed. 5.

Engagement in the global economy encourages governments to follow more sensible economic policies. Nations are sovereign to follow whatever policy however globalization has raised the costs that must be paid for bad policies at a speed probably never seen before. This certainly creates a strong incentive to choose the right policies that encourages domestic and foreign investment. In my personal experience in Argentina, I think that most of the failures of the way the economy was opened were mainly due to the wrong management of all the opportunities and tools that there are available.

Inefficiency and mismanagement by governments and an important part of the private sector coupled with a very high level of corruption that also left the soil fertile for corporate abuses led us to a lot of problems. The complexity of globalization puts government officials with difficult choices that in my country’s case I think they were not able to manage correctly together with a suspected very strong pressure from corporations to encourage certain decisions. The opportunities are clearly out there for LDCs but there has to be a clear-minded and strategic government to be able to capture them.

If not, the negative impacts are very strong. I think two important questions should be asked: Are LDCs ready to exploit the advantages that globalization provides? And secondly, do they have the know how to do it? It has to be considered and given some thought to the statement that “Equally treatment of unequals is inherently unequal”. This is a fact for a number of reasons, which include geography, culture, history, and population. LDCs lagged way behind in many cases, so the starting point for the career is definitely different.

If to this situation is added the speed of innovation and technological change nowadays, it can be seen how difficult maybe for this countries to catch-up. Important challenges ahead The most important challenges that lay ahead for LDCs to develop are: formal and informal institutional frameworks that encourage solid growth, spread of education through society, creation of an environment in which there are competitive advantages in order to develop foreign direct investment (FDI) and increase international trade, and encouragement of corporate accountability and Non-Government Organizations (ONGs) work.

Next I will try to augment these four aspects. * Formal and Informal institutional frameworks Increasingly, development economists are looking to nations’ formal and informal institutional frameworks when seeking to understand why some countries are rich while others remain poor. Formal institutions such as a nation’s written laws, political structure, and enforcement mechanisms are important to economic growth primarily through their ability to reduce various transaction costs. When present, these costs lead to inefficient market outcomes that unnecessarily limit the welfare of the nation’s citizens.

Additionally, informal institutions as a nation’s culture, customs, and traditional beliefs are prerequisites for economic success. By definition, growth is synonymous with change. Democracy itself is probably not a direct cause of economic growth. Instead, the institutional framework that accompanies it likely enables democratic nations to prosper. The election process fosters a culture accepting of debate and creative new ideas. The accountability of leaders reduces corruption, encourages the formation of effective enforcement organizations, and helps produce efficient laws.

All of these tend to minimize transaction costs and allow efficient market outcomes. These serve as examples of ways in which democracy helps foster the formal and informal institutions necessary for economic growth. Results of studies suggest that the correct policy prescription for developing nations is indeed the introduction of a democratic system of governance. This structural change will eventually foster the development of the positive formal and informal institutional frameworks that will afford LDCs the opportunity to escape the cycle of poverty in which they are currently trapped. Education The significance of education for a society is immense. It is probably the most important means to develop the values needed to sustain development. I believe there are actions that cannot wait if we want to develop a better world. Every person must have the right to have access to education and until we cannot assure this, it is going to be very hard to provide opportunities for development for a very large number of human beings. * Foreign Direct Investment (FDI) and International Trade

I have already summarized the most important advantages globalization provides to countries in terms of FDI and international trade. I believe LDCs should strategically open their economies. Chile is a great example to this respect. Twenty-five years ago there were no salmon in Chile. Then in 1980, a group of government officials in the small fishing town of Castro wondered why, as Chile has sheltered waters that are not too different from those in Norway, Chile could not cultivate salmon as Norway does.

With the help of foreign investment (not aid) Chile now accounts for 34 per cent of the world’s exports of salmon and trout, behind only Norway. I personally work for a foreign owned company that invested in excess of US$2 billion in the country and provides work to 1500 persons directly. The main aspects in which I think the company enhanced the society in our city are: * Access to new and advanced technology. * Better working conditions and benefits than local firms. * Modern management techniques. * Development of local suppliers. * Important tax contributions. Involvement in society through corporate accountability. * Enabled competition to improve level of services and prices. * Corporate accountability and Non-Governmental Organizations (NGOs) work Through a growing movement worldwide of corporate accountability practices, companies are becoming much more aware of implementing and acting socially, environmentally and financially responsible, ensuring shared prosperity of shareholders, staff, the environment, as well as local and international communities and fostering an exchange of ideas and information within the business community.

NGOs are doing a whole lot to make this possible and I believe this should be strengthen as it is a very powerful mean to improve societies. I strongly believe that the correct execution of these four basic points just outlined will lead to the desired results in terms of sustainable development of LDCs. There seems to be opposing views on globalization, a number of people and institutions emphasize on the advantages of it and others are focused on the drawbacks.

What cannot be ignored is the reality of it. I consider we must advance on the “in favor and opposition debate” and try to work on the aspects that could turn disadvantages in opportunities. If this is done, I think that globalization could lead us to a better world everywhere but these challenges are not small and a whole lot of work needs to be done yet by the different actors.