http://www.forbes.com/sites/johngoodman/2015/05/21/why-are-some-countries-rich-and-others-poor/#1be2eca1272b
This Forbes article discusses a question asked by Adam Smith in his book The Wealth of Nations as well as discussed extensively in our class about a week and a half ago: why are some countries rich and others poor? In an article we read, links of poverty included poverty, fiscal, and demographic traps, cultural barriers, lack of innovation, and (what I felt was most prominent) governance failures. The Forbes article simplified the problem by reflecting three fundamental factors - capital, labor, and the "efficiency factor" - and asked which one of these was responsible for differences in GDP per person in countries around the world. A study concluded that it was the "efficiency factor," mainly due to misallocation of resources because of the system in which the economy runs. Capital, as valuable as it is, has an output ratio - how much extra output one gets from an extra dollar of capital - that is even across countries. Moreover, input contributions - education and skills - is modest when differentiating the level of human capital per worker. The study found that the largest difference in GDP per workers was the difference in economic institutions and misallocation of resources. Adam Smith discovered this two hundred years ago, when Britain's government established labor monopolies, currency controls, tariffs and quotas, and controlled outputs and prices for industries. Stable government and the rule of common law was taken for granted, and the economy suffered greatly because of it.
This article jumped off the page for me because it reflected what I thought was the largest factor as to why countries were poor: government failure and incompetence. Physical landscape can be manipulated, families can have less children and save the minimal income they have, people in poorer countries are capable of innovation, and cultural barriers and be broken at a microeconomic level. But if a government can't provide basic functions, provide access to a system of courts that enforce contracts, protect property rights, be free from instability and corruption and most importantly, open up the market to private investors then none of that matters. Capital and labor are valuable in every market on Earth, but it's the institution in which they reside and the efficiency in which they operate that determine how well an economy grows. An incompetent institution will inevitably lead to an incompetent economy.
I do agree that an efficiency of a government is a large factor to why a country can be poor, but it is not a lack of efficiency alone that makes that outcome. Capital does play a huge role in a governments success. Having wealth relies on trade into goods and services, trade then relies on infrastructure which can then bring investment. Countries are more developed than others simply because they hold more capital. Do you think these factors overlap or is it simply government failure and incompetence that result in a country being poor?
ReplyDeleteThese factors absolutely overlap, it isn't just one factor that results in a country's poverty. The buying and selling of goods and services is imperative, but in order for that to happen governments also need to invest in infrastructure, assist in R&D, and set the correct regulations for an efficient economy.
DeleteI too agree with the idea government failure is a part of the problem creating poverty in countries. I would also site the idea that these countries have a very different history than the countries that are wealthy. The divide between the colonizers and colonized are still very much apparent in our world today and this can be related to the manipulation of trade agreements and power relations.
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