That poor countries are poor because they lack resources should be a testable hypothesis. By most tests, that hypothesis fails.
WASHINGTON, DC – Why are some countries rich and others poor? Why are per capita incomes in the poorest countries less than one-twentieth of those in the richest countries?
It is often taken for granted that poor countries are poor because of the terrible scarcities they confront; that they remain poor because they lack the resources needed for economic growth. Many poor countries are overpopulated and do not have as much natural resources as rich countries. Most poor countries also do not have much capital – or as much capital embodying the highest technologies – per worker as the rich countries do. Neither do they have as much education and training (or “human capital”) as high-income countries do.
With less natural resources, modern machinery, and human capital per worker, productivity in poor countries and income per capita are lower. The familiar “scarcity” or “resource” explanation of national poverty implies that, without large infusions of aid from rich nations, poor countries will never catch up.
That poor countries are poor because they lack resources should be a testable hypothesis. By most tests, that hypothesis fails.
If poverty were caused by scarcity of land or natural resources, emigration should result in higher living standards in the country of origin and lower living standards in the country where immigrants arrive. In 1821, Ireland had 5.4 million people and Great Britain 14.2 million. In 1986, Ireland had 3.5 million inhabitants, and Great Britain 55.1 million – the density of population was by then five times greater in Britain. Yet Irish per capita income was only about three-fifths that of the British. Such examples are not exceptional: some of the richest countries, say Holland, Singapore, or Hong Kong, have some of the highest population densities in the world; some of the poorest, say Brazil, Kenya, or Zaire, have the lowest.
Nor is the inability to acquire advanced technology a likely cause of national poverty. Look at South Korea, which modernized in a very short period of time. Between 1973 and 1979, royalties and other payments for disembodied technology were often less than one-thousandth of GDP. Even if all profits from direct foreign investment in South Korea are counted as payments for knowledge, the total is still less than 1.5% of the increase in the country’s GDP.
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Is the quality of human capital responsible? Many argue that high-incomes in rich countries arise in part from cultural traits that make individuals adept at responding to economic opportunities. Poor countries are alleged to lack these traits. Cultural traits that perpetuate poverty are, it is argued, born of centuries of social accumulation and cannot be changed quickly.
Again, evidence from migration tests this hypothesis. Researchers find that individuals who arrived in the US from poor countries, despite language difficulties and other adjustments, earned about 55% as much as Americans born with a similar profile. The same individuals came from countries in which per capita income was only one-fifth or one-tenth of that in the US. The Latin American who swims the Rio Grande, it seems, is instantly baptized with the Protestant ethic! His low productivity before emigration was mainly due to inadequate institutions and economic policies of his native country.
The idea that development is a matter of hard-to-change cultural factors is best tested in countries that, owing to accidents of history, were divided and thus pursued two different economic policies: China, Germany, and Korea. Although each had a common culture, the economic performance of Hong Kong and Taiwan, of West Germany, and of South Korea has been incomparably better than the performance of mainland China, East Germany, and North Korea, respectively.
In short, it is the institutions and policies a country chooses – rather than its resources or initial scarcities – that mainly determines its per capita income. Poor countries that choose good institutions and policies can grow far faster than rich ones. The record is striking: the fastest growing countries are never the countries with the highest per capita incomes but always a subset of the lower-income countries. During the 1970s, for example, South Korea grew seven times as fast as the US. Why? Rich countries are indeed near their potential and grow only because of technological or other advances. Some poor countries – those that adopt good economic policies and institutions – enjoy more rapid catch-up growth: because they are short of their potential, their per capita incomes can increase not only because of genuine innovations, but also because they utilize their economic potential better.
What policies work? No familiar ideology provides the needed wisdom. The assumption that what matters, for example, is the smallness or largeness of the state – or the size of transfers to low-income people – does not fit the facts. The real issue lies elsewhere. Really big gains cannot be picked up through uncoordinated individual actions. They can only be obtained when there are institutions that enforce contracts impartially and make property rights secure. These are the social and institutional imperatives that shape the incentives faced by individuals. It is the structure of incentives that mostly determines economic performance.
So the best thing a society can do to increase prosperity is to wise up about the institutional choices it is making. The sums lost because poor countries obtain only a fraction of their economic potential are measured in trillions of dollars.
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WASHINGTON, DC – Why are some countries rich and others poor? Why are per capita incomes in the poorest countries less than one-twentieth of those in the richest countries?
It is often taken for granted that poor countries are poor because of the terrible scarcities they confront; that they remain poor because they lack the resources needed for economic growth. Many poor countries are overpopulated and do not have as much natural resources as rich countries. Most poor countries also do not have much capital – or as much capital embodying the highest technologies – per worker as the rich countries do. Neither do they have as much education and training (or “human capital”) as high-income countries do.
With less natural resources, modern machinery, and human capital per worker, productivity in poor countries and income per capita are lower. The familiar “scarcity” or “resource” explanation of national poverty implies that, without large infusions of aid from rich nations, poor countries will never catch up.
That poor countries are poor because they lack resources should be a testable hypothesis. By most tests, that hypothesis fails.
If poverty were caused by scarcity of land or natural resources, emigration should result in higher living standards in the country of origin and lower living standards in the country where immigrants arrive. In 1821, Ireland had 5.4 million people and Great Britain 14.2 million. In 1986, Ireland had 3.5 million inhabitants, and Great Britain 55.1 million – the density of population was by then five times greater in Britain. Yet Irish per capita income was only about three-fifths that of the British. Such examples are not exceptional: some of the richest countries, say Holland, Singapore, or Hong Kong, have some of the highest population densities in the world; some of the poorest, say Brazil, Kenya, or Zaire, have the lowest.
Nor is the inability to acquire advanced technology a likely cause of national poverty. Look at South Korea, which modernized in a very short period of time. Between 1973 and 1979, royalties and other payments for disembodied technology were often less than one-thousandth of GDP. Even if all profits from direct foreign investment in South Korea are counted as payments for knowledge, the total is still less than 1.5% of the increase in the country’s GDP.
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Don’t miss our next event, taking place at the AI Action Summit in Paris. Register now, and watch live on February 10 as leading thinkers consider what effective AI governance demands.
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Is the quality of human capital responsible? Many argue that high-incomes in rich countries arise in part from cultural traits that make individuals adept at responding to economic opportunities. Poor countries are alleged to lack these traits. Cultural traits that perpetuate poverty are, it is argued, born of centuries of social accumulation and cannot be changed quickly.
Again, evidence from migration tests this hypothesis. Researchers find that individuals who arrived in the US from poor countries, despite language difficulties and other adjustments, earned about 55% as much as Americans born with a similar profile. The same individuals came from countries in which per capita income was only one-fifth or one-tenth of that in the US. The Latin American who swims the Rio Grande, it seems, is instantly baptized with the Protestant ethic! His low productivity before emigration was mainly due to inadequate institutions and economic policies of his native country.
The idea that development is a matter of hard-to-change cultural factors is best tested in countries that, owing to accidents of history, were divided and thus pursued two different economic policies: China, Germany, and Korea. Although each had a common culture, the economic performance of Hong Kong and Taiwan, of West Germany, and of South Korea has been incomparably better than the performance of mainland China, East Germany, and North Korea, respectively.
In short, it is the institutions and policies a country chooses – rather than its resources or initial scarcities – that mainly determines its per capita income. Poor countries that choose good institutions and policies can grow far faster than rich ones. The record is striking: the fastest growing countries are never the countries with the highest per capita incomes but always a subset of the lower-income countries. During the 1970s, for example, South Korea grew seven times as fast as the US. Why? Rich countries are indeed near their potential and grow only because of technological or other advances. Some poor countries – those that adopt good economic policies and institutions – enjoy more rapid catch-up growth: because they are short of their potential, their per capita incomes can increase not only because of genuine innovations, but also because they utilize their economic potential better.
What policies work? No familiar ideology provides the needed wisdom. The assumption that what matters, for example, is the smallness or largeness of the state – or the size of transfers to low-income people – does not fit the facts. The real issue lies elsewhere. Really big gains cannot be picked up through uncoordinated individual actions. They can only be obtained when there are institutions that enforce contracts impartially and make property rights secure. These are the social and institutional imperatives that shape the incentives faced by individuals. It is the structure of incentives that mostly determines economic performance.
So the best thing a society can do to increase prosperity is to wise up about the institutional choices it is making. The sums lost because poor countries obtain only a fraction of their economic potential are measured in trillions of dollars.