THE END OF POVERTY
HOW WE CAN MAKE IT HAPPEN IN OUR LIFE TIME
JEFFREY SACHS
PENGUIN BOOKS 2005
PART IV
Chapter 3: Why Some Countries Fail to Thrive
Of the world’s population of 6.3 billion, roughly 5 billion people have reached at least the first rung of economic development. Five sixths of the world’s population is at least one step above extreme poverty. Moreover, approximately 4.9 billion people live in countries where average income – measured by GDP per person – increased between 1980 and 2000. An even larger number, roughly 5.7 billion people, live in countries where life expectancy increased. Economic development is real and widespread. The extent of extreme poverty is shrinking, both in absolute numbers and as a proportion of the world’s population. That fact is why we can realistically envision a world without extreme poverty as soon as 2025.
The growth of household income
Why countries fail to achieve economic growth
The most common explanation for why countries fail to achieve economic growth often focuses on the faults of the poor: poverty is a result of corrupt leadership and retrograde cultures that impede modern development. However, something as complex as a society’s economic system has too many moving parts to presume that only one thing can go wrong. Problems can occur in different parts of the economic machine and can sometimes cascade, bringing the machine to a near halt.
In economic growth, eight major categories of problems can cause an economy to stagnate or decline. I have witnessed these kinds of disasters in many parts of the world. Each has its own different appropriate course of treatment; therefore, a good diagnosis is crucial.
v The poverty trap: Poverty itself as a cause of economic stagnation
v Physical geography
v Fiscal trap
v Governance failures
v Cultural barriers
v Geopolitics
v Lack of innovation
v The demographic trap
Where growth has failed
Map 5 shows all of the countries in the world where per capita GDP declined during the twenty-year period between 1980 and 2000. Notice that not one single rich country in North America, Western Europe, or East Asia failed to achieve economic growth! All of the problems lie in the developing world. Forty-five countries had negative growth in GDP per capita. (Only countries with a population of at least two million people in 1980 were examined in order to avoid the idiosyncrasies of some very small countries.)
It is very illuminating to divide the world’s economies into the following six categories, depending on their per capita income in 1980:
v All low-income countries
v Middle-income oil exporters
v Middle-income postcommunist countries
v Other middle-income countries
v High-income oil exporters
v All other high-income countries
The accompanying table 2 lists the countries in each category divided into two columns: those that experienced positive economic growth and those that experienced outright economic decline. The number of countries in each category are shown in the two columns at the right of the table. There are several key points. First, the biggest problem with economic decline is indeed in the poorest countries, especially but not only in sub-Sahara Africa. The second observation is that except for oil-exporting and ex-Soviet countries, all high-income countries achieved economic growth, as did most middle-income countries. The only growth failure among high-income countries occurred in Saudi Arabia, an oil-exporting country. Among the middle-income countries, the vast proportion of growth failures were in the oil-exporting and postcommunist countries. In the rest of the middle-income countries, twelve out of fourteen countries enjoyed positive economic growth.
The economic declines in the oil-producing and postcommunist countries reflect very unusual circumstances. The oil-rich states are, of course, not impoverished countries, but instead are middle-income and high-income countries where economic activity depends overwhelmingly on oil exports. These economies rise and fall in line with the “real” price of oil, that is, the price of oil relative to the price of imported goods such as machinery and consumer goods. The real price of oil soared during the 1970s, leading to the massive growth in living standards of these economies, but during the 1980s and 1990s, the oil price fell sharply, leading to a collapse of living standards. If there is a lesson here, it is that an economy dependent on a single product (or a small number of products) for export is bound to experience high volatility as the relative price of the product fluctuates in world markets. Since oil is highly volatile, the real income of the oil economies has similarly been highly volatile.
The economic decline in postcommunist countries is even more of a special case. These countries have experienced a one-time decline in GDP per capita as they changed from a failed communist system to a market economy. Even in the cases of the strongest so-called transition economies – the Czech Republic, Hungary, and Poland – there was a period of sharp reduction in GDP per capita for a few years as old heavy industries linked to the Soviet economy declined or disappeared in bankruptcy and new sectors took time to develop. The result was what economists called a transition recession. By the late 1990s, the postcommunist countries had resumed economic growth, but from a lower GDP per capita than before the Soviet collapse.
Why some poor countries grew and other declined
Poor countries have a significant chance of falling into a poverty trap. Out of the 58 nonoil countries with per capita incomes below $3,000, 22 (or 38%) experienced an outright decline. Yet the 36 other countries enjoyed economic growth. How is it that some very poor countries escaped the ravages of a poverty trap while the rest did not? Comparing those countries that made it and those that did not, the success stories show certain characteristics. The most important determinant, it seems, is food productivity. Countries that started with high cereal yields per hectare, and that used high levels of fertilizer input per hectare, are the poor countries that tended to experience economic growth. Countries that began with low yields in 1980 are the countries that tended to experience economic decline between 1980 and 2000. Figure 2 illustrates this point: among low-income countries, high cereal yields in 1980 (measured on the horizontal axis) are associated with high economic growth rates (measured on the vertical axis).
The poverty trap is mainly a rural phenomenon of peasant farmers caught in a spiral of rising populations and stagnant or falling food production per person.
The biggest difference between Africa and Asia is that Asia has had high and rising food production per capita during recent decades, whereas Africa has low and falling production per capita. The Asian countryside is densely populated, with a relatively extensive road network that can carry fertilizer to the farms and farm output to the markets. Farmers use fertilizers and irrigation, and food yields are high. Donor agencies gave ample support to the development of new high-yield varieties in Asia. Under these conditions Asian farmers were able to adopt high-yield crop varieties that produced the famous Green Revolution of rising food production per farmer. The African countryside is much less densely populated, with an absence of roads to transport fertilizers and crops. Farmers do not use fertilizer on food crops, and depend on rainfall rather than irrigation. Donors have woefully underfunded the scientific efforts toward improved varieties appropriate for African conditions. Under these much harsher conditions, Africa’s farmers were not able to benefit much, if at all, from the Green Revolution development of high-yield varieties of food crops. Although both Asia and Africa were very poor in 1980, Asian agriculture was significantly outperforming African agriculture, as shown in table 3. This performance has provided a platform for Asia’s extraordinary growth since then.
There are other tendencies apparent in the data. The Asian countries that experienced growth started in 1980 with better social conditions: higher literacy, lower infant mortality, and lower total fertility rates. They were, therefore, less prone to fall into a demographic trap of rapidly rising populations pressing on a limited amount of farmland. Once again, the Asia peasants were somewhat better off than their African counterparts. Another tendency is that poor countries with large populations seem to have done better than poor countries with smaller populations. The larger population probably increased the size of the domestic market, making it more appealing to foreign and domestic investors. Perhaps it was easier to introduce key infrastructure such as roads and power supplies in countries with larger populations, since these infrastructure networks are characterized by large initial costs of construction that are more easily financed by larger and more densely populated economies.
Why Latin America’s middle-income countries failed to thrive
The poverty trap of the poorest countries is less puzzling, in some ways, than the stagnation that gripped a number of countries in Central and South America during the 1980s and 1990s. Table 2 shows that countries like Ecuador, Guatemala, Paraguay, and Peru experienced outright economic declines. These are not, in general, destitute countries, though they have destitute populations within them. How can we account for their development failures?
I take up that question in more detail later. It will suffice here to note three characteristics of these economies. First, all of these economies face particular geographical difficulties. Ecuador and Peru are Andean countries, with populations divided between a lowland tropical environment and a mountainous highland environment. Transport conditions are hazardous and expensive. Paraguay, of course, is landlocked. Guatemala is a mix of mountains and low-lying tropical rainforests. Second, the Central American and Andean societies suffer from sharp social divisions, typically along ethnic lines. The European-descended population tends to be much richer than the indigenous and mestizo (mixed) populations. Europeans conquered the native populations, repressed them in many ways, and were generally uninterested in investing in their human capital until very recently. Politics have therefore been highly conflict laden and often violent. Third, these countries are all vulnerable to extreme external shocks, both natural and economic. Natural hazards include earthquakes, droughts, floods, and landslides. Economic hazards include the huge instabilities in international prices for the leading commodity exports of these countries, such as copper, fish meal, coffee, bananas, and other agricultural and mining products.
Continuing extreme poverty in the midst of economic growth
Even among the poor countries in Asia that experienced marked economic growth, extreme poverty often continues to afflict significant parts of the population. Economic growth is rarely uniformly distributed across a country. China’s coastal provinces, linked to world trade and investment, have grown much more rapidly than the hinterland to the west of the country. India’s southern states, also deeply integrated in world trade, have experienced much faster economic development than in the northern regions in the Ganges valley. Thus, even when average economic growth is high, parts of a country may be bypassed for years or decades.
Another reason for persistent poverty is the failure of government. Growth may enrich households linked to good market opportunities, but it may bypass the poorest of the poor even within the same community. The very poor are often disconnected from market forces because they lack the requisite human capital – good nutrition and health, and an adequate education. It is vital that social expenditures directed at human capital accumulation reach the poorest of the poor, yet governments often fail to make such investments. Economic growth enriches households, but it is not taxed sufficiently to enable governments to increase social spending commensurately. Or even when governments have the revenue, they may neglect the poorest of the poor if the destitute groups are part of the ethnic or religious minorities.
A third possible reason for continued poverty in the midst of growth is cultural. In many countries, women face extreme cultural discrimination, whether or not those biases are embedded in the legal and political systems. In south Asia, for example, there are an overwhelming number of case studies and media reports of young women facing extreme undernutrition within the household even when there is enough to go round. The women, often illiterate, are poorly treated by in-laws and lack the social standing and perhaps legal protections to ensure their own basic health and well-being.
In short, there are myriad possibilities for the persistence of poverty even in the midst of economic growth. Only a close diagnosis of particular circumstances will allow an accurate understanding. Policy makers and analysts should be sensitive, however, to geographical, political, and cultural conditions that may each play a role.
The greatest challenge: Overcoming the poverty trap
When countries get their foot on the ladder of development, they are generally able to continue the upward climb. All good things tend to move together at each rising rung: higher capital stock, greater specialization, more advanced technology, and lower fertility. If a country is trapped below the ladder, with the first rung too high off the ground, the climb does not even get started. The main objective of economic development for the poorest countries is to help these countries to gain a foothold on the ladder. The rich countries do not have to invest enough in the poorest countries to make them rich; they need to invest enough so that these countries can get their foot on the ladder. After that, the tremendous dynamism of self-sustaining economic growth can take hold.
Economic development works. It can be successful. It tends to build on itself. But it must get started.
Chapter 4: Clinical economics