1/2 Why Are Some Countries Rich and Others Poor?

In 2019, the total world wealth grew by $9.1 trillion to $360.6 trillion, which amounts to a 2.6% increase over the previous year; out of which the 15 wealthiest nations combine for 84.3% of global wealth. (Image credit: Adapted from an image by cottonbro/Pexels)

 

2/2 Why Are Some Countries Rich and Others Poor? (A follow-up with charts and an infographic)

 

BRIEF NOTES FROM FIVE SEMINAL BOOKS ON THE TOPIC
(Arranged according to the years of book publication)

According to a report in the Visual Capitalist, in 2019, the ‘total world wealth grew by $9.1 trillion to $360.6 trillion, which amounts to a 2.6% increase over the previous year’; and out of which 'the 15 wealthiest nations combine for 84.3% of global wealth.’ 

 

Comparatively, humans have made great strides over the centuries. 

 

However, the fact remains that, on one hand, some countries are doing well, and a few extremely well, but the condition is pathetic in so many other parts of the world. On the other hand, the gap between them have been rising as much as there has been overall development. It is a matter of concern that 84.3% of the global wealth is concentrated in the top 15 richest countries. 

 

To study the phenomenon it will be insufficient to study just one method. We can approach this study from the observation, to begin with, that some countries are stinking rich and others are pathetically poor and that the levels of development are dependent on various social, physical, economic and environmental factors. The  Human Development Index of the United Nations has long been considered as one of the most reliable methods to measure development.

 

Meanwhile, there have been so many seminal books that have dealt with the topic. Today we are picking up five of them. We will analyse these books that have exhaustively explained the phenomenon of prosperity and poverty.

Contents

① Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu  & James Robinson   

② Collapse: How Societies Choose to Fail or Succeed by Jared Diamond 

③ IQ and the Wealth of Nations by Richard Lynn & Tatu Vanhanen

④ The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics by William Easterly

⑤ The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David Landes 

 

(A note on the above interactive graph from Our World in Data: Conceptually, gross domestic product, or simply GDP, measures production capacity and economic growth. According to the International Monetary Fund, it ‘measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time’ but it cannot measure the welfare or the well being of citizens. Neither it accounts for income distribution among those citizens. The GDP is just an aggregate measure. Experts have been coming up with several alternatives, which include, among others, the Human Development Index, the Doughnut economics, Gross National Happiness, Happy Planet Index, Green Gross Domestic Product, and the Better Life Index.)

Why Nations Fail: The Origins of Power, Prosperity and Poverty

DARON ACEMOGLU & JAMES ROBINSON

Economist Daron Acemoglu and political scientist James Robinson bank on ideas from development economics and economic history to explain the phenomenon of different nations amassing power and prosperity while others falling short, some of them terribly. The authors’ contention is that the contemporary accounts on factors such as religion, culture, geography and weather are insufficient to explain the differences. Then what is the reason?

It is the man-made political and economic institutions. Good institutions, according to a reviewer, are ‘laws and practices that motivate people to work hard, become economically productive, and thereby enrich both themselves and their countries’. Institutions are categorised into political and economic, and further into inclusive and extractive.

According to the authors, political institutions regulate the distribution of powers while those of economic regulate the property relations of citizens. Meanwhile, inclusive institutions are popular in the sense it tends to protect at he property rights of wide sections of society while the extractive ones are elitist. 

From case studies, the writers made some insightful observations. One of them is the conditions in North and South Korea. In the Human Development Index prepared by the United Nations Development Programme’s Human Development Report, North Korea is ranked at a lowly 174th, while South Korea is at 15th. In the summary of the book it is explained as:

The south forged a society that created incentives, rewarded innovation and allowed everyone to participate in economic opportunities. The economic success thus spurred was sustained because the government became accountable and responsive to citizens and the great mass of people. Sadly, the people of the north have endured decades of famine, political repression and very different economic institutions—with no end in sight. The difference between the Koreas is due to the politics that created these completely different institutional trajectories.

Why Nations Fail: The Origins of Power, Prosperity and Poverty elucidates rich countries are rich because they enjoy the privilege of a functioning democratic and pluralistic state that assures the rule of law, which further helps raise the initiatives and capacities amongst its subjects. In one of the chapters, the authors explain how a political revolution in 1688 changed the institutions in England and led to the Industrial Revolution in the 18th and 19th centuries, which for the first time in human history, lifted the standard of living exponentially in a relatively short period.

The authors also talk about other related issues such as (a) how the European imperialism impoverished so many countries across the globe, (b) why it is not possible for China to grow economically without end, (c) how the deprived institutions create a vicious cycle of underdevelopment, (d) what the incompetent leaders in poor countries do to damage the prospects for growing, and (e) how politics and political conflicts shape the institutions and so on.

On the other hand, institution is the main premise in the book and this is also the same reason why some critics are not impressed with the book, though the idea has got so many literal buyers. The writers have apparently focused too much on a single element and failed to cite other evidences to explain their hypotheses. For other critics, democracy as a foundation cannot be responsible for growth and development and it cannot be used as a template for all the nations.

READ

1 Official website of the book
2 What Makes Countries Rich or Poor?
Jared Diamond’s review of Why Nations Fail: The Origins of Power, Prosperity and Poverty at the New York Review of Books

Collapse

JARED DIAMOND

The book has a subtitle, How Societies Choose to Fail or Survive. Jared Diamond, a professor of geography, looks at how the great historical civilisations have become desolate today while drawing our attention to the possible disastrous threats that we still have in the present world. His motive is to understand the collapses and to see if those can help us find the ways to mitigate the issues.

So first thing first: why do societies collapse? In his own words, ‘Why did societies that were as powerful as the Khmer Empire and as brilliantly creative as the Maya, abandon the sites into which they had invested such enormous effort for so many centuries?’

Jared Diamond listed five main reasons causing the disintegration:

1. exogenous climate change (exogenous is natural while endogenous is self-inflicted)
2. hostile neighbours/enemies
3. collapse of essential trading partners
4. self-inflicted environmental problems
5. failure to adapt to environmental conditions

According to Diamond, we have been facing 12 environmental issues, out of which the first eight have been primarily responsible at length for the collapse of past societies and the last four factors will result in the breakdown of present and future societies:

1. deforestation and habitat destruction
2. soil problems as in erosion, salinisation and soil fertility losses
3. water management problems
4. overhunting
5. overfishing
6. effects of introduced species on native species
7. overpopulation
8. increased per-capita impact of people
9. anthropogenic climate change (anthropogenic - of, relating to or resulting from the influence of human beings on nature)
10. build-up of toxins in the environment
11. energy shortages
12. full human use of the Earth’s photosynthetic capacity

Collapse: How Societies Choose to Fail or Succeed has an inimitable blend of exhaustive scientific and historical researches. The author says that the idea of the book was not influenced by the ‘curiosity about romantic mysteries’. Again, his motive is to understand the past collapses and to see if those are still relevant today and how it can help us find the ways to mitigate the issues. He elaborates on the societies that had flourished for several millennia but which are reduced to rubble today. This is well supplemented by studies on major historical events in the modern world ranging from the 1994 genocide in Rwanda to the environment disasters awaiting the present China’s economic growth.

Overpopulation is one of the root causes for the collapse of several societies but it cannot be the sole reason for the crisis. Diamond cites the case of the breakdown of the erstwhile USSR in the 20th century and the downfall of Carthage in ancient history to show that military and economic factors are similarly responsible as the accidental or intentional introduction of non-native species to a region.

Critics are more worried about Diamond’s pessimism than the discrepancy in his information as in the number of starving people. The author illustrates with the example of Easter Island—a Chilean island in the south-eastern Pacific Ocean—to show a societal collapse in isolation as a consequence of environmental imbalances. However, several anthropologists and archaeologists argue that the real causes were the slavery system and the diseases introduced by European seafarers. Diamond did admit that ‘a purely environmental explanation would not be sufficient: one also has to understand the political, economic and social factors that prevented the society from solving its environmental problems.’

READ

1 Jared Diamond’s official website; on Collapse: How Societies Choose to Fail or Succeed
2 Man vs Nature
Jonathon Porritt's review of Collapse: How Societies Choose to Fail or Succeed at the Guardian
3 Guns, Germs, and Steel: The Fates of Human Societies (1997) published by the WW Norton & Company

IQ and the Wealth of Nations

RICHARD LYNN & TATU VANHANEN

Written by psychologist Richard Lynn and political scientist Tatu Vanhanen, IQ and the Wealth of the Nations centres on the idea that the differences in the average national intelligence quotient (shortened simply as IQ) affect the differences in national income and wealth. Subsequently, the differences in IQ—affected by genetic and environmental factors—are directly proportional to the differences in national wealth and economic growth rate.

In short, the book presents the IQ scores and economic indicators from 185 nations, though the data not available from 181 countries were clubbed with the average IQs of their equivalent neighbours. The authors rely on peer-reviewed professional journals, adjustment of the information, fine-tuning the Flynn effect (the phenomenon of increasing intelligent test scores across the world since the Thirties to the present) and other approaches to estimate the figures. They have found that, during 1950–90, the national IQ correlates with GDP per capita at 0.82 and with the growth rate at 0.64. Interestingly, they find that low GDP results in low IQ and vice versa.

IQ and the Wealth of the Nations is loaded with tables and figures as solid evidences to the conclusions drawn by the authors but critics and reviewers are finding one common fault with this book: a ‘weak statistical proof, selective data manipulations and doubtful presumptions’. As one reader notes, this book and its findings are quite apt for homogeneous populations.

In the American Psychological Association’s journal, Susan Barnett and Wendy Williams write:

 ‘Among this book’s strengths are that it argues for a point of view unpopular within the scientific community (and) it relies on hard data to make its points, its organisation and clarity. Also, the book is expansive in its thinking and argumentation. All of these strengths considered, however, we believe that the arguments advanced in the book are flawed by an omnipresent logical fallacy and confusion of correlation with causation that undermines the foundation of the book.’

Richard Lynn and Tatu Vanhanen had published IQ and Global Inequality in 2006 as a follow-up to IQ and the Wealth of Nations. The authors have expanded their arguments as a response to the critics while claiming that the rate of economic growth does depend on the national IQ estimates.

READ

1 Intelligence and the Wealth and Poverty of Nations, co-written by the two authors and posted on Richard Lynn’s website
2 IQ and the Wealth of Nations
K Richardson's review of IQ and the Wealth of Nations at the Nature

The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics

WILLIAM EASTERLY

William Easterly is a professor of economics and a top ranking economist at the World Bank. His The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics has been one of the most influential works in economic development despite controversies. Amartya Sen calls him ‘the man without a plan’! (The Nobel laureate, though, was referring to Easterly’s another book The White Man’s Burden.)

Nevertheless this book focuses on the attempts to lift the Third World countries economically over the last five decades. Foreign aid agencies and international financial institutions pump in trillions of dollars to these countries but there has been no marked improvement in the lives of the people in these regions. Easterly believes that this is due to the fact that the donors are overlooking one key truth: people respond to incentives.

The situation is aggravated by corrupt governments of the respective countries with their high inflation and budget deficits, unbridled black market premiums, restrictive trade policies and so on. In a way, the people are receiving only defective incentives.

Agencies and institutions are doing everything to invest in wide-ranging areas from birth control to education but the lack of infrastructure in the receiving tropical countries are proving to be counterproductive. In fact, Easterly believes these donors are misled with the assumption that aid increases investment and the growth in high investment ratios means higher growth—but there is ‘no statistical association between investment and growth’.

While referring to the economic underdevelopment in these countries, he further argues that it is not the failure of economics but the lack of applying economic principles in policy intervention that is the culprit. Efforts to lift the Third World countries, observes Easterly, began right after the WWII based on several models including:

• the Harrod–Domar Model: an early post-Keynesian model of economic growth, which explains the growth rate in terms of the level of saving and productivity of capital
• the Lewis Model or the dual-sector model that explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector
• Rostow's stages of growth that postulates growth occurs in five basic stages, of varying length and which includes (i) Traditional society (ii) Preconditions for take-off (iii) Take-off (iv) Drive to maturity and (v) Age of high mass consumption

The first part of the books deals with the efforts and attempts while the second part deals with the truth about people—including individuals and businesses, government officials, even aid donors — responding to incentives. However, there is a caveat: for instance, a person in a Third World country sees no reason to invest in education when there is no return in that investment. Therefore, Easterly argues, the universal remedy is not incentive per se, but to use it piecemeal in the right manner.

Nowadays, Easterly has been labelled as anti-aid. And the question remains: What Makes a Rich Country Rich and a Poor Country Poor?

 

You may want to read The End of Poverty: Economic Possibilities for Our Time written by his ‘opponent’, Jeffrey Sachs, who claims that development aid can eliminate extreme poverty across the globe by 2025.

READ

1 The Elusive Quest for Growth
Dennis Whittle’s review of The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics at the Global Policy Forums
2 A Modest Proposal
William Easterly’s review of Jeffrey Sachs’ The End of Poverty: Economic Possibilities for Our Time at the Washington Post

 

The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor

DAVID LANDES

David Landes is a former professor of economics and history. He mixes both the disciplines to present a compelling case on how some countries have been going through phenomenal economic growth while others have been struggling and often failing. Through a neoclassical, neoliberal perspective, Landes concentrates on the economic histories of countries and regions such as the United States, Japan, China plus Europe, Latin America and the Arab world. Then he compares them with other elements of culture and enterprise to examine the varying economic conditions.

Landes’ contention is that the wealthier nations have adopted organised market economies while the poorer nations are lagging behind in this aspect. In such a successful system, the state has little role in the economic activities, except in the protection of property rights.

The book title is inspired by Adam Smith’s magnum opus, The Wealth of Nations (originally An Inquiry into the Nature and Causes of the Wealth of Nations, 1776).

The author draws his ideas from several economic theories. Some of these include (a) the 'cultural thesis' or the Protestant (Puritan) work ethic: a term coined by Max Weber, it describes how the Protestants excelled with hard work, punctuality, enterprise and free thinking—some qualities that their Catholic counterparts lack; (b) the 'hydraulic thesis' or the 'Oriental Despotism thesis': a term coined by Karl Wittfogel, it explains how authoritarian rulers control the use of water to further be in command of the population; and (c) 'Climate thesis', a hypothesis that reasons the inability of the tropical countries to make progress.

Referring to the Islamic empires of Moghuls and Ottomans in India and Turkey respectively, Landes argues that just their faith was sufficient for salvation and they needed no further progress as in economic growth. He writes: 

‘Islam's greatest mistake (...) was the refusal of the printing press, which was seen as a potential instrument of sacrilege and heresy. Nothing did more to cut Muslims off from the mainstream of knowledge.’  

One of the most interesting observations made by the professor is on the role of gender in economic development. Landes also believes that the Industrial Revolution happened because of some typical European qualities and that European imperialism is responsible for the rise of the Four Asian Tigers. He had apparently referred to the 1993 report by the World Bank and did not mention about the 1997 crisis, which occurred just a year before the publication of this book. The western prejudice or the Eurocentrism are palpable in his interpretations but Landes’ countercharges, citing a Eurocentric approach was actually more appropriate in his study.

Check the second article of the series:

• 2/2 Why Are Some Countries Rich and Others Poor? (A follow-up with charts and an infographic)

References:
① Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu  & James Robinson  ② Collapse: How Societies Choose to Fail or Succeed by Jared Diamond ③ IQ and the Wealth of Nations by Richard Lynn & Tatu Vanhanen ④ The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics by William Easterly ⑤ The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David Landes

READ

1 The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor: A full book PDF on Ivane Javakhishvili Tbilisi State University’s website
2 The Gap
Andrew Porter's review of The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor at the New York Times

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