Mainstream theories as to why some countries are rich and some are poor

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Mainstream theories as to why some countries are rich and some are poor

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https://research.stlouisfed.org/publica ... hers-poor/

September 2017
Why Are Some Countries Rich and Others Poor?
by Scott A. Wolla

"Open markets offer the only realistic hope of pulling billions of people in developing countries out of abject poverty, while sustaining prosperity in the industrialized world."1
—Kofi Annan, former United Nations Secretary-General



Many people mark the birth of economics as the publication of Adam Smith's The Wealth of Nations in 1776. Actually, this classic's full title is An Inquiry into the Nature and Causes of the Wealth of Nations, and Smith does indeed attempt to explain why some nations achieve wealth and others fail to do so. Yet, in the 241 years since the book's publication, the gap between rich countries and poor countries has grown even larger. Economists are still refining their answer to the original question: Why are some countries rich and others poor, and what can be done about it?

"Rich" and "Poor"
In common language, the terms "rich" and "poor" are often used in a relative sense: A "poor" person has less income, wealth, goods, or services than a "rich" person. When considering nations, economists often use gross domestic product (GDP) per capita as an indicator of average economic well-being within a country. GDP is the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year. In a sense, a country's GDP is like its yearly income. So, dividing a particular country's GDP by its population is an estimate of how much income, on average, the economy produces per person (per capita) per year. In other words, GDP per capita is a measure of a nation's standard of living. For example, in 2016, GDP per capita was $57,467 in the United States, $42,158 in Canada, $27,539 in South Korea, $8,123 in China, $1,513 in Ghana, and $455 in Liberia (Figure 1).2


NOTE: Liberia's GDP per capita of $455 is included but not visible due to the scale. The Republic of Korea is the official name of South Korea.

SOURCE: World Bank, retrieved from FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=eMGq, accessed July 26, 2017.



Because GDP per capita is simply GDP divided by the population, it is a measure of income as if it were divided equally among the population. In reality, there can be large differences in the incomes of people within a country. So, even in a country with relatively low GDP, some people will be better off than others. And, there are poor people in very wealthy countries. In 2013 (the most recent year comprehensive data on global poverty are available), 767 million people, or 10.7 percent of the world population, were estimated to be living below the international poverty line of $1.90 per person per day.3 Whether for people or nations, the key to escaping poverty lies in rising levels of income. For nations specifically, which measure wealth in terms of GDP, escaping poverty requires increasing the amount of output (per person) that their economy produces. In short, economic growth enables countries to escape poverty.

How Do Economies Grow?
Economic growth is a sustained rise over time in a nation's production of goods and services. How can a country increase its production? Well, an economy's production is a function of its inputs, or factors of production (natural resources, labor resources, and capital resources), and the productivity of those factors (specifically the productivity of labor and capital resources), which is called total factor productivity (TFP). Consider a shoe factory. Total shoe production is a function of the inputs (raw materials such as leather, labor supplied by workers, and capital resources, which are the tools and equipment in the factory), but it also depends on how skilled the workers are and how useful the equipment is. Now, imagine two factories with the same number of workers. In the first factory, workers with basic skills move goods around with push carts, assemble goods with hand tools, and work at benches. In the second factory, highly trained workers use motorized forklifts to move pallets of goods and power tools to assemble goods that move along a conveyer belt. Because the second factory has higher TFP, it will have higher output, earn greater income, and provide higher wages for its workers. Similarly, for a country, higher TFP will result in a higher rate of economic growth. A higher rate of economic growth means more goods are produced per person, which creates higher incomes and enables more people to escape poverty at a faster rate. But, how can nations increase TFP to escape poverty? While there are many factors to consider, two stand out.

Institutions
First, institutions matter. For an economist, institutions are the "rules of the game" that create the incentives for people and businesses. For example, when people are able to earn a profit from their work or business, they have an incentive not only to produce but also to continually improve their method of production. The "rules of the game" help determine the economic incentive to produce. On the flip side, if people are not monetarily rewarded for their work or business, or if the benefits of their production are likely to be taken away or lost, the incentive to produce will diminish. For this reason, many economists suggest that institutions such as property rights, free and open markets, and the rule of law (see the boxed insert) provide the best incentives and opportunities for individuals to produce goods and services.






North and South Korea often serve as an example of the importance of institutions. In a sense they are a natural experiment. These two nations share a common history, culture, and ethnicity. In 1953 these nations were formally divided and governed by very different governments. North Korea is a dictatorial communist nation where property rights and free and open markets are largely absent and the rule of law is repressed. In South Korea, institutions provide strong incentives for innovation and productivity. The results? North Korea is among the poorest nations in the world, while South Korea is among the richest.4




NOTE: While the Republic of Korea (the official name of South Korea), China, Ghana, and Liberia had similar standards of living in 1970, they have developed differently since then.

SOURCE: World Bank, retrieved from FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=eMGt, accessed July 26, 2017.



While this seems like a simple relationship—if government provides strong property rights, free markets, and the rule of law, markets will thrive and the economy will grow—research suggests that the "institution story" alone does not provide a complete picture. In some cases, government support is important to the development of a nation's economy. Closer inspection shows that the economic transformation in South Korea, which started in the 1960s, was under the dictatorial rule of Park Chung-hee (who redirected the nation's economic focus on export-driven industry), not under conditions of strong property rights, free markets, and the rule of law (which came later).5 South Korea's move toward industrialization was an important first step in its economic development (see South Korea's growth in Figure 2). China is another example of an economy that has grown dramatically. In a single generation it has been transformed from a backward agrarian nation into a manufacturing powerhouse. China tried market reforms during the Qing dynasty (whose modernization reforms started in 1860 and lasted until its overthrow in 1911) and the Republic Era (1912-1949), but they were not effective. China's economic transformation began in 1978 under Deng Xiaoping, who imposed a government-led initiative to support industrialization and the development of markets, both internally and for export of Chinese goods.6 These early government-supported changes helped develop the markets necessary for the current, dramatic increase in economic growth (see Figure 2).

Trade
Second, international trade is an important part of the economic growth story for most countries. Think about two kids in the school cafeteria trading a granola bar for a chocolate chip cookie. They are willing to trade because it offers them both an opportunity to benefit. Nations trade for the same reason. When poorer nations use trade to access capital goods (such as advanced technology and equipment), they can increase their TFP, resulting in a higher rate of economic growth.7 Also, trade provides a broader market for a country to sell the goods and services it produces. Many nations, however, have trade barriers that restrict their access to trade. Recent research suggests that the removal of trade barriers could close the income gap between rich and poor countries by 50 percent.8

Conclusion
Economic growth of less-developed economies is key to closing the gap between rich and poor countries. Dif­ferences in the economic growth rate of nations often come down to differences in inputs (factors of production) and differences in TFP—the productivity of labor and capital resources. Higher productivity promotes faster economic growth, and faster growth allows a nation to escape poverty. Factors that can increase productivity (and growth) include institutions that provide incentives for innovation and production. In some cases, government can play an important part in the development of a nation's economy. Finally, increasing access to international trade can provide markets for the goods produced by less-developed countries and also increase productivity by increasing the access to capital resources.
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Re: Mainstream theories as to why some countries are rich and some are poor

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(these are the top few google search results I got)

https://www.theschooloflife.com/thebook ... ntry-rich/

How to Make a Country Rich
Most of what we call ‘politics’ really revolves around the question of what you need to do to make a country richer. Rather than ask this of any specific country, let’s imagine designing a country from scratch. How could you make it as rich as possible? Suppose the brief was to design ‘Richland’: an ideal wealth-creating society. What would be the chief characteristics you’d need to build into this society? What would a nation look like that was ideally suited to success in modern capitalism? 13855803075_2d0c8b59b0_z
© Flickr/American Advisor Group
Traditional economics guides us to eight core requirements for Richland: – military security & law and order – lack of corruption in institutions – low amounts of red-tape around employment legislation and taxation – a technically well-educated, mobile, flexible labour-force – high-grade infrastructure and good telecommunications – fair, transparent and competitive markets – reliably enforceable contracts – low corporation tax (between 10 and 15%) But aside from these eight, there is one other thing that invariably makes a critical difference to the wealth of societies: what we might call cultural factors. To make Richland properly rich, you’d need to ensure that a number of cultural factors were embedded in the national mentality. Here are some of these wealth-inducing attitudes: WORK DEFINES WHO YOU ARE In Richland, at parties, the first thing people want to know is: what do you do? According to how you answer, people are either delighted to see you, or swiftly abandon you by the peanuts. 543642045_0464ec8832_o
© Flickr/Seite-3
In Richland, what is on your business card is simply who you are. All the other stuff – what you were like as a child, what you think of late at night, who your parents are – doesn’t really matter. In Richland, friendships are usually linked to work and involve covert status rivalries. If you fall behind, your friends might drop you. You have to invest an enormous amount of effort in your career, not merely to make money, but so you can have a functioning social identity: so that people will be nice to you. LOVE IS EXTRINSIC, NOT INTRINSIC In Richland, parents place a tremendous emphasis on educational achievements. Children come away feeling not just that it’s nice to do well in exams, but that they are more loveable human beings, more worthy of existence, if they triumph at school, especially in maths and science. 16241388115_fec39f427a_z
© Flickr/Chris & Karen Highland
You therefore learn early on that love comes from successful performance: the more you achieve, the kinder people will be to you. OPTIMISM In Richland, everyone is encouraged from a young age to imagine that they might one day – perhaps by 33 – be the richest person in the country – if they work hard. Posters of rich and famous people adorn the walls of primary schools. The national anthem is called ‘I can do it!’ – an ecstatic rendition of human possibility. 522695099_026b8d7ffe_z
© Flickr/Joi Ito
This keeps the workforce highly motivated. Dreams of successful entrepreneurship abound. But by middle age, most people in Richland have by definition failed to measure up to the exalted hopes once placed in them. They keep their regrets hidden, however – and are quietly prescribed tranquilizers and antidepressants. EVERYONE IS ANXIOUS ALL THE TIME People don’t sleep very well in Richland. They’re often up at 4 am. Their worries all relate to their careers. 5960469024_ba617aa78c_z
© Flickr/Jacob Stewart
That’s because market capitalism in Richland is very ‘efficient’. Efficiency means constant innovation and rivalry: the weaker players in any field are always driven out of business swiftly and without mercy. The stock market is ruthless about punishing underperformance (normally on a quarterly basis). THE CONSUMER IS KING In Richland, everything is geared towards the needs of the consumer: there must be low prices, there has to be excellent customer service, shops have to be open at all hours. There can be no sacrosanct high holidays or weekends. 2680078880_d883433f98_z
© Flickr/Andy Wilson
Even though most people are both consumers and producers, in Richland, they are taught to think of themselves primarily as consumers. In their minds, their multiple woes as producers are carefully disassociated from the scale of their expectations as consumers. THE NEWS IS ALWAYS TERRIFYING There is ‘news’ everywhere in Richland – on websites, phones and 24 hour channels – and it’s always catastrophic. 3004665693_c32ab495a6_z
© Flickr/caruba
Citizens thereby learn that the world is incredibly unsafe and that terror, accident and cruelty await at every turn. There is utter silence about anything positive. Every encounter with the media leaves one suspecting that the only way to protect oneself is through the accumulation of ever larger sums of money. People take out a lot of insurance in Richland, a gift the news industry unwittingly hands to insurance brokers. SPARE TIME In Richland, people don’t take many holidays. Generally, they are very self-denying and scared about what might happen if they don’t remain in the office long enough. They get up early, are suspicious of any kind of indulgence and have sandwiches at their desks for lunch. 2581218229_53331b00b2_z
© Flickr/Alan Cleaver
On the other hand they are very interested in paying a lot for what they call ‘fun’. They pay a significant premium to have a car that can go at twice the legal speed-limit and for flying far away on holiday many times a year. Activities that don’t cost much – like going for long walks round the local neighbourhood or writing poetry – are seen as unimpressive, slightly eccentric things. Though many of Richland’s psychologists speak of the benefit of parents spending time with their small children, most children are brought up by staff from low-wage countries while their parents go to work. This lack of secure attachment does wonders for the children in turn: they grow up anxious, eager to please and desperate to attain security through work. FASHION RULES In Richland, there are powerful currents of fashion around most things: what thickness your TV screen has, what kind of ethnicity of food you eat, what models of phone you talk on. People can get rapidly dissatisfied with their current possessions and quickly excited by new products. It feels very important to be up to date. It is a serious blow to one’s self-esteem to feel that one is missing a trend. You can get into trouble if your phone is more than three years old. People speak highly of thinking for yourself, but sheep-like behaviour is far better for the shops. CELEBRITIES SPARKLE Every society has famous people in it. But Richland is very selective about its heroes: it doesn’t revere contemplative monks, wise sages or philosophers. 6808408671_de92a259aa_b
© Flickr/Jasmine Kaloudis
Glamour is monopolised by wealth creators, especially ones in film. Their doings are constantly reported on so that the lives of most ordinary people seem squalid and awful by comparison. News of the famous means that people try much, much harder to work and improve their apparently miserable lot. MERITOCRACY Richland is seen as a very ‘fair’ place. If you work hard and are clever, you’ll get there. There’s no nepotism or insider trading. The playing field is level. 8719935889_bb99a5f2c2_z
© Flickr/UK Parliament
That’s a lovely philosophy for the winners, but more punitive for those who get left behind. They are termed ‘losers’ and are judged personally responsible for their own shortcomings. It’s a culture that is very hostile to the idea of luck. You are the author of your own fate. If things go wrong, don’t blame anyone else. There’s a very high suicide rate in Richland. LITTLE RELIGION In Richland, there’s no religion that energetically promotes spiritual goods and sees kindness and wisdom as superior to wealth and power. In general, people are secular and mock the religious. But in so far as some people do believe, the God they believe in is remarkably materialistic: it’s a chap in the sky who believes in rewarding those who are good with dollops of money. BAD WEATHER Richland has very bad weather. It combines the worst of England and the Netherlands: brief, mild, unreliable summers with only around seven cloudless days in it and with the temperature rarely getting into the 20s. Then come long endless dark winters with gusty, icy winds and low heavy cloud. 17970662609_8c682a23b1_k
© Flickr/Picturepest
As a result, the natural world delivers a constant reminder that delight is never freely and bountifully provided by nature; good things don’t grow on trees, only unremitting human industry can provide salvation. ** The citizens of Richland can certainly be envied for their wealth: their shopping malls are extraordinary and the restaurants are truly superlative. But they also have to be a little pitied for some of their 4am anxieties; for their relentless doubts about their careers and for the worry that no one can really like them outside of what they have managed to achieve this quarter.
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Re: Mainstream theories as to why some countries are rich and some are poor

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https://medium.datadriveninvestor.com/w ... 802d30284d

What makes some countries rich and others poor?
Darek Kedziora
Darek Kedziora
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Dec 10, 2019 · 7 min read




What makes some countries rich and others poor? Why are most European countries so developed and most African can’t get out of poverty? Is it all decided by geography? If that was the case why are some countries with good climate and abundant natural resources still so poor? What stops countries making the jump to a better future?
Those who studied economics know that the growth of any country is built of labour, capital and productivity. So, the nation can become richer by having an increasing (or longer working) population (ie. more hands to produce goods and services), attracting capital and investments (so we have for example more equipment) or by producing things much more efficiently (eg. by advancement in technology). That theory works well in explaining the growth over the medium and short term. Yet, it doesn’t answer the fundamental question — why throughout history some countries become successful and rich and others are always struggling and failing.
Institutions, stupid!
There are many research studies looking at the growth of nations over very longer term, and conclusions are usually very similar. The most important thing deciding about the long-term prospects of a country depends on the strength and quality of its institutions. There are also other important factors that intersect with the institutional framework like ideologies, culture, individuals, geography and luck. All of them play a part, but none of them can be solely attributable to success in the long term.
The stronger the rule of law, the higher the level of income.
It is institutions that decide what kind of activities are promoted in any country: Those that support long-term growth for many, or rent-seeking activities that benefit only a few individuals or groups.
Strong and stable Institutions promote growth by creating the right “environment.” They enforce the property rights so individuals and businesses are not afraid to work and invest. They create equal rules of the game for all (encourage competition). Make sure everyone adheres to the rules (predictable and stable legal system). They reduce the costs of transactions in the market (open economy). They also build the right framework by providing education and social support so most people in society have more or less equal chances of succeeding. It also depends on the institutions on how technological change and innovation is promoted and adopted. And technology and innovation directly impact productivity growth.
If that is so clear, why have not all countries adopted policies that build good institutions?
It is not by chance that reforms are so difficult — Fernando Cardoso (former Brazilian president)
There are usually two problems countries face when deciding about institutional set-up:
Good institutions are very often against the interests of groups who hold the power (think of authoritarian systems and their resistance to democratic elections and freedom of speech) or have preferable access to the resources (why would oligarchs in any country seek open markets and strong competition?).
The best example of the latter is the comparison of Poland and Ukraine after the fall of communism. In 1989, both countries started from a similar position. The program of reforms was slightly different. Yet, the main contrast was the extent to which the privatized wealth led to the creation of oligarchs. In the Ukrainian case, narrow elites captured so much wealth and power that they managed to block further reforms for another two decades.
2. Even if the good institutions are created, there is a challenge to maintain them. Every institution is only as good as the people who manage them. Social norms and culture play a big part here. That is why foreign-induced institutions very often do not survive the test of time if they are not tailored to local circumstances. We find that example in former colonies where institutions did not survive when the authorities who created them left.
So, what makes some countries successful in building strong institutions and others fail?
There are 40 countries that can be classified as high-income by the World Bank’s standards. There were two distinguishing features between them and the rest of the world (captured by M. Piatkowski in “Europe’s Growth Champion”):
They are all democracies (with a question mark around Singapore), and;
They have low or moderate inequality levels (as measured by the Gini coefficient). The only outlier in that group is Chile. Given what’s happening in this country right now it might only serve as a confirmation.
What is so special about those two features?
The first shows the distribution of political power, whereas the second shows the distribution of income and wealth. Democracy encourages people to take part in political life, engage and express. It makes people feel they have control over their own lives. But above all, it gives everyone similar rights and powers. It makes society inclusive.
It’s no coincidence that when the political institutions are democratic and power is widely distributed, the benefits of the economic developments are very likely to be shared among many.
From exclusive to inclusive
What is very interesting is how societies can switch from exclusive to inclusive — the prerequisite for building good-quality institutions. Marcin Piatkowski in the “Europe’s Growth Champion” argues that the transition has never been natural or internally driven. It has always been triggered by either external shock or external pressure. For Western Europe, such transition was initiated by the Black Death in the 14th century. The death of a third of society increased the role of peasants and merchants in society. Later, it was the French occupation under Napoleon that finally got rid of the remaining feudal institutions. In the case of Poland, which is the subject of the book, the adoption of social cohesion came with communism after World War II. In Germany after 1945, it was the U.S. occupation that finally made the society inclusive and democratic.
Similar conclusions can be found in Asia. In his book “How Asia Works,” Joe Studwell argues that one of the major features that distinguish rich Asian countries (eg. Japan, Taiwan, South Korea) from the poor (eg. the Philippines, Indonesia, Malaysia) was the adoption of the comprehensive land reform. The distribution of land to the vast majority of farmers allowed them to increase the efficiency of crops and share the benefits of accompanying growth. A large number of wealthier peasants could then spend more on other goods and support developing manufacturing in urban areas.
There is also another interesting aspect. Good institutions create growth, but it also growth that encourages building better institutions. It is well documented that people with higher incomes demand more from politicians and government, further strengthening economic development. It is, thus, no surprise that the growing middle class is very often a danger for authoritarian regimes.
Now, let's look now at the other circumstances that affect how the countries prosper:
Geography. The first thing that comes to mind is natural resources. Yet, having lots of resources doesn't secure prosperity. Very often it is a curse (Venezuela or some African countries are great examples). Favorable geography is about having a safe environment (without natural disasters), productive lands and access to resources. But none of those factors is decisive on its own.
Culture. Institutions can only work well if the broader culture is favorable and people support it. Just think of Italy, which has the same institutions, but there is a huge gap in prosperity between the south and the north. Another way to imagine the culture in this context is to think what would happen if the whole nation — say the Dutch — were moved one day to a less favorable natural environment. I guess they would again do pretty well.
Luck and Individuals. Sometimes events or decisions by individuals decide about future generations. In the 16th century, Queen Elizabeth I allowed British merchants to trade freely in the open seas and keep the profits for themselves. That decision allowed them to thrive and build overseas power of the British Kingdom. At the same time, the Spanish monarch went the opposite decision and took away a large chunk of profits of their merchants. As a result, Spain lost supremacy over the oceans to the British.
Ideologies. They matter less in the short term, but over the long term we can observe the impact. Liberalism gave rise to the industrial revolution. It also brought concepts of free markets, ownership or entrepreneurship. All were perfect examples of inclusive institutions. Communism, on the other hand, had also inclusive social institutions. Yet, the political and economic institutions were totally exclusive. And it failed over the longer term.
So what makes some countries rich and others poor? It turns out the answer is relatively simple. Successful countries have built institutions that promote long-term growth. Yet, it is a much more complex problem of how to build a stable and reliant institutional framework that can survive over time. In rich countries, people are taking an active part in political institutions. Economic prosperity is shared among many. They have inclusive societies where people decide about themselves and share the benefits of the development.
The widespread distribution of wealth is also essential if the country wants to preserve its system and institutions. Too much concentration of wealth and power can be a short way to destabilize democracy and threaten its existence. Economic inequalities very often spur populism. It risks moving toward authoritarian rules and creating even more economic imbalances. That is why there are growing concerns nowadays. More and more voices urge to tackle huge income and wealth gaps around the world. It is worth keeping in mind that huge inequalities have rarely been reversed in a peaceful way.
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Re: Mainstream theories as to why some countries are rich and some are poor

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https://www.nytimes.com/2006/11/02/busi ... scene.html

ECONOMIC SCENE

What Makes a Nation Wealthy? Maybe It’s the Working Stiff

By Tyler Cowen
Nov. 2, 2006
Economists typically explain the wealth of a nation by pointing to good policies and the quality of a country’s institutions. But why do these differences exist in the first place?

In “A Farewell to Alms: A Brief Economic History of the World” (forthcoming, Princeton University Press, http://www.econ.ucdavis.edu/faculty/gcl ... TA2006.pdf), Gregory Clark, an economics professor at the University of California, Davis, identifies the quality of labor as the fundamental factor behind economic growth. Poor labor quality discourages capital from flowing into a country, which means that poverty persists. Good institutions never have a chance to develop.

Professor Clark’s pessimistic view is that most forms of policy advice or financial aid do not solve the problem of economic development. Unless the quality of labor rises, those would-be remedies are addressing symptoms, not causes.

Professor Clark’s analysis counters Jared M. Diamond, who in his “Guns, Germs and Steel” (W. W. Norton & Company, 1999) located the ultimate sources of European advantage in geography, like safety from tropical diseases, and a greater number of available animals that could be domesticated.

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A simple example from Professor Clark shows the importance of labor in economic development. As early as the 19th century, textile factories in the West and in India had essentially the same machinery, and it was not hard to transport the final product. Yet the difference in cultures could be seen on the factory floor. Although Indian labor costs were many times lower, Indian labor was far less efficient at many basic tasks.

For instance, when it came to “doffing” (periodically removing spindles of yarn from machines), American workers were often six or more times as productive as their Indian counterparts, according to measures from the early to mid-20th century. Importing Western managers did not in general narrow these gaps. As a result, India failed to attract comparable capital investment.

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Professor Clark’s argument implies that the current outsourcing trend is a small blip in a larger historical pattern of diverging productivity and living standards across nations. Wealthy countries face the most serious competitive challenges from other wealthy regions, or from nations on the cusp of development, and not from places with the lowest wages. Shortages of quality labor, for instance, are already holding back India in international competition.

An independent estimate by two economics professors at the University of Wisconsin, Madison, Rodolfo E. Manuelli and Ananth Seshadri, (“Human Capital and the Wealth of Nations,” (http://www.ssc.wisc.edu/~manuelli/resea ... on5_05.pdf) suggests that if variations in the quality of labor across nations are taken into account, other productivity factors need differ by only 27 percent to explain differences in per capita income.

Professor Clark argues that as late as the 18th century, most Europeans had not exceeded the standard of living in hunter-gatherer societies. Until recent times, the early advantages of Europe did not allow it to escape what economists call the Malthusian trap, in which rising populations periodically offset temporary gains in living standards.

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The turning point came when England, and some other parts of Europe, managed a small but persistently positive rate of growth, starting around the 17th century. Pro-business values spread through English society. The Industrial Revolution was not so much a revolution as a continual building of small improvements, and indeed its history shows the difficulty of achieving regular growth. The explosion of technology came only in the late 19th century, well after many incremental gains.

The world’s poorest countries, which now have about one-fiftieth the per capita incomes of the wealthiest countries, have not kept pace. According to Professor Clark, the relative advantage of a highly disciplined and properly acculturated work force is greater for the more complex production processes of the modern world. Low morale and lax discipline will curtail simple factory production but the problem is far worse as production and management become more complex. The poorer countries remain stuck at the bottom as growing populations mean fewer resources for everyone else. Paradoxically, advances in sanitation and medical care, by saving lives, have driven down well-being for the average person. The population is rising in most of sub-Saharan Africa, but living standards have fallen below hunter-gatherer times and 40 percent below the average British living standard just before the Industrial Revolution. The upshot is this: The problem with foreign aid is not so much corruption but rather that the aid brings some real benefits and enables higher populations.

Professor Clark questions whether the poorest parts of the world will ever develop. Japan has climbed out of poverty, and now China is improving rapidly, but Dr. Clark views these successes as built upon hundreds of years of earlier cultural foundations. Formal education is no panacea, since well-functioning institutions are needed for it to be effective.

A more optimistic take might cite the power of cultural globalization. It is hard to reshape workplace norms in poor countries, but in the modern world religious and cultural ideas spread with a hitherto unprecedented speed. Perhaps television and missionaries will prove more important for economic development than privatization plans or exchange rate adjustments.

Professor Clark’s idea-rich book may just prove to be the next blockbuster in economics. He offers us a daring story of the economic foundations of good institutions and the climb out of recurring poverty. We may not have cracked the mystery of human progress, but “A Farewell to Alms” brings us closer than before.
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Re: Mainstream theories as to why some countries are rich and some are poor

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this one contains some interesting insights, still got a fair bit incorrect or incomplete

https://cdn.dal.ca/content/dam/dalhousi ... ballen.pdf
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Re: Mainstream theories as to why some countries are rich and some are poor

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https://www.forbes.com/sites/johngoodma ... c8e5cb3e6e

May 21, 2015,10:56am EDT
Why Are Some Countries Rich And Others Poor?
John C. Goodman
John C. GoodmanContributor
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This article is more than 6 years old.
More than two centuries ago, Adam Smith wrote the book that is generally credited with initiating the science of economics. The central question he addressed is contained in its title, An Inquiry into the Nature and Causes of the Wealth of Nations. What is amazing is how prescient Smith was. Almost everything he said 240 years ago is still true today.

Modern economic studies are confirming it.

Think of an economy as reflecting three fundamental features: capital, labor and what I will call the “efficiency factor.” A country’s stock of capital consists of machinery, buildings, land, etc. Labor consists of the country’s human resources that are used in production. The efficiency factor determines how well the country turns capital and labor into output.

Now let’s jump to the bottom line: which of these three factors is most responsible for differences in GDP per person in countries around the world? The answer: it’s the efficiency factor.

A new paper by Stanford University economist Charles Jones surveys the most recent economics literature and reports that across 128 countries:

a systematic pattern is obvious. In the poorest countries of the world, well over 80 percent of the difference in GDP per worker relative to the United States is due to [efficiency] differences.

Jones goes on to say:

One of the great insights of the growth literature in the last 15 years is that misallocation at the micro level can show up as a reduction in total factor productivity at a more aggregated level…. When resources are misallocated … a given quantity of inputs will produce less output…. [T]his is our best candidate answer to the question of why are some countries so much richer than others.

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What causes a “misallocation of resources”? In Smith’s day and in the country where he lived (Britain) it was mainly bad government policy. Under mercantilism, the British crown established monopolies that were protected against the rigors of competition in the marketplace. Tariffs and quotas did much of the same thing. Medieval guilds operated under anticompetitive conditions – controlling output, prices and entry into such crafts and trades as textile workers, masons, carpenters, carvers, glass workers, etc.

As we look around the world today, we see many vestiges of these practices plus new ones – government created labor monopolies, currency controls, land use controls, etc. Plus, Hernando de Soto has brought our attention to something else. In Adam Smith’s England the existence of stable government and the rule of the common law was taken for granted. In many parts of the world, that is not the case.

In the outskirts of Lima, Peru, for example, de Soto describes highly entrepreneurial capitalistic communities. These “informal economies” operate with very little government interference or governmental protection. In one sense you could call these economies “laissez faire.” But they lack the institutions of capitalism. That is, they lack access to a system of courts that enforce contracts. They lack access to a “night watchman” who protects property rights.

Let’s return to our simple picture of economies as having capital, labor and an efficiency factor. Capital is valuable because it increases output directly and also because it increases the productivity of labor. Yet Jones reports that capital-output ratio is remarkably stable across countries. Its average value is very close to one, meaning that an extra dollar of capital gives you an extra dollar of output. Even the poorest countries tend to have a capital-output ratio very close to the U.S. value. So differences in physical capital contribute almost nothing to differences in GDP per worker across countries. It has also been documented that the marginal product of capital is very similar in rich and poor countries.

What about labor? Because of difference in education and skills, the level of human capital per worker differs considerably among countries around the world. “Loosely speaking, the poorest countries of the world have 4 or 5 years of education, while the richest have 13,” writes Jones. But the contribution of education is still modest.

Take the United States and Mexico. GDP per worker is 3 times higher in the U.S. than in Mexico. About 40 percent of this difference is due to inputs – mainly the difference in educational levels between the two countries. But fully 60 percent is due to efficiently, as reflected in the difference in institutions.

Going forward, traditional economic theory teaches that with similar institutions, the economies around the world will tend to converge. That is, poorer countries will grow faster, while wealthier economies grow slower. But that is not happening. Jones writes:

[a] simplistic view of convergence does not hold for the world as a whole. There is no tendency for poor countries around the world to grow either faster or slower than rich countries. For every Botswana and South Korea, there is a Madagascar and Niger. Remarkably, 14 out of 100 [countries] exhibited a negative growth rate of GDP per person between 1960 and 2011.

Overall, the picture that emerges from this kind of analysis is that there is a basic dynamic in the data for the last 50 years or more that says that once countries get on the “growth escalator,” good things tend to happen and they grow rapidly to move closer to the frontier.

But if a country doesn’t get on the growth escalator, things may not improve at all. That is worrisome – especially if you care about international inequality of income and wealth.
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Re: Mainstream theories as to why some countries are rich and some are poor

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