Why poor countries are poor

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“We still don’t have a good word to describe what is missing in Cameroon, indeed, in poor countries across the world. But we are starting to understand what it is. Some people call it “social capital,” or maybe “trust.” Others call it “the rule of law,” or “institutions.” But these are just labels. The problem is that Cameroon, like other poor countries, is a topsy-turvy world in which it’s in most people’s interest to take action that directly or indirectly damages everyone else. The incentives to create wealth in any way at all are turned on their heads just as surely at the roof of the school library.

The rot starts with government but it afflicts the entire society. There’s no point investing in a business because the government will not protect you against thieves. (So, you might as well become a thief.) There’s no point in paying your phone bill because nobody can successfully take you to court (so there’s nopoint being a phone company). There’s no point getting an education because jobs are not handed out on merit (and in any case, you can’t borrow money for school fees because the bank cannot collect on the loan, and the government doesn’t provide good schools). There’s no point setting up an import business because the customs officers will be the ones to benefit (and so there is little trade, and so the customs office is underfunded and looks even harder for bribes).

Now we are starting to understand just how important this is, we can begin to put it right. But it’s in the nature of the problem to resist solutions, so this is a slow and difficult process. We don’t usually find it acceptable to set up democracies by force, and they usually don’t last when we do. We don’t like development aid to be lost in red tape, but making sure the money is well spent is very time consuming.

These problems cannot be fixed overnight. But there are some simple reforms, which—with a modicum of political will—would move poor countries like Cameroon in the right direction. One simple reform is to cut red tape, allowing small businesses to be legally established, which makes it easier for their entrepreneurs to expand and borrow money. The legal reforms necessary are often trivial; and while they still rely on sensible and benevolent government, all it takes is a single minister with his head and his heart in the right place, rather than hoping for an entire civil service to permanently reform.

Another option, and a vital one, is to enlist the world economy for help. Most poor countries are also very small economies; the entire economy of sub-Saharan Africa is about the size of Belgium’s. A small African state like Chad has an economy smaller than that of a Washington suburb like Bethesda and a banking sector smaller than the Federal Credit union set up for World Bank staff. Tiny countries like Chad and Cameroon cannot possibly be self sufficient: they need access to cheap fuel, raw materials, loans from international banks, and manufacturing equipment. But Cameroonians are trapped behind high barriers to trade—among the highest tariffs in the world at more than 60 percent. Such barriers generate revenue for the government and allow it to protect the businesses of cronies or hand out profitable import licenses. A small country cannot survive without the world economy. With it, small countries can thrive.”

References:
Tim Hardford, The Undercover Economist, Why poor countries are poor