How Government (Mis)manages to keep the Nation Poor ?

Sometimes I wonder why people remain poor even after government providing all kinds of help to alleviate poverty. They provide subsidized food and shelter.  Some countries even provide free education and employment assistance. But, poverty becomes worst in poor countries as well as some developing countries. It creates great divide among rich and poor. It seems that the conditions have improved since they had before, but the fact of the matter is their quality of life got deteriorated badly.

Usually many economists like Xenophon (430 – 354 BCE), Chanakya (370–283 BCE), Adam Smith (1723 –1790 AD), David Ricardo (1772 –1823 AD), Thomas Robert Malthus (1766 –1834 AD) did studied on the determinants for the wealth of the nations, Division of labour, productivity and free markets. They are more technical to comprehend, and requires some knowledge of economics. Thus my quest is to find simple answers which can be understood by a common person like me and many other technocrats as well as non-economists.

I did come across some interesting facts which I would like to share with you.

According to G.P Tripathi [3] the causes of poverty for any nation, simply put, are

  • a)     Productivity of its citizen
  • b)     Law and order in the country
  • c)      Infrastructure
  • d)     Natural resource endowment
  • e)     Strong and bright leadership

Economist Ricardo wrote in 1960 that Productivity determines the development and growth of any economy. This productivity is no longer dependent on land and capital alone but on Technology now. [3]

Technology is two pronged-

  1. Next generation machinery and or processes
  2. Next generation skilled human resources

Despite some nations having all these are infested with backwardness and poverty. This is due to low productivity. This is the most difficult and a tedious task to achieve for any country and their Government. [3]

For the remaining aspects I’ll be referring to Paul Collier, in his book ‘The Bottom Billion’, who describes about the four poverty traps that prevent development of any nation. [2]

  1. Conflict: Low growth means high unemployment and thus plenty of angry young men ready to fight. Conflict then destroys infrastructure and scares away investors, leaving even fewer opportunities.
  2. Landlocked countries: Being landlocked doesn’t have to be a disaster, as long as your neighbours have decent infrastructure and allow you to use their ports. If your neighbours don’t like you, or if they are basket-case countries, there is no way you can export. Without dependable ways to export, landlocked countries are unable to participate in the global economy.  “A reasonable case can be made that these places should never have become countries” says Collier. “However: the deed is done. These countries exist and they will continue to do so.”
  3. Natural resources: It’s rare for natural resource wealth to come back to the people. Sometimes this is simply because the revenues end up in the foreign bank accounts of the elite, but the big problem is the rush of investment into one sector which draws attention, capital, and skills from all the other sectors of the economy. The demand for infrastructure and business development in that area will immediately overtakes other concerns and other sectors of the economy wither, their costs rising from increased wage competition and the sudden rush of foreign currency into the country that is unfairly shared across the country. The phenomenon is known as ‘Dutch Disease‘. The government and the elite make a fortune. There is no incentive for them to invest in the country more broadly.
  4. Bad governance: Some governments do not function, or exist only to benefit themselves, development is ultimately impossible in those countries. Paul Collier estimates that each failed state costs the global economy $100 billion, and since the costs of intervening to fix a failed state would usually be less, he makes a case for more military intervention. That’s going to upset a lot of people, but international presence forcibly removes bad leader, not to occupy, but as a guarantee of democracy.

It is clear from above that Productivity drives growth, Conflict affects Law and order, Infrastructure is paramount for landlocked countries, Natural resource endowment is crucial to economic development planning and lastly Strong and bright Leadership is necessary for effective and efficient functining of the government .

So where should the people, of any country, need to focus to alleviate poverty?

In 1613 the Italian Antonio Serra described the positive effects of increasing returns with greater clarity than Smith. Reinert argues, in his book Review of How Rich Countries Got Rich and Why Poor Countries Stay Poorthat the key concept is not comparative advantage or free trade, but rather what Enlightenment economists called emulation.

They include:

  • Recognition of wealth synergies around increasing returns activities and conscious targeting, support and protection to these activities, including temporary monopolies and patenting, tax breaks, export bounties and cheap credit.
  • Maximizing the division of labor through a diversified manufacturing sector.
  • Relative suppression of landed nobility and other groups with vested interests based in the production of raw materials.
  • Strong support for the agricultural sector combined with restraints on export of raw materials.
  • Emphasis on learning and education.
  • Attracting foreigners to work in targeted activities.

The critical characteristics of what sets apart the countries are their productive structure the products that they export which, in turn, depend on the capabilities of the firms. The primary driver of growth is the gradual build-up in firms’ capabilities, which raises the economy-wide real wage which allows each firm to shift to more capital-intensive techniques. [4] As the firm makes that shift further raises the marginal revenue, keeping rising real wage in check.

Historically, it has been impossible to become a rich country without creating an industrial sector and an advanced service sector. Likewise, historically, no country has become rich without explicit government interventions that amount to industrial policy in different shapes and forms. [4]

CONCLUSION:

Most of the governments, of any country, manges to keep its’s citizen poor by implementing bad policies entwined with bad leadership making impossible for any sort of developments. 75% of the poverty is attributed to bad governance. There is a famous saying in investment world “one should not put all their eggs in one basket”, and similarly any country which throws all its resources in the development of one sector depletes revenue which eventually drives poverty. This poverty creates conflict and disrupts law and order and scares potential investors, which eventually reduce opportunities for development creating more poverty.

Poverty is a vicious cycle and it’s not that easy to break, while the country is locked-in with bad governance and poor leadership.

References:

  1.  http://www.networkideas.org/book/jun2007/bk14_HRC_Review.htm
  2.  http://makewealthhistory.org/2008/12/08/why-some-countries-remain-poor-paul-colliers-four-poverty-traps/
  3. http://gptripathi.hubpages.com/hub/Why-Poor-Countries-will-Remain-Poor-Unless
  4. How Rich Countries Became Rich and Why Poor Countries Remain Poor: It’s the Economic Structure, Working Paper No. 644, Levy Economics Institute

 

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One Response to How Government (Mis)manages to keep the Nation Poor ?

  1. Pingback: Varna vs. Jati | भारत वषॅ

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