The Persistent Problem of Underdevelopment

Right on Comrade

Right on Comrade! /

Article: Liam Fitz-Gerald

What’s going on and why. U of R profs talk to the Carillon.

In May 2007, then-President, Hugo Chavez of Venezuela cut ties with the IMF. According to the Guardian Chavez said, “we are going to get out. I want to formalize our exit from the World Bank and the International Monetary Fund.” Chavez had claimed these policies were more beneficial to Washington than the Venezuelan people.

In 2011, the world watched as peaceful protests swept over the Middle East. When authoritarian leaders cracked down, the protests turned into resistance, creating what is referred to as “the Arab Spring.” In Egypt and Libya, the peoples of these countries rose up against authoritarian dictators. In Syria, an opposition fights against Bassar Assad’s regime. Many of the peoples in these countries took up arms in the wake of widespread poverty and economies facing challenges from the 2008 recession.

In Latin America, countries like Venezuela are turning away from international trade and policies. Why? In their perception, poverty is created by these policies and maybe the answer is to look inward, not outward.

theatlanticLeast Developed Countries (LDCs) are defined by political scientists Jeffrey Friedan, David Lake and Kenneth Schultz as “countries at a relatively low level of economic development.” Many of these countries are located in Latin America and Africa. These are by no means the only reasons, but geography, political and economic institutions and global policies of privatization and liberalization are three factors often discussed by social scientists as possible explanations.

Geography is one reason why countries could struggle with underdevelopment. Economist Jeffrey Sachs points out that poor landlocked countries face a natural handicap. Countries are disadvantaged when they lack adequate rivers to utilize navigation and exist in mountainous regions that make transportation difficult. Not having a coastal border hurts LDCs as many must cross international borders to trade. Yet, rich landlocked countries exist, such as Switzerland. However, Sachs attributes this to rich countries surrounding Switzerland. Climate wise, the environmental conditions of some poor countries are arid. The agricultural sector in countries with arid conditions is often poor. Oftentimes, drought poses a challenge to agricultural development. Furthermore, agriculture in the tropics already suffers from soil problems. Weak soil and erosion mean certain crops will have trouble growing. Tropical diseases in these regions are also problematic. Regional precipitation creates a breeding ground for mosquitoes and malaria. Indeed, Sachs emphasizes the disease in a geographic region may play a crucial part in why some LDCs have remained economically poor.

Malaria wreaks havoc on the population because an individual’s work or education performance suffers from taking time off to recover. Children in these countries are directly impacted by malaria because it creates chronic health problems. There is a vicious cycle, Sachs continues, because parents fear losing their children to malaria. So, they have larger families. These families cannot afford to invest in all of their children. So, many children grow up in these families and do not receive an education that can help develop the economy. Sachs argues the disease is particularly deadly in Sub-Saharan Africa because the disease has evolved alongside humans.

The country of Chad has suffered horribly from the disease in recent weeks. A recent story in the Guardian has said malaria is now a national emergency. In early August, there were over 1,000 cases reported in the Salamat district of the country. By the end of the month, there were over 14,000 cases. Children are the main victims of Malaria, especially in Africa.

HIV-AIDS is also a problematic disease in the region. Indeed, the continent’s southern and eastern regions have been ravaged by the epidemic. From an economic perspective, foreign investors shy away from investing in the continent. High medical expenditures have taken a toll on the economy and made it hard for businesses to develop. Sachs argues that if managed properly, disease does not have to be a factor in impaired growth for Africa or other LDCs. He argues that progress is possible if regional disease is controlled. One example he uses is the construction of the Panama Canal. It could only be completed after the United States engaged in a vigorous anti-mosquito campaign.

In a recent book titled Why Nations Fail, Daron Acemoglu and James Robinson demolished this idea. Geographical explanations are inadequate because it is possible for tropical nations to develop. Both look at Botswana and Singapore as two former LDCs that have developed. Historically, the tropics have had successful civilizations like the Aztecs who built physical infrastructure like roads. Acemoglu and Robinson argue that the Aztecs represented a continental norm of the tropics being richer than the temperate areas. The United States and Canada are richer countries than the rest of the Americas today because the European conquests reversed the norm. Acemoglu and Robinson also address the issue of disease in the tropics, acknowledging it is problematic, but can be controlled by institutions that promote public health. So, disease does not cause poverty, but is a result of poverty. England once struggled with diseases until public health measures that made sure water was clean and waste like sewage could be treated appropriately. Most importantly, the government invested in public health measures. Acemoglu and Robinson certainly have a point. It cannot simply be the case that the LDCs suffer just because of geographic location. As they point out, some states thrive in the tropics, so there has to be an explanation that is more current.

Professors at the University of Regina weighed in on these issues.

Harminder Guliani, professor of Economics at the University of Regina shared her thoughts on these issues.

“If you have bad geography, there will likely be diseases like malaria. Bad geography also brings transportation problems and poor soil fertility. All these hinder economic development, but that doesn’t mean these countries are doomed to poverty.”

Martin Hewson, professor of Political Science, also echoed these sentiments.

“The geography argument at first sight makes strong sense because a landlocked country in the middle of Africa will never be in as good as a position as a trading city like Hong Kong and Singapore. So yeah, geography makes some sense,” he said.

He acknowledged that a geographical argument could not explain every situation.

“If it’s so difficult for tropical countries to develop, why has Singapore become one of the richest places in the world? Singapore is right in the tropics and is one of the most humid places on Earth.”

One reason Singapore developed, claims Hewson, was because of public institutions, leading to another explanation as to why LDCs may struggle with development.

“We need to create different policies” said Guliani, who also explained that institutions are important. “We shouldn’t replicate other economies development criteria. In our development policies, we have to place special emphasis or develop institutions conducive to [the specific country’s] economic growth.”

Institutions will be different because every country has different rules on how the economy works. Developed countries are successful because they have economic institutions that benefit the country overall. Such institutions require certain prerequisites like a rule of law that is impartial, and private property that is secured against unwarranted seizure. Economic institutions must allow contracting between individuals.

Furthermore, new industries must be allowed to develop. The government must be able to use force to make sure contracts are followed through and prevent fraud. The state also must be willing to create a public sector that will create public goods such as roads. Roads are important because they provide a means of transportation. With such a means, states can have goods conveyed throughout the country to allow growth. This is an important factor as to why many LDCs have not developed.

Political Scientist Francis Fukuyama, author of The Origins of Political Order, also emphasizes that economic institutions are crucial to economic success. One reason that Sub-Saharan Africa has remained at economic doldrums is because they do not have a strong state to create necessary institutions to build a national economy. Effective tax collection is a problem for many of these countries. Many Sub-Saharan African states are lucky if they can acquire any taxes whatsoever.  Low levels of taxation in African countries have not created entrepreneurship. Crucial areas that require public subsidy like education and health care do not get the funding necessary for national development. Other crucial aspects such as a police system and courts are non-existent because they cannot be funded. Somalia is one example of such a country. Individuals can buy all sorts of deadly weaponry, ranging from guns to army tanks. They have to do this because since the 1980s, Somalia has not had a central government capable of enforcing law and order, let alone economic development.

Economics professor and department head Hafiz Akhand referred to government as “a facilitator.”

“Obviously, good government would help in fostering elements necessary for a society and an economy to be successful. Bad government has the opposite effect, unfortunately.” He said.

Yet, institutional issues may be only part of the problem. Some problems may lay in policies related to liberalization and privatization. As Hewson points out, in the 1980s and the 1990s, the International Monetary Fund (IMF) and the World Bank pushed policies of free trade and privatization on developing countries. As earlier developments failed, Hewson says these organizations wanted to try something new.

Rules pushed on poor countries are often ones that favour the markets of the rich countries, points out Economist Joseph Stiglitz. Globalization was initially hailed as a sign of success in the 1990s. Developing countries received more capital between 1990 and 1996. While some countries have benefited from globalization, many have not. Critics have pointed out that rich countries are the beneficiaries from globalization. Furthermore, many LDCs lose aspects of sovereignty when they sign deals with the rich countries. As Stiglitz observes, many policies were formulated in the Washington Consensus of the early 1990s. The three parties that were involved in crafting this policy outlook were the US Treasury Department, the World Bank and the IMF. The Washington Consensus was determined that rapid economic growth would be possible if a country emphasized its exports. This also involved the imports of a country being liberalized.

featurepicture-engagingpeace.comThe problem with the Washington Consensus policies was that many LDCs were unprepared for them. They lacked infrastructure like ports and roads used for transportation of goods. The Washington Consensus emphasized government have a small role in the economy as well as the exclusion of any type of trade barrier. Many Washington Consensus policies left a mark on where they were implemented. Latin American governments embraced policies of the Washington Consensus. Many of these policies were adopted to fight the rampant inflation in Latin America in the 1990s. Initially, price stability was restored by these policies. As a result, organizations like the IMF argued that Washington Consensus policies were successful. Yet, the success did not last. Many Latin American countries had received heavy loans to help implement these policies. In addition, many state assets were privatized. This meant that foreigners received the benefits of these organizations, not the states themselves. The GDP of these countries did continue to rise. However, the nationwide prosperity that these assets had brought them was gone and many began to get poorer. As a result, there was disenchantment with the Washington Consensus in Latin America. Stiglitz points out that the success of left-wing movements in countries like Bolivia and Venezuela is explained by the disappointment with the Washington Consensus. Yet, Latin America was not the only region disillusioned by such policies.

The policies of the Washington Consensus had a tremendous impact in Africa. The IMF assumed that free markets would spring from privatization policies. The problem was that essential services once provided by state industries were not provided by the private sector in many countries. One example is the privatization of the State telephone company in Côte d’Ivoire. This was done before any kind of regulatory body could be established by the state. A French company bought the state assets and established a monopoly on landlines and cellular phone services. Internet prices skyrocketed and contributed to a further rich and poor divide in the country.  Liberalization was also problematic in some African countries. The rich countries demanded that LDC countries take down their trade barriers while keeping their own tariffs. Furthermore, there was little abroad that many African countries could sell. Fiscal austerity measures also introduced problems. Countries that borrowed from the IMF had trouble spending that money because of contractual constraints. These policies did not create economic growth. What Stiglitz emphasizes is that the Washington Consensus did not realize that societies had to change before they could accept these types of conditions.

One important aspect of economic development requires an educated population. Studies done also emphasize that girls must be educated, too, for economic development to occur, obviously. Yet, in Africa this has been hard to achieve. Families with multiple children often do not send their daughters to school. This is because they do not grasp the benefit. Many of these families barely survive. Another reason many children and girls do not go to school is the education system is underfunded. The Washington Consensus has advocated that fees be charged for schools. Yet, these fees affect children going to school. Yet, in Uganda, President Museveni ignored the advice of the Washington Consensus and eliminated fees from school.

In May 2007, then-President, Hugo Chavez of Venezuela cut ties with the IMF. According to the Guardian Chavez said, “we are going to get out. I want to formalize our exit from the World Bank and the International Monetary Fund.” Chavez had claimed these policies were more beneficial to Washington than the Venezuelan people.

Guliani says these organizations like the IMF like to point to East Asia as successful examples for liberalization, but they forget that many Asian states had developed institutions before many African countries.

“They forget that East Asia developed their domestic instruments first and then integrated with the world economy. They forget they had supporting policies like reduction in tariffs, providing subsidies for exports and protecting their domestic industries. That’s how they integrated with the world economy.”

Hewson said the record for trade liberalization and privatization has been mixed.

“Unfortunately, since the 90s, a lot of those attempts to try something new have also failed. This is why economists like Stiglitz say they went too far and this experiment has failed. I think they are largely right. It has succeeded in some places, but those are the places like Singapore that do well anyway.”

Both state controlled economies and liberalization have failed in several countries, especially Africa, he says.

Guliani says liberalization could work if domestic institutions could be improved. “Liberalization has led to economic growth but with supporting policies and those policies are domestic like basic education.”

Yet it could be argued that all three factors play a role in why a country could struggle with underdevelopment.

“It would be great if there was one magic bullet. We could say ‘yes, that is the ultimate thing that determines the success or failure of nations.’ But no, there is not one magic bullet. And the things that are the most influential are probably not government policies or free trade, but the culture and institutions that are much harder to change,” Hewson said.

Yet, Hewson is optimistic about the future for developing countries.

“The indicators are pointing upward in the last decade. A country like India has been growing, China has pulled millions of people out of poverty with its growth. So for the world overall, things are getting better. And the poor, even in Africa, have access to things like cellular phones, even smart phones. So while they are poor, in some ways, their life is better.”

Indeed, the Human Development Report for 2013 has discussed the phenomenon of developing countries growing. Countries like Bangladesh, Rwanda and Chile have grown economically and the combined GDP of three of the largest developing countries –China, India and Brazil– is now equal to the developed countries GDP. These three countries are forecasted to be the creators of 40 percent of global production by 2050.  The Human Development Index for 2012 revealed that there has been progress across the developing world but has also revealed that inequality is still alarmingly high. So, although there are improvements, there are still challenges ahead for developing countries.


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