ECONOMICS

Why some nations are rich and others are poor

Why some nations are rich and others are poor

Introduction

The modern era of economic growth that began in Western Europe in the mid-18th century and that has since spread unevenly around the world has produced a diverse record of economic development. Western Europe, its offshoots, and Japan have experienced sustained increases in wealth; poorer countries have gone through erratic growth cycles; some have seen declines in income or have merely stagnated; and at least one country—Argentina—went from developed country status in the early 20th century to developing country status. In recent decades, a minority of poor countries have enjoyed economic success by achieving and sustaining high growth (Wolf, 2006).

The varying growth paths, including the West's initial escape from poverty, have prompted a diversity of explanations about what causes prosperity. As far back as 1755, Adam Smith cited the importance of policies and institutions as key determinants of economic progress, factors he would highlight later in his monumental work, An Inquiry into the Nature and Causes of the Wealth of Nations (Gwartney, 2007). “Little else,” he wrote, “is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” (Goklany, 2007)

Discussion

The early development economists were influenced by the experience of the Great Depression, which they interpreted as a failure of the free market, and by Keynesian economics, which emphasized macroeconomic stimulation of national demand to reduce unemployment and spur growth. The apparent success of the Soviet Union at industrialization also influenced policy prescriptions for rapid growth (Easterly, 2006). From the beginning, the orthodoxy in this field viewed industrialization and capital accumulation—characteristics associated with advanced economies—as policy goals. The lack of capital was seen as a major cause of poverty (Acemoglu, 2008). Paul Rosentstein-Rodan and Hans Singer wrote about the “vicious circle” of poverty, in which the lack of savings and investment perpetuated underdevelopment as small markets and limited resources made it unlikely that private investment would rise to a level sufficient to raise growth (Wolf, 2006). Theorists assumed a direct relationship between investment levels and growth rates, and growth models calculated the “financing gap” said to exist in poor countries. Foreign aid was used to fill that gap.

There are a great number of explanations for economic dependence and underdevelopment. The best known approaches are combined under the heading “dependencia theories.” These theories further develop the concept of imperialism, and assert that the state of economic dependence is directly responsible for the exploitation of developing countries. The theories emphasize that external dependencies are primary causes of internal structural deformations, a process that perpetuates the external dependency (Gwartney, 2007).

The external economic dependence is rooted in the political and military colonial domination that destroyed the indigenous lifestyle and culture, while the postcolonial development schemes forced integration into the international division of labor. The forced integration caused deep structural changes in the ...