Why poor countries are poor

April 4, 2006

Free Market Foundation

The problem with poor countries starts with corrupt governments and then afflicts the entire society, says Tim Harford of Financial Times. Economists used to think wealth came from a combination of man-made resources, human resources and technological resources. When countries such as India, Chile and Botswana quickly began prospering, while other countries loomed far behind, experts realised the major gap lies in corruption.

Harford explains the main elements of corruption:

A leader who expects to remain in power for several years only helps his economy to the extent that his profit is maximised. For example, in 1982, Cameroon, Africa, the new leader likely estimated the roads would last as long as he expected to remain in power, and therefore he never bothered to invest in infrastructure. Instead, the money likely goes right into his personal bank account.

Bureaucracies create numerous regulations and fees, hoping to pocket extra cash. For example, to set up a small business in Cameroon an entrepreneur must spend, on official fees, nearly as much as the average Cameroonian makes in two years. To buy or sell property costs nearly a fifth of the property’s value. To get the courts to enforce an unpaid invoice takes nearly two years, costs more than a third of the invoice’s value, and requires 58 separate procedures

The self-interest of people in power often causes wastefulness and trumps all accountability methods. For example, Cameroon built a library when it already had one. The bizarre architecture caused water to leak and spoiled the building only four years after its completion.

Countries like Cameroon fall far below their potential even considering their poor infrastructure, low investment and minimal education. Worse, the web of corruption foils every effort to improve the infrastructure, attract investment and raise educational standards, says Harford.

Source: Tim Harford, Why Poor Countries Are Poor, Reason, March 2006.

For text: http://www.reason.com/0603/fe.th.why.shtml

For more on International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 28 March 2006