People's Democracy

ECONOMIC NOTES

Why Poor Countries Are Not Catching Up

Jayati Ghosh

ONE of the myths about globalisation that has been systematically punctured over the past decade is that it would lead to greater convergence of incomes between countries. In fact, the period after 2000 has been one of even more uneven development in the world economy than in the past.

It has become evident that those analyses that still try to peddle this line rely essentially on the fast economic growth of China and to a lesser extent India, who together make up more than one-third of the world’s population. And even so, greater rural-urban inequality within these two countries makes a completely optimistic result hard to establish.

However, on the question of the convergence between the richest and poorest countries, it would be impossible to have a debate. The data is unambiguous that the poorest and least developed countries (hereafter LDCs) have not performed well over this period, and the gap between them and both the richest and the middle income countries has grown substantially.

Of course, it is true that even among LDCs, there has been a wide distribution of outcomes. For example, the best performer, Bangladesh, grew at a very respectable annual rate of 2.6 per cent per capita between 1980 and 2002, while the worst performers (Djibouti, Sierra Leone, Haiti) all had per capita income losses of between 40 and 50 per cent. But there were only three clearly good performers among LDCs: Bangladesh, Lesotho and Uganda. The group of LDCs as a whole shows no movement towards higher per capita incomes and nearly half of them had negative growth rates.

What explains this growing divergence? Why are LDCs not only failing to catch up, but even experiencing patterns of growth that widen the gap between them and richer countries? A recent study by the economist Branko Milanovic (Why did the Poorest Countries Fail to Catch Up?, Carnegie Papers No. 62, Trade Equity and Development Project, Carnegie Endowment for International Peace, 2005) tries to identify the factors.

This study at least helps to establish what was not responsible. Mainstream economists, when faced with such reality, have a typical response: "The reforms have been too slow, or too limited, or not deep enough." But Milanovic shows that even when "reforms" (which are basically more neoliberal policies) have been slower or less extensive than in other middle income developing countries, this could have played at best a minimal role.

In fact, even this limited conclusion is unwarranted, since Milanovic suggests that neoliberal reforms in these countries started a decade after those in middle income countries, whereas actually most LDCs (especially those in Sub-Saharan Africa and Central or Latin America) have been engaged in policies of privatisation and liberalisation from the early Eighties, typically due to pressure from multilateral aid institutions.

Similarly, the study shows that the LDCs did at least as much trade liberalisation as other countries. The average level of protection measured by tariff rates is not different for LDCs than it is for other countries, so this too is unlikely to have been a cause of poor countries’ bad performance. The lower ratio of trade to GDP was therefore probably a result of lack of development, rather than a cause of it.

The study also finds that the reliance on multilateral lenders is unlikely to help the poorest countries. (It could be added that this is also because such reliance comes with greater insistence on the very policies that have been associated with earlier lack of growth and development.) There is another important insight: that the much-touted positive roles of democracy and higher education on economic growth are very difficult to discern on the basis of the empirical evidence alone. "Indeed, it could be that both are primary goods, desirable in themselves, instead of purely instrumental goods acting as tools for higher income. In that sense, democratisation and better education in poor countries are worthy goals, but neither seems to be an instrument for economic development — particularly so if other enabling conditions, like peace, are not present." (Page 26)

Instead, the study highlights another potentially important reason for the slow economic growth of the LDCs: the implications of political and social instability. Milanovic points out that one key factor associated with low growth is war and civil strife. The poorest countries have lost, on average, some 40 per cent of their output through much greater frequency of war compared with the rest of the world. According to him, if we take the effect of wars alone, we find that the entire relative decline of the LDCs compared with the middle-income countries can be thus explained. In other words, had prevalence of war among LDCs been at the same level as elsewhere, the LDCs would have at least kept pace with the rest of the world.

This interesting conclusion of course begs a further question: why are there so many more wars and civil conflicts in these LDCs? It is worth noting that most LDCs are not poor in terms of natural resources: many of them are sites of major reserves and ongoing extraction of important ores and minerals, as well as producers of agricultural commodities that require very specific natural conditions.

In fact, there have been those who have argued that it is precisely this natural wealth that has been a curse for these countries, attracting national and international bees to the honey pot in the scramble for accessing or controlling such resources. It is no secret that local conflicts have been stoked by outside, and imperial, interests.

Aside from such considerations, however, there is another sense in which we should not be surprised at the higher levels of violence in LDCs. When substantial populations are at the margin of subsistence, even small changes in territorial access or economic policies can have major implications for life and basic conditions of living. So struggles over even what appear to be relatively minor issues are fought aggressively and bitterly, because often what is at stake is sheer survival.

So, in a very basic sense, the extent of political conflict and instability in particular countries also has material foundations, even though the links are not always so apparent. And this vicious spiral in turn can be traced to certain kinds of neoliberal policies characteristic of current imperialism, which are affecting not only the world economy but especially these particular countries.