September 4, 2017    11 minute read

The Economics of Development

Building Stronger Economies    September 4, 2017    11 minute read

The Economics of Development

As the last generation with the potential to stop climate change and the first one with the opportunity to eradicate poverty from the world, millennials need a deeper understanding of the challenges involved in our interconnected and globalized economy. Daily actions in Western countries often have unintended and drastic consequences elsewhere, leading to rising poverty in other parts of the world and aggravating an already desperate situation.

A Wrong Development?

The article opens with a reflection on whether the term “development” should be used in the economic discourse at all. The term was coined in the 50s and 60s after WWII, referring to those post-colonial countries that do not enjoy a strong economy compared to the west. Also, the terms “First world”, referring to western countries, “Second world”, indicating BRICS countries in a strong position to exploit commercial opportunities, and “Third world”, grouping all the remaining territories, were invented within the same framework of classification based on economic power.

However, early international policies have brought little improvements to poverty and development in disadvantaged countries. Neoclassical economists in the 50s and 60s significantly overlooked the criticalities present in these countries and assumed that they would simply “develop” by themselves, as happened with western countries in the centuries before.

The reasoning is based on three misleading and dangerous assumptions. First, the Smithsonian belief that economic development will improve the living conditions of a whole population has proven to be flawed. In neoclassical economics, wealth is re-distributed via the externalities of industrialization and improves the well-being of a geographic region as a whole. This can happen if, for example, an industry is flourishing in a certain area, attracts talent, raises wages, and creates an ecosystem of supplementary services and auxiliary shops around its core nucleus. Nevertheless, re-distribution of wealth cannot be triggered without strong economic policies and a pro-poor legislative environment.

Second, international policies have encouraged and imposed a strong protectionism on developing countries, especially concerning the agricultural sector. The logic of protectionism is meant to preserve the domestic economy from low-cost products coming from faraway markets, yet has heavy implications for the economic development of disadvantaged communities. One should note how, in history, there is no single country which has managed to start a vital industrial sector without supportive agricultural inputs and surpluses. From the perspective of the poor farmer, there are no incentives to move away from a subsistence agriculture unless viable returns on the invested can be obtained.

Third, poverty is not to be resolved solely through economic development, but instead through a series of contextual and path-dependent societal issues, such as public health, education, access to nutrition, infrastructure and politics. The intertwining of poverty determinants requires a closer level of analysis and a thorough knowledge of the local context to promote interventions relevant, meaningful and effective for the poor. Therefore, historical and cultural differences among Asia, Africa and Latin America should be taken into account in international policies and specific interventions should be tailored for each country.

Historical Determinants of Poverty

How did we get where we are today? What may not be clear from western history books is that this is a post-colonial era, where the colonial period is not so far in the past and still has deep implications on the livelihood of billions outside of Europe and North America. Not many decades ago, the French and British empires were ruling over 30% of the emerged lands, imposing taxes and constraints on the local populations. The world used to be a “Europe-centric” construction, with satellite countries across the globe. In spite of some advantages of colonization, such as urban development and import of technologies, the colonized territories were mostly treated as subordinates to the homeland and arbitraged for their low-cost resources and manpower. Macro differences emerge not only between Asia and Africa, but also between treatments and independence treaties in the British and French Empires.

Before colonization, Asia used to be ruled in centralized systems, with Maharajas in Hindustan and Malaysia, Emperors in China and Japan, and local kings in Cambodia, Burma and smaller countries. First as slave-traders in the 16th century and, later, through the expeditions of British captains in the 1800s, the Europeans have always found tribal systems based on barter and rivalry. Asian countries were somewhat organized and had local leaders with whom Europeans could establish alliances or declare wars, whereas African territories had no centralized government or policy systems but relied on village-based communities and tribes. Consequently, the colonization of African territories was made possible by “divide-et-impera” strategies, pitching rival tribes against each other, forging treaties with the largest tribes and most powerful leaders, and enforcing British rulers over the dominated lands.

Infrastructure and Climate

Furthermore, due to the inhospitable climate and pre-existing lack of infrastructure, the French and British could do little to extend their control in Africa beyond the largest cities and main trade routes. The wide areas covered in tropical forest and the multiple nuclei of villages spread across dirt-roads in the remote parts of the countries made hard to either initiate agricultural development, collect taxes or promote trade in the conquered lands. Asian countries instead benefited from previous social structures, land-management systems and roads facilitating the establishment of plantations, employment and commerce across cities. Although Asian policies in colonial times had always been pro-European, imposing rock-bottom trade fares and fostering the exploitation of local peoples, in the long run, agricultural and commercial systems facilitated the post-independence “Green Revolution” in South East Asia, during which the countries managed to increase their exports and generate incoming cash flow via industrial agriculture and centralized policies, posing the base for a further hi-tech industrialization.

Finally, divergences in management practices and post-independence concessions of the French and British Empires have their respective advantages and disadvantages on the former dominated colonies. The French Empire was ruled directly by the French elite, preventing local populations to gain administration skills and preserving a climate of general protests and political instability up to the current day. French colonies were originally poorer than British ones, afflicted by an arid climate, and multiple tribes always fight each other due to harsh living conditions. On the other hand, British colonies were ruled by British governors and local rulers alike: when possible, the UK preferred to leave the king or dominant tribe in power and help him manage the country. The British system had some obvious advantages in terms of skills and education of the local elite, however, it also considerably contributed to social inequality and tribalism, hindering development for the vast majority of the population.

A positive note of today’s French ex-colonies are their free-trade agreements with the motherland, the presence of a strong common currency inherited from France and preferential migration treaties. Unlike British ex-dominions, French-speaking African countries are arguably well-positioned to take advantage of international trade and economic opportunities. Open trade agreements potentially grant colonies a safe route to export their products, obtaining fair prices and income for the local poor.

The Vicious Cycle of Poverty

Today, African countries still suffer from many of the colonial problems and scarce progress has been made to overcome their challenges in eradicating poverty and developing equally. The lack of real political agendas, social inequality, unsustainable supply chains, and daily life hazards are a vicious cycle preventing active citizenship and fair policies.

European Empires did little to tackle the problem of tribalism and continuous fighting among different ethnic groups. As a result, tribe leaders are still strong socio-political agents in sub-Saharan Africa, undermining the national unity and promoting unfair pro-tribe policies. Few exceptions can be mentioned to the rule of African leaders coming to power after sanguineous and violent rebellions. Indeed, one could question whether the western model of “Democracy” fits the continent at all. Under the assumption of perfectly rational voters, democracy should work because most citizen would choose their own leader according to what they deem best for the country. However, when strong social differences and closed communities (e.g. tribes) exist within a country, every voter will want to maximize his or her own interest. In most African countries, the majority of the population does not vote based on political ideas or

In most African countries, the majority of the population does not vote based on political ideas or agendas, but instead follows the candidate from their own tribe. There are almost no cases in which the major political parties do not reflect a pre-existing tribal subdivision of the country, with President Kenyatta’s post-electoral protests and turmoil being the most recent case. When a president enters into power, he or she will invarably favour fellow tribe members with little attention to the needs of the vast population, raising general opposition and malcontent.

Minorities

The lack of a political agenda favouring minority and disadvantaged groups impedes the poor from reaping the benefits of a steadily growing economy. In fact, In spite of upswinging economies, the African poor are getting poorer and social inequalities are growing visibly. The historical-political systems of the region favour a small privileged elite who has become sufficiently equipped to face the global financial systems and a post-capitalist economy, at the expense of their disadvantaged con-nationals. Education and services are available only to the lucky and relatively rich urban population, who can aspire to attend a University and eventually find an office job in the booming cities.

However, illiterate and rural inhabitants face the constraints of never-increasing wages, disinformation on market prices and ingenuity towards formal commercial and financial systems. Cases of touristic café chains paying their waiters less than $1 a day, peasants forced to sell their land at unrealistic prices and individuals evicted from their houses due to gentrification and rising costs of rent are heard daily in the local newspapers. In short, the few people with sufficient capital to invest in land or other commercial activities are taking advantage of an increasing number of unskilled persons longing for the satisfaction of their primary needs.

A closer focus on the poor’s perspective and reflection on the evolution of capitalism in the last century can explain why locals are not taking action against an unfair and debilitating system. Westerners tend to oversimplify the intricacies of capitalism and the economic mechanisms at play in modern realities, yet those are of not simple nor immediate understanding for the rural masses. The ideas of investment, setting up a business, risking capital and realizing a profit are completely extraneous to rural communities in Sub-Saharan Africa. Moreover, following a long tradition of subsistence economy and limited production, the common peasant may not consider the future consequence of his daily actions.

Economic life is the immediate consumption of one’s salary, satisfying hunger if sufficient funds are available to purchase food. The drastic change from barter to a complex economic system brought by the Europeans is not comprehensible without a formal education and deep immersion in urban contexts, excluding rural communities from the benefits of economic development. The concepts of saving, optimism towards the future and mitigating risk do not come into mind naturally if one has not grown up familiar with them. In the same vicious circle, poverty and lack of expectations lead poor farmers to undervalue their life, spend their belongings in short-term needs and overlook future possibilities. The metrics measuring poverty should be expanded to statistics of poverty-related troubles, including not only malnutrition and health conditions but also prostitution, the incidence of sexually-transmissible diseases (STDs), crime rate and micro-corruption, among others.

The West’s Responsibility

Does the West have a say in what happens in Developing countries? Aren’t we doing good actions with humanitarian aid and NGOs? Or are we, perhaps, closing both eyes on the bigger picture?

As long as tribal and dictatorial regimes are supported in their operations favouring a privileged elite over the masses, poverty can do nothing but increase. The lack of infrastructure, the physical and psychological exclusion of the underprivileged and the impossibility of exiting their vicious cycle are imminent problems that the globalized world as a whole should face.

This responsibility is reflected not only at the macro level, with international trade policies and innovative research focused on empowering small-hold farmers, but also at the micro level, when multinationals and consumers alike deliberately ignore the complications across a global supply chain. Has someone ever wondered where do the $1 chocolate bars and kilos of bananas from the supermarket originate from? This is the right time to ask.

Get articles like this straight to your inbox each morning with our Breakfast Briefing. Sign up by clicking here!

Log in with your details

or    

Forgot your details?

Create Account

Send this to a friend