The Hindu Business Line : Why are some countries richer?

The tools of development are as much the establishment of the rule of law, of property rights, of efficient government, as the granting of foreign aid.

TO SOME, economics disagrees a little too much. Churchill said that if you had two economists in a room you were guaranteed two different points of view, "and three if one of them is Mr Keynes''. That may be a little too harsh. Where would we be without controversy? The comforting thing about economics, indeed, is that it is often possible for both sides to be right. With this in mind, a look at some long-standing controversies.

In the end, there are perhaps only two economic questions that matter: How much wealth is created and how it is distributed between people and countries. Since Adam Smith's day, the world has created wealth at an exponential rate. Its distribution has, however, become more uneven as time has gone on. The disparities in income and wealth between the world's rich and poor are striking. Estimates published in the Economic Journal in 2002 by Branko Milanovic of the World Bank showed that the richest 1 per cent of the world's population, approximately 60 million people, received as much income as the poorest 57 per cent, 3.4 billion. David Landes, the economic historian, estimates that the income gap between one of the richest countries, Switzerland, and one of the poorest, Mozambique, is 400 to one. Prior to the industrial revolution of the middle of the 18th century, he suggests that the biggest such gap would be about five to one. The richest fifth of the world's population receives 86 per cent of global income and 1.2 billion people, 20 per cent of the world's population, exist on less than a dollar a day, with another two billion officially categorised as "in poverty''. Rich countries spawn rich companies. Large, multinational firms account for one-third of world gross domestic product and two-thirds of world trade.

Why such disparities? There are three broad explanations. First is the `late developer' thesis. Political correctness requires that we call poor countries developing even when some of them are not developing at all. On this view, prosperity and success eventually come to everybody, but for some, it takes longer than others. African countries, for example, have a level of income per head about the same as that of Europe two centuries ago. Perhaps in two centuries they may be only a hundred years behind Europe, and thus well above the present European living standards. It is a big perhaps. It is true that changes have taken place in the global economic rankings. As the cradle of the industrial revolution, the UK had first mover advantage — by starting first it managed so stay ahead of the pack — and reigned supreme for a hundred years or so after it. However, as early as the Great Exhibition of 1851, people began to notice the superiority of the products being exhibited by German companies. The UK was surpassed, not just by other European economies, but also by the US. Japan, an economy closed to the outside world until late in the 19th century, was another to come through rapidly, both before and even more impressively after the devastation of the Second World War. China could have had an industrial revolution at the time of the European renaissance but chose a different path. Now, according to some, China will be the most powerful economy of the 21st century, although there are serious reasons to question this, most notably whether it has the appropriate economic structure for sustained growth.

The fact that countries have changed position in the rankings does not, however, offer comfort. Anti-globalisation critics would argue that the rich countries and their corporations have organised things in such a way that they have effectively kicked the ladder away. Poor countries, in other words, are there to exploit and not to be given a helping hand. This criticism cannot be dismissed, and certainly richer countries have tended to control the rules of global trade and have done so in a way that excludes the products of poor countries. That, one hopes, is changing. As for corporations, their main interest is in creating new markets of prosperous customers, not in preserving poverty. There must be another explanation for persistent poverty.

The second explanation has to do with location. The eminent Canadian-born (but American-adopted) economist, J. K. Galbraith, noted years ago that if one were to mark a line around the globe a thousand miles either side of the equator, there would be no developed, that is, rich countries there. Poor countries tend to be in tropical and semi-tropical zones. There, disease tends to be rife, including malaria and AIDS, and life expectancy is low. Agriculture is more difficult and less productive, so producing a relatively small amount of food absorbs a great deal of labour. Many poor countries, particularly those in Africa, are poorly placed geographically to benefit from trade. Landlocked countries, in particular, struggle; if they are in dispute with the neighbours, they need to traverse to get to the seas. A study by Jeffrey Sachs and others put down Africa's economic failure to climate, disease, geography and poor policies. The third explanation, put forward by David Landes, in the book The Wealth and Poverty of Nations, is that it all comes down to culture.

Landes's title deliberately echoes Adam Smith's Wealth of Nations. Smith, explained the route to prosperity through the division of labour. Organisation was the key to harnessing and advancing the powerful forces of industrialisation. The UK, as the first modern industrial country, was ideally place to take advantage of it. There was a powerful desire for economic advancement, a willingness to embrace new technology, an already well-developed capital market (the City), rule of law and a respect for property rights. Other countries, often with similar societies — Germany, the US, Australia, and others — either possessed or were able to emulate this work ethic.

Cultures can change and adapt. Many countries have a tradition of enterprise even if their most entrepreneurial people tend to express themselves elsewhere.

In a sense, most development programmes follow his line of thinking. The tools of development are as much the establishment of the rule of law, of property rights, of efficient government, as the granting of foreign aid. Lord Bauer, the distinguished British economist who died in 2002, pointed out that over decades indiscriminate aid did poor countries more harm than good.

Douglass North, the American economic historian and joint winner of the Nobel Prize for Economics in 1993, has studied the role of institutions in economics development. According to him: "Institution provides the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange.''

The inability to enter into binding contracts and the prevalence of bribery and corruption holds back development both in the poor countries and in the former socialist states. Get the institutions right and you have a chance. And, yet, the message is also a depressing one. People have known for years that there are cultural barriers to economic development. There are good examples of where those barriers have been lowered and the fruits of even small-scale development have gone to corrupt rulers rather than the general population. The poor have stayed poor, and may remain so.

(The author is a Chennai-based management consultant.)