The Causes of Poverty (61): Geography

It’s commonly accepted nowadays that a multitude of causes determines whether a country is relatively rich or poor. The fact that I’m currently writing post number 61 in this series points in the same direction. However, this means that it’s still possible for a particular cause to be dominant in certain countries, outweighing other existing effects. Some focus on institutions for example, others on geography. Let’s have a look at geography, and more specifically at the argument made by Jared Diamond. He cites some geological, geographical and climatological facts that do seem to have a large effect on national prosperity in certain countries:

  • Tropical climates are notoriously unhealthy. There are more parasitic diseases in the tropics because the temperatures are never cold enough to kill parasites. Carriers of diseases, such as mosquitoes and ticks, are also far more diverse in tropical than in temperate areas. Furthermore, tropical diseases – compared to other diseases – are more difficult to combat with effective vaccines. There’s still no vaccine against malaria for instance. Disease is obviously a drag on economic growth: when large parts of a population are sick for extended periods of time, they are unable to work and trade efficiently. Furthermore, disease leads to high fertility rates – as an insurance against infant mortality – which in turn removes many women from the economy for a substantial part of their productive lives.
  • Agricultural productivity is on average lower in tropical than in temperate areas. Temperate plants store more energy in edible parts such as seeds than do tropical plants. Plant diseases borne by insects and other pests reduce crop yields more in the tropics than in the temperate zones because the pests are more diverse and not subject to cold winters. The soils are also better in temperate climates (rainfall washes away the nutrients in tropical soils, and these soils are older and not renewed by glaciers).
  • Landlocked countries are at an economic disadvantage: if an area is accessible to ships because it lies either on the sea coast or on a navigable river, then trade is easier and less costly: it costs roughly seven times more to ship a ton of cargo by land than by sea. Hence, landlocked countries profit less from the advantages of trade.
  • Similar advantages are shared by countries that have abundant reserves of natural resources such as fresh water, forests, minerals, fuels etc. (Although dependence on natural resources can also be a curse).

This being said, there is no overwhelming correlation between national wealth and geographic conditions that supposedly promote wealth: there are countries that are more prosperous than they should be given their geographic endowments, and vice versa. Other factors must therefore play a part, most notably institutions.

More posts in this series here.

Why Do Countries Become/Remain Democracies? Or Don’t? (22): Arab Democracy, an Oxymoron? Ctd.

I already wrote about and dismissed the claim that Islam is the main reason why democracy seems to fail in Arab countries (see here). Now I’ve found a new study that seems to support my argument:

The Arab world’s so-called “democracy deficit” is not tied to the Islamic religion but rather to the Arab world’s history and the institutions introduced following conquest by Arab armies over 1000 years ago. (source)

Territories conquered by Arab armies during the Middle Ages still have weak civil societies and strong states today. Countries that are predominantly Muslim today but outside of this area of medieval conquest are not more or less democratic than the average country.

If this is true, then we can be somewhat optimistic about the possibility of real democracies emerging from the Arab Spring. If Islam were the problem, we could forget about democracy.

However, I have my doubts about the importance and validity of this explanation. It’s not the historical distance of the causal link that troubles me. You may be skeptical about the long-lasting effects of events that occurred centuries ago, but I think such effects are commonly accepted in other areas: the slave trade still causes poverty in Africa to this day, and poverty and inequality in present-day Peru for example are partly the result of the mita system of the Spanish colonizers.

What troubles me is that I can see other, more or equally important reasons for the democratic deficit in Arab countries: the resource curse, foreign intervention (motivated by the FOTA principle) and, yes, some elements of Islam (Islam’s hostility to equality, to the separation of state and church etc.). The latter point should not be understood as implying fatalism with regard to the prospect of democracy: Islam is only one causal element among many, and it’s a cause that can be eliminated. After all, Catholicism as well was once believed to be an insurmountable obstacle to democracy.

More posts in this series are here.

The Causes of Poverty (54): Lack of Trade Liberalization

I mentioned before that trade liberalization – the removal of trade barriers such as tariffs, subsidies and other distortions of international trade – is, on aggregate and in the medium term, a powerful mechanism for poverty reduction. I say “in the medium turn”, because some structural adjustment may be necessary, and “on aggregate” because some may lose while others gain.

The usual fears about trade liberalization – that it reduces government revenues necessary for redistribution, that it leads to labor competition, lower wages and higher unemployment rates, or that it raises prices in developing countries – are, in general and on aggregate, unfounded (an overview of the evidence is here). Of course, trade liberalization may cause local economic shocks, and there can be distributional effects: some people will benefit more than others, and some may even be worse of after liberalization, especially in the short term. But it’s the aggregate medium term effect on a country or an economy that counts.

This is similar to the positive effect of economic growth on poverty reduction:

The vast majority of the world’s poor live in the rural areas of these two countries [China and India]. Both countries achieved significant reductions in poverty during 1980–2000 when they grew rapidly. According to World Bank estimates, real GDP grew at an annual average rate of 10 percent in China and 6 percent in India during these two decades. No country in the world had as rapid growth as China, and fewer than ten countries exceeded the Indian growth rate. The effect on reduction in poverty in both countries was dramatic, entirely in keeping with the “Bhagwati hypothesis” of the early 1960’s that growth is a principal driver of poverty reduction. (source)

Not all of the poor will be automatically better of as a result of economic growth, and growth may widen income inequality or relative poverty while reducing absolute poverty. But on average and on aggregate, economic growth – like trade liberalization – reduces poverty. That’s not just a story of “trickle down” or “all boats rising on a rising tide”; economic growth also means that the government has more resources to fund welfare and redistribution. (Obviously, none of this implies that growth is always beneficial or that there isn’t room to make growth even more “pro-poor” than it already is).

Arguments in favor of trade liberalization

The interesting part of the argument is that the positive effect of trade liberalization on poverty reduction passes through enhanced economic growth: liberalization reduces poverty because it enhances growth.

[P]ractically no country that has been close to autarkic has managed to sustain a high growth performance over a sustained period. Furthermore, … if one classifies countries into globalizers and nonglobalizers by reference to their relative performance in raising the trade share in GNP during 1977–1997, the former group has shown higher growth rates… [T]he outward-orientation of the Far Eastern strategy … led to the Asian miracle. (source)

Free trade is one of the determinants of economic growth. Growth requires increased productivity, and that’s what free trade delivers. Free trade means more productivity because it means

  • more specialization
  • more use of comparative advantage
  • better access to technology and knowledge
  • better and cheaper intermediate goods (raw products etc.) and capital goods (machines etc.)
  • benefits of scale
  • and increased competition.

All these consequences of free trade have a positive effect on productivity and hence on growth. And that’s not just theory; there’s empirical proof. Reductions in trade barriers were almost always followed by significant increases in productivity (source).

And it’s not just productivity; trade liberalization has other effects as well. The removal of tariffs can reduces prices for consumers and hence reduce poverty. It’s often the case that goods consumed by poor people have a higher tariff tax than goods consumed by rich people:

In his research, [Edward Gresser, senior fellow and director of trade policy at the Progressive Policy Institute] found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods. What’s more, when customers pay sales tax on these products, that amount is also higher than it would otherwise be thanks to the tariff that drives up the retail price. (source)

Hence, not only does free trade alleviate poverty, trade restrictions and protectionism actually aggravate poverty. Take also the example of restrictions on rice exports in rice-producing countries:

At first glance, this seems understandable, because a country may not wish to send valuable foodstuffs abroad in a time of need. Nonetheless, the longer-run incentives are counterproductive. (source)

When farmers can’t export, there’s little incentive for them to farm rice. Result: the shortages that were meant to be avoided.

Arguments against trade liberalization

However, we shouldn’t lose sight of the undisputed downsides of trade liberalization. The removal of subsidies can hurt certain producers and it can, especially in the short run, depress employment and wages in certain sectors. It can therefore reduce some people’s incomes and push them into poverty. Trade liberalization can destroy entire markets: it can force a country to abandon tomato production for example, because nonsubsidized local producers are no longer able to compete with increased import competition coming from countries with a comparative advantage. The local producers will lose their jobs and income. However, these same people may benefit in other areas: products which they consume may become cheaper. So, when assessing the impact of trade liberalization on poverty, one has to aggregate all the losses and gains in different areas, and that’s ultimately an empirical question that has to be investigated country by country. Overall, the evidence is that, on aggregate, the effect is probably positive.

There can be individual losers from liberalization, and even individual countries can lose: countries that depend on mineral resources, for example, can take the fast lane towards the resource curse when trade is liberalized. But it’s the global balance of poverty alleviation that determines the desirability and success of trade liberalization.

The claim that liberalization negatively affects government revenues because of decreasing income from tariff taxes, and hence diminishes the generosity of the welfare state, is also not well founded. First of all, liberalization also means reduced subsidies, which should improve governments’ fiscal situation. Secondly, trade volumes increase as tariffs are reduced, and hence the net effect of reducing tariffs doesn’t have to be falling revenues. And finally, even if revenues fall, the poor don’t necessarily have to suffer: it’s ultimately a political decision where to spend which types of government revenues. Priorities can change when revenues change.

Another possible disadvantage of free trade is a cultural one. The claim is that free trade means cultural imperialism: small cultures don’t have the resources to export their cultural products and risk being overwhelmed by, in particular, American culture. Hence, there may be a case for cultural protectionism, but this case doesn’t extrapolate to protectionism writ large.

Conclusion

Liberalization isn’t a magic bullet, neither for economic growth nor for poverty alleviation. Sustained growth and substantial long term poverty reduction require more than free trade. Conflict resolution, good governance, education etc. need to accompany liberalization. It’s no secret that we don’t yet fully understand all the determinants of growth and poverty reduction. The advantage of trade liberalization, compared to other possible pro-growth or pro-poor policies, is that it’s relatively easy to implement: it is – or should be – easier to abolish tariffs and other trade restrictions (especially if there’s an element of reciprocity in global negotiations) than to create a solid education system or a non-corrupt judiciary able to enforce market rules and property rights.

The evidence in favor of the pro-poor effects of trade liberalization is compelling, but we shouldn’t underestimate some measurement difficulties: the measurement of poverty, of trade liberalization and of the effect of the latter on the former is by definition imprecise. The concept of trade liberalization may also be too broad or too vague. And the specific outcomes of liberalization policies depend not only on the precise reforms being undertaken, but also on the context in which they are undertaken. The same measures will have different results in different economic environments. The extent of multilaterality also determines the effects.

Read more on the topic here and here. More posts in this series are here.

Types of Human Rights Violations (6)

Let’s take an example of a fictional and very specific human rights violation: a Nigerian woman, let’s call her Joy, doesn’t have enough money to buy food and other necessities on a regular and predictable basis, for her and her family. And yes, poverty is a human rights violation, but if you insist you can easily rewrite this post with another example of a rights violation. Then you can also take another country. The choice of Nigeria is purely random, and nothing in this post is supposed to imply that certain rights violations are typical of Nigeria, or any other country for that matter.

Joy’s poverty can be a case of one or several types of rights violations. A first question we need to ask is whether we’re dealing with an act or a rule based rights violation. Joy’s predicament can be the result of her dominant husband, Emmanuel, who doesn’t allow her to work because he’s jealous and afraid that she may be unfaithful when given the occasion, but who also doesn’t bring home enough money himself. However, a more important cause of her poverty may be the predominant social and cultural rules against education and professional work for girls and women.

So we can try to understand whether rights violations are caused by the conduct and actions of individuals, groups, states etc. or rather by systems of rules and institutions in a society. Counterfactuals will be helpful: how would things have been different if someone had acted in another way or if some other rules had been in force?

In the case of act based violations we’ll also need to establish an agent’s intent, his ability to predict and to avert the consequences of his actions, the availability of alternative actions, the cost of alternative actions to the agent etc. It’s not Emmanuel’s intention to force Joy into poverty, but he can be expected to understand the consequences of his actions. There’s also an obvious alternative action available – let Joy work – which won’t impose a large cost on Emmanuel (most women are not unfaithful at work).

In the case of rule based violations as well we’ll need to see whether the rule’s consequences could have been predicted and averted, whether alternative rules are available, feasible, realistic and not too costly, and, if so, whether there is someone who can be held responsible for not implementing and enforcing those alternatives. If Joy’s poverty is the result of cultural rules against education and work for girls and women, then there are alternative rules available, but those may not be feasible in the short term given the cultural nature of the existing rules. However, we can perhaps point the finger at the government for not trying hard enough to impose an alternative rule such as compulsory education for girls or a law against gender discrimination in employment.

This leads us to the following point: both act based and rule based rights violations can be divided into two additional categories or types, call them active and passive types of rights violations. Rights violations may be caused by wrongful acts or by a failure to act. Or they may be caused by the wrong rules or by a failure to impose the right rules. Emmanuel can violate Joy’s rights by forcing her to stay home or by failing to help her find a job. Joy’s government can violate her rights by enforcing the cultural norms against education and work for girls and women, or by failing to enforce rules regarding compulsory education and employment discrimination.

As is clear from the last example, the rules in rule based rights violations can be either moral and cultural rules or legal and institutional rules (or both of course). And legal and institutional rules can be national or international. Joy’s poverty may be caused by national rules such as in the example above, but also by international legal rules such as those regarding trade restrictions (and even by national rules of other countries such as those restricting immigration).

Act based rights violations can of course also be national or international. If Joy’s government is corrupt and allows the country’s national resources to be expropriated by foreign companies that fill the pockets of government officials, then that will be the cause of her poverty.

In the case of national legal rule based violations, the cause of violations may be incidental or structural: the cause may be a single rule or a small set of specific rules (e.g. the enforcement of gender discrimination in education and work), but may also be a general failure of the rules in society. If Nigeria becomes a failed state, then that will be the cause of Joy’s poverty because it’s unlikely that an economy will flourish absent the rule of law and good governance – and if the economy won’t flourish, neither will Joy.

Other possible classifications of rights violations could differentiate between

  • vertical and horizontal violations: vertical violations being those inflicted on individuals by a government, international institutions etc.; horizontal violations being those inflicted by individuals or groups on each other (both vertical and horizontal violations can be either rule or act based, caused by wrongful acts/rules or a failure to act/rule, national or international, incidental or structural etc.)
  • zero sum violations, positive sum violations, or negative sum violations (Emmanuel or male citizens of Nigeria in general may profit from gender discrimination in the short run – zero sum – but may ultimately also suffer from it – negative sum – because gender discrimination reduces the pool of talent in a society)
  • inflicted or self-inflicted violations (Joy may only have herself to blame for her poverty)
  • current or transtemporal violations (Joy’s poverty may be the lingering effect of slavery)
  • etc.

The Causes of Poverty (44): Bad Institutions

Botswana is a largely tropical, land-locked country with insignificant agriculture in a geo-politically precarious location. When the British granted independence, they left 12 km of roads and a poor educational system. Making headlines for its devastatingly high HIV rate, Botswana suffers from high inequality and unemployment. Officially a democracy, it has yet to have a functioning opposition party. 40% of Botswana’s output is from the diamond industry, a condition that in other countries casts the resource-curse.

Still, Botswana is a growth miracle. Between 1965 and 1998, it had an average annual growth rate of 7.7%, and in 1998 it had an average per capita income four times the African average. Rule of law, property rights, and enforcement of contracts work; the government is efficient, small, and relatively free from corruption. Indigenous institutions, persisting through colonization, encourage broad-based participation, placing constraints on elites. Institutional quality and good policies are responsible for success against the odds. (source)

Of course, high GDP growth rates don’t always imply low poverty rates, but often they do. About a third of the population still lives in poverty, but this rate has been declining sharply, from 59% in 1985 and 47% in 1992 (source).

More posts in this series are here.

Why Do Countries Become/Remain Democracies? Or Don’t? (16): Climate and Geography

There are some contingent reasons why countries’ governments develop or fail to develop a strong system of centralized control over resources. And those that fail to do so tend to be more democratic. The detailed argument is here, but I’ll give you a short summary.

Montesquieu already related differences in human political conditions to climatic differences. And indeed, it’s not uncommon to see the argument that water for instance plays a crucial role. Water makes land valuable, but only in countries where there’s continuous rainfall over the seasons will water be available in sufficient quantities. In other countries, a centrally coordinated irrigation system will be necessary, and this requirement favors a strong central government. In countries where citizens don’t depend on the government for water for their agriculture for instance, those citizens have more bargaining power.

Also, continuous rainfall results in agrarian surpluses, which in turn favor urbanization and taxation. Taxation is a well-known cause of democratization (“no taxation without representation“), and popular mobilization against authoritarian rule is easier in large cities. Urbanization also leads to commerce, specialization and industrialization, phenomena which result in a large and powerful middle class, able to bargain the taxes it pays against more rights and freedoms.

In light of this, it’s not surprising that democracy developed first in North-West Europe and North America, regions with plenty of rainfall. And neither is it surprising that so many non-democracies suffer from the so-called resource curse: countries that are endowed with natural resources that – unlike rainfall – can easily be brought under central control tend to develop governance structures that favor such control. Government will be centralized and authoritarian because the resource rents for the leaders are very high. And when there’s central control over resources, there’s also central control over all the rest: leaders have a strong financial incentive to stay in power and to oppress opposition movements.

But it’s not just climate that favors democracy or autocracy. There’s also geography. A country that is shielded from external military threats as a result of its geography or topography – for example because it’s an island, has a long coastal line, or is situated in a mountainous area – doesn’t need to sustain a standing army at the exclusive disposal of its leader. Without such an army, the leader’s control over coercion is limited and it’s much more difficult to develop a centralized governance system. Perhaps the success of democracy in countries such as Iceland, the UK, Scandinavia and Switzerland can be explained in this way. The army in Switzerland is really a volunteer militia, whereas the army in the UK has long been the hobby of the nobility.

So these are two examples of climate and geography deciding the balance of power in favor of citizens. A government that isn’t favored by climate or geography in its attempts to centralize power faces a stronger citizenry. Likewise, if a government depends on its citizens’ agreement for the use of an important resource such as the military – for geographic reasons – then those citizens have bargaining power. They will only participate in war or conquest if they get something in return, e.g. more rights and freedoms.

Of course, it would be silly to claim that climate factors or geography determine political outcomes, or even that they are the main causes. Democracy depends on a lot of things, especially beliefs and intentional collective action , much more than objective and contingent circumstances. But those circumstances do play a role, as they always do. Other causes are discussed in other posts in this blog series.

The Causes of Poverty (35): The Membership Theory of Poverty

When you read about the causes of poverty you’ve probably convinced yourself that there are causes, and that the poor don’t have only themselves to blame. What you’re most likely to find are the following causes:

  • culture
  • geography, climate, resources (most notably in the work of Jeffrey Sachs)
  • institutional, political and governmental causes (e.g. the resource curse, the role of the rule of law and economic freedom etc.)
  • education
  • sociological causes (e.g. family structure)
  • etc.

It’s less common to find discussions about group affiliation as a cause of poverty. The group membership theory of poverty states that some people are poor because of the dynamics of the group(s) to which they belong. The groups may be residential areas (“ghettos”), schools, ethnic groups, workplaces etc. Poverty in this sense is “contagious”, hereditary, and self-perpetuating. It’s an example of a poverty trap.

This membership theory of poverty has a certain intuitive appeal to it. Group membership influences individual behavior and individual outcomes in various ways, so it wouldn’t be surprising to see that it influences economic status as well.

How do groups exert a negative influence over their members’ economic status? Peer pressure plays a role. The choices of some members of the group become the “natural” thing to do. The desire for social acceptance can force individuals to mimic their peers. Something similar occurs with role models. The behavior of older group members or members with some form of authority becomes standard behavior. Furthermore, when people witness high rates of failure among members, this will negatively affect their aspirations and effort. Finally, social and economic activities are highly complementary. When few group members start businesses for example, few other members will have the opportunity to work for them or trade with them. Conversely, when many members engage in economically destructive activities such as crime, other members may have no other economic opportunity than to collaborate.

You may ask, if groups are so bad, why don’t people just get out? Of course, it’s not always as easy as that. When you live in a crime infested ghetto, you don’t just move uptown. People will need some form of help. In order to break negative group dynamics, you can either work on these dynamics themselves (provide better education, crime protection, economic opportunities, affirmative action schemes etc.), or you can try to influence the prior group affiliation. How do people end up in a harmful group in the first place? There may be some room for government intervention. There’s the example of school desegregation through busing in the U.S. (not highly successful however). Governments can also tweak their social housing policies. Such policies are often called associational redistribution. One should be careful, however, not to cause harm elsewhere. There’s still a right to freedom of association and a right to privacy. Governments shouldn’t mess too much with group membership.

If you want to read more about the membership theory of poverty, I recommend two papers by Steven Durlauf, here and here. Those papers also contain an overview of the empirical evidence.

Why Do Countries Become/Remain Democracies? Or Don’t? (12): Arab Democracy, an Oxymoron?

When people look for reasons why countries haven’t made the transition from authoritarian government to democracy, they often mention economic development or culture, or both. And culture usually means religion more specifically. And religion usually means Islam. Now it’s true that if you look at the largest Muslim region, the Arab world (roughly North Africa plus the Arab Peninsula), you won’t find a single democracy. You can check the most common democracy indexes, Freedom House and Polity IV. That’s an anomaly: no other large region in the world is similarly devoid of democratic governance.

The question is of course: why? In our post-9/11 world the obvious answer is Islam, which is believed to be a religion that is particularly incompatible with democratic principles such as separation of state and church, pluralism, rule of law, human rights etc. Some even say that there will never be democracies in the Arab world as long as Islam remains an important force.

However, sometimes the obvious answer is also the wrong one. Some Muslim countries outside the Arab world have reasonably well developed democratic systems of government (Albania, Indonesia, Malaysia, Senegal, Turkey etc.) and are doing much better than some non-Muslim dictatorships out there.

But then, if it’s not religion, what is the reason for the absence of democracy in the Arab world? In an interesting new paper, Larry Diamond has a look at some possible reasons. He focuses on the so-called resource-curse and the correlated lack of accountability (accountability only emerges in countries that have to tax their people), but I think he’s wrong there. Lack of economic development could be a cause, but he rightly dismisses it. If you compare economic development in Arab and non-Arab countries, you see that per capita GDP of Kuwait is on the same level as Norway, Bahrain compares to France, and Saudi Arabia is on a par with South Korea. Conversely, you’ll be able to find non-Arab democracies that are much less developed than the average Arab country.

A more promising explanation of enduring Arab authoritarianism is FOTA: fear of the alternative. moderate opposition groups in Arab countries tend to accept their authoritarian governments. Their dislike of “modern pharaohs” is topped by their dislike of radical Islamist groups that could profit from free elections. Rather than the principle “one person, one vote, one time” followed by theocracy, they settle for the relatively mild yoke of secular Arab dictatorship. Something similar happened before in Latin America, when the feared alternative was communist rule.

Another explanation for the lack of Arab democracy is the large proportion of GDP spent on the security apparatus, and the relative efficiency of Arab security forces. This is probably linked to the support these countries receive from the West, which is another reason for their longevity. And finally, the Arab-Israeli conflict is a very convenient diversion: it allows public frustration to discharge outwards, without internal consequences.

As you can see, none of these causes condemn Arab countries to dictatorship. Compared to religion, these are things that can be changed quite easily, if the will is there. The FOTA is self-fulfilling: it’s likely that radical Islamist movements are encouraged by authoritarian rule, as much as they are restrained by it. So better give it up. And the West could use its leverage, resulting from decades of support, to push for reforms.

Why Do Countries Become/Remain Democracies? Or Don’t? (9): The Resource Curse

If we value democracy, then it’s interesting to know

  • how societies have achieved the transition from authoritarian forms of government to more democratic ones
  • why other societies have failed
  • and how democracies have avoided the opposite transition.

This knowledge will help us to promote and sustain democracy in the future. Something we already know is that this isn’t simple. There are a huge number of factors at play and there’s no silver bullet. Some of the most widely discussed factors are economic development, levels of education, and religion and culture.

I’ll bracket two important issues here: what kind of democracy are we talking about, and how do we measure transition or development towards democracy? If you want to know what promotes or inhibits democracy and act on this knowledge in order to further the cause of democracy, you can’t avoid these questions, but discussing them here would take us too far.

What I want to focus on here is the so-called resource curse. This curse is believed to be a phenomenon that blocks countries’ development towards democracy. Promoting democracy means lifting the curse. Now, what is this curse, and is it real or just another simplistic explanation of the course of history?

Countries which own lots of natural resources such as diamonds, oil or other valuables that are found in the ground, are often relatively poor, badly governed, violent and suffering from gross violations of human rights. Resource wealth can trigger corruption and grabbing, can give autocrats the means to retain power by buying off opposition or building a repressive state apparatus, or can tempt democratically elected leaders to cling to highly beneficial positions of power.

This sounds good but even a cursory glance at reality reveals some counter-indications. There are many resource rich countries that are governed very well and are pinnacles of democracy (take Norway). Still, that may only disprove part of the resource curse. It may be the case that democracies benefit from resources and are able to solidify themselves, while non-democracies are doomed to remain as they are because of resource abundance. Resources then only create a curse when democratic institutions are absent. So we shouldn’t worry about democracies failing because of resources, but about autocracies failing to transform because of them.

However, there’s an article here claiming that

resource wealth is positively associated with both economic growth and institutional quality.

Much depends, it seems, on how to measure resource abundance. There also is a reversal of the direction of causation, a common mistake in statistics:

There is no evidence that resource-dependent countries end up with slow growth and bad institutions. Rather, countries with bad institutions attract little investment, and as a result they grow more slowly and remain dependent on exports of commodities.

Why Do Countries Become/Remain Democracies? Or Don’t? (8): The Resource Curse

The resource curse refers to the claim that some countries with lots of natural resources tend to do worse than countries with less resource wealth, worse in two respects: less economic growth and prosperity and less political stability and respect for basic rights.

Reliance on natural resources is said to inhibit development, political and institutional stability, anti-corruption efforts and legal protection for human rights.

Now, the important thing to stress here is that reliance on resources can lead to negative consequences, but doesn’t necessarily have to. Not all resource-rich countries are “cursed”. There’s a paper here arguing

that the natural resource curse burdens non-democracies, but countries with better democratic institutions are not corrupted by such endowments. For governments accountable to their citizens, resources can be a blessing.

The paper does not demonstrate that there’s a linear relationship between higher levels of corruption and natural resources. The dispersion of countries is very wide. Norway and Iraq are more or less on the same level of resources, but on opposite extreme of corruption, and the same is true for many other countries.

So, natural resources do not produce corruption or a resource curse in any mechanical or deterministic way. Some third element is necessary for the curse to take place. The paper cited above argues

that strong democratic institutions help to moderate the effect of natural resources on corruption. In figures, we split the sample into democratic and non-democratic countries. These suggest that the negative relationship between natural resources and the corruption index prevails in the sample of non-democratic countries but not in the sample of democratic countries… the relationship between natural resource rent and corruption depends on the quality of the democratic institutions… These findings imply that resource-rich countries have a tendency to be corrupt, because resource windfalls encourage their governments to engage in rent seeking. However, history shows that countries discovering natural resources after they have established well-functioning democratic institutions tend to handle the scourge of corruption much better.

The Causes of Poverty (29): Overview

Our research shows that if you want to avoid poverty and join the middle class in the United States, you need to complete high school (at a minimum), work full time and marry before you have children. If you do all three, your chances of being poor fall from 12 percent to 2 percent, and your chances of joining the middle class or above rise from 56 to 74 percent. (We define middle class as having an income of at least $50,000 a year for a family of three). Isabel V. Sawhill and Ron Haskins (source, source)

However, that seems to be a bit reductionist. There are many other possible causes of poverty. Some more convincing than others. For example, here’s Montesquieu according to whom people in hot places are simply too lazy to become rich:

In Europe there is a kind of balance between the southern and northern nations. The first have every convenience of life, and few of its wants: the last have many wants, and few conveniences. To one nature has given much, and demands but little; to the other she has given but little, and demands a great deal. The equilibrium is maintained by the laziness of the southern nations, and by the industry and activity which she has given to those in the north. (source)

According to Thomas Malthus, poverty is caused by overpopulation. Food and other resources are limited, and a population growth that exceeds a certain pace will inevitably hit a resource ceiling, and will result in decreasing standards of living, poverty, conflict over scarce resources, famine etc.

Max Weber believed that protestant work ethic put protestant nations at an advantage compared to other nations. Certain values, such as the opinion that God will reward those who work hard and save money, or the belief in predestination—getting rich is a sign of God’s approval—make some nations rich and others, that lack these values, poor.

Jeffrey Sachs focuses on geography and weather. In the poorest parts of the world, the soil is nutrient-starved, making it difficult to produce food. Moreover, tropical climates foment disease, particularly malaria. The UK, on the other hand, the country where the Industrial Revolution started, has a fertile soil, a lot of coal, and good waterways.

Daron Acemoglu states that nations are not like children — they are not born rich or poor. Their governments make them that way.

People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. … if you wish to fix institutions, you have to fix governments. [People should be able to] enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. (source)

There are obviously many more explanations of poverty, both “exotic” and sensible ones. And regarding the latter, it’s extremely difficult to say which ones are more important. Poverty is surely one of the most complex and intractable problems facing humanity. However, if we look at the country that has been most successful in the reduction of poverty – China – then the last quote above seems to be the most convincing one. China still has institutional and legal weaknesses today, but it did start to develop only after it abandoned the follies of the Cultural revolution and communist rule in general, and started to protect property rights and build its government institutions. Which doesn’t mean that institutions are a “silver bullet” solution to the problem of poverty. There’s no such thing, unfortunately.

The Causes of Poverty (9): Poverty Traps

A poverty trap occurs when poverty has effects which act as causes of poverty, creating a vicious circle in which poverty engenders more poverty, a circle of cumulative causation leading to a downward spiral of ever more extreme poverty.

Poverty traps or poverty circles can be of different kinds: individual, social, national, international…

1. Individual poverty traps

A poverty trap can be limited to the purely individual: for example, a person being discouraged by his or her situation or misfortune, and thereby sinking deeper into misfortune because of inactivity.

2. Regional poverty traps

The poverty trap may also have a regional aspect: some parts of the country or the population may be poor because they are isolated geographically from the rest of the population and the main centres of wealth and prosperity.

Profitable business opportunities may be few, and thus productive employment lacking, owing to poor transport and communication links with those centres. But the low level of economic activity in the isolated region means that transport services are inadequate and that improved transport infrastructure cannot be economically justified, thus perpetuating the isolation. (source)

3. Racial/ethnic poverty traps

The isolation may also be racial or ethnic. This may harm their self-esteem or their sense of responsibility for their own advancement. The responsibility for their fate is, not without reason, projected on others, but this can become a fetish creating passivity and hence more poverty.

4. Social poverty traps

Poor people, because they tend to be more often sick, hungry and weak, don’t manage to get well paid jobs or – if they are independent producers – tend to produce less. As a result, they have less money, less food, and limited access to health care. And because of this, they get even more hungry, weak or sick, and the circle starts again.

Another example: an individual is poor because his or her parents are poor; because of this, a good education becomes problematic – the children may have to work instead of attending school; without a good education the individual does not acquire the tools and capabilities to escape poverty, may succumb to the temptation of crime, and as a result sinks deeper into poverty.

5. National poverty traps

Low income leads to low savings; low savings lead to low investment; low investment leads to low productivity and low incomes. Poverty leads to environmental degradation, which in turn undermines the assets of the poor and exacerbates poverty. Poverty can lead to violence and conflict, and the associated destruction of physical, human, social and organizational capital in turn causes poverty to intensify. (source)

6. International poverty traps

A poor country may have to rely on its natural resources for its exports and hard currency. As a result, however, other and more stable sectors of the economy are neglected and the resource curse may set in, creating poverty and forcing the other sectors even more to the background.

Some countries may find that they are regionally isolated from the global economic centres, much like some social groups can be regionally isolated within a country (see above). Their import markets are too far away from the main exporters, or too difficult to reach because of the poverty of the country and the resulting lack of investments in infrastructure and transport facilities.

Needless to say that the different kinds of poverty traps can exacerbate each other, and thereby creating a “poverty trap of poverty traps”, a vicious circle in which different poverty traps reinforce each other. This sounds quite apocalyptic, but fortunately seems to be only a theoretical possibility because globally poverty is actually on the retreat, but only on average. Many countries, many social groups and many individuals are still terribly poor, and the poverty traps are one reason.

Why Do Countries Become/Remain Democracies? Or Don’t? (3): The Resource Curse

Why do countries with lots of natural resources tend to do worse than countries with less resource wealth, both in terms of economic growth and in political, social and human rights terms? We see that countries which own lots of natural resources such as diamonds, oil or other valuables that are found in the ground, are often relatively poor, badly governed, violent and suffering from gross violations of human rights.

There are many possible causes of this curse (also called “the paradox of plenty”):

1. Lack of economic diversification

Other economic sectors tend to get neglected by the government because there is a guaranteed income from the natural resources. These sectors therefore cannot develop and cannot become an alternative when the resources are taking hits. The fluctuations of the international prices of the resources can cause extreme highs and lows in national economic growth. This is bad in itself, but also makes it difficult for the government to do long term planning, since the level of revenues cannot be predicted. Dependence on one economic sector means vulnerability.

Another disadvantage of concentrating the economy on one resource sector, is that these sector often provide few jobs, especially for local people. The oil industry for example needs highly specialized workers, who are mostly foreigners. On top of that, these sectors do not require many forward or backward connections in the economy (such as suppliers, local customers, refiners etc.), which again doesn’t help the local job creation.

Even if the government tries to diversify the economy, it may fail to do so because the resource sector is more profitable for local individual economic agents.

Resource dependent countries also see their best talents going to the resource industry which pays better wages than the rest of the economy or the government sector. As a result, the latter are unable to perform adequately. See point 4 below.

2. Corruption

Corruption tends to flourish when governments own almost the entire economy and have their hands on the natural resources. More on corruption in a future post.

3. Social division

Abundance of natural resources can produce or prolong violent conflicts within societies as different groups try to control (parts of) the resources. Separatist groups may emerge, trying to control the part of the territory most rich in resources. This is often aggravated by existing social or cultural division. Division may also appear between parts of the government (e.g. local government vs central government, or between different parts of the central administration).

The resources therefore may cause divisions and conflict, and thereby cause deficiencies in government, economic turmoil, and social unrest. But the resources may also prolong conflicts because groups which manage to take control of (parts of) the resources may use these to arm themselves or otherwise gain influence and power.

4. Government’s unaccoutability and inefficiency

Countries which do not depend on natural resources are often more efficient in taxing their citizens, because they do not have funds which are quasi-automatically generated by resources. As a result, they are forced to develop the government machinery in an efficient way, hence a reduced risk of government break-down. The citizens in return, as they are taxed, will demand accountability, efficient spending etc.

Conversely, the political leaders in resource-dependent countries don’t have to care about their citizens. They create support by allocating money, generated by the resources, to favored interest parties, and thereby increasing the level of corruption. And if citizens object, they have the material means to suppress protest. They don’t appreciate an effective government administration as this carries the risk of control, oversight and other anti-corruption measures (see point 2). So they have an interest in bad government.

It is obvious that bad government, rights violations and economic stagnation have many causes. The resource curse is only one. There are countries which are blessed with resources and which do well at the same time. And there are mismanaged countries that don’t have any resources. As in all correlations, the causation may go in the other way: bad government can create dependence on exports of natural resources.

“When a country’s chaos and economic policies scare off foreign investors and send local entrepreneurs abroad to look for better opportunities, the economy becomes skewed. Factories may close and businesses may flee, but petroleum and precious metals remain for the taking. Resource extraction becomes ‘the default sector’ that still functions after other industries have come to a halt.” (source)

What to do about it?

Leif Wenar has argued that a strict application of property rights could help reduce or correct the resource curse. When dictators or insurgents sell off a country’s resources to foreigners or multi-national companies, while terrorizing the people into submission, they are in fact selling goods that they stole from those people. They have no right to sell what they don’t own. The natural resources of a country belong equally to all the people of that country. Article 1 of the International Covenant on Civil and Political Rights states:

All peoples may, for their own ends, freely dispose of their natural wealth and resources.

And

“the people, whose resources are being sold off, become not the beneficiaries of this wealth but the victim of those who use their own wealth to repress them”. Leif Wenar (source)

One could take legal action in western jurisdictions to try to enforce the property rights of the citizens of resource cursed countries and to charge multinational corporations with the crime of receiving stolen goods.

Western countries, investors and consumers could also boycott companies that invest in resource-cursed countries, or try to pressure campaign them to get out of these countries, or they could stop to invest in these companies.

When people finally get a grip on their resources, they open the path to better government, a better economy and better protection for human rights. Perhaps then they will not have to die trying to recapture a tiny part of the resources that are their lawful property, as happened in many cases in Nigeria, for example, where people often try to tap some oil from the pipelines channeling their property to the west. In doing so, they risk their lives. As a consequence of their actions, the pipelines can explode.