No simple answers

Jan 10, 2009 Editorial

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For the last six decades economists have been searching for an answer to a simple question: how to bring poor countries out of backwardness?
The initial answer was as simple as the question itself. Societies were backward because they lacked the resources to invest. Most of the population lived close to the level of subsistence which meant that people could not save to invest for a better future. They were caught in a ‘poverty trap’.
The best way of getting them out of the trap was to provide a large infusion of capital from the outside and start the process of capital accumulation and growth. Since the countries that needed money were very poor and could not borrow on interest, a system for providing easy money was created. The World Bank became the central part of this structure and large flows of capital moved into the newly independent countries of Africa and Asia.
When Robert McNamara became the president of the World Bank in 1968, he took stock of the situation in the developing world and concluded that something more than simply giving money had to be done. The progress in what was then called the Third World was not rapid enough to vindicate those who believed that aid was needed for only a short period of time.  Helped by Pakistan’s Mahbub ul Haq, McNamara came up with the concepts of rural and urban development in which the problems faced by the poor in the cities, towns, and villages would be directly addressed by funding the projects that would increase employment, incomes, and also fulfil people’s basic needs.
The progress towards this route was interrupted by the increase in the price of oil in the 1970s when a large number of countries became highly indebted to the banking system which was the main beneficiary of the windfall incomes that came the way of the oil producing countries.
The World Bank and its sister institutions turned their attention to ‘structural adjustment’ – policies that needed to be adopted by the developing world to deal with shocks such as those delivered by the OPEC. Addressing the problem of poverty became a secondary issue.  Since that time a number of economists, some from the World Bank, have turned their attention to understanding why a large number of countries remain poor although they have received large flows of external finance. The number of people living in abject poverty has continued to increase since they began to be counted by the World Bank in the mid-’70s. They now number more than a billion. Two opposite conclusions have been reached by those who have studied the problem of continuing economic backwardness in many parts of the world. According to economists such as William Easterly, once of the World Bank, the real problem is not the absence of resources but the policies adopted by the countries that continue to persist in poverty. Bad governance, corruption by the politically powerful and those holding public office, and lack of institutions that allow broad participation to people in the affairs of the state remain the main reasons for backwardness. The preoccupation of public policy, therefore, should be to correct these faults.  According to some other economists such as Jeffrey Sachs, the availability of resources remains the main issue. A large number of countries in the developing world continue to be caught in a poverty trap from which they can only escape if they are provided a generous dose of funds. These must come in the form of grants and not loans since lending only creates a problem of debt.  Paul Collier, once at the World Bank and now back at Oxford, has inserted himself in this debate by suggesting that the situation is much more complicated than maintained by these two groups. ‘Development traps have become a fashionable area of academic dispute, with a fairly predictable right-left divide’, writes Collier in his new and important book, “The Bottom Billion: Why the poorest countries are failing and what can be done about it”.
‘The right tends to deny the existence of development traps, asserting that any country adopting good policies will escape poverty. The left tends to see global capitalism as inherently generating a poverty trap.’ If these are simplistic conclusions then where does truth lie? ‘This book is about four traps that have received less attention: the conflict trap, the natural resources trap, the trap of being landlocked with bad neighbours, and the trap of bad governance in a small country.’  While Guyana is not landlocked, our policy makers would do well to consider Collier’s recommendations on the other traps that have certainly helped to stymie our progress.

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