Why are some countries wealthy and others poor?

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Why is it that some countries of the world such as the USA, Canada, Australia, Japan, and the countries of western Europe are so wealthy and so many other countries of the world, such as those in sub-Saharan Africa and Latin America, remain so stubbornly poor?

Certainly such things as large areas of highly fertile and level farmland, good climate, natural resources (like oil, natural gas, gold, silver, iron deposits, etc.), good ports, and large navigable rivers are important factors. Yet there are countries who are very poor in natural resources such as Japan and Switzerland who are among the wealthy countries of our world and many countries who are rich in natural resources, as for example Argentina and Russia, who are relatively poor. What is the special ingredient that makes the difference?

Of course the economic system of a country is very important. Free enterprise works, communism doesn’t.

In Chapter 7 of the book Economic Facts and Fallacies by Thomas Sowell, Dr. Sowell goes into these questions. He speaks of the importance of law and order and property rights. Then there is another very important factor: culture and the accumulation of specialized knowledge, technical knowhow associated with a given culture. The following are excerpts from pages 205 - 211:

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While external factors like property rights and geographic factors can influence the economic development of nations, such internal factors as cultural values can be of equal or even greater importance. It has not been at all uncommon for people from outside a given culture to come into a society and, beginning at an economic level below that of the existing population, rise over time well above those around them, despite the fact that all the people in the society live within the same external conditions. Italian immigrants to Argentina, Lebanese immigrants to West Africa, immigrants from India to Fiji, Jewish immigrants to the United States, German immigrants to czarist Russia, and Chinese to a number of countries in Southeast Asia are just some of the examples of this phenomenon. Many, if not most, of these immigrants arrived destitute financially and often with little education. What they had was a culture that was different from that of those whom they overtook and left behind.

Whole industries and sectors of an economy have been created by people from different cultures. Argentina became one of the world’s great exporters of wheat after German immigrants settled there, even though the Argentines had imported wheat before. The land and its ability to grow wheat had not changed. What had changed were the people who settled on the land. Sometimes new industries were introduced not by immigrants but by sojourners from other countries, as the British built railroads in countries around the world, from India to Africa to Australia and Argentina.

Worldwide migrations in recent centuries have led to racially and culturally different peoples interacting in societies far from those in which their forebears originated and developed their different cultures and different economic skills. Often they reproduced in their new destinations the same patterns found in their lands of origin. The mining that was so much the economic history of Wales was also a major part of the history of Welsh immigrants to the United States and Australia. The prominence or predominance of Jews in clothing production in medieval Spain also appeared later in the Ottoman Empire, in the United States and in South America.

Areas blessed with an abundance of natural resources have been unable to sustain prosperity, even after it has been achieved, when the surrounding institutions and culture do not sustain a dependable framework of law and order. Argentina has been a classic example, though similar patterns have appeared in some other Latin American countries.

Argentina has been described as “among the world’s most richly endowed countries,” with “some of the world’s richest soil” and “substantial oil and natural gas deposits”. Early in the twentieth century, it was one of the ten richest countries in the world. Most of its modern development, however, was not internally generated but was due to foreign, mostly British, initiative. The rise of nationalistic and ideological politics, especially under the charismatic leadership of Juan Peron, led to a decline of foreign investment in Argentina from a high of 48 percent of all investment in 1913 to just 5 percent in the 1950s.

Counterproductive domestic and economic policies marked Argentina’s fall from the ranks of the most prosperous nations. As one study put it: “The countries with which Argentina was grouped in terms of economic progress early in this [twentieth] century have attained per-capita GNPs generally four or five times Argentina’s, and virtually all of them are viable democracies. By the end of the twentieth century, Argentina’s economy and monetary system had collapsed, leading to widespread use of barter. Argentina’s gross domestic product per capita in the early twenty-first century was one-tenth that of the United States.

Since the countries which have achieved the kind of prosperity common in Western Europe, North America or Japan remain a minority among the nations of the world, it is the coming together of numerous factors favorable to economic development which requires explanation, rather than the fact that the majority of nations have not been equally fortunate. The fact that most of these prosperous nations took centuries for all these factors to come together underscores the rarity of these achievements. Transplanted European societies such as the United States, Canada, and Australia began their lives with a legacy of already developed cultures favorable to economic development, rather than having to spend centuries developing such cultures on their own. The fact that earlier leaders in economic and other development, such as China and the Ottoman Empire, lost their leadership and fell far behind the new leaders likewise indicates what a combination of favorable circumstances is required — and how economic prosperity can be lost if vital parts of that combination are lost.

Resistance to the idea of internal reasons for differences among individuals, groups, or nations has been widespread and desperate as it has ben fallacious. One academic, for example, said Jews were fortunate to arrive in America just as the garment industry was about to take off — ignoring the possibility that it was precisely the arrival of Jews that led to an upsurge in the garment industry, as their arrival in other countries had done.

The widespread refusal to countenance the very possibility that factors internal to particular peoples have had an influence on their economic condition has been expressed in claims that such beliefs are just “stereotypes” which are “blaming the victim” in the case of poorer individuals or peoples. So strongly have such views been held that those who have them have not hesitated to dismiss first-hand observations in favor of general presumptions by others like themselves, even when they have neither seen nor studied the people concerned. Such views have affected not only how the past has been seen but also what policies have been advocated for the future — especially the advocacy of foreign aid programs for Third World countries. Because foreign aid in the form of the Marshall Plan was so successful in Western Europe after the Second World War, many have argued that it would have similar benefits in the Third World.

The failure of massive amounts of foreign aid to create any comparable economic development in most of the Third World has not dimmed the luster of foreign aid in the eyes of those who refuse to re-examine the assumptions on which it was based. Yet there is nothing mysterious in those failures when the different cultures are taken into account. Postwar Western Europe had suffered devastations as a result of the war but what had not been destroyed was the knowledge and culture which had in the past industrialized Europe and led the world into the industrial age. Foreign aid saved the people from starvation and helped rebuild the physical surroundings but the crucial knowledge and culture were already there. In much of the Third World, the physical surroundings are intact but that same base of knowledge and culture has yet to be built.

Exploitation

Perhaps the most famous and most influential explanation of economic differences between rich and poor nations was V. I. Lenin’s Imperialism. It was a masterpiece in the art of persuasion, for it convinced many highly educated people around the world, not only in the absence of compelling empirical evidence, but in defiance of a large body of hard evidence to the contrary.

The thesis of Imperialism was that industrial capitalist nations had surplus capital, which would drive down the rate of profit over time in accordance with Marxist theory, unless it were exported to the nonindustrial poorer nations of the world, where it could find a wider field for exploitation. What Lenin called the “super profits” to be earned in these poorer nations would save capitalism in the industrial nations and even allow them to share some of the profits of their exploitation with their own working classes, so as to keep them quiescent and forestall the proletarian revolution which Marx had predicted, but which by Lenin’s time showed no signs of materializing. This theory thus neatly explained away the failure of Max’s predictions and at the same time provided a politically satisfying explanation of income differences between rich and poor nations.

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The United States was then, and is today, the largest recipient of foreign investment from Europe. Likewise the foreign investments of Americans went primarily to other prosperous modern nations, not to the third world. For most of the twentieth century, the United States invested more in Canada than in all of Africa and Asia put together. Only the economic rise of postwar Japan and, later, other Asian industrializing nations, attracted American investments to Asia on a large scale in the latter part of the twentieth century. In short, the actual pattern of international investments went directly opposite to the theories of Lenin.

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The combination of Lenin’s genius for propaganda and an audience receptive to his thesis allowed his theory of imperialism to be widely accepted among intellectuals, activists, and people in the Third World. Exploitation is a virtually perfect political explanation of income differences. It validates whatever envy or resentment may be felt by people with lower incomes toward people with higher incomes. It removes whatever stigma may be felt from implications of lower ability or lower performance on the part of those with lower incomes. It locates the need for change in other people, rather than imposing the burden of change on those who wish to rise. Moreover, it replaces any such burdensome task with a morally uplifting sense of entitlement. Whatever the empirical and logical problems with the theory of exploitation, political movements are seldom based on empirical evidence and logic.

Those who blamed the poverty of Third World nations on colonialism continued to blame the legacy of colonialism for decades after most of these Third World countries became independent nations. The same belief provided a basis for independent Third World nations to confiscate the property of foreign investors who were seen as “exploiters”. In the places where there were sizable European communities, as in Zimbabwe or South Africa, such beliefs provided rationales for dispossessing European settlers. However, in doing so, Third World governments inadvertently revealed the fallacy of the belief that physical wealth was crucial.

If it was, such confiscations would improve the economic conditions of the indigenous population. But if it was the internal knowledge, skills, and cultural patterns which produced prosperity, then the transfer of physical wealth from those who had the necessary knowledge, skills, and cultural patterns to those who did not would have very different consequences. The African nation of Zimbabwe was an all too typical example. Zimbabwe repudiated the last remnants of its colonial past in the early twenty-first century by dispossessing white landowners, with these results, as reported in the New York Times:

For close to seven years, Zimbabwe’s economy and quality of life has been in slow, uninterrupted decline. They are still declining this year, people there say, with one notable difference: the pace is no longer so slow ...

In recent weeks, the national power authority has warned of a collapse of electrical service. A breakdown in water treatment has set off a new outbreak of cholera in the capital, Harare. All public services were cut off in Marondera, a regional capital of 50,000 in eastern Zimbabwe, after the city ran out of money to fix broken equipment. In Chitungwiza, just south of Harare, electricity is supplied only four days a week.

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I especially like the above paragraph that I highlighted in red. Exploitation is a virtually perfect political explanation of income differences. It validates whatever envy or resentment may be felt by people with lower incomes toward people with higher incomes. Etc. It does sound like the mind and rhetoric of our modern Left. Today there are Good Guys and Bad Guys. Everywhere there are Bad Guys out exploiting other people. Everyone is being exploited in some way by someone. The rich are exploiting the poor. The whites are exploiting the blacks. We live in a world of all kinds of minority groups where everyone is a victim in one way or another. The Good Guys are the liberals out to stop all of this injustice and exploitation by all of the Bad Guys by all kinds of laws. Do I detect here a bit of the Marxist mindset?

See Formula for Economic Development

2 Nov 2023