"Poverty, not economic growth, is the real miracle today," explains Leon Louw, executive director of the Free Market Foundation of Southern Africa. I met Louw while covering the United Nations' World Summit on Sustainable Development in Johannesburg. Louw's insight is that in the modern world governments have to work hard to make and keep people poor.
In his wonderful book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, the Peruvian economist Hernando De Soto notes: "The cities of the Third World and the former communist countries are teeming with entrepreneurs. You cannot walk through a Middle Eastern market, hike up to a Latin American village, or climb into a taxicab in Moscow without someone trying to make a deal with you. The inhabitants of these countries possess talent, enthusiasm, and an astonishing ability to wring profit out of practically nothing." It's possible to keep such people down only if governments dedicate themselves to the pursuit of really bad policies for decades at a time.
Most notorious, of course, was the grinding poverty sustained for seven decades in the communist bloc. The phrase rich communist country has always been an oxymoron. We still have illustrations of communism's brilliance at sustaining poverty in Cuba and North Korea. Today, even though Cuba has opened a bunch of swank hard currency beach resorts, its GDP per capita is still only $1,700 at purchasing power parity. Per capita GDP in North Korea, which is asking again this year for food aid, is only $1,000.
But policies don't have to be as bad as totalitarian communism to make people poor. Consider the case of Argentina. In the 1920s Argentina's was one of the largest economies in the world, with an average income about the same as France's. Rich as an Argentine was a catch phrase often used in Paris cafés to describe an especially wealthy person.
Since the 1940s Argentina has embarked on a series of policies—nationalization of industries, expansion of state services, and vast overseas borrowing—that has eroded its rank in the world. In recent years, Argentina's per capita income has collapsed, falling from $8,909—double Mexico's and three times Poland's—in 1999 to $2,500 today, roughly on par with Jamaica and Belarus.
Or take Sweden. Long gone are the arguments about the success of that kingdom's alleged "middle way" between capitalism and communism. In 1970 Sweden was ranked third in per capita income among industrialized nations; today it ranks 17th. The country's welfare state is strangling its economy. Taxes consume 55 percent of Sweden's GDP, while public spending equals 65 percent of GDP.
Just as bad policies can ensure poverty, good policies spark wealth creation. As De Soto points out, in the late 19th century tens of thousands of Japanese emigrated from their impoverished country to Peru in search of a better life. In the 1950s South Korean politicians said they hoped their country's citizens would some day be as rich as Jamaicans. Clearly Japan (per capita GDP: $24,900) and South Korea (per capita GDP: $16,100) have done something right, while Peru (per capita GDP: $4,550) and Jamaica (per capita GDP: $3,700) have not. Just for comparison, U.S. GDP per capita is $36,200.
Finally, there is the heartbreak of Africa, where average per capita incomes have been falling for three decades. African politicians have embraced at one time or another all of the policy prescriptions for poverty listed below. In between, they have fought numerous civil wars and engaged in various bloody tribal pogroms.
Some recipes guaranteed to get lean results
Here, then, is a short guide for kleptocrats and egalitarians who want to keep their countries poor. All of these policies have stood the test of time as techniques for creating and maintaining poverty. The list is by no means exhaustive, but it will give would-be political leaders a good idea of how to start their countries on the road to ruin.
First, make sure that your country's money is no good. Print money like there's no tomorrow. Hyperinflation is one of the easiest and most popular ways to dismantle an economy. Another popular monetary gambit is to make sure your currency is not convertible. This guarantees that no one will ever want to invest in your country.
To further discourage investment, be sure to nationalize all major Industries. Nationalization has additional poverty-enhancing benefits. For example, it will ensure that the nationalized industries never improve technologically or become more efficient, and it makes workers pathetically dependent on their political masters, namely you.
Of course, you may find it too tiresome to nationalize everything, in which case it is very important that you establish high tariffs that insulate your country's remaining private industries (usually owned by your cronies anyway) from competition.
In addition, your legal system should make it nearly impossible for anyone to license a new business, however small. This will offer opportunities for your bureaucrats to make a living through corruption and will protect your cronies from domestic competition. An added advantage is that most commerce will be made illegal and subject to arbitrary enforcement.
This leads to the point that property is critical. Once people start to own something, they invest in it and improve it, leading inexorably to the creation of wealth. Again, the legal system can help to make it impossible to issue clear titles so that your citizens can't buy, sell, or borrow against their "property." Also, force your farmers to sell their crops to government commodity boards at below-market rates. This will discourage them from investing in anything more advanced than subsistence agriculture, and you will be able to sell whatever crops you do seize at low prices to keep the urban populations quiet.