Why Poor Countries Are Poor

The clues lie on a bumpy road leading to the world's worst library.

Tim Harford from the March 2006 issue

They call Douala the "armpit of Africa." Lodged beneath the bulging shoulder of West Africa, this malaria-infested city in southwestern Cameroon is humid, unattractive, and smelly. On a torrid evening in late 2001, I was guided out of the chaotic Douala International Airport by my friend Andrew and his driver, Sam, who would have whisked us immediately to the cooler hillside town of Buea if Douala were at all conducive to being whisked anywhere. It isn't. Douala, a city of 2 million people, has no real roads.

A typical Douala street is 50 yards wide from shack to shack. It's packed with street vendors, slouched beside a tray of peanuts or an impromptu plantain barbecue, and with little clusters of people, standing around a motorbike, drinking beer or palm wine, or cooking on a small fire. Piles of rubble and vast holes mark unfinished construction or demolition work. Along the middle is a strip of potholes that 20 years ago was a road.

Down that strip drive four streams of traffic, mostly taxis. The streams on the outside are usually made up of cabs picking up fares, while the taxis on the inside weave in and out of the potholes and other cars with all the predictability of ping pong balls in a lottery machine. Douala used to have buses, but they can no longer cope with the decaying roads. So the taxis are all that's left: beaten-up old Toyotas, carrying four in the back and three in the front, sprayed New York yellow, each with a unique slogan: "God Is Great, " "In God We Trust," "Powered by God, " "Toss Man."

Nobody who sees a Douala street scene can conclude that Cameroon is poor because of a lack of entrepreneurial spirit. But poor it is. The average Cameroonian is eight times poorer than the average citizen of the world and almost 50 times poorer than the typical American. And Cameroon is getting poorer. Can anything be done to reverse the decline and help Cameroon grow richer instead?

That's no small question. As the Nobel laureate economist Robert Lucas put it, "The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else."

The Missing Jigsaw Piece

Economists used to think wealth came from a combination of man-made resources (roads, factories, telephone systems), human resources (hard work and education), and technological resources (technical know-how, or simply high-tech machinery). Obviously, poor countries grew into rich countries by investing money in physical resources and by improving human and technological resources with education and technology transfer programs.

Nothing is wrong with this picture as far as it goes. Education, factories, infrastructure, and technical know-how are indeed abundant in rich countries and lacking in poor ones. But the picture is incomplete, a puzzle with the most important piece missing.

The first clue that something is amiss with the traditional story is its implication that poor countries should have been catching up with rich ones for the last century or so--and that the farther behind they are, the faster the catch-up should be. In a country that has very little in the way of infrastructure or education, new investments have the biggest rewards.

This expectation seems to be confirmed by the experience of China, Taiwan, and South Korea--not to mention Botswana, Chile, India, Mauritius, and Singapore. Fifty years ago they were mired in poverty, lacking man-made, human, technical, and sometimes natural resources. Now these dynamic countries, not Japan, the United States, or Switzerland, have become the fastest-growing economies on the planet.

Since technology is widely available and increasingly cheap, this is what economists should expect of every developing country. In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education. South Korea, for example, acquired technology by encouraging foreign companies to invest or by paying licensing fees. In addition to the fees, the investing companies sent profits back home. But the gains to Korean workers and investors, in the form of economic growth, were 50 times greater than the fees and profits that left the country.

As for education and infrastructure, since the returns seem to be so high, there should be no shortage of investors willing to fund infrastructure projects or lend money to students (or to governments that provide education). Banks, domestic and foreign, should be lining up to lend people the money to get through school or to build a new road or a new power plant. In turn, poor people, or poor countries, should be very happy to take out such loans, confident that investment returns are so high that the repayments will not be difficult. Even if, for some reason, that didn't happen, the World Bank, established after World War II with the express aim of providing loans to countries for reconstruction and development, lends billions of dollars a year to developing countries. Investment money is clearly not the issue; either the investments are not being made, or they are not delivering the returns the traditional model predicts.

A Theory of Government Banditry

As our car slowly bumped and lurched through the crowds, I tried to make sense of it all by asking Sam, the driver, about the country.

"Sam, how long was it since the roads were last fixed?"

Comments

charles|10.19.09 @ 7:05PM|#

I accidentally arrived at this article because of libraries and Africa and the magic name of TH. I was reminded of a grand new impressive library in East Africa, opened by a British PM. I took notice when several students at that university told me there were no books in it for the students. Of course libraries shouldn't have books. Libraries are buildings; just in case of books. Excuse me, I'm now off to get a sparkling new international airport built with my name on it, from whence no planes will really fly. So what? More importantly, it will bear my name.
PS Thank you for reminding us of Mancur Olson.