Why Poor Countries Are Poor

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


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?"

"The roads, they have not been fixed for 19 years."

President Paul Biya came to power in November 1982 and had been in office for 19 years by the time I visited Cameroon. Four years later, he is still in power. He recently described his opponents as "political amateurs"; they are certainly out of practice.

"Don't people complain about the roads?"

"They complain, but nothing is done. The government tells us there is no money. But there is plenty of money coming from the World Bank and from France and Britain and America–but they put it in their pockets. They do not spend it on the roads. "

"Are there elections in Cameroon?"

"Yes! There are elections. President Biya is always re-elected with a 90 percent majority. "

"Do 90 percent of people vote for President Biya?"

"No, they do not. He is very unpopular. But still there is a 90 percent majority. "

You do not have to spend a long time in Cameroon to realize how much people resent the government. Much of government activity appears to be designed expressly to steal money from the people of Cameroon. According to the global watchdog Transparency International, Cameroon is one of the most corrupt countries in the world. I was warned so starkly about government corruption, and the likelihood that officials at the airport would attempt to relieve me of my wad of West African francs, that I was more nervous about that than the risk of malaria or a gunpoint mugging in the back streets of Douala.

Many people have an optimistic view of politicians and civil servants–that they are all serving the people and doing their best to look after the interests of the country. Other people are more cynical, suggesting that many politicians are incompetent and often trade off the public interest against their own chances of re-election. The economist Mancur Olson proposed a working assumption that government's motivations are darker still, and from it theorized that stable dictatorships should be worse for economic growth than democracies, but better than sheer instability.

Olson supposed that governments are simply bandits, people with the biggest guns who will turn up and take everything. That's the starting point of his analysis–a starting point you will have no trouble accepting if you spend five minutes looking around you in Cameroon. As Sam said, "There is plenty of money…but they put it in their pockets."

Imagine a dictator with a tenure of one week–in effect, a bandit with a roving army who sweeps in, takes whatever he wishes, and leaves. Assuming he's neither malevolent nor kindhearted, but purely self-interested, he has no incentive to leave anything, unless he plans on coming back next year. But imagine that the roaming bandit likes the climate of a certain spot and decides to settle down, building a palace and encouraging his army to avail themselves of the locals. Desperately unfair though it is, the locals are probably better off now that the dictator has decided to stay. A purely self-interested dictator will realize he cannot destroy the economy and starve the people if he plans on sticking around, because then he would exhaust all the resources and have nothing to steal the following year. So a dictator who lays claim to a land is a preferable to one who moves around constantly in search of new victims to plunder.

I cannot confirm that President Biya fits Olson's description of a self-interested dictator. But if he did, it wouldn't be in his interest to take too much from the Cameroonian people, because then there would be nothing to take next year. As long as he feels secure in his tenure, he will not wish to kill the golden goose. Like the virus whose very existence relies on the bodies it afflicts, Biya would have to keep the Cameroonian economy functioning in order to keep stealing from it. This suggests that a leader who confidently expects to be in power for 20 years will do more to cultivate his economy than one who expects to flee the country after 20 weeks. Twenty years of an "elected dictator" is probably better than 20 years of one coup after another.

Staying with the simplifying assumption that Biya has absolute power over the distribution of Cameroon's income, he might decide to steal, say, half of it every year in the form of "taxes" that go into his personal bank account. That would be bad news for his victims, of course, but also bad news for Cameroon's long-term growth. Think of a small business owner considering an investment of $1,000 in a new power generator for his workshop. The investment is expected to generate income of $100 a year. That's 10 percent, a pretty good return. But since Biya might take half of it, the return falls to a much less attractive 5 percent. The businessman decides not to make the investment after all, so he misses out and so does Biya.

Olson does not predict that stable dictatorships will do good things for their countries, just that they'll damage the economy less than unstable ones. Of course, Biya might make his own investments–for instance, providing roads or bridges to encourage commerce. While they would be expensive in the short term, they would help the economy to prosper, leaving Biya with more opportunities to steal later. But the flip side of the businessman's problem applies: Biya would be stealing only half of the benefits, not nearly enough to encourage him to provide the infrastructure that Cameroon needs.

When Biya came to power in 1982, he inherited colonial-era roads that had yet to fall apart completely. If he had inherited a country without any infrastructure, it would have been in his interest to build it up to some extent. Because the infrastructure was already in place, Biya needed to calculate whether it was worth maintaining, or whether he could simply live off the legacy of Cameroon's colonial rulers. In 1982 he probably thought the roads would last into the 1990s, which was as long as he could reasonably have expected to hold onto the reins of power. So he decided to live off the capital of the past and never bothered to invest in any type of infrastructure for his people. As long as there was enough to get him through his rule, why bother spending money that could otherwise go right into his personal retirement fund?

Bandits, Bandits Everywhere

But perhaps Biya is not in control as much as it first appears. A little traveling in Cameroon reveals that whether or not Biya is the bandit-in-chief, there are many petty bandits to satisfy.

If you want to drive from the town of Buea to Bamenda, farther north, the most popular way to make the trip is by bus; minibuses ply all long-distance routes in Cameroon. Designed to seat 10 people in comfort, they will depart as soon as 13 paying passengers have boarded. The relatively capacious seat beside the driver is worth fighting for. The vehicles are old bone-shakers, but the system works pretty well. It would work a lot better if not for all the roadblocks.

Bullying gendarmes, often drunk, stop every minibus and try their best to extract bribes from the passengers. They usually fail, but from time to time they become determined. My friend Andrew was once hauled off a bus and harassed for several hours. The eventual pretext for the bribe was his lack of a yellow-fever certificate, which you need when you enter the country but not when riding a bus. The gendarme explained patiently that Cameroon had to be protected from disease. The price of two beers convinced him that an epidemic had been prevented, and Andrew caught the next bus, three hours later.

This is even less efficient than Mancur Olson's model predicts. Olson himself would have admitted that his theory in its starkest form underestimates the damage that bad governments inflict on their people. Biya needs to keep hundreds of thousands of armed police and army officers happy, as well as many civil servants and other supporters. In a "perfect" dictatorship, he would simply impose the least damaging taxes possible in whatever quantity was necessary and distribute the proceeds to his supporters. This approach turns out to be impracticable, because it requires far more information about and control over the economy than a poor government can possibly muster. The substitute is government-tolerated corruption on a massive scale.

The corruption is not only unfair; it is also hugely wasteful. Gendarmes spend their time harassing travelers in return for modest returns. The costs are enormous. An entire police force is too busy extracting bribes to catch criminals. A four-hour trip takes five hours. Travelers take costly steps to protect themselves: carrying less money, traveling less often or at busier times of the day, bringing extra paperwork to help fend off attempts to extract bribes.

The blockades and crooked police officers comprise a particularly visible form of corruption, but there are metaphorical roadblocks throughout the Cameroonian economy. To set up a small business, an entrepreneur must spend on official fees nearly as much as the average Cameroonian makes in two years. To buy or sell property costs nearly a fifth of the property's value. To get the courts to enforce an unpaid invoice takes nearly two years, costs more than a third of the invoice's value, and requires 58 separate procedures. These ridiculous regulations are good news for the bureaucrats who enforce them. Every procedure is an opportunity to extract a bribe. The slower the standard processes, the greater the temptation to pay "speed money."

Inflexible labor regulations help ensure that only experienced professional men are given formal contracts; women and young people have to fend for themselves in the gray market. Red tape discourages new businesses. Slow courts mean that entrepreneurs are forced to turn down attractive opportunities with new customers, because they know they cannot protect themselves if they are cheated. Poor countries have the worst examples of such regulations, and that is one of the major reasons they are poor. Officials in rich countries perform these basic bureaucratic tasks relatively quickly and cheaply, whereas officials in poor countries draw out the process in hopes of pocketing some extra cash themselves.

Institutions Matter

Government banditry, widespread waste, and oppressive regulations are all elements in that missing piece of the puzzle. During the last 10 years or so, economists working on development issues have converged on the mantra that "institutions matter." Of course, it is hard to describe what an "institution" really is. It is even harder to convert a bad institution into a good one.

But progress is being made. We've just seen one kind of institution: business regulations. Sometimes, it can be improved with simple publicity. After the World Bank revealed that entrepreneurs in Ethiopia couldn't legally start a business without paying four years' salary to publish an official notice in government newspapers, the Ethiopian government scrapped the rule. New business registrations jumped by almost 50 percent immediately.

Unfortunately, it is not always so easy to get corrupt governments to change their ways. Although it is becoming clearer and clearer that dysfunctional institutions are a key explanation of poverty in developing countries, most institutions cannot be described with an elegant model like Mancur Olson's, or even with careful data-gathering by the World Bank. Most unhappy institutions are unhappy in their own way.

Such a uniquely backfiring setup was responsible for the world's worst library. A few days after I arrived in Cameroon, I visited one of the country's most prestigious private schools–Cameroon's equivalent of Eton. The school boasted two separate library buildings, but the librarian was very unhappy. I soon understood why.

At first glance the new library was impressive. With the exception of the principal's palatial house, it was the only two-story structure on campus. Its design was adventurous: a poor man's Sydney Opera House. The sloped roof, rather than running down from a ridge, soared up in a V from a central valley like the pages of an open book on a stand.

When you're standing in the blazing sunlight of the Cameroonian dry season, it's hard to see at first what the problem is with a roof that looks like a giant open book. But that's only if you forget, as the architect apparently did, that Cameroon also has a rainy season. When it rains in Cameroon, it rains for five solid months. It rains so hard that even the most massive storm ditches quickly overflow. When that kind of rain meets a roof that is, essentially, a gutter that drains onto a flat-roofed entrance hall, you know it's time to laminate the books. The only reason the school's books still existed was that they'd never been near the new building; the librarian had refused repeated requests from the principal to transfer them from the old library.

I was tempted to conclude that the principal was in an advanced stage of denial when I stepped inside the new library to see the devastation. It was in ruins. The floor contained the stains of countless puddles. The air carried the kind of musty smell associated with a damp cave. The plaster was peeling off the walls. Yet the library is only four years old.

This is a shocking waste. Instead of building the library, the school could have bought 40,000 good books, or acquired computers with Internet connections, or funded scholarships for poor children. Any of these alternatives would have been incomparably better than an unusable new library. The school never even needed a new library in the first place–the old library works perfectly well, could easily hold three times as many books as the school owns, and is waterproof.

If the library was such a pointless endeavor, why was it built at all? It's all too tempting for the visitor in Cameroon to shrug his shoulders and explain the country's poverty by presuming that Cameroonians are idiots. Cameroonians are no smarter or dumber than the rest of us. Seemingly stupid mistakes are so ubiquitous in Cameroon that incompetence cannot be the whole explanation. There is something more systematic at work. We need to consider the incentives of the decision makers.

First, most of the senior education officials in northwest Cameroon come from the small town of Bafut. Known as the Bafut Mafia, these officials control considerable funds for the education system, which they hand out based on personal connections rather than necessity. Not surprisingly, the principal of this prestigious private school was a senior member of the Bafut Mafia. Wanting to convert her school into a university, the principal needed to build a library of university size and quality. It was irrelevant to the principal that the current library was more than sufficient, and that the taxpayers' money could have been better spent in other ways or by other schools.

Second, nobody was monitoring the principal or her spending. Staff members are paid or promoted not on merit but at the principal's command. This is a prestigious school with good conditions for teachers, so staff members would be particularly eager to keep their jobs, which meant keeping in good favor with the principal. In fact, the only person able to defy the principal was the librarian, who was accountable only to the Voluntary Service Overseas office in London. She turned up after the library was built but was at least in time to prevent the book collection from being transferred and destroyed.

Either the principal was so stupid that she did not realize water ruins books, or she did not care very much about the books and simply wanted to demonstrate that the library had some books in it. The second explanation seems more likely. With the money at her fingertips and nobody to object to the wastefulness of building a second library, the principal had full control over the project. She appointed a former pupil of the school to design the library, probably to demonstrate the quality of education provided by the school; she did prove a point, although perhaps not the one she intended. But no matter how incompetent the architect, the flaws in the design would have been spotted if anybody concerned had a strong interest in making sure the library functioned as a library. But that was never the prime concern of anybody with authority. The people in power simply cared about putting up something that could qualify the school as a university.

Consider the situation: money that was provided because of social networks rather than need; a project designed for prestige rather than use; a lack of monitoring and accountability; and an architect appointed for show by somebody with little interest in the quality of the work. The outcome is hardly surprising: A project that should never have been built was built, and built badly. The lesson of the story might appear to be that self-interested and ambitious people in power are often the cause of wastefulness in developing countries. But self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. Cameroon's tragedy is that there is nothing to hold self-interest in check.

Does Development Have a Chance?

Development specialists often focus on helping poor countries become richer by improving primary education and infrastructure such as roads and telephones. That's surely sensible. Unfortunately, it's only a small part of the problem. Economists who have pulled apart the statistics, or studied unusual data such as the earnings of Cameroonians in Cameroon and the earnings of Cameroonians who immigrate to the United States, have found that education, infrastructure, and factories only begin to explain the gap between rich and poor. Because of its lousy education system, Cameroon is perhaps twice as poor as it could be. Because of its terrible infrastructure, it's roughly twice as poor again. So we would expect Cameroon to be four times poorer than the United States. But it is 50 times poorer.

More important, why can't the Cameroonian people seem to do anything about it? Couldn't Cameroonian communities improve their schools? Wouldn't the benefits easily outweigh the costs? Couldn't Cameroonian businessmen build factories, license technology, seek foreign partners, and make a fortune?

Evidently not. Mancur Olson showed that kleptocracy at the top stunts the growth of poor countries. Having a thief for president doesn't necessarily spell doom; the president might prefer to boost the economy and then take a slice of a bigger pie. But in general, looting will be widespread either because the dictator is not confident of his tenure or because he needs to allow others to steal in order to keep their support.

The rot starts with government, but it afflicts the entire society. There's no point investing in a business because the government will not protect you against thieves. (So you might as well become a thief yourself.) There's no point in paying your phone bill because no court can make you pay. (So there's no point being a phone company.) There's no point setting up an import business because the customs officers will be the ones to benefit. (So the customs office is underfunded and looks even harder for bribes.) There's no point getting an education because jobs are not handed out on merit. (And in any case, you can't borrow money for school fees because the bank can't collect on the loan.)

It is not news that corruption and perverse incentives matter. But perhaps it is news that the problem of twisted rules and institutions explains not just a little bit of the gap between Cameroon and rich countries but almost all of the gap. Countries like Cameroon fall far below their potential even considering their poor infrastructure, low investment, and minimal education. Worse, the web of corruption foils every effort to improve the infrastructure, attract investment, and raise educational standards.

We still don't have a good word to describe what is missing in Cameroon and in poor countries across the world. But we are starting to understand what it is. Some people call it "social capital," or maybe "trust." Others call it "the rule of law," or "institutions." But these are just labels. The problem is that Cameroon, like other poor countries, is a topsy-turvy place where it's in most people's interest to take actions that directly or indirectly damage everyone else. The incentives to create wealth are turned on their heads like the roof of the school library.