How countries become rich and reduce poverty

For the sake of less developed countries, it is time to adjust the discourses of international development assistance on poverty reduction. History has repeatedly shown that the single most important thing that distinguished rich countries from poor ones is basically their higher capabilities in manufacturing. We have to shift the discussion about ending world poverty back to one about structural transformation of the economy and increasing technological capabilities. A new working paper by Lindsay Whitfield, Project Senior Researcher at DIIS, attempts to do so by reviewing new and old literature explaining why some countries are rich and others are poor.

The paper argues countries in the West achieved systematic changes in the production structure of their economies which led to sustainable economic growth and generalized improvements in living standards. Recently developed economies (post-World War II) and emerging economies imitated their economic structures. The process of economic development is characterized by productivity growth. High and rising standard of living is ultimately based on the productivity with which capital and labor are employed. It is not the transition from agriculture to industrialization per se, but a change in economic activities from ones of low productivity to high productivity.

More people in South Asia live in extreme poverty than in Africa, but on no other continent than Africa are the extremely poor such a large proportion of the total population. Furthermore, why is it that Africa comes to mind when people think of global poverty? Probably because China and India have experienced significant growth and reductions in extreme poverty (they just happen to have very large populations). African countries have a larger proportion of their population in extreme poverty because a larger proportion is stuck in subsistence economic activities.

Countries that have not seriously begun transforming their production systems, must first face the challenges of structural change. Middle-income countries that have undergone significant structural change, but based largely on increased inputs or low levels of technological change, face the challenges of upgrading. Industrialization must be back on the agenda for poor countries, but it must be linked to a simultaneous drive to increase agricultural productivity in food crops produced by smallholder farmers. Developing countries also need to get out of producing technological dead-end products.

In terms of development assistance, we need to focus on the positions of the poor as producers and not as consumers, and in creating employment in economic activities with higher productivity. Foreign aid has been used in the past to spur economic transformation, as illustrated by South Korea and Taiwan. However, as Robert Wade argues, one of the disastrous effects of the end of the Cold War has been the disappearance of Western commitment to spurring economic transformation in poor countries. Instead of supporting transformative capitalisms, rich countries now focus on poverty reduction, market access and participatory governance. The current development agenda focused on programs to directly alleviate the symptoms of poverty, strengthening participation and eliminating rents and corruption has little to do with creating transformative capitalist systems able to generate mass affluence and a decent quality of life. It also flies in the face of historical evidence on how Western countries and more recent industrializing countries achieved economic development.