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What makes some countries rich and others prone to poverty?


Comments / {{hitsCtrl.values.hits}} Views / Friday, 18 November 2016 00:00


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Many years ago as primary students we were taught that a nation’s environment is the result of a combination of human effort and policies, which can and are influenced by leaders and that rich countries were in the north of the globe, and most poor countries are in the south, but later on we were told that it was not geography that causes wealth or poverty. After all, Australia and New Zealand are part of the Southern hemisphere, and both are doing fine. You couldn’t say this of Papua New Guinea, which is the Asian country closest to Australia and New Zealand.

A superficial view is to blame racial differences. Black Africa is the poorest and most disordered part of the world, and Haiti, with an almost entirely black population, is the poorest country of the Americas. But the coincidence is accidental. What makes some countries rich, and others prone to poverty is not related to skin colour or racial factors. Many immigrants from poor nations do very well in the US and Canada, though one has to admit that both countries are likely to make immigration easy only for the best and the brightest of those who hail from Third World countries. 

It is also not the presence or lack of natural resources that makes a country rich or poor in the long run. Japan is a country with very limited natural resources, and it has been the richest country in Asia for a long time. 

On the other hand, it is easy to predict that some Third World countries that currently are rich because of immense reserves of natural wealth while not being burdened with large populations, will slide back when the natural resources are depleted. While a handful of countries thanks to great leadership managed to achieve economic prosperity that has helped them to escape the perils of poverty, while many other countries fail in this respect and continue to be trapped in poverty. 

Was it chance? Their people? Their products and services? Their markets? The growth experience of the various countries of the world as we all know is filled with success and a great deal of disasters, which has huge implications for the living standards of ordinary people.

 



Drivers of prosperity

Economics has sometimes a narrow scope. It studies a nation’s prosperity through trade flows, monetary, fiscal and budget policies. The analysis of companies is a bit broader. It encompasses strategy, structure and finance but also less “rational” fields such as human resources, corporate culture or consumer behaviours. 

Competitiveness provides a broader basis for analysis. It looks at all the elements that can explain the success of a nation. Industries often thrive when they are forced to overcome high labour costs or lack natural resources. When their customers won’t accept inferior, outdated products, when their local competitors are “murderous”, and when government offers no protection from their competition and sets tough technical and regularity standards.

For instance the Italian shoe industry is prodded by sophisticated consumer demand that encourage entry by many new firms. Many of them, family-owned, compete very jealousy. The shoemakers are compelled to spew out new models continuously and must keep improving to increase efficiency to stay competitive within Italy’s quirky, high cost infrastructure. When the home market got saturated, Italian manufacturers went overseas and achieved international success. 

According to Professor Porter, competitive advantage based on only one or two factors is unsustainable. South Korea’s construction industry grew rapidly during the mid ’80s simply by applying low cost labour to projects that did not require sophisticated engineering. It lost out when other countries that had cheap labour jumped in. Resources based advantages too frequently suffer the same fate. 

Two additional variables, “chance” and “government” have a big impact. Chance is outside the control of industries; wars and embargoes can reshape industry structure in a country for or against it. A government can improve or retard competitive advantage. Vigorous enforcement of antitrust laws encourages competition and stimulates innovation. For an industry to flourish, domestic rivalry is nearly always necessary. It drives companies to move beyond whatever initial advantage that led to the founding of the industry and to develop their international potential. 

 



Productivity

To maintain competitive advantage, the industry must normally broaden and upgrade from their original sources of success and take it to the next level. In the early stage of economic growth many believe that a country needs a strong government that can mobilise and direct resources that are important. Therefore the success of poor countries according to them hinges critically on the quality of government leadership, i.e. its development oriented leadership, its ability to promote good talent to head critical institutions and its approach for policy formulation with industry. 

China is a case in point, however their future success will largely depend on the ability of the Chinese President Xi Jinping to liberalise the financial sector, ensure a democratic system that ensures more people get a bigger share of their growth and more discussion about the human and environmental cost of its massive infrastructure projects. 

On the other hand India, even though poor in resource, is super rich in human talent and in technology. Knowledge is perhaps the most critical competitiveness factor. As countries move up the economic scale, the more they thrive on knowledge to ensure their prosperity and to compete in world markets. How that knowledge is acquired and managed is each nation’s responsibility. 

 



Innovation

Companies via frugal innovation have been able to create affordable products to billions of people in South Asia. By creating scale, Indian companies have expanded domestically and overseas and thereby grown their economy in their own country. Indian companies are stepping into the next level of development by investing big time in HRD and RD almost imitating the Japanese companies in the ’70s and ’80s. However the gap between the rural have-nots and the urban-haves are widening by the day, causing huge problems in many states. 

On the other hand, the Asian Tigers all saw their economies take off during the ’70s and ’80s not purely because of authoritarian regimes but because they aggressively pumped up their exports and integrated well into the world economy. Many of them, despite being starved of human talent, have become service hubs for many top corporations earning top dollars for their country by cleverly opening their doors to skilled talent and by leveraging on technology. The productivity of human capital, productivity of physical capital and the combined effect of these two factors of productivity is therefore essential for a country’s prosperity. 

Hence, in the final analysis, to create a basis for competitive advantage and a platform for sustained economic growth, many believe that a country needs good governance, competent and credible leaders, healthy savings, high levels of investment in technology and people, good macroeconomic management and finally a disciplined public service.

Prime Minister Ranil Wickremesinghe realises the challenges this country is facing and has invited the private sector many times to join the Government’s effort to develop Sri Lanka by investing for growth, harnessing political stability and policies towards a highly competitive social market economy. 

(The writer is a senior company director.)


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