Maple Grove High School
Maple Grove, Minnesota
The past century has seen countless scientific and technological innovations that have greatly improved the human condition. From transportation and communications, to medicine and agriculture, developments in these areas and others have helped to enhance the productivity and wealth of developed nations at a rate previously unseen in history. However, not everyone has experienced these benefits. Twenty-six countries have a per capita GDP of $1,000 or less.1 In order to improve the status of poor countries, it is important to know what factors contribute to their overall wealth or poverty. After examining the issue, it is apparent that the innumerable factors at play can be broken down into one of several categories. The geography, governance, institutions and human capital investments of a country are all essential components in determining its economic success or failure.
The geography of a country is one factor that influences whether it is rich or poor. A disproportionate number of poor countries are found in tropical regions where deadly diseases like malaria often run rampant.2 The result is that life expectancies decrease, and valuable resources must be diverted to help the sick. At the individual level, careers are limited when a person becomes ill, and children lose education when they cannot go to school. On a national level, a country loses foreign investment and tourism when it is plagued with disease. These effects are a major hindrance to economic growth. Renowned development economist Jeffrey Sachs estimates that sub-Saharan Africa would be nearly a third richer today if malaria had been eradicated in 1965.3 Clearly, poor countries affected by disease must focus on finding ways to minimize its consequences. Whether it is through the donation of drugs, vaccines, pesticides or some other development, rich countries should help in lifting this burden.
A country's government and the quality of its institutions is perhaps the single most important component in determining its level of wealth. Rich countries tend to maintain an economic environment that promotes investment and business development. On the other hand, development in poorer countries is often stifled by widespread government corruption. In Cambodia, where corruption is common, local businesses have reported that payoffs add 15% to the cost of operating there.4 Foreign businesses looking to invest in such a country will be turned off by the prospect of having to bribe local officials and politicians. Charitable organizations are less willing to donate if they cannot guarantee the good use of their money. Consequently, many poor countries lose out on opportunities to add jobs and improve their economies. Citizens of these countries must put pressure on their governments to eliminate corruption and bribery.
A country's institutions also play an important role in creating an environment conducive to development. One important institution to nearly every country is its central bank. A country's central bank must constantly monitor economic conditions in order to prescribe proper monetary policy, including interest rates, reserve requirements and open market operations. The Federal Reserve in the United States and the European Central Bank in the European Union are two examples of effective central banks that are generally successful in setting monetary policy. Central banks in poorer countries would benefit by enacting similar policies. By maintaining low inflation, these banks can help bring economic stability, leading to growth and further investment.
One social and political institution common among developed nations is a respect for private property rights. Most rich countries have laws supporting and enforcing these rights for their citizens. The importance of private property rights comes from their ability to help people transform a physical asset, property, into a financial asset. This usually occurs through a bank loan, in which the property serves as the loan's collateral. Lacking a secure claim to their property, a person cannot get such a loan. It is extremely difficult for people to start new businesses or expand existing ones without this source of capital. This is a serious problem in many poor countries where property rights are nonexistent or ambiguous. Although many people in these countries hold property, they usually have no way to prove they own it. Thus, they cannot use it as loan collateral. The distinguished economist Hernando de Soto has estimated that the value of property held but not formally owned by people in poor countries is at least $9.3 trillion.5 There is incredible potential in all this unused capital, but it will remain tied up and useless until governments in these countries begin granting and enforcing private property rights.
The importance a country places in human capital expenditures, such as medical care for its citizens, also contributes to its level of wealth. Diseases such as AIDS continue to ravage many poor Africans. In at least five African countries, more than one in five adults has HIV.6 The economic costs of the epidemic are severe. AIDS deaths cause a country's productivity and skilled labor base to decrease. By one estimate, almost 19% of all skilled workers in South Africa will have HIV by 2015.7 Governments and citizens should work to slow the epidemic by providing medical care to the sick and by adopting preventative policies to educate the public about the AIDS threat. Without these initial human capital investments, the economic toll of the AIDS epidemic will only continue to rise.
Even a brief look at the issue of global poverty reveals it is an immensely complicated problem. Despite this, the governments of both poor and rich countries, along with their citizens, can take steps to improve the situation. The fight against poverty is winnable, though it will take many years to complete. It is imperative that the world remains persistent in working to bring relief to the impoverished.
1. "Rank Order—GDP Per Capita." The World Factbook. Central Intelligence Agency.
2. "Helping the Poorest." The Economist. 12 August 1999.
3. "A Useful Poison." The Economist. 14 December 2000.
4. "Rotten at the Core." The Economist. 19 February 2005.
6. "Aid for AIDS." The Economist. 27 April 2000.