Let’s talk about Sachs

Rav Casley Gera — Sun, 22 Oct 2006 13:11:28 +0000

In the introductory chapters of his book The End of Poverty, Jeffrey Sachs lays out a brief history of economic development since the Industrial Revolution, and argues that the gap between the richest and poorest countries that now exists stems from the failure of poor countries to benefit fully from that process. In the third chapter, he goes on to look in more detail at “Why Some Countries Fail to Thrive.”

As Sachs point out, 4.9bn people live in countries where average income increased between 1980 and 2000. So growth is not limited to the rich world, but large chunks of the developing world have failed to benefit from it in recent years. But if the forces of capitalist development are so strong, how could some countries be left behind? To do that, we first have to understand the ways in which growth can occur:

Saving: Instead of eating all its grain, a family saves some and sells it, and buys a cow with the proceeds. The next year, they benefit from milk sales, and manure improves their grain yield.
Trade: A family swaps grain for a cash crop such as vanilla beans, sells them, and has enough to buy grain and some left over.
Technology: Not necessarily machinery; even a new farming method or special seeds could raise yields substantially, leaving the family something to sell.
Resource boom: A government success in controlling nearby infectious insects, for example, could open up more farmland.

GDP per capita growth - that is, economic growth that outpaces growth in population - basically happens as a combination of these four processes, on a larger scale. So what could cause “negative growth” - economics-ese for recession?

Lack of saving, coupled with resource failure: So if you’ve eaten all this year’s crop, and next year’s falls short of what you need, you go hungry.
Obstacles to trade: A family may wish to switch to cash-crop farming, but be prevented by lack of access to trading places, or lack of the start-up capital required (e.g. the cost of the first set of seeds and equipment).
Technological reversal: This could be as simple as a broken piece of machinery, or even that a parent dies before training their children in farming techniques (for economists, practical ideas and skills count as technology).
Natural resource decline: for example, part of the family’s land becomes unproductive, through a phenomenon like nitrogen depletion
Adverse productivity shock: for example, a whole year’s crop wiped out by floods or drought.
Population growth: this is one of the most damaging, because it is least avoidable: as parents die, and divide their land between two sons; who then die and divide their land between their two sons each, the end result is ever-shrinking land to support each person.

What’s strikingly clear from such a list is how inevitable many of these conditions are: hoes and machetes break, soil gets depleted, and families grow and estates shrink. Far from seeming like an unfortunate occasional event, income decline should be considered the norm unless it is increased by the processes described in the first least. Staying still isn’t an option - if trade and technology don’t push incomes up, they will inevitably decline. Thinking about it, it was surely those very pressures that caused Man to start trading and developing technology in the first place!

Of course, such ideas are easy to illustrate at a one-household level. Sachs goes on to explain at country level why growth might be prevented:

Physical geography: landlocked, river-free and mountainous countries have much higher transport costs, making trade far less viable. Indeed, economic growth tends to begin at coasts and along rivers and spread slowly inland - just think of the location of the world’s major cities. Physical geography can also increase the burden of disease - for example, Africa’s climate makes it perfectly suited to malaria. These factors can be overcome, but it requires extra investment.
Fiscal trap: Even if there is a reasonable amount of money around in the economy, Governments may still be impoverished and unable to provide health care, roads, ports and so on. Corruption or ineptitude might prevent tax collection, or crushing debt commitments might eat up all revenue.
Governance failure: Government must support growth in other ways besides spending money: it must create a stable, peaceful environment, with clear rule of law and minimal bribery and corruption, in order to create an environment in which business can thrive.
Cultural barriers: Norms that block access to education and work for women, or certain religious or ethnic minorities out of the economy, slow growth.
Geopolitics: For example, trade barriers erected by other countries.
Lack of innovation: Even those in poor countries with the education and will to innovate lack the resources to do so, and a strong market in which to sell their ideas. Poor countries are forced to deal with imported innovations that are designed with rich countries in mind and may be completely inappropriate for their needs.
Demographics: Where infant mortality is high, families have many children to ensure some survive; but can ill-afford to feed them all, in fact making it inevitable that most will die. In such an environment educating and nourishing children is much harder. Educated working women must take time off for each child, so the “cost” of each child increases, speeding the transition to a low-birth, low-mortality economy.

Not all of the over 1bn people whose countries failed to achieve growth between 1980 and 2000 fit this picture. 15 countries of the former USSR, for example, experienced economic decline as a result of the shocks of the end of the Soviet regime and the difficult transition to capitalism. Other middle-income countries shrank owing to fluctuating oil prices or political upheaval. And, as Sachs points out, extreme poverty can persist even in the midst of a wealthy economy. In Latin America, for example, income is sharply divided between the European and indigenous or mixed populations. And if a country’s government does not take steps to bring its poor into the fold of development - most notably through education - they will feel none of the benefits of growth.

Nor did all poor countries fail to grow: above all, Sachs pinpoints food productivity as the key factor deciding poor countries’ fate: the better your cereal yields were in 1980, the more you grew in the 20 years that followed. Crucially, this explains much of the difference between Africa and Asia.¹A core majority of those countries, however, started out poor in 1980 and just got poorer, largely as a result of the factors outlined above. The crucial thing to note is that many of these factors are themselves caused or reinforced by the very poverty they exacerbate. For example, a poor population wields no taxes, so the government can’t invest in infrastructure and services to build trade. This is what Sachs calls “The Poverty Trap” - that the very fact of poverty makes it impossible for poor countries to climb out of it. These obstacles, Sachs argues, are why it isn’t enough to spread global free trade, as many economists suggest - the poorest countries will be unable to take advantage of it. Investment and guidance is needed to put the poorest countries onto the bottom rung of the ladder. How economics should respond to that challenge is the topic of his next chapter.

1. Sachs here rebuts the claims of many free-market economists, such as Martin Wolf, that the main reason for Asia’s ascent over Africa is its lack of trade barriers.

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