why some countries are poor and others rich

“Open markets offer the only realistic hope of lifting billions of people in developing countries out of poverty, while maintaining prosperity in the industrialized world.” first—Kofi Annan, former Secretary General of the United NationsMany marked the birth of economics with the publication of Adam Smith’s book The Wealth of Nations in 1776. In fact, the full title of this classic is An Inquiry into Nature. the nature and causes of the wealth of nations, and Smith really tries to explain why some countries achieve wealth and others do not. However, in the 241 years since the book was published, the gap between rich and poor countries has widened even further. Economists are still refining their answers to the original question: Why are some countries rich and others poor, and what can be done about it?

“Rich and poor”

In common language, the terms “rich” and “poor” are often used in a relative sense: A “poor” person has less income, wealth, goods, or services than a “rich” person. When looking at countries, economists often use gross domestic product (GDP) per capita as an indicator of a country’s average level of economic well-being. GDP is the total market value, in dollars, of all final goods and services produced in an economy in a given year. In a sense, a country’s GDP is the same as its annual income. So, dividing the GDP of a particular country by its population is an estimate of the average income the economy generates per person (per capita) per year. In other words, GDP per capita is a measure of a country’s standard of living. For example, in 2016, GDP per capita was $57,467 in the United States, $42,158 in Canada, $27,539 in South Korea, $8,123 in China, $1,513 in Ghana and $455 in Liberia (Figure 1). 2 NOTE: Liberia GDP per capita of $455 is included but not shown due to rates. The Republic of Korea is the official name of Korea ORIGINAL: World Bank, taken from FRED®, Federal Reserve Bank of St. Louis; topqa.info/graph/?g=eMGq, accessed July 26, 2017. Because GDP per capita is simply GDP divided by population, it is a measure of income as if it were divided equally by population. In fact, there can be large differences in the incomes of people within a country. So even in a country with a relatively low GDP, some people will be better off than others. And, there are poor people in very rich countries. In 2013 (the most recent year of global poverty data available), 767 million people, or 10.7% of the world’s population, were estimated to be living below the international poverty line of $1.90 per person per day.3 Whether people or countries, the key to escaping poverty lies in rising income levels. In particular, for countries that measure wealth by GDP, escaping poverty requires increasing the output (per person) their economies produce. In short, economic growth lifts countries out of poverty.

How do economies develop?

Economic growth is a sustained increase over time in a country’s production of goods and services. How can a country increase its output? Well, an economy’s production is a function of its inputs, or factors of production (natural resources, labor, and capital) and the productivity of those factors (specifically) can be labor and capital productivity), which is called total factor of productivity (TFP). Consider a shoe factory. Total shoe output is a function of inputs (raw materials such as leather, labor supplied by workers, and capital, tools and equipment in the factory), but it also depends on the process of production. The level of workmanship of the worker and the usefulness of the equipment is. Now, imagine two factories with the same number of workers. In the first factory, workers with basic skills moved goods around with trolleys, assembled goods with hand tools, and worked on benches. In the second factory, highly trained workers use motorized forklifts to move pallets of goods and power tools to assemble goods that move along conveyors. Because the second factory has a higher TFP, it will have higher output, higher income and provide higher wages for its workers. Similarly, for a country, a higher TFP will lead to a higher rate of economic growth. Higher rates of economic growth mean more goods are produced per person, higher incomes are generated and more people are lifted out of poverty at a faster rate. But, how can countries increase TFP to lift themselves out of poverty? While there are many factors to consider, two stand out.

Institutions

Read more: why doesn’t my toilet stop running | Q&A first, institutional issues. For an economist, institutions are the “rules of the game” that create incentives for people and businesses. For example, when people can make a profit from their work or business, they are motivated not only to produce, but to continuously improve their production methods. The “rules of the game” help define the economic engine for production. On the other hand, if people are not rewarded with money for their work or business, or if their productive interests can be taken away or lost, the incentive to produce is diminished. For this reason, many economists suggest that institutions such as property rights, free and open markets, and the rule of law (see boxed appendix) provide the best incentives and opportunities for individuals who produce goods and services.North Korea and South Korea are often an example of the importance of institutions. In a sense, they are a natural experiment. These two countries share a common history, culture and people. In 1953, these countries were officially divided and governed by very different governments. North Korea is an authoritarian communist country where property rights and free and open markets are virtually nonexistent and the rule of law is suppressed. In Korea, organizations provide a powerful impetus for innovation and productivity. Result? North Korea is one of the poorest countries in the world, while South Korea is one of the richest.4 NOTE: While the Republic of Korea (the official name of South Korea), China, Ghana and Liberia had similar standards of living in 1970, they have evolved differently since then. SOURCE: World Bank, obtained from FRED®, Federal Reserve Bank of St. Louis; topqa.info/graph/?g=eMGt, accessed July 26, 2017. While this may seem like a simple relationship — if the government provides strong property rights, free markets and the rule of law. rights, markets will grow and economies will grow— research shows that the “institutional story” alone does not provide a big picture. In some cases, government support is important to the development of a country’s economy. Closer examination reveals the economic transition in South Korea, which began in the 1960s, under the authoritarian rule of Park Chung-hee (who shifted the nation’s economic focus to industry). export-oriented), not subject to strong, liberal property rights. market and the rule of law (later) .5 Korea’s move towards industrialization was an important first step in its economic development (see Korea’s growth rate in Figure 2) . China is another example of an economy that has grown tremendously. In a single generation, it was transformed from a backward agricultural nation into a manufacturing powerhouse. China attempted market reforms during the Qing dynasty (modernization reforms began in 1860 and lasted until its overthrow in 1911) and the Republic Era (1912-1949), but they don’t work. China’s economic transformation began in 1978 under Deng Xiaoping, who imposed a government-led initiative to support industrialization and market development, both internally and externally. China’s exports of goods.6 These initial government-supported changes helped develop the markets needed for the current, substantial increase in economic growth (see Figure 2).

Purchase

Second, international trade is an important part of the economic growth story of most countries. Think of two kids in the school cafeteria selling a granola bar for a chocolate chip cookie. They are willing to make a trade-off because it gives them the opportunity to benefit. Countries trade for the same reason. When poorer countries use trade to access capital goods (such as advanced technology and equipment), they can increase TFP, leading to higher rates of economic growth.7 At the same time, Trade provides a broader market for a country to sell the goods and services it produces. However, many countries have trade barriers that limit their access to trade. Recent research shows that removing trade barriers can narrow the income gap between rich and poor countries by 50 percent.8

Inference

Economic growth in the least developed economies is key to narrowing the gap between rich and poor. Differences in economic growth rates of countries are often due to differences in inputs (factors of production) and differences in TFP – labor productivity and capital. Higher productivity promotes faster economic growth, and faster growth allows a country to lift itself out of poverty. Factors that can increase productivity (and growth) include the institutions that provide the impetus for innovation and production. In some cases, the government can make an important contribution to the development of the national economy. Finally, increasing access to international trade can provide markets for goods produced by less developed countries and also increase productivity by increasing access to capital.

Note

1 Globalist. “Kofi Annan on Global Futures.” February 6, 2011; topqa.info/kofi-annan-on-global-futures/.Read more: Does basil wilt? (Solutions that really work) | Top Q&A2 data from the World Bank sourced from FRED®; topqa.info/graph/?g=erxy, accessed July 26, 2017.3 World Bank. “Poverty and Commonwealth 2016: Equality.” 2016, p. 4; topqa.info/en/publication/po Poor-and-shared-prosperity.4 Olson, Mancur. “Big bills left on the sidewalk: Why are some countries rich and others poor.” Economic Perspective, Spring 1996, 10 (2), pp. 3-24.5 Wen, Yi and Wolla, Scott. “China’s rapidly rising economy: A new application of an old formula. Social Education.” Social Education, March/April 2017, 81 (2), pp. 93-97.6 Wen, Yi and Fortier, George E. “The Visible Hand: The Role of Government in China’s long-awaited Industrial Revolution.” Federal Reserve Bank of St. Louis Review, Q3 2016, 98 (3), pp. 189-226; topqa.info/10.20955/r.2016.189-226.7 Santacreu, Ana Maria. intensity of research and development and application of technology.” Federal Reserve Bank of St. Louis Economic Brief, No. 11, 2017; topqa.info/10.20955/es.2017.11.8 Mutreja, Piyusha; Ravikumar, B. and Sposi, Michael J. “Commodity Trade capitalization and economic development.” Working Paper No. 2014-012, Federal Reserve Bank of St. Louis, 2014; topqa.info/wp/2014/2014-012.pdf. 2017, Federal Reserve Bank of St. Louis. Perspectives. are expressed as those of the author(s) and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System Read more: Why are town names in Australia is funny again

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