Developing Countries: How to Escape the Poverty Trap?

Author: Pierre Varasi
January 2015

2.5 billion people in the world live under the poverty line, of 2$ per day. 1.3 billion live under the extreme poverty line, which means with less than 1.25$ per day. Sub-Saharan Africa represents alone 46.8% of these (data of 2011). Right after it, we can find South Asia, with 24.5%. Wondering about the origin and the causes of this phenomenon is clearly important, but these are not easy to find: some scholars blame their ‘cultural underdevelopment’, others the European colonization, the remaining blame the climatic and territorial peculiarities. Anyway, theories that are hard to reconcile. As much as we could find arguments in favor of each of them, I think it is more important to understand what to do instead of looking at what caused it.

The developed states have tried for years to help these countries. Since the end of the Second World War, we have witnessed a great acceleration in the growth of institutions, movements and associations for development. However, at almost 70 years from that moment, aids have proved to be almost useless. What is wrong is not the amount of help or its form; but how states delivered it, and what this aid has led to. Specifically, in a great amount of poor areas, the developed countries have not respected the traditions and local culture, while they simply brought tools and western habits too, without taking into consideration the uniqueness of each of the receiving state.

Even more important is to consider that some kind of interest is usually behind the aid: economic, bonded to specific politics or programs, or to the purchase of goods from the country that brought the aid. We can do similar critiques to the Bretton Woods institutions: the World Bank, the International Monetary Fund and the World Trade Organization. The developing countries underline how the world powers control and influence them, and that they dictate only one economic vision, the neo-liberal; they damage the state sovereignty with their impositions; they grant assets, although without taking responsibilities for the workers and the migrants that every economic transformation involve. Last but not least, the developed countries apply the same methods everywhere in the same way.

None of this means that help is not necessary. In a poor country most of the income is devoted to consumption, and this reduces savings. This also means lower investments, funds for technological innovations and so on, which brings low production and a slow rate of growth. This is the poverty trap, called this way as low production will lead again to limited consumption that will represent most of the country’s income. What can change the situation at this point is a foreign investment, which, if well used, can bring to the development of key industrial sectors and of tourism.

From this fact derives the importance of commerce, which increased constantly since the ‘50s, leading to changes and innovations all over the world. We must not forget, then, that there are defenses of the institutions cited before: states are not forced to accept the aids, but even more important, is that really right to leave these countries free to use the money received however they want, considering that they usually have corruption and a lot of political and juridical problems? Moreover, throughout the last century a number of movements that want the relief of these countries from debt were created, meaning that many people have recognized the mistakes they had done in the past, and that this debt has always hold back their economies.

How to lead these countries out of the poverty trap? Using both grants from other states and institutions, managing them in a controlled way without at the same time tidying them to specific provisions, as well as through private investment. Sigrid Kaag, assistant administrator of the UN development program (UNDP), argues that without private investment there will be no significant growth. The private sector would clearly bring advanced knowledge, innovations, and tested models of commerce and of production. Only sharing this knowledge will enable the Third World to develop.

The truth is that as much as we can try, sending money is not enough to improve the life’s conditions of the developing countries. Jim Yong Kim, president of the World Bank, admits that public funds are not sufficient, while giving a greater role to the private sector would bring new jobs. Along with these, even income would increase. This would eventually lead to improvements in the life and health conditions, in the instructions levels and in the creation of infrastructures.

The new companies, which would have just moved, would also mean a new revenue for the government, from taxes; they would be competitive for the markets, and for this reason emulated by those already present in the territory, leading to greater productivity. In the long term, all of this would improve goods’ quality, but at the same time making them cheaper. For example, the lowest segments of population are already a new market for US companies in India and Brazil. Moreover, not only private investment must concentrate in these territories to help them, but to grow as well: since the economic crises of 2008, the growth of the Third World has been an engine for our economies.

SOURCES:

- Worldbank.org
- UNDP.org
- IFC.org
- Baker, “Shaping the Developing World”