Every now and then I come across a documentary that shows extreme poverty in many places around the world. I can’t help but wonder why many of these countries don’t appear to be progressing whereas others that used to be poor, like China and Singapore, have become rich in a relatively short period of time. This article examines some of the reasons that prevent countries from growing.
Inclusive vs Extractive Institutions
In the book, “Why Nations Fail: The Origins of Power, Prosperity, and Poverty”, the authors argue that nations fail because of their institutions (judicial, economic, political, etc). A given country’s prosperity is determined by its economic institutional landscape – the systems and regulations that direct economic behavior within its borders. That landscape includes property laws, the strength of public services and access to finance.
Inclusive economic institutions stimulate economic success and are designed to encourage participation in economic activities. They also nurture economic freedom. Examples of countries with inclusive institutions are the US and South Korea.
Extractive institutions derive incomes from groups within society for the benefit of other groups. Examples of countries with extractive institutions are North Korea and Sierra Leone.
The main characteristic of inclusive political institutions is pluralism. This means that various groups in a given society are politically represented, therefore power is shared between them. For institutions to be truly inclusive, it’s also essential that they are centralized. Centralization of power results in the rule of law being upheld; there is no need for these different groups to fight each other for superiority.
This 544-page book is available on Amazon. You can read a summary of it in 30 minutes on Blinkist.
High Levels of Corruption
According to Transparency International, there tends to be less corruption in rich countries and more corruption in poor countries. This makes sense since growth would be limited if governments steal their people’s money.
The problem with corruption is if you elect a new leader / president who isn’t corrupt, they will have a hard time eliminating corruption if other government officials are used to being corrupt. You likely need to sack all government officials and hire new ones who hopefully aren’t corrupt.
No Access to Education
According to this UNESCO study, it’s clear that there’s a correlation between poverty and education.
Pupil-to-Teacher Ratio
If we look at the countries ranked by primary school pupil-to-teacher ratio, we find, unsurprisingly, that there tends to be a smaller percentage of teachers in poor countries than in rich ones.
- Pupil-teacher ratio, primary school, countries ranked – list view
- Pupil-teacher ratio, primary school, countries ranked – map view
Source: UNESCO Institute for Statistics (http://uis.unesco.org/)
Literacy Rate
Another interesting metric is literacy rates. According to this map, we see consistent results showing poorer countries tend to have more illiterate people.
Education Index
Another interesting metric is the education index.
Tuition Costs
Another issue is the cost of education. While most countries offer free primary school education, most require tuition for a college education. Many rich European countries offer free college education and some, like in the U.S., offer very affordable college tuition. U.S. students can also get free money (grants) and low-interest loans to help pay for college.
High Population
In high-population countries, there aren’t enough resources (jobs, schools, teachers, etc) to support the large population. This situation becomes one of supply and demand where there is a large supply of unskilled workers and a short supply of resources. This results in a large percentage of the population becoming poor because, for example, they are unavailable seats to a nearby school or they are unavailable jobs.
According to this article by the World Economic Forum, there is a correlation between population size and a country’s wealth. In rich countries, people tend to have fewer children whereas in poor countries, people tend to have more children.
There is also a correlation between population size and education. Education leads to lower birth rates and slows population growth. This makes it easier for countries to develop. A more-educated workforce also makes poverty eradication and economic growth easier to achieve. Of course, economic growth brings with it another problem: increased consumption.
In one study, it was found that uneducated Malian women gave birth to almost 7 children whereas educated ones only gave birth to 4.
In order to slow population growth, some countries have tried to limit the number of children born. However, when China did this, it just turned a problem of population growth into one of an aging society.
According to an article on the US National Library of Medicine
National Institutes of Health website, fertility rates tend to be higher in poorly resourced countries. In developing countries children are needed as a labor force and to provide care for their parents in old age. In these countries, fertility rates are higher due to the lack of access to contraceptives and generally lower levels of female education. When children are put to work, e.g. by selling water or tissue at busy intersections, they are not in school and end up following in their parents’ footsteps, i.e. having many kids to make them work. Also, couples don’t expect help from the government when they’re old so they have kids who they expect will take care of them later on in life.
Human Capital
Human capital—the knowledge, skills, and health that people accumulate over their lives—is a central driver of sustainable growth and poverty reduction. More human capital is associated with higher earnings for people, higher income for countries, and stronger cohesion in societies. Unsurprisingly, the developed countries tend to be the ones with a high human capital index (HCI) value. Here’s a subset and the ranking.
| Rank | Economy | HCI Value |
|---|---|---|
| 1 | Singapore | 0.88 |
| 2 | Hong Kong | 0.81 |
| 3 | Japan, South Korea, Canada, Finland, Macao, Sweden | 0.80 |
| … | 0.80 | |
| 5 | United Kingdom | 0.78 |
| … | 0.80 | |
| 9 | Israel | 0.73 |
| … | ||
| 11 | United States | 0.70 |
| … | ||
| 16 | China, Bahrain, Chile, Turkey | 0.65 |
| … | ||
| India, Egypt | 0.49 | |
| … | ||
| Yemen | 0.37 | |
| … | ||
| Nigeria | 0.36 | |
| … | ||
| Central African Republic | 0.29 |
Human Capital Index (HCI) Report For 2020
Low Taxation & Tax Evasion
Low tax revenues means that a government can only fund basic services such as policing, the courts and the armed forces. In order to provide universal healthcare, education, and a social safety net for all of a country’s residents, higher tax revenues are required. According to the UN, this can be achieved if a country’s tax revenues are at least 20% of their GDP [1]. If achieved, this would result in an increase in a society’s quality of life. The Human Development Index (HDI) [2] is a ranking of a society’s quality of life by country. The index groups countries into 4 categories. Following is a 2016 listing of those categories with a sampling of countries. The listing also shows each country’s 2015 tax revenue-to-GDP ratio [3]. Each country’s estimated 2017 GDP per capita per the International Monetary Fund (IMF) is also listed to give an idea of the average individual’s annual income for that country [4]. In addition, I note whether a country is an Islamic country.
[1] Why developing countries need to toughen up on taxes
[2] List of countries by Human Development Index
[3] List of countries by tax revenue to GDP ratio
[4] List of countries by GDP (PPP) per capita
| Rank | Country | Islamic | HDI | Tax Revenue-to-GDP Ratio | GDP per capita |
|---|---|---|---|---|---|
| Very high human development | |||||
| 1 | Norway | 0.949 | 54.8 | $70,590 | |
| 2 | Australia | 0.939 | 43.4 | $49,882 | |
| 3 | Switzerland | 0.939 | 27.8 | $61,360 | |
| 4 | Germany | 0.926 | 44.5 | $50,206 | |
| 5 | Denmark | 0.925 | 50.8 | $49,613 | |
| 5 | Singapore | 0.925 | 14.2 | $90,531 | |
| 6 | Netherlands | 0.924 | 39.8 | $53,582 | |
| 7 | Ireland | 0.923 | 30.8 | $72,632 | |
| 8 | Iceland | 0.921 | 40.4 | $52,150 | |
| 9 | Canada | 0.921 | 31.7 | $48,141 | |
| 10 | United States | 0.920 | 26.0 | $59,495 | |
| 19 | Israel | 0.899 | 36.8 | $36,250 | |
| 30 | Brunei | Yes | 0.865 | ? | $76,743 |
| 33 | Qatar | Yes | 0.856 | 2.2 | $124,927 |
| 38 | Saudi Arabia | Yes | 0.847 | 5.3 | $55,263 |
| 42 | UAE | Yes | 0.840 | 1.4 | $68,245 |
| 47 | Bahrain | Yes | 0.824 | 4.8 | $51,846 |
| 51 | Kuwait | Yes | 0.800 | 1.5 | $69,669 |
| High human development | |||||
| 59 | Malaysia | Yes | 0.789 | 15.5 | $28,871 |
| 69 | Iran | Yes | 0.774 | 6.1 | $20,030 |
| 71 | Turkey | Yes | 0.767 | 24.9 | $26,453 |
| 86 | Jordan | Yes | 0.741 | 21.1 | $12,487 |
| 90 | China | 0.738 | 20.1 | $16,624 | |
| 97 | Tunisia | Yes | 0.725 | 14.9 | $11,987 |
| 102 | Libya | Yes | 0.716 | 2.7 | $9,792 |
| Medium human development | |||||
| 111 | Egypt | Yes | 0.691 | 15.8 | $12,994 |
| 113 | Indonesia | Yes | 0.689 | 12.0 | $12,378 |
| 123 | Morocco | Yes | 0.647 | 22.3 | $8,612 |
| 139 | Bangladesh | Yes | 0.579 | 8.5 | $4,561 |
| 147 | Pakistan | Yes | 0.550 | 11.0 | $5,354 |
| Low human development | |||||
| 168 | Yemen | Yes | 0.482 | 7.1 | $2,300 |
| 169 | Afghanistan | Yes | 0.479 | 6.4 | $1,889 |
| 187 | Niger | 0.353 | 11.0 | $1,153 |
Interestingly, the top 10 countries with the highest quality of life are the countries that collect the most tax from their residents.
If we take the average tax revenue as a % of GDP for all countries in each category, we get the following table.
| Country Group | Average Tax Revenue as % of GDP |
|---|---|
| Top 10 Very High Human Development | 36.75 |
| Very High Human Development | 31.92 |
| High Human Development | 22.08 |
| Medium Human Development | 17.09 |
| Low Human Development | 15.08 |
Based on the two tables above, it appears that, in general, the more taxes a country collects (higher tax-revenue as % of GDP), the higher the quality of life of its residents.
In addition to higher taxation, tax policy should be progressive such that the poor do not may as much or more as middle and upper-class people. Also, corporations and rich people should not be able to evade taxes using loopholes.
GDP Per Capita From 1960 to 2020
Below is a graph of the change in GDP per capita of a few countries. Singapore was able to catch up to the US in a short period of time. China and India have many similarities, e.g. two of the most populated countries. Both countries started growing around the same time but clearly China grew rapidly whereas India barely grew.
Source: The World Bank
Case Studies
How China Went From Poor to Rich
Some key things that supported China’s growth:
- More highly-educated people
- Special Economic Zones (SEZ)
China has 1.4 billion people. 1/5th of all humanity. Chinese was successful up until the 17th century when China closed its doors and decided it didn’t need Western gadgets. Many people ended up dying due to starvation. 14 million Chinese people died in WWII. Mao Tse Dong ruled China and closed all universities. Deng Xioping had a vision to make China prosperous. His slogan was “To be rich is glorious”. Like Mao, he believed that to ensure stability and to prosper, you needed one-party rule. When Mao Tse Dong died in 1976, Deng asked to be in charge of China’s education and science. Deng allowed everyone to take university exams for free. The first exams started in December of 1977. 5.7 million people applied for exams but only 5% could be admitted. In 1978, Deng emerged as preeminent leader. In 1978, Deng went with a delegation of 30 people to Europe. He witnessed how advanced Europe was and how far back China had fallen behind. Deng then went to Singapore and Japan. He noticed that trains in Japan could travel at 210 kph whereas those in China could only go up to 60 kph. He saw robots making cars in Japan. Deng wanted Chinese people to see how people in Japan and Singapore lived so he showed them on TV. Chinese people were in shock to see Japanese people work and have their own refrigerators at home. China embarked on an economic and social experiment – mixing the Communist command economy with the energy of capitalist enterprise. Chinese students were sent to foreign universities. There was a concern that Chinese students may not want to return to China. There was a huge investment in primary and secondary education – especially for women. By the early 80s, the signs of reform were everywhere from the schools to the cars on the streets where there were once only bicycles. The rural population of China had been moving to the cities at a rapid pace. In just 4 years, China’s agriculture, education and industry were reformed. Private business was allowed to flourish. China’s low production costs offered huge opportunities to the outside world. With its fast, expanding urban workforce, China’s GDP would increase nearly 70 times in 40 years. The Chinese way was a marriage of one-party rule with capitalist enterprise. China didn’t want to be dependent anymore on outside people for technology.
How South Korea Went From Poor to Rich
Some characteristics of South Korea
- Highly-educated people
- Export-led industrialization
- Extremely hard-working culture and attitude
How Singapore Went From Poor to Rich
Some characteristics of Singapore
- Education in Singapore is obligatory
- Education is mostly free
- Almost everyone in Singapore is literate
- Real-life skills are prioritized
- Singapore is a leader in science and reading
- Teachers work longer days
- No corruption
- Effective government policy