Development in poor countries:
Not by their bootstraps alone
May 10th 2001
>From The Economist print edition
Don't expect liberalisation on its own to end poverty
HOW should a poor country become less poor? Open its economy, attract investors, export goods and free its markets, of course. But that may not be enough, according to a report by a United Nations trade and development body. UNCTAD is concerned with the world's 49 least developed countries (LDCs). Its third, ten-yearly conference on these, the poorest of the poor, opens next week in Belgium.
Heads of state, UN staffers, aid workers and businessmen will discuss how to lift such countries out of the mire. The task is huge. Excluding Bangladesh, the biggest of the poorest, these countries saw growth of real GDP per head of just 0.4% a year in 1990-98. This was despite the fact that in this period many adopted relatively liberal and open economic policies.
Using evidence from three IMF studies of poor countries that had undertaken to reform themselves, the report argues that some of them liberalised their economies more than richer ones usually do. Many of the LDCs freed their exchange rates and interest rates, and cut regulations on prices and markets for goods, including farm produce, though, crucially, many were tardy on financial reform and privatisation. Moreover, says the report, "LDCs have actually gone further than other developing countries in dismantling trade barriers". Of the 43 poorest countries studied, 37% had no tariff barriers, or only minor ones, an openness matched by only 23% of other developing countries.
In financial openness too, poor African countries (the majority of LDCs) have made great leaps forward. The report suggests that, by 1997, 18 of Africa's poorest countries, including Uganda, Mali and Zambia, had "somewhat or largely" open financial systems.
But that openness may not have made much difference, says the report's author, Charles Gore. Most of the poorest countries' economies have still fared badly, some of them even worse than before liberalisation. Many depend heavily on a single export, such as coffee, where there have been precipitous declines in prices.
Nor have donors done enough, adds Mr Gore, to encourage private investment, or to educate people how to behave in the new, open, system. Simply liberalising poor economies, without giving them support during the transition, can be a recipe for economic instability.
There are other reasons. Of the 24 poorest African countries that made reforms in the past decade, ten suffered from wars or coups. Corruption and weak governments did not help. And on them all, reformed and unreformed alike, diseases such as AIDS and malaria take a heavy toll.