How to Help Poor Countries

Nancy Birdsall, Dani Rodrik, and Arvind Subramanian

From Foreign Affairs, July/August 2005

Summary:  Increasing aid and market access for poor countries makes sense but will not do that much good. Wealthy nations should also push other measures that could be far more rewarding, such as giving the poor more control over economic policy, financing new development-friendly technologies, and opening labor markets.

Nancy Birdsall is President of the Center for Global Development in Washington, D.C. Dani Rodrik is Professor of International Political Economy at Harvard's John F. Kennedy School of Government. Arvind Subramanian is Division Chief in the Research Department of the International Monetary Fund. The views expressed here are their own and not those of their respective institutions.

On the flip side, many African countries have been unable to match Vietnam's success, despite being no poorer or more agrarian. True, education and health indicators have improved markedly in Africa, and some of its countries have achieved macroeconomic stability. But even in the best-performing countries, growth and productivity remain modest, and investment depends completely on foreign aid infusions. It may be tempting to ascribe the rare African successes -- Botswana and Mauritius, for example -- to high foreign demand for their exports (diamonds and garments, respectively), but that explanation goes only so far. Obviously, both countries would be considerably poorer without access to markets abroad. But what distinguishes them is not the external advantages they enjoy, but their ability to exploit these advantages. Natural resource endowments have often hurt many developing countries: the word "diamond" hardly conjures images of peace and prosperity in the context of Sierra Leone, and oil has been more curse than blessing for Angola, Equatorial Guinea, Nigeria, and many others.

Witness the case of Mexico. It has the advantage of sharing a 2,000-mile border with the world's greatest economic power. Since the North American Free Trade Agreement went into effect in 1994, the United States has given Mexican goods duty-free access to its markets, has made huge investments in the Mexican economy, and has continued to absorb millions of Mexican laborers. During the 1994-95 peso crisis, the U.S. Treasury even underwrote Mexico's financial stability. Outside economic help does not get much better. But since 1992, Mexico's economy has grown at an annual average rate of barely more than one percent per capita. This figure is far less than the rates of the Asian growth superstars. It is also a fraction of Mexico's own growth of 3.6 percent per year in the two decades that preceded its 1982 debt crisis. Access to external markets and resources has not been able to make up for Mexico's internal problems.

A notable exception to the limitations of outside assistance is European Union membership. By offering its poorer eastern and southern neighbors not just aid transfers and market access but the prospect of joining the union, the EU has stimulated deep policy and institutional changes and impressive growth in about 20 countries. But the exception proves the rule: the EU is not just an economic arrangement; it is also a political system in which member states transfer extensive legal powers to the central authority. In return, the center shoulders significant responsibilities for the economic well-being of each member.

Unfortunately, accession to the EU or to any other major power is not an option for most of the poorest parts of the world -- and increasing the financial resources and trading opportunities for the poorest countries is not a sufficient substitute.

EASY ACCESS

To start, there is the question of market access. Currently, the international trade system is full of inequities. Rich countries place their highest tariffs on imports important to developing countries -- garments and agriculture, for example. The tariffs escalate as the level of processing increases, discouraging industrialization in the poor countries. In addition, multilateral trade negotiations lack transparency and often exclude developing countries from the real action. Using WTO procedures to settle trade disputes requires money and technical expertise, both of which poor countries lack.

But to say that these flaws seriously hamper development in struggling economies would be to overlook the remarkable success in the last two decades of Vietnam and China in exporting manufactured goods, of Chile in exporting wine and salmon, and most recently of India in exporting services. These countries have achieved success in exporting, despite the impediments. And barriers on manufactured exports from developing countries were even higher when the Asian "tigers" first arrived on the scene in the 1960s and 1970s.

Many argue that agricultural tariffs in particular represent an impediment to poor countries' economic growth. The World Bank and organizations such as Oxfam argue that doing away with agricultural subsidies and protectionism in industrialized nations would significantly reduce poverty in the developing world. European cows, the famous example goes, are richer -- receiving $2.50 a day each in subsidies -- than one-third of the world's people.

Yet the reality is that liberalizing agricultural trade would largely benefit the consumers and taxpayers of the wealthy nations. Why? Because agricultural subsidies serve first and foremost to transfer resources from consumers and taxpayers to farmers within the same country. Thus, citizens of developed countries would derive the most benefit from having those subsidies cut. Other countries are affected only insofar as world prices rise. But the big, clear gainers from such price increases would be countries that are large net exporters of agricultural products -- rich countries, such as the United States, and middle-income countries, such as Argentina, Brazil, and Thailand.