Why Are Some Countries Rich and Others Poor? | Economics for People with Ha-Joon Chang

[Music] [Applause] [Music] why are some countries rich and others poor this question has been at the center of ikonics right from the beginning Adam Smith famous work which many people although not everyone regard as the first proper economics book the nature and causes of Wealth of Nations gaps between countries have always existed but as late as 1700 when European countries started colonizing parts of the world subjugating rican asians and appropriating wealth from their per capita income in the richest region of the world at the time Western Europe was only about two and a half times that of the poorest region at a time that is Africa the economies Angus Medicine measured these incomes of different regions in the last two thousand years in terms of what he calls the International dollar as some of you know this is a fictitious currency that tries to reflect the fact that when converted at the market exchange rates different currencies actually buy different amounts of the same part of goods and services there are a lot of untradable services that people consume so riding a taxi you know eating in a restaurant domestic servants you know that these kind of things are not internationally traded so this means that countries with cheap services tend to have their living standards underestimated if you convert the incomes into market exchange rate because market exchange rate is basically determined by things that are traded mobile phones TV cars so usually countries with cheap service labor namely for developing countries and some rich countries that accept lots of are cheap immigrant laborers like the United States and Singapore they tend to help out there living standard on the valued if their income is are computed into market exchange rate but of course I mean is making big assumptions and because that is saying that everyone is basically consuming the same thing depending on the method of estimate the figures can vary a lot you know forget exactly what year it was but about the decade ago the World Bank changed this a method of estimating purchasing power parity income and in one stroke China's income fell by 43% Singapore's income rose by 53% so these are very kind of sensitive to the exact consumption basket we are assuming that everyone is consuming all over the world the exact method of estimation the data you used so you have to take this with a grain of so you're a pinch of salt but you know these give you some ideas of the gaps between different countries going back to that comparison of the richest region and the poorest region of the world if you use our medicine figures to look at that the comparison in 2001 that is that 300 years later the respective per capita incomes of Western Europe and Africa gave us the ratio of 12. 9 toin the gap used to be two and a half times now 813 times and it comes in international dollars is a good reflection of living standards but in terms of our country's economic power importance in the world economy you have to use our market exchange rate and at these days people often use purchasing power parity income and say China is soon going to take over the US as the biggest economy but that I think is very problematic because that in terms of weighing the importance of countries in the world economy you have to use the income at market exchange rate any so if you use the market exchange rating comes the gap between the rich and the poor countries are even bigger to give you the most extreme example in 2010 no way which is the richest country in the world outside those small tax havens like Monaco it had per capita income 85308 dollars in 2010 in the same year the poorest country in the world lundi a small country in East Africa had a per capita income of 160 dollars though no way it was in market exchange rate income 534 times richer than Burundi if you say compare the United States which in that year had poor captain called 47 thousand one hundred and forty dollars with Ethiopia which is one of the poorest countries in the world although it has been growing actually faster than China in the last 15 years Ethiopia had per capita income of a hundred and eighty dollars in the year so the US was 124 times richer than Ethiopia so the gap is literally huge however you look at it and it has been increasing so people have asked discussion why some countries pulled ahead of the others and why some have fallen behind the usual explanation of course is that our rich countries have pursued better policies they pursued free trade free-market policies developing countries didn't they have basically fallen behind because they have used inferior policies exactly on the basis of this understanding of how countries become rich the World Bank the IMF and many other multilateral institutions as well as individual rich countries have imposed what they think are better policies on developing countries when they lend money to them when they give foreign aid to them they say yeah you can have this money but you have to liberalize your trade you want to power out our money for emergency financial restructuring from the IMF yeah fine take the money but you have to talk you have to privatize half your state-owned enterprises even a quick look at economic history however shows that this interpretation cannot be further from the truth starting with 18th century Britain down to South Korea and Taiwan in the late 20th century virtually all up today's rich countries develop are using those bad policies that they tell that developing country is not to use in you know until the 17th century Britain was actually a backward economy dependent on export of raw materials at the time the high-tech manufacturing center of Europe was the Low Countries what are Belgium and the Netherlands today why because at the time the most high-tech industry in Europe was all in manufacturing you know manufacturing textile out of sheep's wool and Britain was a supplier of that raw material and then the British realized that this is not making them any richer so over time British Kings tried to overcome but this Packard news by promoting woodland manufacturing within Britain by giving protection by banning the export of world to the Low Countries so that raw materials in Britain would be cheaper providing some subsidies Kings like Edward the third Henry des Sables Elizabeth the first they all used these policies to promote our woodland manufacturing but in the 18th century there was a big shift in overall British economic policy when Robert Walpole commonly known as the first British prime minister came to power now war police are today no only for his corruption towards the end of his prime ministership he was accused by a political opponent for becoming rich at using his office but the world polls a response was like yes I mean I have held the most powerful post in the country for the last 20 years is very natural that I become rich through it but you sir you only had a minor that office and you have become rich so you are done with the problem yes that's what he that was fantastically corrupt but I he was a very competent iconic manager he was brought to power in 1721 following the financial crisis of the time the South Sea Bubble now the South Sea Bubble was are caused by a speculative frenzy surrounding this company called South Sea company which was set up by some Tory politicians and got a Royal Charter to give it limited liability you know at the time you had to actually have permission from the King to set up a limited liability company so only very powerful and important companies like the East India Company got limited liability which enabled them to mobilize capital on a large scale because you could sell it sell the show to anyone now the South Sea company was set up ostensibly to trade with the South Sea which at the time meant Latin America but that a company was a scam because at the time Britain and Spain were at war almost all the time so within 10 years of its existence it sent only one trading ship to Latin America because most of the time the Spaniard said no you can come here but in 1720 the relationship attenti Spain and Britain improve a bit and that the guys who were running South companies started spreading all this that rumors that are now we are going to set up a new colony and we are going to send five ships are for trading next year and so on and suddenly people thought wow this is a great opportunity within a year share price that increased by nine times huge fortunes were made and lost one of the people who made our huge fortune and lost all of it was Isaac Newton the famous scientist who apparently lamented that I can predict the movements of heavenly bodies but I cannot predict human madness and know you and uterus are not on innocence scientists he was the head of Royal Mint are where they stamped our coin star for 30 years and he was a quite a wheeler-dealer anyway but even he was tempted by this speculative frenzy and in 1721 it all came tumbling down Wolper was brought in because he was a very competent iconic manager so he sorted out the financial crisis restructured the British tax system but another important thing that he did was to introduce a range of trade and industry policies to promote less develop British manufacturing industries against superior continental competitor ISM so he provided that tyree protection for British industries not just our land manufacturing but the range of industries gave them subsidies especially export subsidies and even imposed government equality controllable exports because a problem with made in England made in somewhere brand is that you know all producers are treated equally so if an unscrupulous producer produces top-quality product the whole country's brand is tarnished so he said no we can't do that the textile exporters have to have the quality checker so it they don't Sully the name of made in England now very interestingly these are policies that were practiced by the so-called East Asian miracle is two centuries two and a half centuries later Japan South Korea and Taiwan you know some of the policies that I had thought were invented in Japan in the 1950s were actually invented by Robert Walpole and British policy makers at the time but basically between the time of Walpole and the 1850s when Britain became the supreme world industrial power and didn't need these uh productions anymore Britain was one of the most heavily protected economies in the world if you look at this table you will see that as late as 1820 Britain had the highest average Industrial tariffs in the world now our here means that figures exist but there are caps and we cannot get complete data and they simply means that data is not available also that there are other studies that estimate a tariff rate in countries like France and I can tell you that at least in the case of France the average tariff was much lower than in Britain for most of the period covered by this table countries that do not appear in this table were either colonists which meant that that he didn't have the independent hairy policy or was subject to so-called unequal treaties that deprived them of many policy options including the power to set their own Harrison so these unequal treaties were originally introduced when the Latin American countries went independent in the eighteen tens and twenties and basically that stronger countries in Europe came to Latin America and said yes now you're a country but you are still not quite there so for example we are not going to let our citizens to be tried in your territory even if that they commit crime there because we don't believe in your code system this is known as extra time to reality and they said that we are going to take away your right to set your own tariffs because that your organization untrustworthy so starting with that country after country was subject to this I mean China was subject to the so-called Nanjing Treaty in 1842 after the infamous opium war you know the Ottoman Empire had to sign this Ethiopia to sign this Thailand which then was a Coliseum so you see that Britain which allegedly invented free trade was actually a country that invented protectionism if you like friedrich glaze a 19th century german economist who is a commonly but mistakenly as I'll tell you in detail later known as the father of the so-called infant industry argument condemned the british advocacy of free trade as an act of kicking away the ladder the infant industry argument is argument that the government of economically backward countries need to protect and nurture their young industries until they grow up and compete in the world market list was a very strong advocate about this argument but one of the things that he was doing was to point out the hypocrisy of british recommendation for free trade because he was saying look the british a tell us the germans the americans the baku nations not to protect our industries or the free trade but look at British history serving how did he become rich if we can reach that through protectionism so Britain telling us not to use our protectionism is like someone climbing up to the top with a ladder and kicking the ladder away so the other people cannot follow I mean you don't need to read this it's all summarized in this cartoon on the cover of my 2002 book it gets more interesting if Britain the first country to have succeeded by protecting immature industries against superior foreign competitors the first country to have theorized the practice is the United States another country that has unleaded lis developed on the basis of free trade and the person who invented this theory is this guy Alexander Hamilton who you see on the $10 bill Alexander Hamilton became the US Treasury secretary at the outrageously young age of 33 in 70 1789 you know the US might have gone independent in 1776 but for 13 years they actually didn't have the federal government George Washington became the prisoner in 1789 and Hamilton was appointed the Treasury secretary and two years after his appointment he submitted this report called the Treasury Secretary's report on the subject of manufacturers to the US Congress in which he argued for a theory which is today known as the theory of infant industry protection now the idea was very simple a very powerful one now in this book I have a chapter called my six-year-old son should get a job I start by saying I have a six-year-old son I don't use that such a strong language in the book but basically I say he is a parasite I mean he's totally dependent on me food lodging no heating education TV you know the entender games you name it so I got thinking you know actually if I stop sending him to school and send him to work I can save a lot of money I mean why should I pay for this guy and then I realized that this is a win-win situation because not only will I be saving a lot of money but he will become a more productive person normal wasting time in front of TV you know playing Nintendo games you know he'll have to go out in the world you know in order to survive with the competition he'll have to practice whatever trade is our pride you know nada no shoe shining chewing gum selling you name it yeah yeah so that's a great idea isn't in here I mean I save money he becomes a better person well why don't I do it you know well I don't I don't know about other people but the reason why I wouldn't do it I said was because well he's quite a clever guy you know I think if I supported him for another 12 maybe 15 years he could become lots of things I mean he could become an architect you know he could become a nuclear physicist he could become a brain surgeon so you know I'm willing to make that investment of course are there's a chance that a good chance that this guy might turn out to be a total waste of time you know he might be 33 unemployed live with me but I'm willing to take that chance because I know that if I send him to the labor market at the age of six what can you become okay maybe if he's really lucky he can own a small shop yeah but that's about it you know he'll never be able to become a brain surgeon never be able to become a tower architect yeah so this is that in a nutshell the idea of infant industry protection of course that today subsidizing this inefficient industries are protecting these the inefficient industries is costly because they actually you can import cheaper and better things from abroad but you have to do it if you want these industries that will become productive if you want your economy to acquire the ability to grow some high-tech sectors in the future but in recommending this infant industry protection for his young country Hamilton was actually going against the greatest economic authority of the time Adam Smith you know he keeps coming up yeah yeah in his a wealth of nations he was explicitly advising the Americas not to try to artificially develop manufacturing industries because it's bad for them but Hamilton had the guts to say to Adam Smith well not personally thank you bond oh thank you I know what is good for my country please go away of course the other Americans were totally unconvinced you know especially Thomas Jefferson Hamilton's political archenemy said look don't be ridiculous you know we can export our cotton and tobacco to Europe and import things that are not only better but also cheaper why should we subsidize this inefficient Yankee manufacturers we need free trade yeah i milton was of course a powerful guide number two to Washington so the Congress said yeah we'll raise that tariff or a little bit from five percent to 12 percent but you're not going to get 40 50 percent that you have asked for Hamilton unfortunately died rather young at the age of 49 in 1804 in a pistol Dewar where he was shot and the guy who shot him dead was some ago Aaron Burr that then serving vice president you know these were wild days you know serving vice president shoes the ex-finance means the dead and no one goes to prison when Britain invaded that our United States in 1812 in the anglo-american war the first and so far the last time when British US mainland was invaded people got a shock and realized unless they start manufacturing things including weapons they cannot defend their country or nessa they'd become richer with manufacturing they can fight these wars so a lot of people are converted to Hamilton's ideas and by the 1830s it had one of the highest tariff rates in the world and basically until the Second World War it remained one of the most protected economies in the world you know basically Industrial tariffs in America fluctuated between 35 and 50 percent on average during this period you know today average Industrial tariff rate in developing countries is about 10 percent whereas similar story applies to other rich countries of today you know most of them use these are bad policies like protectionism when they did it there and of course that dropped them on you and they didn't need them anymore so when the u. s.

became the top dog he started free preaching free trade later countries like Japan and South Korea developed on the basis of these policies when they became rich are they started promoting the idea of free trade and openness to foreign direct investment with a few exceptions like the Netherlands and Switzerland until the first world war all of today's rich countries used protectionism for substantial periods interestingly countries like Britain and the u. s. which are known as the countries in that invented free trade or actually the most protectionist economies in the world in their respective Katcher periods Germany France and Japan are actually much less than protectionist and Britain or the US you know lots of countries had averaged tariff rate of you know 18 percent and 25 percent I keep reminding you that today the average industrial tariff rate of developing countries is around 10 percent so even until the 60s these countries were protecting the industries more heavily than what developing countries are doing today these days for example developing colleges are told that you should not try to regulate foreign direct investment because that is are good for you if you regulate them investors wouldn't come but when they were at the receiving end today's rich country is very heavily regulated for indirect investment for example in the 19th century in the United States for indirect investments in finance shipping mining and logging or very heavily regulated and at the time actually there wasn't a lot of foreign direct investment in manufacturing it was mainly in services and finance and natural resource exploitation and these were sectors that are heavily regulated so especially in banking only American citizens could become director about bank and foreign shareholders were not even allowed to vote in annual general shareholders meeting today I mean you go to Korea you go to Mexico there are a lot of foreigners who Adi I mean CEOs are not to speak of board members of a major banks you know another example of kicking the ladder is that today if you go to the WTO and these internal organizations the Japanese government regularly submitted a document saying regulation of foreign direct investment is bad for economic development hello I mean what did you do when you are developing you basically completely Panta for indirect investment Finland classified all forms with more than 20% foreign ownership as dangerous enterprises you know I mean finns are not exactly the subtlest people in the world but this was quite heavy stuff even from the fanzine I mean I haven't invented this word that is a official Finnish terms and until the early 1980s there was no foreign bank branch in Finland in there only days of development Germany and Japan used state-owned enterprises to kickstart industrialization in key sectors state-owned enterprises were extensively used in France Finland Austria Norway Taiwan and Singapore I already told you about Singapore in my first lecture on the nature of economics 22% of GDP in Singapore is produced by state-owned enterprises in Taiwan 16% of GDP is from state-owned enterprises in all the French firms that you have ever heard of were either still that are significantly owned by the state or until recently or owned by the French state it's actually quite amazing almost all sectors in which the u.

s. still has the internal technological leadership our sectors that were created and promoted by the US military know computer internet Google Maps I mean these were all based on technologies initially promoted by the Pentagon few people noticed but semiconductor the sort of building blocks of the information economy this was initially developed by the US Navy the US would not have the leadership in aircraft industry without the subsidies and procurement up from the US Air Forces in pharmaceutical and biotechnology around 30% of research funding is given by the US federal government if you just look at these statistics of state-owned enterprises the US has a tiny state-owned enterprise sector accounting for only about 1% of GDP so you might think are the u. s.

at a state that doesn't really play an important role in the productive sector once you know you know what it has done to promote that colleges to establish a new industries you would not that have the view more recently some neoclassical economies have broken away from this tradition of emphasizing economic policies as the explanation of international differences in living standards and have come to offer a huge range of unalterable factors as the explanation in the gap between rich and poor countries they say tropical climate is holding back developing countries because it increases topical diseases that reduce labor productivity tropical soil leads to low agricultural yield because it's quite poor in nutrients geography matters a lot of African countries are landlocked and this restricts our ability to trade many of them in bad neighborhoods in the sense that the surrounding countries applause or there are fewer trading opportunities they can't be plagued by violent conflicts many of them Hoppa talked about the natural resource curse basically the argument is that abundant natural resources lead to corruption conflicts and overvaluation of currency that harms the economy they talked about ethnic diversity some people have emphasized is not all diversity that is a problem is medium degree or part iversity with two three four powerful groups if you are like Tanzania with like two hundred groups that is very difficult to organize these groups into warring factions so it's actually okay or if you're homogeneous like Korea everyone allegedly that looks and things alike so that's that good but if you have two three contending groups that it creates all kinds of conflicts the argument by the Turkish economy as Omalu that in many developing countries the colonizers brought poor quality institutions because they had no intention of settling there because they had too many diseases and therefore it was too dangerous to live there so if they found places they could settle like Australia or the United States they brought good institutions from home but if you are going into what are DRC Democratic Republic Congo today you don't want that you know you can't be bothered with those because you are not going to live there so you come in you have put in some basic institutions that will allow you to extract resources and get away and this has persisted for the last few centuries affecting the quality of institutions in those countries some people have even talked about developing countries having bad culture you know poor work ethic inability to save you know Samuel Huntington the author of the controversial book a clash of civilizations commenting on the fact that Ghana and South Korea in the early 1960s had similar levels of development basically he's saying well Canadians had the wrong cultural value South Korea's value thrift Investment hard work education organization discipline Canadians had different values you know what is implying yeah so these people are basically saying that developing countries are not developing because there's something wrong with them it's not even policy they are destined to fail but when you take a closer look at that these things the arguments begin to fall apart first of all all these meta structural factors have been more or less the same throughout you know whenever Africa's a post independence period but the continents growth performance has fluctuated a substantially when the 1670s GDP per capita in sub-saharan Africa was growing at an annual rate of 1 or 2 percent and then it fell to minus 0. 7 percent per year in the 80s and 90s since the 2000s it has going up to above 2% you know if the meta structure factors are the determining factors economic growth in Africa should have stayed more or less the same all along also individual country experiences counter the meta structure arguments to OBE Africa's best growth performers namely Ethiopian Rhonda our landlord Ethiopian had internal war Eritrea split off in the 1990s and Eritrea had all the cost so Ethiopia suddenly became a landlocked country and then it started growing faster who's Becky stan is another interesting example you know this is that the only country that is double landlocked meaning that you have to go through two countries we will get to the sea between 2004 and 13 they were growing at 6. 6 percent per year that is the kind of growth rate that South Korea and Taiwan had during the miracle years and it used a very gradualist approach still has a quite high protection and government intervention so using the wrong policies being EE LAN log you think this will be a disaster zone it's actually the best performing economy in the region best performing ex tobias soviet republic the scandinavian countries used to be land rock half the time until they invented the ice breaking ships in the late 19th century for six months they had no access to see also these meta structural factors have been present in today's developed countries you know you say tropical climate is bad how about Singapore Canada pass up the u.

s.