Why do some countries remain poor?

This is an audio transcript of the Rachman Review podcast episode: Why do some countries remain poor?

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David Pilling
Hello and welcome to the Rachman Review. I’m David Pilling, Africa editor of the Financial Times, standing in for Gideon Rachman. In this week’s edition, we’re looking at the reason why some countries stay poor while others find a rapid path towards growth and development. My guest has been thinking about this question for decades. Stefan Dercon is both academic and practitioner, a professor of development economics at Oxford. He was also chief economist at the UK’s Department for International Development. His latest book, Gambling on Development, attempts to solve the riddle: why do some countries succeed while others fail. In recent decades, several countries in Asia have made spectacular strides. From South Korea to China and from Vietnam to Bangladesh, nations have embarked on a fast growth trajectory that has slashed poverty levels and improved the lives of millions of people. Yet in one region of the world, success stories have been harder to find. From the late 1950s African countries gained independence in a blaze of optimism.

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Africa, one of the fastest growing regions in the world. Huge investments in natural resources and infrastructure. Emerging business centres. New hope for the future.

David Pilling
More recently, there was huge buzz around the idea of Africa rising. Here’s Christine Lagarde, former IMF chief, talking about Africa’s potential in 2014.

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Rising Africa is not just a buzzword. It’s really something that we have seen in reality. And where the IMF can, together with the African countries, actually improve the situation, contribute to better growth, more sustainable growth, more inclusive growth going forward, where we can really focus on those best practices that have worked better for some countries.

David Pilling
Yet the truth is that few, if any, African countries have achieved anything like the economic take-off that has had such a dramatic impact elsewhere. Since 1990, only two African countries, Ghana and Ethiopia, have halved levels of extreme poverty, defined as living on less than $1.90 a day. In seven countries, including Nigeria, the Democratic Republic of Congo, and even relatively dynamic Kenya, the number of people in extreme poverty over that period has actually doubled.

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How the decline in poverty rates in Africa may be a source of hope? The high concentration of extreme poverty is becoming a cause for concern. Today, the continent is home to more than 60 per cent of the world’s extremely poor and this rate is expected to rise to 90 per cent in 2030, according to the World Bank. This development is all the more worrying, as Africa only had a quarter of the world’s poor in 1990.

David Pilling
The question is why. Is this a legacy of the rapacious nature of colonialism in Africa? And if it is all down to history, is there really nothing leaders can do to transform their economies and societies? Or as the extraordinary recent growth in countries like Bangladesh suggests, is there a path to development for states that were once written off? My guest, Stefan Dercon, has made a life study of this question, and I began by asking him when and how this began to crystallise into a theory about growth and development.

Stefan Dercon
I definitely had an epiphany in Kinshasa when I was asked while I was chief economist of DFID to actually go to the prime minister’s office and meet with his core team. So these were all people smartly dressed, incredibly eloquent, and for two, three hours they explained to me all the plans that we’re going to do in Congo. This must have been about seven or eight years ago in terms of how they were going to develop the country. And I was listening to them and this is really good, this high quality stuff, probably the best analysis you could think of that existed at the time on Congo. And they had all these good proposals, you know, everybody could be proud of it. And I remember walking out of it and thinking, wow, this was amazing theatre, and I didn’t believe at all that anything was going to be implemented. And a few weeks later, I was in Ethiopia, sitting in a meeting with prime minister, advisers around the economy, minister of finance was there, some senior ministers there, and they were explaining what they were going to do to actually boost growth further and to get further development in the country. And I remember thinking, listening to them, this is actually slightly dodgy economics. This is really not at all perfect. But I also remember walking out of that room and thinking, well, this is probably going to work. They’re going to make it work. They’re going to work very hard at it and correcting when it’s needed. And of course, if you don’t look back at it, the DRC didn’t really have much productive growth in the last decades while meanwhile, Ethiopia became the fastest growing economy in the world between like 2010 and 2020. And it’s just a lot to do with, you know, they really wanted to make it work, and they really were willing to say, look, we’re going to put the state’s capabilities, however limited they were, to try to actually do this, and they were willing to tinker and correct and so on. This is not about perfect economics, but actually it tells us a bit about how things actually come about. And it needs that fundamental commitment of senior politicians, other business leaders and so on to actually make this work.

David Pilling
Before we go on and discuss what you referred to as an elite bargain, an elite bargain for growth and development, we need to define what constitutes poverty and what constitutes an escape from poverty, the economic take-off that we saw in Asia and that we hope to see across the African continent.

Stefan Dercon
So it’s very hard to think of escaping from very high levels of extreme poverty in a country unless we actually get the economy to grow. And so economic growth is a part of it, but that doesn’t define that escape of poverty. But 10, 15 years ago, the growth commission, which was a commission led by Nobel Prize winner Michael Spence, that kind of said, look, countries that historically have managed to do growth for about 30 years at about 7 per cent per capita, they seem to be countries that are taking off. Seven per cent is quite a lot but actually, that’s what these East Asian economies were achieving in that period. That’s a minimal amount that you would say, well, that would be a kind of a path towards take-off. In the poverty side of course, you know, you don’t want this to be just based on natural resources that people just put in their pockets. So you talk about progress in health, progress in education, progress in a number of different indicators. And I would say take-off means, you know, you get your economy to grow, but you also make sure that what happens to the poorest groups in your society, their lot is actually improving as well.

David Pilling
OK. Now, in your book, you talk about this elite gamble on growth and development. If an elite is doing very well already, let’s say there is lots of oil and the elite is happy to share that oil. Why on earth would they take a gamble on development if things are going quite well from their own very narrow perspective? What forces an elite to gamble? And then what examples of that have we seen where that is actually panned out?

Stefan Dercon
So let me give you an example of what you just described. I think Nigeria is very much a kind of an elite bargain, basically a deal between those with power and influence that somehow is stuck. Nigeria earns something like $500 per person on oil revenue each year, $500 is not that much. But in a country of 200mn people, if you don’t divide it among 200mn people, but say you divide it up among 200,000 people, these 200,000 people have half a million. And it’s exactly what you described. Why would these 200,000 people, those people with power and influence in Nigeria, bother with actually changing the whole thing? I think that’s unfortunately what’s happening there. And changing that is quite a gamble because we may not be able to pocket that any more. And so this suggests somehow that quite a lot of countries may not do this, and it makes it even more remarkable if at some point elites decide to actually try to do this. So let me give an example where I think this is happening. Historically, I think China is an example where at some point, after a period of turmoil, the Cultural Revolution, Mao’s death and the Gang of Four, we’re talking the 1970s now. In 1979, Deng Xiaoping and other people in the parties basically decided we are going to take a gamble on a different course. They probably did this because they were losing all legitimacy among their population. This was a matter of survival for them. So that’s one reason why they would gamble for success via growth and development. And they did it, and at all costs they were trying to get that economy to grow. If you go to Africa, in Ghana, I would actually say probably in the 1990s, after Jerry Rawlings allowed multiparty democracy to come back, I think the political elite kind of gambled on this as well by recognising that if political instability that had existed in the 1970s and so on until Jerry Rawlings took power in the early 1980s, if it had allowed to be continued, they probably wouldn’t have been able to last very long. And they actually got themselves saying, well, let’s get this democracy to work in Ghana. Whenever someone was elected from the other party, we would allow them to govern, and we would take the political transitions as they came. And then somehow get the politics to evolve, as we now have in Ghana, which is increasingly based on outcomes, on results and on progress. So that’s a very different type of country that actually to avoid instability, elites say, well, let’s give this system a chance and let’s make the best of it. That’s an example for me of a country. It’s growing quite well now. Poverty has come down quite significantly. Yes, there is corruption, this is not a perfect country, but it is really striking progress in that country.

David Pilling
So who are these elites you are talking about? And isn’t your theory in danger of being a little bit elitist itself, absent from it are the vast majority of the people of the country. Do they not have agency?

Stefan Dercon
In a lot of countries, the agency is often indirect — by the people that represent them one way or another, directly groups. While I talk about the elite is actually those people with power and influence. And in some countries this can be a narrow group. In other countries it’s going to be a broader group. But it’s not just the political class on its own, it’s the connected businesses, it’s the business that also fires the politics. It’s often the military as well. It can be civil society as well. It can be public intellectuals. And of course, what we would like to see is to have a broader group of people to have more agency. But in my book, I have to come to the conclusion progress is possible even if the elite is actually still quite narrow. You don’t have to have all these things perfectly in place in terms of broad representation, broad inclusion, before the beginning of take-off can happen.

David Pilling
Now, I think your book is interesting because in a sense you say there is no recipe for growth and development. You don’t say you need to be a democracy or you need to be an autocracy. You don’t say you need to have a perfect Chicago school, free market economics. You need to have perfect institutions, you need to have state planning. You kind of say each country should cut its policy according to its cloth. In one section of the book, which is quite an entertaining and possibly a controversial section of the book, you take aim at some of the people who perhaps have had, what you call anyway, the silver bullet theory of development, whether it’s the likes of Jeffrey Sachs, who in your sort of characterisation is asking for much more aid, or people like Daron Acemoglu and James Robinson who are asking for better institutions. First of all, what is wrong with those theories?

Stefan Dercon
Actually, there’s a lot of it right with what they say. If I start with Why Nations Fail, Daron Acemoglu and James Robinson, of course it would be great if we have inclusive institutions. And in fact, their theory is a lot to do with trying to say, look, if we want to have continuing growth and keep on going, we probably need at some point these kind of inclusive institutions. What I don’t like sometimes about the way their theories get interpreted is that we need perfection before we can start. If we have to wait until they’re perfect institutions, nothing will happen. At the same time, when we look around the world, China and if you, for example, read Yuen Yuen Ang’s book, How China Escaped the Poverty Trap, she strongly argues that actually the institutions in China in 1979, they were pretty messy and pretty weak. You know, they came out of conflict. They came out of the Cultural Revolution. So it’s nothing that in itself is wrong but to ask that you have to have it sorted before you can continue is not very helpful. Jeff Sachs, you know, there is all kinds of things there, but the way it sometimes get interpreted again and maybe sometimes he alludes too much to it, is that aid can solve it all. Aid has become a very small part of development in general. Aid for most countries in the world has actually not been a big force for change. I will immediately qualify this at two countries that I named in my book: Ghana and Bangladesh. Very interestingly, these were countries that, given their local circumstances and the way they could use it, they could use it well. But to simply say every country in the world will develop thanks to massive amounts of aid, I don’t think it’s a very good idea, you know, you need to find the best way that it can work in your own context.

David Pilling
So if there is no silver bullet, this is essentially an iterative process. It’s Deng Xiaoping’s crossing the river by feeling the stones. I mean, to use your analogy or to stretch it a bit, what you’re saying is that the elite must have decided that they’re going to cross the river in the first place, and then they work out how to do it by trial and error. Is that right? And can you give us an example of a country that you think has taken that approach?

Stefan Dercon
China, of course, itself did it. But you could argue that, say a country like Indonesia from the 1970s has evolved kind of searching to reduce the power of incumbent elites and actually getting more and more new entrants to be allowed in the elite in businesses you know, in the 1970s was by allowing foreign direct investment to come in. In the 1980s, that continued in the 1990s, of course, we had the Asian crisis, and actually they renewed in their political system. They are now far more democratic now than they were before 1997. So they allowed to actually find a way that works for them. So I think an essential part of it is to find a way that you can correct your errors and use whatever is at hand to actually improve and change it. It’s actually quite an interesting thing. On Indonesia, for example, they use the IMF, of all institutions, very effectively as part of that learning and correction. You know, if your politics is so stuck that actually adjusting your economy and doing some of the bit more market-oriented measures that you need to take. If it’s so stuck that politics doesn’t allow you to do it, the IMF can be really useful. They can actually help you to do this, bringing resources and if necessary, you blame them if it goes wrong. And I think Indonesia played that game very cleverly. And so that situation, it’s very different from Deng Xiaoping, but that is actually finding ways to progress and make progress in general.

David Pilling
Now in Africa, a couple of the countries that come across very well in your book, I mean moderately well, are Ethiopia and Rwanda. People will immediately say, well, these are the classic examples. And anyway, look at Ethiopia now. From 2020, it’s descended into a civil war. Rwanda, you know, many people point out that it is an authoritarian society. They wonder what will happen post Paul Kagame, and they wonder if this is something waiting to blow. What would you say, you know, in defence of those two countries?

Stefan Dercon
You’re right that I do talk quite a lot about Ethiopia and a bit about Rwanda as well. I also talk about Kenya as a place where I think progress is being made and Ghana, which are very different political regimes. And I just want to emphasise, I’m definitely not coming to this view of Africa, everybody must start looking like Rwanda and Ethiopia, otherwise you will go wrong. But Ethiopia is interesting because I called my book Gambling on Development. I think to some extent there’s a risk that the gamble on development in Ethiopia has backfired. So if you think this period between 2005 and 2020 when the Ethiopian government with all the means it had to hand tinkering away, finding a way to actually progress, managed to actually start quite a lot of growth. My argument is somehow that on the economic side they did probably quite well. They also wanted to see whether this economic progress would give them enough legitimacy with the population to allow them to actually continue to do this path. And I think the underlying economic deal was maybe sensible, but the political deal in Ethiopia, of course, was not at all inclusive. And I think the gamble misfired by not paying enough attention to the political deal. You know, the political deal in the end is largely between the Tigrayans, Amharas, Oromos, different nationalities, ethnic groups. Some people would say, you know, running this country needs a deal between them. And probably until 2019, the deal was too much in favour of the Tigrayans, and it was just not tenable. But is it defeating my theory, I would say, while the gamble is actually misfiring. As for Rwanda, you know, I’m very cautious about it. Progress is being made. And of course, they came out of conflict. Kagame very much tried to use development as a source of legitimacy for the progress there. But I am quite concerned that rather than a gradual opening of the space which actually in Ethiopia they tried to do in recent years and it seems to have backfired, it still remains totally closed. And so you could ask yourself: can it continue being as closed as this? And I think the jury’s out. I’m not going to say that’s the example. I definitely don’t want to encourage people to say you must be authoritarian to be successful because autocracies may sometimes do well. But we know from the data they also can do really terrible things in their own societies and economies.

David Pilling
Now, your book, I think, is refreshing in many ways because it does put the spotlight on the country’s broader elites. But a critic could well say, you know, you don’t put nearly enough emphasis on history, particularly the history of colonialism and the kind of exploitation, depredations that what became African nations endured by European colonialists who carved up these countries willy nilly, who extracted all this stuff from them, who left infrastructure that was only really for extraction. And that’s both hard and soft infrastructure. Almost no graduates famously. In many cases, they left. And there were six graduates. Aren’t you, in a sense, relegating history and almost saying, look, you’ve got to pull yourself up by your bootstraps? Isn’t there a danger that your book could be seen like that?

Stefan Dercon
Well, I hope not, but I definitely take the criticism very seriously. The way I would like to think about this is that there’s a lot of work in economic history, of course, that emphasises how historical institutions are a big determinant of progress and growth. In fact, Daron Acemoglu and James Robinson in Why Nations Fail take this kind of historicist view of development, and in fact, a lot of the research tells us that. However, I would say following some other research, research also like from Acemoglu and Robinson to say, well, probably accounts for about 50 per cent. And I’m very happy to actually take this. History really matters in African countries as it matters all over the world. But then I want to look across the continent and I would say, well, but despite all this, some countries are clearly doing better than others. I actually want to applaud those countries that despite all this awful stuff, they do quite a lot better. OK. So take the case of Congo. You know, I’m a Belgian, so I should be willing to talk about this. And I have a chapter on this, and it’s actually very much trying to talk about the history because Congo, it’s very clear that some of the institutions that were set up before independence are strongly determining the outcome now. And actually, the most striking thing about Belgian colonial times is not simply what everybody knows about Leopold’s ghost or the things that happened until 1909. But actually in 1909, rather than being a private estate of the king, it became a colony. But that colony had extremely close interests between the mining industry and the colonial authorities and the church actually as the third party. And it’s really important, if we look at present-day Congo, what goes wrong there is the very close connections between the politics and the mining interests and that actually is holding that country back. Now you don’t say, well, that’s probably where any kind of government that really wants to change. That’s where it can begin to undo colonial history, and it needs to be willing to do this. I worry that we’re not there yet, but it is an important factor. But there is agency. There are countries that get better natural resource contracts that get more distance between business and the politics and so on. And that’s done the kind of thing that you want to get to.

David Pilling
Let us turn to aid. I mean, you’ve talked about it in passing along the way, but if essentially, you know, this is a domestic decision, it’s a matter for elites internally to decide we are going to go for growth and development in the interest of our country and our people. Then is there a role for aid at all and could it not play a negative role? Maybe it lets those who are not willing to have an elite bargain off the hook by kind of papering over the cracks by providing the basics of a health or an education service. You might argue it’s better to go cold turkey, pull the plug and force elites to make this bargain.

Stefan Dercon
You’ve more or less alluded to where the answer would be. The way I look at it, when you have in a country, an elite that is committed to growth and development, I think an international community should be willing to give aid to it, you know. Aid is nothing more than actually extending the resources that the government can have to spend. And actually, at that moment, you know, why not supporting them very strongly. A country that shows signs of trying to move forward like a Ghana, like Ethiopia in that particular period, like a Bangladesh, you actually should be willing to give them aid because there’s a very good chance that money will be used really well, because fundamentally they want the same thing as those who are providing the aid. But yes, I am actually careful that those places where the elite clearly doesn’t really want to progress what’s going on. I am cautious about, say, a country like Malawi. We have just too many incidences of policymaking that is clearly not developmental and actually just keeping the self-interest of groups of people going. So there is a more differentiated picture. Let’s gamble and support those countries where there are signs that they want to make progress and actually just be a bit more careful in other places.

David Pilling
So when Justine Greening moved from transport to international development under David Cameron’s government in 2012, she’s quoted in your book, she apparently said, “I didn’t bloody well go into government to give money to poor people.” You were set with the task of persuading her that she had a big international aid budget, and that she could do good with that budget. What did you tell her?

Stefan Dercon
Well, I first should definitely say that Justine Greening has always denied that she actually said it, but she definitely came into office knowing very little about it all. And in fact I want to actually give credit to her that she was willing to say, look, let me try to learn about what we do. What I did simply is gave her a few tutorials about the way different people think about progress and development and also give her some of the data on what’s taking place. But what is really interesting is someone like her who actually became very committed to development. She wanted to learn and she linked it as a good politician to stories that she understood. And she was linking it to her own story of moving in the UK with a family from the north. Family was involved in the mining industry, had to start working in the south and so on. And she actually, by the end of it, totally started understanding this importance of giving people chances to better their lives and how in development you may actually be able to do it.

David Pilling
I want to end, if I may, with Bangladesh, because your book, I would argue, is an essentially optimistic book. Bangladesh was famously characterised or dismissed, really, as a basket case. And not everybody knows this, but Bangladesh has had a pretty impressive 20 or 25 years in terms of growth and development. First of all, tell us a tiny bit about Bangladesh, but also what does that tell us about the ability of countries to, in a sense, just turn things around and improve the lot of ordinary, in this case, Bangladeshis?

Stefan Dercon
Yeah, well, it was one of the aides to Henry Kissinger who actually said, you know, Bangladesh is a basket case. And we’re talking then maybe somewhere the late 1970s. Bangladesh had a terrible 1970s. Of course, it had a war of independence and it had done a famine. It had a lot of mismanagement in its economy. This was essentially a country that was bankrupt. There was huge poverty. Nothing was happening then. And so Bangladesh is actually quite striking. It had really fast growth, probably starting somewhere in the mid 1980s. And the way it did that is partly through luck you could argue, but I would say more importantly, through actually a government when opportunities arose, didn’t try to stop it. So it’s probably three things that actually changed Bangladesh. One was that Daewoo, Korean investment company, invested in garments in Bangladesh in the late 1970s. They were totally wrong. But being a goods firm had trained a lot of people in how to actually run garment factories. It’s these people who set up the garment industry in Bangladesh that is now employing directly or indirectly about 3 to 4mn people in Bangladesh. It’s a big part of growth in the economy. The second thing it did was allowing aid to play its role, and they did that by actually allowing big NGOs. You know, the biggest NGO in the world is a Bangladeshi NGO called BRAC. And BRAC, more or less in big parts of the country, is running social services. And they allowed this to happen. In most countries, you wouldn’t be allowed to actually do this and take the aid for it. And then the third thing was, is actually it didn’t mind that its citizens used migration as a way of getting jobs overseas and then sent their money back, and it managed the economy quite hands off in Bangladesh to actually allow these monies to be used effectively. So it’s really quite a remarkable story not because the state acted in a really determined way, in a particular way, but actually the state understood its own weaknesses. So, yes, it’s an amazing place and it’s possible the change can happen. And I would also say more and more places in the world are showing signs of it. So this is, in that sense, a hopeful book, because change is happening. Some places, and I highlight them, really stay behind. But it’s these other places that against the odds, seems to have actually gambled on development.

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David Pilling
That was the economist Stefan Dercon ending this edition of the Rachman Review. Gideon will be back as host of the show next week. So please join us then.