Will Some Countries Continue to be Poor?

More than 8% of the world population live in “extreme poverty”, according to figures reported by the Federal Ministry for Economic Cooperation and Development. Does that sound like a small figure? Well, it translates to more than 600 million people. Also, in calculating this figure, the term “extreme poverty” refers to those living below the international poverty line of only $1.90 a day.

The good news is that the number has declined significantly over the past century. According to a report by the World Bank, the percentage of the world population living in extreme poverty started to decline with the onset of industrialization and rising productivity.

Despite this realization, governments look towards protection mechanisms to combat poverty. This makes me wonder whether we’re fighting a losing battle simply because governments tend to get the wrong end of the stick.

There are extensive studies and research papers presented by government agencies across the globe. But none of these have the answer, even a remotely plausible one, to lift an economy out of poverty. The reason is that these reports are looking at protectionism, while the answer lies in just the opposite approach.

Lessons from History

What does empirical data tell us? Extreme poverty is the lowest in the most industrialized countries. Nations like the US, the UK, Switzerland and Japan witnessed rapid industrialization, amid largely free-market conditions.

Yes, there are the so-called social democracies, like Germany and Sweden, which have managed to reduce extreme poverty. But these countries also developed amid free-market conditions. The welfare programs came up only after these nations achieved high levels of industrialization and economic development.

Another factor that alleviated poverty was the collapse of the Soviet Union, which resulted in massive globalization of industry. After this event, the region’s per capita income surged dramatically. In fact, the development of global markets has eased poverty around the world to a great extent.

What about countries like India and China. They continued to experience stifling poverty till they moved in the direction of free markets. Although both these nations continued with socialistic systems, it was the slight loosening of the noose that helped abate poverty. As China and India expanded trade in global markets, their economies benefited, and the benefits tricked down to the poor as well. If these two countries emerge from the shackles of their socialistic systems, nothing can stop them from becoming global heavyweights.

Stop Defying Logic

It is quite evident that a country following socialistic ideologies will continue to face persistent, deep-rooted and widespread poverty. In fact, the situation will only worsen with time. This is because protectionism and socialistic systems cannot be sustained without government involvement. And, the government is an unproductive consumer of an economy’s wealth. The greater the activities of the government, the greater would be the spend.

So, what can alleviate poverty? Common sense will tell you the answer lies in the creation of wealth. To reduce poverty, there needs to be a move towards pro-business policies and a focused attempt at deregulation.

Some believe that the government should provide services that support businesses. These include infrastructure, education and healthcare. No! These sectors, too, need to be left to private companies. Instead of supporting the poor by providing services, governments can provide the funds needed to access private healthcare or education. There’s enough technology today to track thespend on different facilities and prevent misuse.

To alleviate poverty, governments need to encourage new industries to flourish. This doesn’t happen with protectionism through licenses and quotas. It happens by eliminatingbarriers to foreign investment, lowering taxes on imports and production and freeing the trade in goods and foreign exchange.

Interested in further discussions on why some countries can never get out of poverty? Join me at FreedomFest 2018.