How the common explanations for poverty are incorrect

There are a number of common ideas that purport to explain the vast differences in wealth between the richest and the poorest nations of the world. These ideas have become conventional wisdom, and people tend to accept that they are true statements. Careful analysis however makes it clear that these arguments fail to explain the fact of poverty. These common myths do not identify the primary causal factors of poverty.

Some of these explanations are still concepts useful in the discussion of poverty. Some are co-causal factors with poverty, where they are caused by poverty and in turn cause even deeper poverty. Other common explanations are actually outcomes of poverty, or simply incorrect.

Before reading this article, you may find it helpful to read our introduction to extreme poverty. For more detail on the cyclic deepening of poverty, see our work on issues that keep communities trapped in poverty. We have also looked in detail at poverty on the larger scale, when we identified a number of national and cultural issues that hamper development.

Economics is a zero sum game

Some people think that the rich world has stolen most or all of their wealth from the poor world. This could be a reasonable explanation if gross world product had remained roughly constant. However, in the last 200 years, gross world product has increased about fifty times. It is clear that the wealthy could not have stolen all of their wealth from the poor.

Have poor countries have been robbed of what little they have, keeping them in extreme poverty? For the most part, the wealthy nations have created their own wealth rather than stealing it from poor nations. It is true that there have been, and continue to be, incidents where the rich world takes wealth from the poor world. As deplorable as this tendency is, it is not the primary cause of the poverty in the world.

The rich world has made some efforts to help the poorest nations. Humanitarian aid, development aid, and debt forgiveness have helped some poverty-stricken nations to some extent. Poverty in Asia is rapidly disappearing thanks primarily to the success of their own social and health reforms, and to increased trade with the rich world.

However, natural resources and human labor are often extracted from poor countries for a fraction of their real worth. The term ‘banana republic‘ was created to illustrate the unethical exploitation of some of the world’s poor countries though enslaving them to the production of a cash crop. Distribution and other value added processes for the single crop were often controlled by companies from the rich world.

Sweat shops are another problem. The international corporations often have much more power and flexibility than the poor nations they operate in, as they are not obligated to serve all citizens; their only goal is to produce a profit. They are often able to extract preferential treatment for bringing their industry to countries. This can happen to such an extent that countries end up even more poor than they started.¹ What this means is using the impoverishment of nations and their desperation for a wealth as leverage to create an uneven economic system that gives preferential treatment to multi-national corporations.

Most facets of economics are not zero sum.² It is possible to confuse the issue in some ways, such as looking at income distributions in terms of percent. That is, when looking at wealth distributions within a country during a year, money gained by the rich is lost by the poor, and vice versa. This is tautological because if you arbitrarily divide the economy into two populations (rich and poor), and consider only percentages, then gain by one is a loss by the other.³

Just because the rich got richer, or gained a larger fraction of total wealth, doesn’t tell us anything about poverty. That is an issue of wealth distribution, not one of poverty. We must look at economic indicators better correlated to the well being of the poor, such as changes in real income. Hardship is correlated to decreasing income for the poor, not just to a shrinking portion of a growing pie.

Some aspects of economics are zero-sum. For instance, day traders buy and sell stocks on the intervals of seconds to minutes. What money they make is drained from other investors, day traders, and often from the companies themselves. This illustrates one example of a trend in the wealthy nations towards the banking and investment sector gaining more and more of the wealth. Simply moving money around to take away other people’s money is not the creation of real value. The economics of value creation and normal transactions are not zero sum if the agents involved are ‘acting rationally’.⁴ This is a detail about how economic transactions take place, not about whether poverty stricken regions of the world have been kept impoverished by wealthy nations and corporations stealing from them.

We create wealth by trading value with one another.⁵ The rich nations of the world trade value more effectively with themselves and other nations. What this means is that the rich world produces more economic value than the poor world. While a rich world citizen is likely a specialist or laborer of some sort, a poor world citizen spends most of their time growing food to feed themselves and their family. The poor world citizen doesn’t produce substantial surpluses in food that could then be traded for other forms of value. Surpluses are the foundation of economic growth, because they allow for increasing specialization.

Poor countries have corrupt leadership

A popular explanation today for why extreme poverty persists in Africa. This has been popularized for a number of reasons, including news stories like this one detailing corruption and appropriation of aid resources.

Measurements of corruption show that the poor world often has high corruption.⁶ Corruption is one of the factors that can exacerbate poverty, but it is also caused to a large extent by poverty.

Corruption in communist countries was generally regarded as quite high. Many of these countries have gone through a tumultuous transition towards capitalism, and are still relatively poor today. Corruption in some of the post-communist states is extremely high even though the GDP is quite high. This is often a problem of wealth discrepancy, where the wealthy in a nation have the majority of the money and influence. Russia in particular scores poorly on the Corruption Perception Index even though it it is relatively wealthy.⁷

In The End of Poverty, Jeffrey Sachs has a section titled “Look who’s lecturing whom on governance” in which he looks in detail at how corruption and bad governance are not the core issues with regards to poverty. Drawing upon facts regarding policies and outcomes, Sachs shows that the common conception that Africa is poor because of bad governance and corruption is simply incorrect.

When the facts are examined with care, it is clear that Western policies that have been imposed on Africa have been extremely unhelpful. Sachs criticizes the International Monetary Fund (IMF) for only having one major prescription of policies based on budgetary belt-tightening. The IMF recommended the same bag of tricks to each nation, notwithstanding the very different circumstances that exist in different nations. Sachs says that Africa definitely did not prosper between 1960 and 2000, when the IMF policies were being forced upon most of Africa.

Sachs devotes many pages to the deeper roots of African poverty. We have touched upon many of the issues that he raises in our look at issues that keep communities trapped in poverty and national and cultural issues that hamper development. The issues causing poverty are many, but here we are specifically discussing corrupt governance. Sachs says that “good governance and market reforms are not sufficient to guarantee growth if the country is in a poverty trap.” He also says that “the focus on corruption and governance is exaggerated, and seriously overstates the causal role of corruption and poor governance in Africa’s laggard growth performance.” He goes into great detail how factors other than corruption must be more important because economic growth in Africa is very slow even compared to equally poor and corrupt nations elsewhere in the world.

Retrograde cultures

It is true that culture can have a significant impact on the ability of a society to achieve economic development. In another post we go into more detail on the different ways in which culture can pose barriers to development. The fact of it is however, that culture alone is not responsible for the poverty trap.

It seems that culture can hamper development more significantly once a country is on the ladder of economic development, but doesn’t affect extreme poverty very much. Since almost all efforts are directed at survival, all of the issues of the poverty trap kick in. The extreme poverty trap exists, and changes in culture cannot fix the cyclic nature of extreme poverty in communities. Of these factors, the only one that culture could reasonably change significantly is the population growth. Doing this however would still require education and other contraceptive measures. These things are not free, and their cost can be prohibitively high for communities in extreme poverty.

Delivering communities from the poverty trap in a timely manner will require some assistance from wealthier nations. Once on the ladder of development, economic pressures create incentives for the society to reform its culture with increased gender equality, social mobility, and egalitarianism.

In 1961, anthropologist Oscar Lewis coined the term “culture of poverty” to describe what he believed were the common values held by people in poverty. These values were theorized exist in all the world’s poor, and to contribute to the continuing cycles of poverty. This excellent piece by Paul Gorski describes the scientific investigations that definitively did away with the notion of a “culture of poverty”.

Poor people are lazy

Laziness is one of the cultural traits commented on in the previous section, but we felt it deserved special mention because of how pernicious this myth is. Anyone who claims that extreme poverty is due to laziness has either not checked their facts or don’t trust the facts for some reason. Unfortunately it seems that the origin and longevity of this myth may be due to self-serving and racist aspects of rich world cultures.

This argument has been leveled in the past against essentially every nation that was once poor. In the late 1800s there were similar accusations pointed at the Japanese. Japan is now known for their heritage of strong work ethic. Sachs goes through many examples of this sort of misconception in his book. We believe the crux of the matter was illustrated best when he said, “Stereotypes that Africans work little and therefore are poor are put to rest immediately by spending a day in a village, where backbreaking labor by men and women is the norm.” Studies have shown that poor adults spend more time working than their wealthy counterparts.⁸

Lack of democracy

The claim we are considering here is whether extreme poverty is due to a lack of democracy. This is certainly incorrect since many impoverished nations are democracies. Perhaps, then a causal link can be found for democracy being linked to increased prosperity? The answer seems to be that democracy has only a very weak association with reducing poverty.

Democracy has been shown to help avoid the worst calamities of extreme poverty, but does not reduce poverty as effectively as other government systems.⁹ Claims have been made in the past that democracy led to poverty reduction, but more recent analysis has demonstrated that those studies were biased.¹⁰

Many poor nations in Africa have multi-party democracies that have been functioning for some time. Their growth has not been markedly improved since the adoption of this political system. Sachs appraises the subject as follows:

Democratization, alas, does not reliably translate into faster economic growth, at least in the short term. The links from democracy to economic performance are relatively weak, even though democracy is surely a boon for human rights and a barrier against large-scale killing, torture, and other abuses by the state.

For further reading: Failing to end poverty has consequences for economics, disease, and global instability.

1. No Logo, a book by Naomi Klein covers the extensive issue of sweat shops exploiting the poor world. [↩]
2. Wikipedia: Zero sum: Non zero-sum: Economics. Accessed October 25th, 2010. [↩]
3. Economics is not a zero sum game. The Everyday Economist. Accessed October 25th, 2010. [↩]
4. Wikipedia: Zero-Sum: Non zero-sum: Economics. Accessed October 25th, 2010. [↩]
5. Wealth Creation and the Zero-Sum Fallacy. Coyote Blog. Accessed October 25th, 2010. [↩]
6. Gapminder graph of Corruption Perception Index vs GDP per capita. Notice that lower scores on the vertical axis mean more corruption, so the bottom left indicates poor countries with high corruption. Accessed Oct 24th, 2010. [↩]
7. See the graph of corruption vs GDP per capita. In the case of Russia, it is educational to also see how the richest 20% of the people had over half the country’s wealth in 1993. Here is a Gapminder graph illustrating that fact. This indicates that the richest people in Russia benefited enormously from the privatization of the huge soviet industries. [↩]
8. Cited in The Myth of the “Culture of Poverty” April 2008 | Volume 65 | Number 7 Poverty and Learning Pages 32-36. Accessed October 25th, 2010. [↩]
9. Democracy and Poverty. Ashutosh Varshney. Associate Professor of Government and International Studies. University of Notre Dame. Notre Dame, IN 46556. August 1999. Accessed October 25th, 2010. [↩]
10. Is Democracy Good for the Poor? Prof. Michael Ross. UCLA Department of Political Science. March 2005. Accessed October 25th, 2010. [↩]