Are poor countries poor because of their poor people? Economic History in Small Doses 5

Girish Menon*

A bus driver in Mumbai gets paid around Rs.50 per hour whereas his equivalent in Cambridge gets paid £12 per hour. Using currency exchange rates, the Cambridge driver gets paid 24 times more than his Indian equivalent. Does that mean John the Cambridge driver is 24 times more productive than Om? If anything, Om would likely be a much more skilled driver than John because Om has to negotiate his way through bullock carts, rickshaws, bicycles and cows on the street.

The main reason why John is paid 24 times more than Om is because of protectionism. Some, British workers are protected from competition from workers in India, and soon from the EU, through immigration control.  (Technology has erased this protectionism in the relocation of many white collar jobs.) This form of protectionism goes unmentioned in the WTO (World Trade Organization) as countries raise their barriers to immigration of poor workers.

 Many people think that poor countries are poor because of their poor people. The rich people in poor countries typically blame their countries’ poverty on the ignorance, laziness and passivity of the poor. Arithmetically too, it is true that poor people pull down the national income average because of their large numbers.

 Little do the rich people in poor countries realize that their countries are poor not because of the poor but because of themselves. The primary reason why John is paid 24 times more than Om is because John works in a labour market with other people who are way more than 24 times more productive than their Indian counterparts. The top managers, scientists and engineers in the UK are hundreds of times more productive than their Indian equivalents, so the UK’s national productivity ends up being in the region of 24 times that of India.

In other words, poor people from poor countries are usually able to hold their own against counterparts in rich countries. It is the rich from the poor countries who cannot do that. It is their relative low productivity that makes their country poor. So, instead of blaming their own poor for dragging the country down, the rich of the poor countries should ask themselves why they cannot pull up the productivity and innovation in their own country,

Of course, the rich in rich countries need not get smug. They are beneficiaries of economies with better technology, better organized firms, better institutions and better physical infrastructure. Warren Buffet expressed it best:

 “I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a system that happens to reward what I do well – disproportionately well.”

 

* Adapted from 23 Things they don’t tell you about Capitalism by Ha Joon Chang