Wednesday, November 5, 2008

The Developing-Country Trap

The "developing-country trap" is a short-hand I use to describe the malaise of developing countries which is:

1. Most countries that are "developing" are mostly in the tropics, and are generally blessed with the endowment of natural resources. This is where primitive communities are preserved through time - because life is generally comfortable, as nature provides everything for humble human survival.

2. "Development" usually involves the extraction and exporting of the natural resources in the raw form by monopolies or private individuals in collusion with the government or government officials. The elite seeks to preserve its monopoly on the economy and the politics. The profits are invested in assets abroad and are not used to add value to the economic process.

3. When exploitation of the natural resources is done, the economy goes into "structural recession." The next phase is to go into industrialisation. Since local capital is not developed, any attempt by the government to go into business is met with failures. The economy is opened up to foreigners, with deals with the elite.

4. The workforce is trained to feed the industries at "competitive" wages. The local population has no savings. Whatever savings they have go into housing and transportation and food, and privatised pension if any.

In other words, the assets of the nation - the national resources - that are exploited are not used to reinvest into the economy, namely, people and knowledge and investments, but are squirreled abroad - which usually results in a weak currency - which is used as an argument by the central bank that this is good for exports (but with the public having to pay exorbitant prices for imports). This is a trap.

To get out of the trap, I am suggesting that investments should be made by the government on the people and the educational system because our human resources are our next precious resources. Once our human capital has grown, it will come up with ideas and decide for itself the nature of investments - how best to go forward for themselves and hence the society and the economy.

Liberty creates economic opportunities for everyone.

2 comments:

de minimis said...

Wow! This post clears up what "developing country trap" means.

Any views on central banks and their management of forex reserves. Especially the merits of active intervention to shore-up values of domestic currency? No need to comment if you're not interested in the matter, at the moment.

not an economist said...

Not an economist, but felt compelled to just share some thoughts that were floating around.

Malaysia: The land of subsidies

The fuel price issue only reveals a tiny fraction of the actual economic realities that Malaysians are sheltered from.

To paraphrase a well known saying, Malaysians are trying to live a first world lifestyle, but with third world earnings. And how do we achieve this? With the help of some non-governmental subsidies of course.

Let’s see. In the middle to late 1990s, a whole generation of IT workers were produced, thanks in part to the government’s push in education and industry, as made famous by the ‘Cinta IT’ song, but surely just as much to the availability of pirated software that allowed students to practice coding on and type out their assignment on computers that also ran on pirated OS.

This subsidy alone, allowed Malaysia to produce knowledge workers at a lower cost than it actually was and supplied low-cost professional labour, like India is now, to the industries and corporations across the country like in Bayan Lepas.


All work and no play makes Jack a dull boy they say, so for entertainment and to unwind after a hard day’s work at big factories and tall buildings, a vcd or dvd of the most recent Hollywood blockbuster or Bollywood movie or Hong Kong action film makes us forget out troubles for awhile.

Again, economically affordable and available in every neighbourhood, brought to you by everyone’s favourite streetside vcd/dvd peddler. Entire families can enjoy movies at a price less than a cinema ticket. (And we accuse the people in power of plundering.)

Those are some of the local entrepreneurial talents that have done their part to improve the economy and the living standards of Malaysians. Let's not forget foreign ones.

Those nice buildings in Putrajaya, those tall ones in KL and other major towns in the country, those rows of new shophouses in your neighbourhood, or maybe even the house you are now living in, I sure did not help build them. Did you?

While I was busy joining social networks trying and download songs and movies for free, guess who’s toiling under the sun at the construction site. So, the next time we hear the word ‘Indon’, we shouldn't only think of ‘break-ins’ or ‘rape’, but also try to think 'nice tall buildings'. And for people who want to start a family but doesn’t want to do all the housework. No problem honey, why don’t we give the agency a ring.

Ahh, how we have arrived.

And that’s not only it, these days foreign help is everywhere. Just take a look around, plantations, factories, coffee shops, food courts, petrol stations, you name it.

Aren’t these some form of subsidy too? Getting something without paying the full cost of it at the expense of another.

‘Who cares’ you say, too bad that’s how the capitalistic global economy works. Fair enough, but let’s ask ourselves this, ‘have we worked hard enough as a nation to deserve the lifestyle we have today?’ Or are we only so-so but with the help of these 'subsidies' think we are living the good life.