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Mira Adamjee
ECO 128: Intro to Economic Development
Professor Magda Tsaneva
February 2023

Essay 1: Weak States, Weak Economies

Why are some countries poorer than others?

I. Introduction

The aftermath of World War II saw a change in the organization of the world's economic

order, and the introduction of economic development to support European states desperately

seeking assistance to rebuild their economies. Years following WWII, the period of

decolonization thrust several newly independent states into the new economic order, and

economic development shifted its focus from rebuilding European countries to developing

countries across the world suffering from the aftereffects of decolonization; primarily the effects

of a lack of human, physical and financial capital. The imbalance of capital in the Global North

and Global South led to an ongoing global inequality crisis during which the terms developing

country and developed country were coined, to categorize countries based on the quantification

of economic growth.

The complex nature of global inequality is perpetuated by interlinking factors; this paper

presents three factors contributing to the reason why some countries are poorer than others. First,

the choice of development strategies implemented by the state, second the strength of formal

institutions, and finally long-lasting or repeated state conflict. Each factor individually hinders

productivity, but slow productivity is an outcome of factors interlinking. The impact of

successful development strategies and strong formal institutions on economic growth has been

exemplified by the East Asian Miracle (Overview: The Making of a Miracle). While, around the
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same time, economies across the globe in Latin America suffered gravely from their

governments' choice of development strategies. South Asian economies are reputed by weak

institutions that have neglected the capabilities of a large population, and conflict-affected states

in West African countries such as Nigeria and Sierra Leone led to declining economic growth.

II. Development Strategies, Weak Formal Institutions and the Derailment of State Conflict

on Economic Development

In the 1960s most of the world was governed under agriculture-based economies during

which countries in East Asia and Latin America boasted similar incomes per capita. Over the

next three decades, economic growth rates between the regions diverged as a result of

development strategies implemented by governments. Countries in East Asia oversaw rapid

industrialization leading to a significant rise in GDP per capita, while countries in Latin America

experienced slow to no economic growth. The East Asian Miracle was a product of development

strategies focusing on fiscal and monetary policies, specifically: export promotion. East Asian

governments prioritized export markets to accumulate capital that slowly built reserves while

managing domestic inflation rates and fiscal deficits. High savings rates protected them from the

1980s debt crisis and provided the means to finance the growth of domestic industries as well as

improve human development.

Across the world, governments in Latin America took a different approach to economic

growth by adopting protectionist policies, such as Import Substitution Industrialization (ISI);

aiming to protect new domestic industries from global competition. Instead of facilitating

growth, ISI policies resulted in small, uncompetitive, domestic markets with little demand due to

a lacking export economy (Franko). The failure of ISI policies, and neglect of existing industries,
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primarily the agriculture sector, threatened food security and growing inequality. Furthermore,

ISI policies led to macroeconomic instability, leaving countries vulnerable to the debt crisis of

the 1980s as a result of their high fiscal deficits and unimaginable hyperinflation rates, seen as

high as 23,500% in Bolivia (Bolivia). The unfortunate timing of favoring protectionist policies

over export promotion during a global shift from fair trade to free trade economic thought saw

economies across Latin America crumbling.

In addition to efficient development strategies, strong formal institutions, strict rules of

law and skilled bureaucracies are essential to boost productivity by attracting foreign and

domestic investors. Singapore's founder, Lee Kuan Yew, instituted a clear and strict legal system

and invested in primary education to build human capital (Bianchi). The city-state's skilled

bureaucracies and honest law enforcement attracted foreign investors, and today, over 3,000

multinational corporations are operating in the country. Without formal institutions, business

transactions are based on trust between two parties. Failure to comply or follow through with a

business transaction is often the case in developing economies lacking formal institutions, as

party holders are exempt from penalties in countries lacking law enforcement.

Some examples of lacking formal institutions hindering economic development are

described in Chapter 7 of Development Economics by Gerard Roland and are characterized as

informational problems, and hold-up problems. Informational problems occur when two party

holders in a transaction do not have access to the same information, one may lack information

regarding the transaction, which leads to transactions with less profitable businesses. This results

in less competition in markets and an inability for new businesses to join markets, thus

facilitating a cycle of transactions between less profitable businesses, and hindering market

growth.
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Second, the holdup problem occurs when a party in a business transaction fails to follow

through with a negotiated price, causing the contracted party to face a sunk cost. Hold-up

problems cause a loss of profitable investment opportunities and underinvestment. Furthermore,

weak institutions lead to growing informal economies and lacking property rights, without which

domestic and international investors are disincentivized to invest in physical or human capital,

needed for developing economies to grow.

Finally, countries experiencing ongoing or repeated conflicts are characterized by having

weak formal institutions and are bound to low economic growth, usually removing years of

economic progress in a short amount of time. Conflict-affected areas suffer from high indirect

costs associated with the long-lasting effects of human rights violations such as post-traumatic

stress and mental illness that hinder people from contributing productively to society. Such

countries additionally suffer from a growing informal economy that leads to high unemployment

and illiteracy rates, ultimately slowing productivity. In the early 1990s per capita, income in

Burkina Faso and Burundi equaled, until the civil war in Burundi swept away years of economic

progress; export revenues from coffee halved, and high indirect costs from a large proportion of

a productive population moving into refugee camps ("In the Wake of War").

Weak states experiencing conflict pave the way for rebellion groups to form acting under

incentivized monetary greed (Collier), which leads to a growing informal economy. Rebellion

movements have been characterized as "heroes'' in conflict-affected communities, luring more

civilians to join their armies, and accessing power against states through the exploitation of

primary commodity resources. Weak states rich in natural resources are a source of income for

rebel groups that can exploit resources due to low opportunity costs, to finance the war; as seen

in the cases of oil exploitation in Nigeria, and diamonds in Sierra Leone. Rebel groups lure
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civilians into joining, keeping illiteracy and unemployment rates high leading to a growing

informal economy dependent on the exploitation of natural resources.

III. Conclusion

The development strategies implemented in countries in the 1980s, the strength of formal

institutions, and the effects of the ongoing conflict in countries across the developing world,

provide answers to a pressing concern: why are some countries poorer than others? Export

promotion led East Asian countries to achieve high economic growth while protectionist policies

in Latin American countries led to economic default. Strong formal institutions attract

investment, while weak institutions lead to several problems slowing economic growth. Finally,

conflict-affected countries were rid of years of economic progress as a result of high indirect

costs, and growing informal economies maintained high rates of illiteracy and unemployment.
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Works Cited

Bianchi, Giuliano and Dr. Isabelle Blengini. “Singapore: The Reasons Behind Its
Economic Success.” EHL Insights. https://hospitalityinsights.ehl.edu/singapore-
economic-success. Accessed 21 Feb 2023.

“Bolivia. Economic situation 1982-1988.” Youtube, uploaded by hhmmss, 5 May 2006,

https://www.youtube.com/watch?v=ittBp7z-TbM.

Collier, Paul. “The Conflict Trap.” The Bottom Billion. Oxford University Press, 2007, pp. 17-
37.

Franko, Patrice. “Import Substitution Industrialization.” The Puzzle of Latin American

Economic Development. Rowman and Littlefield, third edition, 2006, pp. 55-71.

“In the Wake of War.” Youtube, uploaded by IFAD, 20 September 2014,

https://www.youtube.com/watch?v=y2hoRzrWvno&t=29s.

Roland, Gerard. “Institutions and Economic Development.” Development Economics. Pearson

Education, Inc, 2014, pp. 175-201.

“Overview: The Making of a Miracle.” The East Asian Miracle. World Bank Group, 1993, pp. 1-
7.