What it Takes for Poor Countries to Join the Rich List

Submitted by Share Trading on 10 December, 2005 - 12:07

Professor Jeffrey Sachs of Columbia University, who is also director of the United Nations Millennium Project, says in a talk he gave in Beijing that there are four stages of economic development: pre-commercial, commercial, industrial and knowledge. Thus a country has to make three transformations to get to the wealthiest stage and can get trapped at any of them.

Most African countries are pre-commercial because the rural economy is so isolated from the urban economy that there's little exchange between the two and so little scope for exploiting economies of scale.

Many countries become stuck producing only primary commodities, without successfully industrialising.

"In my opinion, the key to successful industrialisation has been international trade, because if industrialisation is just based on the local market it can develop only to a certain scale, but it will remain small and inefficient," the prof says.

After a country becomes a successful science and innovation economy, having gone through with industrialisation, internationalisation and investment in science, incomes per person have risen to $US15,000 ($20,000).

Since 1949, rural China has for the most part broken free from economic isolation thanks to investments in basic infrastructure, development of a road system, basic disease control, lower fertility rates, increasing literacy and so on.

The economic development between 1949 and 1978 occurred under the central planning system. But the pre-1978 industrialisation was very inefficient and could not have been sustained without a major change of strategy.

China started moving towards the market system, with rural households given responsibility over their land and with the economy being opened to the world. Opening the economy and engaging in international trade was the single most important step in China's very fast growth.

Turning to India, it's about 15 years behind China in its reforms, but the same process is under way. It's enjoying rapid growth, with a wide range of activity ranging from very poor villages to modern industry to high technology.

India's export growth has been occurring more in the services sector than in manufacturing. It has surpassed China in the information technology sector, while China leads India in manufactures. These are probably just accidents of history.

India's advantage in IT might result from the English language required for outsourcing and software writing. India's relative delay in opening its economy probably helped China receive the lion's share of foreign investment in manufacturing.

But it's likely both countries will complete transitions to being knowledge-based economies.

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