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What Makes Poor Countries Poor?

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What Makes Poor Countries Poor?

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  • November 15, 2005
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What Makes Poor Countries Poor?

In the past century, the world has seen countless scientific and technological advancements that have greatly improved the human condition. Thanks to these developments in communications, transportation, medicine and agriculture, the wealth of developed nations has increased at phenomenal rates. Unfortunately, not all countries have experienced these benefits. Many nations still have a per capita GDP of $1000 or less. These countries continue to be poor because they have high barriers to trade and lack a stable government and infrastructure that can foster an entrepreneurial climate.

For many nations it is very common to impose barriers to trade. These come in the forms of high tariffs and quotas that keep foreign imports expensive and protect domestic markets. While in theory they protect a country's workforce, barriers to trade actually make countries worse off economically by preventing them from being active in international trade. High tariffs prohibit countries from producing goods that they are most efficient in producing, and force them to provide such a wide variety of goods that they become very inefficient. This violation of the Law of Comparative Advantage keeps nations poor because they cut themselves off from technology and maintain low standards of living due to the lack of competition to produce high quality goods. This problem was illustrated in The Economist which stated that tariffs imposed by industrial nations are 10% lower than those of developing nations (The Economist, July 1999). Thus, developing countries are poor because of the high tariffs that they themselves impose on imports. If these nations would lower trade barriers it would allow them to import goods they do not efficiently produce and as a consequence, jobs and capital would be reallocated to more productive sectors of the economy. By focusing on these sectors of high productivity, the country can then generate profits through...