Development Short Read

The Secrets of Wealth Accumulation

Accumulation of wealth is one of the driving forces behind widening inequality. From the nature of institutions to maritime access and religion, there are good reasons why rich nations gather more of it than others. 

I f Zimbabwe’s economy continues growing at its current rate, it would take 703 years for the OECD to qualify it as a “rich” country. China and the USA, on the other hand, hold 30% of the world’s wealth. Why then, has national wealth become so unequally distributed? Since the time that Adam Smith, revered as the founding father of economics, attempted to answer this question in “The Wealth of Nations” in 1776, the disparity between the wealthy and the poor has grown profoundly. Therefore, to achieve sustainable growth and alleviate perennial issues such as inequality, the sources of wealth must be understood.

The first is the nature of a region’s institutions. Since the establishment of a communist regime in North Korea in 1953, for example, fundamental rights to property, free markets and the rule of law have each been denied which plays a significant role in influencing consumers’ incentives and determines whether they become productive or complacent. The absence of property rights prevents individuals from generating profit when producing, buying or selling goods & services and thus decreases perceived return on investment, productivity and innovation.

Excessive regulation is another. Symptomatic of autocratic rule, it facilitates nepotism and restricts the nation’s labour force of its most intelligent and suitable workers, thus lowering output per worker. Lastly, psychological certainty that a just legal system will ensure stability provides the economic inclusivity and certainty to encourage investment. Lacking all three, North Korea ranks in the poorest 13 nations in the world by income per person.

Moreover, from determining trade patterns to influencing the productivity of labour, geographical location and surroundings undoubtedly play a central role in explaining the size of national economies. A healthy workforce can, for one, produce a higher level of output than an unhealthy one. Since many employees may not be protected by paid-sick leave, healthy workers also earn and spend more. It’s no surprise that each and every country classed ‘low income’ is affected by at least 5 tropical diseases.

Furthermore, hot and humid temperatures at the equator allowed the tsetse fly to flourish which stunted development historically. This insect decimated populations of large domesticated animals such as oxen and limited African nations’ abilities to both generate agricultural surpluses and transport them over land. It inhibited co-operation between communities and foreign nations, resulted in fickle incomes and at best produced moderate growth.

The second geographic feature is what arguably allowed the British empire to become a dominant superpower in the 17th century through mercantilism, the policy of growth through selling goods & services abroad. It could only pursue this policy due to one important feature: a coastline. Indeed, GDP per capita is up to 40% lower in landlocked nations than in their maritime neighbours. These landlocked countries’ most obvious burden is transporting produce to ports through ‘transit states’, nations which do have access to the sea, since they have little incentive to construct the necessary infrastructure to facilitate this movement of goods & services.

Trading with landlocked nations is also unreliable. In 2013, a strike in Chile, a transit state, led to a 20 kilometre queue of lorries in its contiguous Bolivia, undoubtedly delaying deliveries for enterprises which depend on such countries as trading partners.

What has allowed non-maritime nations such as Switzerland to thrive, however, is the nature of the products it specializes in, namely financial services which constitutes 10.5% of its GDP. No economy has a higher proportion. Unfortunately, when sophisticated industries such as banking are only able to proliferate when other economic fundamentals such as reliable incomes, education and moderate living standards are present, few countries have followed in Switzerland’s path.

From the nature of institutions to the prevalence of disease and access to trade, what makes certain countries rich and others poor is undoubtedly a contentious topic. Understanding the issue would be an integral breakthrough towards stronger economic growth in emerging nations . This will ultimately reduce inequality, encourage education provision and facilitating better healthcare.

One day, if such issues are addressed, the country in which you are born may no longer be such an important determinant of lifetime earnings, social mobility and well-being.

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