When European countries started colonizing weaker nations along the world, going back several hundred years ago, gaps between countries were already an issue, therefore, throughout history, the dispute between theoretical economists has circled the dichotomy between which components make some countries rich, and some countries poor.
Some of them, have focused their thoughts pointing fingers on how unfair is the global market exchange rate, on the other hand, many others argue and believe that protectionist measures, along with complete dominance and control of the global financial markets, are the key issues behind the gap between those developing and developed economies.
Using Angus Maddison measurement, “The international dollar”, a fictitious currency which display how different amounts of goods and services can be acquired with different currencies, if we compare the richest region and the poorest region in the world, in both 2001 and the late 1700s, the per capita incomes in Western Europe and Africa, illustrates a ratio of 12.9 to one, meaning the gap hundreds of years ago, was 13 times smaller.
Therefore, if we are seeking a good backscattering on living standards, incomes in international dollars would be a key tool, however, in respect of a countries’ economic power and the role in the global economy, it is indispensable to use market exchange rates. Nowadays, constant assumptions are being made towards the economic future on a macro perspective, before covid was an issue, people use purchasing power aligned with income, to suggest that China will sooner than later take over the US as the world’s biggest economy, an assumption which lacks accuracy as if in terms of weighing the capacity and the importance of a nation in the world economy, we will need to use income at a market exchange rate.
"In 2010, Norway, had a per capita income of $85,380, in that same year, 2010, Burundi in East Africa, had a per capita income of $160"
In 2010, Norway, the richest country in the world, excluding tax heavens nations like Luxemburg or Monaco, had a per capita income of $85,380, in that same year, 2010, Burundi a small country in East Africa, had a per capita income of $160. If we take into comparison market exchange rate income, Norway is 534 times richer than Burundi, at the same time, if we compare a country like the United States and Ethiopia, with a respective per capita income of $47,140 and $380, we can conclude that the US was 124 times richer than Ethiopia as of 2010. The facts are clear, the gap is huge and is constantly increasing, countries have been growing tremendously at the same time many economies have been left behind.
Seeking an answer, the most common explanation among theoretical economists is because of the fact that these developed and rich nations, applied better policies, free trade, and the free market, opposite to those poor nations which lesser policies. Using this statement as an argument on how countries become rich, both the IMF, The World Bank, and inter-governmental institutions, along with developed economies, have forced the inferior nations to follow these policies at their convenience. When the IMF is opening a line of credit to a developing economy, name Peru in the late 80s, their main requirements were liberalization of trade and privatization of state-owned institutions.
Going back to the seventeenth century Britain and other now rich countries, we can see how erroneous the IMF – World bank are on their assumption of good and bad policies; we have the UK an underdeveloped economy depending on the export of raw materials, that realized that by trading materials with other similar nations, they weren’t becoming any richer, therefore starting one of the modern world’s first protectionist measures, by banning the export of wool to low countries in order to have cheaper raw materials and providing with subsidies, at some point, Britain had the highest average industrial tariff in the world. These protectionist measures continued all along the way throughout the 18th century, when Britain became a supreme world industry power, and these measures were no longer useful.
"This is like playing a tennis match having control of both the referee and the skills your opponent may use during the match, which will result in a complete and unfair outcome for your adversary."
There are several assumptions we can infer towards why are some countries rich and some countries poor, perhaps being the main argument the accumulation of power that some nations gathered throughout history, using policy measures in the likes of protectionism when convenient and free trade when its suitable for them, but at the same time pressuring inferior nations to not use that very same measures the once applied. We can see this as playing a tennis match having control of both the referee and the skills your opponent may use during the match at your earliest convenience, which will result in a complete and unfair outcome for your opponent. Something similar has happened throughout history with developed and colonizer economies, along with inter-governmental institutions like the IMF and World Bank, by pressuring and controlling developing economies at their convenience, by bulldozing policy measures.
Written by Nicolas Martinez
Nicolas Martinez is a columnist at DecipherGrey. He is currently studying International Political Economy at Cass Business School.