If the third world modernizes…

A question from Yahoo! Answers:

Will the world economy collapse if the third world modernizes?

Every developed nation (US, Europe, Japan) has a trade deficit with developing nations. That is they import more materials than they export. Therefore is it possible for all nations to one day be developed? Does the system require that resource rich countries remain impoverished?

It is definitely possible for all nations to be developed, if they stop wasting resources on wars and suppression of their own people. The research convincingly shows that economic development is determined first and foremost by the quality of a nation’s institutions. Here’s how Daron Acemoglu, one of the most eminent experts on the subject, puts it:

Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holders, and when there are relatively few rents to be captured by power-holders.

Now note that exportable mineral resources are just that: a rent that can be captured by power-holders. This rent can be so large that it can sustain not only an otherwise untenable regime, but its armed opposition as well. Paul Collier from the World Bank was one of the first to point that out and do some rather convincing statistical analysis on the matter…

Also, I highly recommend Paul Krugman’s 1994 piece, “Does Third World Growth Hurt First World Prosperity?”, where the issue is presented from the developed countries’ point of view.

Sources:

Daron Acemoglu, Simon Johnson and James A. Robinson, “Institutions as the Fundamental Cause of Long-Run Growth”:

http://econ-www.mit.edu/faculty/download…

Paul Collier, “Economic Causes of Civil War and Their Implications for Policy”:

http://siteresources.worldbank.org/DEC/R…

Paul Krugman, “Does Third World Growth Hurt First World Prosperity?”:

http://www.pkarchive.org/trade/harvard.h…

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