In the 1960s, Zambia produced more output per person than Thailand. Today, however, Thailand’s income per person is six times that of Zambia. Yet Zambia has received far more foreign aid than Thailand. Why did the two countries grow so far apart in one generation? What does the modern theory of economic growth tell us about the divergence between the two countries?
What does it take to lift the yoke of centuries-old poverty from poor countries and lead them to prosperity? I shall attempt to relate the story in broad comparative terms by telling a tale of two countries, one in Africa, the other in Asia.
Some thirty years ago, Zambia and Thailand produced the same amount of output per person. Yet now Thailand is six times more prosperous than Zambia. Zambia was better off than Thailand until the 1970s, although both countries were poor. What explains this large growth differential between the two countries?
This is an urgent question for the people of Zambia where, generally speaking, poverty is an even greater concern than it was about forty years ago, at the time of independence. The same can be said about many other countries that have grown less rapidly than expected. What went wrong? How did Thailand, within a generation or so, manage to increase national income per person six times over? – while at the same time, in Zambia, the standard of living declined by a third.
Begin with foreign trade. In 1964, Zambia’s economy was much more open to trade than that of Thailand. That year, exports of goods and services from Zambia amounted to 60% of GDP, compared with 17% in Thailand. In 2003, by contrast, exports in Thailand had reached almost 70% as compared with 20% in Zambia, a striking reversal. Investment in Thailand exceeded investment in Zambia by more than a third relative to GDP during the same period, averaging 29% of GDP in Thailand compared with 21% in Zambia. How about education? Around 80% of teenagers in Thailand attend secondary schools against one in three in Zambia. The difference is even greater at university level: around one in three young Thais attend university compared with one in fifty in Zambia. Official expenditure on education in 2000 amounted to 5% of GDP in Thailand, 2% in Zambia. What can we conclude from this?
The Thais have done more than the Zambians to foster foreign trade, investment, and education and have accordingly reaped a higher standard of living through more rapid economic growth. This is not all, however. Zambia was, in essence, a centrally planned economy and exercised stringent state control of economic affairs, like Tanzania, until 1991.The consequences of the resulting inefficiency are still being felt. Thailand, on the other hand, is a market economy. Nearly 40% of the Zambian labor force worked in state enterprises between 1978-1991, compared with 1% in Thailand. Another 40% of the labor force worked in the official administration in Zambia against 8% in Thailand. Economic management and organization in Thailand has generally been much better than in Zambia. This inference is based, among other things, on the fact that inflation has been considerably less in Thailand than in Zambia, or 5% per annum 1964-2003 in Thailand compared with Zambia’s 32%.
High inflation can usually be attributed to lax economic management, and both adversely affect long-term economic growth. Zambia’s foreign debt relative to GDP is now about three times that of Thailand. This is important because a heavy debt burden weakens the growth potential of the economy. Thailand has industrialized, not Zambia. The proportion of manufactured goods in Thailand’s exports has increased from practically nil in 1964 to 75% in 2003, while in Zambia it rose, also from nil, to about 20% in 2000, decreasing again thereafter. This is important for economic growth because manufacturing is an important source of innovation and progress that stimulates the economy and strengthens its growth potential in the long run. From the outset, Zambia has relied heavily on copper production for export. The economy of Thailand is more diversified and diversity is good for growth.
In terms of corruption, Thailand is cleaner than Zambia, although only by a narrow margin: Thailand’s corruption index was 3.8 in 2005 compared with 2.6 in Zambia. Recent studies suggest that corruption tends to impede economic efficiency and growth.
Political scientists compile ‘democracy indices’ that take into account democratic rights, freedom of association, free elections and freedom of the press among others. The democracy index is highest in the industrial countries and lowest in – do you want to guess? – Saudi Arabia, the world’s least democratic country in our time (-10). In Thailand, the democracy index was -7 when the country was under military rule, for example, most years from 1958 to 1976. The average democracy index in Thailand 1964-2003 is 2 compared with -3 on average in Zambia. During the last few years, Zambia’s democracy index has been measured at 1, which is an improvement on earlier figures. This is important because, among other things, democracy appears to encourage economic growth by, for example, facilitating peaceful changes of government when voters deem this necessary.
Thus it is possible to discern several clear trends on the economic growth front. Some of the major determinants of economic growth around the world – exports, investment, education, market economy, stable prices, modest debt, industrialization, diversity, honesty, and democracy, to name eleven factors – predict more rapid economic growth in Thailand than in Zambia. It should, therefore, come as no surprise that Zambia has grown at a much slower pace than Thailand. The difference in economic growth in the two countries is a textbook example of one of the oldest lessons in economics, and in life: ‘you reap what you sow.’
By Thorvaldur Gylfason
University of Iceland
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