So there you go, it was really quite simple, wasn't it? Developing countries 
hold themselves up, there is no global poliitical economy, none of it is our 
fault... phew! And all you development geographers insist on making 
everything so *complicated*! Thank goodness the IMF knows what it's talking 
about, at least...

Jon Cloke
Newcastle University

Like Crabs in a Bucket

By Raghuram G. Rajan

Globalist Perspective, The Globalist, Friday, October 27, 2006

Why do poor countries remain stubbornly underdeveloped? Growing consensus 
indicates that poor countries lack the necessary institutions — or worse, 
have the wrong institutions for economic growth. The IMF's Raghuram Rajan 
argues that citizens in poor countries all too often become like crabs in a 
bucket — preventing each other from getting out.

The conundrum in development is why, especially after the advent of 
democracy, the large numbers of the exploited in poor but democratic 
countries don't combine to vote out the elite who exploit them. Why don't 
they change the system to provide opportunities for all?

In development, the answer "fix the political institutions" is probably 
incomplete — if at all correct. "Fix the constituencies" is probably more on 
the mark.

The easy but incorrect explanation, in my view, is that most democracies are 
sham democracies, where the exploited are easily fooled, have little money 
and can't push for their own interests.

Instead, I believe that many poor countries are so riddled with inequality 
that no reform path commands obvious support — and that the status quo 
persists despite being extremely inefficient. Let me offer a stylized 
example of what I mean.


Defining the problem

Consider a society with three "constituencies." A monopolist who owns all 
the factories, the educated middle class who occupy such professional jobs 
as factory managers, architects and doctors — and the uneducated poor who 
work in the factories.

Suppose any two groups who vote for a reform can push it through. Like all 
democracies, this is imperfect, with the rich having power because of their 
money and the poor having power because of their numbers. Consider two 
reforms.


Negating reform

First, pro-market reforms allow anyone to open a factory in competition with 
the monopolist. Only the educated, however, can draw up the citizens in poor 
countries, fearing that the advantage gained by one group may come at the 
expense of the meager rents of the other, become like crabs in a bucket — 
preventing each other from getting out.

Business plans and get the finance to take advantage of this opportunity. 
Second, education reforms allow everyone to get an education.

Clearly, the monopolist will oppose pro-market reforms because he will face 
competition that will reduce his profits. And the educated will oppose 
education reforms because they will also experience competition — from the 
now-educated masses — for the lucrative jobs they currently occupy.

But will either one get support to vote down the reforms they dislike? The 
answer could well be yes. The monopolist would prefer to educate the poor, 
for that would give him a larger labor pool to pick managers from, thus 
reducing salaries he has to pay.

Beggar thy neighbor

However, the monopolist also knows that if he votes to expand education, he 
will have a workforce — the formerly uneducated and the formerly educated — 
that is united in interests. This enlarged constituency will then push for 
pro-market reforms.

To forestall the greater loss from pro-market reforms, the monopolist will 
align himself with the educated against expanding education. If education 
reforms are unlikely to be enacted, the uneducated may reject pro-market 
reforms, preferring the status quo instead. Although pro-market reforms 
expand opportunities for the educated, they also have a dark side for the 
poor.


The cycle

Given that the educated have greater business opportunities, those among 
them who choose to continue providing services such as health care can 
demand higher fees.

Underdevelopment can persist with the full connivance of the exploited — 
even with reasonably well-functioning political institutions.

The uneducated, whose job opportunities go up only a little, if at all, may 
face a substantially higher cost of living because of the opportunities the 
educated now have.

They may side with the monopolist in voting against pro-market reforms. Even 
in a society where political institutions ensure that citizens' preferences 
matter, initial inequalities — in education and wealth — may be 
self-perpetuating.
People problem?

Citizens, fearing that the advantage gained by one group may come at the 
expense of the meagre rents of the other, become like crabs in a bucket, 
preventing each other from getting out.

Finally, while stylized, the example is consistent with the evidence that 
far too many poor economies, like India, have underemphasized universal 
education while overemphasizing higher education — and that the poor and 
uneducated in a number of countries in Latin America have turned against 
(partial) economic liberalization because they see few of the new 
opportunities while bearing additional costs.


The lack of human capital

What lessons does this suggest for development? Clearly, the answer "fix the 
political institutions" is probably incomplete, if at all correct. "Fix the 
constituencies" is probably more on the mark, but how?

Why don't the large numbers of the expoited in poor but democratic countries 
combine to vote out the elite who exploit them?

A number of development successes, like Korea, undertook serious land and 
education reforms prior to their takeoff, as have a number of the 
fast-growing Indian states.

It seems that reforms reducing inequalities in factor endowments — like land 
— and those improving access to education and finance can strengthen the 
constituencies for broader economic liberalization.


The problems of development

That is, the free-access economy may be a necessary stepping-stone to the 
free-enterprise economy. I should not, however, minimize the difficulty of 
enacting such endowment-spreading reforms in highly unequal societies.

The bottom line is that development is likely to be a complex political 
process in which the people themselves must do much of the heavy lifting. 
The outside world can help at the margin but only if the people have 
ownership. And ownership — even of something as beneficial as development 
reforms — can't be taken for granted.



Editor's note: Adapted from "Crabs in a Bucket," in Finance & Development, 
June 2006, Vol. 43, No. 2, published and copyrighted by the International 
Monetary Fund. Reprinted with permission by Finance and Development.

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