From Third World to First World

Conventional thinking has us believe that the best way to help solve poverty in third world countries is through foreign aid (by institutions like the WTO or the US Federal Government) or through charity work (whether it’s mission trips or the Peace Corps).
However, with over 10 million NGOs worldwide — economically the size of the fifth largest economy in the world — the development of third world nations has improved at best by only a smidge.1 Foreign aid by government-related agencies and institutions have also been sharply criticized for worsening conditions through indebtedness or misappropriation to corrupt officials.
Take a look at one such failure. The annual global donations to South Africa increased from $338 million in 2002 to $1.336 billion by 2011.2Yet, about 55% today still live in poverty.3
This is not to say poverty has been getting worse, in fact, the very opposite is true. Neither is this to say that all of our charitable giving has been futile, certainly much of it has contributed significantly to reducing global poverty.
What I am challenging here is the effectiveness of this as a means of helping the poor. The developed world has been blinded by humanitarianism and has not realized the actual solutions to solving third world problems are right in front of them; they live in them. What the least fortunate truly need is not aid but strong institutions. That is, the strong institutions that make the western world great: economic freedom and the rule of law.
Africa is truly a diamond in the rough. In fact, the diamond industry is one of its most notorious outputs. The jewel rich nation of Botswana stands out from its neighbors as being one of the most economically advanced and least corrupt countries.
Unlike other countries that revolted against western liberalism upon independence from their European colonizers, Botswana embraced what the British had brought to them. They embraced liberal economic ideas of economic freedom and the rule of law, and that commitment has grown with time. Today, their GDP per Capita stands over $18,0004 and with a poverty rate less than 20%.5

Sound institutions have done more to give economic security to Botswana’s than any amount of aid given to any underdeveloped country.
So what are some fundamental reforms that underdeveloped countries should choose to take? While by no means is the following guide I’m about to give will meet every country’s need, they are universal policies that should serve as a solid launchpad. These include 3 specific areas that need to be tackled and 3 policies on how to do so.

Legal Reforms

  1. Formally adopt with constitutional authority, a third party judicial agency to fight against corruption i.e., International Commissions Against corruption and Impunity (ICACI). Guatemala and Honduras have implemented this through CICIG and MACCIH respectively. The results of these UN agencies have been extremely positive.6 However, the Honduran MACCIH does not have full autonomy like its Guatemalan counterpart so its results have been more limited. Moreso, corrupt lawmakers have recently further limited its power against embezzlement charges on government officials. In Guatemala, the CICIG successfully removed former President Molina from office after a multi-million graft allegation. Now, it’s facing threats from the current president, Jimmy Morales, after opening up an investigation into campaign finance fraud. Despite these setbacks, the hurdles they face show how extremely effective and threatening they can be against corruption.
  2. Strengthen policing functions and decrease military power. In third world countries, crime, not war, is the real issue. War is only ever propagated by the state and it is almost always against its own people such as in the form of a coup, the history of many African and Latin American countries show this. Costa Rica abolished its military following a brief civil war in 1948 against jingoist, military forces. Since then, it has experienced no internal or external strife despite being in a region plagued by those issues. Instead, they invested more into properly funding internal security through a well-funded police force. A major cause of corrupt law enforcement is due to insufficient funding, making officials susceptible to crime. Of course, challenging the power of the military will always be risky in these countries; let’s not forget Costa Rica had to go through a civil war to abolish it. However, gradual changes towards a focus on internal security should help a great deal.
  3. Police Purging and Prison Reform. A sufficiently funded law force should then be followed by removing and replacing corrupt officers in the police force and strengthening funding to overruned prisons. Honduras successfully purged many corrupt police officers, including a significant amount of high ranking officials. They also built state of the art, maximum security prisons so that top dog gang members and cartel leaders would not escape or give orders from the overran prisons that they practically controlled. All this has contributed greatly into cutting the murder rate of the once homicide capital in the world by 50%.

Property Rights

  1. Land title reform. Money, or wealth, is not necessarily trouble that third world countries face. In fact, they have a lot of wealth! The problem is that they are effectively “dead capital,” as economist Hernando de Soto puts it, due to it being unrecognized as legal property by governments. “In Haiti, untitled rural and urban real estate holdings are together worth some $5.2 billion. To put that some in context, it is four times the total of all the assets of all the legally operating companies in Haiti, nine times the value of all the assets owned by the government, and 158 times the value of all direct investment in Haiti’s recorded history to 1995.”7 Without legal protection of property rights on these assets, they remain “dead” as they can’t be brought to the marketplace as collateral for loans or for secure exchange, thereby greatly stifling economic activity.
  2. Adopting blockchain land registry. Land title reform is one hurdle, keeping those titles secure is another. Most land registries in underdeveloped countries are very outdated, many still relying on paper records from the 19th century. Furthermore, with rampant corruption, it is very likely that these titles can become “lost” or “nonexistent” due to the lack of transparency in these countries registries. The blockchain can solve this problem as it is a decentralized, public ledger. Georgia is the first country to adopt such a system and countries like Ghana and Honduras have been considering following its example.8
  3. Streamline business registration. Just as many assets in the third world exist extralegally, so do many businesses. There are millions of entrepreneurs who are not afforded property rights for their businesses due to overly bureaucratic steps to register them. Data from the World Bank reveals that Latin America and Sub-Saharan Africa significantly trail OECD countries in ease of starting a business, with scores of 78.09, 76.82, and 91.35 respectively. On average, it takes 31 days in Latin America and 24 days in Sub-Saharan Africa to register a business versus 9 days in an OECD country. Furthermore, the cost is absurdly high as registering a business accounts for 37.5% of per capita income in Latin America and about 50% in Sub-Saharan Africa whereas it only costs about 3% of in an OECD country. 9

Economic Policies

  1. Replacing all taxes with a single Land Value Tax. A land value tax is the only tax that does not cause deadweight loss and may actually be economically stimulative.10 As the name suggests, the LTV taxes the value of land, disregarding the value of things on the land or what its being used for. The tax incentivizes landowners to develop vacant/underused land or sell it. The effectiveness of this tax in third world countries depends entirely on if the land title reforms mentioned prior are successfully carried out. As Wikipedia points out, “In some countries, LVT is impractical because of uncertainty regarding land titles and established land ownership and tenure. For instance a parcel of grazing land may be communally owned by village inhabitants and administered by village elders. The land in question would need to be held in a trust or similar body for taxation purposes. If the government cannot accurately define ownership boundaries and ascertain the proper owners, it cannot know from whom to collect the tax. The lack of clear titles is found in many developing countries.”11
  2. Remove all tariffs and quotas. Free trade is one of the best things any economy can have. If many third worlds wish to industrialize their economies, they must cut down on their protectionist policies and open up their economies to the global market. A good compromise would be to replace tariffs with a flat border adjustment tax on all goods (where existing free trade agreements permit otherwise). While a BAT may not be perfectly neutral in trade, it is far less protectionist and provides a much better alternative to raising tax revenue than tariffs
  3. Abolish Central Banks and Deregulate the Financial Sector. While tangible assets are necessary for an advanced company, financial assets and sound money are just as, if not more, important as well. Central banks may plausibly be necessary for first world countries like the US, but for poor nations, they don’t command a powerful share of the global economy to shield itself from its downward effects. All underdeveloped nations are at the mercy of the monetary policies of developed ones. If anything, central banks have only served to breed hyperinflation like in Zimbabwe and Venezuela. In fact, the former is particularly interesting because the African country decided to accept nine different currencies, like the Dollar and Euro, as legal tender in order to stabilize the country, the results can be seen for themselves. Panama also dollarized their economy and has no central bank. In fact, extremely lax regulations and taxes on the banking industry have helped make Panama an important hub of economic activity in the Western Hemisphere.

[2] Alexander O’Riordan, Aid to South Africa (and NGOs): Statistics Snapshot (Source OECD)
[4] World Economic Outlook Database, January 2018, International Monetary Fund. Database updated on October 2017. Accessed on 6 March 2018.
[7] Soto, Hernando de, 1941-. The Mystery of Capital : Why Capitalism Triumphs in the West and Fails Everywhere Else. New York :Basic Books, 2000. Pg. 21
[10] Coughlin (1999) p.263-4

2 thoughts on “From Third World to First World

  1. Great article and realistic methods to making things better in those countries. Only complaint would be a summary statement or something at the end. Ending abruptly after point 3 was, I’m not sure how to say it, jarring? Felt unfinished. I’ll be checking out your other articles.


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