Saturday, April 01, 2006
Is economic uncertainty the root cause of poverty?
A blog was posted recently about economic risk and uncertainty quoting Hilton Root Capital and Collusion: The Political Logic of Global Economic Development:
"Risk, uncertainty and (under)development
Uncertainty refers to events about which knowledge is imprecise, whereas risk relates to events that can be assessed with some degree of certainty. Transforming uncertainty into risk is how
countries grow rich. Lack of institutions that make managing risk possible is the root cause of the disparity in economic performance between developed and developing countries. All developing countries share the same central weakness. Living under deep uncertainty, people in developing societies cannot frame the most basic decisions about investment or
consumption in relation to how the future will unfold. They cannot make decisions based on
reasonable probabilities about the results of their actions, nor can they identify a feasible range of alternatives needed to plan and organize a better future. They can expect a shortsighted
response from the people with whom they must interact: people who, like them, prioritize near-term goals rather than long-term ones.
Poverty deprives households of the ability to take actions that have a long-term impact on the
key variables in their lives. Faced with deep uncertainty about the future, they do not accumulate capital."
Is there really a causal link between uncertainty and poverty? That the ability to be able to predict the future with some degree of accuracy (risk) is vital in the fight against poverty. That the drive for governments should be the reduction of ambiguity and increase in stability or certainty of conditions so that people can manage limited risk? There appears to be somewhat of a paradox here. That to make money requires some form of risk. The lower the risk the less potential profit there is to be made. The higher the risk more money that can usually be made but it is less likely that you will actually make any money. Is there then a threshold point where risk becomes uncertainty to the point that people will no longer take a risk and sort of implode? Clearly where there is a high risk to life, like in a war zone it would appear poverty will prevail and indeed looking at many war torn countries the conditions hardly exist for a flourishing capitalist system of accumulation. And yet in such conditions some people do flourish without resorting to violence and extortion. Excluding famine and environmental disaster where the basic provisions required for life are absent, I wonder if uncertainty really is the problem or it is peoples perceptions, attitudes and limiting beliefs about a situation (and possibly the fact that most of the current systems of profit are actually based on exploitation at some level) are the actual factors which creates poverty. Uncertainty for some provides opportunity, for those that reframe high risk and are comfortable with it. Most entrepreneurs have a history littered with failure, bankruptcy's, poverty, close shaves and numerous losses as they kept launching themselves at new and uncertain futures. Even entrepreneurs in unstable situations.