I went to Nicaragua, one of the poorest countries in our hemisphere, to see poverty for myself. With a literacy rate of 68% and per capita GDP of $3,200, Nicaragua is a world away from New York, my previous home. But why is Nicaragua different from New York? Phil and I have touched on many of these in The Hand, but I wanted to pull together a list of my top reasons:
Lack of education:
Education is expensive and a benefit of wealth, so to some extent, this is a story of “they’re poor because they’re poor.” Nonetheless, I can’t stress how much I’ve learned about the relationship between education and life opportunities.
Many Nicaraguans do not have a high capacity for abstract and analytical thought, an extremely important life skill. Wealthy Nicaraguans are exempt from this judgment because they have access to good private education. However there is a huge deficiency in educational opportunities for the poor.
I met one shoemaker who had pulled himself out of poverty with a shoe workshop employing over thirty people. I wasn’t surprised when he told me that a revolutionary government in the 1980s gave him the opportunity to study chemistry in Cuba. Shoes have nothing to do with chemistry or Cuba, but I’m sure the education was useful and is now part of the reason the shoemaker has had modest success.
The level of education has increased significantly in the past 30 years. Nevertheless, there’s a ways to go. 27% of Nicaragua’s students suffer chronic malnutrition. Bad schools make it hard to learn, but starving makes it even tougher and retards brain development.
See Barefoot Basketball for more intuition on why the education gap matters.
Lack of trust in enterprise:
I’ve spoken to dozens of entrepreneurs, and many say the same thing: the biggest challenge to making their business grow is hiring trustworthy managers who want to work hard and move up the latter with an ownership mentality. How can you build a business if you don’t trust your managers?
There are other reasons trust is fundamental in enterprise. The producer-distributor relationship can be burned by mistrust: does the producer deliver the right product? Does the distributor pay on time? Do both work for a long term relationship where both prosper? Or does each look for a quick individual win where the other may get screwed?
Why is there no trust? Business situations tend to be less stable, so people don’t invest in long term benefit through cooperation. I also believe that the lasting impact of the violent colonial relationship has created cultures of mistrust, but that is a much longer discussion.
Lack of entrepreneurship:
Check out Phil’s post on this problem and how to fix it. Very insightful. I spoke to some entrepreneurs who said that Nicaraguan society puts upmost value on studying a “profession,” like Doctor or Lawyer. Entrepreneur is not a title, and titles are important. In many U.S. social circles, it is the opposite: Doctor and Lawyer are boring titles and Entrepreneur is exciting, laden with mystique and social value.
This could be its own post. Frankly I haven’t seen its effects as sharply as I expected. I have seen that the tax regimes are overly harsh for small businesses. Large businesses can often dedicate the resources to find loopholes or lobby their way to a lower tax burden. Informal businesses don’t pay anything. Meanwhile, to make the jump from an informal micro-enterprise to a formal small or medium business, with full capability to grow, import, and export requires a huge tax cost. I’ve seen it sink a shoe business that was profitable as an informal workshop.
I’m sure bad governance prevents development in more profound ways, but I wasn’t able to observe the effects directly while in Nicaragua.
These are the reasons I have seen. Does the Invisible Hand readership have other ideas?