Why is unemployment so high in the developing world?
When we see pictures of massive want and privation in places like Gaza, Ghana, and other poor nations, it makes us wonder: how can economies with such tremendous shortages fail to employ up to 40% of their workers to meet their needs?
Part of the answer lies in government mismanagement. It’s easy for experts to think they know best—especially when they use sophisticated mathematical models. During the 1970s the government of Bulgaria attempted to optimize its agricultural income via linear programming. They required farmers to devote huge acreage to sunflowers. They were beautiful. Of course the increased yield depressed market prices and the country was worse off. Oops.
Part if it is the massive aid given to poor countries—sometimes 50% of the national economy. Guaranteed income can create dependencies and discourage enterprise. Why work when you don’t have to? Yet another problem is the insular nature of these economies. A recent study compared Gaza to the West Bank and found that Israel’s blockade of Gaza from 2007 to 2010 reduced output by about 20%. Because of comparative advantage, increased trade helps everyone.
Finally, distrust of government leads many to work in the underground economy, where their labor isn’t counted. This can make the official statistics almost meaningless. These people are employed. They just don’t have “jobs.”
All this means that there are incredible investment opportunities in developing and frontier markets. But malfeasance and a lack of legal protection means investors should limit their exposure and stay diversified.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!