OV E R T Y
by Jeffrey D. Sachs
household's imputed annual income will be $600 ($150 per ton times four tons), or$100 per capita ($600 divided by six people). The government will add this figure toother household incomes to calculate the country's gross national product.The family's income per capita can increase in at least four ways the followingyear.
The household might decide to consume only three out of the four tons of maize, andtake one ton to market. With the $150, the household invests in livestock (perhapschickens or sheep or a bull or dairy cow). The livestock generate a new stream of income, whether from improved food yields by using the bull for manure and animaltraction, or the cow for sales of milk, or the animals for meat, eggs, or hides. Ineconomic jargon, the saving has led to capital accumulation (in the form of livestock), which in turn has raised household productivity.
In a different scenario, the household learns from a neighboring farmer that it has theright kind of farmland, climate, and soil to produce vanilla beans, with a much higherincome. After some deliberation, the household decides to shift to vanilla as a cashcrop. The next year the household earns $800 in vanilla, and uses $600 to buy fourtons of grain for food. As more vanilla farmers arise in the region, a new group of trading firms also forms, specializing in shipping and storage of vanilla, food, andfarm inputs.This pattern exemplifies Adam Smith's insight into the two-way link fromspecialization to expanded markets back to increased specialization. The farmhousehold specializes in high-value vanilla farming because it lives in favorableecological conditions for vanilla trees. It relies on the market to trade with otherhouseholds, which instead specialize in producing food. As incomes rise, and the"extent of the market" increases, to use Smith's phrase, there is room for furtherspecialization, in this case in transport services. Later on, economic activities will befurther divided among firms specializing in housing construction, clothingmanufacturing, road maintenance, plumbing, electricity, water and sanitationsystems, and so forth.
Alternatively, an agricultural extension officer teaches the farm household how to
Three: Why Some Countries Fail To Thrive 2