Open Discussions/ Gulf Cultural Club

A widening chasm between

 the rich and the poor

* Professor Ali Allawi

(Author, economist, scholar, politician)

**Iqbal Asaria

(Director Afkar Group, Economist)

The chasm of inequality between the rich and poor is widening in today’s troubled world. Millions of people are fleeing from poor countries in Africa, Asia and the Middle East. Professor Ali Allawi explores the background and reasons for this dichotomy in his recent book “Rich World Poor World: the struggle to escape poverty.”  The publication is a landmark history of the world economic order, exploring how developing countries have fought to escape impoverishment. He traces the evolution of the world economic order from the late imperial era to the present day. In doing so, he argues that the current neoliberal consensus is only the most recent of a series of failed policy imperatives. Covering issues in the Global South as well as failures in the West, Allawi’s definitive account offers an impassioned and authoritative call for change.

Professor Ali Alawi: The book we’re discussing was actually written some time ago now — which shows how long these things take. It was originally going to be titled something else, but for various reasons, including marketing, the title was changed to what it is now. In essence, it is the first full economic history of development since the Second World War.

This subject has interested me since my early years. Growing up in the late 1950s, we could see how our own region compared with the West. In the mid-1950s, Europe was still recovering from the war — bombed buildings, rebuilding under way — so in some ways things there looked, if anything, worse than where we were. But by the end of the 1950s, you could sense a real shift taking place. In Iraq, the Development Board had begun a number of large infrastructure projects that transformed the landscape, and for a while it felt as though our region was moving in the right direction.

That impression did not last. Through the 1960s it became clear that a pattern was emerging: poor countries seemed permanently condemned to “developing,” while the already-developed world — in practice, the Western world — kept moving further ahead. If you wanted to develop, the assumption was that you had to follow the Western model. That assumption came under increasing challenge through the 1960s, but it was what drew me into the whole question of development, and eventually into a career — first at the World Bank, later in investment banking, in what became known as emerging markets.

The origins of the “age of development”

Looking back over three-quarters of a century — what I call, in the book, the “age of development” — you can actually date its beginning quite precisely. It started when President Truman, in his 1949 inaugural address, called on the United States to help develop what he called the “underdeveloped countries” — partly to raise living standards, but primarily for reasons of national security. This is when the Bretton Woods institutions — the IMF and the World Bank — began turning their attention to the former colonies.

Most of the world after the Second World War was under colonial control in some form; only the Americas and China were not under direct political control from a European metropolis. Before the war, the colonial powers had shown very little serious interest in developing their colonies economically. The colonies existed mainly to extract raw materials and, where there was a large enough middle class, to serve as markets for manufactured goods. There had been a modest British Colonial Office initiative before the war to invest in colonial development — focused mainly on the West Indies and parts of West Africa such as Nigeria — but the sums involved were small, perhaps £20–25 million in total. The intellectual and institutional basis for development, as we now understand it, really did not exist until after the war, when the United States declared it had a national-security interest in preventing former colonies from falling into the Soviet camp.

The World Bank itself was originally created to fund European reconstruction, not development in the Global South. But the Marshall Plan dwarfed the Bank’s resources for that purpose, so the Bank began shifting its focus toward the developing world during the 1950s — and one of its first loans, in fact, went to Iraq.

Infrastructure, modernisation, and the crises of the 1950s–60s

Development theory in the 1950s drew partly on the American experience of the New Deal, when the federal government began funding large infrastructure projects in poor regions — the Tennessee Valley Authority being the classic example, which integrated power generation and transport networks across the south-eastern United States. The US held this up after the war as a counter-model to Soviet-style industrialisation. So 1950s development thinking centred on large infrastructure: dams, bridges, ports, road networks, airports — the “stock-in-trade” of the development industry. Build the infrastructure and “social capital” first, the theory went, and industrial take-off would follow.

This became politically charged. Many of you will remember the 1956 Suez Crisis, which was rooted in the withdrawal of Western financing for the Aswan Dam project. By the end of the 1950s, this infrastructure-first model had not delivered what was expected, and many development thinkers began to question it.

Attention shifted in the 1960s to “modernisation theory” — the idea that developing countries would pass through defined stages of growth on their way to economic “take-off,” essentially mimicking the Western, and especially the American, path toward a large, consumer-driven middle class. This required dismantling “traditional” structures seen as obstacles to growth. The same thinking underpinned much of the ideology behind US involvement in Vietnam — the notion that “backward” societies were vulnerable to communism and had to be steered toward the American model instead. President Kennedy’s Alliance for Progress, aimed at modernising Latin America, was part of the same wave. But with the collapse of the American effort in Vietnam, “modernisation” became something of a dirty word and was abandoned as a formal framework by the end of the 1960s.

(As an aside: the language used for the developing world has itself evolved over the decades — from “backward countries,” to “underdeveloped countries,” to “less-developed countries,” to the “Third World,” to “the South,” and now the “Global South.”)

By the late 1960s, other concerns began to dominate the debate — above all, population growth. There was near panic that the world would be unable to feed itself, following the Malthusian logic that population grows geometrically while food supply grows only arithmetically. Gunnar Myrdal’s influential 1968 study Asian Drama argued that South Asian countries were trapped in a cycle of high population growth and low productivity from which they would never escape.

The 1970s: the end of Bretton Woods and the oil shocks

In the early 1970s, two major events reshaped the picture. First, President Nixon took the US off the gold standard in 1971, ending the fixed exchange-rate system. Second, a commodity “supercycle” followed, with prices rising sharply across major commodities — feeding into the first oil crisis.

It’s worth remembering that European and Japanese reconstruction after the war had been built on cheap oil, priced by the “Seven Sisters” oil majors at somewhere between one and three dollars a barrel for nearly thirty years. That changed abruptly after the October 1973 war, when oil prices rose from around four or five dollars to roughly forty dollars within a year. This transferred enormous resources from oil-consuming countries — including many developing countries such as India and Pakistan, which were themselves oil importers — to the oil-producing states, mainly in the Gulf.

At the time, there was serious talk at the World Bank that the Gulf oil states would soon have enough money to buy every company on the New York Stock Exchange. Partly in response, the United States moved — around 1974–75 — to secure an arrangement with Saudi Arabia under which oil would be priced and traded in US dollars: the origin of the “petrodollar” system that still underpins much of the global energy sector.

The oil states received far more in revenue than they could absorb domestically, so the surplus was recycled through Western banks and lent on to oil-importing countries, especially in the developing world. By the late 1970s, many of these borrowing countries were so heavily indebted that even a modest rise in global interest rates could make their debts unpayable — and that’s exactly what happened. Facing “stagflation” (high inflation combined with high unemployment), the US Federal Reserve under Paul Volcker pushed interest rates up to around 18–20%. Debts that borrowers had taken on at low rates suddenly cost two or three times as much to service. A wave of developing-country defaults followed in the early 1980s — Mexico among the most prominent.

The Washington Consensus and the “lost decade”

This debt crisis prompted a rebellion against the old development orthodoxy. The new diagnosis was that developing economies suffered from over-regulation, excessive state involvement, and closed markets. An early model for this alternative had already emerged in Chile after the September 1973 coup, where a military government heavily influenced by University of Chicago-trained economists (the “Chicago Boys”) pursued deregulation, trade liberalisation, and privatisation. The experiment “worked,” in narrow terms, for a few years before running into serious trouble — but it nonetheless became a template that influenced both Thatcher and Reagan.

Through the 1980s, most developing countries — many on their knees because of debt and low commodity prices — adopted some version of what became known as the Washington Consensus: liberalisation, privatisation, deregulation, and open capital markets. In most cases it did not deliver the promised results. Structural adjustment programmes, for instance in Zambia, often meant governments cut public employment and dismantled what little social safety net existed, leaving unemployment as high as 40% with no real improvement to show for it. Even so, structural adjustment and “neoliberal” thinking became entrenched across the development agencies — reinforced by the collapse of the Soviet bloc, after which there seemed to be no credible alternative on offer.

Globalisation, the Asian crisis, and the East Asian exception

The 1990s brought a further wave of thinking under the loose banner of “globalisation”: falling trade barriers (which did genuinely boost global trade), alongside — for the first time — the liberalisation of capital flows. Large volumes of footloose capital, generated partly by the post-Soviet transition, flowed into markets ill-equipped to absorb them, contributing to crises such as the 1997 Asian financial crisis, when capital that had rushed into countries like Korea and Thailand pulled out just as quickly.

In retrospect, the most significant development story of this period is East Asia’s success — often achieved by ignoring the advice of the international development agencies. Korea emerged from the Korean War as one of the poorest countries in the world, with per-capita income around fifty dollars in 1954. Under an authoritarian government, it reoriented its entire economy toward exports, benefiting from US security guarantees that reduced its own defence burden — but crucially rejecting the prevailing orthodoxy of import substitution in favour of export-led growth. Taiwan and Korea, and later the smaller city-states of Singapore and Hong Kong, followed similar paths: not necessarily “open” economies in the textbook sense, but ones that concentrated national effort and savings on exports.

Why did these countries escape poverty so dramatically? Korea’s per-capita income is now roughly $70,000; Singapore may be the wealthiest country in the world on a purchasing-power basis; Taiwan ranks among the top ten. I would point to several factors — discipline and social cohesion prominent among them. (There is, incidentally, a long tradition of linking religious and social culture to economic outcomes — Max Weber’s thesis linking the Protestant ethic to the rise of capitalism is the classic example.) These East Asian societies also achieved extraordinarily high savings rates — often around 15% of GDP, reaching as much as 50% in Korea in some years — which meant their growth depended much less on foreign capital, even though Japanese investment did play a role.

By contrast, other regions fragmented in different directions. Much of Africa has struggled to develop except during commodity booms. The Middle East has been largely unable, from the 1950s to the present, to generate sufficient employment for its young populations, and intra-regional trade remains very low. Parts of Latin America have fared somewhat better, though few countries there have broken out of the pattern either.

By the 2000s, the single overarching goal of “growth” had itself fragmented into the UN’s Millennium Development Goals, bringing in gender, climate, and environmental concerns — useful in themselves, but reflecting the absence of any unifying development framework. Meanwhile, government-led development, backed by international agencies, increasingly gave way to private capital — a trend accelerated, and then badly shaken, by the 2008–09 financial crisis, which hit developing countries hard.

China

If one thing stands out above all in the postwar development record, it is China. The Chinese experience is unparalleled in human history — even the Industrial Revolution doesn’t compare. In under fifty years since 1978–79, China sustained growth rates approaching 8% a year; using the “rule of 72,” that means the economy doubled roughly every nine years. And it did so with essentially no reference to the international development agencies or conventional development economics.

This followed decades of severe upheaval under Mao — collectivisation, the disaster of the Great Leap Forward, the famine of the early 1960s, and then the Cultural Revolution. By the time Mao died, China’s economy was functioning but deeply underdeveloped. What followed was one of the fastest transformations in economic history, and I think it holds major lessons for any serious rethinking of development.

Why has poverty reduction been overstated?

These are the questions that were uppermost in my mind writing this book: why have decades of theories, institutions, and policies succeeded only in one cluster of countries? We often hear that globalisation has dramatically reduced global poverty since the 2000s. I’d treat that claim with real caution, for two reasons.

First, the statistics used are questionable. The old “$2 a day” absolute poverty line is essentially meaningless today; a more realistic minimum subsistence figure would be closer to five or six dollars a day. And if you strip China and the East Asian economies out of the global poverty figures, the improvement in living standards for the rest of the developing world is far more modest — arguably, by some measures, many people are worse off in relative terms than they were decades ago.

Second, global inequality — both within and between countries — has not really narrowed. Excluding China, the share of global wealth held by the very top has barely shifted.

And what does the development establishment have to offer in response? Frankly, not much beyond “more of the same.” The Trump administration dismantled USAID, folding it into the State Department, and cut the aid budget by roughly half to fund defence spending instead. Wealthy Western nations are generally retreating from development assistance, with the possible exception of a few countries such as those in Scandinavia.

This leaves developing countries in a genuinely difficult position. The East Asian economies grew through exports to Western markets that were able and willing to absorb them. That capacity is no longer there in the same way. You cannot simply repeat the East Asian export model today — Egypt’s or Bangladesh’s low-cost manufacturing, for instance, is nowhere near the scale achieved by East Asia, and this kind of low-cost manufacturing tends to trigger a “race to the bottom,” with production shifting from country to country in search of ever-cheaper labour and energy. Becoming a niche, single-product exporter — Bangladesh and garments, for example — does not by itself generate the value added needed for real development.

China is now trying to integrate the developing world into its own economic orbit, partly through the Belt and Road Initiative — investing heavily in African infrastructure (and resource extraction) — but this reflects strategic and mercantile interests, primarily aimed at opening markets for Chinese goods, more than a development mission as such.

Conclusion: power, force, and the conditions for success

Behind all of this lies a deeper issue: the massive imbalance of power between rich and poor countries and classes of countries, embedded in a capitalist world system dating back to the sixteenth century. The core logic of capitalism is accumulation — a business that isn’t expanding and generating profit isn’t really functioning as a capitalist enterprise — and that logic of continuous growth extends even to China’s mixed economy.

Force and violence are also an underappreciated part of this history. Kenneth Pomeranz, in his work on the “great divergence,” argued that China and India were, if anything, more advanced economically than Europe on the eve of the Industrial Revolution. What tipped the balance in Europe’s favour was largely a matter of geography and ecology — cheap, accessible coal near centres of production and population, unlike in China, where coal deposits were far from the economic heartland along the Yangtze. Combined with the military application of new industrial technologies, this created a profound imbalance — enough for a commercial enterprise like the East India Company to defeat the Mughal armies and dominate an entire subcontinent, and for European powers to impose their will on China by force. Violence remains a fundamental, if often ignored, element of how the current world order was — and continues to be — shaped.

So, to conclude: I don’t think any country can succeed without five or six conditions, most of which are necessary though perhaps not individually sufficient.

1. Competent leadership — not necessarily democratic in form, but far-sighted and effective.
2. Functioning institutions — not necessarily parliamentary democracy (I don’t think there’s a strong correlation there), but institutions fit for purpose: financial, educational, and yes, religious institutions too.
3. A broad ethical foundation. Ethics is not simply a set of laws one doesn’t break — most transactions happen outside formal contracts, and they depend on a basic level of trust between people. That trust has eroded significantly; the quality of ethical conduct in business today is nowhere near what it was fifty or sixty years ago.
4. Political stability — policy continuity, rather than constant reversal with every change of government.
5. Awareness of, and responsiveness to, shifts in the international economy. Countries that fail to adapt end up compounding their disadvantages. This is especially true for oil-producing states: the oil era is ending — not necessarily within five years, but certainly within a generation — and countries that don’t reposition themselves will be priced out or left with stranded, declining assets.

If these conditions come together — alongside greater South–South integration, some distancing from a global financial system that increasingly serves narrow interests, and genuine awareness of technological change — then I think there is a real chance for the Global South to stop simply trying to “catch up” with the West on the West’s terms.

Dr Iqbal Asaria: It’s a little daunting to follow Professor Allawi, who has been a close friend for over twenty years — he shared a good deal of his early thinking on this book with me, so none of it is unfamiliar. I worked at the World Bank myself, and with the NGO Committee opposing the

to complement what’s been said.

On the Islamicity Index. This is worth looking up — it asks what qualities you would actually want a Muslim society to have: not necessarily “Islamic” in a narrow sense, but things like women’s literacy, life expectancy, and so on. When you rank countries by this measure, the most Muslim-majority countries typically don’t come out anywhere near the top — often somewhere around fortieth place — while countries you might not expect do relatively well. Iran, for instance, has life expectancy around 78 and literacy around 90%, with infant mortality comparable to Western levels. So the basic building blocks for development can be present even where they haven’t translated into the outcomes one might expect — sometimes for want of the right leadership. By contrast, Pakistan’s female literacy rate is only around 17%, even though the proportion of female university students is much higher — a striking gap in the “building blocks.”

On the end of history and the return of inequality. After the fall of the Soviet Union, there was a wave of triumphalism in the West — Francis Fukuyama’s The End of History being the emblematic text: follow the Western model and you will inevitably converge with it; resist, and you will be compelled. Around the same time, China was joining the WTO. The underlying theory was “trickle-down”: let the wealthy get richer, and the benefits will flow down to everyone else.

This orthodoxy has been challenged most systematically by Thomas Piketty, in Capital in the Twenty-First Century — an unlikely bestseller, given its length. Piketty shows that the trickle-down story, built on a partial reading of the Kuznets curve, has been misrepresented: taken to its logical conclusion, the data actually show rising inequality rather than convergence. His proposed remedy is a wealth tax — interestingly, on the order of 2–3%, not far from the rate of zakat, which I find quite striking as a Muslim economist.

The debate has since moved toward the idea that markets cannot simply be left alone — that some form of state management or guidance is needed, as in Korea, China, and Singapore. Look, for instance, at national airlines: Ethiopian Airlines and Rwandair are both well-run and efficient, reflecting real institutional capacity in those countries — a sign that the underlying building blocks (above all, human capacity) matter enormously before you can even begin to manage an economy well.

China, meanwhile, achieved enormous growth but now faces a demographic problem of its own making, following decades of the one-child policy — a shrinking young cohort and a rapidly ageing population. Many societies, in different ways, now face versions of the same “who looks after the young and the old” question.

On the entrepreneurial state. Mariana Mazzucato’s book The Entrepreneurial State makes an important point: the state very often funds the foundational research behind major innovations, and the crucial question is who ultimately captures the benefit. The US space programme, for example, drove huge advances in miniaturisation — soldiers went from carrying enormous radio equipment to today’s tiny devices — but the commercial benefits of that publicly funded research were captured almost entirely by private companies like Apple. We’re seeing the same dynamic now with AI: public money — through research funding, defence spending, and so on — is generating enormous private gains, and we need a much better balance between public investment and public benefit. If the division between labour’s and capital’s share of income shifts too far — Piketty’s work suggests something like a move from 60:40 to 40:60 — you risk real social unrest.

On universal basic income. There’s growing interest in the idea that, as AI displaces jobs, everyone should receive a guaranteed basic income — or at minimum guaranteed access to essentials like healthcare and connectivity. Various trials are under way. The open question is whether this equalises society, or whether it removes the incentive to work altogether — that’s a live and unresolved debate.

On value capture. Consider something as simple as a bottled water: it can sell for something like eighty-five times its production cost, once you add marketing and branding. Who really benefits from that markup? These are the kinds of structural questions we need to keep asking.

Historically, big shifts in the balance of power have often followed periods of real fear on the part of elites — the postwar welfare state, for instance, emerged partly because Western governments were genuinely worried that dire postwar conditions would push people toward communism.

A final point on manufacturing and labour. Apple moved production to China not out of necessity but because it was cheaper — not because Americans couldn’t be trained to do the work, but because training them would cost more. The same logic now applies to shifts toward India and Vietnam. This kind of value-chain arrangement concentrates the benefits of manufacturing in the hands of a small number of players, wherever production physically happens to be located.

* Prof Ali Allawi was born in Baghdad, Iraq in 1947. He attended universities in the US and graduated from MIT (1968) and Harvard University (1971). He worked in economic development, first with the World Bank Group in Washington, and then as the managing director of an emerging markets investment bank. He was active in the opposition to the dictatorship in Iraq and subsequently served in the post 2003 Iraqi government as Minister of Trade and Minister of Finance. In 2020, he was named as the Deputy Prime Minister of Iraq. He was also active academically as a writer and scholar, and was a visiting fellow at Harvard, Princeton and Oxford universities. He was a Research Professor at the National University of Singapore. He has published many award-winning books of biography, politics, economics and on Islam, all published by Yale University Press.

** M Iqbal Asaria is the director of Afkar Group. Iqbal was a member of the Third World Network. In this capacity he chaired the World Bank NGO Committee for four years. For his work in this field, he was awarded the CBE in the 2005 Queen’s Honours List for services to international development. For the last several years he has been involved in consultancy on financial product structuring and niche marketing services to faith and ethnic communities.