When you travel to South America, you encounter countries that have a vast amount of natural resources and very large labor forces. However, despite an abundance of these resources, you also see a lot of poverty. Can you provide an economic explanation of why poverty exists?    

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Despite having a vast amount of resources, South America and most of the countries that exist in the region suffer extreme levels of poverty brought about by wide-ranging factors, including an aspect of the economy that sustains the problem.

Resources and the main factors of production are controlled by a...

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Despite having a vast amount of resources, South America and most of the countries that exist in the region suffer extreme levels of poverty brought about by wide-ranging factors, including an aspect of the economy that sustains the problem.

Resources and the main factors of production are controlled by a few members of the populace in most, if not all, countries in the region. These individuals are driven by self-interest and the need for self-preservation. Thus, they use their control of the factors of production to maintain authority and power. The few wealthy individuals exploit the majority through poor labor practices that keep the masses in abject poverty.

International interference from powerful countries and other institutions such as the IMF and World Bank have also ensured that the poverty levels continue rising. Powerful countries have managed to secure deals with most South American governments, leading to unfavorable consequences for the region. The powerful countries have managed to siphon resources from South America at unfair rates, and the investments find their way to the wealthy minority.

Policies by bodies such as the IMF have also sustained the issue. The IMF has imposed stringent policies on countries in the region that borrowed funds from the entity. These policies have sought to reduce public spending, which has forced governments to cut back on services such as healthcare, security, and education. The situation has resulted in higher levels of unemployment and retrenchments among the general population. Additionally, access to the public services has become too expensive for the people to afford.

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In one sense, it seems obvious that an abundant supply of natural resources and an abundant workforce should boost economic growth. The actual way in which both of these affect a country's economy are somewhat more complex. You might also note that although many people in Latin America may appear poor from the perspective of a middle class North American, in fact, especially when compared to Asia and Africa, Latin America actually has been relatively successful in reducing extreme poverty, with the percentage of people living in extreme poverty dropping by nearly 15 percent over the past few decades, with programs such as the Brazilian Bolsa Família being notable successes. 

In terms of workforce, economists talk about a "demographic transition", in which industrializing countries are just in the process of moving from the typically high birthrates of underdeveloped agricultural economies to the lower birthrate typical of developed countries. This is a one off occurrence and can bring a massive "demographic dividend" over a 20-30 year period to the transitioning economy in which there is a large number of working age people compared to a small number of children and elderly outside the workforce. However, for a country to exploit a demographic dividend it needs a solid educational system that can train these workers to be productive, a solid infrastructure to support productivity, political stability, and a rule of law. Gender equality also helps, as in highly unequal societies women have low rates of labor force participation. In much of Latin America, poor infrastructure, weak education systems, and drug cartels can be a drag on development.

For natural resources, there is no direct correlation of them to poverty reduction. Although some countries such as Australia and Norway have successfully used natural resources to improve national wealth and infrastructure, the story in many places is more mixed. When the Spaniards looted, pillaged, and exploited Latin America's natural resources, this caused rather than alleviated poverty in the native populations. Even after independence, for many countries, natural resources only benefit a wealthy elite and encourage rent-seeking behavior. Income inequality remains high, meaning that the wealth derived from natural resources benefits only a limited number of wealthy people rather than lifting all people out of poverty. 

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