December 30, 2002
From the desk of Jane Galt:Making Poor Countries Rich
by William Easterly
To read this book is to exult and despair. Exult because it's a fascinating look at all the ways that we have tried to animate growth in the Third World; despair because none of them worked.
The book is terrific -- well written, interesting, and informative on a topic that most of us find pretty compelling. If it has a flaw, it is that it's a little light on data (though extensively footnoted), but I suspect that for most people, that's a feature not a bug. I raced through it over Christmas, enjoying every word.
Then I finished the book and was mightily depressed.
Easterly is an economist with the World Bank and he outlines in painstaking detail why the various theories of development aid, from closing the "investment gap" to building infrastructure, failed so miserably: incentives. No matter how much money you pour into a country, if local conditions make it unprofitable to build, trade, or invest, people will not do it. And the Third World countries that are mired in unpayable debt and abject poverty are a showcase of bad incentives. Property rights are ill-defined, so people will not build or invest; kleptocrats steal anything you do manage to make, so why bother? Short-sighted policies designed to shore up political support destroy or expropriate successful businesses -- why risk it? In those countries it's a better investment to buy a sinecure in a kleptocratic regime, or a gun to start your own free-lance kleptocracy, and that's what people do. And ship any money you make out of the country, where the locals can't inflate, tax, or steal it away.
And that's why it's so depressing. For the people currently in power in many of those countries, the incentives are to keep on with the failed structures of the past, either because they are making more money stealing than they could in private enterprise, or because the electorate is angry and desperate after years of stupid policies, and unwilling to bear further pain. Or they are mired in debt from previous kleptocratic regimes. Often all three.
The World Bank and associated organizations might be able to change those incentives, but while Easterly takes a half-hearted stab at making recommendations, it's clear even he doesn't really believe that these things will happen. The World Bank and the IMF lack the political or institutional will to simply cut off failing countries until they get their act together. And indeed, when tough love means, temporarily, more starving babies, it's hard to get enthusiastic. But unless they do, they are providing the incentive for the bad policies to continue.
One of the most interesting sections of the book discusses the question "What makes people poor", and argues that questioners have got it exactly backwards: the question should be "What makes people rich?" Poverty is freely available, and it's easy to produce; if you destroy the incentives for people to engage in wealth-building activities, such activities will cease. To make people rich, on the other hand, all sorts of things have to line up right: government, institutions, market systems. So perhaps one of the best things about this book is that in reading it, one appreciates just what a miracle our prosperity is.
I haven't read Easterly's book yet (it's been on my list), but I would recommend Hernando de Soto's The Mystery of Capital, which looks at why capitalism appears to fail everywhere except the west. Even slum-dwellers have possessions, but not property rights. The solution he proposes is to bring the poor into the capitalist system by giving them formal rights over their possessions, which often involves taking down the bureaucracies that are keeping the poor out of the formal world of property and capital. It's about using the power of capitalism to help people help themselves in a way they can't as long as the societal structures lock them out. The ideas and data presented in the book are pretty compelling. The book's main flaw is that it occasionally gets tedious and repetitive, hammering the same message home yet one more time. The book also traces the development of property rights in the west, pointing out that informal systems of property rights had evolved in both the settling of the Great Plains and in the California gold rush long before the law caught up with them and formalized those property rights. It's a classic case of spontaneous order and self-regulation, but the latter step of granting the state imprimatur for the formal rights is vital.
De Soto's concept has been widely praised by many third-world leaders, but I am skeptical how many of them will actually want to implement such a program. It would involve giving up power and transferring it to the people. There have been smaller-scale successes in de Soto's native Peru, and various other schemes in Brazil also seem to be bearing fruit.
I will have to read the book. I think he has the right approach when he asks what makes people rich.
Posted by: Starhawk on December 30, 2002 06:52 PMThere's also an excellent paper that cites De Soto here.
Posted by: Paul Snively on December 30, 2002 07:57 PMThere are only two things necessary to eradicate Third World poverty:
(1) Capitalism, i.e. a more-or-less free market.
(2) Liberal democracy, i.e. the rule of law rather than men.
Everything else is a manifestation of one or the other of these....
Posted by: Al Superczynski on December 30, 2002 10:23 PMFernand Braudel (a Frenchman, zounds!) said the same thing in historical analysis. The Italians started the capitalist revolution and when the Spanish and Inquisition screwed the pooch in Italy they moved north, eventually ending up scattered throughout the continent. But the message is the same: it is far easier to destroy than to create value.
Posted by: Tom Roberts on December 30, 2002 10:36 PMI'll second the recommendation to read de Soto. He presents a case that is both extremely fascinating and extremely damning (of the Third World's sheer inability to create laws that effectively accomodate the behavior of its citizens).
As a companion to de Soto's book, I also suggest a quick glance at the Heritage Institute's economic freedom index. It is simply jawdropping to see how many third world countries have top scores on monetary policy and horrible scores in every other category (indicating these countries have done the bare minimum to secure IMF funding while ignoring the real problems).
Frankly, De Soto's book should be mandatory reading for every left wing freak out there (assuming of course they can pass remedial mathematics).
Posted by: Matt Johnson on December 31, 2002 12:38 AMWhat frightens me is the number of people in this Lexus-drving, latte-sipping, bastion of comfort we enjoy that do not appreciate to what degree the phenomena of past citizens being secure in their property that is responsible for today having Lexuses to drive and lattes to drink.
Posted by: Will Allen on December 31, 2002 02:06 AMMost of the people who come to this site are free-marketeers who probably share Al’s sentiments above (myself included). However, I am reluctantly coming to the conclusion that it isn’t quite this simple. Megan hits it on the head when she says:
“No matter how much money you pour into a country, if local conditions make it unprofitable to build, trade, or invest, people will not do it. “
There was a great article in the Wall Street Journal a few days ago about a truck driver in Cameroon trying to get his cargo of Guiness beer from one spot to another. It was a front-page article that was really written as a human interest story. All this guy was trying to do was get the beer from the costal city where it was delivered to an inland city about 350 miles away. Even with lousy roads this trip should have taken hours. Instead it took days.
It took days because local thugs (officially employed as policeman) held the truck up as it moved from city to city for as long as it took for the driver to give up and pay the extortion money. He finally arrived (I believe five days later) with little of his cargo intact. These are just the highlights of the article, the details are actually much more depressing.
The real question that needs to be debated, and Megan says that even Easterly only makes a half-hearted stab at it, is what, if anything, can be done to establish the rule of law in these countries? Is it truly hopeless to try to break the institutionalized corruption that is destroying any incentive to build, trade, or invest?
Another part of the problem in some societies, usually put forth as a strength, is the extended family. If your fourth cousin thrice removed is a government official, you know it - and use it. This is a disincentive for cleaning up cronyist corruption.
Feels strange to be arguing against family ties.
Re: Mr. Plaiss' comments on the article about the Cameroonian Guiness truck, that was the Economist's year-end double issue, not the Wall Street Journal. I read both periodicals and I have the Economist article right here next to my computer.
It is a great article. I just post this to help people find it if they want to read it too.
Posted by: Brent M Krupp on January 1, 2003 07:59 PM"...one appreciates just what a miracle our prosperity is..."
Not so much a miracle as a good idea. Besides, the problem with African nations is not a lack of growth or progress, but rather insufficient acceleration. No one but a member of the Left and/or die-hard Rousseauian would argue, that the bulk of Africans were better off a century ago.
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