Thursday, March 16, 2006

Why Poor Countries Are Poor

Reason: Why Poor Countries Are Poor: The clues lie on a bumpy road leading to the world’s worst library. by Tim Harford: "Economists used to think wealth came from a combination of man-made resources (roads, factories, telephone systems), human resources (hard work and education), and technological resources (technical know-how, or simply high-tech machinery). Obviously, poor countries grew into rich countries by investing money in physical resources and by improving human and technological resources with education and technology transfer programs.

Nothing is wrong with this picture as far as it goes. Education, factories, infrastructure, and technical know-how are indeed abundant in rich countries and lacking in poor ones. But the picture is incomplete, a puzzle with the most important piece missing.

The first clue that something is amiss with the traditional story is its implication that poor countries should have been catching up with rich ones for the last century or so—and that the farther behind they are, the faster the catch-up should be. In a country that has very little in the way of infrastructure or education, new investments have the biggest rewards.

This expectation seems to be confirmed by the experience of China, Taiwan, and South Korea—not to mention Botswana, Chile, India, Mauritius, and Singapore. Fifty years ago they were mired in poverty, lacking man-made, human, technical, and sometimes natural resources. Now these dynamic countries, not Japan, the United States, or Switzerland, have become the fastest-growing economies on the planet.

You do not have to spend a long time in Cameroon to realize how much people resent the government. Much of government activity appears to be designed expressly to steal money from the people of Cameroon.

The economist Mancur Olson proposed a working assumption that government’s motivations are darker still, and from it theorized that stable dictatorships should be worse for economic growth than democracies, but better than sheer instability.

Imagine a dictator with a tenure of one week—in effect, a bandit with a roving army who sweeps in, takes whatever he wishes, and leaves. Assuming he’s neither malevolent nor kindhearted, but purely self-interested, he has no incentive to leave anything, unless he plans on coming back next year. But imagine that the roaming bandit likes the climate of a certain spot and decides to settle down, building a palace and encouraging his army to avail themselves of the locals. Desperately unfair though it is, the locals are probably better off now that the dictator has decided to stay. A purely self-
interested dictator will realize he cannot destroy the economy and starve the people if he plans on sticking around, because then he would exhaust all the resources and have nothing to steal the following year. So a dictator who lays claim to a land is a preferable to one who moves around constantly in search of new victims to plunder.

Government banditry, widespread waste, and oppressive regulations are all elements in that missing piece of the puzzle. During the last 10 years or so, economists working on development issues have converged on the mantra that “institutions matter.” Of course, it is hard to describe what an “institution” really is. It is even harder to convert a bad institution into a good one.

Consider the situation: money that was provided because of social networks rather than need; a project designed for prestige rather than use; a lack of monitoring and accountability; and an architect appointed for show by somebody with little interest in the quality of the work. The outcome is hardly surprising: A project that should never have been built was built, and built badly. The lesson of the story might appear to be that self-interested and ambitious people in power are often the cause of wastefulness in developing countries. But self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. Cameroon’s tragedy is that there is nothing to hold self-interest in check.

Development specialists often focus on helping poor countries become richer by improving primary education and infrastructure such as roads and telephones. That’s surely sensible. Unfortunately, it’s only a small part of the problem. Economists who have pulled apart the statistics, or studied unusual data such as the earnings of Cameroonians in Cameroon and the earnings of Cameroonians who immigrate to the United States, have found that education, infrastructure, and factories only begin to explain the gap between rich and poor. Because of its lousy education system, Cameroon is perhaps twice as poor as it could be. Because of its terrible infrastructure, it’s roughly twice as poor again. So we would expect Cameroon to be four times poorer than the United States. But it is 50 times poorer."

Tim Harford, a columnist for the Financial Times, is the author of The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor—and Why You Can Never Buy a Decent Used Car! (Oxford University Press), from which this article is adapted.

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