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December 13, 2006
Economic development
Economic growth in developing countries, especially Africa, has been in the news in the last few years. Famous musicians have held concerts to raise awareness of the need for aid. Bush's first Treasury Secretary traveled to Africa with U2's Bono to see the plight of Africa's poor. Tony Blair hopes his political legacy will include reducing poverty in Africa. And of course the US is continuously criticized for not doing enough. But I'm also aware over the last half century astonishing amounts of foreign aid have poured into Africa and very little, at least very little positive has happened. Africa has become poorer.
I have found two good authors on economic development. I also found the subject is so deep that I cannot justify prioritizing my time to thoroughly review these books in detail. If you decide you want to understand development, here are experts to start with.
Hernando de Soto is Peruvian and heads a think tank in Lima. His books are The Other Path: The Invisible Revolution in the Third World (1989) and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2000). I think he is relatively non-controversial, although he is in favor of functioning markets. He is a favorite of Bill Clinton, and the Maoist Shining Path in Peru made eforts to murder him.
Willaim Easterly is a Ph.D. and professor of economics at New York University. He worked for the World Bank 16 years and has worked extensively in Africa, Latin America and Russia. In addition to academic writing he has written articles for a number of pretigious British and American publications. His books which are within the reach of lay people are The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, and The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good (2006).
De Soto started out investigating the intersection of formal, legal rules governing business and the actual economic life of the poor in Lima. He set up a tiny business entirely legally, obtaining all approvals and complying with all legal requirements. It took over a year of full time effort, required dozens of bureaucratic approvals, and cost a large multiple of the annual minimum wage. The illegal or unoffical economy in Peru is vast, and people are in it because they have no choice. They are not criminals; they are just trying to earn a living. With additional investigation it became clear this pattern is repeated throughout the developing world.
Operating outside the law is inefficient and limits growth. The businesses face shakedowns by the police and they have great difficulty enforcing property rights or contracts. They don't pay taxes. One obvious step to help development would be to bring them in to the legal economy by drastically reducing the bureaucratic burden, and by making honest, prompt judicial resolution of disputes available.
De Soto's second book focuses on one step that could make an enormous difference for development. The poor have tiny real estate holdings - homes and businesses - which individually aren't worth much by western standards but which in the aggregate amount to trillions of dollars in assets in the developing world. These assets are dead capital. They cannot be used as collateral for loans to fund business because they are outside the legal system. The "owners" do not have title. De Soto explains in detail the problem and solution.
I have not read Easterly's first book. His second is well written and understandable (no math formulas) but so thorough as to be a bit heavy. He has enormous experience and has seen dozens of projects succeed or fail. He has noticed a pattern. In the rich nations and in multi-national agencies, there are "planners" and "seekers". I quote from pages 5-6,
"In foreign aid, Planners announce good intentions but don't motivate anyone to carry them out; Searchers find things that work and get some reward. Planners raise expectations but take no responsibility for meeting them; Searchers accept responsibility for their actions. Planners determine what to supply; Searchers find out what is in demand. Planners apply global blueprints; Searchers adapt to local conditions. Planners at the top lack knowledge of the bottom; Searchers find out what the reality is at the bottom. Planners never hear whether the planned got what it needed; Searchers find out if the customer is satisfied."
Obviously Planners fail and Searchers have some success. The book is filled with factual reviews and short case studies verifying Easterly's observation.
One naturally wonders why the Planners persist in repeating their mistakes decade after decade. One reason is their ideology, what Easterly calls The Legend of the Big Push. The Legend has three parts:
1. The poorest countries are trapped in a poverty trap from which they cannot emerge without an aid-financed big push.
With over 5 decades of development this can be tested against experience. There are poor countries which grew without aid, and many poor countries who received substantial aid and remained stagnant or whose per capita income even shrank.
2. Whenever poor countries have lousy growth it is because of the poverty trap rather than bad government.
This too can be tested. Countries are evaluated and listed for corruption and for democracy (or the lack thereof). Studies indicate bad government is associated with slow growth, but poor countries grow faster than rich countries if they have good government.
3. Foreign aid gives a big push to countries to achieve a takeoff into self-sustained growth.
There are a lot of studies. Most refute this idea. Occasionally one will support it, but careful review usually reveals the study to be spurious. Lots of careers and billions of dollars are involved, so it's tough to kill this idea even though it's wrong.
Development and aid are frustrating topics since the Planners never learn and continue to subsidize corrupt dictators and entrenched elites, waste many billions of dollars, and accomplish nothing positive.
Posted by rob at December 13, 2006 12:47 PM
Comments
Posted by: Anonymous at December 13, 2006 12:47 PM