Tuesday, March 21, 2006

Why poor countries are poor ...

A well-written and engaging essay in Reason magazine. It's got to do with this slightly nebulous idea of "social capital" or "institutions." [And no, liberal Western guilt aside, they're not poor because we're rich.] Reminds me a bit of this essay in Prospect Magazine.
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.

But progress is being made. We’ve just seen one kind of institution: business regulations. Sometimes, it can be improved with simple publicity. After the World Bank revealed that entrepreneurs in Ethiopia couldn’t legally start a business without paying four years’ salary to publish an official notice in government newspapers, the Ethiopian government scrapped the rule. New business registrations jumped by almost 50 percent immediately.

Unfortunately, it is not always so easy to get corrupt governments to change their ways. Although it is becoming clearer and clearer that dysfunctional institutions are a key explanation of poverty in developing countries, most institutions cannot be described with an elegant model like Mancur Olson’s, or even with careful data-gathering by the World Bank. Most unhappy institutions are unhappy in their own way.
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.

More important, why can’t the Cameroonian people seem to do anything about it? Couldn’t Cameroonian communities improve their schools? Wouldn’t the benefits easily outweigh the costs? Couldn’t Cameroonian businessmen build factories, license technology, seek foreign partners, and make a fortune?

Evidently not. Mancur Olson showed that kleptocracy at the top stunts the growth of poor countries. Having a thief for president doesn’t necessarily spell doom; the president might prefer to boost the economy and then take a slice of a bigger pie. But in general, looting will be widespread either because the dictator is not confident of his tenure or because he needs to allow others to steal in order to keep their support.

The rot starts with government, but it afflicts the entire society. There’s no point investing in a business because the government will not protect you against thieves. (So you might as well become a thief yourself.) There’s no point in paying your phone bill because no court can make you pay. (So there’s no point being a phone company.) There’s no point setting up an import business because the customs officers will be the ones to benefit. (So the customs office is underfunded and looks even harder for bribes.) There’s no point getting an education because jobs are not handed out on merit. (And in any case, you can’t borrow money for school fees because the bank can’t collect on the loan.)
Makes me want to read his book!

1 comment:

assiniboine said...

Oh, aren't they poor because we are rich?

You may get a small charge out of this excerpt from a recent news report on the opening of a now-Mainland Chinese-owned mine in Papua New Guinea. (Canada's Placer Dome worried away at that mineral lease for decades before it became clear that they just didn't have the nouse for dealing with appropriately dispatched bribes; the Chinese perhaps do.)

"Mine commissioned

"Papua New Guinea’s drought of opening new mines is coming to an end. This follows the official commissioning of the K180 million-Kainantu gold mine operated by Highlands Kainantu Limited in Eastern Highlands Province by Prime Minster The Right Honourable Grand Chief Sir Michael Somare, GCL, GCMG, CH, PC...."

Rather reminds one of the photos of General Musharraf that hang in overseas missions of Pakistan, looking like the Shah of Iran trying out his entire wardrobe all at once.