Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

wits and hard work of the people who inhabit it. Most countries, including some of the poorest nations on earth, have far more resources than that. Let me get the bad news out of the way: Economists do not have a recipe for making poor countries rich. True, there have been some fabulous success stories, such as the original Asian “tigers”—Hong Kong, Singapore, South Korea, and Taiwan—which saw their economies grow more than 8 percent a year for nearly three decades. China and India have had a terrific decade, much to the benefit of hundreds of millions of people. But we do not have a proven formula for growth that can be rolled out in country after country like some kind of development franchise. Just think about China and India: One is the world’s largest democracy; the other is not democratic at all.

On the other hand, we do have a good understanding of what makes rich countries rich. If we can catalog the kinds of policies that functional economies have in common, then we can turn our attention to Nobel laureate Douglass North’s common-sense query “Why don’t poor countries simply adopt policies that make for plenty?”4

The following is a sample of the kinds of policies and, in some cases, lucky geographical endowments that development economists have come to believe make the difference between the wealth and poverty of nations.

Effective government institutions. To grow and prosper, a country needs laws, law enforcement, courts, basic infrastructure, a government capable of collecting taxes—and a healthy respect among the citizenship for each of these things. These kinds of institutions are the tracks on which capitalism runs. They must be reasonably honest. Corruption is not merely an inconvenience, as it is sometimes treated; it is a cancer that misallocates resources, stifles innovation, and discourages foreign investment. While American attitudes toward government range from indifference to hostility, most other countries would love to have it so good, as New York Times foreign affairs columnist Tom Friedman has pointed out:

I took part in a seminar two weeks ago at Nanjing University in China, and I can still hear a young Chinese graduate student pleading for an answer to her question: “How do we get rid of all our corruption?” Do you know what your average Chinese would give to have a capital like Washington today, with its reasonably honest and efficient bureaucracy? Do you know how unusual we are in the world that we don’t have to pay off bureaucrats to get the simplest permit issued?5

The relationship between government institutions and economic growth prompted a clever and intriguing study. Economists Daron Acemoglu, Simon Johnson, and James Robinson hypothesized that the economic success of developing countries that were formerly colonized has been affected by the quality of the institutions that their colonizers left behind.6 The European powers adopted different colonization policies in different parts of the world, depending on how hospitable the area was to settlement. In places where Europeans could settle without serious hardship, such as the United States, the colonizers created institutions that have had a positive and long-lasting effect on economic growth. In places where Europeans could not easily settle because of a high mortality rate from disease, such as the Congo, the colonizers simply focused on taking as much wealth home as quickly as possible, creating what the authors refer to as “extractive states.”

The study examined sixty-four ex-colonies and found that as much as three-quarters of the difference in their current wealth can be explained by differences in the quality of their government institutions. In turn, the quality of those government institutions is explained, at least in part, by the original settlement pattern. The legal origin of the colonizers—British, French, Belgian—had little influence (though the British come out looking good because they tended to colonize places more hospitable to settlement).

Basically, good governance matters. The World Bank rated 150 countries on six broad measures of governance, such as accountability, regulatory burden, rule of law, graft (corruption), etc. There was a clear and causal relationship between better governance and better development outcomes, such as higher per capita incomes, lower infant mortality, and higher literacy.7 We don’t have to love the Internal Revenue Service, but we ought to at least offer it some grudging respect.

Property rights. Private property may seem like a province of the rich; in fact, it can have a crucial impact on the poor. The developed world is full of examples of informal property rights—homes or businesses built on land that is communal or owned by the government and ignored (such as the shantytowns on the outskirts of many large cities). Families and entrepreneurs make significant investments in their “properties.” But there is a crucial difference between those assets and their counterparts in the developed world: The owners have no legal title to the property. They cannot legally rent it, subdivide it, sell it, or pass it on to family. Perhaps most important, they cannot use it as collateral to raise capital.

Peruvian economist Hernando de Soto has argued convincingly that these kinds of informal property arrangements should not be ignored. He reckons that the total value of property held but not legally owned by poor people in the developing world is worth more than $9 trillion. That is a lot of collateral gone to waste, or “dead capital” as he calls it. To put that number in perspective, it is 93 times the amount of development assistance that the rich countries provided to the developing world over the past three decades.

The Economist tells a story of a Malawian couple who make a living slaughtering goats. Since business is good, they would like to expand. To do so, however, would require an investment of $250—or $50 more than the average annual income in Malawi. This couple “owns” a home worth more than that. Might they borrow against the value of their land and the bungalow they have built on it? No. The home is built on “customary” land that has no formal