A magazine of forecasts, trends, and ideas about the future
March-April 2008 Vol. 42, No. 2
Top 10 Forecasts From the Outlook 2008 Report
Why Some Economies Grow and Others Don't
A group of economists support the benefits of entrepreneurship and freedom in improving prospects for the world's poor.
By Lane Jennings
In 1970, Sweden ranked fourth among OECD member nations in terms of average personal income. By 1990 it had dropped to ninth, and in 2003 it was only fourteenth. Ireland, one of the poorest nations in Europe for the past two centuries, surged from number 21 on this same list to take over Sweden’s old spot at number four. And it did so in just 13 years, from 1990 to 2003. What happened? And, more important, how can other nations imitate Ireland’s example and avoid Sweden’s mistakes?
For Making Poor Nations Rich, editor Benjamin Powell, research fellow at the Independent Institute and assistant professor of economics at Suffolk University, has assembled a collection of essays by economists from several countries that all point to the same answer. And that answer is.... But wait, first let’s look more closely at the question.
Scholars and politicians have often puzzled over why some communities and nations enjoy power and affluence while others struggle merely to survive. Compare Africa and China. Both cover huge areas and have abundant natural resources, but they also have large undeveloped regions and a population heavily concentrated in a few locations. Yet today, China has a unifying culture and a booming economy, while most of Africa remains culturally fragmented and desperately poor.
History tells part of the story. But only a part. In their book Culture Matters: How Values Shape Human Progress (Basic Books, 2000) [reviewed in THE FUTURIST January-February 2001], Lawrence E. Harrison and Samuel P. Huntington noted that the relative importance that different societies assigned to concepts like work ethic, education, equal justice, and planning ahead were often instrumental in exploiting assets and overcoming disasters and constraints.
In his introduction to this book, editor Powell zeroes in on two sets of values within a community or nation that, he believes, largely determine how affluent its citizens become and how long they stay that way. There are "cosmological beliefs," he notes, that involve how a particular culture answers or chooses to ignore the big philosophical questions of life. For example, "What is the meaning of existence? What is justice? What makes a government legitimate?" Cultures differ dramatically over such issues and will fight fiercely to defend their traditional beliefs if they feel threatened. But for most people, cosmological questions do not determine economic success or failure.
What counts more, Powell argues, are a culture’s "material" beliefs—specifically, what activities are considered legitimate ways to make a living. Farming, tool making, and specialized crafts are all common examples. But many cultures have held these productive occupations in surprisingly low esteem. Often, higher prestige and material rewards go to activities like land owning, rent collecting, trade for profit, war for conquest, and simple banditry. Professions such as law, advertising, stock trading, banking, and public administration fall somewhere in between. They can all make valuable contributions to improve the overall quality of life for the general population, but without adequate constraints on their activities, individuals who practice these occupations can become "vampires," consuming the goods and wealth of others and providing no tangible benefits in return.
In the view of Powell, and perhaps of most economists (certainly of those who contributed essays to this book), it is individual greed—the desire for maximum profit for minimal effort—that makes the economic world go round. In any culture, most active, inventive, and able individuals will turn their talents toward the most attractive ways available to accumulate material comfort and social prestige.
So here is the secret of economic success: A country’s standard of living rises so long as those activities it most encourages are productive (e.g., manufacturing and innovation) rather than nonproductive (bureaucratic red-tape handling, for instance) or destructive (bribery, usury, blackmail, or military conquest). But if unproductive or destructive activities seem more likely to bring sure and lasting rewards, a country’s "best and brightest" tend to use their talents in these areas. As a result, the economic well-being of the general populace begins to stagnate and eventually to fall.
Other contributors to the book examine how legislation and policies can play key roles in achieving and sustaining economic development.
Mancur Olsson Jr., late professor of economics at the University of Maryland, emphasizes the importance of contracts. Only those nations where courts respect private property rights and enforce contracts fairly are going to attract foreign investment and motivate local entrepreneurs.
Robert Lawson, professor of economics at Capital University in Columbus, Ohio, offers thought-provoking statistics to prove his contention that those societies that prize and protect "private property, rule of law and free markets [consistently outperform] ... those that are less economically free." To critics who complain that unrestrained free markets ultimately pull society apart into two groups—the very rich and the very poor—Lawson replies, "there is simply no evidence that economic freedom creates greater income inequality." Moreover, evidence shows that even lower income people in economically freer countries live longer, are better educated, and enjoy higher material standards of living than their counterparts in less-free countries.
These essays on policy are followed by case studies assessing areas of the world today with less-than-flourishing economies—including Africa, Latin America, and Sweden.
Despite decades of technical aid, investment, and advice, the vast majority of people in many African nations remain poor, with few prospects for improvement anytime soon. George Ayittey, a native of Ghana and now an economist at American University in Washington, D.C., believes he knows the reason. Western aid-givers, he complains, have consistently believed the promises of smooth-talking African leaders and too seldom provided any help directly to African people. In country after country, material and money intended for development projects have been diverted by members of the governing elite to enrich themselves and their supporters. Well-meaning Europeans and Americans ignore or simply do not know that a market economy depends on "secure property rights, free flow of information, rule of law, and mechanisms for contract enforcement. Because these processes ... are missing in most African countries," Ayittey warns, "so are the free markets."
Dan Johansson, a research fellow of the Ratio Institute in Stockholm, reports that Sweden’s once flourishing economy began to slide in the 1950s because government social programs intended to provide cradle-to-grave security for all citizens produced many unintended consequences. Increasingly complex laws and ever-rising taxes discouraged businesses from expanding and private citizens from saving and investing. Without the economic growth that only business and private investment can generate, Sweden now finds itself unable to make good on its promises, as more citizens leave the workforce for retirement and fewer young workers step up to take their places.
The book concludes with encouraging success stories from nations in Asia (China, India), Europe (Ireland), and even Africa (Botswana), whose economic achievement illustrates Powell’s belief that encouraging small-business entrepreneurs is the best way to achieve and maintain general affluence.
While a few essays are dry and technical, most of the writing here is vivid and intelligent. Futurists will be particularly interested in the essays by James A. Dorn on China’s key achievements and remaining economic needs, as well as the assessment of India’s prospects for attaining world prominence in trade and culture by Parth J. Shah and Renuka Sane.
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