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Thursday, November 02, 2006

"What Makes a Nation Wealthy?"

Tyler Cowen looks at reasons for differences in the wealth of nations:

What Makes a Nation Wealthy? Maybe It’s the Working Stiff, by Tyler Cowen, Economic Scene, NY Times: Economists typically explain the wealth of a nation by pointing to good policies and the quality of a country’s institutions. But why do these differences exist in the first place?

In “A Farewell to Alms: A Brief Economic History of the World” ..., Gregory Clark, an economics professor at the University of California, Davis, identifies the quality of labor as the fundamental factor behind economic growth. Poor labor quality discourages capital from flowing into a country, which means that poverty persists. Good institutions never have a chance to develop.

Professor Clark’s pessimistic view is that most forms of policy advice or financial aid do not solve the problem of economic development. Unless the quality of labor rises, those would-be remedies are addressing symptoms, not causes. ...

A simple example from Professor Clark shows the importance of labor in economic development. As early as the 19th century, textile factories in the West and in India had essentially the same machinery, and it was not hard to transport the final product. Yet the difference in cultures could be seen on the factory floor. Although Indian labor costs were many times lower, Indian labor was far less efficient at many basic tasks. ... As a result, India failed to attract comparable capital investment. ...

An independent estimate by two economics professors at the University of Wisconsin, Madison, Rodolfo E. Manuelli and Ananth Seshadri, “Human Capital and the Wealth of Nations,” suggests that if variations in the quality of labor across nations are taken into account, other productivity factors need differ by only 27 percent to explain differences in per capita income. ...

The world’s poorest countries, which now have about one-fiftieth the per capita incomes of the wealthiest countries, have not kept pace. According to Professor Clark, the relative advantage of a highly disciplined and properly acculturated work force is greater for the more complex production processes of the modern world. ... The poorer countries remain stuck at the bottom as growing populations mean fewer resources for everyone else. Paradoxically, advances in sanitation and medical care, by saving lives, have driven down well-being for the average person. The population is rising in most of sub-Saharan Africa, but living standards have fallen below hunter-gatherer times and 40 percent below the average British living standard just before the Industrial Revolution. The upshot is this: The problem with foreign aid is not so much corruption but rather that the aid brings some real benefits and enables higher populations.

Professor Clark questions whether the poorest parts of the world will ever develop. Japan has climbed out of poverty, and now China is improving rapidly, but Dr. Clark views these successes as built upon hundreds of years of earlier cultural foundations. Formal education is no panacea, since well-functioning institutions are needed for it to be effective.

A more optimistic take might cite the power of cultural globalization. It is hard to reshape workplace norms in poor countries, but in the modern world religious and cultural ideas spread with a hitherto unprecedented speed. Perhaps television and missionaries will prove more important for economic development than privatization plans or exchange rate adjustments.

Professor Clark’s idea-rich book may just prove to be the next blockbuster in economics. He offers us a daring story of the economic foundations of good institutions and the climb out of recurring poverty. We may not have cracked the mystery of human progress, but “A Farewell to Alms” brings us closer than before.

The idea, which goes back to Malthus, is that attempts to help the poor through aid or other measures will only cause them to have more children thereby expanding aggregate misery. From above:

The problem with foreign aid is not so much corruption but rather that the aid brings some real benefits and enables higher populations.

Ultimately, this is an argument that blames poverty on cultural and moral failings of the poor. If, for example, the poor could just stop having kids, things would improve, but they can't. But this takes no account of the reasons why families in poverty might desire to have more children as a consequence of the poverty itself rather than from any intrinsic moral or cultural failing.

Tyler suggests "cultural globalization" as a potential solution for poor countries. Are "television and missionaries" instead of aid really the answer? Missionaries have been around for some time now, and I don't have that much faith in television, so maybe not. Given the claim that moral and cultural failings that are the source of the problem, we could try sending self-help books instead. "The Ten Habits of Highly Successful Third World Entrepreneurs" might do the trick.

Also, this

Paradoxically, advances in sanitation and medical care, by saving lives, have driven down well-being for the average person. ...

Sounds a lot like this quote from Malthus:

But above all, we should reprobate specific remedies for ravaging diseases; and those benevolent, but much mistaken men, who have thought they were doing a service to mankind by projecting schemes for the total extirpation of particular disorders.

By saying that saving lives reduces well-being, is Tyler suggesting, as Malthus did, that welfare would be higher in aggregate if the lives hadn't been saved, that well-being would be enhanced by more death? Would he go as far as Malthus?:

[W]e should facilitate, instead of foolishly and vainly endeavouring to impede, the operations of nature in producing this mortality...

Not so healthy makes you wealthy and wise? Just as Malthus called for an end to relief for the poor, the column calls for "A Farewell to Alms," i.e. an end to relief to poor countries.

I can't see how cutting aid to starving countries will help them. I can see the value in better institutions and methods to deliver the aid, some of which may need to be imposed externally, and I can see the value in various forms of aid and for creating the right economic incentives.

But I don't see the value in and cannot agree with the call to end "alms" on the argument that the recipients aren't morally or culturally fit to receive it. Maybe our reluctance to give aid and our ability to rationalize withholding it should lead us to wonder about our own moral and cultural fitness instead.

    Posted by on Thursday, November 2, 2006 at 03:02 AM in Economics | Permalink  TrackBack (0)  Comments (66)

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