Wednesday, June 13, 2007

Why Rich Nations are Rich, Why Poor Nations are Poor

Eric Falkenstein on Mahalanobis says it best:
Jeffrey Sachs in this Vanity Fair puff piece. "We have enough on the planet to make sure, easily, that people aren't dying of their poverty. That's the basic truth."

Uh huh. But developing countries need more than peace and technocrats, they need the rule of law and property rights, which Sachs's donations really don't address. For example, there's this anecdote on one of Sachs's little experiments in Africa

Today, Ahmed Mohamed, the leader of Dertu's Millennium Villages Project, is trying to explain to the local people the benefits of hay. If you gather and dry the tall grass now, he tells them, you will have food for your animals the next time the drought comes.

It's hard for me to believe that no one has thought about cutting grass and saving it. I'm sure they are uneducated but that's a pretty basic idea for someone who lives off the land. Rather, it is probably very difficult to save because of the lack of law and order, including the ability to store things without theft, or have the right to then sell them in a future drought (at, presumably, higher than-average prices). Then again, if they really never have thought of cutting and saving grass, they really have zero chance of becoming a modern society on their own.
Falkenstein's observation is an excellent example of why capitalism is what will make the poorest countries in the world rich. Consider:

(1) What makes some countries wealthier than others? It's not natural resources: tiny Luxembourgh and middling Ireland share the top 10 with the U.S. and the United Arab Emirate. It's not labor supply: China and India have had more laborers than the U.S. for years, but are only recently starting to be competitive (and even then we're not holding our breath).

What makes some countries wealthier than others is capital. The ability to turn unskilled labor into a manufacturing powerhouse, to produce in hours what used to require days, to turn ideas into reality - that's what makes wealth.

(2) Capital requires savings. Robinson Crusoe, stranded on a desert island, must set aside time to make a net. This net will allow him to catch exponentially more fish, but he has to forego consumption for a brief time in order to make it. A net is a primitive example of capital - and you have to save up to get it.

In a modern society, you don't have to do the saving yourself. You can get a loan from a bank and borrow someone else's savings. But the same principle applies: someone had to forego consumption at some point in order to give you access to capital.

(3) Savings require security. There's no point to saving money, food or any resource if you don't think you're going to be around tomorrow. You can't forego consumption if you're struggling to eke out the minimum that you need to survive. "Live every day as if it were your last" is a romantic sentiment in first-world countries; it's a comic joke in poorer ones.

Further, savings requires some security on what you actually save. As Falkenstein comments, there's no point to stockpiling hay if some unscrupulous neighbor is just going to steal it. Who would dream of starting a farm in Zimbabwe? Or opening a factory in Venezuela? Why put money into something that you can almost count on seeing destroyed?

(4) ... sadly, at this point we run out of easy answers. Security can be imposed through brute force, with cops and armed soldiers, but this is often a pretext for more coercion and seizure (see: Mugabe; Chavez; etc). If everyone looks to his own security, the situation can easily deteriorate into civil war and rioting.

As Steven Landsburg has pointed out, the immense wealth and quality of life that the human race has experienced in the last 300 years is a fluke in the grand scheme of things. Perhaps feuding and barbarism are our species' lot in life.

Let's hope not, though.

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