The 'nature' of nations' poverty

[hammAR]

The 'nature' of nations' poverty
By Robert J. Samuelson
Washington Post
Published on: 11/06/07

Washington —- It's nature vs. nurture. One of the big debates of our times involves the causes of economic growth. Why is North America richer than South America? Why is Africa poor and Europe wealthy? Is it possible to eliminate global poverty? The World Bank estimates that 2.5 billion people still live on $2 a day or less.

On one side are economists who argue that societies can nurture economic growth by adopting sound policies. Not so, say other scholars such as Lawrence Harrison of Tufts University. Culture (aka "nature") predisposes some societies to rapid growth and others to poverty or meager growth.

Comes now Gregory Clark, an economist who interestingly takes the side of culture. In an important new book, "A Farewell to Alms: A Brief Economic History of the World," Clark suggests that much of the world's remaining poverty is semi-permanent. Modern technology and management are widely available, but many societies can't take advantage because their values and social organization are antagonistic. Prescribing economically sensible policies (open markets, secure property rights, sound money) can't overcome this bedrock resistance.

"There is no simple economic medicine that will guarantee growth, and even complicated economic surgery offers no clear prospect of relief for societies afflicted with poverty," he writes. Various forms of foreign assistance "may disappear into the pockets of Western consultants and the corrupt rulers of these societies." Because some societies encourage growth and some don't, the gap between the richest nations and the poorest is actually greater today (50-1) than in 1800 (4-1), Clark estimates.

All this disputes the notion that relentless globalization will inevitably defeat global poverty. To Clark, who teaches at the University of California at Davis, history's most important event was the Industrial Revolution —- more important than the emergence of monotheism, which produced Judaism, Christianity and Islam; or the invention of the printing press in 1452, which spread knowledge; or the American Revolution, which promoted democracy.

Before 1800, says Clark, most societies were stagnant. With some exceptions, people lived no better than their ancestors in the Stone Age. Economic growth was virtually nonexistent. Then England broke the pattern, as textile, iron and food production increased dramatically. Since 1800, English income per person has risen by a factor of 10. Much of Europe and the United States soon followed.

Almost everything that differentiates the modern era from the preceding millennia dates from this point: the virtual end of hunger in advanced societies; the expectation that living standards will constantly rise; the creation of the welfare state to redistribute income; the destructiveness of contemporary warfare; industry's environmental spoilage. But why did the Industrial Revolution start in England?

It's Clark's answer that convinces him of the supremacy of culture in explaining economic growth. Traditional theories have emphasized the importance of the Scientific Revolution and England's favorable climate: political stability, low taxes, open markets. Clark retorts that both China and Japan around 1800 were about as technically advanced as Europe, had stable societies, open markets and low taxes. But their industrial revolutions came only later.

What distinguished England, he says, was the widespread emergence of middle-class values of "patience, hard work, ingenuity, innovativeness, education" that favored economic growth. After examining birth and death records, he concludes that in England, unlike many other societies, the most successful men had more surviving children than the less fortunate. Slowly, the attributes of success that children learned from parents became part of the common culture. Biology drove economics. He rejects the well-known theory of German sociologist Max Weber (1864-1920) that Protestantism fostered these values.

Clark's theory is controversial and, at best, needs to be qualified. Scholars do not universally accept his explanation of the Industrial Revolution. More important, China's recent astonishing expansion (a fact that he barely mentions) demonstrates that economic policies and institutions matter. Bad policies and institutions can suppress growth in a willing population; better policies can release it. All poverty is not preordained. Still, Clark's broader point seems incontestable: Culture counts.

Capitalism in its many variants has been shown, he notes, to be a prodigious generator of wealth. But it will not spring forth magically from a few big industrial projects or cookie-cutter policies imposed by outside experts. It's culture that nourishes productive policies and behavior.

By and large, nations have either lifted themselves up or have stayed down. Societies dominated by tribal, religious, ideological or political values that disparage the qualities needed for broad-based growth will not get growth. Economic success requires a tolerance for change and inequality, some minimum level of trust —- an essential for much commerce —- and risk-taking. There are many plausible combinations of government and market power; but without the proper cultural catalysts, all face long odds.

> Robert J. Samuelson is a Washington Post columnist. His column appears occasionally.

[cmj685]

You mean that you can even fight a mammothly expensive war to "free" nations from tyranny and give them democracy, only to have the nation break apart into warring tribes which prefer civil war, murder and genocide to peace and prosperity? No, I can't believe that!
You mean that no matter how much aid you give third- and fourth-world nations, the money just keeps going into the secret bank accounts of its dictators because it is everyone's understanding that only the rulers are entitled to wealth? No, tell me it isn't true!
You mean that nations which all their histories have lived under leadership models antagonistic to equality and rights can't simply be converted by us saying that democracy is best? It can't be!
You mean that nations where delayed gratification, self-discipline and hard work are rejected won't become prosperous? That's not fair!

A peoples' inner soul determines what outward shape their culture will take. You can't change the culture until you change the inner soul. Not with soldiers or money.

[R.E.T.]

It is very standard around the world that the more corrupt the government the lower the standard of living for the average citizen.

[Ironbear]

It is very standard around the world that the more corrupt the government the lower the standard of living for the average citizen.

A World Bank study posits that the majority of a country's wealth is in the form of "Intangible Wealth," and that the most important piece of intangible wealth is... Rule of Law! I find the concept of Intangible Wealth interesting. It explains why educated, resource poor countries can succeed and countries with significant resources but corrupt government cannot. The last sentence, of the article, makes pretty much the same argument you do.

{The emphasis is mine}

http://www.reason.com/news/show/122854.html
The Secrets of Intangible Wealth
For once the World Bank says something smart about the real causes of prosperity
Ronald Bailey

A Mexican migrant to the U.S. is five times more productive than one who stays home. Why is that?

The answer is not the obvious one: This country has more machinery or tools or natural resources. Instead, according to some remarkable but largely ignored research—by the World Bank, of all places—it is because the average American has access to over $418,000 in intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000.

But what is intangible wealth, and how on earth is it measured? And what does it mean for the world's people—poor and rich? That's where the story gets even more interesting.

Two years ago the World Bank's environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world's wealth! If one simply adds up the current value of a country's natural resources and produced, or built, capital, there's no way that can account for that country's level of income.

The rest is the result of "intangible" factors—such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world's natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

What the World Bank economists have brilliantly done is quantify the intangible value of education and social institutions. According to their regression analyses, for example, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent.

The rule-of-law index was devised using several hundred individual variables measuring perceptions of governance, drawn from 25 separate data sources constructed by 18 different organizations. The latter include civil society groups (Freedom House), political and business risk-rating agencies (Economist Intelligence Unit) and think tanks (International Budget Project Open Budget Index).

Switzerland scores 99.5 out of 100 on the rule-of-law index and the U.S. hits 91.8. By contrast, Nigeria's score is a pitiful 5.8; Burundi's 4.3; and Ethiopia's 16.4. The members of the Organization for Economic Cooperation and Development—30 wealthy developed countries—have an average score of 90, while sub-Saharan Africa's is a dismal 28.

The natural wealth in rich countries like the U.S. is a tiny proportion of their overall wealth—typically 1 percent to 3 percent—yet they derive more value from what they have. Cropland, pastures and forests are more valuable in rich countries because they can be combined with other capital like machinery and strong property rights to produce more value. Machinery, buildings, roads and so forth account for 17% of the rich countries' total wealth.

Overall, the average per capita wealth in the rich Organization for Economic Cooperation Development (OECD) countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a whopping $354,000 in intangible capital. (Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000.)

By comparison, the World Bank study finds that total wealth for the low income countries averages $7,216 per person. That consists of $2,075 in natural capital, $1,150 in produced capital and $3,991 in intangible capital. The countries with the lowest per capita wealth are Ethiopia ($1,965), Nigeria ($2,748), and Burundi ($2,859).

In fact, some countries are so badly run, that they actually have negative intangible capital. Through rampant corruption and failing school systems, Nigeria and the Democratic Republic of the Congo are destroying their intangible capital and ensuring that their people will be poorer in the future.

In the U.S., according to the World Bank study, natural capital is $15,000 per person, produced capital is $80,000 and intangible capital is $418,000. And thus, considering common measure used to compare countries, its annual purchasing power parity GDP per capita is $43,800. By contrast, oil-rich Mexico's total natural capital per person is $8,500 ($6,000 due to oil), produced capital is $19,000 and intangible capita is $34,500—a total of $62,000 per person. Yet its GDP per capita is $10,700. When a Mexican, or for that matter, a South Asian or African, walks across our border, they gain immediate access to intangible capital worth $418,000 per person. Who wouldn't walk across the border in such circumstances?

The World Bank study bolsters the deep insights of the late development economist Peter Bauer. In his brilliant 1972 book Dissent on Development, Bauer wrote: "If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad. . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid."

The World Bank's pathbreaking "Where is the Wealth of Nations?" convincingly demonstrates that the "mainsprings of development" are the rule of law and a good school system. The big question that its researchers don't answer is: How can the people of the developing world rid themselves of the kleptocrats who loot their countries and keep them poor?