Alan Beattie: False Economy

Alan Beattie: False Economy: A Surprising Economic History of the World (2009, Riverhead)

Preface

1. Making Choices: Why Did Argentina Succeed and the United States Stall? (p. 6):

The United States and Argentina took different paths. Yet that was not inevitable. One short century ago, the United States and Argentina were rivals, starting off in similar places. Both were riding the first wave of globalization at the turn of the twentieth century. Both were young dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the ten richest economies in the world. The millions of emigrant Italians and Irish fleeing poverty at home at the end of the nineteenth century were torn between two destinations: Buenos Aires or New York? The pampas or the prairie?

A hundred years later, there was no choice at all. One had gone on to become one of the most successful economies in history. The other was a broken husk, a place where inept, corrupt governments had, time and again, stolen the savings from their own people. And when the flesh of that fruit was sucked dry, they stole from foreign investors foolish enough to recall the promise of the distant past and forget the failure of the present.

(pp. 16-17):

Used wisely, the benefits of this export boom could have kept Argentina up in the pack, chasing the United States. But much of the money was captured by the owners of huge swaths of pasture, not their badly paid employees, and they generally either spent it on imported consumer goods or bought more land with it. Argentina needed to import more than just technology to benefit from the commodity boom. It needed to borrow the money from abroad as well. At this time it hardly seemed to matter. The British were on hand. They poured money and expertise into railroads that opened up the pampas just as they did in Australia, Canada, and the United States.

If Argentina looked like it was following the American route, it was doing so by rote, not by understanding -- importing modern technology, but not the spirit of innovation and change. Argentina borrowed money from the British, but America learned from their experience as well. Economies rarely get rich on agriculture alone. Britain had shown the world the next stage: industrialization. Crudely put, labor-saving inventions increased farm output, created surplus profits, and reduced the demand for labor. The savings were used for investment in industry. The displaced farmers went to the towns to work in the factories. [ . . . ]

America learned quickly. Though it benefited from the farm trade in which it also had a comparative advantage, and from British investment, it never became as dependent on either as its counterpart in the Southern Hemisphere. Its most significant import from Britain was neither money nor goods but ideas. Among other things it grasped that building a manufacturing industry would allow it to benefit from better technologies, whereas halfheartedly trying to squeeze a little more wheat out of the same fields would not.

American business owners wanted to invest their own money in industrializing their country. Although they borrowed a great deal from abroad, they also saved their money and invested it. Foreign capital accounted for no more than 10 to 15 percent of investment in America, compared with more than a third in Argentina. [ . . . ]

Argentina brought the same conservative and oligarchic tendencies to industrialization that it had to the agricultural sector, preferring cozy, safe monopolies protected by government fiat and regulation to the brutal riskiness of the marketplace. Nascent Argentine industry was, in essence, carried by the rest of the economy. It had little momentum of its own.

(p. 18):

If the South had won the Civil War and gone on to dominate the North, America might have looked a lot more like Argentina. The antebellum Southern states would have been very familiar to an Argentine: large estates with a few rich landowners and some badly paid laborers. (Thanks to the low productivity, which could not attract enough labor, it also had a lot of slaves.) They exported crops, principally cotton, to the rest of the world, but with little ability to expand and diversify. The cotton was shipped to Liverpool, to be made into textiles in Lancashire; the financial powers of the South did not make clothes themselves.

(pp. 21-22):

Standing profitably aloof from the mud of Flanders until late in the war [World War I], the United States did rather well out of it. Constructing a neat system of vendor finance, it lent Europeans the money to buy its armaments exports with which to kill one another. By the end of the war, American industry had decisively become the best in the world, and the country had shifted with striking speed from being a borrower of European capital to being a net creditor.

In the face of a long and inconclusive war, the European countries, for their part, sold off assets around the world -- particularly France, which had to write off investments in Russia after the 1917 Bolshevik Revolution. The United States picked up some of them cheaply, its decades of higher savings paying off. Argentina did not. It had been so dependent on foreign borrowing that a decline in international investment, and specifically a sell-off of assets by the British, posed a threat rather than an opportunity. In 1914, half the fixed capital in the country -- railways, factories, the telegraph, meatpacking plants -- was owned by foreigners. Suddenly the previously submerged question of exactly who was paying for Argentina's infrastructure surfaced. After five decades of narrowly focused foreign investment and export activity, Argentina was a glorified export zone, not a global financial power.

(pp. 23-25):

There is a remarkably simple observation about how political systems reacted to the Depression, reflecting what happens when an international financial system freezes up. Countries that owed money and were now cut off from more borrowing saw no virtue in continuing to depend on an international system that had let them down and moved toward economic isolationism and political authoritarianism. Countries to whom money was owed sustained smaller economic damage and remained wedded to democracy and the international economy. Even within continents and among neighboring countries this rule held. France, which still held significant assets abroad, remained a democracy even through repeated political crises in the 1930s; its indebted neighbor, Germany, despite the initial success of the interwar Weimar Republic, rapidly succumbed to fascism.

Argentina was no exception. By contrast with America, it suffered a deep crisis that ran throughout its narrow and exclusive political class. The electoral franchise had been extended in 1912 and a new party come to power in Argentina in 1916, but in practice it made little difference. With a pathological dislike of anything that smacked of socialism, Argentina appeared paralyzed by the slump. Exports of beef and wheat, products in which it had an advantage, were particularly hard hit. [ . . . ] Only now did the foolishness of betting on the indefinite willingness of foreign capital and foreign companies to produce and sell large quantities of a few exports become so evident. Perhaps without even realizing what it was doing, Argentina had staked its all on red, and not only did black keep coming up, but the roulette wheel itself was about to be removed from the table. [ . . . ]

When export demand plunged again as a result of the Second World War, the end was in sight for Argentina's experiment with liberal democracy. In 1940, one of the brighter government ministers of the time, Federico Pinedo, proposed a smaller-scale Argentine version of America's New Deal, including extending credit to manufacturers and cutting import tariffs on the raw materials and other basic inputs they needed. But it died in petty infighting among Argentina's uninspiring political elite.

Liberal democracy and liberal economics seemed to have failed, just as they had in the Weimar Republic. The result was similar in direction if not in extremity. The president was kicked out with the help of the army, and something close to political chaos replaced him, with the military having to suppress disgruntled workers protesting in the streets. Nationalism and self-sufficiency became attractive (at least emotionally) while hapless democratic governments passing power ineffectually from one to the next did not. The new authoritarians wanted the country to take its destiny back into its own hands.

So, along came Juan Perón (p. 26):

Perón projected an assertive, disciplined nationalism for the new Argentina. Though his power was confirmed in an election, faint overtones of fascism grew stronger once he was in office. He encouraged a cult of personality to grow around him, quite unlike the faceless elite that had run the country in the past. He also urged Nazi-style economic self-sufficiency and "corporatism" -- a strong government, organized labor (under strict limits set by the state), and industrial conglomerates jointly directing and managing growth.

(pp. 36-37):

The pretense that Argentina was still a First World country should have disintegrated in the 1970s. Swelling oil prices and economic dislocation battered even seaworthy governments, and Argentina was thrown repeatedly onto the rocks. Time and again throughout the 1970s and 1980s, Argentina promised a fresh start, and often a new currency, and each time failed. [ . . . ]

Argentina slid instead toward military dictatorship. Political stresses between civilian and military rulers -- and criticism from more traditional conservatives who thought that Peronism looked too much like socialism for comfort -- reached the stage where an army junta took over in an out-and-out coup in 1976, just as the White House was changing hands peacefully and constitutionally again. But after the disastrous misadventure of seizing the symbolic but economically worthless Falkland Islands from the British and humiliatingly being forced into retreat, the junta, too, collapsed. As the wits of Buenos Aires said: First the generals showed they could not manage an economy; they they showed they could not run a country; finally they showed they couldn't even win a war.

(pp. 38-40):

Although he came from a Peronist background, [Carlos] Menem edged away from economic isolationism, deciding there was one useful thing Argentina could import from America: credibility. He linked the Argentine peso irrevocably -- or so the intention was -- to the U.S. dollar. This meant adopting U.S. interest rates and fixing the amount of pesos circulating in the country to the amount of dollars held in the government's foreign-exchange reserves. Argentina could borrow like America only when it acted more like America.

This was a high-risk course. Argentina had gotten used to printing as much domestic currency as it saw fit. It now had to earn dollars with an economy that had for decades forgotten how to export. It also had to control public spending: a government persistently spending more than it earned would increase the need for dollars to fund it. So Argentina had to do two things for which it had little talent. In fact, it had to stop acting like Argentina.

For a while, this approach seemed to work. Inflation dropped and the economy stabilized. A wide-scale privatization program followed. The IMF, desperate to find a model globalizer to parade before the rest of the developing world, unwisely began touting Argentina as an exemplar. Menem was invited to address the IMF's 1998 annual meeting in Washington, the only head of government thus honored apart from Bill Clinton, its host. But once again Argentina proved a delinquent, better at borrowing than at earning. For much of the 1990s it was cheap to borrow in hard currencies like the dollar, as money poured into emerging-market countries. After 1998, though, when a succession of Asian countries and Russia were hit by a financial crisis, it became harder for any emerging-market country to roll over its debt. The drying up of capital markets after 1998 did not in any sense compare with the credit drought of the First World War, but the melancholy withdrawing roar of the tide was enough to leave some overloaded boats stranded. [ . . . ]

In desperation, Buenos Aires doubled down on its bets, borrowing billions of dollars from the IMF in the hope that the economy would pull out of its dive. But the investors on whom Argentina depended weren't convinced. In December 2001, the IMF pulled the plug, and Argentina was forced into the largest government bankruptcy in history.

Per capita income dropped by nearly a quarter in three years. The central government had no money to bail out the provinces, as Washington had rescued New York City in 1975. In response, some promptly started printing their own currency, a faint echo of the monetary chaos of pre-independence America. Five presidents came and went within a space of two weeks, and the country became a laughingstock. Rudi Dornbusch, a respected, if outspoken, economist at the Massachusetts Institute of Technology, in all seriousness suggested that an international committee of experts take over and run the finances of Argentina.

(pp. 41-42):

What sparked the U.S. financial crisis was the way that borrowing was being financed domestically. Decades of deregulation had produced ways of borrowing and new financial instruments so complex that not even the banks that produced and sold them really understood what they were handling. An overconfidence similar to that which was carried Buenos Aires into disaster after disaster then took hold. Critics were dismissed as doom-mongers. The short-term interests of banks and other financial institutions were allowed to prevail over the rest of the economy. A real estate bubble was allowed to inflate absurdly. Mortgages were extended to people with "subprime" credit histories -- the Argentinas of the U.S. housing market. Those loans begat yet more borrowing, as the mortgages were turned into new financial assets and sold to investors who allowed themselves to believe the were far safer than they were. Hubris met nemesis, and the bubble burst.

The crisis presented the United States with the biggest threat to its financial system and economy since the Great Depression, a challenge that will take years to right. If America fails to recognize the flaws and correct them, as it slowly and painfully learned to do on that earlier occasion, the trajectory of its future wealth and power will be lowered. "There is a great deal of ruin in a nation," particularly in one as resilient and flexible as the United States. But its rise was not preordained, and neither is its continued preeminence.

One thing that is striking from this series of quotes -- and I left out some significant ones about the fascist-symp America Firsters in the 1930s -- is that at virtually every step along the way, the far right in the U.S. has advocated the sorts of policies that Argentina actually implemented. That still is the case today.

2. Cities: Why Didn't Washington, D.C. Get the Vote? (p. 53):

But the main effect of policies that skew prices toward industry is not just -- or not mainly -- to redress imbalances in competitiveness between newly born homegrown manufacturers and the established beasts prowling the international economy. It also changes the prices between city and countryside. To get going, industry historically needed agriculture to provide the profit surplus to fund investment. But once it was up and running, it frequently found its interests at odds with those of farmers. A defining moment of British industrial history came when the Corn Laws, which had protected landowners and raised the price of food, were repealed. As we will see later, this helped not just working-class consumers, for whom food was a huge part of their weekly household budget, but also manufacturers, who could thus hold down wages without affecting the real incomes of their employees.

(pp. 53-54):

Kenneth Kaunda, Zambia's first president after independence was obtained from Britain in 1964, made things worse. He subscribed to the standard African view that Zambia needed to build an industrial base, and that taxes and import tariffs should be used to encourage it. In Zambia's case, as in those of so many other African countries, this meant that the usual risks from possessing natural resources were compounded with a bad policy decision. In effect, the countryside was taxed to pay for the towns. Food prices were strictly controlled and subsidies were handed out to industry. Because the copper miners and their industry were politically powerful, they, too, got favored treatment. The copper mines, having been nationalized from the private company Anglo-American, were given hefty subsidies and their miners well paid.

Give people a big incentive and they will generally react to it. As food prices were held down, hurting farmers selling their surplus produce, a mass decampment ensued from the Zambian countryside to the towns. Shantytowns (or, at the latest iteration of international-development jargon has it, "periurban settlements") are a familiar feature of African cities, where this policy error has been repeated many times.

(pp. 64-65):

Unstable governments have learned the appropriate lesson about paying particular attention to the mood of the capital, and the result is frequently a city bloated beyond all economic logic. Some examples are striking. We saw in the first chapter how Argentina's misguided policies and attitudes warped its development -- a landholding class that did not live on the land, an indulged hothouse of industrial companies that could not survive being planted out in the fields of international competition, and, like early Stuart England, an economy distorted by cronyism and a corrupt government that hedged it around with regulations, monopolies, and licenses. It is not entirely surprising that more than 35 percent of Argentines -- not 35 percent of the country's urban population, the average for unstable democracies, but 35 percent of the entire nation -- live in Buenos Aires.

The pattern is common across Latin America. Mexico City, a small capital of less than 3 million in 1950, whose dysfunctional expansion created one of the modern world's first vast slums, now has a population pushing 22 million. A well-practiced routine in the city's postwar growth involved a group of rural migrants turning up, squatting on vacant land on the outskirts, and choosing a leader who agitated against the ruling PRI party. The government would promptly give them title to the land and provide them with some basic infrastructure, whereupon they would fall into line behind the PRI. Another small chapter in the bloating of the congested, polluted capital would be complete. Given the influence of the central government, even the governors of Mexico's regions find it politically prudent to spend a lot of their time in Mexico City.

3. Trade: Why Does Egypt Import Half Its Staple Food? (p. 75):

For trade to be worthwhile, transport costs -- shipping charges, time, the risk of spoil or loss, and the uncertainty of price and demand -- have to be outweighed by the extra profit to be gained by taking goods from a place of plenty to one of scarcity. Unsurprisingly, the history of trade is one of the small, light, durable, and reliably expensive being the first to establish regular trade routes. The heavy, bulky, perishable, and cheap follow on slowly behind. As the cost of transport declines and its speed increases, so the range of tradable goods widens. But this process can take centuries.

(p. 86):

When significant international trade in bulk goods -- particularly with economies outside Europe -- did open up, it owed much to two things. One, Europe was bumping up against limits to production at home. Two, the dramatic "differentness" of the New World with which it began to trade generated huge efficiency gains. It was one thing to benefit from the relative dampness and empty land of the Baltics versus the Mediterranean. Exploiting the water and vast expanses of terrain of the New World was an advantage of an entirely different magnitude.

By the eighteenth century, population growth had put increasing pressure on the natural and human resources of the advanced countries of Western Europe. The same was true of the richer and more densely populated regions within Japan and China at the same time. At this stage, as the historian Greg Clark has shown in a remarkable study, higher population growth across the world had succeeded only in depressing living standards, as the greater number of people put pressure on the limited amount of productive land and other resources. On average, remarkably, it appears that people were no better off than they had been centuries, or millennia, before.

4. Natural Resources: Why Are Oil and Diamonds More Trouble Than They Are Worth? (p. 102):

The destructive power of gems is particularly perverse. In the final analysis, many of them are valuable only because they are valuable. There is nothing irreplaceable about diamonds. Cubic zirconia jewelry can be made that's indistinguishable from diamonds to all but an expert eye; gems for industrial use can be created artificially far more cheaply than by mining the natural stone. And the price of diamonds was kept high for decades when they were bought and kept in vaults by a global cartel. When the human race is put on trial, this will be one of the strangest and strongest charges against it: that it valued men's lives less than a gem whose price hung upon nothing but itself, and which was hauled up from the dark recesses of the earth, cut and polished into a jewel of white fire, and then returned, unseen, deep underground.

(p. 103):

It seems bizarre that discovering something that is greatly prized should impoverish its finder. But national economies, by and large, become rich because they can make and provide goods and services, not because they own a source of basic commodities. Nor does it take a gigantic degree of unearned wealth to imperil a country's desire to earn an income, even when that income would be greater than the inheritance. The layabout offspring of rich families often end up poorer than the industrious progeny of more modest parents.

(pp. 104-105):

So why are minerals not more useful? First of all, it is in the nature of oil, gas, and mining to benefit only a few workers. Most of the countries that have very rapidly reduced poverty did so with labor-intensive mass-production industries providing a large number of low-paying or medium-paying jobs. The most obvious cases are the East Asian "tiger economies," starting with Hong Kong, Taiwan, and South Korea, and moving on to Malaysia and now China and Vietnam, and the traditional first step on the ladder of development is to make clothes.

The only capital equipment required for a garment factory is a building and some sewing machines. Most of the rest is down to the skill, time, and effort of the workers. But in extractive industries the process tends to be very capital-intensive, employing many more machines than people Oil extraction and gas extraction generally require giant, high-technology drills, offshore platforms, and vast systems of pipelines operated by a relatively small number of employees.

(pp. 105-106):

Not only that, but the operation of a big commodity-exporting industry can actually prevent jobs from being created in the rest of the economy, a phenomenon known as the "Dutch disease." Though it sounds like a blight on elm trees, the malady in question affected the fate of the Netherlands in the mid-1970s. The soaring price of oil and gas made the country's natural gas deposits -- unusually easy to get at, being onshore -- into a valuable export. Money to buy the gas flooded into the country from all over, and as the dollars, francs, deutsche marks, and yen were changed into guilders, the Dutch national currency, the exchange rate rose. This made other Dutch exports uncompetitive. A thousand guilders' worth of tulips would have cost a London wholesaler £665 in January 1970, but by December 1979 she would have had to shell out £1,168.

Essentially, resources devoted to growing tulips, or whatever the rest of the Dutch economy produced, shifted toward gas extraction. And because the gas industry employed far fewer people than tulip growing, overall unemployment in the Netherlands actually rose. The effect of higher economic output on employment was more than offset by a shift from labor-intensive to capital-intensive industries. [ . . . ]

The pattern repeated itself with much direr effects in developing countries, as in Zambia. In country after country, the discovery of minerals (or a surge in their price) led to a collapse in agriculture, as farm products -- which compete on tough international markets -- became unprofitable, for the same reason natural gas hurt the rest of the Dutch economy. Farmers moved to the cities to look for manufacturing jobs. But since industry was also displaced or discouraged by a high exchange rate and inflated costs, those jobs did not exist.

(p. 107):

Appropriately enough, one of the few oil states that seems to have diversified successfully is one without much oil of its own. Dubai, one of the United Arab Emirates, has generally been much less dependent on oil than other Gulf states. Having long developed a role as a trading post, with a good deal of smuggling of gold and other contraband to India on the side, Dubai managed to expand this into a banking and finance hub. It has added tourism and even a cluster of biotechnology research from scratch. The emirate has dealt with the uncompetitiveness problem by bringing in cheap temporary workers from India, Pakistan, and Bangladesh, whose incomes and living conditions are way below those of the pampered Dubai citizens.

(pp. 111-112):

In economics terminology, the oil companies are earning "economic rent," which refers not to a slum landlord putting the frighteners on his tenants but a producer being paid much more than he actually needs to continue production because other companies are not allowed to compete away the profit. Controlling a resource for which there is a permanent ready market and little or no competition, and which requires nothing more than keeping the drills going, should produce one of the supreme benefits that all monopolists crave -- a quiet life. But when the government gets involved, to keep it that way requires spending enough on armies and presidential guards to prevent anyone else seizing control. This kind of competition does not benefit the country as a whole. The economy becomes a fight -- frequently an illegal and violent one -- over the control and benefits from a given resource, not an open competition to build a better mousetrap.

Extractive industries are notorious for their corruption. They hang out, as it were, with the wrong kind of company. There is a theory about currency, known as Gresham's Law, that states that the circulation of counterfeit money eventually results in the legitimate notes and coins being hoarded. If you know your gold sovereign is genuine, you will not want to use it as currency in a transaction where you might end up with fake coins in change. Thus the bad currency drives out the good. The same can be true with companies. It is not the best companies for the job that get oil contracts, necessarily, but those willing to bribe, sine they are so hard to challenge once they have the contract. And so, honest and decent companies find it difficult to compete. Oil companies -- including those of Western democracies -- have, over the decades, done some pretty repellent things to keep the stuff flowing, and, to the lasting shame of their governments, they have often had official backing.

(p. 115):

Another useful, and hence disastrous, aspect of minerals is that governments with them find it easier to borrow. Now, it is hard to seize the assets of a state that defaults on loan repayment (though some "vulture funds" suing Latin American and African nations for defaulted sovereign debt have had a go at it). So lenders to governments in effect usually have to extend credit without collateral. They are much keener to lend to those they know have minerals in the ground that can be sold for hard currency. In fact, in some cases, borrowing has been collateralized directly on the oil revenues themselves, meaning that the foreign lender can seize the proceeds to ensure repayment.

Many developing countries have built up spectacular debt burdens from borrowing recklessly from reckless lenders, but it is hard to top the oil producers. By the time Saddam Hussein's regime fell, in 2003, Iraq had accumulated, and defaulted on, debt somewhere between two and four times the size of the entire economy, estimated to equal around $6,000 for each Iraqi. Getting the government financially back on its feet involved the biggest debt relief in history. Similarly, while dozens of African countries had their debts to other governments and official institutions like the World Bank written off as part of an international scheme, oil-rich Nigeria was by far the largest. It needed a write-down of $18 billion to give the government financial room to move.

5. Religion: Why Don't Islamic Countries Get Rich? (pp. 140-141):

By the fourteenth century, Islam was becoming hardened, not opening up further for discussion as the Reformation would do for Christianity in Europe. In the sixteenth century, the Ottoman and Saffavid empires in particular regarded each other with intense rivalry. Each clung fiercely to its own tradition of Islam, the Ottomans being Sunni and the Saffavids Shia. Liberal, questioning forms of Islam, such as the Sufi sect, lost ground rapidly to the fixed certainties of existing Islamic law.

At the same time, Western Europe was edging its way, however slowly, toward restraining the absolute power of the monarch. Different groups -- first landowners, and then merchants and manufacturers -- were creating alternative bases of power. These conflicts often took place through religious debates within Christianity, especially after the Reformation.

Yet it was the failure of any one denomination to predominate, not the nature of Protestantism itself, that created a comparatively open European civilization with a variety of beliefs. The object of the Reformation was not to create political and religious freedom. It sought to maintain the unity of the Catholic Church while reforming it.

(p. 145):

And in otherwise fairly similar countries, the dominance of Islam (rather than another religion) rarely seems to predict why one government works and another does not. Malaysia, for example, despite retaining a strong Muslim identity, has been one of the most successful of the second wave of East Asian countries. In recent decades it has embraced industrialization and used the state to encourage private enterprise and attract foreign direct investment. Indeed, it has been more successful than, say, the Christian Philippines or predominantly Buddhist Thailand.

So the effect of religion on economic development probably owes more to a religion's political role than its theology. Perhaps, rather than its values becoming embedded in the psychology of its followers, religion influences growth mainly through its exploitation by the institutions of power. This should explain why Spain and Portugal underperformed in the first few decades after the Second World War. It wasn't that they were Catholic; it was that until the mid-1970s they were ruled by dictators who helped to keep them relatively poor and backward, and who aligned themselves closely with the Catholic Church to enhance further their own authority.

6. Politics of Development: Why Does Our Asparagus Come From Peru? (p. 158):

In the case of asparagus, the political imperative that first filled European and American supermarkets with the products of Peru is the desire to get kids off drugs, or at least publicly be seen to be trying. Peru, along with other Andean countries, got a special trade deal in 1991 to give its farmers something to do other than grow coca to make cocaine. In the United States, within the same landmass as the Andean cocaine industry, the Peruvian asparagus industry benefited not only from lower tariffs (import taxes) to the United States but also from tens of millions of dollars a year in financial help from the U.S. government. Asparagus is a high-value vegetable suitable for airfreighting, and Peru's farmers seized the opportunity. Exports to the United States and to the EU, which granted similar access to its markets, rocketed.

(p. 178):

The [Anti-Corn Law] League's propaganda used every line of rhetoric it possibly could to promote free trade. With those who would benefit directly, like the cotton manufacturers, it appealed to their self-interest. With those, such as tenant farmers and agricultural laborers, who might have been tempted to see the issue as one of the countryside versus the city, they argued that the effect of the Corn Las was merely to raise the price of land -- and thus their rent. And with those who might have lost out financially, it invoked mortality and Scripture. It was wrong on principle, the League said, to support an aristocratic monopoly. John Buckmaster, a free-trade agitator who toured country towns and villages, trying to recruit farm laborers and craftsmen tot he cause of repeal, employed a prototype "What would Jesus do?" campaign. "If the Corn Laws had been in evidence when Jesus Christ was on earth," he rather presumptuously declared, "he would have preached against them."

(p. 187):

When a loaf of bred costs, as it did in England in 1800, a quarter of a day's pay for a construction laborer, there will be riots when it doubles. When it takes, as it does in Britain today, about ten minutes' work at the minimum wage to buy one, fewer people will notice the cost to them of food subsidies. The EU Common Agricultural Policy is currently reckoned to cost an average family about a thousand euros a year -- not negligible, but not enough to get them marching down the Champs-Élysées. No political party has been swept to power in Europe in recent times by promising to get tough on agriculture.

(pp. 188-189):

Litigation at the WTO also illustrates the vehemence and persistence with which vested interests will defend the economic rent they have been extracting. One of the most bitter disputes in world trade over the past few years is, literally, bananas. The low-cost "dollar banana" countries of mainland Central America, such as Ecuador, Honduras, and Panama (favored, in WTO disputes, by the United States), were up against the relatively picturesque but more expensive smallholder bananas from former European colonies in the Caribbean. Appropriately enough, the banana industry in the Caribbean was encouraged by European colonial masters as a replacement for the declining sugar industry. I once visited a former sugar mill in St. Lucia that had ended operations in 1941, just as the severe restrictions on transatlantic trade as a result of the Second World War began to bite. It then became a banana plantation. It is now a museum.

The economic rent that the two sides were fighting over was considerable. The money to be made out of bananas was gigantic, and was reflected strongly in the lobbying power that each side could bring to bear. The remarkable story of United Fruit, the company that created and ran most of the banana plantations in Central America, has been oft told. It managed to get a government overthrown (Guatemala in 1954) for the insolence of proposing to nationalize some unused land owned by United Fruit. The power of the industry has entered the lexicon: such countries are, of course, "banana republics." For decades United Fruit operated almost as an alternative state within Central America, its ubiquitous power and presence earning it the local nickname El Pulpo ("the octopus").

7. Trade Routes and Supply Routes: Why Doesn't Africa Grow Cocaine? (p. 192):

The traditional trade theory of comparative advantage starts off from a baseline assumption of perfect markets, with all sides having complete information about what they are buying and selling, and where economies can rapidly adjust to producing new goods in response to new trading opportunities. In reality, the world doesn't work that way. In earlier centuries, it did so even less.

International trade requires several things: good communications; cheap and reliable transport; certainty about the stuff getting across borders to the customer, and about the price it will fetch when it does; and trust that the exporter will get paid. In earlier eras, when long-distance trade was a precarious and uncertain business, it often took the power of the state to ensure that all this happened, frequently by doing the trade itself or by heavily underwriting those who did.

(pp. 200-201):

One of the effects of better transport is to create a more perfect market across a bigger area rather than one splintered by inefficient logistics. So the effect of cheaper shipping is very clear in the fact that the prices of bulk commodities like wheat on either side of the Atlantic converged. In 1852-1856, a bushel of wheat cost $0.85 in gold dollars in the wheat-selling city of Chicago, while the listed price in the wheat-importing city of London averaged $1.85. By 1895-1899, when the railroads and steamships had enormously improved the supply chain, Chicago wheat cost $0.70 to London's $0.83. By 1910-1913, just before the First World War intervened to end the first era of globalization, wheat was actually very marginally cheaper in London than Chicago, $0.98 to $0.97. A single market had been created.

(pp. 214-215):

The real reason Ghana doesn't export more than a small amount of expensive, high-quality chocolate is that it is prohibitively expensive to do business there. It doesn't help that it's really hot in Ghana and that chocolate melts in the heat: maintaining a refrigerated, or at least cooled, unbroken chain from factory to truck to port to ship -- all the way to Rotterdam -- is expensive. The refrigeration excuse, though, doesn't hold for coffee in Uganda or Ethiopia. There, the absence of more than the basic earliest stage of the supply chain is attributable simply to the fact that the expertise, the finance, and the logistics aren't there to do it. [ . . . ]

When you look at the attempts to bring more parts of the supply chain into Africa, it is clear that these are the most important constraints on trade and production. Mali, in West Africa, for example, is a traditional cotton-growing area, with near-perfect climatic and soil conditions. But apart from "ginning" the cotton -- a basic mechanized process for removing seeds and stalks -- its attempts to go further up the value chain have struggled. I visited a cotton spinning factory in Mali a few years ago and was told that the plant was running below capacity and was some way from making a profit. Labor was cheap but largely unskilled, and production was hobbled by unreliable and expensive power and difficulties exporting through either neighboring Côte d'Ivoire, frequently rocked by civil conflict, or the overloaded port at Dakar, in Senegal.

Being landlocked is a particular problem, which helps to explain why so many African and Central Asian countries have difficulty achieving economic liftoff. Having to rely on neighboring countries to truck out goods involves inevitable border delays and makes exporters vulnerable to conflict or other disruptions in its transit routes. It is notable that the products that landlocked countries like Uganda and Zambia have begun successfully to export -- fresh flowers and high-value vegetables -- are often those carried by air. Each day's delay in shipping reduces a country's trade on average by 1 percent, and by a striking 6 percent for time-sensitive goods like perishable fruit and vegetables. One week longer to get your goods to market, and your country's ability to trade in high-value perishables is nearly halved.

(pp. 218-220):

The first great era of globalization, between 1880 and 1914, was also the age of what some historians have called High Imperialism -- the apotheosis of the dominance of European colonial powers over the rest of the world. During that time, countries that had been colonized saw roughly twice the trade of those that had not. It does not seem to have mattered much whether the imperial capital was London, Paris, Berlin, Madrid, or Washington, D.C. (The United States, born out of a rebellion against an imperial power, had evidently forgotten its principles sufficiently by the end of the nineteenth century to have acquired a number of colonies of its own, including the Philippines.) Using a common currency, belonging to a trading area with few blocks on imports, and possessing a common language all contributed to easier trade.

But not all colonies were treated the same way, even within the same empire. Africa was never occupied to the same extent that Asian colonies such as India or the Dutch East Indies were. The tropical climate and the endemic diseases were inhospitable to Europeans, the notable exception being right at the southern tip. South Africa, the one region of Mediterranean-style climate south of the Sahara, was heavily settled by the Dutch, and subsequently by the British.

Yellow fever, malaria, and other tropical diseases wiped out a large proportion of European soldiers and colonialists who tried to settle in sub-Saharan Africa. When, for example, the West African settlement of Siera Leone was established as a home for freed slaves at the end of the eighteenth century, there were high hopes that it might form a thriving British colony. The requisite trading operation was formed, known first as St. George's Bay Company, and then as the Siera Leone Company. It brought there a number of freed African slaves from North America who had fought on the British side in the American revolutionary war in return for their freedom.

But even compared to India, which came liberally endowed with its own supply of heat and mosquitoes and was not exactly a sanatorium for Europeans, conditions in tropical Africa were deadly. Nearly three-quarters o the European settlers died in the first year of the Sierra Leone Company, in 1792-1793. An expedition by the Scottish explorer Mungo Park in 1805, to chart the course of the Niger River in West Africa, lost a sizable majority of its number of disease before the party had even completed the first overland leg of the journey. The public back home was aware of the calamitous impact of Africa on health, and willingness to settle there was correspondingly lacking. One reason that Britain developed Australia as a penal colony was that West Africa was rejected as being too unhealthy, even for prisoners.

So instead of establishing large, permanent colonies, the dominant modus operandi of Europeans in Africa became to grab the resources and go. They had, of course, centuries of experience of treating Africa like this, thanks to the slave trade. The effect of the trade, part from the disastrous effect on societies of taking away huge numbers o f their young and productive members, was to encourage destructive and exploitative relationships between local kingdoms (who sought to capture enemies to sell as slaves to the traders) and to firmly entrench the European stereotype that Africa was a dark, primitive continent whose riches were theirs to plunder.

The functional names that were given tot he colonies reveal this all too clearly: the Gold Coast (not Ghana); the Ivory Coast (still Côte d'Ivoire). The imperial "scramble for Africa" in the late nineteenth century resulted in the continent's being divided between the competing European powers, rather than just trading gold, diamonds, and slaves on the coasts as hitherto. But the European approach was often the same. Much of Africa was simply commandeered as sources of basic commodities. As well as the traditional metals and minerals, Europe imported the likes of groundnut oil from Nigeria for use as a machine lubricant, and timber from Côte d'Ivoire. Perhaps the very worst case was the Belgian rule of the Congo, in Central Africa, in the late nineteenth century -- though it would be more accurate to say King Leopold II's ownership of the Congo, since it was a personal possession of the Belgian monarch rather than a colony of the state. Congolese were forced to produce rubber, and, if they failed to meet their official quota, were mutilated or murdered. Several million are thought to have died.

The Europeans were there only to extract, not to build.

8. Corruption: Why Did Indonesia Prosper Under a Crooked Ruler and Tanzania Stay Poor Under an Honest One? (p. 225):

Corruption arises because of what economists call "principal-agent" problems, where one person or a group of people (in this case, the electorate or general public) appoint another (here, civil servants or politicians) to carry out functions for them. If the principal cannot perfectly observe the actions of the agent, the agent has an incentive to act in his or her own interest instead. The public may want a government department to build a road as cheaply and efficiently as possible. But they may not notice the civil servant in charge awarding the contract to the expensive and inefficient company run by his brother-in-law, nor the kickback payment he gets in return.

Corruption is a form of self-interest that thrives on a lack of information and a lack of competitition. Information can extinguish corruption by bringing the self-interest of the agents into plain view, thus eliminating discretion over the way they act. Competitition can extinguish coruption by ensuring that those agents doing business expensively and ineffectively to benefit themselves are undercut by those doing it honestly and cheaply. The more monopolistic and discretionary are the powers that agents have over whatever service they are supposed to provide, and the less accountable they are, the more likely they are to succumb to corruption.

But rather than competition bringing down corruption, corruption is often allowed to prevent competition. Apart from the general moral and ethical arguments against bribery and dishonesty, and the way they undermine the rule of law, corruption is generally bad for efficiency. It leads to decisions made by bureaucrats on the basis of what is good for them, not good for the economy. It directly affects quality of life by stopping public spending, whether for health, education, or infrastructure, from going to where it is intended.

(p. 230):

If corruption is stable and predictable enough, it essentially simply becomes a tax. And as the performance of Western European social democracies shows, having substantial rates of taxation, as long as they are collected efficiently and predictably, is no block on getting rich.

(pp. 231-232):

[Julius] Nyerere meant well. He was, however, horrendously misguided. His philosophy involved extending ujamaa, loosely translated as "familyhood," into a principle of economic governance. In practice, as in many African countries, this meant trying to build up a self-sufficient economy behind high barriers to trade. It led to stagnation and inefficiency. Nyerere burdened Tanzania with price controls, foreign exchange rationing, and hundreds of underperforming state-owned companies, all of which only led to smuggling, corruption, and a large underground economy.

Most notoriously, he swept up millions of smallholding farmers into large collectivized villages in the name of efficiency. A wide network of bureaucrats was created to supply them with seeds, fertilizer, and other inputs, and to buy their output from them. Handing such power to officials who had little connection to the people they were supposed to be serving created a fertile environment for expoitation and corruption. However honest Nyerere himself was, his officials took wide advantage to extract bribes. Farmers reacted by retreating into semisubsistence production and selling any surplus produce illicitly in a parallel market in which they could get higher rewards than the state price. After agricultural production collapsed, Nyerere was forced to abandon collectivization. [ . . . ]

The morality of the man at the top did not extend down to the officials executing his policies. Unlike Suharto, Nyerere had no means of getting his subordinates to do what he wanted them to. Tanzania's companies and bureaucrats were shielded from competition and held only weakly accountable to the president. Nyere had a principal-agent problem on a nationwide scale.

(p. 234):

Still worse is the kind of indiscriminate large-scale theft practiced by dictators like Mobutu, whose mismanagement of Zaire made Nyere's Tanzania look like Sweden by comparison. Countries like Mobutu's Zaire look more like episodes of the old TV game show Supermarket Sweep, everything that is not nailed down being whisked away by the "winners." Any regime that looks unstable, as African and Latin American dictators have often tended to be, is liable to grab as much as possible before being kicked out of office. In the words of Mancur Olson, the theorist whose account of interest groups we encountered above, in the discussion of trade politics, it is better to have a "stationary bandit" with a longer time horizon, who looks forward to being able to continue extorting into the future, than a "roving bandit," who just wants to plunder and leave. The other advantage of a dictator who thinks he is going to be around for a while is that most of the proceeds of corruption are kept and spent in the country. African autocrats, always with an eye to the exit, all too often transfer their loot to bank accounts in London or Switzerland.

(p. 235):

Perhaps the best example of disorganized, decentralized corruption is India, where, as the Indian official quoted above suggested to me, there is a multiplicity of political parties and bureaucrats to placate. Like East Asian countries, it has a large and powerful bureaucracy, and in the first half-century after independence in 1947, the prevailing belief in state intervention gave them the ability to meddle extensively in the economy.

But as we will see at length in the next chapter, Indian politics became dominated by a series of fractious, squabbling political parties, which often rely on electoral blocs defined by religious, caste, or ethnic identity. The form of politics practiced, though it often goes under the name of socialism, is essentially a form of "clientelism," in which government spending and privileges (such as jobs) are directed toward key constituencies to buy their support. Enough people can be bought off this way that there is not enough popular demand for the entir esystem to be overthrown.

(pp. 241-244):

First, a short digression about coruption and empire, which will also explain how the British East India Company got ot run the subcontinent in the first place. Empirse are particularly susceptible to corruption. They have monopoly and principal-agent problems in spades. Colonial officials are state bureaucrats who often widld a great deal of power over the economies that they are administering, and are frequently a long way from the imperial capital in whose interests they are supposed to be acting. The British and Dutch East India Companies, as we have seen, took over from the Portuguese, who had constructed a trading empir eby carving out footholds in various corners of Asia. Reading contemporary accounts of jus how decadent and corrupt the Portuguese colonial officers had become, it is painfully clear why the British and the Dutch could take over in Asia.

Portugal had forged trading links with India at the end of the fifteenth century in the person of the explorer Vasco da GAma. By the mid-sixteenth century it had established Goa on the west coast as a fort and trading post. Goa was run by a viceroy who answered to the king in Lisbon, and most of the senior posts were run by fidalgos -- the sons of the Portuguese nobility, who also made up the officer class of the military. This proved to be an arrangement highly inconducive to honest and efficient government.

The trading posts of Portuguese Asia were intended to finance themselves through rents charged to locals and levies charged on traders passing through the ports, with only the hefty profits from the actual trading of spices taken by the crown back in Portugal. Thus the colonial outposts were largely left to their own devices. For a contemporary description of the results we have the highly disgruntled accounts of Diogo de Couto, who arrive din Goa in 1559 as a mid-ranking colonial official and later became the official royal chronicler of Portuguese India. Apparently an honest man himself, he became increasingly appalled by the outright theft and abuse he encountered. [ . . . ]

The British East India Company was also invovled in corruption and self-enrichment on a grand scale. But like Suharto's regime, it did so as part of a system that largely worked. And again like Suharto's regime, though the corruption attracted disapprobation, it was not until it failed on its own terms that the Company was entirely relieved of its power.

(p. 245):

One of the reasons, perhaps, that the East India Company did better than the Portuguese was its personnel policy. While the Portuguese, as we have seen, doled out colonial offices to foppish sons of a decadent aristocracy, the Company became a way for bright young men from more modest backgrounds to transcend their origins. Many were from Scotland, where opportunities for more conventional social advancement were limited by English dominance.

9. Path Dependence: Who Are Pandas So Useless? (pp. 262-264):

The Mongols themselves had little truck with anything but supreme centralized authority. To make it easier to rule, they gave Muscovy (a duchy centered on Moscow) taxation powers and authority over the other principalities in return for loyalty and cash payments to their empire.

Even after Mongol influence diminished, the centralizing tendency remained, as in the Islamic empires in the Middle East. Russia became an authoritarian monarchy and, as it absorbed surounding territories, an empire. Ivan III (Ivan the Great) established a powerful state by breaking the power of his brothers and other princes, and Ivan IV (the Terrible) confirmed the trend by being crowned Tsar of Russia in 1547. [ . . . ]

The period of Mongol conrol disconnected Russia from Western Europe at a time when the Renaissance fostered ideas of progress and intellectual diversity. Tsarism proved resilient to the ideas of political pluralism that grew after teh Protestant Reformation. The version of Christianity it pursued, Russian Orthodoxy, was largely unaffected by developments in religious and political thought in Western Europe.

While Europe was growing out of the feudal system in which lands were granted in return for services rendered to the monarch, and was establishing the idea that individuals could own property outright, Russia was going in the other direction. Ivan the Terrible claimed ultimate property rights over all land for himself. [ . . . ] Serfdom, in which peasants owed dirct allegiance to their master, was not abolished in Russia until 1861, centuries after it had died out in most of Western Europe. The only real recourse that people had against tsarist rule was violence and rebellion. It was once remarked that Russia's constitution was "absolutism moderated by assassination."

(p. 268):

That the economies were inefficient and distorted should have surprised no one. But the organizational incompetence of enterprises under communism went beyond even what many pessimists predicted. Many subtracted, rather than added, value by overusing subsidized materials like steel and cement to make goods that were worthless than the inputs that went into them. Even in East Germany, one of the better-off Communist countries, the privatization agency that rationalized and sold off its big companies after unification with West Germany expected to make a profit of DM500 billion; it ended up taking a loss of DM250 billion.

As it turns out, the economies that had the biggest distortions underwent the largest drop in output, as the most inefficient and unwanted parts of those economies imploded. The FSU countries were chief among these. After all, most Central European countries outside the Soviet Union had experienced some form of market economy before the Second World War, until the Soviets invaded and turned them into satellite states. Most of the Soviet Union's economy, by contrast, had been subject to a hugely distorting and militarily oriented crash industrialization program run by a dictatorship since 1917, and did not have much to build on even before that. It wasn't the speed of the policies that each undertook that proved the critical factor; it was the path that their economies had followed in the way up to starting them.

By "speed" here he means the question of whether post-communist economic reform should follow the "shock therapy" prescription or something more gradual.

(pp. 283-284):

The contrast between India and China in this regard helps explain why, although both are becoming modern economic giants, they are developing quite differently. With a longer tradition of meritocracy and education, and with nothing like the same social stratification, China has got its literacy rate above 90 percent. Its bureaucracy, though corrupt, appears to be relatively efficient in its corruption. The result is a broad-based surge of growth, much of which has taken place in the manufacturing sector. Initially focused in textiles and garments, China's extraordinary rise has more recently taken in electronics, computers, and cars. Such production, particularly in the labor-intensive assembly part of the process, has created mas job opportunities even for the relatively unskilled. Hundreds of millions have been lifted out of poverty. [ . . . ]

But India's lopsided development means the gains have been very unevenly distributed. An overwhelming number of India's poor work in its troubled agricultural sector. But to be able to participate in service industries, employees need good literacy, even more so than in manufacturing. Just like the reserved jobs in the caste system, many of the gains from Indian growth go to the already well-off.

10. Conclusion: Our Remedies Oft in Ourselves Do Lie (pp. 288-289):

The U.S. representatives came [to the Doha Round trade talks] with the weight of the agricultural lobby, and most particularly the cotton farmers. We have seen how American cotton interests manage to wield a political cudgel whose size is way out of proportion to their importance in the American economy. Cotton is one of the few crops that substantially fit the arguments made by development charities that Western agricultural subsidies substantially hurt the livelihoods of some of the poorest farmers in the world. Eleven million people grow cotton in West Africa, all of them in desperately poor countries with few other options.

The situation has a piercing historical irony. The cotton growers in Mali, Burkina Faso, Benin, and Chad are those whose ancestors were lucky enough to have escaped the slave traders that took captured Africans and shipped them across the Atlantic to work in the cotton fields of the Americas. But these days they are hurt by the hugely subsidized cotton grown by white farmers in the southern states of the United States and dumped on the world market.

(p. 298):

I don't know what the exact answers are, and anyone who claims she does should not be trusted. In general, the more that development economists have looked at the questions, the less precise or doctrinaire their advice becomes.

But certain basic ideas command wide acceptance. Don't cut yourself off from the rest of the world. Plan ahead for cities, but don't force them, and don't give them more money than they warrant. Try to let your economy do what it is best at, and support it where possible without trying to force it down a predetermined path. Don't obsess about religious belief, but watch for elites using it to further their own temporal ends. Stop overweening governments from ignoring property rights and the rule of law. Learn from the examples of those who managed to keep oil and diamond money from poisoning their economy and their politics. Call the bluff of small interest groups who say they have the welfare of the whole country at heart. For very poor nations, worry less about trade policy and more about customs procedures. Concentrate on rooting out the forms of bribery that will do the most damage, and worry less about corruption that is moderate and predictable. Be aware when your country is getting stuck on the wrong path and be alert for opportunities to shift it.

posted 2009-10-16