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Why Poor Countries Are Poor, from The Undercover Economist

Why Poor Countries Are Poor, from The Undercover Economist...

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Unformatted text preview: THE UNDERCOVER ECONOMIST Exposing My The Ric/7 Are Rich, The Poor/Ire Pome— Amz’ My You Cam Never Buy A Decent Used Car! Tim Harford IIIIIIIIIIIIIIII OXFORD UNIVERSITY PRESS Oxford University Press, lue., publishes works that further Oxford University’s objective of excellence in research, scholarship. and education. Oxford New York Auckland Cape’l‘owu Dar es Salaam Hong Kongr Karachi Kualalauupur Aladrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto “Vith offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland 'l‘hailand Turkey Ukraine Vietnam Copyright © 2006 by Tim Harford Published by Oxford University Press, Inc. 198 Madison Avenue, New York, New York, 10016 \w'wonpcom Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted. in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. without the prior permission of Oxford University Press. Library of Congress (Litaloging—in—Publication Data llarford, ’l‘ini, I973— Thc undercover economist / Tim Ha rford. p. cm. ISBN—13: 978—0—19—518977—3 lSBN—ll): 0—19—518977—9 1. Economic history, 1990— 2. Economics. 3, Consumer education. I. Title. HC59.15.H35 2005 330.9'0511¥dc22 2005010297 7 9 8 6 Printed in the United States ofAiuerica on acid—free paper 72) Debora/J Hmfom’, Fran film/es, and Stella Hmford . . . past, present, andfilture. family EIGHT Why Poor Countries Are Poor They call Douala “the Armpit of Africa.” The description is per— fect. Lodged neatly beneath the bulging shoulder of West Af— rica, the malaria-infested city of Douala is humid, unattractive, and it stinks. But if you live in Cameroon, Douala is where the action is. Cameroon is a very poor country indeed; the average Cameroonian is eight times poorer than the average citizen of the world and almost fifty times poorer than the typical Ameri— can. In late 2001 I went to Douala to find out why. I’m not sure who first applied the “armpit” label but I wouldn’t be surprised if it was Cameroon’s lVIinistry of Tourism. We all know that in most countries the ZVIinistry of Defense is in charge of attacking other countries and that the lVIinistry of Employment presides over the unemployment lines. Cameroon’s Ministry of Tourism is in that noble tradition. Its job is to discourage tourists from getting into the country. One colleague had warned me that the Cameroonian embassy in London would be so obstructive that I’d have to go to Paris to get my tourist Visa. In the end I had less trouble because I had a man on the inside: a friend in Cameroon paid the equivalent of a half-day’s wages to get me an official stamp of invitation. Armed with this official stamp, I paid another five days’ Cam— eroonian wages to get my visa, in a process that required only three trips to the embassy and some mild groveling. Funnily 'I III L NI)l-’R(I()\'I5R l"(',(),\'(),\lIS’I‘ enough, my companions and I did not meet many tourists in our three weeks in Cameroon. But I don’t want to give too much credit to the .Ministry of Tourism. Discouraging tourists is a real team effort. According to 'I‘ransparency International, Cameroon is one of the most corrupt countries in the world. In 1999, it was the most corrupt country surveyed. VVhen I visited in 2001 it was the fifth most corrupt, an improvement much celebrated by the government. A moment’s reflection should tell you that earning the title of “Most Corrupt Country in the W orld” takes some effort. Because T rans— parency International ranks countries based on international per— ceptions of corruption, a winning strategy is to concentrate on screwing bribes out of foreign businessmen—for instance, at the airport. But the Cameroon authorities have spread themselves too thin, because Cameroon is massively corrupt at every level and does not just target foreigners. Perhaps it’s this lack of focus that has caused them to slip from the top spot. That’s not to say that Douala international airport is a well- oiled machine. Far from it: it’s a humid, chaotic shambles where you have to fight your way through packed crowds despite the fact that the place deals with only three or four flights a day. Thankfully, on a torrid evening, we were guided out by my friend Andrew and his driver, Sam, who would have whisked us imme- diately to the cooler hillside town of Buea, if Douala were at all conducive to being whisked anywhere. It isn’t. Douala, a city of two million people, has no real roads. A typical Douala street is fifty yards wide, from shack t0 shack. This is not because the space is required for tree—lined boule- vards. It’s packed with street vendors, slouched beside a tray of peanuts or an impromptu plantain barbeque; and with little clus- ters of people, standing around a motorbike, or drinking beer or palm wine, or cooking on a small fire. Piles of rubble and vast holes mark unfinished construction or demolition work. Along the middle is a strip of potholes, which twenty years ago had been a road. Down that strip drive four streams of traffic, mostly taxis. The streams on the outside are usually made up of stationary— or nearly stationary—cabs picking up fares, while the taxis on \VIH I’UOR COUNTRIES ARI“. POOR the inside weave in and out ofthe potholes and other cars with all the unpredictability of balls in a lottery machine. There are no hard and fast rules. Sometimes a taxi on the shoulder, over- loaded with passengers, will lurch off and overtake the stuttering traffic on the inside; often the road is more potholed than the shoulder. The noise is incredible, because not only does every man, woman, and child in Douala seem to carry a boom box with the volume stuck on full, but the car horn has become a form of umversal communication. I worked out some of the most com— mon phrases: BligEP—“You don’t see me, but I have spare seats in my ca . BliFfiP—“I see you, but I do not have spare seats in my ca . BEEEP_“1 cannot take your fare because I’m . . different direction.” gomg in a BEEEP~“I can take your fare . . . get in.” BEEEP—“In a moment I will swerve around a pothole, and knock you over. lVIovel” Douala used to have buses, but the buses can no longer COpe with the decaying roads. So the taxis are all that is left. The cabs are beaten—up old Toyotas, carrying four in the back and three in the front, sprayed New York yellow, each with a unique slogan: for instance, “God is great,” “In God We Trust,” “Powered by God,” or “Toss lVIan.” ' Nobody who sees a Douala street scene can conclude that Cameroon is poor because of a lack of entrepreneurial spirit. But poor it is, and it’s getting poorer. Is there anything to be done to reverse the decline and help Cameroon grow richer instead? That’s no small question. As Nobel laureate Robert Lucas put it: The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else. TllF. UN DFRCOVII, R FCUN OMIST The missing jigsaw piece Economists used to think that economic wealth came from a com- bination of man—made resources (roads, factories, machines, tele— phone systems), human resources (hard work and education) and technological resources (technical know—how, or simply hi—tech machinery). Obviously, then, poor countries grew into rich coun— tries by investing money in physical resources and by improving human and technological resources with education and technol— ogy transfer programs. VVhat’s wrong with this picture? Nothing, as far as it goes. Education, factories, infrastructure, and technical know—how are indeed in abundance in rich countries and severely lacking in poor ones. But the picture is incomplete: a puzzle with the most important piece missing. The first clue that something is amiss with the traditional story is its implication that poor countries should have been catching up with rich ones for the past century or so, and the farther be— hind they are, the faster the catch—up should be. The poorer coun— tries should catch up quickly because in a country, which has very little in the way of infrastructure or education, new invest— ments have the biggest rewards. Rich countries don’t gain much from further investment: this is called “diminishing returns.” For instance, a few roads in a poor country can open up whole new areas for trade; in a rich country, a few more roads just relieve a little congestion. The first few telephones in a poor country are of huge importance; in a rich country, phones are used by schoolkids to send text messages in class. A little more education in a poor country can make all the difference; in a rich country, people with degrees often can’t find jobs. And ofcourse, it should be much easier for a poor country to copy technology than for a rich country to invent it: the citizens of Douala can enjoy taxis without waiting for a Cameroonian Gottlieb Daimler to rein— vent the internal combustion engine. When you look at places like Taiwan, South Korea, or China, which have been doubling their incomes every decade or quicker, \VIIY POOR COL‘NTRIFS ARE POOR the theory of catch—up seems reasonable. But many poor coun— tries are not growing faster than rich ones; in fact, they are grow- ing more slowly or, like Cameroon, getting poorer. In order to patch up the traditional story, economists combined their “di- minishing returns” model with one that also takes into account “increasing returns.” The new theory says that sometimes the more you have, the faster you grow: phones are useful if other people have phones; roads are useful if everyone has a car; tech— nology is easier to invent ifyou’ve done a lot ofinventing before. That story would explain why rich countries stay rich and poor countries fall farther behind, but it doesn’t explain how countries like China, Taiwan, and South Korea—not to mention Botswana, Chile, India, lVIauritius, and Singapore—are catching up. These dynamic countries, notJapan, the United States, or Switzerland have become the fastest~gr0wing economies on the planet. Fifty years ago, they were mired in poverty—lacking man—made, hu— man, technical, and sometimes natural resources—and have grown much richer since then. Along the way they have improved education, technology, and infrastructure. And why not? Since technology is so widely available and in— creasingly inexpensive, that is really what economists should ex- pect of every developing country. In a world of diminishing returns, the poorest countries gain the most from new technol— ogy, infrastructure, and education. South Korea, for example, acquired technology by encouraging foreign companies to invest or by paying licensing fees. It wasn’t free: in addition to the fees, the investing companies sent profits back home. But the gains to Korean workers and investors, in the form of economic growth, were fifty times greater than the fees and profits that left the country. As for education and infrastructure, since the returns seem to be so high, there should be no shortage of investors willing to fund infrastructure projects or lend money to students or indeed to governments who provide free education. Banks, domestic and foreign, should be lining up to lend peOple the money to get through school or to build a new road or a new power plant. In 'lilllf. INDIZRCOVI‘R I:I(,(),\I(),\IIS'I‘ turn, poor people, or poor countries, should be very happy to take out such loans, confident that investment returns are so high that the repawnents will not be difficult. Even if, for some rea— son, that didn’t happen, the World Bank, established after World War II with the express aim of providing loans to countries for reconstruction and development, lends billions of dollars a year to developing countries. Investment money is clearly not the issue—either the investments are not being made, or they are not delivering the returns the traditional models predict. Even the “increasing returns” model suggests that it should be possible for poor countries to grow richer as long as they can make a number of complementary investments all at once, such as factories, roads, electricity, and ports, to allow goods to be manufactured and exported. This “big push” theory of invest— ment was advanced by the economist Paul Rosenstein-Rodan, who spent some time at the World Bank in its early years. Whether through a big push or otherwise, many poor countries have managed to grow quickly over the past few decades, so why have so many others been left behind? A theory of government banditry As our car slowly bumped and lurched through the crowds, I tried to make sense of it all by asking Sam, the driver, about the country. “Sam, how long was it since the roads were last fixed?” “The roads, they have not been fixed for nineteen years.” (President Paul Biya came to power in November 1982 and had been in office for nineteen years by the time I visited Cameroon. Four years later, in 2005, he is still in power. He recently described his opponents as “political amateurs”—they are certainly out of practice.) “Don’t people complain about the roads?” “They complain, but nothing is done. The government tells us there is no money. But there is plenty of money coming WHY POOR COUNTRIES ARI"? POOR from .the World Bank and from France and Britain and America—but they put it in their pockets. They do not spend it on the roads.” “Are there elections in Cameroon?” “ . . . . . . Yes! There are elections. Presrdent Biya is always reelected With a 90—percent majority.” “Do 90 percent of people vote for President Biya?” “No, they do not. He is very unpopular. But still there is a 90-percent majority.” You do not have to spend a long time in Cameroon to realize how much people resent the government. Much of government activity appears to be designed expressly to steal money from the people of Cameroon. Iwas warned so starkly about government corruption, and the likelihood that officials at the airport would attempt to relieve me of my wad of francs, that I was more ner— vous about that than any risk of malaria or a gunpoint mugging in the back streets of Douala. iVIany peOple have an optimistic View of politicians and civil servants—that they are all serving the people and doing their best to look after the interests of the country. Other people are more cynical, suggesting that many politicians are incompetent and often trade off the public interest against their own chances of reelection. An economist called Mancur Olson suggested a working as— sumption that government motivations are darker still and pro— duced a remarkable and simple theory of why stable dictatorships should be worse for economic growth than democracies, but bet— ter than anarchies. Olson supposed that governments are simply bandits, people with the biggest guns who will turn up and take everything. That’s the starting point of his analysis—a starting point that you will have no trouble accepting if you spend five minutes looking around you in Cameroon. As Sam said, “There is plenty of money . . . but they out it in rhpir nnnlrtfi'n ” TH]? L Nl)liR(,0\'FR hCUNUMIS’l So imagine a dictator with a tenure of one week: effectively, a bandit with a roving army who sweeps in, takes whatever he wishes, and leaves again. Assuming he’s neither malevolent nor kindhearted, but purely self—interested, what incentive does he have to leave anything? The answer is none . . . unless he plans on coming back next year. But imagine that the roaming bandit likes the climate of a cer— tain spot and decides to settle down, building a palace and en— couraging his army to avail themselves of the locals. Desperately unfair though it is, the locals are probably better offnow that the dictator has decided to stay. A purely self—interested dictator will realize that he cannot destroy the economy and starve the people if he plans on sticking around, because then he would exhaust all the resources and have nothing to steal the following year. And so a dictator who lays claim to a land is a preferable leader than one who moves around constantly in search of new vic— tims to plunder. Although it may seem totally unrelated, biology offers a help— ful archetype for the political economist here: viruses and bacte— ria tend to become much less virulent over time, because the most extreme strains die out rapidly. When syphilis was first recorded in Europe in the late fifteenth century, it was described as being a tremendously aggressive disease, which quickly killed the vic— tim. This is not a terribly successful strategy—it’s much better to be a virus that allows its victims to live, at least for a little while, to spread the disease. 50 mutant strains of syphilis that killed people less quickly turned out to be much more successful and longer—lasting that the more virulent strains. The evolution of diseases certainly stuck in my mind when I thought of President Biya. I cannot confirm that he fits Olson’s description ofa self—interested dictator. But ifhe did, it wouldn’t be in his interests to take too much from the Cameroonian people, because otherwise there would be nothing to take next year. As long as he feels secure in his tenure, he will not wish to kill the golden goose. Like the disease whose very existence relies on the bodies it afflicts, Biya would have to keep the Cameroonian WHY POOR COUNTRIES ARE POOR economy functioning in order to keep stealing from it. This sug— gests that a leader who confidently expects to be in power for twenty years Will do more to cultivate his economy than one who expects to flee the country after twenty weeks. Twenty years of an elected dictator” IS probably better than twenty years of one coup after another. Long live President Biya? This is not tosay that Mancur Olson’s theory predicts that stable d1ctatorsh1ps should do good things for their countries simply that they should damage the economy less than unstable ones. But leaders like Biya who are confi elections, are still very detrimental to th of their countries. Staying with the sim Biya has absolute power over the distri come, he might decide to steal, say, form of “tax,” which goes into his pe would be bad news for his victims, of course, but also bad news for Cameroon’s long—term growth. Think of a small business— man considering an investment of $1,000 in a new power gen— erator for his workshop. The investment is expected to generate income of$100 a year. That’s 10 percent, a pretty good remrn But since Biya might take half of it, the return falls to a much lessattractive 5 percent. The businessman decides not to make the investment after all, so he misses out and so does Biya. That’s an extreme example ofthe phenomenon we dis ter 3: taxes cause inefficiency. and larger, but the fundamenta lar in nature. dent of always winning e people and economies plifying assumption that bution of Cameroon’s in— half of it every year in the rsonal bank account. That covered in chap— ' 1 Biya 5 taxes are more arbitrary 1 effect on the economy is simi— Of course, Biya might make his own investments, for instance prov1ding roads or bridges to encourage commerce. While the , would be expensive in the short—term, they would help the] economyto prosper leaving Biya with opportunities to steal later. But the flip side of the same problem applies: Biya would be steal— ing only half of the benefits, not nearly enough to encourage him to prov1de the infrastructure that Cameroon needs. When Biya came to power in 1982, he inherited mlnniame Marin .1.-. L . J 'l‘lll’ L'NIHCRLUVFR I“('()N()\ll.\"l‘ vet to fall apart completely. If he had inherited a country without any infrastructure, it would have been in his interests to build it up' to some extent. Because that infrastructure was already in place, Biya needed to calculate whether it was ...
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