Making people poor is not an easy task, and governments have to work hard to do it. Ronald Bailey explores this issue in more detail in his piece on “Economics of Ruin 101” that appears in The African Executive, a weekly magazine published by CIPE’s partner the Inter-Region Economic Network (IREN) in Kenya. I am too fascinated by the “Communism’s brilliance at sustaining poverty in Cuba and North Korea” as well the plight of some countries like Argentina.
Consider the case of Argentina. In the 1920s Argentina’s was one of the largest economies in the world, with an average income about the same as France’s. Rich as an Argentine was, a catch phrase often used in Paris cafés to describe an especially wealthy person. Since the 1940s Argentina has embarked on a series of policies—nationalization of industries, expansion of state services, and vast overseas borrowing—that has eroded its rank in the world.
Continuously poor economic performance and widespread poverty in some countries often puzzle me. In the past several decades we’ve acquired a tremendous amount of knowledge of how markets function and economies work, and while modern economics does not provide all the answers to development problems, its does have some very important fundamental insights. One of such insights is that nationalizing private property is not a way to go if you wish to increase employment, attract investment, and raise the standards of living. I am using Zimbabwe as an extreme example, but it is certainly not the only country where the government continues to implement bad policies, making people poor, depriving them of opportunities to make a living, and forcing them to be dependent on government hand-outs rather their own creativity and skills. Why do we continue to see governments that make people poor?
Brian Caplan provides part of the answer in his discussion on the idea trap. He draws the links and develops a circular relationship between ideas, policies, and economic growth:
The good news is that you can have favorable results across the board. Good ideas lead to good policy, good policy leads to good growth, and good growth reinforces good ideas. The bad news is that you can also get mired in the opposite outcome. A society can get stuck in an “idea trap,” where bad ideas lead to bad policy, bad policy leads to bad growth, and bad growth cements bad ideas.
I don’t believe that Caplan’s argument provides a full description of the problems we observe in developing countries, but it is interesting nonetheless. How do you get out of a trap? Its all about luck, says Caplan:
An economy in the idea trap usually stays in the idea trap. But once in a while, it wins a little lottery. Maybe the president of the country happens to read Bastiat during his last term, and decides to try a more free-market approach. This increases growth, which in turn improves the climate of public opinion. And maybe—just maybe—public opinion changes enough to elect another president who embraces his predecessor’s reforms.
My opinion here is that in many of the underperforming countries poor economic growth is more than the idea trap – its part of a design trap. If policymakers enact policies that reward short-term profiteering (corruption) and hamper long-term value creation (investment) they don’t do it just because they misinterpret the outcomes of the policy (although it is often the case), they do it because weak governance mechanisms (poor rules) allow them to do so. What sustains this behavior is also high uncertainty about the future, which means that politicians come into office and attempt to “steal” as much as they can today because they may not be able to do it tomorrow. In other words, distorted incentives lead to bad policies and bad development outcomes. In some ways, I think this echoes views of the Nobel Prize winning economist James Buchanan, who in his work on constitutional design often stresses the need for good governance mechanisms as a means of avoiding bad behavior by politicians:
…political concentration on temporary or short-term benefits, a concentration that is inherent in the structure of unconstrained majoritarian politics and also in other nonconstrained governmental decision-making procedures, to the relative neglect of long-term considerations, may produce results that are desired by no person or group of persons in the community—hence, the use of the word “trap” or “dilemma.”
Published Date: February 01, 2006