Colossus (34 page)

In short, the experiment with political independence, especially in Africa, has been a disaster for most poor countries. Life expectancy in Africa has been declining and now stands at just forty-seven years. This is despite aid, loans and programs of debt forgiveness. Only two sub-Saharan countries out of forty-six, Botswana and Mauritius, have bucked the trend of economic failure.
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Why have so many newly independent countries failed so badly to achieve economic growth? Why have only a tiny handful improved their relative position since the days of imperial rule? There are those who claim that the big divergence in
per capita
incomes between rich and poor countries since the 1960s has been a direct consequence of globalization. But this is a flawed argument. In theory, globalization, meaning simply the international integration of international markets for commodities, services
and capital and labor, should tend to maximize economic efficiency, yielding gains for all concerned. The real problem of the early twenty-first century is not globalization but its absence or inhibition. Indeed, the sad truth about globalization is that it is not truly global at all.

Part of the problem is that world trade is still far from being truly free. At least some of the blame for this can be laid at the door of the world’s richest countries, which continue to pay subsidies to their farmers equivalent to the entire gross domestic product of Africa.
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American producer support still amounts to around 20 percent of gross farm receipts; the figure for the European Union is more than 30 percent.
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To give a single example, the subsidies paid to American cotton producers reduce the value of cotton exports from Benin, Mali, Chad and Burkina Faso by a quarter of a billion dollars a year, equivalent to nearly 3 percent of their combined national income.
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But it is not just rich countries that are at fault. Many poor countries have hedged their economies around with a bewildering variety of restrictions that tend to hamper commerce. It has been convincingly shown that one of the principal reasons for widening international inequality in the 1970s and 1980s was in fact protectionism in less developed economies. A comparison of
per capita
GDP among developing countries found that the more “open” economies grew at an annual rate of 4.5 percent, while the “closed” countries managed barely 0.7 percent.
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These findings have been widely interpreted as making the case for present-day globalization—that is to say, demonstrating that countries that reduce impediments to trade are much more likely to achieve rapid growth than those that incline toward autarky.

A similar point can be made with respect to flows of labor. It is now well established that international migration (or the restriction of it) plays a crucial role in determining the extent of international inequality. The more free movement there is of labor, the more international income levels tend to converge. One reason that modern globalization is associated with high levels of inequality is that there are so many restrictions on the free movement of labor from less developed to developed societies.
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One recent estimate suggests that a liberalization of the global labor market would yield aggregate benefits twenty-five times larger than the expected benefits of further liberalization of flows of goods and capital.
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Above all, consider the evidence on international capital flows, another key component of globalization. Development economists have spent many decades trying to work out how to raise the level of investment in backward agrarian societies. The most obvious solution has been for them to import capital from where it is plentiful—namely, the developed world. According to the basic classical model of the world economy, this ought to happen of its own accord; capital should automatically flow from developed to less developed economies, where returns are likely to be higher. But as the Nobel laureate Robert Lucas pointed out in a seminal article published in 1990, this does not seem to happen in practice.
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Although some measures of international financial integration indicate that the 1990s saw exceptionally large cross-border capital flows, in reality most of today’s overseas investment goes on
within
the developed world. In 1994 only 36 percent of foreign direct investment and 10 percent of portfolio investment went to poor countries (defined as countries with incomes a third or less of the OECD average);
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by 2000 the poor countries’ share had fallen to around 12 percent and 2 percent, respectively.
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The very poorest countries nowadays receive almost no investment from abroad.
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Most cross-border capital flows are in fact
among
the United States, the European Union and Japan. Quite simply, investors in rich countries prefer to invest in other rich countries. The large gross capital flows of recent decades thus have little to do with widening international inequalities; the culprit is the absence of net capital flows from rich countries to poor.

According to one school of thought, geography, climate and the incidence of disease provide a sufficient explanation for the widening of global inequalities. Countries that are far from major sea routes, located in tropical zones where people are prey to diseases like malaria are more likely, if not simply doomed, to be poor.
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However, there is good reason to believe that the key to economic success lies in the adoption of legal, financial and political institutions conducive to investment and innovation—regardless of location, mean temperature and the prevalence of disease-bearing insects.
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Thus investors prefer to put their money in countries where rights of private property are effectively protected, though that should be regarded as a minimum requirement. In
The Wealth and Poverty of Nations
, David Landes summed up this view by postulating that “the ideal growth-and-development” government would:

1. secure rights of private property, the better to encourage saving and investment;
   
2. secure rights of personal liberty … against both the abuses of tyranny and … crime and corruption;
   
3. enforce rights of contract …
   
4. provide stable government … governed by publicly known rules …
   
5. provide responsive government …
   
6. provide honest government … [with] no rents to favor and position
   
7. provide moderate, efficient, ungreedy government … to hold taxes down [and] reduce the government’s claim on the social surplus….
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In a cross-country study of postwar economic growth, the economist Robert Barro concluded that there were six significant variables that correlated closely to a country’s economic performance. Among them were the enforcement of the rule of law and the avoidance of excessive government expenditures and inflation.
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It is widely accepted now that property rights are more likely to be respected in a country where the sovereign is constrained by a representative assembly.
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And constitutional regimes based on the rule of law are in turn more likely to experience the financial revolutions that encourage both foreign investment and domestic capital formation. A representative legislature, a transparent fiscal system, an independent monetary authority and a regular market for securities create the institutional environment within which all kinds of corporations, particularly limited liability companies, can flourish.
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Democracy in the sense of a universal suffrage-based legislature is not indispensable for growth; witness the recent economic success of China, Malaysia, Singapore, South Korea, Taiwan and Thailand. Democratization may even slow a country’s economic development if an overhasty widening of the franchise unleashes popular demands for economically detrimental fiscal and monetary policies. On the other hand, democratic societies are more likely to invest in public education and public health, which also tend to enhance a society’s economic performance.
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Though authoritarian regimes in Asia have fared well economically, most in the rest of the world have not. Exceptions
such as post-1973 Chile may have had the rule of law in the economic sphere, but they certainly lacked it in the sphere of human rights; under Augosto Pinochet’s dictatorship, property had more rights than people.

It is in this realm of economic, legal and political institutions that so many poor countries fall down. There have been numerous attempts in the past fifty years to address the problems of economic backwardness by means of loans and aid. Indeed, Western countries gave away around $1 trillion (in 1985 dollars) in unrequited transfers to poorer countries between 1950 and 1995. But these efforts have yielded pitiful results, in large measure because the recipient countries lacked the political, legal and financial institutions necessary for aid to be productive.
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Arbitrary and corrupt rulers bear a large share of the responsibility for this economic failure.
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Much of the money that has poured into poor countries has simply leaked back out—often to bank accounts in Switzerland—as corrupt rulers have stashed their ill-gotten gains abroad.
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One study of thirty sub-Saharan African countries calculated that total capital flight for the period 1970 to 1996 was in the region of $187 billion, which, when accrued interest is added, implies that Africa’s ruling elites had private overseas assets equivalent to 145 percent of the public debts their countries owed. The authors conclude that “roughly 80 cents on every dollar borrowed by African countries flowed back as capital flight in the same year.”
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There seems to be a close correlation between sub-Saharan economic failure and the generalized absence of the rule of law and political accountability; only five out of nearly fifty countries can be classified today as liberal democracies.
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Perhaps the best evidence for the institutional argument is that even a poorly situated country can prosper with the right institutions. Botswana has enjoyed the fastest rate of growth of
per capita
income in the world over the past thirty-five years, despite being little better endowed in terms of geography, climate and natural resources than other sub-Saharan African countries. According to a recent analysis, the main reason for Botswana’s success is simply that it managed to adopt good institutions:

The basic system of law and contract worked reasonably well. State and private predation have been quite limited. Despite the large revenues from diamonds, this has not induced domestic political instability or conflict for control of this resource. The government sustained the minimal public service structure that it inherited from the British and developed it into a meritocratic, relatively noncorrupt and efficient bureaucracy…. Moreover, the government invested heavily in infrastructure, education and health. Fiscal policy has been prudent in the extreme and the exchange rate has remained closely tied to fundamentals.
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In particular, Botswana has managed to develop functioning institutions of private property, “which protect the property rights of actual and potential investors, provide political stability, and ensure that the political elites are constrained by the political system and the participation of a broad cross-section of the society.”
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Helpfully, controlled experiments were carried out in both Europe and Asia after 1945 to see how practically identical populations—in terms of environment, situation and culture—would fare economically under quite different institutional regimes. The widely divergent experiences of the two Germanies and the two Koreas confirm that institutions do indeed play the decisive role in development. So too did the experiment of keeping one Chinese city, Hong Kong, under Britain’s liberal imperial system and one Chinese island, Taiwan, under a not dissimilar American-sponsored system, while the rest of the country endured the miseries of Mao’s Marxist tyranny.

Most poor countries stay poor because they lack the right institutions—not least the right institutions to encourage investment. Because they are not accountable to their subjects, autocratic regimes are more prone to corruption than those where the rule of law is well established. Corruption in turn inhibits economic development in a multitude of ways, diverting resources away from capital formation and the improvement of human capital through better health care and education. According to the African Union, the costs of corruption are equivalent to around one-quarter of African GDP.
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Moreover, poor countries are more likely to succumb to civil war than rich ones, making them poorer still. In the absence of nonviolent means of bringing dictators to account, political violence is of course more likely to occur. Having begun, however, civil war can quickly become a way of life. A truly vicious circle now exists in many poor countries, as rival warlords
fight for the control of mineral deposits, narcotics plantations and even flows of foreign aid, recruiting cohort after cohort of poor, illiterate youths with little prospect of employment other than warfare and even less expectation of long life.
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The problem is not confined to Africa; Colombia is in the grip of just such a downward spiral.