Naked Economics (40 page)

Natural resources matter less than you would think.
Israel, which has no oil to speak of, is a far richer country than nearly all of its Middle Eastern neighbors that have large petroleum reserves. Israeli GDP per capita is $28,300 compared to $20,500 for Saudi Arabia and $12,800 for Iran. Meanwhile, resource-poor countries like Japan and Switzerland have fared much better than resource-rich Russia.
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Or consider oil-rich Angola. The country takes in some $3.5 billion a year from its oil industry.
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What has happened to the people who might benefit from this treasure in the ground? Much of the oil money goes to fund a never-ending civil war that has ravaged the country. Angola has the world’s highest rate of citizens maimed by land mines (1 out of 133). One-third of Angola’s children die before age five; life expectancy is forty-two. Large swathes of the capital have no electricity, no running water, no sewers, and no garbage pickup.
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These are not anecdotal examples carefully picked to make a point. Economists believe that a rich endowment of natural resources may actually be a detriment to development. All else equal, it is great to discover the world’s largest zinc deposit.
But all else is not equal.
Commodity-rich countries are changed by the experience in ways that can do more harm than good. One study of economic performance in ninety-seven countries over two decades found that growth was higher in countries that were less endowed with natural resources. Of the top eighteen fastest-growing nations, only two were rich in things that can be taken out of the ground. Why?

Mineral riches change an economy. First, they divert resources away from other industries, such as manufacturing and trade, that can be more beneficial to long-term growth. For example, the Asian tigers were resource-poor; their path to prosperity began with labor-intensive exports and progressed into more technology-intensive exports. The countries grew steadily richer in the process. Second, resource rich economies become far more vulnerable to wild swings in the price of commodities. A country built on oil will have a rough stretch when the barrel price drops from $90 to $15. Meanwhile, demand for a nation’s currency rises as the rest of the world begins to buy its diamonds or bauxite or oil or natural gas. That will cause the currency to appreciate, which, we now know, makes the country’s other exports, such as manufactured goods, more expensive.

Economists started referring to the perverse effects of abundant natural resources as “Dutch disease” after observing the economic effects of an enormous North Sea natural gas discovery by the Netherlands in the 1950s. The spike in natural gas exports drove up the value of the Dutch guilder (as the rest of the world demanded more guilders in order to buy Dutch natural gas), making life more difficult for other exporters. The government also used the gas revenues to expand social spending, which raised employers’ social security contributions and therefore their production costs. The Dutch had long been a nation of traders, with exports making up more than 50 percent of GDP. By the 1970s, other export industries, the traditional lifeblood of the economy, had grown far less competitive. One business publication noted, “Gas so distended and distorted the workings of the economy that it became a mixed blessing for a trading nation.”
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Last, and perhaps most important, countries could use the revenues from natural resources to make themselves better off—but they don’t. Money that might be spent on public investments with huge returns—education, public health, sanitation, immunizations, infrastructure—is more often squandered. After the World Bank helped to build an oil pipeline that originates in Chad and runs through Cameroon to the ocean, Chad’s president, Idriss Déby, used the first $4.5 million installment of oil money to buy weapons for fighting rebels.
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Democracy.
Does making the trains run on time matter more to the economic growth of poor countries than niceties like freedom of expression and political representation? No; the opposite is true. Democracy is a check against the most egregious economic policies, such as outright expropriation of wealth and property. Amartya Sen, a professor of economics and philosophy at Harvard, was awarded the Nobel Prize in Economics in 1998 for several strands of work related to poverty and welfare, one of which is his study of famines. Mr. Sen’s major finding is striking: The world’s worst famines are not caused by crop failure; they are caused by faulty political systems that prevent the market from correcting itself. Relatively minor agricultural disturbances become catastrophes because imports are not allowed, or prices are not allowed to rise, or farmers are not allowed to grow alternative crops, or politics in some other way interferes with the market’s normal ability to correct itself. He writes, “[Famines] have never materialized in any country that is independent, that goes to elections regularly, that has opposition parties to voice criticisms and that permits newspapers to report freely and question the wisdom of government policies without extensive censorship.”
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China had the largest recorded famine in history; thirty million people died as the result of the failed Great Leap Forward in 1958–1961. India has not had a famine since independence in 1947.

Economist Robert Barro’s seminal study of economic growth in some one hundred countries over many decades found that basic democracy is associated with higher economic growth. More advanced democracies, however, suffer slightly lower rates of growth. Such a finding is consistent with our understanding of how interest groups can promote policies that are not always good for the economy as a whole.

War is bad.
Now there is a real shocker. Still, the data on the proportion of extremely poor countries involved in armed conflict are strikingly high. Paul Collier, head of the Oxford Center for the Study of African Economies and author of the book
The Bottom Billion,
points out that nearly three-quarters of the world’s billion poorest people are caught in a civil war or have recently been through one. It’s hard to run a business or get an education in the midst of a war. (Obviously the causality runs in both directions: War devastates countries; nations in a shambles are more likely to collapse into civil war.) Once again, natural resources can make things worse by financing weapons and giving the factions something to fight over. (Collier coined the sadly clever phrase “Diamonds are a guerilla’s best friend.”)
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The important point is that security is a prerequisite for most of the other things that have to happen for an economy to flourish. In 2004,
The Economist
published a story about the challenges of doing business in Somalia, a country that had been in the throes of civil war for thirteen years. The story noted, “There are two ways to run a business in Somalia. You can pay off the local warlord, not always the most trustworthy of chaps, and hope he will stop his militiamen from murdering your staff. Or you can tell him to get stuffed and hire your own militia.”
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Woman power.
Imagine two farmers, each with a thousand acres. One of them cultivates all of his land every year; the other leaves half of his land fallow, year after year. Who will grow more? It’s not a trick question. The guy who uses all of his land can grow more. What does this have to do with women? Bill Gates made the connection when speaking about technological progress to an audience segregated by sex in Saudi Arabia. A
New York Times Magazine
article on the role of women in economic development recounts the incident:

The Saudis shouldn’t have been surprised. The Arab Human Development Report came to the same basic conclusion (in a lot more pages) several years earlier. In the 2002 report, several prominent Arab scholars sought to explain the paltry rate of growth in the twenty-two countries that make up the Arab League. Over the previous two decades, real per capita income growth had been a paltry 0.5 percent a year, lower than any place in the world except sub-Saharan Africa. One of the three key problems identified by the authors was “women’s status.” (The other two were a lack of political freedoms and a dearth of human capital.)
The Economist
reported on the findings: “One in every two Arab women still can neither read nor write. Their participation in their countries’ political and economic life is the lowest in the world.”
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Investing in girls and women can be like planting the other half of that 1,000 acre field. There is another subtle (and mildly amusing) part of “women power.” Women in the developing world (and maybe elsewhere) do smarter things with their money. As women get wealthier, they spend more money on the family’s nutrition, medicine, and housing. When men get wealthier, they spend more money on alcohol and tobacco. Really. There was an elegant little experiment on this point in the Ivory Coast, where men and women traditionally grow different crops. In some years the men’s cash crops are bountiful; in other years the women’s cash crops do particularly well. MIT economist Esther Duflo found that when the men have a banner year, the household spends more on drinking and smoking; when the women rake in the cash, the household spends more on food.
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Development officials have learned that if they give cash to the female head of household, it will do more good.

Experts could tick off many other things that matter in the development process: savings and investment rates, fertility rates, ethnic strife, colonial history, cultural factors, etc. All of which raises a question: If we have a decent idea of what constitutes good policy, why is the path out of poverty so steep and treacherous? The answer lies in the difference between describing why Tiger Woods is a great golfer and actually playing like him. It is one thing to explain what makes rich countries work; it is quite another to develop a strategy for transforming the developing world. Consider some simple examples: Building effective government institutions is easier when the population is literate and educated, yet decent public education requires effective government institutions. Public health is crucial, but it’s hard to build health clinics when huge amounts of money are lost to corrupt officials. And so on.

There is a broad continuum of expert opinion on what, if anything, rich countries can do to improve life elsewhere in the world. Jeffrey Sachs anchors one end of that continuum. As you may have inferred from some of the research in this chapter, Sachs believes that impoverished nations are caught in poverty traps, and only capital from the developed world will rescue them. If we were to care and spend more in the developed world, we could jump-start the development process in poor countries—like getting a big boulder moving at the top of a hill. For example, Sachs argues that the world’s rich countries should undertake a comprehensive program to fight AIDS in Africa. He reckons that America’s share of such a program would cost about $10 a person—the price of a movie and popcorn.
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So far, U.S. contributions to such efforts have been far smaller. Indeed, America’s total foreign aid budget comes to one-tenth of 1 percent of GDP—a fraction of what we are capable of and a third of what the Europeans give. Mr. Sachs warned long before September 11 that we ought to invest in the developing world, “not only for humanitarian reasons, but also because even remote countries in turmoil become outposts of disorder for the rest of the world.”
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William Easterly, whose work has also been cited extensively here, anchors the other end of that continuum. He believes that the whole development aid process is broken. His views are best encapsulated by an old joke about the failed development strategies that have gone in and out of favor over the past half century:

Easterly should know. He spent decades working at the World Bank, where he was the guy trying to save the dying chickens. He argues in
The White Man’s Burden
and other works that traditional aid projects are inflexible and ineffective. The results are miserable, both at the micro level (aid agencies hand out mosquito nets that end up getting used as fishing nets or wedding veils) and at the macro level (we can’t show that what we’re doing is making countries better off). Instead, we focus on inputs—how generous are we?—which he compares to evaluating a Hollywood movie by the size of its budget.