The Undercover Economist Part 8

You’re reading novel The Undercover Economist Part 8 online at LightNovelFree.com. Please use the follow button to get notification about the latest chapter next time when you visit LightNovelFree.com. Use F11 button to read novel in full-screen(PC only). Drop by anytime you want to read free – fast – latest novel. It’s great if you could leave a comment, share your opinion about the new chapters, new novel with others on the internet. We’ll do our best to bring you the finest, latest novel everyday. Enjoy!

"Yes! There are elections. President 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. I was 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.

Many 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 put it in their pockets."

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 certain spot and decides to settle down, building a palace and encouraging his army to avail themselves of the locals. Desperately unfair though it is, the locals are probably better off now 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 victims 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. So 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 of a self-interested dictator. But if he 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 economy functioning in order to keep stealing from it. This suggests 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 to say that Mancur Olson's theory predicts that stable dictatorships should do good things for their countries, simply that they should damage the economy less than unstable ones. But leaders like Biya who are confident of always winning elections, are still very detrimental to the people and economies of their countries. Staying with the simplifying assumption that Biya has absolute power over the distribution of Cameroon's in-come, he might decide to steal, say, half of it every year in the form of "tax," which goes into his personal bank account. That 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 return. But since Biya might take half of it, the return falls to a much less attractive 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 of the phenomenon we discovered in chap-ter 3: taxes cause inefficiency. Biya's taxes are more arbitrary and larger, but the fundamental effect on the economy is simi-lar in nature.

Of course, Biya might make his own investments, for instance, providing roads or bridges to encourage commerce. While they would be expensive in the short-term, they would help the economy to 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 provide the infrastructure that Cameroon needs. When Biya came to power in 1982, he inherited colonial-era roads that had yet 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 worth maintaining, or whether he could simply live off the legacy of the past. In 1982 he probably thought that the roads would last into the 1990s, which was as long as he could reasonably expect to hold onto the reins of power. And so he decided to live off the capital of the past and never bothered to invest in any type of infrastructure for his people. As long as there was enough to get him through his rule, why bother spending money that could otherwise go right into his personal retirement fund?

Am I being unfair to President Biya? Perhaps a little. In the 2004 elections, which took place after my visit to Cameroon, Biya secured about 75 percent of the vote in an election, which many observers regarded as at least passably fair. According to Olson's theory, a leader who needs to secure broader support for his poli-cies will need to spend more government revenues on wealth-creating goods and services like roads and courts, and less on himself and his cronies. The fact that Biya has failed to do this but remains in office provokes two questions: first, is it possible that the elections were not as democratic as some observers have concluded? Second, could Biya provide wealth-creating goods and services even if he wanted?

Bandits, bandits everywhere Perhaps Biya is not in control as much as it first appears. If you want to drive from the town of Buea to Bamenda, farther north, the most popular way to make the trip is by bus; minibuses ply all long-distance routes in Cameroon. Designed to seat ten people in comfort, they will depart as soon as thirteen paying passengers have boarded. The relatively capacious seat beside the driver is worth fighting for. The vehicles are old boneshakers, but the system works pretty well.

It would work a lot better if not for the malign influence of government. Sometimes the problem is simply neglect. For ex-ample the quickest, though certainly not the most direct, route from Buea to Bamenda is through the French-speaking part of Cameroon, which has better roads. Simply drive east for two hours, north for two hours and then west for two hours. This is much faster than driving directly north on the appalling roads of the English-speaking region of Cameroon. Biya's government tends to ignore the interests of the politically impotent English-speaking regions. The English-speaking minority complains that when donors funded Cameroon's beltway, the government just sent them the receipts but didn't bother to build the English section.

The second obstacle, literally, is the multitude of police roadblocks. Bullying gendarmes, often drunk, stop every minibus and try their best to extract bribes from the passengers. They usually fail but from time to time they become determined. My friend Andrew was once hauled off a bus and harassed for several hours. The eventual pretext for the bribe was his lack of a yellow-fever certificate, which you need when you enter the country but not when riding a bus. The gendarme explained patiently that Cameroon had to be protected from disease. The price of two beers convinced him that an epidemic had been prevented, and Andrew caught the next bus, three hours later.

This is even less efficient than Mancur Olson's model pre-dicts. Olson himself would have admitted that his theory in its starkest form underestimates the damage that bad governments inflict on their people. President Biya needs to keep hundreds of thousands of armed police and army officers happy, as well as many civil servants and other supporters. In a "perfect" dictator-ship, he would simply impose the least-damaging taxes possible in whatever quantity was necessary and distribute the proceeds to his supporters. This approach to government turns out to be impracticable because it requires far more information about and control over the economy than a poor government can possibly muster. The substitute is government-tolerated corruption on a massive scale.

The corruption is not only unfair, it is also hugely wasteful. Gendarmes spend their time harassing travelers in return for rather modest returns. The costs are enormous. An entire police force is too busy extracting bribes to catch criminals. A four-hour trip takes five hours. Travelers will have to take costly steps to protect themselves: carrying less money, traveling less often or at busier times of day, bringing extra paperwork to help fend off attempts to extract bribes.

The blockades and crooked police officers comprise a particularly visible form of corruption, but there are metaphorical roadblocks throughout the Cameroonian economy. The World Bank threw light on them when it recently started collecting data about simple business regulations. The bank discovered that in order to set up a small business, an entrepreneur in Cameroon must spend on official fees nearly as much as the average Cameroonian makes in two years. (My expenditure on a tourist visa pales into insignificance in comparison.) To buy or sell property costs nearly a fifth of the property's value. To get the courts to enforce an unpaid invoice takes nearly two years, costs over a third of the invoice's value, and requires fifty-eight separate procedures. These ridiculous regulations are good news for the bureaucrats who enforce them. Every procedure is an opportunity to extract a bribe. The slower the standard processes, the greater is the temptation to pay "speed money." As a result, President Biya enjoys the support of enough officials to keep him firmly in power.

Yet that is not the only result. Inflexible labor regulations help make sure that only experienced professional men are given formal contracts; women and young people have to fend for themselves in the gray market. Red tape discourages new busi-nesses. Slow courts mean that entrepreneurs are forced to turn down attractive opportunities with new customers, because they know they cannot protect themselves if they are cheated. Poor countries have the worst examples of such regulations, and that is one of the major reasons they are poor. Governments in rich countries usually perform these basic bureaucratic tasks quickly and cheaply, whereas governments in poor countries draw out the processes in hopes of pocketing some extra cash themselves.

Institutions matter Government banditry, widespread waste, and oppressive regulations designed to make it easier to extract bribes: all are elements of that missing piece of the growth and development puzzle. Over the past ten years or so, economists working on development issues have converged on the mantra that "institutions matter." Of course, it is hard to describe what an "institution" really is; it is even harder to convert a bad institution into a good one.

But progress is being made. Mancur Olson's theory of gov-ernment banditry helps us understand, in a simplified form, how different kinds of government might affect the incentives of ev-eryone in the country, although it gives us little guidance as to how to make things better.

The World Bank's measurement of red tape gives us an excel-lent sense of one kind of institution: simple business regulations. The project also shows how simple publicity can improve some of those institutions. For example, after the World Bank adver-tised the fact that entrepreneurs in Ethiopia couldn't legally start a business without paying four years' salary to publish an official notice in government newspapers, the Ethiopian government relented and decided to scrap the regulation. New business reg-istrations jumped by almost 50 percent immediately.

Unfortunately, it is not always so easy to get corrupt govern-ments to change their ways. Although it is becoming clearer and clearer that dysfunctional institutions are a key explanation of pov-erty in developing countries, most institutions cannot be described with an elegant model like Mancur Olson's, nor even with careful data-gathering from the World Bank. Most unhappy institutions are unhappy in their own way.

The world's worst library Just such a uniquely backfiring institutional setup was respon-sible for the world's worst library. A few days after I arrived in Cameroon, I visited one of the country's most prestigious pri-vate schools, Cameroon's equivalent of Eton. The school is not far from the city of Bamenda. The school grounds were a mix of the familiar and the odd: low, cheaply built classrooms surround-ing playing fields reminded me very much of my old school in England, but a tree-lined avenue of crazy paving (Tim Burton meets Born Free), along which all the teachers live, did not.

We were being shown around the school by the librarian, a volunteer for the British-based voluntary organization VSO, which aims to place skilled volunteers where they are most needed in poor countries. The school boasted two separate library buildings, but the librarian was most unhappy-and I soon understood why.

At first glance the library was very impressive. With the exception of the principal's palatial house, it was the only two-story structure on campus. Its design was adventurous: a poor man's Sydney Opera house. The sloped roof, rather than running down from a ridge, soared up in a V from a central valley like the pages of an open book on a stand.

Despite its creative design, I am sure that my memories of the spectacular new library will last far longer than the building does. Standing in the blazing sunlight of the Cameroonian dry season, it's hard to see at first what the problem is with a roof that looks like a giant open book. But that would be to forget, as the archi-tect apparently did, that Cameroon also has a rainy season. When it rains in Cameroon, it rains for five solid months and so hard that even the most massive storm ditches quickly overflow. When that kind of rain meets not so much a guttered roof as a roof that is, essentially, a gutter that drains onto the flat-roofed entrance hall, then you know it's time to laminate the book collection.

The only reason the school's books still existed was because they'd never been near the new building; the librarian had refused repeated requests from the principal to transfer them from the old library. I was tempted to conclude that the principal was in an advanced stage of denial when I stepped inside the new library to see the devastation. It was in ruins. The floor con-tained the stains of countless puddles. The air carried the kind of musty smell I associate with a damp cave in Europe, not a mod-ern building on the equator. The plaster was peeling off the walls like a thousand-year-old Byzantine fresco. Yet the library is only four years old.

This is a shocking waste. Instead of building the library, the school could have bought forty thousand good books, or com-puters with Internet connections, or they could have funded scholarships for poor children. Any of these alternatives would have been incomparably better than an unusable new library. This leaves aside the fact that the school never needed a new library in the first place-the old library works perfectly well, could easily hold three times as many books as the school owns, and is waterproof.

The fact that the library was unnecessary goes some way to explaining its poor design. After all, nobody pays too much at-tention to the functionality of a building whose functions are redundant. But if the library was such a pointless endeavor, why was it built at all?

Napoleon is often credited with the statement, "Never ascribe to conspiracy that which is adequately explained by incompe-tence." That's the natural response: incompetence is an easy scape-goat. It's all too tempting for the visitor in Cameroon to shrug his shoulders and explain Cameroon's poverty by presuming that Cameroonians are idiots. The library looks like good evidence, but Cameroonians are no smarter or more foolish than the rest of us. Seemingly stupid mistakes are so ubiquitous in Cameroon that incompetence cannot be the adequate explanation we're look-ing for. There is something more systematic at work. Once again, we need to consider the incentives of the decision makers.

First, most of the senior education officials in northwest Cameroon come from the small town of Bafut. Known as the "Bafut Mafia," these officials control considerable funds for the education system, which they hand out on the basis of personal connections rather than necessity. Not surprisingly, the principal of this prestigious private school was a senior member of the "Bafut Mafia." Wanting to convert her school into a university, the principal needed to build a library building of university size and quality. It was irrelevant to the principal that the current library was more than sufficient, and that the taxpayers' money could have been better spent in other ways or by other schools.

Second, nobody was monitoring the principal or her spend-ing. Members of staff in the education system are not paid or promoted on merit but absolutely on the decisions of the princi-pal. This is a prestigious school with good conditions for teach-ers, so staff would be particularly eager to keep their jobs, which meant keeping in good favor with the principal. In fact, the only person with the ability to defy the principal was the librarian, who was accountable only to the VSO head office in London. She turned up after the library was built but was at least in time to prevent the book collection from being transferred and de-stroyed. The principal was either so stupid that she did not real-ize that water ruins books, or she did not care very much about the books and simply wanted to demonstrate that the library had some books in it. The second explanation seems more likely.

With the money at her fingertips and nobody to object to the wastefulness of building a second library, the principal had full control over the project. She appointed a former pupil of the school to design the library, probably to demonstrate the quality of education provided by the school; she did prove a point, al-though perhaps not the one she intended. But no matter how incompetent the architect, the flaws in the design would have been spotted if anybody concerned had a strong interest in mak-ing sure that the library functioned as a library. But that was never the prime concern of anybody with any authority. The people in power simply cared about putting up something that could qualify the school as a university.

Consider the situation: money that was provided because of social networks rather than need; a project designed for prestige rather than to be used; a lack of monitoring and accountability; and an architect appointed for show by somebody with little in-terest in the quality of the work. The outcome is hardly surpris-ing: a project that should never have been built was built, and built badly.

The lesson of the story might appear to be that self-interested and ambitious people in power are often the cause of wasteful-ness in developing countries. The truth is a little sadder than that. Self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. Cameroon's tragedy is that there is nothing to hold self-interest in check.

The plot thickens-incentives and development in Nepal The Cameroonian education system gives administrators such perverse incentives that educating children is the last thing anyone profits from doing, and hence, the last thing education officials focus on.

Other development projects involve more subtle webs of unusual incentives. One example was uncovered by the economist Elinor Ostrom, who looked in detail at the intricate irrigation designs in Nepal. In addition to older traditional systems of dams and canals, Nepal also has some modern concrete dams and canals, designed by expert engineers and funded by big international donor organizations. Which works best, and why?

When I heard about this study I thought I could guess the punch line. The obvious conclusion is that the best of modern design, materials, and engineering, with massive funding, should produce a better irrigation system than a bunch of farmers using mud and sticks, right? Wrong.

We know better now. We know that large dam projects have often been poorly suited to local conditions, and that in fact "small is beautiful"-local methods and traditional knowledge handed down over long years from generation to generation turn out to work far better. Right? Wrong again.

It turns out that the real story in Nepal is much more interest-ing than either of these oversimplified assumptions. Elinor Ostrom identified an apparent paradox. The first part of the para-dox is that modern dams, which are professionally designed and built, seem to reduce the effectiveness of irrigation systems. But the second part of the paradox is that when donors pay to have irrigation channels built, or reinforced with modern materials, they strengthen the irrigation system, reliably delivering more water to more people.

Why can donors provide effective irrigation channels, but not effective dams? Clearly there is something more subtle going on than the tired debate between modern technical expertise and traditional wisdom. The truth is clearer to someone who tries to work out the motivations of all concerned.

Start with the obvious insight that any project is most likely to be successful if the people who benefit from its success are the same people who make it possible. That immediately explains why the existing methods of irrigation might have an advantage, not because they are full of traditional wisdom (they may be, of course) but because they're designed, built, and maintained by the farmers who use them. The modern dams and canals, by con-trast, are designed by engineers who will not starve if the dams fail, commissioned by civil servants whose jobs do not rest on their success, and paid for by donor agency officials who are more likely to be judged by procedure than results. Immediately we start to see why better materials and vastly superior funding do not necessarily lead to success.

Looking deeper still, irrigation systems have to be maintained to be of any use. But who will maintain them? Neither donor agencies nor civil servants have as much interest in maintenance as they should. Nepalese civil servants are promoted mostly by seniority and partly by being associated with "prestige" construction projects. Maintenance is a dead-end job, regardless of whether it pays dividends for the farmers. What civil servant would want to oversee an unending menial task, far from Kathmandu where his wife shops and his children go to school? On top of that, bribes are always a potential source of income for civil servants, and a large construction contract offers much greater chances of accepting backhanders than does maintenance work.

Like the civil service, donor agencies work under constraints that tend to favor large construction projects. All donor agencies need expensive projects because if they fail to spend cash, they are unlikely to raise more. In addition many bilateral aid organi-zations, like USAID, are tied to country-specific types of aid: USAID typically has to use equipment purchased in the United States, which tends to be heavy, high-tech machinery. Since bulldozers are of more use building a dam than maintaining it, the outcome is yet again in favor of big construction projects. Even if the donor agency has no bias toward large projects, they still have to rely on the information they receive from local staff and consultants-who will often have the same incentives as the civil service.

All of this starts to explain why those who commission construction projects do not have as much interest in building good, cost-effective systems as do the farmers. But it does not explain Ostrom's finding that donor-funded dams actually make things worse, and neither does it explain why donor-funded irrigation canals seem to work well despite the fact that the people who commission them don't much care whether they do or not. To understand why, we need to think about the farmers themselves.

Nobody except the farmers is likely to be very interested in maintaining an irrigation system once it is built. This may not be a problem. Before any major modern irrigation systems were built, the farmers had to maintain the traditional systems. If they could maintain the traditional systems, can't they maintain the modern ones, too?

Maintenance requires two big jobs: keeping the dam in one piece, and clearing the canals of obstructions. This is a lot of work. Farmers won't bother unless they see the benefits, and this potentially leads to a problem. The problem is that while all farm-ers need the dam to be kept in one piece, farmers near the dam don't much care what happens to the drainage canals farther down the hill. So why should they bother to help with the drainage canals? Fortunately, most farming communities in Nepal have worked out a system of cooperation; while the details differ, the general principle is that the farmers downstream help maintain the dam in exchange for assistance on the canals. So far, so good.

If a big donor pays for new, concrete canals to be installed, then things will improve-the new canals are better, carry more water, and require less maintenance. But if a big donor pays for a new dam, everything falls apart. This is not because the dam it-self does: quite the reverse. Because the concrete dam needs much less maintenance than the traditional one, the cooperative agree-ment, which maintained the entire irrigation system, no longer works. The traditional bargain breaks down. Upstream farmers no longer help clear the canals in exchange for help on the dam from downstream farmers. The upstream farmers don't need help, so the downstream farmers no longer have anything to offer on their side of the deal.

Many modern irrigation systems in Nepal end in failure because although the technical properties of the system may have been understood and improved, the human properties of the system have not been addressed at all.

This Nepalese example is yet another demonstration that if a society cannot provide the right kind of incentives to behave pro-ductively, no amount of technical infrastructure can save it from poverty. Development projects are often commissioned by people with no great interest in success but a great interest in bribes and career advancement. If the effectiveness of the project is a minor consideration, then it can hardly be a surprise if the project does not deliver on the publicly announced aims, even if it has deliv-ered on the real aims of enriching bureaucrats. And even if the project was one that would still have been commissioned if genu-ine development really was the goal, bribes and other distortions are likely to spoil things.

Is there a chance for development?

Development specialists often focus on helping poor countries be-come richer by improving primary education and infrastructure like roads and telephones, and that's surely sensible. Unfortunately, it's only a small part of the problem. Economists who have pulled apart the statistics, or studied unusual data such as the earnings of Cameroonians in Cameroon and the earnings of Cameroonians who emigrate to the United States, have found that education, infrastructure, and factories don't begin to explain the gap be-tween rich and poor. Because of its lousy education system, Cameroon is perhaps twice as poor as it could be. Because of its terrible infrastructure, it's roughly twice as poor again. So we would expect Cameroon to be four times poorer than the United States, but it is fifty times poorer. More importantly, why can't the Cameroonian people seem to do anything about it? Couldn't Cameroonian communities improve their schools? Wouldn't the benefits easily outweigh the costs? Couldn't Cameroonian busi-nessmen build factories, license technology, seek foreign partners . . . and make a fortune?

Evidently not. Mancur Olson showed that kleptocracy at the top stunts the growth of poor countries. Having a thief for presi-dent doesn't necessarily spell doom; the president might prefer to boost the economy and then take a slice of a bigger pie. But in general, looting will be widespread either because the dictator is not confident of his tenure, or because he needs to allow others to steal in order to keep their support.

Then farther down the pyramid of wealth, development is thwarted because the rules and laws of the society do not encour-age projects or businesses, which would be to the common good. Entrepreneurs don't establish official businesses (too difficult) and so don't pay taxes; officials demand ridiculous projects for their prestige or personal enrichment; schoolchildren don't bother to acquire irrelevant qualifications.

It is not news to hear that corruption and perverse incentives matter. But perhaps it is news to find out that the problem of twisted rules and institutions explains not just a little bit of the gap between Cameroon and rich countries but almost all of the gap. Countries like Cameroon fall far below their potential even considering their poor infrastructure, low investment, and mini-mal education. But worse than that, the web of corruption foils every effort to improve the infrastructure, attract investment, and improve educational standards.

Cameroon's education system would be better if people had an incentive to get a good education; if a meritocracy were in place, and good grades and real skills-rather than personal connections-earned jobs. Cameroon would have better tech-nology and more working factories if the investment climate was right, either for foreign or domestic investors, and if the profits weren't eaten up in bribes and red tape.

The small amount of education and technology and infrastructure that Cameroon does have could be much better used if the society was organized to reward good, productive ideas. But it is not.

We still don't have a good word to describe what is missing in Cameroon, indeed, in poor countries across the world. But we are starting to understand what it is. Some people call it "social capital," or maybe "trust." Others call it "the rule of law," or "institutions." But these are just labels. The problem is that Cameroon, like other poor countries, is a topsy-turvy world in which it's in most people's interest to take action that directly or indirectly damages everyone else. The incentives to create wealth in any way at all are turned on their heads just as surely at the roof of the school library.

The rot starts with government but it afflicts the entire society. There's no point investing in a business because the government will not protect you against thieves. (So, you might as well become a thief.) There's no point in paying your phone bill be-cause nobody can successfully take you to court (so there's no point being a phone company). There's no point getting an edu-cation because jobs are not handed out on merit (and in any case, you can't borrow money for school fees because the bank cannot collect on the loan, and the government doesn't provide good schools). There's no point setting up an import business because the customs officers will be the ones to benefit (and so there is little trade, and so the customs office is underfunded and looks even harder for bribes).

Now we are starting to understand just how important this is, we can begin to put it right. But it's in the nature of the problem to resist solutions, so this is a slow and difficult process. We don't usually find it acceptable to set up democracies by force, and they usually don't last when we do. We don't like development aid to be lost in red tape, but making sure the money is well spent is very time consuming.

These problems cannot be fixed overnight. But there are some simple reforms, which-with a modicum of political will-would move poor countries like Cameroon in the right direction. One simple reform is to cut red tape, allowing small businesses to be legally established, which makes it easier for their entrepreneurs to expand and borrow money. The legal reforms necessary are often trivial; and while they still rely on sensible and benevolent government, all it takes is a single minister with his head and his heart in the right place, rather than hoping for an entire civil service to permanently reform.

Another option, and a vital one, is to enlist the world economy for help. Most poor countries are also very small economies; the entire economy of sub-Saharan Africa is about the size of Belgium's. A small African state like Chad has an economy smaller than that of a Washington suburb like Bethesda and a banking sector smaller than the Federal Credit union set up for World Bank staff. Tiny countries like Chad and Cameroon cannot possibly be self sufficient: they need access to cheap fuel, raw materials, loans from international banks, and manufacturing equipment. But Cameroonians are trapped behind high barriers to trade-among the highest tariffs in the world at more than 60 percent. Such barriers generate revenue for the government and allow it to protect the businesses of cronies or hand out profit-able import licenses. A small country cannot survive without the world economy. With it, small countries can thrive. In the next chapter we shall visit one, and find out how.

NINE

Beer, Fries, and Globalization

Once upon a time there was a prosperous trading city called Bruges, nestling on the Zwin estuary in what is now Belgium. Bruges grew up around a castle built in the late ninth century by the founder of the Duchy of Flanders. A century later Bruges was Flanders's capital, and it began to grow wealthy as trade expanded across Northern Europe. Bruges was a center for the manufacturing of cloth, and ships sailed up the Zwin estuary to buy the fabric, bringing with them English cheese, wool, and minerals, Spanish wine, Russian furs, Danish pork, and silks and spices from the East, traded through the mighty Italian cities of Venice and Genoa. The queen of France herself vis-ited Bruges in 1301 and is reported to have commented, "I thought I alone was queen, but I see that I have six hundred rivals here."

Bruges's wealth continued to flow in for 250 years, despite conquest by the French and the Dukes of Burgundy. Regardless of who was in charge, Bruges continued to prosper: it was the center of gravity for the Hanseatic League of trading cities, its arts scene was flourishing, it was developing new industries such as cutting diamonds from India, and its population was twice that of London. Fine goods from across the world were traded in the tavern owned by the merchant family Van der Beurs-some would have you believe that this is why, to this day, stock exchanges are called "bourses." Tall masts and broad sails adorned the Zwin estuary.

But in the fifteenth century something strange began to hap-pen. The Zwin began to silt up. The great ships could no longer reach the docks of Bruges. The Hanseatic League moved up the coast to Antwerp. Bruges quickly and literally became a backwa-ter. So lifeless did it become that it was nicknamed "Bruges-La-Morte." Today it is a quaint museum piece. Perfectly preserved, it hums busily only because of the tourists eager to visit a time capsule: a beautiful and prosperous trading city of the fifteenth century whose wealth and development dried up with the river.

Meanwhile, Antwerp, still connected to the world via the Scheldt River, took over from Bruges as the greatest economic power in Western Europe. The wealth of that time is clearly visible today: Antwerp's great cathedral dominates the skyline, and more striking still to the first-time visitor are the great guild houses of the Grote Markt, which soar five, six, seven stories above the cobblestones, and appear even higher yet because of their spindly architecture of spires and pencil-thin windows. Al-though the appearance of air, rail, and motorized road transpor-tation have diminished its geographical advantages, Antwerp remains an economic powerhouse. It is still the diamond capital of the world, and the mighty port on the Scheldt operates around the clock.

The contrasting stories of Bruges and Antwerp suggest a simple message: if you would like to be rich, then it is a good idea to forge close links with the rest of the world. If you prefer nothing to change, then it is best to have a harbor that silts up. If you would like to be rich and have nothing change, then you will be disappointed.

There are few pleasures I enjoy more than sitting in Antwerp, wolfing down hot fries smothered in mayonnaise and cooling my mouth with a heady, fizzy beer. Of course, being an economist, I am inclined to contemplate the world trading system as I do. Fries from Frituur No. 1 simply cannot be matched anywhere in the world. But the glass of Duvel beer to wash them down is obtained without difficulty in Washington DC. It may cost twice as much but it tastes every bit as good and is certainly just as potent. So when I am in Antwerp, sitting just off the Grote Markt and enjoying a Duvel, I cannot help but feel a little sad that this thrill has been cheapened by its ready availability in my home city. Of course, when in Washington DC-and sober-I can only praise the noble and enterprising merchants who have brought exotic beers such as Duvel, Chimay, and Maredsous 10 to my doorstep, and look forward to when they get around to importing Westmalle Trippel as well.

The most visible manifestation of the world's increasing eco-nomic interdependence is the availability of foreign products in familiar settings. It is both a blessing and a curse: a blessing be-cause it becomes possible to enjoy a wider variety of treats with-out straying far from the place you were born. It is a curse because when you do travel you may find that foreign places look a little too familiar. From McDonalds in Moscow to Starbucks in Shang-hai, are we not all becoming the same? The whole world seems to have become one seething mass of internationalization. The commerce with foreign lands that was once the preserve of Flo-rence, Venice, and Bruges now appears ubiquitous.

If you spend too much time in airports, hotel chains, and capi-tal cities it is easy to feel this way; but we live in a big and varied world. You may be able to visit Starbucks in Shanghai, but Star-bucks is not the whole of Shanghai and Shanghai is not the whole of China. The world has a long way to go before it truly is "global-ized," if by that odd word we mean "the same everywhere." No doubt we are on the way. Reading biologist Edward O. Wilson, I discover that in a few dozen generations all human beings will be "the same," in the sense that whether in London or Shanghai or Moscow or Lagos, the same racial mix would be found. Viewed differently, the variety of human beings would be unprecedented: as this process of racial mixing accelerates, "many more combi-nations of skin color, facial features, talents, and other traits in-fluenced by genes are now arising than ever existed before."

Personally I find both predictions encouraging, although others might find them alarming.

The same is true for cultures, technology, economic systems, and the range of products available. On the one hand they will increasingly resemble each other across the world; on the other, in any one place they will display tremendous diversity and excit-ing new mixes, as anyone who enjoys Ethiopian stir-fry Tibbs in Washington DC, Japanese sashimi in Antwerp, or Bangladeshi curries in London will attest. Like racial intermixing, economic and cultural integration will take a long time. Furthermore, new ideas and new technologies are always arriving. Globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration. Those who fear a terrible glo-bal sameness must remember that new ideas, welcome or unwel-come, will always arise faster than they can be mixed in.

But perhaps by commenting on culture and race I am stepping well outside the boundaries of my expertise. I shall therefore return to economics, where my "comparative advantage" lies.

Comparative advantage is the foundation of the way economists think about trade. Let's picture it this way: who is the better eco-nomics writer, me, or E. O. Wilson? Professor Wilson is "one of the twentieth century's greatest thinkers" and "considered to be one of the world's greatest living scientists" according to the jacket of his book Consilience. His chapter on social science was written after interviewing some of the world's greatest economists; the result was an insightful explanation, which introduced me to plenty of things I didn't know about economics. The truth is that E. O. Wilson is probably a better economist than I am.

So I know when I'm beaten. Why write a book about economics when Professor Wilson could write a better one? The answer is comparative advantage. Because of comparative advantage, Professor Wilson hasn't written a book about economics, and I'm fairly confident he never will.

We owe the idea of comparative advantage to the star of chap-ter one, David Ricardo. If Wilson and I shared David Ricardo as an agent, he might advise us as follows: "Tim, if you write biol-ogy books you are unlikely to get more than one sale per year of writing-the one your wife buys. But your economics is pass-able, and we predict sales of twenty-five thousand books for ev-ery year you spend writing. Professor Wilson, your economics books will probably sell five hundred thousand copies for every year you spend writing: but why not stick to the biology books and sell ten million?"

E. O. Wilson is twenty times as good an economics writer as I am, but, advised by David Ricardo, he sticks to writing biology, a subject at which he is ten million times more accomplished than I. On a personal level, Ricardo's advice is plain common sense: E. O. Wilson should choose his vocation not with reference to what he does better than I do, but with reference to what he does best. Meanwhile, I would be well advised to make a living as an economics writer, not because I am the best economics writer in the world but because economics writing is what I do best.

Ricardo's advice becomes more controversial when it comes to trading with the Chinese. "Chinese wages are so much lower than ours," cry the protectionists. "They can make televisions and toys and clothes and all kinds of things much more cheaply than we can. We should protect our domestic producers with a tax on Chinese products-or perhaps an outright ban." And so we do. The United States defends the interests of American com-panies (but not the American people) by blocking Chinese im-ports through "antidumping" laws. Dumping, according to these laws, is selling products cheaply. But the truth is that this is not dumping, but competition. Who benefits when, for example, Chinese furniture is blocked because it is "unfairly" cheap? Ameri-can furniture manufacturers, perhaps. Certainly not the average American who wants to buy furniture. Many Europeans, mean-while, cannot afford large, high-definition television screens be-cause the European Union is trying desperately to prevent their arrival from China. Steel, which China now produces more than the United States and Japan combined, was recently subject to illegal tariffs imposed by the United States. Agriculture is even more highly protected.

Isn't this necessary to stem what would otherwise be a flood of cheap foreign products under which our domestic industry would drown? It is not. The United States ought to produce goods and services not by asking what it does more cheaply than China but by focusing on what the United States does best.

Ricardo's insight is that trade barriers-whether they are subsi-dies to our farmers, regulations on textiles, or taxes on televisions- make both us and the Chinese worse off. It does not matter if the Chinese really are better than we are at making everything: they should stick to producing whatever their economy is most effi-cient at turning out. Meanwhile, we, despite (apparently) being worse at everything, should stick to producing what we are least bad at producing. The argument is the same as one the spirit of David Ricardo gave to me and E. O. Wilson: I may be worse at everything, but I should still produce the economics books while E. O. Wilson sticks to biology. Yet barriers to trade are also barriers to this common-sense arrangement.

An example may help to persuade the unconvinced. Let's say an American worker could produce a machine drill in half an hour, or a flat-screen TV in an hour. A Chinese worker could produce a machine drill in twenty minutes or a flat-screen TV in ten. The Chinese worker is evidently the E. O. Wilson of manufacturing. (Incidentally, the productivity numbers in this example are not only fictional but fantastical. Sadly for the Chinese, workers in developing countries are far less productive than workers in de-veloped countries. They are able to compete only because they are paid much less; in fact, the relationship between lower wages and lower productivity is an extremely close one.) If China and America do not trade, it takes ninety minutes work to produce a flat-screen TV and a drill to mount it on the wall in the United States. In China the TV and drill can be made in half an hour. If the protectionists get their way, then that is how things will stay.

If there are no trade barriers, we can trade with each other and both be better off. The Chinese worker makes two televisions, which take her twenty minutes, and the American makes two drills, which take him an hour. Trade one drill for one television and both are better off than when they started, having saved a third of their time. Of course, being more efficient the Chinese worker can quit work earlier, or earn more; but that does not mean the American worker has lost because of trade. Quite the reverse.

It's true that if the Chinese worker put in a bit of overtime, she could do her own job and also do the same work as the American would have achieved all week. But why would she be so extraordinarily generous? The Chinese do not export televi-sions to the United States out of the goodness of their hearts; they do so because we send something in exchange-even if, as with our hypothetical machine drills, the Chinese are better at making them, too.

Contrary to popular belief, it is simply not possible for trade to destroy all of our jobs and for us to import everything from abroad and export nothing. If we did, we would have nothing to buy the imports with. For there to be trade at all, somebody in America must be making something to sell to the outside world.

This should be obvious, but somehow it isn't. Think of Ameri-can workers in, say, Pittsburgh, producing those machine drills. The workers are paid in dollars. The factory is rented in dollars. The heat and light and telephone bills all come asking for pay-ment in dollars. But the drills are exported to China and sold locally or used to make goods in the Chinese currency, the renminbi. The costs of production are in dollars, the revenues are in renminbi. Somewhere renminbi have to be "turned into" dollars to pay the Pittsburgh workers' salaries, but of course there is no process of magically turning dollars into renminbi. The only thing that will work is for an importer in the United States to provide dollars in exchange for renminbi, which he will use to buy imports. Exports pay for imports.

Economics, surprisingly to some, is about the interconnected-ness of things: goods and money do not just appear and disap-pear. Nobody outside the United States would accept dollars in payment if the United States was not exporting things that the dollars could be used to buy.

The Undercover Economist Part 8

You're reading novel The Undercover Economist Part 8 online at LightNovelFree.com. You can use the follow function to bookmark your favorite novel ( Only for registered users ). If you find any errors ( broken links, can't load photos, etc.. ), Please let us know so we can fix it as soon as possible. And when you start a conversation or debate about a certain topic with other people, please do not offend them just because you don't like their opinions.

Rating :
LightNovelFree.com Rate : 4.5/ 5 - 2 Votes


The Undercover Economist Part 8 summary

You're reading The Undercover Economist Part 8. This novel has been translated by Updating. Author: Tim Harford already has 334 views.

It's great if you read and follow any novel on our website. We promise you that we'll bring you the latest, hottest novel everyday and FREE.

LightNovelFree.com is a most smartest website for reading novel online, it can automatic resize images to fit your pc screen, even on your mobile. Experience now by using your smartphone and access to LightNovelFree.com