Wednesday, April 6

The Birth Of Plenty

Questions about how to make any poor country more wealthy can be approached by wondering how any human societies ever managed to end the age old reign of human poverty to begin with. In a reasonable and readable manner William Bernstein answers those questions in The Birth of Plenty where he argues that
Prosperity is not achieved by merely by possessing hydroelectric dams, roads, telephone wires, factories, fertile farmlands, or even great quantities of money. Nor can prosperity be transplanted from one nation to another simply by transferring the key components of an economic infrastructure.

In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather, it is about institutions—the framework within which human beings think, interact, and carry on business.
Most of humanity has been desperately poor for most of history with meaningful growth measured over centuries but
[t]he nature of that growth changed dramatically in the centuries following 1600. Initially, the growth was "extensive," consisting of a significant expansion of the national economy caused purely by population increase, unaccompanied by real improvement in the wealth or material comfort of the average citizen.

For the first time, the British economy mustered enough growth to keep pace with population numbers. By the nineteenth century, however, growth had become "intensive," outpacing even the human urge to reproduce, with advances in per capita income and an increase in material well-being at the individual level.
Karl Marx took note of this sea change in human affairs when in the Manifesto of the Communist Party he wrote “ The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together.” By the ’rule of the bourgeoisie’ he means, of course, capitalism.

Contemporary Ethiopia does not rate very well among the preconditions for future plenty to spare her people levels of suffering that have become tradition. The author of ‘The Birth of Plenty’ defines the ‘sources of growth’ thus:
Property rights. Innovators and tradesmen must rest secure that the fruits of their labors will not be arbitrarily confiscated, by the state, by criminals, or by monopolists. The assurance that a person can keep most of his just reward is the right that guarantees all other rights. Note the emphasis on the word most.

The right to property is never absolute. Even the most economically libertarian governments, such as Singapore and Hong Kong, levy some taxes, enforce some form of eminent domain, and maintain some restrictions on commercial freedom of action. Similarly, confiscation can be more subtle than that which occurs in feudal or socialist states.

A government that fails to control inflation or maintain proper banking controls, such as Brazil's in the 1980s or present-day Zimbabwe's, steals from its citizens as surely as Edward III and Stalin did. In premodern Europe, government-granted monopolies, while highly profit-able to those who exercised them, sapped the incentive of the rest of the nation.
All land in Ethiopia belongs to the state. The citizens of any such state necessarily live in fear of losing their life’s work, represented by their property, for reasons either political or economic.

Indeed, the agents of such an all powerful state hold dominion over the very life and death of what are little more than millions of serfs. Thus, there is little to distinguish socialist models of governance, such as Ethiopia’s from feudal ones. In either case, the people are powerless and the engines of growth are crippled in the service of the power of a few.
Scientific rationalism. Economic progress depends on the development and commercialization of ideas. The inventive process requires a supportive intellectual framework—an infrastructure of rational thought, if you will, with a reliance on empirical observation and on the mathematical tools that support technologic advance. The scientific method that we take for granted in the modern West is a relatively new phenomenon.

Only in' the last four hundred years have Western peoples freed them-selves from the dead hand of the totalitarian, Aristotelian mind-set. Even today, particularly in parts of Africa, Asia, and the Middle East, honest intellectual inquiry places life and property at grave risk from the forces of state and religious tyranny.
This section, in its negative aspects defines contemporary Ethiopia quite clearly. The governing ideology of ‘revolutionary democracy’ is a set of nonsensical frankly silly radical mantras that were long forgotten or wisely ignored by most of humanity. It gives Marxist-Leninist-Maoist justifications for effective one party rule while foreign aid donors are reassured by an impossible and non-existent simultaneous commitment to the free market.

Rationalism is also abandoned in an ethnic mode of governance where all political and thus all economic and social interactions are dominated by tribalism that is manipulated to the minute by minute advantage of Ethiopia’s rulers. Constitutionally any group of any size can secede at will for any reason - of course that is not the case but it lays the foundation for destroying potential rivals of every kind at the center’s convenience.
Capital markets. The large-scale production of new goods and services requires vast amounts of money from others—"capital." (money available for investment) Even if property and the ability to innovate are secure, capital is still required to develop schemes and ideas.

Since almost no entrepreneur has enough money to mass-produce his inventions, economic growth is impossible without substantial capital from outside sources [outside meaning from all but personal sources]. Before the nineteenth century, society's best, brightest, and most ambitious individuals had scant access to the massive amounts of money necessary to transform their dreams into reality.
The litany of impediments to any native entrepreneur’s efforts are only exceeded by how unwelcome foreign investors are beyond almost anecdotal reports involving foreign remittances in Addis Ababa. Ethiopia has one of the lowest rates of foreign investment in Africa and considering the size of its population, per capita foreign investment may be the lowest on the planet.

In addition vast sums are locked up in the removal of all land from economic activity by the fact of state ownership. Taking into account the general anti-growth set of policies in place and the state of the banking sector it is clear that very few can dream of capital of any kind. Even those who manage it find themselves in competition with an effectively one party state and that owns businesses both ‘private’ and public at every level of society - taking any concept of patronage one might imagine to catastrophic levels.
Fast and efficient communications and transportation. The final step in the creation of gadgets [that were necessary for the industrial revolution] is their advertisement and distribution to buyers hundreds or thousands of miles away. Even if entrepreneurs possess secure property rights, the proper intellectual tools, and adequate capital, their innovations will languish unless they can quickly and cheaply put their products into the hands of consumers.

Sea transport did not become safe, efficient, and cheap until two centuries ago with the development of steam power, and land transport did not follow suit until about fifty years later.
Government monopoly of telecommunications places Ethiopia consistently in the very last group of failed of nearly failed states. This is compounded by frank hostility to freedom of communication evidenced by crippling the internet and in the limitations on a free press - or rather the absence of a free press outside of the hearing or sight of foreign aid donors.

Transportation is, of course, hampered by Ethiopia’s terrain. However, even there government interest is almost entirely based on foreign willingness to finance road construction projects. None of these factors can be divorced from each other and one must imagine how many more roads would be built in a rationally governed Ethiopia than the present.

The author continues
Not until all four of these factors—property rights, scientific rationalism, effective capital markets, and efficient transport and communication—are in place can a nation prosper. These four factors first coalesced, briefly, in sixteenth century Holland but were not securely in place in the English-speaking world until about 1820. Not until much later did the four factors begin to spread over the rest of the globe.
The absence of even one of these factors endangers economic prog-ress and human welfare; kicking out just one of these four legs will top-ple the platform upon which the wealth of a nation rests.

This occurred in eighteenth-century Holland with the British naval blockade, in the world's Communist states with the loss of property rights, and in much of the Middle East with the absence of capital markets and Western rationalism. Most tragic of all, in much of Africa, all four factors are still essentially absent.
One of the missing pieces in this book and of much development literature is the stomping roaring brightly pink colored elephant in the middle of the room with the word culture written all over it. We will begin to deal with culture shortly first in terms of Smith and Fukuyama, but will now note that culture is not static and that long before it becomes an issue some minimal accommodations to basic human experience must be made that are - as of 2005 still being ignored in Ethiopia.

Consider the wonderful possibilities of a stock market and imagine one in Ethiopia. Lack of property rights would deny most the capital to participate. The whole thing would never be taken seriously beyond the first few times Western journalists visit because the possibilities of market decisions and new concentrations of wealth and effort would be suspect and considered undoubtedly 'anti-revolutionary democracy' activities. Lastly, how could anyone ever know what a stock was worth when devaluing the stock of a government or party or crony owned company could mean imprisonment or 'disappearance'.

Understanding contemporary Ethiopia makes one come to the tragic realization that Ethiopia’s rulers are actually making perfectly rational choices every day and even in their long term planning. Purely from the point of view of staying in power and jealously guarding most of a small pool of rewards for as long as the juggling act can be kept up - all the right moves are being made.

The mistake from the observer’s point of view comes with the rather innocent set of assumptions one tends to bring to considerations of most national governments - often out of a desperate hope against all evidence.

The natural assumption of the well meaning mind that a decent balance can be found or is even considered worthy of discovery between the general good on one hand and the ruler's will to power on the other does not fit Ethiopia.

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