Naked Economics: Undressing the Dismal Science pdfdrive com

part because India and China have become significantly less poor. For different
reasons, India and China, the world’s two biggest countries, both became more
integrated into the global economy in the final decades of the twentieth century.
(To understand how this made them less poor, go back and read
Chapter 12
.)
There is bad news, too. For all the progress we have made on the anti-
poverty front, economists do not have a recipe for making poor countries rich.
True, there have been some fabulous success stories, such as India, China, and
the original Asian “tigers”—Hong Kong, Singapore, South Korea, and Taiwan—
which saw their economies grow more than 8 percent a year for nearly three

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which saw their economies grow more than 8 percent a year for nearly three
decades. But we do not have a proven formula for growth that can be rolled out
in country after country like some kind of development franchise. Just think
about India and China: One is the world’s largest democracy; the other is not
democratic at all.
On the other hand, we do have a good understanding of what makes rich
countries rich. If we can catalog the kinds of policies that functional economies
have in common, then we can turn our attention to Nobel laureate Douglass
North’s common-sense query “Why don’t poor countries simply adopt policies
that make for plenty?”
4
The following is a sample of the kinds of policies and, in some cases, lucky
geographical endowments that development economists have come to believe
make the difference between the wealth and poverty of nations.
Effective government institutions. To grow and prosper, a country needs laws,
law enforcement, courts, basic infrastructure, a government capable of collecting
taxes—and a healthy respect among the citizenship for each of these things.
These kinds of institutions are the tracks on which capitalism runs. They must be
reasonably honest. Corruption is not merely an inconvenience, as it is sometimes
treated; it is a cancer that misallocates resources, stifles innovation, and
discourages foreign investment. While American attitudes toward government
range from indifference to hostility, most other countries would love to have it
so good, as New York Times foreign affairs columnist Tom Friedman has pointed
out:
I took part in a seminar two weeks ago at Nanjing University in China,
and I can still hear a young Chinese graduate student pleading for an
answer to her question: “How do we get rid of all our corruption?” Do
you know what your average Chinese would give to have a capital like
Washington today, with its reasonably honest and efficient bureaucracy?
Do you know how unusual we are in the world that we don’t have to pay
off bureaucrats to get the simplest permit issued?
5
The relationship between government institutions and economic growth
prompted a clever and intriguing study. Economists Daron Acemoglu, Simon
Johnson, and James Robinson hypothesized that the economic success of
developing countries that were formerly colonized has been affected by the

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quality of the institutions that their colonizers left behind.
6
The European
powers adopted different colonization policies in different parts of the world,
depending on how hospitable the area was to settlement. In places where
Europeans could settle without serious hardship, such as the United States, the
colonizers created institutions that have had a positive and long-lasting effect on
economic growth. In places where Europeans could not easily settle because of a
high mortality rate from disease, such as the Congo, the colonizers simply
focused on taking as much wealth home as quickly as possible, creating what the
authors refer to as “extractive states.”
The study examined sixty-four ex-colonies and found that as much as three-
quarters of the difference in their current wealth can be explained by differences
in the quality of their government institutions. In turn, the quality of those
government institutions is explained, at least in part, by the original settlement
pattern. The legal origin of the colonizers—British, French, Belgian—had little
influence (though the British come out looking good because they tended to
colonize places more hospitable to settlement).
Basically, good governance matters. The World Bank rated 150 countries on
six broad measures of governance, such as accountability, regulatory burden,
rule of law, graft (corruption), etc. There was a clear and causal relationship
between better governance and better development outcomes, such as higher per
capita incomes, lower infant mortality, and higher literacy.
7
We don’t have to
love the Internal Revenue Service, but we ought to at least offer it some
grudging respect.