Naked Economics: Undressing the Dismal Science pdfdrive com

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,

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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:
Four-fifths of the listeners were men, on the left. The remaining
one-fifth were women, all covered in black cloaks and veils, on the
right. A partition separated the two groups. Toward the end, in the
question-and-answer session, a member of the audience noted that
Saudi Arabia aimed to be one of the Top 10 countries in the world in
technology by 2010 and asked if that was realistic. “Well, if you’re not
fully utilizing half the talent in the country,” Gates said, “you’re not
going to get close to the Top 10.”
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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

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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

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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:
A peasant discovers that many of his chickens are dying, so he
seeks advice from a priest. The priest recommends that the peasant say
prayers for his chickens, but the chickens continue to die. The priest
then recommends music for the chicken coop, but the deaths continue
unabated. Pondering again, the priest recommends repainting the
chicken coop in bright colors. Finally, all the chickens die. “What a
shame,” the priest tells the peasant, “I had so many more good
ideas.”
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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.
Easterly says that traditional development aid has been a mistake—because
we still haven’t figured out how to do it.
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He writes in the American Economic
Review:
Economists are reasonably confident that some combination of
free markets and good institutions has an excellent historical track
record of achieving development (as opposed to, say, totalitarian
control of the economy by kleptocrats). It is just that we don’t know

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how to get from here to there; which specific actions contribute to free
markets and good institutions; how all the little pieces fit together.
That is, we don’t know how to achieve development.
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Easterly doesn’t think we should give up trying to help people in poor
countries. Instead, we should do small, context-sensitive projects with
measurable benefits. He writes, “[Aid] could seek to create more opportunities
for poor individuals, rather than try to transform poor societies.”
To be fair, the primary stumbling block to development in poor countries is
not bad advice from rich countries. The best ideas for economic growth are quite
simple, yet, as this chapter has pointed out, there are plenty of leaders in the
developing world doing the economic equivalent of smoking, eating
cheeseburgers, and driving without their seat belts. A study done by the Harvard
Center for International Development of global growth patterns between 1965
and 1990 found that most of the difference between the huge success of East
Asia and the relatively poor performance of South Asia, sub-Saharan Africa, and
Latin America can be explained by government policy. In that respect, foreign
aid presents the same kind of challenges as any other welfare policy. Poor
countries, like poor people, often have very bad habits. Providing support can
prolong behavior that needs to be changed. One study came to the unsurprising
conclusion that foreign aid has a positive effect on growth when good policies
are already in place, and has little impact on growth when they are not. The
authors recommended that aid be predicated on good policy, which would make
the aid more effective and provide an incentive for governments to implement
better policies.
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(Similar criteria have been proposed for relieving the debts of
heavily indebted poor countries.) Of course, turning our backs on the neediest
cases (and denying bailouts to countries in crisis) is easier in theory than it is in
practice. In 2005, the World Bank published a document that might qualify as
bureaucratic introspection—Economic Growth in the 1990s: Learning from a