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Friday, October 22, 2010

Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development

During the 2008 presidential campaign, a critic of then-candidate Barack Obama stated in a letter to the Wall Street Journal, “If he becomes president, I hope he hires some economists who understand why Great Britain, China, Hong Kong and South Korea all prospered when they let private industry rather than government allocate their country’s resources.” Benjamin Powell of the Independent Institute has edited a volume that will amply provide Obama’s economists with that understanding. Making Poor Nations Rich tightly weaves theory and history together into a compelling case that if a country is to generate and sustain strong economic growth, it must have institutions that channel entrepreneurship into productive activities.

Powell opens with four theoretical essays whose common theme is that “the engine of economic growth is not better inputs, but rather an environment in which entrepreneurial activities can be capitalized upon.” That environment is shown to determine whether entrepreneurship gets channeled into uses that make capital more productive, generating prosperity for all, or into such activities as conquest and obtaining sinecures in the bureaucracy, permitting a few to live high at the expense of the many.

A seemingly counterintuitive observation from the last essay in this section is that “those countries with the highest economic freedom . . . have a rate of business failure that is almost twice as high as countries with the lowest economic freedom. . . .” This reminder that capitalism is a profit and loss system, in which the losses play an indispensable role, cannot be emphasized enough to those who have elevated the bailout to the chief economic policy tool.

The next four chapters are devoted to countries that failed to grow because they failed to establish institutions that foster productive entrepreneurship. The wide variety of cultures and circumstances covered in this section adds to the robustness of the findings.

George Ayittey’s discussion of how country after country in Africa opted to throw out the capitalist baby with the colonialist bathwater on independence is a sobering example of libertarian class theory in action. He minces no words, characterizing most African countries as ruled by “unrepentant gangsters.” His essay is replete with details of specific poverty-inducing policies, supporting his contention that most African states direct entrepreneurship into destructive paths. As he pithily summarizes, “Because politics constitutes the gateway to fabulous wealth in Africa, the competition for political power has always been ferocious.” No wonder negative growth is the rule in those countries.

Essays on Latin America and Romania show some of the difficulties of overcoming colonial and communist legacies, respectively. The Latin American essay recounts numerous false starts on the road from parasitic to constructive entrepreneurship. Whether it was land reform programs or the neoliberal privatizations of the 1980s and 1990s, the result was the continued fleecing of the weak by the strong, with free markets wrongly getting the blame. The Romanian case shows the harm to entrepreneurship of a radically uncertain regulatory environment based on executive decrees.

This section ends with Sweden, long lionized by American “liberals” for its advanced welfare state. Here we learn how the high taxes, heavy labor-market regulation, and opulent safety net that comprise that welfare state have smothered entrepreneurship. While Sweden could live off its previously accumulated capital for a while, it eventually was beset by a host of predictable problems. The silver lining in Sweden’s case is that when these problems reached crisis level, some of the most counterproductive policies were jettisoned.

The success stories covered in the last part of the book also avoided adopting market-driven reforms until their hands were forced by necessity. Certainly ideology played little role in Ireland, where the same politician whose policies caused the problems (downgraded debt that could not be monetized and abysmal economic growth) conceded to reality and reversed course. Elsewhere, it took some changes in personnel. Once that occurred, crises begat reform in New Zealand (lagging growth induced by protectionism and a sclerotic labor market, plus a 1984 currency crisis), India (a 1991 foreign-exchange crisis), Botswana (the third-poorest nation in the world in 1965), and China (over 36 million dead from disastrous economic policies from 1949–1976). These cases contrast with Robert Higgs’s finding that crises in the United States led to permanent movements away from free markets. One possible explanation is that those countries had run out of margin for error. (As I write these words, the United States may soon find itself in that situation.) The essayists who discuss each of these disparate success stories also document some degree of backsliding once the situation was stabilized.

This book is extremely valuable for anyone who wants to know what works and what doesn’t in national economic development.

  • Robert Batemarco teaches economics on an adjunct basis at Fordham University and Manhattan College. He was formerly book review editor of The Freeman. He is a member of the FEE Faculty Network.
  • Benjamin Powell is the Director of the Free Market Institute at Texas Tech University and a Senior Fellow with the Independent Institute. He is a member of the FEE Faculty Network.