Friday, January 07, 2005

The political economy of underdevelopment

Russell Roberts points out one of the major barriers to development.
...the richest people in the poorest countries live as well as the richest people in the richest countries. The real problem is that in most so-called poor countries, the powerful people, the government and their friends, live at the expense of the rest of society.
This is related to an argument that Andrew Janos has made. Historically, underdeveloped countries were stuck in a vicious cycle that kept them underdeveloped. Janos spoke about 19th century Eastern Europe. The problem was that Britain and the rest of northwest Europe managed to industrialize first at least partly because of the success of the agricultural and commercial revolutions at improving agricultural productivity (i.e., grain yields): it allowed the commercial class to accumulate capital and invest it. Unfortunately, these advances spread out of the northwest "core" at a glacial pace, such that Eastern Europe was always about 200 years behind northwest Europe in terms of agricultural productivity.

After Britain industrialized, a perverse mechanism kicked in: the industrial nations started exporting nifty new goods around the world: cotton clothes, cool gadgets, etc. Elites in other countries noticed the new goods, and because industrial countries exported tastes and values as well as goods, elites in underdeveloped countires wanted these new goods. Unfortunately, they couldn't afford them. Domestic populations in industrial countries could afford to buy these new goods because they were caught up in the cycle of increasing prosperity. But the underdeveloped economies of Eastern Europe couldn't support that kind of consumption. So Eastern European elites kept spending to "keep up with the Joneses," and spent themselves into debt and bankruptcy. Not exactly a good foundation for domestic capital accumulation and investment.

So there is a sense in which Russell Roberts is right - there is a vicious cycle of underdevelopment in many poor countries. But it's not quite the way he says, which is that corrupt governments suck away aid money. Obviously, corrupt governments do suck away aid money, but why not still try harder to invest more wisely? Especially with programs that have been shown to work, like giving free meals to schoolchildren so starving kids will want to go to school. Maybe we can still break the vicious cycle after all.

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