Perhaps I can open a discussion on the topic. I have to confess I am of several minds as to how to approach the subject.
I first note I reject the idea that any given culture (however defined) has a monopoly on paths to development (in the context of greater material ease for the general population) but certainly in the context of modern economic structures, excluding various idealistic fantasies, there are adjustments which have to be made.
This is less than well-developed, but the underlying issues are where does the responsibility lie (and I am sure it is not in one place) for future development.
Are you aware that Muslims have won more Nobel prizes in physics than have South Americans? That Camus was awarded his Nobel prize in literature because he was not Muslim? Or that . . .
Oh, it’s you, Collounsbury. Sorry about that!
As you say, not the most developed OP. However, I’d make a couple of points.
First, there are a number of factors that are necessary but not sufficient for rapid development e.g., an educated populace. Many of these factors are “culturally independent” and are often pretty easy to identify.
Second, there are a number of factors that hinder development. These factors often depend on the context of the culture and can be extremely complex and difficult to identify, especially before the fact. Of course, there are also culturally independent factors that hinder development, e.g. diseases such as malaria and AIDS.
It is most interesting, though often frustratingly inconclusive, to look at countries that have made a good go at development and compare them to countries that have been abject failures. For example, Botswana, once one of the poorest countries in the world, has chugged along quite nicely and has enjoyed probably the world’s highest sustained growth rate over the last 35 years. Why? What did they do right?
My mother just went as a representative of a formal protestant Christian organization in the US to the Philippines for some annual council of churches meeting. She read me some of the discussion outlines, one of which referred to globalization as the Beast of Revelations. Also blaming the high governmental debt levels in the Philippines as a conspiracy by international banks to keep the Philippines in a permanent subservient state.
Didn’t mention endemic corruption, ineffectual government, lack of regulatory environment etc. At least my mother was willing to listen while I tried to explain that maybe globalization was not the beast of Revelations.
You might also want to look at China. China invented freaking just about everything centuries before the west. And then never developed anything. Gunpowder being but one example. Many would argue that the Chinese governmental mandarin system and lack of rule of law are culprits. Also, pretty much from the early 1800-s to 1980, China rarely had peace or was unified.
The incredible strides that China has made developmentally in the past 20 odd years are owing primarily to huge amounts of foreign investment combined with a highly educated Chinese diaspora bring knowledge and business practices back to China.
My apologies for an underdeveloped OP, as this is an area of real interest for me, but to answer this well requires some rigor.
I would note that in general when we look at this we need to be careful on the following points:
(a) Not overassume cultural similarities, as was often done in much of the early popular dreck written on the ‘Asian miracles’ --thinking of Krugman’s demolition of the more magical thinking on this.
(b) Attention to ‘exogenous’ (to culture) factors such as
(i) rate of pop growth, it’s freaking hard to invest properly in education even if one wants to if your pop is growing faster than you can train teachers.
(ii) political institutions.
Now (b) of course is tied to culture, but confusing culture and religion too easily is a bit dangerous. They are certainly related, but putting Xtian non-Western cultures side by side with Western ones (and I include here Orthodox Xtians, even the Greeks to an extent) one has to question that simplistic religious divides make any sense at all.
Somebody restate the question before it’s too late!
Q: What’s the key to economic development?
A1: How the f*^& should I know? This question is way too big.
A2: But that’s never stopped us before. Here’s my take.
Culture Smulture. Christianity has had far more doctrinal clashes with science and learning than Islam. China Guy’s post illustrates this.
The key to economic development is sound economic policy. To be specific: Establish 1) rule of law and 2) property rights. 3) Invest in education, although it is expensive. Investment in the lower grades (basic education) typically has higher marginal returns than in college degrees. 4) Get the prices right.
In short, the orginal Washington Consensus.
There are other factors which appear to be associated with faster growth / higher development. Among them are higher income equality (eg Asia vs. Latin America) and lower corruption. But these factors seem less fundamental.
China Guy: Has foreign investment really been that important? In the earlier part of the period, I understand that peasant agriculture experienced fantastic productivity growth.
And it is usually the case that FDI pales next to domestic savings. Don’t know about China. At the same time, FDI also brings technological transfer, a good thing. I wondered whether you were refering to the latter, since you mentioned the Chinese diaspora as well.
Regarding China and I’m tossing out numbers from memory. Actual foreign direct investment (FDI) in China (as opposed to pledged) has been running at something like USD80 billion annually for the past several years and has been pretty high for close to 2 decades.
Peasant agriculture recorded some pretty good initial gains as collectives were privatized. But that was from a low base and for the domestic market. Increased farm yields have been eaten up by population growth, and have not been a major driver for wealth accumulation. It has only been within say the past 5 years that international farm exports have earned foreign exchange, but amounts to only a small fraction of what is driven by manufactured goods. These days it is those same peasants who make up a floating migrant population of between 50 and 200 million people driving the low skilled labor throughout China.
Domestic savings held in private accounts is less than USD100 billion. Government fx reserves more like USD150 billion. Substantial but the annual FDI is a major driver.
The Chinese diaspora, not just the overseas Chinese like from HK, Malaysia, Singapore and Taiwan, but also the millions of Chinese that went abroad from the early 1980’s are bringing back investment and expertise.
These combinations of factors (massive FDI, commitment to education, returning expatriates, low cost base, huge domestic market, massive export economy, stable government, etc) is not something you find in most of the poor, underdeveloped countries. China is unique, but there are a lot of parallels with India, and INdian development far lags China’s. Forget somewhere such as Bangladesh or one of the petroleum poor arab states.
Import substitution.
Generally, you want to start with something basic and cheap, and work your way up. Garments, pencils, soap, bicycles, stuff like that.
The stuff you make should be for domestic consumption first, and export ONLY secondarily.
If you’ve got natural resources, you can use that to get the seed capital to get your industries off the ground, but that’s all it should be used for. It should be seen as a crutch, and a very dangerous one at that.
Japan disproved all kinds of theories of economic development: that Europe was better at it, that you needed lots of natural resources, even that natural resources were an advantage. Singapore disproves these things to an even greater extent: I remember reading somewhere that they even have to import water? If that’s true, that would certainly be the ultimate example of an economy lacking natural resources.
As for education, I know I’ll get reamed for this, but in the beginning, if you’re poor and starting from scratch, all you need is a small educated elite. BUT, that elite has to be dedicated to the proposition that educating the populace is a good thing, that feeding them adequately, housing them adequately, and giving them a say in their affairs are also all good things.
Corruption? Not a factor, as long as the corruption is spread among various warring factions. Look at NYC or Chicago, neither of whose governments were ever considered models of rectitude.
As a matter of fact, that’s one of the keys to economic development: that in the political and social sphere, no one faction can dominate completely. In my opinion, the reason why Japan has stalled out for the past decade has to do with the monopoly the Liberal Democratic party has on power. Someone else has to become a viable opposition to them, or Japan’s economic history will be a series of fits of development sandwiched between fattish slices of stagnation.
For instance, I think Mexico will overall do better over the years now that they’ve developed a viable opposition to the PRI. South Africa’s future will be just about assured if a viable opposition to the ANC emerges.
India vs China: does India REALLY lag China? If so, by what measure? IMO if India does lag, it will only be temporary; India’s development will be far messier, but it will last. China’s not going to make it as long as they keep a single party system. In such a system, you inevitably get the situation where the gov says what’s mine is mine and what’s yours is negotiable. Not a formula for long term development.
The conventional wisdom has turned against import substitution, partly due to unhappy experiences with it in Latin America and Africa during the 1970s.
Also, taxes on imports act as taxes on exports: the mechanism operates through increasing domestic price levels. Ergo, very high tariffs conflict with an export-oriented growth strategy.
Some countries (South Korea) have had some success with temporary tariffs. Most countries have been politically unable to lower tariffs after a suitable period however, thus keeping their “infant industries” at an immature level of development.
I should also note that, IIRC, the Asian tigers had tariffs of around 20% (not low) while Latin America and Africa had levels closer to 40% (eegads).
Generally speaking however, this debate (what promotes development) is at bottom an empirical one. One approach to it might be to consider what separates the success stories from the less successful ones.
The import substitution debate is illustrative: there is a plausible case to be made for protectionism (the infant industry argument). Similarly for import substitution (as earlier practiced by India, Brazil and Peru). It’s just that, in practice, the outcomes haven’t been too happy (relatively speaking).
Certain studies have shown a (negative) relationship between corruption and growth. What I don’t know is whether the magnitude of that relationship is particularly large, relative to other factors.
China Guy Thanks. If those numbers are correct, I concede the point. Note that you are comparing a stock (of domestic savings) to a flow (of FDI). So it seems that, outside the informal economy, domestic savings has played a pretty small role in China. Interesting. Another element to look at might be retained earnings.
China vs. India:
per capita GDP Growth 1960-1995
India: 2.1% China: 5.5%
GDP per capita, PPP $1995
India: $1422 China: $2935
Human Development Index, 1995
India: .451 China: .650
flowbark: thanks for the numbers.
Re import substitution: I’ve read about gov-sponsored programs where they deliberately set out to make things in a country, which is NOT what I have in mind. More like setting tariffs and putting out seed capital and letting the private sector figure out what products will work and what won’t. You can’t make everything, obviously, nor should you try, and the list of things that can be made will differ from nation to nation.
You’re right that countries tend to set tariffs too high and keep them long after they’ve done their work, but no one is immune from that. Think the U.S. and the steel industry, to take the most awful example.
India versus China difference becomes even more striking if you compare 1980-2000 timeframe. 1960-1980 was a pretty poor economic period even by Chinese historical standards (famines, aftermath of the great leap forward, cultural revolution, etc.). Even factoring in those two decades, China has outpaced India dramatically.
Flowbark, my numbers are from memory, and could be off by 10-20 billion here or there, but I think it illustrates what is going on here. The domestic savings have been quite important for alleviating poverty and improving the life for the lower segment of society, eg the countryside.
Pantom, I would disagree with a few of your points. Sure Japan proved a lot of development theories wrong, but don’t forget the massive amount of post WW2 foreign aid followed by a huge infusion of cash during the Korean War. Those factors are quite important as are the ones you pointed out. Also the entire economy was geared toward building an export market, which worked extremely well until the 1990’s.
Corruption is very important if it reaches endemic levels that stifle growth. Look at the Philippines or India. If you have enough economic growth, then 2-3% corruption tax of GDP may be acceptable. If you’ve got little or no growth and corruption sucks a couple percentage points out of GDP, then it is a major issue. China probably loses about 2-3% of GDP via corruption, but that is an ‘acceptable level’ as there is something like 7% growth, leaving ‘real’ net growth of say 4%. (yes, I know, the offical GDP numbers may not be accurate, that’s another thread). The other thing about corruption is that some places corruption is everywhere and does little or nothing to speed up cumbersome processes. In other places, corruption is a rapid processing tax. You can get what you want without a bribe, it just takes longer.
I also think that a stable government is critical regardless of whether it is totaliterian or fully democratic. You can compare China and India as opposite ends of the spectrum. Granted, at some point, governments have to change as the economy develops. A paternalistic government at an early stage of development may be appropriate, but ends up stifling the economy at a latter stage. Japan and Singapore (hell, most of the asian tigers) both being cases in point. Agreed, that the Chinese government is going to have to change. I would argue that it has already changed quite dramatically, and is continuing to do so.
To use some jargon, you are against “industrial policy”, but for “limited protectionism”.
Confusingly, the South Korean gov actually, “deliberately set out to make things”: for example, they poured public money into steel, making it at a time when many experts thought that this was a terrible idea. The South Korean government turned out to be right, in this case.
So score 1 for industrial policy. Certain economists respond that an unfettered capital market would have made the same decisions as the government did anyway. More to the point though, there are many instances of governments protecting losers and taxing winners.
Precisely. Which is why I would advocate not starting down the protectionist path, because it is so difficult to lower tariffs at the appropriate time.
Still, though, these are 2nd tier issues, IMHO, relative to rule of law and primary education.
More generally (and with all due respect) empirical analysis is likely to be a better guide to policy than ideology. The latter is more a function of narrative consistency.
China GuyI am skeptical about whether the Post WWII aid was really that important, since it was probably dwarfed by domestic investment during the period. (This was the case for the Marshall Plan in Europe, BTW. Aid flows were historically large, but total investment was much larger.)
But, again, I don’t have the figures. (Hey, I was wrong before. )
Stability: Also, foreign and civil war are not conducive to economic growth, except to the extent that they stimulate aggregate demand.
Re that last bit about war: these figures come from the site http://www.globalfindata.com/ , with some math by me, so beware!
Total stock market return adj for inflation, 1900-1949: 4.54%
Total stock market return adj for inflation, 1950-1999: 9.25%
Rather a dramatic difference. I remember puzzling over that until 9/11, and the staggering cost of reconstruction just from that one attack, and then realizing the first half of this century saw two world wars, not to mention the Great Depression. Ex the depression I suppose the first half of the century wouldn’t have been so bad, but it’s still a pretty dramatic illustration of the economic cost of war, to my mind.
Good insights all around. I’d thought I’d add a few tidbits to mull over…
*Originally posted by pantom *
True, Japan has very little in the way of nature resources. But they shared similarities with Europe in that they had ready access to resources.
Here a similar process is involved. True, tiny Singapore lacks natural resources. But it is, by virtue of its geography, suberbly situated to gain access to the resources it needs. Correct me if I’m wrong, but Singapore first emerged as an impotant military chokepoint for the British and has historically relied on trade activity for much of its economy.
Agreed - institutions (such as education) need to be in place and must stem from a cultural attitude in creating, developing, sustaining, and supporting such institutions. It doesn’t do a country a whole lot of good if people get educations and move to the developed world in search of better opportunities.
I’m not so sure of your assessment of India. I agree that India’s path to development will be messier than China. But will it last?
India has access to resources; it has a (relatively) good infratructure (ie, road/rail/air/communication networks); institutions promoting education are in place, as is the cultural attitude on the importance of education; other institutions (financial, administraive, legal, etc.) are also already in place (although improvements are necessary).
But some things to consider: India is poised to become the largest country (in terms of population) within the next 20-30 years. If India can somehow get a handle on its population growth (relative to that of China which has a much lower rate of growth), then its’ chances are much better.
I know this is simplistic, but can anyone name a poor country that abides by the rule of law, guarantees fundamental human rights, respects private property rights, and demonstrated political stability for the past 25 years.
The wealth that western nations demonstrate in large part is due to the harnessing of human resources in a sustainable and effective manner. Any socio-political system which employs the above fundamental facets is bound to set free its population to organize themselves into wealth generating entities.
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