This is a combined summary of two books that overlap a third:
FC: The Forgotten Continent: A History of the New Latin America, by Michael Reid
WMB: The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good by Richard Easterly
ETR: PJ O’Rourke’s free-market-libertarian Eat the Rich (ETR), still the most entertaining and generally informative book I’ve read about the global role of free-market economics.
I was originally seeking a concise treatment of LatAm history that would answer the question: Why doesn’t Latin America work economically? Europe has had the EEC, then the EC, then the EU and the Eurozone; Southeast Asia came from nowhere in the 1970s to a combination of economic powerhouses (South Korea) and quite stable countries you’d no longer call “developing” (Thailand); even eastern Europe and some of the former Soviet states (the Baltics) have done much better. Yes, LatAm has had colonial exploitation and spells of military authoritarianism, but so have those other regions, and LatAm is largely unified by a common language and many aspects of a common culture, which isn’t the case in any of the other regions.
I found WMB serendipitously while browsing the bargain cart at Bird & Beckett, my neighborhood independent bookstore.
Free markets work really well at raising overall prosperity–indeed, nothing else has been shown to work nearly as well.
But free markets need societal and governmental conditions in which to flourish—weak states foster both internal economic inequality and violent crime, which are inimical to free markets. (This is the summary argument of ETR.)
Where those conditions are absent, they cannot be imposed top-down or wholesale, but must be created incrementally from within.
Therefore, if you want to help, help the people on the ground who are doing incremental but concrete things from within, not the “top down planners” who aren’t accountable to the people they’re trying to help.
LatAm in the 20th century and previously
The typical 20th century LatAm citizen is far better off than their parents, both politically (voting, democracy) and economically, but LatAm’s economic growht still lags behind other regions. (We informally define “growth” as “general rise in standard of living for everyone.”)
Western liberals who think the Castros and Chavezes would be worthy solutions to LatAm’s problems if only the implementation were better often fail to realize that weak states, whether populist dictators or corrupt democracies, foster both internal economic inequality and violent crime.
The US colonists came from a British tradition of participatory, decentralized, and parliamentary democracy based on common law, in which legal principles generalize from case rulings and therefore the law can adapt to reality on the ground. In contrast, French/Spanish colonizers brought those countries’ militarized monarchical feudalism and top-down civil-law tradition, in which judges are glorified clerks applying a rigid prescriptive written law. That model neither scales nor promotes economic growth: missives from the king take months to get to the New World, and are ignored when they do get there because the state apparatus cannot effectively extend its reach, so local strongmen simply rule at their whim (might makes right) and arrogate riches to themselves.
So when the LatAm colonies broke away, LatAm subjects didn’t have a democratic participatory model to follow; they had essentially only been the subjects of empires. Even today, postcolonial countries with British legal origins have better personal-property protections in practice than those with French or Spanish legal origins. Two kinds of governments/leaders emerged in LatAm:
“Modernists” or “reformers” bearing liberal European ideas (the Enlightenment, the Age of Reason, John Locke, Adam Smith), spurred by the various Revolutions of 1848 in Europe. Because these views rely on the concept of protection of private property, these leaders were often opposed by the people, who preferred (and had a long tradition of) communal land ownership.
Populist strongmen promising to advance the will of “the people”, just not through traditional democratic structures and only inasfar as they can stay in power. Economically, the fundamental problem with populism is its hostilility to private property rights, which is incompatible with sustaining a free market.
People in the first category, especially the economic positivists, who believed that the best government is one run scientifically by an intellectual elite who know what is good for the people, formed a slippery slope to corruption and authoritarianism and often laid the groundwork for populist revolts empowering people in the second category.
LatAm history since the Spaniards left has been a push and pull between these poles.
US policy in LatAm hasn’t helped, because it focused on (e.g.)
“anti-communism” even at the expense of democracy, and therefore at
the expense of real economic growth, as when the US crushed
democracy in Guatemala and effectively reinstated the corporatized
colonialism of United Fruit.
Such examples simply served to persuade left-wing elements that armed struggle was the only way forward, and gave dictators such as Chile’s Pinochet license to say that extinguishing communism required suspending democracy, since it had clearly proved unworkable. Yet Cuba demonstrates that this approach doesn’t work either: after 6 decades combining communism and authoritarianism and being an economic dependent of the Soviet Union (and later of China and Venezuela), Cuba is still both less free and economically worse off than most of LatAm.
LatAm countries turned their backs on globalization
Countries rich in natural resources are easy targets for populists: “Our country has so much (oil, diamonds, whatever) that we should all be rich! Put me in power and I’ll make it happen!” But economies that focus on extractive natural resources suffer from the resource curse: the jobs pay little and don’t result in transferable skills, the society increases its reliance on imported industrial machinery and expertise to improve margins, and as a result, wealth gets concentrated at the top. Those who benefit therefore have no incentive to develop new sources of income, even though the rest of the populace stays poor. This situation is the exact opposite of what an economy needs to establish itself through import substitution (as explained in Jane Jacobs’s The Economy of Cities). And since natural resources are non-price-dense commodities highly subject to price fluctuation due to global market forces, a sudden change in market conditions can cause a resource-based economy to collapse; now everyone is poor and out of a job, and the economy as a whole has not grown, since only a few at the top got rich. Revolt ensues, as it does whenever a government abjectly fails to meet the basic economic needs of its people, and so resource-curse countries also swing between oligarchy and populism. Indeed (WMB p.122), Caribbean sugar plantations were wealthier than the small-family-farm American colonies prior to the Industrial Revolution, but New England’s democratic governments, with equal rights and property protection for most citizens, created conditions for them to take advantage of the IR when it did happen.
Note that there is an important distinction between oligarchy and populist dictators. Oligarchs want some laws and democracy, to protect their own property interests; just not so much that a democratic-but-poor majority might choose to redistribute wealth. (As Daniel Patrick Moynihan has said [p. 144], “The socially concerned intellectuals…seemed repeatedly to assume that those who had power would let it be taken away.”) Populist dictators want to control everything. So oligarchs are in a sense the lesser of two evils from the point of view of at least having the potential to lead to conditions that support economic growth.
When Southeast Asian governments responded to the oil shocks of the 1970s by redoubling their attention on exports and globalization, with South Korea (for example) developing entire new industries, hypernationalist LatAm governments instead turned towards resource economies. When these plans stumbled, governments tried currency stabilization/devaluation and other macroeconomic controls that work particularly poorly in the newly-globalized economy. For example, in 1997 global currency markets plunged as the result of an exodus from the overleveraged Thai baht; in response, Argentina pegged their peso to the dollar to keep its value high. This killed their exports, since their largest trading partner, Brazil, couldn’t afford them anymore; then Argentina froze withdrawals, impoverishing people by making their saved money illiquid. The only way out was forced deflation, to drive nominal prices back down, but that is politically very difficult.
State macroeconomic intervention and protectionism don’t make for a stable economy, whether implemented by progressives or despots, and a globalized economy makes many traditional such interventions ineffective anyway.
If “successful” aid is that which grows an economy so that its constituents reduce their dependence on that very aid, almost all large aid programs “from the West to the Rest” have failed.
The book combines the pro-free-market argument in ETR with the argument for Agile vs. top-down software development:
“Searchers” are do-gooders who are “on the ground” in touch with local populations and can identify resources necessary to solve a specific, limited problem. Because they operate with a business mindset–“do more with less”–they also don’t repeat mistakes.
“Planners” (aid agencies, western governments) create big plans from afar without useful input from the folks who are supposed to receive the help, without meaningful timely feedback mechanisms to determine if the plan was effective, without accountability to the end users to either ensure effectiveness or place conditions on continued aid, and most importantly, often ignorant of the fact that the target country lacks the societal/governmental conditions required for the “programs” to succeed. (“The rich people who pay for the tickets aren’t the ones who see the movie”–p. 183.) Because there’s no feedback or accountability, the same mistakes are made over and over. The Planners and their benefactors are rewarded for visible outcomes, but since actual results aren’t visible, the “outcomes” optimized for are reports, summits, and shiny infrastructure that the recipient country often can’t maintain.
The 3 principles behind the argument are then:
Agencies work better with fewer/limited goals than more/larger-scope goals;
Accountable agencies work better than unaccountable ones;
Agencies that can get rapid feedback from the beneficiaries work better than those that can’t.
So while “top-down” aid may plug a hole in the dike, as soon as the aid runs out the recipients will be back where they started, with (eg) infrastructure that cannot then be maintained, such as roads, buildings, or US urban housing projects like Cabrini Green. (Corporate/foundation aid does a bit better because it’s disbursed by entities with a business mindset–give the customer what they want, and measure if they got it effectively.)
The solution is to work to make individuals better off, rather than trying to “fix” governments or societies; better-off individuals have a better shot of doing that from within than you do from without. (p. 368) To that end, you should empower Searchers directly, allowing them the latitude to operate within the local environment they know well.
The book presents a fair amount of aid-program data to dispel various aid myths, including:
Myth: The Big Push – a country just needs a critical mass of aid to get itself out of a hole; then its economy will take off. (The inverse hypothesis is the “poverty trap.”) Fact: the data show that the average poor country doesn’t fit this pattern. Rather, those countries typically also make the list of worst-governed places. As well, the more aid was already in place, the less the effect of each dollar of additional aid (as you’d expect in an entropic situation).
Myth: aid linked to political ideology is less effective than aid from a nonpartisan agency or coalition. Fact: studies found no difference, though aid linked to purchases from the donor country, like much US aid, is even worse, since a good part of the aid then just flows back to the rich country.
Myth: someone who has studied and worked in a prosperous and peaceful society knows enough to plan how to achieve that in other societies. Fact: they don’t.
Even a modest profit motive can be effective in the service of aid.
A program in Malawi by Population Services International (a “searcher” type agency) sells bed nets for 50 cents to prenatal clinics; the nurses who distribute them keep 9 cents per net, providing an incentive to always have them in stock. PSI also sells nets to richer Malawians at a markup to subsidize the program, which pays for itself. Net usage is much higher than in Zambia, where free nets were distributed to people whether they wanted them or not. Similarly (p. 208) Hindustan Lever Limited started educational campaigns and programs to inform less-educated/poor people about the health value of washing their hands, which allowed it to sell more soap while reducing diarrheal diseases resulting from poor hygiene.
But free markets need the right conditions in which to function…
right to your property is only as strong as those around you are
willing to acknowledge, whether out of
trust in societal institutions/norms (including government) or out of
fear of having both kneecaps broken.
(Hernando De Soto’s The Mystery of Capital a few years back argued that LatAms need legal title to their land/homes so they can collateralize it, but that presupposes a system they can trust to enforce that ownership. Interestingly, in Radical Cities, Greenfield quotes Brazilian academic Jailson de Souza saying that a co-op/rent-control model would be better, since if you gave them title to their land, they’d sell it for a quick buck and end up back where they started. This is in a sense what the Swiss government does with property now, giving interest-only long-term mortgages.)
Such failures can happen at the state level as well without good protections for creditors. In the early 90s, Mexico allowed buyers of banks to finance the purchase with loans from the bank being bought. Yet individuals continued to trust those banks because the Mexican government insured their savings (like the FDIC). The avalanche of bad credit ultimately led to the collapse of the peso in 1994, but the bank’s owners then made large loans to themselves (effectively looting the banks) since they knew the government’s policy guaranteed a bailout.
…and “reforms” aimed at creating those conditions usually fail.
Partial reforms to create good protections often fail, because their effects get swamped by the rest of an incompatible system; yet total reforms are basically impossible. For example, one driver of economic growth is a certain degree of trust in strangers (p. 79)–if I extend you credit, can I be assured of being paid? (If not, you get a society based on “cash transactions for low-quality goods and services,” not a great blueprint for growth.) Low-income societies (which tend to be badly governed) don’t trust their government to create these conditions; guilds and ethnic/expat networks help somewhat, though at the risk of ethnic hostility.
Yet if you try to “reform” by running two systems side-by-side within a society, bad actors can asymetrically exploit one against the other, or exit one system on bad terms only to enter the other system “clean”. When the Soviet Union fell, the network of “pushers” or Tolkachi (O’Rourke talks about them in ETR) that had learned to “cheat” and build fiefdoms within the ineffective command economy had a built-in advantage. A “free market” was created, but without the accompanying rules that make profit-seeking behavior beneficial to society.
A solution is to gradually introduce formal rules that reinforce, rather than trying to replace, how existing networks have evolved.
But aid agencies keep giving, because even though the game is rigged, it’s the only game in town.
Aid agencies are rewarded (by new infusions of donor cash) for observable outputs, such as reports, meetings, and shiny buildings, and for setting goals, which are observable where results are not. Buildings are easier for donors to see than, say, textbooks or mosquito nets are. For example, money spent on treatment for AIDS patients (which in the 1990s was extremely expensive and would prolong each life by a few months or years) is more observable than money spent on prevention and education programs, which could save many more lives for much less money. And even without that obstacle, some such programs are ideologically hamstrung, such as forbidding the use of birth control or condoms (p. 244, 251-252, 254-255). (Bill Gates is a notable exception in his foundation’s rational approach to philanthropy.)
Hence, even in countries that aren’t so bad, a distortedly large sector of the economy consists of bureaucrats tied up in the aid industry who present the contact surface needed to court rich benefactors with delusions of grandeur. The actual poor people with specific needs have no voice in this process. The bureaucracy, leakage, and lack of voice or feedback from the afflicated, lead to repeated failure and disillusionment. In contrast, Searchers could produce piecemeal but visible results that make the bureaucracy look good while actually doing some good, such as chipping away at business-hostile practices that make it more difficult or expensive to start a business, enforce a financial contract, or collect a bad debt (p. 111).
Bad government <=> ineffective aid, especially in “resource cursed” countries
Countries with bad/unaccountable governments are most likely to have fiscal, distribution, etc. infrastructures that are corrupt or dysfunctional or both, so their people are poor and those countries get the most aid, but the aid doesn’t reach the right people; yet getting good government in place is really hard. The top 15 recipients of aid in 2002 ($1B+ each) had median ranking in the most corrupt quartile of all world governments, and these were often “resource cursed” countries.
Yet in structuring its loans the IMF assumes the stability it’s trying to create. In trying to create that stability, the IMF may basically try to tell the government how to spend the money, including taking fiscal-policy actions that may be unpopular, for which the government then gets blamed or overthrown. Or it may make deals with governments run by gangsters, which will never be honored and will leave the population of the country as a whole liable for loans that will never reach them and which they can never repay. (The IMF/WB considers whether a government is good or bad relative to a country’s level of income, but the key factor is whether it is good enough to sustain a free market, period.) Indeed, countries go to the IMF precisely when they are desperate, making it unlikely that they are stable. (Historically there is no country so screwed up or uncreditworthy that the IMF will refuse it a loan.) Indeed, overall there is a correlation between spending a lot of time in IMF programs and the risk of suffering state collapse. Many IMF loans don’t get paid back and are forgiven, which further reduces the incentive for borrower countries to be disciplined.
Case in point: in 1999, Argentine president Carlos Menem went on a social-program spending spree to boost his reelection chances. This failed and put the country in such deep debt that it said it would not honor debts to foreign creditors. The IMF put together a bailout that simply postponed the collapse by a few months at a cost of $80 billion.
A similar argument applies to colonial and postcolonial countries. Colonialism introduced all sorts of problems of course, but when Western powers drew new national postcolonial boundaries (as most egregiously in Africa) that put together hostile ethnic groups and divide solid ones, they just sow the seeds of ineffective government. Following up with utopian-level aid gives a predictable result. “Interventionism [whether colonial or post-colonial] suffers from the patronizing assumption that only the West can keep the locals from killing each other. Stanford political scientist Jeremy Weinstein notes that peace usually succeeds war because of a decisive victory by one side, not because of negotiated settlements by outsiders.” (p. 334) The author points out the “strange confluence” of neoconservatives hawks supporting “regime change” and leftist humanitarians calling for military intervention to stop human rights abuses, a cycle leading to “endless wars of altruism.”
As Paul Theroux notes in Dark Star Safari, “only Africans can fix Africa,” and this book generalizes the argument as to why: there is no simple solution to getting decent government, creating the conditions in which a free market can raise prosperity, and incrementally finding ways in the meantime to make specific modest improvements, possibly in furtherance of those goals, but it has to come from the inside. “…gross violations of free markets and brutal self-aggrandizing autocrats usually preclude success. Beyond that breathtakingly obvious point, there is no automatic formula for success, only many political and economic Searchers looking for piecemeal improvements that overcome the many obstacles…” (p. 363).