Billionaires are consistent with the institutions that underlie economic prosperity.

See Billionaires by Tino Sanandaji & Peter T. Leeson.

"Existing studies of entrepreneurship focus on entrepreneurs whose individual contribution to wealth creation is typically trivial: self-employed persons. This article investigates entrepreneurs whose individual contribution to wealth creation is enormous: billionaires. We explore the relationship between economic development, institutions, and these contrasting kinds of entrepreneurs. We find that the institutions consistent with self-employed entrepreneurs differ markedly from the ones consistent with billionaires. Further, only the latter are consistent with the institutions that underlie economic prosperity. Where well-protected private property rights and supporting, market-enhancing institutions flourish, so do billionaires. But self-employed entrepreneurs do not. Where private property rights are weakly protected and interventionist institutions flourish, so do self-employed entrepreneurs. But billionaires do not."

The False Promise of Gleneagles

Misguided Priorities at the Heart of the New Push for African Development

By Marian L. Tupy of Cato. 

"Executive Summary 

"In response to persisting poverty in Africa, representatives from the world’s eight leading industrialized nations—Germany, Canada, the United States, France, Italy, Japan, the United Kingdom, and Russia—met in Glen- eagles, Scotland, in 2005 and agreed on a three-pronged approach to help Africa. They would increase foreign aid to the continent, reduce Africa’s debt, and open their markets to African exports. Unfortunately, aid has harmed rather than helped Africa. It has failed to stimulate growth or reform, and encouraged waste and corruption. For example, aid has financed 40 percent of military spending in Africa. Similarly, debt relief has failed to prevent African countries from falling into debt again. Trade liberalization has the greatest potential to help Africa emerge from poverty. Yet that is where the least amount of progress has been made. Negotiations on trade liberalization have ground to a halt, and the threat of protectionism looms large as the current global economic slow- down worsens. The Gleneagles Summit, for all its good intentions, gave rise to unrealistic expectations. The heavy emphasis on aid and debt relief made Western actions appear to be chiefly responsible for poverty alleviation in Africa. In reality, the main obstacles to economic growth in Africa rest with Africa’s policies and institutions, such as onerous business regulations and weak protection of property rights. Africa remains the poorest and least economically free region on earth. The West should do all it can to help Africa integrate with the rest of the world. It should eliminate remaining restrictions on African exports and end Western farm subsidies. Africans, however, will have to make most of the changes needed to tackle African poverty."

State promotion of small-holder agriculture; state promotion of manufacturing; and state controls over finance, especially capital controls DID NOT cause rapid growth in four African countries

See ‘How Africa Works’ Review: Policies and Prosperity; Four African countries—Botswana, Ethiopia, Mauritius and Rwanda—experienced rapid per capita growth. How did they manage it? William Easterly reviewed the book How Africa Works: Success and Failure on the World's Last Developmental Frontier by Joe Studwell. Excerpts:

"the successful countries were, surprisingly, not very good at following his preferred policies. Botswana’s government promoted neither small-holder agriculture nor manufacturing. Mauritius and Rwanda ended capital controls long ago. Mauritius also successfully promoted manufacturing until it did not, and the share of manufacturing in the economy fell to 11% in 2020 from 20% in the 1980s. The author gives Rwanda a tepid grade on the three policy approaches."

"Ethiopia’s government promoted manufacturing with some successes in cement and floriculture, but its leading state enterprise asked North Korea for help to build 10 sugar mills as part of a vast sugar-development project. (It did not end well.)"

"As for the nonsuccesses, Mr. Studwell notes that some of the three policies were followed there, too. Promoting manufacturing has been a popular idea throughout Africa for decades. Ghana’s enthusiasm for manufacturing contributed to the long decline of its economy, from independence in 1957 to the 1980s. As the author notes, the country encouraged the assembly of automobiles, from kits of car parts, when the value of a finished car was sometimes less than the cost of the parts kit. The author worries that Ghana is repeating this automobile nonsuccess today."

"Nigeria’s Ajaokuta steel plant, which cost billions of dollars but never got around to producing any steel."

"Capital controls were also popular among the nonsuccesses. The author notes how the International Monetary Fund insisted on removing capital controls in the majority of African countries in the 1990s, an indication that the restrictions were widespread at the time. He does not note that these capital controls often went to extremes. When inflation is high, controlled interest rates are far lower than inflation, and capital controls are fierce: Savers can’t preserve their wealth by moving it to dollar-denominated assets outside of the country. Some called such a package financial repression and suggested that savers move their wealth out of banks and into real estate or other real assets (or do not save at all). If savers don’t deposit any money in domestic banks, then the banks will have no money to lend, and borrowers will not get the subsidized bank loans Mr. Studwell favors. Destroying both savings and credit does not seem like a win." 

‘Violent Saviors’ Review: Offering Aid and Taking Power

For centuries, Western countries have used the extension of economic support to justify the imposition of control over poorer countries

Tunku Varadarajan reviews Violent Saviors: The West’s Conquest of the Rest by William Easterly. Excerpts:

"a truth that politicians, missionaries, philosophers and, above all, economists have grappled with (or evaded) since at least the start of the 17th century: that, to the poor, the “inequality of dignity” matters as much, if not more so, as the inequality of incomes."

"In other words, writes Mr. Easterly, the developers believed they had “the right to subjugate people as long as they benefited those people.”"

"This progress became the perfect alibi for the use of force and violence"

"these self-anointed ameliorators of savages (and of other people deemed inferior) saw the benefit they dispensed in only the narrowest material terms. Black American slaves, it was often said in defense of slavery, were better fed and housed than their unenslaved brethren in Africa. It was asserted, even, that American slaves enjoyed better living conditions than the backward English working classes."

"The apologists “failed to recognize Black people’s non-material need for dignity.” And this need could only be satisfied with equal political rights"

"counterblasts that came from many European skeptics of benevolent conquest, most notably Adam Smith (1723-90). The skeptics’ most important point, as Mr. Easterly distills into modern political language, is that “development without consent is not necessarily progress.” Smith’s alternative to conquest was commerce. He insisted that a “project of commerce”—in which there could be “a new set of exchanges” between Europe and America (and by extension anywhere else with commodities to offer)—was morally preferable to a “project of conquest.”"

"Smith is Mr. Easterly’s hero in this debate. Smith and his heirs—the economist-philosophers Benjamin Constant (1767-1830), Harriet Martineau (1802-76) and John Stuart Mill (1806-73), as well as such latter-day thinkers as Ludwig von Mises (1881-1973), Isaiah Berlin (1909-97), Milton Friedman (1912-2006) and P.T. Bauer (1915-2002)—held fast to the view that (relatively) equal rights in less-developed lands were not incompatible with advantageous commerce for the West. Another ally is the philosopher Immanuel Kant (1724-1804), who was, Mr. Easterly writes, “the first major thinker in the West to see the violation of consent as a violation of dignity.” Like Smith, Kant identified commerce as the moral alternative to conquest and held that, in Mr. Easterly’s words, “the quest for respect would be as important as the quest to escape poverty.”"

"After World War II, “the new development mainstream”—which trained its attention on a succession of newly independent states in Africa and Asia—was, Mr. Easterly says, “a lot closer to Condorcet than to Adam Smith.” Aid became a bastion of paternalism or, as some came to see it, neocolonialism. In all of this, Mr. Easterly is firm in his belief that the way forward lies in a marriage of market economics and attention to self-respect."  

 

Gordon Wood on Alexander Hamilton

See Bonus Quotation of the Day… from Cafe Hayek.

"… is from pages 102-103 of Gordon Wood’s excellent 2009 volume, Empire of Liberty: A History of the Early Republic, 1789-1815:

[Alexander] Hamilton was so wedded to a hierarchical view of society that he could only imagine industrial investment and development coming from the top down. Thus he was incapable of foreseeing that the actual source of America’s manufacturing would come from below, from the ambitions, productivity, and investments of thousands upon thousands of middling artisans and craftsmen who eventually became America’s businessmen. Hamilton’s historical reputation as the prophet of America’s industrial greatness therefore seems somewhat exaggerated. He certainly wanted a powerful and glorious nation, but he was no more capable of accurately foretelling the future than the other American leaders."

No Short-cuts to Development Remarks by Lawrence H. Summers Deputy Secretary of the Treasury To the IDB Conference on Development Thinking and Practice

Click here to read it. From 1996. Excerpt:

"I am honored to have this opportunity to address so distinguished a group of people concerned about development thinking and practice. I would like to thank President Iglesias for inviting me to speak.

Consider for a moment the purpose of development. It is not just about low inflation rates or vibrant stock markets, although these are important. The ultimate objective of development is improved living standards for all people.

In the last 25 years we have seen unprecedented progress in improving living conditions. Average infant mortality rates, for example, have been nearly halved, and average per capita incomes have doubled. But there has been enormous diversity of experience. Among regions, striking dissimilarities have emerged.

Per capita growth rates in Asia reached an impressive 7% last year, while in Africa the average has been just 1-2% per year in good years.

Income distribution in East Asia is much more equitable than in Latin America. In Indonesia, the richest fifth of the population averaged about 5 times more income than the poorest fifth, while in Brazil the ratio is 32 and in Guatemala it is 30.

In 1994, the average infant mortality rate in Africa was more than double the infant mortality rates in both East Asia and Latin America.

What policies have shaped these disparate outcomes? And what have we learned as a result?

There are no short-cuts...

It’s clear that there are no short-cuts in development. We have learned some profound lessons from those countries that have tried them.

The first is that inflation produces no enduring output benefit but carries a wide variety of costs. Inflation corrodes markets, discouraging the accumulation of capital and distorting its allocation. Inflation tends to hurt the poor most -- either they are ravaged by the inflation tax or they get ejected from the formal economy entirely.

And inflation undermines democracy, as Latin America has sadly seen during the course of the 20th century. Citizens will not trust governments that cannot maintain the value of their currencies and protect their savings. And governments have resorted to progressively more authoritarian measures to try maintain control while avoiding genuine economic adjustment.

Let me be clear -- I am against a high rate of inflation not because it is morally bad, or because it hurts bond-holders. Rather, experience has shown that in countries where inflation is 30% or higher, the poor stay poor.

The second lesson is that price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time. Take the case of exchange controls. In most instances, they lead to layer after layer of restrictions on imports and capital flows. And when they are finally lifted, as inevitably they are, price shocks burst onto the population. These often hurt the poor most, because they have the thinnest, most thread-bare cushion for absorbing adjustments to relative prices.

Meanwhile, attempts to preserve price controls induce otherwise avoidable rationing schemes and goods shortages. And when goods disappear from official markets -- except perhaps those designated for privileged consumers -- they reappear in unofficial ones, but at much higher prices. Anyone who lived in Eastern Europe during the last 50 years, or in Cuba today, understands this phenomenon well.

A third lesson is that closed markets lock in inefficiencies and, in the long run, suppress real wages. Import substitution has been discredited as an approach to development. It has led to protection that often has been used not to nurture nascent industries but to safeguard the interests of the wealthy and well-connected.

I would even include in this last group the relatively well-off labor groups that work for protected enterprises. Not only have other workers been deprived of opportunities for employment in industries outside the system of protection, but all consumers have endured higher prices and inferior products and services.

A fourth lesson is that state-run enterprises, including state-owned banks, have a disappointing record of performance. While there are exceptions, the reality is that politics usually intrude in the operation of a public enterprise, and efficiency, financial performance and quality of service are often sacrificed.

That is why governments around the world have already shed many state-owned enterprises. The results are beginning to show. Companies that were chronic drains on public treasuries now pay taxes and plow profits back into productive investment. And services to the people improve -- the lights stay on, the phones stay connected, buses operate, the water is kept clean. Basic public services matter most to those who can’t afford to buy themselves generators or water tanks, and who depend on public transportation to get to work.

A fifth lesson is that excessive and inappropriate regulation can strangle an economy and corrupt markets. Even if they start small and are well-intentioned, regulations tend to propagate, as both the regulated and the regulator start to see mutual advantages in their relationship. Moreover, when regulation becomes pervasive, business decision-making shifts to governments, and political entrepreneurship displaces economic entrepreneurship. The poor and politically powerless don’t stand a chance when governments literally rule them out of the formal economic system.

To boil down these five lessons, we must: One, avoid inflation -- macro stabilization is an essential first step; Two, let markets set prices for goods, services and currencies; Three, open trade regimes and allow economic integration; Four, privatize state-owned companies; Five, reduce the size of government by eliminating excessive regulation."

Singapore, Inc.

By Scott Sumner.

"In a recent interview with Dwarkesh Patel, Former UK Prime Minister Tony Blair discussed the policies of Lee Kuan Yew—the father of modern Singapore.  He suggested that Lee made three key decisions early in his administration, which led to Singapore achieving a high level of economic development:

1.  Singapore adopted English as its national language.

2. Singapore became highly open to foreign capital and talent.

3.  Singapore adopted a zero tolerance policy for corruption, combined with salaries for top government officials that were an order of magnitude higher than typical in the public sector.

This made me think of the similarities between Singapore and corporations based in Switzerland.  Many corporations in Switzerland use English as their official language, despite the fact that their country’s main ethnic groups (German 62.1%, French 22.8%, and Italian 8.0%) all speak other languages.  Singapore also has a complex ethnic mix including Chinese (75.9%), Malay (15.1%) and Indian (7.4%.)   Blair noted that Lee’s decision to have Singapore adopt English was quite controversial at the time.

Switzerland is a highly open economy, which welcomes foreign investment.  Approximately 30% of Switzerland’s population is foreign born, far higher than the 10% to 20% typical in Western Europe.  Singapore also welcomes foreign talent and investment, with 37% of its population foreign born.  Again, Lee’s policy was controversial at the time, as import substitution was in vogue at the time Singapore was founded (in 1965.)

Like Singapore’s government, Swiss companies do not tolerate corruption, and pay relatively high salaries to top executives.  Lee’s policies regarding corruption and public sector salaries are quite unusual in the developing world.

Ethnic strife is a very common problem in many parts of the world.  Switzerland has used political decentralization to reduce the danger of conflict between regions speaking different languages.  Decentralization would not be as feasible in a small city-state like Singapore, but by adopting English as a language Singapore was able to at least somewhat reduce the salience of ethnicity.

I don’t know if Lee Kuan Yew had Europe’s most successful country in mind when he adopted these policies, but whatever the motive, Lee ended up creating a Singaporean model that looks uncannily like a successful Swiss multinational corporation."

Advice for the new World Bank chief

By Tyler Cowen.

"From my latest Bloomberg column:

First, contrary to the prevailing wisdom, the World Bank should not make climate change more of a priority. Climate-change issues are more closely associated with rich and middle-income countries than with the poorest countries. The very poorest countries, because they have small economies, do not as a rule emit much carbon. Indoor air pollution, such as burning wood or fuel for heat or cooking, is usually more of a problem. Those emissions can be toxic, and the World Bank should try to help reduce them. But that won’t do much to cut carbon emissions.

The World Health Organization estimates that about seven million people die each year from the direct effects of air pollution. For poorer countries, alleviating that problem should be a greater priority than fighting global climate change.

The reality is that if the World Bank can help elevate some very poor countries into middle-income countries, climate-change problems will become somewhat worse — at least in the short to medium run. “We make climate-change problems worse” is not a marketable slogan. But it is selfish to try to get the World Bank to do more good for the wealthiest nations and less good for the poorest nations, which is essentially what prioritizing climate change would do. And of course the world’s wealthier nations are broadly coincidental with the major shareholders of the World Bank…

If there is any area where the World Bank should double down, it is in public-health interventions. Over the last several decades, the successes have been extraordinary. In Africa, for instance, child mortality rates have plummeted, and many public-health indicators have improved considerably, especially outside of major conflict zones. Why not invest more in what is working?"

Free Markets and the Chilean Miracle

By Dan Mitchell. Excerpt:

"Prior to today, I also would have included this example:

• Nobody on the left ever tries to produce an alternative explanation for Chile’s amazing jump from poverty to prosperity after the country shifted to pro-market policies such as private social security.

But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.

As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.

After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth. Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.

But now let’s consider whether this alternative explanation is accurate.

 

Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.

But if that’s the case, why did per-capita living standards begin to climb much earlier?

As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.

(There is a separate measure of economic freedom for the years before 1970, so the orange and blue lines are discontinuous.)

One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.

Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.

We’ll close with some bad news and good news.

The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.

But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.

P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinian–style decline.

P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.

P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.

P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity."

Solar and Wind Force Poverty on Africa

Letting us use reliable energy doesn’t mean a climate disaster

By Yoweri K. Museveni.

"Africa can’t sacrifice its future prosperity for Western climate goals. The continent should balance its energy mix, not rush straight toward renewables—even though that will likely frustrate some of those gathering at next week’s global climate conference in Glasgow.

My continent’s energy choices will dictate much of the climate’s future. Conservative estimates project that Africa’s population of 1.3 billion will double by 2050. Africans’ energy consumption will likely surpass that of the European Union around the same time.

Knowing this, many developed nations are pushing an accelerated transition to renewables on Africa. The Western aid-industrial complex, composed of nongovernmental organizations and state development agencies, has poured money into wind and solar projects across the continent. This earns them praise in the U.S. and Europe but leaves many Africans with unreliable and expensive electricity that depends on diesel generators or batteries on overcast or still days. Generators and the mining of lithium for batteries are both highly polluting.

This stands to forestall Africa’s attempts to rise out of poverty, which require reliable energy. African manufacturing will struggle to attract investment and therefore to create jobs without consistent energy sources. Agriculture will suffer if the continent can’t use natural gas to create synthetic fertilizer or to power efficient freight transportation.  

A better solution is for Africa to move slowly toward a variety of reliable green energy sources. Wildlife-friendly minihydro technologies should be a part of the continent’s energy mix. They allow for 24-hour-a-day energy production and can be installed along minor rivers without the need for backup energy. Coal-fired power stations can be converted to burning biomass, and carbon capture can help in the meantime. Nuclear power is also already being put to good use in South Africa, while Algeria, Ghana and Nigeria operate research reactors with the intent of building full-scale nuclear facilities.

All this will take time, meaning Africa will have to use fossil fuels as it makes the transition. Natural gas is a greener option that will help the continent reduce emissions even as it grows, as developed nations have done themselves.

Saying any of this meets with backlash from developed nations. Instead of reliable renewables or greener fossil fuels, aid money and development investments go to pushing solar and wind, with all their accompanying drawbacks. And many Western nations have put a blanket ban on public funding for a range of fossil-fuel projects abroad, making it difficult for Africa to make the transition to cleaner nonrenewables.

In the coming decades my continent will have a strong influence on global warming. But it doesn’t now. Were sub-Saharan Africa (minus South Africa) to triple its electricity consumption overnight, powering the new usage entirely by gas, it would add only 0.6% to global carbon emissions.

Africans have a right to use reliable, cheap energy, and doing so doesn’t prevent the development of the continent’s renewables. Forcing Africa down one route will hinder our fight against poverty.

Mr. Museveni is president of Uganda."

 

U.S. Aid to Central America Hasn’t Slowed Migration. Can Kamala Harris?

A stark reality faces the vice president as she visits the region: Expanded aid programs have failed to stem migration.

By Natalie Kitroeff and Michael D. Shear of The NY Times. Excerpts:

"An American contractor went to a small town in the Guatemalan mountains with an ambitious goal: to ignite the local economy, and hopefully even persuade people not to migrate north to the United States.

Half an hour into his meeting with coffee growers, the contractor excitedly revealed the tool he had brought to change their lives: a pamphlet inviting the farmers to download an app to check coffee prices and “be a part of modern agriculture.”

Pedro Aguilar, a coffee farmer who hadn’t asked for the training and didn’t see how it would keep anyone from heading for the border, looked confused. Eyeing the U.S. government logo on the pamphlet, he began waving it around, asking if anyone had a phone number to call the Americans “and tell them what our needs really are.”

“They’ve never helped me,” Mr. Aguilar said after the training a few weeks ago, referring to American aid programs intended to spur the economy and prevent migration. “Where does all the money go? Where’s the aid? Who knows?”

As vice president, Joseph R. Biden Jr. led an enormous push to deter people from crossing into the United States by devoting hundreds of millions of dollars to Central America, hoping to make the region more tolerable for the poor — so that fewer would abandon it.

Now, as President Biden, he is doubling down on that strategy once again and assigning his own vice president, Kamala Harris, the prickly challenge of carrying out his plan to commit $4 billion in a remarkably similar approach as she travels to the region Sunday."

“When I was vice president, I focused on providing the help needed to address these root causes of migration,” Mr. Biden said in a recent speech to Congress. “It helped keep people in their own countries instead of being forced to leave. Our plan worked.”

But the numbers tell a different story. After years of the United States flooding Central America with aid, migration from the region soared in 2019 and is on the upswing once more.

Here in Guatemala, which has received more than $1.6 billion in American aid over the last decade, poverty rates have risen, malnutrition has become a national crisis, corruption is unbridled and the country is sending more unaccompanied children to the United States than anywhere else in the world."

"members of the current administration contend that Mr. Trump’s decision to freeze a portion of the aid to the region in 2019 ended up blunting the impact of the work being done to improve conditions there.

But experts say the reasons that years of aid have not curbed migration run far deeper than that. In particular, they note that much of the money is handed over to American companies, which swallow a lot of it for salaries, expenses and profits, often before any services are delivered.

From 2016 to 2020, 80 percent of the American-financed development projects in Central America were entrusted to American contractors, according to data provided by the U.S. Agency for International Development. The upside is that these companies have big offices capable of meeting the strict oversight requirements involved in handling millions of taxpayer dollars. The downside, critics say, is that a lot of the money disappears into those bureaucracies instead of reaching the people they’re trying to help."

"the same implementers win the contracts again and again, despite having implemented badly in the past, not showing any level of impact and not changing anything.”"

"Even when aid money reached Guatemala in recent years, it often brought little change, according to interviews with dozens who worked with or received assistance from U.S.-financed projects in the country’s western highlands.

One, called the Rural Value Chains Project, spent part of its $20 million in American aid building outhouses for potato farmers — many of which were quickly abandoned or torn apart for scrap metal."

"One achievement touted by Nexos Locales, a $31 million project administered by Development Alternatives Incorporated, a company based in Bethesda, Md., was creating an app to enable residents to see how their local government spent money. Aid workers said that many residents didn’t have smartphones, and that they couldn’t afford to pay for the data to use the app even if they did.

The company did not comment, directing questions to U.S.A.I.D. But several people who worked for or advised Nexos said they had grown frustrated at what they saw as wasted funding on dubious accomplishments. They described being pushed to count results like how many meetings they held and how many people attended, but had no idea whether those activities had any lasting impact."

"Obama . . . oversaw an infusion of new aid money that would, in theory, make countries like Guatemala more bearable for the poor. Mr. Biden was tapped to help disburse $750 million to the region."

"Since then, at least three programs that won more than $100 million in U.S. funding in all have come to San Antonio Huista, hoping to make life better. Yet, in interviews, Ms. Monzón and more than a dozen other coffee farmers here could not point to many long-term benefits, despite the attention.

Aid workers kept coming to deliver lots of seminars on topics in which the farmers were already well versed, they said, such as planting new varieties of coffee beans, and then left."

"After evaluating five years of aid spending in Central America, the Government Accountability Office rendered a blunt assessment in 2019: “Limited information is available about how U.S. assistance improved prosperity, governance, and security.”

One U.S.A.I.D. evaluation of programs intended to help Guatemalan farmers found that from 2006 to 2011, incomes rose less in the places that benefited from U.S. aid than in similar areas where there was no intervention."

Progress by consent: Adam Smith as development economist

By William Easterly.

The Review of Austrian Economics volume 34, pages179–201(2021)

"Abstract

Adam Smith is not sufficiently recognized as a founder of development economics. Smith challenged the longstanding assumption that inferior development outcomes reflected inferior groups, and that superior groups should coerce inferior groups to make development happen. Smith made clear that the positive-sum benefits of markets required respecting the right to consent of all individuals, from whatever group. These ideas led Smith to be a fierce critic of European conquest, enslavement, and colonialism of non-Europeans. The loss of Smith’s insights led to a split in later intellectual history of pro-market and anti-colonial ideas. The importance of the right to consent is still insufficiently appreciated in economic development debates today."

Corona lockdowns terrible for poorer countries

By Bjorn Lomborg.

"Copenhagen Consensus produced the world's first cost-benefit analyses of COVID-19 policies for the African countries Ghana and Malawi.

Here are the benefits and costs for Malawi, in a report done together with the National Planning Commission and the African Institute for Development Policy:



Moderate social distancing will save about 7,000 more lives in total. But school closures will reduce learning and lead to long-term lower productivity, while the economy will be hit harder. The total cost will be $12 billion or two years of GDP. In total, each dollar spent will achieve 4¢ of social benefits.

For reference, other policies in Malawi could save 7,000 people for less than $3 million — at 4,000 times lower cost.

We find a similar result in a new report for the much richer Ghana. Here, the total cost will reach $50 billion, and each dollar in cost will produce just 5¢ of benefits. For comparison, Ghana could save more lives through tuberculosis policies for just $9 million — 5,000 times cheaper.


Our research was highlighted by The Economist in its main story explaining why rich-country style lockdowns are unsustainable in many poor countries."

Economic development subsidies rarely create positive economic outcomes

See An Interstate Compact to Phase Out Corporate Giveaways by Michael D. Farren of Mercatus. Excerpts:

"My testimony today has two main points:

1. Economic development subsidies generally fail to achieve their goals. That is,
   
   1. they generally don’t lead to broad improvements in economic outcomes for the states and cities that use them,
   2. they aren’t as important as many people believe in terms of swaying companies’ decisions of where to locate, and
   3. they can actually reduce economic development.
2. An interstate compact could provide a tailor-made solution to the counterproductive subsidy arms race confronting policymakers."

"Between 2011 and 2018 Kansas and Missouri paid a combined $335 million to subsidize the movement of around 12,000 jobs from one state to the other, with most companies moving only five to seven miles."

"few economic development programs actually provide cash payments, and even when they do, the subsidy is framed as something else. For example, most of Wisconsin’s recent subsidies for Foxconn Technology Group are characterized as corporate income tax credits. But because manufacturing firms are excluded from the state’s corporate income tax, the tax credits are equivalent to a cash handout.

Second, many economic development policies create fungible economic benefits that are, in effect, subsidies. For example, when a government provides a corporation with publicly owned assets, specialized infrastructure, loans, or loan guarantees it displaces some of the resources that the corporation would otherwise have had to spend on the project. Because of these factors, defining an economic development subsidy as any government-granted privilege that creates exclusive economic benefits for the recipients captures the broad universe of such policies."

"

A large body of academic research finds that, while subsidies may benefit the firms, activities, industries, or regions that are privileged, most are not associated with measurable improvements in the broader communities that pay for them. Perhaps unsurprisingly, the peer-reviewed academic research on subsidies generally contradicts the favorable findings of private consultant studies. One important reason for the discrepancy is that the consultant studies rarely include the effect of economic harm done by the taxes that fund the subsidy. In essence, they use a “benefits only” approach, rather than a full-fledged cost-benefit analysis.

Furthermore, in the large majority of cases, economic development subsides don’t actually sway a company’s decision of where to locate, whether to expand, or whether to stay put. This may sound counterintuitive, but it has been documented in a large number of academic studies. Timothy Bartik, one of the leading scholars of economic development, surveyed the body of research on this question and concluded that the typical subsidy materially affects a company’s decision of where to locate or whether to expand in about 2 to 25 percent of cases. In other words, in over 75 percent of cases, a granted economic development subsidy was not the deciding factor in the company’s final decision."

 
"a subsidy can actually depress local economic development. One reason for this is that subsidies must be funded by taxes and taxes tend to discourage economic activity. Recent research suggests that state governments that provide more and larger subsidies tend to have higher taxes. It is difficult, however, to disentangle cause and effect. It may be that the cost of subsidies is passed onto state residents; or it may be that states with high tax burdens must make up for these burdens with more subsidies. Other research by Bartik—again summarizing the broader body of academic literature—finds that cities and states with higher tax rates tend to experience lower levels of economic activity. It is possible that the higher taxes needed to pay for the subsidies—which are ostensibly intended to spur economic development—may have a larger negative effect than the presumed positive effect of the subsidy.

"research by University of the South professor Jia Wang suggests that spending on public goods generally decreases after subsidies have been granted. Reducing the public services provided to residents would, in general, reduce the local quality of life, a factor known to affect firm location decisions."

"the subsidy itself also gives the company a measure of protection from its unsubsidized competition. This sheltered status allows the company to not work quite as hard to please customers as it otherwise would have, and it allows the company to be less vigilant in controlling costs. To put it plainly, subsidies protect companies from the consequences of laziness. Moreover, the very existence of the privilege encourages some firms to expend scarce resources seeking it and others to expend scarce resources opposing it."

"when a subsidy does change the company’s decision of where to locate or expand, then it is generally the case that the policy has persuaded the company to do something it shouldn’t have done. In short, the government has encouraged a particular investment decision and the use of scarce resources that would have been better used elsewhere or in different ways."

Capitalism Helps People in Poor Nations, Foreign Aid Helps Politicians in Poor Nations

By Dan Mitchell. Excerpts:

"Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.

Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.

For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.

"Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about  5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like." 

I’m a fan of “Swiss bank accounts” and “foreign financial havens,” but I want them available for taxpayers, not politicians and government insiders.

Sadly, foreign aid helps the wrong people get rich.

Jose Nino draws the most appropriate conclusion.

"In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation  …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history."

Some folks may think Jose’s conclusion is too sweeping.

So let’s cite some more scholarly evidence.

Three economists, including one from the World Bank, found that foreign aid undermines democracy.

"In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions."

Here’s a graph from the study showing the negative relationship between aid and democracy.

The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.

If we want to help poor people in poor nations, the only practical answer is pro-capitalism policies such as small government, rule of law, and free trade.

P.S. Bigger government also enables corruption in rich nations."

William Easterly reviews ‘Good Economics for Hard Times’ by Banerjee and Duflo

From The WSJ.

"Proponents of market reforms are quick to tout the benefits that markets have to deliver. But as Abhijit Banerjee and Esther Duflo, two of this year’s Nobel laureates in economics, repeatedly show in “Good Economics for Hard Times,” some apologists have a tendency to overpromise. Markets, the authors remind us, can be sticky. Pro-market reforms like freer trade, for instance, only work as well as advocates predict when people can freely move to better opportunities.

In reality, people don’t move so fluidly to new industries or regions. The authors cite a 2013 comparative study of regional labor markets in the U.S.—regions defined by commuting patterns—that were affected by the expansion of Chinese trade between 1991 and 2007. The study showed declines in total employment in the American regions hardest hit by Chinese competition. This should not have happened if workers had simply moved within the same region to an industry that benefited from cheaper imports. Workers could have also, in theory, moved to an expanding region from a declining one.

But workers do not move easily, even when an expanding region is nearby. A 2010 study of labor mobility in India following trade liberalization in 1991 found a similar result of people stuck in declining districts. Yet another study, from 2014, found a different kind of immobility in Bangladesh, where people in rural areas did not migrate to cities as much as predicted by the urban-rural wage discrepancy.

In contrast to such “bad economics,” Mr. Banerjee and Ms. Duflo offer the “good economics” of policies that take such stickiness into consideration. The authors are not trying to get rid of markets. They recognize Venezuela as an example of what happens when markets are distorted by price controls and hyperinflation. They warn that a trade war with China would create a new list of losing American regions. They also admit that removing drastic measures such as state ownership and central planning—as China, India, South Korea and Vietnam have done to varying degrees—delivered much higher economic growth.

Consider the fisheries in the coastal state of Kerala, India. In the past, as the fishermen completed their catch offshore they would head to their nearest fish market, flooding some areas with product while elsewhere customers would go away empty-handed. It was a serious misallocation of resources. The stickiness, in this case, was a lack of information. Once cellphone technology arrived in the region, fishermen could call ahead and locate those markets with the most customers. Sticky markets corrected.

Great so far, but then the book takes some wrong turns. In calling for tax increases, for instance, the authors recommend engaging “the best minds in the world to work with governments . . . to redesign our social programs for effectiveness.” For the U.S. in particular, “the only possible way out involves a much expanded role for the government.” This isn’t merely introducing cellphones to fishermen.

Would such a big redesign really work? Take one program the authors celebrate for having overcome stickiness: the federal government’s 1994 Moving to Opportunity program, which offered residents of high-poverty public housing a chance to move to low-poverty neighborhoods. The early results showed little payoff for the program’s beneficiaries, but 20 years later researchers found strong positive effects on earnings and college enrollment for the children of parents who participated in the program. How do you redesign policies for effectiveness if you won’t know whether something works until 20 years later?

The authors also acknowledge that there will be disagreements about solutions. Do you subsidize the U.S. regions that have lost out from trade with China? Or do you target assistance at people rather than places? Politicians and voters are also unlikely to select policies based on what the academics recommend. In the U.S. and the U.K., the public does not seem to vote as much for redistribution as the authors would want them to. In fact, the authors note that, in U.S. and U.K., polls have shown only about 25% of the public trusts economists.

Unfortunately, the book’s tone does not help foster trust. The authors originally hoped to address a “growing polarization” because policy debates have become “a high-decibel slanging match.” They say their job is “to offer facts” that they hope “will help mediate these divides . . . and thereby arrive at some reasoned disagreement [with] respect on both sides.”

Yet the authors themselves struggle to manifest this respect. They engage in some ad hominem arguments, discounting their opponents’ views if they have appeared on television or in the press, if they work for the private sector, are “strident” or belong to “a previous era.” The authors don’t identify by name those doing bad economics, except for an attack on “nine conservative academic economists, mostly with solid reputations but also part of this older generation.” The authors feel that their opponents suffer from “ignorance and ideology” because they “often feel free to ignore the weight of the evidence.” For their own arguments, the authors appeal to the authority of “recognized leaders in the profession,” also known as “today’s best economists.”

In October, Mr. Banerjee and Ms. Duflo, together with Michael Kremer, won the Nobel Prize for their work on evidence-based policy in economic development. “Good Economics for Hard Times” lives up to its authors’ reputations, giving a masterly tour of the current evidence on critical policy questions facing less-than-perfect markets in both developed and developing countries, from migration to trade to postindustrial blight. But the book is less convincing when it suggests that a wholesale redesign of social programs is a viable or desirable replacement for our messy democracies and sticky markets. The evidence is lacking for such an ambitious evidence-based policy."

Africa Is Growing Thanks to the Free Market

By Marian L. Tupy.

"Sub-Saharan Africa consists of 46 countries and covers an area of 9.4 million square miles. One out of seven people on earth live in Africa and the continent’s share of the world’s population is bound to increase, because Africa’s fertility rate remains higher than elsewhere. If current trends continue, there will be more people in Nigeria than in the United States by 2050. What happens in Africa, therefore, is important not only to the people who live on the continent, but also to the rest of us.

Africa may be the world’s poorest continent, but it is no longer a “hopeless continent,” as The Economist magazine described it back in 2000. Since the start of the new millennium, Africa’s average per capita income adjusted for inflation and purchasing power parity rose by more than 50 percent and Africa’s growth rate has averaged almost 5 percent per year.

Increasing wealth has led to improvements in key indicators of human wellbeing. In 1999, 58 percent of Africans lived on less than $1.90 per person per day. By 2011, 44 percent of Africans lived on that income – all while the African population rose from 650 million to 1 billion. If the current trends continue, Africa’s absolute poverty rate will fall to 24 percent by 2030.

Life expectancy rose from 54 years in 2000 to 62 years in 2015. Infant mortality declined from 80 deaths per 1,000 live births to 49 deaths over the same time period. When it comes to HIV/AIDS, malaria and tuberculosis, occurrence, detection, treatment and survival rates have all improved. Food supply exceeds 2,500 calories per person per day (U.S. Department of Agriculture recommends consumption of 2,000 calories) and famines have disappeared outside of warzones. Primary, secondary and tertiary school enrollments have never been higher.

Some of Africa’s growth was driven by high commodity prices, but much of it, a McKinsey study found in 2010, was driven by economic reforms. To appreciate the latter, it is important to recall that for much of their post-colonial history, African governments have imposed central control over their economies. Inflationary monetary policies, price, wage and exchange rate controls, marketing boards that kept the prices of agricultural products artificially low and impoverished African farmers, and state-owned enterprises and monopolies were commonplace.

That began to change after the fall of the Berlin Wall. Socialism lost much of its appeal and the Soviet Union, which bankrolled and protected many African dictatorships, fell apart. Between 1990 and 2013, economic freedom as measured by the Fraser Institute in Canada rose from 4.75 out of 10 to 6.23. Freedom to trade rose even more, from 4.03 to 6.39. Most impressively, Africa has made much progress in terms of monetary policy, or access to sound money, which rose from a low of 4.9 in 1995 to a remarkable 7.27 in 2013.

Africa has made similar strides in terms of microeconomic policy. As the World Bank’s Doing Business report indicates, Africa’s regulatory environment has much improved. Starting a business, for example, has become easier, with Africa’s score rising from 45 out of 100 in 2004 to 72 in 2015. Dealing with construction permits, resolution of insolvencies, enforcement of contracts, access to electricity, the ease of payment of taxes, registering of property and getting of credit, have all much improved.

Unfortunately, there has been no substantial improvement in the quality of Africa’s institutions. According to the Freedom House’s Freedom in the World 2016 report, there were only 6 free countries in sub-Saharan Africa: Benin, Botswana, Ghana, Namibia, Senegal and South Africa. While many countries have adopted more “democratic” constitutions that include term limits, and other legislative and institutional checks on the executive branch of government, African rulers have found a way around those provisions in order to maintain power and abuse it.

According to the World Bank, corruption continues to thrive among government officials and, importantly, among members of the judiciary. As a consequence, rule of law indicators for African countries have remained, by and large, unchanged. Yet without efficient and impartial courts, Africa’s economic potential will always remain unfulfilled.

That said, as experience in other regions shows, institutional development tends to lag behind economic reforms. In the medium to long run, growth of the African middle class might yet result in a political awakening and greater assertiveness of the African populace, and eventual democratization of the continent.

The new millennium has been good to Africa, but the continent is still far from being prosperous, let alone democratic. In order for Africa’s economy to go on expanding, Africans will need to continue with their reforms – never forgetting that the world economy keeps on changing and global competition keeps on increasing. That is Africa’s challenge as well as its opportunity."

There’s little evidence that the economic-development incentives offered by cities and states work

See The Amazon HQ2 Fiasco Was No Outlier by Nathan M. Jensen. He is a professor of government at the University of Texas, Austin and the co-author (with Edmund J. Malesky) of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. Excerpts:

"When Amazon announced last month that it would split HQ2 between New York City and Arlington, Va., losing applicants cried foul: They accused Amazon of an extraordinary bait-and-switch, enticing dozens of bidders to increase the competition and the incentive offers, only to end up with two of the most obvious candidates all along.

The reality is that this sort of competition for big projects, while unusually large in the Amazon case, is the rule not the exception in economic development and has been for a long time. It has been happening in the U.S. since Alexander Hamilton received local tax exemptions in 1791 to build up the city of Paterson, N.J. as an industrial center. What’s different in our own era is that most companies aren’t actually changing their decisions based on incentives but are pocketing substantial benefits anyway.

Studies show that the cost and frequency of incentive packages—which cities and states typically offer companies to either relocate or stay put—have been rising. Secrecy surrounding many of the deals makes a full accounting difficult, but a new database assembled last year by the Upjohn Institute for Employment Research covers programs for 47 cities in 33 states. It found that the cost of such incentives more than tripled from 1990 to 2015, to $45 billion.

A Washington, D.C.-based watchdog group, Good Jobs First, has compiled data on deals worth more than $50 million each and reports that cities and states have awarded companies nearly 400 incentive packages of that size since the late 1970s—more than a third of them just since 2012. Nineteen of those deals surpassed $1 billion each. The largest package ever accepted was Washington state’s $8.7 billion in response to Boeing’s threat to leave the state in 2013, the group says. The biggest deal known to have been offered without being accepted was disclosed this week through a public-records request: more than $22 billion over 99 years from Dallas-Forth Worth International Airport and nearby cities, for HQ2.

Despite the giant dollar amounts, the Upjohn Institute found that investors mostly don’t change their investment decisions based on incentives. A 2018 review by economist Tim Bartik of 30 different studies of incentive offers concluded that 25% or fewer of the investors were swayed by the offers. The other 75% or more were coming anyway, Dr. Bartik found; they were just capturing added benefits from taxpayers."

"numerous companies applied for incentives after they had already broken ground and, in some cases, after they had completed building. A few even noted in their applications that they weren’t looking at other states for their investments. Yet all of these companies received taxpayer dollars for doing what they would have done anyway."

"Though incentives are rarely effective in changing firms’ investment decisions, they do allow politicians to attend ribbon-cutting ceremonies where they can highlight their own role in attracting a new company (or retaining an old one) and creating jobs."

"Defenders of economic incentives often argue that, though the system is flawed, it is necessary in order for localities to compete, or that the benefits more than pay for themselves. Yet some cities and states have studied their own programs and found reasons to re-evaluate. Virginia’s 2017 examination of its film incentive program found that every $1 in tax credits yielded only 20 cents in tax revenue, spurring recommendations to reform or cancel it. Washington, D.C.’s November evaluation of its economic development incentives showed that numerous programs have targeted firms that were coming anyway. California’s Legislative Analyst’s Office reviewed the state’s flagship economic development incentive program, California Competes, and called for ending it."

Do Targeted Tax Credits Generate Economic Development? Evidence From Movie Production Incentives

By John Charles Bradbury. He is an economics professor at Kennesaw State University.

"Abstract

Most US states offer movie production incentive (MPI) tax credits for the purpose of fostering economic development. The staggered implementation, suspension, and elimination of various incentive programs in the 2000s provides a fertile testing ground for empirical analysis of the economic impact of MPI programs to assess the effectiveness of industry-targeted tax credits on state economies. Econometric analysis using a previously-identified set of robust control variables finds little evidence of positive impacts from MPIs on state economies, though some MPIs are associated film industry growth and size. The findings call into question the standard economic development justification often used to advocate for MPIs and other targeted tax incentives."

How Greece’s archaeological authority slows development

See In Greece, the Authority Investors Fear Most: Its Archaeologists by Nektaria Stamouli of The WSJ. Excerpts:

"Greece’s archaeology authority is among the most feared bureaucracies in a country notorious for red tape, capable of tying up investment plans for years on the mere suspicion that antiquities might lie beneath a proposed development.

As Greece seeks to emerge from years of depression, the need to protect the country’s priceless antique heritage is colliding with its desperate need for investment. Compounding the problem, the archaeology authority is trying to pursue its mission with a budget and staff sharply reduced under austerity, leading to long delays.

In Greece, highways, sewers and other public projects are frequently postponed, redesigned or pushed way over budget by the cost of dealing with buried artifacts. New residential buildings often lack underground garages because developers fear uncovering ancient ruins that can halt the project for years.

The subway in Thessaloniki, Greece’s second-largest city, still isn’t finished after three decades of work, in part because of the discovery of an ancient town that some archaeologists compare to Pompeii in Italy. The excavations brought to light pre-Byzantine buildings, roads and hundreds of thousands of artifacts. As a result, one station had to be redesigned and part of the line remains unfinished."

Hellinikon represents a large piece of a multibillion-euro privatization program Athens has promised its creditors it will complete. The plans call for hotels, museums, theme parks and research facilities, making it one of Europe’s biggest development projects.

The archaeological authority delayed the project’s start for more than a year, even though archaeologists hadn’t expressed reservations before the site was used for sports facilities during the 2004 Olympics. An ancient cemetery and an aqueduct had been found and bracketed out of the 1500-acre area, but the authority delayed construction on the prospect that more findings could be there.

“There is no balance,” said Aristotelis Panteliadis, managing director of a supermarket chain that underwent five years of archaeological reviews over its request to expand a single store in the Peloponnese. “Keeping every ancient object in the spot it was found, even if it’s a small pile of stones from 500 years ago, and blocking investment because of lack of funding for excavations shows an authority with the sole purpose of saying ‘Do not touch anything.’”