Over the past two centuries, quite staggering differences in income have opened up between countries. Understanding why this has happened, and what can be done to reverse it, is the most important project in social science. Although the phenomenon is evidently economic, the discipline of economics has not so far provided a compelling account. The resulting vacuum has attracted other approaches, some from the other social sciences and some from non-mainstream economists. Two recent books, Lawrence E Harrison's The Central Liberal Truth: How Politics Can Change a Culture and Save it From Itself (OUP) and Erik Reinert's How Rich Countries Got Rich, and Why Poor Countries Stay Poor (Constable & Robinson), are, respectively, examples of these variants. They both neglect recent mainstream analyses, but would probably disagree even more strongly with each other than with the mainstream economics they criticise. While they cannot both be right, they can both be wrong, and I think that they largely are. However, each contains enough painful truths to be discomforting for conventional thinking.
Harrison pins the blame for economic divergence on culture, while Reinert blames trade liberalisation. By contrast, in recent years the mainstream contenders have been geography, institutions, and leadership. The geographical thesis has two variants. One emphasises intrinsic differences: for example, being landlocked and being prone to malaria are seen as major obstacles to development. The other variant emphasises differences that arise because some countries develop before others; in traditional economics, late starters should catch up, but according to the "new economic geography," a country that gets ahead then gets further ahead. The institutions thesis, meanwhile, following the work of Douglass North, sees institutions as setting the rules of the game, in particular shaping the incentives for investment. The most celebrated, and contentious, variant of the thesis is that institutions came with European settlers. Colonies that got a lot of settlers got good institutions and these have persisted, accounting for subsequent success. At the other extreme are colonies that got extractive industries without settlement, such as the Belgian Congo, so that good institutions never got established. Finally, the work on leadership proposes that individuals make a big difference to national economic performance.
I am reasonably confident that we will eventually conclude that geography, institutions and leadership are all important in particular contexts: we will not find one single explanation for the many failures in the development process. Institutions and good leadership are probably substitutes: only in the context of bad institutions is there a real difference between having a good leader and a bad one. Both institutions and leaders are only likely to matter where geography is conducive to development: some geographic configurations will frustrate the best human endeavours.
For Harrison, the "central conservative truth" that culture is decisive is trumped by the "central liberal truth" that culture can be changed by government action. But the central liberal truth is hard to distinguish from what we might term the "central economic truth": if the economy develops, the culture (and, consequently, the institutions) will come along.
Take punctuality, one of the virtues Harrison flags. He describes a rather touching campaign in Ecuador to persuade people to take time more seriously. Unsurprisingly, it failed: President Gutiérrez arrived late to launch the campaign. Yet attitudes to time are one of the classic changes induced by prosperity: as the price of time rises, people economise on it. In South Korea, about the fastest developer ever, this change occurred within a single lifetime. A Korean friend recalls how in her youth people ambled down the streets of Seoul as if still in a village, whereas now that time is more valuable people stride along as if on a New York sidewalk. The change in attitude to time is certainly conducive to greater prosperity, but it is not something that requires public action, or even that public action can do much about.
But Harrison's ideas for changing attitudes are quite scary. Taking the BBC as his model, he advocates that governments should retain a monopoly of broadcasting. He acknowledges the risks involved in a monopoly of information, but suggests that a well-intentioned government with a monopoly can achieve a lot. Harrison may well be right in this last sentiment, but it is a case of the best being the enemy of the good. Few governments can be trusted with a monopoly of information, least of all those in the countries now stuck at the bottom of the global economy.
Despite its unpromising emphasis on culture, Harrison's work does contain a few real insights. In poor countries, attitudes often do need to change: they are dysfunctional, but not set in stone. Governments may not be able to do much about them, but opinion leaders can. Harrison provides two examples, one concerning the attitudes of ordinary people, the other of elites.
The attitudes of ordinary people stuck in poverty often reflect the economic circumstances that they have suffered. If their reality has been economic stagnation combined with extreme volatility, it is unsurprising if they are fatalistic, seeking solace in high-risk activities and alcohol. Indeed, what's astounding to me is that in this predictable sea of despair one can invariably find people who display fortitude, courage, hope and initiative. In 19th-century Britain, organisations of the humble—such as the temperance movement, the Salvation Army and provident funds—systematically set about inculcating the values of prudence, hope and fortitude. They made a difference. Of course, in the Britain of my own generation, such self-help was mocked into oblivion, but it is alive and well in poor countries today. Harrison describes the evangelical and Pentecostal movements in Latin America, which while deeply unfashionable, are popular and vigorous, joined by people aiming to gain control over their own lives.
An example of dysfunctional attitudes among elites is provided by Africa, the region with which I am most familiar. Here the dominant source of elite ideas is a particular subculture of western thinking that might be termed neo-Marxism. I am not concerned here with the specific policy errors generated by Marxism, but with the consequence of the Marxist message for attitudes. The predominant concern of the European Marxists has been to criticise their own societies. Inevitably, therefore, their commentaries on development have been concerned to blame the problems of poor countries upon rich societies. This schema limits the role of the developing world to that of victim. The more dreadful the plight of these victims, the more guilty is capitalism.
This mental frame, though not Marxism itself, has proved hugely influential in Africa. In part this is because in the west, only the left has engaged with the continent. The right has switched off, and the centre, rather than oppose the left as it has done so effectively on domestic policy, has found it advantageous to use the victim image for its own purpose: politicians like Tony Blair and Gordon Brown use Africa to demonstrate how much they care. Hence, victimhood is the dominant account that elite Africans hear. Of course, it is comforting to believe that one's failure is the fault of others. But it is also massively disempowering, denying any scope for self-improvement and removing the need to critique one's own actions. The real tragedy of IMF and World Bank policy conditionality in Africa was not that the demanded policy changes were wrong, but that the attempt to impose policy change from outside hardened resistance to them. The psychological term for what happened is "reactance," better expressed as "a man convinced against his will is of the same opinion still." Policy conditionality yielded reluctant, half-hearted reforms that were often merely a pretence: the Kenyan government sold the same reform to the World Bank five times in 15 years.
In Latin America, Harrison's region of expertise, much the same process has happened, spiced by anti-Americanism. Reinert, too, inadvertently provides an almost comic microcosm of this process of intellectual infection when he self-regardingly describes his address to the parliament of the East African Community on how Africa stays poor because rich countries have prevented it from having sufficient trade protectionism. A Tanzanian MP responds by asking: ''I have read your paper and I have only one question. Do they underdevelop us on purpose?''
In mainstream economics, the dysfunctional consequences of such attitudes have recently been explored at the level of individual organisations by George Akerlof. In effective organisations, managers devote serious effort to persuading the workforce to identify with the goals of the organisation: people are insiders and so self-motivate. Where the workforce develops a counter-narrative that it is being exploited, the organisation is dysfunctional. To date no one has tried to apply this idea to citizens' attitudes towards their nation state.
The core idea in Erik Reinert's book is that manufacturing industry offers much better long-term prospects of development than either agriculture or natural resource extraction. Because manufacturing is subject to economies of scale, manufacturing growth is self-reinforcing: as it grows, costs fall. The most intellectually substantial part of the book is Reinert's discussion of the history of this idea. His book is in large part a critique of modern economics, and how its increased emphasis on formal methods of analysis has come at the price of a loss of realism. Unfortunately, this cannot be dismissed as cant. The idea of scale economies in manufacturing goes back centuries and was fully articulated by Alfred Marshall in Principles of Economics (1890), before being rediscovered in the work of Paul Krugman, Tony Venables and Paul Romer.
The problem with Reinert's book is not the core proposition that economic structure matters. It is the casual passage from this to its advocacy of protectionism, which in the context of those countries stuck at the bottom of the world economy is doubly crazy.
The first respect in which it is crazy is that it ignores politics. Protection opens up a political process of lobbying and corruption, which, in the context of already dysfunctional polities, is liable to dominate any technocratic economic strategy. This is not hypothetical: it is what has happened across Africa. It was not coincidental that Daniel Arap Moi, former president of Kenya, a role model for political manipulators, placed his key fixer as minister of trade. Nor that Africa's reformers, such as President Marc Ravalomanana of Madagascar, Emmanuel Tumusiime-Mutebile of Uganda and Ngozi Okonjo-Iweala of Nigeria all prioritised trade liberalisation as a means of puncturing the patronage system that they knew was blocking the entire reform agenda. Of course, developed countries are not immune from patronage-driven protectionism. Reinert cites approvingly American protection of steel and cotton, and European protection of agriculture. Yet these are not instances of shrewd economic strategies for national prosperity, but grotesque abuses of economic policy by sectional interests. For this support of rich country protectionism alone, Reinert's self-description as "one of the world's leading heterodox development economists" should be read in the same sense as would be the description "one of the world's leading quack doctors." Africa can afford such abuses of policy far less than can America and Europe, but its governments have indulged in them far more: Africa's heavily protected industry is the equivalent of our agriculture.
But even if technocratic use of protection were politically possible, would it make sense? The world has changed profoundly since the 19th-century examples of protectionism that are Reinert's guides. He virtually ignores the many 20th-century experiments with protectionism, in Latin America, Africa and India. Nineteenth-century Germany had a serious-sized market with companies at a similar stage of development to British manufacturers. By protecting it against British manufacturers, the German government may well have helped German companies reach the scale of the British ones against whom they could then compete in world markets. By contrast, the market now constituted by Kenya is tiny relative to that available to Chinese manufacturing firms. On Reinert's criteria, the 20th-century protectionist experiment that should have stood the best chance of success was India. Here was an internal market larger than the entire 53 countries of Africa which maintained a very high tariff wall from the 1940s until 1991. Yet during this period, India stagnated. Only once it liberalised did it begin to develop. Nor were the companies established under protectionism the basis for subsequent success. Even the Indian market was not large enough to sustain the intensity of competition needed to drive innovation and productivity growth: India's liberalisation, by exposing firms to greater competition, forced the more efficient to raise their performance and the least efficient into bankruptcy.
The most astonishing omission from Reinert's book is any analysis of the recent manufacturing success of developing countries in global markets. Since 1980, there has been a profound shift in the structure of developing-country exports. In 1980, around 80 per cent of their exports were primary products; now around 80 per cent are manufactures. Developing countries have broken into global manufacturing markets in a spectacular fashion. Indeed, the explosive growth of these exports, rather than the virtues of protectionism, is the key prediction of the scale-economies theory: once a country is able to penetrate the world market, it experiences a virtuous circle of falling costs as a result of its expanding manufacturing clusters, with each firm inadvertently lowering the costs of its apparent rivals. (The process is known as "economies of agglomeration.") This global trade is enabling huge areas of the developing world to make productive use of unskilled labour, and so is massively contributing to poverty reduction. Today some 4bn of the 5bn people living in "developing" countries are in countries that are either already at middle-income levels, or are rapidly converging. The problem of development is now a group of around 50 countries, with a total population of 1bn, that have been stagnating at the bottom of the global economy: a group that I describe in my new book as the "bottom billion." Reinert still uses the term "third world" to refer to the 5bn. His mental frame is a rich world-poor world dichotomy that is now irrelevant. The "third world" has shrunk radically.
So what of the countries, including the entire region of sub-Saharan Africa other than South Africa, that have missed the globalisation boat? Their labour costs may now be lower than China, but labour costs are not sufficiently important in the manufacturing process for this small advantage to offset the lack of agglomeration economies: Africa is locked out of global manufacturing by Asia. The internal market of Africa as a whole is very small, precisely because Africa is so poor; but worse, it is divided into more than 50 different markets, with trade barriers between countries driven by the political lobbying process. Could Africa simulate the Indian strategy of very high external barriers with an open internal market? Even if it could, there is little basis for believing that it would lead anywhere. But it is not even politically feasible. The theory of comparative advantage that Reinert despises is handy in showing why integration between developed countries, such as the EU, generates convergence (poorer countries catching up with the richer), while developing-country integration generates divergence (activity agglomerates towards the already-richer countries). Regional integration benefits those countries within the scheme that are most similar to the countries that are outside it. Thus in the EU, poorer Ireland and Portugal were able to trade with richer European states on more favourable terms than developing countries. But in the East African Community (EAC) of the 1960s and early 1970s, companies in relatively wealthy Kenya gained market share at the expense of poorer Uganda and Tanzania, as a result of the advantage membership of the bloc gave Kenya over developed countries. The old EAC ended in closed borders and a war. The present revival stands a better chance precisely because the common external tariff is now much lower, this being the liberalisation that Reinert asserts has underdeveloped Africa.
In fact, Africa tried heavy protection for a long time. Far from triggering rapid growth, it dwindled into a dead end as the limits of small and stagnant markets were encountered. For example, in the 1980s, Kenya had some potential to export tomato paste, normally packaged in tubes. The local tube manufacturer, a subsidiary of Metal Box, was reasonably efficient, but the plastic tops for the tubes were produced by a local monopoly, owned by an MP. The problem was not that the tops were expensive—their overall cost was insignificant. It was that they didn't fit. The tomato paste leaked. With sufficiently high protection on tomato paste, these leaking tubes could still be sold to Kenyans, but try selling them to Sainsbury's. Protection of the plastic top industry had killed the tomato paste industry.
Protection does have a role to play in helping Africa to industrialise, but not the protection of domestic markets that Reinert fancifully imagines would help the region. Africa needs protection from Asia in rich-world markets until it develops the manufacturing agglomerations that would give it a chance of competing. Clearly, this is outside the control of Africa: it depends upon how we in Europe and America use our trade policy. It may seem fanciful to imagine that Europe or America would protect African producers from Asian producers in domestic markets—but we are already doing it. America has a scheme called the Africa Growth and Opportunity Act (AGOA), and Europe has a broadly equivalent scheme called Everything but Arms (EBA). Both allow products manufactured in Africa to enter our markets duty-free, whereas Asian producers must pay tariffs.
The fact that we are already protecting African products in our own markets demonstrates that it is not politically infeasible, but doesn't it also demonstrate that even this form of protection is ineffective? After all, Africa has not yet industrialised. Yet this assumption is wrong. With all trade policy, the devil is in the detail: AGOA works and EBA doesn't. Together with Tony Venables (who really is "one of the world's top economists"), I have tried to estimate their effects. We found that AGOA has increased African exports of apparel to America around tenfold in five years. In contrast, EBA has been useless. The success of the American policy and the futility of the European is surely a little embarrassing, given that "we" are supposed to be the ones that care about Africa: remember Gleneagles? But EBA is fixable: its weaknesses are that it excludes Africa's more prosperous countries, such as Kenya and Ghana, which have the best chance of developing export manufacturing, and imposes restrictive "rules of origin" that manufacturers can only meet by producing goods uncompetitively. Let's hope it is fixed. The success of AGOA is the germ of truth in the otherwise spectacularly misguided thesis of Reinert.
So where does this leave us? Why, in a world in which most developing countries are rapidly converging on the OECD economies, have the bottom billion been stuck? Like Tolstoy's families, while economic success looks much the same everywhere, failures cannot be accounted for by a single process. Azar Gat's superb book War in Human Civilization (OUP), which should rank alongside Jared Diamond's Guns, Germs and Steel as one of the truly illuminating analyses of social processes, gives us a window into one of the traps that ensnare the bottom billion: violent conflict. Popular misunderstanding of violent conflict in the countries at the bottom is part of the larger misperception: in the neo-Marxist pantheon, rebels are assigned the role of heroes fighting oppression and inequality. Gat systematically analyses the history of violence from its origins. His technique is to compare societies at similar stages of social evolution, even if this implies huge leaps in historical time. He shows that at some stages societies simply lack the means for an effective monopoly of security, and then violence is inevitable. I particularly appreciated his account of why, in hunter-gatherer society, continuous warfare is inherent. He shows that these societies were the antithesis of the havens of peace conjured up by a blinkered past generation of anthropologists.
I will close with an application of the historical leap approach that is pertinent to the postcolonial experience of Africa. Decolonisation thrust Africa into circumstances that bear a family resemblance to the abrupt Roman withdrawal from Britain. British society duly plunged into prolonged civil war, economic decline and mass emigration; Africa has made a better fist of decolonisation than did post-Roman Britain, but has experienced the same consequences. Within the conflicted arena of modern Africa, there is a morally engaging struggle in progress. But it is neither between good rebels and evil governments, nor between good governments and evil international institutions. It is between the reformers within government and their crooked and misguided opponents. To understand why the reformers often lose, and what can be done about it, you might try my new book, The Bottom Billion (OUP).
