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01 / 05
Only the Rule of Law Can Break the Poverty Cycle

Blog Post | Economic Growth

Only the Rule of Law Can Break the Poverty Cycle

Strong institutions are an important component of economic development

How do you stimulate economic growth in poor countries with faulty institutions? In the past, some thought foreign aid was the answer. But, as we have found out over the past 60 years or so, foreign aid cannot spur growth in countries lacking the rule of law, property rights and accountable government. 

In many places, the Democratic Republic of Congo is a prime example, billions of dollars in aid have stolen by rapacious government officials. Meanwhile, ordinary people are just as poor, if not poorer, as they were in colonial times.

Since institutions, such as the rule of law, are an important component of economic development, faulty ones must be fixed. The problem is how. 

Professors Daron Acemoglu from the Massachusetts Institute of Technology and James Robinson from the University of Chicago wrote what many consider a definitive account of the importance of good institutions in their 2012 book Why Nations Fail: The Origins of Power, Prosperity and Poverty. 

The authors note that good, or “inclusive”, institutions allow ordinary citizens to participate in the political and economic life of the country. That leads to greater equality before the law, which, in turn, provides an incentive structure that rewards talent and creativity.

The rule of law, in turn, reduces the likelihood of corruption and abuse of power, by substituting discretionary power with general rules. Moreover, a functioning rule of law necessitates separation of powers. It removes legislative and judicial functions from the executive, such as the Zairean dictator Mobutu Sese Seko Kuku Ngbendu Wa Za Banga (which translates as: the warrior who knows no defeat because of his endurance and inflexible will and is all powerful, leaving fire in his wake as he goes from conquest to conquest), and returns them to elected legislators and independent judiciary. 

But are good institutions sufficient for growth? Professor Deirdre McCloskey of the University of Illinois at Chicago disagrees and argues in a trilogy of books on “The Bourgeois Era” that ideas and rhetoric (holding innovators and entrepreneurs in high esteem, for example) are also key to enrichment.  As she explains:

A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the 17th and 18th centuries in northwestern Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low — the ‘bourgeoisie’ — as though it were dignified and free. The result was modern economic growth.

Whatever the case may be, no one would argue that a corrupt dictatorship with arbitrary enforcement of laws and regulations, and shaky property rights, is a good candidate for growth. So a country’s institutions must be changed from bad to good. 

But this is a tricky business, and there is no effective blueprint for the creation of good institutions. Parts of the world, Africa comes to mind, have actually experienced profound institutional deterioration after independence and are finding it very difficult to change course. 

Paul Romer, Chief Economist and Senior Vice President of the World Bank thinks “charter cities” might provide an answer. Under Romer’s plan, a developing country would set “aside a tract of land for a new charter city. This charter city would be administered by a developed third-party guarantor government, and citizens from the host country (and maybe other countries) could move in and out as they please. The point of the charter cities idea is to give citizens the choice about where they want to live and to provide the basic rules and amenities required for economic growth.” 

The government of the notoriously corrupt Honduras has attempted to follow a similar idea, but the effort has stalled in the Honduran Supreme Court.

Another option would be to “outsource” parts of the judiciary in a developing country to another country which has a well-developed rule of law, or even private arbitration. Such an arrangement can be effective in convincing foreign and domestic investors that a particular place is safe for investment. It might have echoes of a bygone era, but a number of British overseas territories and former colonies have retained Britain’s Judicial Committee of the Privy Council as their court of last resort. 

To be fair, appeals to the Privy Council have worked better in some countries, such as St Lucia, than others, such as Jamaica. After all, decisions of the Privy Council still need to be enforced by the local, often corrupt or dysfunctional, government. But, the impact of changes to legal arrangements, such as the one mentioned above, can be dramatic. Consider Belize, which permitted appeals to the Privy Council in the past, but then replaced its highest legal authority with the Caribbean Court of Justice in 2003. Its rule of law score has suffered as a result.

Since the rule of law took thousands of years to evolve in the West, it is hardly surprising it is yet to blossom in those developing countries whose history and traditions have been very different. That’s why if they cannot transpose the rule of law from abroad, they should consider outsourcing it to independent parties elsewhere. Yes, national pride may end up a little dented, but surely it’s far more shameful to remain mired in perpetual poverty.

This first appeared in CapX. 

Washington Post | Health & Medical Care

FDA Authorizes AI-Driven Test to Predict Sepsis in Hospitals

“Bobby Reddy Jr. roamed a hospital as he built his start-up, observing how patient care began with a diagnosis and followed a set protocol. The electrical engineer thought he knew a better way: an artificial intelligence tool that would individualize treatment.

Now, the Food and Drug Administration has greenlighted such a test developed by Reddy’s company, Chicago-based Prenosis, to predict the risk of sepsis — a complex condition that contributes to at least 350,000 deaths a year in the United States. It is the first algorithmic, AI-driven diagnostic tool for sepsis to receive the FDA’s go-ahead.”

From Washington Post.

BBC | Conservation & Biodiversity

How AI is being used to prevent illegal fishing

“Global Fishing Watch was co-founded by Google, marine conservation body Oceana, and environmental group SkyTruth. The latter studies satellite images to spot environmental damage.

To try to better monitor and quantify the problem of overfishing, Global Fishing Watch is now using increasingly sophisticated AI software, and satellite imagery, to globally map the movements of more than 65,000 commercial fishing vessels, both those with – and without – AIS.

The AI analyses millions of gigabytes of satellite imagery to detect vessels and offshore infrastructure. It then looks at publicly accessible data from ships’ AIS signals, and combines this with radar and optical imagery to identify vessels that fail to broadcast their positions.”

From BBC.

Blog Post | Communications

The Forgotten War on Beepers

Before smartphones, beepers were in the crosshairs of parents, schools and lawmakers.

30 years before parents and lawmakers sought to save youth from smartphones via age limits and bans in schools, a similar conversation took place about a pre-cursor to the cellphone: pagers.

Through the 1980s pagers became increasingly popular with teens, and also: drug dealers. This fact would eventually drag the gadget into the existing moral panic about adolescent drug use of the era.

The pager panic began with a 1988 Washington Post report on the gadgets prevalence in the drug trade, quoting DEA and law enforcement officials. The piece was syndicated throughout the US under headlines like “Beepers flourish in drug business,” “Beepers Speed Drug Connections” and “Drug beepers: Paging devices popular with cocaine dealers.

The spread of the story stoked concerns that beepers in the hands of youths weren’t just a distraction – a common complaint from teachers – but also a direct line to drug dealers. One school district official told The New York Times: “How can we expect students to ‘just say no to drugs’ when we allow them to wear the most dominant symbol of the drug trade on their belts.”

How can we expect students to ‘just say no to drugs’ when we allow them to wear the most dominant symbol of the drug trade on their belts

The New York Times, 1988

In response schools, towns, states and even the Senate would pass rules against beepers. New Jersey prohibited beepers for under-18s entirely, possession could result in a 6-month jail-term – a law proposed by ex-policeman and Senator Ronald L. Rice.

A city ordinance in Michigan mandated 3-month jail terms for children caught in possession of one within school grounds. Chicago passed a ban that its Public Schools Security chief said would also reduce prostitution:

We’ve got girls 11 years old. They get a call and they’re out of school to turn a trick.

George Sims, Chicago Public Schools Security Chief , Associated Press

Other states proposed community service, fines and 1-year drivers license bans as punishment. Thousands of of young people were victims of these heavy handed prohibitions – some of which made headlines:

Some schools regularly referred students found with pagers to police, one 16-year-old – Stephanie Redfern – faced a disorderly persons charge. A 13-year-old was handcuffed. Chicago was particularly aggressive in its enforcement: over 30 children were arrested and suspended for ‘beeper violations’ in one police sweep at a school – many parents couldn’t locate their kids for more than 6-hours. This was just the start:

According to Police Lt. Randolph Barton – head of the Chicago public school patrol unit at the time – by April 1994 there had been 700 beeper arrests in Chicago schools, with the prior school year seeing 1000. Some still felt these numbers were too low:

Right now I don’t think enough people are being arrested for wearing or bringing beepers into Chicago schools.

Ald. Michael Wojcik (35th)

In 1996 a 5-year-old in New Jersey was suspended for taking a beeper on a school trip, outrage ensured – catching the attention of Howard Stern, leading to calls for the laws to be amended or repealed.

Even young adults didn’t escape the beeper prohibition: 18-year-old Anthony Beachum feared a jail term after trying to sell a beeper to a student on school grounds. State prosecutors sought a criminal conviction for Beachum – that would have barred him from his hopes of joining the military. The judge settled for probation and 10 hours of community service.

Hampton University required students register beepers with campus police, even though there was no evidence of them increasing drug access. VP of student affairs at the time would admit as much:

There is not a single case where I can make a connection between beepers and drugs.

Hampton University, VP of Student Affairs

Big Beeper Fights Back

The beeper backlash was a BIG problem for Motorola who had 80% of the pager market at the time. The company had a hit on its hands – that was introducing the brand to a whole new generation – so in 1994 it fought back, partly by rallying youth. A move reminiscent of TikTok’s recent lobbying tactics.

Motorola enlisted children of its employees to help design pro-beeper campaigns, emphasizing the importance of pagers as legitimate communication devices for the young. “Who better to help plan for the battle than teens themselves” one report on the efforts would say. At a week long event, one attendee came up with the slogan “Pages for All Ages.”

The company ran television ads promoting pagers as a tool for child parent communication and in 1996, partnered with PepsiCo to offer 500,000 pagers to youths at a low price.

The promotion angered lawmakers – like State Senator Ronald Rice – who’d been a leading player in the war on beepers. Around this time moves to over-turn bans emerged, by other lawmakers calling them outdated – partly fuelled by the suspension of a 5-year-old alluded to earlier. New Jersey would amend the law in 1996, but not repeal it.

Three decades later, the New Jersey law was still on the books. The original sponsor of the bill – Senator Ronald Rice – sought to repeal it in 2017 saying “Fast forward almost three decades and it’s no longer an issue.”

There is little evidence it ever was an issue, in-fact – the subsequent rise of cellphones in schools coincided with a massive reduction in youth drug taking, while causation has been suggested by some – it certainly serves as stronger evidence against the idea of mobile messaging increasing drug access.

Senator Ronald Rice passed away in 2023 – the New Jersey Pager ban still in place – months later The Washington Post editorial board would call on schools to ban cellphones entirely – part of a new moral panic about kids and digital devices, many of whose parents were once prohibited from bringing pagers to school.

Nod to Ernie Smith of Tedium.co the only other person to cover the beeper bans, a piece that helped highlight a few fun examples included in this piece.

This article was published at Pessimists Archive on 4/10/2024.

Blog Post | Economic Growth

Measuring Freedom and Flourishing | Podcast Highlights

Chelsea Follett interviews Leandro Prados de la Escosura about the long term trends in wellbeing, inequality, and freedom.

Listen to the podcast or read the full transcript here.

Let’s discuss your latest book, Human Development and the Path to Freedom.

I have spent many years working on economic performance in the long run, and while I don’t have anything against GDP, I was always uneasy with the idea of using GDP per head as a shortcut for wellbeing. GDP is a good indicator of output but a very deficient indicator of wellbeing.

Most economists say, “This is true, but it’s highly correlated with non-economic dimensions of wellbeing.” There is also a tendency to produce a dashboard of indicators, basically GDP and some additional measures that create a more nuanced picture.

I was unhappy with that. Then I realized that, since the beginning of modern national accounts in the 1950s, there have been attempts to produce alternative measures. More than 30 years ago, the United Nations Development Programme produced the Human Development Index. I was very interested, but at the same time, I was frustrated when I saw that countries with no freedom at all ranked very highly in the index.

For example, in the first report in 1990, they had a retrospect going back to 1975, and I found that Spain, under Franco’s dictatorship, ranked very highly in human development. How come? It wasn’t satisfactory to rank a nasty dictatorship so highly. And then I read the literature accompanying the report and found this very candid assertion: “The purpose of human development is to increase people’s range of choices. If they are not free to make those choices, the entire process becomes a mockery.”

This is an important philosophical point: Human development is not just about living longer or having a higher material standard of living. You can get that in a high-security prison in Norway. Choosing between alternative ways of life is what makes the difference.

To make a long story short, they have tried time and again to introduce freedom, but they never managed to do so because of strong political opposition from country members of the program. So, as an independent scholar, I thought, “Look, nobody is going to read it, but I have the freedom to introduce the freedom dimension.”

Tell me about what you found.

Perhaps what makes sense is to compare what I found to what you would get on the basis of per capita income. If you look at the average increase from 1870 to 2020, the growth in income and wellbeing is very similar.

But if you look closer, you realize there are large differences across different periods. During first globalization before 1913 and between 1970 and 2000, they are relatively close. During the last two decades, the difference is huge in favor of material living standards measured by per capita income. The first part of the 20th century is just the opposite.

What next? Well, try to provide an explanation.

I went in two steps. One was asking, “Why has this growth in human wellbeing happened? What is the intuition?” The intuition is that if you get richer, you’re going to become better fed, healthier, better educated, and freer. But you can also have different levels of wellbeing at the same income level, and the most important finding from a historical perspective is that at any point of income, you have higher wellbeing today than in the past.

If you compare 1870 to 1913, you see that for most of the income levels, you get the same association between health and income, but at high levels of income, you get higher levels of health. Improvements in health techniques and medical knowledge were restricted to the most advanced countries. But if you look at the 1950s, at any income level, you get higher levels of health than in 1913 or 1870. You also find this for education and freedom. If you move to 2000, there is another upward shift.

Of course, there are reversals. There have been four moments in time in which the progression, the positive progression of human development stopped or declined. One was the Great Depression. The second one was during Mao’s Great Leap Forward. Then there were the oil shocks in the early ’70s, but the most damaging one has been COVID. COVID is the first period in which wellbeing measured in terms of augmented human development has declined

However, over the long run, for any income level, whether you are rich or poor, nowadays you have higher wellbeing than in the past.

Those findings are fascinating. What would you say is the biggest implication of your work?

The first thing is that wellbeing, broadly defined, has expanded worldwide more steadily than per capita income.

Secondly, the phases in which we conventionally associate improvements in wellbeing are not necessarily the same as those in which actual wellbeing improved. For instance, there was an important improvement in the so-called interwar period, even though economic growth stagnated. In 20th-century India, before independence, there was a stagnation in real average income but a remarkable improvement in health. This was because of the discovery of the germ theory of disease, which brought simple hygienic practices like washing your hands before eating and not sleeping near animals.

We also tend to forget that the association between wellbeing and income is not fixed. There are movements along the function: if you are richer, other things being equal, you’re going to be healthier, more educated, and freer. But this is not the whole story. There are also upward and downward shifts.

For instance, you could say that in terms of freedom in 2020, we are worse off than we were 20 years ago. This doesn’t mean that people were richer 20 years ago—we’re richer now—but at the same income level, 20 years ago, people were freer than we are today.

So, it’s a nuanced picture. Overall, things are improving, but there are also worrying declines in freedom.

Exactly.

Can you talk about inequality?

In 1870, in the case of wellbeing, inequality was high, and it increased up to the end of the century, then went down. Then, because of World War I, it increased again. But from the late 1920s to the present, with the exception of a reversal because of World War II, there has been a steady decline in inequality of wellbeing.

In the case of per capita income, inequality increased until the end of the 20th century, around 1980, and only began declining after 1990.

Here, I’m referring to relative inequality. If we increase wealth by 10 percent everywhere, inequality in relative terms doesn’t change. Some people are a bit pickier and think, “If my income increases 10 percent and my income is 100, I get 110. If your income is 1000, you now get 1100.” This is absolute inequality.

Relative inequality in per capita income increased until 1980 and has declined since 1990. But absolute inequality in per capita income, the distance between rich and poor, continues growing.

Absolute inequality in wellbeing has declined since 1960. Today, it is similar to what you would find in 1938, 1913, or 1900, but higher than in 1870.

It’s also important to look at what happens to different parts of the distribution. Who are the winners and losers? Broadly speaking, the middle class of the world gained the most, and the lower classes and those at the top won relatively less. If you look at absolute gains, those who were at a higher level of wellbeing got more. But that changes for different dimensions. Those at the bottom, for example, were the main winners in terms of education, while those in the middle were the main winners in terms of health.

I know that your current focus is on freedom. Could you tell me a little bit about that?

I became interested in human development after reading Amartya Sen, who emphasizes what Isaiah Berlin would call positive freedom. Freedom to. But he also emphasizes negative freedom, the absence of coercion and interference. And I think this is interesting because many people think there is a trade-off between negative and positive freedom.

At the end of the day, everybody wants to have negative freedom, but there are those who think negative freedom has nothing to do with income, that would be Hayek, and those who think negative freedom can only be reached as a second stage once you provide for those who don’t have access. For some, positive freedom is a socialist lie to reduce negative freedom. For others, they are two faces of the same coin.

As an economic historian, I find this is an interesting topic for research. If you look at the world, and you can see this in the Human Freedom Index that Cato publishes, you see the countries at the top in terms of negative freedom are also at the top in terms of positive freedom. For instance, Denmark is at the top of the list in terms of economic freedom, but also in terms of education and health.

My question was, well, maybe this trade-off is only a short-run phenomenon. Maybe if you look at the long run, the trade-off doesn’t hold or only holds for a certain period. So why not construct two alternative sets of estimates, one for positive freedom and the other for negative freedom? And this is what I’m trying to do now.

My main discrepancy with the Fraser Institute economic freedom index is that I don’t take into account the size of government. I know this is a contentious issue. People say, “the larger the government, the less room for private initiative.” At a point in time, this is true. And if you look at similarly developed countries, this is true.

But if you take a cross-section at a point in time, you can see that there are countries in which the size of government is much, much smaller, that are not necessarily freer, in terms of absence of coercion and interference, than countries with larger governments. Look at, for instance, Latin American and Sub-Saharan African countries. Think of Somalia. Or think of my own country under Franco. It was a right-wing, but, in many aspects, very socialist dictatorship in which the government was everywhere. But the size of government was very small.

In 1980, do you know what percentage the income tax contributed to the revenues of the central government in Spain? Give me a figure. You would say 40 percent?

Sure, 40 percent.

2 percent.

Wow.

Nobody paid income tax. So, there was no redistribution.

My point is that the size of government matters less than the nature of government. Perhaps Denmark would have more economic freedom with a smaller government, but if you compare Denmark to other countries, you can see that even though the Danish government is larger, Denmark’s degree of economic freedom is higher. Why? Because the nature of government action is different. It doesn’t interfere as much as another government that is less intrusive in quantitative terms but more intrusive in qualitative terms.

So, if you are looking at a point in time, it makes sense to say, “mutatis mutandis, if a rich country nowadays has a smaller government, this country is going to be freer.” That is true. But the action of government varies from one case to another.

Get Leandro Prados de la Escosura’s book, Human Development and the Path to Freedom: 1870 to the Present, here.