Refugees don’t have money. If they had they’d be exiles.
Generally speaking, that ‘natural resource curse’ is because natural resources are easier to exploit and help finance government than general taxation.
So countries rich in natural resources tend (and that’s not a law, but just a tendency) to have more oppresive government.
In Russia, for example, there’s a well discussed relation between oppressive state actions and the price of oil. When oil revenues are down, suddenly the politicians talk of free markets to help grow revenues, but when oils is sky high, other things are on their agenda than liberalizing the economy.
So you see countries like switzerland and germany, japan, etc.. being very poor in natural resources, but very prosperous, while others like Russia, and Africa being basket cases.
Of course, you have major counter examples like the US, Canada, Australia, etc…
I have nothing against private foreign aid, but the problem is that Western government foreign aid is mostly from government to government, propping up corrupt regimes that would simply collapse without it.
The argument basically goes as follows, under certain institutional settings (such as private property rights and rule of law) natural resources will be a blessing to the economy. However, lacking these conditions large endowments of natural resources will cause government to be more predatory and corrupt. Essentially it leads to centralization of resources and economic activity and all the rent seeking and other forms of corruption that result.
A similar argument holds for foreign aid, when a country is given large amounts of foreign aid people will compete to obtain it, resources that would have otherwise been used to provide goods and services to the public are wasted in lobbying and bribery. Moreover, when governments have received these funds it may adversely affect the likelihood of various beneficial economic reforms that may have otherwise been necessary.
Marek, I’d sort of appreciate it if we could keep terms like economically illiterate out of the discussion.
As far as I’m aware you’d agree with me that the interest rate is a price like any other, and as such is determined by the forces of supply and demand. Now, of course, I’m not denying that the discount rate of people within society determines the demand for capital, but I think you’d have a hard time denying that if the capital stock was suddenly wiped out interest rates wouldn’t rise.
Like I said, I don’t deny that part of the increase in standards of living is attributable to increases in the capital stock, there is certainly more capital per worker in the USA than there is in Angola, for example. But whilst I don’t remember the exact magnitudes or countries in questions, I believe that in order to account for the differences in income per capita, the US would have to have 300 times more capital per capita than India, which I find difficult to believe.
If capital really was scarce then presumably one would expect to see huge rates of return on capital and as such capital rushing from the developed to the developing world. Well, that doesn’t happen. If you’d like some more exact estimates of international capital flows I’ll post some when I get my new copy of Easterly’s book. I’m not really sure what part of Solow’s analysis you’d disagree with here, would you disagree that capital runs into diminishing returns? Because that’s basically the crux of his argument. Since capital is a small part of the overall production process (one third) one would expect it to run into diminishing returns fairly quickly, as such we must find another source of long term growth between countries.
Now, I think technology is part of that explanation. Casual empiricism would seem to corroborate this. Technology is a broad term, and as long as one includes economic reasons (lack of intellectual property rights, lack of private property rights, lack of rule of law etc.) for the adoption of various technologies then the explanation is coherent.
Here is the same argument again. Does it become more self explanatory just because you repeat the same argument again?
Have you thought about the possibilities that the lack of private property rights just may have something to do with private capital not flowing into these corrupt and impoverished States? Your assumption about rate of returns assumes free markets. It assumes private investors feel secured about future investments in those regions and not have to worry about government confiscation and wars destroying their capital. But we know that in reality, these places are very hostile to private property.
So the end causal element is always the same: Amount of real capital per capita.
It sounds like the crux of his argument is basically - they’re just stupid. A marvelous contribution to economic thought.
What in the world is this about? 1/3???
Yes because China and former Soviet Russia really lacked the technology. Soon you’re going to claim that they lacked scientists and engineers. Or maybe that they are genetically inferior.
Nothing is coherent about your thesis expect that it adheres to anything but logic.
he should probably also explain how ‘instantiated technology’ is something other than capital.
Oh the flattery, honestly, you’re too kind.
No sweat.
Just waiting for you to actually address the issue by applying some actual economic logic as oppose to sociological fairy tales. I guess it isn’t going to happen.
The answer is simple. Government is the reason why Africa is poor. Their leaders are busy enriching themselves at the cost of everyone.
I think many people miss this, and don’t realize this is the #1 reason why impoverished nations are impoverished. Instead of curing the problem with capitalism, people will claim that greed run rampant by capitalism has raped this nations of their natural resources and wealth.
Now dont kill the messenger and lets try to stay value-free here, but could possibly race or ethnicity have anything to do with it? There are the ominous race-IQ charts…
Even in libertarian circles, people tend to be PC about this. I don’t get involved in any kind of race discussions here. (I used to get involved in them, but they ended up boring me, as there would usually be too much ignorance and hatred to go around to get anything scientific or meaningful from the discussion. The topic tends to bring out the worst in even some of the most principled people I know.)
Ethnicity possibly, race not likely. Even dumb races have a few smart individuals that can run things. If your ethnic customs are antithetical to private property and markets, on the other hand, only the destruction of your society can save you.
That should be at the bottom of the list, as being poor is preciously what made them vulnerable to conquest.
But the term “African” is a purposely misleading aggregate. The continent is hardly homogeneous. For example, South Africa, Egypt, Liberia, Algeria.
Sub-Saharan Africa was poor because they existed in primative tribal societies. Imperialism, which continues to this day in the form of ruling classes educated in the European Marxist tradition and international “aid”, is why it is still poor.
Well, you didn’t really answer this point last time I attempted to get it across, so I thought perhaps you might if I reposted the argument in greater detail. I’m not really sure what you’re saying here, my point is that if capital really was as scarce as you say it is, we’d expect to see interest rates of well over one hundred percent. Saying that the countries in question don’t have clearly defined and well enforced property rights doesn’t actually get to the heart of the matter, because even with very high expropriation rates, a return on capital of over one hundred percent would make a whole load of investments worth it.
So, let me ask you the question and put it as bluntly as possible, why haven’t we seen as large reduction in interest rates across time and place as we’d expect to see if capital accumulation was the cause of the increase in standards of living.
By the way, I’m sure we agree on the underlying causes, and I’m sure we both agree that incentives matter. But the fact of the matter is that without the correct incentives in place nobody will invest in technology (in a very broad sense of the word). And if you want sources for any of the numbers I’m giving you, then I’ll take a copy of Easterly’s book out of the library.
Well, former Soviet Russia really didn’t lack capital either did it? Definitely not in terms of sheer numbers of machines and the like.
And there I was thinking you were just being flat out mean, fancy that…
Agreed. A far more important question than, “why are Africans still so poor ?” would be, “why are some people suddenly so rich”? Answer that and the first question won’t matter.
DD5 is right its because of all the standard economic explainations: capital, division of labor, etc. But that begs the question, why did that occur? Or better, what changed that allowed it to occur?
Even granting for the sake of argument that the whole continent of Africa is dumber than, say, Germany, how big is the spread really? 5 points out of 100? 10?
You don’t have to be a Norman Einstein to run a viable economy. A bunch of normal average people will do fine. It might not be the world’s best, but it won’t be a disaster.
So is this what passes for economics these days?
Society would start over, billions would die of starvation, and we would go back to barter. So I don’t understand your point here.
That number is completely arbitrary and meaningless. The degree, technical sophistication, remoteness of its employment, and certain capital combination’s all contribute to the productivity of capital. But poverty is always the result of a defunct economic system which is unable to accumulate, structure, and maintain an adequate structure of production. India is poor because it spent the better part of the last century under communism, and before that, under serfdom.
Denying scarcity these days? Either way, that statement presupposes the ceteris paribus condition. Our international monetary system, with perpetual inflation, suppression of interest rates, illusory comparative advantages, and massive (arbitrary) capital flight makes such a statement meaningless. Without sound money, a functional price mechanism, and an adequate defense of property rights (major source of risk), you can’t have rational allocation of resources. You have chaos.
Again, a given amount of capital does not yield constant output; it can be arranged and rearranged in different orders reflecting different degrees of roundaboutness, which will yield different input-output results. The mainstream doesn’t have a capital theory, they ignore the heterogeneity and complementarity of capital, and thus turn to mysticism and sociology.
Sure, as long as you refrain from starting your replies by 'You’re crazy if you think…"
The prices of capital goods are determined by demand and supply of capital goods, not the interest rate.
The interest rate is determined by the demand and supply of present goods in terms of future goods.
If the capital stock would be wiped out, the interest would rise not because it’s supply is suddenly reduced (that will only increase the prices of the capital goods), but because the general fall in productivity and standard of living that the disappearance of capital goods would cause will lead to an increase time preference, i.e. an increase in demand for present goods over future goods.
I recommend Rothbard’s Man Economy and State for more details on that if you are interested.
I’m not sure where you get that capital is a third of the production process, but I bet it’s from GDP figures, where it shows that consumption goods are ~ 70% of goods produced.
This statistic is fatally flawed because the GDP is reallly not a ‘Gross’ statistic, but rather a ‘net’ one, that hides most of economic activity happening in a given year - about 50%. A better statistic would be a Gross Domestic Output (GDO), that shows capital good industries at about 70% of the goods produced. You can read De Soto about the subject.
A long debate, but anyway, the point being is that the proportion of capital goods produced in a year vs final consumption goods has nothing to do with the contribution of the entire capital stock to the final amount of goods produced.
If you want to look at the difference between the capital stock of the US vs an African country, compare the size of the stock market valuations for domestic companies, that you will get at a much, much larger number than 300 times more per capita.
When you write ‘technology is a broad term’, I read ‘I’m not defining precisely what is technology, which may include capital goods’.
See, if technology is the knowledge of how to use combine resources to obtain a given result (water + heat = water vapor, for example), it’s clear that once technology is produced, it is not scarced anymore, and can be shared by everyone on earth (only learning the technology might be have some cost).
If technology was really the issue for Africa’s poverty, you would see something like western countries keeping secrets where no one that knows western technology (engineers, scientists, etc…) are allowed to share it in any way (books, classes, internet, etc…) to people in those African countries.
Obviously, it is far from the case. (Almost) any western person is free from traveling to those countries, teaching, sharing and providing them with our technology. Even more, companies are free to go and import their existing capital stock with them - which includes technological knowledge!
The reason why they don’t do it - while they do it in China (or Dubai), by contrast - is they are guaranteed to be plundered by African governments enough so their investment will be un-profitable.
There is an interesting book I borrowed from my library a little while back:
The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It
I didn’t get a chance to read it, but I did skim through the book. It mainly focuses on Africa and gives four reasons for their problems:
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conflicts & war
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the natural resource trap
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landlocked by bad neighbors
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simply bad governing
It is a 4.5 start book at Amazon.