On many occassions, this blog has criticized foreign aid as an inefficient approach to development. Personally, I am more enclined to see the benefits of free trade and the importance of property rights, the latter being considerably more important. Consider property rights, no matter what form they take, as a product (or a service) produced by an institution: the State. After all, we may all disagree to which extent the government should intervene in the economy, but our common denominator is the defense of property rights. The State has to produce law & order or otherwise growth might never happen. Throwing money won't help without institutions.
However, maybe this will get me some flak from libertarian colleagues, but the State has to be able to "produce" law & order. At very low levels of development, where most exchanges take place in small communities, trust and other social mechanisms mimic the effects of formal law more efficiently than formal law would. However, as a society expands and grows, it needs more formal institution (courts, judges, police). Producing such goods can be tricky. Very tricky in fact.
A State needs to be able to promote liberty under law as John Adams would say. Let us take a look at countries that were once former colonies of European nations. Why did Canada, the United States, Australia, New Zealand, Hong-Kong and India stayed democratic and had either respectable growth or astounding rates of economic growth while others like Zimbabwe, Algeria, Nigeria and Indonesia fared poorly and succumbed to authoritarians regimes? The most common explanation is the following: the institutions left by the British were superior than those left by the french because they were based on a colonization method that was valued development more than exploitation. Myself used to make the case that British Common Law was superior to French Civil Code. However, there might have been a bias in the way I looked at it.
What if the institutions left were due to a different environment of colonization? I have found a paper by D. Acemoglu, S. Johnson & J. Robinson on settler mortality in colonies and economic growth. The graph inserted in the post is a correlation they have between the log of GDP per capita at PPP level in 1995 and the log of settler mortality. The higher the settler mortality, the lower the GDP per capita at PPP level in 1995.
The argument is the following: where colonists were most likely to die, they opted for a colonization method that favorised the maximisation of what they could get while being there as least as possible. On the other side, if as a colonist, you were less likely to die, the institutions were built to last and foster growth. It just so happens that the french colonized areas where colonists were very likely to die, while the british colonized areas where they were less likely to die. As the authors point out : In prosperous and densely settled areas, Europeans introduced or maintained already-existing extractive institutions to force the local population to work in mines and plantations, and took over existing tax and tribute systems. In contrast, in previously sparsely settled areas, Europeans settled in large numbers and created institutions of private property, providing secure property rights to a broad cross section of the society and encouraging commerce and industry
Previously I used to believe somewhat naively that common law was inherently superior to civil code with respect to economic growth. To have development, you only needed to adopt better property rights, but I believe I was wrong. The way institutions were built (read: the government that enforces law and order when you have a large and diverse society) matters very much. The perceived difference for economic growth between french law and british law was only an error.
Free trade works, property rights are important, a sound currency is also very helpful, free factors markets are elementary. Basically, economic freedom matters. However, you need to create an environment where economic freedom can be maintained. That is the question I am laying before you. If tommorow morning, a country like Senegal was to cut its trade tariffs, privatize national companies, cut spending, reduce taxes and make laws that are based on protecting contracts, property and exchange, would Senegal grow rapidly? The answer is no if you don't have a state capable of enforcing such a system.
So how can institutions take form to ensure such freedoms? Do they emerge out of human action or do they emerge only out of pure deliberate design and planning, a mixture of the two? I am a firm defender of economic freedom and its benefits, but there are questions around it that need to be answered. I know this line of questionning might not endear me to some of my libertarian colleagues, but I still cannot account why economic freedom are allowed to be in certain countries (Mauritius, South Africa to a lesser extent, Hong-Kong) and not other countries (Senegal, Nigeria). The main question that proponents of economic freedom need to ask themselves now is how to create the environment that protects it and that needs to adress how to build a state capable of enforcing law & order.
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D. Acemoglu, S. Johnson & J. Robinson, ‘Reversal of Fortune: geography and institutions in the making of the modern world income distribution’, Quarterly Journal of Economics, 118 (Nov 2002), 1231-79.
