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The Secret to Making Poor Nations Rich
February 21, 2008
Benjamin W. Powell, Alvaro Vargas Llosa, George B. N. Ayittey

Contents

Benjamin Powell
Research Fellow, The Independent Institute

I’m Benjamin Powell.  I’m an assistant professor of economics at Suffolk University, and a research fellow at the Independent Institute.  Formally, I directed our Center on Entrepreneurial Innovation at the Independent Institute, which is what got this book project going to produce a book not accidentally title something like tonight’s event—Making Poor Nations Rich

I should say a little something about the title.  I didn’t give the book that title.  And when I first saw it, I actually wasn’t a huge fan of it, because I think there’s very little “we” in the West can do to “make somebody rich.”  It has to come from within their own country, really.  The working title—which sounded a little too academic—is now the subtitle, “Entrepreneurship and the Process of Development,” which is what actually makes a poor nation rich.  And we’ll get into that a little bit more tonight as the program goes on. 

The reason for creating the book really was the interest that started to pick up in promoting third-world development, whether we’re looking at rock stars and pop culture, like Bono, politicians like Tony Blair, or more recently Barack Obama, and looking at big plans for the rest of the world, and doubling aid to impoverished areas—particularly concentrating on Africa. 

Whether these are the Millennium Development Goals from the United Nations, or proposals from here in the United States, it seemed that often these programs placed the focus really on things that P.T. Bauer called the consequences of economic development, not the causes—often focusing on putting in aid for investment, aid for education, things that come about as a country is developing. 

So to remedy that and try to push the policy debate a little bit more in the other direction, we put this book together to really focus on the role that entrepreneurs play in the process of development, and how they respond to institutional environments.  Because if anybody here has traveled to other parts of the world, you know entrepreneurs are all over the place.  It’s not that countries don’t have them, it’s a question of how productive they are at promoting economic growth in these places.  Often it’s barriers that prevent their businesses from expanding—but even worse, often it’s poor institutional environments that channel their efforts into ways that aren’t socially productive.  Adam Smith’s “invisible hand” was institutionally contingent.  Institutionally contingent on the area of voluntary exchange—that’s what you would get the societal benefits from people pursuing their own self-interest. 

All too often the ways entrepreneurs get ahead in other areas of the world, and even here in the United States, and this city in particular, Washington D.C., the focus is on getting somebody else’s money transferred to you.  Competing in that manner isn’t socially beneficial, it’s socially wasteful.  It’s effort that could have gone to making other people better off.  Sometimes it’s even worse than that—it’s socially destructive.  And that’s when you compete to get barriers thrown in the way of your competitors, and in the process you might get ahead, but you hold the rest of society back. 

So what this book does is it focuses on how entrepreneurs switch between these roles in looking at the different institutional environments around the world, and trying to focus on how—by respecting private property rights, better granting greater degrees of economic freedom, respecting the rule of law –we can channel more entrepreneurial effort into the socially productive form.

So what this book does is begin by explaining this economic and institutional background to how entrepreneurs cause growth.  Then Bob Lawson provides a chapter surveying the role of economic freedom and promoting prosperity around the world, and from there we move to really the meat of the book, which is a bunch of case studies from around the world.  We study nine different countries.  We have 12 authors coming from six different countries, all who are experts in the area that they’re writing about, and luckily we have two of them here with us tonight—Professor George Ayittey and Alvaro Vargas Llosa, who both wrote chapters for the book, and will be talking as well as I will. 

I’ll start by introducing one of them, they will give their talk, and after both of them have spoke, I’ll wrap up with a little bit more of a success story, talking about Ireland and some of the bigger lessons from the book, and then we’ll have Q&A at the end.  They are recording tonight, so I ask you please to turn your cell phones off if you have not already.

Our first speaker tonight is Alvaro Vargas Llosa.  He’s a senior fellow and the director of the Center on Global Prosperity here at the Independent Institute.  He’s also a nationally syndicated columnist for the Washington Post Writer’s Group, and the author of the book, Liberty for Latin America, which obtained the Sir Antony Fisher Memorial Award for its contribution to the cause of freedom in 2005.  He was also recently appointed a young global leader in 2007 by the World Economic Forum in Davos. 

He is a native of Peru, and received his bachelor’s degree in International History, and his M.A. from the London School of Economics.  He’s been a member of the board for Miami Herald Publishing Company, and an op-ed page editor and columnist there.  He’s contributed to numerous newspapers around the country and the world.  He’s the author of The Che Guevara Myth, Liberty for Latin America, The Madness of Things Peruvian, and The Guide to the Perfect Latin American Idiot.  Please join me in welcoming Alvaro Vargas Llosa.

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

I wouldn’t want you to get the wrong idea from those titles.  They’re just meant to grab some attention. 

Thank you very much Ben, that was a very kind introduction.  I’m very honored to be here, thank you so much for coming to share some ideas and thoughts with us about development issues. 

I’m going to talk a little bit about Latin America.  It’s not going to be as bleak a picture as you might expect.  Some things are going, I think, well, or at least are going in the right direction.  But in general it’s not going to be the most upbeat talk you’ve ever heard.  But that’s of course always done in the spirit of trying to persuade those who make decisions that things can be better, and that we can move in the right direction.  And if we do, of course, we can achieve glory very quickly.  That’s one of the wonderful things about the world today. 

If you look at Latin America in general, the perception is that there has been a tilt to the left– in some cases, the soft left, in other cases to the hard left, but in general a move to the left, a radicalization of Latin American politics, and a rebirth of some of these old leftist ideas and instincts. 

I have a slightly different take.  I think what’s going on is basically a struggle—a cultural struggle.  It’s also an institutional struggle, but foremost a cultural struggle between what I call modernizers and reactionaries. 

The modernizers are a very mixed bunch.  You have people on the center-right, like the Mexican president, the Colombian president, the Salvadorian president.  And you have what I like to call the vegetarian left—the Lulas from Brazil, or the Vasquezes from Uruguay, or even the Alan Garcias from Peru.  People who are on the left wing of politics, but who have adapted to the circumstances, to the world around them.  So we call them vegetarian—they are softies.  They’re pretty innocuous.  They’re not that dangerous anymore. 

And then we have the reactionaries.  That’s basically the carnivorous left.  We used to have a carnivorous right.  It doesn’t exist anymore.  I’m sure it’ll come back at some point.  We have this tendency for these movements to come back—but we have a carnivorous left—the Chavezes in Venezuela, the Moraleses in Bolivia, the Correas in Ecuador, the Ortegas, perhaps, in Nicaragua, and so on and so forth.

So we have the modernizers and we have the reactionaries.  What do the modernizers want?  Apparently they want the market economy, globalization, and democracy—political democracy.  What do the reactionaries want?  Basically populism, in economic terms, isolationism—or to put it, I think, more precisely, a confrontation with the dominant powers in this world.  But they’re not really isolationist all the way, because they like to team up with themselves and with other radicals around the world.  So they believe in confrontation with the main centers of power around the world, with liberal democracies, so to speak.  And this confrontation, I think, is extremely important because it’s dominating Latin American politics and the economy, and it’s in many ways determining our present and our near future.

Why?  Well, because when modernizers get a breakthrough like they did in the 1990s, for instance, what you tend to have is something that holds them back.  They don’t quite dare go far enough.  They don’t go deep enough and far enough in terms of economic reform.  Again, the market in which they apparently believe in, globalization in which they apparently believe in, and political democracy in which they apparently believe in. 

When the carnivores turn into vegetarians—we’ve had a few examples.  Many of the people I just mentioned in Brazil, in Uruguay, in Peru, used to be carnivores.  Lula’s background in Brazil is out of a Marxist unionist.  Alan Garcia—I was in Peru, my native country, in the 1980s—Alan Garcia was a carnivore.  He was the Chavez of the time.  There wasn’t that much oil around, but apart from the oil aspect, everything else was very much like Chavez, including the rhetoric.  He’s now turned into a vegetarian.  But because of this cultural struggle, he’s turned into only a vegetarian, he hasn’t gone far enough in terms of political and economic reform.  He’s content with managing the status quo, with holding back the carnivores that are trying to take power away from him and influence the course of events. 

But again, this dynamic, I think, is holding back Latin America from catching up with Eastern and Central Europe, India, China, other reforming countries.  In the case of China, obviously leaving politics aside and just concentrating on economics. 

The carnivores, I think, are important, because they’re influential, and there’s a mixed constituency there that’s, in a way, supporting those carnivores.  And I think it’s important to understand where they’re coming from and what they want, what their aspirations are. 

We have people who are disillusioned with the 1990s.  We went through a period of economic reform—apparently free-market reform in the 1990s.  Many people are disillusioned with what happened there.  They think there was a lot of corruption, there were too many private monopolies emerging from that process of reform, from that wave of reform.  There are people who are looking for a cultural identity, and I think that identity needs to be collectively expressed.  And in many cases, ethnically expressed.  And that probably is an important factor in Bolivia and some of the other Andean countries. 

There are people who are rent seekers, rent seekers that have been around forever, who suddenly realize that the populist state is more in tune with rent seekers than the free-market state. 

I’m just trying to illustrate how it’s a very mixed constituency.  People are coming from very different backgrounds and very different illusions and aspirations.  But this is an important base.  Otherwise Chavez wouldn’t be there, Morales wouldn’t be there, Correawouldn’t be there, Ortega wouldn’t be there.  We wouldn’t have had Humala in my native country, in Peru, with 48 percent in the last presidential election.  He didn’t quite win, but he got very close to victory. 

So this is important to understand.  It’s a very fascinating, and at the same time, of course, very dangerous dynamic: the carnivores versus the vegetarians, the modernizers versus the reactionaries. 

Now, I think it’s very important to take into account the background to all of this.  Where is this coming from?  What is behind this?  Why is this state of affairs what it is today? 

Well, there’s one word to describe what happened before, and what led to this state of affairs, and that’s populism.  The twentieth century in Latin America is the century of populism.

Populism. This is a word that has different connotations in different parts of the world, including the United States, where in many cases, it has a positive connotation.  When I talk about populism, I hear a lot of American friends say to me, but populism is a good thing.  We have Jeffersonian populism.  Populism is a bottom-up process of participation, economically and politically, yes.  But not in Latin America.  In Latin America, populism means exactly the opposite.

Populism emerged as a reaction against the nineteenth century oligarchic state.  And it was an oligarchy.  This is not a Marxist invention.  Yes, the nineteenth century was deeply, profoundly oligarchic in Latin America.  And it generated this reaction, which was a populist reaction.  We had these caudillos as we call them. Caudillois a Spanish word meaning—there’s not an exact translation, but it means basically strong man.  And it was always men, not women—strong man—who wanted to do basically three things. 

One was to generate this mythical idea that there was a wealth that somebody took away from us—foreign powers, imperialists, foreign capitalists.  There was this mythical wealth that we possessed at one point in our history.  This is a very powerful idea that populism has in many cases ingrained in our psyche.  The idea of redemption—almost a theological idea—the idea was not to redeem the soul, the idea was to redeem the poor in Latin America.  These caudillos ingrained in our mind the idea that the state was going to be a great redeemer of the poor.  A very powerful idea if you were a Latin American poor, and you felt that the state was an oligarchic state, society was a two-tier society in which the state was basically supporting a group of interests that were alien to your aspirations. 

And the other idea was the idea of wealth redistribution.  In other words, wealth was not something that had to be generated constantly, it was something that was already there—somebody took away from you, and that once you recover it, simply needs to be redistributed in order to create social justice.  A very powerful set of ideas: very simple, very wrong, very flawed, but extremely powerful.  And this is populism. 

Populism had some very interesting characteristics.  I’ve always asked myself, how would I define populism, and I love to start by recalling a famous quote by somebody—an American writer I absolutely admire from the first half of the twentieth century, H.L. Mencken—who said, “a demagogue is somebody who preaches ideas he knows to be untrue to people he knows to be idiots.” 

How would we define populism?  Well, maybe a populist is somebody who wants to abolish an individual right in the name of all the rights, knowing that all the rights are the same as none, because it is the state not the individual who embodies these rights.  And he also knows that populism concentrates the benefits on a small group of people who feel these tangible benefits, and, of course, generates costs that are dispersed throughout society.  In other words, nobody realizes they’re actually paying the cost of populism.  It’s a very perverse system.  You feel the tangible benefits of populism, nobody else feels the tangible costs or intangible costs of populism, and it’s a very perverse system. 

So that kind of dominated the twentieth century.  It had a very important economic dimension, which is something we could call with different names.  I tend to call it economic nationalism, which is what dominated, I think, the economic and political landscape from the ‘30s to the end of the ‘80s.  It was based on the idea that there were unjust terms of trade between Latin America and the rich countries—between the periphery countries, as we called Latin America back then, and the center countries, as the rich countries—mainly the United States and Europe—were called. 

The idea was that periphery countries were selling cheap, primary products and raw materials to the center countries that were selling back to Latin America and other underdeveloped countries very expensive manufactured goods.  So there was this imbalance.  And because the rich countries monopolized technology and capital, it was impossible for Latin America to generate development, because it simply didn’t generate enough foreign exchange, because of this imbalance, to import that capital and that technology.  So this whole thing was a form of exploitation by the rich countries. 

So we came up with structuralism, and dependency theory, and all these sophisticated names to justify—what?  Basically statist policies. interventionist policies.  Tariffs, quotas, nationalizations, industrial policies—all different forms of concentrating power in the state, generating more and more political discretion on the part of those who took decisions, made decisions in society, and sucking away resources from the individual in Latin America. 

Just to give you an example, the consequence of this was, of course, that instead of accumulating capital, as were other countries around the world—and some of them are featured in this important book—we were consuming capital.  We were destroying, annihilating capital. 

In the 1980s alone, capital flight from Latin America amounted to about four times all the foreign aid distributed by multilateral bodies like the IMF—to the entire underdeveloped world, not just to Latin America.  About $250 billion.  So just think of that.  This was a huge process of consumption of capital. 

So obviously this didn’t bode well for Latin America’s future and destiny, and what happened was a huge crisis.  This crisis took place at the end of the ‘80s, early ‘90s, depending on what country you’re talking about.  But it was a huge crisis. 

And as with all crises, it generated great tension within the statist system.  And you had a very interesting division between those who wanted to nationalize the entire economy—they said, we just haven’t gone far enough in this statist process; we need to take over all means of production—and the protectionists, who wanted the government to protect them, who believed deeply and profoundly in government intervention, but, of course, didn’t believe in the government taking the property away from them.  They were, after all, private entrepreneurs who wanted to keep the ownership of their assets. 

And this fascinating tension within the statist system opened the way to what?  To free-market reform.  And that’s what happened in the 1990s.  Except that what happened was flawed free-market reform.  A type of free-market reform that I think didn’t go as far as it should’ve, as it could’ve, as far as some countries in Central Europe. and in Eastern Europe. and in Southern Europe went, or countries like New Zealand, or maybe, at least in economic terms, like India and China today.  And so we have a very mixed result in the 1990s.  Pretty much a loss of a great opportunity. 

Yes, price controls were lifted, capital controls were lifted, a lot of companies were privatized, many of those tariffs went down.  But we ended up replacing all of that with new forms of government intervention.  Inflation was replaced with new taxes.  Tariffs were replaced with regional or sub-regional trading blocks.  Of course, government monopolies would replace with private monopolies. 

So in the end you have a very mixed type of reform, which is free market on the one hand, statist on the other hand, a very contradictory type of reform that I think didn’t quite replace the system that was very much the populist legacy of the twentieth century.

So what was the result of this?  The result of this was growth was tiny—about 1 percent for that decade.  The size of government was not reduced in Argentina.  The GDP, the size of the economy went up, grew by about 40 percent in the ‘90s, which is not bad, but the size of government measured by the public spending, you can measure it in many other ways, went up by 100 percent—two-and-a-half times more than the growth of the economy. 

In the last 30 years, every Latin American country except Chile has seen its GDP per capita grow—sorry, dropped—as a proportion of the US per capita GDP, whereas Thailand’s and Indonesia’s—two middle-of-the-table countries in Asia—have seen theirs rise by 40 percent.  The average growth in Latin America at that period was about 3 percent, the average growth in the world was 3.3 percent, in Southeast Asia it was 7.7 percent.  So the performance was clearly not good enough. 

So this is the background to the situation. Let me come back to the present-day Latin America. 

I talked at the beginning about this cultural struggle.  We’re in a very interesting and deceiving type of situation.  We’re going through a bonanza, a boom in Latin America.  A commodities-led boom, an export-led boom.  We’ve had many of these in the past, in the 1920s, in the 1950s, in the 1970s.  We’ve been through this so many times before.  So Latin America has been growing at an average rate of 4 percent annually for the last half decade.  Foreign investment has totaled about the equivalent of 2 percent of the regions’ GDP in the last half decade. 

All of this has generated some government revenue, the government in every Latin American country spending this revenue on, of course, social programs trying to reduce poverty.  These programs usually entail cash stipends to the poor in exchange for a commitment on the part of those families to take those kids to school and have them vaccinated.  In Brazil you have Bolsa Família, which is one of the many programs around—about 12 million households are getting these cash handouts.  A program called Oportunidades in Mexico about the same, etcetera.  So a lot of revenue because of these exports tie to natural resources.  

Is this sustainable?  I don’t think so.  In the long run I don’t think so.  In the last three years, the regions’ accumulated GDP has gone up by about 53 percent, productivity has gone up by only 4 percent.  This huge disparity I think tells the story.  We’re being dragged along by this world bonanza, mostly, I think, led by the insatiable demand on the part of the Chinese, and to some degree by other Asian countries.  But this is not really the result of a huge torrent of entrepreneurial activity in Latin America.

And I think this is what we need.   Maybe in the question and answer period I can go into this with more detail.  I think we need to remove a lot of barriers to entrepreneurship in Latin America.  What we have today is a labyrinthine system that makes it very costly to participate in various markets in Latin America that makes it extremely difficult to be competitive.  It makes it very hard to even be legal in Latin America.  So what you have is a lot of entrepreneurship that is simply going to be wasted—that is not being productive. 

You have in Peru about three million small and mid-sized companies that only generate about 30 percent of the country’s GDP.  It’s very unproductive when you have 98 percent of the country’s businesses generating only 30 percent of the wealth.  Only 2 percent of the country’s businesses are generating 70 percent of the wealth.  Why?  Because we have too many taxes, too many regulations, a judiciary that is simply not trustworthy—it is totally dependent on the political process, etcetera.

We have a labor market that is entirely riddled with interventionist policies.  In Argentina we have a fascinating situation in which Mussolini’s labor code, that was imported into Argentina by Peron half a century ago, is still there.  So if you want to operate in labor market in Argentina, you’re subject to Mussolini’s rules. 

If you talk about trade in Latin America—I mentioned these sub-regional trading blocks.  I mean, Latin America-South American integration is basically a patchwork of competing sub-regional trading blocks, all of which, of course, liberate trade among a few countries and just generate a lot of tariffs to the rest of the region and the area. 

Very little innovation because the government, again, makes it very difficult to innovate.  If you’re in Mexico, you’re a small business in the pharmaceutical industry, you have to sell your products very cheaply to the government toward a social security program that involves healthcare, and of course you have very little capital left for research and development.  Only about a 0.4 percent of the country’s GDP is destined to that. 

Again, a lot of public spending, which is going up in the area as a whole about 10 percent every year, crowding out private activity, etcetera.  So I will probably go into this in more detail in the question and answer period. 

Because of this populist background, this cultural struggle, we have not determined what kind of society we want. We’re being held back from genuine reform.  And I think that kind of reform basically means eliminating all these barriers to trade, and to labor mobility, and to investment, and basically to entrepreneurial activity.  And that’s what has made other countries, as this book I think illustrates, very profoundly rich. 

So I don’t want to finish with a bleak message.  This is a very positive message.  It can be done.  Yes we can.  Si se pueda.  But we need to engage in reform.  We need to be bold, we need to be daring, we need to shed these legacies, and I think we can do it if we follow the example of some of these countries, that as Ben will tell you at the end, have been extremely successful at creating and generating wealth in a very short period of time.  Thank you very much.

Benjamin Powell
Research Fellow, The Independent Institute

Thank you, Alvaro.

Our next speaker is George Ayittey.  He is a distinguished economist in residence at the Department of Economics here in Washington at American University.  He received his PhD from the University of Manitoba, and he’s the author of many books, including Africa Unchained: the Blueprint for Development, Africa in Chaos, The Blueprint for Ghana’s Economic Recovery, Africa Betrayed, and Indigenous African Institutions

He’s contributed to numerous scholarly volumes, happily including this one, and to many journal articles in professional journals.  He’s testified before the Senate Foreign Relations Committee, the Presidential Advisory Counsel on HIV and AIDS, the House Africa Subcommittee, and a whole bunch of other places.  Please joint me in welcoming Professor Ayittey. 

George Ayittey
American University

First of all I’d like to thank Ben for putting this event together, and also inviting me to contribute a chapter to the book, and I also thank you for finding some time to come and listen to us.  And this particular event is instructive because, as many of you are aware, President Bush just visited Africa, and as a matter of fact, returned today. 

And two days ago I was on CNN, and they were asking me to evaluate U.S. policies towards Africa, Bush’s policies towards Africa has been a success, so what do I think?  And indicated that his policies on AIDS, of course, has been a resounding success.  You know, people loved him in Tanzania and Liberia, for example.  And also he has provided—the federal government—his government, has spent $1.2 billion to purchase six million insecticide-treated bed nets and distributed that across Africa.  So that’s good. 

Unfortunately, this Millennium Challenge Account is not going to well.  One of the purposes of his trip was to try and highlight or showcase success stories, on Africa as far as the Millennium Challenge Account is concerned. 

And if you go their Website, you find that the Millennium Challenge Account has listed 19 African countries as having received the Millennium Challenge Account grant.  And one of those countries is Kenya. 

Another country that he visited was Tanzania, which received $688 million in MCA Account.  Now there’s something very ironic about this, because number one, in 2003, the Millennium Challenge Account applied such stringent regulations that very, very few countries qualified.  And the Millennium MCA was getting a bum rap, so it went to Tanzania and gave Tanzania $11 million grant money to help it qualify for a Millennium Challenge grant.

So, all right, Tanzania got the money, tied to curb corruption.  How successful was the effort? 

A week before President Bush got to Tanzania, the entire cabinet had been dissolved over a corruption scandal.  And that scandal was over a grant of a contract to a Houston-based company, which did not exist.  And get this—the anti-corruption czar himself in Tanzania had been implicated.

Now of course lots of personalities go to Africa.  Paris Hilton even decided to go to Africa after jail time in order to redeem herself. Why so many visitors?  And let me be blunt.  Africa doesn’t lack resources.  You name the mineral, and we’ve got it.  Gold, diamonds, titanium, platinum.  They’re all there in Africa.  But what has held Africa back?

Africa says that, you know, in Latin America you have carnivals.  In Africa we got peoples.  Now these are the old generation of Africans who never took responsibility for their own mistakes, and always blamed their problems on somebody else.  Day in, day out, it was always colonialism.  Imperialism.  They were stuck in their own intellectual patch. 

And you see, the thing, which is so maddening, is that you have so many people—so many people in the West—who come to Africa trying to help the African people.  But the people, they don’t understand.  So, see, in a way, the aid money that we’re pumping into Africa is given by a people—it’s like the blind leading the clueless.  You’re trying to help a people who do not understand. 

So you see, number one we have governments in Africa who are the problem.  And number two, we have foreign aid donors—Westerners, Americans—who are trying to help a people they don’t understand.  So that’s how our problems have been compounded.

First of all let me concentrate on the type of mistakes or misconceptions Americans have about Africa.  The first one is political correctness.  You and I know this.  Too often, Americans are not willing to criticize the policies of black African leaders for fear that they may be called racist. 

Now if you don’t criticize Mugabe, for example, whom do you think you’re helping?  Are you helping the people of Zimbabwe, or are you helping the corrupt and incompetent government, which is in power there? 

Political correctness.  It’s not just the whites—African Americans too.  They don’t want to criticize black African leaders, because they feel that they have to express racial solidarity with them.  So nobody says anything.  When Idi Amin was butchering Ugandans at a rate of 450 a day, nobody said anything.  But had that many African giraffes been slaughtered, the entire world would have erupted in outrage. 

Second, quite often, because of colonial guilt, for example—again, a lot of governments, Western governments, they don’t want to criticize black African leaders.  That’s understandable, but it doesn’t help. 

The third problem that we have is that, quite often, Americans don’t make a distinction between leaders and the people.  The reason why they don’t want to make this distinction, because they don’t want to be seen as criticizing the leaders, because criticizing the leaders may be politically incorrect.  But it is important to make that distinction, because in Africa it is the leaders who are the problem, not the people. 

You may not like Bush.  I may not like Bush, but when I say that, when I criticize Bush’s policies, that doesn’t mean that I hate the American people.  And it’s exactly the same approach, that we should have toward Zimbabwe.  Mugabe is a monster.  He’s a despicable monster.  But that doesn’t mean that we hate the Zimbabwean people. 

The fourth and most fundamental distinction which we should always make is that quite often Americans think that the best way of helping Africans is to hand money over to an African government.  There’s something called a government that Americans can form partnership with.  I mean, the epitome of this approach was led by Bill Clinton.  The emphasis was on leaders and government forming partnerships.  Now of course, that assumes that we have something in Africa called a government. 

Now, you and I know that what is this in Africa?  It’s not a government.  We call it a vampire state.  Vampire state—because it’s a government, which has been hijacked by a phalanx of bandits and crooks who use the instruments of state machinery to enrich themselves, their cronies, and their tribesmen, and exclude everybody else.  They’re carnivores.  They suck the economic vitality out of their country’s economy. 

Witness this.  Ask yourself why is America rich and why is Africa poor, in spite of all the resources that we have in Africa?  And you will be able to find the answer.  Ask yourself this question.  How do the rich in America make their money?  Now how do the rich in Africa make their money? 

The rich in America—who is the richest?  Bill Gates.  How did he make his money?  He made his money in the private sector, by producing something—Microsoft computer software.  He has something to show for his wealth. 

Now let’s go to Africa.  Who are the richest in Africa?  Give me a guess? 

Heads of state and ministers.  How do they make their money?  They make their money by raking it off the backs of their suffering people.  See, that’s not wealth creation, it is wealth redistribution.  So it creates a certain political culture.  Anybody who wants to be rich heads straight into government and into politics.  Everybody who wants to be rich heads straight into government. So don’t come and preach entrepreneurship to me.  We have political entrepreneurs.  And their job is to try and seize the government, and then use the machinery of the government to enrich themselves.  That’s what political entrepreneurship means to us in Africa.

And once you seize that power, are you going to give it up?  No way.  Only with a bulldozer can we dislodge some of these bandits.  Which means this.  Politics of exclusion is the major obstacle that we have.  We have a small group of people who have hijacked the government and used the government to advance their own economic interests and exclude everybody else. 

So let me ask you this.  If you’re a member of the excluded class, what would you do?  You’ve got three options. 

The first option is to say that, well look, you might say to yourself, we’re going to remove these bandits and put our own people there.  That’s what leads to our rebel insurgencies, and the civil wars in Africa, which has destroyed the continent.  Somalia’s blown up.  Rwanda.  Burundi.  Zaire.  Liberia.  Sierra Leone.  Ivory Coast.  Whoever thought Ivory Coast would blow?  And who even thought we’d have this kind of violence in Kenya? 

The moment you have this violence, forget about economic development.  It’s not going to take place.  Because the economic development doesn’t take place in a vacuum.  It takes place in an enabling environment.  And that environment must have certain features. 

Number one, it must have property rights and that enabling environment.  Number two, you must have the rule of law.  And number three, it has to have some basic functioning infrastructure, like electricity, clean water.  Now how you going to have this infrastructure operating when the country’s blown up?  When Bush went to Liberia, for example, Monrovia doesn’t have electricity, or even clean water. 

The third thing that you need to have in that enabling environment is that you have to have some basic freedoms.  Economic freedom or political freedom, and you got to have some basic stability.  We haven’t had development in Africa because the continent, for much of the time, has been in chaos.  You have all these enabling environment requirements when enabling environment—stability, freedoms, and that sort of thing. 

All right.  The second option that you have, if you were a member of the political excluded group is to say that, well, we’re sitting on some oil reserves, so we’re going to break away and set up our own country.  That’s what the Biafrans tried to do in 1967.  And even right now in Nigeria there are rumblings of secession among the Yoruba, for example. 

Nigeria happens to be an oil-producing country.  I was there last month.  It doesn’t have petrol, gasoline.  Severe shortages.  Or if you’re member of the excluded class you might say that, all right, I don’t have the power, we don’t have any resources, all that I got are my feet, so I’m going to vote with my feet and go and settle somewhere else.  And that’s why Africa is crawling with refugees. 

So in other words, what happened was that the leadership, after independence, created two defective systems.  The defective systems that it created—number one, is a political system with a great deal of concentrated power, political power, in the hands of one individual. 

Now you don’t have to be rocket scientist to recognize that anywhere you create a political system in which you concentrate so much power in the hands of one individual—that system, no matter where you are, will always degenerate into tyranny.  And that’s what we had in many, many countries in Africa, where you had one-party state systems.  Life presidents, for example. 

What led to this?  The leadership after independence said, well, we don’t want to have anything to do with democracy.  Democracy is a Western institution.  So here we must make unity.  We only need one person.  That’s how a lot of the political system degenerated into tyranny. 

It was sadly the same thing with the economic system.  After independence they said, we don’t want to have anything to do with capitalism.  Capitalism, colonialism was evil and capitalism was also evil.  Because the colonialists said they were capitalists, aha, capitalism too was evil.  We don’t want to have anything to do with capitalism.  So they adopted socialism.  And what type of socialism?  Socialism, as you know, is an economic system with a great deal of concentration of economic power in the hands of the state. 

So you got two systems, an economic system and a political system with a lot of power, bring them together, all that controlled by one individual.

Now what type of socialism do they practice?  The type of socialism they practice was Swiss bank socialism, which allowed these heads of state to rip and plunder Africa’s treasury for deposit in Switzerland. 

We know what the solutions are.  The solution is to take power away from the hands of these bandits and give it back to the people where it belongs.  We know that.  Both the economic power and political power. 

Will the Western countries help this?  So far they haven’t.  Because they think that they want to work with these governments to reform.  And you know what?  These African governments take the aid money and spin the World Bank around.  That’s right.  They take the aid money and perform the bank boogey.  One step forward, three steps back.  They don’t reform—they are not interested in reform.  Look at Mugabe in Zimbabwe.  See here is where the danger is.  Without reform, more countries in Africa will blow.  Kenya is on the brink.  Zimbabwe will blow.  Chad will blow.  Cameron will blow.  Gabon, Guinea, Uganda will blow. 

So what do we do?  One of the things that we need to do is to tell President Bush to stay home.  Thank you.

Benjamin Powell
Research Fellow, The Independent Institute

Thank you George.  I think there’s nothing like a talk on Latin America and Africa to cheer you up.  Ultimately this book, though, is not just about failed development stories.  In fact, more than half of it’s dedicated to success stories, and ultimately that’s what we’re interested in is taking less developed regions of the world and helping them to transform. 

So one of those success stories I’d like to talk with you about tonight is Ireland, just very briefly.  Now, of course, compared to sub-Saharan Africa or Latin America, they had a relatively high standard of living already.  But compared to the rest of Western Europe, they were far behind.  About two-thirds of the level of Western Europe or Great Britain’s standard of living for most of the last 60 years.

But then something started to change in the mid-1980s.  First, from 1986 to ’90, they start to improve growth rates a little bit.  And then later on in the late half of the 1990s—dramatic growth, almost 10 percent per year.  In a period of under 15 years they went from two-thirds the standard of living to actually wealthier than the European average, and wealthier than Great Britain. 

How to explain this?  When I first started looking at it, the dominant explanation people were using was EU subsidies—EU structural fund subsidies, essentially a form of foreign aid from wealthy European nations to less wealthy European nations.  And it struck me as a rather odd explanation, because it has a lot of problems, albeit with less corruption probably, than aid to Africa programs.  It’s still a form of aid for infrastructure, aid for education.

And like it, it faces the same type of calculational issues of how to best use it, because it’s outside of the profit and loss system that usually directs investment.  It also distorts entrepreneurial incentives.  Basically, in Ireland’s case, by creating a pot of gold for Irish entrepreneurs to go after.  They spend their time and effort trying to get the transfers of the structural funds instead of better serving consumers. 

When we actually look at it empirically it doesn’t hold up very well either.  First of all, Spain, Greece, Portugal all had about the same type of transfers from the European Union during the same period of time, and it didn’t get the big growth.  When we look at Ireland, they had been getting the structural fund subsidies since the early 1970s, when they weren’t growing, and they didn’t help then.  And in fact, as a percent of their economy, it got less and less important as the growth kept going.  So it doesn’t seem to be a very good explanation.

The real story is much more consistent with the theme of this book, and that’s creating the enabling environment that really unleashed the entrepreneurs, basically enhancing economic freedom in the country.  They always had relatively good rule of law, respect for private property rights.  In the 1960s, they had improved their international trade policy, first with Anglo-Irish free trade agreements, but then with unilateral tariff reductions against the rest of the world. 

The 1970s, not so happy.  Basically in response to the oil shocks, they engaged in a lot of the same style of Keynesian stimulus packages that we in the United States and Western Europe were doing, and if you listen to people in Washington, D.C., today are still thinking about doing.  The result was not that great growth, but since everybody else in the world was doing it as well, Ireland didn’t really fall that much farther behind.  They remained about two-thirds the standard of living. 

But in doing this, in all their spending, they tried raising taxes to cover some of it.  But they couldn’t raise taxes enough, and started facing diminishing revenue.  Their borrowing started increasing—it got up to about 17 percent of GNP a year.  By 1986 they got themselves in a position where they had 116 percent debt to GNP ratio.  The government owed more than the value of everything that was produced in the economy in a single year. 

They got to this situation, and there was not big ideological shift.  They were basically facing a financial crisis and worrying about an IMF intervention to bail them out.  The prime minister who was elected actually ran against making any changes.  In fact, he was one of the guys whose big spending policies got them into this situation to start with.  But once in office, it was deemed that they didn’t want to inflate to try to get rid of the debt.  They had already tried higher taxes, and that wasn’t working.  They were already up to the limits of what they could borrow.  They were really faced with one alternative—or two alternatives, really.  Either outside intervention or cut spending.  They chose to cut spending.

And in a dramatic fashion over the course of five years, really started transforming he role of the Irish government and the economy.  They went from a situation in 1985 where the government consumed 55 percent of everything produced in the economy.  By 1990, after the spending cuts, it was down to 41 percent of the economy.  Fourteen percent reduction in a period of five years.  In a period of five years—and a period of five years where it’s really not the economy that just outgrew the rate of government spending growth—they actually made real cuts in government spending.  In 1987, they slashed government spending, so that got rid of their primary deficit.  Then they followed up with even bigger cuts in 1988.  So they made true cuts—not cuts like they talk about in Washington D.C., like a cut in the rate of growth of spending, but actual cuts where you spend less the next year than you did the prior year.  What most of us in our own household accounts would call cuts in spending.

This kind of got them out of the financial crisis.  By 1990 they were back under a 100 percent debt to GDP ratio. Growth rates were starting to improve. 

But an interesting thing happened here. A kind of social partnership formed in Ireland that kept pushing for further reforms.  There was one other outside influence, and while I think myself and probably others here have a lot of reservations about the European Union, the Maastricht Treaty did do a couple things for Ireland. 

One, it made the government’s promises to continue to reduce debt more credible, because it set a target debt to GDP ratio by 1999 of 60 percent debt to GDP.  So as a signal, if Ireland wanted to become part of the European Union, they were going to have to continue to make reductions in this.  It also said that they couldn’t have budget deficits more than 3 percent of GDP.  So it was a signal that they were going to continue being more fiscally responsible if they wanted to get this.  So it’s not perfectly credible, but it’s at least partially credible.

Also, with the nearing of the date for the Euro, even though they had this system of fixed exchange rates with the European currencies before this, it started to become a bigger deal if you had to do a devaluation.  That meant inflation was going to remain in check. 

So with inflation cut off, and debt issue cut off as ways to expand the Irish government spending, the last option is higher taxation.  And that’s what actually the social partnership pushed up against.  It was a mixing together of business interest and labor interests lobbying the government. 

And usually when we hear of this we think of corporatism, maybe in the style of Latin America.  But here it actually became a force lobbying for free markets.  The labor unions basically said to business, we will have smaller wage increases that we want from you if we can get our real wages to increase even faster by keeping the government’s rate of inflation low, and then lowering the tax burden. 

So what we had was multiple cuts in the tax rate.  It started off, the top marginal tax rate was 65 percent before the reform period started in 1985.  They had multiple rounds of these reductions—by 2001 the top rate was down to 44 percent, the standard rate, they have a two-tier rate there, was down to 22 percent. 

One area of taxation remained a little bit higher, and that was corporate taxes. They were still at a rate of 40 percent corporate tax rate in 1996.  This eventually got cut to 24 percent.  But they also had that special 10 percent corporate tax rate. 

And this is what really angered a lot of people in the OECD.  In fact, they started calling it harmful tax competition.  Which my interpretation means, unless you have taxes as high as France, it’s not fair.  But what this 10 percent rate applied to was companies that located in the Shannon or Dublin duty-free zones, and also companies engaged in internationally traded financial services or technology.  They kept coming under pressure from when the OECD ran this campaign against harmful tax competition.  In fact, even the United States was recognized as a tax haven during this campaign, if that gives you an idea of what they were thinking.

Ireland, though, their response I think is just phenomenal.  They eventuallygave in.  But their way of giving in was saying, OK, we’ll get rid of the special 10 percent rate, we’ll give 12.5 percent to everybody. 

So they got rid of that small rate, but then they cut corporate taxes in half for everybody else, and in the process, by the way, got rid of the distortionary effect, that just having a special rate for some companies creates in terms of bias, in terms of industry or location.  So big progress. 

By 1999, the tax burden as a percent of GDP in Ireland is 31 percent. In a 15-year period you go from 55 percent of the economy being consumed by the government to 31 percent.  Big change.  No big ideological shift here.  There’s no comparable Thatcher revolution or Reagan revolution going on in Ireland, but yet, in Ireland they actually made much more progress in the way of shrinking government relative to the economy than we did in the United States or that Great Britain did.

Really, it was in response to this crisis that they had to do something.  Once they got out of the crisis, it seems to be the positive feedback of getting the growth that kept people interested in making the reforms. 

Interestingly, the reforms have stalled more recently. Since 2000 they’ve been backsliding a little bit.  If you look at their index of economic freedom score, they don’t do as well now as they used to, although they’re still one of the freest countries in the world, and they continue to grow.  But not nearly like the 10 percent rate that they were doing in the last half of the 1990s.  In part maybe the positive feedback slowed down when the US had its recession in 2001.  That translated into Ireland’s as well, because there’s such a big trade relationship between the two.  And then there was no further push for the reform, and they’ve slid back a little bit.

Ireland, while an important success story, is certainly not the only one we study in this book.  We look at China, India, Botswana, New Zealand, also a success stories. 

The theme of crisis comes up a few times.  Parth Shah and Renuka Sane in the chapter on India, and Frederic Sautet on New Zealand, write of the crucial role that financial crisis played there in promoting reform.  In fact, in a perverse way kind of, maybe the best way that the IMF promotes reform in other parts of the world is by being so bad at their interventions that countries are scared into making their own reforms so they don’t have to deal with them.  Because that’s basically part of the cause of the reform in all three of these places. 

Of course, China’s a tremendous story that James Dorn tells in his chapter.  In terms of improvement of economic freedom, it’s made the biggest increases in all of Asia since 1980.  Illustrates a couple of important points with the big growth that’s occurring there.  China’s not an exception to the story being told in this book, in fact it’s a good illustration of it. 

While they’re still not nearly as free economically as they could be, and as a lot of the developed nations of the West are, they’ve made a lot of progress moving in that direction.  It tells you not only does your level of freedom matter, but just making improvements in the environment can really unleash pent up growth that is there.  

It also highlights the difference between political and economic freedom.  What’s necessary for prosperity in promoting progress is economic freedom—not political freedom.  Often attempts to export democracy are focusing on the wrong thing.  What’s really needed is the economic freedom.  And what we find quite often is, as you get greater economic freedoms and you grow, people tend to demand more democratic and civil freedoms.  It’ll be interesting to see how that plays out in China. 

Also, what Dorn does very well in the chapter, if you look at reports that you’ll see in the news now often, growing inequality in China.  And they’ll talk about it being related to the economic growth there.  Well, of course it is.  Everybody was poor, now some are becoming better off.  This is actually something to celebrate, not to get upset about. 

What he does is actually look in different regions of China, because a lot of the reform has been at the local level there, not the national level.  So there’s big differences in how much people have opened up to markets in different areas of the country. 

So he uses a marketization index, actually, to look at the different regions and how much they’ve moved that way, and he finds that the more they’ve moved towards the market, the greater the prosperity in a region.  So a lot of the inequality that’s being reported in China actually comes from the disparities between the regions—those who have opened up and are more free, and those who haven’t.  So the answer isn’t some sort of redistributionist scheme in China, it’s to “redistribute” freedom to the rest of the country as well.

And even Africa isn’t just a sad story.  There’re success stories there as well, the biggest one being Botswana.  And that’s what Scott Beaulier deals with in his chapter. 

In fact, some people would be surprised to know that that fastest growing country in the world, from the mid-1960s to the mid-1990s is Botswana, a semi-arid, land-locked former British protectorate in sub-Saharan Africa, just north of South Africa.  Later on, diamonds were discovered there, so they were no exception to the rule of resources being in Africa, but they didn’t know they had the diamonds when they started this big growth path.  In fact, as Beaulier argues in his chapter, he thinks that diamonds are actually slowing the growth now.

How they did it was they took a traditional indigenous leader who came to power, they didn’t displace local property rights and customs, but they did embrace rule of law, basic economic freedoms, respect for private property rights in the country, and instead of fighting over resources that already exist there, they created the right environment for entrepreneurs to create new resources and to create growth, and that’s how they were the great growth machine for 30 years. 

Later, since they’ve discovered diamonds, what was a very limited government has increasingly grown, although it’s still quite good by African standards.  A kind of tallest dwarf syndrome, I guess.  But there Beaulier argues that the revenues that the government’s getting from the diamonds are bloating that, and as that dries up there’s going to be bigger problems for the rest of the economy. 

So it’s not a book about failure stories, it’s a lot about success stories, and then looking at these other regions that haven’t developed and saying, well, why haven’t they?  What are the missing institutions there to get them to harness this type of entrepreneurship? 

So a few lessons come from this.  One, I think the first rule in terms of “making poor nations rich” from our perspective in the West should be: do no harm.  I think, the role of crisis can play a valuable role by breaking existing political deadlocks that have existing inefficient regimes in power.  It doesn’t guarantee you beneficial reform—there’s certainly no shortage of crises in Africa—but at least gives you a shot at it by breaking the stalemate.  Often our foreign aid programs lock in inefficient regimes by transferring money to them that enhances the political sphere at the expense of the economic or the private voluntary sphere, much as P.T. Bauer long contended. 

Other rule: we have to be pretty modest about what we can do when it comes to “making a poor nation rich.”  Ultimately, they have to get the right institutions in their own country, and it has to be supported by the local indigenous base.  If it’s not, they’re not going to stick.  You can’t do this at gunpoint. 

How do you do it? Ultimately it’s about trade and ideas.  There’s some evidence that as you trade more with the country, when a more free-trade country trades with a less free country, the one who has less freedom tends to improve over time.  So one thing we could do that would be good for African or other poor regions of the world development right now is open up our markets to more and trade more freely with them.  But it also might be good in the long term in terms of generating the trade and ideas that could help get you beneficial institutional change. 

And the big thing is, talking about and exporting these type of ideas instead of the institutions policymakers in the West look at—which are not our fundamental institutions that grew us rich, but really, our more interventionist institutions that we've grafted on top of that.  What we end up exporting is our governmental apparatus instead of our underlying fundamental institutions that generated the prosperity that allow us to afford our bloated governments.

But to end on a good note, or a happy note.— the upshot is huge.  Think of the process in Britain and the United States—a 250-year process of going from essentially sub-Saharan African living standards, maybe a little bit better, to a wealthy, first-world nation.  All the capital, all the knowledge had to be created. 

Then think back to the Asian tigers—remember when “Made in Hong Kong” and  “Made in Taiwan” was a joke?  It’s not anymore.  In a period of three generations, they went from third-world status to first-world status.  In the 1950s, South Korea essentially had the standard of living of sub-Saharan Africa.  A few generations, first-world status.  Now look at China and India.  The growth there is even more dramatic as they’re making improvements. 

So the upshot for Africa, for Latin America, for other regions of the world is, when you do get the institutions right, there’s so much more knowledge out there now, so much more capital out there now that will flow to you—the process can happen a lot quicker.  It’s still a process, there’s no silver bullet, we can’t just export something to you that makes it happen, but you get your institutions right, the capital, the ideas, they’ll flow to you, so will the trade, and you can grow a lot faster now than you used to.  Thank you.

Benjamin Powell
Research Fellow, The Independent Institute

All right—first question? 

Audience Member

I’m a banking consultant here in Washington.  Hernando de Soto writes quite eloquently about the importance of property rights, specifically in terms of that providing the foundation for using property as a basis for getting collateral, for securing loans and so forth. 

I’d be interested in the comments of both speakers—both of them did an excellent job, I might add—in talking about the extent to which property rights are being strengthened or not in Africa and South America, and more specifically, the extent to which credit-granting institutions are emerging on those two continents because of a strengthening of property rights, and related to that the strength of the enforcement of contracts.

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

Well, I think Hernando is right on the diagnosis—in other words, he’s right to point out that we have a huge property rights deficit in Latin America.  If I had to mention one basic problem with the Latin American institutional system, I would say it doesn’t adequately protect property rights. 

It’s wrong to say there are no property rights in Latin America.  I’ve often heard free marketeers talk about the developing world as if there were no property rights.  There are always property rights in any society, because somebody has power, and somebody’s in a position to secure and guarantee somebody else’s—usually their own—property rights.  The history of Latin America’s not the history of a continent that hasn’t had any property rights, it’s a history of a continent in which power has allocated property rights in a discriminatory way—in a way that created a two-tier society which some people, usually a minority, enjoyed full property rights, the security of property rights, and the reset was excluded from that.

So I think it’s right to point out that that’s a huge deficit we have.  The big question is how do you incorporate the rest of society into that secure environment in which property rights are protected. 

There have been many propositions.  One of them was the proposition made by Hernando, that property titles be distributed on a massive scale to many Latin Americans, and some countries have begun to do that.  Peru distributed in the last 15 years more than a million—I think about 1.5 million property titles.  And that’s something that needs to be commended.  It needed to be done.  People who have invaded government property that was there, not put to any use for years and years and years, because they simply had nowhere else to go, and built something on it, created something, but wanted to be absolutely sure that they were able to exercise a property right over that territory, or over that land, were in desperate need of property rights, symbolized by property titles. 

Squatters in Latin America, as you know, are an important part of Latin American society.  The urban landscape has changed dramatically in the last 50 years, in large measure due to migration from the countryside to the towns, to the cities, and those people who migrated generally tended to create private property out of government property that was simply being put to no use.  So property titles were distributed. 

Unfortunately, that has not generated the kind of entrepreneurial activity, access to credit, and economic growth and prosperity that it was supposed to.  We were talking a bit before this event with some friends here about exactly why that happened.  There are many different reasons.  I think one of them is that in order for that policy or measure to take effect, you need to change the entire environment.  If it becomes a populist measure—in other words, a candidate who wants to satisfy part of the electorate by handing out property titles as if they were subsidies or handouts, but doesn’t change the environment, doesn’t generate a judicial power that is in a position to actually enforce those rights, that doesn’t generate a political climate in which people actually trust the government, in which banks actually trust the institutions so that if you don’t pay back the loan that I’m going to give you, using as collateral that property title, I’m going to be able to throw you out of that property—then the system is simply not going to work. 

Apparently there have been many studies—and I will finish with this.  There’s an interesting study by some people at Harvard University, in Peru, and apparently what’s been happening is that many of the banks simply don’t trust the system.  They say, “Well, if the government gave you those titles for political reasons, then if I give you some credit and you don’t pay me back, I’m simply not going to be able to exercise foreclosure, because the government’s going to protect you politically.  It’s in the government’s interest to do so.  I don’t trust the judiciary, I don’t trust the government, and therefore why should I give you credit?  Those titles are a political instrument, a populist instrument.” 

So it’s a terrible and tragic irony that a measure that was dictated by the grandest of motives, and deep, profound, historical necessity, has turned into a populist measure.  Which doesn’t mean we shouldn’t be distributing titles and securing peoples’ property rights, it just means we need to change the entire environment so that those property rights actually mean something. 

Benjamin Powell
Research Fellow, The Independent Institute

Do you want to comment on that?

George Ayittey
American University

Yeah. I serve as a consultant to Hernando de Soto, and I congratulated him for his breakthrough book that he wrote about informals.  You see, you can take any African economy and break it up into three sections.  You have the modern sector, which is the abode of the elites, and then you have the informal sector, and then you have the rural, or the traditional sector.

The vast majority of the African people live in the informal and the rural sectors.  You can’t develop Africa by ignoring those two sectors, but that is precisely what we, the elites, did. 

If you look at Africa’s development, for example, more than 80 percent of Africa’s development was focused on the modern sector.  The modern sector is where you the seat of government and the ruling elites.  So that’s where a lot of the development aid resources were channeled.  But the modern sector right now is dysfunctional.  It is lost.  It is collapsing.  It’s been the source of many of Africa’s problems. 

Now when Hernando de Soto writes a book on it—as a matter of fact, the informal sector constitutes something like 80 percent to 90 percent of the economies of Nigeria and Ghana.  The informal sector is alive.  It’s bustling with a lot of entrepreneurship and economic activity. 

Hernando de Soto hit the nail right on the head when he says that you don’t have property rights in the informal sector, so we should hand out titles, etcetera, and we’ll enable the poor to obtain loans from the banks.  What I told Hernando de Soto is that the ruling elites are not going to do that.  They wouldn’t.  Because if you hand titles to the poor, you’re empowering them, and it will become a political threat.  So you have to find a way by which you can empower the poor without going through the ruling elites.  The governments won’t do it, and that’s why there’s been very little progress as far as securing the property rights of the poor.

One of the ways by which you can do this—let me give you a quick example, which is something which I myself am doing.  Anybody who has gone to Africa will see that in any African country you see food vendors.  They are selling goods by the roadside. Let’s suppose I take a little bit of capital—I’ll call it meso-capital—and build a market, and put stalls in the market, and bring these food vendors into the stores. And I charge them rent.  We have a business going.  And that market becomes a property—I can take property titles to that particular market. 

Now, I can use that property to go to a bank, to get out a loan and give out micro-credit loans to those food vendors who are in there.  So in a way, indirectly, there’s a way by which you can bypass these ruling governments and establish small little property rights to these food vendors.  So you can do it—but not through the government.

Benjamin Powell
Research Fellow, The Independent Institute

All right, next question.  Right here.

Audience Member

I am not a development expert, but I recall that there was something called the Washington Consensus.  And this Washington Consensus, I had thought, did include at least the issue of property rights, the issues of markets, and the issues of macro-stability. 

Can you say how your thinking, I mean, any of you, starting with you Ben, differs from that consensus?  I’m told that people have lost faith in the consensus, so maybe you just haven’t lost faith with it, or maybe there are things you take issue with it. 

Benjamin Powell
Research Fellow, The Independent Institute

Yeah, I don’t think the Washington Consensus is nearly thorough enough in its respect for property rights and economic freedom, and often the emphasis on macro-stability and government of the economy at the macro level, and getting that stable, as opposed to actually empowering and creating local property rights for the individuals on the ground there.  I think often the lip service is paid to property rights and economic freedoms, but when you actually look at what’s being done there for change is very little.  I don’t know if you want to comment specifically on your regions in the Washington Consensus.

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

Well, in the case of Latin America, I mean, you’re right.   There’s a backlash against the Washington Consensus, but the problem is it’s a backlash for the wrong reasons.  People think it went too far down the market path.  And our contention is it just didn’t.  It’s not true.  It was much more a corrective measure, actually trying to correct many of the mistakes made by the same multilateral bodies, by the way. 

I mean, they used to in the 1980s say to Latin Americans, instead of cut down public spending, actually create new taxes that you can generate more government revenue, so that you can actually make up for the amount of spending that’s actually increasing.  Of course, what you needed to do was exactly the opposite—reduce the size of government.  However, it’s very hard to put this point across to Latin Americans today because of the current environment. 

Again, I say, we’re going through a booming period in which it looks as if we’re growing, we’re reducing poverty, we have a growing middle class in Latin America, and for the first time, it’s not, by the way, the middle class that’s linked to the state, as in the ’40s, ’50s and ’60s.  Back then it was mostly a sort of managerial class linked to the state.  Now we have a middle class, it’s small but it’s growing, linked to the market—small businesses, mid-sized businesses—providing services to big corporations. 

So it looks as if things are going in the right direction.  I just think that it’s basically sustained by this very positive economic context.  Once that has subsided, I think we will see many of the weaknesses and flaws in the system.  And I think the answer will not be to go back on some of these reforms, but actually to push forward with them big time. 

It’s very clear, if you go one by one through these different areas—labor markets, trade, the size of government, institutions, property rights—I mean the whole thing, you name it.  It’s very clear to me that the government is intervening too much, the government is crowding out private activity, and that it is very costly and very difficult for somebody who is not already part of the game to actually have access to that participation to that market.  And I think that’s one of the reasons why the distribution of property titles hasn’t quite had the effect that it was supposed to.

George Ayittey
American University

The problem with the Washington Consensus is that it keeps changing. I mean, it has been changing for the past 20 years. 

Back in the early 1980s, for example, the World Bank, the IMF were all preaching economic reform, structural adjustment, for example.  They were saying that we’ve got to roll back the pervasive influence of the government and the economy, and place more reliance on the private sector, on markets, for example. 

The World Bank spent $25 billion to try and move 29 African countries to this particular type of consensus.  What happened?  When the World Bank itself came up with its own report in 1984, it said that out of the 29 countries, I just think there’s only six of them who had successful performance.  Six out of 29 gives you a failure rate of 80 percent. 

Now, which countries were successful back then?  The World Bank named Gambia, Burkina Faso, Ghana, Nigeria, Zimbabwe, and Tanzania as economic success stories. 

Now nobody’s talking about economic, structural adjustment anymore.  Now the focus has shifted. Now we’re preaching micro-credit finance, and we’re also preaching entrepreneurship. 

So again, you see, this is a typical case of the blind leading the clueless.  The World Bank has spent so much money trying to help and reform, but they don’t know what they’re doing. So that’s why the consensus keeps changing. 

Benjamin Powell
Research Fellow, The Independent Institute

All right, in the interest of time here we’ve got one here, one there, and one in the very back there.  Why don’t we take three questions and then we’ll do three quick answers and see if we can’t speed this up. 

Audience Member

Question for Alvaro.  Around 1990, when your dad was running for president, there was an extemporaneous movement of parceleros that took government land and informally made their own plots, creating a private-property system.  Whatever happened to that?  Has it happened since?

Alvaro Vargas Llosa

Senior Fellow, The Independent Institute

Well, this would take about a couple of hours—do I have a couple of hours? 

Benjamin Powell
Research Fellow, The Independent Institute

How about we get the three questions up, and we’ll get the answers.

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

OK, that’s a very good question, by the way.

Audience Member

I wonder if you’d comment on George Lodge, the Harvard Business School emeritus professor, who made the observation that economic development is the wrong objective, and economists are really part of the problem, not the solution.  The real objective is systemic change, and that’s very tough to do because the poor stand to lose the most.  They’ve learned that change hurts them the most.  So what do you do? 

Governments are not the answer.  Governments can’t do systemic change.  And the best hope, in his mind, is the multi-national corporations.  They’re the only ones who can create jobs with a future, which will then create perhaps the internal forces that are needed for change.  I wonder if you’d comment on the role of multinational corporations, and the potential to harness them, or to encourage them, or incentivize them to create jobs in the developing arena.

Benjamin Powell
Research Fellow, The Independent Institute

All right, and we got one more question in the back from someone who’s vigorously raising their hand, so somebody must have said something very wrong. 

Audience Member

This is sort of addressed to Professor Ayittey. 

If he would comment on the seeming indifference of the Western nations and the international greens to the world problem of malaria.  Presidents over in Africa, and everybody’s talking about AIDS, and that’s politically correct—you spend billions to fight that.  But meanwhile two million people a year are dying of malaria, and half of those are in Africa, and most of those are children. 

Two million a year is the equivalent of 5,000 747s, fully-laden with black, brown, and yellow children crashing into a mountain every year and dying.  That’s 12 or 13 planes a day.  If one 747 crashed a month, the nations of the world would ground all 747s until they found the problem, but because this is two million children of color dying quietly in the bush, nobody seems to care, because they care more about eagles and falcons.  One of you ought to comment on that.

Benjamin Powell
Research Fellow, The Independent Institute

All right, let’s do quick answers.

Alvaro Vargas Llosa

Senior Fellow, The Independent Institute

Very quickly, the parceleros. In the 1920s, ’30s, ’40s, ’50s you had an interesting group of private haciendas—large estates, for those of you who don’t know Spanish—in Peru and other countries.  They were very successful, linked, of course, to the export economy.  And as I was saying before, we’ve gone through these export bonanzas before, and they were part of that in the ’20s, ’30s, ’40s, and even ’50s.  But because these haciendas were linked very much to the oligarchic state of the nineteenth century, and even before that to the whole colonial establishment, there was a big, big movement in public opinion against them, and in favor of nationalizing them, and that’s what the government of Peru did in the early ’70s.  They nationalized those estates and they gave them, in theory, to the poor to the peasants.  In practice, of course, to government bureaucrats.  Those government bureaucrats in the name of the people simply concentrated that property in even fewer hands than they were in before.

So what happened?  This was a fascinating process.  The peasants, the poorest of the poor in Peru, some of which didn’t even speak Spanish –they spoke some of the ethnic languages—started to privatize the land illegally, and they started to parcel out those properties—that’s why they were called parceleros—in a grassroots , bottom-up movement of rebellion against the government bureaucrats, and they privatized 60 percent of the land in Peru. 

The problem was that those small plots of land—private plots of land, of course—didn’t have property titles.  Again, they were illegal.  They were a very fascinating symptom of rebellion in Latin American society against government action and government power, but they lacked property titles.  They lacked the security that would’ve come along with property titles, had this process been done in a legal way. 

What happened afterwards is what happened with the rest of the economy.  It just continued to be part of an illegal environment, which was, yes, private, but of course, very illegal and therefore very unproductive.  That’s why agricultural production went down by about 3 percent every year for the last 20 years or so.  So that’s basically what happened with parceleros.

Audience Member

Didn’t Fujimori then trying to support them in some places?

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

In some places he did, but again, he handed out property titles, but those property titles didn’t mean very much to the rest of the institutions in Peru, so they didn’t have access to credit.  They didn’t actually capitalize on those small plots of land.  They didn’t create economies of scale, so if you traveled through the Andes, at least in Peru, what you will see are very small plots of land.  People are very proud to own them, but, of course, those are not economies of scale, so they’re still very unproductive.  But they represented big potential. 

Corporations—I don’t tend to think of private enterprise in those terms.  I don’t think of small businesses, mid-sized businesses, multi-lateral corporations, foreign businesses, local businesses.  I tend to think of the business world and private enterprise as one big thing.  I don’t care whether they are small or mid-sized or they’re big.  If we have the right type of environment, all of them will do their job.  Those big corporations will create a lot of wealth, but those small and mid-sized businesses will probably service them, and, in turn, create wealth with them. 

My contention is that in a country like Mexico, 30 percent of the resources of every single small and mid-sized business go towards hiring tax accountants and tax specialists to deal with the labyrinthine tax system.  If you’re a Brazilian entrepreneur, you have to pay 61 different types of taxes.  It’s a crazy environment in which to do business. 

You get rid of all of that and what you will generate is a torrent of entrepreneurial activity—small, mid-sized, and big, local and foreign.  And it really doesn’t matter whether it is local or foreign, whether it’s small or mid-sized or big.  What you will create is a huge amount of entrepreneurial activity that will generate, of course, growth and jobs, and therefore prosperity.

Audience Member

What can outsiders do?

Alvaro Vargas Llosa
Senior Fellow, The Independent Institute

The problem is they have to follow the rules that we set.  When we had statist environments those corporations came in and played by those rules.  And those rules of course were the wrong kinds of rules.  That’s the problem. 

In the ’40s, ’50s and ’60s, when you had this economic nationalist environment, that didn’t mean there was no foreign investment.  There was a lot of foreign investment.  But of course it played by those rules.  You had a lot of imports.  Of course, you were able not to import consumer goods, you were able to import capital goods, because the idea was we need to import capital goods, and those capital goods will go towards producing local consumer goods, which were protected.  So consumers had to pay a lot more for those products. 

So they played by the rules.  Today they’re playing by the rules.  These are more flexible, more open rules than in the past, but still, in an environment in which a lot of local Latin Americans are still not able to compete with them because accessing those markets is very costly and very difficult. 

What can they do?  If we open the doors to them to invest, by all means come and invest.  But in the end, the answer is local.  As Ben said, there’s little people can do from outside.  It has to be a decision-making process that will take place inside.

And ultimately what it’s about is what I think Bauer, who’s probably the greatest development economists of the twentieth century, said.  In the end economic development is about what?  He said it’s about the expansion of choice.  That’s all it’s about.  If you generate a free-enterprise environment that is an environment which is governed by the principle of equality under the law, what you will have is an expansion of choice.  And that choice will, of course, comprise everything –small, mid-sized, big, outsiders, insiders. 

Benjamin Powell
Research Fellow, The Independent Institute

All right.  George, on the Africa question?

George Ayittey
American University

Well, on the Africa question, and also malaria, and also I’d like to say that the multinational corporations have been one of those forces which have been most disappointing.  They go into Africa.  They don’t want to rock the boat.  So we can’t consider them as agents of reform. 

Look, the West doesn’t have to reinvent the wheel.  The West should look at how it dealt with the Soviet Union and Communist countries.  There the West didn’t hand over money to a Communist government on promises of reform.  The West helps solidarity groups.  Why doesn’t the West do the same thing in Africa?  Why doesn’t the West find these solidarity groups, civil society groups, and help them? 

Now, you have to be crafty if you want to instigate change.

To instigate change from within, you need certain institutions—six of them.  They are very critical.  The first one is an independent and free media.  Very, very important. 

The second one is an independent judiciary for the rule of law.  You cannot fight corruption.  Corruption has to be exposed.  It has to be exposed within the country, not in the West.  Now, once you expose it, you prosecute the corrupt for all to see, and then you punish them for all to see.  That’s where you need that independent judiciary. 

You don’t have an independent media in many African countries.  Only eight African countries have a free and independent media—only eight out of 54.  So you can’t expose many problems in Africa. 

Number two, the judiciary is packed with Mugabe’s cronies, so you don’t have the rule of law. 

The third institution that you need is an independent central bank.  And then you need an independent electoral commission.  You can’t have free and fair elections without an independent electoral commission.  So forget about free and fair elections in Zimbabwe next month—it’s not going to happen. 

You also need to have neutral and professional security forces.  Just a policeman who stands to enforce law and order—not because you belong to the ruling party, or you belong to the wrong ethnic group.  And then you also need to have an efficient civil service.

Give Africans these six institutions, and then Africans would do the rest of the job and clean up the continent.  By giving Africans this bit of type of assistance, this is what I call smart aid.  You don’t hand money over to governments on promises of reform, because they’re not going to do it. 

Now, on the question of malaria, I agree with you that it is unnecessary to have two million die of AIDS, especially children under the age of five.  Rest assured, the Free Africa Foundation, which I run, has been establishing malaria-free zones in many African countries.  We have established about thirteen. 

We go to villages.  We talk to the village chiefs.  This is right at a grassroots level.  We help them craft their own anti-malarial eradication programs.  And then we go fumigate the village.  We give them insecticide-treated bed nets, and also anti-malarial drugs.  We’ve established these anti-malaria free zones in Ghana, Benin, Nigeria, Kenya, and we plan to expand these. 

So in other words, there are NGOs, like the Free Africa Foundation, which is doing this sort of work.  The tragedy about malaria is that our governments in Africa have done nothing about it.  That’s where the problem is. 

Audience Member

Aren’t you getting any help from the Western governments?

George Ayittey
American University

No, no, no.  We’re not approaching Western governments, we’re just approaching Western individuals.  Those in the private sector who are willing to help us.  But we have our Website, FreeAfrica.org, and we’re doing this malaria free zones.

Benjamin Powell
Research Fellow, The Independent Institute

I think the question raised about how do we get beneficial social change that generates the right institutions for these countries is probably one of the greatest questions that can be asked, and one of the most unanswered in social science.  It’s maybe the most interesting one to explore.  Certainly it has the greatest upshot in terms of consequences for parts of the Third World, and for that matter, us here. 

When it comes to the multinationals, I’m not particularly optimistic that they’ll have a big part in it.  I think like a lot of entrepreneurs, they’ll respond to whatever incentives they’re faced with.  They’re just as happy to be rent seekers and get money transferred to them from foreign governments as they are our domestic one here.  My hope would be more with the indigenous people there, actually, who are already stuck in that country, pushing for the change. 

The good news is, when you get the change, the evidence is, as a country becomes more free, not only do they get more domestic investment created, but they also get more of the foreign investment in terms of multinationals coming there, where it’s actually beneficial.  So hopefully we’ll see more change in that direction. 

I’d like to thank you all for coming here tonight.  Good evening.

END OF FORUM



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