Book-Blogging: The White Man’s Burden – Chapter ThreePosted: November 21, 2012
This chapter explains the contention that “free markets work, but free-market reforms often don’t;” that a free market is much more than the thing itself, as much an indicator as an end. It also highlights the limitations of the market: “Nor are markets of much help to those who are now very poor – after all, the poor have no money to motivate any market Searchers to meet their needs.” The theme that weaves its way through the chapter is that institutions, markets, and social norms take time to develop – and that a failure to recognize this leads to disastrous consequences.
First, Easterly takes the World Bank’s (and, subsequently, the International Monetary Fund’s) “Structural Adjustment Programs (SAPs)” – essentially, pro-free-market pre-conditions before a loan would be given — to task for failing to appreciate the notion of scale: “either large-scale or small-scale partial reforms could backfire, but it is much easier to correct the small mistakes than the large mistakes.” Based on the research I’ve done, there isn’t a big contingent of supporters who will resolutely defend SAPs on their merits; as Easterly notes, they’re intuitively appealing – “partial reform would not work unless all of the complementary reforms happened quickly and simultaneously — but ineffective and harmful in practice.
A short discussion of cheating follows, with Easterly explaining the various types that can wreak havoc on a market; the Lemon problem (the prospect of poor product pushes down prices, which reduces the incentive sellers have to offer a quality product) and hold-up problem (a supplier may price-gouge when the purchaser needs the product the most) figure prominently. He then brings up multiple possible solutions to these problems: social trust (outside of the family), artificially-created trust (via credit rating agencies and warranties), courts, and reputation-based dealing (via age-groups and extended business relationships). As he notes, the issue with institution-based solutions is that “a poor country cannot use these solutions as much as a rich one” due to lack of scale and infrastructure. Ditto for courts – they’re “more corruptible – the richer or stronger party will pay bribes or intimidate the judge into seeing things their way.”
The most interesting part of this section has to do with another potential stave to cheating: ethnic specialization, where one ethic group establishes a long-term hold on an industry. In the pro column: specialization, the norm of trust (if you buy a fish from a Luo in Kenya, you trust it to be high quality), and innovation sharing. In the con column: the exclusion of the Other, breeding resentment among ethnic groups (see: anti-semitism in Europe), and decreased social mobility. On net, it seems like the con column outweighs the pro column.
Something that was drilled into my head in Economics 101 comes up next: property rights. In class, we were taught how important property rights are to savings, investment, and growth; as Easterly writes, “property rights are an incentive to accumulate assets over time and across generations, which is often necessary to have the productive capacity to meet consumer needs.” If only it were that simple! As it turns out, when societies don’t have formal institutions to create property rights, they create them informally, often leading to messy, confusing – but crucially, agreed upon – rights to land. Try to bring in “traditional” property rights, and a government often creates more problems than it solves: “By imposing land titling on such complex social customs, ‘private property rights’ may actually increase the insecurity of land tenure rather than decrease it.” See: SAPs.
Here’s the thing: change takes time, and the more we forget that, the more trouble we can cause. My own country went to war with itself 150 years ago, and there are still stark differences between the two geographical sides today; in the past, a family could literally squat on a parcel of land and it was theirs – boom, done; our so-called representative democracy was neither 100 years ago (arguably 50 years ago, actually). When we expect Afghanistan or Iraq to “modernize” in a decade, we’re teeing up failure; when we expect Uganda or Kenya to be corruption-free in a decade, we forget Teapot Dome, Tamany Hall, and myriad other scandals in American history.
At the same time, though, I think it’s fair and plausible to contend that intervening in the right way could help speed up the institution/norm-building. What might that look like? The significant increase in the use of technology in many countries in Africa opens the door for instant feedback mechanisms regarding the validity of a product (in Nigeria, this is happening through the use of cell phones and scratch-off labels on medication, with some success), which may replace a relationship-based norm with institution-based trust. Western know-how and funding could go towards establishing scalable credit-rating agencies, and there may be a role in helping to create corruption/cheating-monitoring organizations (like IPaidABribe in Kenya). In short: it seems like there are plenty of ways for the West to help establish the underlying institutions and prerequisites to allow markets to naturally develop in developing countries.