Wealth Creation and Public Policy

One of the defining questions for thoughtful and morally serious human beings pertains to material prosperity: "How is wealth created?" How does a people lift itself out of poverty into widely enjoyed abundance? This question of not-mere-academic debate between American liberals and conservatives. Thus, we are asking how best to respond to this recession that is bordering on a depression. President Obama talks about the wealth creative capacity of the private sector, but he throws trillions of borrowed, government dollars into spending on just whatever Congressmen pull off their wish lists, as well as a some sensibly targeted investments in infrastructure, and the like.

Yesterday at The King's College, David Blankenhorn of the Institute for American Values hosted Cornell economist and New York Times contributor Robert H. Frank and Time magazine columnist Justin Fox in a discussion of the paradox of thrift. Prof. Frank defended the President's stimulus spending, saying that if we are going to borrow money in order to spend more to create demand for production, it makes more sense for the government to borrow at 3% than for private citizens to borrow at 22% on their credit cards--as though those were the only two alternatives. He also contrasted government spending on projects like bridges and tunnels that facilitate commerce and prevent death by bridge collapse which passes all sorts of costs on to the rest of us over against private spending on silly consumables. (He did mention comparable investments that individuals could make, but of course at a much higher rate of interest.)

The problem that some in attendance pointed out is that when given the go ahead to spend, government directs the spending largely in ways that are politically advantageous to officeholders, not economically advantageous to the country as a whole. Furthermore, once given the green light for a prudent burst of public spending, government just keeps going and going. A businessman in the audience suggested somehow arranging a 4% interest rate for mortgages so people could refinance their homes, and spend the resulting income that it would free up on whatever they see fit. Business would boom. Government revenues would rise. Et cetera.

This is why economists are not the most trusted profession. They are not the scientists they boast of being. On this point, read Harvey Mansfield's recent article, "A Question for the Economists" (Apr. 13, 2009, The Weekly Standard).

Mary Anastasia O'Grady recently entertained this question of wealth creation and general prosperity in relation to Latin America with foreign aid in mind "Aid Keep Latin America Poor," Wall Street Journal, Apr. 9, 2009). Among other sources of wisdom on the subject, including Lord Peter Bauer, she cites Alvaro Vargas Llosa's Lessons From the Poor: The Triumph of the Entrepreneurial Spirit (Independent Institute, 2008):

"The decisive element" in bringing a society out of poverty is "the development of the entrepreneurial reserves that exist in its men and women," Mr. Vargas Llosa writes. "The institutions that grant more freedom to their citizens and more security to their citizens' possessions are those that best facilitate the accumulation of wealth."

In an earlier post on development in Africa, I cited John Locke whom I will cite again. In his great Second Treatise on Civil Government (section 42), Locke appeals to the shrewdness of every ruler, saying:

This shews how much numbers of men are to be preferred to largeness of dominions; and that the increase of lands, and the right employing of them, is the great art of government: and that prince, who shall be so wise and godlike, as by established laws of liberty to secure protection and encouragement to the honest industry of mankind, against the oppression of power and narrowness of party, will quickly be too hard for his neighbours.

The lessons concerning "established laws of liberty" and the encouragement of the "honest industry of mankind" is a lesson that is continually in need of review, whether you are President of these prosperous United States or a South American oligarch.

The Nagging Problem of the Bottom Billion

Bono in Mali

Both Bono and I are interested in Africa, but Bono gets all the press. How is that fair?

Vast sums of money are spent trying to figure out why the people of that continent are so beset with poverty and oppression. One can simply resign oneself to the mess, saying "This is Africa," as Leonardo DiCaprio's character does in Blood Diamond (2006), but, as "God gives us all things richly to enjoy" (I Timothy 6:17), it must be on account of some sinful perversion of God's created order that these people are sitting on top of such wealth and yet in such want. The answer is not in the infusion of capital from the wealthy west (which was poor until we developed it). The answer is in Africa!

Paul Collier has written a book entitled The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (Oxford, 2007). What we once called The Third World (neither the Soviet sphere nor the Western alliance), we have come to call The Developing World, and indeed much of it is doing just that. But of the world's 6.7 billion people (last I checked), there are a billion who appear to be inextricably stuck in poverty and generally in a manner of life unworthy of human dignity. Collier calls it "the fourteenth century: civil war, plague, ignorance." Collier reports that most of these people are concentrated in 58 countries, and 70% of those people are in Africa.

He identifies four "traps" that have these people ensnared:

1. The Conflict Trap (e.g. civil war, recent tribal conflict in Kenya comes to mind),

2. The Natural Resource Trap (over dependence on extracting and exporting these, typically mismanaged by a corrupt government),

3. Landlocked with Bad Neighbors, and

4. Bad Governance in a Small Country.

It strikes me that all of these seem to come down to bad government. But if Western governments put the slightest pressure on these dictators they cry "colonialism!" and all the people rally to them (as well as the American left, needless to say).

He rejects the aid-oriented solution advocated by Jeffrey Sachs (The End of Poverty, 2005) and Bill Gates. But he is not quite as opposed to it as William Easterly (The White Man's Burden, 2006). Aid is not a solution, but "a holding operation preventing things from falling apart." It is subject to a law of sharply diminishing returns. Collier actually suggests military intervention in what we have come to call "failed states," but I'm skeptical. Benevolent conquest is always tempting to well-meaning Americans, but for some reason the beneficiaries of our thumpin' good will never seen to recognize their blessings. Furthermore, it would require terror which only the resulting insurgents have the stomach to pull off. Beyond that, he suggests improving trade and various laws and charters for government to sign and honor.

Ah, yes. It all comes back to government. Why should these gangs of thugs called "governments" bind themselves to principles of justice? They need counterbalancing centers of power. Church. Economic interests. The small size of many of these countries is a problem for which James Madison has wise words in Federalist Paper #10. How do you trade with people who don't produce anything worth having? They won't produce anything without capital investment. No one will invest unless property is secure. If people can be sure of enjoying the fruit of their labors, they will labor.

The latest discussion of the merits of aid to Africa is in the City Journal (Winter 2008), "Hearts of Darkness: Trendy paternalism is keeping Africa in chains" by Michael Knox Beran.

You should also look at a recent New York Sun essay by Amity Shlaes ("One Flawed Gift," Feb. 28, 2008) author of The Forgotten Man: A New History of the Great Depression. Her point is, "The 2.3 trillion in aid America and allies have spent in Africa over a half century has been a counter-productive distraction from achieving stable growth."

A missionary to a particular African country who, unlike his suffering church, was recently released from prison and expelled from the country, recommended Martin Meredith's The Fate of Africa which, I am told, attributes much of Africa's problems to bad governance. That conclusion should be universally obvious. Sadly, it is not.

Lighting Up Africa

If you are interested in global economic inequity, this picture from a recent article in The Economist might strike you as it struck me. The article begins:

Seen from space, Africa at night is unlit—as dark as all-but empty Siberia. With nearly 1 billion people, Africa accounts for over a sixth of the world's population, but generates only 4% of global electricity. Three-quarters of that is used by South Africa, Egypt and the other countries along the north African littoral.

Only 17 of Nigeria's 79 power stations are working. Yet Nigeria is an oil exporting country.

Only 6% of Congolese have access to electricity. Yet the mighty Congo River has the potential to produce 39,000MW of electricity by environmentally clean hydro power. That would require capital investment, however, and it seems that neither country that goes by the name Congo (yes, there's two of them now--one on either side of the river) has a good reputation for protecting investments.

These cases are typical. Yet ever more people are leaving the villages for the cities, adding to the strain. (The Economist writer reported several power outages in the course of writing his story in Dar Es Salaam.)

So is anything good happening?

Lilliputian windmills, water mills, solar panels and biomass furnaces could have a big collective impact.

Talk of the mass production of biofuels in Africa is premature, but advances have been made. Some investors are backing jatropha, a plant whose seeds produce an oil for burning in generators. There is also an effort to tap geothermal energy. The Great Rift Valley, from Eritrea to Mozambique, could produce 7,000MW. Kenya hopes to get 20% of its energy from geothermal sources by 2017.

Engineers think they can also use the steady winds in Africa's mountain ranges for power production. And if the costs of using the sun's warmth can be reduced to 30% below its present cost, vast solar farms could offer cheap, clean energy for African cities and in doing so boost incomes in rural areas. Egypt, which relies mostly on natural gas, is looking hard at solar power.

The World Bank has undertaken an initiative called Lighting Africa. We'll see how much of that is either frustrated or pillaged by local governments. Perhaps there will be some residual good.

No African Development Without Local Political Wisdom

Everyone puzzles over Africa. Much of the world is enjoying runaway economic growth and increasingly widespread prosperity, but that huge and wealthy continent is left largely behind. It's a human tragedy. In today's Wall Street Journal, 1970 Nobel Peace Prize winner, and one of the fathers of the 1960s Green Revolution in world food production, Norman Borlaug lays out what is required to save Africa from it's chronic development crisis. He emphasizes science and agriculture, but the subtext is a political challenge to the African leaders themselves.

He compares the Green Revolution in Asia to that of Africa. He says that small-holder agricultural production in sub-Saharan Africa has been especially anemic. Unlike Asia which has a good road and rail network, "African farmlands are generally isolated from motorized transport systems." In addition, population growth "has resulted in progressive -- and now often dramatic -- degradation of the soil resource base, while fertilizer use has hardly increased at all, and is the lowest in the world." Whereas agricultural R&D in Asia has tripled over the last 20 years, in Africa is has grown by only 20%, and in half the countries it has actually declined. This is especially tragic given the "special production circumstances" that put Africa in particular need of research and development investment.

He recommends a "broad and more integrated perspective" that focuses on "transforming staple-food production" and giving greater attention to "post-production market linkages -- especially to grain markets and agro-industrial food processing that offer off-farm employment opportunities." Improvement also requires "[s]ubstantially greater investments in infrastructure -- roads, electrical power, water resources." Without this, "there is little hope for real progress in reversing the alarming food insecurity trends or in making agriculture an engine of economic growth."

Borlaug has been calling for an African Green Revolution for years (e.g. International Herald Tribune 1992; New York Times 2003). He did his great work in the 1960s. He is 93 and he is still beating the drum for this cause. So what's the hold up? There is a important political aspect to all this that Borlaug touches upon at several points, but does not emphasize. Perhaps he is being subtle. Perhaps he is leaving it to the multitude of political leaders, government and NGO officials, journalists and scholars to see the political point and make it explicit. Let me do my part.

These nations are governed by more or less sovereign governments. Implementing many of his recommendations presupposes governments that actually care about their people, i.e. that they are not tyrannies which sadly many of them are. In his opening paragraph, concerning Asia's Green Revolution and the global development agenda, Borlaug quietly underscores the critical role that wise political leadership must play: "Research and development, political courage, effective policies and good governance were the driving forces." African leaders are not known for their"political courage, effective policies and good governance."

One cannot help but wonder why "political courage" should be necessary, at least at the highest levels of power. Why shouldn't crass self-interest and naked ambition not suffice to bring the thug-tyrants of the African continent into line with this program? Robert Mugabe of Zimbabwe comes first to mind. It is a marvel, especially in view of the enormous productive power that modern economic and political principles have made possible, that they see their personal security, prosperity, and glory in brutalizing their peoples whom they keep in heart-rending poverty, rather than in securing their peoples' property, enriching their nations' economies and establishing themselves as the fathers and protectors of these accomplishments.

John Locke argued this point, appealing the the shrewdness of every ruler, in his great Second Treatise on Civil Government (section 42):

This shews how much numbers of men are to be preferred to largeness of dominions; and that the increase of lands, and the right employing of them, is the great art of government: and that prince, who shall be so wise and godlike, as by established laws of liberty to secure protection and encouragement to the honest industry of mankind, against the oppression of power and narrowness of party, will quickly be too hard for his neighbours.

I am not an Africa specialist by any measure, but as a student of politics I find Africa a vivid illustration (all too often a sad one) of many political principles, and of course it draws my Christian concern. You might refer back to two of my previous posts on Africa.

More on Mexico's Plutocracy Problem

In an earlier post on illegal immigration, I mentioned a fabulously wealthy Mexican gentleman named Carlos Slim, and his role in restraining the economic potential of the Mexican economy. I have found his name popping up repeatedly since then. The most recent report that I have encountered is "Mexico's Plutocracy Thrives on Robber-Baron Concessions" by Eduardo Porter (New York Times, August 27, 2007, p. A16).

Porter provides some interesting facts:

• Of the 946 billionaires in the world, 10 are Mexican, and Carlos Slim Helu is one of them.


• Carlos Slim (worth US$59 billion) recently surpassed Bill Gates (US$58 billion) as the world's richest man.


• Mr. Slim's net worth amounts to 7% of Mexico's GDP. Bill Gates's wealth is only 0.5% of America's GDP. John D. Rockefeller's (1839-1937) wealth was worth 1.5% of his country's GDP (I'm guessing that he means around 1890).

This son of Lebanese immigrants who clearly has remarkable abilities that most of the rest of us do not have -- and he is entitled to reap the fair fruit of that -- nonetheless did not get to where he is today without significant and morally questionable government help.

In 1990, the government of President Carlos Salinas de Gortari sold his friend Mr. Slim the Mexican National phone company, Telmex, along with a de facto commitment to maintain its monopoly for years. Then it awarded Telmex the only nationwide cellphone license.

When competitors were eventually allowed in, Telmex kept them at bay with some rather creative gambits, like getting a judge to issue an arrest warrant for the top lawyer of a competitor. Today, it still has a 90 percent share of Mexico's landline phone service and controls almost three-quarters of thew cellphone market.

Porter reports that 20% of Mexicans have land lines, less than half of these have cellphones, and only 9% of Mexican households have Internet access. The corrected front page Wall Street Journal Luhnow article on Slim cites the World Bank as putting that land line figure at about 50%.

Mr. Slim's style of wealth accumulation is not rare in modern Mexico. From television to tortillas, vast swaths of the Mexican economy are controlled by monopolies or oligarchies. Many of Mexico's billionaires were created by the government during the privatization of the state-owned companies in the 1990s.

But though the figures may or may not be off, it is certainly true that if men like Carlos Slim would loosen their monopolistic control of their country's economy, they would have more potential customers with a lot more money. As a consequence, they (along with everyone else) would be much richer -- or "prosperous" is perhaps a gentler word.

Porter's leftist sentiments come through in his attempt to sound the alarm here in the United States against big business and wealth accumulation. We are "fast approaching Mexico's levels of inequality." He cites "[t]he concentration of 44 percent of the nation's income among the top 10 percent of taxpayers...." Aside from his seeming unreliability at reporting figures, the difference between our rich and Mexico's is that, in our relatively free economy (it could benefit from being freer), that wealthy 10% generates productive capacity and wealth which spreads throughout the population.

Mexico's Tight Credit Drives Illegals North

People stream across the Mexico-US border in search of jobs. Clearly, there are far too few jobs in Mexico or the pay differential between Mexico and the US is far too high, or both.

Joel Kurtzman, a senior fellow at the Milken Institute, in "Mexico's Job-Creation Problem" (Wall Street Journal, August 3, 2007), provides some illuminating information: "Mexico has a job-creation problem."

"During President Vicente Fox's six years in office his goal was to create six million jobs across all sectors of the economy." During that time, however, "Mexico created only 1.4 million jobs." Of particular interest to Americans is the observation that during that same period, "[t]he number of illegal immigrants from Mexico was roughly equal to the number of jobs Mr. Fox did not create."

Oh, it gets better. Why does Mexico find it so hard to create jobs? They have lots of oil, an abundant and hard-working labor force, long tourist-attractive coastlines, and a shared border with the American economic behemoth. Ka-ching! But jobs are created by entrepreneurs, and in order to create jobs entrepreneurs need access to capital. The problem is that "Mexico's financial and economic structures fail at providing entrepreneurs with the capital they need to create jobs." According to Kurtzman, nearly half the Mexican economy is controlled by one man, Carlos Slim (see WSJ, "The Secrets of the World's Richest Man," Aug 4-5, 2007), and most of the rest is in the hands of a few others. They don't like competition, failing to understand the basic economic fact that a growing economy that is a free economy enriches everyone, even the Carlos Slims.

Read the article for what he says about the oil and banking industries and about household credit and their residential mortgage market. What a mess. "If mortgages were cheap and plentiful -- through the increased use of mortgage securitization tools, for example -- the epicenter of demand for Mexico's trade- and craftsmen would not be California, Arizona, Texas and Florida. It would be in Mexico."

The people crossing illegally from Mexico into the United States are not just job seekers. They are also capital seekers who come here to start businesses. "Solving the immigration problem will not happen unless Mexico solves its job-creation problem."

Poor Africa and What To Do About It

In Blood Diamond, starring Leo DiCaprio, the characters have a saying: "This is Africa," meaning that it is a violent, unstable place where people do not live in hope of enjoying long life. I recently reported Nicholas Kristof’s hope for Africa. Gregory Clark is less sanguine, but presents what hope requires (“How to Save Africa,” New York Sun, July 20-22).

Dr. Clark is professor of economics at UC Davis. His argument goes as follows. Africa’s problem is that it is caught in what he calls the “Malthusian Trap.” Essentially, it is this. Ours is an industrial economy. It grows. So we need a growing population to work it. High birth rates and low death rates are good things. Africa has largely a pre-industrial economy. It doesn’t grow. A growing population in Africa, therefore, means falling standards of living. In an agrarian economy with fixed land resources, plague, war and crib death are good for average incomes. (Historically, imperial expansion – taking other people’s land – has also been good. I add that myself.) What Africa needs is not handouts. That just feeds the problem. Rather, Africa needs the sort of industrialization that China has been experiencing.

Clark concludes: “There is no simple formula for industrialization that is appealing to many. But that is where the focus must be of the attempts to help Africa.”

All of this tells us that Africa’s problem is not fundamentally economic, but political. Africa’s answer must come from within and among African nations.

Prof. Clark's book is A Farewell to Alms: A Brief Economic History of the World (Princeton, 2007). He is responding to Jeffrey Sach's proposal, endorsed by Bono, for ending world poverty by 2025, in his book, The End of Poverty: Economic Possibilities for Our Time (Penguin, 2006). Another good book on the economic damage that results from inserting large, well intentioned welfare payments into the Developing World is William Easterly's The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good (Penguin, 2006).

Hotel Rwanda Hospitable Again

Have you seen Hotel Rwanda? See it. I make all my Introduction to Politics students watch it (or Schindler's List, The Killing Fields, or The Inner Circle) to dramatize the fact that the stakes involved in politics are deathly high. In 1994, in a genocidal rampage, Rwandans from the Hutu tribe slaughtered 800,000 Tutsis and Tutsi sympathizing Hutus.

Now, 13 years later, Nicholas Kristof reports in The New York Times ("Africa: Land of Hope," July 5, 2007): Rwanda "is clean, safe and enjoying economic growth more than twice as fast as the U.S. or Europe." After the transition of many African nations to independence, "Africa drove over a cliff. Of those countries with good data, one-third now have lower per capita incomes than they did at independence (typically about 1960), and the five worst-performing economies in the world from 1960 to 2001 were all in Africa. What went wrong? The two most important reasons were that Africa was terribly governed and that it was torn apart by wars."

It is academically unfashionable to suggest that individuals, even "great men," shape and direct history, but Kristof points to the presidency of Paul Kagame who is "honest, intelligent and capable. President Kagame reads Harvard Businesss Review...." Kagame is candid in recognizing that his country lacks "that culture of hard work, that culture of being ambitious and wanting to achieve. I believe that those values were in Africans, but I don't know what dampened it -- what killed it." Kristof suggests that "malaria, anemia, worms and misrule" explain a lot. Of course, the misrule explains a lot of the malaria, anemia and worms. Marxist sympathizing, U.S. Constitution despising American leftists should take note.

Africa is the one of the greatest tragedies of the 20th century. National independence, western educated leaders and an immense wealth of natural resources, yet devasting poverty, disease, despotism and bloodshed. Will the 21st century see the rise of Africa? Kristof sees hope: "when African countries have enjoyed stability and sound policies, they have often thrived. Indeed, the fastest growing country in the world from 1960 to 2001 was Botwana (South Korea was second, and Singapore and China tied for third). More and more African countries are now following the Botswana model of welcoming investors and obeying markets."

Hey, Mr. Kristof! Can you convince your friends in the Democratic party to show a similar respect for markets? (See The Wall Street Journal on the same day: "Trade Double-cross: House Democrats Go Protectionist," the lead editorial, and "Dodging the Guest-worker Bullet: the last thing our economy needed was the Senate's ham-handed attempt to regulate the flow of low-skilled labor," by Gordon H. Hanson, pp. A14-15.)

The words preached by Benjamin Colman in a 1730 sermon delivered in Boston are aptly noted here:

God hath set the world upon the gorvernments and rulers, whom he has made the pillars of it. ...[T]he peace, tranquility and flourishing of places are made to depend on the wisdom and fidelity of their rulers, in the good administration of the government. While the utmost misery and confusion defalls those places where the government is ill administered. The reason is given in the text [I Samuel 2:8], "God has set the World" on this foot; it can't stand on any other bottom. The virtue and religion of a people, their riches and trade, their power, honour and reputation; and the favour of God toward them, with his blessing on them; do greatly depend on the pious, righteous and faithful government which they are under." -- Political Sermons of the American Founding Era, Ellis Sandoz ed. (LibertyPress, 1991)