More education in itself is not going to make a country richer (Ha-Joon Chang’s Thing 17)

23-things-they-don-t-tell-you-about-capitalismAnother golden nugget from development economist Ha-Joon Chang‘s book 23 Things They Don’t Tell You About Capitalism, continuing this occasional series:

“There is remarkably little evidence showing that more education leads to greater national prosperity. Much of the knowledge gained in education is actually not relevant for productivity enhancement, even though it enables people to lead a more fulfilling and independent life. Also, the view that the rise of the knowledge economy has critically increased the importance of education is misleading. To begin with, the idea of the knowledge economy itself is problematic, as knowledge has always been the main source of wealth. Moreover, with increasing de-industrialization and mechanization, the knowledge requirements may even have fallen for most jobs in the rich countries. Even when it comes to higher education, which is supposed to matter more in the knowledge economy, there is no simple relationship between it and economic growth. What really matters in the determination of national prosperity is not the educational levels of individuals but the nation’s ability to organize individuals into enterprises with high productivity (p.178-9).

…take the case of the East Asian miracle economies, in whose development education is supposed to have played a critical role. In 1960, Taiwan had a literacy rate of only 54 per cent, while the Philippines’ was 72 per cent. Despite its lower education level, Taiwan has since then notched up one of the best economic growth performances in human history, while the Philippines has done rather poorly. In 1960, the Philippines had almost double the per capita income of Taiwan ($200 vs. $122), but today Taiwan’s per capita income is around ten times that of the Philippines ($18,000 vs. $1,800). In the same year, Korea had a 71 percent literacy rate – comparable to that of the Philippines but still well below Argentina’s 91 per cent. Despite the significantly lower literacy rate, Korea has since grown much faster than Argentina. Korea’s per capita income was just over one-fifth that of Argentina’s in 1960 ($82 vs. $378). Today it is three times higher (around $21,000 vs. around $7,000) (p.180-1)…

What really distinguishes the rich countries from the poorer ones is much less how well-educated their individual citizens are than how well their citizens are organized into collective entities with high productivity…[d]evelopment of such firms needs to be supported by a range of institutions that encourage investment and risk-taking – a trade regime that protects and nurtures firms in ‘infant industries’, a financial system that provides ‘patient capital’ necessary for long-term productivity-enhancing investments, institutions that provide second chances for both the capitalists (a good bankruptcy law) and for the workers (a good welfare state), public subsidies and regulation regarding R&D and training, and so on.

Education is valuable, but its main value is not in raising productivity. It lies in its ability to help us develop our potentials and live a more fulfilling and independent life…the link between education and national productivity is rather tenuous and complicated. Our overenthusiasm with education should be tamed, and, especially in developing countries, far greater attention needs to be paid to the issue of establishing and upgrading productive enterprises and institutions that support them” (p.189).

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Africa is not destined for underdevelopment (Ha-Joon Chang’s Thing 11)

23-things-they-don-t-tell-you-about-capitalismAnother post in this occasional series of excerpts from Cambridge development economist Ha-Joon Chang‘s excellent 23 Things They Don’t Tell You About Capitalism (p.112-3, 124):

“Africa has not always been stagnant. In the 1960s and 70s, when all the supposed structural impediments to growth were present and often more binding, it actually posted a decent growth performance. Moreover, all the structural handicaps that are supposed to hold back Africa have been present in most of today’s rich countries – poor climate (arctic and tropical), landlockness, abundant natural resources, ethnic divisions, poor institutions and bad culture. These structural conditions seem to act as impediments to development in Africa only because its countries do not yet have the necessary technologies, institutions and organizational skills to deal with their adverse consequences. The real cause of African stagnation in the last three decades is free-market policies that the continent has been compelled to implement during the period. Unlike history or geography, policies can be changed. Africa is not destined for underdevelopment.

…[W]hat appear to be unalterable structural impediments to economic development in Africa (and indeed elsewhere) are usually things that can be, and have been, overcome with better technologies, superior organizational skills and improved political institutions. The fact that most of today’s rich countries themselves used to suffer (and still suffer to an extent) from these conditions is an indirect proof of this point. Moreover, despite having these impediments (often in more severe forms), African countries themselves did not have a problem growing in the 1960s and 70s. The main reason for Africa’s recent growth failure lies in policy – namely, the free-trade, free-market policy that has been imposed on the continent through the Structural Adjustment Programs. Nature and history do not condemn a country to a particular future. If it is policy that is causing the problem, the future can be changed even more easily. The fact that we have failed to see this, and not its allegedly chronic growth failure, is the real tragedy of Africa.”

I am broadly sympathetic with Chang’s argument, but he avoids a deeper exploration of the politics of development. It is all very well to say that bad policy is the cause of underdevelopment, but why do bad policies persist? The answer to this lies at the interface between politics and economics, namely in a political economy analysis.

Economic trends influence the distribution of power in society between particular interest groups, and this in turn has an effect on the choice of policies and institutions, and their subsequent success or failure. I will discuss the implications of this for development in future posts, focusing this week on Venezuela, which has been much in the news recently, for all the wrong reasons both economically and politically.

The US does not have the highest living standard in the world (Ha-Joon Chang’s Thing 10)

23-things-they-don-t-tell-you-about-capitalismAnother telling extract from Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism (p.102-3, 111):

“The average US citizen does have greater command over goods and services than his counterpart in any other country in the world except Luxembourg. However, given the country’s high inequality, this average is less accurate in representing how people live than the averages for other countries with a more equal income distribution. Higher inequality is also behind the poorer health indicators and worse crime statistics of the US. Moreover, the same dollar buys more things in the US than in most other rich countries mainly because it has cheaper services than in other comparable countries, thanks to higher immigration and poorer employment conditions. Furthermore, Americans work considerably longer than Europeans. Per hour worked, their command over goods and services is smaller than that of several European countries. While we can debate which is a better lifestyle – more material goods with less leisure time (as in the US) or fewer material goods with more leisure time (as in Europe) – this suggests that the US does not have an unambiguously higher living standard than comparable countries.

…There is no simple way to compare living standards across countries…by focusing just on how many goods and services our income can buy, we miss out a lot of other things that constitute elements of the ‘good life’, such as the amount of quality leisure time, job security, freedom from crime, access to healthcare, social welfare provisions, and so on. While different individuals and countries will definitely have different views on how to weigh these indicators against each other and against income figures, non-income dimensions should not be ignored, if we are to build societies where people genuinely ‘live well’.”

Ha-Joon Chang: Financial markets need to become less – not more – efficient

In this video Cambridge University’s Ha-Joon Chang argues that financial markets need to become less efficient in order to serve the real economy and fund productive investment, rather than fueling financial asset-price bubbles and speculation.

He also makes the case that society needs more ‘active economic citizens’, who can press politicians and other elites to fashion better economic policies, and more effectively hold them to account.

Free-market policies rarely make poor countries rich (Ha-Joon Chang’s Thing 7)

23-things-they-don-t-tell-you-about-capitalismThese telling extracts from Ha-Joon Chang‘s 23 Things They Don’t Tell You About Capitalism come from ‘Thing 7’ (p.63-5):

“Contrary to what is commonly believed, the performance of developing countries in the period of state-led development was superior to what they have achieved during the subsequent period of market-oriented reform. There were some spectacular failures of state intervention, but most of these countries grew much faster, with more equitable income distribution and far fewer financial crises, during the ‘bad old days’ than they have done in the period of market-oriented reforms. Moreover, it is also not true that almost all rich countries have become rich through free-market policies. The truth is more or less the opposite. With only a few exceptions, all of today’s rich countries, including Britain and the US – the supposed homes of free trade and free markets – have become rich through the combinations of protectionism, subsidies and other policies that today they advise the developing countries not to adopt. Free-market policies have made few countries rich so far and they will make few rich in the future.”

To illustrate the above, a brief country case study:

“[This] country’s trade policy has literally been the most protectionist in the world for the last few decades, with an average industrial tariff rate at 40-55 per cent. The majority of the population cannot vote, and vote-buying and electoral fraud are widespread. Corruption is rampant, with political parties selling government jobs to their financial backers. The country has never recruited a single civil servant through an open, competitive process. Its public finances are precarious, with records of government loan defaults that worry foreign investors. Especially in the banking sector, foreigners are prohibited from becoming directors while foreign shareholders cannot even exercise their voting rights unless they are resident in the country. It does not have a competition law, permitting cartels and other forms of monopoly to grow unchecked. Its protection of intellectual property rights is patchy, particularly marred by its refusal to protect foreigners’ copyrights…

…[the country described above]…is the USA, around 1880…one of the fastest-growing – and rapidly becoming one of the richest – countries in the world…[following] policy recipes that go almost totally against today’s neo-liberal free-market orthodoxy.”

What is good for General Motors is not necessarily good for the United States (Ha-Joon Chang’s Thing 18)

23-things-they-don-t-tell-you-about-capitalismA thought-provoking quote from Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism (p.190-191), part of my occasional series of brief excerpts from his bestselling book:

“Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force. Regulations can also help businesses by making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run – such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.”