Economists used to think wealth came from a combination of man-made resources (roads, factories, telephone systems), human resources (hard work and education), and technological resources (technical know-how, or simply high-tech machinery). Obviously, poor countries grew into rich countries by investing money in physical resources and by improving human and technological resources with education and technology transfer programs.
Nothing is wrong with this picture as far as it goes. Education, factories, infrastructure, and technical know-how are indeed abundant in rich countries and lacking in poor ones. But the picture is incomplete, a puzzle with the most important piece missing.
The first clue that something is amiss with the traditional story is its implication that poor countries should have been catching up with rich ones for the last century or so–and that the farther behind they are, the faster the catch-up should be. In a country that has very little in the way of infrastructure or education, new investments have the biggest rewards.
This expectation seems to be confirmed by the experience of China, Taiwan, and South Korea–not to mention Botswana, Chile, India, Mauritius, and Singapore. Fifty years ago they were mired in poverty, lacking man-made, human, technical, and sometimes natural resources. Now these dynamic countries, not Japan, the United States, or Switzerland, have become the fastest-growing economies on the planet.
Since technology is widely available and increasingly cheap, this is what economists should expect of every developing country. In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education.
As for education and infrastructure, since the returns seem to be so high, there should be no shortage of investors willing to fund infrastructure projects or lend money to students (or to governments that provide education).
Banks, domestic and foreign, should be lining up to lend people the money to get through school or to build a new road or a new power plant. In turn, poor people, or poor countries, should be very happy to take out such loans, confident that investment returns are so high that the repayments will not be difficult.
Even if, for some reason, that didn’t happen, the World Bank, established after World War II with the express aim of providing loans to countries for reconstruction and development, lends billions of dollars a year to developing countries.
Investment money is clearly not the issue; either the investments are not being made, or they are not delivering the returns the traditional model predicts.
We still don’t have a good word to describe what is missing in poor countries across the world. But we are starting to understand what it is. Some people call it ‘social capital’ or maybe ‘trust’. Others call it ‘the rule of law’ or ‘institutions’. But these are just labels.
The problem is that poor countries are topsy-turvy places where it’s in most people’s interest to take actions that directly or indirectly damage everyone else.
This is a shocking waste.
Government banditry, widespread waste, and oppressive regulations are all elements in that missing piece of the puzzle.