Why are some countries poor and others rich? That is the most basic question in economics and the focus of Adam Smith’s seminal book, an inquiry into the nature and the causes of the “Wealth of Nations.”
This work is often cited as the point at which economics became a separate discipline rather that a minor branch of philosophy. Yet, 239 years since the insightful Scot argued that extensive government control of economic activity often hurt, rather than helped, productivity, answers to the basic question remain elusive.
Capital accumulation, the flip side of high savings rates, certainly is key. So is government provision of key public goods, such as education and infrastructure for transportation and communication. Moreover, at least to those of us who have worked in developing countries over the years, culture, institutions and historical pasts are enormously important — yet even raising the question in that context can be fraught with pitfalls of racism and religious bigotry.
I write this from the shaded veranda of a pleasant resort on the eastern tip of the Dominican Republic. I can see a pristine white beach and the blue Caribbean between the trunks of royal palms. The maids, groundskeepers and shop clerks I have seen so far all were well dressed, and in the 20 miles in from the airport, I did not see a single malnourished child. Nor did I see any during two weeks I spent in Cuba back in March.
These conditions are considerably better than what I saw when I first went to Brazil 47 year ago. Many things have changed for the better and a few for the worse, but much has stayed the same.
Among the improvements is the near absence of the inflation that was chronic across the region from the 1960s into the 1980s. Venezuela is a glaring exception, and Ecuador and Argentina have problems. But in general, the truth that inflation results from excess expansion of the money supply is generally accepted, that central bank discipline is necessary to control inflation is politically accepted in a way it was not in the past.
Nor are most countries in the region burdened with external debt as they were 30 years ago. Current fiscal discipline may make virtue of necessity — foreign lenders are not pushing money at benighted governments as they did in the 1970s — but taxing and spending are generally in better balance than in much of the past, even if not up to Swiss or Dutch standards.
Some countries, especially Brazil, which has half the population of South America, have made strides in eliminating absolute poverty, in great part through “conditional transfers” — family stipends based on children’s school attendance — introduced in the 1990s. And acute inequality of income distribution has fallen in many nations, including Brazil and Peru that once were the world’s most unequal, even as it has risen in the United States and China.
Politically, democracy, however imperfect, is far stronger in the region than a generation ago. The end of the Cold War was a blessing, as the U.S. no longer gives knee-jerk support to military and other authoritarian regimes that would oppose communism, as it did as recently as the Reagan administration. Moreover, with the fall of the Berlin Wall, central planning serves as an ideal model only to a few diehards in the intelligentsia or among old labor leaders.
Some things have not changed. Even though Brazil in particular has world-class engineering and industrial sectors, the region remains highly dependent on the export of agricultural and mineral commodities to the rest of the world. There is nothing inherently wrong with primary commodity exports; no one sees the export of corn and soybeans from farms in the U.S. as a sign of economic backwardness. Nor is there anything inherently bad in Argentina and Brazil’s exports of the same commodities or of Brazil’s shipments of frozen orange juice, chicken and beef to many nations. Iron ore from Brazil and Venezuela and copper, lead and other metals from Chile and Peru similarly is positive, taken alone.
However, the economic slowdown in China is accentuating the vulnerabilities of strong South American economies dependent on a global “commodity supercycle” that could not continue indefinitely. North Dakota and Canada both suffer the same effects, so there is nothing specific to Latin American culture in the downturn. But its acuteness in the region shows that economic diversification and resiliency are still wanting.
Despite some successes at reducing extreme poverty, many families are poor. Education levels have improved, but the failure of any Latin American country to educate its populace the way South Korea and Taiwan were doing already in the 1960s remains a stark reality. And while infant mortality rates had dropped sharply, basic health and sanitation levels remain deplorable in many areas relative to the resources available.
Some things are worse. Crime rates are high in many regions, often linked to supplying drugs to the inexhaustible demand of North America and Europe. Judiciaries in most countries are ossified and in some corrupt. Despite efforts by numerous conservative and centrist governments to reduce bureaucracy, red tape often consumes a large chunk of resources for households as well as businesses.
Pope Francis just made a swing through South America, and his pronouncements are bringing new attention to poverty reduction and economic justice. Unfortunately, his sweeping references to “capitalism” are as unhelpful and as far off the mark as a dear relative’s sincere conviction that South Dakota public schools “are just teaching socialism all the time.”
Some 25 years have passed since the fall of the Berlin Wall and the collapse of the USSR. The range of economic regimes is far narrower than it used to be, and with the exception of a few wackos like North Korea, all countries are somewhere on the spectrum of “mixed-market economies,” with much left to private markets but with substantial action by government in providing public goods, regulating business behavior and redistributing income, mostly through social insurance programs like Medicare.
The debate is about where on that mixed-market spectrum a particular nation falls and what specific roles markets and government each fill. Invoking loaded but largely meaningless terms like “capitalism” and “socialism” causes more confusion than clarity.
The global financial debacle that unfolded after August 2007 is now bringing new ideas to the forefront of economic theory, some incorporating more realistic assumptions about human behavior than in the past. It has also taken some of the wind out of the sails of policy arrogance on the part of the wealthy nations, although Germany’s recent treatment of Greece is a step back.
The ebbing of commodity demand is forcing a re-evaluation of development priorities across many developing countries. The aftermath may even trigger a fruitful return to economic research in development by a generation of younger economists. One can only hope. In the meantime, the Dominican Republic and its counterparts in the hemisphere must, as always, muddle through.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.