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 to loans — 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, few 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 chance that you may buy a subpar product depresses prices, which reduces the incentive sellers have to offer a quality product
- The Hold-Up Problem. A supplier may price-gouge when the purchaser needs the product the most
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. A group of people get really good at one thing
- Building Trust. As a simplified example: A Kenyan will trust that a fish bought from a Luo is of high quality (removing the Lemon Problem) and will be willing to pay a price commensurate with that quality (i.e., higher)
- Sharing Innovation. In-group trust allows innovations to proliferate within that group, making it better at producing the widget it is known for
In the con column:
- Excluding “The Other.” If your group is excellent at producing a widget, it may want to hold a monopoly on that widget, and thus will exclude anyone who isn’t in the group
- Breeding Resentment. The anti-semitism in much of Eastern Europe was built on a foundation of resentment (the Jewish people were doing really well!)
- Decreasing Social Mobility. A poor group with few skills stays poor, while a wealthy group with skills gains more skills and more wealth
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; an economist, Easterly writes that
“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.”
Here’s the thing: change takes time, and the more we forget that, the more trouble we will cause. Look at America:
- The original constitution, signed in the late 18th century, counted black Americans as 3/5th of a person, and blacks weren’t truly allowed the freedom to vote until the 1960s; our so-called “representative democracy” was neither for almost 200 years
- The American Civil War tore the country in half 150 years ago, and the country still bears scars from those wounds
- Even the definition of a person granted the inalienable rights outlined in the Declaration of Independence took 200 years to actually include all people. What started out as “land-owning white males” eventually became “all people” but it took a long, long time
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 (to say nothing of the present).
I think it’s fair to say and plausible to assume that intervening in the right way could help speed up the institution/norm-building for countries, though . What might that look like? Here are just two ways:
- Boosting the creation and uptake of technologies designed to draw light to, and ferret out, corruption. The West could offer grants or sponsor prizes for groups of people to create technologies that will help improve their governments and their medications. For one cool example of this type of application in Nigeria, check this out; for another, see IPaidABribe from Kenya
- Providing technical expertise to help midwife the creation of appropriate credit-rating agencies. Great Recession aside (“Aside from that, how was the play, Mrs. Lincoln?”), the West has the tools and the know-how to assist in the creation of effective credit-rating agencies, which will help Sub-Saharan Africa offer loans at lower rates
Will this always work? Of course not. But providing technical expertise and helping midwife improvements in knowledge-sharing and technological innovation seem to be concrete ways that the West can assist in development. We’ll see what the next few chapters hold.