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outward to other societies. What was perhaps the greatest eco-
nomic advance in the history of the human race”agriculture”
began in the Middle East and spread outward, as cultivators of the
196 APPLIED ECONOMICS


soil began to displace hunters and gatherers wherever the two
competed for the same territory. Agriculture would support far
more people on a given amount of land, leading to larger societies
with more fighting men than in societies of people who lived by
hunting and gathering the spontaneous produce of the earth, and
who were necessarily spread more thinly over the land, in order for
everyone to have enough to eat.
One society was not always more advanced in all things, so dif-
ferent advances came from different places, even at a given time.
For example, the numbering system in use around the world today
originated centuries ago among the Hindus of India, and displaced
Roman numerals in the West, as well as every other numbering
system that it competed with in every other country. Because Eu-
ropeans first became aware of this numbering system when they
encountered it in use among the Arabs, they called such numbers
"Arabic numerals." But that was not the origin of these numbers.
Innumerable borrowings from one culture to another have taken
place almost continuously over thousands of years. However, the
pace of these borrowings and the opportunities to borrow have
varied greatly in different parts of the world and in different peri-
ods of time. People living in remote mountain valleys or on iso-
lated islands in the middle of a vast sea have usually not been able
to keep up with the advances of technology and other develop-
ments in other societies. When the Spaniards discovered the Ca-
nary Islands in the fifteenth century, they found people of a
Caucasian race living at a stone age level. So were the Australian
aborigines when the British discovered them. In both cases, isola-
tion meant deprivation of the advances of the human race around
the world.
While such things as technology and natural resources are obvi-
ous factors in economic development, less obvious factors may be
of equal or greater importance. The role of government can be cru-
The Economic Development of Nations 197


cial. After the Roman Empire collapsed in the fifth century A.D.,
the institutions it had maintained collapsed with it. What had
once been an inter-connected economy and legal system, stretch-
ing from Britain to North Africa, now fragmented into many in-
dependent local jurisdictions, often separated by areas of varying
sizes that were not effectively controlled by any government and
were unsafe for travel or trade.
As trade declined and the advantages of specialization disap-
peared for lack of markets, cities also declined, roads fell into dis-
repair, educational institutions declined or disappeared, and law
and order broke down. It has been estimated that it was a thou-
sand years after the collapse of the Roman Empire before the
standard of living in Europe rose again to where it had been in
Roman times. The presence or absence of effective government
can be a major factor in economic development or retrogression.
Establishing law and order over a wide area not only enables
producers to find large markets, and therefore take advantage of
economies of scale in production, it also encourages people as well
as products to move to where they are most in demand. When the
British established control over areas of West Africa formerly con-
trolled by different tribes and rulers, this enabled the Ibos from
southern Nigeria to migrate to northern Nigeria in safety, setting
up enterprises and pursuing careers in places where they would
never have dared to locate before, among alien peoples. In various
other parts of the world as well, during the period of European
imperialism, vast numbers of immigrants from China, India, and
Lebanon migrated to lands under the protection of imperial law,
establishing many enterprises and creating whole industries that
helped bring these societies into the modern world.
Another of the functions of government that affects economic
development is its role in providing property rights”or failing to
provide property rights. Many Third World countries suffer from
198 APPLIED ECONOMICS


the fact that, while property rights may exist, they are not realisti-
cally available to vast numbers of people. In some of these coun-
tries, a majority of the economic activity takes place "off the books"
in the underground economy. For example, most of the housing in
Egypt and Peru has been built illegally, whether because of numer-
ous restrictions and red tape that impede building housing legally,
or because of costly legal processes which poor people are unable
to afford. In Egypt, where 4.7 million homes have been built ille-
gally, legally registering a lot on state-owned desert land requires
77 bureaucratic procedures at 31 agencies”and these procedures
can take five years or more. In Haiti, it can take 19 years to acquire
property rights. In some countries, bribes are necessary to get offi-
cials to expedite legal processes, and often the poor are unable to
offer a sufficient bribe.
In these circumstances, much of a country's total wealth may not
be covered by property rights. In Peru, the value of real estate that
is outside the legal system”that is, not covered by property
rights”has been estimated to be more than a dozen times larger
in value than all the foreign investment that has ever been put into
the country throughout its entire history. Even in a desperately
poor country like Haiti, the value of illegal urban real estate hold-
ings has been estimated as four times the value of all the legally
operating businesses in the country, nine times the value of all as-
sets owned by the government and more than 150 times the value
of all foreign investments in Haiti in its entire history. For the
Third World as a whole and the former Communist countries as
well, the estimated value of all the real estate that is not legally
owned is more than 90 times the value of all the foreign aid to all
Third World countries over a period of three decades.
What this means economically is that these vast, but legally un-
recognized, assets cannot be used the way property is used in indus-
trially advanced countries to promote further economic expansion.
Many Americans have created their own businesses”some of
The Economic Development of Nations 199

which later grew into giant corporations”by borrowing money to
get started, using their homes, farms, or other real estate as collateral
to get the initial capital required.2 But an Egyptian or a Peruvian or
other Third World individual who wants to do the same thing can-
not get a loan on a home that is not legally recognized as property,
because banks and other financial institutions avoid lending money
on assets whose ownership is unknown or unclear, and which there-
fore cannot be taken over in case of default. Lenders must think be-
yond stage one, not only to determine what their prospects of being
repaid are, but also what their recourse will be if they are not repaid.
By making property rights difficult to establish, a country's legal
system has, in effect, frozen its own assets and thereby blocked its
own economic development.
Real estate is just one of many economic assets lacking property
rights in Third World countries. In many of these countries, unau-
thorized buses and taxis provide most of the public transportation,
and unauthorized vendors supply most of the food sold in the
markets and on the streets. According to the British magazine The
Economist". "In a typical African country, barely one person in ten
lives in a formal house"”that is, a house with property rights”
"and only one person in ten holds a formal job." While these eco-
nomic activities can go on without property rights, such assets
cannot be used as building blocks for creating new corporations or
venture capital, as they are in countries like the United States or
the industrial nations of Western Europe. Legally, it is the same as
if these assets did not exist”which in turn means that their po-
tential use for further economic development is thwarted.
Those who do not think beyond stage one often think of prop-
erty rights as simply benefits to those fortunate enough to own

2
During its early struggling years, McDonald's was saved from financial ruin by real estate deals
involving the land on which its franchised restaurants were located. But, without property rights on
that land, McDonald's might well have disappeared into bankruptcy, long before it became an inter-
national corporate giant. See John F. Love, McDonald's: Behind the Arches, revised edition, pp.
152-155.
2OO APPLIED ECONOMICS


property. This ignores the role of property rights as a key link in a
chain of events that enable people without property to generate
wealth for themselves and the whole society.
One implication of this is that some Third World countries
could gain the use of more capital by making property rights more
accessible within their own borders than by a ten-fold increase in
the amount of foreign aid they receive. Moreover, the increased
capital would be in the hands of millions of ordinary people, while
foreign aid goes into the hands of the political elite. In short, al-
though property rights are often thought of as things that are im-
portant primarily to the affluent and the rich, these legal
recognitions of existing assets may be especially needed by poor in-
dividuals in poor countries, if they do not wish to continue to be
poor. Millions of Third World people have already demonstrated
their ability to create, in the aggregate, vast amounts of wealth,
even if their tangled legal systems have not yet demonstrated an
ability to let that wealth readily become property that can be used
for further expansion and development. As Peruvian economist
Hernando de Soto concluded, after a worldwide study of this phe-
nomenon:

The lack of legal property thus explains why citizens in developing
and former communist nations cannot make profitable contracts
with strangers, cannot get credit, insurance, or utilities services.
They have no property to lose. Because they have no property to
lose, they are taken seriously as contracting partners only by their
immediate family and neighbors. People with nothing to lose are
trapped in the grubby basement of the precapitalist world.


Put differently, what property rights provide, in countries where
these rights are readily accessible, is the ability of people to convert
physical assets into financial assets, which in turn enables them to
The Economic Development of Nations 201

create additional wealth, whether individually or in combination
with others. Property rights enable strangers to cooperate in eco-
nomic ventures, some of which are beyond the means of any par-
ticular individual and must be undertaken by corporations which
can mobilize the wealth of thousands or even millions of people,
who cannot possibly all know each other. Moreover, property
rights provide incentives to monitor their own economic activities
more closely than government officials can”and protects them
from the over-reaching caprices or corruption of such officials. In
short, property rights are an integral part of a price-coordinated
economy, without which that economy cannot function as effi-
ciently. This in turn means that its people in general”not just
property owners”cannot prosper as much as if it did operate
more efficiently.


GEOGRAPHY

While the influence of the geographical settings in which peoples
evolve has been widely recognized to one degree or another, the
nature of that influence can vary greatly. It is relatively easy to un-
derstand the economic implications of the vast deposits of petro-
leum in the Middle East, the iron ore deposits of Western Europe,
the tin in Malaysia, or the gold in South Africa. What may not be
so obvious, but of equal or greater importance, is the crucial role of
navigable waterways for transporting these and other natural re-
sources, and the products resulting from them, to different regions
of the Earth”creating wider cultural interactions in the process.
It is not simply that some people may be economically more for-
tunate because of the geographical setting in which they happen
to live at a given time. More fundamentally, they themselves can
become enduringly different people, partly as a result of their
broader cultural contacts and the expanded universe of human ex-
202 APPLIED ECONOMICS

perience on which they can draw. When British settlers first con-
fronted the Iroquois on the east coast of North America in cen-
turies past, there was a clash, not simply between the culture
developed within the British isles versus the culture developed
within the regions controlled by the Iroquois. There was a clash
between cultural universes of very different sizes. The British were
able to cross the Atlantic, in the first place, only by using
trigonometry invented in Egypt, the compass invented in China,
utilizing knowledge of astronomy developed in the Middle East,
making calculations with numbers created in India, and drawing
on other knowledge written in letters created by the Romans.
Once ashore, the British had the advantage of weapons using gun-
powder, which originated in Asia, and horses whose military uses
had been developed in Central Asia and the Middle East.
Meanwhile, the Iroquois were geographically cut off from the
civilizations of the Aztecs and the Incas, and had no way of know-
ing of their existence, much less drawing upon their economic, cul-
tural, and military developments. Moreover, two vast oceans cut
off the entire Western Hemisphere from developments in the rest
of the world. The peoples of the Western Hemisphere were not as
isolated as the people living in the Canary Islands or the Aus-
tralian aborigines, since they had a certain amount of interaction
among regions, but their range of cultural access was nowhere near
as great as that of people living on the vast Eurasian land mass,
where the majority of the human race has lived throughout
recorded history.


Navigable Waterways
Access to the outside world is facilitated by navigable waterways”
and access to these waterways is radically different in different part
of the world. Although Africa is more than twice the size of Eu-
The Economic Development of Nations 203


rope, its coastline is shorter than the European coastline. That is
because the coastline of Europe twists and turns innumerable
times, creating harbors where ships can anchor, protected from the
rough waters of the open sea, while the African coastline is much
smoother and has far fewer harbors. The enormous importance of
rivers and harbors to economic and cultural development is indi-
cated by the fact that nearly all the world's great cities developed
on rivers or harbors, at least during the millennia before railroads
and automobiles lowered the cost of land transport.
The fact that so many cities around the world arose on navigable
waterways reflects in part vast differences in costs between trans-
porting goods by water and transporting them by land. For example,
in mid-nineteenth century America, before the transcontinental
railroad was built, San Francisco could be reached both faster and
cheaper from a port in China than it could be reached over land

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