Acerca del autor

Benjamin Powell is Director of the Center on Entrepreneurial Innovation at the Independent Institute and Assistant Professor of Economics at San Jose State University.

Fragmento. © Reproducción autorizada. Todos los derechos reservados.

MAKING POOR NATIONS RICH

Stanford University Press

Contents

List of Illustrations...............................................................................................................................................................................viiForeword Deepak Lal................................................................................................................................................................................xiContributors........................................................................................................................................................................................xixAcknowledgments.....................................................................................................................................................................................xxiii1 Introduction Benjamin Powell....................................................................................................................................................................1PART I Institutions and Entrepreneurship2 Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor Mancur Olson Jr......................................................................................................253 Entrepreneurship and Economic Growth Randall G. Holcombe........................................................................................................................................544 Entrepreneurship: Productive, Unproductive, and Destructive William J. Baumol...................................................................................................................795 Economic Freedom and Property Rights: The Institutional Environment of Productive Entrepreneurship Robert A. Lawson.............................................................................112PART II Failures in Entrepreneurial Development6 The African Development Conundrum George B. N. Ayittey..........................................................................................................................................1377 The Case of Latin America Alvaro Vargas Llosa...................................................................................................................................................1898 Entrepreneurship or Entremanureship? Digging Through Romania's Institutional Environment for Transition Lessons Peter J. Boettke, Christopher J. Coyne, and Peter T. Leeson.....................2239 Sweden's Slowdown: The Impact of Interventionism on Entrepreneurship Dan Johansson..............................................................................................................250PART III Reform and Success in Entrepreneurial Development10 China's March Toward the Market James A. Dorn...................................................................................................................................................28311 India: The Elephant in the Age of Liberation Parth J. Shah and Renuka Sane......................................................................................................................30912 Economic Freedom and Growth: The Case of the Celtic Tiger Benjamin Powell.......................................................................................................................34213 Why Have Kiwis Not Become Tigers? Reforms, Entrepreneurship, and Economic Performance in New Zealand Frederic Sautet............................................................................36414 Look, Botswana: No Hands! Why Botswana's Government Should Let the Economy Steer Itself Scott A. Beaulier.......................................................................................396Index...............................................................................................................................................................................................429

Chapter One

BENJAMIN POWELL

Why do some nations become rich while others remain poor? This has been a central question in economics since at least the time of Adam Smith. China, India, and Botswana are booming and in the process lifting hundreds of millions of people out of wretched poverty, while most of sub-Saharan Africa not only fails to get rich but is instead actually getting poorer.

Traditional mainstream economic growth theory doesn't help us much to answer this question-through most of the twentieth century it focused on models that assumed growth is a simple function of labor, capital, and technology. The new growth theory, of which this book is part, looks more to institutions and policy. How well does a nation protect its entrepreneurs? In what countries do you get rich by inventing a new product, and in what countries do you get rich by wresting control of government from your rivals?

Entrepreneurs drive the market toward efficient outcomes by exploiting profit opportunities and causing the market process to tend toward equilibrium (Kirzner 1973). Entrepreneurs also play a central role in the market's process of creative destruction, whereby new innovations constantly replace old technologies and send the market on a path toward a new equilibrium (Schumpeter 1934). The interaction of these two roles of the entrepreneur drives the process of economic development.

Entrepreneurs exist in almost all cultures and historical contexts. Why, then, doesn't the process of economic development occur in all countries equally? Human decision making responds to perceived costs and benefits, and not all societies have an environment that rewards productive entrepreneurship. Look at the case of imperial China. A brilliant young man would devote all of his energies to studying law in preparation for the exams that gave entrance into the upper echelons of the ruling bureaucracy. That same young man today may study electrical engineering with the dream of one day opening his own firm because now Chinese businessmen can earn greater prestige and profits than they could in the past. In which society should we expect greater economic growth?

In recent years the economics profession and policy world have begun to pay more attention to the institutional environment necessary for economic growth. Geography and other explanations for success have begun to be pushed aside as institutions have become increasingly recognized as the main driver of economic success (Rodrik, Subramanian, and Trebbi 2004). Some in the profession have moved toward detailed analytical narratives to explain individual cases in economic development. There has also been a virtual explosion in research measuring economic freedom and using it to explain economic performance. In Washington, DC, people in policy circles now generally, though incompletely, acknowledge the need for private property rights and the rule of law for economic development.

Making Poor Nations Rich seeks to push the current debate further in the direction of an appreciation for the critical role that entrepreneurs and the institutional environment of private property rights and economic freedom play in economic development. The book begins by collecting the key essays that explain how entrepreneurs create economic growth and why some particular institutional environments encourage more productive entrepreneurship than do others. Part 1 ends with a chapter explaining the overall empirical findings on the importance of economic freedom for prosperity. With the theoretic underpinning and overall empirical results in place, the final two parts of the book provide detailed case studies of individual countries and regions by examining the institutional environment that entrepreneurs operate in and the effect this environment has on economic prosperity. Part 2 focuses on countries and regions that have failed to develop because of barriers to productive entrepreneurship. Part 3 contains case studies of countries that have developed by reforming their institutional environment to better protect private property rights and grant greater levels of economic freedom.

This book is similar to Rodrik's edited volume In Search of Prosperity. Both books employ an analytical narrative approach using case studies. Both find that institutions are important for development. This book differs from Rodrik's by emphasizing the primary importance of entrepreneurship and what specific type of institutional environment is necessary for encouraging the productive entrepreneurship that promotes growth. This is most evident in our three country studies, Botswana, China, and India, which overlap with Rodrik's volume. In each case, the authors in this book illustrate more forcefully the primacy of reforms that promoted property rights and enhanced economic freedom in creating growth in these countries.

This book begins by examining alternative explanations for the vast differences in wealth around the world. In Chapter 2 Mancur Olson begins with the standard economic assumption that any economic gains that can be had are exploited. He pushes the argument to its logical conclusion that "what is, is efficient." However, when one looks around the world and sees the dramatically differing standards of living between countries it seems unlikely that the most efficient policies are in place everywhere. Olson identifies two possible explanations for the differing economic performance of countries. The first is that national borders may mark areas of differing resource endowments. Poor countries are poor because they lack land and natural resources, physical and human capital, or access to the latest technology. If differences in these endowments explain the differing performances, then poor countries are, in fact, doing as well as they can given their endowment. The second possible explanation is that national boundaries mark the borders of public policies and different institutional environments. Some of these policies and institutions are better than others. In those that are better, more profit opportunities are seized, whereas those with poor institutions leave potential gains from trade unexploited-big bills are left on the sidewalk.

Olson first deals with the possibility of each of the differing resource endowments as the explanation for differing economic performance. He finds that differing access to knowledge is not an adequate explanation. In Korea royalties and other payments for disembodied technology were minuscule-less than one-thousandth of GDP. If knowledge can be had so cheaply it is not likely to be holding countries back from developing. The standard assumption that knowledge is equally available to all countries is well founded.

Olson finds that overpopulation and diminishing returns to labor do not cause differences in performance. If they did, we should find countries with net out-migration converging in incomes with countries with in-migration. We do not. Furthermore, population density does not explain differing performance. Many of the most densely settled countries in the world have high per capita incomes.

What about differences in capital? With diminishing returns to capital we should see capital flow from capital-rich countries to capital-poor countries. As Olson puts it, "Capital should be struggling at least as hard to get into the third world as labor is struggling to migrate into the high-wage countries" (p. 38). Instead, we see the lion's share of capital in a few wealthy nations, and we see capital continue to flow to these countries. Labor and capital often migrate in the same direction, but if all countries had the most efficient policies they should move in opposite directions due to diminishing returns. Olson drives home the point that something else, namely institutions, is driving the flow of capital, so a country's capital stock cannot be taken as exogenous in explaining economic performance. Other research, such as Hall and Jones (1999), has followed up on this point by creating measures of institutional quality and finding that institutions do, as Olson predicts, play a major role in the accumulation of capital and achievement of growth.

Next he looks at human capital and divides it into two parts: "marketable human capital" and "public good human capital." Marketable human capital reflects the skills, propensities, or cultural traits that affect the quantity and quality of productive inputs that an individual can sell in the market. Public good human capital is knowledge about what types of public policies are good. Migration allows us examine each of these separately and see which is more important for explaining differing economic performances between countries. When people migrate, they take both forms of human capital with them. However, only the marketable human capital impacts performance in the new country. Because even large migrations do not dramatically alter the public policy outcomes in the new country, we can isolate the effects of each type of human capital. What do we find? New immigrants earn about 55 percent of the income of an American of the same age, sex, and years of schooling, whereas many come from countries whose incomes per capita are only one-tenth or one-fifth as large as America's. Cut a different way, we can look at two immigrant groups in America-one from a rich country and one from a poor country-and see what the gap between their incomes is. Germany is much richer than Haiti. If this difference existed because Germans are better educated or smarter than Haitians, then we would expect German immigrants in the United States to also be much richer than Haitian immigrants. But Haitians and Germans in the United States have much closer income levels than do Haitians and Germans in their home countries. It's not the people that differ; it's the institutions.

Olson's overall finding is that "the large differences in per capita income across countries cannot be explained by differences in access to the world's stock of productive knowledge or to its capital markets, by differences in the quality of marketable human capital or personal culture." The only plausible explanation left is that differing performances are caused by differences in the quality of countries' institutions and policies. There are big bills left on the sidewalk. If a country improves its institutions, it can pick up these bills.

In Chapter 3, "Entrepreneurship and Economic Growth," Randall Holcombe describes the process that creates profit opportunities that lead to economic growth. He provides the theoretic underpinning of a central theme in this book: the importance of entrepreneurs for economic growth. Instead of viewing growth merely as a function of inputs, Holcombe argues that "Smithian growth," in which the division of labor is limited by the extent of the market, is a better description of real-world development. As markets grow, this growth leads to continual innovation and specialization in the division of labor. Growth is essentially unlimited. What is the mechanism that causes more innovation to occur? Holcombe introduces the Kirznerian (1973) entrepreneur for this purpose.

The Kirznerian entrepreneur seizes profit opportunities that had previously gone unnoticed. Although Kirzner used the entrepreneur to explain how the market process attains a particular equilibrium, Holcombe connects the entrepreneur to economic growth. The profit opportunities that the entrepreneur seizes must come from somewhere. As Olson pointed out, profit opportunities do not last very long before they are grasped in a market economy. Most profit opportunities that are acted on must be new. Where do they come from? Holcombe argues that the profit opportunities that entrepreneurs seize come mainly from the actions of other entrepreneurs. Individual acts of entrepreneurship create new profit opportunities for other entrepreneurs to act on.

Holcombe argues that entrepreneurial opportunities emerge from the actions of other entrepreneurs for at least three reasons. One reason is that even in a general equilibrium setting, any change made by one entrepreneur necessarily alters the economic environment and will require additional adjustments by other entrepreneurs to attain a new equilibrium. A second source of opportunities comes from the fact that entrepreneurial activity generates wealth and increases the extent of the market. The third source of opportunities comes through the creation of market niches that did not previously exist. New entrepreneurs enter and expand a market niche after it is created. All of these entrepreneurial opportunities come into being because of prior acts of entrepreneurship. As Holcombe puts it in one example, "Bill Gates could not have made his fortune had not Steve Jobs seen the opportunity to build and sell personal computers, and Steve Jobs could not have built a personal computer had not Gordon Moore invented the microprocessor" (p. 61).

What are the implications of Holcombe's model of entrepreneurial growth? Maybe most important, the implication is that growth is not limited. As long as entrepreneurs make innovations, there will be new opportunities for others. Another implication is that just forcing education, investment, or research and development into a production function will not necessarily improve growth. Instead, these things occur in response to entrepreneurial opportunities. The more opportunities there are, the greater incentive there is to search for them by engaging in these activities. How can we explain differing economic performances of countries? The differences must lie in the entrepreneurial opportunities that are available and hence the new ones that will be created. Holcombe links Kirzner's entrepreneur with Friedrich Hayek's (1945) emphasis on the particular knowledge of time and place. Because opportunities arise in this context, people must be free to act on them and seize the profits when they see them. So a decentralized free economy will likely lead to more entrepreneurial opportunities. After they are seized entrepreneurship builds on itself and acts as an endogenous engine of economic growth. Holcombe does not elaborate very much on the institutional structure that is necessary for entrepreneurial development. For that we turn to Chapters 4 and 5.

Chapter 4 builds on Holcombe's and Olson's insights by examining how the cultural and policy environment impacts the allocation of entrepreneurial activity. William Baumol begins with Schumpeter's five types of entrepreneurial acts-introducing a new good; introducing a new method of production; opening a new market; discovering a new source of supply of raw material or intermediate good; and carrying out the new organization of an industry-and then adds rent seeking as a sixth type of entrepreneurial activity. The rent seeking may take the form of lobbying regulators or legislators for favors, suing in the courts to harm competitors, or conducting military activity. Baumol observes that, unlike the other forms of entrepreneurship, rent-seeking activity is not socially beneficial. He argues that differing economic performances of countries can be explained in part not by the total supply of entrepreneurial activity but rather by the allocation of entrepreneurial efforts among these activities. He further argues that the allocation of entrepreneurship is influenced by the institutions in society. Countries with cultures and economic policies that reward unproductive entrepreneurship will channel more of their entrepreneurial effort to those activities, and consequently the economies will perform poorly. He neatly summarizes his main argument in three propositions.

1. The rules of the game that determine the relative payoffs to different entrepreneurial activities do change dramatically from one time and place to another.

2. Entrepreneurial behavior changes direction from one economy to another in a manner that corresponds to the variations in the rules of the game.

3. The allocation of entrepreneurship between productive and unproductive activities, though by no means the only pertinent influence, can have a profound effect on the innovativeness of the economy and the degree of dissemination of its technological discoveries.

(Continues...)

Excerpted from MAKING POOR NATIONS RICH Copyright © 2008 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.