Making poor nations rich
by Elisa Nay
[ politics | opinion | bookreviews ]
"According to the system of natural liberty, the sovereign has only three duties to attend to..: first, the duty of protecting the society from the violence and invasion of other independent societies... [S]econdly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice... and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society."
Adam Smith, quoted in Lionel Robbins, A History of Economic Thought: The LSE Lectures, Princeton University Press, 2000, p.151-2.
Where would you rather live: Congo, Algeria, Venezuela, Zimbabwe, Myanmar; or HK, Singapore, NZ, Switzerland, UK, US, Australia, Canada, Ireland or Luxembourg? If you favour the second set of countries - because you imagine, rightly, that they enjoy a much higher level of income and personal freedom - you might also be interested to know that they all benefit from a high level of what this book's contributors call "economic freedom"; that is, the rule of law, private ownership, personal choice, voluntary exchange and free entry into markets. The first lot, by contrast, are at the bottom of the "economic freedom" index.
The main message of this excellent book, based on empirical studies of the economic development of countries in Europe, Africa, Asia and Latin America, is that high growth rates - which we need to produce wealth - require economic freedom in the form of liberal institutions such as private property, rule of law and free markets, and a small state sector which does not compete for scarce resources with the private sector. With respect to the latter, the authors quote a number of persuasive studies .
As for economic freedom, those countries with impressive rates of economic growth which are examined in the book (NZ, China, India, Botswana and Ireland) are shown to have made pro-property rights and pro-market reforms. Importantly, these reforms not only, as a rule, achieve a higher growth: freer economies also perform better in terms of life expectancy, literacy, poverty reduction and acceptable income distribution (the alternative measures of human welfare, besides per capital GDP, in the UN Human Development Index). As Lawson says: "Despite considerable hand-wringing about the deleterious effects of markets on the distribution of income, there is simply no evidence that economic freedom creates greater income inequality... However, there is clear evidence that low-income people in freer countries are better off than their counterparts in less-free countries". Furthermore, health and environmental outcomes appear to be better with economic freedom, too. There is, hence, no conflict between economic freedom, growth and an adequate standard of living for all including sustainable development.
There are some other, more detailed and unexpected findings in the book. The world's productive knowledge is, for instance, generally available to poor countries at a relatively modest cost. This was the case for Korea, which Olson analyses; it grew exceptionally rapidly after WWII, and payment for knowledge was less than 1.5 per cent of the increase in the GDP in 1973-79.
There is also a positive (rather than negative, as one would expect) relationship between the number of people per square kilometre and per capita income. Thus, huge migration to the US in the early 1920s from Europe and since WWII from Latin America (and to Western Germany from East Germany after 1945) did not narrow the gap in per capita income between those countries. Many of the most densely settled countries have high per capita incomes, while many poor countries are sparsely settled.  The authors suggest that better economic policies and institutions lead to higher per capita incomes, which in turn lead to more migration and a lower death rate.
Rich countries are not more productive because of the quality of their labour: migrants who arrive in the US from poor countries, for example, earn about 55 per cent as much as non-migrant Americans of the same age, sex, and years of schooling, even if the per capita income in their country of origin is only one tenth of that in the US. Holcombe points out that higher productivity is due (in addition to more capital) to the difference in the quality of the new countries' institutions and economic policies. (Interestingly for economic historians, this view of growth vindicates Adam Smith's belief that the potential for economic growth was virtually unlimited, because of entrepreneurship and innovation, though Ricardo argued that it was limited by the availability of economic resources; in particular, land).
So why does economic freedom result in high economic growth and prosperity? The reason given in the book is that, in freer economies, people have the incentive to invest more ; and, above all, that liberal institutions (such as private property, rule of law and free markets) promote entrepreneurship.
Entrepreneurship can be defined as an alertness to profit opportunities; and the environment in which entrepreneurship opportunities can be capitalised upon is the true engine of growth, more than any of the other inputs traditionally associated with growth such as labour, capital and technology. Countries abundant in labour, capital and technology but without the appropriate liberal institutions, do not grow. Institutions matter, as Smith recognised in his analysis of China's rejection of foreign trade and its mandarins' harassment small businesses, for example; and Marx acknowledged "the productive capacity of the capitalist system", even if he disparaged its impact on the relative standing of workers.
Entrepreneurs everywhere want to allocate resources towards their highest-valued use. In a society characterised by economic freedom, they will devote their energies to profitable business opportunities. Recent studies have thus concluded that GDP per capita in nations with the strongest protection of property is double that in those providing only a moderate amount of protection; and several times higher than in those where there is little protection. In a society that does not have or value business opportunities, however, entrepreneurs will devote their energies to the pursuit of alternative sources of prestige, and the wealth and wellbeing of the country will suffer. In imperial China, as Powell and Baumol point out, prestige came from being in the upper echelons of the ruling bureaucracy, and brilliant young men studied law. Today, businessmen can earn greater prestige and profit, so "the same young man today will study electrical engineering with the dream of one day opening his own firm". In Romania, where unproductive rather than productive entrepreneurship is better rewarded, the country made a relatively unsuccessful transition to a market economy.
This view of growth as being maximised by institutional factors which allow productive entrepreneurship explains also why state planning - relying on increasing inputs such as labour, capital and technology - has failed to promote economic growth, whether in the former communist states of Eastern Europe, China and India, or Africa. Such central planning precludes entrepreneurship, which is necessarily decentralised in nature.
Africa in particular, as the book shows poignantly, is a tragic case, with most of its 54 countries "economic basket cases"; yet, it did not have to go this way. Compared with the Asian continent, for example, Africa has immense untapped mineral wealth and is not overpopulated. After colonisation, many of its countries were no worse off than many Asian countries which subsequently achieved prosperity. When Ghana gained independence in 1957, its $200 per capita income was the same as South Korea's; it had enormous natural resources and an educated population. Fifty years later, however, South Korea's income per capita is 30 times higher ($12,200 versus $420). The same applies to Nigeria, which had the same level of development as South Korea in 1960; and yet today, its income per capita is no greater than in 1960! It is clear that independence did not bring the prosperity promised by nationalist leaders: instead, poverty increased sharply in the postcolonial periods.
Most Africans, claims Ayittey, are worse off today than they were at independence. He argues (convincingly), that most of Africa's leaders, having identified colonialism with capitalism, followed the socialist path after independence (Botswana, discussed at length in one of the chapters, is a notable exception). This led to mad schemes: Nyerere of Tanzania "misread the communalism of African traditional life prior to colonialism as socialism" and wanted to return to that economic model. About 91 per cent of the entire rural population was moved into government villages by end of 1970s, and Tanzania went from being the largest exporter of agricultural products in Africa to its largest importer. Besides the destruction of communities and a huge misallocation of resources (money pouring into foreign paraphernalia such as double-decker buses, basilicas and useless space programs, and state leaders crowning themselves emperors and building innumerable palaces, while neglecting to provide basic social services such as education, health care, clean water and roads), another result of this "African socialism" has been one-party states, centralisation of power within a few hands, enormous corruption and "insane" civil wars. Ayittey doesn't mince his words: "what exists in many African countries is a cabal of criminals and murderers whose members have monopolized both economic and political power as well a subverted state institutions to advance only their interests and to exclude everyone else's". And these are the countries - the "vampire states", in which the richest persons are heads of state and ministers - into which the West, full of guilt about its colonial past, has been pouring billions of pounds in aid since decolonisation.
Here comes the second important message of the book, reinforcing what a number of other scholars have recently claimed: that aid can be actually detrimental to growth and can prolong poverty.  Billions of dollars in aid poured into African countries in the past few decades appear to have ended up mainly in private accounts in Swiss banks and in propping up corrupt, violent and totalitarian African regimes.  Furthermore, Liberia, Zaire and Somalia - the main beneficiaries of official development assistance of over $400 billion in aid in 1960-1997, six times the amount of the Marshall Plan - have slid into virtual anarchy. In Somalia, food aid destroyed the fabric of Somali society. Droughts and famines are not new to Africa, and most traditional societies developed indigenous methods of coping. The flood of cheap food aid destroyed these, and Somalia became increasingly dependent on food imports: 33 per cent of total food consumption was imported in 1970-1979; but 63 per cent during the 1980-1984 period.
Ayittey concludes with two quotes: "Western aid today directly underwrites current policies and practices; indeed, it may actually make possible some of the more injurious policies, which would be impossible to finance without external help" (Eberstadt), and "In fact, foreign aid has done more harm to Africa than we care to admit..." (Karanja, a former Kenyan member of Parliament). Furthermore, and in line with the accusations above, it has not eliminated "political tyranny": in 1990, only four of the 54 African countries were democratic; in 2004, it was 16.
The economic case of Latin America is similar. In the past 50 years, Llosa points out, rich nations have given poor nations as much as $2.3 trillion in aid. Not one of the countries that has overcome underdevelopment has been a primary recipient of that money, whether in Asia, southern Europe, Australasia or, more recently, eastern and central Europe (Chile, for example, received only negligible foreign aid). Just as welfare programs in Latin America have not helped the poor, foreign aid has failed to aid the larger population. Without market reforms, "the cumulative effect of statism on most Latin American countries has been the creation of dual societies in which a small segment of the population is able to partake in the opportunities of globalization and make the most of the technological advances that the information era makes rapidly available". Crazily, the problems are compounded by protectionism in developed nations: farm subsidies in the OECD countries add up to almost $350 billion (no period mentioned), which is six and one-half times all the foreign aid handed out by these nations, "precisely in the name of development!".
Llosa also discusses the legal reforms of 18th century England, when the Whig reformers repealed four-fifths of the laws passed since the reign of Henry III. The result was the long period of prosperity that we now partly associate with the Industrial Revolution. He contrasts this with Latin America, in particular Argentina, where 85 per cent of laws are not even enforced as they contradict or overlap each other: citizens do not know what the law of the land is. The main laws that need to be repealed are those do to with business (those that limit entrepreneurship through use of permits and licenses); finance (competition in the banking system); labour (freedom of contract and association); and social legislation (education and health; justice, and law and order).
Romania also urgently needs regulatory reforms. Eighty-six per cent of respondents in a World Bank survey claimed that "constant changes in the laws and regulations are a main obstacle to doing business", in particular long-term business planning. Corruption is another problem. Transparency International found Romania the second most corrupt country in Europe (after Albania). Romania is, thus, a clear case in Europe where - in line with Baumol's theory - unproductive entrepreneurship is better rewarded.
The final - surprising - case of "entrepreneurial failure" considered in the book is Sweden. Most of its growth, claims Johansson, occurred before it implemented the comprehensive welfare state for which it is so well known; since then, rates of entrepreneurial creation and economic growth have fallen. Yet from 1870 to 1970, Sweden was one of the fastest-growing economies of the world. In 1970, it was the fourth-richest country in the OECD; three decades later, as its tax revenues have risen, it had fallen to 14th. Its wealth per capita is $13,000 (or about 17 per cent of the US level), reflecting the fact, says Johansson, that its entrepreneurial activity is lower than in other countries. Out of 34 countries, it has the sixth lowest share of its population engaged in economic activity; and most new jobs since 1950 have been created in the public sector.
Economic development successes, in contrast, are those countries which undertook major reforms allowing a greater economic freedom. By "economic development", incidentally, most authors appear to mean "extension of the range of choice, that is, an increase in the range of effective alternatives open to people",  so it is not simply GDP growth. The countries discussed are Ireland, NZ (already moderately developed when reforms started), China, India and Botswana (very poor prior to reform, and falling behind again since economic reforms stalled).
In China, the belief that state-led development was superior to market-led development was abandoned in 1978, with de-collectivization of agriculture, liberalization of foreign trade (in particular with the establishment of special economic zones, or SEZs, in the coastal provinces), and opening of a number of cities to foreign investment. Interestingly, as Dorn points out, this reform process "has been driven more by grassroots efforts than by a blueprint from above... Experimentation with new economic arrangements, such as the household responsibility system and privatization of small state-owned enterprises, took place at the local level, often spontaneously. After the reforms were successful, the leadership of the Chinese Communist Party (CCP) took credit and officially sanctioned them... The strategy has been to grow the non-state sector rather than to privatize large SOEs [state-owned enterprises]". As a result, the output of the non-state sector rose from one-third to two-thirds of industrial output, and 70 per cent of national output. China is now the world's third-largest trading nation (after being a largely closed economy till the 1970s), as well as the world's largest recipient of direct foreign investment; its GDP growth has reached 11 per cent per year in recent years; its real per capita income (in terms of purchasing power parity) rose from $440 in 1980 to $4,475 in 2002; while life expectancy rose from 66.8 years in 1980 to 70.7 years in 2002 and infant mortality decreased from 49 to 32 per cent in the same period.
However, "a legacy of central planning" still exists in the capital markets, with interest rates regulated, bulk of investment funds allocated, etc. This means that investment decisions are still distorted, and resources inefficiently allocated. Dorn thinks that this slow progress reflects the fact that "every step toward capital freedom is a threat to the CCP's monopoly on power".
Nonetheless, the changes that have taken place have been accompanied by quite significant changes in the Chinese Constitution. In 1999, the Constitution was amended "to recognise the growing importance of the private sector: 'Individual, private and other non-public economies that exist within the limits prescribed by law are major components of the socialist market economy' (and in 2001, private entrepreneurs were allowed to join the CCP); in 2004, it was further amended "to give individuals more secure rights to their legally acquired assets and for the first time added the words 'human rights' to the document. Three amendments stand out: - 'The state protects the lawful rights and interests of the private sector'; 'The lawful private property of citizens in inviolable', and 'The state respects and protects human rights'". I find these provisions confusing, in view of others such as: "The basis of the socialist economic system of the People's Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people. The system of socialist public ownership supersedes the system of exploitation of man by man; it applies the principle of "from each according to his ability, to each according to his work." [But] In the primary stage of socialism, the state upholds the basic economic system with the public ownership remaining dominant and diverse forms of ownership developing side by side, and upholds the distribution system in which the distribution according to work remains dominant and a variety of modes of distribution coexist".  They are also unlikely to be enforced, as says Dorn, in the absence of an independent judiciary.
In the case of India, the reforms of 1991 (in particular delicensing of industries and export-import liberalisation) and the creation of a National Stock Exchange in 1994 "have sparked a remarkable growth process" including a 10-year GDP growth rate of 6.3 per cent (as opposed to the infamous "Hindu rate of growth" of about 3.5 per cent during the years of central planning); very high export rates, ranging from automobile components and textiles to financial accounting, IT and software; Indian firms investing increasingly abroad and becoming important multinationals ; and poverty falling from 36 per cent in 1993-94 to 26 per cent in 2000. What is most striking, however, is that the areas in which the middle and upper classes make their living have seen the highest degree of liberalization; while those in which the poor earn their livelihood have seen the fewest reforms, so the poor still live under the draconian license-permit-quota raj, a system of extensive government intervention. Setting up a factory or a call center requires no license; setting up a tea stall or cycle-rickshaw operation requires one - and it is extremely hard to get. Agriculture, too, is regulated to the extent that the state dictates what to produce for whom. The poor have, therefore, not benefited as much under the "new India" as they could have, had the reforms applied to them, too.
One exception, according to the authors, is that of "one of fastest-growing industries in the country": private schools for the poor, accompanied by a rise in literacy rate from 50 per cent to 65 per cent in about a decade. Shah and Sane suggest that this shows that government involvement is not necessary even for social goods such as education. As they say, "if government interventions and controls play havoc in the production of simple economic goods, how could they be expected to offer opposite results in the production of rather complex social ones" such as education? They conclude that "what the people of India needed was not necessarily more government spending on education but rather the freedom to produce and trade", and thus have their own means to educate themselves. This conclusion is no doubt controversial: for example, in the case of public goods, government intervention may be necessary, as insufficient quantities of the good - or none at all - might be produced; and education, many people would believe, is a mostly private good that nonetheless needs to be publicly provided, because of the important externalities it generates. However, in view of their apparent success, the experience of private schools for the poor in India may indeed need to be examined by those anxious to provide best education possible to the poor.
Another possibly controversial claim concerns the role of the welfare state. India, unlike most developed countries, apparently has a very small welfare state, but strong family and community bonds. The authors suggest that "[b]efore the state takes over the welfare functions, civil society institutions must be developed - or created, if necessary - to perform those functions with greater care, affection and effectiveness". No doubt, many who believe that too much pressure is already put on civil society institutions in the Western countries (for example on families to look after the aged, mentally ill or disabled) would disagree strongly with this statement.
The conclusion of the chapter is that India's biggest areas of reform have been in its freedom to trade with foreigners. Those still needed include further deregulating of the domestic economy (contractual freedom in labour markets, common market for agricultural products, dereservation of items for small-scale industries, corporatization and privatisation of the banking and insurance sectors, disinvestment of public sector companies, rationalisation of bankruptcy laws), and improving the quality of governance. This means, in particular, getting rid of inefficiencies of a huge bureaucracy and reforming the legislative, executive and judicial branch. 
Ireland is a great recent European success story. One of Europe's poorest countries for more than two centuries, it achieved a remarkable rate of economic growth throughout the 1990s.  By the end of the decade, its GDP per capita stood at $25,500, higher than those of the UK, at $22,300, and Germany, at $23,500. Its GDP per capita was only 63 per cent of the UK's in 1987. This GDP growth followed the government's 1985 adoption of policies "not undertaken for any ideological reason or political motives [but] dictated by the sheer necessity of economic survival".  These fiscal and economic realities were the result of extensive increases in government spending during the 1970s to try to stimulate aggregate demand in response to the oil shocks; in particular, high levels of government debt (116 per cent of GDP), high taxes and interest rates, and growth of only 1.9 per cent of GDP per year since 1973.
The new policies adopted were "dramatic" cuts in government spending, to 40 per cent in 1990 from 55 per cent in 1985, with budget cuts in health, education, agriculture, roads and housing, defence, environment, and public sector employment voluntarily cut by 8,000 to 10,000 jobs; decreases in personal and corporate tax rates throughout the 1990s; and a free trade regime and access to the European market.
The signing of the Maastricht Treaty in 1992 helped Ireland's commitment to sound fiscal policies, as it required members to maintain fiscal deficits below 3 per cent; and helped achieve 60 per cent debt-to-GDP ratio by the start of the EMU in 1999. 
Powell claims that contrary to popular belief, EU subsidies had nothing to do with the Irish economic success. On the contrary, Ireland's economic growth might have occurred in spite of European Union transfers.
First, the subsidies may not contribute to growth if spent on worthless projects (and governments have no way of calculating, according to the author, whether a project is going to be profitable or not); if the government bids the resources away from private investors who could have used them better; or if the government funds projects that benefit their political supporters (the public choice argument).
Secondly, in this particular case, the evidence shows that net EU receipts and Irish growth rates have moved in opposite directions. Ireland started to receive subsidies after joining the EC in 1973. The subsidies, which varied from 3 per cent to 4 per cent of GDP in 1985-2000, remained in absolute terms at about the same level in 2001 as they were in 1985; and the high growth of the late 1990s occurred as EU transfers were phased out.
Thirdly, if subsidies were responsible for high growth, other poor countries within the EU that received subsidies would also have experienced high growth rates. And yet, while EU subsidies represented 4 per cent of Greek, 2.3 per cent of Spanish and 3.8 per cent of Portuguese GDP, the corresponding GDP growth was 2.2 per cent, 2.5 per cent and 2.6 per cent in the period 1990-2000.
The Irish discussion concludes on a pessimistic note: Ireland's rapid growth ended precisely as improvements in its institutional environment stalled.  For another period of economic growth, says Powell, Ireland would have to embark on another series of reforms that promote economic freedom. This is unlikely in the absence of another fiscal crisis. (Having said that, we may want to note that the Irish economy grew by 5.3 per cent in 2007 and is forecast to grow by a further 4 per cent in 2008: this is more than double the corresponding average growth rates for the rest of Europe. Its unemployment rate of around 4.5 per cent-4.8 per cent is still one of the lowest in Europe.)
The final two countries analysed as economic successes are New Zealand and Botswana.
New Zealand had fallen from being one of the five richest countries in the world in the early 20th century to being about the 20th richest by the early 1980s. After 1984, its economic performance improved again (although only enough to stop the economy from deteriorating further relative to other OECD countries: by 2003, NZ was still behind the US, Ireland, GB and Australia in terms of GDP per capita). According to Sautet, four areas of reform were responsible for that improvement: tax reform, labour reform ; trade liberalization , and monetary reforms, resulting in lower inflation. Sautet does not believe that the reforms have gone far enough. Government is still too large; average taxes are too high; and there are too many regulations and interventions in labour and industry. And yet, flexible labour is crucial to the capture of profit opportunities.
Interestingly (and possibly controversially), Sautet refers to various studies that have shown that public spending is higher under proportional representation than under the first-past-the-post system, as coalition governments have many more interest groups to please. He claims, accordingly, that "the existence of coalition governments helps to explain the modest growth NZ has experienced since 1996".
The book ends on one last study by Beaulier: that of the rather amazing case of Botswana. From "close to the poorest" country in the world at the time of independence in the 1960s, and with few natural resources, an arid climate and little infrastructure, Botswana has transformed itself into an upper-middle-income nation, with the fastest rate of GDP growth (7.7 per cent per annum) in the world between 1966-1996 and 10.74 per cent between 1965 and 1975.  It achieved this by avoiding to follow the path most travelled in Africa, that of anti-capitalist, statist policy development. Instead, keeping much of the British common law and British-style institutions, and led by a visionary founding President, Seretse Khama, Botswana embarked on a series of reforms that reduced the government presence in the economy and promoted economic freedom (respect for rule of law, protection of property rights, disapproval of corruption, etc). As a result, government spending fell from 23 per cent in the mid-1960s to 15 per cent of GDP in the early 1970s.
Unfortunately, according to the author, the experiment with free market policies in Botswana did not last long. By 1975 - just 10 years after Botswana had gained independence from Great Britain - the country's experiment with limited government had come to an end, just after, and because of, says Beaulier, the discovery of enormous supplies of diamonds in 1972.  Policymakers and voters, confident of increased revenues, believed that the government needed to play a larger role in the economy. They abandoned Khama's "vision of a government limited in scale and scope", and went on establishing a national defence (something that was nonexistent in the early years), expanding government aid for education, providing health care coverage for most citizens, and building more roads. They also got into the business of defining winners in some important sectors of the economy, subsidizing losers in other sectors, and intervening in labour disagreements.
As a result of this expansion of the role of government, government spending rose from 15 per cent of GDP in the early 1970s to nearly 33 per cent in 2003, increasing at an average annual rate of 10.7 per cent per year; and over 8 per cent between 1995 and 2003, nearly twice the rate of annual GDP growth of 4.4 per cent per year. By comparison, South Africa's government grew at an average of 2.8 per cent over the same period of time.
The diamond industry, responsible for this growth, accounts today for nearly 40 per cent of all economic activity in Botswana. This is the "natural resource curse", described by Zakaria in his The Future of Freedom, and quoted by Beaulier; "Why are unearned riches [like oil, diamonds and gold] such a curse? Because they impede the development of modern political institutions, laws and bureaucracies... In a country with no resources, for the state to get rich, society has to get rich so that the government can then tax this wealth. In this sense East Asia was blessed in that it was dirt poor". With "unearned riches", on the other hand, governments can simply rely on revenue from those, and not worry about making their societies rich so they can tax them.
All is not doom, however: for example, one positive aspect of the diamonds' boom has been the fact that heavy taxes on the industry allowed the government to maintain low marginal taxes on corporate profits and individual income, thereby avoiding the usual problems of African countries: corruption and black markets. According to the corruption watchdog, Transparency International, Botswana is indeed the least corrupt country in Africa.  Also, Botswana has a long tradition of democracy, predating colonialism (something not mentioned by Beaulier but reported by The Economist, ibid). Local chiefs rule most villages and towns and are incorporated into the country's administration. They are unelected but can lose their position if their subjects are unhappy with them and their decisions can be appealed in court.
My problem with this fascinating account of Botswana by Beaulier is that he does not make clear what is wrong exactly with Botswana today, except for the need for its economy to diversify. One has to go to other sources to discover the main development challenges facing Botswana today. The World Bank, for example, points out to GDP growth of "only" 5 per cent in recent years, as well as to high inequality, high unemployment of nearly 20 per cent, and the world's second most severe HIV/AIDS pandemic, with a prevalence rate at 24 per cent. Unlike Beaulier, however, the Bank (still traditionally associated with neo-classical economics) seems to indicate that the reason for these problems may be insufficient - rather than too big - government spending, certainly on health.  The Bank also thinks that Botswana's significant development gains of the past decades are actually evidenced by "improved social and economic infrastructure throughout the country and high rankings on governance, [..] doing business, [..] and economic freedom indicators. Botswana has achieved two Millennium Development Goals (universal access to basic education and reduced gender disparity in access to and control of productive resources) and has a strong supportive environment to achieve several more" (ibid). So why does Beaulier finds the government spending on health, education and infrastructure unacceptably high? He does not explain, except in comparing it to spending by other African countries (where yet the claim could be made that spending on infrastructure is highly insufficient); and he seems to simply assume that the lower growth is due to increased government spending.
This is indeed, in my view, the main weakness of this otherwise excellent book: the fact that the authors seem to assume that the smaller the government, the better, no matter what circumstances and what level of government; and that the government's only role is to provide the institutions in which economic freedom can flourish. Olson is the only author who may possibly be thinking differently, when he points out that uncoordinated individual actions are not enough for growth; and how, in order to have efficient cooperation of many millions of specialised workers and other inputs (so as to obtain gains from specialization and trade), we need institutions that not only enforce contracts impartially and make property rights secure over the long run, but that also correct market failures. He concludes that "individual action is not enough to create efficient societies. As the literature on collective action demonstrates, individual rationality is very far indeed from being sufficient for social rationality".
Surely, this means that in some circumstances economic freedom, while clearly necessary for economic growth, is not sufficient. The operation of market forces, as neo-classical economic theory recognises, needs to be supplemented by government intervening in the economy in order to correct for various market failures such as externalities (pollution, depletion of natural resources), insufficient provision of public goods, or growth cycles (for which we may need counter-cyclical Keynesian demand management policies). Of course, as public choice scholars make us aware, government intervention can often misfire, in the presence of imperfect information and interest groups pressure. This is however not a reason to throw the baby out with the bath water, and to abandon desirable government intervention altogether. It is simply a practical problem of how to make government intervention more efficient.
There are a couple of other weaknesses. There is no discussion of the question of impact of growth on the environment, nor of the relationship between development and civil and political rights.
Only Powell makes a (controversial) statement, quoting Glaser et al that democratic political reforms are not a prerequisite for beneficial policy changes that induce growth: "dictatorships such as China and democracies such as Ireland are both capable of reform". It would have been interesting to pursue this discussion further in the book, especially as the most recent thinking on the matter seems to be that both political and economic reforms (and both sets of civil and political as well as economic, social and cultural human rights) are necessary for sustained economic growth.  This recent thinking is based on the influential view of development by Amartya Sen, for whom development means the expansion of the capabilities of individuals through provision of freedoms, a view which appears similar to the authors'. However, for Sen, there are four necessary freedoms besides the economic one: political freedoms and civil rights (free speech, free media, elections etc); social opportunities (for example, socially-provided education and health facilities); transparency guarantees (such as openness in government and business); and protective security (eg, social safety net). Adequate domestic institutions must, therefore, include property rights, market regulatory institutions, and rule of law, but also democracy, macroeconomic stabilization, and social insurance/safety nets. This is in line with the argument I advanced above, that the role of governments is to provide more than an environment which maximizes solely economic freedom.
Turning to the question of growth and environment: the authors are obviously in the camp of those who believe that greater growth leads to higher incomes; and that higher incomes, in turn, lead to people being better able to afford, and more disposed to demand, higher environmental standards. This may explain why the question is not addressed at all in the book. Nonetheless, as many disagree with this view , the authors ought to have explicitly addressed that question, even if they are right, in the my view, to implicitly recognize the legitimate aspirations of developing countries for growth and poverty reduction.
A final criticism of the book: parts of it seem slightly out of date. Even Sub-Saharan Africa has recently experienced progress on growth and poverty front, with its growth performance the best in more than three decades, averaging 5-6 per cent GDP growth per year  and with the proportion of people living on less than $1 per day (the definition of poverty for Millennium Development Goals purposes) having fallen from 46 per cent in 1999 to 41 per cent in 2007. Nonetheless, it is unfortunately true that this progress is highly fragile, as driven in large measure by a boom in commodity prices. The strengthening and diversification of the productive base in Sub-Saharan Africa is hence an essential condition for improved economic performance in the medium- to long-term, as the authors acknowledge.
This is an important book, to be read by all those interested in solving the problem of poverty worldwide. If the authors are right, the best way to help the poor is to achieve as high a level of economic freedom as possible. Even for those of us who believe that political and civil freedoms (or rights, if we want to use the human rights discourse) are to be secured at the same time as economic growth, this is an important lesson to learn. It's a shame that not one of the contributors is a woman, though.
1 For example, "[r]ecent research shows convincingly that the size of the state sector is a drag on development" (Dorn, p296) ; "Gwartney, Holcombe and Lawson (1998) found a strong and persistent negative relationship between government expenditures and growth of GDP for both OECD and a larger set of 60 countries around the world: 10 per cent increase in government expenditures as a share of GDP results in about 1 per cent reduction in GDP growth" (Powell, p351); "Phillips and [..] Kunrong (2005) [..found that] a 10-percentage-point decrease in the SOE [state owned enterprises, in China] share of industrial output increases the growth of real per capital GDP by a little more than 1 per cent per annum" (Dorn, p296); and "Norton (1998) found that strong property rights tend to reduce deprivation of the world's poorest people, while weak ones tend to amplify their deprivation (Powell, p351). [Back]
2 In high-income Germany, there are 246 people per square kilometre; in Belgium, 322; in Japan, 325; Holland, 357; Singapore, 4,185; Hong Kong, over 5,000: India, by contrast, has only 233. [Back]
3 The investment rate per worker of the persistently free economies was, for example, more than 12 times greater than for the least-free group. Lawson p126. [Back]
4 See, for example, W Easterly, "Why Doesn't Aid Work?" 3 April 2006, modified excerpt from The White Man's Burden: Why the West's Efforts to Aid the Rest have done so much ill and so little good (New York: Penguin Press, 2006); and P Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can be Done About It (Oxford University Press, 2007); and Easterly's debates with Sacks. [Back]
5 A 2000 UN Report on Global Corruption quoted on page 153 mentions a sum of $30 billion in aid for Africa - twice the GDP of a number of African countries combined - ending up in foreign bank accounts. Another figure quoted on the same page is that of $200 billion siphoned out of Africa by the ruling elites in 1991, which is more than 50 per cent of Africa's foreign debt of $320 bn. [Back]
6 Dorn, p283, quoting Peter Bauer, 1957: note the similarity to Amartya Sen's definition. [Back]
7 Article 6, Chinese Constitution, emphasis added) [Back]
8 For instance, Tata Tea buying Tetley and becoming world's largest tea supplier and producer. [Back]
9It is estimated that at the current rate, it would take more than 300 years to clear the backlog of cases pending in the courts, assuming no new ones were filed. [Back]
10 5.1 per cent in 1990-1995; and 9.7 per cent, 1996-2000. [Back]
11 The then Prime Minister Haughey quoted on p346. [Back]
12 It became more difficult to issue debt in order to expand government spending. [Back]
13 Per capita GDP growth fell from 10 per cent averaged in late 1990s to 4.8 per cent in 2001, 5.1 per cent in 2002 and 2 per cent in 2003; and unemployment went up from 3.6 per cent in 2001 to 4.4 per cent in 2004 (around 4.5 per cent in 2007: still one of the lowest in Europe). [Back]
14 Among others, the Employment Contract Act of 1991 gave employees and employers the choice to negotiate either individual employment contract or collective ones; with union power diminished, unemployment fell dramatically from 11 per cent in 1991 to 4 per cent by 2004. [Back]
15 New Zealand had one of the least open economies in the OECD during the 1970s, and now tariff rates are to come down to 10 per cent by 2009. [Back]
16 According to other sources, GDP growth per capita averaging nearly 8 per cent 1970-2000, and GDP per capita of $14,700 in 2007, up from $70 in 1966. [Back]
17 Today, Botswana has the world's largest output of diamonds, according to The Economist, March 29 2008, p72. [Back]
18 "The poster on the wall in the arrivals hall at Gaborone Airport is a clear pointer. 'Botswana has ZERO tolerance for corruption. It is illegal to offer or ask for bribe,', it reads", BBC, March 2005. [Back]
19 "Botswana's social indicators are weaker than those of other economies in similar income levels. In 2006 Botswana ranked 131 out of 177 countries on the Human Development Index (HDI) as the HIV/AIDS pandemic jeopardizes the social gains of recent decades with key health indicators on decline. The pandemic weighs heavily on society, economy and the fiscus. There are already 120,000 AIDS orphans in Botswana. Life expectancy has quickly fallen from 60 to 35 years. Infant mortality is up from 45 (per 1,000 births) in 1990 to 85 in 2005. Tuberculosis is up from 236.2 (per 100,000) in 1990 to 670.2 in 2005' World Bank [Back]
20 See, for example, Charvet and Nay, The Liberal Project and Human Rights, Cambridge University Press, forthcoming January 2009. [Back]
21 See, for example, A Cosbey, New Views on Trade and Sustainable Development: Using Sen's Conception of Development to Re-examine the Debates, Thematic research produced for the ITPS/IISD Trade Knowledge Network workshop, February 14 2003, Johannesburg, International Institute for Sustainable Development. [Back]
22 Source: International Monetary Fund [Back]