July 7, 2005

This will be the last "Outlook Column.

On the G-8 agenda in Scotland is how the developed world should deal with the massive poverty in Africa.  Debt forgiveness is high on the list. 


Simultaneously, musical artists have been holding concerts to encourage that something be done in Africa.  Why should so many starve when so many others have so much, they say?


First, the good news.  Despite a billion increase in the world’s population in the past ten years (that is not the good news), the number of people in poverty has actually declined.


The bad news is that almost all the decline in poverty has occurred in Asia and portions of Latin America.  The starvation economies of Africa have hardly been impacted. 


For years, economic development experts have been debating how to launch countries into the market economy and sustainable economic growth.  One group has argued that increasing the skills of workers through training and education will do the trick.  Another maintains that developing infrastructure, such as roads, storage systems, communications, and utilities will solve the problem. 


Others say, as the G-8 agenda implies, that lifting economic burdens will allow impoverished countries to rise.  Debt has been forgiven for some countries as much as 8 times since World War II with no appreciable change in their poverty levels.  That fact belies the last claim. 


Indeed, others have claimed that with debt forgiveness as the most common response, foolish resource allocation for the enhancement of those in power is actually encouraged.  If you know you eventually will not pay back the resources you borrowed, you become less careful about why and how you borrow.


I am not an economic development economist.  However, I must observe economic behavior to determine how markets are performing and how effective policies are. 


Vietnam can produce fiber products at half the price of northern China (who can produce such products 30 percent less than in Hong Kong and Guangdong province).  Yet, much of our fiber product imports are coming from Hong Kong and only recently from northern China.  Very little is coming from Vietnam at this time.  Why?


Part of the answer is physical infrastructure.  Storage and transportation systems have just recently been  developed in northern China and have not yet been created in vast parts of Vietnam.  However, a larger part is political infrastructure. 


Until recently, Hong Kong was considered the most market friendly place in the world.  Property rights were sacred.  Contracts were rarely overturned.  Liability was limited to the economic entity, not its owners.  And courts would uphold these rights.  Capital was readily available and currency exchanges were easy with predictable values. 


Some of that has eroded as the Chinese central government has intensified its political hold on the former colony.  Nevertheless, enough political infrastructure exists there and in other parts of China to make investment decisions viable throughout that country.  And now some of the needed physical infrastructure is being developed.  


By contrast, government is imposed upon many African peoples, some of whom are more attuned to their tribes across borders than to the governments within their borders.  For many, their governments do not speak for them.


With little capacity to alter power, many Africans do not accept the existing power.  Businesses usually seek local support and try to build their own protected structure.  To some extent, it is economic power created by businesses to exploit what cannot be accomplished elsewhere (otherwise they would not exert the costs needed to prosper in Africa) against government power that has little popular support. 


Corruption is widespread, many government decisions are capricious, and many businesses have their own militias (or buy off those who otherwise threaten them). 


Of course, the debts of the past must be forgiven, if for no other reason than they cannot be paid off.  However, we would do more for the poverty stricken in Africa if we encouraged the enfranchisement of local areas who could then share power to develop countries that can support laws and establish property rights. 

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