Wessel on Global Poverty

Interesting article from WSJ’s David Wessel on global poverty and  the challenges of global economic development. Wessel is writing specifically about concerns voiced by MIT economist Simon Johnson about the economic profession’s frustrating record in much of the world. Possible explanations cited are: (1) sound economic principles were applied but had unintended consequences, such as corruption, economic inefficiencies, and political asymmetries; (2) a learning process was required and has given rise to a consensus around the essentials of development, namely the accumulation of human, financial, and real capital in order to increase economic productivity; and (3) insufficient attention has been paid to the quality of domestic institutions:

A third view is that earlier economists focused on the wrong thing. Mr. Johnson, among others, argues that what really matters is having solid political, legal and economic institutions — courts, central banks, honest bureaucrats, private-property rights — that allow entrepreneurs to flourish. Imposing what seem to be sound economic policies on corrupt, incompetent or myopic governments is doomed. Building strong institutions is a necessary prerequisite. In this camp, there is a running side argument about which comes first: the institutions or the educated people who create them…

This version of the chicken and egg seems a tad myopic to us, as we would argue that institutions, markets, and productive factors (which would include "educated people") develop together over time in a reciprocal and dynamic fashion.

And while institutional economics is a rich and promising area of study, there are at least three areas that deserve special attention in our view. First is the impact of local tax structures (and other barriers to savings, investment, and entrepreneurship) on the domestic supply of human capital and the ability to save and invest. Second is the political economy of global capital-labor dynamics (see, for example, Dutt and Mitra’s study of how political ideology and trade policies vary, depending upon whether a country enjoys a surplus of capital or a surplus of labor). And third is the dynamic tension between modern institutions and traditional cultures (anyone with friends whose families emigrated from traditional cultures three or fewer generations ago has probably witnessed this dynamic up close; for an interesting narrative on how such tensions unfold abroad, see here).