Two things occurred this past week that reminded me how little economists are able to explain economic growth.
The Bolivian government headed by Gonzalo Sanchez de Lozada bowed to popular pressure, including street violence that killed some 20 people, and announced that it is canceling plans for a natural gas export project.
Closer to home, the St. Paul Public Works Department sealed cracks in the asphalt paving in my neighborhood and sandblasted and painted handrails where a sidewalk goes under a nearby railroad bridge near my house.
Economics really has no fundamental explanation of why the Bolivian protests or the Minnesota maintenance happened or how either relates to why different nations have different levels of wealth.
In fairness, contemporary economics can explain part of why St. Paul maintains public infrastructure. Citizens tend to vote for those officials who do a good job. But it cannot explain why St. Paul, U.S.A., works better than Sao Paulo, Brazil, or even why the regional city of Curitiba, Brazil, does so much better in this regard than do other Brazilian cities of the same size.
Economists might take a crack at explaining the Bolivian government’s reversal if it were obvious that some significant portion of Bolivians stood to benefit from the act.
We do have theories of “rent seeking” behavior in which a group that stands to gain from some government action pressures the government by various means to achieve such favorable action.
It is clear, however, that canceling the gas project really isn’t going to benefit any significant fraction of Bolivians and will hurt most in the long run. More importantly, the discipline cannot explain why Bolivia failed to grow while countries that were equally as poor a half century ago, such as Korea and Taiwan, have grown at startling rates since then for four decades or even why the Bolivian economy performs so poorly compared to Chile, its great enemy just to the south.
I muse on the limitations of economics because I am reviewing a number of books on modern theories of economic growth. Nobel laureates wrote two of the books and respected economic scholars wrote the others. None of these scholarly tomes, however, really answers the two questions posed above.
People who have lived in poor countries know how ineffective government spending in such countries often is. Heads of government, democratic and dictatorial alike, like to preside over lavish ceremonies dedicating new roads, canals or power plants. They don’t like to spend time or money on mundane little details such as sealing cracks in asphalt so that they do not develop into potholes or periodically painting safety railings so they don’t rust off.
The return on public dollars spent on maintaining existing infrastructure in poor countries is repeatedly estimated to be several times as high as spending the same dollars on new facilities. Yet new roads continue to be built even as those only a few years old collapse into potholed obstacle courses for lack of simple upkeep.
One may respond that I have answered the question. There is a higher political payoff to funding highly visible new projects than to maintaining old ones. But that is not an economic explanation and it doesn’t tell us why the problem is so severe in Nicaragua but much less so in neighboring Costa Rica or why Botswana does so much better than Angola.
The events in Bolivia are just the latest chapter in that country’s tragic multi-volume history of misgovernment. One can see that popular opposition to exporting gas is the natural reaction of a citizenry that has seen little improvement in living standards in decades.
Many suffered apparent hardship as the result of economic restructuring that was to bring about improvement. Political opportunists who want to overthrow an incumbent can manipulate an uneducated, uninformed populace.
But that does not explain why things so frequently take such a sad course, or why economic reform — as well as social revolution — fails so often in that country. There is no economic model that gives much insight into these questions.
Reviewing what little economists do have to say does disclose one interesting division within the discipline.
One group acknowledges that contemporary economics can explain little of the wide differences in economic outcomes between nations and advises the curious to consult political scientists, sociologists and historians.
The other group dismisses other disciplinary approaches and maintains that while economic explanations remain limited, they are superior to any others because they are expressed in rigorous math rather than in mere words.
Neither group, however, can tell us as much as what one learns through the subjective personal experience acquired by residence abroad. Toss out your theory books and buy a plane ticket.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.