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Wednesday 23 Aug 2017 | 04:31 | SYDNEY
Wednesday 23 Aug 2017 | 04:31 | SYDNEY

Why are some countries rich and others poor?



11 September 2008 21:23

Wolfgang Kasper, an eminent economist and elder statesman at the free market think tank, the Centre for Independent Studies (CIS), has tackled this question in a long book review for the CIS's in-house journal, Policy. Kasper acknowledges the complexity of the issue but essentially sides with the view that cultural factors are decisive:

...it is naive merely to ‘export’ formal institutions such as property rights legislation, transparency compacts, and democracy to underdeveloped societies. To do so now is almost as unsophisticated as it was fifty years ago to simply send capital goods to ports in less developed countries. What really matters is the populace’s receptiveness to freedom, which is based on deep-seated cultural institutions and attitudes, and which does not grow overnight.

Kasper's argument is supported by a neat piece of economic research conducted in New York some years ago. To test the proposition that corruption is a product of culture, the car-parking habits of foreign diplomats posted to New York was examined. At the time, these diplomats were legally exempt from parking restrictions. So if the cultural argument held, the researchers should have found that diplomats from corrupt countries would commit more parking violations, while those from less corrupt countries would commit fewer, because cultural habits would reduce illegal behaviour, even if there were no legal consequences to deter it.

Sure enough, that's just what the research found, according to this summary from Tim Harford: Scandinavian diplomats had very few violations; those from Bangladesh and Chad had thousands. But Harford goes on to say that, in 2002, the rules changed, with New York cops given more powers to punish illegal parking by diplomats. What was the result?A massive decrease in parking violations by all diplomats.

Harford argues that this demonstrates the importance of incentives to influence behaviour and promote economic development. If it is easy and low risk to steal money rather than to earn it, it should come as little surprise that economic development remains low, whatever the particular culture of that society.

What I missed in Kasper's review was discussion of the importance of incentives. But it surely does undercut the cultural argument and support the argument for institutions. After all, you cannot create strong incentives for lawful behaviour (and disincentives for theft and corruption) without strong institutions for making, enforcing and adjudicating law.

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