Well, how do nations escape poverty? Those of us familiar with the prominent US economic historian Deirdre McClosky know the answer to that. Liberal values (what she calls ‘bourgeois values’). Things like respect for individuals and their freedom of action, toleration, limited government, the rule of law, minimising the use of force, property and honouring contracts. All those things provide the compost in which the seeds of prosperity can grow.
But it’s a long and difficult process. And unfortunately, says the prolific German author and economist Rainer Zitelmann in his new book, we don’t often help poor countries to do what it takes to acquire these values. On the contrary, we try to help them with foreign aid, which messes up what markets there are and is too often badly managed or even abused. And when the funding runs out, projects become unaffordable and are terminated, so whatever good was created by them is lost, as William Easterly and Dambisa Moyo point out. So what can poor countries do, and do better, to pull themselves out of poverty?
Zitelmann takes two very different countries, Vietnam and Poland, who took very different paths to reform. Vietnam, of course, was not helped by years of destructive war, then communism sweeping down from the north. Like everywhere else, it found that collective agriculture systems, borne of communist ideology, simply didn’t work. So, like China and so many others, they were eventually forced to modify it, still claiming it was collectivised, of course, but actually transferring responsibility to individual families, who had an incentive to produce more rather than work less. The limited markets for agricultural products gradually expanded, then individuals were allowed to employ up to ten other people. Internal customs barriers were eroded, and international trade opened up. Then price controls and subsidies faded, banking was reformed. The trappings of socialism remained, but it declined in economic significance.
By contrast to this slow and piecemeal approach, says Zitelmann, Poland change rapidly and radically after the fall of communism. Its new finance minister, Leszek Balcerowicz realised that only ‘shock therapy’ would reverse decades of soviet mentality. A new law allowed people to engage in any economic activity they liked, and to employ as many others as they chose. Inflation was reined in by sound money policies. Debt was cut. Banks and other businesses were privatised. Industries were deregulated. Taxes were simpliefied, along the lines of a flat tas. That all led to a big rise in entrepreneurship. And the opening up of trade with the West brought people more and better products, and a rise in prosperity.
The lesson, really, is that there is no ‘right’ way to make a country rich — ‘to carry a state to the highest degree of opulence from the lowest barbarism,’ as Adam Smith put it. But ‘peace, easy taxes and a tolerable administration of justice’ seem to be the essentials that you cannot do without.