Revisiting the Cactus Theory of Development
by Mike Kimel
Revisiting the Cactus Theory of Development
Tyler Cowen links to this paper by this paper by Allen, Murphy and Schneider (warning, PDF!!).
Cowen notes:
It is a common view that North America had to play catch-up, but the extensive data sets in this paper suggest that North American wages were up to twice as high as the general level of wages further south.
Honestly, I don’t know how anyone could be surprised. I think I covered the topic fairly well a few years ago so I’ll reproduce it in its entirety below.
—
I mentioned one of my old Professors, Arnold Harberger, a few times in recent posts. I can be argumentative, and I got into a lot of arguments with him. As a general rule, when I argued with Harberger, I was wrong. There is one thing, and one thing only that I can think of that I disagreed with him that to this day I still think I was right about. So here’s that story…
When I finished my comps, I had a few rudimentary germs of ideas I was considering for thesis topics. My favorite was a theory of economic development. I had spent some time thinking about Mexico and Brazil and the United States – each was the flagship, so to speak, of a colonial power, but the first two are charitably described as developing countries, and the last, well, is the United States.
I also thought about the period from World War 2 onward. At the end of the war, much of the world was in pitiful shape. There wasn’t much to differentiate, say, West Germany from East Germany, or Taiwan from China, or South Korea from North Korea, or England or France from Poland or Czechoslovakia. And Mexico and Brazil were probably in better shape than most, if not all of those countries. And yet, 50 years later there were definitely winners and losers among those countries.
So what was the difference? Here’s what I thought… the difference between Mexico and Brazil and the United States in the 1500s had nothing to do with Mexico, Brazil, and the US, but rather with Spain, Portugal, and England. Spain and Portugal were dying empires, and they basically looted everything they could, often destorying much that they couldn’t loot in the process. England was the most advanced country on earth; it didn’t need anything from the New World, and if anything, there was an outflow of capital (mostly human capital) from England to its colony.
I also thought a bit about Mexico and Brazil and other countries: South Korea, Taiwan, Japan, West Germany, East Germany, Poland, England and China. At the end of World War 2, arguably Mexico and Brazil were in better shape than the other countries I mentioned. South Korea and Taiwan had never been particularly advanced; Japan and West Germany were in ruins. And yet, 50 years later, Mexico and Brazil were lagging behind South Korea and Taiwan and Japan and West Germany. Not so much East Germany and Poland.
What’s the difference? Well… the winners were those that the United States effectively colonized. (And if you don’t think we effectively colonized, say, England, bear in mind there are still US military bases there. As to Taiwan, they were colonized twice – first, when the Nationalists took everything that wasn’t nailed down in China and much that was to Taiwan, and second, with US participation after Quemoy and Matsu. South Korea, Japan, and the rest of Western Europe – I think colonization was self-evident.) In other words, there was an inflow of human capital from the most advanced country on earth. East Germany and Poland were effectively colonized by an empire that was already dying – there was more of a transfer of capital toward that empire (consider reports of Soviet soldiers stealing toilets from German apartment buildings) than the other way.
Now, what is magical about being colonized by whatever the most advanced country on earth? Well… I think it’s a few things. I would imagine that when a country leads the world, it is generally because it has better institutions and a relative strong economic situation. And the institutions, along with capital (human and otherwise) get transferred to the colonies. All of that happened in England and South Korea and so forth, but it did not happen in Mexico or Brazil or Argentina. (Some wag once called them the MBA countries.)
Note that I am not advocating colonization as a way of development. (No “Mouse that Roared” scenario here.) I believe the same effects could be accomplished by copying the institutions from countries that are successful and getting massive infusions of resources.
And yes, I note there are exceptions – places like Luxembourg and the Scandinavian countries – but these seem to have pretty good institutions of their own. Other exceptions include countries where oil was discovered (but an argument could be made the US effectively colonized, if not Saudi Arabia, at least its economy), or one-off special cases; trading posts like Hong Kong and Singapore.
Anyway, Harberger thought this didn’t make sense, and wasn’t a good topic, so I scratched it off the list of thesis topics. But it was one of the things about which he didn’t convince me. And its been over a decade and I still think about this now and then, I still believe there’s something to this. Your thoughts? Am I missing something obvious?
—
As I said earlier, I think it holds up reasonably well. Looking back a few years, I think I didn’t emphasize enough the transfer of capital and overemphasized human institutions. As I get older and more cynical, I start to think more and more that the supposedly “honest” countries that succeed often have the same corruption as the dishonest ones that don’t, but success sweeps problems under the rug.
For instance, I’m starting to think that Brazil is no less corrupt now than it was, say, in 2000, but since then it discovered oil and gas, and its ethanol has become far more valuable due to rising prices of oil and gas. The Japan that spawned so many scare stories in the American press in the 1980s had a society no different than the Japan of today. Ditto the Argentina of 1990 and the Argentina of today, the Russia of mid-1990s and the Russia of today, the Baltic Tigers of the late 1990s and the Baltic Tigers of today, etc.
Capital flows are vital, and they often flow for reasons that are divorced from reality. (Put another way – the people who allocate capital don’t understand the real world any better than anyone else, its just that by allocating capital they do change reality a little bit at least for a time.)
Agree? Disagree? What else is this little theory missing?
I think institutions are the more important factor. In particular a market economy and stable property rights are the best predictor of economic growth. I disagree that capital flows are “divorced from reality.” In fact they are directly related to economic institutions. Investors look to invest where they will see positive returns and not have their capital confinscated.
Human capital is especially affected by institutions. Having a lot of talented, educated people doesn’t do as much good if the society is ruled by cronyism and corruption. The USSR is good example of country that had many good scientists (many abducted from Germany after WWII), but managed to erode that advanage away. How many German scientists went to the USSR by choice either before or after the war? Sure the USSR developed some fancy weapons and a space program, but they couldn’t sustain their human capital, and it never bore fruit beyond military applications.
How do you explain the Banana Republics or the Philippines? They were US colonies by your definition, but they failed to prosper. Or look at the rise of mainland China only after adopting market oriented reforms.
You take for granted that certain empires were already dying (Spain, Portugal, USSR). The reason they were dying is because they had poor institutions. In particular a poor economic philosophy of either mercantilism or communism. Britain and the US have been much more market oriented, and the results speak for themselves. Even Karl Marx admitted that capitalism was an engine of economic growth. If Mexico and Brazil were in good shape after WWII, why would Spain and Portugal still be dragging them down? They had both been independant for over 100 years by that time.
I think that Japan would be an interesting addition to your considerations. Japan was the first major country to “westernize” without being colonized. What accounts for its rise? I submit that the Meiji Restoration was largely driven by the “bourgeois.” Merchants and industrialists reshaped the social institutions to favor a more market oriented economy. Japan already had trade with the west and had been trying (often successfully) to copy European technology for decades. It was not until the Meiji Restoration that Japan became a modern economic power.
heart of flint,
“ The USSR is good example of country that had many good scientists (many abducted from Germany after WWII), but managed to erode that advanage away.”
Yes, but the USSR is also a good example that it isn’t institutions at all. After all, you are stating (and I agree) that the institutions in the USSR were awful. Fine, but the rate of industrialization and electrification of the USSR in the 1920s was tremendously rapid. Even if you don’t believe the Soviet (admittedly propaganda) figures, the USSR underwent tremendous progress very quickly. In the 1920s, the USSR was about as weak and underdeveloped as anywhere in Europe. And yet, two decades later they were one of two superpowers.
There’s no way to argue that the institutions in 1920s USSR were so much better than the institutions in the USSR when the USSR started its downhill trajectory. I’m not sure you can chalk up the Soviet rise to capital inflows, but there was at least an end to capital outflows: the USSR repudiated all of Russia’s pre-revolution debt citing precedent by the post- French Revolution government of France. I suspect removing capital from some completely useless parts of the economy (e.g., propping up a Court that spoke French) and to some slightly less useless parts of the economy (e.g., top down orders) might have “mimicked” capital inflows.
“How do you explain the Banana Republics or the Philippines? They were US colonies by your definition, but they failed to prosper.”
First, each of those were Spanish colonies for a long time, suffering from capital outflows for a long time. I have no familiarity with the Philipines, but I can observe something about Latin America: the countries that came closest to being colonized by the USA, as in, had Americans and their money moving into the country en-masse (even temporarilly), also typically are in better shape today than the ones that saw no such influx. Think Panama, Costa Rica, and Chile as places where there was a massive inflow from the US before the countries began to take off.
“You take for granted that certain empires were already dying (Spain, Portugal, USSR). The reason they were dying is because they had poor institutions.”
No, I do not. Empires rise and fall. Spain, Portugal, and the USSR were rising empires before they were dying empires. I don’t have the data, but I would guess that the pattern of capital flows was different for a rising empire than for a falling empire. (Think early Soviet client states like the Baltics v. late Soviet client states like North Korea, Syria and Egypt.)
“Or look at the rise of mainland China only after adopting market oriented reforms. “
There are massive cities built in the middle of nowhere with nobody living in them because some Communist Party functionary decided they should be built. That can’t possibly be the market oriented reforms […]
Please Mike let me introduce you to the idea that Kenya and much of Africa, Guyana and much of Caribbean countries and even Papua New Guinea in the Pacific were once british colonies. And let´s not forget India, a country that for decades has been the incarnation of poverty and only in the last years found some way of development, and that was once the Jewel of the british Crown _ a country that probably received an infusion of british effort even larger than the USA.
Unless you are prepared to argue along lines like “but USA has a much larger proportion of white people than India”, in what case you will be waging a different war…
Cheers!
Hermenauta,
“but USA has a much larger proportion of white people than India”
Similar, but not quite. And I applaud your effort to read something that isn’t there.
Think of it this way… relative to the population and geographic size of the colony, what proportion of the population came from a power on the rise and how many of the resources flowed into the colony compared to the resources that flowed out?
I know nothing about Papua New Guinea and most of the Carribean islands so I’m going to ignore them.
The capital (human, physical and financial) that flowed into India was relatively small. There was a huge outflow of raw materials like tea and opium, but the East India Company effectively destroyed the domestic industry. That’s not just the lack of an increase in capital, its the actual destruction of capital. Sure, some railroads came later, but first the local industry was wiped out.
Guyana was indeed a British colony. It could have been Hong Kong, except that while Hong Kong was the only way to trade with a big market, Georgetown is the only way to trade with absolutely nothing because there’s absolutely nothing in the vicinity. I’m pretty sure the inflow of capital (human and otherwise) was pretty nil throughout the colony’s history. I think the same is true of most of the parts of Africa colonized by England.
Now, there were mercantilist laws intended to prevent industry from being developed in the North American colonies too, but there was a huge inflow of educated people, and enough room for those who had training and resources to create industry to go ahead and do it. Colonists to North America came to stay. Not to serve their four years at an East India Company trading post, or in Kenya or in Georgetown. Incidentally – that was also a difference between North America and the Spanish and Portuguese colonies. With few exceptions, the English in North America weren’t here to grab some gold and leave.
I think the Physiocrat argument is under-valued today.
We Americans sat at the edge of a wonderfully productive continent (mostly) free for the taking. The Louisana Purchase alone added 400 acres per household!
Then 50 years later we stole the Southwest from Mexico:
http://en.wikipedia.org/wiki/Mexican_Cession
and managed to divvy up the PNW with Canada peacefully enough:
http://en.wikipedia.org/wiki/Oregon_boundary_dispute
Then railroad and steam power technology came and we were off to the races.
We joined WW I and WW II rather late in the festivities, and emerged a stronger power for doing so, just in time to capture the lion’s share of wealth extraction in the oil states and third world.
http://mygeologypage.ucdavis.edu/cowen/~GEL115/115CH14aluminum.html
Mexico and Brazil, on the other hand, were captured by rentiers and became de-facto slave states of the hacienda and latifunda. We in the US encouraged that in recent history via our neocolonialist multinationals.
I don’t understand why you think capital flows tend to be irrational. The Allen, et al paper shows that labor flows and wages followed a rational pattern. Why would it be different for capital. It is generally easier to move capital than labor, and investors have a strong incentive to research their decisions. Even if capital flows were random, there would be a kind of “natural selection” where capital flowing into a fast growing economy would have a greater effect over time than capital flowing into a slow growing economy.
I think it makes more sense to think that investors will be somewhat successful in identifying favorable investment environments. Societies that do not adequately protect individual property rights do not attract investments. You mention Chile as a country that received a lot of US investment, but wasn’t Chile also more investor friendly than its neighbors? How do you respond to the claim that policy and institutions drive the flow of capital?
USSR’s success in the 1920’s does require an explanation, and I’m not qualified to provide it, but I have a suggestion. The seizure of assets after the revolution provided a one time shot of adrenalin. Using your example of debt repudiation, that provides an immediate benefit, but it also ensures they will be cut off from foreign credit and direct investment from then on. It is essentially selling off institutional capital.
As for declining empires – in your view what accounts for their poor performance. I am arguing that Spain and Portugal lost ground relative to England and the Netherlands because the latter countries adopted superior institutions based on a market economy. You seem to take Spain’s decline as a starting point and claim that this fact accounts for the poor performance of its colonies. I believe instead that both Spain and its colonlies suffered from a common weakness. I still don’t see how it can be said that Brazil, Mexico, or Argentina are weak because they were ruled by a weak empire 200 years previously. South Korea made more progress in just 50 years. Furthermore, each of those countries was in a good position to try to attract foreign investment from the US or Britain if they could convince investors that their property would be safe.
Finally, how would you characterize China’s reforms. Obviously they did not create “capitalism”, but they did emphasis private property and markets. Reversing agricultural collectivization and the privatization of state industries is a move toward a market economy. Regardless of whether you call it capitalism or “Socialism with Chinese characteristics”, it seems apparent that these reforms were essential to economic growth. Obviously the Chinese government had to more than allow FDI to attract capital, they had to assure investors that they would not steal the capital invested. This goes back to my point that capital flows are not irrational on balance. Taiwan and Hong Kong led the FDI charge into China, and others have followed as trust has been built up. By contrast Venezuela and Russia lack FDI to develop their oil sectors because companies don’t trust the governments. Companies prefer to develop the more expensive tar sands in Canada.
If I understand your argument correctly, you are saying that irrational capital flows determine determine economic growth. Does this perspective have any predictive power? Does it recommend any particular policy? Is there anything a former Spanish colony could have done differently that would have produced better results?
Is there anything a former Spanish colony could have done differently that would have produced better results?
“Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.
“Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a commonstock for man to labour and live on.” — Jefferson, 1785
Brazil has always had a very high concentration of land ownership. This made the political elite fat & happy and they weren’t about to change it.
Same thing with Mexico.
http://en.wikipedia.org/wiki/Agrarian_land_reform_in_Mexico
Took the words out of my mouth — the US alone among world powers was still sitting on a land mass significantly unexploited, with resources ripe for the picking and not really vulnerable to being taken by other countries. My own home town wasn’t really settled till the late 1860s, and that’s in the heart of sleepy corn-country — hardly savage wilderness.
To say nothing of being effectively guarded by two whacking big oceans. Sure, enemy forces could get here by boat or air, but hardly in numbers sufficient to do much.
Noni
Took the words out of my mouth — the US alone among world powers was still sitting on a land mass significantly unexploited, with resources ripe for the picking and not really vulnerable to being taken by other countries. My own home town wasn’t really settled till the late 1860s, and that’s in the heart of sleepy corn-country — hardly savage wilderness.
To say nothing of being effectively guarded by two whacking big oceans. Sure, enemy forces could get here by boat or air, but hardly in numbers sufficient to do much.
Noni
Took the words out of my mouth — the US alone among world powers was still sitting on a land mass significantly unexploited, with resources ripe for the picking and not really vulnerable to being taken by other countries. My own home town wasn’t really settled till the late 1860s, and that’s in the heart of sleepy corn-country — hardly savage wilderness.
To say nothing of being effectively guarded by two whacking big oceans. Sure, enemy forces could get here by boat or air, but hardly in numbers sufficient to do much.
Noni
To all of you who are wondering about the “wonders” of USSR massive electrification and industrialization after 20s.
All of it and more was possible due to the staggering numbers of people involved in building the communist economy, working without compensation for 24/7.
After the revolution of 1917 USSR established 20th century slavery using their million prisoner population of their vast GULAG system to achieve their unprecendent breakthrough in industrialozation and electrificaton.
Troy,
“Mexico and Brazil, on the other hand, were captured by rentiers and became de-facto slave states of the hacienda and latifunda. We in the US encouraged that in recent history via our neocolonialist multinationals.”
Actually, we encouraged that much more directly and usually with no subtlety whatsoever. I’ve noted in other posts, my father was an exchange student in Rio in 1964. A week before the military overthrew Goulart, my father wrote home saying there was going to be a coup. His tipoff: American warships visible from the beach.
Noni,
“ the US alone among world powers was still sitting on a land mass significantly unexploited, with resources ripe for the picking and not really vulnerable to being taken by other countries. My own home town wasn’t really settled till the late 1860s, and that’s in the heart of sleepy corn-country — hardly savage wilderness. “
The problem is, that’s true of Latin America too.
The other big things that comes out of the first article quoted is that from colonial times till roughly 1980 in the US labor was the scarce resource so labor was expensive. Consequently, the economy concentrated on making labor productive. In the other cultures–especially Spanish — and over the last 20 to 30 years in the US economic–cultural — policy was to make labor cheap and capital expensive. If labor is cheap and capital relative scarce, economic returns flow to capital, not to labor. Moreover, the system based on cheap labor tend to create a downward spiral as cheap labor leads to labor intensive means of production and even cheaper labor.
If you look at US comparative economic performance from colonial times to around 1980 this line of analysis makes a lot of sense and it also explains the poor US performance or stagnation over the last thirty years or so.
roomwview – Yes, coerced labor was essential, but not sufficient. The question is where did they get the capital? You can build the pyramids or the Great Wall with little more than conscript labor and a few engineers, but industrialization requires specialized equipment and technical know-how. China under Mao had plenty of cheap labor too. Coerced labor allowed USSR to concentrate capital in key sectors, so they had high tech jets while many people were using antiquated agricultural equipment.
It does raise the question – at what point did the USSR become a declining empire? My answer would be – once they ran out of stuff to take from others. First they confinscated all the existing capital in Russia, durring WWII they had US help, after the war they had Eastern Europe to pilliage, including part of heavily industrialized and technically advanced Germany. The USSR was never equal to the western states economically; it was considered a super power because it was a military threat.
“I don’t understand why you think capital flows tend to be irrational. “
I dunno. I remember all the money flowing into Japan in the 1980s, and how at one point there were stories saying the grounds of the Japanese imperial palace were worth more than the entire state of California. I remember how huge volumes of money flowed into Argentina when Cavallo instituted his “dollarize, privatize and steal” plan (yes, it had a different name, but this one always made more sense). I remember the money flowing into Russia in the mid-90s, and Ireland and Iceland a few years later. I remember all the money flowing into houses in the US. I remember what happened just a few years later in each of those cases, and how much of the money that went in got burned. I’m also guessing what’s going to happen to the money that has funded cities in China where nobody lives. Anyone who can show that those sorts of money flows are rational can show that the earth is flat using the same assumptions.
“You mention Chile as a country that received a lot of US investment, but wasn’t Chile also more investor friendly than its neighbors? “
Chile is a prime example. The, er, inflow of human capital began about a year before the revolution that brought Pinochet to power. The place was crawling with American, er, specialists. By contrast, in Brazil, recently declassified LBJ era documents indicate that American support for the military overthrow came mostly in the form of meetings between the American military attache and the leaders of the plot, coupled with the upthread mentioned show of force off the coast of Rio to make sure the commander of the Rio garrison didn’t follow through on his threats to resist the plot.
Put another way… Chile was US friendly because American advisors essentially created the policies that Chile implemented once Pinochet took over. The inflow of human capital came first. That same inflow didn’t happen anywhere else in the region, even around the time of what look from the outside to be very similar coups.
“Using your example of debt repudiation, that provides an immediate benefit, but it also ensures they will be cut off from foreign credit and direct investment from then on. “
I’m not sure that’s the case. I don’t know much about Soviet borrowing. I do know that a number of South American countries have a history of repeatedly defaulting on debt. You can’t have a history of repeatedly defaulting on debt if nobody is willing to loan you money after the first time you default. Besides, the Soviets did nothing more than the French did after their revolution, and the French weren’t cut off from capital.
“ I am arguing that Spain and Portugal lost ground relative to England and the Netherlands because the latter countries adopted superior institutions based on a market economy. “
And I say you’re wrong. Consider the whole history of rising countries I mentioned several times on this thread: Japan of the 1980s, Argentina of the early 1990s, Russia of the mid-1990s, and so on and so forth. Are you really going to argue that each of those countries was doing something very right and then stopped? What were the superior institutions that Argentina had in 1991 that it didn’t in 1995? Or Japan had in 1981 that were gone in 1991? And what, pray tell, were the superior institutions put in place by the PT (Worker’s party) government in Brazil in the 2000s that led to the country being one of the BRICs for the past decade?
“ I […]
heart of flint,
to play Devil’s Advocate for a moment… consider your last paragraph. You can also ask something similar about the US depending on how you define a declining empire. I do recall all the articles in the 1980s about how Japan was going to take over the world. That hasn’t happened, but as has been pointed out by many people, real incomes have been stagnant for most Americans for thirty years and most Americans are in a more precarious financial position now than thirty years ago. When did that start?
Well, you can make the argument that it started when we ran out of stuff to take from others. Through the Gold Rush, we had expansion by taking land that other people were on. (In some cases we just took land from people who had previously taken the land from other people.) Then you had the Banana Republics. And of course, a large percentage of the best educated and most eminent scientists in Europe ended up in the US (everyone from Einstein to von Neumann) prior to WW2. After WW2, we picked through the cream of what was left in Germany (think von Braun, Kurt Godel, and pretty much any former Nazi who could get away from the Soviet sector and knew anything of value).
Most of those folks would have gotten to the age of retirement or death by… about 1980.
Spencer,
I kind of missed that. Makes sense.
“And I applaud your effort to read something that isn’t there.”
Maybe. But maybe you should be more cautious with words:
“In other words, there was an inflow of human capital from the most advanced country on earth.”
In any case, I have some news for you. I´m in my late fourties, and when I was a youngster here in Brazil, the History teachers taught that the difference between Canada and the USA and most of Latin America is that the first ones were colonies in the sense of places to be populated, and the second ones, places to be expoliated. This was, let´s see, 30-35 years ago. So your post, and Allen, Murphy and Schneider paper aren´t exactly le dernier cri.
Actually, I think that the most effective way to transport institutions is by transplanting them, not trying to interest foreign people in them. People are bounded to their native institutions in strange and costly to abandon ways.
That´s why I have two major criticisms of your post:
a) first, the fate of Portugal and Spain vis a vis England needs a more sophisticated approach than crying “Dying empires!”. Portugal could keep it´s colonies well into XX century; Spain also. England too, of course. So not many dying empires here. One should be able to explain why iberic institutions were less efficient than the anglo ones.
b) second, it´s laughable your suggestion that Japan become what it is due to american colonization. Japan had a very bad experience with foreign navyies in the XIX century and moved on to emulate western industrial prowness. It already was an economic and industrial power before the II WW.
And about your answer: let´s consider India. It should not be of importance if domestic industry was destroyed _ the same happened, more or less, to Japan and West Germany, as you yourself acknowledged in your post, after the II WW. It was you that brought to first plane the importance of institutions, and institutions were the biggest legacy of the british to India.
So, please don´t think I want to troll you, but you should have your History facts right before write things like this.
In fact, I like your blog most of the time.
Cheers,
H.
H,
Well, I’ll start with this: “In fact, I like your blog most of the time. “
Thanks.
Moving back to the top: “But maybe you should be more cautious with words”
Often true. But in this case, I imagine that the percentage of white people in Portugal when Brazil was colonized was equal to the percentage of white people in England when the US was colonized – about 100%. I don’t think there was room for the “white people were the difference” argument when both the situations where things went went poorly could be be described as “white people did it.”
“This was, let´s see, 30-35 years ago. So your post, and Allen, Murphy and Schneider paper aren´t exactly le dernier cri. “
I had to google le dernier cri. OK. I get it. But you’ll notice in the original post, I never mentioned this as some sort of shocker. In the follow-up, I noted: “Honestly, I don’t know how anyone could be surprised.‘ Put another way… I’m not seeing this as an area of contention. I was unaware that it was an area of contention. That Cowen sees it as a surprise was the surprise to me. Left unsaid, I’m kind of surprised that Harberger was surprised. (At the time I wrote the first post I had mentioned Harberger a lot. I was assigned to him as my advisor in my first year, and while my topic was such that he wasn’t interested in my topic enough to be my primary advisor, he was on my thesis committee so I talked him with regularly during my grad school experience – except when he went to Chile, of course.)
“Actually, I think that the most effective way to transport institutions is by transplanting them, not trying to interest foreign people in them. “
I think many or most institutions are not transferable due to culteral and other geographic issues. Sorry, McArthur wrote the Japanese Constitution, but there’s no mistaking it for the American Constitution. Its not that American ideas were transplanted on Japan, except for things that weren’t too far from the Japanese pale, such as letting Japanese women vote. But Japan, Inc. works, or worked well for several decades in Japan, and that simply doesn’t fly in the US except in the military.
And beyond that, I have a recollection of Reagan commenting that the Soviet and American Constitutions were very similar, but that the difference was in how they were interpreted. I don’t see institutions being transplanted. I see completely different institutions.
“Portugal could keep it´s colonies well into XX century; Spain also. England too, of course. So not many dying empires here. “
Um, no, I think you’re wrong. A rising empire or at least a relevant empire is one that has influence over world events. The Sun didn’t set on the British empire until some time after WW2. Spain and Portugal could split the world between them at the Treaty of Tordesillas in 1494. Maybe England and Holland might have gone ahead with their own colonies, but agreements between Spain and Portugal had an impact on their behavior. Had the Treaty of Tordesillas been signed in 1894 half the world would have died laughing at the presumption.
“ Japan become what it is due to american colonization. “
Actually, I don’t think so. We had two examples of what a counter-factual Soviet occupied Japan might have looked like. First, […]
Mike you are in the wrong line of work. You should be a mutual fund manager, or at least a day trader. By investing money rationally you alone would attain returns undreamed of by Wall St. Eventually you would come to control more and more of the economy until a significant portion of capital is rationally invested – by you. Of course, others would notice your success, but would not let you invest their money, nor try to copy your techniques because investors just aren’t that savvy.
You cite several examples of bubbles where investors lost money. The question is whether that is the exception or the rule. I believe the odds are stacked for the house at a casino, but you could cite many examples of winners to prove me wrong. Do you believe that labor is equally irrational, or is it some special deficiency on the part of investors? It does make you wonder how such economically foolish people wound up with all that money in the first place.
As for investing in China, I’m sure investors demand a risk premium. They are aware of China’s unfair practices, but they bet that they can come out ahead before the government takes too much. The government knows that if they take too much all at once, the FDI will stop on a dime. I’m sure China’s policies have prevented many people from investing in China and made the rest more wary.
heart_of_flint,
“ By investing money rationally you alone would attain returns undreamed of by Wall St.”
Um, no. Keynes gave an example once where readers of a newspaper got a prize if they picked (from pictures) the faces of the contestants of a beauty contest who would win the contest. He noted that in that case, the point is not to pick the contestant one feels is best looking, but rather the contestant who one feels that a group of other people thought was best looking.
I can’t figure out why people do what they do. In a few cases, I saw the train crash coming. (Argentina was fairly obvious, and I purposely did not buy a house during the bubble here in the US as two examples. FYI, you may recall a few other predictions I did write about, such as noting we were in a recession back in March of 2008 when most people insisted things were hunky dorrey, and then writing in December of 2008 when most people thought the recession would last a long time that it would be over in the first half of 2009.) But for the most part, knowing people are irrational doesn’t help.
“ I believe the odds are stacked for the house at a casino, but you could cite many examples of winners to prove me wrong. “
Umm… I believe the odds are stacked for the house too. But then I’m not the one arguing that the folks showing up to play roulette are rational.
“ It does make you wonder how such economically foolish people wound up with all that money in the first place.”
A number of options involving lotto tickets:
1. If everyone buys a lotto ticket, someone can win even if the game is fair.
2. If everyone buys a lotto ticket and the game is rigged, someone can win repeatedly if they have inside information
3. If everyone buys a lotto ticket and the game is rigged, someone can win repeatedly if they have a betting strategy that aligns nicely with the way the game is rigged
4. Offspring of winners can start off pretty well too.
5. Those who prey on lotto winners also do well.
As to China… funny you should mention that. I was just talking with a buddy today who happens to be worth a lot of money and who in the past few years has made a fair amount more in deals with Chinese businessmen. Every time we speak, he uses the same phrase: “one foot out the door.” His goal is simple – ride the tiger, and be among the first through the exit when the doo doo eventually hits the fan. The strategy has worked very well for him in other markets. He has the combination of resources and strategy that I bet he’ll do it again. As Reagan used to joke, you don’t have to outrun the bear, you just have to outrun the other hikers.
>The problem is, that’s true of Latin America too.
Not really. Mexico and Central America is generally crap land.
The best land in S.A. is the productive parts of Uruguay and Argentina, these provide the agricultural base to support capital formation, should sociopolitical conditions mature enough to allow that.
Uruguay last I checked is doing pretty good. I don’t know what happened with Argentina but they kinda went off the rails politically sometime in the 20th century.
If I were playing Civ on an accurate map, I’d certainly plop my first city somewhere around Baltimore if I had the choice.
I don’t want to over-sell ag here but ag — and the “cross of gold” that kept capital flowing to NYC — was how we boostrapped ourselves in the 19th century.
I’m a big fan of wealth-producing economies : )
Troy,
Much of the US is crap land too.
“The best land in S.A. is the productive parts of Uruguay and Argentina”
You may be right, but that depends on definition. If you’re talking cattle, certainly. But if ethanol matters to you, you want to be in Brazil. Sugarcane literally grows wild. And of course, there’s coffee. Also, I assume there’s a reason that if you travel around South America, you find they offer more varieties fruits and vegetables in supermarkets in Brazil than in Argentina and Uruguay – there’s all sorts of things growing on trees on Brazil. I’ve never seen a jaca tree or a guarana plant in Argentina or Uruguay, and I remember trying to explain what a fruta do conde was and how you eat it to some fairly cosmopolitan Argentines.
You now appear to me making the even stronger claim that it is impossible to invest rationally because getting good returns is a matter of predicting how other (irrational) investors will act. Most investors also look to the fundamentals of the company and the industry, but apparently this is a waste of time. I ask again are all economic actors irrational, or is it some special property of investors?
You betray your premise that only luck or cheating determines success in investing when you say that your friend has strategy, and therefore you predict his investments will pay off.
I used the casino to show that contrary anecdotal evidence can exist despite a real trend. I am not suggesting that investing is like gambling although both involve risk. I chose my example poorly because you naturally seized on the “investing as crapshoot” idea. Over the last 100 years investors have gotten better returns than casino patrons. The reason is that investing (often) represents an expansion of capital that allows for real economic growth.
I think that your “blind groping” theory of investment is far more radical than the specifics of economic development in former colonies. Is this a common theory in academia these days? Anyway, it’s such a large departure from my own understanding that it will be difficult for us to discuss other economic issues.
heart of flint,
So tell me about the fundamental change that occurred in, say, Russia between the time it was a darling to investors and the moment that investors fled. Or Ireland. Or Argentina. Or Japan. Because I’m genuinely curious – I don’t see fundamental changes. I just see investors coming to accept information that is already publicly available.
And its not just countries. What changed with, say, Qualcomm pre and post hitting its peak in the 90s? Or Nortel?
“ I ask again are all economic actors irrational, or is it some special property of investors? “
Yes to the first part. But there is a yes to the second part too. Capital adjusts more quickly than labor. Thus, more crises.
“You betray your premise that only luck or cheating determines success in investing when you say that your friend has strategy, and therefore you predict his investments will pay off. “
Not at all. You can make money by putting it into a Ponzi scheme. You just have to get out before everyone else. Making money in a Ponzi scheme thus depends either on lucky timing or good timing. Good timing is easier to pull off if you go in aware that its a Ponzi scheme.
His assumption is that China will continue to rise until it doesn’t, just like Japan and Argentina and Russia and Ireland and so on. He travels frequently to China and feels that nothing is what it looks like. He happens to have the resources to buy more liquidity when he invests in China than most people do, and he happens to believe its worth giving up a small percentage of income to buy that liquidity. He also has the time and resources to monitor events in China, and I think he has the paranoia to get the heck out quickly.
“ Over the last 100 years investors have gotten better returns than casino patrons.”
I would be curious to see an estimate of returns obtained by investors accounting for both surivorship bias and the cost of externalities generated.
“The reason is that investing (often) represents an expansion of capital that allows for real economic growth. “
How is ivnesting an expansion of capital as opposed to a re-allocation of capital?
“Is this a common theory in academia these days? “
What, pray tell, convinced you I’m in academia these days? I’m nobody special, but google can tell you most things you want to know about me.
plantation crops are nice but there’s nothing like row crops with mechanical harvesters to create that food wealth.
then again I see Brazil is producing 130l per capita of ethanol from sugar. That’s some real wealth production, but much of the ag sector in Brazil had to be carved from the jungle I gather. According to wikipedia Brazil imports $700M/yr of wheat.
Hi Mike,
Fair enough about “le dernier cri”. I can see where you stand.
About the transferability of institutions: actually I think that Japan is again a bad example _ more of that later. I was thinking about USA vs Latin America here. By effectively liquidating the native populations, anglo civilization was transplanted to North America without many bumps. In the south, we had more rich trajectories: in Argentina, the iberic colonizer could eliminate the natives nearly as effectively as the anglo in the north; in the rest of the Latin America iberic institutions had to mutate and adapt to the new reality _ a lot of native americans in most countries, and also the influx of africans in Brazil (and some other countries). Brazil is slightly different in that it was the only country in the South to harbor the colonizer Court for a period (in 1808, the royal court of Portugal escaped from Napoleon coming to Brazil), what gave this country something of a start in industry (since the Portuguese court couldn´t import goods from Portugal). Maybe for this reason Brazil was the only country in the region that organized as an Empire (albeit a little bit a constitutional one) after independency, while most or all other latin american countries organized as Republics.
Of course you´re right about the relative wheight of British and iberic Empires, but what you don´t work about is why one was thriving in the XIX century and the others don´t. I think this could explain better the fate of their colonies. You have touched the theme of “original sin” here: “the difference between Mexico and Brazil and the United States in the 1500s had nothing to do with Mexico, Brazil, and the US, but rather with Spain, Portugal, and England.“. What I disagree is that came after “Spain and Portugal were dying empires, and they basically looted everything they could, often destorying much that they couldn’t loot in the process“. Not that it isn´t true in certain places and times. But I think it doesn´t explain the whole process.
About Japan and Germany vs. USA and URSS: sorry but this is a fallacy. Japan was occupied by the USA from 1945 to 1952. Seven years. Let´s see the Phillipinnes: from 1902-1916, american rule, including the disfranchising of the Catholic Church. From 1916-1932, some level of closed monitored “autonomy”. And sadly, for the rest of the century the Phillipinnes couldn´t argue to be in better shape than East German. More: if anything, the consequences of USA occupation were to “degermanize” some aspects of Japanse life (that they imported of their own will), something the URSS also tried in East Germany.
Actually even Cuba was ruled by the US from 1898 to 1902; in that year they had independence and a puppet government of a USA-born president, and also the draconian Platt Amendment, an arrangement only ending with the rise of Fulgencio Batista in 1940.
Hermenauta,
Apologies. Running low on time so this is more of a short high level response than the deailed response your comments deserve.
As I’ve noted elsewhere in this thread, there are different degrees of colonization. Moving a significant amount of capital and labor permanently into a colony is different from setting up a few trading depots and making deals with some of the local grandees.
I don’t know the shape of US colonization of the Philippines, but I suspect it was the latter and not the former. Japan was occupied, thoroughly, to make sure they’d never be a threat. I believe I remember reading that the same twenty or so families have run the Philippines since the Spanish era. In Japan we hanged the folks who had been running the country before we arrived. Cuba – really, all we cared about was whether whoever was running the country was our son of a bitch, to paraphrase LBJ a few years later. I’m not sure that ended with Batista though. As I recall, he was our son of a bitch too.
Yes, South America did avoid killing off all of its native Americans, and there was a big influx of Africans into Brazil and other countries. (I had a post once discussing the question nobody ever asks: what the heck ever happened to the Black slaves in Argentina? Their descendants aren’t around today. You can go days without seeing any Black people in Argentina. The place has been cleansed almost as thoroughly as the Arabian peninsula was of Jews, Christians and animists.) But then so did the US. The difference was that the natives in Brazil could hide for longer, there being more jungle and the Europeans being less effective at extermination.
“Of course you´re right about the relative wheight of British and iberic Empires, but what you don´t work about is why one was thriving in the XIX century and the others don´t. “
Sure, but there was a time taht Portugal and Spain were on the rise and other empires (e.g., Moors) were falling. My knowledge of history isn’t strong enough to comment in detail but here’s what I think happened. I do believe the Moors were over-extended, and it started getting expensive to maintain the far reaches of the empire. That is to say, capital wasn’t flowing into the colonies. Conversely, it was the start of the age of exploration for Portugal and Spain, and they started getting wealth from the new (close) colonies like the Azores.
I think there are a lot of factors in play, so it is hard pick just one. If you read Landes ‘Farewell to Alms’, he picks up on a number of them, some unexpected. For example, ask if women are given a place in public life? In England, Western Europe, the US, Japan, and other successful nations they are. Is this a primary factor or just an indicator? It’s hard to tell. One of the things I liked about Landes book was that he didn’t believe in one single cause, but rather combinations. It is hard to build an economy without resources and with a massive disease burden, just as it is hard to build an economy without institutions and business oriented principles.
One obvious case overlooked is the difference between the northern US and the southern US. The north was full of business oriented settlers, there to make a few shillings, while the south was full of aristocrats, aristocrats manque, convicts and slaves. The settlers largely came from England and the institutions were modeled on English ones, but the economic outcome was quite different. The southern economy didn’t even start to grow after the US colonization in the 1870s. In fact, it wasn’t until the civil rights movement in the 1950s and 1960s when the US sent troops down south again that the economy started moving forwards. It’s a surprisingly telling case, especially now that we are refighting the economic battles of the pre-Civil War era. There’s a reason the railroad boom had to wait until after the war, and a lot of it involved infrastructure spending held hostage in Congress.