Pearls and Irritations

The 2024 Nobel Prize for economics has gone to two economists for work on why some poor nations prosper while others fail and remain poor. But it is their 540 page account that fails, by not mentioning the real causes that are foundational in the global economic system.

The main statement of the case is in a book entitled Why Nations Fail. The explanation given is to do with the extent to which nations have political, legal, social etc. institutions that facilitate and encourage (conventional) development. Two basic types of national developmental systems are distinguished, the first characterised by institutions which provide rewards and security for innovation and investment, such as patent protection, legal systems for settling disputes, and freedom for investment. The second involves systems which thwart entrepreneurial activity, especially where a class or regime has hijacked the system to its own enrichment. This thesis is illustrated at length, through 540 pages, via a great deal of evidence and case studies, much of it delving into the extensive detail on the history of many nations. It is very clear and well written, remarkably well informed, and easily understood by the lay person.

So what’s the problem? It’s not that the book agues what seems to me to be an intuitively obvious finding, hardly remarkable or groundbreaking let alone worthy of a Nobel prize. The problem is that it makes no reference at all to overwhelmingly important reason “why nations fail”, why so many remain “poor” and why billions of people live in inexcusably appalling conditions.

The book’s thesis attributes these effects to conditions within poor countries. They are portrayed as having regimes and institutions which enable dictators and/or elites to control, gear economies to their interests and block desirable economic and political development. In the cases discussed this is quite true. But the main reason why at least half the world’s people are poor is because the global economic system keeps them there and is enforced on them by the rich countries which as a result are able to loot them. Economists endorse, staff and promote this system: they cannot imagine any other.

Outrageous? Here’s how “development” works.

Firstly, the book’s authors never ask what “development” means. They take it for granted as virtually all economists do that development = getting materially richer, as nations and as individuals. It is about being able to purchase more, increasing the amount of producing, selling and consuming going on, and thus it is about increasing the GDP. This is the “unidimensional” view of development whereby nations move up the slope to be like rich nations. Getting richer is assumed to improve all sorts of other things, such as health and welfare.

There is no interest in thinking about what might contribute most to quality of life, let alone in measuring it, let alone prioritising developments that might improve it (except in Bhutan.) They ignore the fact that except for health everything required for a high quality of life can easily be ensured with no material “prosperity”. They are not interested in the possibility that an idyllic quality of life might be provided to all at extremely low levels of material wealth, production, industrialisation, capital investment, globalisation, IT, international trade, “living standards” and GDP. (See below.)

Never mind, how does the conventional economic mind think you achieve development. Well you have to compete in the global market economy to earn money to invest in creating industries and employing people so they can earn incomes to spend, enabling the emergence of local businesses. All you have to sell into the global economy are natural resources and labour. You can’t afford to set up mines so you must solicit foreign investment. But the investors want power and railways and ports, so you have to borrow heavily to build the power stations and railways and other infrastructures. You will be competing with all the other poor nations with only logs and minerals to export so that keeps the prices rich importing countries have to pay right down, and you had better keep your wages down or the investors will go somewhere else.

Before long you will find yourself in an impossible level of debt. John Perkins book Confessions of an Economic Hit Man explains how his job was to suck nations into taking on loans they could never repay. No problem, the IMF will help you pay the interest … by providing you with additional loans … on condition that you accept a Structural Adjustment Package. Its conditions make you more indebted, open your economy more to foreign investors, sell off good businesses to them, keep wages down, reduce welfare spending and make loan repayments your top priority. Obviously this is the best way to “get the economy going ‘gain”.

Thus conventional development is development in the interests of the rich. Local elites in poor countries are delighted because it provides investment opportunities for them. Banks are happy; they get the commissions. For organising one loan to Greece Goldman Sacks got a $600 million commission. These days imperialism does not need to send a gunboat to conquer. The Neoliberal triumph identify by Chosudowsky as enabling “the greatest wealth transfer in history”, was carried out using computer keys.

The result is that the economies of the poor countries are trapped into providing the rich countries with cheap resources to enable lucrative profits for investors, corporations and banks, while preventing development that would do most to benefit impoverished and exploited masses. Hickel et al. estimate that there is a $2.5 trillion net flow of wealth from poor to rich countries every year. In addition they pay the cost of the environmental damage caused by the mines, logging, plantations, industrial smog, and the social damage caused by the unsafe work conditions, low wages and inadequate health care etc.

Central in the conventional development ideology that keeps all this in place is the fanatical religious commitment to the miraculous market system. Foreign Minster Wong regularly worships the “rules-based international order”, the most sacred rule being let market forces determine what is produced and who gets it. Devotees seem to be incapable of grasping the fact that in a market system it is the demand of richer players which determines what is produced and who get it. Why are several hundred million tonnes of grain fed to animals in rich countries every year while around 800 million people are hungry? Because it is much more profitable to produce grain for feedlot beef production in rich countries than to sell it to starving Sudanese. Why are cosmetics and cut flowers produced in Guatemala for export rather than basic food and housing for impoverished peasants? Why do developers in Australia build elaborate dwellings rather than low cost housing for poor people? Because in a market system these are kinds of ventures that promise most profit to those with capital to invest.

Effort has to go into keeping the global economic system functioning like this. Sometimes a little intervention is required, to keep compliant states to policies that suit us and to deal with those threatening to step out of line. Sometimes vast arms sales will do the trick; how much oil would we be getting from Saudi Arabia without these? Sometimes we have to go in and kill a Lummba or Gaddafi or Castro (unfortunately 600 attempts, many by the CIA failed there) to prevent deviation. Sometimes we have to invade and tip out a leader like Mossadegh threatening our access to oil, or supply an ally with the bombs to keep down Arabs threatening our control of the oil regions. Sometimes we have to invade and kill a million or so. Thus the US has attempted “regime change” over seventy times since WW2. You could not be enjoying your resource-intensive high “living standards” had these things not been done to secure your empire.

Yes as this book shows, institutions within a nation which facilitate or thwart conventional development are indeed causal factors contributing to outcomes such as state “failure” and mass poverty, but they are not the dominant factors. They are not, as the book’s title claims, “…the origins of poverty” today. The overwhelmingly important factor is the grotesquely unjust and predatory global economic system all nations are trapped in, a system which forces poor countries to enable the net flow of vast quantities of wealth to rich countries and to forego development in the interests of their people.

The book makes no reference to all to the real “…origins of poverty” today. It’s not that it deliberately seeks to conceal or mislead. It’s worse than that. Conventional economists seem to be incapable of understanding that what they take to be economics is only capitalist economics, and what they take to be development is only capitalist development. They cannot gasp that there might be other kinds. Following is an indication of a sustainable and just kind. (For the detail.)

Capitalism has no future, if only because it is a growth system and we are now far beyond the limits to growth. Rich world per capita lifestyles and GDP are several times higher than all the world’s people could ever rise to. It is the determination to raise them constantly and without limit that is generating all the big global problems now threatening our existence, including resource wars. So the goal has to be large scale degrowth to a situation in which most people live in small, highly self-sufficient and self-governing cooperative communities, in control of their local economies that are needs-driven not driven by profit or market forces, and happy to live very materially simply. This must be the development model for rich and poor countries. Various studies (e.g. Lockyer 2017, Trainer 2020) and examples show that these kinds of settlements can enable per capita resource consumption to be cut by 90% or more, while actually raising the quality of life. Gandhi got it right 100 years ago; the sensible goal for India is villages of this kind. The Ecovillage, Transition Towns, Degrowth, Campesino and many other movements today are working for such a transition.

We are in for a catastrophic breakdown of the global economy as capitalism self-destructs. It is likely to eliminate any hope of such a transition, but it represents the only conception of development that makes sense now. Those who see this are not likely to be awarded a Nobel prize by the reigning economic establishment.

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