We asked a migrant construction worker from Orissa, on a visit back home, why he didn’t stay longer in the city. He explained that he could not take his family there: The housing conditions were too insalubrious. On the other hand, he did not want to stay away from them for too long. Most cities in the developing world have very little planned housing for the very poor. The result is that the poor have had to squeeze themselves into every piece of land they can somehow grab from the city, often in a swamp or even a garbage dump. By comparison, the places where even the poorest live in villages are greener, airier, quieter; the houses are bigger; there is space for children to play. Life may be unexciting, but for those who grew up in the village, that is where their friends live. Moreover, a single male, going to the city for a few weeks or even a few months, does not need to actually find housing; he can sleep under a bridge or under some awning somewhere, or in the shop or construction site where he works. He can save the money he would have paid as rent and just go home more often. But he doesn’t want this life for his family.
There is also the risk: Suppose you pay the cost of setting up a home in the city and moving your family there, only to lose your job. Indeed if you haven’t already had a decent job before and saved up, how do you pay for the move? And what happens if someone gets very sick? It is true that health care is better in the city, but who will come with you to the hospital or have some cash handy if you need it? As long as your family is still in the village, even if you get sick in the city and end up in the hospital, you can rely on your connections in the village. But what if you actually pull up your roots and move?
This is why it is much easier to move if you know people in the city. They can house you and your family when you first arrive, help you out if someone suddenly gets sick, and help you find a job—by giving you a reference or hiring you themselves. Kaivan Munshi, for example, found that Mexican villagers migrate to cities where people from their village have already migrated, even if the original round of migration was purely accidental.12 It is obviously also easier to move if you already have a steady job or some other source of steady income. The Muslim family from Hyderabad had both—an army pension and a job—which in turn was the product of having the right connections. In South Africa, when elderly parents get a pension, the most productive of their children permanently leave the household to move to the city.13 The pension must be what gives them this sense of security, and it allows them to pay for the cost of their own move.
How then can more “good jobs” be created? Clearly, it would help if it were easier to migrate to cities, so policies on urban land use and low-income housing are obviously vital. Less obviously, effective social safety nets, consisting of both public assistance and market insurance, can make migration easier by reducing dependence on social networks.
But because not everyone will be able to move to the city, it is also important that more good jobs be created not just in the largest cities but in smaller towns all over the country. For this to be possible, there must be substantial improvements both in urban and in industrial infrastructure in towns of this sort. The regulatory environment is also important for creating jobs: Labor laws play a role in ensuring job security, but if they are so stringent that no one wants to hire, then they are counterproductive. Credit remains perhaps an even bigger problem, given the S-shaped nature of the production technologies: To set up businesses that create lots of jobs (rather than one job for the entrepreneur alone) takes more money than the average business owner in the developing world has access to, and as noted in Chapter 7 on credit, it is not clear how to get the financial sector to lend more to these people.
It follows, therefore (though it is not a particularly fashionable idea among economists), that there may be a case for using some governmental resources to help create enough large businesses by providing loan guarantees to medium-size ventures, for example. Something like that happened in China, where state businesses, or at least part of their equipment, land, and buildings, were quietly handed over to their employees. This was also, more explicitly, part of the Korean industrial policy. This may set off some virtuous circle: Stable and higher wages would give workers the financial resources, the mental space, and the necessary optimism both to invest in their children and save more. With those savings, and the access to easier credit that a steady job brings, the most talented among them would eventually be able to start businesses large enough to, in turn, hire other people.
So are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially minded business gurus seem to believe? Or is this just an illusion, stemming from a confusion about what we call an “entrepreneur”? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options. Most of them manage to do this well enough to survive, but without the talent, the skills, or the appetite for risk needed to turn these small businesses into really successful enterprises. For every Xu Aihua, who started a clothing empire with nothing but a little training and a huge amount of talent, there are millions of Ben Sedans, who know that the way out of poverty is not one more shed with some cows in it, but a son with a secure job in the army. Microcredit and other ways to help tiny businesses still have an important role to play in the lives of the poor, because these tiny businesses will remain, perhaps for the foreseeable future, the only way many of the poor can manage to survive. But we are kidding ourselves if we think that they can pave the way for a mass exit from poverty.
10
Policies, Politics
Even the most well-intended and well-thought-out policies may not have an impact if they are not implemented properly. Unfortunately, the gap between intention and implementation can be quite wide. The many failings of governments are often given as the reason good policies cannot really be made to work. Government inadequacy is also one of the older arguments advanced by some of the aid skeptics to explain why foreign aid and other attempts by outsiders to influence social policy are likely to make things worse in poor countries rather than better.1
The Ugandan government gives per-student grants to schools to maintain their buildings, buy textbooks, and fund any extra programs that their students might need (teacher salaries are paid directly out of the budget). In 1996, Ritva Reinikka and Jakob Svensson set out to answer a simple question: How much of these funds allocated to schools by the central government actually made it to the schools?2 It was a relatively straightforward exercise. They just sent survey teams to the schools and asked them how much they had received. Then they compared the numbers to computer records of how much had been sent. The answer they got was nothing short of stunning: Only 13 percent of the funds ever reached the schools. More than half the schools got nothing at all. Inquiries suggested that a lot of the money most likely ended up in the pockets of district officials.
It is easy to get depressed by such findings (which have been corroborated by similar studies in several other countries). We are often asked why we do what we do: “Why bother?” These are the “small” questions. William Easterly, for one, criticized randomized control trials (RCTs) on his blog in these terms: “RCTs are infeasible for many of the big questions in development, like the economy-wide effects of good institutions or good macroeconomic policies.” Then, he concluded that “embracing RCTs has led development researchers to lower their ambitions.”3
This statement was a good reflection of an institutionalist view that has strong currency in development economics today. The real problem of development, in this view, is not one of figuring out good policies: It is to sort out the political process. If the politics are right, good policies will eventually emerge. And conversely, without good politics, it is impossible to design or implement good policies, at least not on any scale. There is no point to figuring out the best way to spend a dollar on schools, if 87 cents will never reach the school anyway. It follows (or so it is assumed) that “big questions” require “big answers”—social re
volutions, such as a transition to effective democracy.
At the other extreme, Jeffrey Sachs sees corruption, perhaps not surprisingly, as a poverty trap: Poverty causes corruption, and corruption causes poverty. His suggestion is to break the trap by focusing on making people in developing countries less poor: Aid should be given for specific goals (such as malaria control, food production, safe drinking water, and sanitation) that can easily be monitored. Raising living standards, Sachs argues, would empower civil society and governments to maintain the rule of law.4
This presumes that it is possible to successfully implement such programs on a large scale in poor, corrupt countries. According to Transparency International in 2010, Uganda ranked 127th out of 178 countries in terms of how corrupt it was (better than Nigeria, at the same level as Nicaragua and Syria, worse than Eritrea). Can we expect any progress on education until Uganda solves the bigger problem of corruption?
However, there was an interesting coda to Reinikka and Svensson’s story. When their results were released in Uganda, there was something of an uproar, with the result that the Ministry of Finance started giving the main national newspapers (and their local-language editions) month-by-month information about how much money had been sent to the districts for the schools. By 2001, when Reinikka and Svensson repeated their school survey, they found the schools were getting, on average, 80 percent of the discretionary money that they were entitled to. About half of the headmasters of schools that had received less than they were supposed to had initiated a formal complaint, and eventually most of them received their money. There were no reports of reprisals against them, or against the newspapers that had run the story. It seems that the district officials had been happy to embezzle the money when no one was watching but stopped when that became more difficult. A generalized theft of government funds was possible, it seems, mainly because no one had bothered to worry about it.
The Ugandan headmasters suggest an exciting possibility: If rural school headmasters could fight corruption, perhaps it is not necessary to wait for the overthrow of the government or the profound transformation of society before better policies can be implemented. Careful thinking and rigorous evaluations can help us design systems to keep corruption and inefficiency in check. We are not “lowering our ambitions”: Incremental progress and the accumulation of these small changes, we believe, can sometimes end in a quiet revolution.
POLITICAL ECONOMY
Corruption, or the simple dereliction of duty, creates massive inefficiencies. If teachers or nurses do not come to work, no education or health policy can really be implemented. If truck drivers can pay a small bribe to drive massively overloaded trucks, billions of dollars will be wasted in building roads that will be destroyed under their wheels.
Our colleague Daron Acemoglu and his long-term coauthor, Harvard’s James Robinson, are two of the most thoughtful exponents of the rather melancholy view, active in economics today, that until political institutions are fixed, countries cannot really develop, but institutions are hard to fix. Acemoglu and Robinson define institutions as follows: “Economic institutions shape economic incentives, the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. Political institutions determine the ability of citizens to control politicians.”5
Both political scientists and economists typically think of institutions at a very high level. They have in mind, if you like, institutions in capital letters—economic INSTITUTIONS like property rights or tax systems; political INSTITUTIONS like democracy or autocracy, centralized or decentralized power, universal or limited suffrage. The argument in Acemoglu and Robinson’s book Why Nations Fail,6 which reflects a widely shared view among scholars7 of political economy, is that these (broad) institutions are the prime drivers of the success or failure of a society. Good economic institutions will encourage citizens to invest, accumulate, and develop new technologies, as a result of which society will prosper. Bad economic institutions will have the opposite effects. One problem is that rulers, who have the power to shape economic institutions, do not necessarily find it in their interest to allow their citizens to thrive and prosper. They may personally be better off with an economy that imposes lots of restrictions on who can do what (that they selectively relax to their advantage), and weakening competition may actually help them stay in power. This is why political institutions matter—they exist to prevent leaders from organizing the economy for their private benefit.When they work well, political institutions put enough constraints on rulers to ensure that they cannot deviate too far from the public interest.
Unfortunately, bad institutions tend to perpetuate bad institutions, creating a vicious circle, sometimes called the “iron law of oligarchy.” Those who have power under the current political institutions get to make sure that the economic institutions work toward making them rich, and once they are rich enough they can usually use their wealth to forestall any attempts to move them out of power.
The long shadow of bad political institutions, for Acemoglu and Robinson, is the main reason many countries in the developing world have failed to grow. Those countries inherited from the colonial period a set of institutions that were put in place by colonial rulers not for the development of the country but to maximize the extraction of resources for the benefit of the colonial powers. After decolonization, the new rulers found it convenient to hold on to the same extractive institutions and use them for their own benefit, thereby setting off a vicious cycle. For example, in an article that has become a classic, Acemoglu, Robinson, and Simon Johnson showed that former colonies where the disease environment prevented large-scale settlements by Europeans tended to have worse institutions during colonial times (because they were naturally picked for being exploited from afar), and these bad institutions continued after decolonization.8
Abhijit and Lakshmi Iyer found a striking example of the long shadow of political institutions in India.9 During British colonization, different districts got different systems of land-revenue collection, for largely accidental reasons (mainly, which institution was chosen depended on the ideology of the British servant in charge of the districts and the views prevalent in Britain at the time of conquest). In the zamindari system, the local landlord was given the responsibility for collecting land taxes: This served to reinforce his power and strengthen feudal relationships. In the rayatwari system, farmers were individually responsible for their own taxes: These regions developed more cooperative and horizontal social relationships. Strikingly, the areas that were placed under elite domination still have tenser social relationships, lower agricultural yield, and fewer schools and hospitals than those placed under village control today, 150 years later and long after all land-revenue collection has stopped.
Acemoglu and Robinson do not think it is impossible for former colonies to escape the vicious circle of bad political and bad economic institutions. But they say that it will take the right alignment of forces, combined with a fair amount of luck. The examples they emphasize are the Glorious Revolution in England and the French Revolution. The fact that they are both major upheavals from at least 200 years ago is not entirely encouraging. Acemoglu and Robinson do end their book with some suggestions about what may help to bring about this change, but they are very cautious.
There are two other influential points of view that share Acemoglu and Robinson’s basic stance about the primacy of institutions, but not their essential pessimism. The two groups want to take us in radically opposed directions: In one view, if countries are stuck because they have bad institutions, it is incumbent on the rich countries of the world to help them get better institutions, by force, if need be. In the other view, any attempt at manipulating institutions or policies from the top down is doomed to fail, and changes can only come from within.
One possible way to break the vicious cycle of bad institutions is to import change from the outside. Paul Romer, known for his pioneering work on economic growth a couple of decades a
go, came up with what seems like a brilliant solution: If you cannot run your country, subcontract it to someone who can.10 Still, running an entire country may be difficult. So he proposes starting with cities, small enough to be manageable but large enough to make a difference. Inspired by the example of Hong Kong, developed with great success by the British and then handed back to China, he developed the concept of “charter cities.” Countries would hand over an empty strip of territory to a foreign power, who would then take the responsibility for developing a new city with good institutions. Starting from scratch, it is possible to establish a set of good ground rules (his examples range from traffic congestion charges to marginal cost pricing for electricity, and of course include legal protection of property rights). Because no one was forced to move there and all new arrivals are voluntary—the strip was empty to start with—people would not have any reason to complain about the new rules.
One minor drawback with this scheme is that it is unclear that leaders in poorly run countries would willingly enter into an agreement of this sort. Moreover, even if they did, it is not clear they could find a buyer: Committing not to take over the strip of land once it is actually successful would be quite difficult. So some development experts go further. In his books The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It and Wars, Guns, and Votes: Democracy in Dangerous Places, Paul Collier, an Oxford University professor and former World Bank economist, argues that there are sixty “basket case” countries (think Chad, Congo, and so forth) in which about 1 billion people live.11 These countries are stuck in a vicious circle of bad economic and bad political institutions, and it is the duty of the Western world to get them out, if necessary through military interventions. As an example of a successful intervention of this type, Collier cites British support for Sierra Leone’s fledgling effort at democratization.
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